Employee Benefit and Incentive Plans | 12 Months Ended |
Dec. 31, 2013 |
Employee Benefits and Share-based Compensation [Abstract] | ' |
Employee Benefit and Incentive Plans | ' |
Employee Benefit and Incentive Plans |
Share and Equity-based Compensation |
Our total share and equity-based compensation expense is presented below: |
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| Year ended December 31, 2013 | | Year ended December 31, 2012 | | Year ended December 31, 2011 | |
Cost of sales | $ | 11 | | | $ | 8 | | | $ | 3 | | |
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Selling, general and administrative | 26 | | | 27 | | | 21 | | |
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Research and development | 11 | | | 8 | | | 3 | | |
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Total | $ | 48 | | | $ | 43 | | | $ | 27 | | |
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2011 Omnibus Incentive Plan |
Non-qualified Options |
During 2013, we granted approximately 2.2 million stock options under the 2011 Omnibus Incentive Plan (the "2011 Plan") to certain executives and employees. Included in this amount was 1.9 million stock options from the April 2, 2013 annual long-term incentive grants ("2013 Annual Grant") which had a grant date fair value of $6.90 and strike price of $13.91, which was equal to the closing price on the date of grant. Total compensation costs associated with the stock options under the 2013 Annual Grant was $10 million, net of estimated forfeitures. Pursuant to the 2011 Plan, we had issued approximately 5.8 million non-qualified stock options in Freescale Ltd. (“2011 Options”) with exercise prices ranging from $8.74 to $17.30 per share, to certain qualified participants, which remain outstanding as of December 31, 2013. The 2011 Options generally vest at a rate of 25% of the total grant on each of the first, second, third and fourth anniversaries of the date of grant, and are subject to the terms and conditions of the 2011 Plan and related award agreements. As of December 31, 2013, we had approximately $26 million in unamortized expense, net of estimated forfeitures, which is being amortized on a straight-line basis over a period of four years to additional paid-in capital. |
The fair value of the 2011 Options was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the model are outlined in the following table: |
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| Year ended December 31, 2013 | | Year ended December 31, 2012 | | Year ended December 31, 2011 | |
Weighted average grant date fair value per share | $ | 7.05 | | | $ | 6.93 | | | $ | 7.82 | | |
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Weighted average assumptions used: | | | | | | |
Expected volatility | 60.71 | % | | 63 | % | | 80 | % | |
Expected lives (in years) | 4.75 | | | 5 | | | 4.75 | | |
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Risk free interest rate | 0.75 | % | | 0.92 | % | | 0.89 | % | |
Expected dividend yield | — | % | | — | % | | — | % | |
In accordance with ASC Topic 718, the computation of the expected volatility assumptions used in the Black-Scholes calculations for grants was based on historical volatilities and implied volatilities of peer companies. The Company utilized the volatilities of peer companies due to our lack of extensive history as a public company and the fact that our current equity was not publicly traded prior to May 26, 2011. The peer companies operate in the semiconductor industry and are of similar size. When establishing the expected life assumptions, we use the “simplified” method prescribed in ASC Topic 718 for companies that do not have adequate historical data. The risk-free interest rate is measured as the prevailing yield for a U.S. Treasury security with a maturity similar to the expected life assumption. |
A summary of changes in the 2011 Options outstanding during 2013 is presented below: |
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| Stock Options | | Wtd. Avg. | | Wtd. Avg. | | Aggregate |
(in thousands) | exercise price | Remaining | Intrinsic Value |
| per share | Contractual | (in millions) |
| | Term (Years) | |
Balance at January 1, 2013 | 4,606 | | | $ | 12.93 | | | 6 | | $ | 2 | |
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Granted | 2,246 | | | $ | 14.09 | | | | | |
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Terminated, canceled or expired | (739 | ) | | $ | 14.86 | | | | | |
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Exercised | (306 | ) | | $ | 13.71 | | | | | |
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Balance at December 31, 2013 | 5,807 | | | $ | 13.09 | | | 6 | | $ | 17 | |
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Exercisable options at December 31, 2013 | 983 | | | $ | 12.56 | | | 5 | | $ | 3 | |
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The intrinsic value of options exercised under this plan during 2013 was $1 million. |
Restricted Share Units |
