S-1/A 1 ds1a.htm AMENDMENT NO. 6 TO FORM S-1 Amendment No. 6 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on May 9, 2011.

Registration No. 333-172188

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Amendment No. 6

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


FREESCALE SEMICONDUCTOR HOLDINGS I, LTD.

(Exact name of registrant as specified in its charter)


Bermuda   3674   98-0522138

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer Identification No.)

6501 William Cannon Drive West

Austin, TX 78735

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Jonathan Greenberg

Senior Vice President, General Counsel and Secretary

Freescale Semiconductor, Inc.

6501 William Cannon Drive West

Austin, TX 78735

Telephone: (512) 895-2193

Facsimile: (512) 895-3082

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

Jennifer A. Bensch

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036

Telephone: (212) 735-3000

Facsimile: (212) 735-2000

 

Andrew J. Pitts

Joel F. Herold

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

Telephone: (212) 474-1620

Facsimile: (212) 474-3700


Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer    ¨

         Accelerated filer                  ¨

Non-accelerated filer      x

 

(Do not check if a smaller reporting company)

     Smaller reporting company ¨

 


CALCULATION OF REGISTRATION FEE

 


Title of each Class of

Securities to be Registered

   Amount
to be
Registered(1)
   Proposed
Maximum
Aggregate
Offering Price
Per Share(2)
   Proposed
Maximum
Aggregate
Offering Price(2)
   Amount of
Registration
Fee(3)

Common shares, $0.0258 par value

   50,025,000    $24.00    $1,200,600,000    $139,390

(1)   Includes shares that the underwriters have the option to purchase to cover over-allotments.
(2)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3)   Of such amount, $133,515 was previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated May 9, 2011

PROSPECTUS

 

LOGO

43,500,000 Shares

Freescale Semiconductor Holdings I, Ltd.

Common Shares

$             per share

 


 

This is the initial public offering of our common shares. We are selling 43,500,000 of our common shares. Prior to this offering, there has been no public market for our common shares. We currently expect that the initial public offering price will be between $22.00 and $24.00 per share. We have granted the underwriters a 30-day option to purchase up to an additional 6,525,000 common shares from us to cover over-allotments.

 

The common shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “FSL.”

 

Investing in our common shares involves risks. See “Risk Factors” beginning on page 11 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities nor passed upon the accuracy or adequacy of the disclosures in the prospectus. Any representation to the contrary is a criminal offense.

 


 

     Per Share

     Total

 

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to us

   $         $     

 

The underwriters expect to deliver the common shares against payment on or about                     , 2011.

 


 

Citi   Deutsche Bank Securities
Barclays Capital   Credit Suisse   J.P. Morgan

 


 

Goldman, Sachs & Co.   RBC Capital Markets   UBS Investment Bank
Sanford C. Bernstein  

Gleacher & Company

  Oppenheimer & Co.   Pacific Crest Securities   Piper Jaffray

 

                    , 2011.


Table of Contents

TABLE OF CONTENTS

 

     Page

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     11   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     34   

ENFORCEMENT OF CIVIL LIABILITIES UNDER UNITED STATES FEDERAL SECURITIES LAWS

     35   

USE OF PROCEEDS

     36   

DIVIDEND POLICY

     38   

CAPITALIZATION

     39   

DILUTION

     41   

SELECTED FINANCIAL DATA

     43   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     46   

OUR BUSINESS

     90   

MANAGEMENT

     109   

EXECUTIVE COMPENSATION

     118   

PRINCIPAL SHAREHOLDERS

     150   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     157   

DESCRIPTION OF SHARE CAPITAL

     161   

COMPARISON OF SHAREHOLDER RIGHTS

     166   

SHARES ELIGIBLE FOR FUTURE SALE

     173   

TAX CONSIDERATIONS

     175   

UNDERWRITING

     180   

Relationships and Conflicts of Interest

     182   

LEGAL MATTERS

     186   

EXPERTS

     186   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     187   

GLOSSARY

     188   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority for the issue and transfer of the common shares to and between non-residents of Bermuda for exchange control purposes provided our shares remain listed on an appointed stock exchange, which includes the New York Stock Exchange. This prospectus will be filed with the Registrar of Companies in Bermuda in accordance with Bermuda law. In granting such consent and in accepting this prospectus for filing, neither the Bermuda Monetary Authority nor the Registrar of Companies in Bermuda accepts any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us. We have not authorized anyone to provide you with information different from that contained in this prospectus or any related free writing prospectus. We and the underwriters are offering to sell, and seeking offers to buy, common shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common shares.

 

Through and including                     , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. The distribution of this prospectus and any free writing prospectus and the offering and sale of the common shares may be restricted by law in your jurisdiction. If you have received this prospectus and any free writing prospectus, you are required by us and the underwriters to inform yourselves about and to observe any restrictions relating to this offering of the common shares and the distribution of this prospectus.

 

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research as well as from industry publications and research, surveys and studies conducted by third parties. Industry publications, research, surveys and studies generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Although we believe that such publications, research, surveys and studies are reliable, we have not independently verified industry, market and competitive position data from third-party sources.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained in this prospectus. Because it is a summary, it does not contain all the information you should consider before investing in our common shares. You should carefully read this entire prospectus before deciding whether to purchase our common shares. In particular, you should read the section entitled “Risk Factors” and our consolidated financial statements and the notes relating to those statements included elsewhere in this prospectus. Unless the context otherwise requires, all references herein to “we,” “our,” “us,” “Freescale,” “Holdings I” and the “Company” are to Freescale Semiconductor Holdings I, Ltd. and its consolidated subsidiaries. In this prospectus we refer to our principal shareholder, Freescale Holdings L.P., as “Freescale LP,” and to Freescale Semiconductor, Inc., our indirect wholly owned subsidiary and main U.S. operating entity, as “Freescale Inc.” A glossary of abbreviations and technical terms used in this prospectus is set forth on page 188.

 

Overview

 

We are a global leader in embedded processing solutions. An embedded processing solution is the combination of embedded processors, complementary semiconductor devices and software. In 2010, we derived approximately 80% of our net sales from products where we held the #1 or #2 market positions and had over 30% of the embedded processor market. Our embedded processor products include microcontrollers, single- and multi-core microprocessors, applications processors and digital signal processors. They provide the core functionality of electronic systems, adding essential control and intelligence, enhancing performance and optimizing power usage while lowering system costs. We also offer complementary semiconductor products, including radio frequency (RF), power management, analog, mixed-signal devices and sensors. A key element of our strategy is to combine our embedded processors, complementary semiconductor devices and software to offer highly integrated embedded processing solutions that are increasingly sought by our customers to simplify their development efforts and shorten their time to market. We have a heritage of innovation and product leadership spanning over 50 years and have an extensive intellectual property portfolio, including approximately 6,100 patent families, allowing us to serve our more than 18,000 customers through our direct sales force and distribution partners.

 

We are focused on some of the fastest growing applications within the automotive, networking, industrial and consumer markets. These applications include automotive safety, hybrid and all-electric vehicles, next generation wireless infrastructure, smart energy, portable medical devices, consumer appliances and smart mobile devices. We leverage our deep customer relationships, intellectual property portfolio, extensive suite of software and design tools and technical expertise to introduce innovative new products and platform-level solutions in our target markets. We believe our ability to leverage our intellectual property across product lines and target markets enables us to be early to market with our products.

 

The trend of increasing connectivity and the need for enhanced intelligence in existing and new markets are the primary drivers of the growth of embedded processing solutions in electronic devices. Growing electronic content in automobiles, increasing network bandwidth, connected industrial and medical electronics, context-based sensing, the proliferation of smart mobile devices and the increasing importance of power efficiency are driving the growth of our business. According to the International Data Corporation (“IDC”), a global provider of market intelligence, the total market for microcontrollers, digital signal processors and communications processors is expected to exceed $23.1 billion by 2013, representing a compound annual growth rate of 8.0% from 2010. We believe our competitive offerings will enable us to grow faster than the markets in which we compete.

 

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Our broad product portfolio falls into three primary groupings:

 

   

Microcontrollers


 

Networking and
Multimedia


 

RF, Analog and Sensor


Key Applications

 

Automotive safety & chassis

Traditional, hybrid and all-electric automotive powertrains

Consumer appliances

Factory automation

Portable medical devices

Smart grid & smart energy

 

Wireless infrastructure (basestations)

Enterprise switching & routing

Cloud computing

Networked printing & imaging

Security appliances

Automotive driver
information systems

Smart mobile devices

 

Wireless infrastructure (basestations)

Automotive safety systems

Powertrain & engine management

Hybrid and all-electric
vehicles

Consumer sensors

Smart mobile devices

Consumer appliances

Market Position(1)

 

#2 in Microcontrollers

#2 in Automotive MCUs / MPUs

#2 in China MCU market

 

#1 in Embedded Processing Units—excluding compute applications

#1 in Embedded Processors in communications applications

#1 in eReader Applications Processors

#2 in DSPs

 

#1 in RF Power Devices

#1 in Merchant Automotive MEMS-based Sensors

#1 in Automotive Accelerometers

   

Net Sales ($ in millions) /
% of 2010 net sales(2)

  $1,594 / 36%   $1,233 / 28%   $1,056 / 24%

(1)   For market data sources, please refer to “Business—Overview.”
(2)   Cellular Products and Other accounted for the remaining 12% of total 2010 net sales.

 

We sell our products directly to original equipment manufacturers (“OEMs”), distributors, original design manufacturers and contract manufacturers through our global sales force. Our top 10 customers based on 2010 net sales have purchased our products for an average of over 25 years, and we have built our relationships with these customers upon years of collaborative development. Our top 15 OEM customers based on 2010 sales are Alcatel-Lucent, Robert Bosch GmbH (“Bosch”), Cisco Systems, Inc. (“Cisco Systems”), Continental Automotive GmbH (“Continental Automotive”), Delphi Electronics Corporation (“Delphi), Denso Corporation (“Denso”), Ericsson AB (“Ericsson”), Huawei Technologies Co. Ltd. (“Huawei”), Motorola Mobility Holdings, Inc. (“Motorola Mobility”), Motorola Solutions, Inc. (“Motorola Solutions”), Nokia Siemens Networks BV (“Nokia Siemens Networks”), Research in Motion Ltd. (“Research in Motion”), TRW Automotive Holdings Corp. (“TRW”), Valeo SA (“Valeo”) and ZTE Corporation (“ZTE”).

 

Our Transformation

 

We launched our transformation program in the fall of 2008 and have since refocused our research and development efforts, sharpened our customer engagement strategy, streamlined our manufacturing footprint, and improved our profitability and our capital structure. We have achieved approximately $720 million in annual operating savings as of the quarter ended December 31, 2010, as compared to the third quarter of 2008, and we expect to achieve an additional $120 million in annualized savings in connection with our planned facility closures. Key elements of our transformation program include:

 

Experienced senior leadership team.    We have a highly experienced executive management team with deep industry knowledge and a strong execution track record. Our Chairman and Chief Executive Officer, Rich Beyer, was hired in 2008 to lead our transformation efforts and has assembled an executive team with an average of over 26 years experience in the semiconductor and broader high-technology industries.

 

 

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Focused research and development on creating products for high-growth applications.    We have increasingly focused our research and development activities on our target markets in automotive, networking, industrial and consumer, while deemphasizing investment in our cellular handset baseband products and other non-core technologies. We are focused on producing differentiated embedded processing solutions targeted at the fastest growing applications in our target end markets. This strategy has enabled us to increase our design wins from customers.

 

Streamlined manufacturing footprint and reduced fixed cost base.    We have significantly reduced our manufacturing footprint by closing two 150 millimeter wafer fabrication facilities in high-cost locations and are utilizing outsourced foundry partners to exclusively produce all semiconductor devices below the 90 nanometer geometry node. We recently announced that our manufacturing facilities in Japan will not be reopened as a result of the March 2011 earthquake. We have previously announced the closure of our manufacturing facilities in France, which we expect to complete in the fourth quarter of 2011. We expect to realize improved utilization levels once these actions are complete.

 

Improved capital structure.    Since 2008, we have reduced the face value of our debt by $2.1 billion and extended the maturities on $5.1 billion of our debt to 2016 and beyond. We intend to use the proceeds of this offering to further reduce our net debt.

 

Growth in net sales and gross margin.    Our enhanced customer focus enabled us to generate improved quarterly sales, as evidenced by a 42% increase in quarterly sales for the quarter ended April 1, 2011 as compared to the quarter ended April 3, 2009. In addition, our cost reductions have resulted in expansion of our gross margins over the same period by 19.6 percentage points. We believe we are positioned to continue to achieve improved gross margin and cash flow in future periods.

 

Our Competitive Strengths

 

We possess a number of competitive strengths that we believe will allow us to capitalize on the growth opportunities in the semiconductor industry including the following:

 

Worldwide leader in embedded processing.    We have one of the most comprehensive and technologically advanced embedded processing portfolios in the industry. We believe that our scale and breadth of products allow us to better serve our customers and will enable us to capture market share.

 

Strong system-level technology and applications expertise.    We have deep system-level applications expertise as a result of our long-standing relationships with our customers. We believe this enhances our ability to anticipate industry trends and customer needs and allows us to be early to market with new, innovative products.

 

Strong intellectual property portfolio.    We are a technology leader in our industry with a strong track record of innovation dating back more than 50 years. We have a research and development staff of over 5,500 employees and an extensive intellectual property portfolio that includes approximately 6,100 patent families.

 

Well-established, collaborative relationships with leading customers.    Our close customer relationships enable us to develop critical expertise regarding our customers’ requirements. Our products have been designed into multiple generations of our customers’ products, which enhances our net sales visibility.

 

Efficient operating model with lean manufacturing base.    Our variable and low-cost operating model enabled by our lean manufacturing base enables us to maximize our responsiveness to customer demand and to reduce our investments in manufacturing capacity and process technology.

 

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Executive management team with proven history of success.    Our highly experienced executive management team has driven the significant improvement in our gross margin, successfully refocused our research and development activities, streamlined our manufacturing footprint and improved our capital structure.

 

Our Strategy

 

We intend to capitalize on the proliferation of embedded processing and to leverage our leading embedded processor technology and platform-level solutions in each of our four target markets. The key elements of this strategy are to:

 

Focus research and development on multiple high-growth applications.    We intend to continue to invest in developing innovative embedded processing products and platform-level solutions to pursue attractive opportunities.

 

Rapidly deliver first-to-market highly differentiated products and platform-level solutions.    We intend to continue to leverage our research and development and design capabilities to deliver early to market products and platform-level solutions.

 

Increase our net sales from distribution.    We believe that our distribution partners provide us access to a significant number of potential customers. To gain access to these customers, we are creating additional incentive programs and focusing a portion of our research and development investment on products tailored toward the distribution channel.

 

Leverage our presence in emerging markets to drive growth.    We believe that we are well positioned to significantly grow in emerging markets given our history in China (over 34 years), India (over 13 years) and Brazil (over 14 years). We intend to continue our focus on emerging markets to drive growth in our business.

 

Continue to improve gross and operating margins and free cash flow.    We continue to execute a plan for margin improvement and we expect to continue to efficiently manage our capital expenditures. We believe we are well-positioned to continue to achieve improvements in margins and cash flow.

 

Risks Associated with Our Company

 

Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this prospectus. Some of the factors that we believe could affect our results include, among others:

 

   

We operate in the highly cyclical semiconductor industry, which is subject to significant downturns. Failure to adjust our supply chain volume due to changing market conditions or failure to estimate our customers’ demand could adversely affect our results of operations.

 

   

We rely on a limited number of customers for a substantial portion of our total sales. Our operating results may be adversely affected if we lose one or more of these customers or if economic conditions impact the financial viability of these customers or our distributors or suppliers, particularly in the automotive industry.

 

   

The demand for our products depends in large part on continued growth in the automotive, networking, industrial and consumer electronics industries. A market decline in any of these industries or a decline in demand for particular products in those industries could have a material negative impact on our results of operations.

 

   

Our business is dependent upon technology and associated manufacturing processes. Our failure to keep pace with technological advances or the pursuit of technologies that do not become commercially accepted may adversely affect our business, financial condition and results of operations.

 

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Our substantial leverage may affect our ability to raise additional capital to fund our operations and make capital expenditures, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable debt and restrict us from engaging in activities that we view as otherwise advantageous to our business.

 

   

If our resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or refinance our debt. If we are unable to do so, we may be forced into bankruptcy or liquidation. Although we have in the past refinanced Freescale Inc.’s indebtedness by issuing new indebtedness and amending the terms of the senior credit facilities, our lenders may not participate in such transactions in the future. Certain of our lenders have in the past, and may in the future, object to the validity of the terms of any such amendment or refinancing, including through litigation, which could delay or preclude any such transaction or subject us to significant costs.

 

   

Our ability to engage in specified activities is tied to ratios under our debt agreements, in each case subject to certain exceptions. As of April 1, 2011, Freescale Inc. did not meet the consolidated secured debt ratio set forth in its indentures. Accordingly, we are currently restricted from having liens on assets securing indebtedness, except as otherwise permitted by the indentures, but we are not in default under the indentures as a result.

 

   

Interruptions or reductions in our production or manufacturing capabilities or capacity, or that of our third party contract manufacturers, and our ability to obtain supplies could negatively impact our business. If our production or manufacturing capabilities or capacity is delayed, interrupted or eliminated, we may not be able to satisfy customer demand.

 

   

We have a history of losses and may not achieve or maintain profitability. Our gross margin is dependent on a number of factors, including our level of capacity utilization.

 

   

The failure to capture remaining cost savings from our transformation program and the impact of activities taken under the program could adversely affect our business.

 

Please refer to “Risk Factors” for a more complete discussion of the risks affecting our business. All forward-looking statements contained in this prospectus and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements disclosed under “Risk Factors” and elsewhere in this prospectus.

 

Company Information

 

We were incorporated in Bermuda on November 9, 2006. We were incorporated in connection with the acquisition of Freescale Inc. in 2006 by a consortium of private equity funds (which we refer to in this prospectus as the “Consortium”), including The Blackstone Group, The Carlyle Group, funds advised by Permira Advisers, LLC and TPG Capital (which we refer to in this prospectus as our “Sponsors”). We are a holding company and have no material assets other than our indirect ownership interest in Freescale Inc. and our other subsidiaries. We are, and after giving effect to this offering will be, controlled by a group of investment funds associated with or advised by our Sponsors through their ownership of Freescale LP, which, prior to this offering, owns substantially all of our issued and outstanding common shares. See “Principal Shareholders.”

 

Our principal executive offices are at 6501 William Cannon Drive West, Austin, Texas 78735 and our telephone number is (512) 895-2000. Our website is http://www.freescale.com. The information and other content contained on our website are not part of this prospectus. Freescale, the Freescale logo, CodeWarrior, Coldfire, Coldfire+, Kinetis, PowerQUICC, QorIQ, Qorivva, SMARTMOS, Xtrinsic, StarCore and VortiQa are our trademarks and copyrights. Other names used in this prospectus are for informational purposes only and may be trademarks of their respective owners.

 

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The Offering

 

Common shares offered by us

43,500,000 shares (or 50,025,000 shares if the underwriters exercise their over-allotment option in full).

 

Common shares to be outstanding immediately after this offering

239,795,161 shares (or 246,320,161 shares if the underwriters exercise their over-allotment option in full).

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $944 million, assuming the shares are offered at $23.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus.

 

  We intend to contribute the net proceeds from this offering to Freescale Inc., our indirect wholly owned subsidiary and main U.S. operating entity, to enable it, together with cash on hand, to repay a portion of its outstanding indebtedness and to pay certain other fees and expenses as set forth under “Use of Proceeds.”

 

Conflict of interest

Certain of the underwriters or their affiliates currently hold some of Freescale Inc.’s outstanding indebtedness. Because Citigroup Global Markets Inc. and its affiliates will receive, in the aggregate, more than 5% of the net proceeds from this offering as a result of the repayment of such indebtedness from the proceeds of this offering, this offering is being made in compliance with Rule 5121 of the Financial Industry Regulatory Authority (“FINRA”). FINRA Rule 5121 requires that a “qualified independent underwriter” participate in the preparation of the registration statement of which this prospectus forms a part and exercise the usual standards of due diligence with respect thereto. Deutsche Bank Securities Inc. has assumed the responsibilities of acting as the qualified independent underwriter in this offering. No underwriter having a conflict of interest under FINRA Rule 5121 will confirm sales to any account over which the underwriter exercises discretionary authority without the specific written approval of the accountholder. See “Underwriting.”

 

New York Stock Exchange symbol

FSL.

 

Risk factors

Please read the section entitled “Risk Factors” beginning on page 11 for a discussion of some of the factors you should carefully consider before deciding to invest in our common shares.

 

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The number of common shares to be issued and outstanding after this offering is based on 196,295,161 shares issued and outstanding as of April 1, 2011, and excludes:

 

   

9,270,013 common shares issuable upon the exercise of options (2,496,673 of which were exercisable as of April 1, 2011) outstanding under our 2006 Management Incentive Plan, as amended (which we refer to in this prospectus as the “MIP”), as of April 1, 2011, with a weighted average exercise price of $7.12 per share; and 2,664,151 common shares issuable upon vesting and satisfaction of certain other conditions of restricted stock units and deferred stock units outstanding under the MIP as of April 1, 2011;

 

   

1,646,612 common shares issuable upon the exercise of options (none of which were exercisable as of April 1, 2011) outstanding under our 2007 Employee Incentive Plan, as amended (which we refer to in this prospectus as the “EIP”), as of April 1, 2011, with a weighted average exercise price of $6.91 per share;

 

   

21,661,249 common shares reserved for issuance under the Freescale Semiconductor Holdings I 2011 Omnibus Incentive Plan (the “2011 Plan”), which will become effective upon the completion of this offering;

 

   

6,020,000 common shares reserved for future issuance under the Freescale Semiconductor Holdings I Employee Share Purchase Plan, which will become effective upon the completion of this offering; and

 

   

9,534,587 common shares issuable upon the exercise of a warrant held by Freescale LP, with an exercise price of $36.12 per share, which is currently exercisable.

 

Except as otherwise indicated, all information in this prospectus:

 

   

assumes an initial public offering price of $23.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus;

 

   

assumes no exercise of the underwriters’ over-allotment option;

 

   

gives effect to a 1-for-5.16 consolidation of our common shares effective as of May 7, 2011; and

 

   

does not give effect to a reduction in the par value of our common shares from $0.0258 per share to $0.01 per share, which will be effective May 26, 2011 and will result in an authorized share capital of 1,000 million shares, of which 900 million will be designated common shares par value $0.01 each and 100 million will be designated preference shares par value $0.01 each.

