We do not assume any obligation to update any forward-looking statements and disclaim any obligation to update our view of any risks or uncertainties described herein or to publicly announce the result of any revisions to the forward-looking statements made in this Annual Report, except as required by law.
In addition, this Annual Report contains information concerning the semiconductor industry and business segmentsend markets generally, which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which the semiconductor industry, our market and business segments will develop. We have based these assumptions on information currently available to us, including through the market research and industry reports referred to in this Annual Report. If any one or more of these assumptions turn out to be incorrect, actual market results may differ from those predicted. While we do not know what impact any such differences may have on
our business, if there are such differences, they could have a material adverse effect on our future results of operations and financial condition, and the trading price of our common stock. There can be no assurances that a pandemic, epidemic or outbreak of contagious diseases, such as COVID-19, will not have a material and adverse impact on our business, operating results and financial condition in the future. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak to results only as of the date the statements were made. Except for any ongoing obligation to disclose material information as required by the United States federal securities laws, NXP does not have any intention or obligation to publicly update or revise any forward-looking statements after we distribute this document, whether to reflect any future events or circumstances or otherwise.
The financial information included in this Annual Report is based on United States Generally Accepted Accounting Principles (U.S. GAAP), unless otherwise indicated.
This Annual Report includes market data and certain other statistical information and estimates that are based on reports and other publications from industry analysts, market research firms, and other independent sources, as well as management’s own good faith estimates and analyses. NXP believes these third-party reports to be reputable, but has not independently verified the underlying data sources, methodologies or assumptions. The reports and other publications referenced are generally available to the public and were not commissioned by NXP. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information.
Item 1. Business
Semiconductors perform a broad variety of functions within electronic products and systems, including processing data, sensing, storing information and converting or controlling electronic signals. Semiconductors vary significantly depending upon the specific function or application of the end product in which the semiconductor is used and the customer who is deploying it. Semiconductors also vary on a number of technical characteristics including the degree of integration, level of customization, programmability and the process technology utilized to manufacture the semiconductor. Advances in semiconductor technology have increased the functionality and performance of semiconductors, improving their features and power consumption characteristics while reducing their size and cost. These advances have resulted in growth of semiconductors and electronic content across a diverse array of products. The semiconductor market totaled $412$574.1 billion in 2019.
Growth in automotive semiconductor sales relies on global vehicle sales and production trends and the increase in semiconductor content per vehicle, which is being driven by the proliferation of electronic features throughout the vehicle. Despite the decline in vehicles sales and production in 2020 due to the outbreak of the COVID-19 and the moderate growth in 2021 and 2022 due to the global supply crisis, the increase in semiconductor content per vehicle continued.
Growth in the Industrial market is driven by the replacement of traditional mechanical equipment by smart, energy-saving and connected electronic equipment using various sensors, processors, connectivity, analog and security chipsets that align well with NXP’s ability to provide a complete range of processing, connectivity and secure solutions. Reducing carbon emissions (global net zero emission commitments) will likely also be a key growth driver with large transformations expected of our energy systems. Factories and homes will need to rely much more on renewable energy (e.g., solar, wind) and increase efficient use of energy. The way we generate and store energies will likely be more distributed. The energy ecosystem needs to develop and ensure smart, efficient and reliable power delivery.
In IoT, growth is driven by the increasing use of high-performance edge and media devices (e.g., home
We offer customers a broad portfolio of semiconductor products, including microcontrollers, application processors, communication processors, connectivity chipsets, analog and interface devices, RF power amplifiers,
S32x Automotive Processing Platform offers scalability across products and multiple application domains based on Arm Cortex-A, Cortex-R, and Cortex-M cores with Automotive Safety Integrity Level (ASIL-D) capabilities. capabilities with software compatibility from the MCU’s to SoC’s.
Communication processors combine a computing core, caches and other memories, with high-speed networking and input/output interfaces, such as Ethernet and PCI Express. Our portfolio includes 64-bit Arm-based Layerscape processors with up to 16 CPUs and Ethernet ports running at up to 100Gbps. Software support includes Linux and commercial real-time operating systems. Within enterprise and data-center communications infrastructure, our processors are used in switches, routers, SD-WAN access devices, Wi-Fi access points, and network security systems. Within service-provider communications infrastructure, our processors are used in cellular base stations, fixed wireless access Customer Premises Equipment (CPE), residential gateways, broadband aggregation systems, and core networking equipment. Although designed for use in communications infrastructure, these processors are also find widespread useused in other types of equipment, including industrial automation for control, edge computing nodes,and cloud computing servers for offloading networking functions, and automobiles for communications and some ADAS functions.server offload-applications. We also offer Layerscape Access processors,
are suited for applications demanding the highest security and reliability. Nearly all of our security products consist of multi-functional solutions comprised of passive RF connectivity devices facilitating information transfer from the user document to reader infrastructure; secure, tamper-proof microcontroller devices in which information is securely encrypted (“secure element”); and secure real-time operating system software products to facilitate the encryption-decryption of data, and the interaction with the reader infrastructure systems. Our solutions are developed to provide extreme levels of security of user information, undergoing stringent and continued global governmental and banking certification processes, and to deliver a high level of device performance enabling significant throughput and productivity to our customers.
Sensors serve as a primary interface in embedded systems for advanced human interface and contextual awareness that mimic the human “5 senses” interaction with the external environment. We provide several categories of semiconductor-based environmental and inertial sensors for the Automotive market, including
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2025 Diversity, Equality, & Inclusion Goals |
40% Women in Overall Global Workforce | 30% Women in Global Indirect Labor Workforce | 20% Women in Executive Positions* | 25% Women in R&D Positions | 50% Minority Representation in the management team, and has served in this role since September 2018. Previously, Mrs. Wuamett served as Senior Vice President and Deputy General Counsel at NXP. Prior to that, she was Freescale’s Senior Vice President, General Counsel and Secretary and has served in various positions at Freescale and Motorola.United States* |
Employees
As of December 31, 2019 we had 29,400 full-time equivalent employees compared to 30,000 at December 31, 2018.
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2022 Diversity, Equality, & Inclusion Performance |
37% | 25% | 16% | 19% | 51% |
* Executive positions are defined as individuals at the level of Vice President and above. Minority representation includes team members who self-identify as Asian, Hispanic or Latino, Black or African American, American Indian or Alaska Native, Pacific Islander or two or more races. We also include within minority representation team members who have not self-identified an ethnicity.
Talent Development and Investing in the Future
NXP is committed to a 70/20/10 continuous learning model, including mechanisms for learning through on-the-job experiences (70%), learning through others (20%), and learning through education (10%). Using a blend of internally designed and externally sourced courses and learning resources, we offer our team members around the globe a variety of training programs that provide real-time learning opportunities in support of key business processes, requirements and initiatives. We also provide a library of on-demand skills development and microlearning resources to all our team members.
We work to create developmental opportunities for our team members through stretch assignments, project roles, cross-functional interactions, cross-geography engagements, and both temporary and longer-term job rotations – all of which are used to stimulate core skill and leadership competency development, to provide on-the-job learning experience, and to fuel career growth.
We also believe that our commitment to our internship programs and university partnerships are a key contributor to developing the new generation of talent, including engineers in our industry and company, and provide a pipeline of recent college graduates into our talent pool. Through our partnerships with universities across the world, we fund and support advanced research programs and projects that demonstrate our commitment to investing in the future of not only technology, but also students' knowledge and skills.
Compensation and Benefits
We provide total rewards packages that include market competitive base salary, as well as opportunities to earn short-term cash incentives and equity-based incentives. In addition, in an effort to meet the specific needs of our team members and their families, we offer locally competitive benefits programs, which vary by country/region, and include an Employee Stock Purchase Plan, retirement programs, healthcare and insurance benefits, allowances, paid time off, family leave, our flexible work arrangement program, and other team member assistance programs.
NXP’s compensation programs are designed to attract the best talent and drive performance across all areas of our diverse workforce. NXP is committed to managing all reward-based compensation programs, including merit increases, incentive program payouts and long-term incentive awards, to deliver on our pay-for-performance philosophy. Rewarding performance is a critical foundation for our overall compensation program.
We believe that pay decisions should be made on three factors: external (i.e. market conditions), internal equity, and employee performance/contributions. We have not experienced any material strikes or labor disputesdeveloped a proactive process to evaluate each reward-based compensation program in real time and provide leaders with feedback to create more visibility into fair and equitable compensation while decisions are being made. NXP also utilizes third-party data to formulate compensation and benefits programs that are fair, equitable and competitive. We then empower leaders to recognize both individual and team accomplishments through a variety of compensation programs.
Since 2022, we have linked a portion of our executive and employee compensation to our ESG Goals. For more information, see our 2023 Proxy Statement and the ESG Goals section in the past. Corporate Sustainability Report1.
Employee Health and Safety
We are committed to the safety of our employees, and we continuously assess safety risks globally to ensure workplace risks are mitigated. We are certified to the ISO 45001 Occupational Health and Safety Management System, and have developed robust safety programs and initiatives to safeguard our workforce. In 2022, as a follow-up to a previous survey, we conducted a global survey on employee safety, inquiring about opportunities for improvement and asking employees about their comfort level when raising safety concerns. The follow-up survey had a participation rate of approximately 80% and the responses to all questions were more favorable than those provided on the previous survey. In particular, 94% of our employees felt that safety concerns are a high priority for NXP and 98% of employees felt that safety starts with them. We used the results from the follow-up survey to identify improvement opportunities, and have started working at our sites and locations to address these opportunities.
For the past three years, the ongoing COVID-19 pandemic has made it all the more important to maintain employee health and safety, and we have effectively managed our health-and-safety programs over this period. During the height of the pandemic, we hosted several successful vaccination drives in a number of countries where our employees live and work. As community conditions improved, we developed a global program for flexible work arrangements, offering eligible employees the option to perform a combination of onsite and remote work. We believe this approach – emphasizing onsite safety, vaccination availability, and the option to work remotely – addresses the safety needs of our workforce while ensuring the robust continuity of our operations.
Employee Representation
A number of our employeesteam members are members of a labor union. Inunion and in various countries, local law requires us to inform and consult with employee representatives on matters relating to labor conditions. We have not experienced any material strikes or labor disputes in the past and consider our employee relations to be good.
We also have employee-lead worker’s councils in various countries that provide input and oversight to many of the decisions made on behalf of employees.
Climate and Environment
As part of our commitment to reducing emissions and conserving the earth’s natural resources, we have made the environment a key pillar in our Sustainability Policy and corporate strategy. We set company-wide environmental targets to optimize our use of resources, minimize waste and continuously improve. We periodically set and reset targets, and publish mid- and long-term targets on carbon footprint reduction and renewable energy consumption, as well as water and waste recycling.
See Part I, Item 1A. Risk Factors for a discussion of potential global environmental risks that may adversely affect our business operations, such as climate change or natural disasters.
Our commitment to enabling a smarter, more sustainable world goes beyond our operations, and includes developing innovative product solutions that support the sustainability goals and objectives of our stakeholders. We monitor developments of global legislation by tracking current discussions, timelines, and the likelihood of new implementations. During the design and development of our new product solutions, we emphasize these potential requirements to coincide with new product introductions. By minimizing the environmental impact of our products in the early stages of the design process, we enable sustainable, green technology for NXP and our customers.
Additional information about our environmental strategy, targets, and metrics is included in our Corporate Sustainability Report, and can be found on our website2.
1 The contents of our Corporate Sustainability Report are referenced for general information only and are not incorporated by reference in this Form 10-K. Except as specifically noted elsewhere in this Form 10-K, the contents of our 2023 Proxy Statement are referenced here for general information only and are not incorporated by reference in this Form 10-K.
2 The contents of our website, our Corporate Sustainability Report, and our Sustainability Policy are referenced for general information only and are not incorporated by reference in this Form 10-K.
Available Information
Our main corporate website address is www.nxp.com. Copies of our filings with the United States Securities and Exchange Commission (SEC), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge on our website within the "Investors Relations" section as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC's website at www.sec.gov.www.sec.gov. The information contained on these websites as referenced is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
Item 1A. Risk Factors
Risks related to our business
the semiconductor industry and the markets in which we participate
The semiconductor industry is highly cyclical.
Historically, the relationship between supply and demand in the semiconductor industry has caused a high degree of cyclicality in the semiconductor market. Semiconductor supply is partly driven by manufacturing capacity, which in the past has demonstrated alternating periods of substantial capacity additions and periods in which no or limited capacity was added. As a general matter, semiconductor companies are more likely to add
capacity in periods when current or expected future demand is strong and margins are, or are expected to be, high. Investments in new capacity can result in overcapacity, which can lead to a reduction in prices and margins. In response, companies typically limit further capacity additions, eventually causing the market to be relatively undersupplied. In addition, demand for semiconductors varies, which can exacerbate the effect of supply fluctuations. As a result of this cyclicality, the semiconductor industry has in the past experienced significant downturns, such as in 1997/1998, 2001/2002 and in 2008/2009, often in connection with, or in anticipation of, maturing life cycles of semiconductor companies’ products and declines in general economic conditions. These downturns have been characterized by diminishing demand for end-user products, high inventory levels, under-utilization of manufacturing capacity and accelerated erosion of average selling prices. The foregoing risks have historically had, and may continue to have, a material adverse effect on our business, financial condition and results of operations.
Significantly increased volatility and instability and unfavorable economic conditions may adversely affect our business.
In 2008 and 2009, Europe, the United States and international markets experienced increased volatility and instability. In 2015, volatility and instability in financial markets continued following renewed investor concerns related to the economic situation in parts of the world, a decline in the growth rate of the Chinese economy, increased hostilities in the Middle East, and other world events. These, or other events, could further adversely affect the economies of the European Union, the United States and those of other countries and may exacerbate the cyclicality of our business. Among other factors, we face risks attendant to unfavorable changes related to interest rates, rates of economic growth, fiscal, monetary and trade policies of governments, tax rates and policy and changes in demand for end-user products and changes in interest rates.
There is a significant risk that the global economy could fall into recession again. If economic conditions remain uncertain or deteriorate, our business, financial condition and results of operations could be materially adversely affected.
It is difficult for us, our customers and suppliers to forecast demand trends. We may be unable to accurately predict the extent or duration of cycles or their effect on our financial condition or result of operations and can give no assurance as to the timing, extent or duration of the current or future business cycles. A recurrent declinecycles generally, or specific to the markets in which we participate. In the first half of 2020, demand orin the failureautomotive market steeply declined as a result of demandmanufacturing shutdowns by automotive OEMs due to returnthe coronavirus pandemic, resulting in an unforeseen negative impact to prior levels could place pressure on our results of operations. The timingBeginning in the third quarter of 2020, demand rebounded across all end markets more quickly than anticipated and extentaccelerated through the third quarter of any changes2022, resulting in our inability to currently prevailing marketfully satisfy customer demand. Beginning in the third quarter of 2022, we have seen a slowdown, primarily in our more consumer exposed end markets of IoT and Mobile versus the prior year with a significant degree of uncertainty for the near-term demand trends. In 2008 and 2009, Europe, the United States and international markets experienced increased volatility and instability related to the global financial crisis. In the event of a future decline in global economic conditions, is uncertainour business, financial condition and supplyresults of operations could be materially adversely affected, and demand may be unbalanced at any time.the resulting economic decline might disproportionately affect the markets in which we participate, further exacerbating a decline in our results of operations.
The semiconductor industry is highly competitive. If we fail to introduce new technologies and products in a timely manner, this could adversely affect our business.
The semiconductor industry is highly competitive and characterized by constant and rapid technological change, short product lifecycles, significant price erosion and evolving standards. Accordingly, the success of our business depends to a significant extent on our ability to develop new technologies and products that are
ultimately successful in the market. The costs related to the research and development necessary to develop new technologies and products are significant and subject to increase due to current and expected inflation and any reduction of our research and development budget could harm our competitiveness. Meeting evolving industry requirements and introducing new products to the market in a timely manner and at prices that are acceptable to our customers are significant factors in determining our competitiveness and success. Commitments to develop new products must be made well in advance of any resulting sales, and technologies and standards may change during development, potentially rendering our products outdated or uncompetitivenoncompetitive before their introduction. If we are unable to successfully develop new products, our revenue may decline substantially. Moreover, some of our competitors are well-established entities, are larger than us and have greater resources than we do. If these competitors increase the resources they devote to developing and marketing their products, we may not be able to compete effectively. Any consolidation among our competitors could enhance their product offerings and financial resources, further strengthening their competitive position. In addition, some of our competitors operate in narrow business areas relative to us, allowing them to concentrate their research and development efforts directly on products and services for those areas, which may give them a competitive advantage. As a result of these competitive pressures, we may face declining sales volumes or lower prevailing prices for our products, and we may not be able to reduce our total
costs in line with this declining revenue. If any of these risks materialize, they could have a material adverse effect on our business, financial condition and results of operations.
The demand for our products depends to a significant degree on the demand for our customers’ end products.
The vast majority of our revenue is derived from sales to manufacturers in the automotive, industrial & IoT, mobile, and communication infrastructure. Demand in these markets fluctuates significantly, driven by consumer spending, consumer preferences, the development of new technologies and prevailing economic conditions. In addition, the specific products in which our semiconductors are incorporated may not be successful, or may experience price erosion or other competitive factors that affect the price manufacturers are willing to pay us. Such customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times. This is particularly common during periods of low demand. This can make managing our business difficult, as it limits the predictability of future revenue. It can also affect the accuracy of our financial forecasts. Furthermore, developing industry trends, such as customers’ use of outsourcing and revised supply chain models, including the direct purchase of semiconductor products by end product manufacturers instead of component manufacturers, may affect our revenue, costs, customer relations and working capital requirements.
If customers do not purchase products made specifically for them, we may not be able to resell such products to other customers or may not be able to require the customers who have ordered these products to pay a cancellation fee. The foregoing risks could have a material adverse effect on our business, financial condition and results of operations.
The semiconductor industry is historically characterized by continued price erosion, especially after a product has been on the market.
One of the results of the rapid innovation in the semiconductor industry is that pricing pressure, especially on products containing older technology, can be intense. Product life cycles are relatively short, and as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis.
In turn, historically demand for older technology falls, causing the price at which such products can be sold to drop, in some cases precipitously. If this trend continues, in order to continue profitably supplying these products, we must reduce our production and procurement costs in line with the lower revenue we can expect to generate per unit. Usually, this must be accomplished through improvements in process technology, production efficiencies and efficient procurement pricing. If we cannot advance our process technologies or improve our efficiencies to a degree sufficient to maintain required margins, we will no longer be able to make a profit from the sale of these products. Moreover, we may not be able to cease production of such products, either due to contractual obligations or for customer relationship reasons, and as a result may be required to bear a loss on such products. We cannot guarantee that competition in our core product markets will not lead to price erosion, lower revenue or lower margins in the future. Should reductions in our manufacturing costs fail to keep pace with reductions in market prices for the products we sell, this could have a material adverse effect on our business, financial condition and results of operations.
Risks related to our business operations
In many of the market segments in which we compete, we depend on winning selection processes, and failure to be selected could adversely affect our business in those market segments.
One of our business strategies is to participate in and win competitive bid selection processes to develop products for use in our customers’ equipment and products. These selection processes can be lengthy and require us to incur significant design and development expenditures, with no guarantee of winning a contract or generating revenue. Failure to win new design projects and delays in developing new products with anticipated technological advances or in commencing volume shipments of these products may have an adverse effect on our business. This risk is particularly pronounced in markets where there are only a few potential customers and in the automotive market, where, due to the longer design cycles involved, failure to win a design-in could prevent access to a customer for several years. Our failure to win a sufficient number of these bids could result in reduced revenue and hurt our competitive position in future selection processes because we may not be perceived as being a technology or industry leader, each of which could have a material adverse effect on our business, financial condition and results of operations.
The demand for our products dependsOur global business operations expose us to a significant degree on the demand for our customers’ end products.
The vast majority of our revenue is derived from sales to manufacturers in the automotive, industrial & IoT, mobile, and communication infrastructure. Demand in these markets fluctuates significantly, driven by consumer spending, consumer preferences, the development of new technologies and prevailing economic conditions. In addition, the specific products in which our semiconductors are incorporated may not be successful, or may experience price erosion or other competitive factorsinternational business risks that affect the price manufacturers are willing to pay us. Such customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times. This is particularly common during periods of low demand. This can make managing our business difficult, as it limits the predictability of future revenue. It can also affect the accuracy of our financial forecasts. Furthermore, developing industry trends, including customers’ use of outsourcing and new and revised supply chain models, maycould adversely affect our revenue, costs and working capital requirements. Additionally, a significant portionbusiness.
If any of our products is madethe following international business risks were to order.