During 2013, we granted approximately 3.8 million RSUs to certain executives and employees under the 2011 Plan. Included in this amount was 3.5 million RSUs granted in connection with the 2013 Annual Grant with a grant date fair value of $13.91 and total compensation cost of $37 million, net of estimated forfeitures. While RSUs, to the extent earned, generally vest at a rate of 25% of the total grant on the first, second, third and fourth anniversaries of the date of grant, some RSUs vest at a rate of one-third of the total grant on each of the first, second and third anniversaries of the date of grant, or other vesting schedule depending on the award, and are subject to the terms and conditions of the 2011 Plan and related award agreements. These grants are not entitled to dividends or voting rights, if any, until the underlying common shares are delivered. The fair value of the RSU awards is being recognized on a straight-line basis over the employee service period. |
Also, in connection with the 2013 Annual Grant, we granted approximately 0.9 million market-based performance RSUs to certain executives, which cliff vest on the third anniversary of the date of grant. The number of units that will vest will range from 0% to 150% of the target shares awarded based on the relative total shareholder return (TSRs) of the Company's share price as compared to a set of peer companies. The Company estimates the fair value of the TSRs using a Monte Carlo valuation model, which includes a modifier for market results. The grant date fair value for these TSR awards was $17.01, and total compensation cost of $13 million, net of estimated forfeitures, will be amortized on a straight-line basis over a period of three years to additional paid-in capital. The assumptions, in addition to projections of market results, used in the Monte Carlo model are outlined in the following table: |
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| Year ended December 31, 2013 | | | | | | | | | |
Weighted average grant date fair value per share | $ | 17.01 | | | | | | | | | | |
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Weighted average assumptions used: | | | | | | | | | | |
Expected volatility | 48.32 | % | | | | | | | | | |
Expected lives (in years) | 2.75 | | | | | | | | | | |
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Risk free interest rate | 0.33 | % | | | | | | | | | |
Expected dividend yield | — | % | | | | | | | | | |
We have also granted performance-based RSUs (PRSUs) to certain executives of the Company under the 2011 Plan during 2012. The PRSUs granted, to the extent earned, vest at a rate of one-third of the total grant on each of the first, second and third anniversaries of the date of grant for certain executives or vest fully on the third anniversary of the date of grant for PRSUs granted to our CEO. The number of common shares underlying each PRSU is contingent on Company performance measured by annual revenue and earnings per share goals established by the Compensation and Leadership Committee of the Board of Directors for each annual performance period. Each PRSU entitles the grant recipient to receive from 0 to 1.50 common shares for certain executives or 0 to 1.0 common shares for PRSUs granted to our CEO based on the Company’s achievement of the performance goals for each performance period. |
As of December 31, 2013 we had approximately $74 million in unamortized expense, net of expected forfeitures, which is being amortized on a straight-line basis to additional paid-in capital over a period of three or four years, depending on the award, for RSUs and three years for TSRs and PRSUs. Under the terms of the RSU, TSR and PRSU award agreements, common shares underlying these awards are issued to the participant upon vesting of the award based on performance results. |
A summary of changes in the RSUs, TSRs and PRSUs outstanding under the 2011 Plan during the year ended December 31, 2013 is presented below: |
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| RSUs, TSRs and PRSUs | | Wtd. Avg. grant | | | | | | |
(in thousands) | date fair value | | | | | | |
| per share | | | | | | |
Non-vested RSU, TSR and PRSU balance at January 1, 2013 | 4,520 | | | $ | 14.19 | | | | | | | |
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Granted | 4,710 | | | $ | 13.98 | | | | | | | |
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Issued | (1,145 | ) | | $ | 13.59 | | | | | | | |
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Terminated, canceled or expired | (794 | ) | | $ | 15.34 | | | | | | | |
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Non-vested RSU, TSR and PRSU balance at December 31, 2013 | 7,291 | | | $ | 14.04 | | | | | | | |
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The weighted average grant date fair value of RSUs, TSRs and PRSUs granted during 2013, 2012 and 2011 was $13.98, $14.71 and $12.78, respectively. The total intrinsic value of RSUs, TSRs and PRSUs issued under this plan during 2013 and 2012 was $16 million and $3 million, respectively. |
