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FSL > SEC Filings for FSL > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for FREESCALE SEMICONDUCTOR, LTD.

Form 10-Q for FREESCALE SEMICONDUCTOR, LTD.


30-Oct-2012

Quarterly Report

2006 Management Incentive Plan and 2007 Employee Incentive Plan

Upon completion of the IPO, the shares reserved for issuance under the 2006 Management Incentive Plan ("2006 MIP") and 2007 Employee Incentive Plan ("2007 EIP"), both as described below, that were not issued or subject to outstanding grants became available under the 2011 Plan, and no further awards will be made under the 2006 MIP or 2007 EIP. In the event that any outstanding award under the 2011 Plan, the 2006 MIP or the 2007 EIP is forfeited for any reason, terminates, expires or lapses, any shares subject to such award will be available for issuance under the 2011 Plan. (Refer to our December 31, 2011 Annual Report on Form 10-K for further information on the 2006 MIP and 2007 EIP.)

Non-qualified Options

During the nine months ended September 28, 2012, approximately 973 thousand and 143 thousand stock options were exercised under the 2006 MIP and 2007 EIP, respectively. The weighted average strike prices for the stock options exercised in the nine months ended September 28, 2012 for the 2006 MIP and 2007 EIP were $6.93 and $6.96, respectively. As of September 28, 2012, we had approximately $14 million in unamortized expense related to options issued under the 2006 MIP and 2007 EIP, net of expected forfeitures, which is being amortized on a straight-line basis over a period of four years to additional paid-in capital.

Restricted Share Units and Deferred Share Units

Under the terms of the 2006 MIP, RSUs were granted to certain members of management, key employees and directors. The grants are rights to receive our common shares on a one-for-one basis and vest 25% on each of the first, second, third and fourth anniversaries of the grant date and are not entitled to dividends or voting rights, if any, until the common shares are delivered. The fair value of the RSU awards is being recognized on a straight-line basis over the employee service period.

During 2009, we also granted performance-based deferred stock units (DSUs) to certain executives of Freescale Inc. under the 2006 MIP. The number of DSUs that could be earned pursuant to such awards range from zero to twice the number of target DSUs established at the grant date based upon the achievement of EBITDA and revenue growth levels measured against a group of peer companies over a three-year period beginning January 1, 2009. As of February 1, 2012, these performance-based DSUs were cancelled because the minimum performance conditions were not achieved.


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A summary of changes in RSUs and DSUs outstanding under the 2006 MIP during the nine months ended September 28, 2012 is presented below:

                                                            RSUs and DSUs
                                                           (in thousands)
       Non-vested RSU and DSU balance at January 1, 2012             1,894
       Granted                                                          -
       Vested                                                          (69 )
       Issued                                                          (33 )
       Terminated, cancelled or expired                             (1,722 )

       Non-vested RSU balance at September 28, 2012                     70

Under the terms of the RSU award agreements, common shares are not issued to the participant upon vesting of the RSU. Shares are issued upon the earlier of:
(i) the participant's termination of employment, (ii) the participant's death,
(iii) the participant's disability, (iv) a change of control, or (v) the fifth or seventh anniversary of the date of grant. Vested RSUs are considered outstanding until shares have been issued or the awards have been cancelled. As of September 28, 2012, we had $1 million in unamortized expense related to RSUs issued under the 2006 MIP, net of expected forfeitures, which is being amortized on a straight-line basis to additional paid-in capital over a period of two to four years.

Employee Share Purchase Plan

We initiated an Employee Share Purchase Plan ("ESPP") upon the completion of the IPO, for which we have approximately six million common shares reserved for future issuance. Under the ESPP, eligible participants are allowed to purchase common shares of Freescale through payroll deductions of up to 15% of their compensation on an after-tax basis. The price an employee pays per share is 85% of the fair market value of the common shares on the close of the last trading day of the purchase period. The ESPP has two six-month purchase periods, the first of which begins on January 1 and the second of which begins on July 1.

