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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, 2013 ("2013 Form 10-K"), filed with the Securities and Exchange Commission (the "Commission") on February 21, 2014, and our unaudited consolidated financial statements for the fiscal quarter and six months ended June 27, 2014, 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 2013 Form 10-K. Company Highlights for the Quarter Ended June 27, 2014 • Total revenues of approximately $757.6 million • Gross margin of approximately 36.0% • Net income of $0.20 per diluted share • Cash, cash equivalents and short-term investments of approximately $601.2 million • Completed the acquisition of Truesense Imaging, Inc. ("Truesense") for approximately $95.1 million in cash 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, see Item 2 "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 2014 through 2016. 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 and its subsidiaries ("we," "us," "our," "ON Semiconductor," or the "Company") is driving innovation in energy efficient electronics. Our extensive portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in advanced electronic systems and products. Our power management and motor driver 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' products. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing, communications and industrial systems. Our image sensors, optical image stabilization and auto focus devices provide advanced imaging solutions for optical systems. Our standard semiconductor components serve as "building blocks" 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 electronics, medical, industrial, smart grid and military/aerospace. Our devices are found in a wide variety of end-products including automotive electronics, smartphones, media tablets, wearable electronics, computers, servers, industrial building and home automation systems, consumer white goods, LED lighting, power supplies, networking and telecom equipment, medical diagnostics, imaging and hearing health, and sensor networks. Our portfolio of devices enables us to offer advanced ICs and the "building block" components that deliver system level functionality and design solutions. Our extensive product portfolio consisted of approximately 46,000 products as of June 27, 2014 and we shipped approximately 22.3 billion units in the first six months of 2014, as compared to 20.4 billion units in the first six months of 2013. We offer micro packages, which provide increased performance characteristics while reducing the critical board space inside today's ever shrinking electronic devices and power modules, delivering improved energy efficiency and reliability for a wide variety of high power applications. We believe that our ability to offer a broad range of products, combined with our global manufacturing and logistics network, provides our customers with single source purchasing on a cost-effective and timely basis. 38-------------------------------------------------------------------------------- Table of Contents Acquisitions Acquisition of Truesense On April 30, 2014, we completed the purchase of Truesense, whereby Truesense became our wholly-owned subsidiary. The aggregate purchase price of this transaction was approximately $95.1 million, subject to customary closing adjustments. We believe that the acquisition of Truesense strengthens our product portfolio targeting industrial end-markets such as machine vision, surveillance, and intelligent transportation systems by complementing our existing high-speed, high-resolution, power-efficient image sensing solutions with Truesense's high-performance image sensors for low-light, low-noise. Acquisition of Aptina, Inc. ("Aptina") On June 9, 2014, we entered into an agreement and plan of merger (the "Merger Agreement") with Aptina, pursuant to which, at the effective time of the merger, Aptina would become an indirect wholly-owned subsidiary of ON Semiconductor, for an estimated purchase price of approximately $400.0 million in cash, subject to customary closing adjustments as set forth in the Merger Agreement. The transaction remains subject to the satisfaction or waiver of various closing conditions and is subject to certain regulatory approvals. See Note 3: "Acquisitions" of the notes to our unaudited consolidated financial statements located elsewhere in this Form 10-Q for additional information. Segments As of June 27, 2014, we were organized into three operating segments, which also represented our three reporting segments: Application Products