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ON SEMICONDUCTOR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 02, 2013]

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 June 28, 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 June 28, 2013 • Total revenues of $688.3 million • Gross margin of 33.7 percent • Net income per fully diluted share of $0.11 • Completed the repurchase of approximately 1.5 million shares of common stock for an aggregate purchase price of approximately $12.1 million pursuant to our previously announced share repurchase program 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 5% 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 45,000 products as of June 28, 2013 and we shipped approximately 20.4 billion units in the first six months of 2013, as compared to 18.8 billion units in the first six months of 2012. We specialize in micro packages, which offer increased performance characteristics 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.

40-------------------------------------------------------------------------------- Table of Contents Segments As of June 28, 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. While there have been recent indications of improving conditions, our business environment continues to experience significant uncertainty and volatility. We are continually reviewing our cost structure, 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 Q3 2013 Outlook Based upon product booking trends, backlog levels, and estimated turns levels, we estimate that our revenues will be approximately $700 million to $730 million in the third quarter of 2013. Backlog levels for the third quarter of 2013 represent approximately 80% to 85% of our anticipated third quarter 2013 revenues. We estimate average selling prices for the third quarter of 2013 will be down approximately one to two percent when compared to the second quarter of 2013. For the third quarter of 2013, we estimate that gross margin as a percentage of revenues will be approximately 33.8% to 35.8%.

41-------------------------------------------------------------------------------- Table of Contents Results of Operations Quarter Ended June 28, 2013 Compared to Quarter Ended June 29, 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 June 28, 2013 and June 29, 2012 (in millions): Quarter Ended June 28, 2013 June 29, 2012 Dollar Change Revenues $ 688.3 $ 744.8 $ (56.5 ) Cost of revenues 456.5 486.5 (30.0 ) Gross profit 231.8 258.3 (26.5 ) Operating expenses: Research and development 83.1 97.8 (14.7 ) Selling and marketing 43.3 47.0 (3.7 ) General and administrative 40.2 40.9 (0.7 ) Amortization of acquisition-related intangible assets 8.2 11.1 (2.9 ) Restructuring, asset impairments and other, net 6.1 34.6 (28.5 ) Total operating expenses 180.9 231.4 (50.5 ) Operating income 50.9 26.9 24.0 Other income (expenses), net: Interest expense (9.3 ) (14.1 ) 4.8 Interest income 0.4 0.3 0.1 Other 4.1 2.3 1.8 Other income (expenses), net (4.8 ) (11.5 ) 6.7 Income before income taxes 46.1 15.4 30.7 Income tax benefit (provision) 2.6 (7.2 ) 9.8 Net income 48.7 8.2 40.5 Less: Net income attributable to non-controlling interest (1.0 ) (1.3 ) 0.3 Net income attributable to ON Semiconductor Corporation $ 47.7 $ 6.9 $ 40.8 Revenues Revenues were $688.3 million and $744.8 million for the quarters ended June 28, 2013 and June 29, 2012, respectively. The decrease in revenues during the quarter ended June 28, 2013 compared to the quarter ended June 29, 2012 was most pronounced in our SANYO Semiconductor Products Group with our other operating segments also 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 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 June 29, 2012, we experienced changes in volume and mix, which resulted in a decrease in revenue of approximately 1%, as well as a decline in average selling prices of approximately 7% during the quarter ended June 28, 2013.

Our revenues by reportable segment for the quarters ended June 28, 2013 and June 29, 2012 were as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of June 28, 2013 Total Revenue (1) June 29, 2012 Total Revenue (1) Application Products Group $ 251.5 36.5 % $ 260.2 34.9 % Standard Products Group 276.4 40.2 % 279.2 37.5 % SANYO Semiconductor Products Group 160.4 23.3 % 205.4 27.6 % Total revenues $ 688.3 $ 744.8 (1) Certain amounts may not total due to rounding of individual amounts.

42 -------------------------------------------------------------------------------- Table of Contents Revenues from the Application Products Group decreased by $8.7 million, or approximately 3%, from the second quarter of 2012 to the second quarter of 2013.

This decrease is primarily attributable to a $7.7 million, or approximately 5%, decrease in revenues for our ASIC products combined with a decrease of $2.5 million, or approximately 21%, in revenues from ECL products, partially offset by increases in revenue from analog and TMOS products.