 

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Summary Financial Information

 

The following table presents our summary financial information for the years ended December 31, 2008, 2009 and 2010, which has been derived from our audited financial statements included elsewhere in this prospectus. The following table also presents our summary financial information for the three months ended April 2, 2010 and April 1, 2011 and as of April 1, 2011, which has been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the information set forth herein. The as adjusted balance sheet information reflects: (i) the sale of common shares in this offering at an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, and the application of the net proceeds therefrom as described in “Use of Proceeds” and (ii) the amendment of Freescale Inc.’s senior credit facilities to replace the revolving credit facility thereunder as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.” We prepare our financial statements in accordance with generally accepted accounting principles in the United States. Our results for any historical period are not necessarily indicative of our results for any future period. You should read this summary information in conjunction with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Year Ended December 31,

    Three Months Ended

 

(in millions, except per share data)


  2008

    2009

    2010

    April 2, 2010

    April 1, 2011

 
                     

(unaudited)

 

Operating Results

                                       

Net sales

  $ 5,226      $ 3,508      $ 4,458      $ 1,020      $ 1,194   

Cost of sales

    3,154        2,563        2,768        651        710   
   


 


 


 


 


Gross margin

    2,072        945        1,690        369        484   

Selling, general and administrative

    673        499        502        117        131   

Research and development

    1,140        833        782        191        202   

Amortization expense for acquired intangible assets

    1,042        486        467        121        63   

Reorganization of business, contract settlement and other(1)

    53        345               1        91   

Impairment of goodwill and intangible assets(2)

    6,981                               

Merger expenses(3)

    11                               
   


 


 


 


 


Operating loss

    (7,828)        (1,218)        (61)        (61)        (3)   

Gain (loss) on extinguishment or modification of long-term debt, net(4)

    79        2,296        (417)        (47)          

Other expense, net(5)

    (733)        (576)        (600)        (153)        (148)   
   


 


 


 


 


(Loss) earnings before income taxes

    (8,482)        502        (1,078)        (261)        (151)   

Income tax benefit

    (543)        (246)        (25)        (4)        (3)   
   


 


 


 


 


Net (loss) earnings

  $ (7,939)      $ 748      $ (1,053)        (257)        (148)   
   


 


 


 


 


Net Earnings (Loss) Per Share(6):

                                       

Basic

  $ (40.47)      $ 3.81      $ (5.35)      $ (1.31)      $ (0.75)   

Diluted

  $ (40.47)      $ 3.81      $ (5.35)      $ (1.31)      $ (0.75)   

Weighted Average Shares Outstanding(6):

                                       

Basic

    196        196        197        197        197   

Diluted

    197        196        197        197        197   

Other Data

                                       

Adjusted net (loss) earnings(7) (Unaudited)

  $ (186)      $ (692)      $ (20)      $ (51)      $ 57   

Capital expenditures, net

  $ 239      $ 85      $ 281      $ 42      $ 21   
          Twelve Months Ended

 
                      April 2, 2010

    April 1, 2011

 
                      (unaudited)  

Adjusted EBITDA(8) (Unaudited)

  $ 1,391      $ 579      $ 1,147      $ 759      $ 1,238   

 

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     As of April 1, 2011

 
     Actual

    As Adjusted(9)

 
    

(unaudited)

 

Balance Sheet

                

Total cash and cash equivalents

   $ 1,035      $ 750   

Total assets

   $ 4,097      $ 3,812   

Current portion of long-term debt and capital lease obligations

   $ 34      $ 34   

Long-term debt and capital lease obligations (excluding current portion)

   $ 7,576      $ 6,468   

Total debt and capital lease obligations

   $ 7,610      $ 6,502   

Total shareholders’ deficit

   $ (5,076   $ (4,132

(1)   Charges in the first quarter of 2011 include non-cash impairment and inventory charges, and cash costs for employee termination benefits, contract termination and other costs associated with the closure of our Sendai, Japan facility due to damage from the March 11 earthquake. Charges in 2009 and 2008 relate to a series of restructuring actions to streamline our cost structure and redirect some research and development investments into growth markets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reorganization of Business, Contract Settlement, and Other” for a description of these actions and charges.

 

(2)   In 2008, in connection with the termination of our agreement with Motorola, the significant decline in the market capitalization of the public companies in our peer group as of December 31, 2008, our then announced intent to pursue strategic alternatives for our cellular handset product portfolio and the impact from weakening global market conditions in our remaining businesses, we concluded that indicators of impairment existed related to our goodwill and intangible assets. As a result, we recorded impairment charges of $5,350 million and $1,631 million associated with goodwill and intangible assets, respectively.

 

(3)   Reflects expenses related to our acquisition of SigmaTel, Inc. in 2008 and other merger related items.

 

(4)   Charges recorded in 2010 primarily reflect a net pre-tax charge of $432 million attributable to the write-off of remaining original issue discount and unamortized debt issuance costs along with other charges not eligible for capitalization associated with the refinancing activities completed in 2010. These charges were partially offset by a $15 million net pre-tax gain related to open-market repurchases of Freescale Inc.’s existing notes during the period. Gains recorded during 2009 primarily reflect a $2,264 million net pre-tax gain recorded in the first quarter of 2009 in connection with the debt exchange completed during the period. Gains recorded during 2008 reflect the net pre-tax gain related to open market repurchases of Freescale Inc.’s existing notes.

 

(5)   Primarily reflects interest expense associated with our long-term debt.

 

(6)   On May 7, 2011, we effected a 1-for-5.16 consolidation of our common shares, decreasing the number of common shares outstanding from approximately 1,013 million to 196 million and increasing the par value of the common shares from $0.005 per share to $0.0258 per share. In all periods presented, basic and diluted weighted average common shares outstanding and earnings per common share have been calculated to reflect the 1-for-5.16 consolidation.

 

(7)   Adjusted net (loss) earnings is net (loss) earnings, adjusted for certain items that we believe are not indicative of the performance of our ongoing operations. We present adjusted net (loss) earnings as a supplemental performance measure. We believe adjusted net (loss) earnings is helpful to an understanding of our business and provides a means of evaluating our performance from period to period on a more consistent basis. This presentation should not be construed as an indication that similar items will not recur or that our future results will be unaffected by other items that we consider to be outside the ordinary course of our business. Because adjusted net (loss) earnings facilitates internal comparisons of our historical financial position and operating performance on a more consistent basis, we also use adjusted net (loss) earnings for business planning purposes, in measuring our performance relative to that of our competitors and in evaluating the effectiveness of our operational strategies. Adjusted net (loss) earnings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results as reported under U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using adjusted net (loss) earnings only supplementally.

 

     A reconciliation of adjusted net (loss) earnings to net (loss) earnings, the most directly comparable U.S. GAAP performance measure, is provided below:

 

   

Year Ended December 31,


  Three Months Ended

 

(in millions)


  2008

    2009

   

2010


  April 2, 2010

    April 1, 2011

 
                    (unaudited)  

Net (loss) earnings

  $ (7,939   $ 748      $(1,053)   $ (257   $ (148

Purchase price accounting impact(a)

    1,264        709      613     151        108   

Non-cash share-based compensation expense(b)

    57        38      28     6        7   

Fair value adjustment on interest rate derivatives(c)

    38        8      14     6          

Deferred and non-current tax benefit(d)

    (603     (264   (53)     (9     (6

(Gain) loss on extinguishment or modification of long-term debt, net(e)

    (79     (2,296   417     47          

Reorganization of business, contract settlement and other(f)

    53        345          1        91   

Goodwill and intangible asset impairment(g)

    6,981                          

Merger expenses and other(h)

    42        20      14     4        5   
   


 


 
 


 


Adjusted net (loss) earnings

  $ (186   $ (692   $(20)   $ (51   $ 57   

 

  (a)   Reflects the effects of purchase price accounting relating to our acquisition by a consortium of investors in 2006 and our acquisition of SigmaTel, Inc. in 2008, including depreciation expense associated with the property, plant and equipment step up to fair value, amortization expense for acquired intangible assets related to developed technology, tradenames/trademarks and customer relationships and inventory step up to fair value.

 

  (b)   Reflects non-cash, share-based compensation expense under the provisions of ASC Topic 718, “Compensation—Stock Compensation.”

 

  (c)   Reflects the cumulative ineffectiveness and change in fair value of our interest rate derivatives which are not designated as cash flow hedges under the provisions of ASC Topic 815, “Derivatives and Hedging.”

 

  (d)   Adjustments to reflect cash income tax expense.

 

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  (e)   Reflects gains and losses on extinguishments and modification of our long-term debt, net. See note (4) above.

 

  (f)   Reflects losses related to our reorganization of business programs and other charges. See note (1) above.

 

  (g)   Reflects non-cash charges related to impairments of goodwill and intangible assets. See note (2) above.

 

  (h)   Reflects expenses related to our acquisition of SigmaTel, Inc. in 2008 and the acceleration of depreciation expense relating to the closure of certain of our 150 millimeter manufacturing facilities.

 

(8)   Adjusted EBITDA is calculated in accordance with the indentures governing Freescale Inc.’s existing notes and senior credit facilities. Adjusted EBITDA is net (loss) earnings adjusted for certain non-cash and other items that are included in net (loss) earnings. Our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to ratios under the indentures and the senior credit facilities based on Adjusted EBITDA. Accordingly, we believe it is useful to provide the calculation of Adjusted EBITDA to investors for purposes of determining our ability to engage in these activities.

 

Adjusted EBITDA is a non-U.S. GAAP measure. Adjusted EBITDA does not represent, and should not be considered an alternative to, net (loss) earnings, operating (loss) earnings, or cash flow from operations as those terms are defined by U.S. GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Although Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements by other companies, our calculation of Adjusted EBITDA is not necessarily comparable to such other similarly titled captions of other companies. The calculation of Adjusted EBITDA in the indentures and the senior credit facilities allows us to add back certain charges that are deducted in calculating net (loss) earnings. However, some of these expenses may recur, vary greatly and are difficult to predict. Further, our debt instruments require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. We do not present Adjusted EBITDA on a quarterly basis. In addition, the measure can be disproportionately affected by quarterly fluctuations in our operating results, and it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

 

 

The following is a reconciliation of net (loss) earnings, which is a U.S. GAAP measure of our operating results, to Adjusted EBITDA, as calculated pursuant to Freescale Inc.’s debt agreements.

 

     Year Ended December 31,

   Twelve Months Ended

 

(in millions)


   2008

    2009

   

2010


   April 2, 2010

    April 1, 2011

 

Net (loss) earnings

   $ (7,939   $ 748      $(1,053)    $ (1,265   $ (944

Interest expense, net

     702        556      583      534        587   

Income tax benefit

     (543     (246   (25)      (239     (24

Depreciation and amortization(a)

         1,825            1,193          1,021      1,141        963   

Purchase price accounting impact(b)

     10        —        —        —          —     

Non-cash share-based compensation expense(c)

     57        38      28      28        29   

Fair value loss adjustment on interest rate derivatives(d)

     38        8      14      13        8   

(Gain) loss on extinguishment or modification of long-term debt, net(e)

     (79     (2,296   417      15        370   

Reorganization of business, contract settlement and other(f)

     53        345      —        322        90   

Goodwill and intangible asset impairment(g)

     6,981        —        —        —          —     

Merger expenses(h)

     11        —        —        —          —     

Cost savings(i)

     200        200      126      177        121   

Other terms(j)

     75        33      36      33        38   
    


 


 
  


 


Adjusted EBITDA

   $ 1,391      $ 579      $1,147    $ 759      $ 1,238   
    


 


 
  


 


 

 

  (a)   Excludes amortization of debt issuance costs, which are included in interest expense, net.

 

  (b)   Reflects inventory step up to fair value established in connection with purchase price accounting solely relating to our acquisition of SigmaTel, Inc. in 2008.

 

  (c)   Reflects non-cash, share-based compensation expense under the provisions of ASC Topic 718, “Compensation—Stock Compensation.”

 

  (d)   Reflects the cumulative ineffectiveness and change in fair value of our interest rate derivatives which are not designated as cash flow hedges under the provisions of ASC Topic 815, “Derivatives and Hedging.”

 

  (e)   Reflects gains and losses on extinguishments and modification of our long-term debt, net. See note (4) above.

 

  (f)   Reflects losses related to our reorganization of business programs and other charges. See note (1) above.

 

  (g)   Reflects non-cash charges related to impairments of goodwill and intangible assets. See note (2) above.

 

  (h)   Reflects expenses related to our acquisition of SigmaTel, Inc. in 2008 and other merger related items.

 

  (i)   Reflects cost savings that we expect to achieve from initiatives commenced prior to December 1, 2009 under our reorganization of business programs that are in process or have already been completed.

 

  (j)   Reflects adjustments required by our debt instruments, including management fees payable to our Sponsors, relocation expenses and other items.

 

(9)   Assumes the net proceeds from this offering, together with cash on hand, are used to repay all amounts outstanding under the existing revolving credit facility on the closing date, $576 million of outstanding notes issued by Freescale Inc. thirty days following the closing of this offering, and $56 million in estimated accrued interest and premiums; to pay fees and expenses in connection with the senior credit facilities amendment; and to make a payment to our Sponsors in connection with the termination of the Management Fee Agreement as described under “Certain Relationships and Related Party Transactions.” Does not give effect to any accounting charges that may be recorded as a result of such payments.

 

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RISK FACTORS

 

Investing in our common shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common shares. Our business, operations and financial results are subject to the risks and uncertainties described below, which could adversely affect our business, financial condition, results of operations and cash flows. In any such case, the trading price of our common shares could decline and you could lose all or part of your investment. The following important factors could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf.

 

Risks Related to Our Business

 

We have a history of losses. If net sales grow more slowly than anticipated and operational costs increase, we may be unable to achieve or maintain profitability.

 

We have high interest expense and amortization expense, and as a result, we have historically incurred net and operating losses. We may not succeed in achieving or maintaining profitability on an annual basis and could continue to incur quarterly or annual losses in future periods. In addition, we expect to make significant expenditures related to the development of our products, including research and development and sales and administrative expenses. We may also encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expenditures. As a result of these increased expenditures, we may have to generate and sustain substantially increased net sales to achieve or maintain profitability. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses.

 

We operate in the highly cyclical semiconductor industry, which is subject to significant downturns. Failure to adjust our supply chain volume due to changing market conditions or failure to estimate our customers’ demand could adversely affect our results of operations.

 

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, higher inventory levels and accelerated erosion of average selling prices. We have historically experienced adverse effects on our profitability and cash flows during such downturns and may experience such downturns in the future. We may not be able to effectively respond to future effects which could have a material negative impact on our business, financial condition and results of operations. Likewise, demand for our products is subject to significant fluctuation. If we overestimate demand, we may experience underutilized capacity and excess inventory levels. If we underestimate demand, we may miss sales opportunities and incur additional costs for labor overtime, capital expenditures and logistical complexities.

 

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, levels of reliance on contract manufacturing and outsourcing, personnel needs and other resource requirements based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate future customer requirements. Our results of operations could be impacted if we are unable to adjust our supply chain volume to address market fluctuations, including those caused by the seasonal or cyclical nature of the markets in which we operate. The sale of our products is dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products. For example, the consumer electronics market is particularly volatile and is subject to seasonality related to the holiday selling season, making demand difficult to forecast. On occasion, customers may require rapid increases in production,

 

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which can challenge our resources and reduce margins. During a market upturn, we may not be able to purchase sufficient supplies or components, or secure sufficient contract manufacturing capacity, to meet increasing product demand, which could harm our reputation, prevent us from taking advantage of opportunities and reduce net sales growth. In addition, some parts are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work.

 

In order to secure components for the production of products, we may continue to enter into non-cancelable purchase commitments with vendors or make advance payments to suppliers, which could reduce our ability to adjust our inventory or expense levels during periods of declining market demand. Prior commitments of this type have resulted in an excess of parts when demand for our products has decreased. Downturns in the semiconductor industry have in the past caused, and may in the future cause, our customers to reduce significantly the amount of products ordered from us. If demand for our products is less than we expect, we may experience excess and obsolete inventories and be forced to incur additional charges. Because certain of our sales, research and development and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand may decrease our gross margins and operating earnings.

 

Our operating results may be adversely affected if economic conditions impact the financial viability of our customers, distributors or suppliers, particularly in the automotive industry.

 

We regularly review the financial performance of our customers, distributors and suppliers. However, global economic conditions may adversely impact the financial viability of and increase the credit risk associated with our customers, distributors or suppliers. Customer insolvencies in key industries most affected by any economic downturn, such as the automotive industry, or the financial failure of a large customer or distributor, an important supplier, or a group thereof, could have an adverse impact on our business, financial condition and results of operations and could result in our inability to collect our accounts receivable.

 

Winning business is subject to a competitive selection process that can be lengthy and requires us to incur significant expense, and we may not be selected. Even after we win and begin a product design, a customer may decide to cancel or change their product plans, which could cause us to generate no sales from a product and adversely affect our results of operations.

 

Our primary focus is on winning competitive bid selection processes, known as “design wins,” to develop products for use in our customers’ products. These selection processes can be lengthy and can require us to incur significant design and development expenditures. We may not win the competitive selection process and may never generate any net sales despite incurring significant design and development expenditures. Because of the rapid rate of technological change, the loss of a design win could result in our failure to offer a generation of a product. In addition, the failure to offer a generation of a product to a particular customer could prevent access to that customer for several years. These risks are particularly pronounced in the automotive market, where there are longer design cycles. Our failure to win a sufficient number of designs could result in lost sales and negatively impact our competitive position in future selection processes because we may not be perceived as being a technology or industry leader, each of which could have a material negative impact on our business, financial condition and results of operations.

 

After winning a product design for one of our customers, we may still experience delays in generating sales from our products as a result of the lengthy development and design cycle. In addition, a delay or cancellation of a customer’s plans could significantly and adversely affect our financial results, as we may have incurred significant expense and generated no sales. Finally, if our customers fail to successfully market and sell their products, it could have a material negative impact on our business, financial condition and results of operations as the demand for our products falls.

 

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We face significant competitive pressures that may cause us to lose market share and harm our financial performance.

 

The semiconductor industry is highly competitive and characterized by constant and rapid technological change, short product lifecycles, significant price erosion and evolving standards. Our growth objectives depend on competitive success and increased market share in our markets. If we fail to keep pace with the rest of the semiconductor industry, we could lose market share in the markets in which we compete. Any such loss in market share could have a material negative impact on our financial condition and results of operations.

 

Our competitors range from large, international companies offering a full range of products to smaller companies specializing in narrow markets within the semiconductor industry. The competitive environment is also changing as a result of increased alliances among our competitors and through strategic acquisitions, joint ventures and other alliances. Our competitors may have greater financial, personnel and other resources than we have in a particular market or overall. We expect competition in the markets in which we participate to continue to increase as existing competitors improve or expand their product offerings or as new participants enter our markets. Increased competition may result in reduced profitability and reduced market share for Freescale.

 

We compete in our different product lines primarily on the basis of technology offered, product features, quality and availability of service, time-to-market, reputation and price. Our ability to develop new products to meet customer requirements and to meet customer delivery schedules are also critical factors. We believe that new products represent the most important opportunity to overcome the increased competition and pricing pressure inherent in the semiconductor industry. If we are unable to keep pace with technology changes, our market share could decrease and our business would be adversely affected. In addition, we could lose market share to new entrants that are able to more quickly adapt to technological changes despite our historical relationships with our customers.

 

The loss of one or more of our significant customers or a decline in demand from one or more of these customers could have a material negative impact on net sales.

 

Historically, we have relied on a limited number of customers for a substantial portion of our total sales. Our ten largest end customers accounted for approximately 44%, 46% and 54% of our net sales in 2010, 2009 and 2008, respectively. As a result, the loss of or a reduction in demand from one or more of these customers, either as a result of industry conditions or specific events relating to a particular customer, could have a material negative impact on net sales. Other than Continental Automotive and Motorola, no other end customer represented more than 10% of our total net sales in any of the last three years. Continental Automotive represented 12% and 11% of our total net sales in 2010 and 2009, respectively, and Motorola represented 10% and 23% of our total net sales in 2009 and 2008, respectively.

 

The demand for our products depends in large part on continued growth in the industries into which they are sold. A market decline in any of these industries, or a decline in demand for particular products in those industries, could have a material negative impact on our results of operations.

 

Our growth is dependent, in part, on end-user demand for our customers’ products. Our largest end-markets are automotive, networking and industrial, and we also provide products to targeted consumer electronics markets. Any industry downturns that adversely affect our customers or their customers, including increases in bankruptcies in relevant industries, could adversely affect end-user demand for our customers’ products, which would adversely affect demand for our products.

 

Growth in demand in the markets we serve has in the past and may in the future fluctuate significantly based on numerous factors, including:

 

   

worldwide automotive production levels;

 

   

capital spending levels of our networking customers;

 

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consumer spending;

 

   

rate of adoption of new or alternative technologies;

 

   

changes in consumer preferences;

 

   

changes in regulation of products and services provided; and

 

   

general economic conditions.

 

The rate, or extent to which, the industries we serve will grow, if at all, is uncertain. In addition, there can be no assurance that particular products within these industries will experience the growth in demand that we expect. The industries we serve could experience slower growth or a decline in demand, which could have a material negative impact on our business, financial condition and results of operations.

 

Our automotive customer base is comprised largely of suppliers to U.S. and European automotive manufacturers. Light vehicle production by the U.S. Big 3 automakers declined significantly in 2008 and the first half of 2009. Shifts in demand away from U.S. and European automotive manufacturers or lower demand for U.S. and European automobiles could adversely affect our sales.

 

The semiconductor industry is characterized by significant price erosion, especially after a product has been on the market for a significant period of time.

 

The specific products in which our semiconductors are incorporated may not be successful, or may experience price erosion or other competitive factors that affect the prices manufacturers are willing to pay us. One of the results of the rapid innovation that is exhibited by the semiconductor industry is that pricing pressure, especially on products containing older technology, can be intense. Customers may vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times. This is particularly common during times of low demand for those end products. This can make managing our business difficult, as it limits our ability to effectively predict future demand. In order to profitably supply these products, we must reduce our production costs in line with the lower net sales we can expect to receive per unit. Usually, this must be accomplished through improvements in process technology and production efficiencies. If we cannot advance our process technologies or improve our efficiencies to a degree sufficient to maintain required margins, we will not be able to make a profit from the sale of these products. Moreover, we may not be able to cease production of such products, either due to contractual obligations or for customer relationship reasons, and as a result may incur losses on such products.

 

We cannot guarantee that competition in our core product markets will not lead to price erosion, lower net sales growth rates and lower margins in the future. Should reductions in our manufacturing costs fail to keep pace with reductions in market prices for the products we sell, this could have a material negative impact on our business, financial condition and results of operations. Furthermore, actual growth rates may be less than projected industry growth rates, resulting in spending on process and product development well ahead of market requirements, which could have a material negative impact on our business, financial condition and results of operations.

 

If we fail to keep pace with technological advances in our industry and associated manufacturing processes, or if we pursue technologies that do not become commercially accepted, our products may not be as competitive, our customers may not buy our products and our business, financial condition and results of operations may be adversely affected.

 

Technology and associated manufacturing processes are an important component of our business and growth strategy. Our success depends to a significant extent on the development, implementation and acceptance of new product designs and improvements. Commitments to develop new products must be made well in advance of any resulting sales. Technologies, standards or manufacturing processes may change during development,

 

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potentially rendering our products outdated or uncompetitive before their introduction. Our ability to develop products and related technologies to meet evolving industry requirements and at prices acceptable to our customers will be significant factors in determining our competitiveness in our target markets. If we are unable to successfully develop new products, our net sales may decline and our business could be negatively impacted.

 

We are highly leveraged. The substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our debt agreements.

