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EXCEL - IDEA: XBRL DOCUMENT - Freescale Semiconductor, Ltd.Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Freescale Semiconductor, Ltd.q3201410-qex311.htm
EX-10.1 - 2011 OMNIBUS INCENTIVE PLAN FORM RESTRICTED SHARE UNIT AWARD AGREEMENT-DIRECTOR - Freescale Semiconductor, Ltd.q3201410-qex101.htm
EX-32.2 - SECTION 1350 CERTIFICATION (CHIEF FINANCIAL OFFICER) - Freescale Semiconductor, Ltd.q3201410-qex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Freescale Semiconductor, Ltd.q3201410-qex312.htm
EX-32.1 - SECTION 1350 CERTIFICATION (CHIEF EXECUTIVE OFFICER) - Freescale Semiconductor, Ltd.q3201410-qex321.htm



 
 
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
 
 
 
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2014
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)
 
 
 
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 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
As of October 20, 2014 there were 303,976,599 shares of the registrant’s common shares outstanding.
 



Table of Contents
 

 
 
 
 
 
Page
Part I
Financial Information
 
Item 1.
Financial Statements (Unaudited):
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 3, 2014 and September 27, 2013
 
Condensed Consolidated Statements of Comprehensive Earnings (Loss) for the Three and Nine Months Ended October 3, 2014 and September 27, 2013
 
Condensed Consolidated Balance Sheets as of October 3, 2014 and December 31, 2013
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2014 and September 27, 2013
 
Notes to the Unaudited Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
Part II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits




PART I
Item 1. Financial Statements (Unaudited)
Freescale Semiconductor, Ltd.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share amounts)
 
October 3,
2014
 
September 27,
2013
 
October 3,
2014
 
September 27,
2013
Net sales
 
$
1,213

 
$
1,085

 
$
3,531

 
$
3,104

Cost of sales
 
651

 
612

 
1,927

 
1,792

Gross margin
 
562

 
473

 
1,604

 
1,312

Selling, general and administrative
 
122

 
120

 
376

 
346

Research and development
 
213

 
191

 
642

 
560

Amortization expense for acquired intangible assets
 
4

 
3

 
11

 
10

Reorganization of business and other
 
8

 
2

 
25

 
10

Operating earnings
 
215

 
157

 
550

 
386

Loss on extinguishment or modification of long-term debt
 
(10
)
 
(1
)
 
(69
)
 
(82
)
Other expense, net
 
(82
)
 
(118
)
 
(268
)
 
(363
)
Earnings (loss) before income taxes
 
123

 
38

 
213

 
(59
)
Income tax (benefit) expense
 
(2
)
 
15

 
25

 
31

Net earnings (loss)
 
$
125

 
$
23

 
$
188

 
$
(90
)
 
 
 
 
 
 
 
 
 
Net earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.41

 
$
0.09

 
$
0.64

 
$
(0.35
)
Diluted
 
$
0.40

 
$
0.09

 
$
0.62

 
$
(0.35
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
304

 
258

 
295

 
255

Diluted
 
309

 
261

 
301

 
257

See accompanying notes.

3


Freescale Semiconductor, Ltd.
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(Unaudited)

 
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
October 3,
2014
 
September 27,
2013
 
October 3,
2014
 
September 27,
2013
Net earnings (loss)
 
$
125

 
$
23

 
$
188

 
$
(90
)
Other comprehensive (loss) earnings, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 

 

 

 
(4
)
Derivative instruments adjustments:
 
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
 
(9
)
 
3

 
(3
)
 
(3
)
Reclassification adjustment for items included in net earnings (loss)
 
(2
)
 
1

 

 

Post-retirement adjustments:
 
 
 
 
 
 
 
 
Gains arising during the period
 

 

 

 
2

Amortization of actuarial gains (losses) included in net earnings (loss)
 

 
1

 
(1
)
 
2

Other comprehensive (loss) earnings
 
(11
)
 
5

 
(4
)
 
(3
)
Comprehensive earnings (loss)
 
$
114

 
$
28

 
$
184

 
$
(93
)
See accompanying notes.

4


Freescale Semiconductor, Ltd.
Condensed Consolidated Balance Sheets
 
(in millions)
 
October 3,
2014 (unaudited)
 
December 31,
2013
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
737

 
$
747

Accounts receivable, net
 
605

 
388

Inventory, net
 
715

 
733

Other current assets
 
157

 
127

Total current assets
 
2,214

 
1,995

Property, plant and equipment, net
 
726

 
681

Intangible assets, net
 
54

 
52

Other assets, net
 
312

 
319

Total assets
 
$
3,306

 
$
3,047

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
 
Liabilities:
 
 
 
 
Current portion of long-term debt and capital lease obligations
 
$
35

 
$
93

Accounts payable
 
454

 
398

Accrued liabilities and other
 
392

 
371

Total current liabilities
 
881

 
862

Long-term debt
 
5,643

 
6,386

Other liabilities
 
375

 
393

Total liabilities
 
6,899

 
7,641

 
 
 
 
 
Shareholders’ deficit:
 
 
 
 
Preferred shares, par value $0.01 per share; 100 shares authorized, no shares issued and outstanding at October 3, 2014 and December 31, 2013
 

 

Common shares, par value $0.01 per share; 900 shares authorized, 304 and 258 issued and outstanding at October 3, 2014 and December 31, 2013, respectively
 
3

 
3

Additional paid-in capital
 
9,143

 
8,326

Accumulated other comprehensive earnings
 
45

 
49

Accumulated deficit
 
(12,784
)
 
(12,972
)
Total shareholders’ deficit
 
(3,593
)
 
(4,594
)
Total liabilities and shareholders’ deficit
 
$
3,306

 
$
3,047

See accompanying notes.

5


Freescale Semiconductor, Ltd.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
(in millions)
 
October 3,
2014
 
September 27,
2013
Cash flows from operating activities:
 
 
 
 
Net earnings (loss)
 
$
188

 
$
(90
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
200

 
206

Reorganization of business and other
 
25

 
10

Share-based compensation
 
50

 
36

Excess tax benefits from share-based compensation plans
 
(5
)
 

Deferred incomes taxes
 
4

 
18

Loss on extinguishment or modification of long-term debt, net
 
69

 
82

Deferred intellectual property revenue
 

 
(61
)
Other non-cash items
 
28

 
38

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(252
)
 
(67
)
Inventory, net
 
35

 
67

Accounts payable and accrued liabilities
 
55

 
(31
)
Other operating assets and liabilities
 
(57
)
 
(5
)
Net cash provided by operating activities
 
340

 
203

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(175
)
 
(107
)
Acquisitions and strategic investment activity
 
(11
)
 
(1
)
Proceeds from the sale of property, plant and equipment
 
1

 
6

Payments for purchased licenses and other assets
 
(63
)
 
(50
)
Net cash used for investing activities
 
(248
)
 
(152
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Retirements of and payments for long-term debt and capital lease obligations(1)
 
(1,451
)
 
(3,319
)
Debt issuance proceeds, net of debt issuance costs(1)
 
590

 
3,982

Restricted cash for bond redemptions
 

 
(782
)
Proceeds from equity offering, net of offering costs
 
717

 

Proceeds from stock option exercises and ESPP share purchases
 
44

 
62

Excess tax benefits from share-based compensation plans
 
5

 

Net cash used for financing activities
 
(95
)
 
(57
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(7
)
 
(5
)
Net decrease in cash and cash equivalents
 
(10
)
 
(11
)
Cash and cash equivalents, beginning of period
 
747

 
711

Cash and cash equivalents, end of period
 
$
737

 
$
700

 
 
 
 
 
(1) As discussed in Note 4, "Debt," Freescale Inc. issued a $2.7 billion term loan in the first quarter of 2014, of which $2.1 billion was a non-cash exchange with existing lenders and is not reflected in the above presentation.
See accompanying notes.