Revenues from the Standard Products Group decreased by $2.8 million, or approximately 1%, from the second quarter of 2012 to the second quarter of 2013.

This decrease is primarily attributable to a $6.4 million, or approximately 10%, decrease in revenue from our TMOS products, partially offset by increases in revenue from our standard logic and analog products.

Revenues from the SANYO Semiconductor Products Group decreased by $45.0 million, or approximately 22%, from the second quarter of 2012 to the second quarter of 2013, due to 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 June 28, 2013 and June 29, 2012 were as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of June 28, 2013 Total Revenue (1) June 29, 2012 Total Revenue (1) United States $ 98.5 14.3 % $ 120.3 16.2 % Japan 75.7 11.0 % 105.1 14.1 % China 198.5 28.8 % 217.6 29.2 % Singapore 180.9 26.3 % 163.5 22.0 % United Kingdom 102.6 14.9 % 100.0 13.4 % Other 32.1 4.7 % 38.3 5.1 % Total $ 688.3 $ 744.8 (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 June 28, 2013 and June 29, 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 June 28, 2013 and June 29, 2012 was as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of June 28, 2013 Segment Revenue (1) June 29, 2012 Segment Revenue (1)Application Products Group $ 110.4 43.9 % $ 124.8 48.0 % Standard Products Group 106.0 38.4 % 109.4 39.2 % SANYO Semiconductor Products Group 20.5 12.8 % 33.9 16.5 % Gross profit by segment $ 236.9 $ 268.1 Unallocated manufacturing (2) (5.1 ) (0.7 )% (9.8 ) (1.3 )% Total gross profit $ 231.8 33.7 % $ 258.3 34.7 % (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 $231.8 million in the second quarter of 2013 compared to $258.3 million in the second quarter of 2012. The gross profit decrease of $26.5 million, or approximately 10%, during the second quarter of 2013 is primarily due to decreases in gross profit for our Application Products Group and SANYO Semiconductor Products Group.

43 -------------------------------------------------------------------------------- Table of Contents Gross profit as a percentage of revenues decreased from approximately 35% in the second quarter of 2012 to approximately 34% in the second quarter of 2013, primarily due to the decreased gross margin in our Application Products Group, which was driven by changes in mix across certain product lines, and decreased gross margin in our SANYO Semiconductor Products Group, which experienced a decline in revenues along with an increase in inventory reserves and, to a lesser extent, the expiration of certain operational support credits at the end of 2012.

Operating Expenses Research and development expenses were $83.1 million for the second quarter of 2013 compared to $97.8 million for the second quarter of 2012, representing a decrease of $14.7 million or approximately 15%. This decrease in research and development expenses is primarily associated with decreased payroll related expenses resulting from our previously enacted restructuring and cost saving activities, partially offset by increased share-based compensation expense and the impact of a weakening Yen. Research and development expenses represented approximately 12% and 13% of revenues for the second quarter of 2013 and the second quarter of 2012, respectively.

Selling and marketing expenses were $43.3 million for the second quarter of 2013 compared to $47.0 million for the second quarter of 2012, representing a decrease of $3.7 million or approximately 8%. This decrease in selling and marketing expenses is primarily associated with decreased payroll related expenses resulting from our previously enacted restructuring and cost saving activities, partially offset by increased share-based compensation expense and the impact of a weakening Yen. Selling and marketing expenses as a percentage of revenue remained flat, representing approximately 6%, for both the second quarter of 2013 and the second quarter of 2012.

General and administrative expenses were $40.2 million in the second quarter of 2013 compared to $40.9 million in the second quarter of 2012, representing a decrease of $0.7 million or approximately 2%. This decrease in general and administrative expenses is primarily associated with decreased payroll related expenses resulting from our previously enacted restructuring and cost saving activities, partially offset by increased share-based compensation expense and the impact of a weakening Yen. General and administrative expenses represented approximately 6% and 5% of revenues for the second quarter of 2013 and the second quarter of 2012, respectively.

Other Operating Expenses Amortization of Acquisition-Related Intangible Assets Amortization of acquisition-related intangible assets was $8.2 million and $11.1 million for the quarters ended June 28, 2013 and June 29, 2012, respectively.