If customers do not purchase products made specifically for them, we may not be able to resell such products to other customersmaterialize or may not be able to require the customers who have ordered these products to pay a cancellation fee. The foregoing risksbecome worse, they could have a material adverse effect on our business, financial condition and results of operations.
operations:
The semiconductor•negative economic developments in economies around the world and the instability of governments and international trade arrangements, such as the increase of barriers to international trade including the imposition of tariffs on imports by the United States and China, the withdrawal of the United Kingdom from the European Union, enhanced export controls on certain products and sanctions on certain industry is characterized by continued price erosion, especially after a product has been onsectors and parties and the market.sovereign debt crisis in certain European countries;
One•social and political instability in a number of countries around the results of the rapid innovationworld, including continued hostilities and civil unrest in the semiconductor industry is that pricing pressure, especially on products containing older technology, can be intense. Product life cycles are relatively short,Middle East and as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis.
In turn, demand for older technology falls, causing the price at which such products can be sold to drop,armed conflict in some cases precipitously. In order to continue profitably supplying these products, we must reduce our production costs in line with the lower revenue we can expect to generate per unit. Usually, this must be accomplished through improvements in process technology and production efficiencies. If we cannot advance our process technologies or improve our efficiencies to a degree sufficient to maintain required margins, we will no longer be able to make a profit from the sale of these products. Moreover, weUkraine. The instability may not be able to cease production of such products, either due to contractual obligations or for customer relationship reasons, and as a result may be required to bear a loss on such products. We cannot guarantee that competition in our core product markets will not lead to price erosion, lower revenue or lower margins in the future. Should reductions in our manufacturing costs fail to keep pace with reductions in market prices for the products we sell, this could have a material adversenegative effect on our business, financial condition and resultsoperations via our customers and global supply chain and volatility in energy prices and the financial markets;
•potential terrorist attacks;
•epidemics and pandemics, such as the coronavirus outbreak, which may adversely affect our workforce, as well as our suppliers and customers;
•geopolitical tension and disputes and resulting adverse changes in government policies, especially those affecting global trade and investment. Sustained geopolitical tensions could lead to long-term changes in global trade and technology supply chains and decoupling of operations.global trade networks;
•volatility in foreign currency exchange rates, in particular with respect to the U.S. dollar, and transfer restrictions, in particular in mainland China; and
•threats that our operations or property could be subject to nationalization and expropriation.
In addition, Russia’s recent invasion of Ukraine has led to sanctions, export controls and other penalties being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military and economic actions and resulting sanctions could adversely affect the global economy and financial markets. Further escalation of the conflict between Ukraine and Russia could adversely impact the global supply chain, disrupt our operations, or negatively impact the demand for our products in our primary end markets. Any such disruption could result in an adverse impact to our financial results.
Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.
Goodwill and other identifiable intangible assets are recorded at fair value on the date of an acquisition. As a result of our acquisition of Marvell’s Wireless WiFi Connectivity Business Unit, Bluetooth technology portfolio and related assets in 2019, we recognized goodwill of $1.1 billion and intangible assets of $0.5 billion. As a result of our acquisition of Freescale in 2015, we recognized goodwill of $7.4 billion and intangible assets of $8.5 billion. We review our goodwill and other intangible assets balance for impairment upon any indication of a potential impairment, and in the case of goodwill, at a minimum of once a year. Impairment may result from, among other things, a sustained decrease in share price, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products
and services we sell, challenges to the validity of certain registered intellectual property, reduced sales of certain products incorporating intellectual property and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of impairment of goodwill or other identifiable intangible assets could have a material adverse effect on our financial position, results of operations and stockholders’ equity.
In difficult market conditions, our high fixed costs combined with low revenue may negatively affect our results of operations.
The semiconductor industry is characterized by high fixed costs and, notwithstanding our utilization of third-party manufacturing capacity, our production requirements are in part met by our own manufacturing facilities. In less favorable industry environments, like we faced in the first half of 2020, we are generally faced with a decline in the utilization rates of our manufacturing facilities due to decreases in demand for our products. During such periods, our fabrication plants could operate at lower loading level, while the fixed costs associated with the full capacity continue to be incurred, resulting in lower gross profit.
We may from time to time restructure parts of our organization. Any such restructuring may impact customer satisfaction and the costs of implementation may be difficult to predict.
We have previously executed restructuring initiatives and continue to assess, restructure and make changes to parts of the processes in our organization. If the global economy remains volatile, our revenues could decline and we may be forced to take cost savings steps that could result in additional charges and materially affect our business. The costs of implementing any restructurings, changes or cost savings steps may differ from our estimates and any negative impacts on our revenues or otherwise of such restructurings, changes or steps, such as situations in which customer satisfaction is negatively impacted, may be larger than originally estimated.
If we fail to extend or renegotiate our collective bargaining agreements and social plans with our labor unions as they expire from time to time, if regular or statutory consultation processes with employee representatives such as works councils fail or are delayed, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.
We are a party to collective bargaining agreements and social plans with our labor unions. We are also required to consult with our employee representatives, such as works councils, on items such as restructurings, acquisitions and divestitures. Although we believe that our relations with our employees, employee representatives and unions are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate these agreements as they expire from time to time or to conclude the consultation processes in a timely and favorable way. The impact of future negotiations and consultation processes with employee representatives could have a material impact on our financial results. Also, if we fail to extend or renegotiate our labor agreements and social plans, if significant disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business.
Our working capital needs are difficult to predict.
Our working capital needs are difficult to predict and may fluctuate. The comparatively long period between the time at which we commence development of a product and the time at which it may be delivered to a customer leads to high inventory and work-in-progress levels. The volatility of our customers’ own businesses and the time required to manufacture products also make it difficult to manage inventory levels and require us to stockpile products across many different specifications.
Our business may be adversely affected by costs relating to product defects, and we could be faced with product liability and warranty claims.
We make highly complex electronic components and, accordingly, there is a risk that defects may occur in any of our products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we release defective products into the market, our reputation could suffer and we may
lose sales opportunities and incur liability for damages. Moreover, since the cost of replacing defective semiconductor devices is often much higher than the value of the devices themselves, we may at times face damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. We also face exposure to potential liability resulting from the fact that our customers typically integrate the semiconductors we sell into numerous consumer products, which are then sold into the marketplace. We are exposed to product liability claims if our semiconductors or the consumer products based on them malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence that our products caused the damage in question, and such claims could result in significant costs and expenses relating to attorneys’ fees and damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations.
We face risks related to security vulnerabilities in our products.
We and third parties regularly identify security vulnerabilities with respect to our products and services. The same holds for the operating systems and workloads that run on them and the components that interact with them. Components and Intellectual Property (IP) we purchase or license from third parties for use in our products, as well as industry-standard specifications we implement in our products, are also regularly subject to security vulnerabilities. As we have become a more data-centric company, our processors and other products are being used in additional and new and critical application areas that create new or increased cybersecurity, privacy or safety risks. This includes applications that gather and process large amounts of data, such as the cloud or Internet of Things, and critical infrastructure and automotive applications. We, our customers, and the users of our products do not always promptly learn of or have the ability to fully assess the magnitude or effects of a vulnerability, including the extent, if any, to which a vulnerability has been exploited. Additionally, new information can subsequently develop that may impact our assessment of a security vulnerability, including additional information learned as we develop and deploy mitigations or updates, become aware of additional variants and evaluate the competitiveness of existing and new products.
Security vulnerabilities and any limitations of, or adverse effects resulting from, mitigation techniques can adversely affect our results of operations, financial condition, sales, branding, customer relationships, share price, prospects, and reputation in a number of ways, any of which may be material.
Adverse publicity about security vulnerabilities or mitigations could damage our reputation with customers or users and reduce demand for our products and services. These effects may be greater to the extent that competing products are not susceptible to the same vulnerabilities or if vulnerabilities can be more effectively mitigated in competing products. Moreover, third parties can release information regarding potential vulnerabilities of our products before mitigations are available. This, in turn, could lead to attempted or successful exploits, adversely affect our ability to introduce mitigations, or otherwise harm our business and reputation.
Our business has suffered, and could in the future suffer, from manufacturing problems.
We manufacture, in our own factories as well as with third parties, our products using processes that are highly complex, require advanced and costly equipment and must continuously be modified to improve yields and performance. Difficulties in the production process can reduce yields or interrupt production, and, as a result of such problems, we may on occasion not be able to deliver products or do so in a timely or cost-effective or competitive manner. Such difficulties may include rationing, or other forced disruption of utility supplies such as electricity, gas or water by governments or regulators which could lead to disruptions of our operation resulting in high costs and global supply chain disruptions. As the complexity of both our products and our fabrication processes has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become more demanding. As is common in the semiconductor industry, we have in the past experienced manufacturing difficulties that have given rise to delays in delivery and quality control problems. There can be no assurance that any such occurrence in the future would not materially harm our results of operations. Further, we may suffer disruptions in our manufacturing operations, either due to production difficulties such as those described above or as a result of external factors beyond our control, such as the disruption to our Austin, Texas manufacturing facilities caused by the February 2021 winter storm. We may, in the future, experience manufacturing difficulties or permanent or temporary loss of manufacturing capacity due
to the preceding or other risks. Any such event could have a material adverse effect on our business, financial condition and results of operations.
We rely on the timely supply of equipment and materials and could suffer if suppliers fail to meet their delivery obligations or raise prices. Certain equipment and materials needed in our manufacturing operations are only available from a limited number of suppliers.
Our manufacturing operations depend on deliveries of equipment and materials in a timely manner and, in some cases, on a just-in-time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. Supply disruptions may also occur due to shortages in critical materials, such as silicon wafers or specialized chemicals. Because the equipment that we purchase is complex, it is frequently difficult or impossible for us to substitute one piece of equipment for another or replace one type of material with another. A failure by our suppliers to deliver our requirements could result in disruptions to our manufacturing operations. Our business, financial condition and results of operations could be harmed if we are unable to obtain adequate supplies of quality equipment or materials in a timely manner or if there are significant increases in the costs of equipment or materials due to current or expected inflation or other reasons and we are not able to increase the price of our products.
Failure of our third party suppliers to perform could adversely affect our results of operations.
We currently use outside suppliers for a portion of our manufacturing capacity. Outsourcing our production presents a number of risks. If our outside suppliers are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. For example, as part of the industry-wide shortage of semiconductors during 2022 we could not obtain sufficient silicon wafers from our foundry partners to meet the demand for our products, causing us to not fully supply the demand for our products, and negatively affecting our results of operations. In addition, purchasing rather than manufacturing these products may adversely affect our gross profit margin if the purchase costs of these products are higher than our own manufacturing costs would have been or if we are not able to increase the price of our products to reflect the higher input costs. Prices for foundry products also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter to quarter and, in cases of industry shortages like we experienced in 2022, they can increase significantly, which may negatively affect our gross profit if we are not able to increase the price of our products. In addition, we have entered into long term supply agreements with certain key manufacturing partners. The failure of these suppliers to perform under these agreements or an unexpected reduction in demand for these products could result in a material adverse effect on our business, financial condition and results of operations.
Disruptions in our relationships with any one of our key customers could adversely affect our business.
A substantial portion of our revenue is derived from our top customers, including our distributors. We cannot guarantee that we will be able to generate similar levels of revenue from our largest customers in the future. If one or more of these customers substantially reduce their purchases from us, this could have a material adverse effect on our business, financial condition and results of operations.
We receive subsidies and grants in certain countries, and a reduction in the amount of governmental funding available to us or demands for repayment could increase our costs and affect our results of operations.
As is the case with other large semiconductor companies, we receive subsidies and grants from governments in some countries. These programs are subject to periodic review by the relevant governments, and if any of these programs are curtailed or discontinued, this could have a material adverse effect on our business, financial condition and results of operations. As the availability of government funding is outside our control, we cannot guarantee that we will continue to benefit from government support or that sufficient alternative funding will be available if we lose such support. Moreover, if we terminate any activities or operations, including strategic alliances or joint ventures, we may face adverse actions from the local governmental agencies providing such subsidies to us. In particular, such government agencies could seek to recover such subsidies from us and they could cancel or reduce other subsidies we receive from them. This could have a material adverse effect on our business, financial condition and results of operations.
Certain natural disasters, such as flooding, large earthquakes, volcanic eruptions or nuclear or other disasters, may negatively impact our business. Climate change may cause a rising number of natural disasters that could negatively affect our operations.
Environmental and other disasters, such as flooding, large earthquakes, volcanic eruptions or nuclear or other disasters, or a combination thereof may negatively impact our business. If flooding, a large earthquake, volcanic eruption or, extreme weather event or other natural disaster were to directly damage, destroy or disrupt our manufacturing facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. Even if our manufacturing facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels, supply chains, movement of goods and significant increases in the prices of raw materials used for our manufacturing process. For instance, the nuclear incident following the tsunami in Japan in 2011 impacted the supply chains of our customers and suppliers. Furthermore, any disaster affecting our customers (or their respective customers) may significantly negatively impact the demand for our products and our revenues. In addition, climate change could cause certain natural disasters, such as drought, wildfires, storms, flooding or rising sea levels, to occur more frequently or with greater intensity. Such natural disasters pose physical risks to our manufacturing, IT facilities or our suppliers’ facilities, or could disrupt the availability of water and utilities necessary for the operation of our manufacturing facilities or our suppliers’ facilities resulting in increased operating costs and business disruption, such as the disruption to our Austin, Texas manufacturing facilities caused by the February 2021 winter storm and weather-related disruption of water and utilities to these facilities. In addition, semiconductor manufacturing is a water-intensive process. Many of our manufacturing sites and those of our suppliers are located in semi–arid regions that may become increasingly vulnerable to prolonged droughts associated with evolving changes to the climate, which may lead to water scarcity. If we and our suppliers are not able to implement adequate water recycling and conservation measures or if the water scarcity in a particular region becomes acute and restricts the availability of water necessary for the operation of our manufacturing facilities or our suppliers’ facilities, our business may be significantly negatively impacted.
The impact of any such natural disasters depends on the specific geographic circumstances but could be significant, as some of our factories are located in areas with known earthquake fault zones, flood or storm risks, including but not limited to Singapore, Taiwan, Malaysia or Thailand. There is increasing concern that climate change is occurring that may cause a rising number of natural disasters with potentially dramatic effects on human activity. We cannot predict the economic impact, if any, of natural disasters or climate change.
Risks related to regulatory or legal challenges
As our business is global, we need to comply with laws and regulations in countries across the world and are exposed to international business risks that could adversely affect our business.world.
We operate globally, with manufacturing, assembly and testing facilities in several continents, and we market our products globally.
As a result, we are subject to environmental, data privacy, labor and health and safety laws and regulations in each jurisdiction in which we operate. We are also required to obtain environmental permits and other authorizations or licenses from governmental authorities for certain of our operations. In the jurisdictions where we operate, we need to comply with differing standards and varying practices of regulatory, tax, judicial and administrative bodies.
In addition, the business environment is also subject to many economic and political uncertainties, including the following international business risks:
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• | negative economic developments in economies around the world and the instability of governments and international trade arrangements, such as the withdrawal of the United Kingdom from the European Union, the sovereign debt crisis in certain European countries and the increase of barriers to international trade, such as the recent imposition of tariffs on imports by the United States and China;
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• | social and political instability in a number of countries around the world, including continued hostilities and civil unrest in the Middle East. The instability may have a negative effect on our business, financial condition and operations via our customers and volatility in energy prices and the financial markets;
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• | potential terrorist attacks;
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• | epidemics and pandemics, such as the recent coronavirus outbreak, which may adversely affect our workforce, as well as our suppliers and customers, in particular in Asia;
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adverse changes in governmental policies, especially those affecting trade and investment;
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• | our customers or other groups of stakeholders might impose requirements that are more stringent than the laws in the countries in which we are active;
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volatility in foreign currency exchange rates, in particular with respect to the U.S. dollar, and transfer restrictions, in particular in China; and
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• | threats that our operations or property could be subject to nationalization and expropriation.
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No assurance can be given that we have been or will be at all times in complete compliance with the laws and regulations to which we are subject or that we have obtained or will obtain the permits and other authorizations or licenses that we need. If we violate or fail to comply with laws, regulations, permits and other authorizations or licenses, we could be fined or otherwise sanctioned by regulators. Furthermore, if one or more of our customers are sanctioned by regulators for non-compliance with laws and regulations, we could experience a decrease in demand for our products. For example, import and export regulations, such as the U.S.
Export Administration Regulations administered by the U.S. Department of Commerce, are complex, change frequently, have generally become more stringent over time and have intensified underin recent years. In October 2022, the U.S. imposed restrictions on the export of US-regulated products and technology to certain mainland Chinese technology companies. Our results of operations could be negatively impacted if we are required to suspend activities with certain customers or suppliers due to the current and future changes in regulations. In 2020, due to regulations imposed by the U.S. administration.government, we ceased shipments of our products to Huawei pending approval of export licenses. Furthermore, global privacy legislation, enforcement, and policy activity, such as the EU General Data Privacy Regulation, are rapidly expanding and creating a complex regulatory
compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant. Even our inadvertent failure to comply with applicable privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others. In addition, governments are increasingly imposing restrictions on foreign investment in semiconductor businesses and technology, such as the Dutch foreign investment control regime, that may limit our ability to execute strategic acquisitions, investments and alliances, any of which could have a material adverse effect on our business.
Legal proceedings covering a range of matters are pending in various jurisdictions. Due to the uncertainty inherent in litigation, it is difficult to predict the final outcome. An adverse outcome might affect our results of operations.
We and certain of our businesses are involved as plaintiffs or defendants in legal proceedings in various matters. For example, we are involved in legal proceedings claiming personal injuries to the children of former employees as a result of employees’ alleged exposure to chemicals used in semiconductor manufacturing clean room environments operated by us or our former parent companies, Philips and Motorola. Furthermore, because we continue to utilize these clean rooms, we may become subject to future claims alleging personal injury that may lead to additional liability. A judgment against us or material defense cost could harm our business, financial condition and results of operations.
Our manufacturing operations are subject to environmental laws and regulations and initiatives to address climate change.
We are subject to many environmental, health and safety laws and regulations in each jurisdiction in which we operate, which govern, among other things, emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and ground water contamination and the health and safety of our employees. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. If our customerswe violate or suppliers fail to comply with these laws, regulations or permits, we maycould be requiredfined or otherwise sanctioned by regulators.
As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical manufacturing facilities. Certain environmental laws impose strict, and in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of investigation, removal or remediation of hazardous substances as well as liability for related damages to suspend activities with these customers or suppliers, which could negatively impact our results of operations. Additionally, we may be required to incur significant expense to comply with, or to remedy violationsnatural resources. Certain of these regulations. Inlaws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. While we do not expect that any contamination currently known to us will have a material adverse effect on our business, we cannot assure you that this is the case or if anythat we will not discover new facts or conditions or that environmental laws or the enforcement of the international business risks weresuch laws will not change such that our liabilities would be increased significantly. In addition, we could also be held liable for consequences arising out of human exposure to materializehazardous substances or become worse, they couldother environmental damage. In summary, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, regulated materials, will not have a material adverse effect on our business, financial conditionconditions and results of operations.
In addition, changingPublic and private initiatives to address climate change may result in an increase in the cost of production due to increase in the prices of energy, introduction of energy or carbon tax or the purchase of carbon offsets. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gases. Enterprises may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur expenses. New materials that we are evaluating for use in our operations may become subject to regulation. These developments and standards relatingfurther legislation that is likely to corporate governancebe enacted could affect our operations negatively. Changes in environmental regulations could increase our production and public disclosure are creating uncertainty for public companies, further increasing legaloperational costs, which could adversely affect our results of operations and financial compliance costs. These laws, regulationscondition.
Risks related to cybersecurity and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure.IT systems
Interruptions in our information technology systems could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex information technology applications, systems and networks to operate our business. The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs is critical to our business. Any significant interruption in our business applications, systems or networks, including but not limited to new system implementations, computer viruses, cyberattacks, security breaches, facility issues or energy blackouts could have a material adverse impact on our business, financial condition and results of operations.
Our computer systems and networks are subject to attempted security breaches and other cybersecurity incidents, which, if successful, could adversely impact our business.
We have, from time to time, experienced cyber-attacks attempting to obtain access to and misuse our computer systems and networks. Such incidents whether or not successful, could result in the misappropriation of our proprietary information and technology, the compromise of personal and confidential information of our employees, customers or suppliers or interrupt our business. For instance, in January 2020, we became aware of a compromise of certain of our systems. We are taking steps to identify the malicious activity and are implementing remedial measures to increase the security of our systems and networks to respond to evolving threats and new information. As of the date of this filing, we do not believe that this IT system compromise has resulted in a material adverse effect on our business or any material damage to us. However, the investigation is ongoing, and we are continuing to evaluate the amount and type of data compromised. There can be no assurance that this or any othera breach or incident will not have a material impact on our operations and financial results in the future.
