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ON SEMICONDUCTOR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 ("2012 Form 10-K"), filed with the Securities and Exchange Commission (the "Commission") on February 26, 2013, and our unaudited consolidated financial statements for the fiscal quarter ended March 29, 2013, included elsewhere in this Form 10-Q. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of our 2012 Form 10-K. Company Highlights for the Quarter Ended March 29, 2013 • Total revenues of $661.0 million • Gross margin of 30.9 percent • Net income per fully diluted share of $0.05 • Retired $73.4 million in principal value of our 1.875% Notes • Extended the earliest date of debt maturity for a portion of our 2.625% Notes from December 2013 to December 2016 as part of an exchange transaction for $60.0 million in principal value of our 2.625% Notes in exchange for $58.5 million in principal value of our 2.625% Notes, Series B Executive Overview This Executive Overview presents summary information regarding our industry, markets, business and operating trends only. For further information regarding the events summarized herein, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety. Industry Overview We participate in unit and revenue surveys and use data summarized by the WSTS group to evaluate overall semiconductor market trends and to track our progress against the market in the areas we provide semiconductor components. The most recently published estimates from WSTS project a compound annual growth rate in our serviceable addressable market of approximately 4% during 2013 through 2015. These are not our projections and may not be indicative of actual results. We, like many of our competitors, view this information as helpful third party projections and estimates. Business Overview ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries, ("we," "us," "our," "ON Semiconductor," or the "Company") is driving innovation in energy efficient electronics. Our broad portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in automotive, communications, computing, consumer, industrial, LED lighting, medical, military/aerospace, smart grid and power applications. We design, manufacture and market an extensive portfolio of semiconductor components that address the design needs of sophisticated electronic systems and products. Our power management semiconductor components control, convert, protect and monitor the supply of power to the different elements within a wide variety of electronic devices. Our custom ASICs use analog, DSP, mixed-signal and advanced logic capabilities to act as the brain behind many of our automotive, medical, military/aerospace, consumer and industrial customers' unique products. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing and communications systems. Our standard semiconductor components serve as "building block" components within virtually all types of electronic devices. These various products fall into the logic, analog, discrete, image sensors and memory categories used by the WSTS group. We serve a broad base of end-user markets, including automotive, communications, computing, consumer, medical, industrial, smart grid and military/aerospace. Applications for our products in these markets include portable electronics, computers, game consoles, servers, automotive and industrial control systems, LED lighting, power supplies, networking and telecom gear and automated test equipment. Our extensive portfolio of devices enables us to offer advanced ICs and the "building block" components that deliver system level functionality and design solutions. Our product portfolio was comprised of approximately 44,000 products as of March 29, 2013 and we shipped approximately 9.9 billion units in the first three months of 2013, as compared to 8.9 billion units in the first three months of 2012. We specialize in micro packages, which offer increased performance characteristics 34 -------------------------------------------------------------------------------- Table of Contents while reducing the critical board space inside today's ever shrinking electronic devices. We believe that our ability to offer a broad range of products, global manufacturing network and logistics provides our customers with single source purchasing on a cost-effective and timely basis. Segments As of March 29, 2013, we were organized into three operating segments, which also represented our three reporting segments: Application Products Group, Standard Products Group, and SANYO Semiconductor Products Group. Each of our major product lines has been assigned to a segment based on our operating strategy. Because many products are sold into different end-markets, the total revenue reported for a segment is not indicative of actual sales in the end-market associated with that segment, but rather is the sum of the revenues from the product lines assigned to that segment. From time to time we reassess the alignment of our product families and devices associated with our operating segments, and may move product families or individual devices from one operating segment to another. Business and Macroeconomic Environment We have recognized efficiencies from implemented restructuring activities and programs and continue to implement profitability enhancement programs to improve our cost structure; however, the