10-K 1 a2013123110k.htm 10-K 2013.12.31 10K
 
 
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
 
 
 
 
 
 
 
 
FORM 10-K
 
 
 
 
 
 
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number 001-35184
 
 
 
 
 
 
 
FREESCALE SEMICONDUCTOR, LTD.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
BERMUDA
 
98-0522138
(Jurisdiction)
 
(I.R.S. Employer Identification No.)
6501 William Cannon Drive West
Austin, Texas
 
78735
(Address of principal executive offices)
 
(Zip Code)
(512) 895-2000
(Registrant’s telephone number)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Name of each exchange on which registered:
Common Shares, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨ 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x 
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. (Check one):
 
Large Accelerated Filer
 
x
  
Accelerated Filer
 
¨
Non-Accelerated Filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The aggregate market value of the voting and non-voting shares held by non-affiliates of the registrant was approximately $810 million as of June 28, 2013 (based on the closing price as quoted on the New York Stock Exchange on that date). As of February 3, 2014 there were 259,739,795 shares of the registrant’s common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
 



Table of Contents
 

 
 
 
 
 
Page
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
PART IV
Item 15.
Exhibits, Financial Statement Schedules




PART I
Item 1: Business
Overview
We are a global leader in microcontrollers and digital networking processors, commonly referred to as embedded processors. Embedded processors are the backbone of electronic systems, providing essential control and intelligence, while enhancing performance and power efficiency. We combine our embedded processors with our complementary analog, sensor and radio frequency (RF) devices, as well as a full suite of software and design tools, to provide highly integrated embedded processing solutions that streamline customer development efforts, lower their costs and shorten their time to market. For the year ended December 31, 2013, our revenues were $4.2 billion, compared to $3.9 billion for the year ended December 31, 2012.
Our business is organized around five principal product groups: Microcontrollers, Digital Networking, Automotive MCUs, Analog and Sensors, and RF. We provide our customers embedded processing solutions for the automotive, networking, industrial and consumer markets. A number of trends are driving growth in our end markets, including advances in automotive safety and electronics, the expansion of cloud computing, the build out of next generation communications infrastructure, and the Internet of Things, an emerging network of smart devices designed to help make our lives safer and more productive. Our product and strategic focus is on serving the need for increased connectivity and enhanced intelligence critical to these fast growing semiconductor applications.
We have a heritage of innovation and product leadership spanning over 50 years that has resulted in an extensive intellectual property portfolio. We leverage our intellectual property portfolio, deep customer relationships built over many years of close collaboration, extensive suite of software and design tools and technical expertise to introduce innovative new products and platform-level solutions for 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. As a result, we have established leadership positions in many of our core markets. In 2013, we derived approximately 80% of our net sales from products where we held the #1 or #2 market positions.
Our Industry
Semiconductor Market Overview
Semiconductors perform a broad variety of functions within electronic products and systems, including processing data, sensing, storing information and converting or controlling electronic signals. Semiconductors vary significantly depending upon the specific function or application of the end product in which the semiconductor is used and the customer who is deploying it. Semiconductors also vary on a number of technical characteristics including the degree of integration, level of customization, and the process technology utilized to manufacture the semiconductor. Advances in semiconductor technology have increased the functionality and performance of semiconductors, improving their features and power consumption characteristics while reducing their size and cost. These advances have resulted in the proliferation of semiconductors and electronic content across a diverse array of products.
Increasing Proliferation of Embedded Processing Solutions
Embedded processors are stand-alone semiconductors that perform dedicated computing functions in electronic systems. They provide the core functionality within electronic systems adding essential control and intelligence, optimizing power usage while lowering system costs and enhancing performance. These products can be programmed to address specific requirements of electronic systems in a wide variety of applications and products. Embedded processing solutions combine an embedded processor, most commonly a microcontroller (MCU), a single or multicore processor (MPU), a digital signal controller (DSC) or a digital signal processor (DSP), with software and various sensors, interfaces, analog, power management, RF and networking capabilities.
The proliferation of embedded processing solutions is being driven by the need for increased connectivity, content and capabilities along with higher performance, power efficiency and lower cost. Advances in semiconductor design have resulted in smaller and more energy efficient embedded processors and solutions that enable design engineers to increase system intelligence across a broad and continually increasing variety of products. Embedded processors are well-suited to meet the demands of these products as they provide an efficient combination of processing capabilities per unit of energy consumed. Embedded processing solutions enable OEMs to offer products with higher performance at a lower cost.
Our Target Markets
Our product groups are focused on four primary markets that we believe are characterized by long-term, attractive growth opportunities and where we enjoy sustained, competitive differentiation through our technology leadership.

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Automotive
 
Networking
 
Industrial
 
Consumer
Key Applications
Driver information systems
Safety & chassis
Vehicle automation
Powertrain & engine management
Body & security
Radar & vision systems
Vehicle networking 

 
Cloud computing & data centers
Wired & wireless infrastructure (base stations)
Wireless small cell base stations
Enterprise network & security
 
Building & factory automation
Motor control robotics
Portable medical devices
Consumer appliances & home energy control
Smart grid & smart energy meters
 
Smart mobile devices
Electronic gaming
Phone & game sensors
Consumer wearables 
Human to machine interface
 
 
 
 
 
 
 
 
Growth Drivers
Increasing unit sales of automobiles worldwide
Vehicle electrification and automation
Government requirements & consumer demands for increased safety, comfort and efficiency
 
Proliferation of smart mobile devices, mobile data
Increasing demand for bandwidth, cloud computing
Digital content creation, distribution and consumption
 
Increasing connectivity
Energy efficiency
Increasing robustness
Predictive maintenance automation
Machine to machine (M2M) communications

 
Digital content creation, distribution & consumption
Proliferation of smart mobile devices 
Gaming
Sensor integration and intuition
Automotive Market
Growth in semiconductor sales to the global automotive market relies on global economic trends and growth in semiconductor content per vehicle which is being driven by applications for electrification, automation, powertrain, driver safety, engine management and driver information and convenience systems. Due to the high degree of regulatory scrutiny and safety requirements, the automotive semiconductor market is characterized by stringent qualification processes, zero defect quality processes, functionally safe design architecture, extensive design-in timeframes and long product life cycles resulting in significant barriers to entry and better sales forecasts.
Semiconductor content per vehicle continues to increase due to government regulation of safety and emissions, standardization of higher-end options across a greater number of vehicle classes, consumer demand for greater fuel efficiency and new comfort and multimedia applications. Automotive safety features are evolving from passive safety systems to active safety systems with advanced driver assistance systems such as radar and vision systems. Regulatory actions in North America, Europe, China and Korea drive the increase in applications such as tire pressure monitoring, electronic stability control, occupant detection and advanced driver assistance systems. We expect this evolution to continue. Semiconductor content is also increasing in engine management and fuel economy applications, stability control, occupant comfort and convenience systems and user interface applications. In addition, the use of networking in automotive applications continues to increase as various subsystems communicate within the automobile and with external devices and networks.
Networking Market
Growth in the networking market is driven by strong consumer demand for digital content, increased enterprise adoption of advanced video communications and the trend towards an increasingly global and mobile workforce. These factors have driven greater adoption of mobile Internet services and smart devices, cloud computing environments, Internet Protocol television and online gaming. When combined with the trend toward increasingly media-rich applications such as video sharing sites, social networks, high definition (HD) movie downloads and video conferencing, wireless, enterprise and Internet traffic has been increasing at a significant rate. We expect this growth in network traffic to continue, particularly as Internet delivery of video to TVs and mobile devices followed by cost-effective, HD interactive video communications proliferates.
The growth in data traffic is causing service providers, enterprises and consumers to demand an increase in the amount of wireless infrastructure, networking and electronic equipment to address the significant market opportunities created by these applications. As a result, providers of wireless infrastructure, networking and storage equipment are increasingly required to introduce new technologies and products with enhanced performance and functionality while reducing design and manufacturing costs. For example, in the wireless infrastructure market, equipment manufacturers are currently supplying carriers with wireless infrastructure equipment based on long term evolution, or LTE, a specification being marketed as “4G” that provides downlink peak rates of at least 100 Mbps and uplink peak rates of at least 50 Mbps. This compares to existing 3G networks which have typical downlink peak rates of 2 Mbps and uplink peak rates of approximately 200 kbps. These transitions highlight the need for networking semiconductor providers to deliver higher performance, high signal bandwidth, low-power multicore solutions along with enabling software, tools and reference designs to accommodate the increase in data traffic over networks.
Industrial Market
The industrial market is comprised of a wide variety of diverse submarkets such as M2M connectivity, portable medical devices, home and building automation, smart energy, smart meters, robotics and white goods. M2M connectivity allows a

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device, such as a sensor or a meter, to capture an event and turn it into meaningful information or action. Across multiple use cases, M2M technology is becoming more and more prevalent. For example, in a commercial environment a wirelessly connected device can read a low inventory level and communicate that an item needs restocking or it can sense motor vibration that automatically sends a message that a container needs maintenance. The market for medical imaging, diagnostics, therapy and portable remote monitoring equipment is expected to benefit from aging populations in developed economies and the need for portability in emerging markets, which creates demand for precision analog, connectivity and ultra low-power components. In the white goods market, consumer appliances require more sophisticated electronic control systems to reduce resource consumption, such as electricity, water and gas, and to provide a richer user interface through connectivity to other devices and touch or motion controls. The demand for energy efficiency, including the increased adoption of electronic utility metering, also commonly known as smart meters, also will drive increased semiconductor demand. These smart meters incorporate semiconductors to enable precision measurement and connectivity with the power grid and home networks.
Consumer Market
Growth in the consumer market is driven by the demand for an assortment of rich media content that is consumed on a variety of mobile devices, gaming equipment and consumer wearables, such as cameras and fitness devices. Microcontrollers can address the needs of these consumer devices as they continue to get smaller, more networked and more power efficient. In addition, the application of sensors in consumer devices such as smart phones and other devices has expanded due to the demand for display rotation, motion user interface and touch screen interfaces. In the gaming market, sensors, microcontrollers and analog devices are enabling new and innovative experiences through controllers that sense and communicate the player's movements and commands at low energy consumption while increasing accuracy. To address and further stimulate consumer demand, electronics manufacturers have continued to drive advances in the performance, cost, quality, and power consumption of their products and are continuously implementing advanced semiconductor technologies in new generations of electronic devices including application processors, power management and sensors.
Our Evolution
Following the appointment of Gregg Lowe as president and Chief Executive Officer (CEO) of Freescale in June 2012, we initiated a change to our strategic direction to identify opportunities to accelerate revenue growth in our target markets and improve profitability. As a result of this strategic realignment, we launched the following initiatives:
Reallocation of research and development investment. We have focused our research and development efforts on five strategic product groups: Microcontrollers, Digital Networking, Automotive Microcontrollers, Analog and Sensors and Radio Frequency. Over the last 15 months we have adjusted our investment and targeted approximately 90% of our total research and development investment on the high growth markets served by these product groups.
Alignment of our sales and marketing resources to high growth areas. We have shifted our sales resources to align with industry growth in China and select opportunities in Korea, Taiwan and Japan. As a result, we are increasing the number of accounts covered and expanding our regional distribution presence in those markets. In addition, to better streamline and incentivize our distribution channel, we have consolidated our focus on two global distribution partners.
Improved capital structure. Over the last 15 months we have extended our debt maturity profile resulting in approximately 90% of our outstanding debt maturing in 2020 and beyond. Moreover, we have reduced our annual cash interest expense by approximately $75 million on an annual basis beginning in the first quarter of 2014 based on current interest rates.
Positioned for growth in net sales and gross margin. The strategic initiatives put in motion supported improving net sales, as evidenced by a 6% increase in annual net sales and improved gross margin of 110 basis points in 2013 compared to 2012. We have combined all of our manufacturing operations under a single leader to coordinate with each of the five product groups and drive a relentless focus on execution, efficiency and lower manufacturing costs. We believe we are well positioned to continue growing revenue to gain market share and increase gross margin to improve profitability.
Our Competitive Strengths
We possess a number of competitive strengths that we believe allow us to capitalize on growth opportunities in the semiconductor industry including the following:
Global leadership in embedded processing. We have one of the most comprehensive embedded processing portfolios in the industry. We historically have maintained leading global market positions in overall embedded processors and certain complementary devices, including specifically within communications processors, automotive MCUs and RF power devices for mobile wireless infrastructure. We have the ability to offer a full suite of embedded processors that range from 8-bit to 64-bit and leverage a mixture of proprietary and open processor architectures including ARM and Power Architecture® technology, with a variety of integrated features. We believe that our scale and breadth of products allow us to better serve our customers and maintain the appropriate investment level to continue introducing new products.

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Strong system-level technology and applications expertise. We have deep system-level applications expertise as a result of our long standing customer relationships. Our design tools, reference designs and software and platform solutions allow our customers to efficiently adopt and integrate our products. We believe our unique system-level technology and applications expertise enhance our ability to anticipate industry trends and customer needs. This knowledge enables us to collaborate with our customers during every phase of their product development process, allowing us to be early to market with new, innovative products.
Extensive 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 believe that our $755 million investment in research and development in 2013, which represented 18% of our net sales for the year, positions us to continue to grow our business over the long-term. We have a research and development staff of approximately 5,700 employees focusing on embedded processing, system-level solutions engineering and software solutions. We have an extensive intellectual property portfolio that includes over 6,000 patent families covering key technologies used in products within our target markets. Our patent family includes all of the equivalent patents and patent applications that protect the same invention across different geographical regions. By leveraging our extensive patent portfolio and intellectual property and continuing to invest in research and development, we are able to efficiently deliver market leading products.
Well-established, collaborative relationships with leading customers. We have established strong relationships with leading customers across our target markets through our highly experienced global sales and field engineering teams. Our close customer relationships have been built on years of collaborative product development and enable us to develop critical expertise regarding our customers’ requirements. This system-level expertise, close collaboration with our customers and the mission critical role our products perform in electronic systems have allowed our products to be designed into multiple generations of our customers’ products.
Efficient operating model with lean manufacturing base. Our variable and low-cost operating model enabled by our lean manufacturing base allows us to operate with greater flexibility and at reduced cost. We maintain our internal manufacturing capacity to produce the majority of our products that require our differentiated and specialty process technologies and exclusively utilize third party foundry partners for process nodes below 90-nanometers. This enables us to maximize our responsiveness to customer demand and to reduce our investments in manufacturing capacity and process technology.
Experienced and focused senior leadership team. Our president and CEO, Gregg Lowe, has 29 years of experience in the semiconductor industry and has assembled a highly experienced executive management team. He has focused the Company on growing revenue to gain market share and increasing our gross margins to improve profitability. This strategy includes increasing research and development investment on our core product groups and expanding our sales coverage in emerging markets, particularly in China.
Our Strategy
Our strategy is to capitalize on the proliferation of embedded processing demand in each of our target markets by leveraging our leading embedded processor technology and complementary analog, sensor and RF devices. We believe our scale, broad technology portfolio, focused research and development investment, differentiated products and close customer relationships position us to grow at rates in excess of those of our target markets. The key elements of this strategy are to:
Focus research and development on solutions that align with the macro trends driving growth in our target markets. We focus our research and development activities on some of the fastest growing applications in our target markets such as driver information systems, automotive automation and safety, vehicle efficiency, next generation wireless infrastructure, cloud computing and data centers, consumer wearables, portable medical devices, consumer appliances and smart devices. We intend to continue to invest in developing innovative embedded processing products and solutions to pursue attractive opportunities in our current markets and in new markets where our solutions improve time to market and reduce development costs for our customers.
Increase our net sales from distribution. Distributors provide us with an effective means of reaching a broader and more globally diversified customer base, particularly in emerging markets. Our distribution partners give us access to a significant number of potential customers. We provide training to our distribution partners’ field application and sales engineers to provide coverage and support for our products to those distribution partners. We are making more of our products “distribution-ready” by focusing a portion of our research and development investment on products that are specifically tailored toward the distribution channel, such as our Kinetis line of MCUs, which incorporate the ARM Cortex®-M0+ and M4 architectures. Distribution sales were approximately 25%, 23% and 23% of our total net sales for the three years ended December 31, 2013, 2012 and 2011, respectively.
Leverage our presence in Asia to drive growth. We believe that we are well positioned to significantly grow in Asian markets given our history in China (over 35 years) and India (over 15 years). Through our history, we have established

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experienced, significant design resources and infrastructure within these markets. Additionally, we are continuing to shift sales resources to align with industry growth in select Asian markets and have opened ten new sales offices in China in connection with the change in our strategic direction initiated in the fourth quarter of 2012. We will continue to increase resources in multiple markets, including China, Taiwan, Korea and Japan, to drive growth in our business. We believe this focus will increase the number of accounts covered in these regions.
Drive market share growth through early-to-market and highly differentiated solutions. We leverage our significant research and development investment, broad and deep customer relationships, intellectual property, system-level expertise and complementary product portfolio across our target markets. This allows us to increase the rate of introduction of products and solutions in these markets. For example, we were early to market with the following products: our 32-bit Kinetis MCU products that offer exceptional low-power performance and mixed signal and memory scalability; our QorIQ Qonverge platform of scalable, multimode wireless basestation processors, which offer advantages in processing speed and power consumption in the networking market; and our Layerscape architecture, the industry’s first software-aware, core-agnostic networking multicore architecture, which delivers greater efficiency and scale, and leverages our communications processors based on Power Architecture and ARM Instruction Set Architectures (ISA); our Power SBC products that provide unique functional safety capability to enable safe systems for automotive and industrial applications; and our sensor fusion portfolio that includes accelerometers, gyros and pressure sensors programmed with software that helps to track motions and enhance human to machine interaction. We intend to continue to leverage our research and development, including our software capabilities, to deliver early-to-market products and solutions.
Expand gross and operating margins and free cash flow. We continue to execute a plan for margin improvement which encompasses cost reduction, efficiency improvement via increased manufacturing yields, test time reductions, greater pricing efficiency, conversion from gold to copper in certain of our manufacturing processes and enhancements to our mix of products. We have combined all of our manufacturing operations under a single leader to drive a sharper focus on execution, efficiency and reduced manufacturing costs. Given our streamlined manufacturing footprint and our strategy to utilize outsourced manufacturing partners for advanced process technology nodes, we expect to continue efficiently managing our capital expenditures. We believe we are well positioned to achieve improvements in margins and cash flow as we execute on our other margin initiatives.
Products and Applications
Our key products are embedded processors, which include MCUs, single and multicore MPUs, DSCs, applications processors and DSPs. We also offer customers a broad portfolio of differentiated semiconductor products that complement our embedded processors, including RF, power management, motor drivers, high voltage actuators, analog, mixed-signal devices and precision sensors. A key element of our strategy is to combine our embedded processors, complementary semiconductor devices and open architecture software to offer highly integrated solutions that are increasingly sought by our customers to simplify their development efforts and shorten their time to market. We have over 900 software engineers who work in conjunction with our partners to develop robust design ecosystems for our solutions. The implementation of these solutions can take various forms including devices which encompass a high level of integration within a single piece of silicon, the combination of several semiconductor devices into a single package or the highly integrated combination of multiple semiconductor devices and software into a subsystem.
Microcontrollers
We have been a provider of MCU solutions for more than 30 years. MCUs integrate all the major components of a computing system onto a single semiconductor device. Typically, this includes a programmable processor core, memory, interface circuitry and other components. MCUs provide the digital logic, or intelligence, for electronic applications, controlling electronic equipment or analyzing sensor inputs. We are a trusted, long-term supplier of MCUs to many of our customers, especially in the automotive and industrial markets. Our products provide the intelligence for many systems, ranging from engine management systems that reduce emissions, improve fuel efficiency and enhance driver performance to consumer appliance control systems that utilize resources such as water and energy more efficiently while increasing cleaning capability. Our portfolio is highly scalable, and coupled with our extensive software tools, enables our customers to more easily design in our products and use our MCUs in the same software environment as their systems change over time, become more complex and demand greater processing capabilities.
Our MCU product portfolio ranges from ultra low power, low-end 8-bit products to higher performance 16-bit and 32-bit products with on-board flash memory. In the automotive market, our Qorivva product line, based on Power Architecture technology, is one of the industry’s most powerful MCU developed utilizing 55-nanometer process technology. In the industrial market, we launched our 32-bit Kinetis and Vybrid products for the industrial market and many multi-media applications. We introduced the Kinetis family of 90-nanometer 32-bit MCUs based on the new ARM Cortex-M0+ and M4 processors for the industrial and consumer markets to complement our existing Coldfire solutions. The Kinetis family is one of the most scalable portfolios of MCUs in the industry, featuring hardware and software compatible MCU families that offer exceptional low-power performance, mixed signal and memory scalability. Similar to our Kinetis line, our 16-bit DSCs are primarily used in the