On January 5, 2014, we granted share-based compensation under the 2011 Plan to certain executives and employees as part of our annual long-term incentive grants ("2014 Annual Grant"). We granted approximately 2 million stock options and 3.8 million RSUs. The stock options and RSUs vest 25% on each of the first, second, third and fourth anniversaries of the date of grant. The grant date fair value of the stock options is $6.67 and the strike price for these awards is equal to the closing price on January 3, 2014, the last active trading day prior to the grant date, of $15.37. Total compensation costs associated with these awards of $56 million, net of estimated forfeitures, will be amortizes on a straight-line basis over a period of four years to additional paid-in capital. |
Also, as part of the 2014 Annual Grant, we granted TSRs to certain executives. The target units awarded were approximately 1 million, which cliff vest on the third anniversary of the date of grant. The number of units that will vest will range from 0% to 150% of the target shares awarded based on the relative total shareholder return of the Company's share price as compared to a set of peer companies. The grant date fair value for these TSR awards is $15.94, as determined using the Monte-Carlo valuation model, and total compensation costs of $12 million, net of estimated forfeitures, will be amortized on a straight-line basis over a period of three years to additional paid-in capital. |
2006 Management Incentive Plan and 2007 Employee Incentive Plan |
Upon completion of the IPO, the shares reserved for issuance under the 2006 Management Incentive Plan (the “2006 MIP”) and 2007 Employee Incentive Plan (the “2007 EIP”) that were not issued or subject to outstanding grants became available under the 2011 Plan, and no further awards will be made under the 2006 MIP or 2007 EIP. In the event that any outstanding award under the 2011 Plan, the 2007 EIP or the 2006 MIP is forfeited for any reason, terminates, expires or lapses, any shares subject to such award will be available for issuance under the 2011 Plan. |
Option Exchange |
On April 6, 2009, Freescale Ltd. granted options to purchase common shares of Freescale Ltd. under the 2006 MIP and the 2007 EIP by entering into new non-qualified option agreements with certain officers and employees. The Compensation and Leadership Committee of the Freescale Ltd. Board of Directors approved the form of the non-qualified option agreements in connection with an exchange of existing vested and unvested Class B Limited Partnership Interests in Freescale LP (“Class B Interests”) and options to purchase Freescale Ltd. common shares (both as described below), in each case, for new options to purchase Freescale Ltd. common shares (“Option Exchange”). Under the terms of each of the agreements, the new options have a term of ten years and vest and become exercisable in four equal installments on each of the first, second, third and fourth anniversaries of the grant date and are subject to the terms and conditions of the investors’ agreements. The exercise price for the new options granted under both agreements is equal to the fair value per share of Freescale Ltd. common shares on the date of grant. |
Previously granted options and Class B Interests were exchanged for new options with a lower exercise price granted on a one-for-one basis for options and on a one-for-one hundred forty-four basis for Class B Interests (including the 1.2472% Class B-2008 Series Interest discussed later in this Note). Options to purchase an aggregate of approximately 3 million shares of Freescale Ltd. common shares, 67 thousand Class B Interests and the 1.2472% Class B-2008 Series Interest were exchanged for new options to purchase an aggregate of approximately 7 million common shares of Freescale Ltd. Options granted pursuant to the Option Exchange have an exercise price of $6.40 per share. In accordance with ASC Topic 718, the increase in the fair value of the Freescale Ltd. options that occurred in connection with the Option Exchange resulted in a modification charge of approximately $18 million, net of estimated forfeitures, which was recognized over the four year vesting period of the new options. |
Non-qualified Options |
In connection with the Merger, we adopted the 2006 MIP, which authorized share-based awards to be granted to management, key employees and directors for up to six million common shares. On February 4, 2009, the 2006 MIP was amended to allow up to approximately 11.7 million common shares to be issued under this plan. On October 28, 2009, the 2006 MIP was further amended to allow up to approximately 13.5 million common shares to be issued under the plan. As of December 31, 2013, the Company had issued approximately 1.6 million non-qualified options to purchase its common shares (“2006 Options”), which remain outstanding, with exercise prices ranging from $6.40 to $36.12 per share, to certain members of management pursuant to the 2006 MIP. (These options include those issued in connection with the Option Exchange.) The 2006 Options vest 25% on each of the first, second, third and fourth anniversaries of the date of grant and are subject to the terms and conditions of certain investor agreements. As of December 31, 2013 we had approximately $1 million in unamortized expense, net of expected forfeitures, which is being amortized on a straight-line basis over a period of four years to additional paid-in capital. The fair value of the 2006 Options was estimated on the date of grant using the Black-Scholes option pricing method. The assumptions used in the model are outlined in the following table: |