 

We are highly leveraged. As of April 1, 2011 on an as adjusted basis assuming (i) the sale of common shares in this offering at an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, and the application of the net proceeds therefrom as described in “Use of Proceeds,” and (ii) the amendment of Freescale Inc.’s senior credit facilities to replace the revolving credit facility thereunder with a new revolving credit facility with a committed capacity of $425 million (subject to increase to $500 million in certain circumstances) as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” (which we refer to collectively as “on an As Adjusted Basis”), our total consolidated indebtedness (all of which would have been incurred by our subsidiaries) would have been approximately $6,502 million, and our subsidiaries also would have had an additional $400 million (or $475 million if the committed capacity is increased to $500 million prior to completion of this offering) available for borrowing under the new revolving credit facility after taking into account $25 million in outstanding letters of credit. We are a guarantor of substantially all of this debt. In consideration of the amendment to Freescale Inc.’s senior credit facilities, we will pay amendment and consent fees equal to $4 million in the aggregate upon effectiveness of the amendment. In addition, under the terms of the senior unsecured PIK-election notes due 2014, Freescale Inc., the issuer of the PIK-election notes, has the option to utilize the payment-in-kind (PIK) feature of the outstanding PIK-election notes at the PIK interest rate of 9.875%, make a cash interest payment at the cash interest rate of 9.125%, or use an evenly split combination of the two, for each interest payment period through December 15, 2011. In the event a PIK interest election is made, our consolidated debt will increase by the amount of such PIK interest. Freescale Inc. elected to pay PIK interest for the interest period that ended June 15, 2010, and, as a result, Freescale Inc. increased the principal amount of the PIK-election notes by approximately $25 million on June 15, 2010. Freescale Inc. also elected to use the PIK interest feature for the interest periods ending on June 15, 2009 and December 15, 2009, resulting in an increase in principal amount of approximately $53 million in 2009. Freescale Inc. paid the December 15, 2010 interest payment, and has elected to pay the June 15, 2011 interest payment, in cash. Since the acquisition by the Consortium in 2006, our only indebtedness has consisted of the senior credit facilities, the existing notes, a small working capital line of credit at a foreign subsidiary that is no longer outstanding and an insignificant amount of notes previously issued by Freescale Inc. that remained outstanding after the acquisition. Freescale Inc. has not defaulted under any of this indebtedness.

 

This high degree of leverage could have important consequences, including:

 

   

increasing our vulnerability to adverse economic, industry or competitive developments;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on the indebtedness, therefore reducing our ability to use cash flow to fund operations, capital expenditures and future business opportunities;

 

   

exposing us to the risk of increased interest rates because certain of the borrowings, including borrowings under the senior credit facilities and the senior unsecured floating rate notes, are at variable rates of interest;

 

   

making it more difficult to satisfy obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing the indebtedness;

 

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restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

 

At April 1, 2011 on an As Adjusted Basis, our indebtedness (all of which would have been incurred by our subsidiaries and guaranteed by us), would have included (i) the new revolving credit facility with a committed capacity of $425 million (subject to increase to $500 million in certain circumstances) and no amounts outstanding thereunder (without giving effect to $25 million in letters of credit), which will be available through July 1, 2016, subject to acceleration to September 1, 2014 if (a) on such date the aggregate outstanding principal amount of Freescale Inc.’s senior unsecured notes due 2014 exceeds $500 million and (b) Freescale Inc.’s total leverage ratio for the June 30, 2014 test period is greater than 4:1; (ii) $2,230 million outstanding under a term loan due December 1, 2016, which maturity accelerates to September 1, 2014 if (a) on such date the aggregate outstanding principal amount of Freescale Inc.’s senior unsecured notes due 2014 exceeds $500 million and (b) Freescale Inc.’s total leverage ratio for the June 30, 2014 test period is greater than 4:1; (iii) $885 million aggregate principal amount outstanding under senior unsecured notes due 2014 ($385 million in excess of the threshold for acceleration of indebtedness under our senior credit facilities as described above); (iv) $764 million aggregate principal amount outstanding under senior subordinated notes due 2016; (v) $2,130 million aggregate principal amount outstanding under senior secured notes due 2018; and (vi) $487 million aggregate principal amount outstanding under senior unsecured notes due 2020.

 

Despite our high indebtedness level, we and our subsidiaries may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our outstanding indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. In addition, an additional $400 million would have been available for borrowing under the new revolving credit facility (or $475 million if the committed capacity is increased to $500 million prior to completion of this offering) as of April 1, 2011 on an As Adjusted Basis and after taking into account $25 million in outstanding letters of credit. Also, under the PIK-election notes, Freescale Inc. has the option to utilize the PIK interest feature, make a cash interest payment, or use an evenly split combination of the two, for each interest payment period through December 15, 2011. In the event a PIK interest election is made, our consolidated debt will increase by the amount of such PIK interest.

 

If we cannot make scheduled payments on our indebtedness, we will be in default under one or more of our debt agreements and, as a result, we would need to take other action to satisfy our obligations or be forced into bankruptcy or liquidation. In addition, we are unable to engage in specified activities if we fail to meet specified ratios under our debt agreements.

 

Our cash interest expense for the years ended December 31, 2010, 2009 and 2008 and the three months ended April 1, 2011 was $537 million, $444 million, $671 million and $146 million, respectively. This does not include PIK interest accrued or paid on the PIK-election notes. If we cannot make scheduled payments on our indebtedness, we will be in default under one or more of our debt agreements and, as a result, holders of our debt could declare all outstanding principal and interest due and payable and, in the case of our secured debt, foreclose against the assets securing the debt, and we could be forced into bankruptcy or liquidation.

 

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Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operations sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to take any of these actions, and these actions may not be successful or permit us to meet our scheduled debt service obligations. Furthermore, these actions may not be permitted under the terms of our existing or future debt agreements.

 

We have in the past refinanced Freescale Inc.’s indebtedness by issuing new indebtedness and amending the terms of Freescale Inc.’s senior credit facilities. The refinancing activities have not been as a result of any default under those debt agreements. Rather, we have refinanced Freescale Inc.’s indebtedness to take advantage of market opportunities to improve our capital structure by extending the maturities of the indebtedness, reducing the total outstanding principal amount of our indebtedness by repaying debt at a discount, and increasing flexibility under existing covenants for business planning purposes. Although Freescale Inc.’s lenders have agreed to such amendments and participated in such refinancings in the past, there can be no assurance that its lenders would participate in any future refinancings or agree to any future amendments. In addition, certain of Freescale Inc.’s lenders may object to the validity of the terms of any such amendment or refinancing. For example, in 2009, a group of lenders under the senior credit facilities filed a complaint against Freescale Inc. challenging the 2009 debt exchange transaction under the senior credit facilities. The debt exchange was completed, but the litigation remained outstanding. As part of the on-going litigation, this group of lenders sought to enjoin Freescale Inc. from completing the amendment of its senior credit facilities and the issuance of its 10.125% senior secured notes in the first quarter of 2010. Freescale Inc. reached an agreement to settle the pending litigation and was able to complete the 2010 transactions. Freescale Inc. may be subject to similar actions in connection with future refinancings or amendments, which may impact the terms and conditions or timing thereof, preclude Freescale Inc. from completing any such transaction or subject Freescale Inc. to significant additional costs.

 

In the absence of sufficient operating results and resources to service our debt, or appropriate refinancings or amendments thereof, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations. Our debt agreements restrict our ability to dispose of assets and, even if permitted, we may not be able to consummate any such dispositions, which could result in our inability to meet our debt service obligations. Much of our debt requires, and our future debt may also require, us to repurchase such debt upon an event that would constitute a change of control for the purposes of such debt. We may not be able to meet these repurchase obligations because we may not have sufficient financial resources to do so. Our failure to meet our repurchase obligations upon a change of control would cause a default under the agreements governing our debt.

 

Freescale Inc. is not subject to any maintenance covenants under its existing debt agreements and is therefore not required to meet any specified ratios on an on-going basis. However, our ability to engage in specified activities is tied to ratios under our debt agreements, in each case subject to certain exceptions. We are unable to incur any indebtedness under the indentures and specified indebtedness under the senior credit facilities, pay dividends, make certain investments, prepay junior debt and make other restricted payments, in each case not otherwise permitted by our debt agreements, unless, after giving effect to the proposed activity, our fixed charge coverage ratio (as defined in the applicable indenture) would be at least 2:1 and our senior secured first lien leverage ratio (as defined in the senior credit facilities) would be no greater than 3.5:1. In addition, we may not designate any subsidiary as unrestricted or engage in certain mergers unless, after giving effect to the proposed transaction, our fixed charge coverage ratio would be at least 2:1 or equal to or greater than it was prior to the proposed transaction and our senior secured first lien leverage ratio would be no greater than 3.5:1. We are also unable to have liens on assets securing indebtedness without also securing the notes unless our consolidated secured debt ratio (as defined in the applicable indenture) would be no greater than 3.25:1 after giving effect to the proposed lien, except as otherwise permitted by the indentures. As of April 1, 2011, Freescale Inc. met the

 

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total leverage ratio, the senior secured first lien leverage ratio and the fixed charge coverage ratio but did not meet the consolidated secured debt ratio. Accordingly, we are currently restricted from having liens on assets securing indebtedness, except as otherwise permitted by the indentures. However, the fact that we do not meet the ratio in the indentures does not result in any default thereunder.

 

Increases in interest rates could adversely affect our financial condition.

 

An increase in prevailing interest rates could adversely affect our financial condition. LIBOR (the interest rate index on which our variable rate debt is based) fluctuates on a regular basis. At April 1, 2011, we had approximately $2,819 million aggregate principal amount of variable interest rate indebtedness under the senior unsecured floating rate notes and the senior credit facilities. Any increased interest expense associated with increases in interest rates affects our cash flow and our ability to service our debt. Based on our variable interest rate debt outstanding at April 1, 2011, a 1% increase in LIBOR rates would increase our annual interest expense by approximately $28 million. As a protection against rising interest rates, we have entered and may in the future enter into agreements such as interest rate swap and cap contracts. However, the other parties to the agreements may fail to perform; the terms may be unfavorable to us depending on rate movements; and, such agreements may not completely protect us from increased interest expense in a particular situation.

 

Our debt agreements contain restrictions that limit our flexibility in operating our business.

 

The agreements governing our indebtedness contain various covenants that limit our subsidiaries’ ability to engage in specified types of transactions. These covenants limit our subsidiaries’ ability to, among other things:

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

 

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions and, in the case of the revolving credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our debt agreements, the lenders could elect to declare all amounts outstanding to be immediately due and payable and, in the case of the revolving credit facility, terminate any commitments to extend further credit. Such actions by the lenders under any one of our debt agreements could cause cross defaults under our other indebtedness. If we were unable to repay amounts due to the lenders under the senior credit facilities or the senior secured notes, those lenders could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the senior credit facilities and senior secured notes. If our lenders accelerate the repayment of borrowings, we may not have sufficient assets to repay our debt obligations.

 

Our industry is highly capital intensive and, if we are unable to obtain the necessary capital, we may not remain competitive.

 

To remain competitive, we must constantly improve our facilities and process technologies and carry out extensive research and development, each of which requires investment of significant amounts of capital. This risk is magnified by our high level of indebtedness, since we are required to use a significant portion of our cash flow to service our debt, and also because our level of debt limits our ability to raise additional capital. If we are

 

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unable to generate sufficient cash or raise sufficient capital to meet both our debt service and capital investment requirements, or if we are unable to raise capital on favorable terms when needed, our business, financial condition and results of operations could be materially negatively impacted.

 

Our gross margin is dependent on a number of factors, including our level of capacity utilization.

 

Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. Notwithstanding our utilization of third-party contract manufacturers, a majority of our production requirements are met by our own manufacturing facilities. If we are unable to utilize our manufacturing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins. In the past, we have experienced periods where our gross margins declined due to, among other things, reduced factory utilization resulting from reduced customer demand, reduced selling prices and a change in product mix towards lower margin devices. Market conditions in the future may adversely affect our utilization rates and consequently our future gross margins, and this, in turn, could have a material negative impact on our business, financial condition and results of operations. In addition, increased competition and the existence of product alternatives, more complex engineering requirements, lower demand and other factors may lead to further price erosion, lower net sales and lower margins for us in the future.

 

We outsource a portion of our manufacturing activities to third-party contract manufacturers. If our production or manufacturing capacity at one of these third-party facilities is delayed, interrupted or eliminated, we may not be able to satisfy customer demand.

 

We continue to develop outsourcing arrangements for the manufacture and test and assembly of certain products and components. Based on total units produced, we outsourced approximately 25% of our wafer fabrication and approximately 39% of our assembly, packaging and testing in 2010 to third-party contract manufacturers. If production or manufacturing capacity is delayed, reduced or eliminated at one or more of these facilities, manufacturing could be disrupted, we could have difficulties or delays in fulfilling our customer orders, and our sales could decline. In addition, if a third-party contract manufacturer fails to deliver quality products and components on time and at reasonable prices, we could have difficulties fulfilling our customer orders, and our sales could decline. As a result, our business, financial condition and results of operations could be adversely affected.

 

To the extent we rely on alliances and third-party design and/or manufacturing relationships, we face the following risks:

 

   

reduced control over delivery schedules and product costs;

 

   

manufacturing costs that are higher than anticipated;

 

   

inability of our manufacturing partners to develop manufacturing methods and technology appropriate for our products and their unwillingness to devote adequate capacity to produce our products;

 

   

decline in product reliability;

 

   

inability to maintain continuing relationships with our suppliers; and

 

   

restricted ability to meet customer demand when faced with product shortages.

 

In addition, purchasing rather than manufacturing these products may adversely affect our gross profit margin if the purchase costs of these products become higher than our own manufacturing costs would have been. Our internal manufacturing costs include depreciation and other fixed costs, while costs for products outsourced are based on market conditions. Prices for foundry products also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter-to-quarter and, in cases of industry shortages, they can increase significantly, negatively impacting our gross margin.

 

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If any of these risks are realized, we could experience an interruption in our supply chain or an increase in costs, which could delay or decrease our net sales or otherwise adversely affect our business, financial condition and results of operations.

 

A reduction or disruption in our production capacity or our supplies, or an incorrect forecast, could negatively impact our business.

 

Our production capacity could be affected by manufacturing problems. Difficulties in the production process could reduce yields or interrupt production, and, as a result of such problems, we may not be able to deliver products on time or in a cost-effective, competitive manner. As the complexity of both our products and our fabrication processes has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become more demanding. We have in the past experienced delays in delivery and product quality. Our failure to adequately manage our capacity could have a material negative impact on our business, financial condition and results of operations.

 

Furthermore, we may suffer disruptions in our manufacturing operations, either due to production difficulties such as those described above or as a result of external factors beyond our control. We use highly combustible materials such as silane and hydrogen in our manufacturing processes and are therefore subject to the risk of explosions and fires, which can cause significant disruptions to our operations. If operations at a manufacturing facility are interrupted, we may not be able to shift production to other facilities on a timely basis or at all. In addition, certain of our products are only capable of being produced at a single manufacturing facility and to the extent that any of these facilities fail to produce these products, this risk will be increased. Even if a transfer is possible, transitioning production of a particular type of semiconductor from one of our facilities to another can take between six to twelve months to accomplish, and in the interim period we would likely suffer significant or total supply disruption and incur substantial costs. Such an event could have a material negative impact on our business, financial condition and results of operations. In connection with our decision to eliminate our 150 millimeter manufacturing capability, we are currently transitioning certain technologies to our other manufacturing facilities and contract manufacturers.

 

We have a concentration of manufacturing (including assembly and test) in Asia, primarily in China, Malaysia, Taiwan and Korea, either in our own facilities or in the facilities of third parties. If manufacturing in the region were disrupted, our overall production capacity could be significantly reduced. Our ability to meet customer demands also depends on our ability to obtain timely and adequate delivery of materials, parts and components from our suppliers. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. Supply disruptions may also occur due to shortages in critical materials, such as silicon wafers or specialized chemicals, or energy or other general supplier disruptions. We have experienced shortages in the past that have adversely affected our operations. Although we work closely with our suppliers to avoid these types of shortages, we may encounter these problems in the future. In addition, a number of our supplies are obtained from a single source. A reduction or interruption in supplies or a significant increase in the price of one or more supplies could have a material negative impact on our business, financial condition and results of operations.

 

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions in the countries in which we conduct business and other factors related to our international operations.

 

We sell our products throughout the world. In 2010, 2009 and 2008, 83%, 83% and 78% of our products were sold into countries other than the United States, respectively. In addition, a majority of our operations and employees are located outside of the United States. Multiple factors relating to our international operations and to particular countries in which we operate could have a material negative impact on our business, financial condition and results of operations. These factors include:

 

   

negative economic developments in economies around the world;

 

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the instability of international governments, including the threat of war, terrorist attacks, epidemic or civil unrest;

 

   

adverse changes in laws and governmental policies, especially those affecting trade and investment;

 

   

import or export licensing requirements imposed by governments;

 

   

foreign currency exchange and transfer restrictions;

 

   

differing labor standards and laws;

 

   

differing levels of protection of intellectual property;

 

   

the threat that our operations or property could be subject to nationalization and expropriation;

 

   

varying practices of the regulatory, tax, judicial and administrative bodies in the jurisdictions where we operate;

 

   

pandemics, such as the flu, which may adversely affect our workforce as well as our local suppliers and customers; and

 

   

potentially burdensome taxation and changes in foreign tax laws.

 

International financial crisis and conflicts are creating many economic and political uncertainties that are impacting the global economy. A continued escalation of international financial crisis and conflicts could severely impact our operations and demand for our products.

 

In certain of the countries where we sell our products, effective protections for patents, trademarks, copyrights and trade secrets may be unavailable or limited in nature and scope as compared to the level of protection available in the United States. In addition, as we target increased sales in Asia, differing levels of protection of our intellectual property in Asian countries could have a significant negative impact on our business. The laws, the enforcement of laws, or our efforts to obtain and enforce intellectual property protections in any of these jurisdictions may not be sufficient to protect our intellectual property. As a result, we may lose some or all of the competitive advantage we have over our competitors in such countries.

 

A majority of our products are manufactured in Asia, primarily in China, Malaysia, Taiwan and Korea, and a significant portion of our new design wins in 2010 were awarded in Asia, particularly in China. Any of the factors set forth above impacting these countries, or any other conflict or uncertainty in these countries, including due to political unrest or public health or safety concerns, could have a material negative impact on our business, financial condition and results of operations. In addition, if the government of any country in which our products are manufactured or sold sets technical standards for products made in or imported into their country that are not widely shared, it may lead certain of our customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards and disrupt cross-border manufacturing partnerships which, in each case, could have a material negative impact on our business, financial condition and results of operations.

 

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could impair our freedom to operate or result in significant expense to defend against such claims or obtain a license to such technology.

 

From time to time, third parties may and do assert against us their patent, copyright, trademark and other intellectual property rights relating to technologies that are important to our business. Any claims that our products or processes infringe these rights (including claims arising through our contractual indemnification of our customers and collaborators), regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required to:

 

   

pay substantial damages (potentially treble damages in the United States, including royalties on sales of our products);

 

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cease the manufacture, use or sale of the infringing products or processes;

 

   

discontinue the use of the infringing technology;

 

   

expend significant resources to develop non-infringing technology;

 

   

license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms, or may not be available at all;

 

   

comply with the terms of import restrictions imposed by the International Trade Commission (ITC), or similar administrative or regulatory authority; or

 

   

forego the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others.

 

Any of the foregoing could affect our ability to compete or otherwise have a material negative impact on our business, financial condition and results of operations.

 

We depend significantly on intellectual property to protect our technologies and products.

 

We depend significantly on patents and other intellectual property rights to protect our products and proprietary design and fabrication processes against infringement or misappropriation by others and to ensure that we have the ability to generate royalty and other licensing revenue. We rely primarily on patent, copyright, trademark and trade secret laws, as well as on nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies. Protection of our patent portfolio and other intellectual property rights is very important to our operations. We intend to continue to license our intellectual property to third parties. We have a broad portfolio of approximately 6,100 patent families and numerous licenses, covering manufacturing processes, packaging technology, software systems and circuit design. A patent family includes all of the equivalent patents and patent applications that protect the same invention, covering different geographical regions. We cannot ensure that any of our currently filed or future patent applications will result in issued patents, or even if issued, predict the scope of the claims that may issue in our patents. We do not believe that any individual patent, or the expiration thereof, is or would be material to our business.

 

We may not be successful in protecting our intellectual property rights or developing or licensing new intellectual property, which may harm our ability to compete and may have a material negative impact on our results of operations.

 

We generate revenue from licensing our patents and manufacturing technologies to third parties. Our future intellectual property revenue depend in part on the continued strength of our intellectual property portfolio and enforcement efforts, and on the sales and financial stability of our licensees. In the past, we have found it necessary to engage in litigation with other companies to force those companies to execute license agreements with us or prohibit their use of our intellectual property. Some of these proceedings did, and future proceedings may, require us to expend significant resources and to divert the efforts and attention of our management from our business operations. In connection with our intellectual property:

 

   

the steps we take to prevent misappropriation or infringement of our intellectual property may not be successful;

 

   

our existing or future patents may be challenged, limited, invalidated or circumvented; and

 

   

the measures described above may not provide meaningful protection.

 

Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. Our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. Further, we may not be able to obtain patent protection or secure other intellectual property rights in all the countries in which we operate, and under the laws of such countries, enforcement of patents and other intellectual

 

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property rights may be unavailable or limited in scope. The laws of certain countries in which we manufacture and design our products do not protect our intellectual property rights to the same extent as the laws of the United States. In the Office of the United States Trade Representative (USTR) annual “Special 301” Report released on April 30, 2010, the adequacy and effectiveness of intellectual property protection in a number of foreign countries were analyzed. Those countries where particular concern is expressed include China, where the USTR finds China’s intellectual property enforcement to be “largely ineffective and a non-deterrent,” and India, where the expressed concern was “India’s inadequate legal framework and ineffective enforcement.” In addition, Malaysia was identified as a country where piracy remains widespread and enforcement is declining. No other countries in which we have material operations are named in the Report, and we believe that we have disclosed the differences in intellectual property protections of the countries material to these operations that could have a material adverse impact on our business. The absence of consistent intellectual property protection laws and effective enforcement mechanisms makes it difficult to ensure adequate protection for our technologies and intellectual property rights on a worldwide basis. As a result, it is possible for third parties to use our proprietary information in certain countries without us having the ability to fully enforce our rights in those countries, which could negatively impact our business in a material way. If our patents or trade secrets fail to protect our technology, we could lose some or all of our competitive advantage, which would enable our competitors to offer similar products. Any inability on our part to protect adequately our intellectual property may have a material negative impact on our business, financial condition and results of operations.

 

We obtain some of the intellectual property we use in our operations through license agreements with third parties. Some of these license agreements contain provisions that may require the consent of the counterparties to remain in effect after a change of control. If we are unable to obtain any required consents under any license agreements in the event of a change of control, our rights to use intellectual property licensed under those agreements may be at risk. If any license agreements are terminated or expire, we could lose the right to use the subject intellectual property, which could result in a negative impact on our ability to manufacture and sell some of our existing products.

 

Our products may be subject to product liability and warranty claims, which could be expensive and could divert management’s attention.

 

We make highly complex electronic components and, accordingly, there is a risk that defects may occur in any of our products. Such defects may damage our reputation and can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory, delays in, cancellations of, rescheduling or return of orders or shipments and loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. We typically provide warranties on products we manufacture for a period of 3 years from the date of sale. These warranties typically provide that, on the date of shipment, our products will be free from defects in material and workmanship and will conform to our approved specifications. In the event of a defect, we will either refund the purchase price or repair or replace the product with the same or equivalent product at our cost that meets the warranty, if the warranty applies. If we release defective products into the market, our reputation could suffer and we could lose sales opportunities and become liable to pay damages. Moreover, since the cost of replacing defective semiconductor devices is often much higher than the value of the devices themselves, we may at times face damage claims from customers in excess of the amounts they pay us for our products, including consequential damages.

 

We also face exposure to potential liability resulting from the fact that our customers typically integrate the semiconductors we sell into numerous consumer products, which are then in turn sold into the marketplace. We may be named in product liability claims even if there is no evidence that our products caused a loss. Product liability claims could result in significant expenses relating to defense costs or damages awards. In particular, the sale of systems and components for the transportation and medical industries involves a high degree of risk that such claims may be made. In addition, we may be required to participate in a recall if any of our systems prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or in order to maintain good customer relationships. Each of these actions would

 

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likely harm our reputation and lead to substantial expense. Any product recall or product liability claim brought against us could have a material negative impact on our reputation, business, financial condition and results of operations.

