Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the quarterly period ended April 4, 2003

 

¨   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 000-30419

 


 

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 and telephone number of principal executive offices)

 


 

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  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act).    Yes  x    No  ¨

 

The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on May 2, 2003:

 

Class


 

Number of Shares


Common Stock; $.01 par value

 

176,663,090

 

 



Table of Contents

INDEX

 

    

Page


Part I

  

3

Financial Information

  

3

Item 1    Financial Statements

  

3

Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

23

Item 3    Quantitative and Qualitative Disclosures About Market Risk

  

40

Item 4    Controls and Procedures

  

41

Part II

    

Other Information

  

42

Item 1    Legal Proceedings

  

42

Item 2    Changes in Securities and Use of Proceeds

  

42

Item 3    Defaults Upon Senior Securities

  

42

Item 4    Submission of Matters to a Vote of Security Holders

  

42

Item 5    Other Information

  

43

Item 6    Exhibits and Reports on Form 8-K

  

44

Signatures

  

45

Certifications

  

46

Exhibits

  

48

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET

(in millions, except share data)

 

    

April 4,

2003


    

December 31, 2002


 
    

(unaudited)

        

Assets

                 

Cash and cash equivalents

  

$

189.1

 

  

$

182.4

 

Receivables, net (including $10.8 and $4.7 due from Motorola)

  

 

129.3

 

  

 

121.6

 

Inventories, net

  

 

166.7

 

  

 

160.0

 

Other current assets

  

 

27.5

 

  

 

36.6

 

Deferred income taxes

  

 

7.6

 

  

 

6.4

 

    


  


Total current assets

  

 

520.2

 

  

 

507.0

 

Property, plant and equipment, net

  

 

431.0

 

  

 

454.1

 

Investments in and advances to joint ventures

  

 

100.7

 

  

 

99.3

 

Goodwill

  

 

77.3

 

  

 

77.3

 

Intangible asset, net

  

 

23.7

 

  

 

26.7

 

Other assets

  

 

42.8

 

  

 

38.7

 

    


  


Total assets

  

$

1,195.7

 

  

$

1,203.1

 

    


  


Liabilities, Minority Interests, Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

                 

Accounts payable (including $0.1 and $0.1 payable to Motorola)

  

$

116.8

 

  

$

77.4

 

Accrued expenses (including $1.3 and $0.7 payable to Motorola)

  

 

85.0

 

  

 

99.9

 

Income taxes payable

  

 

14.8

 

  

 

11.0

 

Accrued interest

  

 

22.8

 

  

 

43.6

 

Deferred income on sales to distributors

  

 

68.2

 

  

 

70.8

 

Current portion of long-term debt

  

 

4.0

 

  

 

9.3

 

    


  


Total current liabilities

  

 

311.6

 

  

 

312.0

 

Long-term debt (including $130.2 and $126.9 payable to Motorola)

  

 

1,413.4

 

  

 

1,393.9

 

Other long-term liabilities

  

 

45.8

 

  

 

42.9

 

Deferred income taxes

  

 

0.9

 

  

 

2.2

 

    


  


Total liabilities

  

 

1,771.7

 

  

 

1,751.0

 

    


  


Commitments and contingencies (See Note 7)

  

 

—  

 

  

 

—  

 

    


  


Minority interests in consolidated subsidiaries

  

 

4.2

 

  

 

4.1

 

    


  


Series A cumulative, convertible, redeemable preferred stock ($0.01 par value 100,000 shares authorized,10,000 shares issued and outstanding; 8% annual dividend rate; liquidation value—$100.0 plus $13.1 and $10.9 of accrued dividends)

  

 

112.3

 

  

 

110.1

 

    


  


Common stock ($0.01 par value, 500,000,000 shares authorized, 176,663,090 and 176,439,900 shares issued and outstanding)

  

 

1.8

 

  

 

1.8

 

Additional paid-in capital

  

 

735.5

 

  

 

737.4

 

Accumulated other comprehensive income (loss)

  

 

(32.2

)

  

 

(34.3

)

Accumulated deficit

  

 

(1,397.6

)

  

 

(1,367.0

)

    


  


Total stockholders’ equity (deficit)

  

 

(692.5

)

  

 

(662.1

)

    


  


Total liabilities, minority interests, redeemable preferred stock and stockholders’ equity (deficit)

  

$

1,195.7

 

  

$

1,203.1

 

    


  


 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in millions, except per share data)

 

    

Quarter Ended


 
    

April 4, 2003


    

March 29, 2002


 
    

(unaudited)

    

(unaudited)

 

Revenues (including $21.5 and $18.2 from Motorola)

  

$

266.5

 

  

$

269.1

 

Cost of sales

  

 

196.2

 

  

 

210.9

 

    


  


Gross profit

  

 

70.3

 

  

 

58.2

 

    


  


Operating expenses:

                 

Research and development

  

 

17.7

 

  

 

17.3

 

Selling and marketing

  

 

16.1

 

  

 

14.6

 

General and administrative

  

 

22.1

 

  

 

29.2

 

Amortization of intangible

  

 

3.0

 

  

 

3.0

 

Restructuring and other

  

 

—  

 

  

 

7.1

 

    


  


Total operating expenses

  

 

58.9

 

  

 

71.2

 

    


  


Operating income (loss)

  

 

11.4

 

  

 

(13.0

)

    


  


Other income (expenses), net:

                 

Interest expense

  

 

(37.6

)

  

 

(34.7

)

Equity in earnings of joint ventures

  

 

1.4

 

  

 

1.2

 

Loss on debt prepayment

  

 

(3.5

)

  

 

—  

 

    


  


Other income (expenses), net

  

 

(39.7

)

  

 

(33.5

)

    


  


Loss before income taxes and minority interest

  

 

(28.3

)

  

 

(46.5

)

Income tax provision

  

 

(2.0

)

  

 

(3.7

)

Minority interests

  

 

(0.3

)

  

 

0.2

 

    


  


Net loss

  

 

(30.6

)

  

 

(50.0

)

Less: Redeemable preferred stock dividends

  

 

(2.2

)

  

 

(2.1

)

    


  


Net loss applicable to common stock

  

$

(32.8

)

  

$

(52.1

)

    


  


Comprehensive loss:

                 

Net loss

  

$

(30.6

)

  

$

(50.0

)

Foreign currency translation adjustments

  

 

0.7

 

  

 

(0.8

)

Effects of cash flows hedges

  

 

1.4

 

  

 

3.2

 

    


  


Comprehensive loss

  

$

(28.5

)

  

$

(47.6

)

    


  


Earnings (loss) per common share:

                 

Basic:

                 

Net loss available for common stock

  

$

(0.19

)

  

$

(0.30

)

    


  


Diluted:

                 

Net loss available for common stock

  

$

(0.19

)

  

$

(0.30

)

    


  


Weighted average common shares outstanding:

                 

Basic

  

 

176.4

 

  

 

174.8

 

    


  


Diluted

  

 

176.4

 

  

 

174.8

 

    


  


 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

    

Quarter Ended


 
    

April 4, 2003


    

March 29, 2002


 
    

(unaudited)

    

(unaudited)

 

Cash flows from operating activities:

                 

Net loss

  

$

(30.6

)

  

$

(50.0

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                 

Depreciation and amortization

  

 

32.0

 

  

 

34.0

 

Loss on debt prepayment

  

 

3.5

 

  

 

—  

 

Amortization of debt issuance costs and debt discount

  

 

2.2

 

  

 

1.6

 

Provision for excess inventories

  

 

4.0

 

  

 

10.7

 

Non-cash interest on junior subordinated note payable to Motorola

  

 

3.3

 

  

 

2.7

 

Undistributed earnings of joint ventures

  

 

(1.4

)

  

 

(1.2

)

Deferred income taxes

  

 

(2.5

)

  

 

0.7

 

Stock compensation expense

  

 

0.1

 

  

 

0.3

 

Other

  

 

0.8

 

  

 

(0.3

)

Changes in assets and liabilities:

                 

Receivables

  

 

(5.4

)

  

 

(10.2

)

Inventories

  

 

(10.7

)

  

 

2.9

 

Other assets

  

 

7.8

 

  

 

(1.2

)

Accounts payable

  

 

39.4

 

  

 

0.6

 

Accrued expenses

  

 

(14.8

)

  

 

3.1

 

Income taxes payable

  

 

3.8

 

  

 

1.8

 

Accrued interest

  

 

(20.8

)

  

 

(0.9

)

Deferred income on sales to distributors

  

 

(2.6

)

  

 

(21.3

)

Other long-term liabilities

  

 

3.4

 

  

 

2.3

 

    


  


Net cash provided by (used in) operating activities

  

