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2020-12-31

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020
Or

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
(Commission File Number) 001-39317
ON SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)

Delaware |  | 36-3840979
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

5005 E. McDowell Road
Phoenix, AZ 85008
(602) 244-6600
(Address, zip code and telephone number, including area code, of principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, par value $0.01 per share | ON | The Nasdaq Stock Market LLC
Preferred Stock, Series B Junior Participating, Purchase Rights | N/A | The Nasdaq Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☒ | Accelerated filer | ☐
Non-accelerated filer | ☐ | Smaller reporting company | ☐
|  | Emerging growth company | ☐

If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $7,783,044,394 as of July 3, 2020, based on the closing sales price of such stock on the Nasdaq Global Select Market. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock (as applicable) have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant.
The number of shares of the registrant's common stock outstanding at February 10, 2021 was 411,881,071.
Documents Incorporated by Reference
Portions of the registrant's Definitive Proxy Statement relating to its 2021 Annual Meeting of Stockholders, which is expected to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year ended December 31, 2020, are incorporated by reference into Part III of this Form 10-K.

1

ON SEMICONDUCTOR CORPORATION
FORM 10-K
TABLE OF CONTENTS

| Part I
Item 1. | Business | 5
| Business Overview | 5
| Revenue Generating Activities | 6
| Markets | 9
| Resources | 12
| Seasonality | 14
| Government Regulation | 14
| Human Capital Resources | 15
| Executive Officers of the Registrant | 16
| Available Information | 18
Item 1A. | Risk Factors | 18
Item 1B. | Unresolved Staff Comments | 36
Item 2. | Properties | 37
Item 3. | Legal Proceedings | 37
Item 4. | Mine Safety Disclosure | 37
| Part II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 37
Item 6. | Selected Financial Data | 38
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 39
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 54
Item 8. | Financial Statements and Supplementary Data | 55
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 55
Item 9A. | Controls and Procedures | 55
Item 9B. | Other Information | 56
| Part III
Item 10. | Directors, Executive Officers and Corporate Governance | 56
Item 11. | Executive Compensation | 56
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 57
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 57
Item 14. | Principal Accountant Fees and Services | 57
| Part IV
Item 15. | Exhibits and Financial Statement Schedules | 57
Item 16. | Form 10-K Summary | 65
Signatures | 66

(See the glossary immediately following this table of contents for definitions of certain abbreviated terms)
2

ON SEMICONDUCTOR CORPORATION
FORM 10-K
GLOSSARY OF SELECTED ABBREVIATED TERMS*

Abbreviated Term |  | Defined Term
1.00% Notes |  | 1.00% Convertible Senior Notes due 2020
1.625% Notes |  | 1.625% Convertible Senior Notes due 2023
3.875% Notes |  | 3.875% Senior Notes due 2028
AC |  | Alternating current
ADAS |  | Advanced driver assistance systems
AEC |  | Automotive Electronics Council
AFCI |  | Arc fault circuit interrupter
AI |  | Artificial intelligence
Amended Credit Agreement |  | Credit Agreement, dated as of April 15, 2016, as subsequently amended, by and among the Company, as borrower, the several lenders party thereto, Deutsche Bank AG, New York Branch, as administrative agent and collateral agent, and certain other parties, providing for the Revolving Credit Facility and the Term Loan "B" Facility
Amended and Restated SIP |  | ON Semiconductor Corporation Amended and Restated Stock Incentive Plan, as amended
AMIS |  | AMIS Holdings, Inc.
AP/Gateway |  | Access point/gateway
Aptina |  | Aptina, Inc.
AR/VR |  | Augmented reality/virtual reality
ASC |  | Accounting Standards Codification
ASIC |  | Application specific integrated circuits
ASSP |  | Application specific standard product
ASU |  | Accounting Standards Update
BCD |  | Bipolar-CMOS-DMOS
CMOS |  | Complementary metal oxide semiconductor
CSP |  | Chip scale package
DC |  | Direct current
DFN |  | Dual-flat no-leads
DMOS |  | Double diffused metal oxide semiconductor
DSP |  | Digital signal processing
ECL |  | Emitter coupled logic
EDI |  | Electronic data interface
EEPROM |  | Electrically erasable programmable read-only memory
EPA |  | Environmental Protection Agency
ESD |  | Electrostatic discharge
ESPP |  | ON Semiconductor Corporation 2000 Employee Stock Purchase Plan, as amended
EV/HEV |  | Electric vehicles/hybrid electric vehicles
Exchange Act |  | Securities Exchange Act of 1934, as amended
Fairchild |  | Fairchild Semiconductor International Inc., a wholly-owned subsidiary of ON Semiconductor Corporation
FASB |  | Financial Accounting Standards Board
FDA |  | U.S. Food and Drug Administration
Freescale |  | Freescale Semiconductor, Inc.
GaN |  | Gallium nitride

3

GFCI |  | Ground fault circuit interrupter
HV |  | High voltage
IC |  | Integrated circuit
IGBT |  | Insulated-gate bipolar transistor
IoT |  | Internet-of-things
IP |  | Intellectual property
IPRD |  | In-process research and development
LDOs |  | Low drop out regulator controllers
LED |  | Light-emitting diode
LIBO Rate |  | A base rate per annum equal to the London Interbank Offered Rate as administered by the Intercontinental Exchange Benchmark Administration
LiDAR |  | Light detection and ranging
LSI |  | Large scale integration
MCU |  | Microcontroller unit
MOSFET |  | Metal oxide semiconductor field effect transistor
Motorola |  | Motorola Inc.
ODM |  | Original device manufacturers
OEM |  | Original equipment manufacturers
PC |  | Personal computer
PRP |  | Potentially responsible party
Revolving Credit Facility |  | A $1.97 billion revolving credit facility created pursuant to the Amended Credit Agreement
RF |  | Radio frequency
RSU |  | Restricted stock unit
SCI LLC |  | Semiconductor Components Industries, LLC, a wholly-owned subsidiary of ON Semiconductor Corporation
SEC |  | Securities and Exchange Commission
Securities Act |  | Securities Act of 1933, as amended
SensL |  | SensL Technologies Ltd.
SiC |  | Silicon carbide
SiPM |  | Silicon photomultipliers
SoC |  | System on chip
SPAD |  | Single photon avalanche diode arrays
Term Loan "B" Facility |  | A $2.4 billion term loan "B" facility created pursuant to the Amended Credit Agreement
UPS |  | Uninterruptible power supplies
VCORE |  | Voltage core
WBG |  | Wide band gap
Wi-Fi |  | Wireless radio technologies compliant with Institute of Electrical and Electronics Engineers Standard 802.11b and commonly used in wireless local area networking devices
X4DFN 01005 |  | Dual-flat no-leads 0.445 x 0.24 x 0.18 mm package

* Terms used, but not defined, within the body of the Form 10-K are defined in this Glossary.
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PART I
Item 1. Business
Business Overview
ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries ("ON Semiconductor," "we," "us," "our," or the "Company"), was incorporated under the laws of the state of Delaware in 1992 under the name Motorola Energy Systems, Inc. Immediately prior to our August 4, 1999 recapitalization, we were a wholly-owned subsidiary of Motorola.
ON Semiconductor is driving innovation in energy-efficient electronics. We believe that our extensive portfolio of sensors, power management, connectivity, custom and SoC, analog, logic, timing and discrete devices helps customers efficiently solve their design challenges in advanced electronic systems and products. Our power management and motor driver semiconductor components control, convert, protect and monitor the supply of power to the different elements within a wide variety of electronic devices. Our custom ASICs and SoC devices use analog, MCU, DSP, mixed-signal and advanced logic capabilities to enable the application and uses of many of our automotive, medical, aerospace/defense, consumer and industrial customers’ products. Our signal management semiconductor components provide high-performance clock management and data flow management for precision computing, communications and industrial systems. Our portfolio of sensors, including image sensors, radar and LiDAR, provide advanced solutions for automotive, industrial and IoT applications. Our high performance Wi-Fi solution creates a strong platform for addressing connectivity solutions for industrial IoT applications. Our standard semiconductor components serve as "building blocks" within virtually all types of electronic devices.
As of December 31, 2020, we were 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").
Recent Business Strategy Developments
Our primary focus is on gross margin expansion, while at the same time, achieving significant revenue growth in our focused end-markets of automotive, industrial and communication infrastructure as well as being opportunistic in other end-markets.
In light of these objectives, we have begun the process of evaluating our current product portfolio. We intend to allocate capital and research and development investments and resources to accelerate growth in high-margin products and end-markets by moving away from non-differentiated products, which have had historically lower gross margins, and in that process, reduce complexity, streamline the organization, and improve operating efficiencies.
Additionally, we believe these actions will allow us to transition to a lighter internal fabrication model where our gross margins will be less volatile and not as heavily influenced by our internal manufacturing volumes. As further discussed below, we are also rationalizing our manufacturing footprint to align with our investment priorities and corporate strategy. Our goal is to reduce volatility in our gross margins and maximize return on our manufacturing investments with the intent to have our product strategy drive our manufacturing footprint and capital investments.
Novel coronavirus disease 2019 ("COVID-19")
In March 2020, the World Health Organization declared COVID-19 to be a pandemic, which continues to spread throughout the U.S. and the world. Our results of operations were adversely impacted during the majority of 2020 due to the reduced demand from our customers, government-mandated temporary shutdowns of certain of our facilities, supply shortages and other logistical constraints arising from the COVID-19 pandemic.
We are unable to accurately predict the full impact that the COVID-19 pandemic will have on us due to a number of uncertainties, including the duration and severity of the outbreak, globally and, in particular, in the markets in which we do business, the impact of the pandemic on our customers' businesses, the imposition of any future government restrictions on staffing and facility operations, supply chain shortages, and other disruptions. Without global containment, it is likely that the pandemic will continue to have a negative impact on our business, results of operations and financial condition for the foreseeable future.
Pending and completed acquisitions
On April 22, 2019, we entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with GLOBALFOUNDRIES U.S. Inc. ("GFUS") and GLOBALFOUNDRIES Inc. pursuant to which we will acquire GFUS’s East
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Fishkill, New York site and fabrication facilities and certain other assets and liabilities on or around December 31, 2022 (the "Closing Date"), subject to certain conditions, for an aggregate purchase price of $400.0 million in cash, subject to adjustment as described in the Asset Purchase Agreement (the "Total Consideration"). On April 22, 2019, we paid GFUS $70.0 million of the Total Consideration in cash as a non-refundable deposit, which will be applied toward and reduce the Total Consideration.
On October 1, 2020, we entered into an amendment to the Asset Purchase Agreement (the "APA Amendment") pursuant to which we paid GFUS a non-refundable deposit in the amount of $100.0 million in cash on October 5, 2020 (the "Additional Deposit"). The Additional Deposit will be applied toward and reduce the Total Consideration as a non-refundable deposit, and the remaining $230.0 million of the Total Consideration will be paid on or around the Closing Date. Other terms and conditions of the Asset Purchase Agreement remain unchanged.
With the expected completion of the acquisition in East Fishkill, New York on or around December 31, 2022, we initiated structural changes to our manufacturing footprint. During February and August 2020, we announced that we were exploring the sales of our six-inch fabrication facilities in Oudenaarde, Belgium and Niigata, Japan, respectively. We could incur accounting charges in the future in connection with the active marketing and sale of these fabrication facilities and for costs to transition the manufacturing activity to other sites in our manufacturing network.
On June 19, 2019, we completed our acquisition of Quantenna Communications, Inc. ("Quantenna"). Following the acquisition, Quantenna changed its name to ON Semiconductor Connectivity Solutions, Inc. The purchase price totaled $1,039.3 million, and was funded with the proceeds from a $900.0 million draw against our Revolving Credit Facility and cash on hand. We believe the acquisition of Quantenna creates a strong platform for addressing connectivity solutions for industrial IoT by combining our expertise in power management and bluetooth technologies with Quantenna's Wi-Fi technologies and software capabilities.
See Note 5: ''Acquisitions, Divestiture and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.
Revenue-Generating Activities
ON Semiconductor generates revenue from the sale of our semiconductor products to distributors, OEMs and electronic manufacturing service providers. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. Our devices are found in a wide variety of end products as noted within the sample applications in the end-markets section below. Our portfolio of devices enables us to offer advanced ICs and the "building block" components that deliver system level functionality and design solutions. We offer micro packages, which provide increased performance characteristics while reducing the critical board space inside today's ever shrinking electronic devices and power modules, delivering improved energy efficiency and reliability for a wide variety of medium and high power applications. We believe that our ability to offer a broad range of products, combined with our applications and global manufacturing and logistics network, provides our customers with single source purchasing on a cost-effective and timely basis.
We shipped approximately 64.3 billion units in 2020 and approximately 66.2 billion units in 2019, resulting in a period-over-period decrease of approximately 3%. As many of our products are sold into different end-markets, the total revenue reported under PSG, ASG and ISG 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. From time to time, we reassess the alignment of our product families and devices to our operating segments and may move product families or individual devices from one operating segment to another.
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The following table illustrates the product technologies under each of our segments based on our operating strategy:

PSG |  | ASG |  | ISG |
Analog products |  | Analog products |  | LSI products |
Discrete products |  | ASIC products |  | Sensors |
MOSFET Products |  | Connectivity products |  |  |
Power Module products |  | ECL products |  |  |
Isolation products |  | Foundry products / services |  |  |
Memory products |  | Gate Driver products |  |  |
Gate Driver products |  | LSI products |  |  |
Standard Logic products |  | Standard Logic products |  |  |
WBG products |  |  |  |  |

Products and Technology
The following provides certain information regarding the products and technologies by each of our operating segments. See Note 3: ''Revenue and Segment Information'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for other information regarding our segments, their revenue and property, plant and equipment and the income derived from each segment.
PSG
PSG offers a wide array of analog, discrete, module and integrated semiconductor products that perform multiple application functions, including power switching, power conversion, signal conditioning, circuit protection, signal amplification and voltage regulation functions. The trends driving growth within our end-user markets are primarily higher power efficiency and power density in power applications, the demand for greater functionality in small handheld devices, and faster data transmission rates in all communications. The advancement of existing volt electrical infrastructure, electrification of power train in the form of EV/HEV, higher trench density enabling lower losses in power efficient packages and lower capacitance and integrated signal conditioning products to support faster data transmission rates significantly increase the use of high power semiconductor solutions. The recent increase in the use of WBG MOSFETs and diodes, including SiC and GaN, is further expanding the use of semiconductor products. Certain of PSG's broad portfolio of products and solutions are summarized below:
•Automotive Electronics
AEC qualified products, covering the spectrum from discrete to integrated, as well as automotive modules and known good die to support automotive modules. New semiconductor products based upon WBG technologies, including SiC, are rapidly being adopted for EV/HEV traction and charging applications due to the higher efficiencies they provide.
•Industrial Electronics
Advanced power technologies to support high performance power conversion for high-end power supply/UPS, alternative energy and industrial motors.
•Computing
MOSFETs and protection devices supporting the latest chipsets. Multichip power solutions and advanced LDOs to support power efficiency requirements in new computing platforms. SiC and GaN technology enables drastic reduction in power adapter size.
•Communications
Our smallest packages: DFN MOSFETs, CSP (MOSFET/EEPROMs), EEPROMs and LDOs, and X4DFN 01005 for small signal devices and protection. Low capacitance ESD and common mode filters for high-speed serial interface protection.
ASG
ASG designs and develops analog, mixed-signal, advanced logic, ASSPs and ASICs, Wi-Fi and power solutions for a broad base of end-users in different end-markets. Our product solutions enable industry leading active mode and standby mode efficiency now demanded by regulatory agencies around the world. Additionally, ASG offers trusted foundry and design
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services for our government customers as well as manufacturing services, which leverage the Company’s broad range of manufacturing, IC design, packaging, and silicon technology offerings to provide turn-key solutions for our customers. Certain of ASG’s broad portfolio of products and solutions are summarized below:
•Automotive Electronics
Energy efficient solutions that reduce emissions, improve fuel economy and safety, enhance lighting and make possible an improved driving experience. Multi-phase DC-DC power conversion for compute-intensive solutions for assisted and autonomous driving is also a focus area.
•Industrial Electronics
Efficient power conversion products, sensor interface products and motor control products. Wired and low power RF wireless connectivity for IoT applications. Residential, commercial and industrial-grade circuit breaking products for GFCI and AFCI applications. FDA-compliant assembly and packaging manufacturing services.
•Computing
Solutions for a wide range of voltage and current options ranging from multi-phase power conversion for VCORE processors, power stage and point of load. Thermal and battery charging solutions as well as high density AC to DC power conversion solutions are also supported.
•Communications
High efficiency mixed-signal, power management, Wi-Fi and RF connectivity products that enable our customers to maximize the performance of their products while preserving critical battery life. RF tuning solutions to enhance radio performance. Fast charging, multi-media and ambient awareness system solutions to address increasing customer desire for innovation.
ISG
ISG designs and develops CMOS image sensors, proximity sensors, image signal processors, single photon detectors, including SiPM and SPAD arrays, radar, as well as actuator drivers for autofocus and image stabilization for a broad base of end-users in the different end-markets. Our broad range of product offerings delivers excellent pixel performance, sensor functionality and camera systems capabilities in which high quality visual imagery is becoming increasingly important to our customers and their end-users, particularly in applications powered by AI. Certain of ISG's broad portfolio of products and solutions are summarized below:
•Automotive Imaging
A broad portfolio of automotive sensing technologies spanning ultrasonic, imaging, radar and LiDAR, paving the way for high levels of ADAS and automated driving with built in functional safety and cybersecurity processing.
•Industrial Imaging
A broad range of CMOS and SiPM sensors with an emphasis on machine vision for factory automation, robotics and logistics, intelligent transportation systems, agriculture, medical, cinematography, scientific and aerospace/defense applications.
•Wireless and Consumer Electronics
A broad range of CMOS sensors and driver actuators for high performance AR/VR, drones, mobile phones, PCs, tablets, high-speed video cameras, and various unique consumer applications. Our solutions offer superior image quality, fast frame rates, high definition and low light sensitivity to provide customers with a compelling visual experience, especially in emerging applications in IoT markets for security, surveillance and internet protocol cameras.
Customers
We sell our products to distributors, OEMs and electronic manufacturing service providers for ultimate use in a variety of end-products in different end-markets. In general, we have maintained long-term relationships with our key customers. Sales agreements with customers are renewable periodically and contain certain terms and conditions with respect to payment, delivery, warranty and supply, but generally do not require minimum purchase commitments. Our distributors generally negotiate pricing terms on a quarterly basis, most of our OEM customers negotiate pricing terms on an annual basis near the end of the calendar year and electronic manufacturing service providers negotiate prices periodically during the year. Pricing terms on product development agreements are negotiated at the beginning of a project. With respect to customers in public sector, the government’s remedies may include suspension or debarment from future government business. In addition, almost
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all of our contracts have default provisions, and certain of our contracts in the public sector are terminable at any time for convenience of the contracting agency.
We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Our standard warranty extends for a period of two years from the date of delivery, except in the case of image sensor products, which are warrantied for one year from the date of delivery. Our customers may cancel orders 30 days prior to shipment for standard products and, generally prior to start of production for custom products without incurring a penalty. For the year ended December 31, 2020, aggregate revenue from our five largest customers for PSG, ASG and ISG, comprised approximately 46%, 36% and 43%, respectively, of the respective segment revenue. The loss of certain of these customers may have a material adverse effect on the operations of the respective segment and our consolidated results of operations.
Distributors
Sales to distributors accounted for approximately 60% of our revenue in 2020, 57% of our revenue in 2019 and 60% of our revenue in 2018. We had one distributor whose revenue accounted for approximately 11% of the total revenue for the year ended December 31, 2020. Our distributors resell to mid-sized and smaller OEMs and to electronic manufacturing service providers and other companies. Sales to distributors are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns.
OEMs
Sales to OEMs accounted for approximately 34% of our revenue in 2020, 36% of our revenue in 2019 and 34% of our revenue in 2018. OEM customers include a variety of companies in the electronics industry. We focus on three types of OEMs: multi-nationals; selected regional accounts; and target market customers. Large multi-nationals and selected regional accounts, which are significant in specific markets, are our core OEM customers. The target market customers for our end-markets are OEMs that are on the leading edge of specific technologies and provide direction for technology and new product development. Generally, our OEM customers do not have the right to return our products following a sale other than pursuant to our warranty.
Electronic Manufacturing Service Providers
Sales to electronic manufacturing service providers accounted for approximately 6% of our revenue in 2020, 7% of our revenue in 2019 and 6% of our revenue in 2018. These customers are manufacturers who typically provide contract manufacturing services for OEMs. Many OEMs outsource a large part of their manufacturing to electronic manufacturing service providers in order to focus on their core competencies. Generally, our electronic manufacturing service customers do not have the right to return our products following a sale other than pursuant to our warranty.
For additional information regarding agreements with our customers, see "Markets," "Resources" and "Risk Factors - Trends, Risks and Uncertainties Related to Our Business" included elsewhere in this Form 10-K and Note 2: "Significant Accounting Policies - Revenue Recognition" in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Markets
Product development
Our new product development efforts continue to be focused on building solutions in areas that appeal to customers in focused market segments and across multiple high-growth applications. We collaborate with our customers to identify desired innovations in electronic systems in each end-market that we serve. This enables us to participate in the fastest growing sectors of the market. We also innovate in advanced packaging technologies to support ongoing size reduction in electronic systems and in advanced thermal packaging to support high performance power conversion applications. It is our practice to regularly re-evaluate our research and development spending, to assess the deployment of resources and to review the funding of high-growth technologies. We deploy people and capital with the goal of maximizing the return for our research and development investments by targeting innovative products and solutions for high growth applications that position us to outperform the industry. Our design expertise in analog, digital, mixed signal and imaging ICs, combined with our extensive portfolio of standard products enable us to offer comprehensive, value-added solutions to our global customers for their electronics systems.
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End-Markets
We serve a broad base of end-user markets, including automotive, industrial, medical, aerospace/defense, communications, networking, wireless, consumer and computing. The following table sets forth our principal end-markets, the estimated percentage (based in part on information provided by our distributors and electronic manufacturing service providers) of our revenue generated from each end-market during 2020, and sample applications for our products. Our industrial end-market includes the data relating to the medical, aerospace and defense and our communications end-market includes the data relating to the networking and wireless.

| Automotive | Industrial | Communications | Consumer | Computing |  |
2020 Revenue (%) | 32% | 25% | 20% | 11% | 12% |  |
Sample applications | EV | Energy Infrastructure | 5G Base Stations | Smart Speakers/Digital Assistants | Cloud Computing/Data Center Servers |  |
| ADAS | Industrial Automation | AP/Gateway | White Goods | USB Type-C |  |
| Power Management | Security & Surveillance | Tablets | USB Type-C | Graphics Cards |  |
| Powertrain | Machine Vision | Smart Phones | Power Supplies | Power Supplies |  |
| In-Vehicle Networking | Smart Cities & Buildings | Switches | Gaming, Home Entertainment Systems, & Set Top Boxes | Notebooks, Ultrabooks, & 2-in-1s |  |
| Body & Interior | Hearing Health, Diagnostic, Therapy, & Monitoring | Routers | AR/VR | Desktop PCs & All-in-Ones |  |
| Lighting | Power Solutions | Power Supplies | Wearable Devices |  |  |
| Sensors | AR/VR |  | Robotics |  |  |
| Engine Control | Motor Control |  | Routers/Modems |  |  |
|  | Robotics |  | Drones |  |  |

Competition
We face significant competition from major international semiconductor companies, as well as smaller companies focused on specific market niches. Because some of our components are often building block semiconductors that, in some cases, can be integrated into more complex ICs, we also face competition from manufacturers of ICs, ASICs and fully-customized ICs, as well as customers who develop their own IC products. See "Risk Factors—Trends, Risks and Uncertainties Related to Our Business" included elsewhere in this Form 10-K for additional information.
In comparison, several of our competitors are larger in scale and size, have substantially greater financial and other resources with which to pursue development, engineering, manufacturing, marketing and distribution of their products and may generally be better situated to withstand adverse economic or market conditions. The semiconductor industry has experienced, and may continue to experience, significant consolidation among companies and vertical integration among customers. The following discusses the effects of competition on our three operating segments:
PSG
Our competitive strengths include our core competencies of leading edge fabrication technologies, micro packaging expertise, breadth of product line and IP portfolio, high quality cost effective manufacturing and supply chain management which ensures supply to our customers. Our commitment to continual innovation allows us to provide an ever broader range of semiconductor solutions to our customers who differentiate in power density and power efficiency, the key performance characteristics driving our markets.
The principal methods of competition in our discrete, module and integrated semiconductor products are through new products and package innovations enabling enhanced performance over existing products. Of particular importance are our power MOSFETs, IGBTs, WBG MOSFETs and diodes, including SiC and GaN rectifiers and power module portfolio for power conversion applications, and ESD portfolio for hi-speed serial interface protection products, where we believe we have significant performance advantages over our competition. PSG's competitors include: Broadcom Limited ("Broadcom"), Diodes Incorporated, Infineon Technologies AG ("Infineon"), KEC Corporation, Nexperia BV, Rohm Semiconductor USA LLC ("Rohm"), Semtech Corporation, STMicroelectronics N.V. ("STMicroelectronics"), Texas Instruments Incorporated ("TI"), Toshiba Corporation ("Toshiba") and Vishay Intertechnology, Inc.
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ASG
ASG principally competes on design experience, manufacturing capability, depth and quality of IP, ability to service customer needs from the design phase to the shipping of a completed product, length of design cycle, longevity of technology support and experience of sales and technical support personnel. Our competitive position with respect to the above basis is enhanced by long-standing relationships with leading OEM customers.
Our ability to compete successfully depends on internal and external variables. These variables include, but are not limited to, the timeliness with which we can develop new products and technologies, product performance and quality, manufacturing yields and availability of supply, customer service, pricing, industry trends and general economic trends. Competitors for certain of ASG's products and solutions include: Infineon, NXP Semiconductors N.V. ("NXP"), STMicroelectronics and TI.
ISG
ISG differentiates itself from the competition through deep technical knowledge and close customer relationships to drive leading edge sensing performance for both human and machine vision applications. ISG has significant imaging experience and was one of the earliest to commercialize CMOS active pixel sensors and introduce CMOS technology in many of our markets. ISG has leveraged this expertise into market leading positions in automotive and industrial applications, which allows us to offer technical and end-user applications knowledge to help customers develop innovative sensing solutions across a broad range of end-user needs.
Competitors for certain of ISG's products and solutions include: Sony Semiconductor Manufacturing Corporation ("Sony Semiconductor"), Samsung Electronics Co., Ltd. ("Samsung"), Omnivision, STMicroelectronics and Toshiba for image sensors; Rohm, Renesas Electronics Corporation and Dongwoon Anatech Co., Ltd. for actuator drivers; TI, NXP, and Infineon for radar; and Hamamatsu Photonics K.K., Broadcom and ST Microelectronics for SiPMs and SPADs.
Sales, Marketing and Distribution
As of December 31, 2020, our sales and marketing organization consisted of approximately 1,700 professionals servicing customers globally. We support our customers through just-in-time warehouses. We have global distribution centers in China, the Philippines and Singapore. Global and regional distribution channels further support our customers' needs for quick response and service. We offer efficient, cost-effective global applications support from our technical information centers and solution engineering centers, allowing for applications that are developed in one region of the world to be instantaneously available throughout all other regions.
Backlog
Our trade sales are made primarily pursuant to orders that are predominantly booked as far as 26 weeks in advance of delivery. Generally, prices and quantities are fixed at the time of booking. Backlog as of a given date consists of existing orders and forecasted demand from our EDI customers, in each case scheduled to be shipped over the 13-week period following such date. Backlog is influenced by several factors, including market demand, pricing and customer order patterns in reaction to product lead times. During 2020, our backlog at the beginning of each quarter represented between 85% and 97% of actual revenue during such quarter, which is slightly higher than the backlog levels in recent prior periods. As manufacturing capacity utilization in the industry increases, customers tend to order products further in advance and, as a result, backlog at the beginning of a period as a percentage of revenue during such period is likely to increase.
In the semiconductor industry, backlog quantities and shipment schedules under outstanding purchase orders are frequently revised to reflect changes in customer needs. Agreements calling for the sale of specific quantities are either contractually subject to quantity revisions or, as a matter of industry practice, are often not enforced. Therefore, a significant portion of our order backlog may be cancellable. For these reasons, the amount of backlog as of any particular date may not be an accurate indicator of future results.
We sell products to key customers pursuant to contracts that allow us to schedule production capacity in advance and allow the customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required for producing ordered products. However, these contracts are typically amended to reflect changes in customer demands and periodic price re-negotiations. We routinely generate inventory based on customers' estimates of end-user demand for their products, which are difficult to predict. See "Risk Factors—Trends, Risks and Uncertainties Related to Our Business" located elsewhere in this Form 10-K for additional information regarding the inventory practices within the semiconductor industry.
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Resources
Raw Materials
Our manufacturing processes use many raw materials, including silicon wafers, SiC wafers, laminate substrates, gold, copper, lead frames, mold compound, ceramic packages and various chemicals and gases as well as other production supplies used in our manufacturing processes. We obtain our raw materials and supplies from a large number of sources, generally on a just-in-time basis, and material agreements with our suppliers that impose minimum or continuing supply obligations are reflected in our contractual obligations table in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations" included elsewhere in this Form 10-K. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although we believe that supplies of the raw materials we use are currently and will continue to be available, shortages could occur in various essential materials due to interruption of supply as experienced during the COVID-19 pandemic and increased demand in the industry or other factors.
Manufacturing and Design Operations
We currently have domestic design operations in Arizona, California, Idaho, New York, Oregon, Pennsylvania, Rhode Island, Texas, Utah and Virginia. We also have foreign design operations in Australia, Belgium, Canada, China, the Czech Republic, France, Germany, India, Ireland, Israel, Italy, Japan, South Korea, the Philippines, Romania, Russia, Singapore, Slovak Republic, Slovenia, Switzerland, Taiwan and the United Kingdom.
We operate front-end wafer fabrication facilities in Belgium, the Czech Republic, Japan, South Korea, Malaysia and the United States and back-end assembly and test site facilities in Canada, China, Malaysia, the Philippines, Vietnam and the United States. In addition to these front-end and back-end manufacturing operations, our facility in Rožnov pod Radhoštěm, Czech Republic manufactures silicon wafers that are used by a number of our facilities.
The table below sets forth information with respect to the manufacturing facilities we operate either directly or pursuant to joint ventures, the reportable segments that use such facilities, and the approximate gross square footage of each site's building, which includes, among other things, manufacturing, laboratory, warehousing, office, utility, support and unused areas.
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Location |  | Reportable Segment |  | Size (sq. ft.)
Front-end Facilities: |  |  |  |
Gresham, Oregon |  | ASG, ISG and PSG |  | 558,457
Pocatello, Idaho |  | ASG, ISG and PSG |  | 582,384
Rožnov pod Radhoštěm, Czech Republic |  | ASG and PSG |  | 438,882
Oudenaarde, Belgium (4) |  | ASG, ISG and PSG |  | 422,605
Seremban, Malaysia (Site 2) (3) |  | ASG and PSG |  | 133,061
Niigata, Japan (4) |  | ASG, ISG and PSG |  | 1,106,779
Bucheon, South Korea |  | ASG and PSG |  | 861,081
South Portland, Maine |  | ASG and PSG |  | 344,588
Mountaintop, Pennsylvania |  | ASG and PSG |  | 437,000
Aizuwakamatsu, Japan |  | ASG and PSG |  | 734,482
Back-end Facilities: |  |  |  |
Burlington, Canada (1) |  | ASG |  | 95,440
Leshan, China (3) |  | ASG and PSG |  | 416,339
Seremban, Malaysia (Site 1) (3) |  | ASG, ISG and PSG |  | 328,275
Carmona, Philippines (3) |  | ASG, ISG and PSG |  | 926,367
Tarlac City, Philippines (3) |  | ASG, ISG and PSG |  | 381,764
Shenzhen, China (1) |  | ASG, ISG and PSG |  | 275,463
Bien Hoa, Vietnam (3) |  | ASG and PSG |  | 294,418
Nampa, Idaho (1) (2) |  | ISG |  | 166,268
Cebu, Philippines (3) |  | ASG and PSG |  | 228,460
Suzhou, China (3) |  | ASG and PSG |  | 452,639
Other Facilities: |  |  |  |
Rožnov pod Radhoštěm, Czech Republic |  | ASG, ISG and PSG |  | 11,873
Thuan An District, Vietnam (3) |  | ASG and PSG |  | 30,494

_______________________
(1)These facilities are leased.
(2)This facility is used for both front-end and back-end operations.
(3)These facilities are located on leased land.
(4)In February and August 2020, we announced that we are exploring the sales of the front-end manufacturing facilities in Oudenaarde, Belgium and Niigata, Japan, respectively.
See Note 5: ''Acquisitions, Divestiture and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K regarding the pending acquisition of a manufacturing facility in 2022.
We operate all of our existing manufacturing facilities directly except our assembly and test operations facility located in Leshan, China, which is owned by Leshan-Phoenix Semiconductor Company Limited, a joint venture company in which we own 80% of the outstanding equity interests ("Leshan"). The financial and operating results of Leshan have been consolidated in our financial statements. Our joint venture partner in Leshan, Leshan Radio Company Ltd. ("Leshan Radio"), is formerly a state-owned enterprise. Pursuant to the joint venture agreement between us and Leshan Radio, requests for production capacity are made to the board of directors of Leshan by each shareholder of the joint venture. Each request represents a purchase commitment, provided that any shareholder may elect to pay the cost associated with the unused capacity (which is generally equal to the fixed cost of the capacity) in lieu of satisfying the commitment. We committed to purchase 80% of Leshan's production capacity in each of 2020, 2019 and 2018 and are currently committed to purchase approximately 80% of Leshan's expected production capacity in 2021.
On April 1, 2020, we 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. The
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manufacturing facility located in Aizuwakamatsu, Japan is owned by OSA. The purchase price payable to FSL for the remaining 40% equity, offset by the purchase price adjustment, resulted in us receiving $26.0 million in settlement of the purchase price from FSL. The results of OSA have been consolidated in our financial statements since the fourth quarter of 2018, when we acquired the majority equity interest.
We use third-party contractors for some of our manufacturing activities, primarily for wafer fabrication and the assembly and testing of finished goods. Our agreements with these contract manufacturers typically require us to forecast product needs and commit to purchase services consistent with these forecasts. In some cases, longer-term commitments are required in the early stages of the relationship. These contract manufacturers collectively accounted for approximately 33% of our total manufacturing input costs in 2020, 31% in 2019 and 36% in 2018.
For information regarding risks associated with our foreign operations, see "Risk Factors —Trends, Risks and Uncertainties Related to Our Business" included elsewhere in this Form 10-K.
Patents, Trademarks, Copyrights and Other Intellectual Property Rights
We market our products primarily under our registered trademark ON Semiconductor® and our ON logo, and, in the United States and internationally, we rely primarily on a combination of patents, trademarks, copyrights, trade secrets, employee and non-disclosure agreements and licensing agreements to protect our IP. We acquired or were licensed or sublicensed to a significant amount of IP, including patents and patent applications, in connection with our acquisitions, and we have numerous U.S. and foreign patents issued, allowed and pending. As of December 31, 2020, we held patents with expiration dates ranging from 2021 to 2040, and none of the patents that expire in the next three years materially affect our business. Our policy is to protect our products and processes by asserting our IP rights where appropriate and prudent and by obtaining patents, copyrights and other IP rights used in connection with our business when practicable and appropriate.
Seasonality
We believe our business today is driven more by content gains within applications and secular growth drivers and not solely by macroeconomic and industry cyclicality, as was the case historically. As we did in 2020, we could again experience period-to-period fluctuations in operating results due to general industry or macroeconomic conditions. Although the significant fluctuation experienced during 2020 was mainly due to the COVID-19 pandemic, we continue to employ measures to lower the impact of general industry cyclicality on our results by focusing on product diversification and content gains. For information regarding risks associated with the cyclicality and seasonality of our business, see "Risk Factors—Trends, Risks and Uncertainties Related to Our Business" included elsewhere in this Form 10-K.
Government Regulation
Our manufacturing operations are subject to environmental and worker health and safety laws and regulations. These laws and regulations include those relating to emissions and discharges into the air and water, the management and disposal of hazardous substances, the release of hazardous substances into the environment at or from our facilities and at other sites and the investigation and remediation of contamination. As with other companies engaged in like businesses, the nature of our operations exposes us to the risk of liabilities and claims, regardless of fault, with respect to such matters, including personal injury claims and civil and criminal fines.
We believe that our operations are in material compliance with applicable environmental and health and safety laws and regulations. The costs we incurred in complying with applicable environmental regulations for the year ended December 31, 2020 were not material, and we do not expect the cost of complying with existing environmental and health and safety laws and regulations, together with any liabilities for currently known environmental conditions, to have a material adverse effect on the capital expenditures or earnings of ours or our subsidiaries' competitive position. It is possible, however, that future developments, including changes in laws and regulations, government policies, customer specification, personnel and physical property conditions, including currently undiscovered contamination, could lead to material costs, and such costs may have a material adverse effect on our future business or prospects. See Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information on certain environmental matters.
We are also subject to numerous United States and foreign laws and regulations, including, without limitation, tariffs, trade sanctions, trade barriers, trade embargoes, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act ("ITAR"), the Foreign Corrupt Practices Act ("FCPA"), and the anti-boycott provisions of the U.S. Export Administration Act. Additionally, U.S. or China
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governmental authorities have taken, and may continue to take, administrative, legislative or regulatory action that could impact our operations.
We believe that our operations are in material compliance with applicable trade regulations relating to import-export control, technology transfer restrictions, ITAR, FCPA, the anti-boycott provisions of the U.S. Export Administration Act, and similar applicable laws and regulations. The costs we incurred in complying with applicable trade regulations for the year ended December 31, 2020 were not material, and we do not expect the cost of complying with existing trade laws and regulations to have a material adverse effect on the capital expenditures, or earnings of ours or our subsidiaries' competitive position. It is possible, however, that future developments, including changes in laws and regulations or government policies, could lead to material costs, and such costs may have a material adverse effect on our future business or prospects. For information regarding risks associated with import-export control regulations and similar applicable laws and regulations, see "Risk Factors—Trends, Risks and Uncertainties Related to Our Business" included elsewhere in this Form 10-K.
Human Capital Resources
Core Principles
Our success depends on our ability to attract, train, retain and motivate our employees, particularly highly-skilled engineers involved in the design, development, manufacture and support of new and existing products and services. We are a member of the Responsible Business Alliance ("RBA"). The principles of the RBA are fundamental to our corporate culture and core values and are reflected in our commitments to our employees, customers, communities and other stakeholders. These principles include providing a safe and positive work environment to our employees that emphasizes learning and professional development and respect for individuals and ethical conduct.
Headcount
As of December 31, 2020, we had approximately 31,000 regular full-time employees and approximately 3,500 part-time and temporary employees in facilities located in 34 countries. Approximately 13% of our regular full-time employees are located in the United States and Canada, 13% in Europe and Middle Eastern countries and 74% in Asia Pacific and Japan, with approximately 68% engaged in manufacturing, 3% directly in research and development, 6% in customer service or other aspects of sales and marketing, and 23% in other roles. Approximately 111 of our domestic employees (or approximately 3% of our U.S. based employees) are covered by a collective bargaining agreement. All of these employees are located at our Mountain Top, Pennsylvania manufacturing facility. Certain of our foreign employees are covered by collective bargaining arrangements (e.g., those in China, Vietnam, Japan, the Czech Republic and Belgium) or similar arrangements or are represented by workers councils.
Diversity, Equity and Inclusion
We are consciously expanding the diversity of our workforce, creating growth and development opportunities for our employees, embracing different perspectives and fostering an inclusive work environment. We have organization level and overall Company metrics to monitor for diverse directors and above, diverse new hires and diverse promotions. Our Human Resources organization and the Compensation Committee of the board of directors of the Company (the "Board of Directors"), through its charter, provides oversight of our policies, programs and initiatives focusing on workflow equity and workplace inclusion.
Compensation, Benefits, Health, Safety and Wellness
Our compensation philosophy is focused on delivering total rewards based on corporate affordability in a way that enables attraction, retention, and recognition of performance delivered in an equitable manner. We provide our employees and their families with access to flexible and convenient health and wellness programs, including benefits that secure them during events that may require time away from work or that impact their financial well-being. Our primary focus during the COVID-19 pandemic has been protecting the health and safety of our employees and the communities in which we operate. In response to the COVID-19 pandemic, we implemented appropriate changes in the best interest of our employees and the communities in which we operate, all in compliance with applicable law. We use a combination of total rewards and other programs (which vary by region and salary grade) to attract and retain our employees, including: annual performance bonuses; stock awards, including an employee stock purchase plan; retirement support; healthcare and insurance benefits; business travel and disability insurance; health savings and flexible spending accounts; flexible work schedules, vacation and paid time off; parental leave; paid counseling assistance; backup child and adult care; education assistance; and on-site services, such as health centers and fitness centers.
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Career Growth and Development
We invest resources in professional development and growth as a means of improving employee motivation, performance and improving retention. Our talent development programs provide employees with the resources they need to help achieve their career goals, build management skills and lead their organizations. We have established a leadership pathway model as a tool for employees to practice and apply learning as part of their development.
Turnover
Our voluntary employee turnover rate in 2020 was approximately 9.1%, which rate includes the employees who exited pursuant to the Voluntary Separation Program ("VSP") offered during the year. We monitor employee turnover rates by region and the Company as a whole. The average tenure of our employees is approximately seven years and approximately one-fifth of our employees have been employed by us for more than 10 years. We believe our compensation philosophy along with the career growth and development opportunities promotes longer employee tenure and reduces voluntary turnover.
Executive Officers of the Registrant
Certain information concerning our executive officers as of February 16, 2021 is set forth below.