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consumer appliance market where they manage motor control and enable quieter and more energy efficient consumer appliances. Additionally, our highly integrated, mixed signal MagniV product line, enables further system level integration for a wide range of automotive applications, such as window lifts, wipers, instrument clusters and fuel pumps.
Wireless Connectivity
Our wireless connectivity products provide low power wireless communications functionality for the industrial and consumer markets, focused on devices and applications that utilize a low data rate and require long battery life and secure networking. Our wireless products utilize and support multiple standards and frequencies, including the IEEE standard 802.15.4, which is also the basis for the Zigbee® wireless specification and sub-1 GHz solutions. We offer or integrate this technology with our embedded processors in our solutions for medical devices, smart meters and smart energy, consumer appliances, RF remote controls and home automation.
Applications Processors
Applications processors consist of a computing core with embedded memory and special purpose hardware and software for multimedia applications such as graphics and video. Our products focus on mobile and home consumer devices, automotive driver information systems and industrial applications that require processing and multimedia capabilities. We provide highly integrated ARM-based i.MX application processors with integrated audio, video and graphics capability that are optimized for low-power and high-performance applications. Our i.MX family of processors is designed in conjunction with a broad suite of additional products including power management solutions, audio codecs, touch sensors and accelerometers to provide full systems solutions across a wide range of operating systems and applications. We recently introduced our i.MX 6 family of applications processors. The series integrates one, two or four ARM Cortex®-A9 cores running up to 1.2 GHz and includes five devices: the single-core i.MX 6Solo and i.MX 6SoloLite, dual-core i.MX 6Dual and i.MX 6DualLite, and quad-core i.MX 6Quad processors. Together, these products provide a family of applications processors featuring software, power and pin compatibility across single, dual and quad core implementations. Software support includes Linux and Android implementations.
Communications Processors
Communications processors are programmable semiconductors that perform tasks related to control and management of digital data, as well as network interfaces. They are designed to handle tasks related to data transmission between nodes within a network, the manipulation of that data upon arrival at its destination and protocol conversion. Our product portfolio includes 32-bit and 64-bit offerings ranging from a single core to 28- and 45-nanometer multicore QorIQ communications processors. For over 25 years, our communication processors based on the Power Architecture technology have powered communication networks around the world. Our PowerQUICC communications processors are used throughout the wired and wireless infrastructure today. Our multicore QorIQ platforms use one or more high-performance 32-bit or 64-bit cores integrated with specific network accelerators, and support a wide range of embedded networking equipment, industrial and general-purpose computing applications. Our Layerscape architecture is the industry’s first software-aware and core-agnostic networking multicore architecture, delivering greater efficiency and scale. This flexible architecture emphasizes software capabilities and programmability, leveraging communications processors from both the QorIQ family and products based on ARM ISA.
A key component to our solutions utilizing communications processors is our ability to offer optimized silicon software that decreases the customer’s burden of semiconductor integration into complex systems and allows customization of our products for individual applications. Our historical software acquisitions have provided the foundation for the VortiQa software suite. We continue to invest in the tools, applications and partnerships to create a suite of products built around standard platforms with the flexibility to be configured for specific vertical solutions. An example of this type of investment is the strategic alliances we have formed with embedded software partners ENEA Systems, Green Hills Software and Mentor Graphics. These strategic alliances are intended to allow us to create simpler, more integrated embedded software development environments to help our customers manage the growing complexity of multicore processors and the tools required to assimilate them into their end products.
Digital Signal Controllers
DSCs are a hybrid that combines the functionality of MCUs and the processing power of DSPs, often with an added set of peripherals. Our DSC families offer optimized solutions for digital power conversion, motor control and many other applications across consumer, industrial and healthcare markets requiring high speed and high resolution capability.
Digital Signal Processors
DSPs are MPUs that can perform advanced calculations very rapidly on a real-time basis. Within networking products, DSPs are utilized to perform functions such as baseband modem processing. We are on our fifth generation of multicore digital signal processing technology. Our DSP portfolio includes single-core to multicore DSPs based on the StarCore architecture integrated with specific wireless acceleration technology. These products enable baseband processing in the wireless base station market, support multiple air-interfaces in cellular networks such as LTE, HSPA+, TD-SCDMA, CDMA2000K and

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WiMAX, at leading wireless infrastructure OEMs worldwide. Our DSPs used in conjunction with our communications processors give us a broad portfolio in the market to satisfy wireless infrastructure requirements.
Analog and Mixed-Signal Products
Our analog and mixed-signal products make embedded systems better with more reliable performance for bridging real world signals to the digital intelligence of embedded processors. Our portfolio features a variety of differentiated products for driving actuators (such as in motors, valves, and lights), switching large currents, regulating power to electronic components in a system, charging and cell balancing batteries, providing power efficient functional safety (self monitoring and redundant failsafe backup) for safety critical applications, and providing precision sense and control interfaces for complex analog systems. The product portfolio includes an array of system-on-a-chip (SoC) solutions integrating significant amounts of digital processing logic in conjunction with sophisticated analog functionality and power analog outputs for system automation and control. The support of high voltage and high current coupled with low power and high accuracy measurement is a unique value that Freescale brings our customers. An example of how our analog and mixed-signal semiconductors play a differentiating role in key applications includes the highly efficient and safe battery management for hybrid and all-electric vehicles. Our 77 GHz radar products enable the convergence of active and passive safety systems in automobiles. Our new PowerSBC family combines comprehensive functional safety features with efficient power management and low spurious emissions communication transceivers to enable highly integrated safe systems for mission critical automotive and industrial applications. Our precision direct fuel injection drivers improve combustion engine performance and efficiency while reducing fuel emissions. These products are sold into all of our markets, frequently as part of our embedded systems solutions bundled with microcontrollers, as well as specialized components.
Sensors
Sensors serve as a primary interface in embedded systems for advanced human interface and contextual awareness that mimic the human “5 senses” interaction with the external environment. We provide several categories of semiconductor-based environmental and inertial sensors, including pressure, inertial, magnetic, proximity and gyroscopic sensors that provide orientation detection, gesture recognition, tilt to scroll functionality and position detection in mobile devices and gaming applications. Within automotive, our inertial sensors enable vehicle stability control and airbag crash detection while our pressure sensors are well-positioned for continued growth in tire pressure monitoring, occupancy detection and engine control. Our Xtrinsic smart sensor platforms combine inertial sensors and embedded processors with connectivity and power management supported by a reference software toolset for ease of design-in. This level of integration in a small package footprint enables contextual based processing and decision intelligence for Internet of Things big data management.
Radio Frequency Devices
We have an extensive portfolio of high power RF amplifiers, serving markets such as wireless infrastructure, broadcast, military, medical, radars, air traffic control, land mobile markets, general industrial, among others. The wireless infrastructure products utilize our latest Airfast RF technology and are designed to increase performance, while decreasing costs. The entire RF power portfolio includes solutions from 1 watt to more than 1 kilowatt. Our low power portfolio provides a broad mix of RF small signal and low power products ranging from general purpose amplifiers, gain blocks, and signal control products to feature-rich, low noise amplifiers and high-performance RF integrated circuits.

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Principal
Products
 
 
Key
Applications
MCUs (Qorivva, Kinetis 8-, 16- and 32-bit MCUs built on Power and ARM architectures)
 
 
- automotive powertrain & engine management
 
 
- automotive body & security
Communications processors (Layerscape, QorIQ, QorIQ Qonverge, PowerQUICC single and multicore 32- and 64-bit processors built on Power Architecture®; Starcore, and ARM technologies)
 
 
- automotive safety & chassis
 
 
- automotive radar, vision systems & advanced driver assistance
 
 
- automotive driver information systems
RF Devices (next generation Airfast power amplifiers, power transistors, amplifiers, receivers, tuners)
 
 
- vehicle networking
 
 
- building & factory automation
Applications processors (i.MX and Vybrid 32-bit single and multicore processors built on the ARM architecture)
 
 
- smart grid & smart energy appliances
 
 
- portable medical devices
Analog and mixed-signal products (system-basis chips, auto engine control, stability and braking solutions, battery management, power management & motor control devices, CAN/LIN interface solutions, radar solutions and signal conditioners)
 
 
- M2M communications
 
 
- human-machine interface
 
 
- consumer appliances & home energy control
Sensors (inertial, pressure, proximity, touch, magnetic, gyro)
 
 
- smart mobile devices
DSPs (baseband processors built on the StarCore architecture)
 
 
- electronic gaming
Wireless connectivity (IEEE 802.15.4 / Zigbee low power, sub-1 GHz wireless)
 
 
- phone & game sensors
 
 
- consumer wearables
 
 
 
- wired & wireless infrastructure (base stations)
 
 
 
- enterprise network & security
 
 
 
- wireless small cell base stations
 
 
 
- cloud computing & data centers
 
 
 
- Internet of Things
Sales and Marketing
We sell our products directly to OEMs, distributors, original design manufacturers and contract manufacturers. Our global direct sales force is predominantly organized by customer end markets in order to bring dedicated expertise, knowledge and response to our customers. As of December 31, 2013, we had 51 sales offices located in 19 countries that align us with the development efforts of our customers and enable us to respond directly to customer requirements. We also maintain a network of distributors that we believe has the global infrastructure and logistics capabilities to serve a wide and diversified customer base for our products. Our distribution sales network provides an opportunity for us to offer our products and services to a wider array of customers. Distribution sales were approximately 25%, 23% and 23% of our total net sales for the three years ended December 31, 2013, 2012 and 2011, respectively. In association with the change in the company’s strategic direction during 2012, we have shifted sales resources to align with industry growth in China, opening ten new sales offices, along with select opportunities in Korea, Taiwan and Japan. We believe this focus will increase the number of accounts covered in these regions.
For each of the last three years, greater than 80% of our products were sold into countries other than the United States. Our net product sales into the Asia-Pacific; Europe, Middle East and Africa (EMEA); Americas and Japan regions represented approximately 46%, 23%, 26% and 5%, respectively, of our net sales in 2013.
Our largest customer, Continental Automotive, represented 15%, 15% and 13% of our total net sales in 2013, 2012 and 2011, respectively.
Research and Development
Our research and development activities are comprised of both product and technology development. Our technology development programs, including software, packaging and process technology, support our product design engineering efforts. With regard to the design function, development of our key intellectual property, combined with third party intellectual property, form the basic building blocks that are integrated together in the form of a SoC which defines our product attributes. Package technology development is focused on meeting performance requirements in the extreme environmental conditions of the automotive market, achieving the high performance requirements of the networking market and the high power

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requirements of the RF market. Specialty process technologies are also designed to provide differentiation and competitive advantage, such as embedded memories (particularly non-volatile), smart power, RF and mixed-signal technologies. We believe that this approach allows us to apply our investments in design and packaging and process technologies across a broad portfolio of products. We have a research and development staff of approximately 5,700 employees focusing on embedded processing, system-level solutions engineering and software solutions, and we have over 900 software engineers who work with our partners to develop robust design ecosystems for our solutions. Our research and development locations include facilities in Brazil, Canada, China, Czech Republic, France, Germany, India, Israel, Malaysia, Mexico, Romania, Russia, United Kingdom and the United States.
Research and development expense was $755 million, $742 million and $797 million for 2013, 2012 and 2011, respectively. We anticipate overall research and development spending levels at a rate of approximately 18% of net sales.
Manufacturing
We manufacture our products either at our own facilities or obtain manufacturing services from contract manufacturers. This is intended to allow us to efficiently manage both our supply competitiveness and factory utilization in order to minimize the risk associated with market fluctuations and maximize cash flow. Our internal manufacturing capabilities scale to 200-millimeter wafers and down to 90-nanometer technologies. Due to the increasing costs associated with the development and production of advanced technologies, we outsource the manufacturing of all of our technologies below 90-nanometers. In addition, we have relationships with several wafer foundries and assembly and test subcontractors to provide flexibility and enhance cost effectiveness in meeting our manufacturing needs. The capabilities of our partners span 200-millimeter and 300-millimeter wafer sizes and scale down to 14-nanometer technologies.
Semiconductor manufacturing is comprised of two broad stages: wafer manufacturing, or “front-end,” and assembly and test, or “back-end.” Based on total units produced in 2013, approximately 33% of our front-end manufacturing was outsourced to wafer foundries and approximately 35% of our back-end manufacturing was outsourced to assembly and test subcontractors. Both of these percentages will increase as our business and our product mix changes due to continued changes in technology and reductions in geometry.
Our manufacturing operations are consolidated under a single leader to drive a sharper focus on execution, efficiency and reduced manufacturing costs. Our manufacturing operations include our fabrication facilities, assembly and test operations, planning, procurement, quality and technology organizations. We continually evaluate our manufacturing model in order to improve our supply competitiveness, gross margin and cash flows.
We own and operate five manufacturing facilities, of which three are wafer fabrication facilities and two are assembly and test facilities. These facilities are certified to the ISO/TS 16949:2009 international quality standards. This technical specification aligns existing U.S., German, French and Italian automotive quality system standards within the global automotive industry. These operations also are certified to ISO 9001:2008. Our ISO 14001 management systems are designed to meet and exceed regulatory requirements. All of our manufacturing operations are ISO 14001 certified. The following table describes our manufacturing facilities:

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Location
 
Representative Products
 
Technologies Employed
WAFER FABS
 
 
 
 
Oak Hill, Austin, Texas
 
Power management devices
Sensors
Drivers
RF laterally diffused metal oxide semiconductor (LDMOS) devices
RF transceivers / amplifiers
 
200 millimeter wafers
CMOS, Bipolar CMOS (BiCMOS),
Sensors, LDMOS
Power CMOS, HDTMOS,
0.25 micron
Chandler, Arizona
 
MCUs
Power management devices
 
200 millimeter wafers
CMOS, Embedded NVM, Power
CMOS,
0.25 micron,
0.50 micron
Austin Technology and Manufacturing Center,
Austin, Texas
 
MPUs
MCUs
Power management devices
 
200 millimeter wafers
Advanced CMOS, SoC
Embedded NVM, Power CMOS,
90-nanometer,
0.18 micron
 
 
 
 
ASSEMBLY & TEST
 
 
 
 
Kuala Lumpur, Malaysia
 
MPUs
MCUs
Power management devices
Analog and mixed-signal devices
RF devices
Sensors
 
 
Tianjin, China
 
MPUs
MCUs
Power management devices
Analog and mixed-signal devices
Baseband processors
 
 
Our manufacturing processes require many raw materials, such as silicon wafers, mold compound, packaging substrates and various chemicals and gases, and the necessary equipment for manufacturing. We obtain these materials and equipment from a large number of suppliers located throughout the world. These suppliers deliver products to us on a “just-in-time" basis, and we believe that they have sufficient supply to meet our current needs. However, we have experienced certain supply chain constraints in the past, and it is possible that we could experience supply chain constraints in the future due to a sudden worldwide surge in demand or supply chain disruption.
Our technology approach is to leverage multi-functional technical capabilities and innovation to create unique and differentiated products meeting customer requirements for systems and solutions. For our digital products such as DSPs, MPUs, DSCs and MCUs, we use both industry-standard processes and standard processes enhanced by us and our partners. To develop sensors, analog power and RF devices, we use specialized, differentiated internal processes.
Like many global companies, we maintain plans to respond to external developments that may affect our employees, facilities or business operations. Business continuity is very important to us as we strive to ensure reliability of supply to our customers. TS16949 quality standards and our internal quality standards all require a business continuity plan to effectively return critical business functions to normal in the case of an unplanned event, and our operations are certified to all of these standards. We require our major foundries, assembly and test providers and other suppliers to have a business continuity plan as well. However, in the event that our manufacturing capacity, either internal or through contract manufacturers, is disrupted, we could experience difficulty fulfilling customer orders.
Our business continuity plan covers issues related to continuing operations (for example, continuity of manufacturing and supply to customers), crisis management of our business sites (for example, prevention and recovery from computer, data, hardware and software loss) and information protection. We perform annual risk assessments at each site, reviewing activities, scenarios, risks and actual events and conducting annual test drills. Generally, we maintain multiple sources of supply of high running qualified technologies. We also require our suppliers to maintain business continuity plans.