 

We may be subject to liabilities as a result of personal injury claims based on alleged links between the semiconductor manufacturing process and certain illnesses and birth defects.

 

In the last few years, there has been increased litigation, media scrutiny and associated reports focusing on an alleged link between working in semiconductor manufacturing clean room environments and certain illnesses and birth defects. Because we utilize these clean rooms, we may become subject to liability as a result of current and future claims alleging personal injury. A significant judgment against us or material defense costs could harm our business, financial condition and results of operations.

 

Our operating results are subject to substantial quarterly and annual fluctuations.

 

Our net sales and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others:

 

   

changes in end-user demand for the products manufactured and sold by our customers;

 

   

the timing of receipt, reduction or cancellation of significant orders by customers;

 

   

fluctuations in the levels of component inventories held by our customers;

 

   

the gain or loss of significant customers;

 

   

market acceptance of our products and our customers’ products;

 

   

our ability to develop, introduce and market new products and technologies on a timely basis;

 

   

the timing and extent of product development costs;

 

   

new product and technology introductions by competitors;

 

   

fluctuations in manufacturing yields;

 

   

availability and cost of products from our suppliers;

 

   

changes in our product mix or customer mix;

 

   

intellectual property disputes;

 

   

natural disasters, such as floods, hurricanes and earthquakes, as well as interruptions in power supply resulting therefrom or due to other causes;

 

   

loss of key personnel or the shortage of available skilled workers;

 

   

the effects of competitive pricing pressures, including decreases in average selling prices of our products;

 

   

the effects of adverse economic conditions in the U.S. and international markets, including the recent crisis in global credit and financial markets;

 

   

the effectiveness of our efforts to refocus our operations and reduce our cost structure;

 

   

manufacturing, assembly and test capacity; and

 

   

our ability to hire, retain and motivate key employees to meet the demands of our customers.

 

The foregoing factors are difficult to forecast, and these, as well as other factors, could have a material negative impact on our quarterly or annual operating results. In addition, a significant amount of our operating expenses is relatively fixed in nature due to our research and development and manufacturing costs. If we cannot adjust spending quickly enough to compensate, it could have a material negative impact on our business, financial condition and results of operations.

 

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The failure to complete our transformation program and the impact of activities taken under the program could adversely affect our business.

 

Since 2008 we have significantly transformed our business and market strategy. This transformation program has included strengthening our senior leadership team, winding down our cellular handset research and development and selling, general and administrative activities, restructuring research and development efforts, streamlining our manufacturing footprint, and improving our capital structure, including activities in connection with our transformation program. In the past, we have realized significant annualized cost savings as a result of these activities. However, cost savings from measures yet to be completed may be lower than we currently anticipate, and they may not be realized on our anticipated timeline. We have completed our transformation program, with the exception of completing the closure of our 150 millimeter manufacturing activities, which we expect to occur during the fourth quarter of 2011. Closure of the Toulouse, France facility could be delayed due to unanticipated product demand requiring us to keep the Toulouse, France facility operating to meet such demand. Furthermore, these transformation activities involve transitioning production from the Toulouse, France and Sendai, Japan sites to other manufacturing locations, building inventory to support such transition and potentially requiring our customers to “requalify” the products currently manufactured in those sites, which could also delay closure of the Toulouse, France facility or could adversely impact the expected cost reductions and level of sales to an extent we have not anticipated. If the closure of our 150 millimeter fabrication facility in Toulouse, France is delayed beyond 2011, the anticipated cost savings would be delayed, and we would continue to incur production and other costs related to the operation of this facility.

 

Because of the complex manufacturing process in the semiconductor industry, it is common that the same designed product may have varying performance characteristics based on the facility at which the product is manufactured. Therefore, it is typical in our industry for customers to “requalify” products when they are moved to a new manufacturing facility by confirming that the performance of the product made at the new facility meets the customer’s specifications. The user of the product determines whether requalification is required, based on applicable regulatory requirements and the user’s quality control procedures. We believe that it is likely that most of the products for which manufacturing is transitioned will be required to undergo requalification. The timing and extent of the requalification process varies significantly by product and by transition and could result in product delivery delays to our customers and to the ultimate end user. In addition, we could incur additional costs to ensure the necessary product specifications at the new facilities. It is difficult to predict whether the impact of the transitions and requalifications will be significant. Extended delays in product delivery or the inability to achieve product specifications could have a negative impact on our net sales, and significant additional costs could further impact operating margins. In addition, such events could have similar consequences for our customers, which could harm those customer relationships and adversely affect our business. We seek to mitigate these risks by building up product inventory in advance of a transition and have been doing so with respect to the closures of the manufacturing facilities in Toulouse, France and Sendai, Japan. Even if we fully execute these activities, there may be other unforeseeable and unintended factors or consequences that could adversely impact our business.

 

We have recorded significant charges for reorganization of business activities, interest expense and amortization expense in the past and may do so again in the future, which could have a material negative impact on our business.

 

In 2009 and 2008, we recorded cash costs for restructuring and non-cash asset impairment charges relating to our efforts to consolidate manufacturing operations and streamline our global organizational structure in the amount of $345 million and $320 million, respectively. In the first quarter of 2011, we recorded non-cash asset impairment charges relating to damage to our Sendai facilities of $49 million. Due to a combination of the constant and rapid change experienced in the semiconductor industry, we may incur cash costs for employee termination and exit costs and non-cash asset impairment charges in the future and such charges may have a material negative impact on our business, financial condition and results of operations.

 

From time to time we may also decide to divest product lines and businesses or restructure our operations, including through the contribution of assets to joint ventures. However, our ability to successfully extricate

 

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ourselves from product lines and businesses, or to close or consolidate operations, depends on a number of factors, many of which are outside of our control. For example, if we are seeking a buyer for a particular product line, none may be available. In addition, we may face internal obstacles to our efforts. In some cases, particularly with respect to our European operations, there may be laws or other legal impediments affecting our ability to carry out such sales or restructuring. As a result, we may be unable to exit a product line or business, or to restructure our operations, in a manner we deem to be advantageous.

 

We may engage in acquisitions, joint ventures and other transactions intended to complement or expand our business. We may not be able to complete these transactions and, if executed, these transactions could pose significant risks and could have a negative effect on our operations.

 

Our future success may be dependent on opportunities to enter into joint ventures and to buy other businesses or technologies that could complement, enhance or expand our current business or products or that we believe might otherwise offer us growth opportunities. If we are unable to identify suitable targets, our growth prospects may suffer, and we may not be able to realize sufficient scale advantages to compete effectively in all markets. In addition, in pursuing acquisitions, we may face competition from other companies in the semiconductor industry. Our ability to acquire targets may also be limited by applicable antitrust laws and other regulations in the United States, the European Union and other jurisdictions in which we do business. To the extent that we are successful in making acquisitions, we may have to expend substantial amounts of cash, incur debt, assume loss-making divisions and incur other types of expenses. We may not be able to complete such transactions for reasons including, but not limited to, a failure to secure financing or as a result of restrictive covenants in our debt instruments. Any transactions that we are able to identify and complete may involve a number of risks, including:

 

   

the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or joint venture;

 

   

possible negative impacts on our operating results during the integration process; and

 

   

our possible inability to achieve the intended objectives of the transaction.

 

In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. We may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies.

 

Loss of our key management and other personnel, or an inability to attract key management and other personnel, could impact our business.

 

We depend on our senior executive officers and other key personnel to run our business and on technical experts to develop new products and technologies. Future turnover in these positions or the loss of other key personnel could adversely affect our operations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could hinder our ability to conduct research and development activities successfully and develop marketable products.

 

Our results of operations could be adversely affected by changes in tax-related matters.

 

We conduct operations in more than 30 countries worldwide and as a result are subject to taxation and audit by a number of taxing authorities. Tax rates vary among the jurisdictions in which we operate. Changes in tax laws, regulations, and related interpretations in the countries in which we operate may adversely affect our results of operations. Our results of operations could also be affected by market opportunities or decisions we make that cause us to increase or decrease operations in one or more countries, or by changes in applicable tax rates or audits by the taxing authorities in countries in which we operate.

 

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In addition, we are subject to laws and regulations in various jurisdictions that determine how much profit has been earned and when it is subject to taxation in that jurisdiction. Changes in these laws and regulations could affect the locations where we are deemed to earn income, which could in turn adversely affect our results of operations. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations or in our business performance could affect our ability to realize those deferred tax assets, which could also adversely affect our results of operations.

 

We currently operate under tax holidays and favorable tax incentives in certain foreign jurisdictions. Such tax holidays and incentives often require us to meet specified employment and investment criteria in such jurisdictions. We cannot assure you that we will continue to meet such criteria or enjoy such tax holidays and incentives, or realize any net tax benefits from these tax holidays or incentives. If any of our tax holidays or incentives are terminated, our results of operations may be materially and negatively impacted.

 

We are subject to environmental, health and safety laws, which could increase our costs and restrict our operations in the future.

 

Our operations are subject to a variety of environmental laws and regulations in each of the jurisdictions in which we operate governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. We could incur significant costs as a result of any failure by us to comply with, or any liability we may incur under, environmental, health and safety laws and regulations, including the limitation or suspension of production, monetary fines or civil or criminal sanctions, clean-up costs or other future liabilities in excess of our reserves. We are also subject to laws and regulations governing the recycling of our products, the materials that may be included in our products, and our obligation to dispose of our products at the end of their useful life. For example, the European Directive 2002/95/Ec on restriction of hazardous substances (RoHS Directive) bans the placing on the European Union market of new electrical and electronic equipment containing more than specified levels of lead and other hazardous compounds. As more countries enact requirements like the RoHS Directive, and as exemptions are phased out, we could incur substantial additional costs to convert the remainder of our portfolio, conduct required research and development, alter manufacturing processes, or adjust supply chain management. Such changes could also result in significant inventory obsolescence. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution control equipment, incur other significant expenses or modify our manufacturing processes. We also are subject to cleanup obligations at certain properties. In the event of the discovery of new or previously unknown contamination, additional requirements with respect to existing contamination, or the imposition of other cleanup obligations at these or other sites for which we are responsible, we may be required to take remedial or other measures that could have a material negative impact on our business, financial condition and results of operations.

 

In addition to the costs of complying with environmental, health and safety requirements, we have incurred, are currently incurring, and may in the future incur, costs defending against environmental litigation brought by government agencies and private parties. We have been, are, and may be in the future, defendants in lawsuits brought by parties in the future alleging environmental damage, personal injury or property damage. A significant judgment against us could harm our business, financial condition and results of operations.

 

We rely on manufacturing capacity located in geologically unstable areas, which could affect the availability of supplies and services to us and our customers. Certain natural disasters, such as coastal flooding, large earthquakes or volcanic eruptions in those or other areas, may negatively impact our business.

 

We rely on internal manufacturing capacity, wafer fabrication foundries, logistics providers and other suppliers and sub-contractors in geologically unstable locations around the world. If coastal flooding, a large earthquake, volcanic eruption or other natural disaster were to directly damage, destroy or disrupt one of our manufacturing facilities, or those of our providers, subcontractors or third-party wafer fabrication foundries, it

 

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could disrupt our operations, cause temporary loss of capacity, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business, financial condition and results of operation. We may also be forced to move production to another manufacturing facility, which could result in additional production delays and unanticipated costs due to product requalification requirements, required modifications to the new facility to support production or other production challenges resulting from the transition. In addition, a large natural disaster may result in disruptions in our supply chains, including the availability and cost of key raw materials, utilities and equipment and other key services, which could negatively impact our business. Even if we are not directly impacted, such disruptions to our customers could result in decreased demand for our products, which could negatively impact our revenues and margins. Any prolonged inability to utilize one of our manufacturing facilities, or those of our subcontractors or third-party wafer fabrication foundries, or any disruption in the operations of our logistic providers as a result of fire, natural disaster, unavailability of utilities or otherwise, could have a material negative effect on our business, financial condition and results of operations. The impact of such occurrences depends on the specific geographic circumstances but could be significant, as some of our factories are located in islands with known earthquake fault zones, including Japan and Taiwan.

 

Our wafer fabrication facility in Sendai, Japan was seriously damaged in the March 11, 2011, 9.0-magnitude earthquake which struck off the coast of Japan near that city. As a result of the significant damage and our previously announced plans to close the facility at the end of 2011, we determined not to reopen the facility following the earthquake. We incurred $90 million in charges associated with non-cash asset impairment and inventory charges and cash costs for employee termination benefits, contract termination and other items in the first quarter of 2011 in connection with our inability to reopen our Sendai, Japan facilities. We expect to complete the payments associated with these activities by the end of 2011. As we continue to evaluate and address the damage associated with our Sendai facilities, we will incur additional charges associated with contract termination, our employees and other costs associated with preparing our site for sale. These non-cash charges and cash costs do not take into consideration any potential cost savings resulting from our inability to reopen or any offset resulting from potential recoveries from Freescale’s insurance coverage associated with the earthquake.

 

The earthquake is also negatively impacting our manufacturing capacity and disrupting our supply chain. Our business may be further negatively impacted by our inability to move production to other facilities, the failure of our buffer inventory to meet customers’ needs, any negative impact on our global supply chain and vendors resulting from the earthquake, any decrease in demand from customers taking delivery of products in Japan, and any decrease in demand from our customers who may be impacted by other industry supply constraints resulting from the earthquake.

 

Risks Relating to this Offering and Our Common Shares

 

Our Sponsors control us and may act in a manner that advances their best interests and not necessarily those of other shareholders.

 

Upon consummation of this offering, Freescale LP, which is controlled by our Sponsors, will own 82% of our issued and outstanding common shares, or 80% if the underwriters exercise their over-allotment option in full. In addition, our Sponsors have agreed to elect two individuals designated by each Sponsor to serve on our board of directors. As a result, our Sponsors will continue to control our board of directors and will be able to influence or control all matters requiring approval by our shareholders, including:

 

   

the election of directors;

 

   

mergers, amalgamations, consolidations, takeovers or other business combinations involving us;

 

   

the sale of all or substantially all of our assets and other decisions affecting our capital structure;

 

   

the amendment of our memorandum of association and our bye-laws; and

 

   

our winding up and dissolution.

 

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In addition, pursuant to the shareholders agreement to be entered into in connection with this offering, for so long as Freescale LP and our Sponsors collectively own, in the aggregate, at least 50% of our then issued and outstanding common shares, certain actions by us or our subsidiaries will require the approval of at least a majority of our Sponsors acting through their respective director designees in addition to any other vote by our board or shareholders. The actions requiring Sponsor approval include change of control transactions, the acquisition or sale of any asset in excess of $150 million, the incurrence of indebtedness in excess of $250 million, making any loan, advance or capital contribution in excess of $150 million, equity issuances in excess of $25 million, the approval and registration of equity securities in connection with a public offering, changes in the nature of our or our subsidiaries’ business, changes to our jurisdiction of incorporation, hiring or removing the Chief Executive Officer, the commencement or settlement of any litigation over $50 million and changing the number of directors on the board. We have received all required approvals for this offering from the Sponsors.

 

The contractual rights and significant ownership by the Sponsors may delay, deter or prevent acts that may be favored by our other shareholders, including a change of control of us. The interests of the Sponsors may not always coincide with our interests or the interests of our other shareholders, and the Sponsors may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our other shareholders or adversely affect us or our other shareholders, including investors in this offering.

 

Our Sponsors are also in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as our Sponsors, or other funds controlled by or associated with our Sponsors, have these contractual rights or continue to indirectly own a significant amount of our outstanding common shares, even if such amount is less than 50%, our Sponsors will continue to be able to strongly influence or effectively control our decisions. See “Principal Shareholders” and “Certain Relationships and Related Party Transactions.”

 

We will be a “controlled company” within the meaning of the rules of the New York Stock Exchange, and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

 

After completion of this offering, our Sponsors will continue to control a majority of the voting power of our outstanding common shares through their ownership of Freescale LP. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors consist of independent directors;

 

   

the requirement that the listed company have a nomination and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that the listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nomination and corporate governance and compensation committees.

 

Following this offering, we intend to utilize each of these exemptions. As a result, we will not have a majority of independent directors, our nomination and corporate governance committee and compensation

 

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committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange. See “Management.”

 

We are a Bermuda company and it may be difficult for you to enforce judgments against us or certain of our directors or officers.

 

We are a Bermuda exempted company. The significance of our being a Bermuda entity is that the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. One of our directors is not a resident of the United States and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on such director or any future non-resident directors or officers in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or any non-resident directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our non-resident directors or officers under the securities laws of other jurisdictions. We have been advised by Conyers Dill & Pearman Limited, our special Bermuda counsel, that there is no treaty in effect between the United States and Bermuda providing for enforcement of judgments of U.S. courts and that there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.

 

Furthermore, we have been advised by Conyers Dill & Pearman Limited, our special Bermuda counsel, that the Bermuda courts will not recognize or give effect to U.S. federal securities laws that such Bermuda court considers to be procedural in nature, are revenue or penal laws or the application of which would be inconsistent with public policy in Bermuda. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. federal securities laws, will not be recognized or given effect to in any action brought before a court of competent jurisdiction in Bermuda where the application of such remedies would be inconsistent with public policy in Bermuda. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violations of U.S. federal securities laws because those laws do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law. Shareholders of a Bermuda company may have a cause of action against us or our directors for breach of any duty in the bye-laws or any shareholder’s agreement owed personally by us to the shareholder. Directors of a Bermuda company may be liable to the company for breach of their duties as directors to that company under the Companies Act 1981, as amended, of Bermuda (“Companies Act”) and at common law. Such actions must as a general rule be brought by the company. Where the directors have carried on an act which is ultra vires or illegal, then the shareholder has the right, with leave of the court, to bring a derivative action to sue the directors on behalf of the company with any damages awarded going to the company itself. Shareholders are also able to take action against a company if the affairs of the company are being conducted in a manner which is oppressive or unfairly prejudicial to the shareholders or some number of them, and to seek either a winding-up order or an alternative remedy if a winding-up order would be unfairly prejudicial to them.

 

Our bye-laws restrict shareholders from bringing legal action against our officers and directors.

 

Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.

 

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Our bye-laws contain a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or prospects.

 

Our bye-laws provide that, except as otherwise agreed in writing by the Sponsors and their affiliates and us, (i) each Sponsor shall have the right to, and shall have no duty not to, engage in the same or similar business activities or lines of business as us, including those deemed to be competing with us, and (ii) in the event that a Sponsor or any of its affiliates acquires knowledge of a potential transaction or matter that may be a corporate opportunity for us, the Sponsor shall have no duty (contractual or otherwise) to communicate or present such corporate opportunity to us, unless presented to an employee or agent of the Sponsor in its capacity as one of our directors or officers, and shall not be liable for breach of any duty (contractual or otherwise) by reason of the fact that the Sponsor or any of its affiliates directly or indirectly pursues or acquires such opportunity for itself, directs such opportunity to another person, or does not present such opportunity to us. In addition, the shareholders agreement that we will enter into with our Sponsors and Freescale LP in connection with this offering will contain substantially identical provisions with respect to corporate opportunities as the provisions in our bye-laws described above. As a result, we may be in competition with our Sponsors or their affiliates, and we may not have knowledge of, or be able to pursue, a transaction that could potentially be beneficial to us. Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects. See “Description of Share Capital – Corporate Opportunity.”

 

We have provisions in our bye-laws that may discourage a change of control.

 

Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These include, among others:

 

   

restrictions on the time period in which directors may be nominated;

 

   

no provision in our bye-laws for cumulative voting in the election of directors, which means that the holders of a majority of the issued and outstanding common shares can elect all the directors standing for election; and

 

   

the ability of our board of directors to determine the powers, preferences and rights of our preference shares and to issue preference shares without shareholder approval.

 

These provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares. See “Description of Share Capital.”

 

An active trading market for our common shares may not develop and you may not be able to sell your common shares at or above the initial public offering price.

 

Prior to this offering, there has been no public market for our common shares. An active trading market for our common shares may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your common shares at an attractive price, or at all. The initial public offering price for our common shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common shares at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common shares and may impair our ability to acquire other companies, products or technologies by using our common shares as consideration.

 

We expect that the price of our common shares will fluctuate substantially.

 

You should consider an investment in our common shares risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. In addition to the risks described in this prospectus, factors that may cause the market price of our common shares to fluctuate include:

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

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our announcements or our competitors’ announcements regarding new products, enhancements, design wins, significant contracts, acquisitions or strategic investments;

 

   

success of competitive products;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

changes in our capital structure, such as future issuances of securities, sales of large blocks of common shares by our shareholders or the incurrence of additional debt;

 

   

investors’ general perception of us; and

 

   

changes in general economic, industry and market conditions.

 

In addition, the securities markets have recently experienced significant price and volume fluctuations that often have not been related to the operating performance of particular companies. If the stock market in general experiences fluctuations or a loss of investor confidence, the trading price of our common shares could decline for reasons unrelated to our business, financial condition or results of operations. As a result of these factors, you may be unable to resell your shares at or above the initial public offering price after this offering.

 

Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or outcome, it would likely result in substantial costs and divert management’s attention and resources. This could have a material negative impact on our business, operating results and financial condition.

 

You will incur immediate and substantial dilution as a result of this offering.

 

If you purchase common shares in this offering, you will pay more for your shares than the amounts paid by existing shareholders for their shares. As a result, you will incur immediate and substantial dilution of $41.79 per share, representing the difference between the initial public offering price of $23.00 per share (the mid-point of the estimated price range set forth on the cover page of this prospectus) and our as adjusted net tangible book value per share after giving effect to this offering. See “Dilution.”

 

Future sales of our common shares, or the perception that such sales may occur, could depress our common share price.

 

If our existing shareholders sell, or indicate an intention to sell, substantial amounts of our common shares in the public market after the contractual lock-up agreements described below expire, or pursuant to a waiver from such agreements, and other restrictions on resale lapse, the trading price of our common shares could decline below the initial public offering price. Based on shares outstanding as of April 1, 2011, upon the closing of this offering, we will have outstanding approximately 240 million common shares. Of these shares, all common shares sold in this offering, except for any shares held by our affiliates, will be eligible for sale in the public market and substantially all of our other common shares will be subject to a 180-day contractual lock-up with the underwriters. Citigroup Global Markets Inc. and Deutsche Bank Securities, Inc., acting as representatives of the underwriters, may permit our officers, directors, employees and current shareholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements. Upon expiration of the contractual lock-up agreements with the underwriters, substantially all of our shares will be eligible for sale in the public market.

 

Some of our existing shareholders have demand and piggyback registration rights to require us to register with the SEC approximately 206 million of our outstanding common shares following the closing of this offering and expiration of the lock-up agreements. If we register these common shares, the shareholders would be able to sell those shares freely in the public market. In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act of 1933, as amended (the “Securities Act”) the common shares reserved for issuance in respect of incentive awards to our directors, officers and employees. If

 

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any of these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common shares. These sales also could impede our ability to raise future capital. See “Shares Eligible for Future Sale” for further details regarding the number of shares eligible for sale in the public market after this offering.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, the price of our common shares could decline.

 

The trading market for our common shares likely will be influenced by the research and reports that equity research analysts publish about us and our business. The price of our shares could decline if one or more securities analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, our share price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our common share price to decline.

 

We do not intend to pay cash dividends on our common shares for the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.