Name |  | Age |  | Position
Hassane S. El-Khoury |  | 41 |  | President, Chief Executive Officer and Director
Bernard Gutmann |  | 61 |  | Executive Vice President, Chief Financial Officer and Treasurer(1)
Thad Trent |  | 53 |  | Executive Vice President, Chief Financial Officer and Treasurer(2)
George H. Cave |  | 63 |  | Executive Vice President, General Counsel, Chief Compliance Officer, Chief Risk Officer and Secretary
Vincent C. Hopkin |  | 58 |  | Executive Vice President and General Manager, ASG
Ross F. Jatou |  | 52 |  | Senior Vice President and General Manager, ISG
Simon Keeton |  | 48 |  | Executive Vice President and General Manager, PSG
Paul E. Rolls |  | 58 |  | Executive Vice President, Sales and Marketing

(1)Mr. Gutmann will retire from his position as Executive Vice President, Chief Financial Officer and Treasurer, effective as of the filing of this Form 10-K on February 16, 2021.
(2)In connection with Mr. Gutmann’s retirement, on January 24, 2021, the Board of Directors approved the appointment of Mr. Trent as Executive Vice President, Chief Financial Officer and Treasurer, effective immediately following the filing of this Form 10-K on February 16, 2021.
All of our executive officers are also officers of SCI LLC. The present term of office for the officers named above will generally expire on the earliest of their retirement, resignation or removal. There is no family relationship among our executive officers.
Hassane S. El-Khoury. Mr. El-Khoury was elected as a Director of ON Semiconductor and appointed as President and Chief Executive Officer of ON Semiconductor and SCI LLC in December 2020. Prior to joining ON Semiconductor, he spent 13 years at Cypress Semiconductor Corporation, a semiconductor design and manufacturing company ("Cypress"), serving as Chief Executive Officer from August 2016 to April 2020. During his time at Cypress, he held various positions spanning business unit management, product development, applications engineering and business development. Additionally, Mr. El-Khoury currently serves as a member of the board of directors at KeraCel, Inc. He holds a Bachelor of Science in electrical engineering from Lawrence Technological University and a Master's of Engineering Management from Oakland University.
Bernard Gutmann. As previously reported, Mr. Gutmann has announced his retirement as Executive Vice President, Chief Financial Officer and Treasurer of ON Semiconductor and SCI LLC, effective as of February 16, 2021 upon the filing of this Form 10-K. Mr. Gutmann was promoted and appointed Executive Vice President and Chief Financial Officer of ON Semiconductor and SCI LLC in September 2012 and has served as ON Semiconductor's and SCI LLC's Treasurer since January 2013. Before his promotion, he worked with the Company as Vice President, Corporate Analysis & Strategy of SCI LLC, serving in that position from April 2006 to September 2012. In these roles, his responsibilities have included finance integration, financial reporting, restructuring, tax, treasury and financial planning and analysis. From November 2002 to April 2006, Mr. Gutmann served as Vice President, Financial Planning & Analysis and Treasury of SCI LLC. From September 1999
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to November 2002, he held the position of Director, Financial Planning & Analysis of SCI LLC. Prior to joining ON Semiconductor, Mr. Gutmann served in various financial positions with Motorola from 1982 to 1999, including controller of various divisions and an off-shore wafer and backend factory, finance and accounting manager, financial planning manager and financial analyst. He holds a Bachelor of Science in Management Engineering from Worcester Polytechnic Institute in Massachusetts (U.S.). Additionally, he is fluent in English, French and Spanish and is conversant in German.
Thad Trent. Mr. Trent was appointed Executive Vice President, Chief Financial Officer and Treasurer of ON Semiconductor and SCI LLC, effective as of February 16, 2021 immediately following the filing of this Form 10-K. Mr. Trent previously served as the Chief Financial Officer and Executive Vice President of Finance & Administration at Cypress between June 2014 and April 2020. Mr. Trent joined Cypress in 2005 and became a Vice President of Finance at Cypress in 2010. Prior to serving as Chief Financial Officer of Cypress, he led the strategic planning functions for Cypress’ business units and worldwide operations and managed the financial reporting, accounting, and planning and analysis functions for Cypress. Prior to joining Cypress, Mr. Trent held finance leadership roles at publicly-traded companies Wind River Systems, a developer of embedded systems software, and Wyle Electronics, a distributor of high-tech electronic components, as well as two technology startups. Mr. Trent holds a Bachelor of Science degree in business administration and finance from San Diego State University.
George H. "Sonny" Cave. Mr. Cave is the founding General Counsel and Secretary of ON Semiconductor, positions he has held since the 1999 spin-out from Motorola. He is also Executive Vice President, Chief Compliance Officer and Chief Risk Officer of ON Semiconductor and SCI LLC. His extensive legal and business experience spans over 30 years, including seven years with Motorola. For two years prior to ON Semiconductor’s spin-out, he was an ex-patriate stationed in Geneva, Switzerland as Regulatory Affairs Director for Motorola’s Semiconductor Components Group. Before that assignment, he spent five years with Motorola’s Corporate Law Department in Phoenix, Arizona, where he was Senior Counsel for global Environmental Health and Safety. Mr. Cave also practiced law for six years with two large law firms in Denver and Phoenix. He has extensive experience in corporate and commercial law, governance, enterprise risk management and compliance and ethics. He holds a Juris Doctorate degree from the University of Colorado School of Law, a Master of Science degree from Arizona State University and a Bachelor of Science degree cum laude from Duke University.
Vincent C. Hopkin. Mr. Hopkin joined the Company in March 2008 and currently serves as Executive Vice President and General Manager, ASG of ON Semiconductor and SCI LLC. From September 2016 to May 2018, he was Senior Vice President and General Manager of the Digital and DC/DC Solutions Division. He has more than three decades of experience in the electronics industry. During his career, Mr. Hopkin has held various leadership positions within business units, sales and manufacturing. Prior to joining ON Semiconductor in 2008, he successfully managed several businesses including ASIC, military/aerospace, image sensing and foundry services at AMIS. Mr. Hopkin joined AMIS in 1983 and worked in several operations functions. Mr. Hopkin holds a Bachelor of Science degree in management and organizational behavior from Idaho State University.
Ross F. Jatou. Mr. Jatou joined ON Semiconductor in 2015 as the Vice President and General Manager of the Automotive Solutions Division within the Company’s ISG. In October 2020, he was named Senior Vice President and General Manager, ISG of ON Semiconductor and SCI LLC, assuming leadership of both the divisions within ISG: the Automotive Sensing Division and the Industrial and Consumer Solutions Division. Prior to ON Semiconductor, Mr. Jatou had an extensive career with NVIDIA Corporation of nearly 15 years, where he was the Vice President of Hardware Engineering. His background and experience include product development, engineering management, and automotive design quality and forecasting, and he is an expert in imaging graphics and system interfaces, telecommunications, high performance computing, automotive and embedded solutions. He has a Bachelor of Science degree in electrical engineering and a Master of Applied Science in millimeter wave technology and parallel processing from the University of Toronto. Mr. Jatou completed executive business programs from Stanford University School of Business and Harvard Business School.
Simon Keeton. Mr. Keeton joined the Company in July 2007 and is currently the Executive Vice President and General Manager, PSG of ON Semiconductor and SCI LLC. During his career, Mr. Keeton has held various management positions within the Company. Before Mr. Keeton’s promotion to his current role on January 1, 2019, he was a Senior Vice President and General Manager of the MOSFET Division. From 2012 to 2016, Mr. Keeton served as Vice President and General Manager of the Integrated Circuit Division under our former Standard Products Group. Prior to that time, he served as Vice President and General Manager of the Consumer Products Division from 2009 to 2012 and as Business Unit Director of our Signals and Interface Business Unit from 2007 to 2009. Before joining the Company, Mr. Keeton served as Strategic Planning Manager of the Digital Enterprise Group of Intel Corporation ("Intel") and held various marketing and business management roles at Vitesse Semiconductor Corporation.
Paul E. Rolls. Mr. Rolls was promoted and appointed Executive Vice President, Sales and Marketing of ON Semiconductor and SCI LLC in July 2013. Before his promotion, he served as Senior Vice President, Japan Sales and Marketing and Senior
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Vice President of Global Sales Operations, serving in that position from October 2012 to July 2013. Mr. Rolls has more than 26 years of technology sales, sales management and operations experience, with more than 19 years of sales and sales management experience in the semiconductor industry. Before joining the Company, Mr. Rolls was the Senior Vice President, Worldwide Sales and Marketing at Integrated Device Technology, Inc. from January 2010 to April 2012. From August 1996 to December 2009, he held multiple sales positions at International Rectifier Corp., most recently as Senior Vice President, Global Sales. During his career, he has also held management roles at Compaq Computer Corporation.
Available Information
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available, free of charge, in the "Investor Relations" section of our website as soon as reasonably practicable after we electronically file these materials with, or furnish these materials to the SEC. Our website is www.onsemi.com. Information on or connected to our website is neither part of, nor incorporated by reference into, this Form 10-K or any other report filed with or furnished to the SEC. You will find these materials on the SEC website at www.sec.gov, which contains reports, proxy statements and other information regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors
Forward-Looking Statements
This Annual Report on Form 10-K includes "forward-looking statements," as that term is defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included or incorporated in this Form 10-K could be deemed forward-looking statements, particularly statements about our plans, strategies and prospects under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," "anticipates," "should" or similar expressions, or by discussions of strategy, plans or intentions. All forward-looking statements in this Form 10-K are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update such information, except as may be required by law.
You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with or furnished to the SEC before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Summary Risk Factors
An investment in the Company’s stock involves a certain measure of risk. Some of the factors that could materially and adversely affect our business, financial condition, results of operations, liquidity, and prospects for future growth include, but are not limited to, the following. If any of the factors listed below occurs, the market price of our shares could decline, and you may lose some or all of your investment. You should read this summary together with the more detailed description of each risk factor contained in "Risk Factors" in this Annual Report on Form 10-K.
Trends, Risks and Uncertainties Related to Our Business
•Changes in, and the regulatory implementation of, tariffs or other government trade policies could reduce demand for our products, limit our ability to sell our products to certain customers or comply with applicable laws and regulations.
•Many of our facilities and processes are interdependent and an operational disruption at any particular facility could have a material adverse effect on our ability to produce many of our products.
•The effects of the COVID-19 pandemic have had, and could continue to have, an adverse impact on our business, results of operations and financial condition.
•We may be unable to identify and make the substantial research and development investments or develop new products required to satisfy customer demands or regulatory requirements as required to remain competitive in our business.
•A significant portion of our revenue is derived from customers in the automotive, industrial and communications
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industries, and a downturn or lower sales to customers in one or more of these industries could occur.
•We may be unable to maintain manufacturing efficiency.
•We may be unable to successfully implement cost reduction initiatives, including through restructuring activities.
•Uncertainties regarding the timing and amount of customer orders could lead to excess inventory and write-downs of inventory.
•The semiconductor industry is highly competitive, and has experienced rapid consolidation, and we may be unable to compete effectively or unable to identify attractive opportunities for consolidation.
•We are dependent on the services of third-party suppliers and contract manufacturers, and we may experience a disruption in or deterioration of the quality of the services or goods delivered by such third parties.
•We may be subject to warranty claims, product liability claims and product recalls.
•Currency fluctuations, changes in foreign exchange regulations and repatriation delays and costs could have a material adverse effect on our results of operations and financial condition.
Trends, Risks and Uncertainties Related to Intellectual Property
•Our technologies could be subject to claims of infringement on the IP rights of others.
•We may be unable to protect the IP we use.
Trends, Risks and Uncertainties Related to Technology and Data Privacy
•We may be subject to disruptions or breaches of our secured network.
•We are subject to governmental laws, regulations and other legal obligations related to privacy and data protection.
Trends, Risks and Uncertainties Related to Regulation
•We may be subject to environmental and health and safety liabilities and expenditures.
•Compliance with regulations regarding the use of "conflict minerals" could limit the supply and increase the cost of certain raw materials used in manufacturing our products.
•If we are unable to comply with anti-corruption laws in the jurisdictions we operate, including the FCPA, it could result in penalties that could harm our reputation.
Trends, Risks and Uncertainties Related to Our Indebtedness
•Our debt could materially adversely affect our financial condition and results of operations.
•If we are unable to meet our obligations under our Amended Credit Agreement, it could materially and adversely affect our business, results of operations and financial condition.
•The agreements relating to our indebtedness, including the Amended Credit Agreement and the 3.875% Notes, may restrict our ability to operate our business.
•We may not be able to generate sufficient cash flow to meet our debt service obligations.
•An event of default under any agreement relating to our outstanding indebtedness could cross default other indebtedness.
•Our operating subsidiaries have no independent obligation to repay our debt, and may not able to make cash available to us for such repayment.
•If interest rates increase, our debt service obligations under our variable rate indebtedness could increase significantly.
•Servicing the 1.625% Notes and the 3.875% Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 1.625% Notes and the 3.875% Notes in a timely manner.
•The conditional conversion feature of the 1.625% Notes, if triggered, may adversely affect our financial condition and results of operations and, if we elect to settle the conversion of the 1.625% Notes in common stock, any such settlement could materially dilute the ownership interests of existing stockholders.
•Note hedge and warrant transactions we have entered into may materially adversely affect the value of our common stock.
•Counterparty risk with respect to the note hedge transactions, if realized, could have a material adverse impact on our
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results of operations.
Trends, Risks and Uncertainties Related to Our Common Stock
•The stockholders’ rights plan adopted by our Board of Directors may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
•Provisions in our charter documents may delay or prevent the acquisition of our Company.
General Risk Factors
•Downturns or volatility in general economic conditions could have a material adverse effect on our business and results of operations.
•We may be unable to successfully integrate new strategic acquisitions.
•Natural disasters, health and safety epidemics and other business disruptions could cause significant harm to our business operations and facilities and could adversely affect our supply chain and our customer base.
•We could be subject to changes in tax rates or the adoption of new tax legislation or have exposure to additional tax liabilities.
•We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies and/or legal entity structures.
•We may be unable to attract and retain highly skilled personnel.
•The failure to comply with the terms and conditions of our contracts could result in, among other things, damages, fines or other liabilities.
•We are subject to the effects of climate change and the regulatory and legislative developments related to climate change.
•We may be unable to implement our recent business strategy developments.
•We may from time to time desire to exit certain product lines or businesses, or to restructure our operations, but may not be successful in doing so.
•Our operating results depend, in part, on the performance of independent distributors.
Trends, Risks and Uncertainties Related to Our Business
Changes in, and the regulatory implementation of, tariffs or other government trade policies could reduce demand for our products, limit our ability to sell our products to certain customers or comply with applicable laws and regulations, which may materially adversely affect our business and results of operations.
The imposition of tariffs and trade restrictions as a result of international trade disputes or changes in trade policies may adversely affect our sales and profitability. For example, in recent years, the U.S. government imposed and proposed, among other actions, new or higher tariffs on specified imported products originating from the People's Republic of China (the "PRC") in response to what it characterized as unfair trade practices, and the PRC responded by imposing and proposing new or higher tariffs on specified products, including some semiconductors fabricated in the United States and certain transistors, diodes, ICs and other products that we import into the PRC as part of our supply chain. These tariffs, and the related geopolitical uncertainty between the United States and the PRC, may cause decreased end-market demand for our products from distributors and other customers, which could have a material adverse effect on our business and results of operations. Ongoing international trade disputes and changes in trade policies could also impact economic activity and lead to a general contraction of customer demand. In addition, tariffs on components that we import from the PRC or other nations that have imposed, or may in the future impose, tariffs will adversely affect our profitability unless we are able to exclude such components from the tariffs or we raise prices for our products, which may result in our products becoming less attractive relative to products offered by our competitors. Future actions or escalations by either the United States or the PRC that affect trade relations may also impact our business, or that of our suppliers or customers, and we cannot provide any assurances as to whether such actions will occur or the form that they may take. To the extent that our sales or profitability are negatively affected by any such tariffs or other trade actions, our business and results of operations may be materially adversely affected.
Our international sales and purchases are subject to numerous United States and foreign laws and regulations, including, without limitation, tariffs, trade sanctions, trade barriers, trade embargoes, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, FCPA and the anti-boycott provisions of the U.S. Export Administration Act. Licenses or proper license exceptions are required
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for the shipment of our products to certain countries. A determination by the U.S. government or any foreign government that we have failed to comply with trade or export regulations or anti-bribery regulations can result in penalties, including fines, administrative, civil or criminal penalties or other liabilities, seizure of products, or, in the extreme case, denial of export privileges or suspension or debarment from government contracts, which could have a material adverse effect on our sales, business and results of operations.
Additionally, U.S. or China governmental authorities have taken, and may continue to take, administrative, legislative or regulatory action that could materially interfere with our ability to make sales to certain of our customers. We could experience unanticipated export bans or other restrictions on our ability to sell to certain customers where sales of products and the provision of services may require export licenses or are prohibited by government action. Export restrictions may also include technical discussions with customers that can impede our ability to pursue design-wins with customers and may impact future sales. In May 2019, the U.S. Department of Commerce added Huawei Technologies Co., Ltd. and certain of its non-U.S. affiliates and subsidiaries (collectively, "Huawei") and certain of our other customers to the U.S. Department of Commerce’s Bureau of Industry and Security (the "BIS") Entity List (the "Entity List"), imposing restrictions on the export and transfer of goods and technologies to such entities. Additionally, in August 2020, the BIS issued final rules that, among other things, further mandated license permissions to ship our products to Huawei and added additional non-U.S. Huawei affiliates to the Entity List. In response to these actions, the PRC has initiated reciprocal actions against the United States as a result of which additional export or other restrictions are anticipated. The terms and duration of any such restrictions may not be known to us in advance and may be subject to ongoing modifications, including modifications that impose more stringent restrictions or conditions on our ability to sell our products and services to certain foreign customers. Even to the extent such restrictions are subsequently modified, lifted or temporarily suspended, any financial or other penalties imposed on affected foreign customers could have a negative impact on future orders. These foreign customers may also respond to sanctions or the threat of sanctions by employing their own solutions to address the impacts of restrictions. The loss or temporary loss of customers as a result of such future regulatory limitations could materially adversely affect our sales, business and results of operations.
Many of our facilities and processes are interdependent and an operational disruption at any particular facility could have a material adverse effect on our ability to produce many of our products, which could materially adversely affect our business and results of operations
Our manufacturing platform includes multiple owned and third-party facilities, which may each produce one or more components necessary for the assembly of a single product. As a result of this interdependence, an operational disruption at a facility may have a disproportionate impact on our ability to produce many of our products. In the event of a disruption at any such facility, we may be unable to effectively source replacement components on acceptable terms from qualified third parties, in which case our ability to produce many of our products could be materially disrupted or delayed. Conversely, many of our facilities are single source facilities that only produce one of our end-products, and a disruption at any such facility would materially delay or cease production of the related product. In the event of any such operational disruption, we may experience difficulty in beginning production of replacement components or products at new facilities (for example, due to construction delays) or transferring production to other existing facilities (for example, due to capacity constraints or difficulty in transitioning to new manufacturing processes), any of which could result in a loss of future revenues and materially adversely affect our business and results of operations.
The effects of the COVID-19 pandemic have had, and could continue to have, an adverse impact on our business, results of operations and financial condition.
Our business has been, and is expected to continue to be, adversely impacted by the effects of the COVID-19 pandemic. In addition to global macroeconomic effects, the COVID-19 pandemic and related adverse public health developments have been causing, and are expected to continue to cause, disruption to our domestic and international operations and sales activities. In addition, we and our suppliers, third-party distributors, sub-contractors and customers have been, and are expected to continue to be, disrupted by worker absenteeism, quarantines and restrictions on certain of our employees’ ability to perform their jobs, office and factory closures or restrictions, disruptions to ports and other shipping infrastructure, border closures or other travel or health-related restrictions. Depending on the magnitude of such effects on our manufacturing activities or the operations of our suppliers, third-party distributors or sub-contractors, our supply chain, manufacturing and product shipments could be delayed, which could materially adversely affect our business, results of operations and financial condition. In addition, the COVID-19 pandemic or other disease outbreaks will, in the short-term, and could over the longer term, adversely affect the economies and financial markets of many countries, resulting in an economic downturn or recession that could adversely affect demand for our products and impact our results of operations and financial condition. There can be no assurance that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in subsequent periods. These effects, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure, or financial condition. The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future
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developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, we are not able at this time to estimate the long-term effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows has been, and could continue to be, material.
If we are unable to identify and make the substantial research and development investments or develop new products required to satisfy customer demands or regulatory requirements as required to remain competitive in our business, our business, financial condition and results of operations may be materially adversely affected.
The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced technologies and products. The development of new products is a complex and time-consuming process and often requires significant capital investment and lead time for development and testing. We cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is required to remain competitive. In addition, the lengthy development cycle for our products limits our ability to adapt quickly to changes affecting the product markets and requirements of our customers and end-users, and we may be unable to develop innovative responses to our customers’ and end-users’ evolving needs on the timelines they require or at all. There can be no assurance that we will win competitive bid selection processes, known as "design wins," for new products. In addition, design wins do not guarantee that we will make customer sales or that we will generate sufficient revenue to recover design and development investments, as expenditures for technology and product development are generally made before the commercial viability for such developments can be assured. There is no assurance that we will realize a return on the capital expended to develop new products, that a significant investment in new products will be profitable or that we will have margins as high as we anticipate at the time of investment or have experienced historically. To the extent that we underinvest in our research and development efforts, fail to recognize the need for innovation with respect to our products, or that our investments and capital expenditures in research and development do not lead to sales of new products, we may be unable to bring to market technologies and products that are attractive to our customers, and as a result our business, financial condition and results of operations may be materially adversely affected.
The semiconductor industry is characterized by rapidly changing technologies, innovation, short product life cycles, evolving regulatory and industry standards and certifications, changing customer needs and frequent new product introductions. Our success is largely dependent on our ability to accurately predict, identify and adapt to changes affecting the requirements of our customers in a timely and cost-effective manner. Products are frequently replaced by more technologically advanced substitutes and, as demand for older technology falls, the price at which such products can be sold drops, in some cases precipitously. If we cannot advance our process technologies or improve our production efficiencies to a degree sufficient to maintain required margins, we will no longer be able to make a profit from the sale of older products. In certain limited cases, we may not be able to cease production of older products, either due to contractual obligations or for customer relationship reasons and, as a result, may be required to bear a loss on such products for a sustained period of time. If reductions in our production costs fail to keep pace with reductions in market prices for the products we sell, our business and results of operations could be materially adversely affected. Additionally, the emergence of new industry or regulatory standards and certification requirements may adversely affect the demand for our products. A fundamental shift in technologies, excess inventory levels for our or our competitors’ products, the regulatory climate or consumption patterns and preferences in our existing product markets or the product markets of our customers or end-users, could result in, or accelerate, price erosion for our products or make them obsolete, prevent or delay the introduction of new products that we planned to make or render our current or new products irrelevant to our customers’ needs. If our new product development efforts fail to align with the needs of our customers, including due to circumstances outside of our control, like a fundamental shift in the product markets of our customers and end-users or regulatory changes, our business and results of operations could be materially adversely affected.
Because a significant portion of our revenue is derived from customers in the automotive, industrial and communications industries, a downturn or lower sales to customers in one or more of these industries could materially adversely affect our business and results of operations.
A significant portion of our sales are to customers within the automotive, industrial (including medical, aerospace and defense) and communications industries (including wireless and networking). Sales into these industries represented approximately 32%, 25%, and 20% of our revenue, respectively, for the year ended December 31, 2020, and those percentages will vary from quarter to quarter. Each of the automotive, industrial and communications industries is cyclical, and, as a result, our customers in these industries are sensitive to changes in general economic conditions, disruptive innovation and end-market preferences, which can adversely affect sales of our products and, correspondingly, our results of operations. Additionally, the quantity and price of our products sold to customers in these industries could decline despite continued growth in their respective end markets. Lower sales to customers in the automotive, industrial or communications industries may have a material adverse effect on our business and results of operations.
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We may be unable to maintain manufacturing efficiency, which could have a material adverse effect on our results of operations.
We believe that our success materially depends on our ability to maintain or improve our current margin levels related to our manufacturing. Semiconductor manufacturing requires advanced equipment and significant capital investment, leading to high fixed costs that include depreciation expense. Manufacturing semiconductor components also involves highly complex processes that we and our competitors are continuously modifying to improve yields and product performance. In addition, impurities, waste or other difficulties in the manufacturing process can lower production yields. Our manufacturing efficiency is and will continue to be an important factor in our future profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency, increase manufacturing efficiency to the same extent as our competitors, or be successful in our manufacturing rationalization plans. If we are unable to utilize our manufacturing facilities, testing facilities and external manufacturers at expected or minimum purchase obligation levels, or if production capacity increases while revenue does not, the fixed costs and other operating expenses associated with these facilities and arrangements will not be fully absorbed, resulting in higher average unit costs and lower gross profits, which could have a material adverse effect on our results of operations.
The failure to successfully implement cost reduction initiatives, including through restructuring activities, could materially adversely affect our business and results of operations.
From time to time, we have implemented cost reduction initiatives, including relocating manufacturing to lower cost regions, transitioning higher-cost external supply to internal manufacturing, working with our material suppliers to lower costs, implementing personnel reductions and voluntary retirement programs, reducing employee compensation, temporary or permanent shutdowns of facilities, and aggressively streamlining our overhead. In addition, we continuously monitor productivity and capital expenditures at our facilities in order to make strategic determinations regarding the temporary or permanent shutdown or disposition of facilities to improve our cost structure. In the past, we have recorded net restructuring charges to cover costs associated with our cost reduction initiatives. These costs have been primarily composed of employee separation costs (including severance payments) and asset impairments. We also often undertake restructuring activities and programs to improve our cost structure in connection with our business acquisitions, which can result in significant charges, including charges for severance payments to terminated employees and asset impairment charges.
We cannot assure you that our cost reduction and restructuring initiatives will be successfully or timely implemented or that they will materially and positively impact our profitability. Because our restructuring activities involve changes to many aspects of our business, including but not limited to the location of our production facilities and personnel, the associated cost reductions could materially adversely impact productivity and sales to an extent we have not anticipated. Even if we fully execute and implement these activities and they generate the anticipated cost savings, there may be other unforeseeable and unintended consequences that could materially adversely impact our profitability and business, including unintended employee attrition or harm to our competitive position. Cost reduction measures may also result in reduced compliance budgets, and ultimately, our ability to comply with applicable laws and regulations. If we fail to comply with any such laws or regulations, we may be subject to governmental fines or similar costs. Additionally, our initiatives to reduce our costs may make it difficult for us to attract, motivate and retain our key employees and/or impact the breadth of our IP portfolio, which could have a material adverse effect on our competitive position and on our business. To the extent that we do not achieve the profitability enhancement or other benefits of our cost reduction and restructuring initiatives that we anticipate, our results of operations may be materially adversely effected.
Uncertainties regarding the timing and amount of customer orders could lead to excess inventory and write-downs of inventory that could materially adversely affect our financial condition and results of operations.
Our sales are typically made pursuant to individual purchase orders or customer agreements, and we generally do not have long-term supply arrangements with our customers requiring a commitment to purchase. Our customers may cancel orders 30 days prior to shipment for standard products and, generally prior to start of production for custom products without incurring a penalty. We routinely generate inventory based on customers’ estimates of end-user demand for their products, which is difficult to predict. In times of under supply for certain products, some customers could respond by inflating their demand signals. As markets level off and supply capacity begins to match actual market demands, we could experience an increased risk of inventory write-downs, which may materially adversely affect our results of operations and our financial condition. In addition, our customers may change their inventory practices on short notice for any reason. Furthermore, short customer lead times are standard in the industry due to overcapacity. The cancellation or deferral of product orders, the return of previously sold products, or overproduction of products due to the failure of anticipated orders to materialize could result in excess obsolete inventory, which could result in write-downs of inventory or the incurrence of significant cancellation penalties under
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our arrangements with our raw materials and equipment suppliers. Unsold inventory, canceled orders and cancellation penalties may materially adversely affect our results of operations, and inventory write-downs, which may materially adversely affect our financial condition.
The semiconductor industry is highly competitive, and has experienced rapid consolidation, and if we are unable to compete effectively or are unable to identify attractive opportunities for consolidation, it could materially adversely affect our business and results of operations.
The semiconductor industry is highly competitive, and our ability to compete successfully depends on elements both within and outside of our control. We face significant competition within each of our product lines from major global semiconductor companies as well as smaller companies focused on specific market niches. Because our components are often building block semiconductors that, in some cases, are integrated into more complex ICs, we also face competition from manufacturers of ICs, ASICs and fully customized ICs, as well as from customers who develop their own IC products. In addition, companies not currently in direct competition with us may introduce competing products in the future.
If we are unable to compete effectively, such inability to compete could have a material adverse effect on our business and results of operations. Products or technologies developed by competitors that are larger and have more substantial research and development budgets, or that are smaller and more targeted in their development efforts, may render our products or technologies obsolete or noncompetitive. We also may be unable to market and sell our products if they are not competitive on the basis of price, quality, technical performance, features, system compatibility, customized design, innovation, availability, delivery timing and reliability. If we fail to compete effectively on developing strategic relationships with customers and customer sales and technical support, our sales and revenue may be materially adversely affected. Competitive pressures may limit our ability to raise prices, and any inability to maintain revenue or raise prices to offset increases in costs could have a significant adverse effect on our gross margin. Reduced sales and lower gross margins would materially adversely affect our business and results of operations.
The semiconductor industry has experienced, and may continue to experience, significant consolidation among companies and vertical integration among customers. Larger competitors resulting from consolidations may have certain advantages over us, including, but not limited to: more efficient cost structures; substantially greater financial and other resources with which to withstand adverse economic or market conditions and pursue development, engineering, manufacturing, marketing and distribution of their products; longer independent operating histories; presence in key markets; patent protection; and greater name recognition. In addition, we may be at a competitive disadvantage to our peers if we fail to identify attractive opportunities to acquire companies to expand our business. Consolidation among our competitors and integration among our customers could erode our market share, negatively impact our capacity to compete and require us to restructure our operations, any of which would have a material adverse effect on our business.
We are dependent on the services of third-party suppliers and contract manufacturers, and any disruption in or deterioration of the quality of the services or goods delivered by such third parties could materially adversely affect our business and results of operations.
We use third-party contractors for certain of our manufacturing activities, primarily wafer fabrication and the assembly and testing of final goods, and for the supply of raw materials. Our agreements with these manufacturers typically require us to commit to purchase services based on forecasted product needs, which may be inaccurate, and, in some cases, require longer-term commitments. We are also dependent upon a limited number of highly specialized third-party suppliers for required components and materials for certain of our key technologies. Arranging for replacement manufacturers and suppliers can be time consuming and costly, and the number of qualified alternative providers can be extremely limited. Our business operations, productivity and customer relations could be materially adversely affected if these contractual relationships were disrupted or terminated, the cost of such services increased significantly, the quality of the services provided deteriorated or our forecasted needs proved to be materially incorrect. Our manufacturing processes rely on many raw materials, including various chemicals and gases, polysilicon, silicon wafers, aluminum, gold, silver, copper, lead frames, mold compound and ceramic packages. Generally, our agreements with suppliers of raw materials impose no minimum or continuing supply obligations, and we obtain our raw materials and supplies from a large number of sources on a just-in-time basis. From time to time, suppliers of raw materials may extend lead times, limit supplies or increase prices due to capacity constraints or other factors beyond our control. Shortages could occur in various essential raw materials due to interruption of supply or increased demand. If we are unable to obtain adequate supplies of raw materials in a timely manner, the costs of our raw materials increases significantly, their quality deteriorates or they give rise to compatibility or performance issues in our products, our results of operations could be materially adversely affected.
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Warranty claims, product liability claims and product recalls could harm our business, results of operations and financial condition.
Manufacturing semiconductors is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Minute impurities in our manufacturing materials, contaminants in the manufacturing environment, manufacturing equipment failures, and other defects can cause our products to be non-compliant with customer requirements or otherwise nonfunctional. We face an inherent business risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in bodily injury or property damage (or both). In addition, if any of our designed products are or are alleged to be defective, we may be required to participate in their recall. As suppliers become more integrally involved in electrical design, OEMs are increasingly expecting them to warrant their products and are increasingly looking to them for contributions when faced with product liability claims or recalls. A successful warranty or product liability claim against us in excess of our available insurance coverage, if any, and established reserves, or a requirement that we participate in a product recall, could have material adverse effects on our business, results of operations and financial condition. Additionally, in the event that our products fail to perform as expected or such failure of our products results in a recall, our reputation may be damaged, which could make it more difficult for us to sell our products to existing and prospective customers and could materially adversely affect our business, results of operations and financial condition.
Since a defect or failure in our product could give rise to failures in the goods that incorporate them (and claims for consequential damages against our customers from their customers), we may face claims for damages that are disproportionate to the revenue and profits we receive from the products involved. In certain instances, we attempt to limit our liability through our standard terms and conditions of sale and other customer contracts. There is no assurance that such limitations will be effective, and to the extent that we are liable for damages in excess of the revenue and profits we received from the products involved, our results of operations and financial condition could be materially adversely affected.
Currency fluctuations, changes in foreign exchange regulations and repatriation delays and costs could have a material adverse effect on our results of operations and financial condition.
We have sizeable sales and operations in the Asia/Pacific region and Europe and a significant amount of this business is transacted in currency other than U.S. dollars. In addition, while a significant percentage of our cash is generated outside the U.S., many of our liabilities, including our outstanding indebtedness, and certain other cash payments, such as share repurchases, are payable in the U.S. in U.S. dollars. As a result, currency fluctuations and changes in foreign exchange regulations can have a material adverse effect on our liquidity and financial condition.
In addition, repatriation of funds held outside the U.S. could have adverse tax consequences and could be subject to delay due to required local country approvals or local obligations. From time to time, we are required to make cash deposits outside of the U.S. to support bank guarantees of our obligations under certain office leases or amounts we owe to certain vendors and such cash deposits are not available for other uses as long as the related bank guarantees are outstanding. Foreign exchange regulations may also limit our ability to convert or repatriate foreign currency. As a result of having a lower amount of cash and cash equivalents in the U.S., our financial flexibility may be reduced, which could have a material adverse effect on our ability to make interest and principal payments due under our various debt obligations. Restrictions on repatriation or the inability to use cash held abroad to fund our operations in the U.S. may have a material adverse effect on our liquidity and financial condition.
Trends, Risks and Uncertainties Related to Intellectual Property
If our technologies are subject to claims of infringement on the IP rights of others, efforts to address such claims could have a material adverse effect on our results of operations.
We may from time to time be subject to claims that we may be infringing the IP rights of others. If necessary or desirable, we may seek licenses under such IP rights. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for IP we use could cause us to incur substantial liabilities or to suspend the manufacture or shipment of products or our use of processes requiring such technologies. Further, we may be subject to IP litigation, which could cause us to incur significant expense, materially adversely affect sales of the challenged product or technologies and divert the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. In the event of an adverse outcome or pursuant to the terms of a settlement of any such litigation, we may be required to:
•pay substantial damages or settlement costs;
•indemnify customers or distributors;
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•cease the manufacture, use, sale or importation of infringing products;
•expend significant resources to develop or acquire non-infringing technologies;
•discontinue the use of processes; or
•obtain licenses, which may not be available on reasonable terms, to the infringing technologies.
Please see Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a more detailed description of the litigation we are currently engaged in. The outcome of IP litigation is inherently uncertain and, if not resolved in our favor, could materially adversely affect our business, financial condition and results of operations.
If we are unable to protect the IP we use, our business, results of operations and financial condition could be materially adversely affected.
The enforceability of our patents, trademarks, copyrights, software licenses and other IP is uncertain in certain circumstances. Effective IP protection may be unavailable, limited or not applied for in the U.S. and internationally. The various laws and regulations governing our registered and unregistered IP assets, patents, trade secrets, trademarks, mask works and copyrights to protect our products and technologies are subject to legislative and regulatory change and interpretation by courts. With respect to our IP generally, we cannot assure you that:
•any of the substantial number of U.S. or foreign patents and pending patent applications that we employ in our business will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others;
•any of our pending or future patent applications will be issued or have the coverage originally sought;
•any of the trademarks, copyrights, trade secrets, know-how or mask works that we employ in our business will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others;
•any of our pending or future trademark, copyright, or mask work applications will be issued or have the coverage originally sought; or
•that we will be able to successfully enforce our IP rights in the U.S. or foreign countries.
When we seek to enforce our rights, we are often subject to claims that the IP right is invalid, is otherwise not enforceable or is licensed to the party against whom we are asserting a claim. In addition, our assertion of IP rights often results in the other party seeking to assert alleged IP rights of its own against us, which may materially adversely impact our business. An unfavorable ruling in these sorts of matters could include money damages or an injunction prohibiting us from manufacturing or selling one or more products, which could in turn negatively affect our business, results of operations or cash flows.
In addition, some of our products and technologies are not covered by any patents or pending patent applications. We seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that persons or institutions will not assert rights to IP arising out of our research. Should we be unable to protect our IP, competitors may develop products or technologies that duplicate our products or technologies, benefit financially from innovations for which we bore the costs of development and undercut the sales and marketing of our products, all of which could have a material adverse effect on our business, results of operations and financial condition.
Trends, Risks and Uncertainties Related to Technology and Data Privacy
We may be subject to disruptions or breaches of our secured network that could irreparably damage our reputation and our business, expose us to liability and materially adversely affect our results of operations.
We routinely collect and store sensitive data, including confidential and other proprietary information about our business and our customers, suppliers and business partners. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We may be subject to disruptions or breaches of our secured network caused by computer viruses, illegal hacking, criminal fraud or impersonation, acts of vandalism or terrorism or employee error. Our security measures and/or those of our third-party service providers and/or customers may not detect or prevent such security breaches. The costs to us to reduce the risk of or alleviate cyber security breaches and vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may materially impede our sales, manufacturing, distribution or other critical functions. Any such compromise of our information security could result in the misappropriation or unauthorized publication of our confidential business or proprietary information or that of other parties with which we do business, an interruption in our operations, the unauthorized transfer of cash or other of our assets, the unauthorized release of customer or employee data or a violation of privacy or other laws. In addition, computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that