6


Freescale Semiconductor, Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except as noted)
(1) Overview and Basis of Presentation
Overview: Freescale Semiconductor, Ltd. (“Freescale Ltd.”), based in Austin, Texas, is 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.
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. We sell our products directly to original equipment manufacturers, distributors, original design manufacturers and contract manufacturers. Freescale 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.
On February 18, 2014, we completed an equity issuance in which we sold 40,250,000 of our common shares, including the exercise of the underwriters' option, at a public offering price of $18.50 per share (the "Q1 2014 Equity Offering"). The net proceeds of this offering were approximately $717 million, after deducting the costs directly attributable to the transaction including underwriters’ discounts and commissions and offering expenses. We contributed the net proceeds to Freescale Inc. to redeem, along with cash on hand, an aggregate of approximately $680 million in outstanding indebtedness and to pay approximately $38 million in call premiums associated with the debt extinguishment. (Refer to Note 4, “Debt,” for further discussion of the redemption and related transactions referenced in this section.)
Basis of Presentation: The accompanying condensed consolidated financial statements for Freescale Ltd. as of October 3, 2014 and December 31, 2013, and for the three and nine months ended October 3, 2014 and September 27, 2013 are unaudited, with the December 31, 2013 amounts included herein derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of October 3, 2014 and for all periods presented. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our December 31, 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 10, 2014 (the "Annual Report"). The results of operations for the three and nine months ended October 3, 2014 are not necessarily indicative of the operating results to be expected for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. In addition to the items described below, our significant accounting policies and critical estimates are disclosed in our Annual Report. Refer to “Significant Accounting Policies and Critical Estimates” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for more information.
Recent Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue

7


is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied using either the retrospective or cumulative effect transition method and are effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. We are evaluating the effects, if any, adoption of this guidance will have on our consolidated financial statements.
(2) Other Financial Data
Statements of Operations Supplemental Information
Loss on Extinguishment or Modification of Long-Term Debt
During the third quarter and first nine months of 2014, we recorded charges totaling $10 million and $69 million, respectively, in the Condensed Consolidated Statements of Operations associated with the debt redemption that occurred during the third quarter of 2014 along with the extinguishment of debt and the amendments to our senior secured credit facilities completed during the first quarter of 2014. These charges consisted of call premiums, the write-off of unamortized debt issuance costs and original issue discount ("OID") associated with the extinguished debt and other expenses not eligible for capitalization in accordance with ASC Subtopic 470-50, “Modifications and Extinguishments” (“ASC Subtopic 470-50”). (Refer to Note 4, “Debt,” for discussion of the transactions referenced in this section.)
During the third quarter and first nine months of 2013, we recorded charges of $1 million and $82 million, respectively, in the Condensed Consolidated Statements of Operations associated with the extinguishment and modification of existing debt and the issuance of secured notes and term loans. These charges consisted of the write-off of unamortized debt issuance costs, OID and other expenses not eligible for capitalization.
Other Expense, Net
The following table displays the amounts comprising Other expense, net in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2014
 
September 27,
2013
 
October 3,
2014
 
September 27,
2013
Interest expense
$
(84
)
 
$
(120
)
 
$
(274
)
 
$
(368
)
Interest income
3

 
2

 
9

 
4

Interest expense, net
(81
)
 
(118
)
 
(265
)
 
(364
)
Other, net
(1
)
 

 
(3
)
 
1

Other expense, net
$
(82
)
 
$
(118
)
 
$
(268
)
 
$
(363
)
Cash paid for interest was $95 million and $290 million during the third quarter and first nine months of 2014, respectively, and $103 million and $352 million during the third quarter and first nine months of 2013, respectively.
Net Earnings (Loss) Per Share
We calculate earnings per share (EPS) in accordance with ASC Topic 260, “Earnings per Share,” using the treasury stock method. Basic EPS is computed based on the weighted average number of common shares outstanding and unissued shares underlying vested restricted share units (RSUs) during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the net earnings of the Company. During both the third quarter and first nine months of 2014, approximately 10 million and during the third quarter and first nine months of 2013, approximately 14 million and 15 million, respectively, of the Company’s stock options, RSUs and a warrant were excluded from the calculation of diluted EPS because the inclusion of these awards would have been anti-dilutive. These awards could be dilutive in the future if the average estimated fair value of the common shares increases and is greater than the exercise price of these awards and the assumed repurchases of shares under the treasury stock method.

8


The following is a reconciliation of the numerators and denominators of the basic and diluted net earnings (loss) per common share computations for the periods presented:
 
 
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share amounts)
 
October 3,
2014
 
September 27,
2013
 
October 3,
2014
 
September 27,
2013
Basic net earnings (loss) per share:
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
125

 
$
23

 
$
188

 
$
(90
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (1) 
 
304

 
258

 
295

 
255

Basic net earnings (loss) per share
 
$
0.41

 
$
0.09

 
$
0.64

 
$
(0.35
)
Diluted net earnings (loss) per share:
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
125

 
$
23

 
$
188

 
$
(90
)
Denominator:
 
 
 
 
 
 
 
 
Number of shares used in basic computation (1)
 
304

 
258

 
295

 
255

Add: Incremental shares for dilutive effect of warrants (2)
 

 

 

 

Add: Incremental shares for dilutive effect of stock options (3)
 
2

 
2

 
2

 
2

Add: Incremental shares for dilutive effect of unvested RSUs (4)
 
3

 
1

 
4

 

Adjusted weighted average common shares outstanding
 
309

 
261

 
301

 
257

Diluted net earnings (loss) per share (5)
 
$
0.40

 
$
0.09

 
$
0.62

 
$
(0.35
)
 
(1)
Weighted average common shares outstanding includes outstanding common shares of the Company and unissued common shares underlying vested RSUs. The increase in weighted average common shares outstanding during the comparable periods is largely the result of the Q1 2014 Equity Issuance.
(2)
A warrant to purchase an aggregate of 10 million common shares at $36.12 per share was outstanding during all periods presented but was not included in the computation of diluted EPS because the warrant’s exercise price was greater than the average fair market value of the common shares.
(3)
Stock options to purchase an aggregate of less than 1 million common shares that were outstanding during both the third quarter and first nine months of 2014 and stock options to purchase an aggregate of 4 million common shares that were outstanding during both the third quarter and first nine months of 2013 were anti-dilutive and were not included in the computation of diluted EPS because the exercise price was greater than the average fair market value of the common shares or the number of shares assumed to be repurchased using the proceeds of unrecognized compensation expense, potential windfall tax benefits and exercise prices was greater than the weighted average number of shares underlying outstanding stock options.
(4)
Unvested RSUs of less than 1 million for both the third quarter and first nine months of 2014 and 1 million for the first nine months of 2013 were anti-dilutive and were not included in the computation of diluted EPS because the number of shares assumed to be repurchased using the proceeds of unrecognized compensation expense and potential windfall tax benefits was greater than the weighted average number of outstanding unvested RSUs. There were no unvested RSUs that were anti-dilutive during the third quarter of 2013.
(5)
No dilutive securities have been included in the diluted net loss per share calculation in the period when a net loss was incurred.
Balance Sheets Supplemental Information
Inventory, Net
Inventory, net consisted of the following:
 
 
October 3,
2014
 
December 31,
2013
Work in process and raw materials
$
489

 
$
497

Finished goods
226

 
236

Inventory, net
$
715

 
$
733

As of October 3, 2014 and December 31, 2013, we had $51 million and $61 million, respectively, in reserves for inventory deemed obsolete or in excess of forecasted demand. If actual future demand or market conditions are less favorable than those projected by our management, additional inventory write-downs may be required.
Property, Plant and Equipment, Net
Depreciation and amortization expense was $44 million and $129 million during the third quarter and first nine months of 2014, respectively, and $45 million and $136 million during the third quarter and first nine months of 2013, respectively.

9


Accumulated depreciation and amortization was $2,846 million and $2,774 million at October 3, 2014 and December 31, 2013, respectively.

