NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Background and Basis of Presentation
ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries ("ON Semiconductor," "we," “us,” “our,” or the "Company"), uses a thirteen-week fiscal quarter accounting period for the first three fiscal quarters of each year, with the first quarter of 2020 having ended on April 3, 2020 and each fiscal year ending on December 31. The quarter ended April 3, 2020 and March 29, 2019 contained 94 and 88 days, respectively. As of April 3, 2020, the Company was organized into the following three operating and reportable segments: the Power Solutions Group ("PSG"), the Advanced Solutions Group ("ASG") and the Intelligent Sensing Group ("ISG"). Additional details on the Company’s operating and reportable segments are included in Note 2: ''Revenue and Segment Information.''
The accompanying unaudited financial statements as of and for the quarter ended April 3, 2020 have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for unaudited interim financial information. Accordingly, the unaudited financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of December 31, 2019 was derived from the Company's audited financial statements but does not include all disclosures required by GAAP for audited financial statements. In the opinion of the Company's management, the interim information includes all adjustments, which includes normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on February 19, 2020 (the “2019 Form 10-K”).
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) future payouts for customer incentives and amounts subject to allowances, returns and warranties; (ii) measurement of valuation allowances relating to inventories; (iii) fair values of share-based compensation; and (iv) measurement of valuation allowances against deferred tax assets and evaluations of unrecognized tax benefits. Even though the novel coronavirus disease 2019 (“COVID-19”) pandemic impacted the demand for the Company's products and gross margin, it did not have a significant impact on these estimates. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows used to assess and test for impairment of indefinite-lived intangible assets, long-lived assets and goodwill and in assumptions used in connection with business combinations. Actual results may differ from the estimates and assumptions used in the consolidated financial statements and related notes.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in the context of the information reasonably available and the unknown future impact of the COVID-19 pandemic as of April 3, 2020, and through the date of this Form 10-Q. The accounting matters assessed included, but were not limited to, the allowance for doubtful accounts, share based compensation, inventory valuation and corresponding reserves, carrying value of indefinite-lived assets, other long-lived assets and goodwill, valuation allowance for tax assets, contingencies and revenue recognition. While there was not a material impact to the consolidated financial statements as of and for the quarter ended April 3, 2020, resulting from these assessments, future assessment of the current expectations, including of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in a material adverse impact to the consolidated financial statements in future reporting periods.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 2: Revenue and Segment Information
The Company is organized into three operating and reportable segments consisting of PSG, ASG and ISG. Because many products are sold into different end-markets, the total revenue reported for a segment is not indicative of actual sales in the end-market associated with that segment, but rather is the sum of the revenue from the product lines assigned to that segment. These segments represent the Company’s view of the business and its gross profit is used to evaluate progress of major initiatives and allocation of resources.
Revenue and gross profit for the Company’s operating and reportable segments are as follows (in millions):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
PSG
|
|
ASG
|
|
ISG
|
|
Total
|
For the quarter ended April 3, 2020:
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
$
|
623.9
|
|
|
$
|
467.1
|
|
|
$
|
186.9
|
|
|
$
|
1,277.9
|
|
Gross profit
|
$
|
178.6
|
|
|
$
|
174.8
|
|
|
$
|
62.8
|
|
|
$
|
416.2
|
|
For the quarter ended March 29, 2019:
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
$
|
704.2
|
|
|
$
|
494.1
|
|
|
$
|
188.3
|
|
|
$
|
1,386.6
|
|
Gross profit
|
$
|
249.0
|
|
|
$
|
200.1
|
|
|
$
|
74.9
|
|
|
$
|
524.0
|
|
|
|
|
|
|
|
|
|
|
|
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Gross profit is exclusive of the amortization of acquisition-related intangible assets. Depreciation expense is included in segment gross profit. Reconciliation of segment gross profit to consolidated gross profit is provided below (in millions):
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|
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|
|
|
|
|
|
Quarters Ended
|
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|
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
|
|
|
|
Gross profit for reportable segments
|
$
|
416.2
|
|
|
$
|
524.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Unallocated manufacturing costs
|
(13.5)
|
|
|
(10.3)
|
|
|
|
|
|
Consolidated gross profit
|
$
|
402.7
|
|
|
$
|
513.7
|
|
|
|
|
|
Revenue for the Company's operating and reportable segments disaggregated into geographic locations based on sales billed from the respective country and sales channels are as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
Quarter Ended April 3, 2020
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|
|
|
|
|
|
PSG
|
|
ASG
|
|
ISG
|
|
Total
|
Geographic Location
|
|
|
|
|
|
|
|
Singapore
|
$
|
194.3
|
|
|
$
|
172.6
|
|
|
$
|
41.4
|
|
|
$
|
408.3
|
|
Hong Kong
|
192.0
|
|
|
91.9
|
|
|
32.3
|
|
|
316.2
|
|
United Kingdom
|
105.1
|
|
|
76.8
|
|
|
45.1
|
|
|
227.0
|
|
United States
|
72.7
|
|
|
77.3
|
|
|
34.5
|
|
|
184.5
|
|
Other
|
59.8
|
|
|
48.5
|
|
|
33.6
|
|
|
141.9
|
|
Total
|
$
|
623.9
|
|
|
$
|
467.1
|
|
|
$
|
186.9
|
|
|
$
|
1,277.9
|
|
|
|
|
|
|
|
|
|
Sales Channel
|
|
|
|
|
|
|
|
Distributors
|
$
|
386.3
|
|
|
$
|
213.6
|
|
|
$
|
103.4
|
|
|
$
|
703.3
|
|
OEM/ODM
|
194.2
|
|
|
219.4
|
|
|
73.5
|
|
|
487.1
|
|
Electronic Manufacturing Service Providers
|
43.4
|
|
|
34.1
|
|
|
10.0
|
|
|
87.5
|
|
Total
|
$
|
623.9
|
|
|
$
|
467.1
|
|
|
$
|
186.9
|
|
|
$
|
1,277.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
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|
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|
|
|
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|
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|
|
|
|
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|
|
|
|
|
Quarter Ended March 29, 2019
|
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|
|
|
|
|
|
PSG
|
|
ASG
|
|
ISG
|
|
Total
|
Geographic Location
|
|
|
|
|
|
|
|
Singapore
|
$
|
225.0
|
|
|
$
|
153.0
|
|
|
$
|
47.2
|
|
|
$
|
425.2
|
|
Hong Kong
|
200.6
|
|
|
112.0
|
|
|
25.4
|
|
|
338.0
|
|
United Kingdom
|
125.8
|
|
|
79.5
|
|
|
41.6
|
|
|
246.9
|
|
United States
|
88.9
|
|
|
92.6
|
|
|
32.1
|
|
|
213.6
|
|
Other
|
63.9
|
|
|
57.0
|
|
|
42.0
|
|
|
162.9
|
|
Total
|
$
|
704.2
|
|
|
$
|
494.1
|
|
|
$
|
188.3
|
|
|
$
|
1,386.6
|
|
|
|
|
|
|
|
|
|
Sales Channel
|
|
|
|
|
|
|
|
Distributors
|
$
|
423.7
|
|
|
$
|
234.8
|
|
|
$
|
106.3
|
|
|
$
|
764.8
|
|
OEM
|
236.2
|
|
|
221.1
|
|
|
71.5
|
|
|
528.8
|
|
Electronic Manufacturing Service Providers
|
44.3
|
|
|
38.2
|
|
|
10.5
|
|
|
93.0
|
|
Total
|
$
|
704.2
|
|
|
$
|
494.1
|
|
|
$
|
188.3
|
|
|
$
|
1,386.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
|
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|
|
The Company operates in various geographic locations. Sales to unaffiliated customers have little correlation with the location of manufacturers. It is, therefore, not meaningful to present operating profit by geographical location.