 

11.5

 

  

 

(24.4

)

    


  


Cash flows from investing activities:

                 

Purchases of property, plant and equipment

  

 

(6.0

)

  

 

(5.6

)

Proceeds from sales of property, plant and equipment

  

 

—  

 

  

 

0.2

 

    


  


Net cash used in investing activities

  

 

(6.0

)

  

 

(5.4

)

    


  


Cash flows from financing activities:

                 

Proceeds from debt issuance, net of discount

  

 

190.9

 

  

 

—  

 

Proceeds from issuance of common stock under the employee stock purchase plan

  

 

0.2

 

  

 

0.4

 

Proceeds from stock option exercises

  

 

—  

 

  

 

0.8

 

Payment of capital lease obligation

  

 

—  

 

  

 

(0.7

)

Payment of debt issuance costs

  

 

(9.3

)

  

 

—  

 

Repayment of long-term debt

  

 

(180.9

)

  

 

(2.8

)

    


  


Net cash provided by (used in) financing activities

  

 

0.9

 

  

 

(2.3

)

    


  


Effect of exchange rate changes on cash and cash equivalents

  

 

0.3

 

  

 

(0.1

)

    


  


Net increase (decrease) in cash and cash equivalents

  

 

6.7

 

  

 

(32.2

)

Cash and cash equivalents, beginning of period

  

 

182.4

 

  

 

179.8

 

    


  


Cash and cash equivalents, end of period

  

$

189.1

 

  

$

147.6

 

    


  


 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1:  Background and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of ON Semiconductor Corporation, its wholly-owned subsidiaries, and the majority-owned subsidiaries that it controls (collectively, the “Company”). An investment in a majority-owned joint venture that the Company does not control is accounted for on the equity method. Investments in companies that represent less than 20% of the related voting stock and for which the Company does not exert significant influence on are accounted for on the cost basis. All material intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited financial statements as of April 4, 2003 and for the three months ended April 4, 2003 and March 29, 2002, respectively, have been prepared in accordance with generally accepted accounting principles for interim financial information and on the same basis of presentation as the audited financial statements included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 25, 2003 (the “Company’s 10-K”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of the Company’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of December 31, 2002 and for the year then ended included in the Company’s 10-K.

 

The preparation of financial statements in accordance with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain prior period amounts have been reclassified to conform to the current period presentation. These changes had no impact on previously reported results of operations or stockholders’ equity (deficit).

 

Note 2:  Liquidity

 

During the quarter ended April 4, 2003, the Company incurred a net loss of $30.6 million compared to a net loss of $50.0 million in the first quarter of 2002. The Company’s net results included expense from restructuring and other of $7.1 million in the first quarter of 2002, as well as interest expense of $37.6 million and $34.7 million, in the first quarter of 2003 and the first quarter of 2002, respectively. The Company’s operating activities provided cash of $11.5 million in the first quarter of 2003 and used cash of $24.4 million in the first quarter of 2002.

 

At April 4, 2003, the Company had $189.1 million in cash and cash equivalents, net working capital of $208.6 million, term or revolving debt of $1,417.4 million and a stockholders’ deficit of $692.5 million. The Company’s long-term debt includes $520.7 million under its senior bank facilities; $291.7 million (net of discount) of its 12% second lien senior secured notes due 2008; $191.0 million (net of discount) of its 12% first lien senior secured notes due 2010; $260.0 million of its 12% senior subordinated notes due 2009; $130.2 million under a 10% junior subordinated note payable to Motorola due 2011; and, $23.8 million under a note payable to a Japanese bank due 2010. The Company was in compliance with all of the covenants contained in its various debt agreements as of April 4, 2003 and expects to remain in compliance over the next twelve months.

 

As described in Note 6 “Long-Term Debt,” ON Semiconductor Corporation and its principal domestic operating subsidiary, Semiconductor Components Industries, LLC (collectively, the “Issuers”), issued $200.0

 

6


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

million principal amount of first lien notes (the “First-Lien Notes”) on March 3, 2003 in a private offering that was exempt from the registration requirements of the federal securities laws. The First-Lien Notes, which are callable after four years, were issued at 95.467% of par value and generated net proceeds of approximately $180.9 million after deducting the discount and related issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities, including $25.0 million relating to the Company’s revolving credit facility. In connection with the prepayment, the Company wrote off $3.5 million of debt issuance costs in the first quarter of 2003 which are included in other income (expenses), net in the accompanying consolidated statement of operations and comprehensive loss.

 

The Company’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control.

 

If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its 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 the Company. Although there can be no assurance, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company’s operating and capital needs as well as to enable it to maintain compliance with its various debt agreements through April 3, 2004. To the extent that results or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.

 

7


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Note 3:  Balance Sheet Information

 

Balance sheet information is as follows (in millions):

 

    

April 4, 

2003


    

December 31, 

2002


 

Receivables, net:

                 

Accounts receivable

  

$

131.2

 

  

$

123.5

 

Less: Allowance for doubtful accounts

  

 

(1.9

)

  

 

(1.9

)

    


  


    

$

129.3

 

  

$

121.6

 

    


  


Inventories, net:

                 

Raw materials

  

$

18.8

 

  

$

15.5

 

Work in process

  

 

110.1

 

  

 

106.3

 

Finished goods

  

 

76.7

 

  

 

81.9

 

    


  


Total inventory

  

 

205.6

 

  

 

203.7

 

Less: Inventory reserves

  

 

(38.9

)

  

 

(43.7

)

    


  


    

$

166.7

 

  

$

160.0

 

    


  


Property, plant and equipment, net:

                 

Land

  

$

12.1

 

  

$

11.9

 

Buildings

  

 

392.7

 

  

 

386.0

 

Machinery and equipment

  

 

854.8

 

  

 

856.8

 

    


  


Total property, plant and equipment

  

 

1,259.6

 

  

 

1,254.7

 

Less: Accumulated depreciation

  

 

(828.6

)

  

 

(800.6

)

    


  


    

$

431.0

 

  

$

454.1

 

    


  


Goodwill, net:

                 

Goodwill

  

$

95.7

 

  

$

95.7

 

Less: Accumulated amortization

  

 

(18.4

)

  

 

(18.4

)

    


  


    

$

77.3

 

  

$

77.3

 

    


  


Intangible asset, net:

                 

Developed technology

  

$

59.3

 

  

$

59.3

 

Less: Accumulated amortization

  

 

(35.6

)

  

 

(32.6

)

    


  


    

$

23.7

 

  

$

26.7

 

    


  


Other assets:

                 

Debt issuance costs

  

$

37.7

 

  

$

33.7

 

Other

  

 

5.1

 

  

 

5.0

 

    


  


    

$

42.8

 

  

$

38.7

 

    


  


Accrued expenses:

                 

Accrued payroll

  

$

30.5

 

  

$

27.5

 

Sales related reserves

  

 

12.0

 

  

 

14.1

 

Restructuring reserves

  

 

12.5

 

  

 

19.5

 

Other

  

 

30.0

 

  

 

38.8

 

    


  


    

$

85.0

 

  

$

99.9

 

    


  


Other long-term liabilities:

                 

Accrued retirement benefits

  

$

37.4

 

  

$

33.7

 

Cash flow hedge liability

  

 

7.7

 

  

 

8.2

 

Other

  

 

0.7

 

  

 

1.0

 

    


  


    

$

45.8

 

  

$

42.9

 

    


  


Other comprehensive loss:

                 

Foreign currency translation adjustments

  

$

(1.3

)

  

$

(2.0

)

Minimum pension liability

  

 

(19.6

)

  

 

(19.6

)

Net unrealized losses and adjustments related to cash flow hedges

  

 

(10.7

)

  

 

(12.1

)

Unrealized losses on deferred compensation plan investments

  

 

(0.6

)

  

 

(0.6

)

    


  


    

$

(32.2

)

  

$

(34.3

)

    


  


 

8


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Estimated amortization expense for the intangible asset is as follows (in millions):

 

Year ended December 31,


    

Remainder of 2003

  

$

8.9

2004

  

 

11.9

2005

  

 

2.9

    

    

$

23.7

    

 

The activity related to our warranty reserves for the quarter ended April 4, 2003 is as follows (in millions):

 

Balance as of December 31, 2002

  

$

2.7

 

Provision

  

 

—  

 

Usage

  

 

(0.3

)

    


Balance as of April 4, 2003

  

$

2.4

 

    


 

Note 4:  Restructuring and Other

 

Activity related to the Company’s restructuring programs is as follows (in millions):

 

    

Reserve Balance at 12/31/02


  

2003 Charges


  

2003 Usage


      

2003 Adjustments


    