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attack our products, or that otherwise exploit any security vulnerabilities, and any such attack, if successful, could expose us to liability to customer claims. Any of the foregoing could irreparably damage our reputation and business, which could have a material adverse effect on our results of operations.
The Company is subject to governmental laws, regulations and other legal obligations related to privacy and data protection.
The legislative and regulatory framework for privacy and data protection issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. The Company collects Personally Identifiable Information ("PII") and other data as part of its business processes and activities. This data is subject to a variety of U.S. and international laws and regulations, including oversight by various regulatory or other governmental bodies. Many foreign countries and governmental bodies, including the European Union and other relevant jurisdictions where the Company conducts business, have laws and regulations concerning the collection and use of PII and other data obtained from their residents or by businesses operating within their jurisdictions that are currently more restrictive than those in the U.S. Additionally, in May 2016, the European Union adopted the General Data Protection Regulation that imposed more stringent data protection requirements and provided for greater penalties for noncompliance beginning in May 2018. In July 2020, the Court of Justice of the European Union declared the EU-U.S. Privacy Shield, which had been an accepted mechanism to comply with data transfers between the European Union and the United States, invalid. Any inability, or perceived inability, to adequately address privacy and data protection concerns, even if unfounded, or to comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations, could result in additional cost and liability to the Company or company officials, including substantial monetary fines, and could damage our reputation, inhibit sales and adversely affect our business.
Trends, Risks and Uncertainties Related to Regulation
Environmental and health and safety liabilities and expenditures could materially adversely affect our results of operations and financial condition.
Our operations are subject to various environmental, health and safety laws and regulations. For example, our manufacturing operations are subject to laws and regulations relating to the management, disposal and remediation of hazardous substances and the emission and discharge of pollutants into the air, water and ground, and we have been identified as either a primary responsible party or a potentially responsible party at sites where we or our predecessors operated or disposed of waste in the past. Our other operations are also subject to laws and regulations relating to workplace safety and worker health, which, among other requirements, regulate employee exposure to hazardous substances. We have indemnities from third parties for certain environmental and health and safety liabilities for periods prior to our operations at some of our current and past sites, and we have also purchased environmental insurance to cover certain claims related to historical contamination and future releases of hazardous substances. However, we cannot assure you that such indemnification arrangements and insurance will cover any or all of our material environmental costs. In addition, the nature of our operations exposes us to the continuing risk of environmental and health and safety liabilities including:
•changes in U.S. and international environmental or health and safety laws or regulations, including, but not limited to, future laws or regulations imposed in response to climate change concerns;
•the manner in which environmental or health and safety laws or regulations will be enforced, administered or interpreted;
•our ability to enforce and collect under indemnity agreements and insurance policies relating to environmental liabilities;
•the cost of compliance with future environmental or health and safety laws or regulations or the costs associated with any future environmental claims, including the cost of clean-up of currently unknown environmental conditions; or
•the cost of fines, penalties or other legal liability, should we fail to comply with environmental or health and safety laws or regulations.
To the extent that we face unforeseen environmental or health and safety compliance costs or remediation expenses or liabilities that are not covered by indemnities or insurance, we may bear the full effect of such costs, expenses and liabilities, which could materially adversely affect our results of operations and financial condition.
Compliance with regulations regarding the use of “conflict minerals” could limit the supply and increase the cost of certain raw materials used in manufacturing our products.
The SEC, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, adopted disclosure regulations for public companies that manufacture products containing certain minerals that are mined from the Democratic Republic of Congo and adjoining countries and procedures pertaining to a manufacturer’s efforts regarding the source of such minerals. These "conflict minerals" are commonly found in metals used in the manufacture of semiconductors. Manufacturers
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are also required to disclose their efforts to prevent the sourcing of such minerals and metals produced from them. The implementation of these requirements could adversely affect the sourcing, availability and pricing of metals used in the manufacture of our products. We may also incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. We may also face difficulties in satisfying customers who may require that our products be certified as free of "conflict materials," which could harm our relationships with these customers and lead to a loss of revenue.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the FCPA. Our failure to comply with these laws could result in penalties that could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have significant operations in Asia, which place us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have a material adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations.
Trends, Risks and Uncertainties Related to Our Indebtedness
Our debt could materially adversely affect our financial condition and results of operations.
As of December 31, 2020, we had $3,589.5 million of outstanding indebtedness. We may need to incur additional indebtedness in the future to repay or refinance other outstanding debt, to make acquisitions or for other purposes, and if we incur additional debt, the related risks that we now face could intensify. For example, on March 24, 2020, as a precautionary measure in order to increase our cash position and facilitate financial flexibility in light of uncertainty resulting from the COVID-19 pandemic, we borrowed an additional $1,165.0 million under the Revolving Credit Facility. On August 21, 2020, we used the net proceeds from the issuance of the 3.875% Notes along with cash on hand to repay $1,200.0 million of borrowings under the Revolving Credit Facility. As of December 31, 2020, we have approximately $1,269.0 million available for future borrowings under the Revolving Credit Facility. The degree to which we are leveraged could have important consequences to our potential and current investors, including:
•our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired;
•the timing, amount and execution of our capital allocation policy, including our 2018 Share Repurchase Program (as defined below), could be affected by the degree to which we are leveraged;
•a significant portion of our cash flow from operating activities must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations and may limit our ability to engage in acts that may be in our long-term best interests;
•some of our debt is and will continue to be at variable rates of interest, which may result in higher interest expense in the event of increases in market interest rates;
•our debt agreements may contain, and any agreements to refinance our debt likely will contain, financial and restrictive covenants, and our failure to comply with them may result in an event of default which if not cured or waived, could have a material adverse effect on us;
•our level of indebtedness will increase our vulnerability to, and reduce our flexibility to respond to, general economic downturns and adverse industry and business conditions, including as a result of the COVID-19 pandemic;
•as our long-term debt ages, we must repay, and may need to renegotiate, such debt or seek additional financing;
•to the extent the debt we incur requires collateral to secure such indebtedness, our assets could be at risk and our flexibility related to such assets could be limited;
•our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and the semiconductor industry;
•our ability to deduct interest expense that we may incur may be limited or deferred under U.S. and/or local tax rules, including Section 163(j) of the Code and the Treasury Regulations promulgated thereunder; and
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•our level of indebtedness may place us at a competitive disadvantage relative to less leveraged competitors.
To the extent that we continue to maintain or expand our significant indebtedness, our financial condition and results of operations may be materially adversely affected.
The inability to meet our obligations under our Amended Credit Agreement could materially and adversely affect us by, among other things, limiting our ability to conduct our operations and reducing our flexibility to respond to changing business and economic conditions.
Our Amended Credit Agreement provides for our $1.97 billion Revolving Credit Facility and our $2.4 billion Term Loan "B" Facility, the proceeds of which have been used, among other things, to fund acquisitions. The obligations under the Amended Credit Agreement are collateralized by a lien on substantially all of the personal property and material real property assets of the Company and most of the Company’s domestic subsidiaries. As a result, if we are unable to satisfy our obligations under the Amended Credit Agreement, the lenders could take possession of and foreclose on the pledged collateral securing the indebtedness, in which case we would be at risk of losing the related collateral, which would have a material adverse effect on our business and operations. In addition, subject to customary exceptions, the Amended Credit Agreement requires mandatory prepayment under certain circumstances, which may result in prepaying outstanding amounts under the Revolving Credit Facility and the Term Loan "B" Facility rather than using funds for other business purposes. Our financing could have a material adverse effect on our business and financial condition, including, among other things, our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate purposes and could reduce our flexibility to respond to changing business and economic conditions.
The agreements relating to our indebtedness, including the Amended Credit Agreement and the 3.875% Notes, may restrict our ability to operate our business, and as a result may materially adversely affect our results of operations.
Our debt agreements, including the Amended Credit Agreement and the 3.875% Notes, contain, and any future debt agreements may include, a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries. Such restrictive covenants may significantly limit our ability to:
•incur additional debt, including issuing guarantees;
•incur liens;
•make certain investments;
•settle a conversion of our 1.625% Notes in whole or in part with cash;
•redeem, or otherwise perform our obligations under the terms of, our 3.875% Notes;
•sell or otherwise dispose of assets;
•make some acquisitions;
•engage in mergers or consolidations or certain other "change of control" transactions;
•make distributions to our stockholders;
•engage in restructuring activities;
•engage in certain sale and leaseback transactions; and
•issue or repurchase stock or other securities.
Such agreements may also require us to satisfy other requirements, including maintaining certain financial ratios and condition tests. Our ability to meet these requirements can be affected by events beyond our control, and we may be unable to meet them. To the extent we fail to meet any such requirements and are in default under our debt obligations, our financial condition may be materially adversely affected. These restrictions may limit our ability to engage in activities that could otherwise benefit us. To the extent that we are unable to engage in activities that support the growth, profitability and competitiveness of our business, our results of operations may be materially adversely affected.
We may not be able to generate sufficient cash flow to meet our debt service obligations, and any inability to repay our debt when due would have a material adverse effect on our business, financial condition and results of operations.
Our ability to generate sufficient cash flow from operating activities to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. If we do not generate sufficient cash flow from operating activities and proceeds from sales of assets in the ordinary course of business to satisfy our debt obligations as they come due, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling additional assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments
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then in effect. Furthermore, we cannot assure you that, if we were required to repurchase any of our debt securities upon a change of control or other specified event, our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments or that we would be able to refinance or restructure the payments on those debt securities. If we are unable to repay, refinance or restructure our indebtedness under our collateralized debt, the holders of such debt could proceed against the collateral securing that indebtedness, which could materially negatively impact our results of operations and financial condition. A default under our committed credit facilities, including our Amended Credit Agreement, could also limit our ability to make further borrowings under those facilities, which could materially adversely affect our business and results of operations. In addition, to the extent we are not able to borrow or refinance debt obligations, we may have to issue additional shares of our common stock, which would have a dilutive effect to the current stockholders.
An event of default under any agreement relating to our outstanding indebtedness could cross default other indebtedness, which could have a material adverse effect on our business, financial condition and results of operations.
If there were an event of default under certain of our agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately, which default or acceleration of debt could cross default other indebtedness. Any such cross default would put immediate pressure on our liquidity and financial condition and would amplify the risks described above with regards to being unable to repay our indebtedness when due and payable. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, and, as described above, any inability to repay our debt when due would have a material adverse effect on our business, financial condition and results of operations.
If our operating subsidiaries, which may have no independent obligation to repay our debt, are not able to make cash available to us for such repayment, our business, financial condition and results of operations may be adversely affected.
We conduct our operations through our subsidiaries. Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of our indebtedness, our subsidiaries have no obligation to pay amounts due on such indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal, contractual, governmental or regulatory restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions or payments from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness and, as described above, any inability to repay our debt when due would have a material adverse effect on our business, financial condition and results of operations.
If interest rates increase, our debt service obligations under our variable rate indebtedness could increase significantly, which would have a material adverse effect on our results of operations.
Borrowings under certain of our facilities from time to time, including under our Amended Credit Agreement, are at variable rates of interest and as a result expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. During the first quarters of 2017 and 2019 and the second quarter of 2020, we entered into interest rate swaps that involved the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility for a portion of our Term Loan "B" Facility and our Revolving Credit Facility through the end of 2022. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk. To the extent the risk materializes and is not fully mitigated, the resulting increase in interest expense could have a material adverse effect on our results of operations.
Some of our current debt and related agreements, including the Amended Credit Agreement and our interest rate swap agreements, have an interest rate tied to LIBO Rate. While certain of these agreements, such as the Amended Credit Agreement, provide procedures for determining an alternative base rate in the event that LIBO Rate is discontinued, not all do so. On July 27, 2017, the United Kingdom Financial Conduct Authority ("FCA"), which regulates the LIBO Rate, announced its intention to stop persuading or compelling banks to submit LIBO Rate quotations by the end of 2021. Further, on November 30, 2020, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued a joint statement (the "Joint Statement") on LIBO Rate transition, in connection with which ICE Benchmark Administration Limited, in its capacity as administrator of U.S. LIBO Rate, announced its plan to extend the date that most U.S. LIBO Rate values would cease being computed and announced from December 31, 2021 to June 30, 2023. Even though U.S. LIBO Rate would continue to be published through June 30, 2023, the Joint Statement called on banks to cease
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entering into new contracts that use U.S. LIBO Rate as a reference rate by no later than December 31, 2021, and if practicable, as far in advance of that deadline as possible. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBO Rate and any other unforeseen impacts of the potential discontinuation of LIBO Rate. The Company intends to monitor the developments with respect to the potential phasing out of LIBO Rate and work with its lenders to ensure any transition away from LIBO Rate will have minimal impact on its financial condition, but can provide no assurances that the impact of the discontinuation of LIBO Rate would not have a material adverse effect on our results of operations.
Servicing the 1.625% Notes and the 3.875% Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 1.625% Notes and the 3.875% Notes in a timely manner.
In March 2017, we issued $575.0 million aggregate principal amount of our 1.625% Notes, and in August 2020, we issued $700.0 million aggregate principal amount of our 3.875% Notes. Holders of the 1.625% Notes will have the right to require us to repurchase all or a portion of their 1.625% Notes upon the occurrence of a fundamental change (as defined under the respective indentures governing such notes) at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any, accrued prior to, but not including, the fundamental change repurchase date. Holders of the 3.875% Notes will have the right to require us to repurchase all of their 3.875% Notes upon the occurrence of certain change of control triggering events accompanied by certain ratings events (as described in the indenture governing the 3.875% Notes) at a repurchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, accrued prior to, but not including, the repurchase date. Moreover, we will be required to repay the 1.625% Notes and the 3.875% Notes in cash at their respective maturity dates, unless earlier repurchased or, in the case of the 1.625% Notes, converted. In addition, upon conversion of the 1.625% Notes to be repurchased, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional shares), we will be required to make cash payments in respect of such 1.625% Notes being converted.
Servicing the 1.625% Notes and the 3.875% Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under such notes. Our ability to make cash payments in connection with conversions of the 1.625% Notes, repurchase the 1.625% Notes or the 3.875% Notes in the case of an applicable repurchase-triggering event under the respective indentures or repay such notes at maturity will depend on market conditions and our future performance, which is subject to economic, financial, competitive and other factors beyond our control. If we are unable to make cash payments upon conversion of the 1.625% Notes, we would be required to issue significant amounts of our common stock, which would dilute existing stockholders.
In addition, if we do not have sufficient cash to repurchase the 1.625% Notes or the 3.875% Notes following the applicable repurchase-triggering events, we would be in default under the terms of such notes, which could cross default other debt and materially adversely harm our business. In certain circumstances, a takeover of our Company and similar triggering events could also trigger an option of the holders of the 1.625% Notes and the 3.875% Notes to require us to repurchase such notes. This may have the effect of delaying or preventing a takeover of our Company that would otherwise be beneficial to investors in the 1.625% Notes, the 3.875% Notes and our common stock, which could materially decrease the value of such notes and of our common stock.
The terms of the Amended Credit Agreement and the terms of the 3.875% Notes limit the amount of future indebtedness secured by liens that we may incur, but the terms of the 1.625% Notes do not contain such limits. If we incur significantly more debt, this could intensify the risks described above. Our decision to use our cash for other purposes, such as to make acquisitions or to repurchase our common stock, could also intensify these risks.
The conditional conversion feature of the 1.625% Notes, if triggered, may adversely affect our financial condition and results of operations and, if we elect to settle the conversion of the 1.625% Notes in common stock, any such settlement could materially dilute the ownership interests of existing stockholders.
If specified conditions are met, holders of the 1.625% Notes may convert their notes prior to the close of business on the business day immediately preceding July 15, 2023. Unless we elect to satisfy our conversion obligations by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional shares), in the event the conditional conversion feature under the 1.625% Notes is triggered, holders electing to convert their notes could require us to settle a portion or all of our conversion obligations through the payment of cash, which could materially adversely affect our liquidity. Additionally, when the conditional conversion feature under the 1.625% Notes is triggered at the end of the reporting period, we are required under applicable accounting rules to reclassify the outstanding principal of such notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. A conditional conversion feature has
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been triggered as of December 31, 2020, and we can provide no assurance as to when or whether these conditional conversion features will lapse or be triggered again in the future. Any material decrease in our liquidity or reduction in our net working capital could have a material adverse effect on our financial condition and results of operations. In addition, we may elect to settle the 1.625% Notes solely in common stock to avoid an event of default under our Amended Credit Agreement, and any such issuance of common stock could materially dilute the ownership interests of existing stockholders, including stockholders who previously converted such notes to shares of our common stock.
Note hedge and warrant transactions we have entered into may materially adversely affect the value of our common stock.
Concurrently with the issuance of the 1.625% Notes, we entered into note hedge transactions with certain financial institutions, which we refer to as the option counterparties. The convertible note hedges are expected to reduce the potential dilution upon any conversion of the respective series of notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes of such series, as the case may be. We also entered into warrant transactions with the option counterparties with respect to the 1.625% Notes and the 1.00% Notes. The warrants we entered with option counterparties for the 1.00% Notes are still outstanding. The warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds $25.96, with respect to the 1.00% Notes, and $30.70, with respect to the 1.625% Notes. The warrants with respect to the 1.00% Notes can be exercised by holders beginning in March 2021 and expire no later than April 2021. We currently anticipate the holders of the 1.00% Notes to exercise the warrants to purchase up to 37.3 million shares of common stock from us, which will be settled on a net-share basis depending on the average stock price on the day of exercise.
In connection with establishing their initial hedge of the convertible note hedges and warrant transactions, the option counterparties or their respective affiliates have purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock following the pricing of the 1.625% Notes. The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives contracts with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of 1.625% Notes (and are likely to do so during any observation period related to a conversion of 1.625% Notes following any repurchase of 1.625% Notes by us on any fundamental change repurchase date or otherwise). The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could materially adversely affect the value of our common stock.
Counterparty risk with respect to the note hedge transactions, if realized, could have a material adverse impact on our results of operations.
The option counterparties are financial institutions or affiliates of financial institutions, and we are subject to the risk that these option counterparties may default under the note hedge transactions. We can provide no assurances as to the financial stability or viability of any of the option counterparties. Our exposure to the credit risk of the option counterparties is not secured by any collateral. If one or more of the option counterparties to one or more of our note hedge transactions becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those transactions.
To the extent the option counterparties do not honor their contractual commitments with us pursuant to the note hedge transactions, we could face a material increase in our exposure to potential dilution upon any conversion of the 1.625% Notes and/or cash payments we are required to make in excess of the principal amount of converted 1.625% Notes, as the case may be. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price of our common stock and in the volatility of the market price of our common stock. In addition, upon a default by one of the option counterparties, we may suffer adverse tax consequences with respect to our common stock. Any such adverse tax consequences or increased cash payments could have a material adverse effect on our results of operations.
Trends, Risks and Uncertainties Related to Our Common Stock
The stockholders’ rights plan adopted by our Board of Directors may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
On June 7, 2020, our Board of Directors authorized and declared a dividend of one Right for each outstanding share of common stock. If a person or group of affiliated or associated persons acquires beneficial ownership of 15% or more of our then outstanding common stock, subject to certain exceptions, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional shares of our common stock at a substantial discount to the
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public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for shares of our common stock on a one-for-one basis. The stockholders’ rights plan could make it more difficult for a third party to acquire us or a large block of our common stock without the approval of our Board of Directors, which may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Provisions in our charter documents may delay or prevent the acquisition of our Company, which could materially adversely affect the value of our common stock.
Our certificate of incorporation and by-laws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. These provisions:
•establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting;
•authorize the issuance of "blank check" preferred stock, which is preferred stock that our Board of Directors can create and issue without prior stockholder approval and that could be issued with voting or other rights or preferences that could impede a takeover attempt; and
•require the approval by holders of at least 66 2/3% of our outstanding common stock to amend any of these provisions in our certificate of incorporation or by-laws.
Although we believe these provisions make a higher third-party bid more likely by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if an initial offer may be considered beneficial by some stockholders. Any delay or prevention of an acquisition of our Company that would have been beneficial to our stockholders could materially decrease the value of our common stock.
General Risk Factors
Downturns or volatility in general economic conditions could have a material adverse effect on our business and results of operations.
In recent years, worldwide semiconductor industry sales have tracked the impacts of financial crises, subsequent recoveries and persistent economic uncertainty. We believe that the state of global economic conditions are particularly volatile and uncertain, and that an uneven recovery or a renewed global downturn may put pressure on our sales due to reductions in customer demand. Volatile or uncertain economic conditions, as well as continuing political unrest in markets in which we conduct significant business, can adversely impact sales and profitability and make it difficult for us and our competitors to accurately forecast and plan our future business activities.
Historically, the semiconductor industry has been highly cyclical and, as a result, subject to significant downturns and upturns in customer demand for semiconductors and related products. We believe our business today is driven more by secular growth drivers and not solely by macroeconomic and industry cyclicality, as was the case historically. However, we could experience period-to-period fluctuations in operating results due to general industry or economic conditions. We cannot accurately predict the timing of future downturns and upturns in the semiconductor industry or how severe and prolonged these conditions might be. Significant downturns can result in reduced product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices, any of which could materially adversely affect our operating results as a result of: increased operating expenses outpacing decreased revenue, reduced margins, underutilization of our manufacturing capacity and/or asset impairment charges. On the other hand, significant upturns can cause us to be unable to satisfy demand in a timely and cost efficient manner. In the event of such an upturn, we may not be able to expand our workforce and operations in a sufficiently timely manner, procure adequate resources and raw materials, or locate suitable third-party suppliers to respond effectively to changes in demand for our products, and our business and results of operations could be materially and adversely affected.
We may be unable to successfully integrate new strategic acquisitions, which could materially adversely affect our business, results of operations and financial condition.
We have made, and may continue to make, strategic acquisitions and alliances that involve significant risks and uncertainties. Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because they require, among other things, efficient integration and aligning of product offerings and manufacturing operations and coordination of sales and marketing and research and development efforts, often in markets or regions in which we have less experience than others. Our decision to pursue an acquisition is based on, among other factors, our estimates of expected future earnings growth and potential cost savings. Risks related to successful integration of an acquisition include, but are not limited to: (1) the ability to integrate information technology and other systems; (2) unidentified issues not discovered in our due diligence; (3) customers
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responding by changing their existing business relationships with us or the acquired company; (4) diversion of management’s attention from our day to day operations; and (5) loss of key employees due to uncertainty about positions post-integration. In addition, we may incur unexpected costs, such as operating or restructuring costs (including severance payments to departing employees) or taxes resulting from the acquisition or integration of the newly acquired business. In the past, we have recorded goodwill impairment charges related to certain of our acquisitions as a result of such factors as significant underperformance relative to historical or projected future operating results. Missteps or delays in integrating our acquisitions, which could be caused by factors outside of our control, or our failure to realize the expected benefits of the acquisitions on the timeline we anticipate or at all, could materially adversely affect our results of operations and financial condition.
Depending on the level of our ownership interest in and the extent to which we can exercise control over the acquired business, we may be required by U.S. generally accepted accounting principles ("GAAP") and SEC rules and regulations to consolidate newly acquired businesses into our consolidated financial statements. The acquired businesses may not have independent audited financial statements, such statements may not be prepared in accordance with GAAP or the acquired businesses may have financial controls and systems that are not compatible with our financial controls and systems, any of which could materially impair our ability to properly integrate such businesses into our consolidated financial statements on a timely basis. Any revisions to, inaccuracies in or restatements of our consolidated financial statements due to accounting for our acquisitions could have a material adverse effect our financial condition and results of operations.
Natural disasters, health and safety epidemics and other business disruptions could cause significant harm to our business operations and facilities and could adversely affect our supply chain and our customer base, any of which may materially adversely affect our business, results of operation, and financial condition.
Our U.S. and international manufacturing facilities and distribution centers, as well as the operations of our third-party suppliers, are susceptible to losses and interruptions caused by floods, hurricanes, earthquakes, typhoons, volcanic eruptions, and similar natural disasters, as well as power outages, telecommunications failures, industrial accidents, health and safety epidemics and similar events. The occurrence of natural disasters in any of the regions in which we operate could severely disrupt the operations of our businesses by negatively impacting our supply chain, our ability to deliver products, and the cost of our products. Such events can negatively impact revenue and earnings and can significantly impact cash flow, both from decreased revenue and from increased costs associated with the event. In addition, these events could cause consumer confidence and spending to decrease or result in increased volatility to the U.S. and worldwide economies. Although we carry insurance to generally compensate for losses of the type noted above, such insurance may not be adequate to cover all losses that may be incurred or continue to be available in the affected area at commercially reasonable rates and terms. To the extent any losses from natural disasters or other business disruptions are not covered by insurance, any costs, write-downs, impairments and decreased revenue can materially adversely affect our business, our results of operations and our financial condition.
We could be subject to changes in tax rates or the adoption of new U.S. or international tax legislation or have exposure to additional tax liabilities, which could adversely affect our results of operations and financial condition.
Changes to, or interpretations of, tax legislation or regulations in the United States and the jurisdictions in which we operate could significantly increase our effective tax rate and ultimately reduce our cash flow from operating activities. In addition, other factors or events, including business combinations, strategy and investment decisions, changes in the valuation of our deferred tax assets and liabilities, adjustments to income taxes upon finalization of various tax returns or as a result of deficiencies asserted by taxing authorities, increases in expenses not deductible for tax purposes, availability of income tax credits and incentives, increasing operations in high tax jurisdictions, and changes in tax rates, could also increase our future effective tax rate and ultimately reduce our cash flow from operating activities.
We exercise significant judgment in determining our worldwide income tax provision and resulting income tax accrual. Interpretations of tax legislation or regulations with regard to transactions that occur in or outside the ordinary course of our business, may result in uncertainty regarding the final tax determination. Our tax filings are subject to audit by the Internal Revenue Service (the "IRS") and state, local and foreign taxing authorities. The final determination of an audit may be materially different than the determination which was reflected in our worldwide income tax provision and accrual. An assessment of additional taxes because of an audit could have a material adverse effect on our results of operations and financial condition. We are also liable for potential tax liabilities of businesses we acquire.
The Organization for Economic Cooperation and Development ("OECD") has been working on a Base Erosion and Profit Shifting ("BEPS") Project and issued a report in 2015 and an interim report in 2018, and continues to issue guidelines and develop proposals that could change numerous long-standing tax principles, including allocating greater taxing rights to countries where customers are located and establishing a minimum tax on global income. The changes arising from the BEPS
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project, if adopted by countries in which we do business, could have a material adverse effect on our results of operations and financial condition.
We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies and/or legal entity structures, which could adversely affect our results of operations and financial condition.
We conduct operations worldwide through our foreign subsidiaries and are, therefore, subject to complex transfer pricing regulations in the jurisdictions in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between related parties be priced on a basis that would be comparable to an arm’s length transaction between unrelated parties. There is uncertainty and inherent subjectivity in complying with these rules. To the extent that any foreign tax authorities disagree with our transfer pricing policies, we could become subject to significant tax liabilities and penalties. The ultimate outcome of a tax examination could differ materially from our income tax accrual and could have a material adverse effect on our results of operations and financial condition.
Our legal organizational structure and the domicile of our entities that own our IP could result in unanticipated unfavorable tax or other consequences that could have a material adverse effect on our results of operations and financial condition. Changes in tax legislation, future jurisdictional profitability of our subsidiaries, and related regulatory interpretations in the countries in which we operate may impact the taxes we pay or income tax accrual we record, which could have a material adverse effect on our results of operations and financial condition.
We may be unable to attract and retain highly skilled personnel.
Our success depends on our ability to attract, motivate and retain highly skilled personnel, including technical, marketing, management and staff personnel, both in the U.S. and internationally. In the semiconductor industry, the competition for qualified personnel, particularly experienced design engineers and other technical employees, is intense, particularly when the business cycle is improving. During such periods, competitors may try to recruit our most valuable technical employees. Additionally, we have entered into employment agreements with certain senior executives, but we do not have employment agreements with most of our employees. Many of these employees could leave our company with little or no prior notice and would be free to work for a competitor. While we devote a great deal of our attention to designing competitive compensation programs aimed at attracting and retaining personnel, specific elements of our compensation programs may not be competitive with those of our competitors, and there can be no assurance that we will be able to retain our current personnel or recruit the key personnel we require. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all and other senior management may be required to divert attention from other aspects of our business. Loss of the services of, or failure to effectively recruit, qualified personnel, including senior managers, could have a material adverse effect on our competitive position and on our business.
The failure to comply with the terms and conditions of our contracts could result in, among other things, damages, fines or other liabilities.
We have a diverse customer base consisting of both private sector clients and public sector clients, including the U.S. government. Sales to our private sector clients are generally based on stated contractual terms, the terms and conditions on our website or terms contained in purchase orders on a transaction-by-transaction basis. Sales to our public sector clients are generally derived from sales to federal, state and local governmental departments and agencies through various contracts and programs that may require compliance with regulations covering many areas of our operations, including, but not limited to, accounting practices, IP rights, information handling, and security. Noncompliance with contract terms, particularly with respect to highly-regulated public sector clients, or with government procurement regulations could result in fines or penalties against us, termination of such contracts or civil, criminal and administrative liability to the Company. With respect to public sector clients, the government’s remedies may also include suspension or debarment from future government business. In addition, almost all of our contracts have default provisions, and certain of our contracts in the public sector are terminable at any time for convenience of the contracting agency. The effect of any of these possible actions or the adoption of new or modified procurement regulations or practices could materially adversely affect our business, financial position and results of operations.
Climate change, and the regulatory and legislative developments related to climate change, may materially adversely affect our business and financial condition.
The potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and
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intensities, water shortages, changing sea levels and changing temperatures. The impacts of climate change may materially and adversely impact the cost, production and financial performance of our operations. Further, any impacts to our business and financial condition as a result of climate change are likely to occur over a sustained period of time and are therefore difficult to quantify with any degree of specificity. For example, extreme weather events may result in adverse physical effects on portions of our infrastructure, which could disrupt our supply chain and ultimately our business operations. In addition, disruption of transportation and distribution systems could result in reduced operational efficiency and customer service interruption. Climate-related events have the potential to disrupt our business, including the business of our customers, and may cause us to experience higher attrition, losses and additional costs to resume operations.
A number of governments or governmental bodies have introduced or are contemplating legislative and regulatory changes in response to various climate change interest groups and the potential impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on us and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Any future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the political significance and uncertainty around the impact of climate change and how it should be addressed, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation. Any of the foregoing could result in a material adverse effect on our business and financial condition.
We may be unable to implement our recent business strategy developments, which could have a material adverse effect on our business operations.
We believe our recent business strategy developments will help us remain competitive. However, we may face difficulties, delays and increased expenses as we transition our business to implement this strategy and may not be able to effectively manage such transitions or efficiently implement this strategy, all of which could have a material adverse effect on our business operations. In addition, implementation of a new business strategy may lead to the disruption of our existing business operations, including distracting management from current operations. Results of operations from new activities may be lower than our existing activities, and, if a strategy is unsuccessful, we may not recoup our investments in that strategy. Failure to successfully and timely realize the anticipated benefits of these transactions or strategies could have a material adverse effect on our financial condition or results of operations.
We may from time to time desire to exit certain facilities, product lines or businesses, or to restructure our operations, but may not be successful in doing so.
From time to time, we may decide to divest certain product lines and businesses or restructure our operations. We have, in recent years, exited several of our product lines and businesses, and we have closed several of our manufacturing and research facilities. We may continue to do so in the future. However, our ability to successfully exit product lines and businesses, or to close or consolidate operations, depends on a number of factors, many of which are outside of our control. For example, if we are seeking a buyer for a particular business line, none may be available, or we may not be successful in negotiating satisfactory terms with prospective buyers.
Our operating results depend, in part, on the performance of independent distributors.
A portion of our sales occurs through independent global and regional distributors that are not under our control. We rely on distributors to grow and develop their customer base and anticipate customer needs, and any lack of such actions by our distributors may adversely affect our results of operations. In particular, revenue from one of our distributors accounted for approximately 11% of the Company’s total consolidated revenue for the year ended December 31, 2020. If the business relationship with such distributor is terminated, whether through industry consolidation or otherwise, and we are unable to find a suitable replacement, our operations and operating results could be materially adversely affected. These independent distributors also generally represent product lines offered by several companies and are not subject to any minimum sales requirements or obligation to market our products to their customers. In turn, distributors could reduce their sales efforts for our products or choose to terminate their representation of us. Additionally, we rely on our distributors to provide accurate and timely sales reports in order for us to be able to generate financial reports that accurately represent distributor sales of our products during any given period. Any inaccuracies or untimely reports could adversely affect our ability to produce accurate and timely financial reports and recognize revenue.
Item 1B. Unresolved Staff Comments
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None.
Item 2. Properties
Our corporate headquarters, as well as certain design center and research and development operations, are located in approximately 600,000 square feet of building space on property that we own in Phoenix, Arizona. We also own and lease properties around the world for use as sales offices, design centers, research and development labs, warehouses, logistic centers, trading offices and manufacturing support. The size and location of these properties, which are used by all of our reportable segments, change from time to time based on business requirements. We operate distribution centers, which are leased or contracted through a third-party, in locations throughout Asia, Europe and the Americas. See "Business—Resources" included elsewhere in this Form 10-K for information on properties used in our manufacturing operations. While these facilities are primarily used in manufacturing operations, they also include office, utility, laboratory, warehouse and unused space. Additionally, we own and lease research and development facilities located in Australia, Belgium, Canada, China, the Czech Republic, France, Germany, India, Ireland, Israel, Italy, Japan, the Philippines, Singapore, South Korea, Romania, Russia, the Slovak Republic, Slovenia, Switzerland, Taiwan, the United Kingdom and the United States. Our joint venture in Leshan, China also owns manufacturing, warehouse, laboratory, office and other unused space. We believe that our facilities around the world, whether owned or leased, are well-maintained.
Certain of our properties are subject to encumbrances such as mortgages and liens. See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for further information. In addition, due to local law restrictions, the land upon which our facilities are located in certain foreign locations is subject to varying long-term leases. See "Business—Resources" included elsewhere in this Form 10-K for further details on our properties and "Business-Governmental Regulation" for further details on environmental regulation of our properties.
Item 3. Legal Proceedings
See Note 13: ''Commitments and Contingencies'' under the heading "Legal Matters" in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of legal proceedings and related matters.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded under the symbol "ON" on the Nasdaq Global Select Market. The stock price details can be obtained from the Nasdaq website at www.nasdaq.com. As of February 10, 2021, there were approximately 209 holders of record of our common stock and 411,881,071 shares of common stock outstanding.
We have neither declared nor paid any cash dividends on our common stock since our initial public offering. Our future dividend policy with respect to our common stock will depend upon our earnings, capital requirements, financial condition, debt restrictions and other factors deemed relevant by our Board of Directors in its sole discretion.
Our outstanding debt facilities may limit the amount of dividends we are permitted to pay and the amount we are permitted to buy back shares under the 2018 Share Repurchase Program (as defined below). So long as no default has occurred and is continuing or results therefrom, our Amended Credit Agreement permits us to pay cash dividends to our common stockholders, buy back shares under the 2018 Share Repurchase Program, or a combination thereof, in an amount up to $100.0 million. Additionally, we may pay dividends and buy back shares under the 2018 Share Repurchase Program in an unlimited amount so long as, after giving effect thereto, the consolidated total net leverage ratio (calculated in accordance with our Amended Credit Agreement) does not exceed 2.50 to 1.00. See Note 9: ''Long-Term Debt'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K for further discussion of our Amended Credit Agreement.
Issuer Purchases of Equity Securities
The following table provides information regarding repurchases of our common stock during the quarter ended December 31, 2020:
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Period (1) |  | Total Number of Shares Purchased (2) |  | Average Price Paid per Share (3) |  | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs |  | Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs ($ in millions)(4)
October 3, 2020 - October 30, 2020 |  | 1,919 |  |  | $ | 23.35 |  |  | — |  |  | $ | 1,295.8 |
October 31, 2020 - November 27, 2020 |  | 5,808 |  |  | 26.57 |  |  | — |  |  | 1,295.8 |
November 28, 2020 - December 31, 2020 |  | 11,913,263 |  |  | 27.17 |  |  | — |  |  | 1,295.8 |
Total |  | 11,920,990 |  |  | 27.17 |  |  | — |  |  |