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| Year ended December 31, 2011 | | | | | | | | | |
Weighted average grant date fair value per share | $ | 7.43 | | | | | | | | | | |
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Weighted average assumptions used: | | | | | | | | | | |
Expected volatility | 70 | % | | | | | | | | | |
Expected lives (in years) | 6.25 | | | | | | | | | | |
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Risk free interest rate | 1.8 | % | | | | | | | | | |
Expected dividend yield | — | % | | | | | | | | | |
A summary of changes in the 2006 Options outstanding during the year ended December 31, 2013 is presented below: |
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| Stock Options | | Wtd. Avg. | | Wtd. Avg. | | Aggregate |
(in thousands) | exercise price | Remaining | Intrinsic |
| per share | Contractual | Value |
| | Term (Years) | (in millions) |
Balance at January 1, 2013 | 6,746 | | | $ | 6.88 | | | 7 | | $ | 30 | |
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Granted | — | | | $ | — | | | | | |
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Terminated, canceled or expired | (98 | ) | | $ | 27.07 | | | | | |
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Exercised | (5,096 | ) | | $ | 6.51 | | | | | |
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Balance at December 31, 2013 | 1,552 | | | $ | 6.85 | | | 6 | | $ | 14 | |
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Exercisable options at December 31, 2013 | 1,458 | | | $ | 6.76 | | | 5 | | $ | 14 | |
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The intrinsic value of options exercised under this plan during 2013, 2012 and 2011 was $44 million, $9 million and $1 million, respectively. |
Under the 2006 MIP, we also issued fully vested options (“Rollover Options”) to purchase approximately 0.8 million shares of our common shares, in exchange for approximately 143 thousand fully vested Freescale Inc. options held by certain members of management that were not exercised before the closing of the Merger. The number and exercise price for the Rollover Options were determined based on a formula that maintained the intrinsic value of the Freescale Inc. options and maintained the fair value of the award before and after conversion. Using the closing price of Freescale Inc.’s common shares at the conclusion of the Merger, the average price for the Rollover Options was $22.24 per share. Except as noted for the number and exercise price, the Rollover Options generally maintained the same terms as the options that existed prior to the Merger. |
The Rollover Options are considered temporary equity under the provisions of SEC Accounting Series Release No. 268, “Presentation in Financial Statements of ‘Redeemable Preferred Stocks’,” due to having a contingent cash-settlement feature upon the death or disability of the option holder and the awards having intrinsic value as of December 1, 2006 (the “Grant Date”). As such, the Grant Date intrinsic value of approximately $11 million recognized in additional paid-in capital should be considered temporary equity of the Company. |
In June 2007, we adopted the 2007 EIP, which authorized the issuance of up to 0.9 million shares of our common shares in the form of share-based awards to key employees. On October 28, 2009, the 2007 EIP was amended to allow up to approximately 2.1 million shares of to be issued under the plan. As of December 31, 2013, 1 million non-qualified options to purchase our common shares (“2007 Options”), with exercise prices ranging from $6.40 to $36.12 per share remain outstanding. (These options include those issued in connection with the Option Exchange.) The 2007 Options vest 25% on each of the first, second, third and fourth anniversaries of the options’ grant date. As of December 31, 2013, we had less than $1 million in unamortized expense, net of expected forfeitures, which is being amortized on a straight-line basis over a period of four years to additional paid-in capital. |
The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing method. The assumptions used in the model are outlined in the following table: |
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| Year ended December 31, 2011 | | | | | | | | | |
Weighted average grant date fair value per share | $ | 7.43 | | | | | | | | | | |