Reserve Balance at 04/04/03


December 2002 Restructuring

                                        

Cash employee separations charges

  

$

9.9

  

$

—  

  

$

(3.7

)

    

$

—  

 

  

$

6.2

Cash exit costs

  

 

1.8

  

 

—  

  

 

(1.0

)

    

 

—  

 

  

 

0.8

    

                             

December 2002 Restructuring reserve balance

  

 

11.7

                             

 

7.0

    

                             

June 2002 Restructuring

                                        

Cash employee separations charges

  

 

0.4

  

 

—  

  

 

(0.4

)

    

 

—  

 

  

 

—  

Cash exit costs

  

 

1.5

  

 

—  

  

 

—  

 

    

 

—  

 

  

 

1.5

    

                             

June 2002 Restructuring reserve balance

  

 

1.9

                             

 

1.5

    

                             

March 2002 Restructuring

                                        

Cash employee separations charges

  

 

3.0

  

 

—  

  

 

(0.8

)

    

 

—  

 

  

 

2.2

    

                             

March 2002 Restructuring reserve balance

  

 

3.0

                             

 

2.2

    

                             

December 2001 Restructuring

                                        

Cash employee separations charges

  

 

0.1

  

 

—  

  

 

—  

 

    

 

—  

 

  

 

0.1

    

                             

December 2001 Restructuring reserve balance

  

 

0.1

                             

 

0.1

    

                             

June 2001 Restructuring

                                        

Cash employee separations charges

  

 

1.7

  

 

—  

             

 

(1.7

)

  

 

—  

Cash exit costs

  

 

1.1

  

 

—  

  

 

(1.1

)

    

 

1.7

 

  

 

1.7

    

                             

June 2001 Restructuring reserve balance

  

 

2.8

                             

 

1.7

    

  

  


    


  

    

$

19.5

  

$

—  

  

$

(7.0

)

    

$

—  

 

  

$

12.5

    

  

  


    


  

 

9


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

December 2002 Restructuring Program

 

The remaining restructuring reserves of $7.0 million at April 4, 2003 are comprised of $6.2 million and $0.8 million related to separation costs associated with approximately 130 terminated employees and lease termination and other exit costs, respectively. The Company expects to settle it remaining obligations related to this restructuring program by December 2003.

 

June 2002 Restructuring Program

 

The remaining restructuring reserve at April 4, 2003 relates to estimate termination charges associated with a supply agreement. The Company is currently in negotiations to settle this obligation.

 

March 2002 Restructuring Program

 

The remaining restructuring reserve of $2.2 million at April 4, 2003 relates to the unpaid separation costs associated with terminated employees and the remaining 15 employees to be terminated under the program. The Company currently expects that the terminations will be completed by June 30, 2003.

 

December 2001 Restructuring Program

 

As of April 4, 2003, all impacted employees had been terminated and the Company currently expects that the final severance payments will be made by June 2003.

 

June 2001 Restructuring Program

 

The Company reversed the $1.7 million employee separation charges reserve as all employees have been terminated under the program and all severance payments have been made. The Company recorded a charge of $1.7 million related to additional costs associated with the closure of the Guadalajara, Mexico facility. This reserve is expected to be utilized within three months after the sale of the Guadalajara facility.

 

Note 5:  Earnings (Loss) per Common Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) adjusted for dividends accrued on the Company’s redeemable preferred stock by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share generally assumes the conversion of the convertible redeemable preferred stock into common stock and also incorporates the incremental impact of shares issuable upon the assumed exercise of stock options if such conversions or exercises are dilutive. The number of incremental shares from the assumed exercise of stock options is calculated by applying the treasury stock method. For the first quarter of 2003 and the first quarter of 2002, the effect of stock option shares were not included as the related impact would have been anti-dilutive as the Company generated a net loss in those periods. Had the Company generated net income in the first quarter of 2003 and the first quarter of 2002, the assumed exercise of stock options would have resulted in an additional 0.4 million shares and 3.8 million shares of diluted weighted average common shares outstanding in the first quarter of 2003 and the first quarter of 2002, respectively. This computation excludes an additional 21.0 million and 14.4 million of options outstanding at April 4, 2003 and March 29, 2002 as their exercise price exceeded the average fair market value during those periods and, accordingly, the related impact would have been anti-dilutive. For the first quarter of 2003 and the first quarter of 2002, the conversion of the redeemable preferred stock was not assumed in determining diluted earnings per share as the related impact would have been anti-dilutive. The redeemable preferred stock is

 

10


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

convertible into shares of the Company’s common stock at a price of $2.82. Earnings (loss) per share calculations for quarters ended April 4, 2003 and March 29, 2002 are as follows (in millions, except per share data):

 

    

Quarter Ended


 
    

April 4, 2003


    

March 29, 2002


 

Net loss

  

$

(30.6

)

  

$

(50.0

)

Less: Redeemable preferred stock dividends

  

 

(2.2

)

  

 

(2.1

)

    


  


Net loss applicable to common stock

  

 

(32.8

)

  

 

(52.1

)

    


  


Basic weighted average common shares outstanding

  

 

176.4

 

  

 

174.8

 

Add: Incremental shares for :

                 

Dilutive effect of stock options

  

 

—  

 

  

 

—  

 

Convertible redeemable preferred stock

  

 

—  

 

  

 

—  

 

    


  


Diluted weighted average common shares outstanding

  

 

176.4

 

  

 

174.8

 

    


  


Earnings (loss) per share:

                 

Basic

  

$

(0.19

)

  

$

(0.30

)

    


  


Diluted

  

$

(0.19

)

  

$

(0.30

)

    


  


 

The Company accounts for employee stock options on its common stock in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and provides the pro forma disclosures required by SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”) as amended by SFAS No. 148 “Accounting for Stock Based Compensation—Transition and Disclosure”. The Company measures compensation expense relating to non-employee stock awards in accordance with SFAS No. 123.

 

Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net loss for the first quarter of 2003 and 2002 would have been increased to the pro forma amounts indicated below (in millions except per share data):

 

    

Quarter Ended


 
    

April 4, 

2003


    

March 29, 

2002


 

Net loss, as reported

  

$

(30.6

)

  

$

(50.0

)

Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects

  

 

0.1

 

  

 

0.3

 

Less: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

  

 

(3.5

)

  

 

(3.5

)

    


  


Pro forma net loss

  

 

(34.0

)

  

 

(53.2

)

Less: Redeemable preferred stock dividends

  

 

(2.2

)

  

 

(2.1

)

    


  


Pro forma net loss applicable to common stock

  

$

(36.2

)

  

$

(55.3

)

    


  


Earnings per share:

                 

Basic—as reported

  

$

(0.19

)

  

$

(0.30

)

    


  


Basic—pro forma

  

$

(0.21

)

  

$

(0.32

)

    


  


Diluted—as reported

  

$

(0.19

)

  

$

(0.30

)

    


  


Diluted—pro forma

  

$

(0.21

)

  

$

(0.32

)

    


  


 

11


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

The fair value of each option grant has been estimated at the date of grant while the fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan has been estimated at the beginning of the respective offering periods, both using a Black-Scholes option-pricing model with the following weighted-average assumptions:

 

    

Quarter Ended


 

Employee Stock Options


  

April 4,

2003


    

March 29,

2002


 

Expected life (in years)

  

5

 

  

5

 

Risk-free interest rate

  

3.03

%

  

4.47

%

Volatility

  

0.70

 

  

0.70

 

    

Quarter Ended


 

Employee Stock Purchase Plan


  

April 4,

2003


    

March 29,

2002


 

Expected life (in years)

  

0.25

 

  

0.25

 

Risk-free interest rate

  

1.22

%

  

1.74

%

Volatility

  

0.70

 

  

0.70

 

 

The weighted-average estimated fair value of employee stock options granted during the first quarter of 2003 and 2002 was $0.76 and $2.05 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during the first quarter of 2003 and 2002 was $0.34 and $0.55, respectively.