Group, Standard Products Group, and System Solutions 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 have historically reviewed, and will continue to review, our cost structure, capital investments and other expenditures to align our spending and capacity with our current sales and manufacturing projections. Outlook ON Semiconductor Third Quarter 2014 Outlook Based upon product booking trends, backlog levels, and estimated turns levels, we estimate that our revenues will be approximately $765 million to $795 million in the third quarter of 2014. Backlog levels for the third quarter of 2014 represent approximately 80% to 85% of our anticipated third quarter 2014 revenues. We estimate average selling prices for the third quarter of 2014 will be down approximately one to two percent when compared to the second quarter of 2014. For the third quarter of 2014, we estimate that gross margin as a percentage of revenues will be approximately 35.6% to 37.6%. 39-------------------------------------------------------------------------------- Table of Contents Results of Operations Quarter Ended June 27, 2014 Compared to the Quarter Ended June 28, 2013 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 27, 2014 and June 28, 2013 (in millions): Quarter Ended June 27, 2014 June 28, 2013 Dollar Change Revenues $ 757.6 $ 688.3 $ 69.3 Cost of revenues 484.6 456.5 28.1 Gross profit 273.0 231.8 41.2 Operating expenses: Research and development 84.2 83.1 1.1 Selling and marketing 47.9 43.3 4.6 General and administrative 44.7 40.2 4.5 Amortization of acquisition-related intangible assets 10.4 8.2 2.2 Restructuring, asset impairments and other, net 4.1 6.1 (2.0 ) Total operating expenses 191.3 180.9 10.4 Operating income 81.7 50.9 30.8 Other income (expense), net: Interest expense (7.9 ) (9.3 ) 1.4 Interest income 0.2 0.4 (0.2 ) Other (1.2 ) 4.1 (5.3 ) Other income (expense), net (8.9 ) (4.8 ) (4.1 ) Income before income taxes 72.8 46.1 26.7 Income tax benefit 16.2 2.6 13.6 Net income 89.0 48.7 40.3 Less: Net income attributable to non-controlling interest (1.0 ) (1.0 ) - Net income attributable to ON Semiconductor Corporation $ 88.0 $ 47.7 $ 40.3 Revenues Revenues were $757.6 million and $688.3 million for the quarters ended June 27, 2014 and June 28, 2013, respectively. The increase in revenues for the quarter ended June 27, 2014 compared to the quarter ended June 28, 2013 was attributed to our Application Products Group and Standard Products Group, both of which experienced increases in revenue as a result of an improved demand environment, along with approximately $13.3 million of additional revenue in the Application Products Group provided by the acquisition of Truesense on April 30, 2014, partially offset by decreased revenue from our System Solutions Group due to the continued impact of a softening of the consumer end-markets. As compared to the quarter ended June 28, 2013, we experienced a decline in average selling prices of approximately 4%, offset by favorable changes in volume and mix, which resulted in a net increase in revenue of approximately 10% for the quarter ended June 27, 2014. Our revenues by reportable segment for the quarters ended June 27, 2014 and June 28, 2013 were as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of June 27, 2014 Total Revenue (1) June 28, 2013 Total Revenue (1) Application Products Group $ 301.2 39.8 % $ 251.5 36.5 % Standard Products Group 303.7 40.1 % 276.4 40.2 % System Solutions Group 152.7 20.2 % 160.4 23.3 % Total revenues $ 757.6 $ 688.3 (1) Certain amounts may not total due to rounding of individual amounts. 40 -------------------------------------------------------------------------------- Table of Contents Revenues from the Application Products Group increased by $49.7 million, or approximately 20%, from the second quarter of 2013 to the second quarter of 2014. This increase is primarily attributable to a $29.7 million, or approximately 22%, increase in revenues from our ASIC products, combined with an increase in revenues from our analog products of $14.3 million, or approximately 16%. These increases are the result of an improved demand environment as well as the addition of revenue provided by the acquisition of Truesense. Revenues from the Standard Products Group increased by $27.3 million, or approximately 10%, from the second quarter of 2013 to the second quarter of 2014. This increase is primarily attributable to a $18.3 million, or approximately 17%, increase in revenue from our discrete products, combined with an increase in revenues from our analog products of $9.7 million, or approximately 