(1)The periods represent our fiscal month start and end dates for the fourth quarter of 2020.
(2)The number of shares purchased represents shares of common stock held by employees who tendered owned shares of common stock to the Company to satisfy the employee withholding taxes due upon the vesting of RSUs and shares purchased under the previously disclosed share repurchase program pursuant to the Capital Allocation Policy (the "2018 Share Repurchase Program"). Also included in the November 28, 2020 – December 30, 2020 period is an aggregate of 11,823,348 shares that were repurchased on December 1, 2020 pursuant to bond hedges for which no cash was exchanged. See Note 9: ''Long-Term Debt'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K for additional information on this transaction.
(3)The price per share is based on the fair market value at the time of tender or repurchase, as applicable.
(4)On November 15, 2018, we announced the 2018 Share Repurchase Program for up to $1.5 billion of our common stock, exclusive of any fees, commissions or other expenses, subject to certain contingencies, that became effective on December 1, 2018 and expires on December 31, 2022.
Share Repurchase Program
We repurchased approximately 3.6 million shares of common stock for $65.3 million under the 2018 Share Repurchase Program during the year ended December 31, 2020.
Under the 2018 Share Repurchase Program, we may repurchase our common stock from time to time in privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, or by any combination of such methods or other methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations, and other market and economic conditions. The 2018 Share Repurchase Program does not require us to purchase any particular amount of common stock and is subject to a variety of factors including the Board’s discretion. As of December 31, 2020, the authorized amount remaining under the 2018 Share Repurchase Program was $1,295.8 million.
See Note 10: ''Earnings Per Share and Equity'' of the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for further information on shares of common stock tendered to the Company by employees to satisfy applicable employee withholding taxes due upon vesting of RSUs and the 2018 Share Repurchase Program.
Item 6. Selected Financial Data
The following table sets forth certain of our selected financial data for the periods indicated. The consolidated statements of operations and balance sheet data set forth below are derived from our audited consolidated financial statements. The table below includes consolidated results, including our recent acquisitions, thus comparability will be materially affected. See Note 4: ''Recent Accounting Pronouncements'', Note 5: ''Acquisitions, Divestitures and Licensing Transactions'' and Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for further information.
You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-K.
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| Year ended December 31,
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
| (in millions, except per share data)
Consolidated Statements of Operations: |  |  |  |  |  |  |  |  |
Revenue | $ | 5,255.0 |  |  | $ | 5,517.9 |  |  | $ | 5,878.3 |  |  | $ | 5,543.1 |  |  | $ | 3,906.9 |
Income tax (provision) benefit | 59.8 |  |  | (62.7) |  |  | (125.1) |  |  | 265.5 |  |  | 3.9 |
Net income | 236.4 |  |  | 213.9 |  |  | 629.9 |  |  | 813.0 |  |  | 184.5 |
Diluted net income per common share attributable to ON Semiconductor Corporation | 0.56 |  |  | 0.51 |  |  | 1.44 |  |  | 1.89 |  |  | 0.43 |
| As of December 31,
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
| (in millions)
Consolidated Balance Sheets: |
Total assets | $ | 8,668.0 |  |  | $ | 8,425.5 |  |  | $ | 7,587.6 |  |  | $ | 7,195.1 |  |  | $ | 6,924.4 |
Net long-term debt, including current maturities | 3,491.3 |  |  | 3,612.5 |  |  | 2,766.1 |  |  | 2,951.8 |  |  | 3,622.3 |
Total stockholders' equity | 3,558.1 |  |  | 3,324.1 |  |  | 3,194.1 |  |  | 2,801.0 |  |  | 1,845.0 |

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our audited historical consolidated financial statements, including the notes thereto, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed in "Risk Factors" included elsewhere in this Form 10-K.
Executive Overview
This executive overview presents summarized information regarding our business and operating trends only. For further information relating to the information summarized herein, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety.
Recent ON Semiconductor Results
Our revenue for the year ended December 31, 2020 was $5,255.0 million, a decrease of 4.8% from $5,517.9 million for the year ended December 31, 2019. The decrease was attributable to reduced demand for our products across PSG, ASG and ISG primarily due to the negative impact from the COVID-19 pandemic. During 2020, while we reported net income attributable to ON Semiconductor of $234.2 million compared to $211.7 million in 2019, our operating income during 2020 was $348.7 million compared to $432.7 million during 2019. While the decrease in operating income was primarily due to the pervasive macroeconomic impacts of the COVID-19 pandemic, the increase in net income attributable to ON Semiconductor was due to the income tax benefit recorded during the year. Our gross margin decreased by approximately 310 basis points to 32.7% in 2020 from 35.8% in 2019. See discussion under "Results of Operations" for further discussion on the reasons for the fluctuations year over year.
Business and Macroeconomic Environment
The COVID-19 pandemic has had, and is expected to continue to have, a significant adverse impact on global economic activity, including creating supply chain and market disruption. While certain measures enacted in 2020 to contain the spread of the COVID-19 pandemic have since been relaxed in many jurisdictions, the extent to which the pandemic will impact demand for our products depends on future developments, which are highly uncertain and difficult to predict, including new information that may emerge concerning the severity and longevity of the pandemic, and actions to contain and treat its impact.
We historically have pursued, and expect to continue to pursue, cost-saving initiatives to align our overall cost structure, capital investments and other expenditures with our expected revenue, spending and capacity levels based on our current sales and manufacturing projections. We have taken, and continue to take, significant cost containment efforts, including, but not limited to, workforce reductions, reducing discretionary spending, furloughs, and mandatory vacations. While all our global
39

manufacturing sites are currently operational, our facilities could be required to temporarily curtail production levels or temporarily cease operations based on government mandates. There can be no assurances that we will adequately forecast the impact of adverse economic conditions on our business or that we will effectively align our cost structure, capital investments and other expenditures with our revenue, spending and capacity levels in the future.
See Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information relating to our most recent cost-saving initiatives.
The Impact of the COVID-19 Pandemic on our Business
In an effort to protect the health and safety of our employees, we have taken proactive, aggressive actions to adopt social distancing policies at our locations around the world, including reducing the number of people in our sites at any one time, encouraging our employees to work from home where possible, limiting the number of employees attending meetings and significantly reducing employee travel. In our role as responsible corporate citizens, we have taken actions to support our global communities by providing personal protective equipment to hospitals and health workers. We will continue to actively monitor implications of the COVID-19 pandemic on our business and may take further actions to adjust our business operations if deemed necessary, or as required by federal, state, or local law.
During the majority of 2020, our results of operations were adversely impacted due to the reduced demand from our customers, government-mandated temporary shutdowns of certain of our facilities, supply shortages and other logistical constraints arising from the COVID-19 pandemic. However, towards the end of 2020, we experienced a meaningful improvement in the demand for most of our products, specifically products in the automotive sector that had been significantly impacted by the pandemic. However, current demand levels have yet to reach levels achieved before the pandemic. While we believe that our business has stabilized from the impact of the pandemic, a possible resurgence or another wave of the pandemic could alter the business and economic landscape again. We expect volatility in demand to continue in varying duration and severity until such time as the COVID-19 pandemic is effectively contained globally. Our long-term fundamentals remain strong as we believe that we are well-positioned for growth as business conditions continue to improve. We believe that secular trends in the automotive, industrial, and cloud-power end-markets, which are our primary areas of focus, will continue to drive long-term growth in the semiconductor industry.
Results of Operations
Our results of operations for the year ended December 31, 2020 includes the full year results, and our results of operations for the year ended December 31, 2019 includes partial year results of Quantenna, which we acquired on June 19, 2019.
For a discussion and comparison of the results of our operations for the year ended December 31, 2019 with the year ended December 31, 2018, refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year ended December 31, 2019 filed with the SEC on February 19, 2020.
Operating Results
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The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements (in millions):

| Year ended December 31, |  |  |  |  |  |  |  |
| 2020 |  | 2019 |  |  |  |  |  | Change |  |  |  |  |  |
Revenue | $ | 5,255.0 |  |  | $ | 5,517.9 |  |  |  |  |  |  | $ | (262.9) |  |  |  |  |  |  |
Cost of revenue (exclusive of amortization shown below) | 3,539.2 |  |  | 3,544.3 |  |  |  |  |  |  | (5.1) |  |  |  |  |  |  |
Gross profit | 1,715.8 |  |  | 1,973.6 |  |  |  |  |  |  | (257.8) |  |  |  |  |  |  |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development | 642.9 |  |  | 640.9 |  |  |  |  |  |  | 2.0 |  |  |  |  |  |  |
Selling and marketing | 278.7 |  |  | 301.0 |  |  |  |  |  |  | (22.3) |  |  |  |  |  |  |
General and administrative | 258.7 |  |  | 284.0 |  |  |  |  |  |  | (25.3) |  |  |  |  |  |  |
Litigation settlement | — |  |  | 169.5 |  |  |  |  |  |  | (169.5) |  |  |  |  |  |  |
Amortization of acquisition-related intangible assets | 120.3 |  |  | 115.2 |  |  |  |  |  |  | 5.1 |  |  |  |  |  |  |
Restructuring, asset impairments and other charges, net | 65.2 |  |  | 28.7 |  |  |  |  |  |  | 36.5 |  |  |  |  |  |  |
Intangible asset impairment | 1.3 |  |  | 1.6 |  |  |  |  |  |  | (0.3) |  |  |  |  |  |  |
Total operating expenses | 1,367.1 |  |  | 1,540.9 |  |  |  |  |  |  | (173.8) |  |  |  |  |  |  |
Operating income | 348.7 |  |  | 432.7 |  |  |  |  |  |  | (84.0) |  |  |  |  |  |  |
Other income (expense), net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense | (168.4) |  |  | (148.3) |  |  |  |  |  |  | (20.1) |  |  |  |  |  |  |
Interest income | 4.9 |  |  | 10.2 |  |  |  |  |  |  | (5.3) |  |  |  |  |  |  |
Loss on debt refinancing and prepayment | — |  |  | (6.2) |  |  |  |  |  |  | 6.2 |  |  |  |  |  |  |
Other expense | (8.6) |  |  | (11.8) |  |  |  |  |  |  | 3.2 |  |  |  |  |  |  |
Other income (expense), net | (172.1) |  |  | (156.1) |  |  |  |  |  |  | (16.0) |  |  |  |  |  |  |
Income before income taxes | 176.6 |  |  | 276.6 |  |  |  |  |  |  | (100.0) |  |  |  |  |  |  |
Income tax (provision) benefit | 59.8 |  |  | (62.7) |  |  |  |  |  |  | 122.5 |  |  |  |  |  |  |
Net income | 236.4 |  |  | 213.9 |  |  |  |  |  |  | 22.5 |  |  |  |  |  |  |
Less: Net income attributable to non-controlling interest | (2.2) |  |  | (2.2) |  |  |  |  |  |  | — |  |  |  |  |  |  |
Net income attributable to ON Semiconductor Corporation | $ | 234.2 |  |  | $ | 211.7 |  |  |  |  |  |  | $ | 22.5 |  |  |  |  |  |  |

Revenue
Revenue was $5,255.0 million and $5,517.9 million for 2020 and 2019, respectively. The decrease from 2019 to 2020 of $262.9 million, or 4.8%, w as primarily attributable to a 6.5%, 3.1% and 2.5% decrease in revenue in PSG, ASG and ISG, respectively, which is further explained below. We had one customer, a distributor, whose revenue accounted for approximately 11% of the total revenue for the year ended December 31, 2020.
Revenue by operating and reportable segments was as follows (dollars in millions):

| 2020 |  | As a % of Revenue (1) |  | 2019 |  | As a % of Revenue (1) |  |  |
PSG | $ | 2,606.1 |  |  | 49.6 | % |  | $ | 2,788.3 |  |  | 50.5 | % |  |  |
ASG | 1,910.4 |  |  | 36.4 | % |  | 1,972.3 |  |  | 35.7 | % |  |  |
ISG | 738.5 |  |  | 14.1 | % |  | 757.3 |  |  | 13.7 | % |  |  |
Total revenue | $ | 5,255.0 |  |  |  |  | $ | 5,517.9 |  |  |  |  |  |

_______________________
(1) Certain of the amounts may not total due to rounding of individual amounts.
Revenue from PSG
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Revenue from PSG decreased by $182.2 million, or approximately 7%, during 2020 compared to 2019. The revenue from our Advanced Power Division and Protection and Signal Division decreased by $116.8 million and $49.1 million, respectively. The decreases were due to a combination of a general decline in demand for these products due to economic conditions caused by the COVID-19 pandemic, and was exacerbated by internal delays in fulfilling certain customer orders due to our factories in China, the Philippines and Malaysia, which operated at significantly reduced capacity levels during portions of the first half of 2020 as a result of the COVID-19 pandemic.
Revenue from ASG
Revenue from ASG decreased by $61.9 million, or approximately 3%, during 2020 compared to 2019. The revenue from our Automotive Division and Mobile, Computing and Cloud Division decreased by $47.4 million and $39.6 million, respectively, and was partially offset by an increase in revenue of $34.1 million in our Wireless Connectivity Solutions Division, which included the acquired Quantenna business. The decreases in demand for the products in these divisions was primarily due to the economic conditions as a result of the COVID-19 pandemic, and specifically the automotive industry during the first half of the year, which has started to experience a meaningful recovery during the fourth quarter. Similar to PSG, this decrease was exacerbated by delays in fulfilling certain customer orders due to our factories in China, the Philippines and Malaysia, which operated at a significantly reduced capacity levels during portions of the first half of 2020 as a result of the COVID-19 pandemic.
Revenue from ISG
Revenue from ISG decreased by $18.8 million, or 2.5%, during 2020 compared 2019, which was primarily due to the decrease in revenue from our Automotive Sensing Division of $20.0 million, which was due to decreased demand and delays in fulfilling certain customer orders due to supply chain constraints during the first half of 2020 as a result of the COVID-19 pandemic.
Revenue by Geographic Location
Revenue by geographic location, based on sales billed from the respective country or regions, are as follows (dollars in millions):

| 2020 |  | As a % of Revenue (1) |  | 2019 |  | As a % of Revenue (1) |  |  |  |
Singapore | $ | 1,799.5 |  |  | 34.2 | % |  | $ | 1,713.1 |  |  | 31.0 | % |  |  |  |
Hong Kong | 1,311.6 |  |  | 25.0 | % |  | 1,417.3 |  |  | 25.7 | % |  |  |  |
United Kingdom | 805.9 |  |  | 15.3 | % |  | 921.6 |  |  | 16.7 | % |  |  |  |
United States | 728.6 |  |  | 13.9 | % |  | 810.3 |  |  | 14.7 | % |  |  |  |
Other | 609.4 |  |  | 11.6 | % |  | 655.6 |  |  | 11.9 | % |  |  |  |
Total | $ | 5,255.0 |  |  |  |  | $ | 5,517.9 |  |  |  |  |  |  |

_______________________
(1) Certain of the amounts may not total due to rounding of individual amounts.
Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets)
Our gross profit by operating and reportable segment was as follows (dollars in millions):

| 2020 |  |  | As a % of Segment Revenue (1) |  |  |  | 2019 |  |  | As a % of Segment Revenue (1) |  |  |  |
PSG | $ | 801.7 |  |  |  | 30.8 | % |  |  |  | $ | 976.0 |  |  |  | 35.0 | % |  |  |  |
ASG | 730.5 |  |  |  | 38.2 | % |  |  |  | 794.8 |  |  |  | 40.3 | % |  |  |  |
ISG | 237.7 |  |  |  | 32.2 | % |  |  |  | 275.4 |  |  |  | 36.4 | % |  |  |  |
Gross profit for all segments | $ | 1,769.9 |  |  |  |  |  |  |  | $ | 2,046.2 |  |  |  |  |  |  |  |
Unallocated manufacturing costs (2) | (54.1) |  |  |  | (1.0) | % |  |  |  | (72.6) |  |  |  | (1.3) | % |  |  |  |
Total gross profit | $ | 1,715.8 |  |  |  | 32.7 | % |  |  |  | $ | 1,973.6 |  |  |  | 35.8 | % |  |  |  |

___________________
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(1) Certain of the amounts may not total due to rounding of individual amounts.
(2) Unallocated manufacturing costs are presented as a percentage of total revenue (2019 includes expensing of the fair market value step-up of inventory of $19.6 million acquired from Quantenna).
Our gross profit was $1,715.8 million during 2020 compared to $1,973.6 million during 2019 representing a decrease of $257.8 million, or approximately 13%. Our gross margin decreased to 32.7% during 2020 compared to 35.8% during 2019. The decrease in gross profit and gross margin were attributable to a significant decline in sales volume due to the COVID-19 pandemic and a decline in average selling prices.
While the improving business conditions during the second half of 2020 positively impacted our gross margins, we incurred additional expenses for freight, transportation and cleaning costs to operate our facilities in compliance with local government regulations that had an adverse impact on our gross margin.
Operating Expenses
Research and Development
Research and development expenses were $642.9 million and $640.9 million, or approximately 12% of revenue during each of 2020 and 2019, representing an increase of $2.0 million, or approximately 0.3% year-over-year. While there was a decrease in the cost of external consultants and travel-related expenses due to the cost-saving measures and travel restrictions implemented in response to the COVID-19 pandemic, these decreases were offset due to the payroll expenses for Quantenna employees for the entire year in 2020.
Selling and Marketing
Selling and marketing expenses were $278.7 million and $301.0 million, or approximately 5% of revenue during each of 2020 and 2019, representing a decrease of $22.3 million, or approximately 7.4% year-over-year. The decrease was primarily related to a significant decrease in travel-related expenses due to the cost-saving measures and travel restrictions implemented in response to the COVID-19 pandemic and nominal decreases in payroll expenses as a result of furloughs and the VSP and Involuntary Separation Program ("ISP") offered during 2020. Please see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a more detailed description of the VSP and the ISP.
General and Administrative
General and administrative expenses were $258.7 million and $284.0 million, or approximately 5% of revenue during each of 2020 and 2019, representing a decrease of $25.3 million, or approximately 9% year-over-year. This decrease was primarily attributable to a decrease in stock compensation expense, travel-related expenses due to the cost-saving measures and travel restrictions implemented in response to the COVID-19 pandemic and certain other categories due to the general cost-saving measures.
Litigation Settlement
During 2019, we reached a litigation settlement with Power Integrations, Inc. ("PI"). In connection with the settlement, we incurred an expense of $169.5 million, and ultimately paid $175.0 million in cash, pursuant to which all outstanding legal and administrative disputes were withdrawn by both the parties. No such expenses were incurred during 2020. See Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information with respect to the litigation settlement with PI.
Amortization of Acquisition—Related Intangible Assets
Amortization of acquisition-related intangible assets was $120.3 million and $115.2 million for 2020 and 2019, respectively. The increase of $5.1 million, or approximately 4.4%, was primarily due to the amortization of intangible assets acquired from Quantenna.
See Note 5: ''Acquisitions, Divestiture and Licensing Transactions'' and Note 6: ''Goodwill and Intangible Assets'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information with respect to the acquired intangible assets.
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Restructuring, Asset Impairments and Other Charges, net
Restructuring, asset impairments and other charges, net was $65.2 million and $28.7 million for 2020 and 2019, respectively. Amounts incurred during 2020 related to the VSP, ISP and other restructuring programs, primarily through workforce reductions. Included in 2020 were also asset impairment charges amounting to $17.5 million. Amounts incurred during 2019 related to the post-Quantenna acquisition related restructuring program as well as certain restructuring actions undertaken by us aimed at cost savings, primarily through workforce reductions.
For additional information, see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Intangible Asset Impairment
Intangible asset impairment charges were $1.3 million and $1.6 million for 2020 and 2019, respectively, related to the cancellation and abandonment of certain IPRD projects during the year.
See Note 6: ''Goodwill and Intangible Assets'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.
Other Income and Expenses
Interest Expense
Interest expense increased by $20.1 million, or approximately 14%, to $168.4 million during 2020 compared to $148.3 million in 2019, primarily due to an increase in the outstanding balances of long-term debt as a result of the borrowings under the Revolving Credit Facility (which was subsequently repaid) and our issuance of the 3.875% Notes, offset partially by the repayment of our 1.00% Notes. We recorded amortization of debt discount to interest expense of $38.2 million and $37.8 million for 2020 and 2019, respectively. Our average gross amount of long-term debt balance (including current maturities) during 2020 and 2019 was $3,669.4 million and $3,344.1 million, respectively. Our weighted average interest rate on our gross amount of long-term debt (including current maturities) was 4.6% and 4.4% per annum in 2020 and 2019, respectively.
See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.
Loss on Debt Refinancing and Prepayment
We recorded loss on debt refinancing and prepayment of $6.2 million during 2019 related to the activity under the Amended Credit Agreement. No such expenses were incurred during 2020.
Other Income (Expense)
Other expense decreased by $3.2 million, or approximately 27%, from 2019 to 2020. The decrease was primarily attributable to a decrease of $11.6 million in actuarial losses on our pension obligations during 2020 compared to 2019, offset by the recognition of an indemnification gain of $7.8 million primarily attributable to the resolution of a foreign tax dispute and other IP related claims during 2019.
Income Tax Provision
We recorded an income tax benefit of $59.8 million and a provision of $62.7 million in 2020 and 2019, respectively.
The income tax benefit for the year ended December 31, 2020 consisted of discrete benefits of $63.0 million primarily due to the recognition of certain deferred tax assets, net of deferred tax liabilities, related to the domestication of certain foreign subsidiaries and a benefit of $49.4 million related to the release of valuation allowance against certain state deferred tax assets. These benefits were partially offset by a provision of $43.9 million for income and withholding taxes of certain of our foreign and domestic operations, a $2.3 million discrete provision relating to prior year uncertain tax positions, a discrete provision of $5.5 million relating to additional foreign valuation allowance, and $0.9 million of other discrete items.
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The income tax provision for the year ended December 31, 2019 consisted primarily of $66.4 million for income and withholding taxes of certain of our foreign and domestic operations, $6.0 million relating to the resolution of a foreign tax dispute and $3.3 million of new reserves and interest on existing reserves for uncertain tax positions in foreign jurisdictions and $2.1 million of prior year adjustments. These amounts were offset by discrete benefits of $9.2 million relating to the release of reserves and interest for uncertain tax positions in foreign jurisdictions related to prior years and $5.9 million relating to equity award excess tax benefits.
For additional information, see Note 16: ''Income Taxes'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K.
Liquidity and Capital Resources
This section includes a discussion and analysis of our cash requirements, off-balance sheet arrangements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.
Contractual Obligations
Our principal outstanding contractual obligations relate to our long-term debt, operating lease liabilities and purchase obligations. The following table summarizes our contractual obligations at December 31, 2020 and the effect such obligations are expected to have on our liquidity and cash flow in the future (in millions):

| Payments Due by Period
Contractual obligations (1) | Total |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | Thereafter
Long-term debt (2) | $ | 4,110.8 |  |  | $ | 699.0 |  |  | $ | 107.9 |  |  | $ | 104.7 |  |  | $ | 785.8 |  |  | $ | 77.3 |  |  | $ | 2,336.1 |
Operating lease liabilities | 174.6 |  |  | 36.5 |  |  | 30.1 |  |  | 23.1 |  |  | 20.8 |  |  | 14.2 |  |  | 49.9 |
Purchase obligations for (3): |  |  |  |  |  |  |  |  |  |  |  |  |
Capital expenditures | 58.1 |  |  | 52.0 |  |  | 4.8 |  |  | 1.3 |  |  | — |  |  | — |  |  | — |
Inventory and external manufacturing | 1,256.9 |  |  | 418.6 |  |  | 339.5 |  |  | 245.9 |  |  | 246.0 |  |  | 3.4 |  |  | 3.5 |
Information technology and support services | 16.1 |  |  | 8.8 |  |  | 4.8 |  |  | 2.2 |  |  | 0.3 |  |  | — |  |  | — |
Other (4) | 307.2 |  |  | 45.5 |  |  | 249.8 |  |  | 10.1 |  |  | 1.7 |  |  | 0.1 |  |  | — |
Total contractual obligations | $ | 5,923.7 |  |  | $ | 1,260.4 |  |  | $ | 736.9 |  |  | $ | 387.3 |  |  | $ | 1,054.6 |  |  | $ | 95.0 |  |  | $ | 2,389.5 |

_______________________
(1)The table above excludes approximately $45.1 million of liabilities related to unrecognized tax benefits because we are unable to reasonably estimate the timing of the settlement of such liabilities.
(2)Includes interest payments at applicable rates as of December 31, 2020.
(3)These represent our off-balance sheet arrangements (See "Liquidity and Capital Resources - Off-Balance Sheet Arrangements" for further information).
(4)During 2019, we incurred additional commitments relating to the pending acquisition of a manufacturing facility, of which, $170.0 million has been deposited with the seller already. The remaining commitment of $230.0 million will be owed on or around December 31, 2022. See Note 5: ''Acquisitions, Divestiture and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.
The table also excludes our pension obligations. We expect to make cash contributions to comply with local funding requirements and required benefit payments of approximately $22.1 million and $7.0 million, respectively, in 2021. This future payment estimate assumes we continue to meet our statutory funding requirements. The timing and amount of contributions may be impacted by a number of factors, including the funded status of the plans. Beyond 2021, the actual amounts required to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory actions related to pension funding obligations. See Note 12: ''Employee Benefit Plans'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for more information on our pension obligations.
Our balance of cash and cash equivalents was $1,080.7 million as of December 31, 2020. We believe that our cash flows from operations, coupled with our existing cash and cash equivalents, and cash available from our Revolving Credit Facility, will be adequate to fund our operating, debt repayment and capital needs for at least the next 12 months. Total cash and cash equivalents at December 31, 2020 include approximately $489.1 million available in the United States. We require a substantial
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amount of cash in the United States for operating requirements, debt service, debt repayments and acquisitions. While we hold a significant amount of cash and cash equivalents outside the United States in various foreign subsidiaries, we have the ability to obtain cash in the United States in order to cover our domestic needs, through distributions from our foreign subsidiaries, by utilizing existing credit facilities or through new bank loans or debt obligations.
See Note 9: ''Long-Term Debt,'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a discussion of our long-term debt. See "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" included elsewhere in this Form 10-K for a discussion of restrictions on our ability to pay dividends and our stock repurchase activities.
Off-Balance Sheet Arrangements
In the ordinary course of business, we provide standby letters of credit or other guarantee instruments to certain parties in connection with certain transactions including, but not limited to: material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of December 31, 2020, our Revolving Credit Facility included $15.0 million available for the issuance of letters of credit. There were $0.9 million letters of credit outstanding under our Revolving Credit Facility as of December 31, 2020, which reduced our borrowing capacity dollar-for-dollar. As of December 31, 2020, we also had outstanding guarantees and letters of credit outside of our Revolving Credit Facility in the amount of $9.7 million.
As part of securing financing in the ordinary course of business, we have issued guarantees related to certain of our subsidiaries', which totaled $0.9 million as of December 31, 2020. Based on historical experience and information currently available, we believe that we will not be required to make payments under the standby letters of credit or guarantee arrangements for the foreseeable future.
We have not recorded any liability in connection with these letters of credit and guarantee arrangements. See Note 9: ''Long-Term Debt,'' and Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements found elsewhere in this Form 10-K for additional information.
Contingencies
We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify 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 us require us to indemnify the other party against losses, including, but not limited to, losses due to IP infringement, environmental contamination and other property damage, personal injury, our failure to comply with applicable laws, our negligence or willful misconduct or our breach of representations, warranties or covenants related to such matters as title to sold assets.
We face risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in economic damage, bodily injury or property damage. In addition, if any of our designed products are alleged to be defective, we may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, we may agree to provide more favorable rights to such customer for valid defective product claims.
We maintain directors’ and officers’ insurance policies that indemnify our 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 Semiconductor International Inc. (the "Fairchild Agreement") provides for indemnification and insurance rights in favor of Fairchild’s then current and former directors, officers and employees. Specifically, we have agreed that, for no fewer than six years following the Fairchild acquisition, we 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, provide to Fairchild’s then current directors and officers an insurance and indemnification policy that provides
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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, we have agreed that, for no fewer than six years following the Quantenna acquisition, we 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 our 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 our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows, and we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows.
See Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for possible contingencies related to legal matters. See also "Business—Government Regulation" for information on certain environmental matters.
Sources and Uses of Cash
Our balance of cash and cash equivalents was $1,080.7 million as of December 31, 2020. We require cash to fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments, for debt service including principal and interest, for research and development, for capital expenditures, and to repurchase our common stock. As part of our business strategy, we review acquisition and divestiture opportunities on a regular basis. During 2019, we entered into an agreement on the pending acquisition of a manufacturing facility and completed the acquisition of Quantenna.
We believe that the key factors that could affect our internal and external sources of cash include:
•Geopolitical and macroeconomic factors caused by the COVID-19 pandemic which has had, and is expected to continue to have, negative impacts on the economies of the majority of countries and industries. While there has been a nominal recovery during the second half of 2020, the ultimate effect of the COVID-19 pandemic and the responses of various governmental entities and industries thereto, the duration and severity and the possibility of the re-emergence of the pandemic in future months and the anticipated recovery period is uncertain.
•Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our products, including as a result of the COVID-19 pandemic, competitive pricing pressures, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business; and
•Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, including as a result of the COVID-19 pandemic, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.
The following are some of the significant sources and uses of cash during 2020 outside of our operating activities and regular capital expenditures:
•Borrowing of $1,165.0 million under the Revolving Credit Facility on March 24, 2020 and repayment of $1,200.0 million of such borrowings using the net proceeds from the issuance of the 3.875% Notes and cash on hand on August 21, 2020.
•Issuance of $700.0 million of 3.875% Notes on August 21, 2020, the net proceeds of which were used to repay a portion of the outstanding borrowings under the Revolving Credit Facility.
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•Additional deposit of $100.0 million for the pending acquisition of GFUS’s East Fishkill, New York site and fabrication facilities and certain other assets and liabilities on October 5, 2020.
•Repayment upon maturity of the principal portion of the 1.00% Notes amounting to $690.0 million on December 1, 2020.
•Repayment of $65.0 million of the outstanding borrowings under the Revolving Credit Facility on December 31, 2020.
•Repurchase of 3.6 million shares of common stock for an aggregate purchase price of approximately $65.3 million under the 2018 Share Repurchase Program
Our ability to service our long-term debt, including our 3.875% Notes, 1.625% Notes, Revolving Credit Facility and Term Loan "B" Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, timing of the full economic recovery from the COVID-19 pandemic, as well as to financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.
If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash and cash equivalents and existing credit facilities will be adequate to fund our operating, debt repayment and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures for inventory, operating expenditures and capital expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment. Our capital expenditure levels can materially influence our available cash for other initiatives. For example, during 2020, we paid approximately $383.6 million for capital expenditures, while in 2019 we paid approximately $534.6 million. While our capital expenditures have historically been approximately 6% to 7% of annual revenue, we incurred capital expenditures of approximately 7% and 10% of annual revenue in 2020 and 2019, respectively. We expect to incur capital expenditures in the range of 7% to 8% of revenue in 2021 to further improve our manufacturing cost structure. Future capital expenditures are expected to be lower, however, may be impacted by events and transactions that are not currently forecasted.
As of December 31, 2020, there was $1,614.5 million outstanding under the Term Loan "B" Facility and $700.0 million outstanding under the Revolving Credit Facility, in addition to the 3.875% Notes for $700.0 million and 1.625% Notes for $575.0 million, of which the 1.625% Notes net of unamortized discount and issuance costs has been reclassified as a current portion of long-term debt. The associated interest expense related to this indebtedness will continue to have a significant impact on our results of operations.
See Note 5: ''Acquisitions, Divestiture and Licensing Transactions'' and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.
Cash Management
Our ability to manage cash is limited, as our primary cash inflows and outflows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. While we have some flexibility with respect to the timing of capital equipment purchases, we must invest in capital equipment on a timely basis to allow us to maintain our manufacturing efficiency and support our platforms for new products.
Primary Cash Flow Sources
Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were $884.3 million, $694.7 million, and $1,274.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Our operating cash flows for the year ended December 31, 2020 increased by $189.6 million, or 27.3%, compared to the year ended December 31, 2019, which was primarily due to the payment of $175.0 million in 2019 to PI relating to a litigation settlement, which decreased our cash flows during 2019. Although, there was a significant decrease in operating income and income before income taxes in 2020 due to decreased demand for our products as a result of the COVID-19 pandemic, the negative impact on the cash flows provided from operating activities were offset by effective working capital management.
Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our
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revenue goals and manufacturing and operating cost targets. Our management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows, and each of these components is discussed below.
Working Capital
Working capital, calculated as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may be affected as we purchase additional manufacturing materials and increase production. Our working capital may also be affected by restructuring programs, which may require us to use cash for severance payments, asset transfers and contract termination costs. In addition, our working capital may be affected by acquisitions and transactions involving our convertible notes and other debt instruments. Although investments made to fund working capital will reduce our cash balances, these investments are necessary to support business and operating initiatives.
Our working capital, excluding cash and cash equivalents and the current portion of long-term debt, was $960.5 million as of December 31, 2020 and has fluctuated between $879.3 million and $1,057.1 million at the end of each of our last eight fiscal quarters. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was $1,509.6 million as of December 31, 2020 and has fluctuated between $1,071.4 million and $2,379.8 million at the end of each of our last eight fiscal quarters. The significant fluctuation was due to the additional borrowings under the Revolving Credit Facility during 2020 in light of the COVID-19 pandemic. For the year ended December 31, 2020, there was not a significant impact to our working capital as we tried to manage our business conservatively in light of the negative impact from the COVID-19 pandemic.
Long-Term Assets and Liabilities
Our long-term assets consist primarily of property, plant and equipment, intangible assets, deferred taxes and goodwill. Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We believe that near-term access to additional manufacturing capacity, should it be required, could be readily obtained on reasonable terms through manufacturing agreements with third parties. We will continue to look for opportunities to make strategic purchases in the future for additional capacity.
Our long-term liabilities, excluding long-term debt and deferred taxes, consist of liabilities under our foreign defined benefit pension plans, operating lease liabilities and contingent tax reserves. In regard to our foreign defined benefit pension plans, our annual funding of these obligations is equal to the minimum amount legally required in each jurisdiction in which the plans operate. This annual amount is dependent upon numerous actuarial assumptions. For additional information, see Note 12: ''Employee Benefit Plans'', "Note 8: ''Balance Sheet Information'' and Note 16: ''Income Taxes'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Key Financing and Capital Events
Overview
For the past several years, we have undertaken various measures to secure liquidity to pursue acquisitions, repurchase shares of our common stock, reduce interest costs, amend existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility. Certain of these measures continued in 2020. Set forth below is a summary of certain key financing events affecting our capital structure during the last three years. For further discussion of our debt instruments, see Note 9: ''Long-Term Debt'' and for further discussion on the 2018 Share Repurchase Program and the 2014 Share Repurchase Program (as defined below), see Note 10: ''Earnings Per Share and Equity'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
2020 Financing Events
Maturity and Settlement of 1.00% Notes due 2020
The 1.00% Notes matured on December 1, 2020. The maturity of the notes resulted in us paying $690.0 million in cash, representing the principal portion of the 1.00% Notes, to holders of the 1.00% Notes using our available cash and cash equivalents.
The excess over the principal amount was settled by issuing shares of common stock held in treasury. At the time of issuance of
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the 1.00% Notes, we concurrently entered into hedge transactions with certain of the initial purchasers of the 1.00% Notes, and accordingly, repurchased an equivalent number of shares of our common stock at fair market value, to effectively offset the issuance of shares.
Also at the time of issuance of the 1.00% Notes, we sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase from us, the equivalent number of shares of our common stock at a price of $25.96 per share. These warrants can be exercised by the holders beginning in March 2021 and expire no later than April 2021. We currently anticipate the holders to exercise the warrants to purchase up to 37.3 million shares of common stock from us, which will be settled on a net-share basis depending on the average stock price on the day of exercise.
Issuance of 3.875% Notes
On August 21, 2020, we completed a private offering of $700.0 million aggregate principal amount of the 3.875% Notes. The 3.875% Notes were offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act and outside the United States pursuant to Regulation S under the Securities Act. The 3.875% Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of our subsidiaries that is a borrower or guarantor under the Amended Credit Agreement and will also be fully and unconditionally guaranteed by any our subsidiaries that becomes a borrower or guarantees any indebtedness under the Amended Credit Agreement in the future.
The 3.875% Notes and the guarantees thereof are ours' and the guarantors' general unsecured obligations, respectively, and (i) rank equally in right of payment with all of ours' and the guarantors’ existing and future senior indebtedness (including the 1.625% Notes); (ii) rank senior to any subordinated indebtedness that we or the guarantors may incur; (iii) are effectively subordinated to all of ours' or the guarantors’ existing and future secured indebtedness (including indebtedness under the Amended Credit Agreement), in each case, to the extent of the value of the assets securing such indebtedness; and (iv) are structurally subordinated in right of payment to all existing and future obligations of our subsidiaries that are not guarantors of the 3.875% Notes.
The 3.875% Notes bear interest at a rate of 3.875% per year, payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2021, and will mature on September 1, 2028, unless earlier redeemed or repurchased by us. In connection with the issuance, we incurred original issue discount and debt issuance costs amounting to $9.4 million, which has been capitalized and will be amortized to interest expense through the maturity date of September 1, 2028. The net proceeds from the issuance of the 3.875% Notes were used entirely to repay borrowings under the Revolving Credit Facility.
Borrowing and repayment under the Revolving Credit Facility
On March 24, 2020, we 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 uncertainty resulting from the impact of the COVID-19 pandemic. Due to better macroeconomic and business conditions, on August 21, 2020, we used the net proceeds from the issuance of the 3.875% Notes along with cash on hand to repay $1,200.0 million of outstanding borrowings. Additionally, on December 31, 2020, we repaid $65.0 million of outstanding borrowings under the Revolving Credit Facility. As of December 31, 2020, approximately $1,269.0 million was available for future borrowings under the Revolving Credit Facility.
Amendments to the Amended Credit Agreement
On June 23, 2020, we entered into the Eighth Amendment ("Eighth Amendment") to the Amended Credit Agreement with the subsidiary guarantors party thereto, Deutsche Bank AG New York Branch, as administrative agent and collateral agent, and certain Lenders party thereto constituting the Required Lenders (as defined in the Amended Credit Agreement). The Eighth Amendment provided for, among other things, (i) replacing the defined term "Capital Lease Obligations" with a new defined term "Finance Lease Obligations," providing that such obligations only include property classified as finance leases under U.S. GAAP and (ii) making certain amendments in connection with the proposed domestication of ON Management Ltd. and Quantenna Ltd., each of which is our subsidiary that is not a Loan Party (as defined in the Amended Credit Agreement) and both of which hold economic rights in certain intellectual property, from Bermuda entities to Delaware entities, including, among other things, (a) permitting Investments (as defined in the Amended Credit Agreement) by any Loan Party in any Foreign Subsidiary (as defined in the Amended Credit Agreement) if the proceeds of such Investments are used for Capital Expenditures (as defined in the Amended Credit Agreement) ("Capital Expenditure Investments") and (b) increasing the amount of certain permitted intercompany Investments by any Loan Party in any subsidiary that is not a Loan Party by an amount (which shall not be less than zero) equal to (A) Net Royalties (as defined in the Amended Credit Agreement) minus (B) the aggregate amount of Capital Expenditure Investments.
2018 Share Repurchase Program
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During 2020, we repurchased 3.6 million shares of our common stock for an aggregate purchase price of $65.3 million pursuant to the 2018 Share Repurchase Program.
2019 Financing Events
Amendments to the Amended Credit Agreement
On June 12, 2019, we entered into the Fifth Amendment to the Amended Credit Agreement (the "Fifth Amendment"), with the subsidiary guarantors party thereto, Deutsche Bank AG New York Branch, as administrative agent, collateral agent and issuing lender, the "2019 Incremental Revolving Lenders" (as defined in the Fifth Amendment) party thereto, and the "New Required Lenders" (as defined in the Fifth Amendment) party thereto. The Fifth Amendment provided for, among other things, modifications to the Amended Credit Agreement to: (i) increase the amount that may be borrowed pursuant to the Revolving Credit Facility by $900.0 million to $1.9 billion; (ii) extend the maturity date of borrowings under the Revolving Credit Facility to the later of (x) December 30, 2022 or (y) June 12, 2024, so long as the borrowings under the Term Loan "B" Facility have been fully repaid or otherwise redeemed, discharged or defeased on or prior to December 30, 2022, or if the maturity date of borrowings under the Term Loan "B" Facility has been extended prior to December 30, 2022, to a date no earlier than June 12, 2024; and (iii) amend certain financial covenants, including deleting the minimum Interest Coverage Ratio and increasing the maximum Consolidated Total Net Leverage Ratio (as such terms are defined in the Amended Credit Agreement) from 4.00 to 1.00 to 4.50 to 1.00 during any period of four consecutive fiscal quarters commencing after a Permitted Acquisition (as defined in the Amended Credit Agreement) with consideration in excess of $250.0 million. On June 19, 2019, we drew $900.0 million of the Revolving Credit Facility to partially fund the acquisition of Quantenna.
On August 15, 2019, we entered into the Sixth Amendment to the Amended Credit Agreement (the "Sixth Amendment"), which increased amounts that may be borrowed under the Revolving Credit Facility by $70.0 million to $1.97 billion.
On September 19, 2019, we entered into the Seventh Amendment to the Amended Credit Agreement (the "Seventh Amendment"). The Seventh Amendment provided for, among other things, modifications to the Amended Credit Agreement to (i) increase the amount that may be borrowed pursuant to the Term Loan "B" Facility by approximately $500.5 million, up to an aggregate principal amount of $1.635 billion; (ii) extend the maturity date of borrowings under the Term Loan "B" Facility to September 19, 2026; (iii) for any interest period ending after the date of the Seventh Amendment, increase the interest rate for borrowings under the Term Loan "B" Facility to (a) with respect to eurocurrency loans, a base rate per annum equal to the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) plus an applicable margin of 2.00% and (b) with respect to alternate base rate loans, a base rate per annum equal to the Alternate Base Rate (as defined in the Amended Credit Agreement) plus an applicable margin equal to 1.00%; and (iv) make certain amendments providing for the determination of an alternate interest rate to the Adjusted LIBO Rate and/or the LIBO Rate (as defined in the Amended Credit Agreement) in the event of certain circumstances that result in the inability to adequately and reasonably determine such rates or such rates no longer adequately and fairly reflecting the cost of the applicable loans. In addition, pursuant to the Fifth Amendment (defined above), as a result of the extension described in (ii) above, the maturity date of borrowings under the Revolving Credit Facility was extended to June 12, 2024. We utilized the additional borrowings pursuant to the Seventh Amendment to repay $500.0 million of the outstanding balance under the Revolving Credit Facility.
2018 Share Repurchase Program
During 2019, we repurchased 7.8 million shares of our common stock for an aggregate purchase price of $138.9 million pursuant to the 2018 Share Repurchase Program.
2018 Financing Events
Amendments to the Amended Credit Agreement
On May 31, 2018, we, the Guarantors (as defined in the Amended Credit Agreement), the several lenders party thereto and the Agent (as defined in the Amended Credit Agreement) entered into the Fourth Amendment to the Amended Credit Agreement (the “Fourth Amendment”). Pursuant to the Fourth Amendment, for any interest period ending after the date of the Fourth Amendment, Eurocurrency Loans (as defined in the Amended Credit Agreement) will accrue interest at (i) a base rate per annum equal to the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) plus (ii) an applicable margin equal to (x) 1.25% with respect to borrowings under the Revolving Credit Facility (with step-downs and step-ups as set forth in the Amended Credit Agreement) or (y) 1.75% with respect to borrowings under the Term Loan “B” Facility.
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Pursuant to the Fourth Amendment, ABR Loans (as defined in the Amended Credit Agreement) will accrue interest at (i) a base rate per annum equal to the highest of (x) the federal funds rate plus 0.50%, (y) the prime commercial lending rate announced by the Agent from time to time as its prime lending rate and (z) the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) for a one month interest period (or if such day is not a business day, the immediately preceding business day) (determined after giving effect to any applicable “floor”) plus 1.00%; provided that, the Adjusted LIBO Rate for any day shall be based on the LIBO Rate (as defined in the Amended Credit Agreement), subject to the interest rate floors set forth in the Amended Credit Agreement, plus (ii) an applicable margin equal to (x) 0.25% with respect to borrowings under the Revolving Credit Facility (with step-ups as set forth in the Amended Credit Agreement) or (y) 0.75% with respect to borrowings under the Term Loan "B" Facility.
During the year ended December 31, 2018, we prepaid $70.0 million of borrowings under the Term Loan "B" Facility.
2014 Share Repurchase Program
During 2018, we repurchased 16.8 million shares of our common stock for an aggregate purchase price of $315.0 million under the 2014 Share Repurchase Program (as defined below).
Debt Guarantees and Related Covenants
As of December 31, 2020, we were in compliance with the indentures relating to our 3.875% Notes and 1.625% Notes and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. Our 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of ON Semiconductor and our guarantor subsidiaries and rank equally in right of payment to all of our existing and future senior debt and as unsecured obligations and are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt. See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.
Critical Accounting Policies and Estimates
The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires us 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. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe 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 and returns; (ii) valuation and obsolescence relating to inventories; (iii) variable and share-based compensation; and (iv) measurement of valuation allowances against deferred tax assets, and evaluations of uncertain tax positions. 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.
Revenue. We generate revenue from sales of our semiconductor products to OEMs, electronic manufacturing service providers and distributors. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. We recognize revenue when we satisfy a performance obligation in an amount reflecting the consideration to which we expect to be entitled. For sales agreements, we have identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, we have identified the completion of a service defined in the agreement to be the performance obligation. We apply a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied. We allocate the transaction price to each distinct product based on its relative stand-alone selling price. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. Substantially all of our revenue is recognized at the time control of the products transfers to the customer.
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Sales to certain distributors, primarily those with ship and credit rights, can be subject to price adjustment on certain products. We develop an estimate of their expected claims under the ship and credit program based on the historical claims data submitted by product and customer and expected future claims, which requires the use of estimates and assumptions related to the amount of each claim as well as the historical period used to develop the estimate.
Our OEM customers do not have the right to return products, other than pursuant to the provisions of our standard warranty. Sales to distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue are recognized, and are netted against revenue. For non-quality related returns, we recognize a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. We record a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.
Inventories. We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value and record provisions for potential excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. These provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory that is considered to be in excess of anticipated demand is reserved, impacting our cost of revenue and gross profit. The majority of product inventory that has been previously reserved is ultimately discarded. However, we do sell some products that have previously been written down, such sales have historically been consistently insignificant and the related impact on our margins has also been insignificant.
Variable and Share-Based Compensation. We record compensation expense for all share-based payment awards, including RSUs and shares issued under the ESPP, and measure them at the grant date, based on the estimated fair value of the award, and we recognize each such award as an expense over the performance measurement period and/or employee's requisite service period. We have outstanding awards with service, performance, and market-based vesting conditions. Determining the amount of share-based compensation requires us to develop estimates and use valuation models in calculating the grant-date fair value of the award. Additionally, employees are compensated on a variable basis during periods when we are profitable and certain performance goals are achieved. Determining the amount of variable compensation expense requires us to estimate future profitability and achievement of performance goals, which involves judgment.
Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.
In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. No tax benefit is recognized for tax positions that are not more likely than not to be sustained. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to our effective tax rate.
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Business Combination. We use significant estimates and assumptions in allocating the purchase price of acquired business by utilizing established valuation techniques appropriate for the technology industry to record the acquired assets and liabilities at fair value. We utilize the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. If the income approach is used, the fair value determination is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life and involves significant assumptions as to cash flows, associated expenses, long-term growth rates and discount rates. The cost approach takes into account the cost to replace (or reproduce) the asset and involves assumptions relating to the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.
Impairment of Goodwill, Indefinite-lived Intangible Assets and Long-Lived Assets. We evaluate our goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our impairment evaluation consists of a qualitative assessment, and if deemed necessary, a quantitative test is performed which compares the fair value of a reporting unit with its carrying amount, including goodwill.
Determining the fair value of our reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates. We determine the fair value of our reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.
We are required to test our IPRD assets for impairment annually using the guidance for indefinite-lived intangible assets. Our impairment evaluation consists of first assessing qualitative factors, and if deemed necessary, we calculate the fair value of the IPRD asset and record an impairment charge if the carrying amount exceeds fair value. We determine the fair value based on an income approach, which is calculated as the present value of the estimated future cash flows of the IPRD asset. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends.
We evaluate the recoverability of the carrying amount of our property, plant and equipment and intangible assets (excluding IPRD), whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Impairment is first assessed when the undiscounted expected cash flows derived for an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset group. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests.
Contingencies. We are involved in a variety of legal matters that arise in the normal course of business. Based on the available information, we evaluate the relevant range and likelihood of potential outcomes and we record the appropriate liability when the amount is deemed probable and reasonably estimable.
For a further listing and discussion of our accounting policies, see Note 2: ''Significant Accounting Policies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 4: ''Recent Accounting Pronouncements'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading
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purposes.
As of December 31, 2020, our gross long-term debt (including current maturities) totaled $3,589.5 million. We have no interest rate exposure to rate changes on our fixed rate debt, which totaled $2,775.0 million. We do have interest rate exposure with respect to the $814.5 million balance of our variable interest rate debt outstanding as of December 31, 2020. A 50 basis point increase in interest rates would impact our expected annual interest expense for the next 12 months by approximately $4.1 million. However, some of this impact would be offset by additional interest earned on our cash and cash equivalents should rates on deposits and investments also increase. Our interest rate swaps hedge the majority of the risk of variability in cash flows resulting from future interest payments on our variable interest rate debt.
While we have recently begun to observe stabilization in the capital markets impacted by the COVID-19 pandemic, there can be no assurance that equity or borrowings will be available when we access the capital markets again or, if available, will be at rates or prices acceptable to us.
To ensure the adequacy and effectiveness of our foreign exchange hedge positions, we continually monitor our foreign exchange forward positions, both on a stand-alone basis and in conjunction with their underlying foreign currency exposures, from an accounting and economic perspective. However, given the inherent limitations of forecasting and the anticipatory nature of exposures intended to be hedged, we cannot provide any assurances that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in foreign exchange rates.
We are subject to risks associated with transactions that are denominated in currencies other than our functional currencies, as well as the effects of translating amounts denominated in a foreign currency to the U.S. Dollar as a normal part of the reporting process. Some of our Japanese operations utilize Japanese Yen as the functional currency, which results in a translation adjustment that is included as a component of accumulated other comprehensive income.
We enter into forward foreign currency contracts that economically hedge the gains and losses generated by the re-measurement of certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in other income and expense immediately as an offset to the changes in the fair value of the assets or liabilities being hedged. The notional amount of foreign exchange contracts at December 31, 2020 and 2019 was $263.4 million and $183.3 million, respectively. Our policies prohibit speculation on financial instruments, trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.
Substantially all of our revenue is transacted in U.S. Dollars. However, a significant amount of our operating expenditures and capital purchases are transacted in local currencies, including Chinese Renminbi, Czech Koruna, Euros, Japanese Yen, Korean Won, Malaysian Ringgit, Philippine Peso and Vietnamese Dong. Due to the materiality of our transactions in these local currencies, our results are impacted by changes in currency exchange rates measured against the U.S. Dollar. For example, we determined that based on a hypothetical weighted-average change of 10% in currency exchange rates, our results would have impacted our income before taxes by approximately $129.7 million for the year ended December 31, 2020, assuming no offsetting hedge position or correlated activities.
See Note 15: ''Financial Instruments'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K for further information with respect to our hedging activity.
Item 8. Financial Statements and Supplementary Data
Our consolidated Financial Statements listed in the index appearing under Part IV, Item 15(a)(1) of this Form 10-K and the Financial Statement Schedule listed in the index appearing under Part IV, Item 15(a)(2) of this Form 10-K are filed as part of this Form 10-K and are incorporated herein by reference in this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in
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Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this Form 10-K, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting.
We also carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended December 31, 2020.
There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended December 31, 2020 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework 2013. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in "Exhibits and Financial Statement Schedules" of this Form 10-K.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the heading "Executive Officers of the Registrant" in this Form 10-K is incorporated by reference into this section. Information concerning directors and persons nominated to become directors and executive officers is incorporated by reference from the text under the captions "Management Proposals—Proposal No. 1: Election of Directors," "The Board of Directors and Corporate Governance," "Section 16(a) Reporting Compliance" and "Miscellaneous Information—Stockholder Nominations and Proposals" in our Proxy Statement to be filed pursuant to Regulation 14A within 120 days after our fiscal year ended December 31, 2020 in connection with our 2021 Annual Meeting of Stockholders ("Proxy Statement").
Code of Business Conduct
Information concerning our Code of Business Conduct is incorporated by reference from the text under the caption "The Board of Directors and Corporate Governance—Code of Business Conduct" in our Proxy Statement.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated by reference from the text under the captions "The Board of Directors and Corporate Governance—2020 Compensation of Directors," "Compensation of Executive Officers," "Compensation Committee Report," "Compensation Discussion and Analysis," "ON Semiconductor 2020 Pay Ratio
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Disclosure" and "Compensation Committee Interlocks and Insider Participation" in our Proxy Statement.
The information incorporated by reference under the caption "Compensation Committee Report" in our Proxy Statement shall be deemed furnished, and not filed, in this Form 10-K and shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act as a result of this furnishing, except to the extent that we specifically incorporate it by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the text under the captions "Principal Stockholders," "Share Ownership of Directors and Officers" and "Share-Based Compensation Plan Information" in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions involving us and certain others is incorporated by reference from the text under the captions "Management Proposals—Proposal No. 1: Election of Directors," "The Board of Directors and Corporate Governance," and "Relationships and Related Transactions" in our Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information concerning principal accounting fees and services is incorporated by reference from the text under the caption "Audit and Related Fees" in our Proxy Statement.
PART IV