Accumulated Other Comprehensive Earnings
 
 
Unrealized
(Losses)
Gains on
Derivatives
 
Unrealized
Gains (Losses) on
Post-retirement
Obligations
 
Foreign Currency
Translation
 
Total
Balance at January 1, 2014
$
(6
)
 
$
36

 
$
19

 
$
49

Current period net change
(3
)
 
(1
)
 

 
(4
)
Balance at October 3, 2014
$
(9
)
 
$
35

 
$
19

 
$
45

(3) Fair Value Measurement
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are market inputs participants would use in valuing the asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect management's assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and,
Level 3 – inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure cash and cash equivalents, derivative contracts and certain other assets and liabilities, as required, at fair value on a recurring basis. The tables below set forth, by level, the fair value of these assets and liabilities as of October 3, 2014 and December 31, 2013, respectively. The table does not include assets and liabilities which are measured at historical cost or on any basis other than fair value. In the first nine months of 2014 and 2013, there were no transfers between Level 1 and Level 2. We had no Level 3 instruments at October 3, 2014 or December 31, 2013.
 
 
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
As of October 3, 2014
Total    
 
(Level 1)
 
(Level 2)
Assets
 
 
 
 
 
Time deposits (1)
$
332

 
$
332

 
$

Money market mutual funds (1)
25

 
25

 

Foreign currency derivative contracts (2)
3

 

 
3

Interest rate swap agreements (3)
1

 

 
1

Total assets
$
361

 
$
357

 
$
4

Liabilities
 
 
 
 
 
Foreign currency derivative contracts (2)
$
10

 
$

 
$
10

Interest rate swap agreements (3)
6

 

 
6

Commodity derivative contracts (4)
2

 

 
2

Total liabilities
$
18

 
$

 
$
18


10


 
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
As of December 31, 2013
Total    
 
(Level 1)
 
(Level 2)
Assets
 
 
 
 
 
Time deposits (1)
$
339

 
$
339

 
$

Money market mutual funds (1)
5

 
5

 

Foreign currency derivative contracts (2)
2

 

 
2

Interest rate swap agreements (3)
1

 

 
1

Total assets
$
347

 
$
344

 
$
3

Liabilities
 
 
 
 
 
Foreign currency derivative contracts (2)
$
5

 
$

 
$
5

Interest rate swap agreements (3)
6

 

 
6

Commodity derivative contracts (4)
3

 

 
3

Total liabilities
$
14

 
$

 
$
14

The following footnotes indicate where the noted items are reported in our Condensed Consolidated Balance Sheets at October 3, 2014 and December 31, 2013:
(1)
Time deposits and money market mutual funds are reported as cash and cash equivalents. Funds invested in money market mutual funds increased from December 31, 2013 to October 3, 2014 to maximize the combination of fee offsets on bank account holdings and interest income.
(2)
Foreign currency derivative contracts are reported as other current assets or accrued liabilities and other.
(3)
Interest rate swap arrangements are reported as current assets, other assets, accrued liabilities and other or other liabilities.
(4)
Commodity derivative contracts are reported as other current assets and accrued liabilities and other.
Valuation Methodologies
In determining the fair value of our interest rate swap derivatives, we use the present value of expected cash flows based on market observable interest rate yield curves commensurate with the term of each instrument. For foreign currency and commodity derivatives, our approach is to use forward contract valuation models employing market observable inputs, such as spot and forward rates for currencies and commodities. Since we only use observable inputs in our valuation of our derivative assets and liabilities, they are considered Level 2. Refer to Note 5, “Risk Management,” for further information on our foreign currency and commodity derivative contracts and our interest rate swap agreements. During the second quarter of 2014, we completed a business acquisition and recorded contingent consideration as a result of that transaction. Under the terms of the acquisition, we determined in the third quarter of 2014 that we are required to pay the $2 million obligation during the first half of 2015.
Fair Value of Other Financial Instruments
In addition to the assets and liabilities described above, our financial instruments also include accounts receivable, other investments, accounts payable, accrued liabilities and long-term debt. Except for the fair value of our long-term debt, which was approximately $5,710 million, exclusive of $35 million of current maturities, at October 3, 2014, and approximately $6,566 million, exclusive of $93 million of current maturities, at December 31, 2013 (as determined based upon quoted market prices), the fair values of these financial instruments were not materially different from their carrying or contract values on those dates.

11


(4) Debt
The carrying value of our long-term debt at October 3, 2014 and December 31, 2013 consisted of the following:
 
 
October 3,
2014
 
December 31,
2013
2016 Term Loan
$

 
$
347

2020 Term Loan

 
2,349

Amended 2020 Term Loan
2,680

 

2021 Term Loan
785

 
790

2019 Revolver

 

Senior secured 5.00% notes due 2021
500

 
500

Senior secured 6.00% notes due 2022
960

 
960

Senior unsecured floating rate notes due 2014

 
57

Senior unsecured 10.75% notes due 2020
473

 
473

Senior unsecured 8.05% notes due 2020
280

 
739

Senior subordinated 10.125% notes due 2016

 
264

Total debt
5,678

 
6,479

Less: current maturities
(35
)
 
(93
)
Total long-term debt
$
5,643

 
$
6,386

Third Quarter of 2014 Debt Redemption Transaction
On September 29, 2014, after the requisite notice period, Freescale Inc. redeemed $100 million principal amount of the senior unsecured 8.05% notes due 2020 (the "8.05% Unsecured Notes") and recorded a $10 million charge, reflective of call premiums and the write-off of unamortized debt issuance costs on the extinguished notes.
First Quarter of 2014 Revolver Amendment and Debt Redemption Transactions
On February 10, 2014, Freescale Inc. entered into an amendment to its existing revolving credit facility which became effective on February 18, 2014 (the "Q1 2014 Revolver Amendment"). Pursuant to the amendment, the existing revolving credit facility was replaced with a new revolving credit facility with an aggregate of $400 million of commitments (the "2019 Revolver"). The amendment also extended the maturity of the new revolving credit facility to February 1, 2019. Except as described above, the 2019 Revolver is subject to substantially the same terms and conditions as the existing revolving credit facility, including the same pro rata split between United States Dollar and alternative currency availability.
On March 20, 2014, after the requisite notice period, Freescale Inc. utilized approximately $717 million of net proceeds from the Q1 2014 Equity Offering, which were contributed to Freescale Inc. by Freescale Ltd. and certain of its subsidiaries, along with cash on hand, to redeem (i) the remaining $264 million of senior subordinated 10.125% notes due 2016, (ii) the remaining $57 million of senior unsecured floating rate notes due 2014 and (iii) $359 million of the outstanding principal amount of the 8.05% Unsecured Notes and to pay call premiums of $38 million and accrued interest of $11 million. Because cash proceeds were used for the redemption of debt, which relieved Freescale Inc., Freescale Ltd. and certain other Freescale Ltd. subsidiaries of their obligations associated with the aforementioned liabilities outstanding under these notes, the transaction was accounted for as an extinguishment of debt in accordance with ASC Subtopic 470-50.
In connection with these transactions, we recorded a charge of $48 million in the Condensed Consolidated Statement of Operations during the first nine months of 2014 comprised of call premiums totaling $38 million along with the write-off of unamortized debt issuance costs and other expenses not eligible for capitalization under ASC Topic 470-50.
First Quarter of 2014 Term Loan Refinancing Transaction
On March 4, 2014, Freescale, Inc. entered into an amendment and refinancing agreement to its senior secured term loan facilities, which effectively (i) lowered the interest rate of our existing $347 million senior secured term loan facility maturing in December 2016 (the “2016 Term Loan”), (ii) extended the maturity of the 2016 Term Loan to March 2020 to coincide with the maturity of its existing $2.37 billion senior secured term loan facility maturing in March 2020 (the “2020 Term Loan”) and (iii) lowered the interest rate applicable to the 2020 Term Loan. This transaction was referred to as the "Q1 2014 Term Loan Refinancing Transaction."
In connection with this transaction, (i) a portion of the existing lenders under the 2016 Term Loan agreed to the lower interest rate and extended maturity, (ii) a portion of the existing lenders under the 2020 Term Loan agreed to the lower interest rate and (iii) Freescale used the proceeds of new senior secured term loans to refinance in full the 2016 Term Loan lenders and the 2020 Term Loan lenders who did not agree to the amendment. As a result, the amended 2016 Term Loan, the amended 2020 Term Loan and the new senior secured term loans, now have identical terms and are treated as a single tranche of senior