The offering period for the first ESPP began on January 1, 2012 and ended on June 29, 2012. During the third quarter of 2012, approximately 1.4 million common shares of Freescale were issued to participating employees under the ESPP at a discounted price of $8.71 per share.

(7) Income Taxes

Income taxes for the interim periods presented have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. Our effective tax rate is impacted by the mix of earnings and losses by taxing jurisdictions. Although the Company is a Bermuda entity with a statutory income tax rate of zero, the earnings of many of the Company's subsidiaries are subject to taxation in the U.S. and other foreign jurisdictions. We record minimal tax expense on our U.S. earnings due to valuation allowances recorded on substantially all the Company's U.S. net deferred tax assets, as we have incurred cumulative losses in the United States.

For the third quarter of 2012, we recorded an income tax provision of $14 million. This includes $5 million net tax expense related to discrete events primarily attributable to withholding tax on intellectual property royalties and the impact of enacted foreign tax legislation. For the first nine months of 2012, we recorded an income tax provision of $39 million. This included a net income tax expense of $11 million primarily attributable to discrete events associated with withholding tax on intellectual property royalties.

For the third quarter of 2011, we recorded an income tax provision of $14 million. This includes a $6 million tax expense associated with discrete events related primarily to withholding tax on intellectual property royalties and reserves for tax contingencies. For the first nine months of 2011, we recorded an income tax provision of $17 million, including a $5 million net tax benefit related to discrete events consisting principally of the release of domestic valuation allowances on capital losses carryforwards which the Company believes will likely be realized and the tax benefit from the reversal of unrecognized tax benefits related to foreign audit settlements, partially offset by withholding tax on intellectual property royalties.

The Company estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $51 million in the next twelve months primarily due to the lapsing of statutes. The projected decrease is anticipated to result in a tax benefit of approximately $7 million. The remaining decrease will not impact our effective tax rate, as the tax benefits will be offset by valuation allowance on our deferred tax assets. Certain of our income tax returns for the 2004 through 2010 tax years are currently under examination by various taxing authorities around the world. Although the resolution of open audits is highly uncertain, management considers it unlikely that the results of these examinations will have a material impact on our financial condition or results of operations.


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(8) Commitments and Contingencies

Commitments

Product purchase commitments associated with our strategic manufacturing relationships with our wafer foundries and for assembly and test services include take or pay provisions based on volume commitments for work in progress and forecasted demand based on 18-month rolling forecasts, which are adjusted monthly. The commitment under these relationships is $70 million as of September 28, 2012.

Environmental Contingencies

Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA, or Superfund), and equivalent state law, Motorola, Inc. ("Motorola") has been designated as a Potentially Responsible Party (PRP) by the United States Environmental Protection Agency with respect to certain waste sites with which the Company's operations may have had direct or indirect involvement. Such designations are made regardless of the extent of Motorola's involvement. Pursuant to the master separation and distribution agreement entered into in connection with our spin-off from Motorola in 2004, Freescale Inc. has indemnified Motorola for these liabilities going forward. These claims are in various stages of administrative or judicial proceedings. They include demands for recovery of past governmental costs and for future investigations or remedial actions. The remedial efforts include environmental cleanup costs and communication programs. In many cases, the dollar amounts of the claims have not been specified and have been asserted against a number of other entities for the same cost recovery or other relief as was asserted against Freescale Inc. We accrue costs associated with environmental matters when they become probable and reasonably estimable by recording the future estimated cash flows associated with such costs on a discounted basis, as the amount and timing of cash payments become fixed or readily determinable, for the estimated remediation periods, ranging from seven years to over 50 years.