13%, as a result of an improved demand environment. Revenues from the System Solutions Group decreased by $7.7 million, or approximately 5%, from the second quarter of 2013 to the second quarter of 2014. This decrease is primarily attributable to a $6.0 million, or approximately 6% decrease in revenue from our LSI products along with decreases from a softening of the consumer end-markets. Revenues by geographic location for the quarters ended June 27, 2014 and June 28, 2013 were as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of June 27, 2014 Total Revenue (1) June 28, 2013 Total Revenue (1) United States $ 126.1 16.6 % $ 98.5 14.3 % Japan 66.8 8.8 % 75.7 11.0 % China 220.9 29.2 % 198.5 28.8 % Singapore 189.7 25.0 % 180.9 26.3 % United Kingdom 118.3 15.6 % 102.6 14.9 % Other 35.8 4.7 % 32.1 4.7 % Total $ 757.6 $ 688.3 (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 27, 2014 and June 28, 2013, we had no single customer that accounted for 10% or more of our total revenues. Gross Profit Our gross profit by reportable segment for the quarters ended June 27, 2014 and June 28, 2013 was as follows (dollars in millions): As a % of As a % of Quarter Ended Segment Revenue Quarter Ended Segment Revenue June 27, 2014 (1) June 28, 2013 (1) Application Products Group $ 136.9 45.5 % $ 110.4 43.9 % Standard Products Group 110.2 36.3 % 106.0 38.4 % System Solutions Group 31.0 20.3 % 20.5 12.8 % Gross profit by segment $ 278.1 $ 236.9 Unallocated manufacturing costs (2) (5.1 ) (0.7 )% (5.1 ) (0.7 )% Total gross profit $ 273.0 36.0 % $ 231.8 33.7 % (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 $273.0 million in the second quarter of 2014 compared to $231.8 million in the second quarter of 2013. The gross profit increase of $41.2 million, or approximately 18%, during the second quarter of 2014 is primarily due to increased capacity utilization and cost savings realized from previous restructuring activities, partially offset by decreased average selling prices. 41 -------------------------------------------------------------------------------- Table of Contents Gross profit as a percentage of revenues increased from approximately 33.7% in the second quarter of 2013 to approximately 36.0% in the second quarter of 2014. This increase was primarily driven by favorable changes in volume and mix across certain product lines as well as a larger proportion of revenues generated from our Applications Products Group and Standard Products Group which experience higher gross margin levels than our System Solutions Group. Operating Expenses Research and development expenses were $84.2 million for the second quarter of 2014 compared to $83.1 million for the second quarter of 2013, representing an increase of $1.1 million, or approximately 1%. This increase in research and development expenses is primarily associated with increased personnel costs in our Application Products Group and Standard Products Group along with increased performance-based compensation as a result of improved performance results for the second quarter of 2014 compared to the second quarter of 2013, partially offset by decreased research and development expenses in our System Solutions Group attributable to decreased payroll related expenses resulting from our 2013 restructuring and cost saving activities. Selling and marketing expenses were $47.9 million for the second quarter of 2014 compared to $43.3 million for the second quarter of 2013, representing an increase of $4.6 million, or approximately 11%. This increase is primarily associated with increased sales commissions and increased payroll related expenses associated with performance-based compensation as a result of improved performance results for the second quarter of 2014 compared to the second quarter of 2013. General and administrative expenses were $44.7 million in the second quarter of 2014 compared to $40.2 million in the second quarter of 2013, representing an increase of $4.5 million, or approximately 11%. This increase in general and administrative expenses is primarily associated with increased payroll related expenses associated with performance-based compensation as a result of improved performance results for the second quarter of 2014 compared to the second quarter of 2013. Other Operating Expenses Amortization of Acquisition-Related Intangible Assets Amortization of acquisition-related intangible assets was $10.4 million and $8.2 million for the quarters ended June 27, 2014 and June 28, 2013, respectively. The increase in amortization of acquisition-related intangible assets is attributable to the