12


secured term loans with an initial aggregate principal amount of $2.72 billion, collectively referred to as the "Amended 2020 Term Loan.” (Refer to further discussion of the key terms of this instrument described in the Credit Facility discussion below.)
The Amended 2020 Term Loan was issued at par, but was originally recorded at a $21 million discount, reflecting a portion of the remaining OID previously attributable to the 2020 Term Loan which was deemed exchanged for the Amended 2020 Term Loan. A portion of the proceeds from the issuance of the Amended 2020 Term Loan was used to prepay portions of the 2016 and 2020 Term Loans, thus relieving Freescale Inc., Freescale Ltd. and certain other Freescale Ltd. subsidiaries of their obligations associated with that liability. This portion of the Q1 2014 Term Loan Refinancing Transaction constitutes an extinguishment of debt under ASC Subtopic 470-50 and was accounted for accordingly. A significant portion of our lenders under the Amended 2020 Term Loan were lenders under the 2016 and 2020 Term Loans. Effectively, these lenders exchanged a portion of the previous loans for the Amended 2020 Term Loan. This portion of the transaction was accounted for as an exchange that was a non-substantial modification of debt under ASC Subtopic 470-50, as the difference between the present value of the cash flows under the Amended 2020 Term Loan and the present value of the cash flows under each of the 2016 and 2020 Term Loans held by these lenders was less than 10%. The remaining portion of the Amended 2020 Term Loan related to new funds committed and was accounted for as a new debt issuance.
In connection with this transaction, we incurred approximately $6 million of fees and expenses, of which $1 million was capitalized and will be amortized over the term of the Amended 2020 Term Loan. We recorded a charge of $11 million during the first nine months of 2014 associated with this transaction, which was comprised of the write-off of unamortized debt issuance costs, OID and other expenses not eligible for capitalization under ASC Subtopic 470-50.
Credit Facility
At October 3, 2014, Freescale Inc.’s senior secured credit facilities (the "Credit Facility") included (i) the Amended 2020 Term Loan, (ii) the senior secured term loan facility maturing in 2021 (the "2021 Term Loan") and (iii) the 2019 Revolver, including letters of credit and swing line loan sub-facilities, with a committed capacity of $400 million. At October 3, 2014, the interest rate on the Amended 2020 Term Loan and the 2021 Term Loan was 4.25% and 5.00%, respectively. The available capacity under the 2019 Revolver was $384 million, as reduced by $16 million of outstanding letters of credit at October 3, 2014.
Amended 2020 Term Loan
At October 3, 2014, $2,699 million was outstanding under the Amended 2020 Term Loan, which will mature on March 1, 2020. The Amended 2020 Term Loan bears interest, at Freescale Inc.'s option, at a rate equal to a spread over either (i) a base rate equal to the higher of either (a) the prime rate of Citibank, N.A. or (b) the federal funds rate, plus one-half of 1%; or (ii) a LIBOR rate based on the cost of funds for deposit in the currency of borrowing for the relevant interest period, adjusted for certain additional costs. The third amended and restated credit agreement as of March 1, 2013 as amended by the Q1 2014 Revolver Amendment and the Q1 2014 Term Loan Refinancing transaction (the "Credit Agreement") governs the terms of the Credit Facility and based on our total leverage ratio provides that the spread over LIBOR with respect to the Amended 2020 Term Loan is 3.25%, with a LIBOR floor of 1.00%. Under the Credit Agreement, Freescale Inc. is required to repay a portion of the Amended 2020 Term Loan in quarterly installments in aggregate annual amounts equal to 1% of the initial balance of the Amended 2020 Term Loan, or $27 million annually. At October 3, 2014, the Amended 2020 Term Loan was recorded on the Condensed Consolidated Balance Sheet at a $19 million discount which is subject to accretion to par value over the term of the loan using the effective interest method.
2021 Term Loan
At October 3, 2014, $792 million was outstanding under the 2021 Term Loan, which will mature on January 15, 2021. The 2021 Term Loan bears interest, at Freescale Inc.'s option, at a rate equal to a spread over either (i) a base rate equal to the higher of either (a) the prime rate of Citibank, N.A. or (b) the federal funds rate, plus one-half of 1%; or (ii) a LIBOR rate based on the cost of funds for deposit in the currency of borrowing for the relevant interest period, adjusted for certain additional costs. Based on our total leverage ratio, the Credit Agreement provides that the spread over LIBOR with respect to the 2021 Term Loan is 3.75%, with a LIBOR floor of 1.25%. Under the Credit Agreement, Freescale Inc. is required to repay a portion of the 2021 Term Loan in quarterly installments in aggregate annual amounts equal to 1% of the initial outstanding balance, or $8 million annually. At October 3, 2014, the 2021 Term Loan was recorded on the Condensed Consolidated Balance Sheet at a $7 million discount which is subject to accretion to par value over the term of the loan using the effective interest method.
The obligations under the Credit Agreement are unconditionally guaranteed by the same parties and in the same manner as under the credit agreement that was in effect prior to the Q1 2014 Revolver Amendment and the Q1 2014 Term Loan Refinancing Transaction.

13


Senior Notes
Freescale Inc. had an aggregate principal amount of $2,213 million in senior notes outstanding at October 3, 2014, consisting of (i) $500 million of 5.00% senior secured notes due 2021 (the "5.00% Secured Notes"), (ii) $960 million of 6.00% senior secured notes due 2022 (the "6.00% Secured Notes"), (iii) $473 million of 10.75% senior unsecured notes due 2020 (the "10.75% Unsecured Notes) and (iv) $280 million of 8.05% Unsecured Notes (collectively, the "Senior Notes"). With regard to these 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 for the 6.00% Secured Notes; (iii) every February 1st and August 1st for the 10.75% Unsecured Notes; and (iv) every February 1st and August 1st for the 8.05% Unsecured Notes.
Covenant Compliance
The Credit Agreement and the indentures governing the senior secured and senior unsecured notes (the "Indentures") contain restrictive covenants that limit the ability of our subsidiaries to, among other things, incur or guarantee additional indebtedness or issue preferred shares, pay dividends and make other restricted payments, impose limitations on the ability of our restricted subsidiaries to pay dividends or make other distributions, create or incur certain liens, make certain investments, transfer or sell assets, engage in transactions with affiliates and merge or consolidate with other companies or transfer all or substantially all of our assets. Under the Credit Agreement and Indentures, Freescale Inc. must comply with conditions precedent that must be satisfied prior to any borrowing.
As of October 3, 2014, Freescale Inc. was in compliance with the covenants under the Credit Facility and the Indentures and met the total leverage ratio of 6.50:1 or lower, the senior secured first lien leverage ratio of 4.00:1 or lower and the fixed charge coverage ratio of 2.00:1 or greater but did not meet the consolidated secured debt ratio of 3.25:1 or lower. As of October 3, 2014, Freescale Inc.’s total leverage ratio was 4.72:1, senior secured first lien leverage ratio was 3.98:1, fixed charge coverage ratio was 3.37:1 and consolidated secured debt ratio was 4.68:1. Accordingly, we are currently restricted from incurring liens on assets securing indebtedness, except as otherwise permitted by the Indentures. The fact that we did not meet one of these ratios does not result in any default under the Credit Agreement or the Indentures.
Hedging Transactions
During the third quarter of 2014, we entered into cash flow designated interest rate swap agreements to hedge a portion of our variable rate debt against exposure to increasing LIBOR rates which may exceed the LIBOR floor on the Amended 2020 Term Loan in future periods. These agreements fix the interest rate on a portion of our variable rate debt beginning in 2016 and continuing through 2018. (Refer to Note 5, “Risk Management,” for further details of these hedging agreements.)
Prior to 2013, Freescale Inc. utilized interest rate swap and interest rate cap agreements with various counterparties as a hedge of the variable cash flows of our variable interest rate debt through 2016. In connection with the refinancing transaction in the first quarter of 2013, under which the majority of our debt essentially became fixed rate debt as long as LIBOR rates remain below the respective LIBOR floors on our variable rate term loans, we effectively terminated these previous agreements and fixed the remaining payment stream.
Debt Service
We are required to make debt service principal payments under the terms of our debt agreements. As of October 3, 2014, future obligated debt payments are $9 million during the remainder of 2014, $35 million in 2015, $35 million in 2016, $35 million in 2017, $35 million in 2018, $35 million in 2019 and $5,520 million thereafter. Subsequent to the end of the third quarter of 2014, Freescale Inc. delivered notice of an additional $100 million redemption of 8.05% Unsecured Notes to occur during the fourth quarter of 2014. Accordingly, an incremental $100 million of principal payments previously obligated in 2020 will be paid in the fourth quarter of 2014.
(5) Risk Management
Foreign Currency Risk
The functional currency for all of our foreign operations is the U.S. dollar. Accordingly, exchange rate gains and losses are recognized on transactions in currencies other than the U.S. dollar and included in operations for the period in which the exchange rates changed.
In order to reduce the exposure of our financial results resulting from 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 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 jurisdictions 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.