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Competition
The semiconductor industry is highly competitive and characterized by constant and rapid technological change, short product life cycles, significant price erosion and evolving standards. 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. 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.
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 significant opportunity to overcome the increased competition and pricing pressure inherent in the semiconductor industry.
The majority of the markets in which we compete are mature and include established competitors with substantial experience. Although product life cycles and the degree of complexity varies by end market, our primary competitors generally offer products that have similar breadth, depth and design complexity. Our competitors include Analog Devices Incorporated, Applied Micro Circuits Corporation, Atmel Corporation, Broadcom Corporation, Cavium Networks, Inc., Infineon Technologies AG, Intel Corporation, LSI Corporation, Marvell Technology Group, Microchip Technology Incorporated, NVIDIA Corporation, NXP Semiconductors N.V., Renesas Electronics Corporation, STMicroelectronics and Texas Instruments Incorporated.
Backlog
Our backlog was $1,060 million at December 31, 2013 compared to $847 million at December 31, 2012. Orders are placed by customers for delivery for up to twelve months in the future, but for purposes of calculating backlog, only orders expected to be fulfilled during the next 13 weeks are reported. An order is removed from backlog only when the product is shipped, the order is canceled or the order is rescheduled beyond the 13-week delivery window used for backlog reporting. In the semiconductor industry, backlog quantities and shipment and delivery schedules under outstanding purchase orders are frequently revised in response to changes in customer needs. While in certain instances, applicable terms of sale limit a customer's ability to cancel, revise or reschedule orders, historically we rarely enforce such limitations. For these reasons, the amount of backlog as of any particular date is not the sole indicator of future results.
Intellectual Property
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 revenues. 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. On a selective basis we may also sell or enter into other business arrangements with third parties relative to individual patents or portfolios of patents. We have a broad portfolio of over 6,000 patent families and numerous licenses, covering manufacturing processes, packaging technology, software systems and circuit design. When and if issued, patents are typically valid for 20 years from the date of filing the application. We do not believe that any individual patent, or the expiration thereof, is or would be material to our business.
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 in May 2013, the adequacy and effectiveness of intellectual property protection in a number of foreign countries were analyzed. The report indicated that particular problems exist in China and India, among others, with respect to intellectual property rights protection, enforcement or market access for persons relying on intellectual property. The USTR report noted that despite signs of progress, protection and enforcement of intellectual property rights in China remain a significant challenge, and in India, the report noted a weak legal framework and enforcement system for intellectual property rights. No other countries in which we have material operations are named in this report to the "Priority Watch List", 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 other 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

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part to adequately protect our intellectual property may have a material negative impact on our business, financial condition and results of operations.
We generate revenue from licensing or selling our patents and certain technologies to third parties. Our future intellectual property revenue depends in part on the continued strength of our intellectual property portfolio and enforcement efforts, a healthy marketplace for the transaction of intellectual property rights and the sales and financial stability of our licensees. In situations where we believe that a third party has infringed on our intellectual property, we enforce our rights through appropriate legal means to the extent that we determine the potential benefits of such actions outweigh any costs involved. The revenue stream associated with intellectual property sales and licensing arrangements is generally high margin and can fluctuate significantly from quarter to quarter.
Environmental Matters
For a discussion of the material effects of compliance with environmental laws, please see the “Environmental Matters” discussion in “Item 3: Legal Proceedings.”
Employees
As of December 31, 2013, we employed approximately 16,800 full-time employees. Our U.S. employees are not represented by labor unions. A portion of our non-U.S. employees are represented by labor unions or work councils. We consider relations with our employees to be satisfactory.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”). Such reports and other information filed or furnished by the Company with the SEC are available free of charge on the Company’s website at http://investors.freescale.com as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing.
Financial Information about Geographic Areas
Refer to “Item 1A: Risk Factors” below for a discussion of the risks associated with our operations in certain geographic areas and to Note 12 to our accompanying Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for financial information by country.
Item 1A: Risk Factors
Set forth below, and elsewhere in this report and in other documents we file with the SEC, are risks and uncertainties that could cause our actual results to materially differ from the results contemplated. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations.
We have a history of losses. If net sales do not grow and operational costs increase, we may be unable to achieve or maintain profitability.
We have high interest expense and have historically recorded high amortization expense, and as a result, we have previously 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 results of operations and cash flows during such downturns and may experience such adverse effects in future downturns. We may not be able to effectively respond to future downturns which could have a material negative impact on our business, financial condition and

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results of operations. Likewise, demand for our products is subject to considerable fluctuation. If we overestimate demand, we may experience underutilized capacity and excess inventory levels, and we may miss sales opportunities and incur additional costs for labor overtime, capital expenditures and logistical complexities.
We make major 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 future 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 adversely 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 largely dependent 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, 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 our products, we may continue to enter into non-cancellable 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 drastically reduce 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.
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 38%, 39% and 43% of our net sales in 2013, 2012 and 2011, 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, no other end customer represented more than 10% of our total net sales in any of the last three years. Continental Automotive represented 15%, 15% and 13% of our total net sales in 2013, 2012 and 2011, respectively.
Our gross margin is dependent on a number of factors, including our level of factory utilization and intellectual property revenue.
Semiconductor manufacturing requires extensive 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 maximize the utilization our manufacturing facilities , 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, a change in product mix towards lower margin devices and procurement inefficiencies. 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, the existence of product alternatives, the success of our new product introductions, more complex engineering requirements, lower demand and other factors may lead to further price erosion, lower net sales and lower gross margins for us in the future.
Our gross margin is also affected by the amount of revenue generated from licensing or selling our intellectual property to third parties. The revenue associated with intellectual property sales and licensing arrangements is generally high margin but can fluctuate significantly from quarter to quarter.
Our operating results may be adversely affected if economic conditions negatively 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

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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 even in the case we are not ultimately selected. After we win and begin a product design, a customer may decide then 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.
We participate in competitive bid selection processes to develop products for use in our customers’ products. These selection processes can be lengthy and can require us to incur large design and development expenditures. We may not win the competitive selection process and may never generate any sales despite incurring the major design and development expenditures. Because of the rapid rate of technological change, the failure to win a particular selection process 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, which is characterized by long 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 a technology or industry leader, which could have a material negative impact on our business, financial condition and results of operations.
After winning a product design, we may still experience delays in generating sales from our products as a result of the lengthy development and design cycle. In addition, if there is a delay or cancellation of a customer’s plans or if our customers fail to successfully market and sell their products, it could adversely affect our financial results, as we may have incurred large expenses and generated no sales.
We face fierce 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, product quality, 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.
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. 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 along with content per vehicle;
capital spending levels of our networking customers;
consumer spending;
rate of adoption of new or alternative technologies;
changes in consumer preferences;
changes in regulation of products and services provided; and

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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.
The semiconductor industry is characterized by drastic price erosion, especially after a product has been on the market for an extended 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. 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.
Competition in our core product markets could 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, we could experience 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 largely depends 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, 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 are major 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 or 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 rate debt and prevent us from meeting our obligations under our debt agreements.
We are highly leveraged. As of December 31, 2013, the aggregate outstanding principal amount of our consolidated indebtedness, all of which has been incurred by our indirect subsidiary, Freescale Semiconductor, Inc., a Delaware corporation (“Freescale Inc.”), was approximately $6,511 million, and Freescale Inc. also has an additional $409 million available for borrowing under a revolving credit facility after taking into account $16 million in outstanding letters of credit. We are a guarantor of all of this debt. Since the acquisition by a consortium of private equity funds, referred to as our “Sponsors,” in 2006 and as a result of numerous refinancing transactions, our indebtedness consists of the senior credit facilities and the senior secured, senior unsecured and senior subordinated notes. 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 our 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;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

17


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 pursuing.
At December 31, 2013, our indebtedness included (i) the revolving credit facility with a committed capacity of $425 million and no amounts outstanding thereunder (without giving effect to $16 million in outstanding letters of credit),which will be available through July 1, 2016; (ii) $347 million outstanding under a term loan due 2016; (iii) $2,373 million outstanding under a term loan due 2020; (iv) $798 million outstanding under a term loan due 2021; (v) $500 million aggregate principal amount outstanding under senior secured notes due in 2021; (vi) $960 million aggregate principal amount outstanding under senior secured notes due in 2022; (vii) $57 million aggregate principal amount outstanding under senior unsecured notes due 2014; (viii) $1,212 million aggregate principal amount outstanding under senior unsecured notes due 2020; and (ix) $264 million aggregate principal amount outstanding under senior subordinated notes due 2016.
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 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, $409 million is available for borrowing under the revolving credit facility after taking into account $16 million in outstanding letters of credit.
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, 2013, 2012 and 2011 was $471 million, $500 million and $554 million, respectively. 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.
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 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, lowering cash interest expense and increasing flexibility under existing covenants for business planning purposes. The refinancing activities have not been as a result of any default under those debt agreements. 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 refinancing 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

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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 based on Adjusted EBITDA, in each case subject to certain exceptions. Our subsidiaries are unable to incur any indebtedness under the indentures and specified indebtedness under the existing senior secured credit facilities ("Credit Facility"), 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, the fixed charge coverage ratio (as defined in the applicable indenture) would be at least 2.00:1 and the senior secured first lien leverage ratio (as defined in the Credit Facility) would be no greater than 4.00:1. Also, our subsidiaries may not incur certain indebtedness in connection with acquisitions unless, prior to and after giving effect to the proposed transaction, the total leverage ratio (as defined in the Credit Facility) is no greater than 6.50:1, except as otherwise permitted by the Credit Facility. In addition, except as otherwise permitted by the applicable debt agreement, we may not designate any subsidiary as unrestricted or engage in certain mergers unless, after giving effect to the proposed transaction, the fixed charge coverage ratio would be at least 2.00:1 or equal to or greater than it was prior to the proposed transaction and the senior secured first lien leverage ratio would be no greater than 4.00:1. We are also unable to have liens on assets securing indebtedness without also securing our outstanding notes unless the 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. 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. Freescale Inc. was in compliance with the covenants under the Credit Facility and the Indentures and met the fixed charge coverage ratio of 2.00:1 and the total leverage ratio of 6.50:1 but did not meet the senior secured first lien leverage ratio of 4.00:1 and the consolidated secured debt ratio of 3.25:1. As of December 31, 2013, Freescale Inc.’s total leverage ratio was 6.50:1, senior secured first lien leverage ratio was 4.74:1, the fixed charge coverage ratio was 2.24:1 and the consolidated secured debt ratio was 5.58:1. Accordingly, we are currently restricted from making certain investments and incurring liens on assets securing indebtedness, except as otherwise permitted by the Credit Facility and the Indentures. The fact that we do not meet these ratios does not result in any default under the Credit Facility or the indentures.
Increases in interest rates could adversely affect our results of operations.
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 December 31, 2013, we had approximately $3,575 million aggregate principal amount of variable interest rate indebtedness under the senior unsecured floating rate notes and the senior credit facilities, $3,518 million of which is subject to a LIBOR floor. Any increased interest expense associated with increases in interest rates affects our cash flow and our ability to service our debt. At December 31, 2013, a 100 basis point increase in LIBOR rates from their current levels would remain below the 1.25% LIBOR floors on the term loans due in 2020 and 2021 and would result in an increase in our interest expense of only $1 million per year. If the LIBOR rate exceeds the aforementioned 1.25% LIBOR floors, our cash interest obligation could increase greatly and could adversely affect our financial condition, results of operations and cash flows.
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 (or note holders, as applicable) to cease making loans to us. In the 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 note holders under 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

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lenders and/or note holders, as applicable, 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, all of which requires investment of significant amounts of capital. This risk is magnified by our high level of indebtedness, which requires to use a significant portion of our cash flow to service our debt and limits our ability to raise additional capital. If we are 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.
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 33% of our wafer fabrication and approximately 35% of our assembly, packaging and testing in 2013 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, especially for certain advanced technologies that we are not capable of manufacturing internally. 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 also 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 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 prices 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, can increase drastically, negatively impacting our gross margins.
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. In the past, we have experienced delays in delivery and product quality. Our failure to adequately manage our capacity or maintain product quality could have a negative impact on net sales and harm our customer relationships.
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 major 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 due to qualification requirements 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 extensive 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.

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We have a concentration of manufacturing operations (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 this 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 resources, such as silicon wafers, 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 large 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. For each of the last three years, greater than 80% of our products were sold into countries other than the United States. 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;
the instability of international governments, including the threat of war, terrorist attacks 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 may create many economic and political uncertainties that impact the global economy and could negatively 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. Any of the factors set forth above impacting these countries, or any other conflict or uncertainty in these countries, including due to political unrest, public health or safety concerns or natural disasters (such as earthquakes), 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:

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pay substantial damages (potentially treble damages in the United States, including royalties on sales of our products);
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 heavily on intellectual property rights to protect our technologies and products.
We depend heavily 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. On a selective basis we may also sell or enter into other business arrangements with third parties relative to individual patents or portfolios of patents. We have a broad portfolio of over 6,000 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 result from 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 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 or selling our patents and technologies to third parties. Our future intellectual property revenue depends in part on the continued strength of our intellectual property portfolio and enforcement efforts, a healthy marketplace for the transaction of intellectual property rights and 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. Changes in the laws or judicial precedents of the United States or other countries that make it more difficult to enforce patents or affect the valuation of patents, or the prospect of such changes, could negatively impact revenues from licensing or selling our patents. 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 or meaningful incentive for others to respect our intellectual property rights.
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 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 USTR annual “Special 301” Report released on May 2013, the adequacy and effectiveness of intellectual property protection in a number of foreign countries were analyzed. The report indicated that particular problems exist in China and India, among others, with respect to intellectual property rights protection, enforcement or market access for persons relying on intellectual property. The USTR report noted that despite signs of progress, protection and enforcement of intellectual property rights in China remain a significant challenge, and in India, the report noted a weak legal framework and enforcement system for intellectual property rights. No other countries in which we have material operations are named in this report to the "Priority Watch List", 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

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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 other 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 adequately protect 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 licensor's consent 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 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 important orders by customers;
fluctuations in the levels of component inventories held by our customers;
the gain or loss of significant customers;
the inventory levels maintained by, performance of and our relationship with our key distributors;
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, customer mix or levels of intellectual property revenue;
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 majority 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.
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 three 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. Subject to certain customary conditions, in the event of a defect, we will either refund the purchase price or

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repair or replace the product with the same or equivalent product at our cost. 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 our warranty obligations or 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 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 large 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 likely harm our reputation and lead to substantial expense. Any product recall or product liability claim 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 judgment against us or material defense costs could harm our business, financial condition and results of operations.
The failure to complete our transformation programs and the impact of activities taken under the programs could adversely affect our business.
During 2012, following the appointment of Gregg Lowe as president and Chief Executive Officer (CEO), the company completed a detailed review of its strategic direction with the overall objective of identifying opportunities that would accelerate revenue growth and improve profitability. As a result of this review, we executed a new reorganization of business program to re-allocate research and development expenses, re-distribute sales resources and add new management to the company. During 2013, we have continued to implement steps related to this transformation program, and we continue to assess the progress of this program. The redirection of research and development resources may impact on our net sales if changes to our strategic business plan cause speculation and uncertainty among customers regarding our future business strategy and direction. There may be unforeseeable and unintended factors or consequences that could adversely impact our business related to this transformation program.
We have recorded significant charges for reorganization of business activities in the past and may do so again in the future, which could have a material negative impact on our business.
In the past, we recorded significant 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 2013 and 2012, we recorded cash and non-cash charges of $31 million and $52 million, respectively, in connection with reallocating research and development resources, realigning sales resources along with other activities associated with the implementation of the strategic plan initiated in the fourth quarter of 2012. 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 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 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 major 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

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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;
negative impacts on our operating results during the integration process; and
our 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, an inability to attract key management and other personnel, or an unsuccessful transition of key responsibilities 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. Turnover in these positions 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 Chief Financial Officer, Alan Campbell, announced in January of 2014 his intent to retire after a transition to his successor. We may have difficulty attracting or hiring talented and skilled candidates which may delay the transition. We have also recently experienced transitions in certain members of our executive management team, including the roles of our General Counsel and Chief Sales and Marketing Officer. An unsuccessful transition of the key responsibilities of these or other executive roles may disrupt our business and distract our management and employees
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.
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 business, financial condition and 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 ensure 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 that govern, 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 considerable 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

25


placing new electrical and electronic equipment containing more than specified levels of lead and other hazardous compounds on the European Union market. 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 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 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 operations. 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 net sales 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 serious, as some of our facilities and our suppliers' facilities are located in geologically unstable locations including China, Malaysia and Taiwan.
For example, our wafer fabrication facility in Sendai, Japan was seriously damaged in 2011 by a 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 decided not to reopen the facility following the earthquake. During 2011 and 2012, we incurred asset impairment, inventory charges, employee termination benefits, contract termination and other on-going closure costs associated with earlier than expected closure of our Sendai, Japan facilities.
Breaches of our information technology systems could adversely affect our operating results and our reputation.
We may be subject to breaches of our information technology systems caused by computer viruses, unauthorized access, sabotage, vandalism or terrorism. The compromise of our information technology systems could result in a disruption to our manufacturing and other operations, unauthorized release of our, our customers' or our suppliers' confidential or proprietary information, or the release of employee personal data, any of which could adversely affect our operating results and our reputation.
Our Sponsors control us and may act in a manner that advances their best interests and not necessarily those of other shareholders.
Our Sponsors control Freescale Holdings L.P., a Cayman Island limited partnership, ("Freescale LP"), which owns approximately 76% of our outstanding common shares. In addition, each of our four Sponsors has the contractual right to select two individuals to serve on our Board of Directors (the “Board”). As a result, our Sponsors control our Board 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;

26


the amendment of our memorandum of association and our bye-laws; and
our winding up and dissolution.
In addition, we are parties to the shareholders agreement with our Sponsors and Freescale LP that provides, among other things, that for so long as Freescale LP and our Sponsors collectively own, in the aggregate, at least 50% of our 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 CEO, the commencement or settlement of any litigation over $50 million and changing the number of directors on the Board.
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.
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 issued and 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.
We are a “controlled company” within the meaning of the rules of the New York Stock Exchange (NYSE), and, as a result, we qualify for, and rely on, exemptions from certain corporate governance requirements. Our shareholders do not have the same protections afforded to shareholders of companies that are subject to such requirements.
Our Sponsors control a majority of the voting power of our issued and outstanding common shares through their ownership of Freescale LP. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the NYSE. 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;
the requirement that the listed company have a compensation committee that is composed entirely of independent directors; and
the requirement for an annual performance evaluation of the nomination and corporate governance and compensation committees.
As a controlled company, these exemptions are available to us. Therefore, we do not have a majority of independent directors, our nomination and corporate governance committee and compensation committee do not consist entirely of independent directors and such committees are not required to conduct annual performance evaluations. Accordingly, our shareholders do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.
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 company 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. In addition, 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. federal 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 directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. We have been advised by Conyers Dill & Pearman Limited, our special

27


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 courts consider 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 the company or its directors for breach of any duty in the bye-laws or any shareholder’s agreement owed personally by the company 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 (the “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.
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 have entered into with our Sponsors and Freescale LP contains 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.
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. 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.