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, state-sponsored intrusions, industrial espionage, employee malfeasance, and human or technological error. Computer hackers and others routinely attempt to breach the security of technology products, services, and systems, and those of customers, suppliers, and some of those attempts may be successful. Such breaches could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of our, our customer, or other third party data or systems, theft of sensitive or confidential data including personal information (including personal data about our employees, customers or other third parties) and intellectual property, system disruptions, and denial of service. In the event of such breaches, we, our customers or other third parties could be exposed to potential liability, litigation, and regulatory action, as well as the loss of existing or potential customers, damage to our reputation, and other financial loss. In addition, the cost and operational consequences of responding to breaches and implementing remediation measures could be significant. We have identified instances of employee misappropriation or theft of certain proprietary technology by individuals who are no longer employed by NXP. In some cases, such misappropriation may result in the violation of applicable export control regulations, which we report to relevant authorities as appropriate. As of the date of this filing we do not believe that any such misappropriation or theft known to us has resulted in a material adverse effect on our business or any material damage to us. However, there can be no assurance that these or other similar incidents will not have a material impact on our operations and financial results in the future. Accordingly, as these threats become increasingly sophisticated and continue to develop and grow, we have beenare actively adapting our security measures and we continue to increase the amount we allocate to implement, maintain and/or update security systems to protect dataour infrastructure, intellectual property and infrastructure.data. As a global enterprise, we could also be impacted by existing and proposed laws and regulations, as well as government policies and practices related to cybersecurity, privacy and data protection. Additionally cyber-attacks or other catastrophic events resulting in disruptions to or failures in power, information technology, communication systems or other critical infrastructure could result in interruptions or delays to us, our customers, or other third party operations or services, financial loss, potential liability, and damage our reputation and affect our relationships with our customers and suppliers.
In addition, we may be subject to theft, loss, or misuse of personal data about our employees, customers, or other third parties, which could increase our expenses, damage our reputation, or result in legal or regulatory proceedings. The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in significantly increased business and security costs or costsRisks related to defending legal claims. Global privacy legislation, enforcement, and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant. In addition, even our inadvertent failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others.intellectual property
In difficult market conditions, our high fixed costs combined with low revenue may negatively affect our results of operations.
The semiconductor industry is characterized by high fixed costs and, notwithstanding our utilization of third-party manufacturing capacity, most of our production requirements are met by our own manufacturing facilities. In less favorable industry environments, like we faced in the second half in 2011, we are generally faced with a decline in the utilization rates of our manufacturing facilities due to decreases in demand for our products. During such periods, our fabrication plants could operate at lower loading level, while the fixed costs associated with the full capacity continue to be incurred, resulting in lower gross profit.
The semiconductor industry is capital intensive and if we are unable to invest the necessary capital to operate and grow our business, we may not remain competitive.
To remain competitive, we must constantly improve our facilities and process technologies and carry out extensive research and development, all of which requires investment of significant amounts of capital. This risk is magnified by the indebtedness we currently have, since we are required to use a portion of our cash flow to service that debt. If we are unable to generate sufficient cash flow or raise sufficient capital to meet both our debt service and capital investment requirements, or if we are unable to raise required capital on favorable terms when needed, this could have a material adverse effect on our business, financial condition and results of operations.
We rely to a significant extent on proprietary intellectual property. We may not be able to protect this intellectual property against improper use by our competitors or others.
Our success and future revenue growth depends, in part, on our ability to protect our proprietary technology, our products, our proprietary designs and fabrication processes, and other intellectual property against misappropriation by others. We primarily rely on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our intellectual property. We may have difficulty obtaining patents and other intellectual property rights to protect our proprietary products, technology and intellectual property, and the patents and other intellectual property rights we receive may be insufficient to provide us with meaningful protection or commercial advantage. We may not obtain patent protection or secure other intellectual property rights in all the countries in which we operate, and under the laws of such countries,
patents and other intellectual property rights may be or become unavailable or limited in scope. Even if new patents are issued, the claims allowed may not be sufficiently broad to effectively protect our proprietary technology, processes and other intellectual property. In addition, any of our existing patents, and any future patents issued to us may be challenged, invalidated or circumvented. The protection offered by intellectual property rights may be inadequate or weakened for reasons or circumstances that are out of our control. Further, our proprietary technology, designs and processes and other intellectual property may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our proprietary technologies, our products, designs, processes and other intellectual property despite our efforts to protect our intellectual property. While we hold a significant number of patents, there can be no assurances that additional patents will be issued or that any rights granted under our patents will provide meaningful protection against misappropriation of our intellectual property. Our competitors may also be able to develop similar technology independently or design around our patents. We may not have or pursue patents or pending applications in all the countries in which we operate corresponding to all of our primary patents and applications. Even if patents are granted, effective enforcement in some countries may not be available. In particular, intellectual property rights are difficult to enforce in countries where the application and enforcement of the laws governing such rights may not have reached the same level as compared to other jurisdictions where we operate. Consequently, operating in some countries may
subject us to an increased risk that unauthorized parties may attempt to copy or otherwise use our intellectual property or the intellectual property of our suppliers or other parties with whom we engage. There is no assurance that we will be able to protect our intellectual property rights or have adequate legal recourse in the event that we seek legal or judicial enforcement of our intellectual property rights under the laws of such countries. Any inability on our part to adequately protect our intellectual property may have a material adverse effect on our business, financial condition and results of operations.
We may become party to intellectual property claims or litigation that could cause us to incur substantial costs, pay substantial damages or prohibit us from selling our products.
We have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other intellectual property rights of others. Further, we may become involved in costly litigation brought against us regarding patents, copyrights, trademarks, trade secrets or other intellectual property rights. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be able to obtain any or all of the necessary licenses on satisfactory terms, if at all. In the event that we cannot obtain or take the view that we don’t need a license, these parties may file lawsuits against us seeking damages (and potentially treble damages in the United States) or an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted. Such lawsuits, if successful, could result in an increase in the costs of selling certain of our products, our having to partially or completely redesign our products or stop the sale of some of our products and could cause damage to our reputation. Any litigation could require significant financial and management resources regardless of the merits or outcome, and we cannot assure you that we would prevail in any litigation or that our intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. The award of damages, including material royalty payments, or the entry of an injunction against the manufacture and sale of some or all of our products, could affect our ability to compete or have a material adverse effect on our business, financial condition and results of operations.
Risks related to human capital management
From time to time, we may rely on strategic partnerships, joint ventures and alliances for manufacturing and research and development. However, we often do not control these partnerships and joint ventures, and actions taken by any of our partners or the termination of these partnerships or joint ventures could adversely affect our business.
As part of our strategy, we have historically entered into a number of long-term strategic partnerships with other leading industry participants, and may do so again in the future. For example, we currently participate in a joint venture with Taiwan Semiconductor Manufacturing Company Limited (“TSMC”) called Systems on Silicon Manufacturing Company Pte. Ltd. (“SSMC”).
If any of our strategic partners in alliances we currently engage with or may engage with in the future were to encounter financial difficulties or change their business strategies, they may no longer be able or willing to participate in these groups or alliances, which could have a material adverse effect on our business, financial condition and results of operations. Under the terms of current or future alliances, we may have certain obligations, including funding obligations or take or pay obligations. For example, we have made certain commitments to SSMC, in which we have a 61.2% ownership share, whereby we are obligated to make cash payments to SSMC should we fail to utilize, and TSMC does not utilize, an agreed upon percentage of the total available capacity at SSMC’s fabrication facilities if overall SSMC utilization levels drop below a fixed proportion of the total available capacity.
We may from time to time desire to exit certain product lines or businesses, or to restructure our operations, but may not be successful in doing so.
From time to time, we may decide to divest certain product lines and businesses or restructure our operations, including through the contribution of assets to joint ventures. We have, in recent years, exited several of our product lines and businesses, and we have closed several of our manufacturing and research facilities. We may continue to do so in the future. However, our ability to successfully exit product lines and businesses, or to close or consolidate operations, depends on a number of factors, many of which are outside of our control. For example, if we are seeking a buyer for a particular business line, none may be available, or we may not be successful in negotiating satisfactory terms with prospective buyers. In addition, we may face internal obstacles
to our efforts. In particular, several of our operations and facilities are subject to collective bargaining agreements and social plans or require us to consult with our employee representatives, such as work councils, which may prevent or complicate our efforts to sell or restructure our businesses. In some cases, particularly with respect to our European operations, there may be laws or other legal impediments affecting our ability to carry out such sales or restructuring.
If we are unable to exit a product line or business in a timely manner, or to restructure our operations in a manner we deem to be advantageous, this could have a material adverse effect on our business, financial condition and results of operations. Even if a divestment is successful, we may face indemnity and other liability claims by the acquirer or other parties.
We may from time to time restructure parts of our organization. Any such restructuring may impact customer satisfaction and the costs of implementation may be difficult to predict.
Between 2008 and 2011, we executed a redesign program and, in 2013 we executed a restructuring initiative designed to improve operational efficiency and to competitively position the company for sustainable growth. In 2015, we began a restructuring initiative to prepare for and implement the integration of Freescale into our existing businesses. We plan to continue to restructure and make changes to parts of the processes in our organization. Furthermore, if the global economy remains volatile or if the global economy reenters a recession, our revenues could decline, and we may be forced to take additional cost savings steps that could result in additional charges and materially affect our business. The costs of implementing any restructurings, changes or cost savings steps may differ from our estimates and any negative impacts on our revenues or otherwise of such restructurings, changes or steps, such as situations in which customer satisfaction is negatively impacted, may be larger than originally estimated.
If we fail to extend or renegotiate our collective bargaining agreements and social plans with our labor unions as they expire from time to time, if regular or statutory consultation processes with employee representatives such as works councils fail or are delayed, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.
We are a party to collective bargaining agreements and social plans with our labor unions. We are also required to consult with our employee representatives, such as works councils, on items such as restructurings, acquisitions and divestitures. Although we believe that our relations with our employees, employee representatives and unions are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate these agreements as they expire from time to time or to conclude the consultation processes in a timely and favorable way. The impact of future negotiations and consultation processes with employee representatives could have a material impact on our financial results. Also, if we fail to extend or renegotiate our labor agreements and social plans, if significant disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business.
Our working capital needs are difficult to predict.
Our working capital needs are difficult to predict and may fluctuate. The comparatively long period between the time at which we commence development of a product and the time at which it may be delivered to a customer leads to high inventory and work-in-progress levels. The volatility of our customers’ own businesses and the time required to manufacture products also makes it difficult to manage inventory levels and requires us to stockpile products across many different specifications.
Our business may be adversely affected by costs relating to product defects, and we could be faced with product liability and warranty claims.
We make highly complex electronic components and, accordingly, there is a risk that defects may occur in any of our products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we release defective products into the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages. Moreover, since the cost of replacing defective
semiconductor devices is often much higher than the value of the devices themselves, we may at times face damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. We also face exposure to potential liability resulting from the fact that our customers typically integrate the semiconductors we sell into numerous consumer products, which are then sold into the marketplace. We are exposed to product liability claims if our semiconductors or the consumer products based on them malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence that our products caused the damage in question, and such claims could result in significant costs and expenses relating to attorneys’ fees and damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations.
Our business has suffered, and could in the future suffer, from manufacturing problems.
We manufacture, in our own factories as well as with third parties, our products using processes that are highly complex, require advanced and costly equipment and must continuously be modified to improve yields and performance. Difficulties in the production process can reduce yields or interrupt production, and, as a result of such problems, we may on occasion not be able to deliver products or do so in a timely or cost-effective or competitive manner. As the complexity of both our products and our fabrication processes has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become more demanding. As is common in the semiconductor industry, we have in the past experienced manufacturing difficulties that have given rise to delays in delivery and quality control problems. There can be no assurance that any such occurrence in the future would not materially harm our results of operations. Further, we may suffer disruptions in our manufacturing operations, either due to production difficulties such as those described above or as a result of external factors beyond our control. We may, in the future, experience manufacturing difficulties or permanent or temporary loss of manufacturing capacity due to the preceding or other risks. Any such event could have a material adverse effect on our business, financial condition and results of operations.
We rely on the timely supply of equipment and materials and could suffer if suppliers fail to meet their delivery obligations or raise prices. Certain equipment and materials needed in our manufacturing operations are only available from a limited number of suppliers.
Our manufacturing operations depend on deliveries of equipment and materials in a timely manner and, in some cases, on a just-in-time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. Supply disruptions may also occur due to shortages in critical materials, such as silicon wafers or specialized chemicals. Because the equipment that we purchase is complex, it is frequently difficult or impossible for us to substitute one piece of equipment for another or replace one type of material with another. A failure by our suppliers to deliver our requirements could result in disruptions to our manufacturing operations. Our business, financial condition and results of operations could be harmed if we are unable to obtain adequate supplies of quality equipment or materials in a timely manner or if there are significant increases in the costs of equipment or materials.
Failure of our third party suppliers to perform could adversely affect our ability to exploit growth opportunities.
We currently use outside suppliers for a portion of our manufacturing capacity. Outsourcing our production presents a number of risks. If our outside suppliers are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. In addition, purchasing rather than manufacturing these products may adversely affect our gross profit margin if the purchase costs of these products are higher than our own manufacturing costs would have been. Prices for foundry products also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter to quarter and, in cases of industry shortages, they can increase significantly, negatively affecting our gross profit.
Loss of our key management and other personnel, or an inability to attract such management and other personnel, could affect our business.
We depend on our key management to run our business and on our senior engineers to develop new products and technologies. Our success will depend on the continued service of these individuals. Although we have several share based compensation plans in place, we cannot be sure that these plans will help us in our ability to retain key personnel, especially considering that the stock options under some of our plans become exercisable upon a change of control (in particular, when a third party, or third parties acting in concert, obtains, whether directly or indirectly, control of us). The loss of any of our key personnel, whether due to departures, death, ill health or otherwise, could have a material adverse effect on our business. The market for qualified employees, including skilled engineers and other individuals with the required technical expertise to succeed in our business, is highly competitive and the loss of qualified employees or an inability to attract, retain and motivate the additional highly skilled employees required for the operation and expansion of our business could hinder our ability to successfully conduct research activities or develop marketable products. The foregoing risks could have a material adverse effect on our business.
Disruptions in our relationships with any one of our key customers could adversely affect our business.
A substantial portion of our revenue is derived from our top customers, including our distributors. We cannot guarantee that we will be able to generate similar levels of revenue from our largest customers in the future. If one or more of these customers substantially reduce their purchases from us, this could have a material adverse effect on our business, financial condition and results of operations.
We receive subsidies and grants in certain countries, and a reduction in the amount of governmental funding available to us or demands for repayment could increase our costs and affect our results of operations.
As is the case with other large semiconductor companies, we receive subsidies and grants from governments in some countries. These programs are subject to periodic review by the relevant governments, and if any of these programs are curtailed or discontinued, this could have a material adverse effect on our business, financial condition and results of operations. As the availability of government funding is outside our control, we cannot guarantee that we will continue to benefit from government support or that sufficient alternative funding will be available if we lose such support. Moreover, if we terminate any activities or operations, including strategic alliances or joint ventures, we may face adverse actions from the local governmental agencies providing such subsidies to us. In particular, such government agencies could seek to recover such subsidies from us and they could cancel or reduce other subsidies we receive from them. This could have a material adverse effect on our business, financial condition and results of operations.
Legal proceedings covering a range of matters are pending in various jurisdictions. Due to the uncertainty inherent in litigation, it is difficult to predict the final outcome. An adverse outcome might affect our results of operations.
We and certain of our businesses are involved as plaintiffs or defendants in legal proceedings in various matters. For example, we are involved in legal proceedings claiming personal injuries to the children of former employees as a result of employees’ alleged exposure to chemicals used in semiconductor manufacturing clean room environments operated by us or our former parent companies, Philips and Motorola. Furthermore, because we continue to utilize these clean rooms, we may become subject to future claims alleging personal injury that may lead to additional liability. A judgment against us or material defense cost could harm our business, financial condition and results of operations.
We are exposed to a variety of financial risks, including currency risk, interest rate risk, liquidity risk, commodity price risk, credit risk and other non-insured risks, which may have an adverse effect on our financial results.
We are a global company and, as a direct consequence, movements in the financial markets may impact our financial results. We are exposed to a variety of financial risks, including currency fluctuations, interest rate risk, liquidity risk, commodity price risk and credit risk and other non-insured risks. We have euro-denominated assets and liabilities and, since our reporting currency is the U.S. dollar, the impact of currency translation adjustments to such assets and liabilities may have a negative effect on our stockholders’ equity. We continue to hold or convert a part of our cash in euros as a hedge for euro expenses and euro interest payments. We are
exposed to fluctuations in exchange rates when we convert U.S. dollars to euro. We enter into diverse financial transactions with several counterparties to mitigate our currency risk. We only use derivative instruments for hedging purposes.
We are also a purchaser of certain base metals, precious metals, chemicals and energy used in the manufacturing process of our products, the prices of which can be volatile. Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform upon their agreed payment obligations. Credit risk is present within our trade receivables. Such exposure is reduced through ongoing credit evaluations of the financial conditions of our customers and by adjusting payment terms and credit limits when appropriate. We invest available cash and cash equivalents with various financial institutions and are in that respect exposed to credit risk with these counterparties. We actively manage concentration risk on a daily basis adhering to a treasury management policy. We seek to limit the financial institutions with which we enter into financial transactions, such as depositing cash, to those with a strong credit rating wherever possible. If we are unable to successfully manage these risks, they could have a material adverse effect on our business, financial condition and results of operations.
The impact of a negative performance of financial markets and demographic trends on our defined benefit pension liabilities and costs cannot be predicted.
We sponsor defined benefit pension plans in a number of countries and a significant number of our employees are covered by our defined benefit pension plans. As of December 31, 2019, we had recognized a net accrued benefit liability of $462 million, representing the unfunded benefit obligations of our defined pension plans. The funding status and the liabilities and costs of maintaining these defined benefit pension plans may be impacted by financial market developments. For example, the accounting for such plans requires determining discount rates, expected rates of compensation and expected returns on plan assets, and any changes in these variables can have a significant impact on the projected benefit obligations and net periodic pension costs. Negative performance of the financial markets could also have a material impact on funding requirements and net periodic pension costs. Our defined benefit pension plans may also be subject to demographic trends. Accordingly, our costs to meet pension liabilities going forward may be significantly higher than they are today, which could have a material adverse impact on our financial condition.
Future changes to Dutch, U.S. and other foreign tax laws could adversely affect us.
The European Commission, U.S. Congress and Treasury Department, the Organization for Economic Co-operation and Development, and other government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational corporations, particularly payments made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the European Union, U.S. and other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect us and our affiliates.
Recent examples include the Organization for Economic Co-operation and Development’s initiatives to revise profit allocation and nexus rules to allocate more taxing rights to countries where companies have their markets and to establish a minimum tax rate on a global basis. These initiatives include recommendations and proposals that, if enacted in countries in which we and our affiliates do business, could adversely affect us and our affiliates.
We are exposed to a number of different tax uncertainties, which could have an impact on our results.
We are required to pay taxes in multiple jurisdictions. We determine the taxes we are required to pay based on our interpretation of the applicable tax laws and regulations in the jurisdictions in which we operate. We may be subject to unfavorable changes in the respective tax laws and regulations to which we are subject. Tax controls, audits, change in controls and changes in tax laws or regulations or the interpretation given to them may expose us to negative tax consequences, including interest payments and potentially penalties. We have issued transfer-pricing directives in the areas of goods, services and financing, which are in accordance with the Guidelines of the Organization of Economic Co-operation and Development (OECD). As transfer pricing has a cross border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country.
Transfer pricing uncertainties can also result from disputes with local tax authorities about transfer pricing of internal deliveries of goods and services or related to financing, acquisitions and divestments, the use of tax credits and permanent establishments, and tax losses carried forward. These uncertainties may have a significant impact on local tax results. We also have various tax assets resulting from acquisitions. Tax assets can also result from the generation of tax losses in certain legal entities. Tax authorities may challenge these tax assets. In addition, the value of the tax assets resulting from tax losses carried forward depends on having sufficient taxable profits in the future.
Additionally, in December of 2017, the United States enacted a budget reconciliation act amending the Internal Revenue Code of 1986 (the “Tax Cuts and Jobs Act”) and, in 2018, the U.S. Treasury Department issued regulations to clarify certain provisions of the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains provisions affecting the tax treatment of both U.S. companies (such as certain of our subsidiaries) and non-U.S. companies that could materially affect us. The Tax Cuts and Jobs Act includes provisions that reduce the U.S. corporate tax rate, impose a base erosion minimum tax on income of a U.S. corporation determined without regard to certain otherwise deductible payments made to certain foreign affiliates, impose a global intangible low-income tax on foreign earnings made by U.S. corporations’ foreign subsidiaries, and impose a one-time transition tax on certain historic earnings and profits of U.S.-owned foreign subsidiaries. The Tax Cuts and Jobs Act also includes provisions that provide a deduction for certain foreign-derived intangible income. The U.S. Treasury Department has issued temporary and proposed regulations providing guidance on the application of many of the provisions of the Tax Cuts and Jobs Act. However, there may continue to be a substantial delay before all such regulations are promulgated and/or finalized, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also possible that there will be technical corrections legislation proposed with respect to the Tax Cuts and Jobs Act, the effect of which cannot be predicted.