The decrease of $2.9 million, or approximately 26%, is the result of the impairment of certain of SANYO Semiconductor Products Group's intangible assets recorded during the fourth quarter of 2012, which significantly reduced the carrying value of the related assets. 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 was $6.1 million for the quarter ended June 28, 2013 compared to $34.6 million for the quarter ended June 29, 2012. The information below summarizes certain activities for each respective quarter. 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 additional information with respect to restructuring activities.

Quarter Ended June 28, 2013 During the quarter ended June 28, 2013, we recorded net charges of approximately $3.9 million in connection with the voluntary retirement program for certain employees of our SANYO Semiconductor Products Group, which consisted of employee severance charges of $6.8 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $2.9 million.

Quarter Ended June 29, 2012 During the quarter ended June 29, 2012, we initiated a separate voluntary retirement program for certain employees of our SANYO Semiconductor Products Group. During the quarter ended June 29, 2012, we recorded charges of $30.8 million associated with this activity, which was comprised of employee severance charges of $42.5 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $11.7 million.

44-------------------------------------------------------------------------------- Table of Contents Operating Income Information about operating income (loss) from our reportable segments for the quarters ended June 28, 2013 and June 29, 2012 is as follows (in millions): SANYO Standard Semiconductor Application Products Products Products Group Group Group Total For quarter ended June 28, 2013: Segment operating income (loss) $ 22.2 $ 65.3 $ (23.0 ) $ 64.5 For quarter ended June 29, 2012: Segment operating income (loss) $ 36.6 $ 67.1 $ (31.4 ) $ 72.3 Reconciliations of segment information to the financial statements is as follows (in millions): Quarter Ended June 28, 2013 June 29, 2012 Operating income for reportable segments $ 64.5 $ 72.3 Unallocated amounts: Restructuring, asset impairments and other charges, net (6.1 ) (34.6 ) Other unallocated manufacturing costs (5.1 ) (9.8 ) Other unallocated operating expenses (2.4 ) (1.0 ) Operating income $ 50.9 $ 26.9 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 $4.8 million to $9.3 million during the quarter ended June 28, 2013 compared to $14.1 million during the quarter ended June 29, 2012. We recorded amortization of debt discount to interest expense of $2.7 million and $6.0 million for the quarters ended June 28, 2013 and June 29, 2012, respectively. Our average long-term debt balance (including current maturities and net of debt discount) during the quarter ended June 28, 2013 was $933.6 million at a weighted average interest rate of approximately 4.0%, compared to $1,129.6 million at a weighted average interest rate of approximately 5.0% during the quarter ended June 29, 2012.

Other Other income increased by $1.8 million from a gain of $2.3 million for the quarter ended June 29, 2012 to a gain of $4.1 million for the quarter ended June 28, 2013. The increase is primarily attributable to the impact of our hedging activities during the quarter ended June 28, 2013.

Provision for Income Taxes We recorded an income tax benefit of $2.6 million and a provision for income taxes of $7.2 million during the quarters ended June 28, 2013 and June 29, 2012, respectively.

The income tax benefit for the quarter ended June 28, 2013 was $2.6 million, which consisted of the reversal of $6.0 million of valuation allowances against deferred tax assets of certain foreign subsidiaries and the reversal of $0.1 million for reserves of interest for potential liabilities in foreign jurisdictions, partially offset by $3.3 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.

The income tax provision for the quarter ended June 29, 2012 was $7.2 million, which consisted of $7.0 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.

45-------------------------------------------------------------------------------- Table of Contents 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 June 28, 2013 was a 5.6% benefit, 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, as well as the reversal of certain valuation allowances during the quarter ended June 28, 2013. We continue to maintain a full valuation allowance on all of our domestic and substantially all of our Japan related deferred tax assets.