14


At October 3, 2014 and December 31, 2013, we had net outstanding foreign currency exchange contracts not designated as accounting hedges with notional amounts totaling approximately $89 million and $112 million, respectively, which are accounted for at fair value. 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 both October 3, 2014 and December 31, 2013. Forward contract (losses) gains of $(4) million and $(3) million for the third quarter and first nine months of 2014, respectively, and $1 million and $(3) million for the third quarter and first nine months of 2013, respectively, were recorded in Other expense, net in the Condensed Consolidated Statements 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 as of October 3, 2014 and December 31, 2013: 
Buy
 
October 3,
2014
 
December 31,
2013
Chinese Renminbi
 
$
23

 
$
30

Japanese Yen
 
$
19

 
$
15

Malaysian Ringgit
 
$
19

 
$
16

Euro
 
$
9

 
$
29

Hong Kong Dollar
 
$
3

 
$
1

Cash Flow Hedges
We use foreign currency exchange contracts to hedge future expected cash flows associated with Net sales, Cost of sales, Selling, general and administrative expenses and Research and development expenses. These forward 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 under ASC Topic 815 as of October 3, 2014 and December 31, 2013:
Buy (Sell)
 
October 3,
2014
 
December 31,
2013
 
Hedged Exposure
Malaysian Ringgit
 
$
121

 
$
80

 
Cost of sales
Chinese Renminbi
 
$
131

 
$
93

 
Cost of sales
 
$
34

 
$
23

 
Selling, general and administrative
 
$
34

 
$
23

 
Research and development
Japanese Yen
 
$
52

 
$
35

 
Cost of sales
 
 
18

 

 
Selling, general and administrative
Euro
 
$
(53
)
 
$
(33
)
 
Net sales
At October 3, 2014 and December 31, 2013, we had cash flow designated forward contracts with a total fair value of net unrealized losses of $6 million and $2 million, respectively. Gains of $1 million and less than $1 million during the third quarter and first nine months of 2014, respectively, and less than $1 million and $2 million during the third quarter and first nine months of 2013, respectively, were recorded in the Condensed Consolidated Statements of Operations related to our realized results associated with these cash flow hedges. 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 forecasted expenses being hedged.
Commodity Price Risk
We operate facilities that consume commodities, and we have established forecasted transaction risk management programs to mitigate fluctuations in the fair value and the volatility of future cash flows caused by changes in commodity prices. These programs reduce, but do not always entirely eliminate, the impact of commodity price movements.
We use gold swap contracts to hedge our exposure to increases in the price of gold and designate such contracts as cash flow hedges under ASC Topic 815. At October 3, 2014 and December 31, 2013, these contracts had net outstanding notional amounts totaling 17,000 ounces and 27,500 ounces, respectively, and are accounted for at fair value. All of these outstanding gold swap contracts have original maturities of 15 months or less. The fair value of these contracts was a net unrealized loss of $2 million and $3 million at October 3, 2014 and December 31, 2013, respectively. During both the third quarter and first nine months of 2014, losses of less than $1 million and during both the third quarter and first nine months of 2013 losses of $2 million were recorded in cost of sales related to our realized results attributable to these gold swap contracts. Management

15


believes that these financial instruments will not subject us to undue risk of fluctuations in the price of gold because gains and losses on these swap contracts should offset losses and gains on the forecasted gold wire expense being hedged.
Interest Rate Risk
We use interest rate swaps to assist in managing the interest rate risk associated with the variable rate portion of our debt portfolio. During the third quarter of 2014, we entered into cash flow designated interest rate swap agreements that fix the interest rate on a portion of our variable rate debt beginning in 2016. We are required to pay the counterparties a stream of fixed rate interest payments at a weighted average rate of: (i) 1.62% on a notional amount of $1.4 billion in 2016, (ii) 2.43% on a notional amount of $1.1 billion in 2017 and (iii) 2.95% on a notional amount of $800 million in 2018. In connection with these interest rate swap agreements, we will receive variable rate payments from the counterparties based on 1-month LIBOR, subject to a LIBOR floor of 1%, which coincides with the LIBOR floor on the Amended 2020 Term Loan. The fair value of the interest rate swap agreements was an unrealized loss of $1 million at October 3, 2014. (Refer to Note 4, “Debt,” for further details of our variable rate indebtedness.)
Prior to 2013, we used interest rate swap agreements to assist in managing the variable rate portion of our debt portfolio. In connection with the debt refinancing transaction that occurred during the first quarter of 2013, under which the majority of our debt became effectively fixed rate debt as long as LIBOR rates remain below the respective LIBOR floors on our variable rate term loans, we either terminated or, in lieu of terminating the agreements and incurring a penalty, entered into offsetting interest rate swap agreements which resulted in a $15 million liability to be paid through December 1, 2016, the end of the original expiration of the interest rate swap agreements. The balance of this obligation at October 3, 2014 was $10 million, after $3 million of this liability was paid during the first nine months of 2014. The change in fair value arising from the offsetting swap agreements along with the existing agreements are recorded in Other expense, net in the Condensed Consolidated Statements of Operations.
Counterparty Risk
Outstanding financial derivative instruments expose us to credit losses 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 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 October 3, 2014, we believe that our exposure to counterparty risk is immaterial.
(6) Share and Equity-based Compensation
2011 Omnibus Incentive Plan
Non-qualified Options
During the first nine months of 2014, we granted approximately 2.4 million stock options under the 2011 Omnibus Incentive Plan, as amended and restated, (the "2011 Plan") to certain executives and employees. Included in this amount were 2.1 million stock options granted on January 5, 2014 as part of the annual long-term incentive grants (the "2014 Annual Grant"). The awards granted in connection with the Annual Grant had a grant date fair value of $6.67 per share and an exercise price of $15.37 per share, which was equal to the stock price on January 3, 2014, the last trading day before the award date. Total compensation costs associated with the stock options under the 2014 Annual Grant was $11 million, net of estimated forfeitures.
Under the 2011 Plan, we have granted approximately 7.2 million non-qualified stock options in Freescale Ltd. (the “2011 Options”) with exercise prices ranging from $8.73 to $23.87 per share, to certain qualified participants, which remain outstanding as of October 3, 2014. The 2011 Options generally vest at a rate of 25% of the total grant on each of the first, second, third and fourth anniversaries of the date of grant, and are subject to the terms and conditions of the 2011 Plan and related award agreements. As of October 3, 2014, we had approximately $29 million of unamortized expense, net of estimated forfeitures, which is being amortized on a straight-line basis over a period of four years to additional paid-in capital.