We may not be able to maintain a competitive worldwide effective corporate tax rate.
We cannot give any assurance as to what our effective tax rate will be in the future, because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate. Our actual effective tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of the Netherlands, the U.S., and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.
There may from time to time exist deficiencies in our internal control systems that could adversely affect the accuracy and reliability of our periodic reporting.
We are required to establish and periodically assess the design and operating effectiveness of our internal control over financial reporting. Despite the compliance procedures that we have adopted to ensure internal control over financial controls, there may from time to time exist deficiencies in our internal control systems that could adversely affect the accuracy and reliability of our periodic reporting. Our periodic reporting is the basis of investors’ and other market professionals’ understanding of our businesses. Imperfections in our periodic reporting could create uncertainty regarding the reliability of our results of operations and financial results, which in turn could have a material adverse impact on our reputation or share price.
Environmental laws and regulations expose us to liability and compliance with these laws and regulations, and any such liability may adversely affect our business.
We are subject to many environmental, health and safety laws and regulations in each jurisdiction in which we operate, which govern, among other things, emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and ground water contamination and the health and safety of our employees. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.
As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical manufacturing facilities. Certain environmental laws impose strict, and in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of investigation, removal or remediation of hazardous
substances as well as liability for related damages to natural resources. Certain of these laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. While we do not expect that any contamination currently known to us will have a material adverse effect on our business, we cannot assure you that this is the case or that we will not discover new facts or conditions or that environmental laws or the enforcement of such laws will not change such that our liabilities would be increased significantly. In addition, we could also be held liable for consequences arising out of human exposure to hazardous substances or other environmental damage. In summary, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, regulated materials, will not have a material adverse effect on our business, financial conditions and results of operations.
Scientific examination of, political attention to and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in the cost of production due to increase in the prices of energy and introduction of energy or carbon tax. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gases. Enterprises may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur expenses. New materials that we are evaluating for use in our operations may become subject to regulation. These developments and further legislation that is likely to be enacted could affect our operations negatively. Changes in environmental regulations could increase our production and operational costs, which could adversely affect our results of operations and financial condition.
Certain natural disasters, such as flooding, large earthquakes, volcanic eruptions or nuclear or other disasters, may negatively impact our business. There is increasing concern that climate change is occurring and may cause a rising number of natural disasters.
Environmental and other disasters, such as flooding, large earthquakes, volcanic eruptions or nuclear or other disasters, or a combination thereof may negatively impact our business. If flooding, a large earthquake, volcanic eruption or other natural disaster were to directly damage, destroy or disrupt our manufacturing facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. Even if our manufacturing facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains and significant increases in the prices of raw materials used for our manufacturing process. For instance, the nuclear incident following the tsunami in Japan in 2011 impacted the supply chains of our customers and suppliers. Furthermore, any disaster affecting our customers (or their respective customers) may significantly negatively impact the demand for our products and our revenues.
The impact of any such natural disasters depends on the specific geographic circumstances but could be significant, as some of our factories are located in areas with known earthquake fault zones, flood or storm risks, including but not limited to Singapore, Taiwan, Malaysia or Thailand. There is increasing concern that climate change is occurring that may cause a rising number of natural disasters with potentially dramatic effects on human activity. We cannot predict the economic impact, if any, of natural disasters or climate change.
The price of our common stock historically has been volatile. The price of our common stock may fluctuate significantly.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. The market price for our common stock has varied between a high of $129.50 on December 26, 2019 and a low of $71.56 on January 2, 2019 in the twelve-month period ending on December 31, 2019. The market price of our common stock is likely to continue to be volatile and subject to significant price and volume fluctuations for many reasons, including in response to the risks described in this section, changes in our dividend or share repurchase policies, or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors, peer companies or suppliers regarding their own performance, or announcements by our competitors of significant contracts, strategic partnerships, joint ventures, joint marketing relationships or capital commitments, the passage of legislation or other regulatory developments affecting us or our industry, as well as industry conditions and general financial, economic and political instability. In the past, following periods of
market volatility, shareholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
We may have fluctuations in the amount and frequency of our stock repurchases.
The amount, timing, and execution of our stock repurchases may fluctuate based on our priorities for the use of cash for other purposes—such as investing in our business, including operational spending, capital spending, and acquisitions, and returning cash to our stockholders as dividend payments—and because of changes in cash flows, tax laws, and the market price of our common stock.
Future sales of our shares of common stock could depress the market price of our outstanding shares of common stock.
The market price of our shares of common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
In the future, we may issue additional shares of common stock in connection with acquisitions and other investments. The amount of our common stock issued in connection with any such transaction could constitute a material portion of our then outstanding common stock.
There can be no assurance that we will continue to declare cash dividends.
Our board of directors has adopted a dividend policy pursuant to which we currently pay a cash dividend on our ordinary shares on a quarterly basis. The declaration and payment of any dividend is subject to the approval of our board and our dividend may be discontinued or reduced at any time. There can be no assurance that we will declare cash dividends in the future in any particular amounts, or at all.
Future dividends, if any, and their timing and amount, may be affected by, among other factors: management’s views on potential future capital requirements for strategic transactions, including acquisitions; earnings levels; contractual restrictions; cash position and overall financial condition; and changes to our business model. The payment of cash dividends is restricted by applicable law, contractual restrictions and our corporate structure.
Our actual operating results may differ significantly from our guidance.
From time to time, we release guidance regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information contained or referred to in such release and the factors described under “Forward-Looking Statements”. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our independent registered public accounting firm nor any other independent expert or outside party compiles, reviews or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Our guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future the data is forecasted. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.
Any failure to successfully implement our operating strategy, or the occurrence of any of the events or circumstances set forth in, or incorporated by reference into, this Annual Report could result in the actual operating results being different than the guidance, and such differences may be adverse and material.
Risks related to our corporate structure
United States civil liabilities may not be enforceable against us.
We are incorporated under the laws of the Netherlands and substantial portions of our assets are located outside of the United States. In addition, certain members of our board ourand officers and certain experts named herein reside outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such other persons residing outside the United States, or to enforce outside the United States judgments obtained against such persons in U.S. courts in any action. In addition, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon the U.S. laws.
In the absence of an applicable treaty for the mutual recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters to which the United States and the Netherlands are a party, a judgment obtained against the Company in the courts of the United States, whether or not predicated solely upon the U.S. federal securities laws, including a judgment predicated upon the civil liability provisions of the U.S. securities law or securities laws of any State or territory within the United States, will not be directly enforceable in the Netherlands.
In order to obtain a judgment which is enforceable in the Netherlands, the claim must be relitigated before a competent court of the Netherlands; the relevant Netherlands court has discretion to attach such weight to a judgment of the courts of the United States as it deems appropriate; based on case law, the courts of the Netherlands may be expected to recognize and grant permission for enforcement of a judgment of a court of competent jurisdiction in the United States without re-examination or relitigation of the substantive matters adjudicated thereby, provided that (i) the relevant court in the United States had jurisdiction in the matter in accordance with standards which are generally accepted internationally; (ii) the proceedings before that court complied with principles of proper procedure; (iii) recognition and/or enforcement of that judgment does not conflict with the public policy of the Netherlands; and (iv) recognition and/or enforcement of that judgment is not irreconcilable with a decision of a Dutch court rendered between the same parties or with an earlier decision of a foreign court rendered between the same parties in a dispute that is about the same subject matter and that is based on the same cause, provided that earlier decision can be recognized in the Netherlands.
Based on the foregoing, there can be no assurance that U.S. investors will be able to enforce against us or members of our board of directors officers or certain experts named hereinofficers who are residents of the Netherlands or countries other than the United States any judgments obtained in U.S. courts in civil and commercial matters.
In addition, there is doubt as to whether a Dutch court would impose civil liability on us, the members of our board of directors, our officers or certain experts named herein in an original action predicated solely upon the U.S. laws brought in a court of competent jurisdiction in the Netherlands against us or such members, officers or experts, respectively.
We are a Dutch public company with limited liability. The rights of our stockholders may be different from the rights of stockholders governed by the laws of U.S. jurisdictions.
We are a Dutch public company with limited liability (naamloze vennootschap). Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands.
The rights of stockholders and the responsibilities of members of our board of directors may be different from the rights and obligations of stockholders in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board of directors is required by Dutch law to consider the interests of our company, its stockholders, its employees and other stakeholders, in all cases with due observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a stockholder. See Part III, Item 10. Directors, Executive Officers and Corporate Governance.
Risks related to our indebtedness
Our debt obligations expose us to risks that could adversely affect our financial condition, which could adversely affect our results of operations.
As of December 31, 2019,2022, we had outstanding indebtedness with an aggregate principal amount of $7,400$11,250 million. Our substantial indebtedness could have a material adverse effect on our business by:
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• | increasing our vulnerability to adverse economic, industry or competitive developments;
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• | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
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• | exposing us to the risk of increased interest rates in the event we have borrowings under our $1,500 million revolving credit facility agreement (the “RCF Agreement”) because loans under the RCF Agreement bear interest at a variable rate;
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• | making it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations of any our debt instruments, including restrictive covenants and borrowing conditions, could result in an event default under the indentures governing our notes and agreements governing other indebtedness;
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• | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
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• | limiting our ability to obtain additional financial for working capital, capital expenditures, restructurings, product development, research and development, debt service requirements, investments, acquisitions and general corporate or other purposes; and
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• | limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
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•increasing our vulnerability to adverse economic, industry or competitive developments;
•requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
•exposing us to the risk of increased interest rates in the event we have borrowings under our $2,500 million revolving credit facility agreement (the “RCF Agreement”) because loans under the RCF Agreement bear interest at a variable rate;
•making it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations of any our debt instruments, including restrictive covenants and borrowing conditions, could result in an event default under the indentures governing our notes and agreements governing other indebtedness;
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•limiting our ability to obtain additional financial for working capital, capital expenditures, restructurings, product development, research and development, debt service requirements, investments, acquisitions and general corporate or other purposes; and
•limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.
Despite our level of indebtedness, we may still incur significantly more debt, which could further exacerbate the risks described above and affect our ability to service and repay our debt.
If we do not comply with the covenants in our debt agreements or fail to generate sufficient cash to service and repay our debt, it could adversely affect our operating results and our financial condition.
The RCF Agreement and the indentures governing our unsecured notes or any other debt arrangements that we may have require us to comply with various covenants. If there were an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could terminate commitments to lend and cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn could result in cross defaults under our other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon an event of default.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, competitive, legislative, regulatory and other factors beyond our control. Our business may not generate sufficient cash flow from operations, or future borrowings under the RCF Agreement or other sources may not be available to us in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs, including our working capital and capital expenditure requirements, and we may be forced
to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, restructure or refinance our indebtedness or reduce or delay capital expenditures, strategic acquisitions, investments and alliances, any of which could have a material adverse effect on our business. We cannot guarantee that we will be able to obtain enough capital to service our debt and fund our planned capital expenditures and business plan. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
The rating of our debt by major rating agencies may further improve or deteriorate, which could affect our additional borrowing capacity and financing costs.
The major debt rating agencies routinely evaluate our debt. These ratings are based on current information furnished to the ratings agencies by us and information obtained by the ratings agencies from other sources. An explanation of the significance of such rating may be obtained from such rating agency. There can be no assurance that such credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment,
circumstances so warrant. Actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under further review for a downgrade, could affect our market value and/or increase our corporate borrowing costs.
General risk factors
The coronavirus (COVID-19) pandemic and measures taken in response have adversely impacted the Company's financial condition and results of operations. The COVID-19 pandemic, or a similar global health crisis, may continue to impact us in the future.
The COVID-19 outbreak has significantly increased economic and demand uncertainty. We experienced a significant decline in revenue in the first half of 2020 related to the COVID-19 outbreak and then a swift rebound in demand beginning in the third quarter of 2020 and accelerating through the fourth quarter of 2021. The situation remains uncertain and the continued spread of COVID-19 or variants of COVID-19 may result in economic slowdown or disruptions to our supply chain in one or more geographic areas in which we operate, including the possibility that it could lead to a global recession. Specifically, in the last quarter of 2022 we experienced an unexpected decrease in demand in mainland China due to the increased COVID-19 infection rate. Risks related to a slowdown or recession are described in our risk factor titled “Significantly increased volatility and instability and unfavorable economic conditions may adversely affect our business” above.
The spread of COVID-19 caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may reinstitute these and additional measures as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers.
The degree to which COVID-19, or a similar global health crisis, adversely impacts our future results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. To the extent the COVID-19 pandemic, or a similar global health crisis, adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in Part I, Item 1A Risk Factors.
We previously identified a material weakness in our internal control related to ineffective information technology general controls and if we fail to maintain an effective system of internal control in the future, this could result in loss of investor confidence and adversely impact our stock price.
Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting. We reported in our Annual Report on Form 10-K as of December 31, 2021, a material weakness in our internal control over financial reporting associated with ineffective information technology general controls (ITGCs) in the areas of user access, change-management and IT operations over certain information technology (IT) systems that support the Company’s financial reporting processes.
During 2022, we completed the remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of December 31, 2022. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.
The price of our common stock historically has been volatile. The price of our common stock may fluctuate significantly.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. The market price for our common stock has varied between a high of $234.90 on January 4, 2022 and a low of $132.08 on October 13, 2022 in the twelve-month period ending on December 31, 2022. The market price of our common stock is likely to continue to be volatile and subject to significant price and volume fluctuations for many reasons, including in response to the risks
described in this section, changes in our dividend or share repurchase policies, variations between our actual financial results or guidance and expectations of securities analysts or investors or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors, peer companies or suppliers regarding their own performance, or announcements by our competitors of significant contracts, strategic partnerships, joint ventures, joint marketing relationships or capital commitments, the passage of legislation or other regulatory developments affecting us or our industry, as well as industry conditions and general financial, economic and political instability. In the past, following periods of market volatility, shareholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
We may have fluctuations in the amount and frequency of our stock repurchases.
The amount, timing, and execution of our stock repurchases may fluctuate based on our priorities for the use of cash for other purposes—such as investing in our business, including operational spending, capital spending, and acquisitions, and returning cash to our stockholders as dividend payments—and because of changes in cash flows, tax laws, and the market price of our common stock.
There can be no assurance that we will continue to declare cash dividends.
Our board of directors has adopted a dividend policy pursuant to which we currently pay a cash dividend on our ordinary shares on a quarterly basis. The declaration and payment of any dividend is subject to the approval of our board and our dividend may be discontinued or reduced at any time. There can be no assurance that we will declare cash dividends in the future in any particular amounts, or at all.
Future dividends, if any, and their timing and amount, may be affected by, among other factors: management’s views on potential future capital requirements for strategic transactions, including acquisitions; earnings levels; contractual restrictions; cash position and overall financial condition; and changes to our business model. The payment of cash dividends is restricted by applicable law, contractual restrictions and our corporate structure.
The impact of a negative performance of financial markets and demographic trends on our defined benefit pension liabilities and costs cannot be predicted.
We sponsor defined benefit pension plans in a number of countries and a significant number of our employees are covered by our defined benefit pension plans. As of December 31, 2022, we had recognized a net accrued benefit liability of $335 million, representing the unfunded benefit obligations of our defined pension plans. The funding status and the liabilities and costs of maintaining these defined benefit pension plans may be impacted by financial market developments. For example, the accounting for such plans requires determining discount rates, expected rates of compensation and expected returns on plan assets, and any changes in these variables can have a significant impact on the projected benefit obligations and net periodic pension costs. Negative performance of the financial markets could also have a material impact on funding requirements and net periodic pension costs. Our defined benefit pension plans may also be subject to demographic trends. Accordingly, our costs to meet pension liabilities going forward may be significantly higher than they are today, which could have a material adverse impact on our financial condition.
Future changes to Dutch, U.S. and other foreign tax laws could adversely affect us.
The European Commission, U.S. Congress and Treasury Department, the Organization for Economic Co-operation and Development (OECD), and other government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational corporations, particularly payments made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the European Union, U.S. and other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect us and our affiliates.
Recent examples include the OECD’s initiatives to revise profit allocation and nexus rules to allocate more taxing rights to countries where companies have their markets and to establish a minimum tax rate on a global basis. As part of the OECD framework to implement a minimum tax rate, the EU has adopted a directive on ensuring a global minimum level of taxation for multinational companies, also known as Pillar 2, to become
effective in 2024. It is anticipated that other countries will also introduce Pillar 2 legislation. These initiatives include recommendations and proposals that, if enacted in countries in which we and our affiliates do business, could adversely affect us and our affiliates.
We are exposed to a number of different tax uncertainties, which could have an impact on our results.
We are required to pay taxes in multiple jurisdictions. We determine the taxes we are required to pay based on our interpretation of the applicable tax laws and regulations in the jurisdictions in which we operate. We may be subject to unfavorable changes in the respective tax laws and regulations to which we are subject. Tax controls, audits, change in controls and changes in tax laws or regulations or the interpretation given to them may expose us to negative tax consequences, including interest payments and potentially penalties. We have issued transfer-pricing directives in the areas of goods, services and financing, which are in accordance with OECD guidelines. As transfer pricing has a cross border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country.
Transfer pricing uncertainties can also result from disputes with local tax authorities about transfer pricing of internal deliveries of goods and services or related to financing, acquisitions and divestments, the use of tax credits and permanent establishments, and tax losses carried forward. These uncertainties may have a significant impact on local tax results. We also have various tax assets resulting from acquisitions. Tax assets can also result from the generation of tax losses in certain legal entities. Tax authorities may challenge these tax assets. In addition, the value of the tax assets resulting from tax losses carried forward depends on having sufficient taxable profits in the future.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
NXP uses 100 sitesThe Company's headquarters are located in 32Eindhoven, the Netherlands. As of March 1, 2023, the Company operates owned manufacturing facilities primarily in the United States, Netherlands, Malaysia, China, Thailand and Taiwan, as well as in Singapore (SSMC) together with our joint venture partner TSMC. The Company also owns or leases other properties in multiple countries with 11.2 million square feet of total ownedfor use as administrative, sales or research and leased building space of which 9.7 million square feet is owned property.development facilities. The following table sets outCompany believes its existing facilities and equipment are in good operating condition and adequate to meet our principal real property holdings as of December 31, 2019:need for the near future. |
| | | | | | |
Location | | Use | | Owned/leased | | Building space
(square feet)
|
Eindhoven, the Netherlands | | Headquarters | | Leased | | 163,188 |
Nijmegen, the Netherlands | | Manufacturing | | Owned | | 1,515,550 |
Singapore (SSMC) * | | Manufacturing | | Owned | | 971,936 |
Bangkok, Thailand | | Manufacturing | | Owned | | 547,882 |
Kaohsiung, Taiwan | | Manufacturing | | Owned | | 636,400 |
Tianjin, China | | Manufacturing | | Owned | | 447,624 |
Kuala Lumpur, Malaysia | | Manufacturing | | Owned | | 828,858 |
Chandler, United States | | Manufacturing | | Owned | | 1,173,196 |
Austin (Oak Hill), United States | | Manufacturing | | Owned | | 1,511,861 |
Austin (Ed Bluestein), United States | | Manufacturing | | Owned | | 1,158,731 |
| |
* | Joint venture between TSMC and NXP. |
Item 3. Legal Proceedings
The information set forth under the “Litigation” and “Environmental Remediation” captions of Note 1615 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see Part I, Item 1A. Risk Factors.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The shares ofCompany's common stock of the Company are listedis traded on the Nasdaq stock market of Nasdaq in New York under the ticker symbol “NXPI”.NXPI. On February 20, 202022, 2023 there were 1215 shareholders of record and 393,191730,850 beneficial shareholders of our common stock.
Dividends Per Common Share
The following table presents the quarterly dividends on our common stock for the periods indicated:
| | | | | | | | | | | |
| 2022 | | 2021 |
First Quarter | 0.845 | | | 0.5625 | |
Second Quarter | 0.845 | | | 0.5625 | |
Third Quarter | 0.845 | | | 0.5625 | |
Fourth Quarter | 0.845 | | | 0.5625 | |
|
| | | | | |
| 2019 | | 2018 |
First Quarter | 0.250 |
| | - |
|
Second Quarter | 0.250 |
| | - |
|
Third Quarter | 0.375 |
| | 0.250 |
|
Fourth Quarter | 0.375 |
| | 0.250 |
|
On January 30, 2023, the board of directors of NXP approved a 20 percent increase in the quarterly cash dividend to $1.014 per ordinary share to be paid in cash on April 5, 2023 to shareholders of record as of March 15, 2023. We currently expect to continue to pay dividends in the future.
Equity Compensation Plan Information
Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our Proxy Statement for our 2020 Annual Meeting of Stockholders under the caption “Equity Compensation Plan Information” and is incorporated by reference into this report.