Due to the uncertain nature, the actual costs that will be incurred could differ significantly from the amounts accrued. As of both September 28, 2012 and December 31, 2011, the undiscounted future cash flows are estimated at $90 million. The expected payments for the remainder of 2012 through 2016 are $6 million, $5 million, $4 million, $3 million and $3 million, respectively, with remaining expected payments of $69 million thereafter. Accruals at both September 28, 2012 and December 31, 2011 were $42 million, the majority of which are included in other liabilities on the accompanying Condensed Consolidated Balance Sheets. These amounts represent only our estimated share of costs incurred in environmental cleanup sites without considering recovery of costs from any other party or insurer, since in most cases PRPs other than us may exist and be held responsible. For more information, refer to "Environmental Matters" in Part I, "Item 3: Legal Proceedings" and Note 8, "Commitments and Contingencies," to our audited consolidated financial statements in our December 31, 2011 Annual Report on Form 10-K.

Litigation

We are a defendant in various lawsuits, including intellectual property suits noted in this section, and are subject to various claims which arise in the normal course of business. The Company records an associated liability when a loss is probable and the amount is reasonably estimable.

From time to time, we are involved in legal proceedings arising in the ordinary course of business, including tort, contractual and customer disputes, claims before the United States Equal Employment Opportunity Commission and other employee grievances, and intellectual property litigation and infringement claims. Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling our products. Under agreements with Motorola, Freescale Inc. must indemnify Motorola for certain liabilities related to our business incurred prior to our separation from Motorola.

On April 17, 2007, Tessera Technologies, Inc. filed a complaint against Freescale Inc., ATI Technologies, Inc., Motorola, Inc., Qualcomm, Inc., Spansion, Inc., Spansion LLC, and STMicroelectronics N.V. in the International Trade Commission (ITC) requesting the ITC to enter an injunction barring the importation of any product containing a device that infringes two identified patents related to ball grid array packaging technology. On May 20, 2009, the ITC issued a final order finding that all the respondents infringed Tessera's asserted patents, and granted Tessera's request for a Limited Exclusion Order prohibiting the importation of respondents' infringing products. On September 17, 2010, the asserted patents expired, thus nullifying the Limited Exclusion Order.

On April 17, 2007, Tessera also filed a parallel lawsuit in the United States District Court for the Eastern District of Texas against ATI, Freescale Inc., Motorola and Qualcomm claiming an unspecified amount of monetary damage as compensation for the alleged infringement of the same Tessera patents. The lawsuit was stayed during the pendency of the ITC matter, but is now active, and has been transferred to the United States District Court for the Northern District of California. We continue to assess the merits of the United States District Court litigation and have recorded no associated liability as of September 28, 2012.

The resolution of intellectual property litigation, including those matters described above, may require us to pay damages for past infringement or to obtain a license under the other party's intellectual property rights that could require one-time license fees or ongoing royalties, require us to make material changes to our products and/or manufacturing processes, require us to cross-license


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certain of our patents and other intellectual property and/or prohibit us from manufacturing or selling one or more products in certain jurisdictions, which could adversely impact our operating results in future periods. If any of those events were to occur, our business, financial condition and results of operations could be adversely affected.

Other Contingencies

In the ordinary course of business, we regularly execute contracts that contain customary indemnification provisions. Additionally, we execute other contracts considered outside the ordinary course of business which contain indemnification provisions. Examples of these types of agreements include business divestitures, business acquisitions, settlement agreements and third-party performance guarantees. In each of these circumstances, payment by us is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow us to challenge the other party's claims. Further, our obligations under these agreements may be limited in terms of duration, (i.e. typically not in excess of 24 months) and/or amount (i.e. not in excess of the contract value). In some instances we may have recourse against third parties for certain payments made by us.

Historically, we have not made significant payments for indemnification provisions contained in these agreements. During the first nine months of 2012, we recorded a benefit of $4 million to reorganization of business and other for the expiration of indemnification obligations under a contract previously executed outside the ordinary course of business. At September 28, 2012, we have no remaining accruals related to known estimated indemnification obligations. We believe that if we were to incur additional losses with respect to any unknown matters at September 28, 2012, such losses would not have a material negative impact on our financial position, results of operations or cash flows. (Refer to Note 9 "Reorganization of Business and Other", for further information on the contract reversal discussed in this note.)