16


The fair value of the 2011 Options was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the model are outlined in the following table:
 
Nine Months Ended
 
October 3,
2014
 
September 27,
2013
Weighted average grant date fair value per share
$
6.96

 
$
7.03

Weighted average assumptions used:
 
 
 
Expected volatility
49.06
%
 
60.73
%
Expected lives (in years)
4.75

 
4.75

Risk free interest rate
1.42
%
 
0.75
%
Expected dividend yield
%
 
%
In accordance with ASC Topic 718, the computation of the expected volatility assumptions used in the Black-Scholes calculations for grants was based on historical volatilities and implied volatilities of peer companies. The Company utilized the volatilities of peer companies due to our lack of extensive history as a public company and the fact that our current equity was not publicly traded prior to May 26, 2011. The peer companies operate in the semiconductor industry and are of similar size. When establishing the expected life assumptions, we use 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.
A summary of changes in the 2011 Options outstanding during the nine months ended October 3, 2014 is presented below:
 
Stock Options
(in thousands)
 
Wtd. Avg.
Exercise Price
Per Share
 
Wtd. Avg.
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in millions)
Balance at January 1, 2014
5,807

 
$
13.09

 
6
 
$
17

Granted
2,419

 
$
16.41

 
 
 
 
Terminated, canceled or expired
(360
)
 
$
14.59

 

 
 
Exercised
(714
)
 
$
12.63

 

 
 
Balance at October 3, 2014
7,152

 
$
14.18

 
5
 
$
33

Exercisable options at October 3, 2014
1,495

 
$
13.10

 
5
 
$
8

The intrinsic value of options exercised under this plan during the first nine months of 2014 and 2013 was $5 million and less than $1 million, respectively.
Restricted Share Units
During the first nine months of 2014, we granted approximately 4.1 million RSUs to certain executives and employees under the 2011 Plan. Included in this amount were 3.8 million RSUs granted in connection with the 2014 Annual Grant with a grant date fair value of $15.37 per RSU and total compensation cost of $45 million, net of estimated forfeitures. While RSUs generally vest at a rate of 25% of the total grant on the first, second, third and fourth anniversaries of the date of grant, some RSUs vest at a rate of one-third of the total grant on each of the first, second and third anniversaries of the date of grant, or other vesting schedule depending on the award, and are subject to the terms and conditions of the 2011 Plan and related award agreements. RSUs are not entitled to dividends or voting rights, if any, until the underlying common shares are delivered. The fair value of the RSU awards is recognized on a straight-line basis over the vesting period.
Also during the first nine months of 2014, we granted approximately 0.9 million performance-based RSUs ("TSR") to certain executives largely in connection with the 2014 Annual Grant. Each TSR, which cliff vests on the third anniversary of the date of grant, entitles the grant recipient to receive from 0 to 1.50 common shares for each of the target units awarded based on the relative total shareholder return of the Company's share price as compared to a set of peer companies. The Company estimates the fair value of the TSRs using a Monte Carlo valuation model, which includes a modifier for market results. The grant date fair value for the TSRs granted in connection with the Annual Grant was $15.98 per TSR, with a total compensation cost of $12 million, net of estimated forfeitures. TSRs are amortized on a straight-line basis over a period of three years to additional paid-in capital. The assumptions used in the Monte Carlo model, outside of projections of market results, are outlined in the following table:

17


 
Nine Months Ended
 
October 3,
2014
 
September 27,
2013
Weighted average grant date fair value per share
$
16.13

 
$
17.01

Weighted average assumptions used:
 
 
 
Expected volatility
48.40
%
 
48.32
%
Expected lives (in years)
2.98

 
2.75

Risk free interest rate
0.80
%
 
0.33
%
Expected dividend yield
%
 
%
We also have outstanding performance-based RSUs ("PRSUs") that were granted to certain executives of the Company under the 2011 Plan. The PRSUs granted, to the extent earned, vest at a rate of one-third of the total grant on each of the first, second and third anniversaries of the date of grant for certain executives or vest fully on the third anniversary of the date of grant for PRSUs granted to our Chief Executive Officer ("CEO"). The number of common shares underlying each PRSU is contingent on Company performance measured by annual revenue and earnings per share goals established by the Compensation and Leadership Committee of the Board of Directors for each annual performance period. Each PRSU entitles the grant recipient to receive from 0 to 1.50 common shares for certain executives or 0 to 1.0 common shares for PRSUs granted to our CEO based on the Company’s achievement of the performance goals for each performance period.
As of October 3, 2014 we had approximately $89 million of unamortized expense, net of expected forfeitures, which is being amortized on a straight-line basis to additional paid-in capital over a period of three or four years, depending on the award, for RSUs and three years for TSRs and PRSUs. Under the terms of the RSU, TSR and PRSU award agreements, common shares underlying these awards are issued to the participant upon vesting of the award based on the passage of time for the RSUs and based on both the passage of time and performance results for the TSRs and PRSUs.
A summary of changes in the RSUs, TSRs and PRSUs outstanding under the 2011 Plan during the nine months ended October 3, 2014 is presented below:
 
RSUs, TSRs and PRSUs
(in thousands)
 
Wtd. Avg. Grant
Date Fair Value
Per Share
Non-vested RSU, TSR and PRSU balance at January 1, 2014
7,291

 
$
14.04

Granted
5,049

 
$
15.89

Issued
(1,733
)
 
$
14.21

Terminated, canceled or expired
(486
)
 
$
14.55

Non-vested RSU, TSR and PRSU balance at October 3, 2014
10,121

 
$
14.91

The weighted average grant date fair value of all RSUs, TSRs and PRSUs granted during the first nine months of 2014 and 2013 was $15.89 per share and $14.55 per share, respectively. The total intrinsic value of RSUs, TSRs and PRSUs issued under this plan during the first nine months of 2014 and 2013 was $42 million and $11 million, respectively.
2006 Management Incentive Plan and 2007 Employee Incentive Plan
During the first nine months of 2014, approximately 881 thousand and 275 thousand stock options were exercised under the 2006 Management Incentive Plan and the 2007 Employee Incentive Plan, respectively, with weighted average strike prices of $6.86 and $6.40, respectively.
Employee Share Purchase Plan
Our Employee Share Purchase Plan (“ESPP”), as amended and restated, has approximately 7 million remaining common shares reserved for future issuance. Under the ESPP, eligible participants are allowed to purchase common shares of Freescale through payroll deductions of up to 15% of their compensation on an after-tax basis. The price an employee pays per share is 85% of the fair market value of the common shares on the close of the last trading day of the purchase period. The ESPP has two six-month purchase periods, the first of which begins on January 1 and the second of which begins on July 1. On January 3, 2014, approximately 902 thousand common shares of Freescale were issued to participating employees under the ESPP for the second half of 2013 purchase period at a discounted price of $13.64 per share. On July 3, 2014, approximately 722 thousand common shares of Freescale were issued to participating employees under the ESPP for the first half of 2014 purchase period at a discounted price of $19.98 per share. During the first nine months of 2014 and 2013, we recognized $4 million and $3 million, respectively, of compensation costs related to the 15% discount offered under this plan.