Issuer Purchases of Equity Securities
Effective July 26, 2018, the board of directors of NXP (the “Board”), as authorized by the 2018 annual general meeting of shareholders, authorized the repurchase of $5 billion of the Company’s ordinary shares over a period of 18 months (the “2018 Share Repurchase Program”). In October 2018, the board of directors of NXP increased the repurchase authorization under the 2018 Share Repurchase Program up to a maximum of 20% of issued share capital (approximately 69 million shares). The 2018 Share Repurchase Program was completed in July 2019, and a total of 69 million shares were repurchased under this program. In November 2019, theOur Board as authorized by the 2019 annual general meeting of shareholders, authorized the repurchase of $2 billion of shares (the “2019 Share Repurchase Program”). In addition, the Boardhas approved the purchase of shares from participants in the Company'sNXP's equity programs who trade shares as trade for tax. Thisto satisfy participants' tax withholding obligations and this authorization will remain in effect until terminated by the Board. DuringIn March 2021, the fiscal year-ended December 31, 2019, NXP repurchased noBoard approved the repurchase of shares up to a maximum of $2 billion (the "2021 Share Repurchase Program"), and in August 2021, the Board increased the 2021 Share Repurchase Program authorization by $2 billion, for a total of $4 billion approved for the repurchase of shares under the 20192021 Share Repurchase Program. Under Dutch tax law,In January 2022, the Board approved the repurchase of shares up to a company’smaximum of $2 billion (the "2022 Share Repurchase Program"). At December 31, 2022, there was approximately $437 million remaining for the repurchase of shares by an entity domiciled inunder the Netherlands results in a taxable event. The tax on2021 Share Repurchase Program and $2 billion remaining under the repurchased shares is attributed to the shareholders, with NXP making the payment on the shareholders’ behalf. As such, the tax on the repurchased shares is accounted for within stockholders’ equity. 2022 Share Repurchase Program.
The following table provides a summary of share repurchase activity during the three months ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program (1) | | Number of Shares Purchased as Trade for Tax (2) |
October 3, 2022 – November 6, 2022 | | 2,620,196 | | $147.71 | | 2,065,200 | | 16,600,635 | | 554,996 |
November 7, 2022 – December 4, 2022 | | 318,794 | | $161.66 | | 209,500 | | 14,454,957 | | 109,294 |
December 5, 2022 – December 31, 2022 | | 221,381 | | $163.56 | | 220,800 | | 15,418,236 | | 581 |
Total | | 3,160,371 | | | | 2,495,500 | | | | 664,871 |
(1) Represents the number of shares repurchasedthat may be purchased under the remaining dollar repurchase authorizations noted above, calculated based on the share closing price at the end of the respective monthly period.
(2) Reflects shares surrendered by participants to satisfy tax withholding obligations in connection with the Company in 2019:Company's equity programs.
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program | | Number of Shares Purchased as Trade for Tax (1) |
January 1, 2019 – February 3, 2019 | | 5,323,164 |
| | $80.18 | | 5,254,300 |
| | 9,776,779 |
| | 68,864 |
|
February 4, 2019 – March 3, 2019 | | 3,158,779 |
| | $91.28 | | 3,134,759 |
| | 6,618,000 |
| | 24,020 |
|
March 4, 2019 – March 31, 2019 | | 454 |
| | $93.30 | | — |
| | 6,617,546 |
| | 454 |
|
April 1, 2019 – May 5, 2019 | | 3,099,582 |
| | $100.35 | | 3,096,600 |
| | 3,517,964 |
| | 2,982 |
|
May 6, 2019 – June 2, 2019 | | 3,516,432 |
| | $94.98 | | 3,500,000 |
| | 1,532 |
| | 16,432 |
|
June 3, 2019 – June 30, 2019 | | — |
| | $0.00 | | — |
| | 1,532 |
| | — |
|
July 1, 2019 – August 4, 2019 | | 84,865 |
| | $101.81 | | — |
| | — |
| | 84,865 |
|
August 5, 2019 – September 1, 2019 | | 3,829 |
| | $100.78 | | — |
| | — |
| | 3,829 |
|
September 2, 2019 – September 29, 2019 | | 200 |
| | $106.00 | | — |
| | — |
| | 200 |
|
September 30, 2019 – November 3, 2019 | | 678,473 |
| | $108.56 | | — |
| | — |
| | 678,473 |
|
November 4, 2019 – December 1, 2019 | | (60 | ) | | $108.27 | | — |
| | 17,304,032 |
| | (60 | ) |
December 2, 2019 – December 31, 2019 | | — |
| | $0.00 | | — |
| | 15,715,857 |
| | — |
|
Total | | 15,865,718 |
| | | | 14,985,659 |
| | | | 880,059 |
|
| |
(1) | Reflects shares surrendered by participants to satisfy tax withholding obligations in connection with the Company's equity programs. |
Company Performance
The following graph shows a comparison, since December 31, 20142017 of cumulative total return for NXP, the Standard & Poor's 500 Index, and the Philadelphia Stock Exchange Semiconductor Index. The graph assumes $100 (not in millions) invested on December 31, 20142017 in our common stock and each of the indices.
Item 6. Selected Financial Data
The following table presents a summary of our selected historical consolidated financial data. We prepare our financial statements in accordance with U.S. GAAP.
The results of operations for prior years are not necessarily indicative of the results to be expected for any future period.
On December 6, 2019, we acquired Marvell Technology Group Ltd.'s ("Marvell") Wireless WiFi Connectivity Business Unit, Bluetooth technology portfolio and related assets, for total consideration of $1.7 billion, net of closing adjustments. The results of their operations and the estimated fair value of the assets acquired and liabilities assumed in the business combination are included in our financial statements from the date of acquisition forward.
On July 26, 2018, we received $2 billion in termination compensation from Qualcomm per the terms of the purchase contract.
On February 6, 2017, we divested our Standard Products (“SP”) business, receiving $2.6 billion in cash proceeds, net of cash divested. Prior to February 6, 2017, the results of the SP business were included in the reportable segment SP.
On December 7, 2015, we acquired Freescale Semiconductor, Ltd. (“Freescale”) for a total consideration of $11.6 billion (the “Merger”). The results of their operations and the estimated fair value of the assets acquired and liabilities assumed in the business combination are included in our financial statements from the date of acquisition forward.
The information set forth below for the five years ended December 31, 2019, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below.
|
| | | | | | | | | | | | | | |
| As of and for the years ended December 31, |
($ in millions unless otherwise stated) | 2019 | | 2018 | | 2017⁽¹⁾ | | 2016 | | 2015 |
Consolidated statements of operations data: | | | | | | | | | |
Revenue(2) | 8,877 |
| | 9,407 |
| | 9,256 |
| | 9,498 |
| | 6,101 |
|
Gross profit(3) | 4,618 |
| | 4,851 |
| | 4,619 |
| | 4,069 |
| | 2,787 |
|
Total operating expenses(4) | (4,002 | ) | | (4,142 | ) | | (4,092 | ) | | (4,228 | ) | | (2,035 | ) |
Other income (expense)(5) | 25 |
| | 2,001 |
| | 1,575 |
| | 9 |
| | 1,263 |
|
Operating income (loss) | 641 |
| | 2,710 |
| | 2,102 |
| | (150 | ) | | 2,015 |
|
Financial income (expense) | (350 | ) | | (335 | ) | | (366 | ) | | (453 | ) | | (529 | ) |
Net income (loss) attributable to stockholders | 243 |
| | 2,208 |
| | 2,215 |
| | 200 |
| | 1,526 |
|
| | | | | | | | | |
Earnings per share data: | | | | | | | | | |
Net income per common share attributable to stockholders in $ | | | | | | | | | |
| 0.86 |
| | 6.78 |
| | 6.54 |
| | 0.59 |
| | 6.36 |
|
| 0.85 |
| | 6.72 |
| | 6.41 |
| | 0.58 |
| | 6.10 |
|
Weighted average number of shares of common stock outstanding during the year (in thousands) | | | | | | | | | |
| 282,056 |
| | 325,781 |
| | 338,646 |
| | 338,477 |
| | 239,764 |
|
| 285,911 |
| | 328,606 |
| | 345,802 |
| | 347,607 |
| | 250,116 |
|
Cash dividends declared per share(6) | 1.25 |
| | 0.50 |
| | — |
| | — |
| | — |
|
Cash dividends declared per share in EUR(6) | 1.12 |
| | 0.43 |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
Consolidated balance sheet data(7): | | | | | | | | | |
Cash and cash equivalents | 1,045 |
| | 2,789 |
| | 3,547 |
| | 1,894 |
| | 1,614 |
|
Total assets | 20,016 |
| | 21,530 |
| | 24,049 |
| | 24,898 |
| | 26,354 |
|
Net assets | 9,655 |
| | 10,690 |
| | 13,716 |
| | 11,156 |
| | 11,803 |
|
Working capital(8) | 1,476 |
| | 2,947 |
| | 4,077 |
| | 3,386 |
| | 2,820 |
|
Total debt(9), (10) | 7,365 |
| | 7,354 |
| | 6,565 |
| | 9,187 |
| | 9,212 |
|
Total stockholders’ equity | 9,441 |
| | 10,505 |
| | 13,527 |
| | 10,935 |
| | 11,515 |
|
Common stock | 64 |
| | 67 |
| | 71 |
| | 71 |
| | 68 |
|
| | | | | | | | | |
Other operating data: | | | | | | | | | |
Capital expenditures | (526 | ) | | (611 | ) | | (552 | ) | | (389 | ) | | (341 | ) |
Depreciation and amortization(11) | 2,047 |
| | 1,987 |
| | 2,173 |
| | 2,205 |
| | 517 |
|
| | | | | | | | | |
Consolidated statements of cash flows data: | | | | | | | | | |
Net cash provided by (used for): | | | | | | | | | |
Operating activities | 2,373 |
| | 4,369 |
| | 2,447 |
| | 2,303 |
| | 1,330 |
|
Investing activities | (2,284 | ) | | (522 | ) | | 2,072 |
| | (627 | ) | | (430 | ) |
Financing activities(12) | (1,831 | ) | | (4,597 | ) | | (2,886 | ) | | (1,392 | ) | | (449 | ) |
Increase (decrease) in cash and cash equivalents | (1,742 | ) | | (750 | ) | | 1,633 |
| | 284 |
| | 451 |
|
| |
(1) | Reflects the results of the SP business up to the February 6, 2017 divestment. |
| |
(2) | Under the modified retrospective method, revenue amounts before January 1, 2018 have not been adjusted for the impact of adopting ASC 606. |
| |
(3) | Gross profit in 2019 includes a charge of $8 million resulting from the purchase accounting effect on the inventory acquired from Marvell. In 2016 gross profit includes a charge of $448 million (2015: $149 million), resulting from the purchase accounting effect on the inventory acquired from Freescale. |
| |
(4) | In 2019, total operating expenses include charges related to the acquisition of Marvell as follows - $7 million for the amortization of acquisition-related intangibles and $5 million of acquisition related costs. Total operating expenses in 2016 include charges related to the acquisition of Freescale as follows - $1,430 million for the amortization of acquisition-related intangibles, which includes an impairment charge of $89 million relative to in-process research and development (IPR&D) that was acquired from Freescale, and $53 million of merger and integration related costs. In 2015, total operating expenses include charges related to the acquisition of Freescale as follows - $226 million in restructuring charges, $105 million for the amortization of acquisition-related intangibles, $49 million of share-based compensation charges related to employees terminated as a result of the Merger and $42 million of merger related costs. |
| |
(5) | Other income (expense) in 2018 includes the termination compensation received from Qualcomm ($2 billion). Other income (expense) in 2017 includes the recognition of the gain on the sale of our SP business ($1,597 million). Other income (expense) in 2015 includes the recognition of the gains from the sale of our Bipolar business on November 9, 2015 and the sale of our RF Power business on December 7, 2015. See the section on Other Significant Transactions in Part I, Item 1. Business.
|
| |
(6) | Reflects the interim dividends declared under the previously announced Quarterly Dividend Program. |
| |
(7) | Consolidated balance sheet data as of 2019 includes the impact of purchase accounting on the assets acquired and liabilities assumed in connection with our acquisition of Marvell and as of 2015 includes the impact of purchase accounting on the assets acquired and liabilities assumed in connection with our acquisition of Freescale. |
| |
(8) | Working capital is calculated as current assets less current liabilities (excluding short-term debt). |
| |
(9) | On June 18, 2019, NXP entered into two new senior unsecured notes, which are due in 2026 ($750 million) and 2029 ($1 billion). NXP used the net proceeds for general corporate purposes as well as the repayment of the $600 million outstanding aggregate principal amount of 2020 senior notes. In addition, in December 2019 NXP fully repaid the $1.15 billion 2019 cash convertible senior notes. On December 6, 2018, NXP entered into 3 new senior unsecured notes, which are due in 2024 ($1 billion), 2026 ($500 million) and 2028 ($500 million). NXP used the net proceeds for general corporate purposes as well as the repayment of the $1 billion senior unsecured bridge term credit facility agreement (the “Bridge Loan”), which was entered into on September 19, 2018 for general corporate purposes as well as to finance parts of the announced equity buy-back program. In April 2018, NXP fully repaid the $750 million senior unsecured notes on the due date. In addition, NXP fully repaid the $500 million senior unsecured notes due in 2023. In February 2017, NXP repaid all term loans, including Term Loan B (defined below), with the funds from the proceeds of the divestment of the SP business. Additionally, $500 million was repaid on the 2021 unsecured senior notes in March 2017. On December 7, 2015, in connection with the Merger, NXP entered into a $2.7 billion secured term loan (“Term Loan B”). Proceeds from Term Loan B, among others, were used to (i) pay the cash consideration in connection with the Merger, (ii) effect the repayment of certain amounts under Freescale’s outstanding credit facility and (iii) pay certain transaction costs. |
| |
(10) | The following is a reconciliation of net debt to the most directly comparable GAAP measure, total debt, as adjusted for our cash and cash equivalents our net debt was calculated as follows: |
|
| | | | | | | | | | | | | | |
($ in millions) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Long-term debt | 7,365 |
| | 6,247 |
| | 5,814 |
| | 8,766 |
| | 8,656 |
|
Short-term debt | — |
| | 1,107 |
| | 751 |
| | 421 |
| | 556 |
|
Total debt | 7,365 |
| | 7,354 |
| | 6,565 |
| | 9,187 |
| | 9,212 |
|
Less: cash and cash equivalents | (1,045 | ) | | (2,789 | ) | | (3,547 | ) | | (1,894 | ) | | (1,614 | ) |
Net debt | 6,320 |
| | 4,565 |
| | 3,018 |
| | 7,293 |
| | 7,598 |
|
[Reserved]Net debt is a non-GAAP financial measure. See “Use of Certain Non-GAAP Financial Measures” under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| |
(11) | Depreciation and amortization includes the effect of purchase accounting related to acquisitions in certain years. The effect of purchase accounting in depreciation and amortization was $1,528 million in 2019, $1,535 million in 2018, $1,741 million in 2017, $1,782 million (which includes an impairment charge of $89 million relative to IPR&D that was acquired from Freescale) in 2016 and $252 million in 2015. |
| |
(12) | Financing activities includes the repurchases of NXP common stock in 2019 ($1,443 million) and in 2018 ($5,006 million) and the distribution of cash dividends in 2019 ($319 million) and in 2018 ($74 million). |
As used in this Annual Report, “euro”, or “€” means the single unified currency of the European Monetary Union. “U.S. dollar”, “USD”, “U.S. $” or “$” means the lawful currency of the United States of America. As used in this Annual Report, the term “noon buying rate” refers to the exchange rate for euro, expressed in U.S. dollars per euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in the city of New York for cable transfers in foreign currencies.
The table below shows the average noon buying rates for U.S. dollars per euro for the five years ended December 31, 2019. The averages set forth in the table below have been computed using the noon buying rate on the next to last business day of each fiscal month during the periods indicated.
|
| | | | | | | | | | | | | | |
| Year ended December 31, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Average $ per € | 1.1210 |
| | 1.1794 |
| | 1.1310 |
| | 1.1065 |
| | 1.1150 |
|
Fluctuations in the value of the euro relative to the U.S. dollar have had a significant effect on the translation into U.S. dollar of our euro-denominated assets, liabilities, revenue and expenses, and may continue to do so in the future. For further information on the impact of fluctuations in exchange rates on our operations, see the “Fluctuations in Foreign Rates May Have An Adverse Effect On Our Financial Results” section in Part I, Item 1A. Risk Factors and the “Foreign Currency Risks” section in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. This section of this Form 10-K generally discusses 20192022 and 20182021 items and year-to-year comparisons between 20192022 and 2018.2021. Discussions of 20172020 items and year-to-year comparisons between 20182021 and 20172020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I,II, Item 5.A. "Operating Results"7 of our Annual Report on Form 20-F10-K for the fiscal year ended December 31, 20182021 as filed with the SEC on March 1, 2019.February 24, 2022.
Our MD&A is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows:
| |
• | •Overview - Overall analysis of financial and other highlights to provide context for the MD&A •Results of Operations - An analysis of our financial results •Financial Condition, Liquidity and Capital Resources - An analysis of changes in our balance sheets and cash flows and a discussion of our financial condition and potential sources of liquidity •Critical Accounting Estimates - Accounting estimates that management believes are the most important to understanding the assumptions and judgments incorporated in our financial results and forecasts • - Overall analysis of financial and other highlights to provide context for the MD&A |
| |
• | Results of Operations - An analysis of our financial results
|
| |
• | Financial Condition, Liquidity and Capital Resources - An analysis of changes in our balance sheets and cash flows and a discussion of our financial condition and potential sources of liquidity
|
| |
• | Critical Accounting Estimates - Accounting estimates that management believes are the most important to understanding the assumptions and judgments incorporated in our financial results and forecasts
|
| |
• | Use of Certain Non-GAAP Financial Measures - A discussion of the non-GAAP measures used |
Effective January 1, 2019, NXP removed the reference to HPMS in its organizational structure in acknowledgment of the non-GAAP measures used
NXP has one reportable segment representing the entity as a whole. Our segment represents groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the consolidated financial statements for more information regarding our segment.
Overview
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Three Months Ended | | Years Ended |
| December 31, 2022 | | December 31, 2021 | | Increase/(decrease) | | December 31, 2022 | | December 31, 2021 | | Increase/(decrease) |
Revenue | 3,312 | | | 3,039 | | | 273 | | | 13,205 | | | 11,063 | | | 2,142 | |
Gross profit | 1,891 | | | 1,707 | | | 184 | | | 7,517 | | | 6,067 | | | 1,450 | |
Operating income (loss) | 980 | | | 807 | | | 173 | | | 3,797 | | | 2,583 | | | 1,214 | |
Cash flow from operating activities | 1,076 | | | 785 | | | 291 | | | 3,895 | | | 3,077 | | | 818 | |
Total debt | 11,165 | | | 10,572 | | | 593 | | | 11,165 | | | 10,572 | | | 593 | |
Net debt | 7,320 | | | 7,742 | | | (422) | | | 7,320 | | | 7,742 | | | (422) | |
Diluted weighted average number of shares outstanding | 261,448 | | | 268,545 | | | (7,097) | | | 264,053 | | | 275,646 | | | (11,593) | |
Diluted net income per share | 2.76 | | | 2.24 | | | 0.52 | | | 10.55 | | | 6.79 | | | 3.76 | |
Dividends per common share | 0.8450 | | | 0.5625 | | | 0.283 | | | 3.38 | | | 2.25 | | | 1.13 | |
|
| | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Three Months Ended | | Years Ended |
| December 31, 2019 |
| | September 29, 2019 |
| | Increase/(decrease) |
| | December 31, 2019 |
| | December 31, 2018 |
| | Increase/(decrease) |
|
Revenue | 2,301 |
| | 2,265 |
| | 36 |
| | 8,877 |
| | 9,407 |
| | (530 | ) |
Gross profit | 1,209 |
| | 1,186 |
| | 23 |
| | 4,618 |
| | 4,851 |
| | (233 | ) |
Operating income (loss) | 197 |
| | 233 |
| | (36 | ) | | 641 |
| | 2,710 |
| | (2,069 | ) |
Cash flow from operating activities | 814 |
| | 746 |
| | 68 |
| | 2,373 |
| | 4,369 |
| | (1,996 | ) |
Total debt | 7,365 |
| | 8,505 |
| | (1,140 | ) | | 7,365 |
| | 7,354 |
| | 11 |
|
Net debt | 6,320 |
| | 4,968 |
| | 1,352 |
| | 6,320 |
| | 4,565 |
| | 1,755 |
|
Diluted weighted average number of shares outstanding | 285,518 |
| | 283,518 |
| | 2,000 |
| | 285,911 |
| | 328,606 |
| | (42,695 | ) |
Diluted net income per share | 0.40 |
| | 0.38 |
| | 0.02 |
| | 0.85 |
| | 6.72 |
| | (5.87 | ) |
Dividends per common share | 0.375 |
| | 0.375 |
| | — |
| | 1.25 |
| | 0.50 |
| | 0.75 |
|
Revenue for 20192022 was down 5.6% from 2018 against a very challenging semiconductor industry backdrop. Revenues decreased by 7%$13,205 million as compared to the $11,063 million reported in our largest end market, Automotive, and 12% in our Industrial and IOT end market which were slightly offset by2021, an increase of 5%$2,142 million or an increase of 19.4% year-on-year. The increase is attributed to inflationary effects of increased input costs from suppliers which were passed along to end customers in the Communications & Infrastructureform of higher average selling prices and strong customer demand.