 

Note 6:  Long-Term Debt

 

Long-term debt at April 4, 2003 and December 31, 2002 consists of the following (dollars in millions):

 

   

April 4, 2003


      

December 31, 2002


 
   

Amount of
Facility


    

Interest
Rate


    

Balance


      

Amount of
Facility


  

Interest
Rate


    

Balance


 

Senior Bank Facilities:

                                                

Tranche A

 

$

200.0

    

6.80

%

  

$

4.8

 

    

$

200.0

  

6.4375

%

  

$

6.6

 

Tranche B

 

 

325.0

    

6.80

%

  

 

153.1

 

    

 

325.0

  

6.4375

%

  

 

209.9

 

Tranche C

 

 

350.0

    

6.80

%

  

 

164.9

 

    

 

350.0

  

6.4375

%

  

 

226.0

 

Tranche D

 

 

200.0

    

6.80

%

  

 

97.9

 

    

 

200.0

  

6.4375

%

  

 

134.1

 

Tranche R

 

 

62.5

    

6.80

%

  

 

62.5

 

    

 

—  

  

—  

 

  

 

—  

 

Revolver

 

 

62.5

    

6.80

%

  

 

37.5

 

    

 

150.0

  

6.4375

%

  

 

125.0

 

                   


                  


                   

 

520.7

 

                  

 

701.6

 

12% Senior Secured Notes due 2010, interest payable semi-annually, net of debt discount of $9.0

                 

 

191.0

 

                  

 

—  

 

12% Second-Lien Senior Secured Notes due 2008, interest payable semi-annually, net of debt discount of $8.3 and $8.6

                 

 

291.7

 

                  

 

291.4

 

12% Senior Subordinated Notes due 2009, interest payable semi-annually

                 

 

260.0

 

                  

 

260.0

 

10% Junior Subordinated Note to Motorola due 2011, interest compounded semi-annually, payable at maturity

                 

 

130.2

 

                  

 

126.9

 

2.25% Note payable to Japanese bank due 2010

                 

 

23.8

 

                  

 

23.3

 

                   


                  


                   

 

1,417.4

 

                  

 

1,403.2

 

Less: Current maturities

                 

 

(4.0

)

                  

 

(9.3

)

                   


                  


                   

$

1,413.4

 

                  

$

1,393.9

 

                   


                  


 

12


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

First-Lien Notes

 

On March 3, 2003, the Issuers issued $200.0 million principal amount of First-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The First-Lien Notes, which are callable after four years, were issued at 95.467% of par value and generated net proceeds of approximately $180.9 million after deducting the discount and related issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities, including $25.0 million relating to the Company’s revolving credit facility. In connection with the prepayment, the Company wrote off $3.5 million of debt issuance costs in the first quarter of 2003.

 

The First-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries. In addition, the First-Lien Notes and related guarantees are secured on a first-priority basis by the assets that secure the senior bank facilities and they rank equal in right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness and senior to the Company’s and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of the Company’s subsidiaries that have not guaranteed such notes.

 

The Issuers filed an exchange offer registration statement on May 2, 2003 relating to the First-Lien Notes pursuant to a registration rights agreement. The Securities and Exchange Commission declared the registration statement effective on May 8, 2003.

 

Second-Lien Notes

 

On May 6, 2002, the Issuers issued $300.0 million principal amount of second lien notes (the “Second-Lien Notes”) in a private offering that was exempt from the registration requirements of the federal securities laws. The Second-Lien Notes, which are callable after four years, were issued at 96.902% of par value and generated net proceeds of $278.6 million after deducting the discount and related issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities. In connection with this prepayment, the Company wrote off $6.5 million of debt issuance costs during the second quarter of 2002. Because the amount outstanding under the senior bank facilities was reduced below $750.0 million, the supplemental interest charges were reduced from 3.0% to 1.0%. The Company exercised its option to terminate the supplemental interest charges by paying the entire accrued balance of supplemental interest charges of $26.9 million during the first quarter of 2003. The Second-Lien Notes accrued interest at the rate of 12% until February 6, 2003, when the related annual interest increased to 13%. The increased interest rate will remain in effect unless on or prior to August 6, 2003 the Company issues $100.0 million of its common stock or certain convertible preferred stock to financial sponsors and uses the net proceeds to prepay additional amounts outstanding under its senior bank facilities or under any other credit facility secured by a first-priority lien and permanently reduces the related loan commitments in an amount equal to the amount prepaid. Interest on Second-Lien Notes is payable semi-annually on May 15 and November 15.

 

The Second-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries that are also guarantors under the 12% Senior Subordinated Notes Due 2009 (the “Senior Subordinated Notes”) described below. In addition, the Second-Lien Notes and the related guarantees are secured on a second-priority basis by the capital stock or other equity interests of the Company’s domestic subsidiaries, 65% of the capital stock or other equity interests of the Company’s first-tier foreign subsidiaries and substantially all other assets, in each case that are held by the Company or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.

 

13


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

The Issuers filed an exchange offer registration statement on October 1, 2002 relating to the Second-Lien Notes pursuant to a registration rights agreement. The Securities and Exchange Commission declared the registration statement effective on January 27, 2003.

 

Annual maturities relating to the Company’s long-term debt as of April 4, 2003 are as follows (in millions):

 

Remainder of 2003

  

$

1.8

       2004

  

 

6.0

       2005

  

 

155.8

       2006

  

 

194.5

       2007

  

 

176.8

      Thereafter

  

 

882.5

    

      Total

  

$

1,417.4

    

 

The Company and SCI LLC are co-issuers of the First-Lien Notes (issued in March 2003), the Second-Lien Notes, and the Senior Subordinated Notes (collectively, “the Notes”.) The Company’s other domestic subsidiaries (collectively, the “Guarantor Subsidiaries”) fully and unconditionally guarantee on a joint and several basis, the Issuers’ obligations under the Notes. The Guarantor Subsidiaries include Semiconductor Components Industries of Rhode Island, Inc, an operating subsidiary, as well as holding companies whose net assets consist primarily of investments in the Company’s Czech subsidiaries, the Leshan joint venture and nominal equity interests in certain of the Company’s other foreign subsidiaries. The Company’s remaining subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes.

 

14


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

The Company does not believe that the separate financial statements and other disclosures concerning the Guarantor Subsidiaries provide any additional information that would be material to investors in making an investment decision. Condensed consolidating financial information for the Issuers, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):

 

      

Issuers


                        
      

ON Semiconductor
Corporation


   

SCI LLC


    

Guarantor
Subsidiaries


  

Non-Guarantor
Subsidiaries


  

Eliminations


   

Total


 

As of April 4, 2003

                                                 

Cash and cash equivalents

    

$

—  

 

 

$

125.4

 

  

$

—  

  

$

63.7

  

$

—  

 

 

$

189.1

 

Receivables, net

    

 

—  

 

 

 

41.9

 

  

 

—  

  

 

87.4

  

 

—  

 

 

 

129.3

 

Inventories, net

    

 

—  

 

 

 

21.8

 

  

 

2.5

  

 

159.4

  

 

(17.0

)

 

 

166.7

 

Other current assets

    

 

—  

 

 

 

6.2

 

  

 

0.3

  

 

28.6

  

 

—  

 

 

 

35.1

 

      


 


  

  

  


 


Total current assets

    

 

—  

 

 

 

195.3

 

  

 

2.8

  

 

339.1

  

 

(17.0

)

 

 

520.2

 

Property, plant and equipment, net

    

 

—  

 

 

 

95.8

 

  

 

30.9

  

 

304.3

  

 

—  

 

 

 

431.0

 

Goodwill and other intangibles, net

    

 

—  

 

 

 

8.1

 

  

 

92.9

  

 

—  

  

 

—  

 

 

 

101.0

 

Investments and other assets

    

 

(624.6

)

 

 

145.8

 

  

 

49.1

  

 

1.4

  

 

571.8

 

 

 

143.5

 

      


 


  

  

  


 


Total assets

    

$

(624.6

)

 

$

445.0

 

  

$

175.7

  

$

644.8

  

$

554.8

 

 

$

1,195.7

 

      


 


  

  

  


 


Accounts payable

    

$

—  

 

 

$

38.4

 

  

$

2.2

  

$

76.2

  

$

—  

 

 

$

116.8

 

Accrued expenses and other current liabilities

    

 

—  

 

 

 

95.4

 

  

 

1.7

  

 

27.5

  

 

2.0

 

 

 

126.6

 

Deferred income on sales to distributors

    

 

—  

 

 

 

31.3

 

  

 

—  

  

 

36.9

  

 

—  

 

 

 

68.2

 

      


 


  

  

  


 


Total current liabilities

    

 

—  

 

 

 

165.1

 

  

 

3.9

  

 

140.6

  

 

2.0

 

 

 

311.6

 

Long-term debt(1)

    

 

742.7

 

 

 

1,392.8

 

  

 

—  

  

 

20.6

  

 

(742.7

)

 

 

1,413.4

 

Other long-term liabilities

    

 

—  

 

 

 

32.3

 

  

 

—  

  

 

14.4

  

 

—  

 

 

 

46.7

 

Intercompany(1)

    

 

(787.1

)

 

 

(516.4

)

  

 

162.1

  

 

356.6

  

 

784.8

 

 

 

—  

 

      


 


  

  

  


 


Total liabilities

    

 

(44.4

)

 

 

1,073.8

 