amortization of intangible assets assumed as a result of our acquisition of Truesense. Restructuring, Asset Impairments and Other, Net Restructuring, asset impairments and other, net was $4.1 million for the quarter ended June 27, 2014 compared to $6.1 million for the quarter ended June 28, 2013. The information below summarizes certain activities for each respective quarter. See Note 5: "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. Quarter Ended June 27, 2014 During the fourth quarter of 2013, we initiated a voluntary retirement program for certain employees of our System Solutions Group subsidiaries in Japan (the "Q4 2013 Voluntary Retirement Program"). Approximately 350 employees opted to retire pursuant to the Q4 2013 Voluntary Retirement Program, of which 340 employees had retired by June 27, 2014. The remaining employees who accepted retirement packages are expected to retire by the end of 2014. As part of these restructuring activities, approximately 70 contractor positions were also identified for elimination, all of which were exited as of June 27, 2014. As an extension of this program, we also identified approximately 40 additional positions for elimination, consisting of 20 employees and 20 contractors, substantially all of which had existed by June 27, 2014. We anticipate total cost savings for the Q4 2013 Voluntary Retirement Program, which includes the above referenced headcounts, to be within the range of our previously disclosed expectations of $36 million to $45 million during the first year following the completion of the anticipated headcount reductions. During the quarter ended June 27, 2014, we initiated further voluntary retirement activities for certain of our System Solutions Group subsidiaries in Japan, applicable to an additional 60 to 70 positions, consisting of employees and contractors, which are expected to be eliminated during the third quarter of 2014. During the quarter ended June 27, 2014, we recorded net charges of approximately $0.6 million in connection with the Q4 2013 Voluntary Retirement Program, which consisted of employee severance charges of $2.3 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $1.7 million. 42 -------------------------------------------------------------------------------- Table of Contents Additionally, during the quarter ended June 27, 2014, we recorded approximately $1.7 million of net charges related to our previously announced plan to close our KSS facility. Quarter Ended June 28, 2013 During the first quarter of 2013, we initiated a voluntary retirement program for employees of certain of our System Solutions Group subsidiaries in Japan. During the quarter ended June 28, 2013, we recorded net charges of approximately $3.9 million in connection with this program, 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. Operating Income Information about operating income (loss) from our reportable segments for the quarters ended June 27, 2014 and June 28, 2013 is as follows (in millions): Standard Application Products System Solutions Products Group Group Group Total For quarter ended June 27, 2014: Segment operating income (loss) $ 36.5 $ 60.7 $ (0.1 ) $ 97.1 For quarter ended June 28, 2013: Segment operating income (loss) $ 22.2 $ 65.3 $ (23.0 ) $ 64.5 Reconciliations of segment information to the financial statements is as follows (in millions): Quarter Ended June 27, 2014 June 28, 2013 Operating income for reportable segments $ 97.1 $ 64.5 Unallocated amounts: Restructuring, asset impairments and other charges, net (4.1 ) (6.1 ) Other unallocated manufacturing costs (5.1 ) (5.1 ) Other unallocated operating expenses (1) (6.2 ) (2.4 ) Operating income $ 81.7 $ 50.9 (1) Other unallocated operating expenses consist of expenses associated with certain corporate decisions and initiatives which do not impact expenses that are directly attributable to our reporting segments. Interest Expense Interest expense decreased by $1.4 million to $7.9 million during the quarter ended June 27, 2014 compared to $9.3 million during the quarter ended June 28, 2013. We recorded amortization of debt discount to interest expense of $1.7 million and $2.7 million for the quarters ended June 27, 2014 and June 28, 2013, respectively. Our average long-term debt balance (including current maturities and net of debt discount) during the quarter ended June 27, 2014 was $912.6 million at a weighted average interest rate of approximately 3.5%, compared to $933.6 million at a weighted average interest rate of approximately 4.0% during the quarter ended June 28, 2013. Other Other expense increased by $5.3 million from income of $4.1 million for the quarter ended June 28, 2013 to expenses of $1.2 million for the quarter ended June 27, 2014. The increase is primarily attributable to certain foreign currency exchange movements that are not offset by our hedging activity. 