Our gross profit percentage for 2022 increased to 56.9% from 54.8%, primarily due to the significant higher revenue during 2022, which led to improved utilization and efficiencies, partly offset by higher personnel-related costs and higher supplier costs.
Revenue for the fourth quarter, which ended December 31, 2022, was $3,312 million as compared to $3,039 million for the fourth quarter ended December 31, 2021, an increase of $273 million or an increase of 9.0%. The growth compared with the previous year period results from higher average selling prices across all of our end markets and strong demand within NXP’s Automotive end market, while the Industrial IoT, Communication Infrastructure & Other and a 2% increase in the Mobile end market.markets experienced slower demand signals versus the year ago period. When aggregating all end markets together, and reviewing sales channel performance, business transacted through direct OEM and EMS customers was $1,397 million, an increase of 8.1% versus the decrease inyear ago period. NXP's third party distribution partners was $1,876 million, an increase of 9.8%. From a geographic perspective, revenue was mostly related to lower sales to distributors due to lower end customer demand, in particular in Greater China (including Asia Pacific).increased across all regions.
Notwithstanding the challenging operating environment, we continue to successfully execute our strategy within our target markets and focus on driving profitability. OurThe gross profit percentage for 2019the fourth quarter of 2022 increased to 57.1% from 51.6% to 52.0%56.2%, due to a slightly more favorable end-market and customer mix and alsoprimarily due to the benefit of certain manufacturing cost controls.
NXP’shigher revenue in the fourth quarter revenue of $2,301 million increased 1.6% sequentially from the third quarter of 2019. This was driven primarily by an increase of 5% in the Automotive end-market2022 which led to improved utilization and a 3% increase in the mobile end-market, these increases wereefficiencies, partly offset by a 3% decline in each of the other two end markets. We continue to believe that the demand trends within our end markets are beginning to improve.
Over the course of 2019, we significantly enhanced our product portfolio. At the end of the year, we announced the completion of the acquisition of the Marvell wireless connectivity assetshigher personnel-related costs and with that introduced new product solutions. Our customers have already begun to adopt many of the new solutions which we anticipate will help to underpin NXP's long-term growth.higher supplier costs.
We continue to generate strong operating cash flows, with $2,373$3,895 million in cash flows from operations for 2019.2022. We returned $1,762$2,244 million to our shareholders during the year in dividends and repurchases of common stock. On August 29, 2019, we announced an increase in our quarterly dividend by $0.125, or 50%, to $0.375 per common share. Our cash position at the end of 20192022 was $1,045$3,845 million. On November 19, 2019, the NXP Board of Directors approved a cash dividend of $0.375 per common share for the fourth quarter of 2019.
Results of Operations
The following table presents the composition of operating income for the years ended December 31, 20192022 and December 31, 2018.2021.
| | ($ in millions, unless otherwise stated) | 2019 | | 2018 | ($ in millions, unless otherwise stated) | 2022 | | 2021 |
Revenue | 8,877 |
| | 9,407 |
| Revenue | 13,205 | | | 11,063 | |
% nominal growth | (5.6 | ) | | 1.6 |
| % nominal growth | 19.4 | | | 28.5 | |
Gross profit | 4,618 |
| | 4,851 |
| Gross profit | 7,517 | | | 6,067 | |
Research and development | (1,643 | ) | | (1,700 | ) | Research and development | (2,148) | | | (1,936) | |
Selling, general and administrative (SG&A) | (924 | ) | | (993 | ) | Selling, general and administrative (SG&A) | (1,066) | | | (956) | |
Amortization of acquisition-related intangible assets | (1,435 | ) | | (1,449 | ) | Amortization of acquisition-related intangible assets | (509) | | | (592) | |
Other income (expense) | 25 |
| | 2,001 |
| |
Operating income (loss) | 641 |
| | 2,710 |
| |
Other income | | Other income | 3 | | | 0 | |
Operating income | | Operating income | 3,797 | | | 2,583 | |
Revenue
Revenue for the year-ended December 31, 20192022 was $8,877$13,205 million compared to $9,407$11,063 million for the year-ended December 31, 2018, a decrease2021, an increase of $530$2,142 million or 5.6%. As19.4% year-on-year, with growth in all of January 1, 2019, income and expenses derived from manufacturing service arrangements (“MSA”) and transitional service arrangements (“TSA”) that are put into
the Company’s end markets.
place when we divest a business or activity, are included in other income (expense). In 2018, revenue related to these divested activities was $136 million The remaining decrease is essentially related to lower sales in our Automotive and in our Industrial & IOT end markets, which were in particular impacted by the trade tensions between the United States and China.
Revenue by end-marketend market was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2022 | | 2021 | | Increase/(decrease) | | % |
Automotive | 6,879 | | | 5,493 | | | 1,386 | | | 25.2 | % |
Industrial & IoT | 2,713 | | | 2,410 | | | 303 | | | 12.6 | % |
Mobile | 1,607 | | | 1,412 | | | 195 | | | 13.8 | % |
Communication Infrastructure & Other | 2,006 | | | 1,748 | | | 258 | | | 14.8 | % |
Revenue | 13,205 | | | 11,063 | | | 2,142 | | | 19.4 | % |
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2019 | | 2018 | | Increase/(decrease) |
| | % |
|
Automotive | 4,212 |
| | 4,507 |
| | (295 | ) | | (6.5 | )% |
Industrial & IoT | 1,599 |
| | 1,813 |
| | (214 | ) | | (11.8 | )% |
Mobile | 1,191 |
| | 1,164 |
| | 27 |
| | 2.3 | % |
Communication Infrastructure & Other | 1,875 |
| | 1,787 |
| | 88 |
| | 4.9 | % |
Manufacturing Service Agreements | — |
| | 136 |
| | (136 | ) | | NM |
|
Revenue | 8,877 |
| | 9,407 |
| | (530 | ) | | (5.6 | )% |
Revenue by sales channel was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2022 | | 2021 | | Increase/(decrease) | | % |
Distributors | 7,261 | | | 6,325 | | | 936 | | | 14.8 | % |
OEM/EMS | 5,775 | | | 4,587 | | | 1,188 | | | 25.9 | % |
Other | 169 | | | 151 | | | 18 | | | 11.9 | % |
Revenue | 13,205 | | | 11,063 | | | 2,142 | | | 19.4 | % |
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2019 | | 2018 | | Increase/(decrease) |
| | % |
|
Distributors | 4,409 |
| | 4,891 |
| | (482 | ) | | (9.9 | )% |
OEM/EMS | 4,352 |
| | 4,229 |
| | 123 |
| | 2.9 | % |
Other | 116 |
| | 287 |
| | (171 | ) | | (59.6 | )% |
Revenue | 8,877 |
| | 9,407 |
| | (530 | ) | | (5.6 | )% |
Revenue by geographic region, which is based on the customer’s shipped-to location, (except for intellectual property licensewas as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2022 | | 2021 | | Increase/(decrease) | | % |
China 1) | 4,700 | | | 4,180 | | | 520 | | | 12.4 | % |
APAC, excluding China | 4,165 | | | 3,471 | | | 694 | | | 20.0 | % |
EMEA (Europe, the Middle East and Africa) | 2,582 | | | 2,036 | | | 546 | | | 26.8 | % |
Americas | 1,758 | | | 1,376 | | | 382 | | | 27.8 | % |
Revenue | 13,205 | | | 11,063 | | | 2,142 | | | 19.4 | % |
|
1) China includes Mainland China and Hong Kong |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
n | Automotive | n | Mobile | | n | Distributors | n | Other |
n | Industrial & IoT | n | Comm Infra & Other | | n | OEM/EMS | | |
The year-on-year increase in revenue whichis driven by a combination of higher average selling prices across all of our end markets and ongoing customer demand. Of the 19.4% year-on-year revenue increase, approximately 14% is attributable to higher average selling prices and 5% is attributable to product mix and increased sales volume.
From an end market perspective, within the Netherlands)automotive end market the year-on-year growth was as follows:
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2019 | | 2018 | | Increase/(decrease) |
| | % |
|
Greater China (including Asia Pacific) | 4,934 |
| | 5,287 |
| | (353 | ) | | (6.7 | )% |
EMEA (Europe, the Middle East and Africa) | 1,760 |
| | 1,882 |
| | (122 | ) | | (6.5 | )% |
Americas | 1,076 |
| | 1,146 |
| | (70 | ) | | (6.1 | )% |
Japan | 780 |
| | 735 |
| | 45 |
| | 6.1 | % |
South Korea | 327 |
| | 357 |
| | (30 | ) | | (8.4 | )% |
Revenue | 8,877 |
| | 9,407 |
| | (530 | ) | | (5.6 | )% |
attributable to advanced analog, automotive processing and radar in support of the secular shift of electrification, advanced driver safety and assistance, and driver connectivity systems. The decreasegrowth within the Industrial & IoT market reflects the increase in revenue in the company’s ARM-based processing solutions, industrial analog products, and IoT connectivity solutions. Growth within the Mobile end market was due to ongoing adoption of our secure embedded transaction solutions along with the company’s growth in our advanced analog high-speed interfaces. The growth within the Communication Infrastructure & Other end market was attributable to the network edge equipment, RFID tagging solutions, the transit and access solutions, and cellular base stations. Offsetting these positive growth trends were declines in demand for company’s smart antennae products used in the Android mobile handset market, as well as declines in demand for the company’s embedded power products, and wireless access point solutions.
When aggregating all end markets together, and reviewing sales channel performance, business transacted through direct OEM and EMS customers was $5,775 million, an increase of 25.9% versus the year ago period. NXP's third party distribution partners was $7,261 million, an increase of 14.8%.
From a geographic perspective, revenue increased across all regions.
Revenue in the Automotive end market was $6,879 million, an increase of $295$1,386 million or 25.2% versus the year ago period. Within Automotive, customers are focused on the key functional pillars of safety, electrification and improved driver comfort to accelerate competitive differentiation. These broad functional areas are fundamentally enabled by the secular adoption of new and increased levels of semiconductor content, which is the resultlayered on top of a declinestrong base of existing electronic content in volumesmodern automobiles. The increase in all Automotive revenue can be attributed to growth in advanced analog, automotive processing and radar in support
of the related product groups. The weakness was primarily driven by Greater China (including Asia Pacific), through lower demandsecular shift of electrification, advanced driver safety and assistance, and driver connectivity systems. From a channel perspective, the Company experienced growth from both our distributorsdirect OEM and OEMEMS customers as a result of lower vehicle production and lower vehicle sales, but weakness was also seen in EMEA and the Americas.NXP's distribution partners across all geographic regions.
The decrease in revenueRevenue in the Industrial & IoT end market was $2,713 million, an increase of $214$303 million was essentially associated with our Microcontrollers product group with a decreaseor 12.6% versus the year ago period. The Industrial & IoT market is driven by the secular trend of multi-market OEMs seeking to enable secure, connected, high performance processing solutions at the edge of the network, whether it is in distributor sales, primarilyfactory automation, smart building/smart home or the exploding plethora of connected IoT devices. The innovation in Greater China (including Asia Pacific).
this market is being driven by thousands of relatively smaller customers, which NXP effectively services through its extended global distribution channel. The net increase in revenue was due to growth in the company’s ARM-based processing solutions, industrial analog products, and IoT connectivity solutions. The Industrial IoT end market experienced slower demand since second half of $27 million2022 versus the year ago period as a result of lower demand for consumer centric IoT products. From a channel perspective, the Company experienced growth from its distribution channel partners in the Asia Pacific, Europe, Americas and China regions.
Revenue in the Mobile end market was mostly driven by$1,607 million, an increase of $195 million or 13.8% versus the year ago period. The increase in revenue was due to strong adoption of our secure mobile wallet solutions, with key OEMs,and demand for our advanced analog high-speed interfaces, partly offset by declines in our semi-customembedded power solutions. Within the Mobile end market, we experienced softening demand from Android-based mobile analog interface productscustomers, offset by strength experienced from other premium mobile customers. Our mobile customers are primarily serviced through our global distribution channels. From a channel perspective, NXP’s distribution partners in China and both withinAsia Pacific facilitated the Greater China (including Asia Pacific) region. year-on-year growth, servicing the concentrated mobile manufacturing centers in Asia.
The increase of $88 millionRevenue in the Communication Infrastructure & Other end market was related to robust growth$2,006 million, an increase of $258 million or 14.8% versus the year ago period. The Communication Infrastructure & Other end market is an amalgamation of three separate product portfolios, which service multiple end markets, including cellular base stations, the network edge equipment, and the secure access, transit and government sponsored identification market. The increase in RF products in Greater China (including Asia Pacific)revenue was due to a combination of strength from network edge equipment, RF Power products levered to the adoptionsecular build-out of 5G base stations, and the ongoing demand for RFID tagging solutions and transit and access solutions. Offsetting these positive growth trends were declines in demand for the company’s massive-MIMO (“mMIMO”) solutions for the cellular basestation market, as mobile carriers began to increase network densification efforts ahead of future 5G cellular deployments but partly offset by a reductionsmart antennae products used in the company’s secure bank card and e-government product groups in Greater China (including Asia Pacific)Android mobile handset market, as well as declines in Europe. demand for wireless access point solutions. From a channel perspective, NXP’s distribution partners in China, Asia Pacific, the Americas, and Europe regions were responsible for the year-on-year growth. Additionally, OEM and EMS revenues increased in the China and Europe geographic regions.
Gross Profit
Gross profit for the year-ended December 31, 20192022 was $4,618$7,517 million, or 52.0%56.9% of revenue, compared to $4,851$6,067 million, or 51.6%54.8% of revenue, for the year-ended December 31, 2018.2021. The decreaseincrease of $233$1,450 million was primarily driven by lower revenue resulting from lower demand. Thehigher selling prices as well as improved factory loading as a result of increased manufacturing volumes to meet increased demand, which were mostly offset by higher input costs and a less favorable product mix. As a result, the gross margin percentage increased to 56.9% from 51.6% to 52.0%, due to a slightly more favorable end-market and customer mix and also due to the benefit of certain manufacturing cost controls.54.8%.
Operating Expenses
Operating expenses for the year-ended December 31, 20192022 totaled $4,002$3,723 million, or 45.1%28.2% of revenue, compared to $4,142$3,484 million, or 44%31.5% of revenue, for the year-ended December 31, 2018.2021.
The following table below presents the composition of operating expenses by line item in the statement of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2022 | | % of revenue | | 2021 | | % of revenue | | % change |
Research and development | 2,148 | | | 16.3 | % | | 1,936 | | | 17.5 | % | | 11.0 | % |
Selling, general and administrative | 1,066 | | | 8.1 | % | | 956 | | | 8.6 | % | | 11.5 | % |
Amortization of acquisition-related intangible assets | 509 | | | 3.9 | % | | 592 | | | 5.4 | % | | (14.0) | % |
Operating expenses | 3,723 | | | 28.2 | % | | 3,484 | | | 31.5 | % | | 6.9 | % |
|
| | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2019 | | % of revenue | | 2018 | | % of revenue | | % change |
Research and development | 1,643 |
| | 18.5 | % | | 1,700 |
| | 18.1 | % | | (3.4 | )% |
Selling, general and administrative | 924 |
| | 10.4 | % | | 993 |
| | 10.6 | % | | (6.9 | )% |
Amortization of acquisition-related intangible assets | 1,435 |
| | 16.2 | % | | 1,449 |
| | 15.4 | % | | (1.0 | )% |
Operating expenses | 4,002 |
| | 45.1 | % | | 4,142 |
| | 44.0 | % | | (3.4 | )% |
|
| | | | | | | | | | | | | | | | |
n | R&D | n | SG&A | n | Amortization acquisition-related |
The decreaseincrease in operating expenses was a result of the following items:
Research and development (R&D) costs primarily consist of engineer salaries and wages (including share based compensation and other variable compensation), engineering related costs (including outside services, fixed-asset, IP and other licenses related costs), shared service center costs and other pre-production related expenses.
•R&D costs for the year-ended December 31, 2019 decreased2022 increased by $57$212 million, or 3.4%11.0%, when compared to last year driven by:
+ higher personnel-related costs;
+ higher professional services;
+ higher share-based compensation expenses; and
- lower variable compensation costs;costs.
- lower costs associated with the Qualcomm transaction;
+ higher restructuring costs; and
+ share-based compensation expenses.
Selling, general and administrative (SG&A) costs primarily consist of personnel salaries and wages (including share based compensation and other variable compensation), communication and IT related costs, fixed-asset related costs and sales and marketing costs (including travel expenses).
•SG&A costs for the year-ended December 31, 2019 decreased2022 increased by $69$110 million, or 6.9%11.5%, when compared to last year mainly due to:
- lower salaries;+ higher professional services;
+ higher legal expense;
+ higher travel expenses; and
- lower variable compensation costs;costs.
- lower costs associated with the Qualcomm transaction;
- reductions in information technology expenditures as well as in professional services; and
+ higher share-based compensation expenses driven by the equity reboot grant to executives in 2018.
•Amortization of acquisition-related intangible assets slightly decreased by $14$83 million, or 1.0%14.0%, when compared to last year driven by:
- certain intangibles became fully amortized during 2019;2021; and
- an impairment charge in 2021 as a result of the discontinuation of an IPR&D project.
+ the start of amortization of intangible assets related to the Wifi Marvell acquisition.
Other Income (Expense)
As of January 1, 2019,Other income and expenses derived(expense) includes results from manufacturing service arrangements (“MSA”) and transitional service arrangements (“TSA”) that are put into place when we divest a business or activity, are included inas well as other income (expense).activity. These arrangements are short-term in nature and are expected to decrease as the divested business or activity becomes more established.
The following table presents the split of other income (expense) for the years ended December 31, 2019 and 2018:
|
| | | | | |
($ in millions) | 2019 | | 2018 |
Income from MSA and TSA arrangements | 62 |
| | — |
|
Expenses from MSA and TSA arrangements | (62 | ) | | — |
|
Result from MSA and TSA arrangements | — |
| | — |
|
Other, net | 25 |
| | 2,001 |
|
Total | 25 |
| | 2,001 |
|
Other income (expense) reflects an income of $25$3 million for 2019,2022, compared to $2,001 million of incomenil in 2018. Included in 2019 is $20 million relating to the sale of assets, whereas the 2018 amount included the $2 billion termination compensation received from Qualcomm.2021.
Financial Income (Expense)
|
| | | | | |
($ in millions) | For the years ended December 31, |
| 2019 | | 2018 |
Interest income | 57 |
| | 48 |
|
Interest expense | (370 | ) | | (273 | ) |
Total interest expense, net | (313 | ) | | (225 | ) |
Foreign exchange rate results | (15 | ) | | (14 | ) |
Extinguishment of debt | (11 | ) | | (26 | ) |
Miscellaneous financing costs/income and other, net | (11 | ) | | (70 | ) |
Total other financial income (expense) | (37 | ) | | (110 | ) |
Total | (350 | ) | | (335 | ) |
| | | | | | | | | | | |
($ in millions) | For the years ended December 31, |
| 2022 | | 2021 |
Interest income | 61 | | | 4 | |
Interest expense | (427) | | | (369) | |
Total interest expense, net | (366) | | | (365) | |
Foreign exchange rate results | (17) | | | 5 | |
Extinguishment of debt | (18) | | | (22) | |
Miscellaneous financing income (expense) and other, net | (33) | | | (21) | |
Total other financial income (expense) | (68) | | | (38) | |
Total | (434) | | | (403) | |
Financial income (expense) was an expense of $350$434 million in 2019,2022, compared to an expense of $335$403 million in 2018.2021. The change in financial income (expense) is primarily attributable to an increase in interest expenses, netexpense of $88$58 million as a result of (re-)financing activities, foreign exchange results, which resulted in a loss of $17 million in 2022 versus a profit of $5 million in 2021 and a change in miscellaneous financial income/expense of $12 million, mainly driven by $5 million interest expense on corporate income tax in 2022, vs. nil in 2021. This was partially offset by higher interest income of $57 million as a result of higher debt levels throughout 2019, partially offset byinterest rates, and lower debt extinguishment costs in 20192022 versus 20182021 of $15 million and the absence of the one time charge ($60 million) on certain financial instruments for compensation related to an adjustment event required by the termination of the Qualcomm transaction in 2018.$4 million.