semiconductor industry has traditionally been highly cyclical and has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. We believe the business environment continues to experience significant uncertainty and volatility, which we believe has contributed to the current market weakness in our industry. These factors combined with other events, including the impact of the March 2011 Japan earthquake and resulting tsunami, the October 2011 flooding in Thailand and the heightened political and economic tensions between Japan and China, have either impacted us directly or have affected our customers and suppliers, which in turn has affected our business, including sales, production capacity, and results of operations for both our SANYO Semiconductor Products Group and our other reporting segments. Although we regard certain of these conditions as temporary, our continuing outlook will ultimately affect our future emphasis on marketing to various industries, our future research and development efforts into new product lines and our segments in general. As a result of these factors, we have taken actions to align our overall cost structure with our expected revenue levels, including a voluntary retirement program for certain employees of our SANYO Semiconductor Products Group. Additionally, we are continuing to review our capital investments and other expenditures to align our spending and capacity with our current sales and manufacturing projections. See Note 4: "Restructuring, Asset Impairments, and Other, Net" for further details relating to our most recent cost saving actions. Outlook ON Semiconductor Q2 2013 Outlook Based upon product booking trends, backlog levels, and estimated turns levels, we estimate that our revenues will be approximately $675 million to $715 million in the second quarter of 2013. Backlog levels for the second quarter of 2013 represent approximately 80% to 85% of our anticipated second quarter 2013 revenues. We estimate average selling prices for the second quarter of 2013 will be down approximately one to two percent when compared to the first quarter of 2013. For the second quarter of 2013, we estimate that gross margin as a percentage of revenues will be approximately 32.5% to 34.5%. 35-------------------------------------------------------------------------------- Table of Contents Results of Operations Quarter Ended March 29, 2013 Compared to Quarter Ended March 30, 2012 The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements for the quarters ended March 29, 2013 and March 30, 2012 (in millions): Quarter Ended March 29, 2013 March 30, 2012 Dollar Change Revenues $ 661.0 $ 744.4 $ (83.4 ) Cost of revenues 456.5 499.2 (42.7 ) Gross profit 204.5 245.2 (40.7 ) Operating expenses: Research and development 88.4 91.4 (3.0 ) Selling and marketing 39.8 45.6 (5.8 ) General and administrative 36.2 42.0 (5.8 ) Amortization of acquisition-related intangible assets 8.4 11.1 (2.7 ) Restructuring, asset impairments and other, net (6.0 ) 11.5 (17.5 ) Total operating expenses 166.8 201.6 (34.8 ) Operating income 37.7 43.6 (5.9 ) Other income (expenses), net: Interest expense (10.1 ) (15.7 ) 5.6 Interest income 0.3 0.5 (0.2 ) Other 0.9 4.7 (3.8 ) Loss on debt exchange (3.1 ) - (3.1 ) Other income (expenses), net (12.0 ) (10.5 ) (1.5 ) Income before income taxes 25.7 33.1 (7.4 ) Income tax provision (2.4 ) (4.1 ) 1.7 Net income 23.3 29.0 (5.7 ) Less: Net income attributable to non-controlling interest (0.7 ) (0.8 ) 0.1 Net income attributable to ON Semiconductor Corporation $ 22.6 $ 28.2 $ (5.6 ) Revenues Revenues were $661.0 million and $744.4 million for the quarters ended March 29, 2013 and March 30, 2012, respectively. The decreased revenues during the quarter ended March 29, 2013 compared to the quarter ended March 30, 2012 was most pronounced in our SANYO Semiconductor Products Group with our other operating segments experiencing revenue declines as a result of a weakened demand environment associated with less favorable global economic conditions. Our SANYO Semiconductor Products Group was impacted by the continued effects of the October 2011 Thailand flood, which permanently damaged one of our SANYO Semiconductor Products Group's manufacturing locations; a softening of the Japanese consumer market; a weakening Yen; and, to a lesser extent, political tensions between Japan and China which began to impact revenue levels during the second half of 2012. As compared to the quarter ended March 30, 2012, we experienced changes in volume and mix, which resulted in a decrease in revenue of approximately 3%, as well as a decline in average selling prices of approximately 8%. Our revenues by reportable segment for the quarters ended March 29, 2013 and March 30, 2012 were as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of March 29, 2013 Total Revenue (1) March 30, 2012 Total Revenue (1) Application Products Group $ 245.0 37.1 % $ 259.9 34.9 % Standard Products Group 265.2 40.1 % 278.6 37.4 % SANYO Semiconductor Products Group 150.8 22.8 % 205.9 27.7 % Total revenues $ 661.0 $ 744.4 (1) Certain amounts may not total due to rounding of individual amounts. 