Six Months Ended June 28, 2013 Compared to Six Months Ended June 29, 2012 The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements for the six months ended June 28, 2013 and June 29, 2012 (in millions): Six Months Ended June 28, 2013 June 29, 2012 Dollar Change Revenues $ 1,349.3 $ 1,489.2 $ (139.9 ) Cost of revenues 913.0 985.7 (72.7 ) Gross profit 436.3 503.5 (67.2 ) Operating expenses: Research and development 171.5 189.2 (17.7 ) Selling and marketing 83.1 92.6 (9.5 ) General and administrative 76.4 82.9 (6.5 ) Amortization of acquisition-related intangible assets 16.6 22.2 (5.6 ) Restructuring, asset impairments and other, net 0.1 46.1 (46.0 ) Total operating expenses 347.7 433.0 (85.3 ) Operating income 88.6 70.5 18.1 Other income (expenses), net: Interest expense (19.4 ) (29.8 ) 10.4 Interest income 0.7 0.8 (0.1 ) Other 5.0 7.0 (2.0 ) Loss on debt exchange (3.1 ) - (3.1 ) Other income (expenses), net (16.8 ) (22.0 ) 5.2 Income before income taxes 71.8 48.5 23.3 Income tax benefit (provision) 0.2 (11.3 ) 11.5 Net income 72.0 37.2 34.8 Less: Net income attributable to non-controlling interest (1.7 ) (2.1 ) 0.4 Net income attributable to ON Semiconductor Corporation $ 70.3 $ 35.1 $ 35.2 Revenues Revenues were $1,349.3 million and $1,489.2 million for the six months ended June 28, 2013 and June 29, 2012, respectively. The decrease in revenues during the six months ended June 28, 2013 compared to the six months ended June 29, 2012 was most pronounced in our SANYO Semiconductor Products Group with our other operating segments also 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 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.

For the six months ended June 28, 2013, we experienced a decrease in volume and mix of approximately 2% and a decline in average selling prices of approximately 7% as compared to the six months ended June 29, 2012.

46-------------------------------------------------------------------------------- Table of Contents Our revenues by reportable segment for the six months ended June 28, 2013 and June 29, 2012 were as follows (dollars in millions): Six Months Ended As a % of Six Months Ended As a % of June 28, 2013 Total Revenue (1) June 29, 2012 Total Revenue (1) Application Products Group $ 496.5 36.8 % $ 520.1 34.9 % Standard Products Group 541.6 40.1 % 557.8 37.5 % SANYO Semiconductor Products Group 311.2 23.1 % 411.3 27.6 % Total revenues $ 1,349.3 $ 1,489.2 (1) Certain amounts may not total due to rounding of individual amounts.

Revenues from the Application Products Group decreased by $23.6 million, or approximately 5%, from the six months ended June 29, 2012 to the six months ended June 28, 2013. This decrease is primarily attributable to a $18.2 million, or approximately 6%, decrease in revenues from our ASIC products combined with a decrease of $5.1 million, or approximately 21%, in revenues from our ECL products.

Revenues from the Standard Products Group decreased by $16.2 million, or approximately 3%, from the six months ended June 29, 2012 to the six months ended June 28, 2013. This decrease is primarily attributable to a $8.5 million, or approximately 7%, decrease in revenue from our TMOS products, a decrease of $3.9 million, or approximately 13%, from our memory products, and a decrease of $1.7 million, or approximately 1%, from our analog products.

Revenues from the SANYO Semiconductor Products Group decreased by $100.1 million, or approximately 24%, from the six months ended June 29, 2012 to the six months ended June 28, 2013, due to 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.

Revenues by geographic location for the six months ended June 28, 2013 and June 29, 2012 were as follows (dollars in millions): Six Months Ended As a % of Six Months Ended As a % of June 28, 2013 Total Revenue (1) June 29, 2012 Total Revenue (1)United States $ 197.4 14.6 % $ 231.6 15.6 % Japan 147.3 10.9 % 220.3 14.8 % China 397.9 29.5 % 435.9 29.3 % Singapore 347.3 25.7 % 307.0 20.6 % United Kingdom 200.3 14.8 % 205.8 13.8 % Other 59.1 4.4 % 88.6 5.9 % Total $ 1,349.3 $ 1,489.2 (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 six months ended June 28, 2013 and June 29, 2012, we had no single customer that accounted for 10% of our total revenues.