Item 15. | Exhibits and Financial Statement Schedules

| (a) | The following documents are filed as part of this Annual Report on Form 10-K:

| (1) | Consolidated Financial Statements:

ON Semiconductor Corporation Consolidated Financial Statements: |
Report of Independent Registered Public Accounting Firm | 68
Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019 | 70
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 | 72
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, 2019 and 2018 | 73
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 | 74
Notes to Consolidated Financial Statements | 75

| (2) | Consolidated Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2020, 2019 and 2018 | 117

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or related notes

| (3) | Exhibits:

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EXHIBIT INDEX*

Exhibit No. |  | Exhibit Description |
2.1 |  | Asset Purchase Agreement, dated as of March 11, 1997, between Fairchild Semiconductor Corporation and National Semiconductor Corporation (incorporated by reference to Exhibit 2.02 to Fairchild Semiconductor Corporation’s Registration Statement filed with the Commission on May 12, 1997 (File No. 333-26897))† |
2.2 |  | Reorganization Agreement, dated as of May 11, 1999, among Motorola, Inc., SCG Holding Corporation and Semiconductor Components Industries, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement filed with the Commission on November 5, 1999 (File No. 333-90359))† |
2.3(a) |  | Agreement and Plan of Recapitalization and Merger, as amended, dated as of May 11, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement filed with the Commission on November 5, 1999 (File No. 333-90359))† |
2.3(b) |  | Amendment No. 1 to Agreement and Plan of Recapitalization and Merger, dated as of July 28, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference to Exhibit 2.3 to the Company’s Registration Statement filed with the Commission on November 5, 1999 (File No. 333-90359))† |
2.4(a) |  | Purchase Agreement by and among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and SANYO Electric Co., Ltd. dated July 15, 2010 (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 4, 2010)† |
2.4(b) |  | Amendment No. 1 to Purchase Agreement by and among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and SANYO Electric Co., Ltd. dated November 30, 2010 (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 6, 2011)† |
2.5 |  | Agreement and Plan of Merger by and among ON Semiconductor Benelux B.V., Alpine Acquisition Sub, Aptina, Inc. and Fortis Advisors LLC, as Equityholder Representative, dated as of June 9, 2014 (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 1, 2014)† |
2.6 |  | Agreement and Plan of Merger, dated November 18, 2015, by and among Fairchild Semiconductor International, Inc., ON Semiconductor Corporation and Falcon Operations Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 18, 2015)† |
2.7 |  | Agreement and Plan of Merger, dated March 27, 2019, by and among Quantenna Communications, Inc., ON Semiconductor Corporation and Raptor Operations Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 27, 2019)† |
3.1(a) |  | Certificate of Incorporation of ON Semiconductor Corporation, as further amended through March 26, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 7, 2008) |
3.1(b) |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 3, 2014) |
3.1(c) |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation, dated May 17, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017) |
3.2 |  | By-Laws of ON Semiconductor Corporation as Amended and Restated on November 21, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 25, 2013) |
3.3 |  | Certificate of Designations of Series B Junior Participating Preferred Stock of ON Semiconductor Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 8, 2020) |

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4.1 |  | Specimen of share certificate of Common Stock, par value $0.01, ON Semiconductor Corporation (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed with the Commission on March 10, 2004) |
4.2(a) |  | Indenture regarding the 1.625% Convertible Senior Notes due 2023, dated as of March 31, 2017 among ON Semiconductor Corporation, the guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 3, 2017) |
4.2(b) |  | Form of Global 1.625% Convertible Senior Note due 2023 (included in Exhibit 4.2(a)) |
4.2(c) |  | First Supplemental Indenture to the Indenture regarding the 1.625% Convertible Senior Notes due 2023, dated as of January 7, 2020 among ON Semiconductor Corporation, the guarantors party thereto and Wells Fargo Bank, National Association, as trustee |
4.3(a) |  | Indenture, dated as of August 21, 2020, among ON Semiconductor Corporation, the guarantors party thereto and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 21, 2020) Semiconductor Corporation, the guarantors party thereto and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 21, 2020) |
4.3(b) |  | Form of Global 3.875% Senior Note due 2028 (included in Exhibit 4.3(a)) |
4.4 |  | Description of the Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934, as amended(1) |
4.5 |  | Rights Agreement, dated as of June 8, 2020, between ON Semiconductor Corporation and Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 8, 2020) |
10.1 |  | Amended and Restated Intellectual Property Agreement, dated August 4, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Company’s Registration Statement filed with the Commission on January 11, 2000 (File No. 333-90359)) |
10.2 |  | Lease for 52nd Street property, dated July 31, 1999, among Semiconductor Components Industries, LLC as Lessor, and Motorola, Inc. as Lessee (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement filed with the Commission on November 5, 1999 (File No. 333-90359)) |
10.3 |  | Declaration of Covenants, Easement of Restrictions and Options to Purchase and Lease, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement filed with the Commission on November 5, 1999 (File No. 333-90359)) |
10.4(a) |  | Joint Venture Contract for Leshan-Phoenix Semiconductor Company Limited, amended and restated on April 20, 2006 between SCG (China) Holding Corporation (a subsidiary of ON Semiconductor Corporation) and Leshan Radio Company Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on July 28, 2006) |
10.4(b) |  | Amendment Agreement, dated September 29, 2014, to Joint Venture Contract for Leshan-Phoenix Semiconductor Company Limited between ON Semiconductor (China) Holding, LLC (a subsidiary of ON Semiconductor Corporation) and Leshan Radio Company Ltd. (incorporated by reference to Exhibit 10.5(b) to the Company’s Annual Report on Form 10-K filed with the Commission on February 27, 2015) |
10.5(a) |  | Credit Agreement, dated April 15, 2016, among ON Semiconductor Corporation, as borrower, the several lenders party thereto, Deutsche Bank AG New York Branch, as administrative agent and collateral agent, Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BMO Capital Markets Corp., HSBC Securities (USA) Inc. and Sumitomo Mitsui Banking Corporation, as joint lead arrangers and joint bookrunners, Barclays Bank PLC, Compass Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Morgan Stanley Senior Funding, Inc., BOKF, NA and KBC Bank N.V., as co-managers, and HSBC Bank USA, N.A. and Sumitomo Mitsui Banking Corporation, as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 15, 2016) |

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10.5(b) |  | Guarantee and Collateral Agreement, dated April 15, 2016, made by ON Semiconductor Corporation and the other signatories thereto in favor of Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on April 15, 2016) |
10.5(c) |  | Escrow Agreement, dated April 15, 2016, among ON Semiconductor Corporation, MUFG Union Bank, N.A., as escrow agent, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on April 15, 2016) |
10.5(d) |  | Joinder to Amended and Restated Guaranty, dated March 15, 2016, among the guarantors party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8‑K filed with the Commission on March 17, 2016) |
10.5(e) |  | Joinder to Amended and Restated Guaranty, dated April 14, 2016, among the guarantors party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on April 15, 2016) |
10.5(f) |  | Assumption Agreement, dated September 19, 2016, by and between ON Semiconductor (China) Holdings, LLC and Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 23, 2016) |
10.5(g) |  | Pledge Supplement, dated September 19, 2016, by ON Semiconductor (China) Holdings, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on September 23, 2016) |
10.5(h) |  | Assumption Agreement, dated September 19, 2016, by and among Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation, Fairchild Semiconductor Corporation of California, Giant Holdings, Inc., Fairchild Semiconductor West Corporation, Kota Microcircuits, Inc., Silicon Patent Holdings, Giant Semiconductor Corporation, Micro-Ohm Corporation, Fairchild Energy, LLC and Deutsche Bank AG New York Branch (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on September 23, 2016) |
10.5(i) |  | Pledge Supplement, dated September 19, 2016, by Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation, Fairchild Semiconductor Corporation of California, Giant Holdings, Inc., Fairchild Semiconductor West Corporation, Kota Microcircuits, Inc., Silicon Patent Holdings, Giant Semiconductor Corporation, Micro-Ohm Corporation and Fairchild Energy, LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on September 23, 2016) |
10.5(j) |  | First Amendment to Credit Agreement, dated September 30, 2016, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 30, 2016) |
10.5(k) |  | Second Amendment to Credit Agreement, dated March 31, 2017, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 3, 2017) |
10.5(l) |  | Third Amendment to Credit Agreement, dated November 30, 2017, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 4, 2017) |
10.5(m) |  | Fourth Amendment to Credit Agreement, dated May 31, 2018, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on July 30, 2018) |

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10.5(n) |  | Fifth Amendment to Credit Agreement, dated June 12, 2019, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 17, 2019) |
10.5(o) |  | Sixth Amendment to Credit Agreement, dated August 15, 2019, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on October 28, 2019) |
10.5(p) |  | Seventh Amendment to Credit Agreement, dated September 19, 2019, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on September 20, 2019) |
10.5(q) |  | Eighth Amendment to Credit Agreement, dated as of June 23, 2020, among ON Semiconductor Corporation, as borrower, certain subsidiaries thereof, as guarantors, the several lenders party thereto, and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 24, 2020) |
10.6(a) |  | Form of Convertible Note Hedge and Warrant Transactions (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 8, 2015) |
10.6(b) |  | Form of Warrant Confirmation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 8, 2015) |
10.7(a) |  | ON Semiconductor Corporation 2000 Stock Incentive Plan, as amended and restated May 19, 2004 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 6, 2004)(2) |
10.7(b) |  | Amendment to the ON Semiconductor Corporation 2000 Stock Incentive Plan, dated May 16, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 1, 2007)(2) |
10.7(c) |  | Non-qualified Stock Option Agreement for the ON Semiconductor Corporation 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.35(d) to Amendment No. 1 to the Company’s Registration Statement filed with the Commission on March 24, 2000 (File No. 333-30670))(2) |
10.7(d) |  | ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement filed with the Commission on May 19, 2010 (File No. 333-166958))(2) |
10.7(e) |  | First Amendment to the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 3, 2012)(2) |
10.7(f) |  | Second Amendment to the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan, effective May 20, 2015 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 3, 2015)(2) |
10.7(g) |  | Third Amendment to the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan, effective May 17, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017)(2) |
10.7(h) |  | Non-qualified Stock Option Agreement for Senior Vice Presidents and Above for the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (form of standard agreement) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 5, 2010)(2) |
10.7(i) |  | Restricted Stock Units Award Agreement for Senior Vice Presidents and Above for the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (form of standard agreement) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 5, 2010)(2) |

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10.7(j) |  | Stock Grant Award Agreement for Directors under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (form of standard Stock Grant Award for Non-employee Directors) (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 6, 2011)(2) |
10.7(k) |  | Performance-Based Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (2017 form of Performance-Based Award for Senior Vice Presidents and Above) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017)(2) |
10.7(l) |  | Performance-Based Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (2018 form of Performance-Based Award for Senior Vice Presidents and Above) (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on April 30, 2018)(2) |
10.7(m) |  | Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (2018 form agreement for Senior Vice Presidents and Above) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on April 30, 2018)(2) |
10.7(n) |  | Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (2019 form agreement for Section 16 Officers) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 19, 2019)(2) |
10.7(o) |  | Performance-Based Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (2019 form agreement for Senior Vice Presidents and Above) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 19, 2019)(2) |
10.7(p) |  | Performance-Based Restricted Stock Units Upside Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (2019 form agreement for Senior Vice Presidents and Above) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on February 19, 2019)(2) |
10.7(q) |  | 2020 Form of Performance-Based Restricted Stock Units Award for Senior Vice Presidents and Above (Upside) under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the Commission on March 5, 2020)(2) |
10.7(r) |  | Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan for Hassane S. El-Khoury, dated December 7, 2020(1)(2) |
10.7(s) |  | Performance-Based Restricted Stock Units Award Agreement under the ON Semiconductor Corporation Amended and Restated Stock Incentive Plan for Hassane S. El-Khoury, dated December 7, 2020(1)(2) |
10.8(a) |  | ON Semiconductor Corporation 2000 Employee Stock Purchase Plan, as amended and restated as of May 20, 2009 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 No. 333-159381 filed with the Commission on May 21, 2009)(2) |
10.8(b) |  | Amendment to the ON Semiconductor Corporation 2000 Employee Stock Purchase Plan, as amended as of May 15, 2013 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 2, 2013)(2) |
10.8(c) |  | Amendment to the ON Semiconductor Corporation 2000 Employee Stock Purchase Plan, as amended as of May 20, 2015 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 3, 2015)(2) |
10.8(d) |  | Amendment to the ON Semiconductor Corporation 2000 Employee Stock Purchase Plan, as amended as of May 17, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 7, 2017)(2) |
10.9 |  | Amended and Restated Employment Agreement, effective June 1, 2017, by and between Semiconductor Components Industries, LLC and Keith Jackson (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 2, 2017)(2) |

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10.10 |  | Amended and Restated Employment Agreement, effective June 1, 2017, by and between Semiconductor Components Industries, LLC and George H. Cave (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed with the Commission on February 21, 2018)(2) |
10.11(a) |  | Employment Agreement by and between Semiconductor Components Industries, LLC and Bernard Gutmann, dated as of September 26, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 27, 2012)(2) |
10.11(b) |  | Amendment No. 1 to Employment Agreement by and between Semiconductor Components Industries, LLC and Bernard Gutmann, dated as of June 1, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 2, 2017)(2) |
10.12(a) |  | Employment Agreement between Semiconductor Components Industries, LLC and William Schromm dated as of August 25, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 25, 2014)(2) |
10.12(b) |  | Amendment No. 1 to Employment Agreement by and between Semiconductor Components Industries, LLC and William Schromm, dated as of June 1, 2017 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on June 2, 2017)(2) |
10.13(a) |  | Employment Agreement between Semiconductor Components Industries, LLC and Paul Rolls dated as of July 14, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 4, 2015)(2) |
10.13(b) |  | Amendment No. 1 to Employment Agreement by and between Semiconductor Components Industries, LLC and Paul Rolls, effective June 1, 2017 (incorporated by reference to Exhibit 10.21(b) to the Company’s Annual Report on Form 10-K filed with the Commission on February 21, 2018)(2) |
10.14 |  | Employment Agreement by and between Semiconductor Components Industries, LLC and Vincent C. Hopkin, dated as of May 11, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on July 30, 2018)(2) |
10.15 |  | Employment Agreement by and between Semiconductor Components Industries, LLC and Simon Keeton, dated January 1, 2019 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K filed with the Commission on February 20, 2019)(2) |
10.16 |  | Employment Agreement by and between Semiconductor Components Industries, LLC and Hassane S. El-Khoury, dated December 7, 2020(1)(2) |
10.17 |  | Key Officer Severance and Change in Control Agreement by and between Semiconductor Components Industries, LLC and Ross F. Jatou, dated as of October 1, 2020 (1)(2) |
10.18 |  | Form of Indemnification Agreement with Directors and Officers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 25, 2016)(2) |
10.19(a) |  | Environmental Side Letter, dated March 11, 1997, between National Semiconductor Corporation and Fairchild Semiconductor Corporation (incorporated by reference to Exhibit 10.19 to Fairchild Semiconductor Corporation’s Registration Statement filed with the Commission on May 12, 1997 (File No. 333-26897)) |
10.19(b) |  | Intellectual Property License Agreement, dated April 13, 1999, between Samsung Electronics Co., Ltd. and Fairchild Korea Semiconductor, Ltd. (incorporated by reference to Exhibit 10.41 to Fairchild Semiconductor International, Inc.’s Registration Statement filed with the Commission on June 30, 1999 (File No. 333-78557)) |
10.19(c) |  | Fairchild Benefit Restoration Plan (incorporated by reference to Exhibit 10.23 to Fairchild Semiconductor Corporation’s Registration Statement filed with the Commission on May 12, 1997 (File No. 333-26897))(2) |
10.19(d) |  | Technology Licensing and Transfer Agreement, dated March 11, 1997, between National Semiconductor Corporation and Fairchild Semiconductor Corporation (incorporated by reference to Amendment No. 3 to Fairchild Semiconductor Corporation’s Registration Statement on Form S-4, filed with the Commiss ion on July 9, 1997 (File No. 333-28697)) |

63

10.19(e) |  | Intellectual Property Assignment and License Agreement, dated December 29, 1997, between Raytheon Semiconductor, Inc. and Raytheon Company (incorporated by reference to Fairchild Semiconductor International, Inc.’s Current Report on Form 8-K, dated December 31, 1997, filed with the Commission on January 13, 1998. (File No. 333-26897)) |
10.20(a) |  | Asset Purchase Agreement, dated as of April 22, 2019, between GLOBALFOUNDRIES U.S. Inc. and Semiconductor Components Industries, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 5, 2019)† |
10.20(b) |  | Amendment No. 1 to Asset Purchase Agreement, dated October 1, 2020, by and among Semiconductor Components Industries, LLC, GLOBALFOUNDRIES U.S. Inc., and GLOBALFOUNDRIES Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 7, 2020) |
10.21 |  | Settlement Agreement, dated October 19, 2019, by and between ON Semiconductor Corporation and Settlement Agreement, dated October 19, 2019, by and between ON Semiconductor Corporation and Power Integrations, Inc. (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K filed with the Commission on February 19, 2020) |
14.1 |  | ON Semiconductor Corporation Code of Business Conduct effective as of August 16, 2016 (incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 24, 2016) |
21.1 |  | List of Significant Subsidiaries(1) |
23.1 |  | Consent of Independent Registered Public Accounting Firm-PricewaterhouseCoopers LLP(1) |
24.1 |  | Powers of Attorney(1) |
31.1 |  | Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) |
31.2 |  | Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) |
32 |  | Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3) |
101.INS |  | XBRL Instance Document |
101.SCH |  | XBRL Taxonomy Extension Schema Document |
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document |
104 |  | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. |

* | Reports filed under the Securities Exchange Act (Form 10-K, Form 10-Q and Form 8-K) are filed under File No. 000-30419 and File No. 001-39317.

(1) | Filed herewith.

(2) | Management contract or compensatory plan, contract or arrangement.

(3) | Furnished herewith.

† | Schedules or other attachments to these exhibits not filed herewith shall be furnished to the Commission upon request.

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Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

February 16, 2021 |  | ON Semiconductor Corporation
|  | By: /s/ HASSANE S. EL-KHOURY
|  | Name: Hassane S. El-Khoury
|  | Title: President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature | Titles | Date
/s/ HASSANE S. EL-KHOURY Hassane S. El-Khoury | President, Chief Executive Officer and Director | February 16, 2021
| (Principal Executive Officer) |
/s/ BERNARD GUTMANN Bernard Gutmann | Executive Vice President, Chief Financial Officer and Treasurer | February 16, 2021
| (Principal Financial Officer) |
/s/ BERNARD R. COLPITTS, JR. Bernard R. Colpitts, Jr. | Chief Accounting Officer (Principal Accounting Officer) | February 16, 2021
* | Chair of the Board of Directors | February 16, 2021
Alan Campbell |  |
* | Director | February 16, 2021
Atsushi Abe |  |
* | Director | February 16, 2021
Susan K. Carter |  |
* | Director | February 16, 2021
Thomas L. Dietrich |  |
* | Director | February 16, 2021
Gilles Delfassy |  |
* | Director | February 16, 2021
Emmanuel T. Hernandez |  |
* | Director | February 16, 2021
Bruce E. Kiddoo |  |
* | Director | February 16, 2021
Paul A. Mascarenas |  |
* | Director | February 16, 2021
Gregory L. Waters |  |
* | Director | February 16, 2021
Christine Y. Yan |  |
*By: /s/ BERNARD GUTMANN Bernard Gutmann | Attorney-in-Fact | February 16, 2021

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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ON Semiconductor Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ON Semiconductor Corporation and its subsidiaries (the "Company") as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
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expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Ship and Credit Reserves
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s ship and credit reserves are $180.2 million as of December 31, 2020. Sales returns and allowances, which include ship and credit reserves for distributors, are estimated by management based on historical claims data and expected future claims. Provisions for ship and credit claims are provided for in the same period the related revenue is recognized, and are netted against revenue.
The principal considerations for our determination that performing procedures relating to ship and credit reserves is a critical audit matter are the significant judgment by management in estimating the reserves, which in turn led to significant auditor judgment, subjectivity and effort in performing procedures to evaluate management’s expected future claims assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the ship and credit reserves. These procedures also included, among others (i) testing management’s process for determining the estimate, (ii) evaluating the appropriateness of the approach used by management in developing the estimate, (iii) evaluating the reasonableness of the expected future claims assumptions, and (iv) testing the completeness and accuracy of historical claims data. Evaluating the assumptions related to the expected future claims involved evaluating whether the assumptions used were reasonable considering the past claim activity.
Valuation of Inventories
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s inventory balance of $1,251.4 million as of December 31, 2020, is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. Management writes down excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand.
The principal considerations for our determination that performing procedures relating to the valuation of inventories is a critical audit matter are the significant judgment by management in developing the write down for excess and obsolete inventories. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures to evaluate the reasonableness of management’s analysis, including the inputs utilized and the significant assumptions related to projected end-user demand employed within the analysis.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of inventories. These procedures also included, among others (i) testing management’s process for developing the write down for excess and obsolete inventories, (ii) evaluating the appropriateness of the analysis, and (iii) evaluating the reasonableness of the significant assumptions related to projected end-user demand used by management in developing the write down for excess and obsolete inventories. Evaluating the reasonableness of the assumptions related to projected end-user demand involved considering the performance of product sales and whether they were consistent with evidence obtained in other areas of the audit.
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/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 16, 2021
We have served as the Company’s auditor since 1999.
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ON SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)

| December 31, 2020 |  | December 31, 2019
Assets |  |  |
Cash and cash equivalents | $ | 1,080.7 |  |  | $ | 894.2 |
Receivables, net | 676.0 |  |  | 705.0 |
Inventories | 1,251.4 |  |  | 1,232.4 |
Other current assets | 176.0 |  |  | 188.4 |
Total current assets | 3,184.1 |  |  | 3,020.0 |
Property, plant and equipment, net | 2,512.3 |  |  | 2,591.6 |
Goodwill | 1,663.4 |  |  | 1,659.2 |
Intangible assets, net | 469.0 |  |  | 590.5 |
Deferred tax assets | 429.0 |  |  | 307.8 |
Other assets | 410.2 |  |  | 256.4 |
Total assets | $ | 8,668.0 |  |  | $ | 8,425.5 |
Liabilities, Non-Controlling Interest and Stockholders’ Equity |  |  |
Accounts payable | $ | 572.9 |  |  | $ | 543.6 |
Accrued expenses and other current liabilities | 570.0 |  |  | 538.8 |
Current portion of long-term debt | 531.6 |  |  | 736.0 |
Total current liabilities | 1,674.5 |  |  | 1,818.4 |
Long-term debt | 2,959.7 |  |  | 2,876.5 |
Deferred tax liabilities | 57.3 |  |  | 60.2 |
Other long-term liabilities | 418.4 |  |  | 346.3 |
Total liabilities | 5,109.9 |  |  | 5,101.4 |
Commitments and contingencies (Note 13) |  |  |
ON Semiconductor Corporation stockholders’ equity: |  |  |
Common stock ($0.01 par value, 1,250,000,000 shares authorized, 570,766,439 and 565,562,607 shares issued, 411,842,629 and 411,312,664 shares outstanding, respectively) | 5.7 |  |  | 5.7 |
Additional paid-in capital | 4,133.1 |  |  | 3,809.5 |
Accumulated other comprehensive loss | (57.6) |  |  | (54.3) |
Accumulated earnings | 1,425.5 |  |  | 1,191.3 |
Less: Treasury stock, at cost; 158,923,810 and 154,249,943 shares, respectively | (1,968.2) |  |  | (1,650.5) |
Total ON Semiconductor Corporation stockholders’ equity | 3,538.5 |  |  | 3,301.7 |
Non-controlling interest | 19.6 |  |  | 22.4 |
Total stockholders' equity | 3,558.1 |  |  | 3,324.1 |
Total liabilities and stockholders' equity | $ | 8,668.0 |  |  | $ | 8,425.5 |

See accompanying notes to consolidated financial statements
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ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share data)

|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Revenue |  | $ | 5,255.0 |  |  | $ | 5,517.9 |  |  | $ | 5,878.3 |
Cost of revenue (exclusive of amortization shown below) |  | 3,539.2 |  |  | 3,544.3 |  |  | 3,639.6 |
Gross profit |  | 1,715.8 |  |  | 1,973.6 |  |  | 2,238.7 |
Operating expenses: |  |  |  |  |  |
Research and development |  | 642.9 |  |  | 640.9 |  |  | 650.7 |
Selling and marketing |  | 278.7 |  |  | 301.0 |  |  | 324.7 |
General and administrative |  | 258.7 |  |  | 284.0 |  |  | 293.3 |
Litigation settlement (Note 13) |  | — |  |  | 169.5 |  |  | — |
Amortization of acquisition-related intangible assets |  | 120.3 |  |  | 115.2 |  |  | 111.7 |
Restructuring, asset impairments and other charges, net |  | 65.2 |  |  | 28.7 |  |  | 4.3 |
Goodwill and intangible asset impairment |  | 1.3 |  |  | 1.6 |  |  | 6.8 |
Total operating expenses |  | 1,367.1 |  |  | 1,540.9 |  |  | 1,391.5 |
Operating income |  | 348.7 |  |  | 432.7 |  |  | 847.2 |
Other income (expense), net: |  |  |  |  |  |
Interest expense |  | (168.4) |  |  | (148.3) |  |  | (128.2) |
Interest income |  | 4.9 |  |  | 10.2 |  |  | 6.1 |
Loss on debt refinancing and prepayment |  | — |  |  | (6.2) |  |  | (4.6) |
Gain on divestiture of business |  | — |  |  | — |  |  | 5.0 |
Licensing income |  | — |  |  | — |  |  | 36.6 |
Other expense |  | (8.6) |  |  | (11.8) |  |  | (7.1) |
Other income (expense), net |  | (172.1) |  |  | (156.1) |  |  | (92.2) |
Income before income taxes |  | 176.6 |  |  | 276.6 |  |  | 755.0 |
Income tax (provision) benefit |  | 59.8 |  |  | (62.7) |  |  | (125.1) |
Net income |  | 236.4 |  |  | 213.9 |  |  | 629.9 |
Less: Net income attributable to non-controlling interest |  | (2.2) |  |  | (2.2) |  |  | (2.5) |
Net income attributable to ON Semiconductor Corporation |  | $ | 234.2 |  |  | $ | 211.7 |  |  | $ | 627.4 |
Comprehensive income (loss), net of tax: |  |  |  |  |  |
Net income |  | $ | 236.4 |  |  | $ | 213.9 |  |  | $ | 629.9 |
Foreign currency translation adjustments |  | 1.8 |  |  | 0.1 |  |  | 0.7 |
Effects of cash flow hedges |  | (5.1) |  |  | (16.5) |  |  | 2.0 |
Other comprehensive income (loss), net of tax |  | (3.3) |  |  | (16.4) |  |  | 2.7 |
Comprehensive income |  | 233.1 |  |  | 197.5 |  |  | 632.6 |
Comprehensive income attributable to non-controlling interest |  | (2.2) |  |  | (2.2) |  |  | (2.5) |
Comprehensive income attributable to ON Semiconductor Corporation |  | $ | 230.9 |  |  | $ | 195.3 |  |  | $ | 630.1 |
Net income per share of common stock attributable to ON Semiconductor Corporation: |  |  |  |  |  |
Basic |  | $ | 0.57 |  |  | $ | 0.52 |  |  | $ | 1.48 |
Diluted |  | $ | 0.56 |  |  | $ | 0.51 |  |  | $ | 1.44 |
Weighted-average shares of common stock outstanding: |  |  |  |  |  |
Basic |  | 410.7 |  |  | 410.9 |  |  | 423.8 |
Diluted |  | 418.8 |  |  | 416.0 |  |  | 435.9 |