 

We do not anticipate paying cash dividends on our common shares for the foreseeable future. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends on our common shares in the future will be at the discretion of our board of directors. In addition, our ability to pay cash dividends on our common shares or to receive distributions or other transfers from our subsidiaries to enable us to pay cash dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including the senior credit facilities and the indentures governing Freescale Inc.’s notes, and by Bermuda law. As a result, you may not receive any return on an investment in our common shares unless you sell our common shares for a price greater than that which you paid for them. See “Dividend Policy.”

 

We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

 

We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet our operating needs. Legal and contractual restrictions in any existing and future outstanding indebtedness we or our subsidiaries incur, including the senior credit facilities and the indentures governing Freescale Inc.’s notes, may limit our ability to obtain cash from our subsidiaries. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other distributions to us.

 

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

 

We intend to contribute the net proceeds of this offering to Freescale Inc. to enable it to repay debt and to pay certain other fees and expenses as described under “Use of Proceeds.” Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements within the meaning of federal securities laws. These statements relate to, among other things, net sales, earnings, cash flows, capital expenditures, working capital and other financial items. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases to identify forward-looking statements. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors including those that are described in greater detail in “Risk Factors.” Accordingly, investors should not place undue reliance on our forward-looking statements. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

 

All forward-looking statements contained in this prospectus and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include, among others:

 

   

our inability to achieve and maintain profitability;

 

   

general economic and business conditions and any downturns in the cyclical industry in which we operate;

 

   

economic conditions in the industries in which our products are sold;

 

   

the financial viability of our customers, distributors or suppliers;

 

   

our competitive environment and our ability to make technological advances;

 

   

the loss of one or more of our significant customers or strategic relationships;

 

   

our substantial indebtedness;

 

   

our ability to service our outstanding indebtedness and the impact such indebtedness may have on the way we operate our business;

 

   

inability to make necessary capital expenditures;

 

   

interruptions in our production or manufacturing capacity and our ability to obtain supplies;

 

   

political and economic conditions in the countries where we conduct business;

 

   

maintenance and protection of our intellectual property;

 

   

potential product liability claims;

 

   

integration of future acquisitions into our business;

 

   

loss of key personnel; and

 

   

the costs of environmental compliance and/or the imposition of liabilities under environmental laws and regulations.

 

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ENFORCEMENT OF CIVIL LIABILITIES UNDER UNITED STATES

FEDERAL SECURITIES LAWS

 

We are a Bermuda limited liability exempted company. The significance of our being a Bermuda entity is that the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions, including the United States. See “Description of Share Capital.” One of our directors is not a resident of the United States and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on such director or any future non-resident directors or officers in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our non-resident directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our non-resident directors or officers under the securities laws of other jurisdictions. We have been advised by Conyers Dill & Pearman Limited, our special Bermuda counsel, that there is no treaty in effect between the United States and Bermuda providing for enforcement of judgments of U.S. courts and that there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of our common shares in this offering will be $944 million, assuming an initial public offering price of $23.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Our net proceeds will increase by approximately $143 million if the underwriters’ over-allotment option is exercised in full. Each $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the net proceeds to us from this offering by $41 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to contribute the net proceeds from this offering to Freescale, Inc., our indirect wholly owned subsidiary and main U.S. operating entity. We expect Freescale Inc. to use the net proceeds, together with cash on hand, to repay an aggregate of approximately $1.1 billion in outstanding indebtedness as described below; to pay approximately $4 million in fees and expenses in connection with the senior credit facilities amendment; and to make a payment to our Sponsors in connection with the termination of the Management Fee Agreements as described under “Certain Relationships and Related Party Transactions” as follows: $33.6 million to Blackstone Management Partners V L.L.C., $10.8 million to TC Group IV, L.L.C., $6.5 million to Permira Advisors (London) Limited, $6.5 million to Permira Advisers LLC, $6.7 million to TPG GenPar V—AIV, L.P. and $2.9 million to TPG GenPar IV—AIV, L.P.

 

We currently expect to repay the following indebtedness:

 

   

the full amount of indebtedness outstanding under the existing revolving credit facility upon completion of this offering ($532 million at April 30, 2011);

 

   

$255 million principal amount of 9.125%/9.875% Senior PIK-Election Notes due 2014;

 

   

$58 million principal amount of 8.875% Senior Fixed Rate Notes due 2014; and

 

   

$263 million principal amount of 10.75% Senior Notes due 2020.

 

The actual amount to be repaid under the existing revolving credit facility will depend on the amount outstanding upon completion of this offering, although we currently do not expect to have any additional amounts outstanding. Freescale Inc. currently expects to redeem each of the foregoing amounts and series of notes thirty days following completion of this offering pursuant to the applicable redemption provisions set forth in the applicable indentures. Assuming repayment of the existing credit facility upon completion of this offering and the redemption of the notes as specified above, Freescale Inc. would pay an additional $56 million in estimated accrued interest and premiums, all of which will be paid with available cash. Although the foregoing represents Freescale Inc.’s current intentions with respect to the repayment of its outstanding notes, the actual series of notes to be repaid, the amount to be repaid under each series, the timing of repayment and the method of repayment may change depending upon pricing terms available for each method of repayment, which could include redemptions, open market purchases, privately negotiated transactions or tender offers, or some combination thereof. The foregoing does not constitute a notice of redemption for or an obligation to issue a notice of redemption for or an offer to repurchase any of the outstanding notes. In the event that Freescale Inc. elects to exercise its redemption rights, the appropriate notice or notices of redemption will be issued at a later date or dates upon the terms and conditions set forth in the applicable indentures.

 

After giving effect to the above repayments, on an As Adjusted Basis as of April 1, 2011, our existing revolving credit facility would have been terminated, and our new revolving credit facility, with a committed capacity of $425 million (subject to increase to $500 million in certain circumstances), would have been undrawn (without giving effect to $25 million in letters of credit). The new revolving credit facility will be available through July 1, 2016, subject to acceleration to September 1, 2014 if (a) on such date the aggregate outstanding principal amount of Freescale Inc.’s senior unsecured notes due 2014 exceeds $500 million and (b) Freescale

 

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Inc.’s total leverage ratio for the June 30, 2014 test period is greater than 4:1. In addition, after giving effect to the above repayments, on an As Adjusted Basis as of April 1, 2011, we would have had (1) $2,230 million outstanding under a term loan due December 1, 2016, which maturity accelerates to September 1, 2014 if (a) on such date the aggregate outstanding principal amount of Freescale Inc.’s senior unsecured notes due 2014 exceeds $500 million and (b) Freescale Inc.’s total leverage ratio for the June 30, 2014 test period is greater than 4:1, and (2) the following amounts outstanding under our senior notes: $57 million aggregate principal amount of Senior Floating Rate Notes due 2014; no amounts under our 9.125%/9.875% Senior PIK-Election Notes due 2014; $828 million aggregate principal amount of 8.875% Senior Fixed Rate Notes due 2014; $764 million aggregate principal amount of 10.125% Senior Subordinated Notes due 2016; $750 million aggregate principal amount of 10.125% Senior Secured Notes due 2018; $1,380 million aggregate principal amount of 9.25% Senior Secured Notes due 2018; and $487 million aggregate principal amount of 10.75% Senior Notes due 2020. Accordingly, we would have had $885 million aggregate principal amount of senior unsecured notes due 2014 outstanding on an As Adjusted Basis as of April 1, 2011, or $385 million in excess of the threshold for acceleration of indebtedness under our senior credit facilities as described above. In the event the underwriters exercise their over-allotment option in whole or in part, we currently expect to contribute the net proceeds therefrom to Freescale Inc. to enable it to repay additional amounts outstanding under the senior unsecured notes due 2014.

 

The net proceeds of the 10.125% Senior Secured Notes due March 15, 2018, the 9.25% Senior Secured Notes due April 15, 2018 and the 10.75% Senior Notes due August 1, 2020 were used to repay outstanding indebtedness. As of April 1, 2011, the interest rate applicable to the Senior Floating Rate Notes due 2014 was 4.18%, and the interest rate applicable to the revolving credit facility, which matures on December 1, 2012, was 2.26%.

 

None of our Sponsor or our other affiliates hold balances under Freescale Inc.’s revolving credit facility nor do they hold debt securities of Freescale Inc. Accordingly, other than the payment to our Sponsors in connection with the termination of the Management Fee Agreements as described above, none of our Sponsors or our other affiliates will receive any of the net proceeds from this offering.

 

Certain of the underwriters or their affiliates currently hold balances under Freescale Inc.’s revolving credit facility and debt securities of Freescale Inc. As a result, based on amounts outstanding as of April 30, 2011, and assuming the above repayments, the following underwriters and their respective affiliates would receive net proceeds from this offering as follows: Citigroup, N.A., $50.9 million; Barclays Capital Inc., $0.006 million; Credit Suisse AG, $31.9 million; J.P. Morgan Chase Bank, N.A., $39.3 million; J.P. Morgan Securities LLC, $0.1 million; Goldman, Sachs & Co., $25 million; UBS Loan Finance LLC, $24.6 million; and RBC Capital Markets LLC, $0.8 million. See “Underwriting.”

 

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DIVIDEND POLICY

 

We have not paid cash dividends on our common shares in the last two years. We do not intend to pay cash dividends on our common shares for the foreseeable future. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business, reducing our debt and for general corporate purposes. In addition, our ability to pay cash dividends on our common shares or to receive distributions or other transfers from our subsidiaries to enable us to pay cash dividends on our common shares may be limited by restrictions under the terms of the agreements governing our and our subsidiaries’ existing and future outstanding indebtedness, including the senior credit facilities and the indentures governing Freescale Inc.’s notes. Subject to the foregoing, the payment of dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition and any other factors deemed relevant by our board of directors. In addition, pursuant to Bermuda law and our bye-laws, no dividends may be declared or paid if there are reasonable grounds for believing that: (i) we are, or would after the payment be, unable to pay our liabilities as they become due; or (ii) that the realizable value of our assets would thereby be less than the aggregate of our liabilities, our issued share capital and our share premium accounts.

 

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CAPITALIZATION

 

The following table sets forth our consolidated capitalization as of April 1, 2011 (i) on an actual basis and (ii) on an As Adjusted Basis to reflect (a) the sale of 43.5 million common shares in this offering at an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, and the application of the net proceeds therefrom as described in “Use of Proceeds” and (b) the amendment of Freescale Inc.’s senior credit facilities to replace its revolving credit facility thereunder as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.” You should read this table together with “Use of Proceeds,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of April 1, 2011

 

(In millions)


   Actual

    As Adjusted(1)

 
     (unaudited)  

Debt:

                

Credit facilities

                

Term loan

     2,230        2,230   

Revolving credit facility(2)

     532        —     

Capital lease obligations

     6        6   

Other existing debt(3)

     4,842        4,266   
    


 


Total debt

     7,610        6,502   
    


 


Shareholders’ deficit:

                

Preferred shares, $0.01 par value, no shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted(4)

            —     

Common shares, $0.0258 par value: 388 authorized, 196 issued and outstanding, actual; 388 shares authorized, 240 issued and outstanding, as adjusted(4)

     5        6   

Treasury shares, at cost; no shares, actual and no shares as adjusted

     (1     (1

Additional paid-in capital(4)

     7,291        8,234   

Accumulated other comprehensive earnings

     26        26   

Accumulated deficit

     (12,397     (12,397
    


 


Total shareholders’ deficit

     (5,076     (4,132
    


 


Total capitalization

   $ 2,534      $ 2,370   
    


 



(1)   Assumes the net proceeds from this offering, together with cash on hand, are used on the closing date to repay all amounts outstanding under the existing revolving credit facility and $576 million of outstanding notes issued by Freescale Inc.; to pay fees and expenses in connection with the senior credit facilities amendment; and to make a payment to our sponsors in connection with the termination of the Management Fee Agreements as described under “Certain Relationships and Related Party Transactions.” Does not give effect to any accounting charges that may be recorded as a result of such payment. A $1.00 increase (decrease) in the assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus and the application of the net proceeds therefrom, would increase (decrease) the net proceeds to us by $41 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and would increase (decrease) our total long-term debt reduction by $40 million and decrease (increase) our total shareholders’ deficit by $41 million.

 

(2)  

We expect to replace our revolving credit facility upon completion of this offering with a new revolving credit facility with a committed capacity of $425 million (subject to increase to up to $500 million in certain

 

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circumstances). As of April 1, 2011, on an As Adjusted Basis, the revolving credit facility would have had a remaining capacity of $400 million (or $475 million if the committed capacity is increased to $500 million prior to completion of this offering) after taking into effect $25 million in outstanding letters of credit.

 

(3)  

Includes Freescale Inc.’s Senior Floating Rate Notes due 2014, 9.125%/9.875% Senior PIK–Election Notes due 2014, 8.875% Senior Fixed Rate Notes due 2014, 10.125% Senior Subordinated Notes due 2016, 10.125% Senior Secured Notes due 2018, 9.25% Senior Secured Notes due 2018 and 10.75% Senior Notes due 2020, each as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities” and in note 4 to our consolidated financial statements included elsewhere in this prospectus.

 

(4)   Effective as of May 26, 2011, the par value of the common shares will be reduced from $0.0258 per share to $0.01 per share, which will result in an authorized share capital of 1,000 million shares, of which 900 million will be designated common shares par value $0.01 each and 100 million will be designated preference shares par value $0.01 each. In addition, the decrease in par value will result in a decrease in value of common shares and a corresponding increase in value of additional paid-in capital for each of the periods presented.

 

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DILUTION

 

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the as adjusted net tangible book value (deficit) per share of our common shares immediately after this offering. Our historical net tangible book value as of April 1, 2011 was a deficit of $5,329 million, or $27.15 per common share. Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of common shares outstanding.

 

After giving effect to the sale of 43.5 million common shares at an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds therefrom, together with cash on hand, as described under “Use of Proceeds”, our as adjusted net tangible book value as of April 1, 2011 would have been a deficit of $4,506 million or $18.79 per share. This amount represents an immediate increase in net tangible book value to our existing shareholders of $8.36 per share and an immediate dilution to new investors of $41.79 per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $ 23.00   

Historical net tangible book value (deficit) per share as of April 1, 2011

   $ (27.15

As adjusted net tangible book value (deficit) per share after giving effect to this offering

   $ (18.79
          

Dilution in as adjusted net tangible book value per share to investors in this offering

   $ 41.79   
          

 

Each $1.00 increase (decrease) in the assumed initial public offering price per share would (decrease) increase our as adjusted net tangible book value deficit by approximately $40 million, or approximately $0.17 per share, and the dilution per share to investors in this offering by approximately $0.17 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us and the application of the net proceeds therefrom, together with cash on hand, as described under “Use of Proceeds”. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us, together with a $1.00 increase in the assumed offering price of $23.00 per share, would result in an as adjusted net tangible book value deficit (calculated as described above) of approximately $4,445 million, or $18.46 per share, and the dilution per share to investors in this offering would be $41.46 per share. Similarly, a decrease of 1.0 million shares in the number of shares offered by us, together with a $1.00 decrease in the assumed public offering price of $23.00 per share, would result in an as adjusted net tangible book value deficit (calculated as described above) of approximately $4,566 million, or $19.12 per share, and the dilution per share to investors in this offering would be $42.12 per share. The as adjusted information discussed above is illustrative only and will change based on the actual public offering price and other terms of this offering determined at pricing.

 

Based upon an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, if the underwriters exercise their over-allotment option in full, our as adjusted net tangible book value (calculated as described above) at April 1, 2011 would be a deficit of $4,369 million, or $17.74 per share, representing an immediate increase in as adjusted net tangible book value to our existing shareholders of $9.41 per share and an immediate dilution to investors participating in this offering of $40.74 per share.

 

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The following table summarizes as of April 1, 2011, on an as adjusted basis, the number of common shares purchased from us, the total consideration paid to us and the average price per share paid by our existing shareholders and by investors participating in this offering, based upon an assumed initial public offering price of $23.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased

    Total Consideration

    Average Price
Per Share


 
     Number

     Percent

    Amount

     Percent

   

Existing equity holders

     196,295,161         81.9   $ 7,068,000,000         87.6   $ 36.01   

Investors participating in this offering

     43,500,000         18.1   $ 1,000,500,000         12.4   $ 23.00   
    


  


 


  


       

Total

     239,795,161         100   $ 8,068,500,000         100        
    


  


 


  


       

 

The above discussion and tables also assume no exercise of any outstanding restricted stock units, deferred stock units, options or warrants. To the extent any such restricted stock units, deferred stock units, options or warrants are exercised, there will be further dilution to investors participating in this offering.

 

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SELECTED FINANCIAL DATA

 

The predecessor selected consolidated statements of operations data for the period from January 1 through December 1, 2006 have been derived from our predecessor’s audited consolidated financial statements which are not included in this prospectus. The successor selected consolidated statements of operations data for the period from December 2 through December 31, 2006 and the year ended December 31, 2007 and the successor selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from our audited financial statements that are not included in this prospectus. The successor selected consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the successor selected consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from our audited financial statements included elsewhere in this prospectus. The successor selected consolidated balance sheet data as of April 2, 2010 has been derived from our unaudited financial statements that are not included in this prospectus. The successor selected consolidated statement of operations data for the three months ended April 2, 2010 and April 1, 2011 and the successor selected consolidated balance sheet data as of April 1, 2011 has been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth herein. We prepare our financial statements in accordance with U.S. GAAP. Our results for any historical period are not necessarily indicative of our results for any future period. You should read this selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Predecessor

    Successor

    Combined (1)

    Successor

       

(Dollars in millions except

per share data)


  Period from
January 1
through
December 1,
2006


    Period from
December 2
through
December 31,
2006


    (Unaudited)
Year Ended
December 31,
2006


    Year Ended December 31,

    Three Months Ended

       
        2007

    2008

    2009

    2010

    April 2, 2010

    April 1, 2011

       

Operating Results

                                                            (unaudited)           

Net sales

  $ 5,794      $ 565      $ 6,359      $ 5,722      $ 5,226      $ 3,508      $ 4,458      $ 1,020      $ 1,194           

Cost of sales

    3,175        450        3,625        3,821        3,154        2,563        2,768        651        710           
   


 


 


 


 


 


 


 


 


       

Gross margin

    2,619        115        2,734        1,901        2,072        945        1,690        369        484           

Selling, general and administrative

    670        59        729        653        673        499        502        117        131           

Research and development

    1,105        99        1,204        1,139        1,140        833        782        191        202           

Amortization expense for acquired intangible assets

    11        106        117        1,310        1,042        486        467        121        63           

In-process research and development (2)

           2,260        2,260                                                     

Reorganization of business, contract settlement, and other (3)

    (12            (12     64        53        345               1        91           

Impairment of goodwill and intangible assets (4)

                         449        6,981                                       

Merger expenses (5)

    466        56        522        5        11                                       
   


 


 


 


 


 


 


 


 


       

Operating earnings (loss) 

    379        (2,465     (2,086     (1,719     (7,828     (1,218     (61     (61     (3        

(Loss) gain on extinguishment or modification of long-term debt, net (6)

    (15            (15            79        2,296        (417     (47               

Other income (expense), net (7)

    48        (56     (8     (780     (733     (576     (600     (153     (148        
   


 


 


 


 


 


 


 


 


       

Earnings (loss) before income taxes and cumulative effect of accounting change

    412        (2,521     (2,109     (2,499     (8,482     502        (1,078     (261     (151        

Income tax expense (benefit)

    26        (134     (108     (886     (543     (246     (25     (4     (3        
   


 


 


 


 


 


 


 


 


       

Earnings (loss) before cumulative effect of accounting change

    386        (2,387     (2,001     (1,613     (7,939     748        (1,053     (257     (148        

Cumulative effect of accounting change, net of income tax expense

    7               7                                                     
   


 


 


 


 


 


 


 


 


       

Net earnings (loss)

  $ 393      $ (2,387   $ (1,994   $ (1,613   $ (7,939   $ 748      $ (1,053   $ (257   $ (148        
   


 


 


 


 


 


 


 


 


 


 

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    Predecessor

    Successor

    Combined(1)

    Successor

       
   

Period from
January 1
through

December 1,
2006

   

Period from

December 2

through

December 31,
2006

   

(Unaudited)

Year ended

December 31,
2006

    Year Ended December 31,

    Three Months Ended

       

(Dollars in millions
except per share data)


        2007

    2008

    2009

    2010

    April 2,
2010


    April 1,
2011


       
                                              (unaudited)        

Net Earnings (Loss) Per Share (8):

                                                                               

Basic:

                                                                               

Earnings (loss) before cumulative effect of accounting change

          $ (12.17           $ (8.22   $ (40.47   $ 3.81      $ (5.35   $ (1.31   $ (0.75        

Cumulative effect of accounting change, net of income tax expense

          $              $      $      $      $      $      $           

Net earnings (loss)

          $ (12.17           $ (8.22   $ (40.47   $ 3.81      $ (5.35   $ (1.31   $ (0.75        

Diluted:

                                                                               

Earnings (loss) before cumulative effect of accounting change

          $ (12.17           $ (8.22   $ (40.47   $ 3.81      $ (5.35   $ (1.31   $ (0.75        

Cumulative effect of accounting change, net of income tax expense

          $              $      $      $      $      $      $           

Net earnings (loss)

          $ (12.17           $ (8.22   $ (40.47   $ 3.81      $ (5.35   $ (1.31   $ (0.75        

Weighted Average Shares (in millions) (8):

                                                                               

Basic

            196                196        196        196        197        197        197           

Diluted

            196                196        197        196        197        197        197           

Balance Sheet (End of Period)

                                                                               

Total cash and cash equivalents and short-term
investments (9)

                  $ 710      $ 751      $ 1,394      $ 1,363      $ 1,043      $ 1,191      $ 1,035           

Total assets

                  $ 17,739      $ 15,117      $ 6,651      $ 5,093      $ 4,269      $ 4,794      $ 4,097           

Total debt and capital lease obligations

                  $ 9,526      $ 9,497      $ 9,786      $ 7,552      $ 7,618      $ 7,480      $ 7,610           

Total shareholders’ equity (deficit)

                  $ 4,717      $ 3,190      $ (4,692   $ (3,894   $ (4,934   $ (4,145   $ (5,076        

(1)   Our combined results for the year ended December 31, 2006 represent the addition of the predecessor period from January 1, 2006 through December 1, 2006 and the successor period from December 2, 2006 to December 31, 2006. This combination does not comply with U.S. GAAP or with the rules for pro forma presentation but is presented because we believe it provides the most meaningful comparison of our results.

 

(2)   In connection with our acquisition by the Consortium in 2006, purchase accounting adjustments were recorded to establish intangible assets including in-process research and development. This amount was expensed upon closing of the acquisition.

 

(3)   Charges in the first quarter of 2011 include non-cash impairment and inventory charges, and cash costs for employee termination benefits, contract termination and other costs associated with the closure of our Sendai, Japan facility due to damage from the March 11 earthquake. Charges in 2009 and 2008 relate to a series of restructuring actions to streamline our cost structure and redirect some research and development investments into growth markets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reorganization of Business, Contract Settlement, and Other” for a description of these actions and charges. During 2007, we recorded severance costs as part of a program to improve our operational efficiencies and reduce costs and we also recorded impairment and exit costs associated with the closure of our wafer fabrication facility in Crolles, France.

 

(4)   In 2008, in connection with the termination of our agreement with Motorola, the significant decline in the market capitalization of the public companies in our peer group as of December 31, 2008, our then announced intent to pursue strategic alternatives for our cellular handset product portfolio and the impact from weakening global market conditions in our remaining businesses, we concluded that indicators of impairment existed related to our goodwill and intangible assets. As a result, we recorded impairment charges of $5,350 million and $1,631 million associated with goodwill and intangible assets, respectively. During 2007, we began discussions regarding an existing supply agreement with Motorola and concluded that indicators of impairment existed related to the intangible assets associated with our wireless business. As a result, we recorded a $449 million impairment charge related to these assets in 2007.