(9) Reorganization of Business and Other

Nine Months Ended September 28, 2012

Chief Executive Leadership Transition

During the first nine months of 2012, $13 million, net was recorded in reorganization of business and other related to the change in the executive leadership of the Company. The majority of this amount was a charge related to indemnification and other provisions included in Gregg Lowe's (our current president and CEO) employment agreement along with other costs associated with his hiring. We also recognized costs related to the successful transition of duties of our former Chairman of the Board and CEO.

Sendai, Japan Fabrication Facility and Design Center

On March 11, 2011, a 9.0-magnitude earthquake off the coast of Japan caused extensive infrastructure, equipment and inventory damage to our 150 millimeter fabrication facility and design center in Sendai, Japan. The design center was vacant and being marketed for sale at the time of the earthquake. The fabrication facility was previously scheduled to close in the fourth quarter of 2011. The extensive earthquake damage to the facility and the interruption of basic services, coupled with numerous major aftershocks and the resulting environment, prohibited us from returning the facility to an operational level required for wafer production in a reasonable time frame. As a result, the Sendai, Japan fabrication facility ceased operations at the time of the earthquake, and we were unable to bring the facility back up to operational condition due to the extensive damage to our facilities and equipment. During the first nine months of 2012, we recorded a $55 million benefit for business interruption insurance recoveries which was partially offset by $4 million of expenses primarily related to on-going closure costs. These amounts do not include the $95 million benefit recorded in the second half of 2011 for property and inventory damage and related business interruption insurance recoveries. We continue to work with our insurers and expect to finalize our claims and receive additional insurance proceeds in the fourth quarter of 2012. In the first nine months of 2012, the remaining $3 million of contract termination exit costs previously accrued in connection with the site closure were paid.

Reorganization of Business Program

We have executed a series of restructuring initiatives under the Reorganization of Business Program that streamlined our cost structure and re-directed some research and development investments into expected growth markets. The closure of our Toulouse, France manufacturing facility occurred during the third quarter of 2012. The only remaining actions relating to the Reorganization of Business Program are the disposal or sale of the land and buildings located in Sendai, Japan and the decommissioning and sale of the land, buildings and equipment at our Toulouse, France manufacturing facility along with payment of the remaining separation and exit costs.

At each reporting date, we evaluate our accruals for exit costs and employee separation costs, which consist primarily of separation benefits (principally severance and relocation payments), to ensure that our accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out our plans or because employees previously identified for separation resign unexpectedly and do not receive severance or are redeployed due to circumstances not foreseen when the original plans were initiated. We reverse accruals to earnings when it is determined they are no longer required.


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The following table displays a roll-forward from January 1, 2012 to September 28, 2012 of the employee separation and exit cost accruals established related to the Reorganization of Business Program:

                                             Accruals at                         Adjustments                            Accruals at
                                             January 1,                          & Currency           Amounts          September 28,
(in millions, except headcount)                 2012             Charges           Impact              Used                2012
Employee Separation Costs
Supply chain                                $         106              -                    3              (21 )      $            88
Selling, general and administrative                     8              -                   (6 )             -                       2
Research and development                               14              -                  (12 )             -                       2

Total                                       $         128              -                  (15 )            (21 )      $            92

Related headcount                                     720              -                   -              (170 )                  550

Exit and Other Costs                        $           6               2                  -                (2 )      $             6

The $21 million used reflects cash payments made to employees separated as part of the Reorganization of Business Program in the first nine months of 2012. We have adjusted our anticipated future severance payments by $15 million to incorporate the currency impact in the above presentation. These adjustments reflect the strengthening of the U.S. dollar against the Euro partially offset by the weakening of the U.S. dollar against the Japanese Yen since the charges were originally recorded in 2009. The accrual of $92 million at September 28, 2012 reflects the estimated liability to be paid to the remaining 550 employees through 2014 based on current exchange rates. Additionally, during the first nine months of 2012 we recorded $2 million in exit costs related to the termination of various supply agreements in connection with the closure of our Toulouse, France manufacturing facility and in accordance with ASC Topic 420 "Exit or Disposal Cost Obligations" ("ASC Topic 420"). During the first nine months of 2012, we paid $2 million of exit costs related to underutilized office space which was previously vacated in connection with our Reorganization of Business Program.