28


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 senior 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.
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2: Properties
Our principal executive offices are at 6501 William Cannon Drive West, in Austin, Texas. We also operate manufacturing facilities, design centers and sales offices throughout the world. As of December 31, 2013 we owned 10 facilities and leased 69 facilities. Our total square footage consists of approximately eight million square feet, of which approximately 6.2 million square feet is owned and approximately 1.9 million square feet is leased. Our remaining lease terms range from one to eight years. The following table describes our facilities as of December 31, 2013:
 
 
 
 
 
 
 
 
 
 
Region
 
Description
 
Principal Locations
 
Total Owned
Square
Footage
 
Total Leased
Square
Footage
 
 
 
 
 
 
 
 
 
Americas
 
3 owned facilities(1)
19 leased facilities
 
Austin, Texas
Chandler, Arizona
Tempe, Arizona
 
3.8 million
 
1.0 million
 
 
 
 
 
 
 
 
 
Asia
 
5 owned facilities
28 leased facilities
 
Kuala Lumpur, Malaysia
Noida, India
Tianjin, China
 
1.5 million
 
0.5 million
 
 
 
 
 
 
 
 
 
Europe and the Middle East
 
2 owned facilities
22 leased facilities
 
Toulouse, France (2)
Munich, Germany
Tel Aviv, Israel
 
0.9 million
 
0.4 million
(1) Each of our owned facilities in the United States are subject to mortgages under our secured credit facility and secured bonds. 
(2) The manufacturing operations at this facility ceased in the third quarter of 2012.
We believe that all of our facilities and equipment are in good condition, are well maintained and are adequate for our present operations.
We have a concentration of manufacturing operations (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 this region were disrupted, our overall production capacity could be significantly reduced. Please refer to "Item 1A: Risk Factors" for a discussion of the risks associated with our operations in this region.
Item 3: Legal Proceedings
Legal Proceedings
We are a defendant in various lawsuits and are subject to various claims which arise in the normal course of business. We record an associated liability when a loss is probable and the amount is reasonably estimable.
From time to time, we are involved in legal proceedings arising in the ordinary course of business, including tort, contractual and customer disputes, claims before the United States Equal Employment Opportunity Commission and other employee grievances, and intellectual property litigation and infringement claims. Under agreements with Motorola, Inc. (“Motorola”), Freescale Inc. must indemnify Motorola for certain liabilities related to our business incurred prior to our separation from Motorola.
The resolution of intellectual property litigation may require us to pay damages for past infringement or to obtain a license under the other party’s intellectual property rights that could require one-time license fees or ongoing royalties, require us to make material changes to our products and/or manufacturing processes, require us to cross-license certain of our patents or other intellectual property and/or prohibit us from manufacturing or selling one or more products in certain jurisdictions, which could adversely impact our operating results in future periods. If any of those events were to occur, our business, financial condition and results of operations could be adversely affected.

29


Environmental Matters
Our operations are subject to a variety of environmental laws and regulations in the United States and other jurisdictions in which we operate that govern, 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. As with other companies engaged in similar industries, environmental compliance obligations and liability risks are inherent in many of our manufacturing and other activities. In the United States, certain environmental remediation laws, such as the federal “Superfund” law, can impose the entire cost of site clean-up, regardless of fault, upon any single potentially responsible party, including companies that owned, operated, or sent wastes to a site. Environmental requirements may become more stringent in the future, which could affect our ability to obtain or maintain necessary authorizations and approvals or could result in increased environmental compliance costs. We believe that our operations are in compliance in all material respects with current requirements under applicable environmental laws. Please refer to Note 8, "Commitments and Contingencies," to our accompanying Consolidated Financial Statements for additional information regarding the amounts we have accrued related to our environmental remediation obligations.
Motorola was identified as a potentially responsible party at certain locations in the past, and has been engaged in investigations, administrative proceedings and/or cleanup processes with respect to past chemical releases into the environment. Freescale Inc. agreed to indemnify Motorola for certain environmental liabilities related to its business, including the sites described below. Potential future liability at these or other sites for which we are responsible may adversely affect our results of operations.
52nd Street Facility, Phoenix, AZ. In 1983, a trichloroethane leak from a solvent tank led to the discovery of chlorinated solvents in the groundwater underlying a former Motorola facility located on 52nd Street in Phoenix, Arizona, which resulted in the facility and adjacent areas being placed on the federal National Priorities List of Superfund sites. The 52nd Street site was subsequently divided into three operable units by the Environmental Protection Agency (EPA), which is overseeing site investigations and cleanup actions with the Arizona Department of Environmental Quality (ADEQ). To date, two separate soil cleanup actions have been completed at the first operable unit (“Operable Unit One”), for which Motorola received letters stating that no further action would be required with respect to the soils. We also implemented and are operating a system to treat contaminated groundwater in Operable Unit One and prevent migration of the groundwater from Operable Unit One. In addition, we entered into an agreement with the EPA to test for vapors emanating from the soil in Operable Unit One and in residential areas adjacent to Operable Unit One. We have agreed to undertake certain limited remedial actions in areas where the results of the vapor studies exceeded certain EPA standards. We do not expect the cost of these remedial actions to be material. The EPA has not announced a final remedy for Operable Unit One, and it is therefore possible that costs to be incurred at this operable unit in future periods may vary from our estimates. In relation to the second operable unit ("Operable Unit Two"), the EPA issued a Record of Decision in July 1994, and subsequently issued a Consent Decree, which required Motorola to design a remediation plan targeted at containing and cleaning up solvent groundwater contamination downgradient of Operable Unit One. That remedy is now being implemented by Freescale Inc. and another potentially responsible party pursuant to an administrative order. Of our total accrual for environmental remediation liabilities of $44 million as of December 31, 2013, approximately 79% was for Operable Unit One and Operable Unit Two. The EPA and ADEQ are currently performing a remedial investigation at the third operable unit (“Operable Unit Three”) to determine the extent of groundwater contamination. A number of additional potentially responsible parties, including Motorola and Freescale, have been identified in relation to Operable Unit Three. Because these investigations are in the early stages, we cannot predict at this time whether or to what extent we may be held liable for cleanup at Operable Unit Three, or whether any such liability would be material. In addition, Maricopa County has filed a third party complaint against Freescale and others, seeking contribution in the event that Maricopa County is held liable for any contamination in an area downgradient of Operable Unit Three (the “West Van Buren Area”). Because these proceedings are in the early stages, we cannot predict at this time whether or to what extent Maricopa County or we may be held liable for cleanup in the West Van Buren Area, or whether any such liability would be material.
Item 4: Mine Safety Disclosures
Not applicable.
PART II 
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares have traded on the New York Stock Exchange (NYSE) under the symbol “FSL” since our initial public offering (IPO) on May 26, 2011. Prior to that date, there was no public trading market for our common shares. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common shares, as reported by the NYSE:

30


 
 
Market Prices
Year Ended December 31, 2013:
High        
 
Low        
First Quarter ended March 29, 2013
$
16.15

 
$
10.38

Second Quarter ended June 28, 2013
$
17.44

 
$
12.35

Third Quarter ended September 27, 2013
$
17.44

 
$
13.47

Fourth Quarter ended December 31, 2013
$
17.82

 
$
13.95

Year Ended December 31, 2012:
 
 
 
First Quarter ended March 30, 2012
$
17.84

 
$
12.20

Second Quarter ended June 29, 2012
$
15.55

 
$
8.50

Third Quarter ended September 28, 2012
$
12.61

 
$
8.43

Fourth Quarter ended December 31, 2012
$
11.10

 
$
7.63

Share Performance Graph
The graph and table below compare the cumulative total shareholder return of our common shares with the cumulative total return of the S&P 500 Index and the Philadelphia Semiconductor Index (PHLX) from May 26, 2011 through December 31, 2013. The graph assumes that $100 was invested on May 26, 2011 in our common shares, and in each index and that any dividends were reinvested. No cash dividends have been declared on our common shares since our IPO.
Comparison of Cumulative Total Return(1) 
Among Freescale, the S&P 500 Index and the PHLX (By Quarter)


31


Cumulative Total Return by Quarter(1) 
 
 
 
Company/Index
Quarter ended
 
FSL
 
S&P 500
 
PHLX
May 26, 2011
 
$100
 
$100
 
$100
July 1, 2011
 
$108
 
$101
 
$98
September 30, 2011
 
$60
 
$86
 
$80
December 31, 2011(2)
 
$69
 
$96
 
$86
March 30, 2012
 
$84
 
$108
 
$104
June 29, 2012
 
$56
 
$105
 
$91
September 28, 2012
 
$52
 
$112
 
$91
December 31, 2012
 
$60
 
$111
 
$92
March 29, 2013(3)
 
$81
 
$123
 
$105
June 28, 2013
 
$74
 
$127
 
$113
September 27, 2013
 
$89
 
$134
 
$119
December 31, 2013
 
$88
 
$148
 
$131
 
 
 
 
 
 
 
(1) The share performance included in this graph and table is not necessarily indicative of future performance.
(2) Last trading day for 2011 was December 30, 2011.
(3) Last trading day for the first fiscal quarter of 2013 was March 28, 2013.
Holders
As of January 31, 2014, there were approximately 15,300 individual shareholders of our common shares.
Dividend Policy
We have not paid cash dividends on our common shares in the last three years. We do not intend to pay cash dividends on our common shares in 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 is limited by restrictions under the terms of the agreements governing our and our subsidiaries’ existing and future outstanding indebtedness, including the Credit Facility 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 our liabilities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.

32


Item 6:     Selected Financial Data
Freescale Semiconductor, Ltd.
Five Year Financial Summary
(in millions, except per share amounts)
 
Year Ended
December 31,
2013
 
Year Ended
December 31,
2012
 
Year Ended
December 31,
2011
 
Year Ended
December 31,
2010
 
Year Ended
December 31,
2009
Operating Results
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
4,186

 
$
3,945

 
$
4,572

 
$
4,458

 
$
3,508

Cost of sales
 
2,399

 
2,304

 
2,677

 
2,768

 
2,563

Gross margin
 
1,787

 
1,641

 
1,895

 
1,690

 
945

Selling, general and administrative
 
464

 
438

 
510

 
502

 
499

Research and development
 
755

 
742

 
797

 
782

 
833

Amortization expense for acquired intangible assets
 
13

 
13

 
232

 
467

 
486

Reorganization of businesses and other (1)
 
24

 
(15
)
 
82

 

 
345

Operating earnings (loss)
 
531

 
463

 
274

 
(61
)
 
(1,218
)
(Loss) gain on extinguishment or modification of long-term debt, net (2)
 
(217
)
 
(32
)
 
(97
)
 
(417
)
 
2,296

Other expense, net (3)
 
(482
)
 
(531
)
 
(559
)
 
(600
)
 
(576
)
(Loss) earnings before income taxes
 
(168
)
 
(100
)
 
(382
)
 
(1,078
)
 
502

Income tax expense (benefit)
 
40

 
2

 
28

 
(25
)
 
(246
)
Net (loss) earnings
 
$
(208
)
 
$
(102
)
 
$
(410
)
 
$
(1,053
)
 
$
748

Net (loss) earnings per share (4)
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.81
)
 
$
(0.41
)
 
$
(1.82
)
 
$
(5.35
)
 
$
3.81

Diluted
 
$
(0.81
)
 
$
(0.41
)
 
$
(1.82
)
 
$
(5.35
)
 
$
3.81

Weighted average common shares outstanding (4,5)
 
 
 
 
 
 
 
 
 
 
Basic
 
256

 
248

 
226

 
197

 
196

Diluted
 
259

 
251

 
227

 
197

 
196

Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total cash and cash equivalents
 
$
747

 
$
711

 
$
772

 
$
1,043

 
$
1,363

Total assets
 
$
3,047

 
$
3,171

 
$
3,415

 
$
4,269

 
$
5,093

Total carrying value of debt and capital lease obligations
 
$
6,480

 
$
6,381

 
$
6,592

 
$
7,618

 
$
7,552

Total stockholders’ deficit
 
$
(4,594
)
 
$
(4,531
)
 
$
(4,480
)
 
$
(4,934
)
 
$
(3,894
)
(1)
Charges in 2013 were predominately related to continued implementation of the change in our strategic direction which began in 2012 partially offset by benefits related to the sale of certain assets located at our Toulouse, France and Sendai, Japan facilities. Benefits in 2012 were primarily related to insurance recoveries from the 2011 Sendai, Japan earthquake offset by charges related to the hiring of our CEO and the change in our strategic direction. Charges in 2011 were related to the termination of management agreements with affiliates and advisors of the Sponsors recorded in connection with the IPO. (Refer to Note 11, “Certain Relationships and Related Party Transactions,” in the accompanying Consolidated Financial Statements for further discussion.) Additionally in 2011, we incurred charges related to our 150 millimeter fabrication facility and design center in Sendai, Japan as a result of the extensive damage from the earthquake; these charges were partially offset by insurance recoveries related to the event. Charges in 2009 related to a series of restructuring actions we initiated in 2008 to streamline our cost structure and redirect some research and development investments into growth markets. (Refer to Note 10 “Reorganization of Business and Other,” in the accompanying Consolidated Financial Statements for further description of charges incurred during the three years ended December 31, 2013.)
(2)
Charges in both 2013 and 2012 related to multiple debt refinancing and redemption transactions occurring over those periods and were comprised of make-whole premiums, call premiums, the write-off of remaining original issue discount and unamortized deferred financing costs along with other charges not eligible for capitalization, as applicable. Charges in 2011 were related to the extinguishment of debt and the amendment to the Credit Facility in connection with the IPO. We also incurred charges associated with refinancing our debt and open-market repurchases of portions of our senior notes during 2011. Charges recorded in 2010 primarily reflect a charge attributable to the write-off of remaining

33


original issue discount and unamortized deferred financing costs along with other charges not eligible for capitalization associated with the refinancing activities completed in 2010. This charge was partially offset by a net gain related to open-market repurchases of Freescale Inc.’s existing notes during the period. Gains recorded during 2009 primarily reflect a net gain recorded in the first quarter of 2009 in connection with the debt exchange completed during the period. (Refer to Note 2, "Other Financial Data," in the accompanying Consolidated Financial Statements for further description of charges incurred during the three years ended December 31, 2013.)
(3)
Primarily reflects interest expense associated with our long-term debt.
(4)
No dilutive securities have been included in the diluted net loss per share calculation in periods where a net loss was incurred.
(5)
Years ended December 31, 2009 and 2010 were adjusted for the impact of the 1-for-5.16 reverse stock split as discussed in Note 2, “Other Financial Data” of the accompanying Consolidated Financial Statements.


34


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of our results of operations for each of the three years ended December 31, 2013, 2012 and 2011 and our financial condition as of December 31, 2013 and 2012. The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the notes in “Item 8: Financial Statements and Supplementary Data” of this Annual Report on Form 10-K ("Annual Report"). This discussion contains forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” in Part I, Item 1A of this Annual Report. Actual results may differ materially from those contained in any forward looking statements. Freescale Semiconductor, Ltd. and its wholly-owned subsidiaries, including Freescale Semiconductor, Inc. (“Freescale Inc.”), are collectively referred to as the “Company,” “Freescale,” “we,” “us” or “our,” as the context requires. We refer to our principal shareholder, Freescale Holdings L.P., as “Freescale LP,” its general partner, Freescale Holdings G.P., Ltd., as “Freescale GP,” 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.
Our Business. We are a global leader in microcontrollers and digital networking processors. These embedded processors form the foundation of emerging technologies, including the Internet of Things, a network of smart devices and electronics that will help make our lives easier, safer and more productive. We complement our embedded processors with analog, sensor and radio frequency (RF) devices to help provide highly integrated solutions that streamline customer development efforts and shorten their time to market. An embedded processing solution is the combination of embedded processors, complementary semiconductor devices and software. Our embedded processor products include microcontrollers (MCUs), single-and multicore microprocessors, digital signal controllers, applications processors and digital signal processors. Our programmable devices, along with software, provide the core functionality of electronic systems, adding essential control and intelligence, enhancing performance and optimizing power usage while lowering system costs.
A key element of our strategy is to combine our embedded processors, complementary semiconductor devices and software to offer highly integrated solutions that are increasingly sought by our customers to simplify their development efforts and shorten their time to market. In addition, we are expanding our customer base by more aggressively leveraging the unique breadth and depth of our product portfolio. We have a heritage of innovation and product leadership spanning over 50 years and have an extensive intellectual property portfolio. We sell our products directly to original equipment manufacturers, distributors, original design manufacturers and contract manufacturers. We have built close customer relationships through years of collaborative product development.
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 38%, 39% and 43% of our net sales in 2013, 2012 and 2011, respectively. Other than Continental Automotive, no other end customer represented more than 10% of our total net sales for any of the last three years. For each of the last three years, greater than 80% of our products were sold into countries other than the United States. Net sales into the Asia-Pacific; Europe, Middle East and Africa (EMEA); Americas and Japan regions represented approximately 46%, 23%, 26% and 5%, respectively, of our net sales in 2013.
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 the five product groups listed below. Our Microcontrollers product group represented 20%, 18% and 17% of our total net sales in 2013, 2012 and 2011, respectively. MCUs are a self-contained embedded control system with processors, memory and peripherals on a chip. Combined with applications processors, we deliver solutions for industrial, smart energy, healthcare and multimedia applications. Our Digital Networking product group represented 22%, 22% and 20% of our total net sales in 2013, 2012 and 2011, respectively. We offer a scalable portfolio of multicore communication processors and system-on-a-chip solutions for the networking and communication markets. Our products provide enhanced intelligence and connectivity to the telecommunications equipment, network infrastructure and general embedded connectivity nodes that are enabling the Internet of Things. Our Automotive MCU product group represented 25%, 25% and 23% of our total net sales in 2013, 2012 and 2011, respectively. Our Automotive MCUs are developed specifically for the critical performance and quality requirements of the automotive industry. We are driving the latest developments in powertrain, advanced safety and infotainment applications. Our Analog and Sensors product group represented 18%, 18% and 17% of our total net sales in 2013, 2012 and 2011, respectively. Our analog, mixed-signal analog and sensor products help capture, manage and transmit data from the real-world environment for embedded processing applications in the automotive, industrial and consumer markets. These devices complement our MCUs in applications for robotics, factory automation, automotive radar, braking and airbag control. Our RF product group represented 8%, 8% and 9% of our total net sales in 2013, 2012 and 2011, respectively. We are the leading supplier of RF high-