See accompanying notes to consolidated financial statements
72

ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions, except share data)

| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss |  | Treasury Stock | Non-Controlling Interest |
| Number of shares | At Par Value | Accumulated (Deficit) Earnings | Number of shares | At Cost | Total Equity
Balance at December 31, 2017 | 551,873,115 |  | $ | 5.5 |  | $ | 3,593.5 |  | $ | (40.6) |  | $ | 351.5 |  | (126,754,921) |  | $ | (1,131.1) |  | $ | 22.2 |  | $ | 2,801.0 |
Impact of the adoption of ASU 2016-16 | — |  | — |  | — |  | — |  | (1.4) |  | — |  | — |  | — |  | (1.4) |
Impact of the adoption of ASC 606 | — |  | — |  | — |  | — |  | 2.1 |  | — |  | — |  | — |  | 2.1 |
Stock option exercises | 794,165 |  | — |  | 5.7 |  | — |  | — |  | — |  | — |  | — |  | 5.7 |
Shares issued pursuant to the ESPP | 1,516,012 |  | — |  | 24.9 |  | — |  | — |  | — |  | — |  | — |  | 24.9 |
RSUs and stock grant awards issued | 4,518,328 |  | 0.1 |  | (0.1) |  | — |  | — |  | — |  | — |  | — |  | — |
Payment of tax withholding for RSUs | — |  | — |  | — |  | — |  | — |  | (1,343,961) |  | (31.6) |  | — |  | (31.6) |
Share-based compensation | — |  | — |  | 78.3 |  | — |  | — |  | — |  | — |  | — |  | 78.3 |
Repurchase of common stock | — |  | — |  | — |  | — |  | — |  | (16,768,511) |  | (315.3) |  | — |  | (315.3) |
Dividend to non-controlling shareholder | — |  | — |  | — |  | — |  | — |  | — |  | — |  | (2.2) |  | (2.2) |
Comprehensive income | — |  | — |  | — |  | 2.7 |  | 627.4 |  | — |  | — |  | 2.5 |  | 632.6 |
Balance at December 31, 2018 | 558,701,620 |  | 5.6 |  | 3,702.3 |  | (37.9) |  | 979.6 |  | (144,867,393) |  | (1,478.0) |  | 22.5 |  | 3,194.1 |
Stock option exercises | 266,363 |  | — |  | 1.7 |  | — |  | — |  | — |  | — |  | — |  | 1.7 |
Shares issued pursuant to the ESPP | 1,666,559 |  | — |  | 26.2 |  | — |  | — |  | — |  | — |  | — |  | 26.2 |
RSUs and stock grant awards issued | 4,928,065 |  | 0.1 |  | (0.1) |  | — |  | — |  | — |  | — |  | — |  | — |
Payment of tax withholding for RSUs | — |  | — |  | — |  | — |  | — |  | (1,620,543) |  | (33.5) |  | — |  | (33.5) |
Share-based compensation | — |  | — |  | 79.4 |  | — |  | — |  | — |  | — |  | — |  | 79.4 |
Repurchase of common stock | — |  | — |  | — |  | — |  | — |  | (7,762,007) |  | (139.0) |  | — |  | (139.0) |
Dividend to non-controlling shareholder | — |  | — |  | — |  | — |  | — |  | — |  | — |  | (2.3) |  | (2.3) |
Comprehensive income (loss) | — |  | — |  | — |  | (16.4) |  | 211.7 |  | — |  | — |  | 2.2 |  | 197.5 |
Balance at December 31, 2019 | 565,562,607 |  | 5.7 |  | 3,809.5 |  | (54.3) |  | 1,191.3 |  | (154,249,943) |  | (1,650.5) |  | 22.4 |  | 3,324.1 |
Stock option exercises | 5,625 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Shares issued pursuant to the ESPP | 1,838,256 |  | — |  | 23.6 |  | — |  | — |  | — |  | — |  | — |  | 23.6 |
RSUs and stock grant awards issued | 3,359,951 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Payment of tax withholding for RSUs | — |  | — |  | — |  | — |  | — |  | (1,062,377) |  | (20.0) |  | — |  | (20.0) |
Share-based compensation | — |  | — |  | 67.7 |  | — |  | — |  | — |  | — |  | — |  | 67.7 |
Repurchase of common stock | — |  | — |  | — |  | — |  | — |  | (3,611,413) |  | (65.4) |  | — |  | (65.4) |
Dividend to non-controlling shareholder | — |  | — |  | — |  | — |  | — |  | — |  | — |  | (5.0) |  | (5.0) |
Shares issued to settle excess over principal for 1.00% Notes | — |  | — |  | (88.7) |  | — |  | — |  | 11,823,271 |  | 88.7 |  | — |  | — |
Repurchase of shares under bond hedges | — |  | — |  | 321.0 |  | — |  | — |  | (11,823,348) |  | (321.0) |  | — |  | — |
Comprehensive income (loss) | — |  | — |  | — |  | (3.3) |  | 234.2 |  | — |  | — |  | 2.2 |  | 233.1 |
Balance at December 31, 2020 | 570,766,439 |  | $ | 5.7 |  | $ | 4,133.1 |  | $ | (57.6) |  | $ | 1,425.5 |  | (158,923,810) |  | $ | (1,968.2) |  | $ | 19.6 |  | $ | 3,558.1 |

See accompanying notes to consolidated financial statements
73

ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

| Year ended December 31,
| 2020 |  | 2019 |  | 2018
Cash flows from operating activities: |  |  |  |  |
Net income | $ | 236.4 |  |  | $ | 213.9 |  |  | $ | 629.9 |
Adjustments to reconcile net income to net cash provided by operating activities and other adjustments: |  |  |  |  |
Depreciation and amortization | 625.1 |  |  | 593.1 |  |  | 508.7 |
(Gain) loss on sale or disposal of fixed assets | (3.2) |  |  | 1.9 |  |  | 2.4 |
Gain on divestiture of business | — |  |  | — |  |  | (5.0) |
Loss on debt refinancing and prepayment | — |  |  | 6.2 |  |  | 4.6 |
Amortization of debt discount and issuance costs | 12.1 |  |  | 13.0 |  |  | 13.2 |
Payments for term debt modification | — |  |  | — |  |  | (1.1) |
Share-based compensation | 67.7 |  |  | 79.4 |  |  | 78.3 |
Non-cash interest on convertible notes | 38.2 |  |  | 37.8 |  |  | 36.1 |
Non-cash asset impairment charges | 17.5 |  |  | 3.4 |  |  | 2.4 |
Goodwill and intangible asset impairment charges | 1.3 |  |  | 1.6 |  |  | 6.8 |
Change in deferred tax balances | (122.6) |  |  | 11.2 |  |  | 69.2 |
Other | 10.5 |  |  | (0.1) |  |  | (1.6) |
Changes in assets and liabilities (exclusive of the impact of acquisitions and divestitures): |  |  |  |  |
Receivables | 31.4 |  |  | 4.7 |  |  | (2.7) |
Inventories | (26.3) |  |  | 34.6 |  |  | (129.5) |
Other assets | (60.0) |  |  | (34.6) |  |  | (37.4) |
Accounts payable | 34.2 |  |  | (79.9) |  |  | 44.8 |
Accrued expenses and other current liabilities | (18.5) |  |  | (201.7) |  |  | 56.5 |
Other long-term liabilities | 40.5 |  |  | 10.2 |  |  | (1.4) |
Net cash provided by operating activities | $ | 884.3 |  |  | $ | 694.7 |  |  | $ | 1,274.2 |
Cash flows from investing activities: |  |  |  |  |
Purchase of property, plant and equipment | $ | (383.6) |  |  | $ | (534.6) |  |  | $ | (514.8) |
Proceeds from sale of property, plant and equipment | 6.3 |  |  | 1.9 |  |  | 36.5 |
Deposits utilized for purchases of property, plant and equipment | 2.2 |  |  | 4.6 |  |  | 4.1 |
Purchase of business, net of cash acquired | (4.5) |  |  | (888.0) |  |  | (70.9) |
Settlement of purchase price and purchase of equity interest and assets, net of cash acquired | 26.0 |  |  | — |  |  | (24.6) |
Purchase of license and deposit made for manufacturing facility | (100.0) |  |  | (100.0) |  |  | — |
Proceeds from divestiture of business and release of escrow | — |  |  | 5.2 |  |  | 8.4 |
Proceeds from repayment of note receivable | — |  |  | — |  |  | 10.2 |
Other | — |  |  | — |  |  | 2.2 |
Net cash used in investing activities | $ | (453.6) |  |  | $ | (1,510.9) |  |  | $ | (548.9) |
Cash flows from financing activities: |  |  |  |  |
Proceeds for the issuance of common stock under the ESPP | $ | 23.6 |  |  | $ | 26.2 |  |  | $ | 25.0 |
Proceeds from exercise of stock options | — |  |  | 1.7 |  |  | 5.7 |
Payments of tax withholding for RSUs | (20.0) |  |  | (33.5) |  |  | (31.6) |
Repurchase of common stock | (65.4) |  |  | (139.0) |  |  | (315.3) |
Issuance and borrowings under debt agreements | 1,858.0 |  |  | 1,404.8 |  |  | 15.3 |
Payment of debt issuance and other financing costs | (2.4) |  |  | (24.0) |  |  | — |
Repayment of borrowings under debt agreements | (2,023.9) |  |  | (594.4) |  |  | (298.4) |
Release of escrow related to prior acquisition | — |  |  | (10.4) |  |  | — |
Payment of finance lease obligations | — |  |  | (0.8) |  |  | (3.6) |
Payments related to prior acquisition | (8.9) |  |  | (5.2) |  |  | — |
Dividend to non-controlling shareholder | (5.0) |  |  | (2.3) |  |  | (2.2) |
Net cash provided by (used in) financing activities | $ | (244.0) |  |  | $ | 623.1 |  |  | $ | (605.1) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 0.6 |  |  | 0.2 |  |  | 0.3 |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 187.3 |  |  | $ | (192.9) |  |  | $ | 120.5 |
Cash, cash equivalents and restricted cash, beginning of period (Note 18) | $ | 894.2 |  |  | $ | 1,087.1 |  |  | $ | 966.6 |
Cash, cash equivalents and restricted cash, end of period (Note 18) | $ | 1,081.5 |  |  | $ | 894.2 |  |  | $ | 1,087.1 |

See accompanying notes to consolidated financial statements
74

ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Background and Basis of Presentation
ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries (the "Company"), prepares its consolidated financial statements in accordance with GAAP. As of December 31, 2020, the Company was organized into three operating segments, which also represent its three reportable segments: PSG, ASG and ISG. Additional information about the Company's operating and reportable segments is included in Note 3: ''Revenue and Segment Information''.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in the context of the information reasonably available as of December 31, 2020, and through the filing date of this Form 10-K. The accounting matters assessed included, but were not limited to, the allowance for doubtful accounts, share-based compensation, inventory valuation, carrying value of indefinite-lived intangible assets, other long-lived assets and goodwill, valuation allowance for tax assets, contingencies and revenue recognition. 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.
Unless otherwise noted, all dollar amounts are in millions, except per share amounts.
Note 2: Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the assets, liabilities, revenue and expenses of all wholly-owned and majority-owned subsidiaries over which the Company exercises control and, when applicable, entities in which the Company has a controlling financial interest or is the primary beneficiary. Investments in affiliates where the Company does not exert a controlling financial interest are not consolidated. All intercompany balances and transactions have been eliminated.
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 and returns; (ii) valuation and obsolescence relating to inventories; (iii) variable and share-based compensation; and (iv) measurement of valuation allowances against deferred tax assets, and evaluations of uncertain tax positions. 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and highly liquid investments with original maturities at the time of purchase of three months or less. The Company maintains amounts on deposit at various financial institutions, which may at times exceed federally insured limits. However, management periodically evaluates the credit-worthiness of those institutions and has not experienced any losses on such deposits.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. General market conditions, as well as the Company's design activities, can cause certain of its products to become obsolete. The Company writes down excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. These write downs can influence results from operations. For example, when demand for a given part falls, all or a portion of the related inventory that is considered to be in
75

ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
excess of anticipated demand is written down, impacting cost of revenue and gross profit. However, the majority of product inventory that has been previously written down is ultimately discarded. Although the Company does sell some products that have previously been written down, such sales have historically been consistently insignificant and the related impact on the Company's gross profit has also been insignificant.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated over estimated useful lives of 30-50 years for buildings and 3-10 years for computers, machinery and equipment using straight-line methods. Expenditures for maintenance and repairs are charged to operations in the period in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying value of an asset group may not be fully recoverable. A potential impairment charge is evaluated when the undiscounted expected cash flows derived from an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of the asset group.
Business Combination Purchase Price Allocation
The allocation of the purchase price of business combinations is based on management estimates and assumptions, which utilize established valuation techniques appropriate for the technology industry. These techniques include the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. Management records the acquired assets and liabilities at fair value. If the income approach is used, the fair value determination is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual market transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development and other operating expenses.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination. The Company evaluates its goodwill for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of a reporting unit may not be recoverable. The Company’s divisions are one level below the operating segments, constituting individual businesses, at which level the Company’s segment management conducts regular reviews of the operating results. The Company's divisions, either individually or in a combination, constitute reporting units for purposes of allocating and testing goodwill.
The Company's impairment evaluation consists of a qualitative assessment. If this assessment indicates that it is more likely than not the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired. Otherwise, the Company performs a quantitative impairment test by comparing the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and will be determined as the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company can bypass the qualitative assessment for any period and proceed directly to the quantitative impairment test.
Determining the fair value of the Company's reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount rates and long-term growth rates. The Company determines the fair value of its reporting units based on an income approach derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses and industry trends. The Company considers historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. The Company considers other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.
76

ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Intangible Assets
The Company's acquisitions have resulted in intangible assets consisting of values assigned to customer relationships, patents, developed technology, licenses, IPRD and trademarks. IPRD is considered an indefinite-lived intangible asset until the abandonment or completion of the associated research and development efforts. If abandoned, the assets would be impaired. If the activities are completed, a determination is made regarding the useful lives of such assets and methods of amortization.
The Company is required to test its IPRD assets for impairment annually using the guidance for indefinite-lived intangible assets. The Company calculates the fair value of the IPRD asset and records an impairment charge if the carrying amount exceeds fair value. The Company determines the fair value based on an income approach, which is calculated as the present value of the estimated future cash flows of the IPRD asset. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses and industry trends. The Company can bypass the qualitative assessment for any asset in any period and proceed directly to the quantitative impairment test.
The remaining intangible assets are considered long-lived assets and are stated at cost less accumulated amortization. These intangible assets are amortized over their estimated useful lives and are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset group containing these assets may not be recoverable.
Leases
The Company determines if an arrangement is a lease at its inception. Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the right-of-use ("ROU") assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued expenses and other current liabilities or other long-term liabilities in the Consolidated Balance Sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes options to extend the lease when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the Consolidated Balance Sheet.
The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date, giving consideration to publicly available data for instruments with similar characteristics. The Company accounts for the lease and non-lease components as a single lease component.
Debt Issuance Costs
Debt issuance costs for line-of-credit agreements, including the Company's Revolving Credit Facility, are capitalized and amortized over the term of the underlying agreements on a straight-line basis. Amortization of these debt issuance costs is included in interest expense while the unamortized balance is included in other assets.
Debt issuance costs for the Company's convertible notes and term debt are recorded as a direct deduction from the carrying amounts of the such debt, consistent with debt discounts, and are amortized over their term using the effective interest method. Amortization of these debt issuance costs is included in interest expense.
Contingencies
The Company is involved in a variety of legal matters, IP matters, environmental, financing and indemnification contingencies that arise in the ordinary course of business. Based on the information available, management evaluates the relevant range and likelihood of potential outcomes and records the appropriate liability when the amount is deemed probable and reasonably estimable.
Treasury Stock
Treasury stock is recorded at cost, inclusive of fees, commissions and other expenses, when outstanding common shares are repurchased by the Company, including when outstanding shares are withheld to satisfy tax withholding obligations in connection with certain shares pursuant to RSUs under the Company's share-based compensation plans. Reissuance of shares
77

ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
held in treasury stock is accounted for on a first-in, first-out basis.
Revenue Recognition
The Company generates revenue from sales of its semiconductor products to OEMs, electronic manufacturing service providers and distributors. The Company also generates revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. The Company recognizes revenue when it satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. For sales agreements, the Company has identified the promise to transfer products, each of which is distinct, as the performance obligation. For product development agreements, the Company has identified the completion of a service defined in the agreement as the performance obligation. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied.
Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty and supply, but typically do not require minimum purchase commitments. In the absence of a sales agreement, the Company’s standard terms and conditions apply. The Company considers the customer purchase orders, governed by sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. The Company evaluates certain factors including the customer’s ability to pay (or credit risk).
Most of the Company’s OEM customers negotiate pricing terms on an annual basis, distributors generally negotiate pricing terms on a quarterly basis, while the pricing terms for electronic manufacturing service providers are negotiated periodically during the year. Pricing terms on product development agreements are negotiated at the beginning of a project. The Company allocates the transaction price to each distinct product based on its relative stand-alone selling price.
In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company’s OEM customers do not have the right to return products, other than pursuant to the provisions of the Company’s standard warranty. Sales to distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Sales to certain distributors, primarily those with ship and credit rights, can also be subject to price adjustment on certain products. Although payment terms vary, most distributor agreements require payment within 30 days. In addition, the Company offers cash discounts to certain customers for payments received within an agreed upon time, generally ten days after shipment.
The Company recognizes revenue when it satisfies a performance obligation. The Company recognizes revenue from sales agreements upon transferring control of a product to the customer. This typically occurs when products are shipped or delivered, depending on the delivery terms, or when products that are consigned at customer locations are consumed. The Company recognizes revenue from product development agreements over time based on the cost-to-cost method. Sales returns and allowances, which include ship and credit reserves for distributors, are estimated based on historical claims data and expected future claims. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue are recognized, and are netted against revenue. For non-quality related returns, the Company recognizes a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. The Company records a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.
Frequently, the Company receives orders with multiple delivery dates that may extend across reporting periods. Each delivery constitutes an individual performance obligation, which consists of transferring control of the products to the customers based on their stand-alone selling price. The Company invoices the customer for each delivery upon shipment and recognizes revenue in accordance with delivery terms. As scheduled delivery dates are within one year, revenue allocated to future shipments of partially completed contracts are not disclosed.
The Company records freight and handling costs associated with outbound freight after control over a product has transferred to a customer as a fulfillment cost and includes it in cost of revenue. Taxes assessed by government authorities on revenue-producing transactions, including value-added and excise taxes, are presented on a net basis (excluded from revenue).
The Company generally warrants that products sold to its customers will, at the time of shipment, be free from defects in workmanship and materials and conform to specifications. The Company’s standard warranty extends for a period of two years from the date of delivery, except in the case of image sensor products, which are warrantied for one year from the date of
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delivery. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with its sales and records them as a component of the cost of revenue.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which management cannot conclude that it is more likely than not that such deferred tax assets will be realized.
In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted, are considered. If the Company determines it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if the Company determines it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.
The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. No tax benefit is recognized for tax positions that are not more likely than not to be sustained. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in significant increases or decreases in income tax expense in the period in which the change is made, which could have a significant impact to the Company's effective tax rate.
Foreign Currencies
Most of the Company's foreign subsidiaries conduct business primarily in U.S. dollars and, as a result, utilize the U.S. dollar as their functional currency. For the remeasurement of financial statements of these subsidiaries, assets and liabilities in foreign currencies that are receivable or payable in cash are remeasured at current exchange rates, while inventories and other non-monetary assets in foreign currencies are remeasured at historical rates. Gains and losses resulting from the remeasurement of such financial statements are included in the operating results, as are gains and losses incurred on foreign currency transactions.
Some of the Company's Japanese subsidiaries utilize Japanese Yen as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates, while revenue and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in other comprehensive income or loss within the Consolidated Statements of Operations and Comprehensive Income.
Share-Based Compensation
Share-based compensation is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite service period and for awards with performance conditions, over the performance measurement period. The Company has outstanding awards that vest based on service, performance and market conditions.
Defined Benefit Pension Plans
The Company maintains defined benefit pension plans covering certain of its foreign employees. Net periodic pension costs and
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pension obligations are determined based on actuarial assumptions, including discount rates for plan obligations, assumed rates of return on pension plan assets and assumed rates of compensation increases for employees participating in plans. These assumptions are based upon management's judgment and consultation with actuaries, considering all known trends and uncertainties. The service cost component of the net periodic pension cost is allocated between the cost of revenue, research and development, selling and marketing and general and administrative line items, while the other components are included in other expense in the Consolidated Statements of Operations and Comprehensive Income.
Fair Value Measurement
The Company measures certain of its financial and non-financial assets at fair value by using the fair value hierarchy that prioritizes certain inputs into individual fair value measurement approaches. Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities;
•Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Companies may choose to measure certain financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected must be reported in earnings. The Company has elected not to carry any of its debt instruments at fair value.
Note 3: Revenue and Segment Information
Revenue recognized for product sales amounted to $5,227.8 million, $5,492.0 million and $5,849.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Revenue recognized for product development agreements amounted to $27.2 million, $25.9 million and $29.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is organized into three operating and reportable segments consisting of PSG, ASG and ISG. The Company's wafer manufacturing facilities fabricate ICs for all business units, as necessary, and their operating costs are reflected in the segments' cost of revenue on the basis of product costs. Because operating segments are generally defined by the products they design and sell, they do not make sales to each other. The Company does not allocate income taxes or interest expense to its operating segments as the operating segments are principally evaluated on gross profit. Additionally, restructuring, asset impairments and other charges, net and certain other manufacturing and operating expenses, which include corporate research and development costs, unallocated inventory reserves and miscellaneous nonrecurring expenses, are not allocated to any segment. In addition to the operating and reportable segments, the Company also operates global operations, sales and marketing, information systems and finance and administration groups. A portion of the expenses for each of these groups are allocated to the segments based on specific and general criteria and are included in the segment results.
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Revenue and gross profit for the Company’s operating and reportable segments are as follows (in millions):

|  | PSG |  | ASG |  | ISG |  | Total
For year ended December 31, 2020: |  |  |  |  |  |  |  |
Revenue from external customers |  | $ | 2,606.1 |  |  | $ | 1,910.4 |  |  | $ | 738.5 |  |  | $ | 5,255.0 |
Segment gross profit |  | 801.7 |  |  | 730.5 |  |  | 237.7 |  |  | 1,769.9 |
For year ended December 31, 2019: |  |  |  |  |  |  |  |
Revenue from external customers |  | $ | 2,788.3 |  |  | $ | 1,972.3 |  |  | $ | 757.3 |  |  | $ | 5,517.9 |
Segment gross profit |  | 976.0 |  |  | 794.8 |  |  | 275.4 |  |  | 2,046.2 |
For year ended December 31, 2018: |  |  |  |  |  |  |  |
Revenue from external customers |  | $ | 3,038.2 |  |  | $ | 2,071.2 |  |  | $ | 768.9 |  |  | $ | 5,878.3 |
Segment gross profit |  | 1,110.1 |  |  | 878.3 |  |  | 317.1 |  |  | 2,305.5 |

The Company had one customer, a distributor, whose revenue accounted for approximately 11% of the total revenue for the year ended December 31, 2020. There were no customers whose revenue exceeded 10% or more of total revenue for the years ended December 31, 2019 or 2018.
Gross profit is exclusive of the amortization of acquisition-related intangible assets. Depreciation expense is included in segment gross profit. Reconciliations of segment gross profit to consolidated gross profit are as follows (in millions):

| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
Gross profit for reportable segments | $ | 1,769.9 |  |  | $ | 2,046.2 |  |  | $ | 2,305.5 |
Less: unallocated manufacturing costs | (54.1) |  |  | (72.6) |  |  | (66.8) |
Consolidated gross profit | $ | 1,715.8 |  |  | $ | 1,973.6 |  |  | $ | 2,238.7 |

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):

| Year Ended December 31, 2020
| PSG |  | ASG |  | ISG |  | Total
Geographic Location |  |  |  |  |  |  |
Singapore | $ | 978.0 |  |  | $ | 695.0 |  |  | $ | 126.5 |  |  | $ | 1,799.5 |
Hong Kong | 723.2 |  |  | 410.6 |  |  | 177.8 |  |  | 1,311.6 |
United Kingdom | 395.7 |  |  | 264.5 |  |  | 145.7 |  |  | 805.9 |
United States | 282.8 |  |  | 282.0 |  |  | 163.8 |  |  | 728.6 |
Other | 226.4 |  |  | 258.3 |  |  | 124.7 |  |  | 609.4 |
Total | $ | 2,606.1 |  |  | $ | 1,910.4 |  |  | $ | 738.5 |  |  | $ | 5,255.0 |
Sales Channel |  |  |  |  |  |  |
Distributors | $ | 1,776.4 |  |  | $ | 986.4 |  |  | $ | 406.8 |  |  | $ | 3,169.6 |
OEM | 673.6 |  |  | 794.6 |  |  | 297.5 |  |  | 1,765.7 |
Electronic Manufacturing Service Providers | 156.1 |  |  | 129.4 |  |  | 34.2 |  |  | 319.7 |
Total | $ | 2,606.1 |  |  | $ | 1,910.4 |  |  | $ | 738.5 |  |  | $ | 5,255.0 |

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| Year Ended December 31, 2019
| PSG |  | ASG |  | ISG |  | Total
Geographic Location |  |  |  |  |  |  |
Singapore | $ | 864.7 |  |  | $ | 679.7 |  |  | $ | 168.7 |  |  | $ | 1,713.1 |
Hong Kong | 843.5 |  |  | 436.8 |  |  | 137.0 |  |  | 1,417.3 |
United Kingdom | 467.1 |  |  | 303.5 |  |  | 151.0 |  |  | 921.6 |
United States | 356.3 |  |  | 332.6 |  |  | 121.4 |  |  | 810.3 |
Other | 256.7 |  |  | 219.7 |  |  | 179.2 |  |  | 655.6 |
Total | $ | 2,788.3 |  |  | $ | 1,972.3 |  |  | $ | 757.3 |  |  | $ | 5,517.9 |
Sales Channel |  |  |  |  |  |  |
Distributors | $ | 1,740.6 |  |  | $ | 971.5 |  |  | $ | 461.0 |  |  | $ | 3,173.1 |
OEM | 857.5 |  |  | 860.3 |  |  | 258.8 |  |  | 1,976.6 |
Electronic Manufacturing Service Providers | 190.2 |  |  | 140.5 |  |  | 37.5 |  |  | 368.2 |
Total | $ | 2,788.3 |  |  | $ | 1,972.3 |  |  | $ | 757.3 |  |  | $ | 5,517.9 |

| Year Ended December 31, 2018
| PSG |  | ASG |  | ISG |  | Total
Geographic Location |  |  |  |  |  |  |
Singapore | $ | 1,086.6 |  |  | $ | 704.2 |  |  | $ | 164.2 |  |  | $ | 1,955.0 |
Hong Kong | 847.9 |  |  | 496.5 |  |  | 144.7 |  |  | 1,489.1 |
United Kingdom | 488.5 |  |  | 319.8 |  |  | 138.2 |  |  | 946.5 |
United States | 398.5 |  |  | 339.2 |  |  | 125.0 |  |  | 862.7 |
Other | 216.7 |  |  | 211.5 |  |  | 196.8 |  |  | 625.0 |
Total | $ | 3,038.2 |  |  | $ | 2,071.2 |  |  | $ | 768.9 |  |  | $ | 5,878.3 |
Sales Channel |  |  |  |  |  |  |
Distributors | $ | 2,011.1 |  |  | $ | 1,066.4 |  |  | $ | 464.2 |  |  | $ | 3,541.7 |
OEM | 846.8 |  |  | 860.7 |  |  | 263.4 |  |  | 1,970.9 |
Electronic Manufacturing Service Providers | 180.3 |  |  | 144.1 |  |  | 41.3 |  |  | 365.7 |
Total | $ | 3,038.2 |  |  | $ | 2,071.2 |  |  | $ | 768.9 |  |  | $ | 5,878.3 |

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.
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Property, plant and equipment, net by geographic location, are summarized as follows (in millions):

| As of December 31, |  |
| 2020 |  | 2019 |  |
United States | $ | 686.6 |  |  | $ | 616.7 |  |  |
South Korea | 455.5 |  |  | 485.4 |  |  |
Philippines | 386.6 |  |  | 433.5 |  |  |
China | 229.6 |  |  | 243.6 |  |  |
Japan | 209.3 |  |  | 218.1 |  |  |
Czech Republic | 216.1 |  |  | 213.4 |  |  |
Malaysia | 190.2 |  |  | 204.4 |  |  |
Other | 138.4 |  |  | 176.5 |  |  |
| $ | 2,512.3 |  |  | $ | 2,591.6 |  |  |

The following table illustrates the product technologies under each of the Company's reportable segments based on the Company's operating strategy. 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 as such are used to evaluate progress of major initiatives and allocation of resources.

PSG |  | ASG |  | ISG
Analog products |  | Analog products |  | LSI products
Discrete products |  | ASIC products |  | Sensors
MOSFET products |  | Connectivity products |  |
Power Module products |  | ECL products |  |
Isolation products |  | Foundry products / services |  |
Memory products |  | Gate Driver products |  |
Gate Driver products |  | LSI products |  |
Standard Logic products |  | Standard Logic products |  |
WBG products |  |  |  |

Note 4: 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 elected to apply the provisions of 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 the Company's 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, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Income taxes (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 the Company's consolidated financial statements.
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ASU 2018-14 – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements of Defined Benefit Plans ("ASU 2018-14")
During 2018, the FASB issued ASU 2018-14, which amended ASC 715: Compensation - Retirement Benefits, to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 added requirements to disclose, among others, a narrative description of the reasons for significant gains and losses affecting the benefit obligation for the period, and also removed certain other disclosure requirements. For public business entities, the provisions of ASU 2018-14 is effective for fiscal years ending after December 15, 2020. The adoption of ASU 2018-14 did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2016-02 - Leases (Topic 842) ("ASU 2016-02"), ASU No. 2018-10 - Codification improvements to Topic 842, Leases ("ASU 2018-10"), ASU No. 2018-11 - Leases (Topic 842) ("ASU 2018-11") (collectively, the "New Leasing Standard")
The New Leasing Standard became effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted the New Leasing Standard as of January 1, 2019 using the effective date method by recording right-of-use assets of $112.3 million, net of deferred rent liabilities of $5.1 million that were reclassified to right-of-use assets, and lease liabilities of $117.4 million. Under this method, periods prior to 2019 remain unchanged. The Company applied the practical expedients relating to the leases that commenced before January 1, 2019 whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.
Pending Adoption:
ASU 2020-06 - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06")
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company does not intend to early adopt ASU 2020-06; however, based on the application of the new standard on the 1.625% Notes, there would be a decrease in interest expense and an increase in the dilutive effect of convertible notes included in diluted weighted average shares of common stock outstanding for calculating earnings per share.
Note 5: Acquisitions, Divestiture and Licensing Transactions
The Company pursues strategic acquisitions and divestitures from time to time to leverage its existing capabilities and further build its business. Acquisition costs are not included as components of consideration transferred and instead are accounted for as expenses in the period in which the costs are incurred. During the years ended December 31, 2020 and 2019, the Company incurred acquisition and divestiture related costs of approximately $1.0 million and $11.3 million, respectively, which are included in operating expenses in the Company's Consolidated Statements of Operations and Comprehensive Income. The decrease in 2020 was due to the lack of any significant acquisition-related activities.
Pending Acquisition of Manufacturing Facility and Related Assets
On April 22, 2019, the Company entered into the Asset Purchase Agreement with GFUS and GLOBALFOUNDRIES Inc. pursuant to which the Company will acquire GFUS’s East Fishkill, New York site and fabrication facilities and certain other assets and liabilities on or around the Closing Date, subject to certain conditions, for the Total Consideration of $400.0 million. On April 22, 2019, the Company paid GFUS $70.0 million of the Total Consideration in cash as a non-refundable deposit, which will be applied toward and reduce the Total Consideration.
Also on April 22, 2019, the parties entered into certain ancillary agreements pursuant to which, the Company will be provided with technology transfer and development services as well as foundry services prior to the Closing Date, and GFUS will be
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provided foundry services for a limited period of time following the Closing Date, and the Company paid GFUS a license fee of $30.0 million in cash for certain technology. This amount has been recorded as an intangible asset in the Consolidated Balance Sheets.
On October 1, 2020, the Company entered into an amendment to the APA Amendment pursuant to which the Company paid GFUS a non-refundable deposit in the amount of $100.0 million in cash on October 5, 2020 (the "Additional Deposit"). The Additional Deposit will be applied toward and reduce the Total Consideration, and the remaining $230.0 million of the Total Consideration will be paid on or around the Closing Date. Other terms and conditions of the Asset Purchase Agreement remain unchanged. In connection with the APA Amendment, the Company also entered into an amendment to an ancillary agreement relating to the provision of foundry services entered into in connection with the execution of the Asset Purchase Agreement, which provides the Company certain additional tools and flexibility in its capital expenditures and manufacturing plans for 2021.
2019 Acquisition
On June 19, 2019, the Company acquired 100% of the outstanding shares of Quantenna, a global leader and innovator of high performance Wi-Fi solutions, whereby Quantenna became a wholly-owned subsidiary of the Company. The acquisition of Quantenna created a strong platform for addressing connectivity solutions for industrial IoT by combining the Company's expertise in power management and Bluetooth technologies with Quantenna's Wi-Fi technologies and software capabilities. Following the acquisition, Quantenna changed its name to ON Semiconductor Connectivity Solutions, Inc.
The purchase price consideration for the acquisition totaled $1,039.3 million, and was funded by a combination of a draw of $900.0 million against the Revolving Credit Facility and cash on hand. From the closing date of the Quantenna acquisition through December 31, 2019, the Company recognized approximately $84.8 million in revenue and $39.3 million in net loss relating to Quantenna, which included the amortization of fair market value step-up of inventory and intangible assets and restructuring charges. The operations of Quantenna have since been integrated with that of the Company.
The following table presents the allocation of the purchase price of Quantenna for the assets acquired and liabilities assumed based on their relative fair values, which was finalized during the year ended December 31, 2019 (in millions):

|  |  |  | Purchase Price Allocation
Cash and cash equivalents |  |  |  | $ | 133.4 |
Receivables |  |  |  | 22.2 |
Inventories |  |  |  | 41.8 |
Other current assets |  |  |  | 4.3 |
Property, plant and equipment |  |  |  | 16.9 |
Goodwill |  |  |  | 726.7 |
Intangible assets (excluding IPRD) |  |  |  | 87.1 |
IPRD |  |  |  | 23.8 |
Deferred tax assets |  |  |  | 29.2 |
Other non-current assets |  |  |  | 12.7 |
Total assets acquired |  |  |  | 1,098.1 |
Accounts payable |  |  |  | 22.6 |
Other current liabilities |  |  |  | 17.5 |
Deferred tax liabilities |  |  |  | 3.3 |
Other non-current liabilities |  |  |  | 15.4 |
Total liabilities assumed |  |  |  | 58.8 |
Net assets acquired/purchase price |  |  |  | $ | 1,039.3 |

Acquired intangible assets of $110.9 million include developed technology of $58.3 million (which are estimated to have a useful life of eight years). The value assigned to developed technology was determined using the income approach. The total weighted average amortization period for the acquired intangibles is eight years.
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IPRD assets are amortized over the estimated useful life of the assets upon successful completion of the related projects. The value assigned to IPRD was determined by estimating the net cash flows from the projects when completed and discounting the net cash flows to their present value using a discount rate of approximately 12.0%. The cash flows from IPRD’s significant products commenced from 2020 onwards.
The acquisition produced $726.7 million of goodwill, which has been assigned to a reporting unit within ASG. The goodwill is attributable to a combination of Quantenna's assembled workforce, expectations regarding a more meaningful engagement by the customers due to the scale of the combined company and other product and operating synergies. Goodwill arising from the Quantenna acquisition is not deductible for tax purposes.
Pro-Forma Results of Operations
Unaudited pro-forma consolidated results of operations for the year ended December 31, 2020 is not required because the results of the acquired business are included in the Consolidated Statements of Operations and Comprehensive Income for this period. The following unaudited pro-forma consolidated results of operations for the years ended December 31, 2019 and December 31, 2018 have been prepared as if the acquisition of Quantenna had occurred on January 1, 2018 and includes adjustments for amortization of intangibles, interest expense from financing, restructuring, and the effect of purchase accounting adjustments including the step-up of inventory (in millions, except per share data):

| Year Ended
| December 31, 2019 | December 31, 2018
Revenue | $ | 5,613.2 |  | $ | 6,098.8 |
Net income | 218.2 |  | 567.2 |
Net income attributable to ON Semiconductor Corporation | 216.0 |  | 564.7 |
Net income per common share attributable to ON Semiconductor Corporation: |  |
Basic | 0.53 |  | 1.33 |
Diluted | 0.52 |  | 1.30 |

2018 Acquisition
On May 8, 2018, the Company acquired 100% of the outstanding shares of SensL, a company specializing in SiPM, single photon avalanche diode and LiDAR sensing products for the automotive, medical, industrial and consumer markets, for $71.6 million, funded with cash on hand. This acquisition positioned the Company to extend its products in automotive sensing applications for ADAS and autonomous driving by adding LiDAR capabilities to the Company’s existing capabilities in imaging and radar.
The following table presents the allocation of the purchase price of SensL for the assets acquired and liabilities assumed based on their fair values (in millions):

|  |  |  | Purchase Price Allocation
Current assets (including cash and cash equivalents of $0.7) |  |  |  | $ | 4.2 |
Property, plant and equipment and other non-current assets |  |  |  | 1.8 |
Goodwill |  |  |  | 18.9 |
Intangible assets (excluding IPRD) |  |  |  | 31.4 |
IPRD |  |  |  | 20.0 |
Total assets acquired |  |  |  | 76.3 |
Current liabilities |  |  |  | 0.7 |
Other non-current liabilities |  |  |  | 4.0 |
Total liabilities assumed |  |  |  | 4.7 |
Net assets acquired/purchase price |  |  |  | $ | 71.6 |