43-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes We recorded an income tax benefit of $16.2 million and of $2.6 million during the quarters ended June 27, 2014 and June 28, 2013, respectively. The income tax benefit for the quarter ended June 27, 2014 consisted of the reversal of $21.5 million of our previously established valuation allowance against our U.S. deferred tax assets as a result of a net deferred tax liability recorded as part of the Truesense acquisition and the reversal of $3.2 million for reserves and interest for uncertain tax positions in foreign taxing jurisdictions that were effectively settled or for which the statute lapsed during the quarter ended June 27, 2014, partially offset by $6.6 million for income and withholding taxes of certain of our foreign and domestic operations and $1.9 million of new reserves and interest on existing reserves for uncertain tax positions in foreign taxing jurisdictions. The income tax benefit for the quarter ended June 28, 2013 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. 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 27, 2014 was a benefit of 22.3%, 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 valuation allowances and certain reserves and interest for potential liabilities in foreign taxing jurisdictions that were effectively settled or for which the statute lapsed during the quarter ended June 27, 2014. We continue to maintain a full valuation allowance on all of our domestic and substantially all of our Japan related deferred tax assets; however, it is reasonably possible that a substantial portion of the valuation allowance will be reversed within one year of June 27, 2014, which is not expected to have a material effect on our cash taxes. As of December 31, 2013, the valuation allowance on our domestic deferred tax assets was approximately $524 million. 44-------------------------------------------------------------------------------- Table of Contents Results of Operations Six Months Ended June 27, 2014 Compared to the Six Months Ended June 28, 2013 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 27, 2014 and June 28, 2013 (in millions): Six Months Ended June 27, 2014 June 28, 2013 Dollar Change Revenues $ 1,464.1 $ 1,349.3 $ 114.8 Cost of revenues 940.3 913.0 27.3 Gross profit 523.8 436.3 87.5 Operating expenses: Research and development 162.3 171.5 (9.2 ) Selling and marketing 92.3 83.1 9.2 General and administrative 85.7 76.4 9.3 Amortization of acquisition-related intangible assets 18.6 16.6 2.0 Restructuring, asset impairments and other, net 9.9 0.1 9.8 Total operating expenses 368.8 347.7 21.1 Operating income 155.0 88.6 66.4 Other income (expense), net: Interest expense (16.0 ) (19.4 ) 3.4 Interest income 0.4 0.7 (0.3 ) Other (1.8 ) 5.0 (6.8 ) Loss on debt exchange - (3.1 ) 3.1 Other income (expense), net (17.4 ) (16.8 ) (0.6 ) Income before income taxes 137.6 71.8 65.8 Income tax benefit 10.0 0.2 9.8 Net income 147.6 72.0 75.6 Less: Net income attributable to non-controlling interest (1.2 ) (1.7 ) 0.5 Net income attributable to ON Semiconductor Corporation $ 146.4 $ 70.3 $ 76.1 Revenues Revenues were $1,464.1 million and $1,349.3 million for the six months ended June 27, 2014 and June 28, 2013, respectively. The increase in revenues for the six months ended June 27, 2014 compared to the six months ended June 28, 2013 was attributed to our Application Products Group and Standard Products Group, both of which experienced increases in revenue as a result of an improved demand environment, along with approximately $13.3 million of additional revenue in the Application Products Group provided by the acquisition of Truesense on April 30, 2014, partially offset by decreased revenue from our System Solutions Group due to a weakened Yen and the continued impact of a softening of the consumer end-markets. As compared to the six months ended June 28, 2013, we experienced a decline in average selling prices of approximately 5%, offset by favorable changes in volume and mix, which resulted in a net increase in revenue of approximately 9% for the six months ended June 27, 2014. Our revenues by reportable segment for the six months ended June 27, 2014 and June 28, 2013 were as follows (dollars in millions): Six Months Ended As a % of Six Months Ended As a % of June 27, 2014 Total Revenue (1) June 28, 2013 Total Revenue (1) Application Products Group $ 580.7 39.7 % $ 496.5 36.8 % Standard Products Group 596.6 40.7 % 541.6 40.1 % System Solutions Group 286.8 19.6 % 311.2 23.1 % Total revenues $ 1,464.1 $ 1,349.3 (1) Certain amounts may not total due to rounding of individual amounts. 