35


power products for the cellular infrastructure market. We continue to expand our portfolio to leverage our RF technology leadership into the military, appliance and automotive markets.
Conditions Impacting Our Business. Our business is significantly impacted by demand for electronic content in automobiles, networking and wireless infrastructure equipment, industrial automation and consumer 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, customer inventory levels and fluctuations in product supply and demand.
Our total net sales in the fourth quarter of 2013 were essentially flat with the third quarter of 2013. Product revenues increased slightly, offset by a decline in intellectual property revenue and cellular product sales. Our gross margin increased 30 basis points in the fourth quarter of 2013 as compared to the third quarter of 2013. The sequential increase in gross margin is attributable to procurement savings and operational efficiencies, partially offset by an adverse product sales mix and lower intellectual property revenue.
Net sales in the near term will depend on the health of the general global economy and our ability to meet unscheduled or temporary increases in demand in our target markets, among other factors. We anticipate that our total net sales and gross margin will increase modestly as compared to the fourth quarter of 2013. For more information on trends and other factors affecting our business, refer to Part I, Item 1A "Risk Factors" included herein.
Reorganization of Business Program Activities. Following the appointment of Gregg Lowe as president and Chief Executive Officer (CEO) of Freescale in June 2012, we completed a detailed review of our strategic direction to identify opportunities to accelerate revenue growth and improve profitability. In connection with this strategic realignment, we incurred approximately $52 million of employee termination and exit costs along with other non-cash charges in the fourth quarter of 2012. We completed the majority of the actions and realized the majority of the annualized savings of $35 million to $40 million as of the end of the second quarter of 2013. During 2013, we incurred an additional $31 million of exit and employee termination costs related to the continued implementation of the strategic direction enacted during 2012. The resulting savings achieved are being invested in research and development programs and other initiatives associated with our strategic realignment. We began making payments to the employees separated under this plan during 2012, and we expect to continue making cash payments through the first quarter of 2015.
We have completed a series of restructuring actions announced in 2008 and 2009 which included the closure of our remaining 150 millimeter manufacturing facilities in Toulouse, France and Sendai, Japan. The Toulouse, France manufacturing facility ceased operations in the third quarter of 2012 following the scheduled end of production at the site. We estimate the remaining severance and other costs of this facility closure to be approximately $25 million, including $20 million in cash severance costs and $5 million in cash costs for other site decommissioning and exit expenses. We anticipate substantially all remaining payments will be made through 2015; however, the timing of these payments depends on many factors, including the decommissioning of the manufacturing facility and local employment laws, and actual amounts paid may vary based on currency fluctuation. The only actions remaining to finalize the closure of this manufacturing facility besides payments to employees and site decommissioning costs include the costs incurred to make the site ready to sale, which we expect to be offset with proceeds from the sale.
The Sendai, Japan facility ceased operations in the first quarter of 2011 due to extensive damage following the earthquake in March of that year. The only remaining action to finalize the exit from this facility is the demolition and sale of the remainder of the site. We anticipate incurring charges during first half of 2014 associated with the preparing the facility site for sale, which we expect to be offset with proceeds from the sale.
The Company previously disclosed that it expected to realize approximately $120 million in annualized savings once the closure process was completed and production moved to our remaining 200 millimeter facilities. As of the end of 2013, we have realized all of these estimated annualized cost savings.
Debt Restructuring Activities. During 2013, Freescale Inc. completed multiple refinancing and redemption transactions. These transactions achieved the following objectives: (i) reduced near term maturities, (ii) extended the maturities of a substantial portion of our indebtedness and (iii) reduced our prospective cash interest expense by approximately $75 million annually based on current interest rates, the impact of which we will fully realize beginning in the first quarter of 2014. (Refer to Note 4, "Debt," in the accompanying Consolidated Financial Statements and “Liquidity and Capital Resources - Financing Activities” for additional discussion of these transactions.)
Selected Statement of Operations Items
Orders
Orders are placed by customers for delivery for up to as much as twelve 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

36


industry practice, rarely formally enforced. Therefore, most of our orders are cancellable. We track orders because we believe that it provides visibility into our potential future net sales.
Net Sales
Our net sales originate from the sale of our embedded processors and other semiconductor products and the licensing and sale of our intellectual property. The majority of our net sales are derived from our five major product groups: Microcontrollers, Digital Networking, Automotive MCU, Analog & Sensors, and RF. We also derive net sales from “Other” which consists of product sales associated with end markets outside of our target markets, including the cellular market, intellectual property licensing and sales, foundry wafer sales to other semiconductor companies and net sales from sources other 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 are 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 the majority of our products internally at our three 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 twice a year and are valued at the lower of cost or estimated net realizable value.
Gross Margin
Our gross margin is significantly influenced by the utilization rates in our owned wafer fabrication facilities. Utilization refers only to our wafer fabrication facilities and is based on the capacity of the installed equipment. As utilization rates increase, operating leverage increases because fixed manufacturing costs are spread over higher output. We experienced an increase in our utilization rate to 86% during 2013 compared to 77% during 2012.
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 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. A significant portion of our developed technology initially established in connection with the Merger became fully amortized during 2011. (Refer to Note 1, "Summary of Significant Accounting Policies," and to Note 14, “Supplemental Guarantor Condensed Consolidating Financial Statements,” in the accompanying Consolidated Financial Statements for the definition and discussion of the term Merger.)

37


Results of Operations
(in millions)
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
Orders
 
$
4,322

 
$
4,004

 
$
4,369

Net sales
 
$
4,186

 
$
3,945

 
$
4,572

Cost of sales
 
2,399

 
2,304

 
2,677

Gross margin
 
1,787

 
1,641

 
1,895

Selling, general and administrative
 
464

 
438

 
510

Research and development
 
755

 
742

 
797

Amortization expense for acquired intangible assets
 
13

 
13

 
232

Reorganization of business and other
 
24

 
(15
)
 
82

Operating earnings
 
531

 
463

 
274

Loss on extinguishment or modification of long-term debt, net
 
(217
)
 
(32
)
 
(97
)
Other expense, net
 
(482
)
 
(531
)
 
(559
)
Loss before income taxes
 
(168
)
 
(100
)
 
(382
)
Income tax expense
 
40

 
2

 
28

Net loss
 
$
(208
)
 
$
(102
)
 
$
(410
)
 Percentage of Net Sales
 
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
Orders
 
103.2
%
 
101.5
%
 
95.6
%
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
 
57.3
%
 
58.4
%
 
58.6
%
Gross margin
 
42.7
%
 
41.6
%
 
41.4
%
Selling, general and administrative
 
11.1
%
 
11.1
%
 
11.2
%
Research and development
 
18.0
%
 
18.8
%
 
17.4
%
Amortization expense for acquired intangible assets
 
0.3
%
 
0.3
%
 
5.1
%
Reorganization of business and other
 
0.6
%
 
*

 
1.7
%
Operating earnings
 
12.7
%
 
11.7
%
 
6.0
%
Loss on extinguishment or modification of long-term debt, net
 
*

 
*

 
*

Other expense, net
 
*

 
*

 
*

Loss before income taxes
 
*

 
*

 
*

Income tax expense
 
1.0
%
 
0.1
%
 
0.6
%
Net loss
 
*

 
*

 
*

* Not meaningful.
 
 
 
 
 
 
Net Sales
Our net sales increased by $241 million, or 6%, and our orders increased 8% in 2013 compared to 2012 driven by growth across all of our product groups with significant growth in the automotive, networking and industrial end markets along with higher intellectual property revenue. This sales growth was partially offset by declines in sales of legacy products into the cellular market. Distribution sales were approximately 25% of net sales in 2013 and represented an increase of 14% compared to 2012. Distribution inventory, in dollars, was 9.1 weeks at December 31, 2013, compared to 9.7 weeks at December 31, 2012. The decrease in weeks of distribution inventory, as compared to the prior year, was due to our distributors continuing to closely manage their inventory levels.
Our net sales in 2012 decreased by $627 million, or 14%, compared to 2011, and orders decreased 8% over the same period, reflecting weaker demand in our core automotive, networking and consumer markets and declines in industrial products purchased through our distribution channel, as compared to the prior year. This decline included a decrease of $204 million in other net sales largely the result of lower demand for our cellular products offset by an increase in intellectual property revenue.

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Distribution sales were approximately 23% of our total net sales in 2012 and represented a decrease of 10% compared to the prior year. Distribution inventory, in dollars, was 9.7 weeks at December 31, 2012, compared to 11.1 weeks at December 31, 2011. The decrease in weeks of distribution inventory resulted from our distribution partners working through higher than normal inventory levels at the end of 2011 due to concerns surrounding supply over the course of 2011 after the Japan earthquake in March 2011.
Net sales by product group for the years ended December 31, 2013, 2012 and 2011 were as follows:
(in millions)
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
Microcontrollers
 
$
826

 
$
707

 
$
790

Digital Networking
 
915

 
852

 
928

Automotive MCUs
 
1,063

 
986

 
1,072

Analog & Sensors
 
736

 
722

 
785

RF
 
352

 
303

 
418

Other
 
294

 
375

 
579

Total net sales
 
$
4,186

 
$
3,945

 
$
4,572

Microcontrollers
Microcontrollers' net sales increased by $119 million, or 17%, in 2013 compared to 2012 driven by growth in microcontrollers and applications processors. The increase in microcontrollers related to higher sales to original equipment manufacturers, while the increase in applications processors related to increased sales into the automotive market. Additionally, we experienced higher net sales through our distribution channel in all our key geographies.
Microcontrollers' net sales decreased by $83 million, or 11%, in 2012 compared to 2011 driven by decreased demand for our products included in eReaders and a decline in the products purchased through our distribution channel, largely within the Americas and EMEA in connection with economic uncertainty in those regions impacting demand in the industrial markets we target.
Digital Networking
Digital Networking's net sales increased by $63 million, or 7%, in 2013 compared to 2012. Sales growth was broad-based with higher sales of next generation enterprise systems, service provider equipment and general embedded products sold into the distribution channel, partially offset by declines in certain legacy equipment sales.
Digital Networking's net sales decreased by $76 million, or 8%, in 2012 compared 2011. We experienced weaker enterprise and wireless spending in the Americas and EMEA, particularly during the fourth quarter of 2012. This was compounded by some customers going through inventory corrections over the course of 2012. In addition, capital expenditures in wireless infrastructure declined in 2012, except for limited investments in infrastructure in China over the second half of 2012.
Automotive MCUs
Automotive MCUs' net sales increased by $77 million, or 8%, in 2013 compared to 2012. We experienced increased revenue due to higher worldwide automotive production in geographies where we have a significant presence, such as the U.S., China and Europe.
Automotive MCUs' net sales decreased by $86 million, or 8%, in 2012 compared to 2011 primarily as a result of lower demand in the European automotive market along with changes in the mix of products sold.
Analog & Sensors
Analog and Sensors' net sales increased by $14 million, or 2%, during 2013 compared to 2012. Approximately 85% of our Analog and Sensors sales are into the automotive market. We experienced higher net sales due to growth in the automotive and industrial markets during 2013. Total net sales into the automotive market were partially offset as a result of end of life shipments in 2012 in connection with the closure of our Toulouse, France manufacturing facility.
Analog and Sensors' net sales decreased by $63 million, or 8%, in 2012 compared to 2011 primarily as a result of lower demand in the European automotive market and decreased demand for our products included in various consumer devices. This decrease was partially offset by increases in certain of our sensors products sold in the automotive market.
RF
RF's net sales increased by $49 million, or 16%, in 2013 compared to 2012. The increase was driven by growth in next generation wireless basestation spending, primarily in China.

39


RF's net sales decreased by $115 million, or 28%, in 2012 compared to 2011 as a result of decreased investment in wireless infrastructure in various emerging and established markets and the overall weak global macroeconomic environment.
Other
Other net sales decreased by $81 million, or 22%, in 2013 compared to 2012 and by $204 million, or 35%, in 2012 compared to 2011. In both comparative periods, the declines were primarily due to a decrease in cellular product sales, partially offset by an increase in intellectual property revenue. As a percentage of net sales, intellectual property revenue was 5%, 5% and 3% for 2013, 2012 and 2011, respectively. Our level of intellectual property revenue during 2013 and 2012 significantly exceeded our historical average of approximately 3% of net sales and benefited from certain agreements entered into in the second quarter of 2012. The revenue stream under these agreements ended in the fourth quarter of 2013, and agreements of similar magnitude may not reoccur in the future.
Gross Margin
As a percentage of net sales, gross margin as a percentage of net sales was 42.7%, reflecting an increase of 110 basis points compared to 2012. Improvement in gross margin as a percentage of net sales was largely attributable to an increase in utilization of our front-end manufacturing assets which contributed to improvements in operating leverage of our fixed manufacturing costs. Front-end wafer manufacturing facility utilization improved from 77% during 2012 to 86% during 2013 due to increased demand and the transfer of production from our Toulouse, France manufacturing facility to our 200 millimeter manufacturing facilities. Additional factors benefiting gross margin included procurement savings and operational efficiencies. These improvements were partially offset by the impact of decreases in average selling price resulting from our annual negotiations with our customers that went into effect during the first quarter of 2013, adverse changes in product sales mix and higher incentive compensation.
Gross margin as a percentage of net sales in 2012 was 41.6%, reflecting a slight increase of 20 basis points compared to 2011. The improvement in gross margin as a percentage of net sales was the result of (i) a $209 million decrease in depreciation expense, largely due to $167 million of PPA depreciation and depreciation acceleration related of the closure of our 150 millimeter manufacturing facilities incurred in 2011, (ii) the realization of cost savings from the closure of our Sendai, Japan manufacturing facility, (iii) higher intellectual property revenue, (iv) procurement and productivity cost savings and (v) lower incentive compensation.
The term “PPA” refers to the effect of acquisition accounting. Certain PPA impacts were 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. The majority of the PPA depreciation impact was driven by tools and equipment which had PPA depreciable lives that ended during 2011.
Selling, General and Administrative
Our selling, general and administrative expenses increased by $26 million, or 6%, in 2013 compared to 2012. This increase is primarily the result of higher incentive compensation, settlement of intellectual property litigation and commitments for charitable contributions to the Freescale Foundation, a nonprofit, 501(c)(3) organization we established to support science, technology, engineering and math (STEM) education initiatives. These increases were partially offset by lower marketing spending and the elimination of costs associated with the lease of our corporate aircraft, which we terminated in 2012. As a percentage of net sales, our selling, general and administrative expenses remained flat at 11% in both 2013 and 2012.
Our selling, general and administrative expenses decreased $72 million, or 14%, in 2012 compared to 2011. This decrease was primarily the result of (i) lower incentive compensation, (ii) the elimination of management fees in connection with the 2011 IPO, (iii) decreased spending on certain sales and marketing programs and (iv) discretionary cost reductions. As a percentage of net sales, our selling, general and administrative expenses remained relatively flat as compared to 2011.
Research and Development
Our research and development expenses increased by $13 million, or 2%, in 2013 compared to 2012. The increase is related to additional investment in our strategic areas and higher incentive compensation partially offset by cost savings as a result of the employee transitions related to the strategic transformation program implemented in the fourth quarter of 2012. As a percentage of net sales, our research and development expenses were 18% in 2013 reflecting a decrease of 80 basis points compared to 2012.
Our research and development expense for 2012 decreased $55 million, or 7%, compared to 2011. This decrease was primarily the result of lower incentive compensation and decreased spending on certain research and development programs that were no longer essential as a result of the implementation of the strategic plan in the fourth quarter of 2012. These cost reductions were partially offset by increased expenses related to focused investment in our core businesses. As a percentage of our net sales, our research and development expenses were 19% in 2012, reflecting an increase of 140 basis points over 2011, primarily due to lower net sales.

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Amortization Expense for Acquired Intangible Assets
Amortization expense for acquired intangible assets related to tradenames/trademarks remained flat in 2013 compared to 2012 as these intangible assets have reached a normalized amortization run rate.
Amortization expense for acquired intangible assets related to developed technology and tradenames/trademarks decreased by $219 million, or 94%, in 2012 compared to 2011. These decreases were associated with portions of our developed technology and tradenames/trademarks becoming fully amortized during 2011.
Reorganization of Business and Other
During 2013, we recorded $36 million of charges primarily related to (i) continued implementation of the restructuring plan initiated in the fourth quarter of 2012, (ii) exit costs for the consolidation of workspace in both Austin, Texas and Israel, (iii) the write down of specific manufacturing assets to fair value and a related contract termination charge due to the elimination of certain manufacturing processes for some of our next generation products and (iv) charges related to indemnification provisions included in our current CEO's employment agreement. These charges were partially offset by (i) a net benefit of $7 million associated with our Toulouse, France manufacturing facility, which included a benefit for proceeds received for the sale of certain of our equipment and machinery partially offset by charges related to on-going closure and decommissioning costs for this site and (ii) a net benefit of $5 million related to the sale of a portion of our of former manufacturing facility center located in Sendai, Japan. (Refer to Note 10, “Reorganization of Business and Other,” in the accompanying Consolidated Financial Statements for more information on these charges discussed in this section.)
In 2012, we recorded a benefit of $90 million for earthquake-related business interruption insurance recoveries related to our Sendai, Japan fabrication facility which suffered extensive damage from the March 2011 earthquake. We also recorded a benefit of $9 million related to proceeds received in connection with the sale of the Sendai, Japan design center. These benefits were partially offset by $9 million of expenses related to on-going closure costs and costs associated with the dissolution of the Sendai, Japan entity. Additionally, we recorded benefits totaling $16 million primarily related to the expiration of contractual obligations associated with to the wind down of our cellular handset business and the expiration of indemnification obligations under a contract previously executed outside the ordinary course of business. These benefits were partially offset by charges of $52 million including a non-cash accelerated amortization charge and cash costs for employee termination benefits and other exit costs recorded in connection with the restructuring plan initiated in the fourth quarter of 2012. Additionally we recorded charges of $39 million primarily for (i) exit costs related to the termination of various supply agreements, on-going closure and decommissioning costs incurred in connection with the closure of our Toulouse, France manufacturing facility, (ii) the change in the executive leadership of the Company and (iii) costs recorded in connection with the termination of our corporate aircraft lease agreement.
In 2011, in connection with the accelerated closure of the Sendai, Japan fabrication facility due to extensive damage from the March 2011 earthquake off the coast of Japan, we incurred $118 million in charges associated with non-cash asset impairment and inventory charges, cash costs for employee termination benefits, contract termination and other on-going closure costs. These charges were partially offset by (i) a $95 million benefit attributable to earthquake-related insurance recoveries, (ii) a $10 million benefit related to the sale of certain tools and equipment at the site and (iii) a $2 million settlement of the majority of our Sendai, Japan subsidiary’s pension plan liability. We also recorded $71 million of cash costs attributable primarily to the termination of various management agreements with affiliates and advisors of the Sponsors in connection with the completion of our IPO. (Refer to Note 1, "Summary of Significant Accounting Policies," for the definition and Note 11, “Certain Relationships and Related Party Transactions,” in the accompanying Consolidated Financial Statements for more information regarding this transaction with the Sponsors.)
Loss on Extinguishment or Modification of Long-Term Debt
During 2013, we recorded charges of $217 million associated with the refinancing of $4.8 billion of indebtedness and the redemption of the remaining $98 million of 8.875% Unsecured Notes. These charges included make-whole premiums, the write-off of unamortized deferred financing costs, the write-off of original issue discount (OID) and other expenses not eligible for capitalization. (Capitalized terms referenced in this section are defined and discussed in Note 4, "Debt," in the accompanying Consolidated Financial Statements.)
During 2012, we recorded charges of $32 million associated with (i) the refinancing of $500 million of our Senior Subordinated Notes, which included both the extinguishment and modification of existing debt and the issuance of the 2012 Term Loan and (ii) the redemption of $200 million of our 8.875% Unsecured Notes. This charge consisted of call premiums, the write-off of unamortized deferred financing costs and other costs not eligible for capitalization.
In 2011, we recorded charges of $97 million associated with (i) the amendment to the Credit Facility, (ii) the redemption of $974 million of indebtedness using the proceeds from the IPO and over-allotment exercise, (iii) the refinancing of $750 million of indebtedness and (iv) open-market repurchases of $26 million of our senior unsecured notes. This charge included call premiums, the write-off of remaining unamortized deferred financing costs and other costs not eligible for capitalization.