18


(7) Income Taxes
Income taxes for the interim periods presented have been included in the Condensed Consolidated Financial Statements on the basis of an estimated annual effective tax rate. Our effective tax rate is impacted by the mix of earnings and losses by taxing jurisdictions. Although the Company is a Bermuda entity with a statutory income tax rate of zero, the earnings of many of the Company’s subsidiaries are subject to taxation in the U.S. and other foreign jurisdictions. We incur minimal income tax expense on our U.S. earnings due to valuation allowances recorded on substantially all the Company’s U.S. net deferred tax assets.
On an ongoing basis, we assess the recoverability of our deferred tax assets by considering all available positive and negative evidence and provide a valuation allowance for deferred tax assets if it is more likely than not that these assets will expire before the Company is able to realize their benefit or if future deductibility is uncertain. Although the Company has identified positive evidence such as cumulative domestic profits over the past three years, management believes that a U.S. valuation allowance is still required. Management believes that the weight of positive and negative evidence could change in the future such that the U.S. valuation allowance may 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. This ongoing assessment of positive and negative evidence 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, we are not able to reasonably estimate when sufficient positive evidence will require reversal of the valuation allowance or the impact such reversal will have on the Company’s effective tax rate. The valuation allowance on our U.S. deferred tax assets at October 3, 2014 was $1.2 billion. Any release of the valuation allowance will be recorded as a tax benefit increasing net earnings.
During the third quarter and first nine months of 2014, we recorded an income tax (benefit) provision of $(2) million and $25 million, respectively, predominately related to our foreign operations. The income tax provision recorded during the third quarter and first nine months of 2014 included income tax (benefit) expense of $(4) million and $2 million, respectively, associated with discrete events. The discrete benefit in the third quarter of 2014 was related to (i) a partial release of foreign valuation allowance due to realizability of foreign research credits and (ii) the impact of adjustments necessary in connection with tax returns filed during the period. The discrete expense for the first nine months of 2014 also included an increase in the domestic valuation allowance resulting from the deferred tax asset created by the excess tax benefit from share-based awards during the period. The excess tax benefit resulted from deductions related to equity compensation in excess of compensation recognized for financial reporting and was recorded in additional paid-in capital in accordance with ASC Subtopic 718-740, "Income Taxes." 
For the third quarter and first nine months of 2013, we recorded an income tax provision of $15 million and $31 million, respectively, which related primarily to our foreign operations. These provisions included a $5 million and $4 million tax expense during the third quarter and first nine months of 2013, respectively, associated with discrete events related primarily to withholding taxes on intellectual property royalties.
The Company does not expect the liability for unrecognized tax benefits to decrease substantially in the next twelve months. Certain of our income tax returns for the 2004 through 2012 tax years are currently under examination by various taxing authorities around the world. Although the resolution of open audits is highly uncertain, management considers it unlikely that the results of these examinations will have a material impact on our financial condition or results of operations.
(8) Commitments and Contingencies
Commitments
Product purchase commitments associated with our strategic manufacturing relationships with our wafer foundries and for assembly and test services include take or pay provisions based on volume commitments for work in progress and forecasted demand based on 18-month rolling forecasts, which are adjusted monthly. The commitment under these relationships was $139 million as of October 3, 2014.
Litigation
We are a defendant in various lawsuits and are subject to various claims which arise in the normal course of business. The Company records an associated liability when a loss is probable and the amount is reasonably estimable.
From time to time, we are involved in legal proceedings arising in the ordinary course of business, including tort, contractual and customer disputes, claims before the United States Equal Employment Opportunity Commission and other employee grievances, and intellectual property litigation and infringement claims. Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling our products. Under agreements with Motorola 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

19


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 and other intellectual property and/or prohibit us from manufacturing or selling one or more products in certain jurisdictions, which could adversely impact our operating results in future periods. If any of those events were to occur, our business, financial condition and results of operations could be adversely affected.
(9) Reorganization of Business and Other
Nine months ended October 3, 2014
2012 Strategic Realignment
As a result of the strategic review initiated in 2012 (the "2012 Strategic Realignment"), we identified opportunities to accelerate revenue growth and improve profitability. We have continued to shift our research and development investment and sales force to reflect this strategic realignment. Since the inception of the plan, we have recorded a total of $95 million in net charges to reorganization of business and other for employee termination benefits and other exit costs in connection with re-allocating research and development resources and re-aligning sales resources, as further described below.
At each reporting date, we evaluate our accruals for exit costs and employee separation costs, which consist primarily of termination benefits (principally severance payments), to ensure that our accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out our plans or because employees previously identified for separation resign unexpectedly and do not receive severance or are redeployed due to circumstances not foreseen when the original plans were initiated. We reverse accruals to earnings when it is determined they are no longer required.
The following table displays a roll-forward from January 1, 2014 to October 3, 2014 of the employee separation and exit cost accruals established related to the 2012 Strategic Realignment:
(in millions, except headcount)
 
Accruals at
January 1, 2014
 
Charges
 
Adjustments
 
Usage
 
Accruals at
October 3, 2014
Employee Separation Costs
 
 
 
 
 
 
 
 
 
 
Supply chain
 
$
5

 
$
2

 
$

 
$
(5
)
 
$
2

Selling, general and administrative
 
4

 
4

 

 
(5
)
 
3

Research and development
 
2

 
7

 

 
(5
)
 
4

Total
 
$
11

 
$
13

 
$

 
$
(15
)
 
$
9

Related headcount
 
170

 
115

 

 
(210
)
 
75

Exit and Other Costs
 
$
8

 
$

 
$
(1
)
 
$
(4
)
 
$
3

During the first nine months of 2014, we incurred $13 million of additional employee separation charges related to the continued execution of this strategic plan. The $15 million used reflects cash payments made to employees separated as part of the plan during the first nine months of 2014. The accrual of $9 million at October 3, 2014 reflects the estimated liability to be paid to the remaining 75 employees to be separated through the first quarter of 2015, along with previously separated employees still receiving severance benefits, based on current exchange rates.
Additionally, we recorded an adjustment of $1 million to our previously estimated cost to vacate underutilized office space in Austin, Texas during the first nine months of 2014, of which $4 million of the liability was paid during the period. These costs were estimated in accordance with ASC Topic 420 “Exit or Disposal Cost Obligations” (“ASC Topic 420”).
Reorganization of Business Program
In 2008, we began executing a series of restructuring initiatives that streamlined our cost structure and re-directed some research and development investments into expected growth markets (the "Reorganization of Business Program"). Since the inception of the plan, we have recorded $254 million in net charges to reorganization of business and other. The only remaining actions relating to this reorganization program are demolishing the buildings and selling the land located in Sendai, Japan and the decommissioning of the land and buildings at our Toulouse, France manufacturing facility, along with payment of the remaining separation costs.

20


The following table displays a roll-forward from January 1, 2014 to October 3, 2014 of the employee separation cost accruals established related to the Reorganization of Business Program:
(in millions, except headcount)
 
Accruals at
January 1, 2014
 
Charges
 
Adjustments & Currency Impact
 
Usage
 
Accruals at
October 3, 2014
Employee Separation Costs
 
 
 
 
 
 
 
 
 
 
Supply chain
 
$
17

 
$

 
$
(1
)
 
$
(5
)
 
$
11

Selling, general and administrative
 
1

 

 

 
(1
)
 

Research and development
 
1

 

 

 

 
1

Total
 
$
19

 
$

 
$
(1
)
 
$
(6
)
 
$
12

Related headcount
 
30

 

 

 
(20
)
 
10

The $6 million used reflects cash payments made to employees separated as part of the Reorganization of Business Program during the first nine months of 2014. We adjusted our anticipated future severance payments by $1 million to incorporate the currency impact in the above presentation reflecting the strengthening of the U.S. dollar against the Euro during the first nine months of 2014. The accrual of $12 million at October 3, 2014 reflects the estimated liability to be paid through 2014 (i) to the remaining 10 employees to be separated, along with previously separated employees still receiving severance benefits and (ii) for outplacement services and other severance-related costs, based on current exchange rates.
Disposition Activities
During first nine months of 2014 and in connection with the closure of the Toulouse, France manufacturing facility which occurred during 2012, we recorded a $4 million charge related to on-going closure and decommissioning costs. We also recorded a charge of $6 million related to demolition costs incurred to prepare the site of our former manufacturing facility located in Sendai, Japan for sale.
Nine months ended September 27, 2013
2012 Strategic Realignment
The following table displays a roll-forward from January 1, 2013 to September 27, 2013 of the employee separation and exit cost accruals established related to the 2012 Strategic Realignment:
(in millions, except headcount)
Accruals at
January 1, 2013
 
Charges
 
Adjustments
 
Used
 
Accruals at
September 27, 2013
Employee Separation Costs
 
 
 
 
 
 
 
 
 
Supply chain
$
6

 
$

 
$

 
$
(3
)
 
$
3

Selling, general and administrative
11

 

 

 
(7
)
 
4

Research and development
13

 

 

 
(10
)
 
3

Total
$
30

 
$

 
$

 
$
(20
)
 
$
10

Related headcount
270

 

 

 
(170
)
 
100

Exit and Other Costs
$
2

 
$
19

 
$
(2
)
 
$
(17
)
 
$
2

The $20 million used reflects cash payments paid to employees separated as part of the 2012 Strategic Realignment during the first nine months of 2013. Additionally, we recorded $19 million in exit and other costs related to (i) additional compensation for employees who were deemed crucial to the implementation of the plan, (ii) a lease termination charge associated with our plans to consolidate workspace in Israel and (iii) exit costs for underutilized office space vacated in connection with plans to consolidate workspace in Austin, Texas in accordance with ASC Topic 420, on which we recorded a $2 million adjustment during the first nine months of 2013. In addition to the separation and exit costs associated with 2012 Strategic Realignment, a $1 million net charge was recorded in reorganization of business and other related to indemnification provisions included in Gregg Lowe’s (our president and CEO) employment agreement.