47 -------------------------------------------------------------------------------- Table of Contents Gross Profit Our gross profit by reportable segment for the six months ended June 28, 2013 and June 29, 2012, respectively, was as follows (in millions): Six Months Ended As a % of Six Months Ended As a % of June 28, 2013 Segment Revenue June 29, 2012 Segment Revenue Application Products Group 217.3 43.8 % 239.1 46.0 % Standard Products Group 200.5 37.0 % 212.4 38.1 % SANYO Semiconductor Products Group 29.1 9.4 % 73.8 17.9 % Gross profit by segment $ 446.9 $ 525.3 Unallocated manufacturing (1) (10.6 ) (7.8 )% (21.8 ) (1.5 )% Total gross profit $ 436.3 32.3 % $ 503.5 33.8 % (1) Unallocated manufacturing costs are being shown as a percentage of total revenue.

Our gross profit was $436.3 million for the six months ended June 28, 2013 compared to $503.5 million for the six months ended June 29, 2012. The gross profit decrease of $67.2 million for the six months ended June 28, 2013 is primarily attributable to a decrease in gross profit for our SANYO Semiconductor Products Group.

Gross profit as a percentage of revenues decreased from approximately 34% for the six months ended June 29, 2012 to 32% for the six months ended June 28, 2013, primarily due to the decreased gross margin in our SANYO Semiconductor Products Group, which experienced a decline in revenues along with an increase in inventory reserves and, to a lesser extent, the expiration of certain operational support credits at the end of 2012.

Operating Expenses Research and development expenses were $171.5 million for the six months ended June 28, 2013 compared to $189.2 million for the six months ended June 29, 2012, representing a decrease of $17.7 million or 9%. This decrease in research and development expenses is primarily associated with decreased payroll related expenses resulting from our previously enacted restructuring and cost saving activities, partially offset by increased share-based compensation expense and the impact of a weakening Yen. Research and development expenses as a percentage of revenue remained flat, representing approximately 13% for each of the six months ended June 28, 2013 and June 29, 2012.

Selling and marketing expenses were $83.1 million for the six months ended June 28, 2013 compared to $92.6 million for the six months ended June 29, 2012, representing a decrease of $9.5 million or approximately 10%. This decrease in selling and marketing expenses is primarily associated with decreased payroll related expenses resulting from our previously enacted restructuring and cost saving activities, partially offset by increased commission and share-based compensation expense along with the impact of a weakening Yen. Selling and marketing expenses as a percentage of revenue remained flat, representing approximately 6% for each of the six months ended June 28, 2013 and June 29, 2012.

General and administrative expenses were $76.4 million for the six months ended June 28, 2013 compared to $82.9 million for the six months ended June 29, 2012, representing a decrease of $6.5 million or 8%. This decrease in general and administrative expenses is primarily associated with decreased payroll and outside service related expenses resulting from our previously enacted restructuring and cost saving activities, partially offset by increased share-based compensation expense and the impact of a weakening Yen. General and administrative expenses as a percentage of revenue remained flat, representing approximately 6% for each of the six months ended June 28, 2013 and June 29, 2012.

Other Operating Expenses Amortization of Acquisition-Related Intangible Assets Amortization of acquisition-related intangible assets was $16.6 million and $22.2 million for the six months ended June 28, 2013 and June 29, 2012, respectively. The decrease of $5.6 million, or approximately 25%, is the result of the impairment of certain of SANYO Semiconductor Products Group's intangible assets recorded during the fourth quarter of 2012, which significantly reduced the carrying value of the related assets. 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 was $0.1 million for the six months ended June 28, 2013 compared to $46.1 million for the six months ended June 29, 2012. The information below summarizes the certain of the activities for each respective period. 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 additional information with respect to restructuring activities.

48 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 28, 2013 During the six months ended June 28, 2013, we initiated a voluntary retirement program for certain employees of our SANYO Semiconductor Products Group. We recorded net charges of approximately $20.5 million in connection with this program, which consisted of employee severance charges of $32.4 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $11.9 million.

Additionally, during the six months ended June 28, 2013, we recorded $2.3 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 owned the Aizu facility, which utilized 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 Other 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.

Six Months Ended June 29, 2012 During the six months ended June 29, 2012, we initiated a separate voluntary retirement program for certain employees of our SANYO Semiconductor Products Group. During the six months ended June 29, 2012, we recorded charges of $30.8 million associated with this activity, which was comprised of employee severance charges of $42.5 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $11.7 million.