 

(5)   Costs associated with the 2006 acquisition by the Consortium included (i) the redemption of outstanding notes, (ii) share-based compensation due to accelerated vesting of stock options, restricted stock units, and stock appreciation rights awards, (iii) various professional fees and (iv) employee compensation and payroll taxes. Amount for 2008 reflects expenses related to our acquisition of SigmaTel, Inc. and other merger related items.

 

(6)   Charges recorded in 2010 primarily reflect a net pre-tax charge of $432 million attributable to the write-off of remaining original issue discount and unamortized debt issuance costs along with other charges not eligible for capitalization associated with the refinancing activities completed in 2010. These charges were partially offset by a $15 million net pre-tax gain related to open-market repurchases of Freescale Inc.’s existing notes during the period. Gains recorded during 2009 primarily reflect a $2,264 million net pre-tax gain recorded in the first quarter of 2009 in connection with the debt exchange completed during the period. Gains recorded during 2008 reflect the net pre-tax gain related to open market repurchases of Freescale Inc.’s existing notes. The charge recorded in the predecessor period reflects the loss related to the full redemption of our floating rate notes due 2009.

 

(7)   Primarily reflects interest expense associated with our long-term debt for periods after the acquisition in 2006.

 

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(8)   On May 7, 2011, we effected a 1-for-5.16 consolidation of our common shares, decreasing the number of common shares outstanding from approximately 1,013 million to 196 million and increasing the par value of the common shares from $0.005 per share to $0.0258 per share. In all periods presented, basic and diluted weighted average common shares outstanding and earnings per common share have been calculated to reflect the 1-for-5.16 consolidation.

 

(9)   The following table provides a reconciliation of total cash and cash equivalents and short-term investments to the amounts reported in our audited consolidated balance sheets at December 31, 2006, 2007, 2008, 2009 and 2010 and April 2, 2010 and April 1, 2011 and the related notes included elsewhere in this prospectus.

 

(in millions)


   December 31,
2006


     December 31,
2007


     December 31,
2008


     December 31,
2009


     December 31,
2010


     April  2,
2010

     April  1,
2011

 
                                        (unaudited)  

Cash and cash equivalents

   $ 177       $ 206       $ 900       $ 1,363       $ 1,043       $ 1,191       $ 1,035   

Short-term investments

     533         545         494                                   
    


  


  


  


  


  


  


Total

   $ 710       $ 751       $ 1,394       $ 1,363       $ 1,043       $ 1,191       $ 1,035   
    


  


  


  


  


  


  


 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

The following is a discussion and analysis of our financial position and results of operations for each of the three months ended April 1, 2011 and April 2, 2010 and each of the three years ended December 31, 2010, 2009 and 2008. You should read the following discussion of our results of operations and financial condition with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements. We refer to our direct subsidiary, Freescale Semiconductor Holdings II, Ltd., as “Holdings II” and our indirect subsidiaries, Freescale Semiconductor Holdings III, Ltd., Freescale Semiconductor Holdings IV, Ltd. and Freescale Semiconductor Holdings V, Inc., as “Holdings III,” “Holdings IV” and “Holdings V,” respectively.

 

Overview

 

Our Business. We are a global leader in embedded processing solutions. An embedded processing solution is the combination of embedded processors, complementary semiconductor devices and software. Our embedded processor products include microcontrollers, single-and multi-core microprocessors, applications processors and digital signal processors. They provide the core functionality of electronic systems, adding essential control and intelligence, enhancing performance and optimizing power usage while lowering system costs. We also offer complementary semiconductor products, including radio frequency, power management, analog, mixed-signal devices and sensors. A key element of our strategy is to combine our embedded processors, complementary semiconductor devices and software to offer highly integrated platform-level solutions that are increasingly sought by our customers to simplify their development efforts and shorten their time to market. We have a heritage of innovation and product leadership spanning over 50 years and have an extensive intellectual property portfolio, including approximately 6,100 patent families which allow us to serve our more than 18,000 customers through our direct sales force and distribution partners.

 

Our broad product portfolio falls into three primary groupings, Microcontroller Solutions (“MSG”), Networking and Multimedia (“NMG”) and Radio Frequency, Analog and Sensor (“RASG”). We sell our products directly to original equipment manufacturers, distributors, original design manufacturers and contract manufacturers through our global direct sales force. Our ten largest end customers accounted for approximately 44%, 46% and 54% of our net sales in 2010, 2009 and 2008, respectively. Other than Continental Automotive and Motorola, no other end customer represented more than 10% of our total net sales for any of the last three years. In 2010, 2009 and 2008, 83%, 83% and 78% of our products were sold in countries other than the United States. Our net product sales in the Asia-Pacific, Europe, Middle East and Africa (EMEA), Americas and Japan regions represented approximately 45%, 26%, 23% and 6%, respectively, of our net sales in 2010.

 

The trend of increasing connectivity and the need for enhanced intelligence in existing and new markets are the primary drivers of the growth of embedded processing solutions in electronic devices. The majority of our net sales is derived from our three primary groupings. Our MSG product line represents the largest component of our total net sales. Microcontrollers and associated application development systems represented approximately 36%, 37%, 36%, 32% and 31% of our total net sales in the three months ended April 1, 2011 and April 2, 2010 and in 2010, 2009 and 2008, respectively. Demand for our microcontroller products is driven by the automotive, consumer and industrial markets. The automotive end market accounted for 66%, 65%, 64%, 64% and 65% of MSG’s net sales in the three months ended April 1, 2011 and April 2, 2010 and in 2010, 2009 and 2008, respectively. Our NMG product line, which includes communications processors and digital signal processors, networked multimedia devices and application processors, represented 25%, 25%, 28%, 27% and 22% of our total net sales in the three months ended April 1, 2011 and April 2, 2010 and in 2010, 2009 and 2008, respectively. Our primary end markets for our network and multimedia products are communications infrastructure for enterprise and service provider markets, processors for industrial applications, and application processors for the mobile consumer and driver information system markets. Our RASG product line, which

 

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includes radio frequency devices, analog devices and sensors, represented 24% of our total net sales in each of the three months ended April 1, 2011 and April 2, 2010 and in 2010, and 23% and 20% of our total net sales in 2009 and 2008, respectively. Demand for these products is driven by the automotive, consumer, industrial, wireless infrastructure, and computer peripherals markets. The automotive end market accounted for 59%, 57%, 55%, 49% and 53% of RASG’s sales in the three months ended April 1, 2011 and April 2, 2010 and in 2010, 2009 and 2008, respectively.

 

Conditions Impacting Our Business. Our business is significantly impacted by demand for electronic content in automobiles, networking and wireless infrastructure equipment and consumer electronic devices. During 2010, we experienced significant demand improvement and net sales growth. As a result, we selectively increased headcount and capital expenditures to meet the required increase in production. We increased our headcount by approximately 9% during 2010, and our capital expenditures were approximately 6% of our net sales in 2010 as compared to 2% in 2009. We also terminated certain austerity measures (executive salary reductions, mandatory time off without pay, savings plan company match elimination in countries where lawfully allowed, and certain other employee benefit curtailments) effective January 1, 2010, as a result of improving business conditions. However, over the course of 2010, we also faced certain supply chain constraints consistent with general conditions in the semiconductor industry. This resulted in higher production and shipping costs and higher material costs.

 

Net sales in the first quarter of 2011 were up 17% over the prior year quarter, with growth in all geographic regions in which we operate. The increase in net sales in the first quarter of 2011 was broad-based and driven primarily by strength in the automotive market for our MSG and RASG product groups. Our NMG product group also experienced revenue growth attributable to expansion of our core networking business across various markets compared to the prior year quarter. In the first quarter of 2011, MSG product sales grew 13%, or $50 million; RASG product sales grew 18%, or $45 million; and NMG products sales grew 19%, or $48 million; in each case as compared to the first quarter of 2010. The significant growth in our MSG and RASG net product sales was attributable primarily to the continued recovery of the global automotive markets, including increases in light vehicle production over the prior year quarter. Our automotive net sales in the first quarter of 2011 increased by 18% compared to the prior year quarter.

 

Net sales in 2010 were up 27% over the prior year, with growth in all geographic regions in which we operate, excluding Japan. The increase in net sales in 2010 was broad-based, demonstrating strength in each of our MSG, NMG and RASG product groups. In 2010, MSG product sales grew 43%, or $480 million; NMG product sales grew 33%, or $304 million; and RASG product sales grew 30%, or $242 million; in each case as compared to 2009. The significant growth in our MSG and RASG product portfolios was attributable primarily to the continued recovery of the global automotive markets, including significant increases in light vehicle production over the prior year. Our automotive net sales in 2010 increased by 44% compared to the prior year, in line with market growth rates. Within our NMG business, our communications processor and digital signal processors products, which are sold into enterprise and service provider markets, also contributed a substantial portion of product sales growth, along with higher net sales in our emerging multimedia business. In addition, the continued general economic recovery fueled stronger consumer and industrial product sales in our MSG and RASG products.

 

In 2009 and 2008, our business was significantly impacted by the global economic downturn. Decreased global automotive demand and production cuts in the automotive markets as well as reduced demand in the consumer and industrial market negatively impacted our results. We experienced lower net sales and profitability, as well as lower factory utilization compared to peak levels because of the downturn in general and our position as an electronic content provider to the automotive industry. In addition, our decision in 2008 to gradually wind down our cellular handset product portfolio and to restructure our relationship with Motorola, whereby it agreed to pay certain consideration to us in exchange for our terminating its remaining minimum purchase commitment obligations, resulted in substantial declines in cellular products sales beginning in the second half of 2008. We have completed our transformation activities relating to the winding down of our cellular handset product portfolio, which consisted of significant reductions in the related research and

 

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development and selling, general and administrative activities. We intend to continue to provide products, solutions and support to our existing cellular customers, although we expect demand for these products and services to continue to decline over time. As a result, we expect our net sales from our cellular handset product portfolio to continue to decline.

 

Going forward, our business will continue to be highly dependent on demand for electronic content in automobiles, networking and wireless infrastructure equipment and other electronic devices. We operate in an industry that is cyclical and subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand. Following the severe downturn in economic conditions in 2008 and the beginning of 2009, we experienced sequential quarterly increases in net sales in each quarter beginning the third quarter of 2009 and continuing through the first quarter of 2011. We are currently experiencing more balance in our demand and inventory levels, and we expect overall market conditions to return to a more normalized level. As a result, in the near term, we do not expect growth to continue at the same pace we experienced in 2010. Net sales throughout 2011 will depend on a continued general global economic recovery, our ability to effectively deal with semiconductor material supply chain challenges potentially arising from the March 11, 2011 earthquake in Japan, our ability to meet unscheduled or temporary increases in demand, and our ability to achieve design wins and meet product development launch cycles in our targeted markets, among other factors. For more information on trends and other factors affecting our business, see the “Risk Factors” section included elsewhere in this prospectus.

 

Reorganization of Business Program and Sendai Closure. As a result of the downturn in global economic conditions, beginning in 2008, we began executing a series of restructuring actions that are referred to as the “Reorganization of Business Program” that streamlined our cost structure and redirected some research and development investments into expected growth markets. These actions have reduced our workforce in our supply chain, research and development, sales, marketing and general and administrative functions. As of April 1, 2011, with the exception of the completion of our 150 millimeter exit strategy from Toulouse, France described below, we have completed these restructuring actions.

 

As a part of this program, we announced in the second quarter of 2009 that we were executing a plan to exit our remaining 150 millimeter manufacturing facilities, as the industry has experienced a migration from 150 millimeter technologies and products to more advanced technologies and products. The declining overall demand for the bulk of the products served by our 150 millimeter fabrication facilities has resulted in lower factory utilization. We are in the process of transitioning these products to our more efficient 200 millimeter facilities. This decline in demand was accelerated by the weaker global economic climate in 2008 and 2009. Accordingly, we closed our 150 millimeter fabrication facility in East Kilbride, Scotland in the second quarter of 2009. We also previously announced the planned closure of both our 150 millimeter fabrication facilities in Toulouse, France and Sendai, Japan, which we expected to complete in the fourth quarter of 2011. While we still expect to close the Toulouse, France facility within this time frame, the Sendai, Japan facility will not be reopened due to extensive damage following the March 11, 2011 earthquake off the coast of Japan. Although we currently expect to close our Toulouse, France facility in the fourth quarter of 2011, closure could be delayed due to unanticipated product demand requiring us to keep the facility operating to meet such demand or as a result of transitioning production from the Toulouse, France and Sendai, Japan sites to other manufacturing locations, building inventory to support such transition and potentially requiring our customers to “requalify” the products currently manufactured in those sites. See “Risk Factors—The failure to complete our transformation program and the impact of activities taken under the program could adversely affect our business”.

 

Our facilities, equipment and inventory in Sendai, Japan have experienced significant damage resulting from the earthquake, the on-going aftershocks and other difficulties associated with the current environment. We incurred $90 million of asset impairment and inventory charges, employee termination benefits, contract termination and other costs in the first quarter of 2011 associated with our inability to reopen our Sendai, Japan facilities. The majority of this charge consists of non-cash asset impairment charges of approximately $49 million and non-cash charges for damaged inventory of approximately $15 million. The remainder of this charge consists of approximately $26 million of cash costs consisting of incremental termination benefits of

 

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approximately $12 million and contract termination and other costs of approximately $14 million. We expect to complete the payments associated with these activities by the end of 2011. As we continue to evaluate and address the damage associated with our Sendai facilities, we will incur additional charges associated with contract termination, our employees and other costs associated with preparing our sites for sale. These non-cash charges and cash costs do not take into consideration any potential cost savings resulting from our inability to reopen or any offset resulting from potential recoveries from Freescale’s insurance coverage associated with the earthquake.

 

In addition to the foregoing charge related to our inability to reopen our Sendai facility, we continue to estimate the other severance costs of the Sendai, Japan and Toulouse, France closures to be approximately $180 million, including approximately $170 million in cash severance costs and $10 million in cash costs for other exit expenses. We anticipate substantially all remaining payments will be made over the course of 2011 and 2012; however, the timing of these payments depends on many factors, including the actual closing date and local employment laws, and actual amounts paid may vary based on currency fluctuation. We expect these closures to result in annualized cost savings of approximately $120 million, which we expect to fully realize by the end of 2012. Actual cost savings realized and the timing thereof will depend on many factors, some of which are beyond our control, and could differ materially from our estimates.

 

The Sendai, Japan facility produced microcontrollers, analog ICs and sensor products. In anticipation of the previously announced closure, we have been building buffer inventory to support end-of-life products and the transfer of production from the Sendai, Japan facility to our other fabrication facilities and outside foundry partners. This buffer inventory has been stored in other Freescale facilities and was not affected by the events in Japan. In addition, some products produced in the Sendai, Japan facility have been qualified in our other locations, while other products are in the process of being transferred.

 

We are continuing to assess the impact of the earthquake near Sendai on our entire supply chain in an effort to minimize the impact on our customers’ operations and we have initiated a number of actions to address potential supply gaps, including:

 

   

Use of buffer inventories already built in anticipation of the previously announced Sendai, Japan factory closure;

 

   

Partnering with customers to substitute compatible, alternate devices where viable;

 

   

Production ramp of products already qualified in our semiconductor fabrication facilities in Oak Hill, Texas and Chandler, Arizona, or foundry partners;

 

   

Working with customers to accelerate the ongoing transition of products to our other facilities or foundry partners; and

 

   

Adding capacity earlier than planned for select technologies that are being transferred to our other fabrication facilities.

 

Net sales in future quarters may be negatively impacted by our ability to move production to other facilities, the extent that buffer inventory fails to meet customers’ needs, any negative impact on our global supply chain and vendors due to the impact from the earthquake, any decrease in demand from customers taking delivery of products in Japan, and any decrease in demand from our customers who may be impacted by other industry supply constraints resulting from the earthquake in Japan.

 

Debt Restructuring Activities. During 2010 and 2009, we undertook several debt restructuring initiatives that have enabled us to reduce our long-term debt and extend the maturity of a significant portion of our outstanding indebtedness. In the first quarter of 2009, Freescale Inc. refinanced approximately $2,083 million of its senior notes due 2014 and $746 million of its senior subordinated notes due 2016 with approximately $924

 

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million of incremental term loans due 2016 which were borrowed under its senior credit facilities in a transaction we refer to as the “debt exchange.” In addition, in the first quarter of 2010, Freescale Inc. amended its senior credit facilities and extended the maturity of $2,265 million of term loans thereunder to 2016 (subject to acceleration to 2014 in certain circumstances), and used the proceeds from the issuance of $750 million in senior secured notes due 2018 to repay a like amount of debt outstanding under the senior credit facilities in a transaction we refer to as the “amend and extend.” Also, in the second quarter of 2010, Freescale Inc. issued $1,380 million of senior secured notes due 2018 and used the proceeds, plus cash on hand, to prepay the remaining balances under the original maturity term loans and the incremental term loans under the senior credit facilities, and in the third quarter of 2010, it issued $750 million of senior unsecured notes due 2020 and used the proceeds to repurchase a like amount of its existing senior unsecured notes due 2014. We refer to the 2010 second and third quarter transactions collectively as our “other 2010 debt refinancing activities.” We have also been opportunistically repurchasing Freescale Inc.’s existing notes in the open market. During 2010, 2009 and 2008, we repurchased $213 million, $99 million and $177 million, respectively, of existing notes. These restructuring activities were not undertaken due to any defaults under our indebtedness but rather to improve our capital structure and increase our flexibility under the terms of such debt. Please refer to “Liquidity and Capital Resources” below for additional information.

 

Effect of Acquisition Accounting. On December 1, 2006, Freescale Inc. was acquired by a consortium of private equity funds in a transaction we refer to as the “Merger.” The consortium included The Blackstone Group, The Carlyle Group, funds advised by Permira Advisers, LLC, TPG Capital and others, which we refer to as our “Sponsors.” In connection with the Merger, Freescale Inc. incurred significant indebtedness. In addition, the purchase price paid in connection with the Merger was allocated to state the acquired assets and assumed liabilities at fair value. The purchase accounting adjustments (i) increased the carrying value of our inventory and property, plant and equipment, (ii) established intangible assets for our trademarks/tradenames, customer relationships, developed technology/purchased licenses, and in-process research and development (IPR&D) (which was expensed in the financial statements after the consummation of the Merger), and (iii) revalued our long-term benefit plan obligations, among other things. Subsequent to the Merger, interest expense and non-cash depreciation and amortization charges significantly increased. During 2008, however, we incurred substantial non-cash impairment charges against the intangible assets established at the time of the Merger. This reduced the post-Merger increase in our non-cash amortization charges, although they are still above historical levels. The term “PPA” refers to the effect of acquisition accounting. Certain PPA impacts are recorded in our cost of sales and affect our gross margin and earnings from operations, and other PPA impacts are recorded in our operating expenses and only affect our earnings from operations.

 

Selected Statement of Operations Items

 

Orders

 

Orders are placed by customers for delivery for up to as much as 12 months in the future. However, only orders expected to be fulfilled during the 13 weeks following the last day of a quarter are included in orders for that quarter. Orders presented as of the end of a year are the sum of orders for each of the quarters in that fiscal year. Typically, agreements calling for the sale of specific quantities at specific prices are contractually subject to price or quantity revisions and are, as a matter of industry practice, rarely formally enforced. Therefore, most of our orders are cancelable. We track orders because we believe that it provides visibility into our potential future net sales.

 

Net sales

 

Our net sales are derived from the sale of our embedded processors and other semiconductor products and the licensing of our intellectual property. The majority of our net sales are derived from our three major product groups: MSG, NMG and RASG. We also derive net sales from Cellular Products and “Other,” which consists of foundry wafer sales to other semiconductor companies, intellectual property net sales, product net sales associated with end markets outside of our product design group target markets and net sales from sources other

 

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than semiconductors. We sell our products primarily through our direct sales force. We also use distributors for a portion of our sales and recognize net sales upon the delivery of our products to the distributors. Distributor net sales is reduced for estimated returns and distributor sales incentives.

 

Cost of sales

 

Cost of sales are costs incurred in providing products and services to our customers. These costs consist primarily of the cost of semiconductor wafers and other materials, the cost of assembly and test operations, shipping and handling costs associated with product sales and provisions for estimated costs related to product warranties (which are made at the time the related sale is recorded based on historic trends).

 

We currently manufacture a substantial portion of our products internally at our five wafer fabrication facilities and two assembly and test facilities. We track our inventory and cost of sales by using standard costs that are reviewed at least once a year and are valued at the lower of cost or estimated net realizable value.

 

Gross margin

 

Our gross margin is significantly influenced by our utilization. Utilization refers only to our wafer fabrication facilities and is based on the capacity of the installed equipment. As utilization rates increase, there is more operating leverage because fixed manufacturing costs are spread over higher output. We experienced a significant increase in our utilization rate to 74% in the first quarter of 2011 and to 75% in the fourth quarter of 2010 compared to 36% in the first quarter of 2009 due to increased demand for our products during the second half of 2009, which accelerated during 2010. We also experienced a significant decrease in our utilization rate from 74% in the first quarter of 2008 to the fourth quarter of 2009 of 60% (with the low point in the first quarter of 2009 mentioned above) due to the decreased demand for our products in connection with the global recession during the second half of 2008 and first half of 2009.

 

Selling, general and administrative

 

Selling, general and administrative expenses are costs incurred in the selling and marketing of our products and services to customers, corporate overhead and other operating costs. Selling expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows and corporate marketing. General and administrative expense consists primarily of compensation and associated costs for executive management, finance, human resources, information technology and other administrative personnel, outside professional fees and other corporate expenses.

 

Research and development

 

Research and development expenses are expensed as incurred and include the cost of activities attributable to development and pre-production efforts associated with designing, developing and testing new or significantly enhanced products or process and packaging technology. These costs consist primarily of compensation and associated costs for our engineers engaged in the design and development of our products and technologies: amortization of purchased technology; engineering design development software and hardware tools; depreciation of equipment used in research and development; software to support new products and design environments; project material costs; and third-party fees paid to consultants.

 

Amortization expense for acquired intangible assets

 

Amortization expense for acquired intangible assets consists primarily of the amortization of assets acquired as a part of the Merger. They are being amortized on a straight line basis over their respective estimated useful lives ranging from two to ten years. The useful lives of the intangible assets were established in connection with the allocation of fair values at December 2, 2006.