The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information. The Company’s consolidated assets are not specifically ascribed to its individual reportable segments. Rather, assets used in operations are generally shared across the Company’s operating and reportable segments.
Property, plant and equipment, net by geographic location, is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
April 3, 2020
|
|
December 31, 2019
|
United States
|
$
|
633.3
|
|
|
$
|
616.7
|
|
South Korea
|
487.4
|
|
|
485.4
|
|
Philippines
|
426.4
|
|
|
433.5
|
|
China
|
238.1
|
|
|
243.6
|
|
Japan
|
216.3
|
|
|
218.1
|
|
Czech Republic
|
213.8
|
|
|
213.4
|
|
Malaysia
|
195.4
|
|
|
204.4
|
|
Other
|
169.2
|
|
|
176.5
|
|
Total
|
$
|
2,579.9
|
|
|
$
|
2,591.6
|
|
Note 3: Recent Accounting Pronouncements
Adopted:
ASU 2020-04 – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”)
In March 2020, the FASB issued ASU 2020-04 to address constituents’ concerns about certain accounting consequences that could result from the global markets’ anticipated transition away from the use of the LIBO Rate and other interbank offered rates to alternative reference rates. ASU 2020-04 includes optional expedients and the relief provided is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBO Rate or another reference rate expected to be discontinued because of reference rate reform. These amendments are effective for entities as of March 12, 2020 through December 31, 2022. The Company has elected to apply the provisions of
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
ASU 2020-04 for its contracts and hedging relationships as of March 12, 2020. The adoption of ASU 2020-04 did not have a material impact on its consolidated financial statements.
ASU 2019-12 – Income taxes (Topic 740): Simplifying the accounting for income taxes (“ASU 2019-12”)
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 during the quarter ended April 3, 2020. The adoption of ASU 2019-12 did not have a material impact on its consolidated financial statements.
Note 4: Restructuring, Asset Impairments and Other, Net
Details of restructuring, asset impairments and other charges are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
Asset Impairments (1)
|
|
Other
|
|
Total
|
|
|
|
|
|
Quarter ended April 3, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary separation program
|
|
$
|
27.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27.5
|
|
|
|
|
|
|
General workforce reduction
|
|
3.4
|
|
|
—
|
|
|
—
|
|
|
3.4
|
|
|
|
|
|
|
Post-Quantenna acquisition restructuring
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
—
|
|
|
1.4
|
|
|
0.1
|
|
|
1.5
|
|
|
|
|
|
|
Total
|
|
$
|
31.3
|
|
|
$
|
1.4
|
|
|
$
|
0.1
|
|
|
$
|
32.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Impairment of lease right-of-use assets.
Summary of changes in accrued restructuring from December 31, 2019 to April 3, 2020 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
As of
|
|
|
December 31, 2019
|
|
Charges
|
|
Usage
|
|
|
|
April 3, 2020
|
Employee separation charges
|
|
$
|
0.1
|
|
|
$
|
31.3
|
|
|
$
|
(3.6)
|
|
|
|
|
$
|
27.8
|
|
Other
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
|
|
0.1
|
|
Total
|
|
$
|
0.2
|
|
|
$
|
31.3
|
|
|
$
|
(3.6)
|
|
|
|
|
$
|
27.9
|
|
Voluntary Separation Program and Involuntary Separation Program
During the first quarter of 2020, the Company offered a voluntary separation program (the "VSP") to employees that met certain criteria. Participation was subject to management review and approval. The purpose of the VSP was to allow employees to voluntarily separate employment during a specific time and with enhanced separation compensation and benefits, thereby enabling the Company to optimize its cost structure and progress towards its target financial model. Management approved 243 employees for participation in the VSP during the quarter ended April 3, 2020, after which the VSP was terminated. The aggregate expense for the VSP amounted to $27.5 million, which remained accrued as of April 3, 2020 and is expected to be paid during the second quarter of 2020 when the employees exit.
The Company will also implement an involuntary separation program (the “ISP”) during the second quarter of 2020. Under the ISP, the Company expects to notify an estimated 215 additional employees of their employment termination, with aggregate severance costs amounting to approximately $15.0 million.
Other General Workforce Reduction
In addition to the VSP and the ISP, the Company took other general workforce reduction measures during the first quarter of 2020. In connection with such measures, the Company notified approximately 88 employees of their employment termination, all of whom exited by April 3, 2020. During the quarter ended April 3, 2020, the aggregate expense for these other general workforce reduction measures amounted to $3.4 million.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Post-Quantenna acquisition restructuring
Following the acquisition of Quantenna, the Company implemented a cost-reduction plan resulting in the elimination of positions, primarily as a result of redundancies. During the quarter ended April 3, 2020, the Company terminated an additional ten employees and severance costs amounted to $0.4 million. All employees have exited and severance benefits have been paid out. This program has closed and no further expenses are expected to be incurred.