36 -------------------------------------------------------------------------------- Table of Contents Revenues from the Application Products Group decreased by $14.9 million, or approximately 6%, from the first quarter of 2012 to the first quarter of 2013. This decrease is primarily attributable to a $10.5 million, or approximately 7%, decrease in revenues for our ASIC products combined with a decrease of $3.6 million, or approximately 53%, in revenues from foundry services. Revenues from the Standard Products Group decreased by $13.4 million, or approximately 5%, from the first quarter of 2012 to the first quarter of 2013. This decrease is primarily attributable to a $2.7 million, or approximately 4%, decrease in revenue from our analog products, a decrease of $3.3 million, or approximately 21%, from our memory products, and a decrease of $2.1 million, or approximately 4%, from our TMOS products. Revenues from the SANYO Semiconductor Products Group decreased by $55.1 million, or approximately 27%, from the first quarter of 2012 to the first quarter of 2013, due to the continued impact from the October 2011 Thailand flooding, a softening of the Japanese consumer market, a weakening Yen, and, to a lesser extent, political tensions between Japan and China, which began to impact revenue levels in the second half of 2012. Revenues by geographic location for the quarters ended March 29, 2013 and March 30, 2012 were as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of March 29, 2013 Total Revenue (1) March 30, 2012 Total Revenue (1) Americas $ 105.1 15.9 % $ 120.7 16.2 % Japan 71.7 10.8 % 115.2 15.5 % Other Asia/Pacific 386.4 58.5 % 402.6 54.1 % Europe 97.8 14.8 % 105.9 14.2 % Total $ 661.0 $ 744.4 (1) Certain amounts may not total due to rounding of individual amounts. A majority of our end customers, served directly or through distribution channels, are manufacturers of electronic devices. For the quarters ended March 29, 2013 and March 30, 2012, we had no single customer that accounted for 10% of our total revenues. Gross Profit Our gross profit by reportable segment for the quarters ended March 29, 2013 and March 30, 2012 was as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of March 29, 2013 Segment Revenue (1) March 30, 2012 Segment Revenue (1) Application Products Group $ 106.9 43.6 % $ 114.3 44.0 % Standard Products Group 94.5 35.6 % 103.0 37.0 % SANYO Semiconductor Products Group 8.6 5.7 % 39.9 19.4 % Gross profit by segment $ 210.0 $ 257.2 Unallocated Manufacturing (2) (5.5 ) (0.8 )% (12.0 ) (1.6 )% Total gross profit $ 204.5 30.9 % $ 245.2 32.9 % (1) Certain amounts may not total due to rounding of individual amounts. (2) Unallocated manufacturing costs are shown as a percentage of total revenue. Our gross profit was $204.5 million in the first quarter of 2013 compared to $245.2 million in the first quarter of 2012. The gross profit decrease of $40.7 million, or approximately 17%, during the first quarter of 2013 is primarily due to decreases in gross profit for our SANYO Semiconductor Products Group as a result of lower revenues, partially offset by our restructuring activities. See Note 4: "Restructuring, Asset Impairments and Other, Net" of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for information on our restructuring activities. Gross profit as a percentage of revenues decreased from approximately 33% in the first quarter of 2012 to approximately 31% in the first quarter of 2013, primarily due to decreased gross margin in our SANYO Semiconductor Products Group. 37 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Research and development expenses were $88.4 million for the first quarter of 2013 compared to $91.4 million for the first quarter of 2012, representing a decrease of $3.0 million or approximately 3%. Research and development expenses represented approximately 13% and 12% of revenues for the first quarter of 2013 and the first quarter of 2012, respectively. This decrease in research and development expenses is primarily associated with decreased payroll and pension related expenses. Selling and marketing expenses were $39.8 million for the first quarter of 2013 compared to $45.6 million for the first quarter of 2012, representing a decrease of $5.8 million or approximately 13%. Selling and marketing expenses as a percentage of revenue remained flat, represented approximately 6%, for both the first quarter of 2013 and the first quarter of 2012. General and administrative expenses were $36.2 million in the first quarter of 2013 compared to $42.0 million in the first quarter of 2012, representing a decrease of $5.8 million or approximately 14%. General and administrative expenses represented approximately 5% and 6% of revenues for the first quarter of 2013 and the first quarter of 2012, respectively. The decrease is primarily attributable to reductions in outside services and decreased payroll expenses as a result of our restructuring activities initiated during 2012. Other Operating Expenses Amortization of Acquisition-Related Intangible Assets Amortization of acquisition-related intangible assets was $8.4 million and $11.1 million for the quarters ended March 29, 2013 and March 30, 2012, respectively. The decrease of $2.7 million, or approximately 24%, is the result of assets belonging to our SANYO Semiconductor Products Group which were impaired during 2012 and, as a result, had significantly less remaining amortization during the quarter ended March 29, 2013. See Note 3: "Goodwill and Intangible Assets" of the notes to our audited consolidated financial statements included in Part IV, Item 15 of