Acquired intangible assets of $31.4 million include developed technology of $30.0 million (which are estimated to have a
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weighted-average useful life of seven years). The total weighted average amortization period for the acquired intangibles is seven years. IPRD assets are amortized over the estimated useful life of the assets upon successful completion of the related projects. The value assigned to IPRD was determined by estimating the net cash flows from the projects when completed and discounting the net cash flows to their present value using a discount rate of 30.0%. The cash flows from IPRD’s significant products commenced in 2019.
The acquisition produced $18.9 million of goodwill, which was allocated to ISG. Goodwill is attributable to a combination of SensL’s assembled workforce, expectations regarding a more meaningful engagement by the customers due to the scale of the combined company and other product and operating synergies. Goodwill arising from the SensL acquisition is not deductible for tax purposes.
Unaudited pro-forma consolidated results of operations for the year ended December 31, 2018 is not included considering the significance of the acquisition to the results of the Company.
2018 Divestiture
On June 25, 2018, the Company divested the transient voltage suppressing diodes business it acquired from Fairchild to TSC America, Inc. for $5.6 million in cash and recorded a gain of $4.6 million after writing off the carrying values of the assets and liabilities disposed. There were certain other insignificant transactions resulting in a total gain of $5.0 million during the year ended December 31, 2018.
Licensing Transactions
During 2016 and 2017, the Company entered into an asset purchase agreement with Huaian Imaging Device Manufacturer Corporation ("HIDM") pursuant to which the Company provided perpetual, non-exclusive licenses relating to certain technologies to HIDM and recognized $10.0 million of licensing income during the year ended December 31, 2018.
On November 29, 2017, the Company and QST Co. Ltd ("QST") entered into an IP license and technology transfer agreement ("IP Agreement") to grant QST patent licenses and IP rights to certain of the Company’s technologies. Pursuant to the IP Agreement, QST receives perpetual, worldwide, nonexclusive and nontransferable patents licenses and IP rights upon the payment of license fees of which the Company recognized licensing income of $22.7 million during the year ended December 31, 2018. The Company also recognized certain insignificant amounts of licensing income relating to other transactions during the year ended December 31, 2018.
Note 6: Goodwill and Intangible Assets
Goodwill
Goodwill is tested for impairment at the reporting unit level, which is one level below the Company's operating segments. The Company performed qualitative assessments for the annual impairment analysis during the fourth quarters of 2020 and 2019 and concluded that it is more likely than not that the fair value of its reporting units exceed their carrying amounts and a quantitative impairment test was not required.
The following table summarizes goodwill by operating and reportable segments (in millions):

|  | As of December 31, 2020 |  | As of December 31, 2019 |  | As of December 31, 2018
|  | Goodwill |  | Accumulated Impairment Losses |  |  |  | Carrying Value |  | Goodwill |  | Accumulated Impairment Losses |  |  |  | Carrying Value |  | Goodwill |  | Accumulated Impairment Losses |  |  |  | Carrying Value
Operating and Reportable Segments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ASG |  | $ | 1,566.3 |  |  | $ | (418.9) |  |  |  |  | $ | 1,147.4 |  |  | $ | 1,563.4 |  |  | $ | (418.9) |  |  |  |  | $ | 1,144.5 |  |  | $ | 836.7 |  |  | $ | (418.9) |  |  |  |  | $ | 417.8 |
ISG |  | 114.7 |  |  | — |  |  |  |  | 114.7 |  |  | 114.4 |  |  | — |  |  |  |  | 114.4 |  |  | 114.4 |  |  | — |  |  |  |  | 114.4 |
PSG |  | 433.2 |  |  | (31.9) |  |  |  |  | 401.3 |  |  | 432.2 |  |  | (31.9) |  |  |  |  | 400.3 |  |  | 432.2 |  |  | (31.9) |  |  |  |  | 400.3 |
Total |  | $ | 2,114.2 |  |  | $ | (450.8) |  |  |  |  | $ | 1,663.4 |  |  | $ | 2,110.0 |  |  | $ | (450.8) |  |  |  |  | $ | 1,659.2 |  |  | $ | 1,383.3 |  |  | $ | (450.8) |  |  |  |  | $ | 932.5 |

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The Company recorded a goodwill impairment charge of $3.3 million in 2018 as a result of the licensing transaction with QST, which represented the entire goodwill assigned to a reporting unit within PSG.
The following table summarizes the change in goodwill (in millions):

Net balance as of December 31, 2018 |  | $ | 932.5 |
Addition due to business combination |  | 726.7 |
Net balance as of December 31, 2019 |  | 1,659.2 |
Addition due to business combination |  | 4.2 |
Net balance as of December 31, 2020 |  | $ | 1,663.4 |

Intangible Assets
Intangible assets, net, were as follows (in millions):

| As of December 31, 2020
| Original Cost |  | Accumulated Amortization |  |  |  | Accumulated Impairment Losses |  | Carrying Value |  |
Customer relationships | $ | 581.5 |  |  | $ | (411.7) |  |  |  |  | $ | (17.6) |  |  | $ | 152.2 |  |  |
Developed technology | 794.7 |  |  | (532.9) |  |  |  |  | (2.6) |  |  | 259.2 |  |  |
IPRD | 49.5 |  |  | — |  |  |  |  | (25.4) |  |  | 24.1 |  |  |
Licenses | 30.0 |  |  | — |  |  |  |  | — |  |  | 30.0 |  |  |
Other intangibles | 79.3 |  |  | (60.6) |  |  |  |  | (15.2) |  |  | 3.5 |  |  |
Total intangible assets | $ | 1,535.0 |  |  | $ | (1,005.2) |  |  |  |  | $ | (60.8) |  |  | $ | 469.0 |  |  |

| As of December 31, 2019
| Original Cost |  | Accumulated Amortization |  |  |  | Accumulated Impairment Losses |  | Carrying Value |  |
Customer relationships | $ | 585.2 |  |  | $ | (386.8) |  |  |  |  | $ | (20.1) |  |  | $ | 178.3 |  |  |
Developed technology | 779.5 |  |  | (440.3) |  |  |  |  | (2.6) |  |  | 336.6 |  |  |
IPRD | 64.7 |  |  | — |  |  |  |  | (24.1) |  |  | 40.6 |  |  |
Licenses | 30.0 |  |  | — |  |  |  |  | — |  |  | 30.0 |  |  |
Other intangibles | 79.3 |  |  | (59.1) |  |  |  |  | (15.2) |  |  | 5.0 |  |  |
Total intangible assets | $ | 1,538.7 |  |  | $ | (886.2) |  |  |  |  | $ | (62.0) |  |  | $ | 590.5 |  |  |

During the years ended December 31, 2020 and December 31, 2019, the Company completed certain of its IPRD projects resulting in the reclassification of $15.2 million and $23.2 million, respectively, from IPRD to developed technology.
During the year ended December 31, 2018, the Company determined that the value of one of its IPRD projects under ISG was impaired and recorded a charge of $3.5 million.
Amortization expense for intangible assets for the years ended December 31, 2020, 2019 and 2018 amounted to $120.3 million, $115.2 million and $111.7 million, respectively. Amortization expense for intangible assets, with the exception of the $24.1 million of IPRD assets that will be amortized once the corresponding projects have been completed, is expected to be as follows over the next five years, and thereafter (in millions):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

| Total
2021 | $ | 99.2 |
2022 | 83.8 |
2023 | 65.9 |
2024 | 54.1 |
2025 | 41.1 |
Thereafter | 100.8 |
Total estimated amortization expense | $ | 444.9 |

Note 7: Restructuring, Asset Impairments and Other Charges, net
Details of restructuring, asset impairments and other charges, net are as follows (in millions):

|  | Restructuring |  | Asset Impairments (1) |  | Other |  | Total |
Year Ended December 31, 2020 |  |  |  |  |  |  |  |  |
Voluntary separation program |  | $ | 27.5 |  |  | $ | — |  |  | $ | — |  |  | $ | 27.5 |  |
2020 Involuntary separation program |  | 11.8 |  |  | — |  |  | — |  |  | 11.8 |  |
General workforce reduction |  | 12.3 |  |  | — |  |  | — |  |  | 12.3 |  |
Other |  | — |  |  | 17.5 |  |  | (3.9) |  |  | 13.6 |  |
Total |  | $ | 51.6 |  |  | $ | 17.5 |  |  | $ | (3.9) |  |  | $ | 65.2 |  |
Year Ended December 31, 2019 |  |  |  |  |  |  |  |  |
General workforce reduction |  | $ | 8.4 |  |  | $ | — |  |  | $ | — |  |  | $ | 8.4 |  |
Post-Quantenna acquisition restructuring |  | 15.7 |  |  | — |  |  | — |  |  | 15.7 |  |
Other |  | 0.8 |  |  | 3.4 |  |  | 0.4 |  |  | 4.6 |  |
Total |  | $ | 24.9 |  |  | $ | 3.4 |  |  | $ | 0.4 |  |  | $ | 28.7 |  |
Year Ended December 31, 2018 |  |  |  |  |  |  |  |  |
Other |  | $ | 3.9 |  |  | $ | 4.6 |  |  | $ | (4.2) |  |  | $ | 4.3 |  |
Total |  | $ | 3.9 |  |  | $ | 4.6 |  |  | $ | (4.2) |  |  | $ | 4.3 |  |

_______________________
(1) The asset impairment charges recorded during the year ended December 31, 2020 related to a) property, plant and equipment amounting to $9.1 million b) investments in certain entities where the Company does not exert a significant influence amounting to $7.0 million and c) lease right-of-use assets of $1.4 million.
Summary of changes in accrued restructuring charges as follows (in millions):

|  | Estimated employee separation charges |  | Estimated costs to exit |  | Total
Balance as of December 31, 2018 |  | $ | 0.3 |  |  | $ | 0.2 |  |  | $ | 0.5 |
Charges |  | 24.9 |  |  | — |  |  | 24.9 |
Usage |  | (25.1) |  |  | (0.1) |  |  | (25.2) |
Balance as of December 31, 2019 |  | $ | 0.1 |  |  | $ | 0.1 |  |  | $ | 0.2 |
Charges |  | 51.6 |  |  | — |  |  | 51.6 |
Usage |  | (45.5) |  |  | (0.1) |  |  | (45.6) |
Balance as of December 31, 2020 |  | $ | 6.2 |  |  | $ | — |  |  | $ | 6.2 |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Year ended December 31, 2020:
Voluntary Separation Program
During the first quarter of 2020, the Company offered 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 first quarter, after which the VSP was terminated. The aggregate expense for the VSP amounted to $27.5 million for the 243 employees, all of whom had exited by the end of the second quarter of 2020. All amounts under the VSP have been paid during 2020, and there are no payments remaining as of December 31, 2020.
2020 Involuntary Separation Program
During the second quarter of 2020, the Company implemented the ISP restructuring program. Under the ISP, the Company notified approximately 191 employees of their employment termination with aggregate severance costs and other benefits amounting to $11.8 million. All notified employees have exited during 2020 and an insignificant amount remained accrued as of December 31, 2020. The Company currently does not anticipate additional employee terminations under this program.
General workforce reduction
In addition to the VSP and the ISP, the Company undertook certain general workforce reduction measures during 2020.
During the first three quarters of 2020, the Company notified approximately 153 employees of their employment termination with aggregate severance costs and other benefits amounting $6.2 million. All notified employees have exited during 2020 and an insignificant amount remained accrued as of December 31, 2020.
During the fourth quarter of 2020, the Company notified approximately 106 employees of their employment termination with aggregate severance costs and other benefits amounting to approximately $6.1 million, of which 67 employees have exited as of the end of the year. As of December 31, 2020, $5.3 million remained accrued and is expected to be paid during the first quarter of 2021.
Year ended December 31, 2019:
General workforce reductions and post-Quantenna acquisition restructuring
During the first quarter of 2019, the Company approved and began to implement certain restructuring actions aimed at cost savings, primarily through workforce reductions. As of December 31, 2019, the Company had notified approximately 143 employees of their employment termination, all of whom had exited by December 31, 2019. For the year ended December 31, 2020, the expense for this program amounted to $8.4 million, all of which was paid as of December 31, 2019.
Following the acquisition of Quantenna and during the quarter ended June 28, 2019, the Company implemented a cost-reduction plan resulting in the elimination of approximately eight executive positions from Quantenna’s workforce, primarily as a result of redundancies. During the year ended December 31, 2019, the Company terminated an additional ten employees. The total restructuring expense of $15.7 million was attributable to the accelerated vesting of stock awards previously issued by Quantenna, executive retention and other severance benefits. All severance benefits for this program were paid as of December 31, 2019.
Year ended December 31, 2018:
The Company did not have any significant restructuring activities during the year ended December 31, 2018.
The Company continues to evaluate employee positions and locations for potential efficiencies and may incur additional charges in the future.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8: Balance Sheet Information
Certain significant amounts included in the Company's Consolidated Balance Sheets consist of the following (in millions):

| As of
| December 31, 2020 |  | December 31, 2019
Inventories: |  |  |
Raw materials | $ | 135.7 |  |  | $ | 138.4 |
Work in process | 829.7 |  |  | 772.9 |
Finished goods | 286.0 |  |  | 321.1 |
| $ | 1,251.4 |  |  | $ | 1,232.4 |
Property, plant and equipment, net: |  |  |
Land | $ | 119.7 |  |  | $ | 125.2 |
Buildings | 850.0 |  |  | 860.6 |
Machinery and equipment | 4,538.0 |  |  | 4,275.2 |
Property, plant and equipment, gross | 5,507.7 |  |  | 5,261.0 |
Less: Accumulated depreciation | (2,995.4) |  |  | (2,669.4) |
| $ | 2,512.3 |  |  | $ | 2,591.6 |
Accrued expenses: |  |  |
Accrued payroll and related benefits | $ | 166.8 |  |  | $ | 153.4 |
Sales related reserves | 233.3 |  |  | 247.3 |
Income taxes payable | 25.5 |  |  | 22.5 |
Other | 144.4 |  |  | 115.6 |
| $ | 570.0 |  |  | $ | 538.8 |

Assets classified as held-for-sale, consisting primarily of land and buildings, are required to be recorded at the lower of carrying value or fair value less any costs to sell. The carrying value of these assets as of December 31, 2020 was $7.4 million, and is reported as other current assets on the Company’s Consolidated Balance Sheet.
Depreciation expense for property, plant and equipment, including amortization of finance leases, totaled $444.1 million, $409.7 million and $359.3 million for 2020, 2019 and 2018, respectively.
Included within sales related reserves are ship and credit reserves for distributors amounting to $180.2 million and $178.7 million as of December 31, 2020 and 2019, respectively.
Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements. The Company's existing leases do not contain significant restrictive provisions or residual value guarantees; however, certain leases contain renewal options and provisions for payment of real estate taxes, insurance and maintenance costs by the Company.
The components of lease expense are as follows (in millions):

| Year Ended
| December 31, 2020 |  | December 31, 2019 |
Operating lease | $ | 38.2 |  |  | 35.0 |  |
Variable lease | 4.2 |  |  | 4.0 |  |
Short-term lease | 4.1 |  |  | 2.6 |  |
Total lease expense | $ | 46.5 |  |  | 41.6 |  |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The lease liabilities included in the following captions in the Consolidated Balance Sheet are as follows (in millions):

| As of
| December 31, 2020 |  | December 31, 2019
Accrued expenses and other current liabilities | $ | 32.2 |  |  | 26.1 |
Other long-term liabilities | 115.7 |  |  | 87.9 |
Total lease liabilities | $ | 147.9 |  |  | 114.0 |

Operating lease assets of $136.3 million and $110.2 million are included in other assets in the Consolidated Balance Sheet as of December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020, the weighted-average remaining lease-term was 6.9 years and the weighted-average discount rate was 4.9%.
As of December 31, 2020, there was an insignificant amount of commitments for operating leases that have not yet commenced. The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Balance Sheet as of December 31, 2020 is as follows (in millions):

2021 | $ | 36.5 |
2022 | 30.1 |
2023 | 23.1 |
2024 | 20.8 |
2025 | 14.2 |
Thereafter | 49.9 |
Total lease payments | $ | 174.6 |
Less: Interest | (26.7) |
Total lease liabilities | $ | 147.9 |

Total rent expense associated with operating leases for 2018 was $43.6 million.

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ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9: Long-Term Debt
The Company's long-term debt consists of the following (annualized interest rates, dollars in millions):

| As of
| December 31, 2020 |  | December 31, 2019
Amended Credit Agreement: |  |  |
Revolving Credit Facility due 2024, interest payable monthly at 1.90% and 3.30%, respectively | $ | 700.0 |  |  | $ | 800.0 |
Term Loan "B" Facility due 2026, interest payable monthly at 2.15% and 3.80%, respectively | 1,614.5 |  |  | 1,630.9 |
3.875% Notes due 2028 (1) | 700.0 |  |  | — |
1.00% Notes due 2020 (2) | — |  |  | 690.0 |
1.625% Notes due 2023 (3) | 575.0 |  |  | 575.0 |
Other long-term debt (4) | — |  |  | 53.3 |
Gross long-term debt, including current maturities | 3,589.5 |  |  | 3,749.2 |
Less: Debt discount (5) | (69.7) |  |  | (102.7) |
Less: Debt issuance costs (6) | (28.5) |  |  | (34.0) |
Net long-term debt, including current maturities | 3,491.3 |  |  | 3,612.5 |
Less: Current maturities | (531.6) |  |  | (736.0) |
Net long-term debt | $ | 2,959.7 |  |  | $ | 2,876.5 |

_______________________
(1)Interest is payable on March 1 and September 1 of each year at 3.875% annually.
(2)Interest was payable on June 1 and December 1 of each year at 1.00% annually. Balance was fully repaid during 2020.
(3)Interest is payable on April 15 and October 15 of each year at 1.625% annually.
(4)Consisted 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.
(5)Debt discount of $6.5 million and zero for the 3.875% Notes, zero and $20.4 million for the 1.00% Notes, $54.2 million and $71.8 million for the 1.625% Notes and $9.0 million and $10.5 million for the Term Loan "B" Facility, in each case as of December 31, 2020 and December 31, 2019, respectively.
(6)Debt issuance costs of $2.3 million and zero for the 3.875% Notes, zero and $2.8 million for the 1.00% Notes, $5.2 million and $6.9 million for the 1.625% Notes and $21.0 million and $24.3 million for the Term Loan "B" Facility, in each case as of December 31, 2020 and December 31, 2019, respectively.
Maturities
Expected maturities relating to the Company’s gross long-term debt (including current maturities) as of December 31, 2020 are as follows (in millions):

|  | Annual Maturities
2021 |  | $ | 591.4 |
2022 |  | 16.3 |
2023 |  | 16.3 |
2024 |  | 716.4 |
2025 |  | 16.3 |
Thereafter |  | 2,232.8 |
Total |  | $ | 3,589.5 |

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ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Amended Credit Agreement
The Company obtained capital for the acquisition of Fairchild and other general corporate purposes under a Credit Agreement dated as of April 15, 2016, by and among the Company, as borrower, the several lenders party thereto, Deutsche Bank AG, New York Branch, as administrative agent and collateral agent, and certain other parties (as subsequently amended, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a $1.97 billion revolving credit facility (the "Revolving Credit Facility") and a $2.4 billion term loan "B" facility (the “Term Loan "B" Facility”).
Amendments to the Amended Credit Agreement
Between 2016 and 2019, the Company, the Guarantors (as defined in the Amended Credit Agreement), the several lenders party thereto and the Agent (as defined in the Amended Credit Agreement) entered into seven amendments to the Amended Credit Agreement. These amendments, among others, reduced the interest rates payable under the Term Loan "B" Facility and the Revolving Credit Facility, increased the amounts that may be borrowed under the Term Loan "B" Facility and the Revolving Credit Facility and also amended certain financial covenants. As part of the seventh amendment to the Amended Credit Agreement executed during 2019, the Company drew an additional $500.0 million under Term Loan "B" Facility and utilized the additional borrowings to repay $500.0 million of the outstanding balance under the Revolving Credit Facility. The maturity date of borrowings under the Revolving Credit Facility and Term Loan "B" Facility currently is June 12, 2024 and September 19, 2026, respectively.
On June 23, 2020, the Company entered into the Eighth Amendment ("Eighth Amendment") to the Amended Credit Agreement to change certain defined terms and to modify certain terms and conditions of the Amended Credit Agreement to align with the domestication of certain foreign subsidiaries. There was no impact to the consolidated financial statements due to the Eighth Amendment. See Note 16: ''Income Taxes'' for additional information on the domestication.
The obligations under the Amended Credit Agreement are guaranteed by the Guarantors and collateralized by a pledge of substantially all of the assets of the Company and the Guarantors, including a pledge of the equity interests in certain of the Company’s domestic and first tier foreign subsidiaries, subject to customary exceptions. The obligations under the Amended Credit Agreement are also collateralized by mortgage on certain real property assets of the Company and its domestic subsidiaries.
The Amended Credit Agreement includes a maximum total net leverage ratio as a financial maintenance covenant, which the Company was in compliance as of December 31, 2020. It also contains other customary affirmative and negative covenants and events of default.
Loss on debt refinancing and prepayment
In connection with an amendment during 2019, the Company incurred fees to lenders, third parties, legal and other costs amounting to $17.5 million, of which a significant portion was capitalized. Management recorded a loss on debt refinancing amounting to $5.8 million, which included a proportionate write-off of the unamortized debt discount and issuance costs and the third party fees incurred for the transaction. In connection with another amendment during 2019, the Company incurred third party, legal and other fees of $6.6 million and recorded $0.4 million as loss on extinguishment of debt, while capitalizing the remaining cost incurred.
The loss on debt refinancing and prepayment amounted to $6.2 million for the year ended December 31, 2019. No such losses were recorded during the year ended December 31, 2020.
Borrowing and repayments under the Revolving Credit Facility
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 uncertainty resulting from the impact of the COVID-19 pandemic. Due to better macroeconomic and business conditions, on August 21, 2020, the Company used the net proceeds from the issuance of the 3.875% Notes along with cash on hand to repay $1,200 million of such outstanding borrowings. Additionally, on December 31, 2020, the Company repaid $65.0 million of outstanding borrowings under the Revolving Credit Facility. As of December 31, 2020, approximately $1,269.0 million was available for future borrowings under the Revolving Credit Facility.
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ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Issuance of 3.875% Notes
On August 21, 2020, the Company completed its private offering of $700.0 million aggregate principal amount of the 3.875% Notes. The 3.875% Notes were offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act and outside the United States pursuant to Regulation S under the Securities Act. The 3.875% Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company’s subsidiaries that is a borrower or Guarantor under the Amended Credit Agreement and will also be fully and unconditionally guaranteed by any of the Company’s subsidiaries that becomes a borrower or guarantees any indebtedness under the Amended Credit Agreement in the future.
The 3.875% Notes and the guarantees thereof are the Company’s and the Guarantors’ general unsecured obligations, respectively, and (i) rank equally in right of payment with all of the Company’s and the Guarantors’ existing and future senior indebtedness (including the 1.625% Notes); (ii) rank senior to any subordinated indebtedness that the Company or the Guarantors may incur; (iii) are effectively subordinated to all of the Company’s or the Guarantors’ existing and future secured indebtedness (including indebtedness under the Amended Credit Agreement), in each case, to the extent of the value of the assets securing such indebtedness; and (iv) are structurally subordinated in right of payment to all existing and future obligations of the Company’s subsidiaries that are not Guarantors of the 3.875% Notes.
The 3.875% Notes bear interest at a rate of 3.875% per year, payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2021, and will mature on September 1, 2028, unless earlier redeemed or repurchased by the Company. The original issue discount and debt issuance costs incurred by the Company in connection with the offering of the 3.875% Notes amounted to $9.4 million, which has been capitalized and will be amortized to interest expense through the maturity date of September 1, 2028. The net proceeds from the issuance of the 3.875% Notes were used entirely to repay borrowings under the Revolving Credit Facility.
Maturity and Settlement of 1.00% Notes due 2020
The 1.00% Notes matured on December 1, 2020. The maturity of the notes resulted in the Company paying $690.0 million in cash to holders of the 1.00% Notes, representing the principal portion of the 1.00% Notes, using the available cash and cash equivalents.
The excess over the principal amount was settled on December 1, 2020 by issuing shares of the Company's common stock held in treasury. The transaction resulted in a net impact of $88.7 million to additional paid-in capital and treasury stock, measured based on the acquisition cost of the reissued shares with no overall impact to equity. At the time of issuance of the 1.00% Notes, the Company concurrently entered into hedge transactions with certain of the initial purchasers of the 1.00% Notes. According to the terms of these hedge contracts, on December 1, 2020, the Company repurchased an equivalent amount of shares of its common stock at the prevailing fair market value, to effectively offset the issuance of shares, which resulted in an impact of $321.0 million to additional paid-in capital and treasury stock, with no overall impact to equity.
Also at the time of issuance of the 1.00% Notes, the Company sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase the equivalent number of shares of the Company’s common stock at a price of $25.96 per share from the Company. These warrants can be exercised by the holders beginning in March and expire no later than April 2021. The Company currently anticipates the holders to exercise the warrants to purchase up to 37.3 million shares of common stock from the Company, which will be settled on a net-share basis depending on the average stock price on the day of exercise.
1.625% Notes due 2023
On March 31, 2017, the Company completed a private placement of $575.0 million of its 1.625% Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 1.625% Notes are governed by an indenture between the Company, as the issuer, the guarantors named therein and Wells Fargo Bank, National Association, as trustee (the "1.625% Indenture"). The 1.625% Notes are convertible by holders into cash and shares of the Company’s common stock at a conversion rate of 48.2567 shares of common stock per $1,000 principal amount of notes (subject to adjustment in certain events), which is equivalent to an initial conversion price of $20.72 per share of common stock. The Company will settle conversion of all 1.625% Notes validly tendered for conversion in cash, shares of the Company’s common stock or a combination of cash and shares to be determined by the Company.
Holders may convert their 1.625% only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading
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days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 1.625% Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (iii) upon the occurrence of specified corporate transactions described in the 1.625% Indenture; or (iv) on or after July 15, 2023 (each considered a "trigger"). Upon conversion of the 1.625% Notes, the Company will deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.
The last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on December 31, 2020 was greater than or equal to $26.94 (130% of the conversion price) on each applicable trading day. As a result, the Company recorded the outstanding balance of the 1.625% Notes amounting to $515.6 million, net of unamortized discount and issuance costs, as a current portion of long-term debt as of December 31, 2020, and as required by the 1.625% Indenture, gave notice to the trustee, the conversion agent and each holder on December 31, 2020 that each holder has the right to surrender any portion of its 1.625% Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending March 31, 2021 (and only during such calendar quarter unless the trigger remains) pursuant to the terms of the 1.625% Indenture.
Other Long-term Debt
Note Payable to Fujitsu
On October 1, 2018, the Company assumed a yen-denominated non-collateralized loan obligation amounting to $50.6 million as a result of the Company acquiring a majority ownership in OSA. Amortization and maturity of the loan was at the request of the lender, FSL. Upon acquiring 100% ownership in OSA, the Company repaid the balance in full during the year ended December 31, 2020.
Note 10: Earnings Per Share and Equity
Earnings Per Share
Net income per share of common stock attributable to ON Semiconductor Corporation is shown below (in millions, except per share data):

|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Net income attributable to ON Semiconductor Corporation |  | $ | 234.2 |  |  | $ | 211.7 |  |  | $ | 627.4 |
Basic weighted-average shares of common stock outstanding |  | 410.7 |  |  | 410.9 |  |  | 423.8 |
Add: Incremental shares for: |  |  |  |  |  |
Dilutive effect of share-based awards |  | 1.9 |  |  | 1.9 |  |  | 4.3 |
Dilutive effect of convertible notes and warrants |  | 6.2 |  |  | 3.2 |  |  | 7.8 |
Diluted weighted average shares of common stock outstanding |  | 418.8 |  |  | 416.0 |  |  | 435.9 |
Net income per share of common stock attributable to ON Semiconductor Corporation: |  |  |  |  |  |
Basic |  | $ | 0.57 |  |  | $ | 0.52 |  |  | $ | 1.48 |
Diluted |  | $ | 0.56 |  |  | $ | 0.51 |  |  | $ | 1.44 |

Basic income per share of common stock is computed by dividing net income attributable to the Company by the weighted average number of shares of common stock outstanding during the period.
To calculate the diluted weighted-average shares of common stock outstanding, treasury stock method has been applied to calculate the number of incremental shares from the assumed issuance of shares relating to RSUs. Share-based awards of approximately 0.8 million, 0.8 million and 0.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, were excluded as the impact was considered to be anti-dilutive.
The dilutive impact related to the Company’s 1.00% Notes and 1.625% Notes, for the period such notes were outstanding, has
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been 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. The 1.00% Notes matured and were repaid and settled on December 1, 2020. While the dilutive impact of the warrants that were issued concurrently with the issuance of the 1.00% Notes which have an exercise price of $25.96 have been included in the calculation of diluted weighted-average common shares outstanding, the warrants issued concurrently with the issuance of the 1.625% Notes which have an exercise price of $30.70 were still anti-dilutive and excluded. Prior to conversion, the convertible note hedges are not considered for purposes of the earnings per share calculations, as their effect would be anti-dilutive. Upon conversion, the convertible note hedges are expected to offset the dilutive effect of the 1.625% Notes when the stock price is above $20.72 per share.
Equity
Share Repurchase Programs
On December 1, 2014, the Company announced the "Capital Allocation Policy" under which the Company intends to return to stockholders approximately 80 percent of free cash flow, less repayments of long-term debt, subject to a variety of factors, including the strategic plans, market and economic conditions and the discretion of the Board of Directors. For the purposes of the Capital Allocation Policy, the Company defines "free cash flow" as net cash provided by operating activities less purchases of property, plant and equipment.
On December 1, 2014, the Company announced the 2014 Share Repurchase Program pursuant to the Capital Allocation Policy. Under the Company’s 2014 Share Repurchase Program, the Company had the ability to repurchase up to $1.0 billion (exclusive of fees, commissions and other expenses) of the Company’s common stock over a period of four years from December 1, 2014, subject to certain contingencies. The 2014 Share Repurchase Program, which did not require the Company to purchase any particular amount of common stock and was subject to the discretion of the Board of Directors, expired on November 30, 2018 with approximately $288.2 million remaining unutilized. The Company repurchased common stock for an aggregate purchase price of approximately $315.0 million under the 2014 Share Repurchase Program during the year ended December 31, 2018.
On November 15, 2018, the Company announced the 2018 Share Repurchase Program pursuant to the Capital Allocation Policy. Under the 2018 Share Repurchase Program, the Company is authorized to repurchase up to $1.5 billion of its common shares from December 1, 2018 through December 31, 2022, exclusive of any fees, commissions or other expenses. The Company may repurchase its common stock from time to time in privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, or by any combination of such methods or other methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, corporate and regulatory requirements, restrictions under the Company’s debt obligations and other market and economic conditions. There were $65.3 million and $138.9 million in repurchases of the Company's common stock under the 2018 Share Repurchase Program during the years ended December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020, the remaining authorized amount under the 2018 Share Repurchase Program was $1,295.8 million.
Information relating to the Company's 2018 and 2014 Share Repurchase Programs is as follows (in millions, except per share data):

|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Number of repurchased shares (1) |  | 3.6 |  |  | 7.8 |  |  | 16.8 |
Aggregate purchase price |  | $ | 65.3 |  |  | $ | 138.9 |  |  | $ | 315.0 |
Fees, commissions and other expenses |  | 0.1 |  |  | 0.1 |  |  | 0.3 |
Total cash used for share repurchases |  | $ | 65.4 |  |  | $ | 139.0 |  |  | $ | 315.3 |
Weighted-average purchase price per share (2) |  | $ | 18.08 |  |  | $ | 17.89 |  |  | $ | 18.78 |
Available under the 2018 Share Repurchase Program |  | $ | 1,295.8 |  |  | $ | 1,361.1 |  |  | $ | 1,500.0 |

_______________________
(1) None of these shares had been reissued or retired as of December 31, 2020, but may be reissued or retired later.
(2) Exclusive of fees, commission or other expenses
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Reissuance of shares held in treasury stock
In connection with the maturity of the 1.00% Notes, the Company reissued shares of common stock held in treasury to settle the excess over the principal amount. This was the first time the Company reissued shares held in treasury stock and accounted for such reissuance on a first-in, first-out basis. Pursuant to the hedge transactions entered concurrently with the issuance of the 1.00% Notes, the Company repurchased an equivalent number of shares of its common stock at the prevailing fair market value, to effectively offset the reissuance from treasury stock. This repurchase did not reduce the authorized amount remaining under the 2018 Share Repurchase Program.
Shares for Restricted Stock Units Tax Withholding
Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the accompanying consolidated financial statements. Shares with a fair market value equal to the applicable amount of the employee withholding taxes due are withheld 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 years ended December 31, 2020, 2019 and 2018 were $20.0 million, $33.5 million and $31.6 million, respectively, for which the Company withheld approximately 1.1 million, 1.6 million and 1.3 million shares of common stock, respectively, that were underlying the RSUs that vested. None of these shares had been reissued or retired as of December 31, 2020, but may be reissued or retired later. These deemed repurchases in connection with tax withholding upon vesting were not made under the 2018 Share Repurchase Program or 2014 Share Repurchase Program, and the amounts spent in connection with such deemed repurchases did not reduce the authorized amount remaining under the 2018 Share Repurchase Program.
Non-Controlling Interest
Leshan operates assembly and test operations in Leshan, China. The Company owns 80% of the outstanding equity interests in Leshan, and the results of Leshan have been consolidated in the Company's financial statements. At December 31, 2020, the Leshan non-controlling interest balance was $19.6 million. This balance included the Leshan non-controlling interest's $2.2 million share of the earnings for the year ended December 31, 2020 offset by $5.0 million of dividends paid to the non-controlling shareholder. At December 31, 2019, the Leshan non-controlling interest balance was $22.4 million. This balance included the Leshan non-controlling interest's $2.2 million share of the earnings for the year ended December 31, 2019 offset by $2.3 million of dividends paid to the non-controlling shareholder.
OSA operates a front-end wafer fabrication facility in Aizuwakamatsu, Japan. During 2018, the Company acquired an incremental 50% equity interest in OSA for approximately $24.6 million, net of cash acquired, to increase its ownership to 60% of the outstanding equity interest. During 2020, the Company acquired the remaining 40% of the equity interest in OSA from FSL, whereby OSA became a wholly-owned subsidiary of the Company. 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 in settlement of the purchase price from FSL during the year ended December 31, 2020. The results of OSA have been consolidated in the Company’s financial statements since 2018 when the Company became the majority owner.
Stockholders' Rights Plan
On June 7, 2020, the Board of Directors authorized and declared a dividend of one preferred share purchase right (a "Right") to be issued as of 5:00 p.m. New York City time on June 18, 2020 for each outstanding share of common stock to the stockholders of record on that date. In connection with the Rights, the Company and Computershare Trust Company, N.A., as rights agent, entered into a Rights Agreement, dated as of June 8, 2020 (the "Rights Agreement"). Each Right entitles the registered holder of common stock to purchase from the Company one one-hundred-thousandth of a share (a "Unit") of Series B Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $100.80 per Unit (the "Purchase Price"), subject to adjustment as provided in the Rights Agreement. Subject to certain exceptions, if a person or group becomes the beneficial owner of more than 15% of the Company’s outstanding shares of common stock, the Rights will become exercisable for that number of shares of Common Stock having a market value of two times the Purchase Price. The Rights, which have a de minimis value as of December 31, 2020, expire on the earlier of (i) the close of business on June 7, 2021, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board of Directors, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement.
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Note 11: Share-Based Compensation
Total share-based compensation expense related to the Company's RSUs, stock grant awards and ESPP were recorded within the Consolidated Statements of Operations and Comprehensive Income as follows (in millions):

|  | Year Ended December 31,
|  | 2020 |  | 2019 |  | 2018
Cost of revenue |  | $ | 11.5 |  |  | $ | 10.6 |  |  | $ | 7.0 |
Research and development |  | 18.2 |  |  | 17.0 |  |  | 14.3 |
Selling and marketing |  | 12.9 |  |  | 14.8 |  |  | 14.1 |
General and administrative |  | 25.1 |  |  | 37.0 |  |  | 42.9 |
Share-based compensation expense |  | 67.7 |  |  | 79.4 |  |  | 78.3 |
Income tax benefit |  | (14.2) |  |  | (16.7) |  |  | (16.4) |
Share-based compensation expense, net of taxes |  | $ | 53.5 |  |  | $ | 62.7 |  |  | $ | 61.9 |

At December 31, 2020, total unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $74.5 million, which is expected to be recognized over a weighted-average period of 1.6 years. There was an insignificant amount of stock options exercised during the year ended December 31, 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.
Share-Based Compensation Information
The fair value per unit of RSU and stock grant award is determined on the grant date. There were no employee stock options granted during the years ended December 31, 2020, 2019 and 2018. Share-based compensation expense is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The annualized pre-vesting forfeitures for RSUs were estimated to be approximately 5% for the years ended December 31, 2020, 2019 and 2018.
Plan Descriptions
On March 23, 2010, the Company adopted the Amended and Restated SIP, which was subsequently approved by the Company's stockholders at the annual stockholder meeting on May 18, 2010 and reapproved by the Company’s stockholders at the annual stockholder meeting on May 20, 2015. The Amended and Restated SIP provides key employees, directors and consultants with various equity-based incentives as described in the plan document. The Amended and Restated SIP is administered by the Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules. On May 15, 2012, stockholders approved certain amendments to the Amended and Restated SIP to increase the number of shares of common stock subject to all awards under the Amended and Restated SIP by 33.0 million. On May 17, 2017, stockholders approved certain amendments to the Amended and Restated SIP to increase the number of shares of common stock subject to all awards under the Amended and Restated SIP by 27.9 million to 87.0 million, exclusive of shares of common stock subject to awards that were previously granted pursuant to the 2000 SIP that have or will become available for grant pursuant to the Amended and Restated SIP.
Generally, RSUs granted under the Amended and Restated SIP vest ratably over three years for awards with service conditions 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. Generally, upon the termination of an RSU holder's employment, all unvested RSUs will immediately cancel, except under circumstances where the service condition has been fulfilled.
As of December 31, 2020, there was an aggregate of 16.5 million shares of common stock available for grant under the Amended and Restated SIP.
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Restricted Stock Units
A roll forward of the beginning to ending balance of RSUs outstanding as of December 31, 2020 is as follows (number of shares in millions):

|  | Number of Shares |  | Weighted-Average Grant Date Fair Value
Nonvested shares of RSUs at December 31, 2019 |  | 8.9 |  |  | $ | 20.84 |
Granted |  | 6.5 |  |  | 19.50 |
Released |  | (3.3) |  |  | 18.57 |
Canceled |  | (0.8) |  |  | 20.86 |
Nonvested shares of RSUs at December 31, 2020 |  | 11.3 |  |  | 20.73 |