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Weighted average assumptions used: | | | | | | | | | | |
Expected volatility | 70 | % | | | | | | | | | |
Expected lives (in years) | 6.25 | | | | | | | | | | |
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Risk free interest rate | 1.8 | % | | | | | | | | | |
Expected dividend yield | — | % | | | | | | | | | |
A summary of changes in the 2007 Options outstanding during the year ended December 31, 2013 is presented below: |
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| Stock | | Wtd. Avg. | | Wtd. Avg. | | Aggregate |
Options | exercise price | Remaining | Intrinsic |
(in thousands) | per share | Contractual | Value |
| | Term (Years) | (in millions) |
Balance at January 1, 2013 | 1,222 | | | $ | 6.93 | | | 7 | | $ | 37 | |
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Granted | — | | | $ | — | | | | | |
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Terminated, canceled or expired | (35 | ) | | $ | 7.33 | | | | | |
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Exercised | (321 | ) | | $ | 6.46 | | | | | |
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Balance at December 31, 2013 | 866 | | | $ | 7.08 | | | 6 | | $ | 8 | |
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Exercisable options at December 31, 2013 | 858 | | | $ | 7.06 | | | 6 | | $ | 8 | |
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The intrinsic value of options exercised under this plan during 2013, 2012 and 2011 was $3 million, $1 million and less than $1 million, respectively. |
Class B Interests |
In connection with the Merger, Freescale LP adopted an equity-based management compensation plan (“2006 Interest Plan”), under which 344 thousand unvested Class B Interests in Freescale LP were issued to thirteen individuals, thereby making those individuals parties to the Amended and Restated Agreement of Limited Partnership of Freescale LP (“Limited Partnership Agreement”). Under the provisions of the Limited Partnership Agreement, the Class B Interests will participate in any increase in the equity of the partnership subsequent to the initial contribution. The Class B Interests awards vest 25% on each of the first, second, third and fourth anniversaries of the date of grant. The Class B Interests are subject to the terms, conditions, and restrictions of the Limited Partnership Agreement and the Investors Agreement dated December 1, 2006. In 2009, approximately 6 thousand Class B Interests became vested upon the separation of two executives, and concurrently, approximately 3 thousand Class B Interests were forfeited. As of December 31, 2013, 130 thousand Class B Interests, held by former executives of Freescale Inc., remain outstanding. These Class B Interests exclude those canceled in exchange for new options to purchase Freescale Ltd. common shares in connection with the Option Exchange. |
Restricted Stock Units and Deferred Stock Units |
Under the terms of the 2006 MIP, RSUs were granted to certain members of management, key employees and directors. The grants are rights to receive our common shares on a one-for-one basis and vest 25% on each of the first, second, third and fourth anniversaries of the grant date and are not entitled to dividends or voting rights, if any, until they are vested. The fair value of the RSU awards is being recognized on a straight-line basis over the employee service period. |
During 2009, we also granted performance-based deferred stock units (DSUs) to certain executives of Freescale Inc. under the 2006 MIP. The number of DSUs that could be earned pursuant to such awards range from zero to twice the number of target DSUs established at the grant date based upon the achievement of EBITDA and revenue growth levels measured against a group of peer companies over a three-year period from January 1, 2009. As of February 1, 2012, these performance-based DSUs were canceled because the minimum performance conditions were not achieved. |
A summary of changes in RSUs and DSUs outstanding during the year ended December 31, 2013 is presented below: |
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| RSUs and DSUs | | Wtd. Avg. grant | | | | | | |
(in thousands) | date fair value | | | | | | |
| per share | | | | | | |
Non-vested RSU and DSU balance at January 1, 2013 | 99 | | | $ | 11.63 | | | | | | | |
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Granted | — | | | $ | — | | | | | | | |
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Vested | 14 | | | $ | 10.48 | | | | | | | |
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Issued | (61 | ) | | $ | 24.79 | | | | | | | |
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Terminated, canceled or expired | (30 | ) | | $ | 12.69 | | | | | | | |
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Non-vested RSU and DSU balance at December 31, 2013 | 22 | | | $ | 10.59 | | | | | | | |