Note 5: Balance Sheet Information and Other
Goodwill
Changes in the goodwill balance from December 31, 2019 through April 3, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
Net balance as of December 31, 2019
|
|
$
|
1,659.2
|
|
Addition due to business combination
|
|
4.2
|
|
|
|
|
Net balance as of April 3, 2020
|
|
$
|
1,663.4
|
|
Goodwill is tested for impairment annually on the first day of the fourth quarter or more frequently if events or changes in circumstances (each, a "triggering event") would more likely than not reduce the carrying value of goodwill below its fair value. Management considered the general economic decline and the impact of the COVID-19 pandemic, but did not identify any triggering events during the quarter ended April 3, 2020 that would require an interim impairment analysis.
Inventory
Details of Inventory included in the Company’s Consolidated Balance Sheets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
April 3, 2020
|
|
December 31, 2019
|
Inventories:
|
|
|
|
Raw materials
|
$
|
142.7
|
|
|
$
|
138.4
|
|
Work in process
|
808.6
|
|
|
772.9
|
|
Finished goods
|
300.6
|
|
|
321.1
|
|
|
$
|
1,251.9
|
|
|
$
|
1,232.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
As of April 3, 2020, the total accrued pension liability for underfunded plans was $133.2 million, of which the current portion of $0.3 million was classified as accrued expenses and other current liabilities. As of December 31, 2019, the total accrued pension liability for underfunded plans was $132.7 million, of which the current portion of $0.3 million was classified as accrued expenses and other current liabilities.
The components of the net periodic pension expense are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
|
|
|
|
Service cost
|
$
|
2.7
|
|
|
$
|
2.3
|
|
|
|
|
|
Interest cost
|
1.1
|
|
|
1.3
|
|
|
|
|
|
Expected return on plan assets
|
(1.5)
|
|
|
(1.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost
|
$
|
2.3
|
|
|
$
|
2.1
|
|
|
|
|
|
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements. The components of lease expense are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
|
|
Operating lease
|
$
|
9.1
|
|
|
$
|
8.3
|
|
|
|
Variable lease
|
1.1
|
|
|
1.2
|
|
|
|
Short-term lease
|
1.1
|
|
|
0.7
|
|
|
|
Total lease expense
|
$
|
11.3
|
|
|
$
|
10.2
|
|
|
|
The lease liabilities recognized in the Consolidated Balance Sheets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
April 3, 2020
|
|
December 31, 2019
|
Accrued expenses and other current liabilities
|
$
|
27.6
|
|
|
$
|
26.1
|
|
Other long-term liabilities
|
87.8
|
|
|
87.9
|
|
|
$
|
115.4
|
|
|
$
|
114.0
|
|
Operating lease assets of $111.5 million and $110.2 million are included in other assets in the Consolidated Balance Sheets as of April 3, 2020 and December 31, 2019, respectively. As of April 3, 2020, the weighted-average remaining lease-term was 6.3 years and the weighted-average discount rate was 5.5%.
Supplemental Disclosure of Cash Flow Information
Certain of the Company's cash and non-cash activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
Non-cash financing activity:
|
|
|
|
|
Liability incurred for purchase of business
|
|
$
|
7.7
|
|
|
$
|
—
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures in accounts payable and other liabilities
|
|
$
|
123.5
|
|
|
$
|
207.2
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange of lease liabilities
|
|
8.8
|
|
|
4.1
|
|
Cash (received) paid for:
|
|
|
|
|
Interest income
|
|
$
|
(1.9)
|
|
|
$
|
(2.5)
|
|
Interest expense
|
|
24.5
|
|
|
15.4
|
|
Income taxes
|
|
9.9
|
|
|
15.6
|
|
Operating lease payments in operating cash flows
|
|
8.2
|
|
|
9.5
|
|
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Reconciliation of the captions in the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
December 31, 2019
|
|
March 29, 2019
|
|
December 31, 2018
|
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,982.0
|
|
|
$
|
894.2
|
|
|
$
|
939.6
|
|
|
$
|
1,069.6
|
|
Restricted cash (included in other current assets)
|
|
—
|
|
|
—
|
|
|
17.5
|
|
|
17.5
|
|
Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows
|
|
$
|
1,982.0
|
|
|
$
|
894.2
|
|
|
$
|
957.1
|
|
|
$
|
1,087.1
|
|
The restricted cash balance, which included the consideration held in escrow for the acquisition of Aptina in 2014, was released during the year ended December 31, 2019 upon satisfaction of certain outstanding items contained in the merger agreement for such acquisition.
Note 6: Long-Term Debt
The Company's long-term debt consists of the following (annualized interest rates, in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
April 3, 2020
|
|
December 31, 2019
|
Amended Credit Agreement:
|
|
|
|
|
Revolving Credit Facility due 2024, interest payable monthly at 2.45% and 3.30%, respectively
|
$
|
1,965.0
|
|
|
$
|
800.0
|
|
Term Loan “B” Facility due 2026, interest payable monthly at 2.99% and 3.80%, respectively
|
1,626.8
|
|
|
1,630.9
|
|
1.00% Notes due 2020 (1)
|
690.0
|
|
|
690.0
|
|
1.625% Notes due 2023 (2)
|
575.0
|
|
|
575.0
|
|
Other long-term debt (3)
|
0.7
|
|
|
53.3
|
|
Gross long-term debt, including current maturities
|
$
|
4,857.5
|
|
|
$
|
3,749.2
|
|
Less: Debt discount (4)
|
(92.8)
|
|
|
(102.7)
|
|
Less: Debt issuance costs (5)
|
(32.1)
|
|
|
(34.0)
|
|
Net long-term debt, including current maturities
|
$
|
4,732.6
|
|
|
$
|
3,612.5
|
|
Less: Current maturities
|
(689.6)
|
|
|
(736.0)
|
|
Net long-term debt
|
$
|
4,043.0
|
|
|
$
|
2,876.5
|
|
_______________________
(1) Interest is payable on June 1 and December 1 of each year at 1.00% annually.