  

 

166.0

  

 

532.2

  

 

44.1

 

 

 

1,771.7

 

Minority interests in consolidated subsidiaries

    

 

—  

 

 

 

—  

 

  

 

—  

  

 

—  

  

 

4.2

 

 

 

4.2

 

Redeemable preferred stock

    

 

112.3

 

 

 

—  

 

  

 

—  

  

 

—  

  

 

—  

 

 

 

112.3

 

Stockholders’ equity (deficit)

    

 

(692.5

)

 

 

(628.8

)

  

 

9.7

  

 

112.6

  

 

506.5

 

 

 

(692.5

)

      


 


  

  

  


 


Liabilities, minority interests and stockholders’ equity (deficit)

    

$

(624.6

)

 

$

445.0

 

  

$

175.7

  

$

644.8

  

$

554.8

 

 

$

1,195.7

 

      


 


  

  

  


 


 

15


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

      

Issuers


                        
      

ON Semiconductor
Corporation


   

SCI LLC


    

Guarantor
Subsidiaries


  

Non-Guarantor
Subsidiaries


  

Eliminations


   

Total


 

As of December 31, 2002

                                                 

Cash and cash equivalents

    

$

—  

 

 

$

121.5

 

  

$

—  

  

$

60.9

  

$

—  

 

 

$

182.4

 

Receivables, net

    

 

—  

 

 

 

38.2

 

  

 

—  

  

 

83.4

  

 

—  

 

 

 

121.6

 

Inventories, net

    

 

—  

 

 

 

25.4

 

  

 

0.5

  

 

147.3

  

 

(13.2

)

 

 

160.0

 

Other current assets

    

 

—  

 

 

 

7.4

 

  

 

0.1

  

 

35.5

  

 

—  

 

 

 

43.0

 

      


 


  

  

  


 


Total current assets

    

 

—  

 

 

 

192.5

 

  

 

0.6

  

 

327.1

  

 

(13.2

)

 

 

507.0

 

Property, plant and equipment, net

    

 

—  

 

 

 

104.4

 

  

 

33.5

  

 

316.2

  

 

—  

 

 

 

454.1

 

Goodwill and other intangibles, net

    

 

—  

 

 

 

8.1

 

  

 

95.9

  

 

—  

  

 

—  

 

 

 

104.0

 

Investments and other assets

    

 

(596.3

)

 

 

131.3

 

  

 

47.2

  

 

1.3

  

 

554.5

 

 

 

138.0

 

      


 


  

  

  


 


Total assets

    

$

(596.3

)

 

$

436.3

 

  

$

177.2

  

$

644.6

  

$

541.3

 

 

$

1,203.1

 

      


 


  

  

  


 


Accounts payable

    

$

—  

 

 

$

25.3

 

  

$

1.7

  

$

50.4

  

$

—  

 

 

$

77.4

 

Accrued expenses and other current liabilities

    

 

—  

 

 

 

134.9

 

  

 

1.6

  

 

25.4

  

 

1.9

 

 

 

163.8

 

Deferred income on sales to distributors

    

 

—  

 

 

 

32.3

 

  

 

—  

  

 

38.5

  

 

—  

 

 

 

70.8

 

      


 


  

  

  


 


Total current liabilities

    

 

—  

 

 

 

192.5

 

  

 

3.3

  

 

114.3

  

 

1.9

 

 

 

312.0

 

Long-term debt(1)

    

 

551.4

 

 

 

1,372.2

 

  

 

—  

  

 

21.7

  

 

(551.4

)

 

 

1,393.9

 

Other long-term liabilities

    

 

—  

 

 

 

28.3

 

  

 

—  

  

 

16.8

  

 

—  

 

 

 

45.1

 

Intercompany(1)

    

 

(595.7

)

 

 

(558.1

)

  

 

158.9

  

 

401.4

  

 

593.5

 

 

 

—  

 

      


 


  

  

  


 


Total liabilities

    

 

(44.3

)

 

 

1,034.9

 

  

 

162.2

  

 

554.2

  

 

44.0

 

 

 

1,751.0

 

Minority interests in consolidated subsidiaries

    

 

—  

 

 

 

—  

 

  

 

—  

  

 

—  

  

 

4.1

 

 

 

4.1

 

Redeemable preferred stock

    

 

110.1

 

 

 

—  

 

  

 

—  

  

 

—  

  

 

—  

 

 

 

110.1

 

Stockholders’ equity (deficit)

    

 

(662.1

)

 

 

(598.6

)

  

 

15.0

  

 

90.4

  

 

493.2

 

 

 

(662.1

)

      


 


  

  

  


 


Liabilities, minority interests and stockholders’ equity (deficit)

    

$

(596.3

)

 

$

436.3

 

  

$

177.2

  

$

644.6

  

$

541.3

 

 

$

1,203.1

 

      


 


  

  

  


 


 

16


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

      

Issuers


                                 
      

ON Semiconductor
Corporation


    

SCI LLC


      

Guarantor
Subsidiaries


      

Non-Guarantor
Subsidiaries


    

Eliminations


    

Total


 

For the quarter ended April 4, 2003

                                                

Revenues

    

$

—  

 

  

$

136.5

 

    

$

15.5

 

    

$

323.8

 

  

$

(209.3

)

  

$

266.5

 

Cost of sales

    

 

—  

 

  

 

121.6

 

    

 

11.2

 

    

 

268.9

 

  

 

(205.5

)

  

 

196.2

 

      


  


    


    


  


  


Gross profit

    

 

—  

 

  

 

14.9

 

    

 

4.3

 

    

 

54.9

 

  

 

(3.8

)

  

 

70.3

 

      


  


    


    


  


  


Research and development

    

 

—  

 

  

 

5.6

 

    

 

3.5

 

    

 

8.6

 

  

 

—  

 

  

 

17.7

 

Selling and marketing

    

 

—  

 

  

 

8.9

 

    

 

0.1

 

    

 

7.1

 

  

 

—  

 

  

 

16.1

 

General and administrative

    

 

—  

 

  

 

13.5

 

    

 

—  

 

    

 

8.6

 

  

 

—  

 

  

 

22.1

 

Amortization of goodwill and other intangibles

    

 

—  

 

  

 

—  

 

    

 

3.0

 

    

 

—  

 

  

 

—  

 

  

 

3.0

 

      


  


    


    


  


  


Total operating expenses

    

 

—  

 

  

 

28.0

 

    

 

6.6

 

    

 

24.3

 

  

 

—  

 

  

 

58.9

 

      


  


    


    


  


  


Operating income (loss)

    

 

—  

 

  

 

(13.1

)

    

 

(2.3

)

    

 

30.6

 

  

 

(3.8

)

  

 

11.4

 

Interest expense, net

    

 

—  

 

  

 

(24.8

)

    

 

(4.9

)

    

 

(7.9

)

  

 

—  

 

  

 

(37.6

)

Loss on debt prepayment

    

 

—  

 

  

 

(3.5

)

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

(3.5

)

Equity earnings

    

 

(30.6

)

  

 

9.8

 

    

 

1.9

 

    

 

—  

 

  

 

20.3

 

  

 

1.4

 

      


  


    


    


  


  


Income (loss) before income taxes and minority interests

    

 

(30.6

)

  

 

(31.6

)

    

 

(5.3

)

    

 

22.7

 

  

 

16.5

 

  

 

(28.3

)

Income tax provision

    

 

—  

 

  

 

(0.9

)

    

 

—  

 

    

 

(1.1

)

  

 

—  

 

  

 

(2.0

)

Minority interests

    

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

(0.3

)

  

 

(0.3

)

      


  


    


    


  


  


Net income (loss)

    

$

(30.6

)

  

$

(32.5

)

    

$

(5.3

)

    

$

21.6

 

  

$

16.2

 

  

$

(30.6

)

      


  


    


    


  


  


For the quarter ended March 29, 2002

                                                

Revenues

    

$

—  

 

  

$

127.6

 

    

$

20.7

 

    

$

306.0

 

  

$

(185.2

)

  

$

269.1

 

Cost of sales

    

 

—  

 

  

 

132.8

 

    

 

15.4

 

    

 

251.4

 

  

 

(188.7

)

  

 

210.9

 

      


  


    


    


  


  


Gross profit

    

 

—  

 

  

 

(5.2

)

    

 

5.3

 

    

 

54.6

 

  

 

3.5

 

  

 

58.2

 

      


  


    


    


  


  


Research and development

    

 

—  

 

  

 

10.3

 

    

 

1.2

 

    

 

5.8

 

  

 

—  

 

  

 

17.3

 

Selling and marketing

    

 

—  

 

  

 

7.4

 

    

 

0.5

 