45 -------------------------------------------------------------------------------- Table of Contents Revenues from the Application Products Group increased by $84.2 million, or approximately 17%, from the six months ended June 28, 2013 to the six months ended June 27, 2014. This increase is primarily attributable to a $47.7 million, or approximately 18%, increase in revenues from our ASIC products, combined with an increase in revenues from our analog products of $27.5 million, or approximately 15%, along with increases in revenue from our TMOS and foundry products. These increases are the result of an improved demand environment, as well as the addition of revenue provided by the acquisition of Truesense. Revenues from the Standard Products Group increased by $55.0 million, or approximately 10%, from the six months ended June 28, 2013 to the six months ended June 27, 2014. This increase is primarily attributable to a $37.3 million, or approximately 18%, increase in revenue from our discrete products, combined with an increase in revenues from our analog products of $14.1 million, or approximately 10%, as a result of an improved demand environment. Revenues from the System Solutions Group decreased by $24.4 million, or approximately 8%, from the six months ended June 28, 2013 to the six months ended June 27, 2014. This decrease is primarily attributable to a $21.8 million, or approximately 10% decrease in revenue from our LSI products, along with decreases from a softening of the consumer end-markets and the impact of a weakening Yen. Revenues by geographic location for the six months ended June 27, 2014 and June 28, 2013 were as follows (dollars in millions): Six Months Ended As a % of Six Months Ended As a % of June 27, 2014 Total Revenue (1) June 28, 2013 Total Revenue (1) United States $ 238.1 16.3 % $ 197.4 14.6 % Japan 132.1 9.0 % 147.3 10.9 % China 423.6 28.9 % 397.9 29.5 % Singapore 370.1 25.3 % 347.3 25.7 % United Kingdom 235.5 16.1 % 200.3 14.8 % Other 64.7 4.4 % 59.1 4.4 % Total $ 1,464.1 $ 1,349.3 (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 27, 2014 and June 28, 2013, we had no single customer that accounted for 10% or more of our total revenues. Gross Profit Our gross profit by reportable segment for the six months ended June 27, 2014 and June 28, 2013 was as follows (dollars in millions): Six Months Ended As a % of Six Months Ended As a % of June 27, 2014 Segment Revenue (1) June 28, 2013 Segment Revenue (1)Application Products Group $ 263.0 45.3 % $ 217.3 43.8 % Standard Products Group 216.4 36.3 % 200.5 37.0 % System Solutions Group 56.0 19.5 % 29.1 9.4 % Gross profit by segment $ 535.4 $ 446.9 Unallocated manufacturing costs (2) (11.6 ) (0.8 )% (10.6 ) (0.8 )% Total gross profit $ 523.8 35.8 % $ 436.3 32.3 % (1) Certain amounts may not total due to rounding of individual amounts. (2) Unallocated manufacturing costs are shown as a percentage of total revenue. 46 -------------------------------------------------------------------------------- Table of Contents Our gross profit was $523.8 million during the six months ended June 27, 2014 compared to $436.3 million during the six months ended June 28, 2013. The gross profit increase of $87.5 million, or approximately 20%, during the six months ended June 27, 2014 is primarily due to increased capacity utilization, the impact of a weakened Yen on our cost of revenues, costs savings realized from previous restructuring activities and a lower inventory write down, partially offset by decreased average selling prices. Gross profit as a percentage of revenues increased from approximately 32.3% during the six months ended June 28, 2013 to approximately 35.8% during the six months ended June 27, 2014. This increase was primarily driven by favorable changes in volume and mix across certain product lines as well as a larger proportion of revenues generated from our Applications Products Group and Standard Products Group which experience higher gross margin levels than our System Solutions Group. Operating Expenses Research and development expenses were $162.3 million for the six months ended June 27, 2014 compared to $171.5 million for the six months ended June 28, 2013, representing a decrease of $9.2 million, or approximately 5%. This decrease in research