(2) Interest is payable on April 15 and October 15 of each year at 1.625% annually.
(3) Consists of a term loan, finance lease and other facility at certain international locations where interest is payable monthly or quarterly, with interest rates ranging between 1.00% and 1.48% and maturity dates in 2020.
(4) Debt discount of $15.0 million and $20.4 million for the 1.00% Notes, $67.7 million and $71.8 million for the 1.625% Notes and $10.1 million and $10.5 million for the Term Loan "B" Facility, in each case as of April 3, 2020 and December 31, 2019, respectively.
(5) Debt issuance costs of $2.1 million and $2.8 million for the 1.00% Notes, $6.5 million and $6.9 million for the 1.625% Notes and $23.5 million and $24.3 million for the Term Loan "B" Facility, in each case as of April 3, 2020 and December 31, 2019, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Expected maturities of gross long-term debt (including current maturities) as of April 3, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
Period
|
|
Expected Maturities
|
Remainder of 2020
|
|
$
|
703.0
|
|
2021
|
|
16.3
|
|
2022
|
|
16.3
|
|
2023
|
|
591.4
|
|
2024
|
|
1,981.4
|
|
Thereafter
|
|
1,549.1
|
|
Total
|
|
$
|
4,857.5
|
|
The Company was in compliance with its covenants under all debt agreements as of April 3, 2020.
On March 24, 2020, the Company borrowed $1,165.0 million under the Revolving Credit Facility as a precautionary measure in order to increase the Company’s cash position and provide financial flexibility in light of the current uncertainty resulting from the impact of the COVID-19 pandemic (the “Credit Facility Draw”). As a result of the Credit Facility Draw, as of March 24, 2020, the Company had borrowed substantially all amounts available under the Revolving Credit Facility and has $4.0 million available for draw under the Revolving Credit Facility, subject to certain conditions. The proceeds from the Credit Facility Draw could be used to repay a portion of debt maturing in 2020, and for working capital, general corporate or other purposes.
Note 7: Earnings Per Share and Equity
Earnings Per Share
Net income (loss) per common share attributable to ON Semiconductor Corporation is calculated as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
|
|
|
|
Net income (loss) attributable to ON Semiconductor Corporation
|
$
|
(14.0)
|
|
|
$
|
114.1
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
410.6
|
|
|
410.6
|
|
|
|
|
|
Dilutive effect of share-based awards
|
—
|
|
|
3.2
|
|
|
|
|
|
Dilutive effect of convertible notes
|
—
|
|
|
3.9
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
410.6
|
|
|
417.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to ON Semiconductor Corporation:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.03)
|
|
|
$
|
0.28
|
|
|
|
|
|
Diluted
|
$
|
(0.03)
|
|
|
$
|
0.27
|
|
|
|
|
|
Basic income (loss) per common share is computed by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the period.
To calculate the diluted weighted-average common shares outstanding, the number of incremental shares from the assumed exercise of stock options and assumed issuance of shares relating to RSUs is calculated by applying the treasury stock method. Share-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per share calculation. The excluded number of anti-dilutive share-based awards was 2.6 million and 0.6 million for the quarters ended April 3, 2020 and March 29, 2019. The increase in the anti-dilutive share-based awards for the quarter ended April 3, 2020 was due to the net loss for the quarter ended April 3, 2020, as the inclusion would have the effect of decreasing the net loss per common share attributable to the Company.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The dilutive impact related to the 1.00% Notes and 1.625% Notes is determined in accordance with the net share settlement requirements, under which the Company's convertible notes are assumed to be convertible into cash up to the par value, with the excess of par value being convertible into common stock. During the quarter ended April 3, 2020, although the average share price exceeded the conversion price for the 1.00% Notes, the impact of the excess over par value was excluded in calculating the dilutive effect of the convertible notes as the impact would be anti-dilutive due to the net loss for the quarter ended April 3, 2020.
Equity
Share Repurchase Program
Under the Company's share repurchase program announced on November 15, 2018 (the “Share Repurchase Program”), the Company may repurchase up to $1.5 billion (exclusive of fees, commissions and other expenses) of the Company’s common stock from December 1, 2018 through December 31, 2022.
There were $65.3 million and $75.7 million in repurchases of the Company's common stock under the Share Repurchase Program during the quarters ended April 3, 2020 and March 29, 2019, respectively. As of April 3, 2020, the authorized amount remaining under the Share Repurchase Program was $1,295.8 million.
Information relating to the Share Repurchase Program during the quarter ended April 3, 2020 and March 29, 2019 is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
Number of repurchased shares (1)
|
3.6
|
|
|
4.4
|
|
Aggregate purchase price
|
$
|
65.3
|
|
|
$
|
75.7
|
|
Fees, commissions and other expenses
|
0.1
|
|
|
0.1
|
|
Less: Ending accrued share repurchases (2)
|
—
|
|
|
(0.8)
|
|
Total cash used for share repurchases
|
$
|
65.4
|
|
|
$
|
75.0
|
|
Weighted-average purchase price per share (3)
|
$
|
18.08
|
|
|
$
|
17.17
|
|
(1) None of these shares had been reissued or retired as of April 3, 2020, but may be reissued or retired by the Company at a later date.
(2) Represents unpaid amounts recorded in accrued expenses and other current liabilities.
(3) Exclusive of fees, commissions and other expenses.
Shares for Restricted Stock Units Tax Withholding
Shares with a fair market value equal to the applicable amount of the employee withholding taxes due are withheld by the Company upon the vesting of RSUs to pay the applicable amount of employee withholding taxes and are considered common stock repurchases. The Company then pays the applicable amount of withholding taxes in cash. The amounts remitted during the quarters ended April 3, 2020 and March 29, 2019 were $16.0 million and $26.1 million, respectively, for which the Company withheld approximately 0.9 million and 1.2 million shares of common stock, respectively, that were underlying the RSUs that vested. Treasury stock is recorded at cost and is presented as a reduction of stockholders' equity in the accompanying consolidated financial statements. None of these shares had been reissued or retired as of April 3, 2020, but may be reissued or retired by the Company at a later date. These repurchases in connection with tax withholding upon vesting were not made under the Share Repurchase Program, and the amounts spent in connection with such deemed repurchases did not reduce the authorized amount remaining under the Share Repurchase Program.