    

 

6.7

 

  

 

—  

 

  

 

14.6

 

General and administrative

    

 

—  

 

  

 

16.6

 

    

 

—  

 

    

 

12.6

 

  

 

—  

 

  

 

29.2

 

Amortization of goodwill and other intangibles

    

 

—  

 

  

 

—  

 

    

 

3.0

 

    

 

—  

 

  

 

—  

 

  

 

3.0

 

Restructuring and other

    

 

—  

 

  

 

7.1

 

    

 

—  

 

    

 

—  

 

  

 

—  

 

  

 

7.1

 

      


  


    


    


  


  


Total operating expenses

    

 

—  

 

  

 

41.4

 

    

 

4.7

 

    

 

25.1

 

  

 

—  

 

  

 

71.2

 

      


  


    


    


  


  


Operating income (loss)

    

 

—  

 

  

 

(46.6

)

    

 

0.6

 

    

 

29.5

 

  

 

3.5

 

  

 

(13.0

)

Interest expense, net

    

 

—  

 

  

 

(19.1

)

    

 

(4.7

)

    

 

(10.9

)

  

 

—  

 

  

 

(34.7

)

Equity earnings

    

 

(50.0

)

  

 

41.5

 

    

 

(0.5

)

    

 

—  

 

  

 

10.2

 

  

 

1.2

 

      


  


    


    


  


  


Income (loss) before income taxes and minority interests

    

 

(50.0

)

  

 

(24.2

)

    

 

(4.6

)

    

 

18.6

 

  

 

13.7

 

  

 

(46.5

)

Income tax provision

    

 

—  

 

  

 

(1.7

)

    

 

—  

 

    

 

(2.0

)

  

 

—  

 

  

 

(3.7

)

Minority interests

    

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

—  

 

  

 

0.2

 

  

 

0.2

 

      


  


    


    


  


  


Net income (loss)

    

$

(50.0

)

  

$

(25.9

)

    

$

(4.6

)

    

$

16.6

 

  

$

13.9

 

  

$

(50.0

)

      


  


    


    


  


  


 

17


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

      

Issuers


    

Guarantor Subsidiaries


    

Non-Guarantor Subsidiaries


    

Eliminations


 

Total


 
      

ON Semiconductor Corporation


 

SCI LLC


            

For the quarter ended April 4, 2003

                                                 

Net cash provided by (used in) operating activities

    

$

—  

 

$

(0.8

)

  

$

0.9

 

  

$

11.4

 

  

$

—  

 

$

11.5

 

      

 


  


  


  

 


Cash flows from investing activities:

                                                 

Purchases of property, plant and equipment

    

 

—  

 

 

(0.4

)

  

 

(0.9

)

  

 

(4.7

)

  

 

—  

 

 

(6.0

)

      

 


  


  


  

 


Net cash used in investing activities

    

 

—  

 

 

(0.4

)

  

 

(0.9

)

  

 

(4.7

)

  

 

—  

 

 

(6.0

)

      

 


  


  


  

 


Cash flows from financing activities:

                                                 

Intercompany loans

    

 

—  

 

 

(83.0

)

  

 

—  

 

  

 

83.0

 

  

 

—  

 

 

—  

 

Intercompany loan repayments

    

 

—  

 

 

87.2

 

  

 

—  

 

  

 

(87.2

)

  

 

—  

 

 

—  

 

Proceeds from debt issuance, net of discount

    

 

—  

 

 

190.9

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

190.9

 

Payment of debt issuance costs

    

 

—  

 

 

(9.3

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

(9.3

)

Repayment of long term debt

    

 

—  

 

 

(180.9

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

(180.9

)

Proceeds from issuance of common stock under the employee stock purchase plan

    

 

—  

 

 

0.2

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

0.2

 

      

 


  


  


  

 


Net cash provided by (used in) financing activities

    

 

—  

 

 

5.1

 

  

 

—  

 

  

 

(4.2

)

  

 

—  

 

 

0.9

 

      

 


  


  


  

 


Effect of exchange rate changes on cash and cash equivalents

    

 

—  

 

 

—  

 

  

 

—  

 

  

 

0.3

 

  

 

—  

 

 

0.3

 

      

 


  


  


  

 


Net increase in cash and cash equivalents

    

 

—  

 

 

3.9

 

  

 

—  

 

  

 

2.8

 

  

 

—  

 

 

6.7

 

Cash and cash equivalents, beginning of period

    

 

—  

 

 

121.5

 

  

 

—  

 

  

 

60.9

 

  

 

—  

 

 

182.4

 

      

 


  


  


  

 


Cash and cash equivalents, end of period

    

$

—  

 

$

125.4

 

  

$

—  

 

  

$

63.7

 

  

$

—  

 

$

189.1

 

      

 


  


  


  

 


For the quarter ended March 29, 2002

                                                 

Net cash provided by (used in) operating activities

    

$

—  

 

$

(104.8

)

  

$

—  

 

  

$

80.4

 

  

$

—  

 

$

(24.4

)

      

 


  


  


  

 


Cash flows from investing activities:

                                                 

Purchases of property, plant and equipment

    

 

—  

 

 

(0.4

)

  

 

(0.1

)

  

 

(5.1

)

  

 

—  

 

 

(5.6

)

Proceeds from sales of property, plant and equipment

    

 

—  

 

 

0.2

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

0.2

 

      

 


  


  


  

 


Net cash used in investing activities

    

 

—  

 

 

(0.2

)

  

 

(0.1

)

  

 

(5.1

)

  

 

—  

 

 

(5.4

)

      

 


  


  


  

 


Cash flows from financing activities:

                                                 

Intercompany loans

    

 

—  

 

 

(72.5

)

  

 

—  

 

  

 

72.5

 

  

 

—  

 

 

—  

 

Intercompany loan repayments

    

 

—  

 

 

140.4

 

  

 

—  

 

  

 

(140.4

)

  

 

—  

 

 

—  

 

Payment of capital lease obligation

    

 

—  

 

 

(0.7

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

(0.7

)

Repayment of long term debt

    

 

—  

 

 

(2.8

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

(2.8

)

Proceeds from exercise of stock options and issuance of common stock under the employee stock purchase plan

    

 

—  

 

 

1.2

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

1.2

 

      

 


  


  


  

 


Net cash provided by financing activities

    

 

—  

 

 

65.6

 

  

 

—  

 

  

 

(67.9

)

  

 

—  

 

 

(2.3

)

      

 


  


  


  

 


Effect of exchange rate changes on cash and cash equivalents

    

 

—  

 

 

—  

 

  

 

—  

 

  

 

(0.1

)

  

 

—  

 

 

(0.1

)

      

 


  


  


  

 


Net increase (decrease) in cash and cash equivalents

    

 

—  

 

 

(39.4

)

  

 

(0.1

)

  

 

7.3

 

  

 

—  

 

 

(32.2

)

Cash and cash equivalents, beginning of period

    

 

—  

 

 

124.9

 

  

 

0.1

 

  

 

54.8

 

  

 

—  

 

 

179.8

 

      

 


  


  


  

 


Cash and cash equivalents, end of period

    

$

—  

 

$

85.5

 

  

$

—  

 

  

$

62.1

 

  

$

—  

 

$

147.6

 

      

 


  


  


  

 



(1)   For purposes of this presentation, the Senior Subordinated Notes, Second-Lien Notes, and First-Lien Notes have been reflected in the condensed balance sheets of both the Company and SCI LLC with the appropriate offset reflected in the eliminations column. Interest expense has been allocated to SCI LLC only.
(2)   The Company is a holding company and has no operations apart from those of its operating subsidiaries. Additionally, the Company does not maintain a bank account; rather, SCI LLC, its primary operating subsidiary, processes all of its cash receipts and disbursements on its behalf.

 

18


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Note 7:  Commitments and Contingencies

 

Other Contingencies

 

The Company’s manufacturing facility in Phoenix, Arizona is located on property that is a “Superfund” site, a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola is actively involved in the cleanup 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 August 4, 1999 recapitalization, Motorola has retained responsibility for this contamination, and has agreed to indemnify the Company with respect to remediation costs and other costs or liabilities related to this matter.

 

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 the Company to indemnify the other party against losses due to intellectual property 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 is a party to various agreements with Motorola, a former affiliate, which were entered into in connection with the Company’s separation from Motorola. Pursuant to these agreements, the Company has agreed to indemnify Motorola for losses due to, for example, breach of representations and warranties and covenants, damages arising from assumed liabilities or relating to allocated assets, and for specified environmental matters. The Company’s obligations under these agreements may be limited in terms of time and/or amount and payment by the Company is conditioned on Motorola making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge Motorola’s claims.

