Fair Value Measurements

9 Months Ended

Sep. 28, 2018

Note 11: 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):



			Fair Value Hierarchy
Description	As of September 28, 2018		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Demand and time deposits	$	11.3	$	11.3	$	—	$	—
Money market funds	0.3		0.3		—		—

During the quarter ended March 30, 2018, the Company reduced the contingent consideration payable relating to the second earn-out for the AXSEM acquisition to zero due to a revision in the Company's expectations regarding the likelihood that the earn-out would be achieved. The gain was recorded in other expense in the Consolidated Statements of Operations and Comprehensive Income.



			Fair Value Hierarchy
Description	As of December 31, 2017		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Demand and time deposits	$	71.7	$	71.7	$	—	$	—
Money market funds	0.2		0.2		—		—
Liabilities:
Contingent consideration	$	2.3	$	—	$	—	$	2.3

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 capital lease obligations, real estate mortgages and equipment financing) are as follows (in millions):



	As of
	September 28, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion
Convertible notes	$	1,109.9	$	1,445.4	$	1,080.1	$	1,596.7
Long-term debt	$	1,573.2	$	1,584.4	$	1,833.2	$	1,845.4

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 September 28, 2018 and December 31, 2017.

Cost and Equity Method Investments

The Company accounts for investments in companies that it does not control, or have significant influence over, under the cost method, as applicable. If a decline in the fair value of a cost method investment is determined to be other than temporary, an impairment charge is recorded, and the carrying value of the cost method investment is reduced to fair value. The Company evaluates all of its cost method investments for impairment; however, it is not required to determine the fair value of its investment unless impairment indicators are present.

The Company’s cost method investments had a carrying value of $7.4 million and $12.6 million as of September 28, 2018 and December 31, 2017, respectively.

On April 1, 2018 (the "second closing date”), the Company acquired a 30 percent incremental interest in AFSM for $19.8 million in cash, resulting in a 40 percent ownership interest with an aggregate investment value of $26.2 million. The Company’s investment in AFSM, which was accounted for under the cost method through the quarter ended March 30, 2018, has been accounted for under the equity method beginning April 1, 2018 following the increase in the Company's investment.

On October 1, 2018 (the “third closing date”), the Company acquired a 20 percent incremental interest in AFSM for $12.3 million in cash, resulting in a 60 percent majority ownership interest in AFSM with an aggregate investment value of $40.9 million. Consequently, the legal name of AFSM was changed to ON Semiconductor Aizu Co., Ltd. As a result of acquiring majority ownership of AFSM, for reporting periods beginning on or after October 1, 2018, purchase method accounting will be applied, the results of AFSM will be consolidated with the results of the Company and the non-controlling interest held by the minority shareholder will be initially recognized at fair value. Purchase accounting is not complete as of the date of the filing of this Form 10-Q.

Subject to the fulfillment of certain conditions, the Company will be required to increase its ownership interest in AFSM to 100 percent between nine and 18 months following the third closing date.

AFSM, a related party for the quarters ended September 28, 2018 and June 29, 2018, operates a front-end fabrication facility in Aizu-Wakamatsu that manufactures 8-inch wafers based on design specification from its customers, which are primarily the Company and another investor. During the quarter ended September 28, 2018, the Company purchased inventory of approximately $22.6 million and has a payable of $21.1 million to AFSM as of September 28, 2018.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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