Non-Controlling Interest
The Company owns 80% of the outstanding equity interests in a joint venture, Leshan-Phoenix Semiconductor Company Limited (“Leshan”), which operates assembly and test operations in Leshan, China. The results of Leshan have been consolidated in the Company's financial statements. As of December 31, 2019, the non-controlling interest balance was $22.4
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
million. This balance increased to $22.7 million as of April 3, 2020, resulting from the non-controlling interest’s $0.3 million share of the earnings for the quarter ended April 3, 2020.
During the quarter ended April 3, 2020, the Company acquired the remaining 40% of the equity interest in ON Semiconductor Aizu Co., Ltd., ("OSA") from Fujitsu Semiconductor Limited (“FSL”), whereby OSA became a wholly-owned subsidiary of the Company. OSA operates a front-end wafer fabrication facility in Aizuwakamatsu, Japan. The purchase price payable to FSL for the remaining 40% equity, offset by the purchase price adjustment, resulted in the Company receiving $26.0 million from FSL during the quarter ended April 3, 2020. The results of OSA have been consolidated in the Company’s financial statements since the fourth quarter of 2018, when the Company acquired the majority equity interest.
Note 8: Share-Based Compensation
Total share-based compensation expense related to the Company's RSUs, stock grant awards and the ESPP were recorded within the Consolidated Statements of Operations and Comprehensive Income as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
|
|
|
|
Cost of revenue
|
$
|
2.5
|
|
|
$
|
1.9
|
|
|
|
|
|
Research and development
|
4.1
|
|
|
3.6
|
|
|
|
|
|
Selling and marketing
|
2.9
|
|
|
3.8
|
|
|
|
|
|
General and administrative
|
6.2
|
|
|
10.4
|
|
|
|
|
|
Share-based compensation expense
|
$
|
15.7
|
|
|
$
|
19.7
|
|
|
|
|
|
Related income tax benefits at federal rate of 21%
|
(3.3)
|
|
|
(4.1)
|
|
|
|
|
|
Share-based compensation expense, net of taxes
|
$
|
12.4
|
|
|
$
|
15.6
|
|
|
|
|
|
As of April 3, 2020, total unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $132.5 million, which is expected to be recognized over a weighted-average period of 1.7 years. There were no stock options exercised during the quarter ended April 3, 2020. Upon option exercise, vesting of RSUs, stock grant awards or completion of a purchase under the ESPP, the Company issues new shares of common stock. The annualized pre-vesting forfeiture rate for RSUs was estimated to be 5% for the quarters ended April 3, 2020 and March 29, 2019.
Shares Available
As of April 3, 2020 and December 31, 2019, there was an aggregate of 18.1 million and 25.5 million shares of common stock, respectively, available for grant under the Amended and Restated SIP. As of April 3, 2020 and December 31, 2019, there was an aggregate of 4.3 million and 4.8 million shares of common stock, respectively, available for issuance under the ESPP.
Restricted Stock Units
RSUs generally vest ratably over three years for awards with service condition and over two years for awards with performance or market conditions, or a combination thereof, and are settled in shares of the Company's common stock upon vesting. A summary of the RSU transactions for the quarter ended April 3, 2020 is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value Per Share
|
Non-vested RSUs at December 31, 2019
|
|
8.9
|
|
|
$
|
20.84
|
|
Granted
|
|
4.8
|
|
|
18.94
|
|
|
|
|
|
|
Released
|
|
(2.7)
|
|
|
18.31
|
|
Forfeited
|
|
(0.1)
|
|
|
20.69
|
|
Non-vested RSUs at April 3, 2020
|
|
10.9
|
|
|
20.63
|
|
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 9: Commitments and Contingencies
Environmental Contingencies
The Company’s headquarters in Phoenix, Arizona are located on property that is a “Superfund” site, which is a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Motorola and Freescale (acquired by NXP Semiconductors N.V.) have been involved in the clean-up activities of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to consent decrees with the State of Arizona. As part of the Company’s separation from Motorola in 1999, Motorola retained responsibility for this contamination, and Motorola and Freescale have agreed to indemnify the Company with respect to remediation costs and other costs or liabilities related to this matter. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
The Company’s former front-end manufacturing location in Aizu, Japan is located on property where soil and ground water contamination was detected. The Company believes that the contamination originally occurred during a time when the facility was operated by a prior owner. The Company worked with local authorities to implement a remediation plan and has completed remaining remediation. The majority of the cost of remediation was covered by insurance. During 2018, semi-annual groundwater monitoring indicated that the treatment was effective, and accordingly, the Company ceased such monitoring and has determined that this remediation project is complete. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
The Company’s manufacturing facility in the Czech Republic has undergone remediation to respond to releases of hazardous substances that occurred during the years that this facility was operated by government-owned entities. The remediation projects consisted primarily of monitoring groundwater wells located on-site and off-site with additional action plans developed to respond in the event certain contamination levels are exceeded. The government of the Czech Republic has agreed to indemnify the Company and its respective subsidiaries, subject to specified limitations, for remediation costs associated with this historical contamination. The Company has completed remediation on this project and, accordingly, has ceased all related monitoring efforts. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
The Company’s design center in East Greenwich, Rhode Island is located on property that has localized soil contamination. In connection with the purchase of the facility, the Company entered into a Settlement Agreement and Covenant Not to Sue with the State of Rhode Island. This agreement requires that remedial actions be undertaken and a quarterly groundwater monitoring program be initiated by the former owners of the property. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
As a result of the acquisition of AMIS in 2008, the Company is a “primary responsible party” to an environmental remediation and clean-up plan at AMIS’s former corporate headquarters in Santa Clara, California. Costs incurred by AMIS include implementation of the clean-up plan, operations and maintenance of remediation systems, and other project management costs. However, AMIS’s former parent company, a subsidiary of Nippon Mining, contractually agreed to indemnify AMIS and the Company for any obligations relating to environmental remediation and clean-up activities at this location. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
Through its acquisition of Fairchild, the Company acquired a facility in South Portland, Maine. This facility has ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of Fairchild from its former parent company, National Semiconductor Corporation, which is now owned by Texas Instruments Incorporated. Although the Company may incur certain liabilities with respect to these remediation projects, pursuant to a 1997 asset purchase agreement entered into in connection with the Fairchild recapitalization, National Semiconductor Corporation agreed to indemnify Fairchild, without limitation and for an indefinite period of time, for all future costs related to these projects. Under a 1999 asset purchase agreement pursuant to which Fairchild purchased the power device business of Samsung, Samsung agreed to indemnify Fairchild in an amount up to $150.0 million for remediation costs and other liabilities related to historical contamination at Samsung’s Bucheon, South Korea operations. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Under a 2001 asset purchase agreement pursuant to which Fairchild purchased a manufacturing facility in Mountain Top, Pennsylvania, Intersil Corp. (subsequently acquired by Renesas Electronics Corporation) agreed to indemnify Fairchild for remediation costs and other liabilities related to historical contamination at the facility. Any costs to the Company incurred to respond to the above conditions and projects have not been, and are not expected to be, material and any future payments the Company makes in connection with such liabilities are not expected to be material.