and development expenses is primarily associated with our System Solutions Group and is attributable to decreased payroll related expenses resulting from our restructuring and cost saving activities, along with the impact of a weakened Yen. These decreases were partially offset by increased personnel costs in our Application Products Group and Standard Products Group along with increased performance-based compensation as a result of improved performance results for the six months ended June 27, 2014 compared to the six months ended June 28, 2013. Selling and marketing expenses were $92.3 million for the six months ended June 27, 2014 compared to $83.1 million for the six months ended June 28, 2013, representing an increase of $9.2 million, or approximately 11%. This increase is primarily associated with increased sales commissions and increased payroll related expenses associated with performance-based compensation as a result of improved performance results for the six months ended June 27, 2014 compared to the six months ended June 28, 2013. General and administrative expenses were $85.7 million for the six months ended June 27, 2014 compared to $76.4 million for the six months ended June 28, 2013, representing an increase of $9.3 million, or approximately 12%. This increase in general and administrative expenses is primarily associated with increased payroll related expenses associated with performance-based compensation as a result of improved performance results for the six months ended June 27, 2014 compared to the six months ended June 28, 2013, in addition to approximately $4.0 million in third-party acquisition related expenses. Other Operating Expenses Amortization of Acquisition-Related Intangible Assets Amortization of acquisition-related intangible assets was $18.6 million and $16.6 million for the six months ended June 27, 2014 and June 28, 2013, respectively. The increase in amortization of acquisition-related intangible assets is attributable to the amortization of intangible assets assumed as a result of our acquisition of Truesense. Restructuring, Asset Impairments and Other, Net Restructuring, asset impairments and other, net was $9.9 million for the six months ended June 27, 2014 compared to $0.1 million for the six months ended June 28, 2013. The information below summarizes certain activities for each respective quarter. See Note 5: "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. Six Months Ended June 27, 2014 During the fourth quarter of 2013, we initiated a voluntary retirement program for certain employees of our System Solutions Group subsidiaries in Japan (the "Q4 2013 Voluntary Retirement Program"). Approximately 350 employees opted to retire pursuant to the Q4 2013 Voluntary Retirement Program, of which 340 employees had retired by June 27, 2014. The remaining employees who accepted retirement packages are expected to retire by the end of 2014. As part of these restructuring activities, approximately 70 contractor positions were also identified for elimination, all of which were exited as of June 27, 2014. As an extension of this program, we also identified approximately 40 additional positions for elimination, consisting of 20 employees and 20 contractors, substantially all of which had existed by June 27, 2014. We anticipate total cost savings for the Q4 2013 Voluntary Retirement Program, which includes the above referenced headcounts, to be within the range of our previously disclosed expectations of $36 million to $45 million during the first year following the completion of the anticipated headcount reductions. 47-------------------------------------------------------------------------------- Table of Contents During the six months ended June 27, 2014, we initiated further voluntary retirement activities for certain of our System Solutions Group subsidiaries in Japan, applicable to an additional 60 to 70 positions, consisting of employees and contractors, which are expected to be eliminated during the third quarter of 2014. During the six months ended June 27, 2014, we recorded net charges of approximately $2.8 million in connection with the Q4 2013 Voluntary Retirement Program, which consisted of employee severance charges of $7.3 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $4.5 million. Additionally, during the six months ended June 27, 2014, we recorded approximately $5.3 million of net charges related to our previously announced plan to close our KSS facility. 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 System Solutions 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. |