21


Reorganization of Business Program
The following table displays a roll-forward from January 1, 2013 to September 27, 2013 of the employee separation accruals established related to the Reorganization of Business Program:
(in millions, except headcount)
 
Accruals at
January 1, 2013
 
Charges
 
Adjustments & Currency Impact
 
Usage
 
Accruals at
September 27, 2013
Employee Separation Costs
 
 
 
 
 
 
 
 
 
 
Supply chain
 
$
77

 
$

 
$
(1
)
 
$
(52
)
 
$
24

Selling, general and administrative
 
2

 

 

 

 
2

Research and development
 
2

 

 

 

 
2

Total
 
$
81

 
$

 
$
(1
)
 
$
(52
)
 
$
28

Related headcount
 
520

 

 

 
(440
)
 
80

The $52 million used reflects cash payments made to employees separated as part of the Reorganization of Business Program during the first nine months of 2013. We adjusted our anticipated future severance payments by $1 million to incorporate the currency impact in the above presentation. These adjustments reflect the strengthening of the U.S. dollar against the Euro during the first nine months of 2013.
Disposition Activities
During the first nine months of 2013 and in connection with the closure of the Toulouse, France manufacturing facility, we recorded a benefit of $13 million related to proceeds received for the sale of certain of our equipment and machinery located at this facility, which was partially offset by a $5 million charge related to on-going closure and decommissioning costs.
(10) Supplemental Guarantor Condensed Consolidating Financial Statements
Pursuant to the terms of our acquisition by a consortium of private equity funds (“Sponsors”) in a transaction referred to as the “Merger” in December 2006, Freescale Inc. continues as a wholly-owned indirect subsidiary of Freescale Ltd. The reporting entity subsequent to the Merger is Freescale Ltd.
As a result of the Merger and subsequent debt redemption and refinancing transactions, we had $2,213 million aggregate principal amount of Senior Notes outstanding as of October 3, 2014, as further discussed in Note 4, “Debt.” The senior secured notes are jointly and severally guaranteed on a secured, senior basis; the senior unsecured notes are jointly and severally guaranteed on an unsecured, senior basis; and, the senior subordinated notes are jointly and severally guaranteed on an unsecured, senior subordinated basis, in each case, subject to certain exceptions, by Freescale Ltd., its wholly owned direct and indirect subsidiaries created in connection with the Merger, and SigmaTel, LLC (together, the “Guarantors”). Each Guarantor fully and unconditionally guarantees, jointly and severally with the other Guarantors, as a primary obligor and not merely as a surety, the due and punctual payment and performance of the obligations. As of October 3, 2014, other than SigmaTel, LLC, none of Freescale Inc.’s domestic or foreign subsidiaries (“Non-Guarantors”) guarantee the Senior Notes or Credit Facility. In the future, other subsidiaries may be required to guarantee all or a portion of the Senior Notes, if and to the extent they guarantee the Credit Facility. (The relationship between the Company and the parent companies is defined and discussed in Note 1, “Basis of Presentation and Principles of Consolidation,” to our consolidated financial statements in the Annual Report.)
The following tables present our results of operations, financial position and cash flows of Freescale Ltd., the Guarantors, Freescale Inc., the Non-Guarantors and eliminations for the three and nine months ended October 3, 2014 and September 27, 2013 and as of October 3, 2014 and December 31, 2013, to arrive at the information on a consolidated basis:

22


Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended October 3, 2014
(in millions)
Freescale Ltd.
 
Guarantors
 
Freescale Inc.
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$

 
$
1,606

 
$
1,637

 
$
(2,030
)
 
$
1,213

Cost of sales

 

 
1,126

 
1,555

 
(2,030
)
 
651

Gross margin

 

 
480

 
82

 

 
562

Selling, general and administrative
1

 

 
176

 
54

 
(109
)
 
122

Research and development

 

 
139

 
74

 

 
213

Amortization expense for acquired intangible assets

 

 
4

 

 

 
4

Reorganization of business and other

 

 
3

 
5

 

 
8

Operating (loss) earnings
(1
)
 

 
158

 
(51
)
 
109

 
215

Loss on extinguishment or modification of long-term debt

 

 
(10
)
 

 

 
(10
)
Other income (expense), net
140

 
141

 
(7
)
 
115

 
(471
)
 
(82
)
Earnings before income taxes
139

 
141

 
141

 
64

 
(362
)
 
123

Income tax benefit

 

 

 
(2
)
 

 
(2
)
Net earnings
$
139

 
$
141

 
$
141

 
$
66

 
$
(362
)
 
$
125


Supplemental Condensed Consolidating Statement of Comprehensive Earnings
For the Three Months Ended October 3, 2014
(in millions)
Freescale Ltd.
 
Guarantors
 
Freescale Inc.
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net earnings
$
139

 
$
141

 
$
141

 
$
66

 
$
(362
)
 
$
125

Other comprehensive (loss) earnings, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments

 

 

 

 

 

Derivative instrument adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses arising during the period

 

 
(9
)
 

 

 
(9
)
Reclassification adjustment for items included in net earnings

 

 
(2
)
 

 

 
(2
)
Post-retirement adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) arising during the period

 

 

 

 

 

Amortization of actuarial (losses) gains included in net earnings

 

 
(1
)
 
1

 

 

Other comprehensive (loss) earnings

 

 
(12
)
 
1

 

 
(11
)
Comprehensive earnings
$
139

 
$
141

 
$
129

 
$
67

 
$
(362
)
 
$
114



23


Supplemental Condensed Consolidating Statement of Operations
For the Three Months Ended September 27, 2013
(in millions)
Freescale Ltd.
 
Guarantors
 
Freescale Inc.
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$

 
$
1,446

 
$
1,420

 
$
(1,781
)
 
$
1,085

Cost of sales

 

 
984

 
1,409

 
(1,781
)
 
612

Gross margin

 

 
462

 
11

 

 
473

Selling, general and administrative
2

 

 
163

 
50

 
(95
)
 
120

Research and development

 

 
125

 
66

 

 
191

Amortization expense for acquired intangible assets

 

 
3

 

 

 
3

Reorganization of business and other

 

 
2

 

 

 
2

Operating (loss) earnings
(2
)
 

 
169

 
(105
)
 
95

 
157

Loss on extinguishment or modification of long-term debt

 

 
(1
)
 

 

 
(1
)
Other income (expense), net
75

 
75

 
(90
)
 
96

 
(274
)
 
(118
)
Earnings (loss) before income taxes
73

 
75

 
78

 
(9
)
 
(179
)
 
38

Income tax expense

 

 
3

 
12

 

 
15

Net earnings (loss)
$
73

 
$
75

 
$
75

 
$
(21
)
 
$
(179
)
 
$
23


Supplemental Condensed Consolidating Statement of Comprehensive Earnings (Loss)
For the Three Months Ended September 27, 2013
(in millions)
Freescale Ltd.
 
Guarantors
 
Freescale Inc.
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net earnings (loss)
$
73

 
$
75

 
$
75

 
$
(21
)
 
$
(179
)
 
$
23

Other comprehensive earnings, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments

 

 

 

 

 

Derivative instrument adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains arising during the period

 

 
3

 

 

 
3

Reclassification adjustment for items included in net earnings (loss)

 

 
1

 

 

 
1

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

 

 

 

 

 

Amortization of actuarial gains included in net earnings (loss)

 

 

 
1

 

 
1

Other comprehensive earnings

 

 
4

 
1

 

 
5

Comprehensive earnings (loss)
$
73

 
$
75

 
$
79

 
$
(20
)
 
$
(179
)
 
$
28



24


Supplemental Condensed Consolidating Statement of Operations
For the Nine Months Ended October 3, 2014
(in millions)
Freescale Ltd.
 
Guarantors
 
Freescale Inc.
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$

 
$
4,528