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The weighted average grant date fair value of RSUs and DSUs granted during 2011 was $12.69. The total intrinsic value of RSUs and DSUs issued under this plan during 2013, 2012 and 2011 was $1 million, $4 million and $1 million, respectively. |
Under the terms of the RSU award agreements, common shares are not issued to the participant upon vesting of the RSU. Shares are issued upon the earlier of: (i) the participant’s termination of employment, (ii) the participant’s death, (iii) the participant’s disability, (iv) a change of control, or (v) the seventh anniversary of the date of grant. Vested RSUs are considered outstanding until shares have been issued or the awards have been canceled. |
As of December 31, 2013, we had less than $1 million in unamortized expense related to RSUs and DSUs issued under the 2006 MIP, net of expected forfeitures, which is being amortized on a straight-line basis over a period of two to four years to additional paid-in capital. |
Employee Share Purchase Plan |
We initiated an Employee Share Purchase Plan (“ESPP”) upon the completion of the IPO, for which we have approximately 1.6 million remaining common shares reserved for future issuance. Under the ESPP, eligible participants are allowed to purchase common shares of Freescale through payroll deductions of up to 15% of their compensation on an after-tax basis. The price an employee pays per share is 85% of the fair market value of the common shares on the close of the last trading day of the purchase period. The ESPP has two six-month purchase periods, the first of which begins on January 1 and the second of which begins on July 1. |
The first ESPP offering period of 2013 began on January 1, 2013 and ended on June 30, 2013. On July 2, 2013, approximately 1 million common shares of Freescale were issued to participating employees under the ESPP at a discounted price of $11.52 per share. The second offering period for ESPP began on July 1, 2013 and ended on December 31, 2013. On January 3, 2014, approximately 1 million common shares of Freescale were issued to participating employees under the ESPP at a discounted price of $13.64 per share. During both 2013 and 2012, we recognized $4 million in compensation costs related to the 15% discount offered under this plan. |
Defined Contribution Plans |
We have a retirement savings plan covering substantially all eligible U.S. employees (the “Plan”). The Plan provides for employer matching contributions which may be made in amounts up to a 100% match of each participant’s pre-tax and/or post-tax contributions to the Plan not to exceed 5% of the participant’s eligible earnings. Under our defined contribution plans, matching contributions totaled $27 million in 2013, $29 million in 2012 and $31 million in 2011. |
Incentive Plans |
We are parties to an incentive awards program under which the Company has the authority to grant cash bonuses to employees. In conjunction with this awards program, Freescale Inc. has established a bonus plan for the first and second halves of each year. Freescale Inc. plans to allocate an incentive pool percentage to each designated employee for each semi-annual period during the calendar year. The employee’s incentive award then will be determined by us based on the employee’s allocated portion of the incentive pool, our performance against pre-established objectives and the employee’s individual performance, subject to adjustment at our sole discretion. We recognized expense of $51 million in 2013 and $59 million in 2011 related to this program. No expense was recorded in 2012, as the company did not achieve the pre-established performance objectives under the bonus plan. |
Pension and Post-retirement Benefit Plans |
In accordance with the provisions of ASC Topic 715, “Compensation – Retirement Benefits,” we recognize the funded status of our defined benefit post-retirement plans on our accompanying Consolidated Balance Sheets, and changes in the funded status are reflected in comprehensive earnings in the accompanying Consolidated Statements of Comprehensive Loss. The measurement date for all U.S. and non-U.S. plans was December 31st for 2013 and 2012. |
Pension Benefits |
At the Distribution Date, the pension benefits for all active U.S. employees were frozen. Obligations related to retired and other vested participants as of the Distribution Date remained the responsibility of Motorola. We did not adopt a new U.S. pension plan. Most of Freescale Inc.’s non-U.S. retirement benefit plans were also frozen as of the Distribution, with respect to our employees, with the obligation for retirees and vested participants remaining the responsibility of Motorola, and Freescale Inc. no longer participating in the Motorola plans. We continue to offer defined benefit plans to approximately 2,700 non-U.S. employees. |