Operating Income Information about operating income (loss) from our reportable segments for the six months ended June 28, 2013 and June 29, 2012 is as follows (in millions): SANYO Standard Semiconductor Applications Products Products Products Group Group Group Total For the six months ended June 28, 2013: Segment operating income (loss) $ 49.7 $ 122.9 $ (68.7 ) $ 103.9 For the six months ended June 29, 2012: Segment operating income (loss) $ 62.0 $ 129.2 $ (51.8 ) $ 139.4 Reconciliations of segment information to the financial statements is as follows (in millions): Six Months Ended June 28, 2013 June 29, 2012 Operating income for reportable segments $ 103.9 $ 139.4 Unallocated amounts: Restructuring, asset impairments and other charges, net (0.1 ) (46.1 ) Other unallocated manufacturing costs (10.6 ) (21.8 ) Other unallocated operating expenses (4.6 ) (1.0 ) Operating income $ 88.6 $ 70.5 Interest Expense Interest expense decreased by $10.4 million to $19.4 million for the six months ended June 28, 2013 compared to $29.8 million in the first six months of 2012.

We recorded amortization of debt discount to interest expense of $5.8 million and $13.2 million for the six months ended June 28, 2013 and June 29, 2012, respectively. Our average long-term debt balance (including current maturities and net of debt discount) for the six months ended June 28, 2013 was $964.7 million at a weighted average interest rate of 4.0%, compared to $1,138.7 million at a weighted average interest rate of 5.2% for the six months ended June 29, 2012.

49 -------------------------------------------------------------------------------- Table of Contents Other Other income decreased $2.0 million from a gain of $7.0 million for the six months ended June 29, 2012 to a gain of $5.0 million for the six months ended June 28, 2013. The decrease is primarily attributable to certain foreign currency exchange movements that are not offset by our hedging activity.

Loss on Debt Exchange During the six months ended June 28, 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 on the 2.625% Notes, 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.

Provision for Income Taxes We recorded an income tax benefit of $0.2 million and an income tax provision of $11.3 million during the six months ended June 28, 2013 and June 29, 2012, respectively.

The income tax benefit for the six months ended June 28, 2013 was $0.2 million, which consisted of the reversal of $6.0 million of valuation allowances against deferred tax assets of certain foreign subsidiaries and the reversal of $0.1 million for reserves of interest for potential liabilities in foreign jurisdictions, partially offset by $5.4 million for income and withholding taxes of certain of our foreign operations and $0.5 million of interest on existing reserves for potential liabilities in foreign taxing jurisdictions.

The income tax provision for the six months ended June 29, 2012 was $11.3 million, which consisted of $11.3 million for income and withholding taxes of certain of our foreign operations and $0.5 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 six months ended June 29, 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 six months ended June 28, 2013 was 0.3%, 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, as well as the reversal of certain valuation allowances during the six months ended June 28, 2013. 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 six months ended June 28, 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 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. This pension 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.

50-------------------------------------------------------------------------------- Table of Contents Our balance of cash, cash equivalents and short-term investments was $579.0 million as of June 28, 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 June 28, 2013 include approximately $362.4 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 by settling loans with our foreign subsidiaries in order to cover our domestic needs, by utilizing existing credit facilities, or through new bank loans or debt obligations.

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 June 28, 2013. We also had outstanding guarantees and letters of credit outside of our senior revolving credit facility of $4.6 million as of June 28, 2013.

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 June 28, 2013. We are also a guarantor of SCI LLC's unsecured loan with SMBC, which had a balance of $292.6 million as of June 28, 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 $113.7 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.

51-------------------------------------------------------------------------------- Table of Contents 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.

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 six months ended June 28, 2013, we paid $84.7 million for capital expenditures, while during the six months ended June 29, 2012, we paid approximately $114.7 million for capital expenditures.

Our current projection for 52 -------------------------------------------------------------------------------- Table of Contents capital expenditures for the remainder of 2013 is approximately $85 million, of which our current minimum contractual commitment is approximately $11.3 million.

The capital expenditure levels can materially influence our available cash for other initiatives.

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