 

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Results of Operations

 

Operating Results

 

    Year Ended December 31,

  Three Months Ended

 

(in millions)


  2008

    2009

   

2010


  April 2, 2010

    April 1, 2011

 
                    (unaudited)  

Orders (unaudited)

  $ 4,845      $ 3,719      $4,631   $ 1,118      $ 1,192   
   


 


 
 


 


Net sales

  $ 5,226      $ 3,508      $4,458   $ 1,020      $ 1,194   

Cost of sales

    3,154        2,563      2,768     651        710   
   


 


 
 


 


Gross margin

    2,072        945      1,690     369        484   

Selling, general and administrative

    673        499      502     117        131   

Research and development

    1,140        833      782     191        202   

Amortization expense for acquired intangible assets

    1,042        486      467     121        63   

Reorganization of business, contract settlement, and other

    53        345          1        91   

Impairment of goodwill and intangible assets

    6,981                          

Merger expenses

    11                          
   


 


 
 


 


Operating loss

    (7,828     (1,218   (61)     (61     (3

Gain (loss) on extinguishment or modification of long-term debt, net

    79        2,296      (417)     (47       

Other expense, net

    (733     (576   (600)     (153     (148
   


 


 
 


 


(Loss) earnings before income taxes

    (8,482     502      (1,078)     (261     (151

Income tax benefit

    (543     (246   (25)     (4     (3
   


 


 
 


 


Net (loss) earnings

  $ (7,939   $ 748      $(1,053)     (257   $ (148
   


 


 
 


 


Percentage of Net Sales                                    
    Year Ended December 31,

  Three Months Ended

 
    2008

    2009

   

2010


  April 2, 2010

    April 1, 2011

 
                    (unaudited)  

Orders (unaudited)

    92.7     106.0   103.9%     109.6     99.8
   


 


 
 


 


Net sales

    100.0     100.0   100.0%     100.0     100.0

Cost of sales

    60.4     73.1   62.1%     63.8     59.5
   


 


 
 


 


Gross margin

    39.6     26.9   37.9%     36.2     40.5

Selling, general and administrative

    12.9     14.2   11.3%     11.5     11.0

Research and development

    21.8     23.7   17.5%     18.7     16.9

Amortization expense for acquired intangible assets

    19.9     13.9   10.5%     11.9     5.3

Reorganization of business, contract settlement, and other

    1.0     9.8   —%     0.1     7.6

Impairment of goodwill and intangible assets

    133.6       —%        

Merger expenses

    0.2       —%        
   


 


 
 


 


Operating loss

    *        *      *     *        *   

Gain (loss) on extinguishment or modification of long-term debt, net

    1.5     65.4   *     *       

Other expense, net

    *        *      *     *        *   
   


 


 
 


 


(Loss) earnings before income taxes

    *        14.3   *     *        *   

Income tax benefit

    *        *      *     *        *   
   


 


 
 


 


Net (loss) earnings

    *        21.3   *     *        *   
   


 


 
 


 



*   Not meaningful.

 

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Three Months Ended April 1, 2011 Compared to Three Months Ended April 2, 2010

 

Net Sales

 

Our net sales and orders of approximately $1,194 million and $1,192 million in the first quarter of 2011 increased 17% and 7%, respectively, compared to the prior year quarter. We experienced higher net sales in all of the product groups we are currently focusing on primarily as a result of increased production in the global automotive industry and increased demand from our distribution supply chain customers for consumer and industrial products. Distribution sales were approximately 23% of our total net sales and increased 15% compared to the prior year quarter, due primarily to increased demand in the consumer and industrial markets for products purchased through the distribution channel. Distribution inventory, in dollars and units, was 11.2 weeks and 9.2 weeks, respectively, of net sales at April 1, 2011, compared to 11.8 weeks and 10.0 weeks, respectively, of net sales at December 31, 2010, and compared to 10.2 weeks and 8.4 weeks, respectively, of net sales at April 2, 2010. Net sales by product design group for the three months ended April 1, 2011 and April 2, 2010 were as follows:

 

     Three Months Ended

 

(in millions)


   April 2,
2010


     April 1,
2011


 

Microcontroller Solutions

   $ 374       $ 424   

Networking and Multimedia

     255         303   

RF, Analog and Sensors

     245         290   

Cellular Products

     121         138   

Other

     25         39   
    


  


Total net sales

   $ 1,020       $ 1,194   
    


  


 

MSG

 

MSG’s net sales increased by $50 million, or 13%, compared to the prior year quarter, as a result of an increase in worldwide automotive production as well as strength in the broader industrial market. For example, in the first quarter of 2011, global and U.S. Big 3 light vehicle production increased by 6% and 15%, respectively, compared to the first quarter of 2010. This increase was attributable primarily to growth in U.S. and global automotive sales. MSG’s net sales increased by 16% in the automotive marketplace in the first quarter of 2011 compared to the prior year quarter. We also experienced an increase in the first quarter of 2011 in MSG’s net sales associated with consumer and industrial products purchased primarily through our distribution channel compared to the prior year quarter.

 

NMG

 

NMG’s net sales increased by $48 million, or 19%, compared to the prior year quarter. This growth was driven by broad-based expansion in our core networking business across various markets, including the service provider and enterprise markets. Our multimedia product revenues also increased primarily as a result of design wins ramping into production.

 

RASG

 

RASG’s net sales increased by $45 million, or 18%, compared to the prior year quarter, attributable primarily to higher demand for both analog and sensor products and increased wireless infrastructure investment. RASG’s net sales increased by 22% in the automotive marketplace in the first quarter of 2011 compared to the prior year quarter, predominantly as a result of increased light vehicle sales. In addition, we experienced an increase in radio frequency product net sales in the first quarter of 2011 compared to the prior year quarter. This increase was attributable primarily to increased wireless telecommunication network investment in 2G and 3G networks.

 

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Cellular Products

 

Cellular Products net sales increased by $17 million, or 14%, in the first quarter of 2011 compared to the prior year quarter due to an increase in demand for our baseband processors and power management integrated circuits from our legacy customers.

 

Other

 

Other net sales increased by $14 million, or 56%, in the first quarter of 2011 compared to the prior year quarter, primarily due to an increase in intellectual property revenue and partially offset by a decrease in contract manufacturing sales. As a percentage of net sales, intellectual property revenue was 2% and 1% for the first quarter of 2011 and 2010, respectively.

 

Gross margin

 

In the first quarter of 2011, our gross margin increased $115 million, or 31%, compared to the prior year quarter. As a percentage of net sales, gross margin in the first quarter was 40.5%, reflecting an increase of 4.3 percentage points compared to the first quarter of 2010. Gross margin benefitted from lower depreciation expense of $16 million resulting from a change in the useful lives of certain of our probe, assembly and test equipment. Gross margin was also positively impacted by higher net product and intellectual property sales, the reallocation of resources to focus on new product introduction initiatives, an increase in utilization at our assembly and test facilities, procurement cost savings, improved yields and direct labor efficiencies. The improvement in manufacturing facility utilization (to 74% at April 1, 2011 compared to 66% at April 2, 2010) and the decrease in depreciation expense contributed to continued improvement in operating leverage of our fixed manufacturing costs. Partially offsetting these improvements in gross margins were decreases in average selling price resulting from our annual negotiations with our customers put into effect in the first quarter of 2011. Our gross margin included PPA impact and depreciation acceleration related to the closure of our 150 millimeter manufacturing facilities of $48 million in the first quarter of 2011 and $33 million in the first quarter of 2010. (The term “PPA” refers to the effect of acquisition accounting. Certain PPA impacts are recorded in our cost of sales and affect our gross margin and earnings from operations, and other PPA impacts are recorded in our operating expenses and only affect our earnings from operations.)

 

Selling, general and administrative

 

Our selling, general and administrative expenses increased $14 million, or 12%, in the first quarter of 2011 compared to the prior year quarter. This increase was primarily the result of increased spending on select sales and marketing programs and higher incentive compensation associated with our improved performance. As a percentage of our net sales, our selling, general and administrative expenses were 11.0% in the first quarter of 2011, reflecting a slight decrease over the prior year quarter, primarily due to improved leverage of existing resources while generating higher net sales.

 

Research and development

 

Our research and development expense for the first quarter of 2011 increased $11 million, or 6%, compared to the first quarter of 2010. This increase was the result of continued focused investment in our core businesses, including the reallocation of resources to continue our focus on new product introduction initiatives. As a percentage of our net sales, our research and development expenses were 16.9% in the first quarter of 2011, reflecting a decrease of 1.8 percentage points over the prior year quarter, due primarily to improved leverage of existing resources and higher net sales.

 

Amortization expense for acquired intangible assets

 

Amortization expense for acquired intangible assets related to developed technology and tradenames/trademarks decreased by $58 million, or 48%, in the first quarter of 2011 compared to the prior year quarter. This decrease was associated with a portion of our developed technology and purchased licenses being fully amortized during 2010.

 

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Reorganization of business, contract settlement, and other

 

In the first quarter of 2011, in connection with the closing of the Sendai fabrication facility due to extensive damage from the March 11, 2011 earthquake off the coast of Japan, we incurred $90 million in charges associated with non-cash asset impairment and inventory charges and cash costs for employee termination benefits, contract termination and other items in reorganization of business and other.

 

In the first quarter of 2010, we had $5 million of non-cash asset impairment charges and $1 million of exit costs related to underutilized office space which was previously vacated in connection with our Reorganization of Business Program. We also reversed $5 million of severance accruals.

 

Loss on extinguishment or modification of long-term debt, net

 

In the first quarter of 2010, we recognized a net charge of $47 million in the accompanying Condensed Consolidated Statement of Operations associated with the completion of the amend and extend, which included the extinguishment of debt and the issuance of the 10.125% Secured Notes, and gains on repurchases of debt. This charge consisted of expenses associated with the amend and extend, the write-off of unamortized debt issuance costs and remaining original issue discount related to the extinguished debt, and other related costs, partially offset by gains from repurchases of debt. (Refer to “Financing Activities” within “Liquidity and Capital Resources” for the definition and discussion of terms referenced in this section.)

 

Other expense, net

 

Net interest expense in the first quarter of 2011 included interest expense of $151 million, partially offset by interest income of $2 million. Net interest expense in the first quarter of 2010 included interest expense of $148 million partially offset by interest income of $3 million. During the first quarter of 2011, we recorded a $2 million pre-tax gain in other expense, net related to foreign currency fluctuations. This gain was partially offset by pre-tax losses of less than $1 million primarily attributable to changes in the fair value of our interest rate swaps and interest rate caps, recorded in accordance with ASC Topic 815, “Derivatives and Hedging” (“ASC Topic 815”), as well as one of our investments accounted for under the equity method.

 

During the first quarter of 2010, we recognized pre-tax losses in other expense, net of $6 million due to the change in the fair value of our interest rate swaps and interest rate caps recorded in accordance with ASC Topic 815. In addition, we recorded $2 million in pre-tax losses attributable to foreign currency fluctuations and one of our investments accounted for under the equity method.

 

Income tax benefit

 

As of April 1, 2011, our effective tax rate was a tax benefit of 2%, including an income tax benefit of $8 million recorded for discrete events, which relate primarily to the release of valuation allowance related to certain deferred tax assets of a foreign subsidiary. Although we are a Bermuda entity with a statutory income tax rate of zero, the earnings of many of our subsidiaries are subject to taxation in the United States and other foreign jurisdictions. We record minimal tax expense on our U.S. earnings due to valuation allowances reflected against U.S. deferred tax assets. Our effective tax rate is impacted by the mix of earnings and losses by taxing jurisdictions.

 

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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

 

Net sales

 

Our net sales of $4,458 million and orders of $4,631 million in 2010 increased 27% and 25%, respectively, compared to the prior year. We experienced higher net sales in all of the product design groups (except Cellular Products and Other) as a result of (i) increased production in the global automotive industry, (ii) increased demand from our distribution supply chain customers for consumer and industrial products, (iii) strong demand in the enterprise and service provider markets of our core networking business, and (iv) an increase in consumer spending affecting multimedia products. Distribution sales were approximately 23% of our total net sales in 2010 and increased 41% compared to the prior year, due primarily to increased demand in the consumer and industrial markets for products purchased through the distribution channel. Distribution inventory, in dollars and units, was 11.8 weeks and 10.0 weeks, respectively, of net sales at December 31, 2010, compared to 11.4 weeks and 8.0 weeks, respectively, of net sales at December 31, 2009. Net sales by product group for the years ended December 31, 2009 and 2010 were as follows:

 

(in millions)


   Year Ended
December 31,
2009


     Year Ended
December 31,
2010


 

Microcontroller Solutions

   $ 1,114       $ 1,594   

Networking and Multimedia

     929         1,233   

Radio Frequency, Analog and Sensors

     814         1,056   

Cellular Products

     471         455   

Other

     180         120   
    


  


Total Net Sales

   $ 3,508       $ 4,458   
    


  


 

MSG

 

MSG’s net sales increased by $480 million, or 43%, in 2010 compared to the prior year, as a result of an increase in worldwide automotive production. For example, global and U.S. Big 3 light vehicle production increased by 23% and 49%, respectively. This increase was attributable to the recovery in U.S. and global automotive sales and the broader industrial market. We also experienced an increase in 2010 in MSG’s net sales associated with consumer and industrial products purchased primarily through our distribution channel compared to the prior year.

 

NMG

 

NMG’s net sales increased by $304 million, or 33%, in 2010 compared to the prior year. This increase was attributable primarily to a broad-based increase in core networking net sales in major markets, with particular strength in the enterprise and service provider markets. In addition, multimedia products sales grew over the prior year driven by strength in consumer smart mobile devices and driver information system applications.

 

RASG

 

RASG’s net sales increased by $242 million, or 30%, in 2010 compared to the prior year, attributable primarily to higher demand for both analog and sensor products resulting from a rise in worldwide automotive production. RASG’s net sales increased by 45% in the automotive marketplace in 2010 compared to the prior year, predominantly as a result of increased light vehicle sales. Higher demand for our analog products also fueled an increase in our consumer business in 2010 over the prior year and is reflective of the continued general economic recovery. We also experienced an increase in radio frequency product net sales in 2010 compared to the prior year. This increase was attributable primarily to a period of increased spending in China’s wireless infrastructure investment cycle.

 

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Table of Contents

Cellular Products

 

Cellular Products net sales declined by $16 million, or 3%, in 2010 compared to the prior year due in part to the change in sales mix between our remaining customers. We have completed our transformation activities relating to the winding down of our cellular handset product portfolio, which consisted of significant reductions in related research and development and selling, general and administrative activities. We intend to continue to provide products, solutions and support to our existing cellular customers.

 

Other

 

Other net sales decreased by $60 million, or 33%, in 2010 compared to the prior year, due primarily to a $38 million, or 52%, decrease in foundry wafer sales in connection with the expiration of a manufacturing contract with a customer, coupled with a $13 million, or 15%, decline in intellectual property revenue. As a percentage of sales, intellectual property revenue was 2% for both of 2010 and 2009.

 

Gross margin

 

In 2010, our gross margin increased $745 million compared to the prior year. As a percentage of net sales, gross margin in 2010 was 37.9%, reflecting an increase of 11.0 percentage points compared to 2009. This increase was attributable to higher net sales and an increase in factory utilization of approximately 15 percentage points as compared to the end of 2009. The increase in factory utilization and a $112 million decrease in depreciation and amortization expense positively impacted gross margin, as we experienced greater operating leverage of our fixed manufacturing costs. In addition, in connection with increasing our capacity to meet current demand, our manufacturing and supply chain operations workforce has increased 13% since the end of 2009. Manufacturing-related expenses, including tool maintenance and support, purchased parts and production supplies, were also higher in 2010 as compared to 2009 as a result of increased production volumes. We also experienced increases in other costs, including shipping and expedite fees, to ensure we met our customers increasing demand requirements during 2010. Our gross margin included PPA impact and depreciation acceleration related to the planned closures of our 150 millimeter manufacturing facilities of $156 million in 2010 and $228 million in 2009.

 

Selling, general and administrative

 

Our selling, general and administrative expenses increased $3 million, or 1%, in 2010 compared to the prior year. This increase was primarily the result of higher incentive compensation associated with our increased net sales and improved performance, increased spending on select sales and marketing programs, and the termination of austerity measures at the beginning of 2010. These increases were almost entirely offset by focused cost restructuring in the information technology function, a decrease in litigation costs and the realization of cost savings associated with workforce reductions. On average, our headcount in the selling, general and administrative areas fell by approximately 6% in 2010 compared to 2009. As a percentage of our net sales, our selling, general and administrative expenses were 11.3% in 2010, reflecting a decrease of 2.9 percentage points over the prior year primarily due to improved leverage of existing resources while generating higher net sales.

 

Research and development

 

Our research and development expense for 2010 decreased $51 million, or 6%, compared to 2009. This decrease was primarily the result of the gradual winding-down of research and development activities related to our cellular handset product portfolio and the realization of cost savings associated with workforce reductions. On average, we reduced our research and development headcount by approximately 13% in 2010 compared to 2009. This decrease was partially offset by higher incentive compensation associated with our increased net sales and improved performance, the termination of austerity measures at the beginning of 2010, higher costs associated with intellectual property licensing and focused investment in the new product introduction process. As a percentage of our net sales, our research and development expenses were 17.5% in 2010, reflecting a decrease of 6.2 percentage points over the prior year, due primarily to improved leverage of existing resources and higher net sales.

 

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Amortization expense for acquired intangible assets

 

Amortization expense for acquired intangible assets related to developed technology, tradenames, trademarks and customer relationships decreased by $19 million, or 4%, in 2010 compared to the prior year. This decrease is associated with a portion of our developed technology and purchased licenses being fully amortized during 2010.

 

Reorganization of business, contract settlement, and other

 

In 2010, in connection with our Reorganization of Business Program, we reversed $19 million of severance accruals as a result of employees previously identified for separation who either resigned and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved. This reversal also includes amounts associated with outplacement services and other severance-related costs that will not be incurred. We also recorded a $4 million benefit related to the sale of our facility in Dunfermline, Scotland. These benefits were partially offset by charges of (i) $8 million attributable to employee severance costs associated with the separation of certain employees in management positions in the fourth quarter of 2010, thus concluding our workforce transformation efforts under the Reorganization of Business Program; (ii) $11 million related primarily to underutilized office space which was vacated in the prior year, also in connection with our Reorganization of Business Program; and (iii) $6 million in connection with non-cash asset impairment charges.

 

Gain (loss) on extinguishment or modification of long-term debt, net

 

In 2010, we recorded a $432 million net pre-tax charge attributable to the write-off of remaining original issue discount and unamortized debt issuance costs along with other charges not eligible for capitalization, associated with the amend and extend and other 2010 debt refinancing activities. These charges were partially offset by a $15 million pre-tax gain, net related to open-market repurchases of $213 million of our senior unsecured notes.

 

Other expense, net

 

Other expense, net increased $24 million, or 4%, in 2010 compared to the prior year. Net interest expense in 2010 included interest expense of $591 million, partially offset by interest income of $8 million. Net interest expense in 2009 included interest expense of $571 million partially offset by interest income of $15 million. The $20 million increase in interest expense over the prior year is due to higher interest rates on the debt extended and incurred in 2010 in connection with the amend and extend and the other 2010 debt refinancing activities. This increase was partially offset by savings related to the extinguishment of outstanding debt during 2010 and 2009.

 

During 2010, we also recorded in other expense, net a $14 million pre-tax loss related to the change in the fair value of our interest rate swaps and interest rate caps and a $3 million pre-tax loss attributable to one of our strategic investments accounted for under the equity method.

 

Income tax benefit

 

In 2010, our effective tax rate is an income tax benefit of approximately 2%, inclusive of an income tax benefit of $23 million recorded for discrete events. These discrete events relate primarily to the release of valuation allowances related to certain deferred tax assets of our foreign subsidiaries and the release of income tax reserves associated with statute expirations and other items. Although we are a Bermuda entity with a statutory income tax rate of zero, the earnings of many of our subsidiaries are subject to taxation in the United States and other foreign jurisdictions. Our annual effective tax rate was different from the Bermuda statutory rate of zero in 2010 due to (i) income tax expense (benefit) incurred by subsidiaries operating in jurisdictions that impose an income tax, (ii) the mix of earnings and losses by taxing jurisdictions, (iii) a foreign capital investment incentive providing for enhanced tax deductions associated with capital expenditures in one of our foreign manufacturing facilities and (iv) the effect of valuation allowances and uncertain tax positions.

 

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Table of Contents

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

Net sales

 

Our net sales of $3,508 million and orders of $3,719 million in 2009 decreased 33% and 23%, respectively, compared to the prior year. We experienced lower net sales in almost all product groups as a result of (i) the termination of certain minimum purchase commitments of our cellular products by Motorola, (ii) decreasing production in the global automotive industry along with the impact of the General Motors Company and Chrysler LLC bankruptcies and the bankruptcies of certain of our other customers, (iii) decreased demand from our distribution supply chain customers for consumer and industrial products, (iv) lower capital spending in enterprise and wireline infrastructure and (v) a decline in consumer spending affecting digital home and multimedia products which negatively impacted our networking business. Distribution sales were approximately 21% of our total net sales in 2009 and fell by 21% compared to the prior year. Distribution inventory, in dollars and units, was 11.4 weeks and 8.0 weeks, respectively, of net sales at December 31, 2009, compared to 14.0 weeks and 11.8 weeks, respectively, of net sales at December 31, 2008. Net sales by product design group for the years ended December 31, 2008 and 2009 were as follows:

 

(in millions)


   Year Ended
December 31,
2008


     Year Ended
December 31,
2009


 

Microcontroller Solutions

   $ 1,640       $ 1,114   

Networking and Multimedia

     1,161         929   

Radio Frequency, Analog and Sensors

     1,032         814   

Cellular Products

     1,063         471   

Other

     330         180   
    


  


Total Net Sales

   $ 5,226       $ 3,508   
    


  


 

MSG

 

MSG’s net sales declined in 2009 by $526 million, or 32%, compared to 2008, primarily as a result of decreased global automotive demand and production cuts in the U.S. automotive market, where the U.S. Big 3 automakers produced 39% fewer vehicles during 2009 as compared to the prior year. We were also affected by reduced demand in the consumer and industrial markets purchased through our distribution channel. Despite the overall decline from the prior year, sequentially we noted improving sales volumes of our MSG’s products in the second half of 2009. MSG’s net sales increased by 29% in total, and by 27% in the automotive marketplace, in the second half of 2009 as compared to the first half of the year. This increase related primarily to a 46% increase in units produced by the Big 3 in the second half of 2009 and corresponding increases in our foreign markets, compared to the first half of the year, resulting from government incentive programs and the replenishment of inventories.

 

NMG

 

NMG’s net sales decreased in 2009 by $232 million, or 20%, compared to 2008. This decrease was attributable to lower capital spending on communications infrastructure, combined with a decline in consumer spending affecting sales of digital home and multimedia products.

 

RASG

 

RASG’s net sales declined in 2009 by $218 million, or 21%, compared to 2008, as a result of lower demand for both analog and sensor products due to weaker automotive vehicle production. In addition, we also experienced a decline in radio frequency product demand due to the end of that period of China’s investment in its 3G wireless infrastructure. Despite the overall decline from the prior year, in the second half of 2009, RASG’s net sales increased sequentially by 11% in total, and by 48% in the automotive marketplace, as

 

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Table of Contents

compared to the first half of 2009. This increase related primarily to a 46% increase in units produced by the Big 3 in the second half of 2009 and corresponding increases in our foreign markets, as compared to the first half of 2009, resulting from government incentive programs and the replenishment of inventories.

 

Cellular Products

 

Cellular Products net sales declined by $592 million, or 56%, in 2009 compared to 2008 due primarily to significantly lower demand from Motorola due to the termination of our agreement with it in the second half of 2008. The sharp decline in product sales to Motorola was partially offset by higher demand in 2009 from Research In Motion for our baseband processors.

 

Other

 

Other net sales declined by $150 million, or 45%, in 2009 as compared to 2008 due principally to a $175 million, or 71%, decrease in foundry wafer sales in connection with the winding down of a manufacturing contract with a customer. As a percentage of net sales, intellectual property revenue was 2% and 1% for 2009 and 2008, respectively.

 

Gross margin

 

In 2009, our gross margin decreased $1,127 million compared to 2008. As a percentage of net sales, gross margin was 26.9% in 2009, reflecting a decline of 12.7 percentage points from the prior year. This decrease was attributable to substantially reduced net sales which resulted in a decline in factory utilization of approximately 20 percentage points, as compared to 2008. This negatively impacted gross margin, as we experienced less operating leverage of fixed manufacturing costs. In response to these circumstances, we executed several cost savings initiatives, including reducing our cost of procured materials and services, internalizing certain wafer manufacturing and assembly and test contract services and executing a workforce reduction across our manufacturing organization. On average, our manufacturing and supply chain operations workforce was reduced 22% during 2009 compared to 2008. Our gross margin included PPA impact and depreciation acceleration related to the planned closures of our 150 millimeter manufacturing facilities of $228 million in 2009 and $225 million in 2008.