Net periodic benefit cost for pension plans was $13 million, $11 million and $11 million in 2013, 2012 and 2011, respectively. Our contributions to these plans aggregated to $2 million, $3 million and $5 million in 2013, 2012 and 2011, respectively. The estimated amount of net actuarial loss included in accumulated other comprehensive earnings as of December 31, 2013, that is expected to be amortized into net periodic benefit cost over the next fiscal year is $2 million for the non-U.S. defined benefit plans. |
The weighted average assumptions for these benefit plans as of December 31, 2013 and 2012 were as follows: |
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| December 31, | | December 31, | | | | | | | |
2013 | 2012 | | | | | | | |
Discount rates | 3 | % | | 3 | % | | | | | | | |
Expected return on plan assets | 3.4 | % | | 3.4 | % | | | | | | | |
Rate of compensation increase | 3.2 | % | | 3 | % | | | | | | | |
The overall expected long-term rate of return on plan assets is based on expected returns on individual asset types included in asset portfolios provided by pension plan fund managers, as well as expected interest on insurance contracts purchased to fund pension benefits. |
The accumulated benefit obligation (ABO) for all defined benefit plans was $142 million and $139 million at December 31, 2013 and 2012, respectively. The projected benefit obligation of these plans was $158 million and $155 million at December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, plan assets of approximately $53 million and $55 million, respectively, were principally invested in equity, debt and guaranteed investment securities. |
Plan Assets Underlying Pension Plans |
The pension plans for certain of our foreign subsidiaries have underlying assets, while pension plans of other foreign subsidiaries are unfunded. Our overall investment strategy with regard to these pension assets is to achieve a wide diversification of asset types, fund strategies and fund managers with resulting future cash flows associated with such investments sufficient to fund anticipated future pension payments. The target allocations for plan assets are 30% equity securities and 70% fixed income securities with minimal cash investment, although the actual plan asset allocations may be within a specified range of these targets. Equity securities primarily include investments in U.S. and international large-cap and mid-cap companies. Fixed income securities include international government securities, corporate bonds from diversified industries, municipal bonds, and U.S. Treasury securities. Cash investments primarily include cash balances and investments in time deposits. The actual asset allocations are reviewed and rebalanced on a periodic basis to maintain the target allocations. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. |
The fair values of our pension plan assets at December 31, 2013 and 2012 by asset category, utilizing the fair value hierarchy discussed in Note 3, “Fair Value Measurements,” are as follows: |
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| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | |
As of December 31, 2013 | Total | | (Level 1) | | (Level 2) | |
Assets | | | | | | |
Common collective trust | $ | 39 | | | $ | — | | | $ | 39 | | |
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Insurance contracts | 14 | | | — | | | 14 | | |
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Total assets | $ | 53 | | | $ | — | | | $ | 53 | | |
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| | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | |
As of December 31, 2012 | Total | | (Level 1) | | (Level 2) | |
Assets | | | | | | |
Common collective trust | $ | 41 | | | $ | — | | | $ | 41 | | |
|
Insurance contracts | 14 | | | — | | | 14 | | |
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Total assets | $ | 55 | | | $ | — | | | $ | 55 | | |
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Our interest in the common collective trust investments are managed by one custodian. Consistent with our investment strategy, the custodian has invested the assets across a widely diversified portfolio of U.S. and international equity and fixed income securities. Fair values of each security within the collective trust as of December 31, 2013 and 2012 were obtained from the custodian and are based on quoted market prices of individual investments; however, since the fund itself does not have immediate liquidity or a quoted market price, these assets are considered Level 2. |
Our insurance contract pension assets represent a claim on a policy value which are independent from the value of investments underlying it, as the insurer is obliged to guarantee this amount regardless of (i) how the amount is invested, (ii) the value of the insurer’s investment at a point in time and (iii) the future fluctuations in value of the insurer’s assets underlying the policies. This guaranty is demanded by the German Federal Insurance Board, and any insurer must accept and declare this guaranty in its business terms, otherwise their terms are not approved. The value of the insurance contracts is considered Level 2. There were no Level 3 instruments at December 31, 2013 or 2012. |