41


Other Expense, Net
Net interest expense in 2013, 2012 and 2011 included interest expense of $490 million, $519 million and $572 million, respectively, partially offset by interest income of $7 million, $9 million and $9 million, respectively. The decrease in interest expense is due to the aforementioned debt refinancing and redemption transactions.
As a result of these transactions completed over the course of 2012 and 2013, we have reduced our outstanding indebtedness by $51 million and decreased our weighted average interest rate from 7.8% at December 31, 2011 to 6.1% at December 31, 2013. Additionally, as of the first quarter of 2014, based on current rates, we have reduced our annualized cash interest expense by approximately $115 million as compared to 2011.
During 2012, we recorded losses in other, net of $21 million attributable to the realized results and changes in the fair value associated with our interest rate swap agreements and foreign currency fluctuations. During 2011, we recorded gains in other, net of $4 million primarily attributable to foreign currency fluctuations along with changes in the fair value of our interest rate swaps, interest rate caps and gold swap contracts.
Income Tax Expense
In 2013, we recorded an income tax provision of $40 million, which included a net income tax expense of $4 million attributable to discrete events related primarily to withholding tax on intellectual property royalties. In 2012, we recorded an income tax provision of $2 million, which also included a $34 million net tax benefit primarily related to the reversal of reserves for unrecognized tax benefits from foreign audit activity and statute lapses as well as tax benefits from deferred tax positions in China. In 2011, we recorded an income tax provision of $28 million, inclusive of a $2 million net tax benefit related to discrete events. These discrete events consisted principally of the release of valuation allowances on certain deferred tax assets which the Company believes will more-likely-than-not be realized and the tax benefit from the reversal of reserves for unrecognized tax benefits related to foreign audit settlements, partially offset by withholding tax on intellectual property royalties. Excluding discrete tax items, income tax expense was $36 million in both 2013 and 2012, and $30 million in 2011. These amounts primarily reflect tax expense attributable to income earned in non-U.S. jurisdictions. The increase in tax expense in 2012 as compared to 2011 reflects higher profitability attributable to our non-U.S. operations.
Although the Company is a Bermuda entity with a statutory income tax rate of zero, the earnings of many of the Company’s subsidiaries are subject to taxation in the U.S. and other foreign jurisdictions. Our annual effective tax rate was different from the Bermuda statutory rate of zero in 2013 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 across various 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. We record minimal tax expense on our U.S. earnings due to valuation allowances recorded on substantially all the Company’s U.S. net deferred tax assets, as we have incurred cumulative losses in the United States. Our effective tax rate is impacted by the mix of earnings and losses by taxing jurisdictions. (Refer to Note 7, "Income Taxes," in the accompanying Consolidated Financial Statements for more information regarding our income tax expense.)
Liquidity and Capital Resources
Cash and Cash Equivalents
Of the $747 million of cash and cash equivalents at December 31, 2013, $357 million is attributable to our U.S. subsidiaries and $390 million is attributable to our foreign subsidiaries. The repatriation of the funds of these foreign subsidiaries could be subject to delay and potential tax consequences, principally with respect to withholding taxes paid in foreign jurisdictions.
Operating Activities
We generated cash flow from operations of $321 million, $350 million and $99 million in 2013, 2012 and 2011, respectively. The decrease in cash generated from operations in 2013 as compared to 2012 is primarily attributable to proceeds from the Sendai, Japan earthquake-related insurance recoveries received during 2012, higher intellectual property transaction proceeds in 2012 along with higher payments for incentive compensation during 2013. These declines were partially offset by (i) higher revenues, (ii) the strategic reduction of days of inventory on hand and (iii) lower cash paid for interest as a result of the various debt redemption and refinancing transactions that occurred during 2013.
The improvement in cash flow from operations in 2012 as compared to 2011 is attributable to (i) proceeds from the sale and license of intellectual property, some of which had not yet been recognized as revenue as of the end of 2012, (ii) proceeds from the Sendai, Japan earthquake-related business interruption insurance recoveries, (iii) lower payments for incentive compensation, (iv) lower interest expense costs attributable to our 2012 debt redemption and refinancing transactions and (v) costs associated with the completion of our IPO in the second quarter of 2011. These items are partially offset by payments associated with the closure of our Sendai, Japan and Toulouse, France fabrication facilities, including the cost of inventory builds to support end-of-life products produced at these facilities.

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Our days purchases outstanding increased to 60 days at December 31, 2013 from 51 days at December 31, 2012 and 53 days at December 31, 2011, reflecting the timing of payments on our payables. Our days sales outstanding decreased to 33 days at December 31, 2013 from 37 days at December 31, 2012 and 41 days at December 31, 2011. Our days of inventory on hand decreased to 110 days at December 31, 2013 from 125 days at December 31, 2012 and 122 days at December 31, 2011. The decrease in days of inventory on hand from the prior year periods is due to lower factory utilization in the second half of 2012, consumption of inventory related to prior period builds that supported the end-of-life products fabricated in our Toulouse, France facility along with an overall focus on reducing days of inventory on hand to what we believe better corresponds to our ideal for our business operating conditions.
Investing Activities
Our net cash utilized for investing activities was $210 million, $176 million and $89 million in 2013, 2012 and 2011, respectively. Our investing activities are driven primarily by capital expenditures and payments for purchased licenses and other assets. The cash utilized for investing activities in 2013 increased from 2012 and was predominately the result of increased capital expenditures, which were $151 million, $123 million and $135 million for 2013, 2012 and 2011, respectively, and represented 4%, 3% and 3% of net sales, respectively, partially offset by decreased cash paid for purchased licenses and other assets of $70 million, $73 million and $62 million for 2013, 2012 and 2011, respectively. Additionally, the proceeds from the sale of property, plant and equipment during 2013 were lower than 2012. The $12 million of proceeds in 2013 were primarily attributable to the sale of certain tools and equipment located at our Toulouse, France manufacturing facility and the sale of a portion of our former manufacturing facility in Sendai, Japan. The $19 million of proceeds in 2012 was largely the result of proceeds from the sale of the Sendai, Japan design center and the sale of certain tools and equipment located at our Toulouse, France manufacturing facility during in 2012.
The increase in the cash utilized for investing activities from 2011 to 2012 was predominantly the result of the benefit in 2011 for the receipt of $57 million in cash for the sale of our Tempe, Arizona facility (of which we are leasing a portion) along with proceeds from property and casualty insurance recoveries related to the March 2011 earthquake that occurred off the coast of Japan.
Financing Activities
Our net cash utilized for financing activities was $71 million, $232 million and $290 million in 2013, 2012 and 2011, respectively. Cash flows related to financing activities in 2013 included (i) the prepayment of the 2012 Term Loan and the Extended Term Loan totaling $2,711 million in connection with the refinancing transaction in the first quarter of 2013, (ii) the redemption of a portion of the 10.125% Secured Notes, including payment of the related make-whole premiums, totaling $495 million in connection with the second quarter of 2013 refinancing transaction, (iii) the redemption of the remaining $98 million principal amount of 8.875% Unsecured Notes during the third quarter of 2013, (iv) the redemption of the remaining 10.125% Secured Notes and a portion of the 9.25% Secured Notes and payment of the related make-whole premiums totaling $782 million made as part of the refinancing transaction initiated during the third quarter which closed during the fourth quarter (v) the redemption of the remaining 9.25% Secured Notes and payment of the related make-whole premiums totaling $953 million in connection with the fourth quarter of 2013 refinancing transaction, along with (vi) $23 million of capital lease and quarterly principal payments on the term loans. These outflows were partially offset by the receipt of (i) $2,707 million in net proceeds from the issuance of the 2016 and 2020 Term Loans during the first quarter of 2013, (ii) $493 million in net proceeds from the issuance of the 5.00% Secured Notes during the second quarter of 2013, (iii) $782 million in net proceeds from the issuance of the 2021 Term Loan during the third quarter of 2013 and (iv) $947 million in net proceeds from the issuance of the 6.00% Secured Notes during the fourth quarter of 2013. Additionally, cash provided by financing activities in 2013 included $62 million of proceeds from the exercise of stock options and ESPP share purchases. (Refer to Note 6 "Employee Benefit and Incentive Plans," in the accompanying Consolidated Financial Statements for further information on ESPP.)
Cash flows related to financing activities in the year ended of 2012 included (i) the repayment of $500 million of the Senior Subordinated Notes in connection with the refinancing transaction in the first quarter of 2012, along with call premiums of $25 million, (ii) the repayment of $200 million of 8.875% Unsecured Notes during the third and fourth quarters of 2012, along with call premiums of $2 million and (iii) $7 million in capital lease and quarterly principal payments on the 2012 Term Loan. These payments were partially offset by the receipt of $481 million of net proceeds from the issuance of the 2012 Term Loan. Additionally, cash provided by financing activities during 2012 included $21 million of proceeds from the exercise of stock options and ESPP share purchases.
Cash flows related to financing activities in 2011 included the receipt of approximately $838 million in net cash proceeds upon completion of the IPO and the over-allotment exercise and $724 million in net cash proceeds in connection with the issuance of the 8.05% Unsecured Notes. These cash inflows were offset by the utilization of $1,853 million related to payments for principal and call premiums in connection with the redemption of indebtedness using proceeds from the IPO and over-allotment exercise and the refinancing of indebtedness, as well as open-market repurchases of senior unsecured notes and scheduled capital lease payments.

43


Fourth Quarter 2013 Debt Refinancing Transactions
On November 1, 2013, Freescale Inc. issued $960 million aggregate principal amount of 6.00% senior secured notes (“6.00% Secured Notes”) which will mature on January 15, 2022. The proceeds from this issuance, along with cash on hand, were used to redeem the remaining $884 million of 9.25% senior secured notes due 2018 ("9.25% Secured Notes") on December 2, 2013, and to pay make-whole premiums totaling $69 million, accrued interest of $11 million and related fees and expenses of $13 million. We recorded a charge of $75 million in the accompanying Consolidated Statement of Operations associated with this transaction, which consisted of the majority of the make-whole premiums, the write-off of unamortized deferred financing costs and other expenses not eligible for capitalization. This transaction was completed in compliance with the Credit Facility as well as the indentures governing our senior secured, senior unsecured and senior subordinated notes (the "Indentures”). The 6.00% Secured Notes were recorded at fair value which was equal to the gross cash proceeds received from the issuance.
Third Quarter 2013 Debt Redemption and Refinancing Transactions
On August 7, 2013, after the requisite notice period, Freescale, Inc. redeemed the remaining $98 million principal amount of senior unsecured 8.875% notes due 2014 ("8.875% Unsecured Notes") at par, and paid related accrued interest of $1 million. In connection with the redemption, we recorded a charge of $1 million in the accompanying Consolidated Statement of Operations associated with the write-off of unamortized deferred financing costs.
On September 11, 2013, Freescale Inc. entered into a new $800 million senior secured term loan facility (the “2021 Term Loan”) pursuant to an amendment to its existing senior secured credit facilities (as so amended and restated, the “Credit Facility” or "Credit Facilities") which will mature on January 15, 2021. The 2021 Term Loan was issued at 99% of par and was recorded at fair value, which was equal to $792 million, reflective of the 1% discount. The proceeds from the issuance of the new term loan, along with cash on hand, were used in the fourth quarter of 2013, after the requisite notice period, to redeem the remaining $221 million of the 10.125% senior secured notes due 2018 ("10.125% Secured Notes") and $496 million of the 9.25% Secured Notes, and to pay related make-whole premiums of $65 million, accrued interest of $24 million and fees and expenses of $10 million. In connection with this transaction, we recorded an additional charge of $60 million during the fourth quarter of 2013 in the accompanying Consolidated Statement of Operations associated with the redemption of these notes, which consisted of the write-off of unamortized deferred financing costs, the majority of the make-whole premiums and other expenses not eligible for capitalization.
Second Quarter 2013 Debt Refinancing Transaction
On May 21, 2013, Freescale, Inc. issued $500 million aggregate principal amount of 5.00% senior secured notes (“5.00% Secured Notes”) which will mature on May 15, 2021. The proceeds from this issuance, along with cash on hand, were used to redeem $442 million of the 10.125% Secured Notes on June 20, 2013, and to pay make-whole premiums totaling $53 million, accrued interest of $12 million and related fees and expenses of $7 million. This transaction was completed in compliance with the Credit Facility as well as the Indentures. The 5.00% Secured Notes were recorded at fair value which was equal to the gross cash proceeds received from the issuance. We recorded a charge of $59 million in the accompanying Consolidated Statement of Operations associated with this transaction, which consisted of the majority of the make-whole premiums, the write-off of unamortized deferred financing costs and other expenses not eligible for capitalization.
First Quarter 2013 Debt Refinancing Transaction
On March 1, 2013, Freescale Inc. obtained new senior secured term loan facilities pursuant to an amendment and restatement of the Credit Facility. The terms of the Credit Facility, among other things, provided for the issuance of a $350 million term loan that will mature in December 2016 (the “2016 Term Loan”) and a $2.39 billion term loan that will mature in March 2020 (the “2020 Term Loan”). The 2016 Term Loan was issued at par, while the 2020 Term Loan was issued at 99% of par. The term loans were recorded at fair value, which was equal to the $350 million principal amount for the 2016 Term Loan and $2.36 billion for the 2020 Term Loan. The fair value of the 2020 Term Loan was reflective of the 1% discount on issuance along with $3 million of OID previously attributable to the senior secured term loan facility due 2019 (the "2012 Term Loan"), which was deemed exchanged for the 2020 Term Loan. The proceeds from the issuances of the new term loans, along with cash on hand, were used to prepay $496 million of outstanding principal on the 2012 Term Loan, $2.2 billion of outstanding principal on the extended maturity term loan due 2016, accrued interest of $10 million and related fees and expenses of $10 million. We recorded a charge of $22 million in the accompanying Consolidated Statement of Operations associated with this transaction, which consisted of the write-off of unamortized deferred financing costs, OID and other expenses not eligible for capitalization.
Credit Facility
At December 31, 2013, Freescale Inc.’s Credit Facility included (i) $347 million outstanding under the 2016 Term Loan, (ii) $2,373 million outstanding under the 2020 Term Loan, (iii) $798 million outstanding under the 2021 Term Loan and (iv) the revolving credit facility (the "Replacement Revolver"), including letters of credit and swing line loan sub-facilities, with a committed capacity of $425 million. The spread over LIBOR with respect to the 2016 Term Loan is 3.75%, with a

44


LIBOR floor of 1.00%, resulting in an effective interest rate on the 2016 Term Loan of 4.75% at December 31, 2013. The spread over LIBOR with respect to both the 2020 and 2021 Term Loans is 3.75%, with a LIBOR floor of 1.25%, resulting in an effective interest rate on both instruments of 5.00% at December 31, 2013. At the end of the fourth quarter of 2013, the Replacement Revolver’s available capacity was $409 million, as reduced by $16 million of outstanding letters of credit. Under the Credit Agreement, Freescale Inc. is required to repay a portion each of the 2016, 2020 and 2021 Term Loans in quarterly installments in aggregate annual amounts equal to 1% of the initial outstanding balance.
Senior Notes
Freescale Inc. had an aggregate principal amount of $2,993 million in Senior Notes outstanding at December 31, 2013, consisting of (i) $500 million of 5.00% Secured Notes, (ii) $960 million of 6.00% Secured Notes, (iii) $57 million of senior unsecured floating rate notes due 2014 ("Floating Rate Notes"), (iv)  $473 million of 10.75% senior unsecured notes due 2020, (v) $739 million of 8.05% senior unsecured notes due 2020 ("8.05% Unsecured Notes") and (vi) $264 million of senior subordinated 10.125% notes due 2016 ("Senior Subordinated Notes"). With regard to our fixed rates notes, interest is payable semi-annually in arrears as follows: (i) every May 15th and November 15th for the 5.00% Secured Notes; (ii) every May 15th and November 15th commencing on May 15, 2014 for the 6.00% Secured Notes; (iii) every February 1st and August 1st for the 10.75% Unsecured Notes; (iv) every February 1stand August 1st for the 8.05% Unsecured Notes; and (v) every June 15th and December 15th for the Senior Subordinated Notes. The Floating Rate Notes bear interest at a rate, reset quarterly, equal to three-month LIBOR (which was 0.24% in effect on December 31, 2013) plus 3.875% per annum, which is payable quarterly in arrears on every March 15th, June 15th, September 15th and December 15th.
Hedging Transactions
Freescale Inc. has previously entered into interest rate swap agreements and interest rate cap agreements with various counterparties as a hedge of the variable cash flows of our variable interest rate debt. In connection with the refinancing transaction in the first quarter of 2013, under which the majority of our debt essentially became fixed rate debt for the near term, we effectively terminated all of these agreements. (Refer to Note 5, “Risk Management,” for further details of these hedging agreements.)
Debt Service
We are required to make debt service principal payments under the terms of our debt agreements. As of December 31, 2013, future obligated debt payments are $93 million in 2014, $35 million in 2015, $637 million in 2016, $32 million in 2017, $32 million in 2018 and $5,682 million thereafter.
Fair Value
At December 31, 2013 and December 31, 2012, the fair value of the aggregate principal amount of our long-term debt was approximately $6,566 million, exclusive of $93 million of current maturities, and $6,562 million, exclusive of $5 million of current maturities, respectively, which was determined based upon quoted market prices. Since considerable judgment is required in interpreting market information, the fair value of the long-term debt is not necessarily the amount which could be realized in a current market exchange.
Refer to Note 4, "Debt," in the accompanying Consolidated Financial Statements for more detail on the notes described in this section along with details on the guarantees, rights and redemption requirements.
Adjusted EBITDA
Adjusted EBITDA is calculated in accordance with the Credit Facility and the Indentures governing Freescale Inc.'s senior notes. Adjusted EBITDA is net earnings (loss) adjusted for certain non-cash and other items that are included in net earnings (loss). Freescale Inc. is not subject to any maintenance covenants under its existing debt agreements and is therefore not required to maintain any minimum specified level of Adjusted EBITDA or maintain any ratio based on Adjusted EBITDA or otherwise. However, our ability to engage in specified activities is tied to ratios under Freescale Inc.'s debt agreements based on Adjusted EBITDA, in each case subject to certain exceptions. Our subsidiaries are unable to incur any indebtedness under the Indentures and specified indebtedness under the Credit Facility, 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, the fixed charge coverage ratio (as defined in the applicable indenture) would be at least 2.00:1 and the senior secured first lien leverage ratio (as defined in the Credit Facility) would be no greater than 4.00:1. Also, our subsidiaries may not incur certain indebtedness in connection with acquisitions unless, prior to and after giving effect to the proposed transaction, the total leverage ratio (as defined in the Credit Facility) is no greater than 6.50:1, except as otherwise permitted by the Credit Facility. In addition, except as otherwise permitted by the applicable debt agreement, we may not designate any subsidiary as unrestricted or engage in certain mergers unless, after giving effect to the proposed transaction, the fixed charge coverage ratio would be at least 2.00:1 or equal to or greater than it was prior to the proposed transaction and the senior secured first lien leverage ratio would be no greater than 4.00:1. We are also unable to have liens on assets securing indebtedness, except as otherwise permitted by the Indentures. Accordingly, we believe it is useful to provide the calculation of