 

Selling, general and administrative

 

Our selling, general and administrative expenses decreased $174 million, or 26%, in 2009 compared to 2008. This decrease was the result of a coordinated effort to reduce costs across all selling, general and administration departmental functions and categories of expenses. We executed workforce reductions and focused cost restructuring in the information technology, legal, sales and marketing functions. On average, our selling, general and administrative workforce was reduced 21% during 2009 versus 2008. As a percent of our net sales, our selling, general and administrative expenses were 14.2% in 2009, reflecting an increase of 1.3 percentage points over the prior year, due primarily to lower net sales.

 

Research and development

 

Our research and development expense for 2009 decreased $307 million, or 27%, compared to 2008. This decrease was the result of savings from a comprehensive transformation plan to refocus our research and development efforts on the automotive, networking, industrial and consumer markets. This refocus also included the termination of our participation in the IBM alliance, which was a jointly-funded research alliance of several semiconductor manufacturing companies focused on cooperative development of 300 millimeter process technology. The termination of our participation in the IBM alliance was not significant to our operations, as we continue to work with IBM and our other foundry partners to incorporate new process technology into our product roadmap. We also exited our Magnetoresistive Random Access Memory (MRAM) process technology

 

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development by contributing it to an external party and generated initial savings from the strategic realignment of our cellular handset product portfolio. As a result, on average, our research and development workforce was reduced 20% during 2009 compared to 2008. These savings were partially offset by external acquisitions in 2008 and internal organic investments in our remaining core businesses. As a percentage of our net sales, our research and development expenses were 23.7% in 2009, reflecting an increase of 1.9 percentage points over the prior year, due primarily to lower net sales.

 

Amortization expense for acquired intangible assets

 

Amortization expense for acquired intangible assets related to developed technology, tradenames, trademarks and customer relationships decreased by $556 million, or 53%, in 2009 compared to 2008. The decrease was the result of a lower asset base following non-cash impairment charges recorded against these assets in the second half of 2008.

 

Reorganization of business, contract settlement, and other

 

In 2009, we recorded $298 million in net charges for severance costs primarily in connection with our decision to exit our manufacturing facilities in Sendai, Japan and Toulouse, France and severance costs associated with the wind-down of our cellular handset product portfolio. Additional reorganization costs consisted primarily of severance costs related to our ongoing Reorganization of Business Program, including the general consolidation of certain research and development, sales and marketing, and logistical and administrative operations. These net charges also included $15 million of severance reversals recorded as a result of employees previously identified for separation who either resigned and did not receive severance or were redeployed due to circumstances not foreseen when original plans were approved. In addition to these severance charges, we recorded $24 million in exit costs related primarily to underutilized office space which was vacated during 2009 in connection with the consolidation of certain research and development activities, $25 million of non-cash asset impairment charges and $4 million of gains related to the sale and disposition of certain capital assets.

 

We also recorded $15 million in charges in 2009 related to our Japanese subsidiary’s pension plan in reorganization of business, contract settlement, and other. These charges were related to certain termination benefits and settlement costs in connection with our plan to discontinue our manufacturing operations in Sendai, Japan in 2011 and other previously executed severance actions in Japan. In addition, in connection with our planned closure of our fabrication facility in Toulouse, France in 2011, we recorded a $9 million curtailment gain attributable to certain of our French subsidiary’s employee obligations.

 

In 2008, we recorded a benefit of $296 million in reorganization of business, contract settlement, and other in connection with a settlement agreement with Motorola whereby Motorola agreed to provide certain consideration to us in exchange for our terminating its remaining minimum purchase commitment obligations. This amount included the recognition of $187 million of previously deferred revenue recorded under an earlier amended and extended arrangement with Motorola whereby we received cash proceeds, provided certain pricing modifications and relieved Motorola of certain obligations. This benefit was partially offset by a $38 million charge for future foundry deliveries and contract termination fees associated with the cancellation of certain third-party manufacturing agreements as a result of the settlement agreement.

 

We also accrued $151 million in employee severance and other exit costs in connection with our Reorganization of Business Program in 2008. In addition, we recorded exit costs of $43 million related to a strategic decision to terminate our participation in the IBM alliance. In addition to these Reorganization of Business Program charges, we recorded $88 million of non-cash impairment charges in 2008 related to (i) idle property, plant and equipment assets, (ii) certain research and development assets, (iii) the closure of our manufacturing facility located in Tempe, Arizona and (iv) certain other assets previously classified as held-for-sale.

 

As a result of a change in executive leadership in 2008, we recorded in reorganization of business, contract settlement, and other a $17 million non-cash charge for equity compensation expense as a result of the

 

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accelerated vesting of awards in connection with the execution of a separation agreement with our former Chief Executive Officer. We also recognized $8 million in severance costs related to this separation and $1 million in compensation related to the hiring of our current Chief Executive Officer. In addition, we recorded $12 million in charges related to severance payments and accelerated compensation expense related to the turnover we experienced in a number of our senior management positions.

 

Finally, we finalized a grant related to our former research and manufacturing alliance in Crolles, France. We recognized a benefit of $9 million for the grant in reorganization of business, contract settlement, and other related to the portion of the grant for assets disposed of during 2008.

 

Impairment of goodwill and intangible assets

 

In 2008, in connection with the termination of our agreement with Motorola, the significant decline in the market capitalization of the public companies in our peer group as of December 31, 2008, our then announced intent to pursue strategic alternatives for our cellular handset product portfolio and the impact from weakening global market conditions in our remaining businesses, we concluded that indicators of impairment existed related to our goodwill and intangible assets. As a result, we recorded impairment charges of $5,350 million and $1,631 million associated with goodwill and intangible assets, respectively. These goodwill and intangible assets were primarily established in purchase accounting at the completion of the Merger in December 2006.

 

Merger expenses

 

Merger expenses were $11 million in 2008 and consisted primarily of retention costs associated with the acquisition of SigmaTel, Inc. on April 30, 2008, as well as accounting, legal and other professional fees. SigmaTel was a fabless semiconductor company which designed, developed and marketed mixed-signal integrated circuits for the consumer electronics market.

 

Gain (loss) on extinguishment or modification of long-term debt

 

During 2009, we recorded a $2,264 million net pre-tax gain in connection with the debt exchange completed in the first quarter. Upon completion of the debt exchange, the carrying value of our outstanding long-term debt obligations on the existing notes declined by $2,853 million, including $24 million of accrued PIK interest. This decline was partially offset by the borrowing of the incremental term loans in the debt exchange, which had a carrying value of $540 million. The incremental term loans were valued based upon the public trading prices of the existing notes exchanged immediately prior to the launch of the debt exchange. In addition, during 2009, we recorded a $32 million pre-tax gain, net associated with open-market repurchases of $99 million of senior unsecured notes.

 

During 2008, we recorded a $79 million pre-tax gain, net in connection with open-market repurchases of $177 million of senior unsecured notes.

 

Other expense, net

 

Other expense, net decreased $157 million, or 21%, in 2009 compared to 2008. Net interest expense in 2009 included interest expense of $571 million partially offset by interest income of $15 million. Net interest expense in 2008 included interest expense of $738 million partially offset by interest income of $36 million. The $167 million decrease in interest expense over the prior year period was due to (i) savings related to the debt exchange and the retirement of outstanding debt during 2009 and (ii) lower interest rates on the outstanding floating rate debt. This decline was partially offset by an increase in interest expense associated with the interest incurred on borrowings under the revolving credit facility in the fourth quarter of 2008 and the first quarter of 2009.

 

During 2009, we also recorded in other, net pre-tax losses of (i) $15 million related to certain of our investments which were accounted for under either the cost method or the equity method; (ii) $8 million in connection with the ineffective portion of swaps that were no longer classified as a cash flow hedge; (iii) $4 million

 

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associated with the change in the fair value of our interest rate swaps and interest rate caps; and (iv) $3 million attributable to foreign currency fluctuations. These losses were partially offset by pre-tax gains in other, net of (i) $5 million related to the change in fair value of our auction rate securities and other derivatives (see further discussion of our auction rate securities in note 3 to our consolidated financial statements included elsewhere in this prospectus), and (ii) $4 million recorded in connection with a settlement of a Lehman Brothers Special Financing, Inc. (LBSF) swap arrangement with a notional amount of $400 million (see further discussion of the LBSF swap arrangement in note 5 to our consolidated financial statements included elsewhere in this prospectus).

 

During 2008, we recognized a $38 million pre-tax loss in other, net related to the cumulative ineffective portion and subsequent change in fair value of interest rate swaps that were no longer classified as a cash flow hedge. In 2008, we also recorded in other, net (i) a $12 million pre-tax gain as a result of the sale of all of the shares in one of our investments accounted for under the cost method, (ii) a $5 million pre-tax loss attributable to one of our investments accounted for under the equity method and (iii) foreign currency fluctuations.

 

Income tax benefit

 

In 2009, our effective tax rate was an income tax expense of less than 1%, excluding a net income tax benefit of $253 million recorded for discrete events occurring in 2009. These discrete events primarily reflect a non-cash tax benefit of $270 million related to the release of a U.S. valuation allowance in connection with unremitted earnings of one of our foreign subsidiaries. Other discrete events offsetting the non-cash benefit described above include income tax expense related to a valuation allowance associated with the deferred tax assets of one of our foreign subsidiaries. The impact of the valuation allowance was partially offset by the release of income tax reserves related to foreign audit settlements and statute expirations. Our annual effective tax rate was different from the Bermuda statutory rate of zero in 2009 due to (i) income tax expense (benefit) incurred by subsidiaries operating in jurisdictions that impose an income tax, (ii) the mix of earnings and losses by taxing jurisdictions and (iii) the effect of valuation allowances and uncertain tax positions. During 2009, we also recorded a $2,264 million net gain as a result of the reduction in our outstanding long-term debt in connection with the debt exchange. We continued to be in an overall three year U.S. cumulative loss position, inclusive of the cancellation of debt gain. A valuation allowance of $560 million was recorded on our U.S. deferred tax assets as of December 31, 2008, so substantially all of the U.S. income tax expense related to the cancellation of debt income was offset by a beneficial release of the valuation allowance on our U.S. deferred tax assets.

 

In 2008, our effective tax rate was a tax benefit of 6%. Our annual effective tax rate was different from the Bermuda statutory rate of zero in 2008 due to (i) income tax expense (benefit) incurred by subsidiaries operating in jurisdictions that impose an income tax, (ii) the mix of earnings and losses by taxing jurisdictions, (iii) the nondeductible nature of goodwill impairments and (iv) the effect of valuation allowances and uncertain tax positions. The recognition of the valuation allowance resulted from having incurred cumulative losses in the United States, which is a strong indication that it is more likely than not that all or a portion of our U.S. deferred tax assets may not be recoverable. The effective rate included the tax impact recorded for discrete events of $22 million related to increases in valuation allowances associated with certain of our foreign deferred tax assets, foreign tax rate changes, tax audit settlements, and interest expense associated with tax reserves.

 

Reorganization of Business, Contract Settlement, and Other

 

Three Months Ended April 1, 2011

 

Sendai 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 current environment, prohibit us from returning the facility to an operational level required for wafer production in a reasonable time

 

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frame. As a result, the Sendai fabrication facility ceased operations at the time of the earthquake, and we are unable to bring the facility back up to operational condition due to the extensive damage to our facilities and equipment. In the first quarter of 2011, we reported $90 million in charges associated with non-cash asset impairment and inventory charges and cash costs for employee termination benefits, contract termination and other items in reorganization of business and other in the Condensed Consolidated Statement of Operations in association with this decision. We expect to complete the payments associated with these actions by the end of 2011. These non-cash charges and cash costs do not take into consideration any offset resulting from potential recoveries from Freescale’s insurance coverage associated with the earthquake.

 

We are continuing to assess the situation in Sendai and evaluate the associated non-cash charges and cash costs. At each reporting date, we will review our accruals for employee termination benefits, exit costs and other contingencies associated with our Sendai facilities, which consist primarily of termination benefits (principally payroll and other incentive costs), to ensure that our accruals are still appropriate. In certain circumstances, accruals may no longer be required because of efficiencies in carrying out our plans or because employees previously identified for separation resign unexpectedly and do not receive their full termination benefits or were redeployed due to circumstances not currently foreseen. We will reverse accruals to earnings when it is determined they are no longer required.

 

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

 

(in millions, except headcount)


   Accruals at
January 1,
2011


     Charges

     Adjustments

     2011
Amounts
Used


     Accruals at
April 1,
2011


 

Employee Separation Costs

                                            

Supply chain

   $  —           12         —           —         $ 12   

Selling, general and administrative

     —           —           —           —           —     

Research and development

     —           —           —           —           —     
    


  


  


  


  


Total

   $ —           12         —           —         $ 12   
    


  


  


  


  


Related headcount

     —           480         —           —           480   
    


  


  


  


  


Exit and Other Costs

   $ —           7         —           —         $ 7   
    


  


  


  


  


 

We recorded $12 million in employee termination benefits associated the closure of the Sendai fabrication facility in the first quarter of 2011. We will make payments to these 480 separated employees through the end of 2011. In addition, we also recorded $7 million of exit costs related to the termination of various supply contracts.

 

As a result of the significant structural and equipment damage to the Sendai fabrication facility and the Sendai design center, we recorded $49 million in non-cash asset impairment charges in the first quarter 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 of $15 million directly attributable to the impact of the earthquake in the first quarter of 2011. In addition to these non-cash asset impairment and inventory charges, we incurred $7 million of operational costs due to inactivity subsequent to the March 11, 2011 earthquake.

 

Reorganization of Business Program

 

Over the last three years, 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. We have completed the following actions related to the program: (i) the winding-down of our cellular handset research and development and selling, general and administrative activities and

 

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reduction of all related headcount, except for a minimal number required in connection with the selling of legacy products, (ii) the termination of our participation in the IBM alliance in connection with our decision to refocus our efforts from developing future process technology or obtaining rights to the underlying intellectual property via research alliances to leveraging broader participation with our foundry partners to integrate their advanced process technologies in developing and manufacturing our new products, (iii) the closure of our 150 millimeter manufacturing operations at our facilities in East Kilbride, Scotland in 2009 and in Sendai, Japan in March 2011 and (iv) the reduction of headcount in connection with the consolidation of certain research and development, sales and marketing, and logistical and administrative operations. The only remaining action relating to the Reorganization of Business Program is the closure of our Toulouse, France manufacturing facility, which is expected to occur during the fourth quarter of 2011, with the reduction in headcount occurring through the second quarter of 2012. In each of the first quarters of 2011 and 2010, our severance and exit costs and other non-cash charges associated with the Reorganization of Business Program were approximately $1 million.

 

At each reporting date, we evaluate our accruals for exit costs and employee separation costs, which consist primarily of termination 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 resigned unexpectedly and did not receive severance or were 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.

 

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

 

(in millions, except headcount)


   Accruals at
January 1,
2011


     Charges

     Adjustments

     2011
Amounts
Used


    Accruals at
April 1,
2011


 

Employee Separation Costs

                                           

Supply chain

   $ 157           —             —           (10   $ 147   

Selling, general and administrative

     12         —           —           (1     11   

Research and development

     16         —           —           —          16   
    


  


  


  


 


Total

   $ 185         —           —           (11   $ 174   
    


  


  


  


 


Related headcount

     1,420         —           —           (70     1,350   
    


  


  


  


 


Exit and Other Costs

   $ 15         —           —           (2   $ 13   
    


  


  


  


 


 

The $11 million used reflects cash payments made to employees separated as part of the Reorganization of Business Program in the first quarter of 2011. We will make substantially all remaining payments to these separated employees and the remaining approximately 1,350 employees through 2012. While previously recorded severance accruals for employees at our Sendai, Japan facility are reflected in the table above, refer to the prior section, “Sendai Fabrication Facility and Design Center,” for other charges associated with this facility in the first quarter of 2011 as a result of the earthquake in Japan. In addition, in the first quarter of 2011, we also paid $2 million of exit costs related primarily to underutilized office space which was previously vacated in connection with our Reorganization of Business Program.

 

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Three Months Ended April 2, 2010

 

Reorganization of Business Program

 

The following table displays a roll-forward from January 1, 2010 to April 2, 2010 of the employee separation and exit cost accruals established related to the Reorganization of Business Program:

 

(in millions, except headcount)


   Accruals at
January 1,
2010


     Charges

     Adjustments

    2010
Amounts

Used

    Accruals at
April 2,
2010


 

Employee Separation Costs

                                          

Supply chain

   $ 181           —           (2     (7   $ 172   

Selling, general and administrative

     14         —           —          (1     13   

Research and development

     44         —           (2     (8     34   
    


  


  


 


 


Total

   $ 239         —           (4     (16   $ 219   
    


  


  


 


 


Related headcount

     1,750         —           (65     (65     1,620   
    


  


  


 


 


Exit and Other Costs

   $ 16         —           1        (4   $ 13   
    


  


  


 


 


 

The $16 million used reflects cash payments made to employees separated as part of the Reorganization of Business Program in the first quarter of 2010. We reversed $4 million of severance accruals as a result of 65 employees previously identified for separation who either resigned and did not receive severance or were redeployed due to circumstances not foreseen when original plans were approved. This reversal also includes amounts associated with outplacement services and other severance-related costs that will not be incurred. In addition, we also recorded $1 million of exit costs related to underutilized office space which was previously vacated in connection with our Reorganization of Business Program. In the first quarter of 2010, $4 million of these exit costs were paid.

 

Asset Impairment Charges and Other Costs

 

During the first quarter of 2010, we recorded $5 million of non-cash asset impairment charges related to our manufacturing facility in East Kilbride, Scotland which was classified as held-for-sale as of April 2, 2010.

 

Other Reorganization of Business Programs

 

In the first quarter of 2010, we reversed $1 million of severance accruals related to reorganization of business programs initiated in periods preceding the third quarter of 2008. These reversals were due to a number of employees previously identified for separation who resigned and did not receive severance or were redeployed due to circumstances not foreseen when original plans were approved. As of December 31, 2010, we had no remaining severance relocation or exit cost accrual associated with these programs.

 

Year Ended December 31, 2010

 

Reorganization of Business Program

 

The following table displays a roll-forward from January 1, 2010 to December 31, 2010 of the employee separation and exit cost accruals established related to the Reorganization of Business Program:

 

(in millions, except headcount)


   Accruals at
January 1,
2010


     Charges

     Adjustments

    2010
Amounts
Used


    Accruals at
December 31,
2010


 

Employee Separation Costs

                                          

Supply chain

   $ 181         4         (6     (22   $ 157   

Selling, general and administrative

     14         2         (2     (2     12   

Research and development

     44         2         (11     (19     16   
    


  


  


 


 


Total

   $ 239         8         (19     (43   $ 185   
    


  


  


 


 


Related headcount

     1,750         70         (170     (230     1,420   
    


  


  


 


 


Exit and Other Costs

   $ 16         5         6        (12   $ 15   
    


  


  


 


 


 

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The $43 million used reflects cash payments made to employees separated as part of the Reorganization of Business Program in 2010. We will make additional payments to these separated employees and the remaining approximately 1,420 employees through the first half of 2012. We reversed $19 million of severance accruals as a result of 170 employees previously identified for separation who either resigned and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved. This reversal also includes amounts associated with outplacement services and other severance-related costs that will not be incurred. We also recorded $8 million in charges related to severance payments associated with the separation of certain employees in management positions, reflecting the culmination of workforce transformation efforts under the Reorganization of Business Program. In addition, we recorded $11 million of exit costs related primarily to underutilized office space which was vacated in the prior year in connection with our Reorganization of Business Program. During 2010, $12 million of these exit costs were paid.

 

Asset Impairment Charges and Other Costs

 

During 2010, we recorded (i) a net benefit of $4 million related primarily to proceeds received in connection with the sale of our former facility in Dunfermline, Scotland which was sold in the fourth quarter of 2010 and (ii) $6 million of non-cash impairment charges related primarily to our manufacturing facility in East Kilbride, Scotland, which was classified as held for sale as of December 31, 2010, and other items.

 

Other Reorganization of Business Programs

 

During 2010, we reversed approximately $2 million of severance accruals related to reorganization of business programs initiated in periods preceding the third quarter of 2008. These reversals were due to a number of employees previously identified for separation who resigned and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved. As of December 31, 2010, we have no remaining severance, relocation or exit cost accruals associated with these programs.

 

Year Ended December 31, 2009

 

Reorganization of Business Program

 

The following table displays a roll-forward from January 1, 2009 to December 31, 2009 of the employee separation and exit cost accruals established related to the Reorganization of Business Program:

 

(in millions, except headcount)


   Accruals at
January 1,
2009


     Charges

     Adjustments

    2009
Amounts
Used


    Accruals at
December 31,
2009


 

Employee Separation Costs

                                          

Supply chain

   $ 70         197         (9     (77   $ 181   

Selling, general and administrative

     20         24         (2     (28     14   

Research and development

     25         92         (4     (69     44   
    


  


  


 


 


Total

   $ 115         313         (15     (174   $ 239   
    


  


  


 


 


Related headcount

     2,640         3,610         (300     (4,200     1,750   
    


  


  


 


 


Exit and Other Costs

   $ 26         22         2        (34   $ 16   
    


  


  


 


 


 

In 2009, we recorded $313 million in charges for severance costs primarily in connection with our planned closures of our manufacturing facilities in Sendai, Japan and Toulouse, France and severance costs associated with the gradual wind-down of our cellular handset research and development and selling, general and administrative activities. Additional reorganization costs consisted primarily of severance costs related to our ongoing Reorganization of Business Program, including the general consolidation of certain research and development, sales and marketing, and logistical and administrative operations. We reversed $15 million of severance accruals as a result of employees previously identified for separation who either resigned and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved.

 

 

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During 2009, we also recorded charges for exit costs of $24 million related primarily to underutilized office space which was vacated in connection with the Reorganization of Business Program. As of December 31, 2009, $8 million of these exit costs were paid. During the third quarter of 2008, we recorded exit and other costs related to a strategic decision to terminate our participation in the IBM alliance, a jointly-funded research alliance of several semiconductor manufacturing companies focused on cooperative development of 300-millimeter process technology. We paid the remaining $26 million of the related charge for this action in 2009.

 

Termination Benefits

 

We recorded $15 million in charges in 2009 related to our Japanese subsidiary’s pension plan. These charges were related to certain termination benefits and settlement costs in connection with our planned closure of our manufacturing operations in Sendai, Japan in 2011 and other previously executed severance actions in Japan. In addition, in connection with our planned closure of our fabrication facility in Toulouse, France in 2011, we recorded a $9 million curtailment gain attributable to certain of our French subsidiary’s employee obligations.

 

Asset Impairment Charges and Other Costs

 

During 2009, we recorded $25 million of non-cash impairment charges related to certain assets classified as held-for-sale (or previously classified as held-for-sale) and in connection with consolidating our leased facilities. We also recorded gains of (i) $2 million associated with the disposition of certain equipment formerly used in our cellular handset product portfolio and (ii) $2 million in connection with the sale of a parcel of land at our Toulouse, France manufacturing facility.

 

Other Reorganization of Business Programs

 

During 2009, we reversed approximately $4 million of severance accruals related to reorganization of business programs initiated in periods preceding the third quarter of 2008. These reversals were due to a number of employees previously identified for separation who resigned and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were approved.