Benefit (Provision) for Income Taxes
We recorded an income tax expense of $20$529 million for the year-ended December 31, 2019,2022, which reflects an effective tax rate of 6.9%15.7% compared to ana expense of $176$272 million (7.4%(12.5%) for the year-ended December 31, 2018.2021. |
| | | | | | | | | | | | | |
| 2019 | | 2018 | |
| $ | | % | | $ | | % | |
Statutory income tax in the Netherlands | 73 |
| | 25.0 |
| | 594 |
| | 25.0 |
| |
| | | | | | | | |
Rate differential local statutory rates versus statutory rate of the Netherlands | 16 |
| | 5.5 |
| | 19 |
| | 0.8 |
| |
Net change in valuation allowance | 59 |
| | 20.2 |
| | 10 |
| | 0.4 |
| |
Non-deductible expenses/losses | 52 |
| | 17.8 |
| | 64 |
| | 2.7 |
| |
Sale of non-deductible goodwill | — |
| | — |
| | — |
| — |
| — |
| |
The U.S. Tax Cuts and Jobs Act | — |
| | — |
| | (3 | ) | | (0.1 | ) | |
Tax on gains related to internal corporate reorganization transaction | — |
| | — |
| | — |
| | — |
| |
Netherlands tax incentives | (68 | ) | | (23.2 | ) | | (252 | ) | | (10.6 | ) | |
Foreign tax incentives | (118 | ) | | (40.5 | ) | | (119 | ) | | (5.0 | ) | |
Adjustments of prior years’ income taxes | (3 | ) | | (1.2 | ) | | (83 | ) | | (3.5 | ) | |
Other differences | 9 |
| | 3.3 |
| | (54 | ) | | (2.3 | ) | |
Effective tax rate | 20 |
| | 6.9 |
| | 176 |
| | 7.4 |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| $ | | % | | $ | | % |
Statutory income tax in the Netherlands | 868 | | | 25.8 | | | 545 | | | 25.0 | |
| | | | | | | |
Rate differential local statutory rates versus statutory rate of the Netherlands | (80) | | | (2.4) | | | (42) | | | (1.9) | |
Net change in valuation allowance | — | | | — | | | (20) | | | (0.9) | |
Non-deductible expenses/losses | 56 | | | 1.7 | | | 53 | | | 2.5 | |
Netherlands tax incentives | (113) | | | (3.4) | | | (69) | | | (3.2) | |
Foreign tax incentives | (266) | | | (7.9) | | | (163) | | | (7.5) | |
Changes in estimates of prior years’ income taxes | (2) | | | (0.1) | | | (21) | | | (1.0) | |
Sale of non-deductible goodwill | — | | | — | | | — | | | — | |
Withholding taxes | 8 | | | 0.3 | | | (8) | | | (0.4) | |
Other differences | 58 | | | 1.7 | | | (3) | | | (0.1) | |
Effective tax rate | 529 | | | 15.7 | | | 272 | | | 12.5 | |
The effective tax rate reflects the impact of tax incentives, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate, adjustmentschanges in estimates of prior years' income taxes, change in valuation allowance and non-deductible expenses.expenses, sale of non-deductible goodwill and withholding taxes. The impact of these items results in offsetting factors that attribute to the change in the effective tax rate between the two periods, with the significant drivers outlined below:
•The Company benefits from certain tax incentives, which reduce the effective tax rate. The dollar amount of the incentive in any given year is commensurate with the taxable income in that same period. For 2022, the foreign tax and Netherlands tax incentives were higher than 2021 by $147 million, mainly due to the fact that NXP benefited from higher qualifying income and also taking into account the effect of specific U.S. tax law that became effective as from 2022.
| |
• | The Company benefits from certain tax incentives, which reduce the effective tax rate in a relative location. The dollar amount of the incentive in any given year is commensurate with the taxable income in that same period. For 2019, the Netherlands tax incentives was lower than 2018, mainly due to the fact that NXP had received a break-up fee from Qualcomm of $2 billion in 2018 which drove a higher income before tax in 2018.
|
| |
• | The adjustments to prior years’ income taxes was higher in 2018 as a result of the agreement NXP reached with the Dutch tax authorities relative to the application of the Dutch innovation box regime to the taxable income attributable to the Netherlands. This agreement is effective from January 1, 2017. As such, the Company was able to refine its estimate of the Dutch tax liability, recognizing an additional income tax benefit of $67 million in 2018.
|
| |
• | The increase in the valuation allowance is mainly•The movement in the valuation allowance was mostly due to new Dutch corporate income tax law applicable as from 2019. A portion of the interest expenses is non-deductible in the year it is recorded but can be carried forward without expiration. |
| |
• | The higher other differences in 2018 relate primarily to a tax benefit on the liquidation of a former investment of $45 million.
|
On a go-forward basis, cash payments for corporate income tax law applicable as from 2019. A portion of the interest expenses is non-deductible in the year it is recorded but can be carried forward without expiration. The release of the valuation allowance in 2021 is due to higher qualifying income compared to 2020 and 2019.
•The movement in the withholding taxes that are relativein 2022 as compared to our on-going operations are expected at $45 – $50 million per quarter during 2020. Our future cash payments for income taxes will also be impacted by non-recurring events,2021 is mainly due to considering more undistributed earnings as indefinitely reinvested in 2021, resulting in additional paymentsa 2021 tax benefit of $125 million in total, which will be paid in 2020.$17 million.
•The other differences tax expense in 2022 is mainly relating to lower excess tax benefits, unfavorable FX-effects and higher taxes due on Global Intangible Low-Taxed Income (GILTI) inclusions in U.S. compared to the same period in 2021. GILTI is recognized as a current period expense when incurred.
Results Relating to Equity-accounted Investees
Results relating to equity-accounted investees amounted to a gainloss of $1 million in 2019,2022, whereas in 2018,2021, results relating to equity-accounted investees amounted to a gainloss of $59 million, which includes a net gain realized of $51 million resulting from the sale of ASEN in July 2018.$2 million.
Non-controlling Interests
Non-controlling interests are related to the third-party share in the results of consolidated companies, predominantly SSMC. Their share of non-controlling interests amounted to a profit of $29 million for the year-ended December 31, 2019, compared to a profit of $50$46 million for the year-ended December 31, 2018.2022, compared to a profit of $35 million for the year-ended December 31, 2021.
Financial Condition, Liquidity and Capital Resources
We derive our liquidity and capital resources primarily from our cash flows from operations. We continue to generate strong positive operating cash flows. As of December 31, 2019, our cash balance was $1,045 million, a decrease of $1,744 million compared to December 31, 2018 ($2,789 million). Taking into account the available undrawn amount of the Unsecured Revolving Credit Facility (the “RCF Agreement”) of $1,500 million,flows, and we had access to $2,545 million of liquidity as of December 31, 2019.
We currently use cash to fund operations, meet working capital requirements, for capital expenditures and for potential common stock repurchases, dividends and strategic investments. Based on past performance and current expectations, we believe that our current available sources of funds (including cash and cash equivalents, RCF Agreement, plus anticipated cash generated from operations) will be adequate to finance our operations, working capital requirements, capital expenditures and potential dividends for at least the next year. Our capital expenditures were $526 million in 2019, compared to $611 million in 2018.
The common stock repurchase activity was as follows:
|
| | | | | |
($ in millions, unless otherwise stated) | 2019 |
| | 2018 |
|
Shares repurchased | 15,865,718 |
| | 54,376,181 |
|
Cost of shares repurchased | 1,443 |
| | 5,006 |
|
Average price per share | $90.94 | | $92.07 |
Effective July 26, 2018, the board of directors of NXP, as authorized by its annual general meeting of shareholders (the “AGM”), authorized the repurchase of $5 billion of the Company’s stock period of 18 months. In October 2018, the board of directors of NXP authorized the additional repurchase of shares up to a maximum of 20% (approximately 69 million shares) of the number of shares issued. As of year-end 2018, NXP repurchased 54.4 million shares, for a total of approximately $5 billion, of which a number of 17,300,143 shares had been cancelled. Effective June 17, 2019, the board of directors of NXP, as authorized by its annual general meeting of shareholders (the “AGM”), renewed and revised this authorization for a period of 18 months to repurchase ordinary shares up to the statutory limit. During the fiscal year-ended December 31, 2019 NXP repurchased 15.9 million shares, for a total of approximately $1.4 billion, of which a number of 13.2 million shares had been cancelled. Under Dutch tax law, the repurchase of a company’s shares by an entity domiciled in the Netherlands results in a taxable event. The tax on the repurchased shares is attributed to the shareholders, with NXP making the payment on the shareholders’ behalf. As such, the tax on the repurchased shares is accounted for within stockholders’ equity.
On November 27, 2019, the Company, as authorized by the June 2019 AGM, canceled approximately 4% (representing 13,183,081 shares) of the issued number of NXP shares. As a result, the number of issued NXP shares as per November 27, 2019 is 315,519,638 shares.
On September 10, 2018, NXP announced the initiation of a Quarterly Dividend Program under which the Company intends to pay a regular quarterly cash dividend. Accordingly, interim dividends of $0.25 per ordinary share were paid on March 15, 2019 and June 13, 2019, and dividends of $0.375 per ordinary share were paid on October 4, 2019 and January 6, 2020.
|
| | | | | |
($ in millions, unless otherwise stated) | 2019 |
| | 2018 |
|
Dividend per share | 1.25 |
| | 0.50 |
|
Amount | 351 |
| | 147 |
|
Our total debt amounted to $7,365 million as of December 31, 2019,2022, our cash balance was $3,845 million, an increase of $11$1,015 million compared to December 31, 20182021 ($7,3542,830 million). On December 2, 2019, NXP retired the $1.15 billion outstanding principal amount of the 1.0% Cash Convertible Senior Notes at maturity.
At December 31, 2019, our cash balance was $1,045 million,, of which $188$227 million (2021, $208 million) was held by SSMC, our consolidated joint venture company with TSMC. Under the terms of our joint venture agreement with TSMC, a portion of this cash can be distributed by way of a dividend to us, but 38.8% of the dividend will be paid to our joint venture partner. There wasDuring 2022 and 2021, no dividend declaredwas declared. Taking into account the available undrawn amount of the RCF Agreement of $2,500 million, we had access to $6,345 million of liquidity as of December 31, 2022.
Capital return
The common stock repurchase activity was as follows:
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | 2022 | | 2021 |
Shares repurchased | 8,330,021 | | | 20,628,901 | |
Cost of shares repurchased | 1,429 | | | 4,015 | |
Average price per share | $171.59 | | $194.63 |
Under Dutch corporate law and our articles of association, NXP may acquire its own shares if the general meeting of shareholders has granted the board of directors the authority to effect such acquisitions. It is our standard practice to request our annual general meeting of shareholders (the “AGM”) every year to renew this authorization for a period of 18 months from the AGM. For repurchases of shares in 2021 and 2022, the board of directors made use of the authorizations renewed by the AGM on June 17, 2019, (in 2018,May 27, 2020, May 26, 2021 and June 1, 2022, respectively. Our board of directors has approved the purchase of shares from participants in NXP's equity programs to satisfy participants' tax withholding obligations ("trade for tax") and this authorization will remain in effect until terminated by the board of directors. In November 2019, the board of directors approved the repurchase of shares up to a dividendmaximum of $139$2 billion (the "2019 Share Repurchase Program"). In March 2021, the board of directors approved the additional repurchase of shares up to a maximum of $2 billion (the "2021 Share Repurchase Program"), and in August 2021, the board of directors increased the 2021 Share Repurchase Program authorization by $2 billion, for a total of $4 billion approved for the repurchase of shares under the 2021 Share Repurchase Program. In January 2022, the board of directors approved the additional repurchase of shares up to a maximum of $2 billion (the "2022 Share Repurchase Program"). During the fiscal year-ended December 31, 2021, NXP repurchased 20.6 million has been paidshares for a total of approximately $4 billion under the trade for tax and 2019 and 2021 Share Repurchase Programs, and during the fiscal year-ended December 31, 2022, NXP repurchased 8.3 million shares, for a total of approximately $1.4 billion under the trade for tax and 2021 Share Repurchase Program. Under Dutch tax law, the repurchase of a company’s shares by SSMC)an entity domiciled in the Netherlands results in a taxable event (unless exemptions apply). The tax on the repurchased shares is attributed to the shareholders, with NXP making the payment on the shareholders’ behalf. As such, the tax on the repurchased shares is accounted for within stockholders’ equity.
Subject to Dutch corporate law and our articles of association, the board of directors of NXP may cancel shares acquired if authorized by the general meeting of shareholders. As with repurchases of our shares, it is our standard practice to request our annual general meeting of shareholders (the “AGM”) every year to renew this authorization for a period of 18 months from the AGM. For cancellations of shares in 2020 and 2021, the board of directors made use of the authorizations renewed on May 27, 2020 and May 26, 2021, respectively.
As approved by the board of directors, on December 15, 2020, NXP cancelled 26 million shares and on November 30, 2021, NXP cancelled 15 million shares. As a result, the number of issued NXP shares as per November 30, 2021 is 274,519,638.
Under our Quarterly Dividend Program, interim dividends of $0.5625 per ordinary share were paid on April 5, July 6, October 6, 2021; and January 6, 2022, and dividends of $0.845 per ordinary share were paid on April 6, July 6, October 6, 2022; and January 6, 2023.
| | | | | | | | | | | |
| 2022 | | 2021 |
Dividends declared (per share) | 3.38 | | | 2.25 | |
Dividends declared (in millions) | 885 | | | 606 | |
Debt
Our total debt, inclusive of aggregate principal, unamortized discounts, premiums, debt issuance costs and fair value adjustments, amounted to $11,165 million as of December 31, 2022, an increase of $593 million compared to December 31, 2021 ($10,572 million). On May 16, 2022, NXP issued $500 million of 4.4% Senior Unsecured Notes due 2027 and $1 billion of 5% Senior Unsecured Notes due 2033. On May 27, 2022, $900 million of 4.625% Senior Notes due 2023 were redeemed in full.
As of December 31, 2022, the Company had outstanding fixed-rate notes with varying maturities for an aggregate principal amount of $11,250 million (collectively the “Notes”), with $0 payable within 12 months. Future interest payments associated with the Notes total $3,585 million, with $435 million payable within 12 months.
Additional capital requirements
We believe our current cash and cash equivalents position, our expected cash flow generated from operations and our expected financing activities will satisfy our working and other capital requirements for at least the next 12 months based on our current business plans. Recent and expected working and other capital requirements, in addition to the above matters, also include the items described below:
•The Company maintains purchase commitments with certain suppliers, primarily for raw materials, semi-finished goods and manufacturing services and for some non-production items. Purchase commitments for inventory materials are generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary for different suppliers. As of December 31, 2022, the Company had purchase commitments of $3,672 million, of which $1,187 million is expected to be paid in the next 12 months. We expect operating cash outflows to remain elevated as we make payments under these purchase agreements.
•Amounts related to future lease payments for operating lease obligations at December 31, 2022 totaled $295 million, with $63 million expected to be paid within the next 12 months.
•The Company enters into certain technology license arrangements which are used in conjunction with research and development activities for product development. Payments for these technology licenses are made over varying time periods. Outstanding unpaid balances for technology licenses total $260 million as of December 31, 2022, of which $121 million is expected to be paid in the next 12 months.
•Cash outflows for capital expenditures were $1,063 million in 2022, compared to $767 million in 2021. We expect to maintain similar levels of capital expenditures as a percentage of revenue in 2023, to support current and future manufacturing and production capacity needs.
•Our research and development expenditures were $2,148 million in 2022 and $1,936 million in 2021, and we expect to maintain similar levels of investment in research and development as a percentage of revenue in 2023.
From time to time, we engage in discussions with third parties regarding potential acquisitions of, or investments in, businesses, technologies and product lines. Any such transaction could require significant use of our cash and cash equivalents, or require us to arrange for new debt and equity financing to fund the transaction. Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions. In the future, we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness. Our business may not generate sufficient cash flow from operations, or we may not have enough capacity under the RCF Agreement, or from other sources in an amount sufficient to enable us to repay our indebtedness, including the RCF Agreement, the unsecured notes or
to fund our other liquidity needs, including working capital and capital expenditure requirements. In any such case, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. See Part I, Item 1A. Risk Factors.
Cash Flow from Operating Activities
For the year-ended December 31, 2019 our operating activities provided $2,373 million in cash. This was primarily the result of net income of $272 million, adjustments to reconcile the net income of $2,261 million and changes in operating assets and liabilities of ($160) million. Adjustments to net income includes offsetting non-cash items, such as depreciation and amortization of $2,047 million, share-based compensation of $346 million, amortization of the discount on debt and debt issuance costs of $53 million, a gain on sale of assets of ($20) million, a loss on extinguishment of debt of $11 million, results relating to equity-accounted investees of ($1) million and changes in deferred taxes of ($175) million.
The change in operating assets and liabilities (working capital accounts) was attributable to the following:
The $116 million decrease in receivables and other current assets was primarily due to the decrease in accounts receivable, net, which was driven by the linearity in revenue and the related timing of cash collections in the fourth quarter of 2019 compared with the same period in 2018.
The $128 million decrease in inventories was primarily related to management's efforts to align inventory on hand with the current demand forecasts in the fourth quarter of 2019 compared with the same period in 2018 along with the reclassification of $8 million of inventory related to Voice and Audio Solutions as held for sale, offset by $50 million of inventory that was acquired as part of the acquisition of assets from Marvell.
The $460 million decrease in accounts payable and other liabilities was primarily related to a decrease in other liabilities resulting from the $197 million payment of an income tax payable related to the Qualcomm break-up fee received in 2018, a decrease of $90 million related to the accrual for variable compensation, a decrease of $76 million related to the accrual for litigation matters, coupled with a decrease of $55 million in accounts payable due to timing in the fourth quarter of 2019 compared with the same period in 2018.
The $43 million decrease in other non-current assets was primarily related to the decrease of $44 million for insurance claims in relation to litigation matters as a result of settlement activity.
For the year-ended December 31, 2018 our operating activities provided $4,369 million in cash. This was primarily the result of net income of $2,258 million, adjustments to reconcile the net income of $2,114 million and changes in operating assets and liabilities of ($3) million. Net income includes offsetting non-cash items, such as depreciation and amortization of $1,987 million, share-based compensation of $314 million, amortization of the discount on debt and debt issuance costs of $52 million, a loss on extinguishment of debt of $26 million, results relating to equity-accounted investees of ($54) million and changes in deferred taxes of ($211) million.
Cash Flow from Investing Activities
Net cash used for investing activities amounted to $2,284 million for the year-ended December 31, 2019 and principally consisted of the cash outflows for purchases of interests in businesses (net of cash) of $1,698 million, relating to the acquisition of the Wifi assets of Marvell, capital expenditures of $526 million and $102 million for the purchase of identified intangible assets, partly offset by proceeds of $37 million from the sale of businesses (net of cash) and $23 million from the disposal of property, plant and equipment.
Net cash used for investing activities amounted to $522 million for the year-ended December 31, 2018 and principally consisted of the cash outflows for capital expenditures of $611 million and $50 million for the purchase of identified intangible assets, partly offset by proceeds of $159 million from the sale of businesses (net of cash).
Cash Flow from Financing Activities
Net cash used for financing activities was $1,831 million for the year-ended December 31, 2019 compared to $4,597 million for the year-ended December 31, 2018. The cash flows related to financing transactions in 2019 and 2018 are primarily related to the financing activities described below under the captions2019 Financing Activities and 2018 Financing Activities.
In addition to the financing activities described below, net cash used for financing activities by year included:
|
| | | | | |
($ in millions) | Year ended December 31, |
| 2019 | | 2018 |
Dividends paid to non-controlling interests | — |
| | (54 | ) |
Dividends paid to common stockholders | (319 | ) | | (74 | ) |
Cash proceeds from exercise of stock options | 84 |
| | 39 |
|
Purchase of treasury shares | (1,443 | ) | | (5,006 | ) |
Cash paid for terminated acquisition adjustment event | — |
| | (60 | ) |
Cash paid on behalf of shareholders for tax on repurchased shares | (128 | ) | | (142 | ) |
20192022 Financing Activities
2024 Revolving Credit Facility
On June 11, 2019,August 26, 2022, NXP B.V., together with NXP Funding LLC, amended and restated its revolving credit agreement entered into a $1.5on June 11, 2019. The amended and restated revolving credit agreement provides for $2.5 billion of senior unsecured revolving credit facility agreement, replacingcommitments and is scheduled to mature on August 26, 2027.
Exchange Offers
On April 14, 2022, we initiated a registered exchange offering of our outstanding Senior Unsecured Notes for new issues of substantially identical registered debt securities (the “Exchange Offers”). The Exchange Offers
expired on May 16, 2022, at which time substantially all of the $600 million secured revolving credit facility, entered into on December 7, 2015.Notes were exchanged for registered senior unsecured notes.