45


Adjusted EBITDA to investors for purposes of determining our ability to engage in these activities. As of December 31, 2013, Freescale Inc. was in compliance with the covenants under the Credit Facility and the Indentures and met the fixed charge ratio and the total leverage ratio but did not meet the senior secured ratio or the consolidated secured debt ratio. As of December 31, 2013, Freescale Inc.'s total leverage ratio was 6.50:1, senior secured first lien leverage ratio was 4.74:1, the fixed charge coverage ratio was 2.24:1 and the consolidated secured debt ratio was 5.58:1. Accordingly, we are currently restricted from making certain investments and incurring liens on assets securing indebtedness, except as otherwise permitted by the Credit Facility and the Indentures. The fact that we do not meet some of these ratios does not result in any default under the Credit Facility or the Indentures.
Adjusted EBITDA is a non-U.S. GAAP measure. Adjusted EBITDA does not represent, and should not be considered an alternative to, net earnings (loss), operating earnings (loss), or cash flow from operations as those terms are defined by accounting principles generally accepted in the United States of America (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 Credit Facility allows us to add back certain charges that are deducted in calculating net earnings (loss). 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, which is a U.S. GAAP measure of our operating results, to Adjusted EBITDA, as calculated pursuant to Freescale Inc.'s debt agreements for the most recent four fiscal quarter period as required by such agreements.
(in millions)
Year ended December 31, 2013
Net loss
$
(208
)
Interest expense, net
483

Income tax expense
40

Depreciation and amortization expense(1)
259

Non-cash share-based compensation expense (2)
48

Fair value adjustment on interest rate and commodity derivatives (3)
(1
)
Loss on extinguishment or modification of long-term debt (4)
217

Reorganization of business and other (5)
24

Cost savings (6)
24

Other terms (7)
7

Adjusted EBITDA
$
893

 
(1)
Excludes amortization of debt issuance costs, which are included in interest expense, net.
(2)
Reflects non-cash, share-based compensation expense under the provisions of ASC Topic 718, “Compensation – Stock Compensation.”
(3)
Reflects the 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.”
(4)
Reflects losses on extinguishments and modifications of our long-term debt.
(5)
Reflects items related to our reorganization of business programs and other charges.
(6)
Reflects costs 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.
(7)
Reflects adjustments required by our debt instruments, including business optimization expenses, relocation expenses and other items.
Contractual Obligations
We own most of our major facilities, but we do lease certain office, factory and warehouse space, as well as data processing and other equipment primarily under non-cancellable operating leases.
Summarized in the table below are our obligations and commitments to make future payments in connection with our debt, minimum lease payment obligations (net of minimum sublease income), software, service, supply and other contracts, and product purchase commitments as of December 31, 2013.

46


 
 
Payments Due by Period
(in millions)
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Debt obligations (including short-term debt) (1)
 
$
93

 
$
35

 
$
637

 
$
32

 
$
32

 
$
5,682

 
$
6,511

Operating leases
 
33

 
22

 
14

 
12

 
7

 
2

 
90

Software licenses
 
41

 
34

 
21

 
7

 

 

 
103

Service and other obligations (2)
 
56

 
32

 
18

 
12

 

 

 
118

Foundry commitments (3)
 
82

 

 

 

 

 

 
82

Purchase commitments
 
21

 

 

 

 

 

 
21

Total cash contractual obligations (4)
 
$
326

 
$
123

 
$
690

 
$
63

 
$
39

 
$
5,684

 
$
6,925

(1)
Reflects the principal payments under the Credit Facility and the notes. These amounts exclude estimated cash interest payments of approximately $403 million in 2014, $397 million in 2015, $394 million in 2016, $348 million in 2017, $347 million in 2018 and $656 million thereafter (based on currently applicable interest rates in the case of variable interest rate debt).
(2)
Includes capital lease obligations of less $1 million in the aggregate which are payable through 2017.
(3)
Foundry commitments associated with our strategic manufacturing relationships are based on volume commitments for work in progress and forecasted demand based on 18-month rolling forecasts, which are adjusted monthly.
(4)
As of December 31, 2013, we had reserves of $138 million recorded for uncertain tax positions, including interest and penalties. We are not including this amount in our long-term contractual obligations table presented because of the difficulty in making reasonably reliable estimates of the timing of cash settlements, if any, with the respective taxing authorities.
Future Financing Activities
Our primary future cash needs on a recurring basis will be for working capital, capital expenditures and debt service obligations, including debt service principal payments on the term loans and payment of $57 million upon the maturity of the senior unsecured floating rate notes in December of 2014. In addition, we expect to spend approximately $35 million over the course of 2014 and approximately $10 million thereafter in connection with the 2012 Strategic Realignment and the closure of the Toulouse, France manufacturing facility; however, the timing of these payments depends on many factors, including the timing of redeployment of existing resources and compliance with local employment laws, and actual amounts paid may vary based on currency fluctuation. We believe that our cash and cash equivalents balance as of December 31, 2013 of $747 million and cash flows from operations will be sufficient to fund our working capital needs, capital expenditures, restructuring plan and other business requirements for at least the next 12 months. In addition, our ability to borrow under the Replacement Revolver was $409 million as of December 31, 2013, as reduced by $16 million of outstanding letters of credit. (Refer to Note 4, "Debt," and Note 10, "Reorganization of Business and Other," for additional discussion of the reorganization actions and borrowing abilities described in this section.)
If our cash flows from operations are less than we expect or we require funds to consummate acquisitions of other businesses, assets, products or technologies, we may need to incur additional debt, sell or monetize certain existing assets or utilize our cash and cash equivalents. In the event additional funding is required, there can be no assurance that future funding will be available on terms favorable to us or at all. Furthermore, our debt agreements contain restrictive covenants that limit our ability to, among other things, incur additional debt and sell assets. We are highly leveraged, and this 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 one or more of our debt agreements. Increases in interest rates could also adversely affect our financial condition. In the absence of sufficient operating results and resources to service our debt, or as the result of the inability to complete appropriate refinancings and amendments of our debt, we could face substantial liquidity problems and may be required to seek the disposal of material assets or operations to meet our debt service and other obligations. 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.
As market conditions warrant, or as repurchase obligations under the agreements governing our Credit Facility and senior notes may require, we and our major equity holders may from time to time repurchase or redeem debt securities issued by Freescale Inc. through redemptions under the terms of the Indentures, in privately negotiated or open-market transactions, by tender offer or otherwise, or issue new debt in order to refinance or prepay amounts outstanding under the Credit Facility or the existing senior notes or for other permitted purposes. Further, depending on market conditions, the strategy for our capital structure and other factors, we also may issue equity securities from time to time in public or private offerings.  There can be no assurance, however, that any issuance of equity or debt securities will occur or be successful.
Off-Balance Sheet Arrangements
We use customary off-balance sheet arrangements, such as operating leases and letters of credit, to finance our business. None of these arrangements has or is likely to have a material effect on our results of operations, financial condition or liquidity.

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Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the presentation of our financial condition and results of operations and the disclosure of contingent assets and liabilities. These estimates and assumptions generally require difficult and subjective accounting judgments and often involve matters that are inherently uncertain.
The estimates that shape our critical accounting policies are assessed on an on-going basis. Our management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions which might cause a material impact on our financial statements. Our management believes the following accounting policies to be those most critical to the portrayal of our financial condition and those that require the most subjective judgment:
valuation of long-lived assets;
restructuring activities;
accounting for income taxes;
inventory valuation methodology;
product sales and intellectual property revenue recognition and valuation; and
share-based compensation.
We have other significant accounting policies that either do not generally require estimate and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our results. Refer to Note 1, “Summary of Significant Accounting Policies,” in the accompanying Consolidated Financial Statements for further detail on these policies.
Valuation of Long-Lived Assets
We assess the impairment of long-lived assets, which include our property, plant and equipment (PP&E) and identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that may trigger an impairment analysis for our long-lived assets include significant under-performance of the business, considerable negative industry or economic trends, major changes in our use of the asset and rapid technological changes. Management must make subjective judgments regarding the estimated future cash flows of the asset and its remaining useful life to determine if impairment is necessary. Additionally, if an impairment loss exists, the underlying facts used to determine the original charge may change or estimates may prove to be inaccurate, which could warrant additional impairment charges in future periods.
We determine the fair value of our intangible assets and PP&E in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.” Our impairment evaluation of identifiable intangible assets and PP&E includes an analysis of estimated future undiscounted net cash flows expected to be generated by the asset group over their remaining estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the asset group over the remaining estimated useful lives, we record an impairment loss in the amount by which the carrying value of the asset group exceeds the fair value. We determine fair value based on either market quotes, if available, or discounted cash flows using a discount rate commensurate with the risk inherent in our current business model for the specific asset being valued.
Major factors that influence our cash flow analysis are our estimates for future net sales and expenses and the discount rate associated with the asset. These estimates are based upon historical information and future projections for the Company. Different estimates could have a significant impact on the results of our evaluation. If, as a result of our analysis, we determine that our intangible assets or PP&E has been impaired, we will recognize an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material negative effect on our results of operations.
The net book values of these tangible and intangible long-lived assets at December 31, 2013 and 2012 were as follows:
 
(in millions)
 
Year ended December 31, 2013
 
Year ended December 31, 2012
Property, plant and equipment
 
$
681

 
$
715

Intangible assets
 
52

 
64

Total net book value
 
$
733

 
$
779

During 2013, we incurred a $4 million charge primarily related to the write-down of the net book value of certain manufacturing assets to their fair market values less the expected cost to sell in association with the classification of the assets

48


as available for sale as of December 31, 2013 and also included a contract termination charge associated with similar manufacturing assets under a previous operating lease. These assets are no longer deemed necessary due to the strategic decision to eliminate certain processes for some of our next generation products.
During 2012, we recorded an $11 million accelerated amortization charge to reorganization of business and other based on the reassessment of useful lives for certain of our purchased licenses which have no future benefit due to being directly related to programs we canceled in connection with the 2012 Strategic Realignment.
During 2011, we recorded $49 million of non-cash asset impairment charges in reorganization of business and other for PP&E as a result of the significant structural and equipment damage to the Sendai, Japan fabrication facility and the Sendai, Japan design center from the March 2011 earthquake which occurred off the coast of Japan near this site. (Refer to Note 2, “Other Financial Data”, Note 9, “Asset Impairment Charges,” and Note 10, “Reorganization of Business and Other,” in the accompanying Consolidated Financial Statements for further discussion.) As of December 31, 2013 and 2012, no indications of impairment existed with regard to our PP&E and our intangible assets.
Restructuring Activities
We have undertaken, and may continue to undertake, significant restructuring initiatives which have required us, or may require us in the future, to implement plans to reduce our workforce, close facilities, discontinue product lines, refocus our business strategies and consolidate manufacturing, research and design center and administrative operations. We initiate these plans in an effort to improve our operational effectiveness, reduce costs or simplify our product portfolio. The restructuring reserves include estimated payments for employee termination benefits, such as severance payments, and exit costs, such as termination fees associated with leases or other contracts and other costs related to the closure of facilities. Given the significance and importance of successful execution of our restructuring activities, the complex process requires extensive reviews of plan estimates.
We operate in a highly cyclical industry; and therefore, we monitor and evaluate business conditions on a regular basis. At each reporting date, we evaluate our accruals for exit costs and employee separation costs to ensure that the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from our company 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. In addition, we may incur additional charges for new plans or as a result of changes in estimates for plans previously recorded.
Following the appointment of Gregg Lowe as president and CEO of Freescale in 2012, we completed a detailed review of our strategic direction with the overall objective of identifying opportunities that would accelerate revenue growth and improve profitability. We recorded cash and non-cash charges of $31 million and $52 million in 2013 and 2012, respectively, in connection with re-allocating research and development resources and re-aligning sales resources. (Refer to Note 2, “Other Financial Data,” and Note 10, “Reorganization of Business and Other,” in the accompanying Consolidated Financial Statements for more information on the transactions described in this section.)
In 2008, we began executing a series of restructuring actions that are referred to as the “Reorganization of Business Program” which streamlined our cost structure and redirected some research and development investments into expected growth markets. We announced in the second quarter of 2009 our plans to exit our remaining 150 millimeter manufacturing facilities in Sendai, Japan and Toulouse, France, as the industry has experienced a migration from 150 millimeter technologies and products to more advanced technologies and products. The Sendai, Japan facility ceased operations in the first quarter of 2011 due to extensive damage following the March 2011 earthquake off the coast of Japan. The Toulouse, France manufacturing facility ceased operations in the third quarter of 2012 following the scheduled end of production at the site. As of December 31, 2013, the remaining actions to be completed are the sale of the site located in Sendai, Japan and the decommissioning of the land and building located in Toulouse, France along with payment of the remaining separation and exit costs. Our severance and exit costs associated with the Reorganization of Business Program in 2013, 2012 and 2011 were not significant or approximated reversals of prior accruals.
Accounting for Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties relating to these uncertain tax positions. As a multinational corporation, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets, liabilities, net operating loss and other tax carryforwards. Significant management judgment is required in determining whether these deferred tax assets will be realized in full or in part. When it is more-likely-than-not that

49


all or some portion of these deferred tax assets will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more-likely-than-not that deferred tax assets are recoverable. Such items of evidence include our past operating results, the existence of cumulative losses in recent years and our forecast of future profitability and taxable income. A significant piece of objective evidence identified includes the absence of U.S. operational profitability and recent cumulative losses. The evaluation of this evidence requires management to exercise judgment based on the individual facts and circumstances of such evidence.
Valuation allowances of $1,230 million have been recorded on substantially all our U.S. deferred tax assets as of December 31, 2013. We have not recognized tax benefits for our net U.S. deferred tax assets because ASC Topic 740, “Income Taxes” generally precludes the consideration of the impact of future forecasted income in assessing whether it is more-likely-than-not that all or a portion of our deferred tax assets may be recoverable when the Company has incurred cumulative losses. The Company computes cumulative losses for these purposes by adjusting pre-tax results (excluding the cumulative effects of accounting method changes and including discontinued operations and other “non-recurring” items such as restructuring or impairment charges) for permanent items. Due to the decrease in domestic cumulative losses over the past three years, management believes that sufficient positive evidence could become available in the future to reach a conclusion that the U.S. valuation allowance will no longer be needed, in whole or in part. Acceleration of improved operating results or significant taxable income from specific non-recurring transactions could further impact this assessment. The likelihood of realizing the benefit of deferred tax assets and the related need for a valuation allowance is assessed on an ongoing basis. This assessment requires estimates and significant management judgment as to future operating results, as well as an evaluation of the effectiveness of the Company's tax planning strategies. At this time, the Company is not able to make a reasonable estimate of the time of reversal or the range of impact on the effective tax rate related to these items.
Additionally, in certain foreign jurisdictions, we record valuation allowances to reduce our net deferred tax assets to the amount we believe is more-likely-than-not to be realized after considering all positive and negative factors as to the recoverability of these assets. At December 31, 2013 valuation allowances of $58 million have also been recorded on certain deferred tax assets in foreign jurisdictions.
We have reserves for taxes, associated interest, and other related costs that may become payable in future years as a result of audits by tax authorities. Although we believe that the positions taken on previously filed tax returns are fully supported, we have established reserves recognizing that various taxing authorities may challenge certain positions and our tax positions may not be fully sustained. The tax reserves are reviewed quarterly and adjusted as events occur that affect our potential liability for additional taxes, such as lapsing of applicable statues of limitations, proposed assessments by tax authorities, resolution of tax audits, negotiations between tax authorities of different countries concerning our transfer prices, identification of new issues, and issuance of new regulations or new case law. The amounts ultimately paid upon resolution of audits could be different from the amounts previously included in our income tax expense and therefore could have an impact on our tax provision, net income and cash flows. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to record additional income tax expense (benefit) or adjust valuation allowances.
We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. As of December 31, 2013, we had reserves of $138 million for taxes, associated interest, and other related costs that may become payable in future years as a result of audits by tax authorities.
Inventory Valuation Methodology
Inventory is valued at the lower of standard cost or estimated net realizable value. We regularly review our inventories and write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand. Future demand is affected by market conditions, technological obsolescence, new products and strategic plans, all of which is subject to change with little or no forewarning. In estimating obsolescence, we utilize our backlog information for the next 13 weeks as well as projecting future demand.
We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers with the risk of inventory obsolescence due to rapidly changing technology and customer requirements. We also consider pending cancellation of product lines due to technology changes, long life cycle products, lifetime buys at the end of supplier production runs, business exits and a shift of production to outsourcing.
As of December 31, 2013 and 2012, we recorded $61 million and $58 million, respectively, in reserves for inventory deemed obsolete or in excess of forecasted demand. Inventory impairment charges establish a new cost basis for inventory and are recorded in cost of sales. The change in our reserves for inventory from 2013 to 2012 was due to the normal review and