The Company was notified by the EPA that it has been identified as a PRP under CERCLA in the Chemetco Superfund matter. Chemetco, a defunct reclamation services supplier that operated in Hartford, Illinois, at what is now a Superfund site, has performed reclamation services for the Company in the past. The EPA is pursuing Chemetco customers for contribution to the site clean-up activities. The Company has joined a PRP group, which is cooperating with the EPA in the evaluation and funding of the clean-up activities. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
Financing Contingencies
In the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions, including, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of April 3, 2020, the Company's Revolving Credit Facility included $15.0 million of commitment subject to the available balance of the Revolving Credit Facility for the issuance of letters of credit, which, as of the date of this Form 10-Q was $4.0 million. There were $1.0 million letters of credit outstanding under the Revolving Credit Facility as of April 3, 2020, which reduced the Company's borrowing capacity. As of April 3, 2020, the Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $11.5 million.
As part of obtaining financing in the ordinary course of business, the Company issued guarantees related to certain of its subsidiaries' term loan financing and surety bond, which totaled $1.6 million as of April 3, 2020.
Based on historical experience and information currently available, the Company believes that it will not be required to make payments under the standby letters of credit or guarantee arrangements for the foreseeable future.
Indemnification Contingencies
The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to IP infringement, property damage (including environmental contamination), personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct or breach of representations and warranties and covenants related to such matters as title to sold assets.
The Company faces risk of exposure to warranty and product liability claims in the event that its products fail to perform as expected or such failure of its products results, or is alleged to result, in economic damage, bodily injury or property damage. In addition, if any of the Company’s designed products are alleged to be defective, the Company may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, the Company may agree to provide more favorable rights to such customer for valid defective product claims.
The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability company operating agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. Section 145 of the Delaware General Corporation Law (“DGCL”) authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the DGCL are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Exchange Act. As permitted by the DGCL, the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), contains provisions relating to the limitation of liability and indemnification of directors and officers. The Certificate of Incorporation eliminates the personal liability of each of the Company’s directors to the fullest extent permitted by Section 102(b)(7) of the DGCL, as it may be amended or supplemented, and provides that the Company will indemnify its directors and officers to the fullest extent permitted by Section 145 of the DGCL, as amended from time to time.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The Company has entered into indemnification agreements with each of its directors and executive officers. The form of agreement (the “Indemnification Agreement”) provides, subject to certain exceptions and conditions specified in the Indemnification Agreement, that the Company will indemnify each indemnitee to the fullest extent permitted by Delaware law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with a proceeding or claim in which such person is involved because of his or her status as one of the Company’s directors or executive officers. In addition, the Indemnification Agreement provides that the Company will, to the extent not prohibited by law and subject to certain exceptions and repayment conditions, advance specified indemnifiable expenses incurred by the indemnitee in connection with such proceeding or claim.
The Company also maintains directors’ and officers’ insurance policies that indemnify its directors and officers against various liabilities, including certain liabilities under the Exchange Act that might be incurred by any director or officer in his or her capacity as such.
The agreement and plan of merger relating to the acquisition of Fairchild (the “Fairchild Agreement”) provides for indemnification and insurance rights in favor of Fairchild’s then current and former directors, officers and employees. Specifically, the Company has agreed that, for no fewer than six years following the Fairchild acquisition, the Company will: (a) indemnify and hold harmless each such indemnitee against losses and expenses (including advancement of attorneys’ fees and expenses) in connection with any proceeding asserted against the indemnified party in connection with such person’s servings as a director, officer, employee or other fiduciary of Fairchild or its subsidiaries prior to the effective time of the acquisition; (b) maintain in effect all provisions of the certificate of incorporation or bylaws of Fairchild or any of its subsidiaries or any other agreements of Fairchild or any of its subsidiaries with any indemnified party regarding elimination of liability, indemnification of officers, directors and employees and advancement of expenses in existence on the date of the Fairchild Agreement for acts or omissions occurring prior to the effective time of the acquisition; and (c) subject to certain qualifications, deliver to Fairchild’s then current directors and officers an insurance and indemnification policy that provides coverage for events occurring prior to the effective time of the acquisition that is no less favorable than Fairchild’s then-existing policy; or, if insurance coverage that is no less favorable is unavailable, the best available coverage.
Similarly, the agreement and plan of merger relating to the acquisition of Quantenna (the “Quantenna Agreement”) provides for indemnification and insurance rights in favor of Quantenna’s then current and former directors, officers, employees and agents. Specifically, the Company has agreed that, for no fewer than six years following the Quantenna acquisition, the Company will: (a) indemnify and hold harmless each such indemnified party to the fullest extent permitted by Delaware law in the event of any threatened or actual claim suit, action, proceeding or investigation against the indemnified party based in whole or in part on, or pertaining to, such person’s serving as a director, officer, employee or agent of Quantenna or its subsidiaries or predecessors prior to the effective time of the acquisition or in connection with the Quantenna Agreement; (b) maintain in effect provisions of the certificate of incorporation and bylaws of Quantenna and each of its subsidiaries regarding the elimination of liability of directors and indemnification of officers, directors and employees that are no less advantageous to the intended beneficiaries than the corresponding provisions in the certificate of incorporation and bylaws of Quantenna and each of its subsidiaries in existence on the date of the Quantenna Agreement; and (c) obtain and fully pay the premium for a non-cancelable extension of directors’ and officers’ liability coverage of Quantenna’s directors’ and officers’ policies and Quantenna’s fiduciary liability insurance policies in effect as of the date of the Quantenna Agreement.