Post-retirement Health Care Benefits |
Certain retiree benefits are available to eligible U.S. employees meeting certain age and service requirements upon termination of employment through the Motorola Post-retirement Healthcare Plan ("Post-retirement Healthcare Plan"). At the Distribution Date, Freescale Inc. assumed responsibility for the retiree medical benefit obligation for all eligible retired participants, active vested participants, and active participants who vested within the three year period following the Distribution. |
The components of the expense we incurred under the Post-retirement Healthcare Plan were as follows: |
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| Year ended December 31, 2013 | | Year ended December 31, 2012 | | Year ended December 31, 2011 | |
Service cost | $ | 1 | | | $ | 1 | | | $ | 1 | | |
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Interest cost | 6 | | | 7 | | | 9 | | |
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Net amortization of gains | (1 | ) | | (1 | ) | | — | | |
|
One-time deviation | — | | | — | | | (1 | ) | |
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Post-retirement expense | $ | 6 | | | $ | 7 | | | $ | 9 | | |
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The measurement date for the valuation of our obligations and assets for the Post-retirement Healthcare Plan was December 31st for 2013 and 2012. Our obligation consists of an ABO and represents the actuarial present value of benefits payable to plan participants for services rendered at the valuation date. Our obligation to the Post-retirement Healthcare Plan is as follows: |
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| |
| | | | | | | | | | | | |
| Year ended December 31, 2013 | | Year ended December 31, 2012 | | Year ended December 31, 2011 | |
Beginning of year | $ | 166 | | | $ | 158 | | | $ | 177 | | |
|
Service cost | 1 | | | 1 | | | 1 | | |
|
Interest cost | 6 | | | 7 | | | 9 | | |
|
Actuarial loss (gain) | (45 | ) | | 10 | | | (18 | ) | |
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Benefits paid, net | (6 | ) | | (6 | ) | | (10 | ) | |
Prior service cost | — | | | (5 | ) | | — | | |
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Other | — | | | 1 | | | — | | |
|
One-time deviation | — | | | — | | | (1 | ) | |
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Total benefit obligation | $ | 122 | | | $ | 166 | | | $ | 158 | | |
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Benefit payments, which reflect expected future service, are estimated to be $5 million in 2014, $7 million in 2015, $8 million in 2016, $9 million in 2017, $10 million in 2018 and $51 million for the next five years thereafter. The estimated amount of net actuarial gain and unrecognized prior service credit included in accumulated other comprehensive earnings as of December 31, 2013, that are expected to be amortized into net periodic benefit cost over the next fiscal year is $4 million for U.S retiree health care plan. |
The weighted average assumptions for these retiree medical benefits as of December 31, 2013 and 2012 were as follows: |
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| December 31, | | December 31, | | | | | | | |
2013 | 2012 | | | | | | | |
Discount rate | 4.75 | % | | 3.75 | % | | | | | | | |
Assumed health care trend rate for next year | 6.72 | % | | 7.24 | % | | | | | | | |
Assumed ultimate health care trend rate | 4.5 | % | | 5 | % | | | | | | | |
Year that the rate reaches the ultimate trend rate | 2026 | | | 2020 | | | | | | | | |
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The assumed discount rate is based on market rates as of the measurement date and is utilized in calculating the actuarial present value of our obligation, periodic expense and health care cost trend rate for the Post-retirement Healthcare Plan. |
The assumed health care cost trend rate represents our estimate of the annual rates of change in the costs of the health care benefits currently provided by the Post-retirement Healthcare Plan. The estimated effect of a 1% increase in assumed health care cost trends would increase 2014 costs by less than $1 million and increase the benefit obligation at December 31, 2013 by $11 million. The estimated effect of a 1% decrease in assumed health care cost trends would decrease 2014 costs by less than $1 million and decrease the benefit obligation at December 31, 2013 by $9 million. |
The reconciliation of the funded status of the Post-retirement Healthcare Plan is as follows: |
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| | | | | | | | | | | | |
| December 31, | | December 31, | | | | | |
2013 | 2012 | | | | | |
Benefit obligation | $ | (122 | ) | | $ | (166 | ) | | | | | |
Fair value of plan assets | — | | | — | | | | | | |
| | | | |
Funded status | (122 | ) | | (166 | ) | | | | | |
Unrecognized net gain | (67 | ) | | (23 | ) | | | | | |
Unrecognized prior service cost | (4 | ) | | (5 | ) | | | | | |
Accrued cost | $ | (193 | ) | | $ | (194 | ) | | | | | |