50


accrual of obsolete or excess inventory. If actual future demand or market conditions are less favorable than those projected by our management, additional inventory write-downs may be required.
Product Sales and Intellectual Property Revenue Recognition and Valuation
We generally market our products to a wide variety of end users and a network of distributors. Our policy is to record revenue for product sales when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable and collection of the related receivable is reasonably assured, which is generally at the time of shipment. We record reductions to sales associated with reserves for allowances for collectability, discounts, price protection, product returns and distributor incentive programs at the time the related sale is recognized. The establishment of such reserves is dependent on a variety of factors, including contractual terms, analysis of historical data, current economic conditions, industry demand and both the current and forecasted pricing environments. The process of evaluating these factors is highly subjective and requires significant estimates, including, but not limited to, forecasted demand, returns, industry pricing assumptions, distributor resales and inventory levels. In future periods, additional provisions may be necessary due to (i) a deterioration in the semiconductor pricing environment, (ii) reductions in anticipated demand for semiconductor products and/or (iii) lack of market acceptance for new products. If these factors result in a significant adjustment to our reserves, they could significantly impact our future operating results.
Distributor reserves estimate the impact of credits granted to distributors under certain programs common in the semiconductor industry whereby distributors receive certain price adjustments to meet individual competitive opportunities, or are allowed to return or scrap a limited amount of product in accordance with contractual terms agreed upon with the distributor, or receive price protection credits when our standard published prices are lowered from the price the distributor paid for product still in its inventory. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends in pricing environments and distributor resales and inventory levels. Distributor reserves are also adjusted when recent historical data does not represent anticipated future activity. In 2013, 2012 and 2011, 25%, 23% and 23% of our revenue, respectively, was generated from sales of our products to distributors.
On January 7, 2014, in an effort to streamline our operations and improve the efficiency of our global distribution network, we executed a consolidation of our global distribution channel from three to two distribution partners.  In connection with this action, we recorded a modest reduction to net sales with a corresponding decrease to gross margin and net loss in our Consolidated Statement of Operations for the year ending December 31, 2013, related to the potential impact of the discontinued distributor’s inventory held by them as of December 31, 2013.
In revenue arrangements that include multiple deliverables, judgment is required to properly identify the accounting units of such multiple deliverable transactions and to determine the manner in which revenue should be allocated among those accounting units. Net sales from contracts with multiple deliverables are recognized as each deliverable is earned based on the relative fair value of each deliverable or based on each deliverable’s relative selling price depending on the underlying terms of the arrangement. When using each deliverable’s relative selling price various inputs may be required including, but not limited to, our pricing practices, gross margin objectives, internal costs and industry specific information. Changes in any number of these factors may have a substantial impact on the selling price as assigned to each deliverable. These inputs and assumptions represent management’s best estimates at the time of the transaction. Applicable receivables are discounted in accordance with U.S. GAAP.
We entered into several intellectual property revenue arrangements during 2012 that contained multiple deliverables. Certain of these arrangements limited our ability to sell or license some of our intellectual property to other parties through the third quarter of 2013. The total consideration under these agreements was $304 million, of which $78 million was received in 2013 and $198 million was received in 2012. We expect to continue our efforts to monetize the value of our intellectual property in the future. These licensing agreements can also be linked with other contractual agreements and could represent multiple element arrangements under ASC Topic 605, “Revenue Recognition” or contain future performance provisions pursuant to SEC Staff Accounting Bulletin 104, “Revenue Recognition.” The process of determining the appropriate revenue recognition in such transactions is highly complex and requires significant judgments and estimates. Refer to Note 2 “Other Financial Data,” for more information on these intellectual property revenue arrangements.
We recognize revenue from the licensing of our intellectual property when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection of resulting receivables is reasonably assured. Revenue from upfront payments for the licensing of our patents is recognized when the arrangement is mutually signed, if there is no future delivery or future performance obligations and all other criteria are met. When patent licensing arrangements include royalties for future sales of the licensees’ products using our licensed patented technology, revenue is recognized based on royalty reports received from the licensee, provided that all other criteria have been met. Revenue from licensing our intellectual property approximated 5%, 5% and 3% of net sales for 2013, 2012 and 2011, respectively.

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Share-Based Compensation
We account for awards granted under our share-based employee compensation plans using the fair-value recognition provisions of ASC Topic 718, “Compensation-Stock Compensation” (“ASC Topic 718”). These plans are more fully described in Note 6, “Employee Benefits and Incentive Plans” in the accompanying Consolidated Financial Statements.
In accordance with ASC Topic 718 and for purposes of determining share-based compensation expense, we estimated the fair values of non-qualified stock options granted under the 2011 Omnibus Plan using the Black-Scholes option-pricing model with the weighted-average assumptions indicated below:
 
 
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
Weighted average grant date fair value per share
 
$
7.05

 
$
6.93

 
$
7.82

Weighted average assumptions used:
 
 
 
 
 
 
Expected volatility
 
60.71
%
 
63.00
%
 
80.00
%
Expected lives (in years)
 
4.75

 
5.00

 
4.75

Risk free interest rate
 
0.75
%
 
0.92
%
 
0.89
%
Expected dividend yield
 
%
 
%
 
%
Due to our continued lack of extensive history as a public company, the computation of the expected volatility assumptions used in the Black-Scholes calculations for grants was based on historical volatilities and implied volatilities of our peer group companies. When establishing the expected life assumption, we used the “simplified” method prescribed in ASC Topic 718 for companies that do not have adequate historical data. The risk-free interest rate is measured as the prevailing yield for a U.S. Treasury security with a maturity similar to the expected life assumption. We also must estimate a forfeiture rate at the time of grant and revise this rate in subsequent periods if actual forfeitures or vesting differ from the original estimates. In addition, for certain of our performance-based awards, we must make subjective assumptions regarding the likelihood that the related performance metrics will be met. These assumptions are based on various operational and market results.
Also, we estimated the fair value of market-based restricted share units granted to certain executives awarded using the Monte Carlo valuation model, which includes a modifier for market results. The number of units that will best will range from 0% to 150% of the target shares awards based on the relative Total Shareholder Return (TSR) of the Company's share price as compared to a set of peer companies. The total compensation cost of these awards, net of forfeitures, will be amortized on a straight-line basis over a period of three years. The assumptions, in addition to projections of market results, used in the Monte Carlo model are outlined in the following table:
 
Year ended December 31, 2013
Weighted average grant date fair value per share
$
17.01

Weighted average assumptions used:
 
Expected volatility
48.32
%
Expected lives (in years)
2.75

Risk free interest rate
0.33
%
Expected dividend yield
%
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellation of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
Recent Legislation Changes
The SEC adopted the conflict mineral rules under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act on August 22, 2012. The rules require public companies to disclose information about their use of specific minerals originating from and financing armed groups in the Democratic Republic of the Congo or adjoining countries. The conflict mineral rules cover minerals frequently used to manufacture a wide array of electronic and industrial products including semiconductor devices. The rules do not ban the use of minerals from conflict sources, but require public disclosure beginning with calendar year 2013. We have determined that we are subject to the rules and are evaluating our supply chain and continue to develop processes to assess the impacts and comply with the regulation.

52


Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
As a multinational company, our transactions are denominated in a variety of currencies. We have a foreign exchange hedging process to manage currency risks resulting from transactions in currencies other than the functional currency of our subsidiaries. We use financial instruments to hedge, and therefore attempt to reduce our overall exposure to the effects of currency fluctuations on cash flows. Our policy prohibits us from speculating in financial instruments for profit on exchange rate price fluctuations, from trading in currencies for which there are no underlying exposures, and from entering into trades for any currency to intentionally increase the underlying exposure.
A significant variation of the value of the U.S. dollar against currencies other than the U.S. dollar could result in a favorable impact on our net earnings (loss) in the case of an appreciation of the U.S. dollar, or a negative impact on our net earnings (loss) if the U.S. dollar depreciates relative to these currencies. Currency exchange rate fluctuations affect our results of operations because our reporting currency is the U.S. dollar, in which we receive the majority of our net sales, while we incur a significant portion of our costs in currencies other than the U.S. dollar. Certain significant costs incurred by us, such as manufacturing labor costs, research and development, and selling, general and administrative expenses are incurred in the currencies of the countries in which our operations are located.
In order to reduce the exposure of our financial results to fluctuations in exchange rates, our principal strategy has been to naturally hedge the foreign currency-denominated liabilities on our balance sheet against corresponding foreign currency-denominated assets such that any changes in liabilities due to fluctuations in exchange rates are inversely and entirely offset by changes in their corresponding foreign currency assets. In order to further reduce our exposure to U.S. dollar exchange rate fluctuations, we have entered into foreign currency hedge agreements related to the currency and the amount of expenses we expect to incur in countries in which our operations are located. No assurance can be given that our hedging transactions will prevent us from incurring higher foreign currency-denominated costs when translated into our U.S. dollar-based accounts in the event of a weakening of the U.S. dollar on the non-hedged portion of our costs and expenses. (Refer to Note 5, "Risk Management," in our accompanying Consolidated Financial Statements for further discussion.)
At December 31, 2013, we had net outstanding foreign currency exchange contracts not designated as accounting hedges with notional amounts totaling approximately $112 million. These forward contracts have original maturities of less than three months. The fair value of the forward contracts was a net unrealized loss of $1 million at December 31, 2013. Forward contract losses of $6 million for 2013 were recorded in other expense, net in the accompanying Consolidated Statement of Operations related to our realized and unrealized results associated with these foreign exchange contracts. Management believes that these financial instruments will not subject us to undue risk of foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets and liabilities being hedged. The following table shows, in millions of U.S. dollars, the notional amounts of the most significant net foreign exchange hedge positions for outstanding foreign exchange contracts not designated as accounting hedges:
Buy (Sell)
 
December 31,
2013
Chinese Renminbi
 
$
30

Euro
 
$
29

Malaysian Ringgit
 
$
16

Japanese Yen
 
$
15

Indian Rupee
 
$
(5
)
Foreign exchange financial instruments that are subject to the effects of currency fluctuations, which may affect reported earnings, include financial instruments which are not denominated in the functional currency of the legal entity holding the instrument. Derivative financial instruments consist primarily of forward contracts. Other financial instruments, which are not denominated in the functional currency of the legal entity holding the instrument, consist primarily of cash and cash equivalents, notes and accounts payable and accounts receivable. The fair value of these foreign exchange financial instruments would hypothetically decrease by $41 million as of December 31, 2013, if the U.S. dollar were to appreciate against all other currencies by 10% of current levels. This hypothetical amount is suggestive of the effect on future cash flows under the following conditions: (i) all current payables and receivables that are hedged were not realized, (ii) all hedged commitments and anticipated transactions were not realized or canceled, and (iii) hedges of these amounts were not canceled or offset. We do not expect that any of these conditions will be realized. We expect that gains and losses on the derivative financial instruments should offset losses and gains on the assets and liabilities being hedged. If the hedged instruments were included in the sensitivity analysis, the hypothetical change in fair value would be immaterial. The foreign exchange financial instruments are held for purposes other than trading.

53


Instruments used as cash flow hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a cash flow hedge at the inception of the contract. Accordingly, changes in the fair values of such hedge instruments must be highly correlated with changes in the fair values of underlying hedged items both at inception of the hedge and over the life of the hedge contract. At December 31, 2013, we had forward contracts designated as foreign currency cash flow hedges with a total fair value of a net unrealized loss of $2 million. These contracts have original maturities of less than 18 months. The following table shows, in millions of U.S. dollars, the notional amounts of the foreign exchange hedge positions for outstanding foreign exchange contracts designated as cash flow hedges as of December 31, 2013:
Buy (Sell)
 
December 31,
2013
 
Hedged Exposure
Malaysian Ringgit
 
$
80

 
Cost of sales
Chinese Renminbi
 
$
93

 
Cost of sales
 
$
23

 
Selling, general and administrative
 
$
23

 
Research and development
Japanese Yen
 
$
35

 
Cost of sales
Euro
 
$
(33
)
 
Net sales
Gains of $3 million for 2013 were recorded in the accompanying Consolidated Statement of Operations related to our realized results associated with these cash flow hedges.
Commodity Price Risk
We use gold swap contracts to hedge our exposure to increases in the price of gold wire used in our manufacturing processes. At December 31, 2013 we had outstanding gold swap contracts designated as cash flow hedges with notional amounts totaling 27,500 ounces. All of these outstanding contracts had original maturities of 15 months or less. The fair value of these gold swap contracts was a net unrealized loss of $3 million at December 31, 2013. During 2013, losses of $5 million were recorded in cost of sales related to the realized results attributable to these contracts. Based on expected gold purchases for the next twelve months, a 10% increase in the price of gold from the price at December 31, 2013 would increase our cost of sales by $6 million annually, absent our outstanding gold swap contracts. As of December 31, 2013 a 10% increase in the price of gold would increase the fair value of our gold swap contracts by $3 million. Management believes that these financial instruments will not subject us to undue risk due to fluctuations in the price of gold bullion because gains and losses on these swap contracts should offset losses and gains on the forecasted gold wire expense being hedged.
Interest Rate Risk
At December 31, 2013, we had total indebtedness with an outstanding principal amount of $6,511 million, including $3,575 million of variable interest rate debt based on LIBOR. As of December 31, 2013, $3,518 million of our variable rate debt has LIBOR floors that are above the current LIBOR rates, and therefore, is effectively fixed rate debt for so long as LIBOR rates remain below these LIBOR floors. Our remaining variable interest rate debt of $57 million is subject to immediate interest rate risk, because interest payments will fluctuate as the underlying interest rates change. A 100 basis point increase in LIBOR rates from their current levels would result in an increase in our interest expense of only $1 million per year, because the rates would remain below the aforementioned 1.25% LIBOR floor on the 2020 and 2021 Term Loans. We have effectively terminated our interest rate swap agreements by entering into offsetting agreements and as such, a change in LIBOR rates would not effect the cash flows under our interest rate swap arrangements because we have fixed the remaining payment stream under these arrangements. The fair value of our interest rate swap agreements (including outstanding historical swap agreements and their offsetting swap agreements) was a net obligation of $5 million, which was estimated based on the yield curve at December 31, 2013. We continue to monitor the interest rate environment and may opportunistically enter into interest rate swap contracts or similar arrangements to hedge a portion of our exposure to interest rate risk at the time we expect LIBOR rates to exceed the LIBOR floors on our variable rate debt.
The fair value of the aggregate principal amount of our long-term debt, exclusive of $93 million of current maturities, was $6,566 million at December 31, 2013, based upon quoted market prices. Since considerable judgment is required in interpreting market information, the fair value of the long-term debt is not necessarily indicative of the amount which could be realized in a current market exchange. A 100 basis point change in LIBOR rates would impact the fair value of our long-term debt by $95 million.
Refer to Note 2, “Other Financial Data,” Note 3, “Fair Value Measurement,” Note 4, "Debt," and Note 5, “Risk Management,” in the accompanying Consolidated Financial Statements for more information about these financial instruments, their fair values and the financial impact recorded in our results of operations. Other than the change to the fair value of our long-term debt, we experienced no significant changes in market risk during 2013. However, we cannot provide assurance that future changes in foreign currency rates, commodity prices or interest rates will not have a significant effect on our consolidated financial position, results of operations or cash flows.

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Counterparty Risk
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. We also enter into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. On a periodic basis, we review the credit ratings of our counterparties and adjust our exposure as deemed appropriate. As of December 31, 2013, we believe that our exposure to counterparty risk is immaterial.

55


Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Freescale Semiconductor, Ltd.:
We have audited the accompanying consolidated balance sheets of Freescale Semiconductor, Ltd. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, shareholders’ deficit and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Freescale Semiconductor, Ltd. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Freescale Semiconductor, Ltd.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 10, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Austin, Texas
February 10, 2014

56


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Freescale Semiconductor, Ltd.:
We have audited Freescale Semiconductor, Ltd.’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Freescale Semiconductor, Ltd.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Freescale Semiconductor, Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Freescale Semiconductor, Ltd. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, shareholders’ deficit and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 10, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Austin, Texas
February 10, 2014

57


Freescale Semiconductor, Ltd.
Consolidated Statements of Operations
 
(in millions, except per share amounts)
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
Net sales
 
$
4,186

 
$
3,945

 
$
4,572

Cost of sales
 
2,399

 
2,304

 
2,677

Gross margin
 
1,787

 
1,641

 
1,895

Selling, general and administrative
 
464

 
438

 
510

Research and development
 
755

 
742

 
797

Amortization expense for acquired intangible assets
 
13

 
13

 
232

Reorganization of business and other
 
24

 
(15
)
 
82

Operating earnings
 
531

 
463

 
274

Loss on extinguishment or modification of long-term debt, net
 
(217
)
 
(32
)
 
(97
)
Other expense, net
 
(482
)
 
(531
)
 
(559
)
Loss before income taxes
 
(168
)
 
(100
)
 
(382
)
Income tax expense
 
40

 
2

 
28

Net loss
 
$
(208
)
 
$
(102
)
 
$
(410
)
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
Basic
 
$
(0.81
)
 
$
(0.41
)
 
$
(1.82
)
Diluted
 
$
(0.81
)
 
$
(0.41
)
 
$
(1.82
)
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
256

 
248

 
226

Diluted
 
259

 
251

 
227

See accompanying notes.

58


Freescale Semiconductor, Ltd.
Consolidated Statements of Comprehensive Loss

 
(in millions)
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
Net loss
 
$
(208
)
 
$
(102
)
 
$
(410
)
Other comprehensive earnings (loss), net of tax:
 
 
 
 
 
 
Foreign currency translation adjustments
 
(6
)
 

 
(5
)
Derivative instruments adjustments:
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
 
(8
)
 
6

 
(4
)
Reclassification adjustment for items included in net loss
 

 
1

 

Post-retirement adjustments:
 
 
 
 
 
 
Gains (losses) arising during the period
 
47

 
(18
)
 
7

Amortization of actuarial gains included in net loss
 
2

 

 

Other comprehensive earnings (loss)
 
35

 
(11
)
 
(2
)
Comprehensive loss
 
$
(173
)
 
$
(113
)
 
$
(412
)
See accompanying notes.

59


Freescale Semiconductor, Ltd.
Consolidated Balance Sheets
 
(in millions)
 
December 31,
2013
 
December 31,
2012
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
747

 
$
711

Accounts receivable, net
 
388

 
384

Inventory, net
 
733

 
797

Other current assets
 
127

 
166

Total current assets