While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial position, results of operations, or cash flows.
Legal Matters
From time to time, the Company is party to various legal proceedings arising in the ordinary course of business, including indemnification claims, claims of alleged infringement of patents, trademarks, copyrights and other IP rights, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations. The Company regularly evaluates the status of the legal proceedings in which it is involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may have been incurred and determines if accruals are appropriate. If
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
accruals are not appropriate, the Company further evaluates each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be made for disclosure. Although litigation is inherently unpredictable, the Company believes that it has adequate provisions for any probable and estimable losses. Nevertheless, it is possible that the Company’s consolidated financial position, results of operations or liquidity could be materially and adversely affected in any particular period by the resolution of a legal proceeding. The Company’s estimates do not represent its maximum exposure. Legal expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel are expensed as incurred.
The Company is currently involved in a variety of legal matters that arise in the ordinary course of business. Based on information currently available, except as disclosed below, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity. The litigation process is inherently uncertain, and the Company cannot guarantee that the outcome of any litigation matter will be favorable to the Company.
Litigation with AcBel Polytech, Inc.
On November 27, 2013, Fairchild and Fairchild Semiconductor Corporation were named as defendants in a complaint filed by AcBel Polytech, Inc. (“AcBel”) in the U.S. District Court for the District of Massachusetts. The lawsuit alleged a number of causes of action, including breach of warranty, fraud, negligence and strict liability, and has been docketed as AcBel Polytech, Inc. v. Fairchild Semiconductor International, Inc. et al, Case # 1:13-CV-13046-DJC. On December 10, 2016, the Court issued an order on the Company’s motion for summary judgment dismissing all of AcBel’s claims except for claims alleging breach of implied warranties. A bench trial was held in June 2017. On December 27, 2017, the Court rendered a verdict in favor of the Fairchild defendants on the remaining implied warranty claims. AcBel appealed the Court’s ruling, and on September 11, 2018, the U.S. Court of Appeals for the First Circuit heard arguments in this matter from Fairchild and AcBel. On June 20, 2019, the First Circuit vacated the decision of the District Court in favor of Fairchild and remanded the matter for additional discovery and a new trial. The First Circuit also reversed the District Court’s dismissal of the fraud, fraudulent misrepresentation and negligent misrepresentation claims at the summary judgment phase and remanded those claims for trial. The District Court scheduled a new trial for July 2020. The Company will continue to vigorously defend itself in this matter.
In parallel to the litigation with AcBel, Fairchild filed an arbitration against its distributor, Synnex Technology International Corp (“Synnex”), in Hong Kong in response to Synnex’s failure to pass along Fairchild’s limited warranty to AcBel. The arbitration was held in December 2017. On August 17, 2018, the arbitrator ruled in favor of Fairchild and ordered Synnex to indemnify Fairchild for any damages Fairchild is required to pay AcBel in connection with the litigation between Fairchild and AcBel. On November 16, 2018, Synnex appealed the arbitrator’s ruling. A hearing was held on October 23, 2019, and on November 1, 2019, a Hong Kong court affirmed the arbitrator’s ruling in favor of Fairchild.
Intellectual Property Matters
The Company faces risk of exposure from claims of infringement of the IP rights of others. In the ordinary course of business, the Company receives letters asserting that the Company’s products or components breach another party’s rights. Such letters may request royalty payments from the Company, that the Company cease and desist using certain IP or other remedies.
Note 10: Fair Value Measurements
Fair Value of Financial Instruments
The following table summarizes the Company's financial assets and liabilities, excluding pension assets, measured at fair value on a recurring basis (in millions):
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As of
|
|
Fair Value Hierarchy
|
|
|
|
|
Description
|
|
April 3, 2020
|
|
Level 1
|
|
Level 2
|
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Level 3
|
Assets:
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|
|
|
|
|
|
|
Cash and cash equivalents:
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|
|
|
|
|
|
|
Demand and time deposits
|
|
$
|
338.9
|
|
|
$
|
338.9
|
|
|
$
|
—
|
|
|
$
|
—
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
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As of
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Fair Value Hierarchy
|
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|
|
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Description
|
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December 31, 2019
|
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Level 1
|
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Level 2
|
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Level 3
|
Assets:
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|
|
|
|
|
|
|
Cash and cash equivalents:
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|
|
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Demand and time deposits
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$
|
28.2
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|
$
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28.2
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$
|
—
|
|
|
$
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—
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|
|
|
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|
|
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Other
The carrying amounts of other current assets and liabilities, such as accounts receivable and accounts payable, approximate fair value based on the short-term nature of these instruments.
Fair Value of Long-Term Debt, including Current Portion
The carrying amounts and fair values of the Company’s long-term borrowings (excluding finance lease obligations, real estate mortgages and equipment financing) are as follows (in millions):
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As of
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April 3, 2020
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|
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December 31, 2019
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Carrying
Amount
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Fair Value
|
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Carrying
Amount
|
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Fair Value
|
Long-term debt, including current portion
|
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|
|
|
|
|
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Convertible notes (1)
|
$
|
1,173.7
|
|
|
$
|
1,234.5
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|
|
$
|
1,163.1
|
|
|
$
|
1,730.2
|
|
Long-term debt (1)
|
3,558.9
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|
|
3,116.3
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|
|
2,449.3
|
|
|
2,427.8
|
|
(1) Carrying amount shown is net of debt discount and debt issuance costs.
The fair values of the Company's 1.00% Notes and 1.625% Notes were estimated based on market prices in active markets (Level 1). The fair value of other long-term debt was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2) at April 3, 2020 and December 31, 2019.
Note 11: Financial Instruments
Foreign Currencies
As a multinational business, the Company’s transactions are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures and entering into trades for any currency to intentionally increase the underlying exposure.
The Company primarily hedges existing assets and liabilities associated with transactions currently on its balance sheet, which are undesignated hedges for accounting purposes.