During 2020, the Company awarded 2.7 million RSUs to certain officers and employees of the Company that vest upon the achievement of certain performance criteria and market conditions. The number of units expected to vest is evaluated each reporting period and compensation expense is recognized for those units for which achievement of the performance criteria is considered probable. Compensation expense for RSUs with market conditions are recognized based on the grant date fair value irrespective of the achievement of the condition.
As of December 31, 2020, unrecognized compensation expense, net of estimated forfeitures related to non-vested RSUs granted under the Amended and Restated SIP with service, performance and market conditions, was $69.7 million, $0.8 million and $4.0 million, respectively. For RSUs with time-based service conditions, expense is being recognized over the vesting period; for RSUs with performance criteria, expense is recognized over the period when the performance criteria is expected to be achieved; for RSUs with market conditions, expense is recognized over the period in which the condition is assessed irrespective of whether it would be achieved or not. Unrecognized compensation cost for awards with certain performance criteria that are not expected to be achieved is not included here. Total compensation expense related to performance-based, service-based, and market-based RSUs was $58.1 million for the year ended December 31, 2020, which included $52.5 million for RSUs with time-based service conditions that were granted in 2020 and prior that are expected to vest.
Stock Grant Awards
During the year ended December 31, 2020, the Company granted 0.1 million shares of stock under stock grant awards to certain directors of the Company with immediate vesting at a weighted-average grant date fair value of $18.19 per share. Total compensation expense related to stock grant awards for the year ended December 31, 2020 was $1.5 million.
Employee Stock Purchase Plan
On February 17, 2000, the Company adopted the ESPP. Subject to local legal requirements, each of the Company's eligible employees may elect to contribute up to 10% of eligible payroll applied towards the purchase of shares of the Company's common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. Employees are limited to annual purchases of $25,000 under this plan. In addition, during each quarterly offering period, employees may not purchase stock exceeding the lesser of: (i) 500 shares; or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During the years ended December 31, 2020, 2019 and 2018 employees purchased approximately 1.8 million, 1.7 million and 1.5 million shares, respectively, under the ESPP. On May 17, 2017, stockholders approved an amendment to the Company’s ESPP, which increased the number of shares reserved and available to be issued pursuant to the ESPP to a total of 28.5 million. As of December 31, 2020, there were approximately 3.0 million shares available for issuance under the ESPP. Total compensation expense related to the ESPP for the year ended December 31, 2020 was $8.1 million.
Note 12: Employee Benefit Plans
Defined Benefit Pension Plans
The Company maintains defined benefit pension plans for employees of certain of its foreign subsidiaries. Such plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. The
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Company recognizes the aggregate amount of all overfunded plans as assets and the aggregate amount of all underfunded plans as liabilities in its Consolidated Balance Sheets. The Company's expected long-term rate of return on plan assets is updated at least annually, taking into consideration its asset allocation, historical returns on similar types of assets and the current economic environment. For estimation purposes, the Company assumes its long-term asset mix will generally be consistent with the current mix. The Company determines its discount rates using highly rated corporate bond yields and government bond yields.
Benefits under all of the plans are valued utilizing the projected unit credit cost method. The Company's policy is to fund its defined benefit plans in accordance with local requirements and regulations. The funding is primarily driven by the current assessment of the economic environment and projected benefit payments of foreign subsidiaries. The measurement date for determining the defined benefit obligations for all plans is December 31 of each year.
The Company recognizes actuarial gains and losses during the period the Company's annual pension plan actuarial valuations are prepared, which generally occurs during the fourth calendar quarter of each year, or during any interim period where a revaluation is deemed necessary. For the years ended December 31, 2020, 2019 and 2018, the Company recognized actuarial losses amounting to $4.0 million, $15.6 million and $6.1 million, respectively. For 2020, the net actuarial loss of $8.1 million which was primarily due to a decrease in the discount rates and other insignificant changes in actuarial assumptions, was partially offset by better than expected return on plan assets amounting to $4.1 million.
Following is a summary of the status of the Company's foreign defined benefit pension plans and the net periodic pension cost (amounts in millions):

|  | Year Ended December 31,
|  | 2020 |  | 2019 |  | 2018
Service cost |  | $ | 10.9 |  |  | $ | 9.4 |  |  | $ | 9.6 |
Interest cost |  | 4.7 |  |  | 5.0 |  |  | 4.7 |
Expected return on plan assets |  | (6.3) |  |  | (6.0) |  |  | (6.1) |
Curtailment gain |  | (1.6) |  |  | — |  |  | (0.3) |
Actuarial losses |  | 4.0 |  |  | 15.6 |  |  | 6.1 |
Total net periodic pension cost |  | $ | 11.7 |  |  | $ | 24.0 |  |  | $ | 14.0 |
Weighted average assumptions |  |  |  |  |  |
Discount rate used for net periodic pension costs |  | 1.43 | % |  | 1.74 | % |  | 1.66 | %
Discount rate used for pension benefit obligations |  | 1.31 | % |  | 1.43 | % |  | 1.74 | %
Expected return on plan assets |  | 3.06 | % |  | 3.23 | % |  | 3.18 | %
Rate of compensation increase |  | 3.26 | % |  | 3.07 | % |  | 3.22 | %

The long-term rate of return on plan assets was determined using the weighted-average method, which incorporates factors that include the historical inflation rates, interest rate yield curve and current market conditions.
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|  | 2020 |  | 2019
Change in projected benefit obligation (PBO) |  |  |  |
Projected benefit obligation at the beginning of the year |  | $ | 322.9 |  |  | $ | 290.8 |
Service cost |  | 10.9 |  |  | 9.4 |
Interest cost |  | 4.7 |  |  | 5.0 |
Net actuarial loss |  | 8.1 |  |  | 25.8 |
Benefits paid by plan assets |  | (8.9) |  |  | (5.7) |
Benefits paid by the Company |  | (7.4) |  |  | (3.8) |
Curtailments and settlements |  | (1.6) |  |  | (0.2) |
Translation and other loss |  | 22.5 |  |  | 1.6 |
Projected benefit obligation at the end of the year |  | $ | 351.2 |  |  | $ | 322.9 |
Accumulated benefit obligation at the end of the year |  | $ | 288.3 |  |  | $ | 258.8 |
Change in plan assets |  |  |  |
Fair value of plan assets at the beginning of the year |  | $ | 190.2 |  |  | $ | 174.9 |
Actual return on plan assets |  | 10.4 |  |  | 16.2 |
Benefits paid from plan assets |  | (8.9) |  |  | (5.7) |
Employer contributions |  | 4.3 |  |  | 4.6 |
Settlements |  | — |  |  | (0.2) |
Translation and other gain |  | 13.3 |  |  | 0.4 |
Fair value of plan assets at the end of the year |  | $ | 209.3 |  |  | $ | 190.2 |
|  | As of December 31,
|  | 2020 |  | 2019
Plans with underfunded or non-funded projected benefit obligation (1) |  |  |  |
Projected benefit obligation |  | $ | 248.7 |  |  | $ | 314.7 |
Fair value of plan assets |  | 97.7 |  |  | 180.5 |
Plans with underfunded or non-funded accumulated benefit obligation |  |  |  |
Accumulated benefit obligation |  | $ | 189.4 |  |  | $ | 193.6 |
Fair value of plan assets |  | 97.7 |  |  | 115.2 |
Amounts recognized in the balance sheet consist of |  |  |  |
Non-current assets |  | $ | 9.0 |  |  | $ | — |
Current liabilities |  | (0.3) |  |  | (0.3) |
Non-current liabilities |  | (150.6) |  |  | (132.4) |
Funded status |  | $ | (141.9) |  |  | $ | (132.7) |

(1) Certain pension plans that were in an underfunded status as of December 31, 2019 changed to an overfunded status as of December 31, 2020.
Plan Assets
The Company's overall investment strategy is to focus on stable and low credit risk investments aimed at providing a positive rate of return to the plan assets. The Company has an investment mix with a wide diversification of asset types and fund strategies that are aligned with each region and foreign location's economy and market conditions. Investments in government securities are generally guaranteed by the respective government offering the securities. Investments in corporate bonds, equity securities, and foreign mutual funds are made with the expectation that these investments will give an adequate rate of long-term returns despite periods of high volatility. Other types of investments include investments in cash deposits, money market funds and insurance contracts. Asset allocations are based on the anticipated required funding amounts, timing of benefit payments, historical returns on similar assets and the influence of the current economic environment.
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The following table sets forth, by level within the fair value hierarchy, a summary of investments measured at fair value and the asset allocations of the plan assets in the Company's foreign pension plans (in millions):

|  | As of December, 31, 2020
|  | Allocation |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Asset Category |  |  |  |  |  |  |  |  |  |
Cash/Money Markets |  | 2 | % |  | $ | 4.1 |  |  | $ | 4.1 |  |  | $ | — |  |  | $ | — |
Foreign Government/Treasury Securities (1) |  | 10 | % |  | 21.4 |  |  | 21.4 |  |  | — |  |  | — |
Corporate Bonds, Debentures (2) |  | 18 | % |  | 36.9 |  |  | — |  |  | 36.9 |  |  | — |
Equity Securities (3) |  | 23 | % |  | 48.5 |  |  | — |  |  | 48.5 |  |  | — |
Mutual Funds |  | 5 | % |  | 9.5 |  |  | — |  |  | 9.5 |  |  | — |
Investment and Insurance Contracts (4) |  | 42 | % |  | 88.9 |  |  | — |  |  | 31.4 |  |  | 57.5 |
|  | 100 | % |  | $ | 209.3 |  |  | $ | 25.5 |  |  | $ | 126.3 |  |  | $ | 57.5 |
|  | As of December, 31, 2019
|  | Allocation |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Asset Category |  |  |  |  |  |  |  |  |  |
Cash/Money Markets |  | 3 | % |  | $ | 4.5 |  |  | $ | 4.5 |  |  | $ | — |  |  | $ | — |
Foreign Government/Treasury Securities (1) |  | 10 | % |  | 19.4 |  |  | 19.4 |  |  | — |  |  | — |
Corporate Bonds, Debentures (2) |  | 19 | % |  | 35.3 |  |  | — |  |  | 35.3 |  |  | — |
Equity Securities (3) |  | 21 | % |  | 40.4 |  |  | — |  |  | 40.4 |  |  | — |
Mutual Funds |  | 4 | % |  | 8.0 |  |  | — |  |  | 8.0 |  |  | — |
Investment and Insurance Contracts (4) |  | 43 | % |  | 82.6 |  |  | — |  |  | 30.6 |  |  | 52.0 |
|  | 100 | % |  | $ | 190.2 |  |  | $ | 23.9 |  |  | $ | 114.3 |  |  | $ | 52.0 |

_______________________
(1) Includes investments primarily in guaranteed return securities.
(2) Includes investments in government bonds and corporate bonds of developed countries, emerging market government bonds, emerging market corporate bonds and convertible bonds.
(3) Includes investments in equity securities of developed countries and emerging markets.
(4) Includes certain investments with insurance companies that guarantee a minimum rate of return on the investment.
When available, the Company uses observable market data, including pricing on recently closed market transactions and quoted prices, which are included in Level 2. When data is unobservable, valuation methodologies using comparable market data are utilized and included in Level 3. Activity during the years ended December 31, 2020 and 2019, respectively, for plan assets with fair value measurement using significant unobservable inputs (Level 3) were as follows (in millions):

|  |  |  |  |  | Investment and Insurance Contracts |  |
Balance at December 31, 2018 |  |  |  |  |  | $ | 50.6 |  |  |
Actual return on plan assets |  |  |  |  |  | 3.3 |  |  |
Purchase, sales and settlements. net |  |  |  |  |  | (0.9) |  |  |
Foreign currency impact |  |  |  |  |  | (1.0) |  |  |
Balance at December 31, 2019 |  |  |  |  |  | $ | 52.0 |  |  |
Actual return on plan assets |  |  |  |  |  | 0.8 |  |  |
Purchase, sales and settlements, net |  |  |  |  |  | (0.3) |  |  |
Foreign currency impact |  |  |  |  |  | 5.0 |  |  |
Balance at December 31, 2020 |  |  |  |  |  | $ | 57.5 |  |  |

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The expected benefit payments from the Company's defined benefit plans from 2021 through 2025 and the five years thereafter are as follows (in millions):

2021 |  | $ | 7.0 |
2022 |  | 10.6 |
2023 |  | 14.0 |
2024 |  | 15.8 |
2025 |  | 17.9 |
Five years thereafter |  | 114.3 |
Total |  | $ | 179.6 |

The total underfunded status was $141.9 million at December 31, 2020. The Company expects to contribute $22.1 million during 2021 to its foreign defined benefit plans.
Defined Contribution Plans
The Company has a deferred compensation savings plan for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code (the "Code"). Eligible employees may contribute a percentage of their salary subject to certain limitations. The Company has elected to match 100% of employee contributions between 0% and 4% of their salary, with an annual limit of $11,400. The Company recognized $19.4 million, $18.1 million and $19.2 million of expense relating to matching contributions in 2020, 2019 and 2018, respectively.
Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $21.8 million, $20.6 million and $20.5 million relating to these plans for the years ended 2020, 2019 and 2018, respectively.
Note 13: Commitments and Contingencies
Purchase Obligations
The Company has agreements with suppliers, external manufacturers and other vendors for capital expenditures, inventory purchases, manufacturing services, information technology and other goods and services. The following is a schedule by year of future minimum purchase obligations under non-cancelable arrangements entered into during the ordinary course of business as of December 31, 2020 (in millions):

Year Ending December 31, |
2021 | $ | 524.9 |
2022 (1) | 598.9 |
2023 | 259.5 |
2024 | 248.0 |
2025 | 3.5 |
Thereafter | 3.5 |
Total | $ | 1,638.3 |

(1) During 2019, the Company incurred additional commitments related to the pending acquisition of a manufacturing facility, of which $70.0 million and $100.0 million were deposited with the seller during the years ended December 31, 2019 and 2020, respectively. The remaining commitment of $230.0 million will be owed on or around December 31, 2022.
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
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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, we ceased such monitoring and have 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. 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.
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.
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.
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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 December 31, 2020, the Company's Revolving Credit Facility included $15.0 million available for the issuance of letters of credit. There were $0.9 million letters of credit outstanding under the Revolving Credit Facility as of December 31, 2020, which reduced the Company's borrowing capacity. The Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $9.7 million as of December 31, 2020.
As part of obtaining financing in the ordinary course of business, the Company issued guarantees related to certain of its subsidiaries, which totaled $0.9 million as of December 31, 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.
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
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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, which 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, provide 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 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.
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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.
Patent Litigation with PI
On October 19, 2019, the Company and PI entered into a Settlement Agreement (the "Settlement Agreement") pursuant to which the parties agreed to withdraw all outstanding legal and administrative disputes on the terms set forth in a binding term sheet previously entered into by and among the Company and PI on October 4, 2019.
Pursuant to the Settlement Agreement, the Company paid PI $175.0 million in cash on October 22, 2019, and the parties have dismissed all previously pending litigation and administrative proceedings. In addition, each party agreed to release the other party from any claims to damages or monetary relief for alleged acts of patent infringement across the various patent infringement litigations and not to file any additional action for legal or equitable relief until June 30, 2023. Neither party granted any licenses to the other.
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. 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.
On July 31, 2020, the Company entered into a settlement agreement and release in respect of the dispute with Synnex and AcBel. On August 6, 2020, the Company paid its full aggregate liability of $6.0 million in accordance with the settlement agreement and all applicable claims were released.
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 14: 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 December, 31, 2020 |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |  |
Cash, cash equivalents: |  |  |  |  |  |  |  |
Demand and time deposits |  | $ | 8.5 |  |  | $ | 8.5 |  |  | — |  |  | — |

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|  |  |  | Fair Value Hierarchy
Description |  | As of December, 31, 2019 |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |  |
Cash, cash equivalents: |  |  |  |  |  |  |  |
Demand and time deposits |  | $ | 28.2 |  |  | $ | 28.2 |  |  | — |  |  | — |

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 value of the Company’s long-term borrowings are as follows (in millions):

| As of December 31,
| 2020 |  | 2019
| Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Long-term debt, including current portion (1) |  |  |  |  |  |  |
Convertible notes | $ | 515.6 |  |  | $ | 967.1 |  |  | $ | 1,163.1 |  |  | $ | 1,730.2 |
Long-term debt | 2,975.7 |  |  | 2,966.8 |  |  | 2,449.3 |  |  | 2,427.8 |

_______________________
(1) Long-term debt is carried on the Consolidated Balance Sheets at historical cost net of debt discount and issuance costs.
The fair value of the Company's 1.00% Notes (as of December 31, 2019), 3.875% Notes (as of December 31, 2020) and 1.625% Notes (as of December 31, 2020 and December 31, 2019) 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 December 31, 2020 and December 31, 2019.
Fair Values Measured on a Non-Recurring Basis
Our non-financial assets, such as property, plant and equipment, goodwill and intangible assets are recorded at fair value upon a business combination and are remeasured at fair value only if an impairment charge is recognized. The Company uses unobservable inputs to the valuation methodologies that are significant to the fair value measurements, and the valuations require management's judgment due to the absence of quoted market prices. The Company determines the fair value of its held and used assets, goodwill and intangible assets using an income, cost or market approach as determined reasonable.
As of December 31, 2020 and December 31, 2019, there were no non-financial assets included in the Company's Consolidated Balance Sheet that were remeasured at fair value on a non-recurring basis.
The following table shows the adjustments to fair value of certain of the Company's non-financial assets that had an impact on the Company's results of operations (in millions):

|  | Year Ended December 31,
|  | 2020 |  | 2019 |  | 2018
Nonrecurring fair value measurements |  |  |  |  |  |
Asset impairments (Level 3) |  | $ | 17.5 |  |  | $ | 3.4 |  |  | $ | 2.4 |
Goodwill and IPRD impairments (Level 3) |  | 1.3 |  |  | 1.6 |  |  | 6.8 |
|  | $ | 18.8 |  |  | $ | 5.0 |  |  | $ | 9.2 |

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Note 15: 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 December 31, 2020 and 2019, the Company had outstanding foreign exchange contracts with notional amounts of $263.4 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.
The following schedule summarizes the Company's net foreign exchange positions in U.S. dollars (in millions):

|  | As of December 31,
|  | 2020 |  | 2019
|  | Buy (Sell) |  | Notional Amount |  | Buy (Sell) |  | Notional Amount
Japanese Yen |  | $ | 71.2 |  |  | $ | 71.2 |  |  | $ | 49.8 |  |  | $ | 49.8 |
Philippine Peso |  | 57.2 |  |  | 57.2 |  |  | 36.4 |  |  | 36.4 |
Euro |  | 47.7 |  |  | 47.7 |  |  | — |  |  | — |
Korean Won |  | 34.4 |  |  | 34.4 |  |  | 18.1 |  |  | 18.1 |
Chinese Yuan |  | 17.7 |  |  | 17.7 |  |  | 20.2 |  |  | 20.2 |
Malaysian Ringgit |  | 11.7 |  |  | 11.7 |  |  | 20.4 |  |  | 20.4 |
Czech Koruna |  | — |  |  | — |  |  | 11.9 |  |  | 11.9 |
Other currencies - Buy |  | 12.4 |  |  | 12.4 |  |  | 21.9 |  |  | 21.9 |
Other currencies - Sell |  | (11.1) |  |  | 11.1 |  |  | (4.6) |  |  | 4.6 |
|  | $ | 241.2 |  |  | 263.4 |  |  | $ | 174.1 |  |  | $ | 183.3 |

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. For the years ended December 31, 2020, 2019 and 2018, realized and unrealized foreign currency transactions totaled a loss of $6.2 million, $5.0 million and $8.0 million, respectively. The realized and unrealized foreign currency transactions are included in other income (expense) in the Company's Consolidated Statements of Operations and Comprehensive Income.
Cash Flow Hedges
All derivatives are recognized on the balance sheet at their fair value and classified based on each instrument’s maturity date.
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.
The Company did not have outstanding derivatives for its foreign currency exposure designated as cash flow hedges as of December 31, 2020 and 2019. See Note 17: ''Changes in Accumulated Other Comprehensive Loss'' for the effective amounts
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related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive loss and the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2020.
Interest rate risk
The Company uses interest rate swap contracts to mitigate its exposure to interest rate fluctuations. On April 17, 2020, the Company entered into interest rate swap agreements for notional amounts totaling $1.25 billion (effective as of April 30, 2020) and $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.
The Company did not identify any ineffectiveness with respect to the notional amounts of the interest rate swap contracts effective as of December 31, 2020 and December 31, 2019 amounting to $1.5 billion and $1.0 billion, respectively.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 1.625% Notes.
Other
At December 31, 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 December 31, 2020, the counterparties to the Company's hedge contracts are held at financial institutions which the Company believes to be highly rated, and no credit related losses are anticipated.
Note 16: Income Taxes
The Company's geographic sources of income (loss) before income taxes and non-controlling interest are as follows (in millions):

| Year ended December 31,
| 2020 |  | 2019 |  | 2018
United States | $ | (181.2) |  |  | $ | (308.2) |  |  | $ | (181.8) |
Foreign | 357.8 |  |  | 584.8 |  |  | 936.8 |
Income before income taxes | $ | 176.6 |  |  | $ | 276.6 |  |  | $ | 755.0 |

The Company's provision (benefit) for income taxes is as follows (in millions):

| Year ended December 31,
| 2020 |  | 2019 |  | 2018
Current: |  |  |  |  |
Federal | $ | 0.6 |  |  | $ | 1.2 |  |  | $ | (2.0) |
State and local | 0.1 |  |  | — |  |  | (2.2) |
Foreign | 54.0 |  |  | 48.5 |  |  | 55.3 |
| 54.7 |  |  | 49.7 |  |  | 51.1 |
Deferred: |  |  |  |  |
Federal | (69.2) |  |  | (5.0) |  |  | 99.4 |
State and local | (66.4) |  |  | — |  |  | — |
Foreign | 21.1 |  |  | 18.0 |  |  | (25.4) |
| (114.5) |  |  | 13.0 |  |  | 74.0 |
Total provision (benefit) | $ | (59.8) |  |  | $ | 62.7 |  |  | $ | 125.1 |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:

|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018 |
U.S. federal statutory rate |  | 21.0 | % |  | 21.0 | % |  | 21.0 | % |
Increase (decrease) resulting from: |  |  |  |  |  |  |
State and local taxes, net of federal tax benefit |  | (1.4) |  |  | (2.6) |  |  | (1.0) |  |
Impact of U.S. Tax Reform and related effects (1) |  | — |  |  | — |  |  | 4.7 |  |
Impact of foreign operations |  | 7.6 |  |  | 3.8 |  |  | (1.2) |  |
Impact of U.S. tax method changes (2) |  | — |  |  | — |  |  | (6.4) |  |
Impact of the Domestication (3) |  | (35.7) |  |  | — |  |  | — |  |
Change in valuation allowance and related effects (4) |  | (24.4) |  |  | 1.8 |  |  | 0.6 |  |
Non-deductible share-based compensation costs |  | 1.7 |  |  | (0.5) |  |  | (0.5) |  |
U.S. federal R&D credit |  | (3.6) |  |  | (3.7) |  |  | (1.1) |  |
Nondeductible officer compensation |  | 1.1 |  |  | 1.5 |  |  | 0.4 |  |
Other |  | (0.1) |  |  | 1.4 |  |  | 0.1 |  |
Total |  | (33.8) | % |  | 22.7 | % |  | 16.6 | % |

(1)For the year ended December 31, 2018, this primarily included expense of (i) $31.8 million, or 4.2%, related to the recognition of deferred tax liability for undistributed prior years' earnings of the foreign subsidiaries, (ii) $1.8 million, or 0.3% related to the limitation on deductibility of prior years’ executive compensation, and (iii) $1.5 million, or 0.2% related to the impact of the mandatory repatriation tax. These adjustments were made pursuant to SAB 118.
(2)For the year ended December 31, 2018, this included a one-time benefit of $48.2 million, or 6.4%, related to U.S. tax method changes made during the year that impacted the Company’s GILTI inclusion.
(3)On July 6, 2020, the Company completed a simplification of its corporate structure by repatriating the economic rights of its non-U.S. IP to the United States via domestication of certain foreign subsidiaries (the "Domestication"). The Domestication more closely aligns the Company's corporate structure with its operating structure in accordance with the OECD’s BEPS conclusions and changes to U.S. and European tax laws. The impact of the Domestication, which is regarded as a change in tax status, resulted in a benefit primarily from recognizing certain deferred tax assets, net of deferred tax liabilities, of $63.0 million, or 35.7%.
(4)For the year ended December 31, 2020, this included a benefit of $49.4 million, or 28.0%, for the release of a partial state valuation allowance due to an increase to forecasted domestic income as a result of the Domestication of certain foreign subsidiaries and an expense of $61.8 million, or 35.0%, primarily related to the expiration of Japan net operating losses, netted with the offsetting benefit of $61.8 million, or 35.0%, primarily for the decrease in the related valuation allowance for those same Japan net operating losses. For the year ended December 31, 2019, this included an expense of $11.2 million, or 4.0%, primarily related to the write-off of Hong Kong NOL and expiration of Japan NOL, netted with the offsetting benefit of $11.2 million, or 4.0%, primarily for the decrease in related valuation allowance for those same Hong Kong and Japan NOLs. For the year ended December 31, 2018, this included an expense of $135.2 million, or 17.9%, primarily related to the expiration of Japan NOLs, netted with the offsetting benefit of $135.2 million, or 17.9%, primarily for the decrease in the related valuation allowance for those same Japan NOLs.
The Company’s effective tax rate for 2020 was a benefit of (33.8)%, which differs from the U.S. federal income tax rate of 21%, primarily due to the Domestication of certain foreign subsidiaries and a partial release of state valuation allowance, partially offset by foreign taxes for which the Company will not receive a U.S. tax credit as well as period costs related to the Company's GILTI inclusion.
The Company’s effective tax rate for 2019 was 22.7%, which differs from the U.S. federal income tax rate of 21%, primarily due to foreign taxes for which the Company will not receive a U.S. tax credit as well as period costs related to the Company's GILTI inclusion.
The Company's effective tax rate for 2018 was 16.6%, which differs from the U.S. federal statutory income tax rate of 21% primarily due to a one-time benefit of U.S. tax method changes made during the year that impacted the Company's GILTI inclusion.
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ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the net deferred tax asset (liability) are as follows (in millions):

|  | As of December 31,
|  | 2020 |  | 2019
NOL and tax credit carryforwards |  | $ | 471.6 |  |  | $ | 612.9 |
163 (j) interest expense carryforward |  | 65.7 |  |  | 49.3 |
Lease liabilities (1) |  | 32.5 |  |  | 22.1 |
ROU asset (1) |  | (32.5) |  |  | (22.1) |
Tax-deductible goodwill and amortizable intangibles |  | (38.0) |  |  | (48.6) |
Capitalization of research and development expenses |  | 90.7 |  |  | 42.7 |
Reserves and accruals |  | 68.4 |  |  | 27.5 |
Property, plant and equipment |  | (95.8) |  |  | (81.2) |
Inventories |  | 84.3 |  |  | 22.0 |
Undistributed earnings of foreign subsidiaries |  | (57.5) |  |  | (63.7) |
Share-based compensation |  | 7.7 |  |  | 10.3 |
Pension |  | 21.2 |  |  | 26.3 |
Other |  | 3.2 |  |  | 8.0 |
Deferred tax assets and liabilities before valuation allowance |  | 621.5 |  |  | 605.5 |
Valuation allowance |  | (249.9) |  |  | (357.9) |
Net deferred tax asset |  | $ | 371.6 |  |  | $ | 247.6 |

(1)The deferred tax assets and liabilities disclosure as of December 31, 2019 has been adjusted to reflect the gross deferred tax right-of-use asset and related gross deferred lease liability recognized in accordance with the New Leasing Standard.
As of December 31, 2020 and 2019, the Company had approximately $99.0 million and $521.9 million, respectively, of federal NOL carryforwards, before reduction for unrecognized tax benefits, which are subject to annual limitations prescribed in Section 382 of the Internal Revenue Code. The decrease is due to current year utilization. If not utilized, a portion of the NOLs will expire in varying amounts from 2028 to 2036; however, a small portion of the NOL that was generated after December 31, 2017 is carried forward indefinitely.
As of December 31, 2020 and 2019, the Company had approximately $153.4 million and $134.5 million, respectively, of federal credit carryforwards, before consideration of valuation allowance or reduction for unrecognized tax benefits, which are subject to annual limitations prescribed in Section 383 of the Internal Revenue Code. If not utilized, the credits will expire in varying amounts from 2028 to 2040.
As of December 31, 2020 and 2019, the Company had approximately $741.3 million and $825.8 million, respectively, of state NOL carryforwards, before consideration of valuation allowance or reduction for unrecognized tax benefits. The decrease is primarily due to current year utilization. If not utilized, a portion of the NOLs will expire in varying amounts starting in 2021. Certain states have adopted the federal rule allowing unlimited NOL carryover for NOLs generated in tax years beginning after December 31, 2017. Therefore, a portion of the state NOLs generated after 2017 carry forward indefinitely. As of December 31, 2020 and 2019, the Company had $141.1 million and $138.6 million, respectively, of state credit carryforwards before consideration of valuation allowance or reduction for unrecognized tax benefits. If not utilized, a portion of the credits will begin to expire in varying amounts starting in 2021.
As of December 31, 2020 and 2019, the Company had approximately $581.6 million and $757.1 million, respectively, of foreign NOL carryforwards, before consideration of valuation allowance. The decrease is primarily due to expiration of Japan NOLs as discussed above. If not utilized, a portion of the NOLs will begin to expire in varying amounts starting in 2021. A significant portion of these NOLs will expire by 2025. As of December 31, 2020 and 2019, the Company had $69.4 million and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
$76.8 million, respectively, of foreign credit carryforwards before consideration of valuation allowance. If not utilized, the majority of these credits will expire by 2026.
The Company continues to maintain a valuation allowance of $128.5 million on a portion of its Japan NOLs, which expire in varying amounts from 2021 to 2024. In addition to the valuation allowance on the Japan NOLs, the Company maintains a partial valuation allowance of $72.5 million 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.
At December 31, 2020, 2019 and 2018, respectively, the Company was not indefinitely reinvested with respect to the earnings of its foreign subsidiaries and has therefore accrued withholding taxes that would be owed upon future distributions of such earnings.
The Company maintains liabilities for unrecognized tax benefits. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. The Company is currently under examination by various taxing authorities. Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its consolidated financial statements for any additional taxes that the Company may be required to pay as a result of such examinations. If the payment ultimately proves not to be necessary, the reversal of these tax liabilities would result in tax benefits being recognized in the period the Company determines such liabilities are no longer necessary. However, if an ultimate tax assessment exceeds the Company's estimate of tax liabilities, additional tax expense will be recorded. The impact of such adjustments could have a material impact on the Company's results of operations in future periods.
The activity for unrecognized gross tax benefits is as follows (in millions):

| 2020 |  | 2019 |  | 2018
Balance at beginning of year | $ | 130.0 |  |  | $ | 112.2 |  |  | $ | 114.8 |
Acquired balances | — |  |  | 15.5 |  |  | — |
Additions for tax benefits related to the current year | 11.9 |  |  | 9.4 |  |  | 7.4 |
Additions for tax benefits of prior years | 12.3 |  |  | 8.0 |  |  | 2.8 |
Reductions for tax benefits of prior years | (1.4) |  |  | (0.2) |  |  | (1.9) |
Lapse of statute | (1.3) |  |  | (8.2) |  |  | (10.9) |
Settlements | (0.5) |  |  | (6.7) |  |  | — |
Balance at end of year | $ | 151.0 |  |  | $ | 130.0 |  |  | $ | 112.2 |

Included in the December 31, 2020 balance of $151.0 million is $116.0 million related to unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2020 is $35.0 million of benefit that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. Although the Company cannot predict the timing of resolution with taxing authorities, if any, the Company believes it is reasonably possible that its unrecognized tax benefits will be reduced by $48.8 million in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company recognized approximately $0.2 million of tax expense for interest and penalties during the year ended December 31, 2020. The Company had approximately $5.3 million, $5.1 million, and $5.1 million of accrued interest and penalties at December 31, 2020, 2019, and 2018, respectively.
Tax years prior to 2017 are generally not subject to examination by 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 2016. 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 2010. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 17: Changes in Accumulated Other Comprehensive Loss
Amounts comprising the Company's accumulated other comprehensive loss and reclassifications are as follows (in millions):

|  | Currency Translation Adjustments |  |  |  | Effects of Cash Flow Hedges |  |  |  | Total
Balance December 31, 2018 |  | $ | (42.5) |  |  |  |  | 4.6 |  |  |  |  | $ | (37.9) |
Other comprehensive income (loss) prior to reclassifications |  | 0.1 |  |  |  |  | (19.6) |  |  |  |  | (19.5) |
Amounts reclassified from accumulated other comprehensive loss |  | — |  |  |  |  | 3.1 |  |  |  |  | 3.1 |
Net current period other comprehensive income (loss) (1) |  | 0.1 |  |  |  |  | (16.5) |  |  |  |  | (16.4) |
Balance December 31, 2019 |  | (42.4) |  |  |  |  | (11.9) |  |  |  |  | (54.3) |
Other comprehensive income prior to reclassifications |  | 1.8 |  |  |  |  | 14.9 |  |  |  |  | 16.7 |
Amounts reclassified from accumulated other comprehensive loss |  | — |  |  |  |  | (20.0) |  |  |  |  | (20.0) |
Net current period other comprehensive income (loss) (1) |  | 1.8 |  |  |  |  | (5.1) |  |  |  |  | (3.3) |
Balance December 31, 2020 |  | $ | (40.6) |  |  |  |  | $ | (17.0) |  |  |  |  | $ | (57.6) |

_______________________
(1)Effects of cash flow hedges are net of tax benefit of $1.7 million and $4.4 million for the years ended December 31, 2020 and December 31, 2019, respectively.
Amounts reclassified from accumulated other comprehensive loss to the specific caption within the Consolidated Statements of Operations and Comprehensive Income were as follows:

|  | Year Ended December 31, |  | To caption
|  | 2020 |  | 2019 |  |
Interest rate swaps |  | $ | 20.0 |  |  | $ | (3.1) |  |  | Interest expense
Total reclassifications |  | $ | 20.0 |  |  | $ | (3.1) |  |  |

Note 18: Supplemental Disclosures
Supplemental Disclosure of Cash Flow Information
Certain of the Company's cash and non-cash activities were as follows (in millions):

|  | Year ended December 31,
|  | 2020 |  | 2019 |  | 2018
Non-cash investing activities: |  |  |  |  |  |
Capital expenditures in accounts payable and other long-term liabilities |  | $ | 162.5 |  |  | $ | 155.3 |  |  | $ | 233.9 |
Sale of property in exchange of note receivable |  | 7.2 |  |  | — |  |  | — |
Right-of-use assets obtained in exchange of lease liabilities (1) |  | 58.2 |  |  | 17.5 |  |  |
Non-cash financing activities: |  |  |  |  |  |
Liability incurred for purchase of business |  | $ | — |  |  | $ | 12.7 |  |  | $ | — |
Debt assumed through purchase of equity interest and assets |  | — |  |  | — |  |  | 50.6 |
Cash paid for: |  |  |  |  |  |
Interest expense |  | $ | 109.1 |  |  | $ | 97.2 |  |  | $ | 80.0 |
Income taxes |  | 52.5 |  |  | 62.9 |  |  | 53.2 |
Operating lease payments in operating cash flows (1) |  | 36.9 |  |  | 37.6 |  |  |

(1) These disclosures are not applicable for the year ended December 31, 2018 due to the method of adoption of the New Leasing Standard.
See Note 9: ''Long-Term Debt'' and 10: ''Earnings Per Share and Equity'' for shares of common stock issued and repurchased in
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ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
connection with the maturity and settlement of the 1.00% Notes.
Following is a reconciliation of the captions in the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows (in millions):

|  | As of December 31,
|  | 2020 |  | 2019 |  | 2018
Consolidated Balance Sheets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,080.7 |  |  | $ | 894.2 |  |  | $ | 1,069.6 |
Restricted cash (included in other current assets) |  | 0.8 |  |  | — |  |  | 17.5 |
Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows |  | $ | 1,081.5 |  |  | $ | 894.2 |  |  | $ | 1,087.1 |

The restricted cash balance as of December 31, 2018, which included the consideration held in escrow for the acquisition of Aptina in 2014, was settled during the year ended December 31, 2019, upon satisfaction of certain outstanding items contained in the merger agreement relating to such acquisition.
Note 19: Supplementary Financial Information - Selected Quarterly Financial Data (Unaudited)
Consolidated unaudited quarterly financial information is as follows (in millions, except per share data):

| Quarters ended in 2020
| April 3 |  | July 3 |  | October 2 |  | December 31
Revenue | $ | 1,277.9 |  |  | $ | 1,213.5 |  |  | $ | 1,317.3 |  |  | $ | 1,446.3 |
Gross Profit (exclusive of the amortization of acquisition-related intangible assets) | 402.7 |  |  | 374.3 |  |  | 441.2 |  |  | 497.6 |
Net income (loss) attributable to ON Semiconductor Corporation | (14.0) |  |  | (1.4) |  |  | 160.6 |  |  | 89.0 |
Diluted net income (loss) per common share attributable to ON Semiconductor Corporation | (0.03) |  |  | 0.00 |  |  | 0.38 |  |  | 0.21 |
| Quarters ended in 2019
| March 29 |  | June 28 |  | September 27 (1) |  | December 31
Revenue | $ | 1,386.6 |  |  | $ | 1,347.7 |  |  | $ | 1,381.8 |  |  | $ | 1,401.8 |
Gross Profit (exclusive of the amortization of acquisition-related intangible assets) | 513.7 |  |  | 499.0 |  |  | 475.2 |  |  | 485.7 |
Net income (loss) attributable to ON Semiconductor Corporation | 114.1 |  |  | 101.8 |  |  | (60.7) |  |  | 56.5 |
Diluted net income (loss) per common share attributable to ON Semiconductor Corporation | 0.27 |  |  | 0.24 |  |  | (0.15) |  |  | 0.14 |
(1) The net loss for the quarter ended September 27, 2019 was primarily due to the expensing of $169.5 million relating to the settlement of litigation with PI.

116

ON SEMICONDUCTOR CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)

Description |  | Balance at Beginning of Period |  | Charged (Credited) to Costs and Expenses |  | Charged to Other Accounts |  | Deductions/Write-offs |  | Balance at End of Period
Allowance for deferred tax assets |  |  |  |  |  |  |  |  |  |
Year ended December 31, 2018 |  | $ | 462.3 |  |  | $ | 4.6 |  |  | $ | 15.8 |  | (1) | $ | (135.2) |  | (2) | $ | 347.5 |
Year ended December 31, 2019 |  | 347.5 |  |  | 5.0 |  |  | 16.6 |  | (3) | (11.2) |  | (4) | 357.9 |
Year ended December 31, 2020 |  | 357.9 |  |  | (43.1) |  | (5) | 11.0 |  | (1) | (75.9) |  | (2) | 249.9 |

______________________
(1)Primarily represents the effects of cumulative translation adjustments.
(2)Primarily relates to the expiration of Japan net operating losses. See Note 16: "Income Taxes."
(3)Primarily represents the effects of cumulative translation adjustments and includes $14.0 million of additional allowance for deferred tax assets arising from the Quantenna acquisition.
(4)Primarily relates to the write-off of Hong Kong net operating losses upon the liquidation of Sanyo Semiconductor (H.K.) Co., Ltd. as well as the expiration of Japan net operating losses.
(5)Primarily relates to the release of state valuation as a result of the Domestication of certain foreign subsidiaries. See Note 16: "Income Taxes."
117