our 2012 Form 10-K for information on intangible asset impairments during 2012. Restructuring, Asset Impairments and Other, Net Restructuring, asset impairments and other, net resulted in a net gain of $6.0 million for the quarter ended March 29, 2013 compared to expenses of $11.5 million for the quarter ended March 30, 2012. The information below summarizes the major activities for each respective quarter. For detailed information see Note 4: "Restructuring, Asset Impairments and Other, net" of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q. Quarter Ended March 29, 2013 During the quarter ended March 29, 2013, we initiated a voluntary retirement program for employees of SANYO Semiconductor and certain of its subsidiaries. We recorded net charges of approximately $16.6 million in connection with this program, which consisted of employee severance charges of $25.6 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $9.0 million. Additionally, during the quarter ended March 29, 2013, we recorded $2.2 million of restructuring charges related to the announced closure of our Aizu facility for cost savings purposes. We also released approximately $21.0 million of associated cumulative foreign currency translation gains related to our subsidiary that owns the Aizu facility, which utilizes the Japanese Yen as its functional currency. The related amount was recorded as a benefit to restructuring, asset impairments and other, net on the Company's Consolidated Statements of Operations and Comprehensive Income. See Note 12: "Changes in Accumulated Comprehensive Loss" of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information on amounts reclassified from accumulated other comprehensive loss. Quarter Ended March 30, 2012 During the quarter ended March 30, 2012, we recorded $1.5 million of employee separation charges and other charges of $1.8 million for costs incurred relating to the closure of certain of our operations in Ayutthaya, Thailand and Bang Pa In, Thailand as a result of flooding in those regions. Additionally, during the quarter ended March 30, 2012, we recorded $5.8 million of employee separation charges associated with the closure of our Aizu facility and $2.3 million in exit costs associated with the integration of certain operations of SANYO Semiconductor into our other operating segments. 38-------------------------------------------------------------------------------- Table of Contents Operating Income Information about operating income (loss) from our reportable segments for the quarters ended March 29, 2013 and March 30, 2012 is as follows (in millions): SANYO Standard Semiconductor Application Products Products Products Group Group Group Total For quarter ended March 29, 2013: Segment operating income (loss) $ 27.5 $ 57.6 $ (45.7 ) $ 39.4 For quarter ended March 30, 2012: Segment operating income (loss) $ 25.4 $ 62.1 $ (20.4 ) $ 67.1 Depreciation and amortization expense is included in segment operating income. Reconciliations of segment information to the financial statements is as follows (in millions): Quarter Ended March 29, 2013 March 30, 2012 Operating income for reportable segments $ 39.4 $ 67.1 Unallocated amounts: Restructuring, asset impairments and other charges, net 6.0 (11.5 ) Other unallocated manufacturing costs (5.5 ) (12.0 ) Other unallocated operating expenses (2.2 ) - Operating income $ 37.7 $ 43.6 Other unallocated operating expenses consist of expenses associated with certain corporate decisions and initiatives which are not directly attributable to our reporting segments. Interest Expense Interest expense decreased by $5.6 million, or approximately 36%, to $10.1 million during the quarter ended March 29, 2013 compared to $15.7 million during the quarter ended March 30, 2012. We recorded amortization of debt discount to interest expense of $3.1 million and $7.2 million for the quarters ended March 29, 2013 and March 30, 2012, respectively. Our average long-term debt balance (including current maturities and net of debt discount) during the quarter ended March 29, 2013 was $980.7 million with a weighted average interest rate of approximately 4.1%, compared to $1,198.0 million and a weighted average interest rate of approximately 5.3% during the quarter ended March 30, 2012. Loss on Debt Exchange During the quarter ended March 29, 2013, we exchanged $60.0 million in principal value ($57.4 million of carrying value) of our 2.625% Notes for $58.5 million in principal value of our 2.625% Notes, Series B, plus accrued and unpaid interest, resulting in a loss on debt repurchase of $3.1 million. Subject to certain other terms and conditions, this transaction extended the earliest put date for the exchanged amount from December 2013 to December 2016. See Note 6: "Long-Term Debt" of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for information on this exchange. Other Other expense decreased by $3.8 million from a gain of $4.7 million for the quarter ended March 30, 2012 to a gain of $0.9 million for the quarter ended March 29, 2013. The decrease is primarily attributable to certain foreign currency exchange movements that are not offset by our hedging activity. Provision for Income Taxes The provision for income taxes was $2.4 million and $4.1 million during the quarters ended March 29, 2013 and March 30, 2012, respectively. 