As of April 3, 2020 and December 31, 2019, the Company had net outstanding foreign exchange contracts with notional amounts of $121.8 million and $183.3 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within one to three months from the time of purchase. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts should offset losses and gains on the underlying assets, liabilities and transactions to which they are related.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The following summarizes the Company’s net foreign exchange positions in U.S. Dollars (in millions):
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|
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As of
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|
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|
|
|
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|
|
April 3, 2020
|
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|
|
December 31, 2019
|
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|
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Buy (Sell)
|
|
Notional Amount
|
|
Buy (Sell)
|
|
Notional Amount
|
|
|
|
|
|
|
|
|
|
Philippine Peso
|
|
46.5
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|
|
46.5
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36.4
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|
|
36.4
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Korean Won
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|
18.9
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|
|
18.9
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|
|
18.1
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|
18.1
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Chinese Yuan
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|
17.6
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|
|
17.6
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|
20.2
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|
|
20.2
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Malaysian Ringgit
|
|
7.6
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|
|
7.6
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|
20.4
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|
|
20.4
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Japanese Yen
|
|
(6.2)
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|
6.2
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|
49.8
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|
|
49.8
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Czech Koruna
|
|
(3.8)
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|
3.8
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|
|
11.9
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|
|
11.9
|
|
Other Currencies - Buy
|
|
16.9
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|
|
16.9
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|
|
21.9
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|
|
21.9
|
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Other Currencies - Sell
|
|
(4.3)
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|
|
4.3
|
|
|
(4.6)
|
|
|
4.6
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|
|
|
$
|
93.2
|
|
|
$
|
121.8
|
|
|
$
|
174.1
|
|
|
$
|
183.3
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|
Amounts receivable or payable under the contracts are included in other current assets or accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets. Realized and unrealized foreign currency transactions totaled a loss of $0.2 million for the quarter ended April 3, 2020 and loss of $3.1 million for the quarter ended March 29, 2019. The realized and unrealized foreign currency transactions are included in other income and expenses in the Company's Consolidated Statements of Operations and Comprehensive Income.
Cash Flow Hedges
All derivatives are recognized on the Company’s Consolidated Balance Sheets at their fair value and classified based on the instrument's maturity date.
Interest rate risk
The Company uses interest rate swap contracts to mitigate its exposure to interest rate fluctuations. The notional amounts of the interest rate swap agreements outstanding as of each of April 3, 2020 and March 29, 2019 amounted to $1.0 billion. The Company performed effectiveness assessments and concluded that there was no ineffectiveness during the quarters ended April 3, 2020 and March 29, 2019.
On April 17, 2020, the Company entered into additional interest rate swap agreements for notional amounts totaling $1.25 billion (effective as of April 30, 2020), $750.0 million (effective as of December 31, 2020) and $750.0 million (effective as of December 31, 2021) with maturity dates of December 31, 2020, December 31, 2021 and December 31, 2022, respectively.
Foreign currency risk
The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. The Company enters into forward contracts that are designated as foreign currency cash flow hedges of selected forecasted payments denominated in currencies other than U.S. Dollars.
For the quarters ended April 3, 2020 and March 29, 2019, the Company did not have outstanding derivatives for its foreign currency exposure designated as cash flow hedges.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 1.00% Notes and 1.625% Notes.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Other
At April 3, 2020, the Company had no outstanding commodity derivatives, currency swaps or options relating to either its debt instruments or investments. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies. The Company is exposed to credit-related losses if counterparties to hedge contracts fail to perform their obligations. As of April 3, 2020, the counterparties to the Company’s hedge contracts were held at financial institutions that the Company believes to be highly-rated, and no credit-related losses are anticipated.
Note 12: Income Taxes
The Company recognizes interest and penalties related to unrecognized tax benefits in tax expense on the Company's Consolidated Statements of Operations and Comprehensive Income. The Company had approximately $5.2 million and $5.8 million of net interest and penalties accrued at April 3, 2020 and March 29, 2019, respectively. It is reasonably possible that $1.5 million of its unrecognized tax benefits will be reduced in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company continues to maintain a full valuation allowance on its U.S. state deferred tax assets and a valuation allowance on foreign net operating losses and tax credits in certain other foreign jurisdictions, a substantial portion of which relate to Japan net operating losses, which are projected to expire prior to utilization.
Tax years prior to 2016 are generally not subject to examination by the Internal Revenue Service (the “IRS”) except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. The Company is currently under IRS examination for the 2017 tax year. For state tax returns, the Company is generally not subject to income tax examinations for tax years prior to 2015. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to jurisdictions outside the United States, the Company is generally not subject to examination for tax years prior to 2009. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
Note 13: Changes in Accumulated Other Comprehensive Loss
Amounts comprising the Company's accumulated other comprehensive loss and reclassifications are as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustments
|
|
Effects of Cash Flow Hedges
|
|
|
|
Total
|
Balance as of December 31, 2019
|
|
$
|
(42.4)
|
|
|
$
|
(11.9)
|
|
|
|
|
$
|
(54.3)
|
|
Other comprehensive income (loss) prior to reclassifications
|
|
0.6
|
|
|
(10.9)
|
|
|
|
|
(10.3)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
(1.9)
|
|
|
|
|
(1.9)
|
|
Net current period other comprehensive income (loss) (1)
|
|
0.6
|
|
|
(12.8)
|
|
|
|
|
(12.2)
|
|
Balance as of April 3, 2020
|
|
$
|
(41.8)
|
|
|
$
|
(24.7)
|
|
|
|
|
$
|
(66.5)
|
|
(1) Effects of cash flow hedges are net of tax benefit of $3.4 million of tax benefit for the quarter ended April 3, 2020.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Amounts which were reclassified from accumulated other comprehensive loss to the Company's Consolidated Statements of Operations and Comprehensive Income are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
March 29, 2019
|
|
|
|
|
|
Statements of Operations and Comprehensive Income Line Item
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1.9
|
|
|
$
|
(1.4)
|
|
|
|
|
|
|
Interest expense
|
|
Total reclassifications
|
|
$
|
1.9
|
|
|
$
|
(1.4)
|
|
|
|
|
|
|
|