 

The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance, which should enable it to recover a portion of any future amounts paid.

 

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with sales of our securities and the engagement of financial advisors and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by the Company.

 

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 condition, results of operations or cash flows.

 

 

19


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Legal Matters

 

The Company is involved in a variety of legal matters that arose in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described in the next paragraphs, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

During the period July 5, 2001 through July 27, 2001, the Company was named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against the Company and certain of its current and former officers, current directors and the underwriters for its initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York as: Abrams v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of the Company’s initial public offering improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company’s common stock in the aftermarket as conditions of receiving shares in its initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in the Company’s initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. We understand that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which along with the cases against the Company have all been transferred to a single federal district judge for purposes of coordinated case management. The Company believes that the claims against it are without merit and have defended, and intend to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and the Company cannot guarantee that the outcome of these claims will be favorable.

 

Accordingly, on July 15, 2002, together with the other issuer defendants, the Company filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of our individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the Court granted in part and denied in part those motions. As to the claims brought against the Company under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow plaintiffs the opportunity to re-plead these claims. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to the Company and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects. While the Company can make no promises or guarantees as to the outcome of these proceedings, it believes that the final result of these actions will have no material effect on the Company’s consolidated financial condition, results of operations or cash flows.

 

20


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

Note 8:  Related Party Transactions

 

Related party activities between the Company and Motorola, excluding those separately disclosed in the accompanying financial statements are as follows (in millions):

 

    

Quarter Ended


    

April 4, 

2003


  

March 29, 

2002


Cash paid for:

             

Purchases of manufacturing services from Motorola

  

$

1.9

  

$

3.2

    

  

Cost of other services, rent and equipment purchased from Motorola

  

$

0.4

  

$

0.5

    

  

Cash received for:

             

Freight sharing agreement with Motorola

  

$

—  

  

$

5.7

    

  

Rental of property and equipment to Motorola

  

$

 2.2

  

$

2.5

    

  

Product sales to Motorola

  

$

15.4

  

$

24.1

    

  

 

Note 9:  Recent Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying value and depreciated over the assets’ remaining useful life. The Company adopted SFAS No. 143 effective January 1, 2003. The implementation of SFAS No. 143 did not have a material effect on the Company’s results of operations.

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet the Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends FASB Statement No. 13, “Accounting for Leases” and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS No. 145 effective January 1, 2003. The adoption of SFAS No. 145 will require the reclassification within the Company’s statement of operations of losses on debt prepayment previously classified as extraordinary items.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated by the Company after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment to FAS 123.” SFAS No. 148 provides alternative methods of

 

21


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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company’s fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003 and are provided in Note 5 to the Company’s unaudited consolidated financial statements. The Company has no plans to change to the fair value based method of accounting for stock-based employee compensation.

 

In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately and such disclosures have been included in Note 3 “Balance Sheet Information.” The Company does not expect the adoption of FIN No. 45 to have a material effect on its financial condition or results of operations.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied to the first interim or annual period beginning after June 15, 2003. Additionally, certain transitional disclosures are required immediately if it is reasonably possible that the Company will consolidate or disclose information about a variable interest entity when FIN No. 46 becomes effective. The Company does not expect the implementation will have a material impact on its results of operations and financial condition. The Company is currently evaluating the effect that the adoption of FIN No. 46 will have on the investment in Leshan-Phoenix Semiconductor Ltd. (“Leshan”). The Company owns a majority of the outstanding equity interests of Leshan, which operates a back-end manufacturing facility in Leshan, China. Due to certain rights held by the minority shareholder, the Company does not exercise control over Leshan normally commensurate with majority ownership and therefore, accounts for its investment using the equity method. At December 31, 2002 and April 4, 2003, the Company’s exposure to losses related to Leshan include $35.7 million and $37.2 million in equity investments, respectively, and an additional $63.3 million related to an outstanding loan to Leshan.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30. The Company is currently evaluating the impact that this pronouncement will have on its financial condition and results of operations.

 

22


Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes thereto as of and for the year ended December 31, 2002 included in our Annual Report on Form 10-K filed with the SEC on March 25, 2003. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those discussed below and elsewhere in this Form 10-Q.

 

We are a global supplier of power and data management semiconductors and standard semiconductor components. We design, manufacture and market an extensive portfolio of semiconductor components that addresses the design needs of sophisticated electronic systems and products. Our power management semiconductor components distribute and monitor the supply of power to the different elements within a wide variety of electronic devices. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing and communications systems. Our standard semiconductor components serve as “building block” components within virtually all electronic devices.

 

We serve a broad base of end-user markets including wireless communications, consumer electronics, automotive and industrial electronics and computing and networking. Applications for our products in these markets include portable electronics, computers, game stations, servers, automotive and industrial automation control systems, routers, switches, storage-area networks and automated test equipment.

 

We have four main product lines: power management and standard analog devices, metal oxide semiconductor (MOS) power devices, high frequency clock and data management devices and standard components. Our extensive portfolio of devices enables us to offer advanced integrated circuits and “building block” components that deliver system level functionality and design solutions. Our product portfolio currently comprises approximately 15,000 products and we shipped approximately 21.1 billion units in 2002. We specialize in micro packages, which offer increased performance characteristics while reducing the critical board space inside today’s ever shrinking electronic devices. We believe that our ability to offer a broad range of products provides our customers with single source purchasing on a cost-effective and timely basis.

 

We have approximately 200 direct customers worldwide, and we also service approximately 300 significant original equipment manufacturers indirectly through our distributor and electronic manufacturing service provider customers. Our direct and indirect customers include: (1) leading original equipment manufacturers in a broad variety of industries, such as Alcatel, DaimlerChrysler, Delphi, Delta Electronics, Intel, Motorola, Nokia, Siemens, Sony and Visteon; (2) electronic manufacturing service providers, such as Flextronics, Sanmina-SCI and Solectron; and (3) global distributors, such as Arrow, Avnet and Future Electronics.

 

We have design operations in Arizona, Rhode Island, China, Hong Kong, the Czech Republic and France, and we operate manufacturing facilities independently and through joint ventures in Arizona, Rhode Island, China, the Czech Republic, Japan, Malaysia, the Philippines and Slovakia.

 

The following table of contents sets forth the components of management’s discussion and analysis contained herein:

 

    

Page


Summary of Recent Developments

  

24

ON Financial Performance

  

24

Liquidity and Capital Structure

  

25

Critical Accounting Policies

  

26

Results of Operations

  

28

Quarter Ended April 4, 2003 Compared to Quarter Ended March 29, 2002

  

28

Liquidity and Capital Resources

  

31

Sources and Uses of Cash

  

31

Key Events Affecting our Capital Structure

  

32

Analysis of Cash Flows

  

34

EBITDA

  

36

Commercial Commitments and Contractual Obligations

  

37

Off-Balance Sheet Arrangements

  

38

Recent Accounting Pronouncements

  

38

Trends, Risks and Uncertainties

  

40

 

23


Table of Contents

 

Summary of Recent Developments

 

ON Financial Performance

 

Revenues

 

The following table sets forth our total revenues for the last five quarters:

 

Quarter Ended(1)


    

Total Revenues


    

% Change


 
      

(in millions)

        

March 29, 2002

    

$

269.1

        

June 28, 2002

    

$

277.7

    

3.2

%

September 27, 2002

    

$

272.0

    

(2.1

%)

December 31, 2002

    

$

265.7

    

(2.3

%)

April 4, 2003

    

$

266.5

    

0.3

%


(1)   Because our fiscal quarters are determined based on 13 calendar weeks ending on a Friday, except for the fourth quarter which ends on December 31, certain quarters may have more or fewer days than other quarters which may have a slight impact on the comparability of results.

 

Our total revenues have been relatively stable over the last five quarters. Total revenues for the first quarter of 2003 improved 0.3% as compared to the fourth quarter of 2002 and declined 1.0% as compared to the first quarter of 2002. While pricing pressures have led to continuing declines in average selling prices during the last five quarters, this has predominately been offset by increases in unit volumes and product mix changes.

 

Profitability Enhancement Programs

 

In order to better align our cost structure with our revenues, we initiated profitability enhancement programs in the fourth quarter of 2000 and in the fourth quarter of 2002. The principal elements of these programs are a manufacturing rationalization plan, a reduction of non-manufacturing personnel and other cost controls.