39-------------------------------------------------------------------------------- Table of Contents The provision for the quarter ended March 29, 2013 was $2.4 million, which consisted of $2.1 million for income and withholding taxes of certain of our foreign operations and $0.3 million of interest on existing reserves for potential liabilities in foreign taxing jurisdictions. The provision for the quarter ended March 30, 2012 was $4.1 million, which consisted of $4.4 million for income and withholding taxes of certain of our foreign operations and $0.2 million of interest on existing reserves for potential liabilities in foreign taxing jurisdictions, partially offset by the reversal of $0.5 million for reserves and interest for potential liabilities in foreign taxing jurisdictions which were effectively settled or for which the statute lapsed during the first quarter of 2012. Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates and earnings being higher than anticipated in countries that have higher tax rates. Our effective tax rate for the quarter ended March 29, 2013 was 9.3%, which differs from the U.S. statutory federal income tax rate of 35%, due to our domestic tax losses and tax rate differential in our foreign subsidiaries. We continue to maintain a full valuation allowance on all of our domestic and substantially all of our Japan related deferred tax assets. Liquidity and Capital Resources This section includes a discussion and analysis of our cash requirements, off-balance sheet arrangements, contingencies, sources and uses of cash, operations, working capital, and long-term assets and liabilities. Contractual Obligations During the quarter ended March 29, 2013, there have not been any material changes outside of the ordinary course of business to the contractual obligations table, including notes thereto, contained in our 2012 Form 10-K. For information on long-term debt see Note 6: "Long-Term Debt," for operating leases see Note 9: "Commitments and Contingencies" and for pension plans see Note 5: "Balance Sheet Information" of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q. We expect to make cash contributions and future pension payments to comply with local funding requirements of approximately $27.4 million in 2013, in addition to approximately $21.7 million in payments associated with the voluntary retirement program for certain employees of our SANYO Semiconductor Products Group. The future pension payment estimate assumes we continue to meet our statutory funding requirements. The timing and amount of contributions may be impacted by a number of factors, including the funded status of the plans. Beyond 2013, the actual amounts required to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory actions related to pension funding obligations. Our balance of cash, cash equivalents and short-term investments was $614.3 million as of March 29, 2013. We believe that our cash flows from operations, coupled with our existing cash and cash equivalents and short-term investments, will be adequate to fund our operating and capital needs for at least the next 12 months. Total cash and cash equivalents and short-term investments at March 29, 2013 include approximately $420.6 million available in the United States. In addition to cash and cash equivalents and short-term investments already on hand in the United States, we have the ability to raise cash through existing credit facilities, new bank loans, debt obligations or by settling loans with our foreign subsidiaries in order to cover our domestic needs. We hold a significant amount of cash, cash equivalents and short-term investments outside the United States in various foreign subsidiaries. As we intend to reinvest certain of our foreign earnings indefinitely, this cash held outside the United States in various foreign subsidiaries is not readily available to meet certain of our cash requirements in the United States. We require a substantial amount of cash in the United States for operating requirements, debt repurchases, payments and acquisitions. If we are unable to address our U.S. cash requirements through operations, borrowings under our current debt agreements or other sources of cash obtained at an acceptable cost, it may be necessary for us to consider repatriation of earnings that are permanently reinvested, and we may be required to pay additional taxes under current tax laws, which could have a material effect on our results of operations and financial condition. Off-Balance Sheet Arrangements In the normal course of business, we enter into various operating leases for buildings and equipment including our mainframe computer system, desktop computers, communications, foundry equipment and service agreements relating to this equipment. In the normal course of business, we provide standby letters of credit or other guarantee instruments to certain parties initiated by either our subsidiaries or us, as required for transactions such as, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. Our senior revolving credit facility includes a $40.0 million availability for the issuance of letters of credit. A $0.2 million letter of credit was outstanding under our senior revolving credit facility as of March 29, 2013. We also had outstanding guarantees and letters of credit outside of our senior revolving credit facility of $4.6 million as of March 29, 2013. 