Other Contingencies and Disposition Activities

During the first nine months of 2012, we recorded benefits totaling $18 million related to the expiration of indemnification obligations under a contract previously executed outside the ordinary course of business and the expiration of contractual obligations associated with the wind down of our cellular handset business. Additionally, we incurred $13 million of on-going closure and decommissioning costs associated with the closure our Toulouse, France manufacturing facility and a net $6 million contract termination charge related to our corporate jet lease agreement accounted for in accordance with ASC Topic 420.

Nine Months Ended September 30, 2011

IPO-Related Costs

In the first nine months of 2011 and in connection with the IPO, we recorded $71 million of cash costs primarily attributable to the termination of various management agreements with affiliates and advisors of the Sponsors. (Refer to Note 10, "Supplemental Guarantor Condensed Consolidating Financing Statements" elsewhere in this report as well as Note 11, "Certain Relationships and Related Party Transactions," to our consolidated financial statements in our December 31, 2011 Annual Report on Form 10-K for further discussion.)

Sendai, Japan Fabrication Facility and Design Center

In the first nine months of 2011, we reported a net charge of $79 million associated with non-cash asset impairment and inventory charges, cash costs for employee separation benefits, contract termination, other on-going closure costs and insurance recoveries in reorganization of business and other in the Condensed Consolidated Statement of Operation in association with this event.


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The following table displays a roll-forward from January 1, 2011 to September 30, 2011 of the employee separation benefits and exit cost accruals established related to the closing of our fabrication facility in Sendai, Japan:

                                                Accruals at                                                                Accruals at
                                                January 1,                                               Amounts          September 30,
(in millions, except headcount)                    2011             Charges         Adjustments           Used                2011
Employee Separation Costs
Supply chain                                   $          -               12                  (3 )             (9 )      $            -
Selling, general and administrative                       -               -                   -                -                      -
Research and development                                  -               -                   -                -                      -

Total                                          $          -               12                  (3 )             (9 )      $            -

Related headcount                                         -              480                (100 )           (380 )                   -

Exit and Other Costs                           $          -               12                  -                (7 )      $             5

We recorded $12 million in employee separation benefits associated with the closure of the Sendai, Japan fabrication facility in the first nine months of 2011. The $9 million used reflects cash payments made to employees separated as part of this action in the first nine months of 2011. We reversed $3 million of employee separation benefits as a result of 100 employees previously identified as eligible for such benefits who were either temporarily redeployed due to circumstances not foreseen when the original plan was approved or have forfeited these benefits in connection with establishing other employment outside the Company. In addition, we also recorded $12 million of exit costs related to the termination of various supply contracts. In the first nine months of 2011, $7 million of these exit costs were paid.

Asset Impairment Charges and Other Costs

As a result of the significant structural and equipment damage to the Sendai, Japan fabrication facility and the Sendai, Japan design center, we recorded $49 million in non-cash asset impairment charges in the first nine months of 2011. We also had raw materials and work-in-process inventory that were destroyed or damaged either during the earthquake or afterwards due to power outages, continuing aftershocks and other earthquake-related events. As a result, we recorded a non-cash inventory charge, net of $14 million directly attributable to the impact of the earthquake in the first nine months of 2011. In addition to these non-cash asset impairment and inventory charges, we incurred $31 million of on-going closure costs due to inactivity subsequent to the March 11, 2011 earthquake.

Insurance Recoveries

In the first nine months of 2011, we recorded a $36 million benefit for insurance recoveries based on an agreement with our insurance carriers regarding the impact of the property damage to our Sendai, Japan facilities as a result of the March 11, 2011 earthquake.


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Reorganization of Business Program

The following table displays a roll-forward from January 1, 2011 to
September 30, 2011 of the employee separation and exit cost accruals established
related to the Reorganization of Business Program:


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