 

The elements of the 2000 plan that we commenced in June 2001 were completed in the fourth quarter of 2002 and resulted in $365 million of annualized cost savings, based on a comparison of our cost structure during the first quarter of 2001 to our cost structure during the third quarter of 2002. We expect the 2002 plan to be completed by the end of 2003 and to result in an estimated $80 million of cost savings in 2003 and an estimated $125 million of annual cost savings thereafter, in both cases as compared to our cost structure during the third quarter of 2002. Savings from these plans include reduced employee costs resulting from staff reductions, reduced depreciation expense resulting from asset impairments and other cost savings resulting from the transfer of certain manufacturing and administrative functions to lower cost regions, renegotiation of service and supply contracts, and other actions taken to improve our manufacturing efficiency. As of April 4, 2003, actual savings for the 2002 plan were approximately $14 million and we are on track to achieve our targeted savings of $80 million by the fourth quarter of 2003.

 

The following table summarizes the estimated annual cost savings from the 2002 plan that we expect following 2003 by type of cost and by the applicable caption contained in our consolidated statement of operations (in millions):

 

    

Reduced

Employee

Costs


  

Other

Cost

Savings


  

Total


Cost of sales

  

$

19

  

$

93

  

$

112

Sales and marketing

  

 

4

  

 

—  

  

 

4

General and administrative

  

 

7

  

 

2

  

 

9

    

  

  

    

$

30

  

$

95

  

$

125

    

  

  

 

24


Table of Contents

 

Outlook

 

Regarding our second quarter outlook, we anticipate that total revenues will be in line with the first quarter of 2003 as our beginning backlog levels were similar to the beginning first quarter levels and we expect consistent turns business in the second quarter of 2003 as compared to first quarter of 2003. We expect that our gross margins, operating margins and EBITDA will increase slightly in the second quarter of 2003 as a result of our cost reduction measures. We also expect a slight reduction in our cash balance during the second quarter of 2003 due to modest changes in working capital and increases in capital expenditures. Capital expenditures are projected to increase in the remainder of 2003 as compared to the first quarter of 2003, with annual capital expenditures targeted at between $50 and $60 million for 2003.

 

Liquidity and Capital Structure

 

Cash Position and Capital Expenditures

 

Cash flows have not changed significantly in the first quarter of 2003 as compared to the fourth quarter of 2002. Our cash balance at April 4, 2003 increased by $6.7 million as compared to December 31, 2002. Cash flows provided by operating activities were $11.5 million in the first quarter of 2003, a $4.2 million improvement from the net cash provided of $7.3 million in the fourth quarter of 2002. The increase in cash flows from operations is, in part, attributable to an increase in accounts payable of $39.4 million in the first quarter of 2003, offset by $26.9 million in payments of supplemental interest payments and other working capital changes in the first quarter of 2003.

 

Our manufacturing rationalization plans have included efforts to efficiently utilize our existing manufacturing assets and supply arrangements. Accordingly, we have reduced our capital expenditures during 2002 and 2003. We do not expect that our capital expenditure reductions will have a negative impact on our ability to service our customers, as 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. Capital expenditures are expected to be between $50 and $60 million in 2003. In the first quarter of 2003, our capital expenditures were $6.0 million.

 

25


Table of Contents

 

Debt Refinancing

 

During 2002 and the first quarter of 2003, we refinanced a portion of our senior bank facilities through the issuance of $300.0 million principal amount of our second lien senior secured notes due 2008 and $200.0 million principal amount of our first lien senior secured notes due 2010. The net proceeds from these two transactions were used to prepay a portion of our senior bank facilities. In connection with the issuance of the first lien senior secured notes, we amended our senior bank facilities to provide us additional financial flexibility by removing the requirement that we maintain certain minimum interest expense coverage ratios and that we do not exceed certain maximum leverage ratios, and by reducing to $140.0 million our minimum EBITDA requirement for any four consecutive fiscal quarters. While we also reduced our permitted capital expenditures to $100.0 million per year (subject to certain increases for improved financial performance and carryovers from prior periods), we do not expect this reduction to have a significant impact on our operating plans or financial performance. These refinancings have extended our debt maturities as reflected in the following table (in millions):

 

    

Actual Maturities as of December 31, 2001


  

2002 Activity


    

Actual Maturities

as of December 31, 2002


  

2003 Activity


    

Actual

Maturities

as of

April 4, 2003


       

Additions


    

Repayments


    

2002*

Refinancing


       

Additions


  

2003**

Refinancing


    

2002

  

$

12.4

  

$

—  

    

$

(9.6

)

  

$

(2.8

)

  

$

—  

  

$

—  

  

$

—  

 

  

$

—  

2003

  

 

13.8

  

 

—  

    

 

—  

 

  

 

(4.5

)

  

 

9.3

  

 

—  

  

 

(7.5

)

  

 

1.8

2004

  

 

18.3

  

 

—  

    

 

—  

 

  

 

(6.5

)

  

 

11.8

  

 

—  

  

 

(5.8

)

  

 

6.0

2005

  

 

290.1

  

 

—  

    

 

—  

 

  

 

(53.2

)

  

 

236.9

  

 

—  

  

 

(81.1

)

  

 

155.8

2006

  

 

412.3

  

 

—  

    

 

—  

 

  

 

(131.4

)

  

 

280.9

  

 

—  

  

 

(86.4

)

  

 

194.5

2007

  

 

258.8

  

 

—  

    

 

—  

 

  

 

(82.0

)

  

 

176.8

  

 

—  

  

 

—  

 

  

 

176.8

Thereafter

  

 

381.2

  

 

13.1

    

 

—  

 

  

 

293.2

 

  

 

687.5

  

 

4.2

  

 

190.8

 

  

 

882.5

    

  

    


  


  

  

  


  

    

$

1,386.9

  

$

13.1

    

$

(9.6

)

  

$

12.8

 

  

$

1,403.2

  

$

4.2

  

$

10.0

 

  

$

1,417.4

    

  

    


  


  

  

  


  


*   Relates to impact on debt maturities resulting from the May 2002 issuance of the second lien senior secured notes due 2008 and prepayment of amounts outstanding under our senior bank facilities.
**   Relates to impact on debt maturities resulting from the March 2003 issuance of the first lien senior secured notes due 2010 and prepayment of amounts outstanding under our senior bank facilities.

 

Critical Accounting Policies

 

The accompanying discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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.

 

Revenue.    We generate revenue from sales of our semiconductor products to original equipment manufacturers, electronic manufacturing service providers, and distributors. We recognize revenue on sales to original equipment manufacturers and electronic manufacturing service providers when title passes to the customer net of provisions for related sales returns and allowances. For distributor sales, the related revenues are deferred until the distributor resells the product to the end user. Title to products sold to distributors typically passes at the time of shipment by us so we record accounts receivable for the amount of the transaction, reduce our inventory for the products shipped and defer the related margin in our consolidated balance sheet. We recognize the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days. Our revenue recognition method for distributor sales aligns our reported results with, focuses us on, and enables investors to better understand, end user demand for the products we sell through distribution as our revenue is not influenced by our distributors’ stocking decisions.

 

26


Table of Contents

 

Inventories.    We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market and record provisions for slow moving inventories based upon a regular analysis of inventory on hand compared to historical and projected end user demand. Projected end user demand is generally based on sales during the prior twelve months. 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 is reserved, impacting our cost of sales and gross profit. If demand recovers and the parts previously reserved are sold, we will generally recognize a higher than normal margin. However, the majority of product inventory that has been previously reserved is ultimately discarded. Although we do sell some products that have previously been written down, such sales have historically been relatively consistent on a quarterly basis and the related impact on our margins on a comparative basis has not been material.

 

Deferred Tax Valuation Allowance.    We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that we will not realize all or a portion of our remaining deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately 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 released to income as a credit to income tax expense. In the fourth quarter of 2001, we established a valuation allowance for the majority of our deferred tax assets and, to date, we have not recognized any incremental domestic deferred tax benefits. We monitor our ability to utilize our deferred tax assets and the continuing need for a related valuation allowance on an ongoing basis.

 

Impairment of Long-Lived Assets.    We periodically evaluate the recoverability of the carrying amount of our property, plant and equipment, intangible asset and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted expected cash flows derived from an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset 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. 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.

 

Goodwill.    We evaluate our goodwill for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing our goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

Defined Benefit Plans.    We maintain pension plans covering certain of our employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and cash funding requirements of our pension plans.

 

27


Table of Contents

 

Results of Operations

 

Quarter Ended April 4, 2003 Compared to Quarter Ended March 29, 2002

 

The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements. The dollar amounts in the following table are in millions.

 

   

Quarter Ended


             
   

April 4, 

2003


    

% of  

Revenues(1)


    

March 29, 

2002


    

% of 

Revenues(1)


   

Dollar 

Change


   

Percent 

Change


 

Total revenues

 

$

266.5

 

  

100.0

%

  

$

269.1

 

  

100.0

%

 

$

(2.6

)