40 -------------------------------------------------------------------------------- Table of Contents As part of securing financing in the normal course of business, we issued guarantees related to our receivable financing, capital lease obligations and real estate mortgages which totaled approximately $77.4 million as of March 29, 2013. We are also a guarantor of SCI LLC's unsecured loan with SMBC, which had a balance of $302.0 million as of March 29, 2013. See Note 6: "Long-Term Debt" and Note 9: "Commitments and Contingencies" of the notes to our unaudited consolidated financial statements found elsewhere in this Form 10-Q for additional information. Based on historical experience and information currently available, we believe that in the foreseeable future we will not be required to make payments under the standby letters of credit or guarantee arrangements. For our operating leases, we expect to make cash payments and similarly incur expenses totaling $111.0 million as payments come due. We have not recorded any liability in connection with these operating leases, letters of credit and guarantee arrangements. See Note 9: "Commitments and Contingencies" of the notes to our unaudited consolidated financial statements found elsewhere in this Form 10-Q for additional information. Contingencies We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by us require us to indemnify the other party against losses due to IP infringement, property damage including environmental contamination, personal injury, failure to comply with applicable laws, our negligence or willful misconduct, or breach of representations and warranties and covenants related to such matters as title to sold assets. We face risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in bodily injury or property damage (or both). In addition, if any of our designed products are alleged to be defective, we may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, we may agree to provide more favorable indemnity rights to such customer for valid warranty claims. We and our subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. We maintain directors' and officers' insurance, which should enable us to recover a portion of any future amounts paid. In addition to the above, from time to time, we provide standard representations and warranties to counterparties in contracts in connection with sales of our securities and the engagement of financial advisers and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by us. While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows, and we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows. See Note 9: "Commitment and Contingencies" of the notes to our unaudited consolidated financial statements under the heading "Legal Matters" in this Form 10-Q for possible contingencies related to legal matters. See also Part I, Item 1 "Business-Government Regulation" of our 2012 Form 10-K for information on certain environmental matters. Sources and Uses of Cash We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, to make capital expenditures, for strategic acquisitions and investments, to repurchase our stock and other Company securities, and to pay debt service, including principal and interest and capital lease payments. Our principal sources of liquidity are cash on hand, cash generated from operations and funds from external borrowings and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations and cash and cash equivalents on hand and short-term investments. Additionally, as part of our business strategy, we review acquisition and divestiture opportunities and proposals on a regular basis. 41 -------------------------------------------------------------------------------- Table of Contents We believe that the key factors that could affect our internal and external sources of cash include: • Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our products, competitive pricing pressures, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business; and • Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing; and our ability to maintain compliance with covenants under our debt agreements in effect from time to time. Our ability to service our long-term debt including our senior subordinated notes, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control. If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash and cash equivalents and short-term investments will be adequate to fund our operating and capital needs as well as enable us to maintain compliance with our various debt agreements through at least the next twelve months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures for inventory, operating expenditures and capital expenditures to reflect the current market conditions and our projected sales and demand. For example, during the quarter ended March 29, 2013, we paid $38.9 million for capital expenditures, while during the quarter ended March 30, 2012, we paid approximately $50.4 million for capital expenditures. Our current projection for capital expenditures for the remainder of 2013 is approximately $130 million, of which our current minimum contractual commitment is approximately $14.6 million. The capital expenditure levels can materially influence our available cash for other initiatives. 42-------------------------------------------------------------------------------- Table of Contents |