Debt Issuance and redemption
2020 Senior Notes
On June 11, 2019,May 16, 2022, NXP B.V., together with NXP Funding LLC commenced a cash tender offer for any and allNXP USA, Inc., issued $500 million of their $600 million outstanding aggregate principal amount4.4% senior unsecured notes due June 1, 2027 and $1 billion of 5.0% senior unsecured notes due January 15, 2033. On May 27, 2022 we redeemed the 4.125% Senior Notes due 2020 (“4.125% 2020 Notes”). An amount of $553$900 million aggregate principal amount of the 4.125% 2020outstanding dollar-denominated 4.625% Senior Unsecured Notes were tendereddue 2023 in this offer and retired on June 18, 2019. The remaining $47 million were redeemed underaccordance with the terms of the indenture governing these notes on July 3, 2019.indenture.
2021 Financing Activities
2026
2032, 2042 and 20292051 Senior Unsecured Notes
On June 18, 2019,November 30, 2021, NXP B.V., together with NXP USA Inc. and NXP Funding LLC, issued $750 million$1 billion of 3.875%2.65% Senior Unsecured Notes due 2026 and $1 billion2032, $500 million of 4.3%3.125% Senior Unsecured Notes due 2029. NXP2042 and $500 million of 3.25% Senior Unsecured Notes due 2051. The Company used a portion of the net proceeds of the offering of these notes to repay in full,redeem the 2020 Senior Notes, as described above. The remaining proceeds were used to refinance the $1,150 million$1 billion aggregate principal amount of Cash Convertibleoutstanding 3.875% Senior Notes due 2019 issued by NXP Semiconductors N.V. on December 1, 2014 upon the maturity of these notes on December 1, 2019.
2019 Cash Convertible Senior Notes
On December 2, 2019, NXP repaid the Cash Convertible Notes upon their maturity through a combination of available cash and payments made by the counterparties under privately negotiated convertible note hedge transactions (the “Cash Convertible Notes Hedges”), as further described in Note 14 of the notes to consolidated financial statements in this report.
2018 Financing Activities
2024, 2026 and 2028 Senior Unsecured Notes
On December 6, 2018, NXP B.V., together with NXP Funding LLC, issued $1 billion of 4.875% Senior Unsecured Notes due March 1, 2024, $500 million of 5.35% Senior Unsecured Notes due March 1, 2026 and
$500 million of 5.55% Senior Unsecured Notes due 2028. NXP used a portion of the net proceeds of the offering of these notes to repay in full the Bridge Loan, as described below.2022. The remaining net proceeds will be used for general corporate purposes, which may include the repurchase of additional shares of NXP’s common stock.capital expenditures or equity buyback transactions.
2031 and 2041 Senior Unsecured Notes
2019 Bridge Loan
On September 19, 2018,May 11, 2021, NXP B.V., together with NXP USA Inc. and NXP Funding LLC, entered into a $1 billion senior unsecured bridge term credit facility agreement under which an aggregate principal amount ofissued $1 billion of term loans (the “Bridge Loan”2.5% Senior Unsecured Notes due 2031 and $1 billion of 3.25% Senior Unsecured Notes due 2041. The net proceeds of the 2.5% Senior Notes due 2031 ("2031 Notes") was borrowed. The Bridge Loan wasare being used to mature on September 18, 2019 andfinance certain eligible green projects. Pending the interest at a LIBOR rate plusallocation of an applicable margin of 1.5 percent. NXP usedamount equal to the net proceeds of the Bridge Loan2031 Notes to finance these eligible green projects, the remaining net proceeds of the 2031 Notes, together with the net proceeds of the 3.25% Senior Notes due 2041, are temporarily being held as cash and other short-term securities or are being used for general corporate purposes, as well as to finance parts of the announcedincluding capital expenditures, short-term debt repayment or equity buy-back program. On December 6, 2018, the Bridge Loan was repaid in full, as described above.
buyback transactions.
2018 Senior Notes
On March 8, 2018, NXP B.V., together with NXP Funding LLC, delivered notice that it would repay to holders of its 3.75% Senior Notes due 2018 (the “2018 Notes”) $750 million of the outstanding aggregate principal amount of the 2018 Notes, which represented all of the outstanding aggregate principal amount of the 2018 Notes. The repayment occurred in April 2018 using available surplus cash.
2023 Senior Notes
On March 2, 2018, NXP B.V., together with NXP Funding LLC, delivered notice that it would repay to holders of its 5.75% Senior Notes due 2023 (the “2023 Notes”) $500 million of the outstanding aggregate principal amount of the 2023 Notes, which represented all of the outstanding aggregate principal amount of the 2023 Notes. The repayment occurred in April 2018 using available surplus cash.
Debt Position
Short-term Debt
As of December 31, 2019, there was2022 and 2021, we had no short-term debt outstanding.
As of December 31, 2018, our short-term debt amounted to $1,107 million.
Long-term Debt
As of December 31, 2019,2022 and 2021, we had outstanding debt of:
|
| | | | | | | | | | | | | | |
($ in millions) | December 31, 2018 | | Accrual/release Original Issuance/Debt Discount and Debt Issuance Cost | | Debt Exchanges/ Repurchase/ New Borrowings | | Other(10) | | December 31, 2019 |
U.S. dollar-denominated 4.125% senior unsecured notes due June 2020 (1) | 598 |
| | 2 |
| | (600 | ) | | — |
| | — |
|
U.S. dollar-denominated 4.125% senior unsecured notes due June 2021 (2) | 1,349 |
| | 1 |
| | — |
| | — |
| | 1,350 |
|
U.S. dollar-denominated 4.625% senior unsecured notes due June 2022 (3) | 398 |
| | — |
| | — |
| | — |
| | 398 |
|
U.S. dollar-denominated 3.875% senior unsecured notes due September 2022 (4) | 995 |
| | 2 |
| | — |
| | — |
| | 997 |
|
U.S. dollar-denominated 4.625% senior unsecured notes due June 2023 (5) | 895 |
| | 1 |
| | — |
| | — |
| | 896 |
|
U.S. dollar-denominated 4.875% senior unsecured notes due March 2024 (6) | 994 |
| | — |
| | — |
| | — |
| | 994 |
|
U.S. dollar-denominated 5.35% senior unsecured notes due March 2026 (6) | 497 |
| | — |
| | — |
| | — |
| | 497 |
|
U.S. dollar-denominated 3.875% senior unsecured notes due June 2026 (7) | — |
| | 1 |
| | 745 |
| | — |
| | 746 |
|
U.S. dollar-denominated 5.55% senior unsecured notes due December 2028 (6) | 496 |
| | — |
| | — |
| | — |
| | 496 |
|
U.S. dollar-denominated 4.3% senior unsecured notes due June 2029 (7) | — |
| | — |
| | 991 |
| | — |
| | 991 |
|
| 6,222 |
| | 7 |
| | 1,136 |
| | — |
| | 7,365 |
|
RCF Agreement (8) | — |
| | — |
| | — |
| | — |
| | — |
|
Other long-term debt (9) | 25 |
| | — |
| | — |
| | (25 | ) | | — |
|
Total long-term debt | 6,247 |
| | 7 |
| | 1,136 |
| | (25 | ) | | 7,365 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | December 31, 2021 | | Accrual/release Original Issuance/Debt Discount and Debt Issuance Cost | | Debt Exchanges/ Repurchase/ New Borrowings | | December 31, 2022 |
U.S. dollar-denominated 4.625% senior unsecured notes due June 2023 (1) | 898 | | | 2 | | | (900) | | | — | |
U.S. dollar-denominated 4.875% senior unsecured notes due March 2024 (2) | 997 | | | 1 | | | — | | | 998 | |
U.S. dollar-denominated 2.7% senior unsecured notes due May 2025 (3) | 498 | | | — | | | — | | | 498 | |
U.S. dollar-denominated 5.35% senior unsecured notes due March 2026 (2) | 498 | | | — | | | — | | | 498 | |
U.S. dollar-denominated 3.875% senior unsecured notes due June 2026 (4) | 747 | | | 1 | | | — | | | 748 | |
U.S. dollar-denominated 3.15% senior unsecured notes due May 2027 (3) | 497 | | | 1 | | | — | | | 498 | |
U.S. dollar-denominated 4.4% senior unsecured notes due June 2027 (7) | — | | | — | | | 496 | | | 496 | |
U.S. dollar-denominated 5.55% senior unsecured notes due December 2028 (2) | 497 | | | — | | | — | | | 497 | |
U.S. dollar-denominated 4.3% senior unsecured notes due June 2029 (4) | 993 | | | — | | | — | | | 993 | |
U.S. dollar-denominated 3.4% senior unsecured notes due May 2030 (3) | 993 | | | 1 | | | — | | | 994 | |
U.S. dollar-denominated 2.5% senior unsecured notes due May 2031 (5) | 992 | | | 1 | | | — | | | 993 | |
U.S. dollar-denominated 2.65% senior unsecured notes due Feb 2032 (6) | 992 | | | — | | | — | | | 992 | |
U.S. dollar-denominated 5% senior unsecured notes due Jan 2033 (7) | — | | | 1 | | | 988 | | | 989 | |
U.S. dollar-denominated 3.25% senior unsecured notes due May 2041 (5) | 987 | | | 1 | | | — | | | 988 | |
U.S. dollar-denominated 3.125% senior unsecured notes due Feb 2042 (6) | 492 | | | — | | | — | | | 492 | |
U.S. dollar-denominated 3.25% senior unsecured notes due Nov 2051 (6) | 491 | | | — | | | — | | | 491 | |
| 10,572 | | | 9 | | | 584 | | | 11,165 | |
RCF Agreement (8) | — | | | — | | | — | | | — | |
Total long-term debt | 10,572 | | | 9 | | | 584 | | | 11,165 | |
(1) On June 9, 2015, we issued $600 million aggregate principal amount of 4.125% Senior Unsecured Notes due 2020. On June 11, 2019, an amount of $553 million aggregate principal amount were tendered and on June 18, 2019, retired. The remaining $47 million were redeemed under the terms of the indenture governing these notes on July 3, 2019.
(2) On May 23, 2016, and August 1, 2016, we issued $850 million and $500 million, respectively, aggregate principal amount of 4.125% Senior Unsecured Notes due 2021.
(3) On June 9, 2015, we issued $400 million aggregate principal amount of 4.625% Senior Unsecured Notes due 2022.
(4) On August 11, 2016, we issued $1,000 million aggregate principal amount of 3.875% Senior Unsecured Notes due 2022.
(5)(1) On May 23, 2016, we issued $900 million aggregate principal amount of 4.625% Senior Unsecured Notes due 2023. On May 27, 2022, the Notes were redeemed in full.
(6)(2) On December 6, 2018, we issued $1,000 million aggregate principal amount of 4.875% Senior Unsecured Notes due 2024, $500 million aggregate principal amount of 5.35% Senior Unsecured Notes due 2026 and $500 million aggregate principal amount of 5.55% Senior Unsecured Notes due 2028.
(7)(3) On May 1, 2020, we issued $500 million aggregate principal amount of 2.7% Senior Unsecured Notes due 2025, $500 million aggregate principal amount of 3.15% Senior Unsecured Notes due 2027 and $1 billion aggregate principal amount of 3.4% Senior Unsecured Notes due 2030.
(4) On June 18, 2019, we issued $750 million of 3.875% Senior Unsecured Notes due 2026 and $1 billion of 4.3% Senior Unsecured Notes due 2029.
(5) On May 11, 2021, we issued $1,000 million aggregate principal amount of 2.5% Senior Unsecured Notes due 2031 and $1,000 million aggregated principal amount of 3.25% Senior Unsecured Notes due 2041.
(6) On November 30, 2021, we issued $1,000 million aggregate principal amount of 2.65% Senior Unsecured Notes due 2032, $500 million aggregate principal amount of 3.125% Senior Unsecured Notes due 2042 and $500 million aggregated principal amount of 3.25% Senior Unsecured Notes due 2051.
(7) On May 16, 2022, we issued $500 million aggregate principal amount of 4.4% Senior Unsecured Notes due 2027 and $1,000 million aggregate principal amount of 5% Senior Unsecured Notes due 2033.
(8) On June 11, 2019,August 26, 2022, we entered into a $1.5$2.5 billion unsecured revolving credit facility agreement, replacing the $600 million secured revolving credit facility, entered into on December 7, 2015. agreement.
(9) Other long-term debt consists primarily of capital lease obligations.
(10) Other mainly relates to the reclassification of capital lease obligations to current and non-current other liabilities due to the adoption of the new lease standard in 2019.
We may from time to time continue to seek to retire or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. See the discussion in Part II, Item 7. Financial Condition, Liquidity and Capital Resources above.
Cash flows
2019
Our cash and cash equivalents in 2022 increased by $1,027 million (excluding the effect of changes in exchange rates on our cash position of $(12) million) as follows:
| | | | | | | | | | | |
($ in millions) | Year ended December 31, |
| 2022 | | 2021 |
Net cash provided by (used for) operating activities | 3,895 | | | 3,077 | |
Net cash (used for) provided by investing activities | (1,249) | | | (934) | |
Net cash provided by (used for) financing activities | (1,619) | | | (1,585) | |
Increase (decrease) in cash and cash equivalents | 1,027 | | | 558 | |
•Cash Convertible Senior NotesFlow from Operating Activities
For the year-ended December 31, 2022 our operating activities provided $3,895 million in cash. This was primarily the result of net income of $2,833 million, adjustments to reconcile the net income of $1,410 million and changes in operating assets and liabilities of $(372) million. Adjustments to net income include offsetting non-cash items, such as depreciation and amortization of $1,250 million, share-based compensation of $364 million, amortization of the discount on debt and debt issuance costs of $9 million, a loss on extinguishment of debt of $18 million, a loss on equity securities of $4 million, results relating to equity-accounted investees of $1 million and changes in deferred taxes of $(236) million.
The change in operating assets and liabilities was attributable to the following:
The $106 million increase in receivables and other current assets was driven by the accumulation of insignificant increases in numerous asset accounts within the "other" classification, with the most significant increase relating to $30 million in other receivables. In addition there was an increase of $37 million in trade accounts receivable, net, which was driven by higher average selling prices and timing of cash collections at the end of the year.
The $593 million increase in inventories was primarily related to increased production levels in order to align inventory on hand with expected demand.
The $633 million increase in accounts payable and other liabilities was primarily related to the following increases: $365 million in trade accounts payable as a result of purchases to meet the increase in growth in our business and timing related to payments; $211 million in income tax payables primarily driven by tax law changes in the U.S. that went into effect at the beginning of 2022; $47 million in interest payable due to new bond issuances; $48 million of other net movements including the non-cash adjustment for capital expenditures and licensing intangibles. Partially offsetting these cash flow increases was $38 million related to employee bonus accruals.
The $306 million increase in other non-current assets was primarily related to prepayments to secure long-term production supply with multiple vendors.
For the year-ended December 31, 2021 our operating activities provided $3,077 million in cash. This was primarily the result of net income of $1,906 million, adjustments to reconcile the net income of $1,628 million and changes in operating assets and liabilities of $(437) million. Adjustments to net income include offsetting non-cash items, such as depreciation and amortization of $1,262 million, share-based compensation of $353 million, amortization of the discount on debt and debt issuance costs of $8 million, a gain on sale of assets of $1 million, a loss on extinguishment of debt of $22 million, a loss on equity securities of $2 million, results relating to equity-accounted investees of $2 million and changes in deferred taxes of $(20) million.
•Cash Flow from Investing Activities
Net cash used for investing activities amounted to $1,249 million for the year-ended December 31, 2022 and principally consisted of the cash outflows for capital expenditures of $1,063 million, $159 million for the purchase of identified intangible assets, $5 million for the purchase of equipment leased to others, $27 million for purchases of interests in businesses (net of cash acquired) and $20 million for the purchase of investments, partly offset by $10 million from proceeds from return of equity investments and $13 million from proceeds from sale of investments.
Net cash used for investing activities amounted to $934 million for the year-ended December 31, 2021 and principally consisted of the cash outflows for capital expenditures of $767 million, $132 million for the purchase of identified intangible assets, $33 million for the purchase of equipment leased to others, $23 million purchases of interests in businesses (net of cash acquired), and $8 million purchase of investments, partly offset by proceeds of $10 million from insurance recoveries received for equipment damage, $10 million from proceeds from return of equity investments and $8 million from proceeds from sale of investments.
•Cash Flow from Financing Activities
Net cash used for financing activities was $1,619 million for the year-ended December 31, 2022 compared to $1,585 million for the year-ended December 31, 2021. The cash flows related to financing transactions in 2022 and 2021 are primarily related to the financing activities described above under the captions 2022 Financing Activities and 2021 Financing Activities.
We repaid the Cash Convertible Notes upon their maturity on December 1, 2019 through a combination of available cash and payments made by the counterparties under privately negotiated convertible note hedge transactions (the “Cash Convertible Notes Hedges”), as further described in Note 14 of the notes to consolidated financial statements in this report.
For a detailed description of the Warrants underlying the Cash Convertible Notes Hedge, refer to Note 14 of the notes to consolidated financial statements included in this report.
Off-Balance Sheet Arrangements
As of December 31, 2019, we had no material off-balance sheet arrangements
Contractual Obligations
Presented below is a summary of our contractual obligations as of December 31, 2019.
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions) | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and thereafter |
Principal payments on debt | 7,400 |
| | — |
| | 1,350 |
| | 1,400 |
| | 900 |
| | 1,000 |
| | 2,750 |
|
Interest payments on debt | 1,579 |
| | 331 |
| | 297 |
| | 251 |
| | 193 |
| | 135 |
| | 372 |
|
Finance lease obligations | 33 |
| | 3 |
| | 3 |
| | 3 |
| | 3 |
| | 3 |
| | 18 |
|
Operating lease obligations | 260 |
| | 68 |
| | 51 |
| | 37 |
| | 30 |
| | 22 |
| | 52 |
|
Long-term purchase obligations | 290 |
| | 206 |
| | 35 |
| | 11 |
| | 6 |
| | 6 |
| | 26 |
|
Technology license obligations | 188 |
| | 85 |
| | 73 |
| | 24 |
| | 6 |
| | — |
| | — |
|
Total contractual cash obligations (1), (2) | 9,750 |
| | 693 |
| | 1,809 |
| | 1,726 |
| | 1,138 |
| | 1,166 |
| | 3,218 |
|
| |
(1) | As of December 31, 2019, we had reserves of $170 million recorded for uncertain tax positions, including interest and penalties. We are not including this amount in the long-term contractual obligations table presented because of the difficulty in making reasonably reliable estimates of the timing of cash settlements, if any, with the respective taxing authorities. |
| |
(2) | Certain of these obligations are denominated in currencies other than U.S. dollars, and have been translated from foreign currencies into U.S. dollars based on an aggregate average rate of $1.1209 per €1.00, in effect at December 31, 2019. As a result, the actual payments will vary based on any change in exchange rate. |
In addition to the financing activities described above, obligations, we enter intonet cash used for financing activities by year included:
| | | | | | | | | | | |
($ in millions) | Year ended December 31, |
| 2022 | | 2021 |
| | | |
Dividends paid to common stockholders | (815) | | | (562) | |
Cash proceeds from exercise of stock options | 59 | | | 62 | |
Purchase of treasury shares | (1,426) | | | (4,015) | |
| | | |
Other, net | (2) | | | (2) | |
Information Regarding Guarantors of NXP (unaudited)
Summarized Combined Financial Information for Guarantee of Securities of Subsidiaries
The following debt instruments are guaranteed, fully and unconditionally, jointly and severally, by NXP Semiconductors N.V. and issued or guaranteed by NXP USA, Inc., NXP B.V. and NXP LLC, (together, the “Subsidiary Obligors” and together with NXP Semiconductors N.V., the “Obligor Group”): 4.875% Senior Notes due 2024, 2.700% Senior Notes due 2025, 5.350% Senior Notes due 2026, 3.875% Senior Notes due 2026, 3.150% Senior Notes due 2027, 4.400% Senior Notes due 2027, 5.550% Senior Notes due 2028, 4.300% Senior Notes due 2029, 3.400% Senior Notes due 2030, 2.500% Senior Notes due 2031, 2.650% Senior Notes due 2032, 5.000% Senior Notes due 2033, 3.250% Senior Notes due 2041, 3.125% Senior Notes due 2042 and the 3.250% Senior Notes due 2051 (together the “ Notes”). Other than the Subsidiary Obligors, none of the
Company’s subsidiaries (together the “Non-Guarantor Subsidiaries”) guarantee the Notes. The Company consolidates the Subsidiary Obligors in its consolidated financial statements and each of the Subsidiary Obligors are wholly owned subsidiaries of the Company.
All of the existing guarantees by the Company rank equally in right of payment with all of the existing and future senior indebtedness of the Obligor Group. There are no significant restrictions on the ability of the Obligor Group to obtain funds from respective subsidiaries by dividend or loan.
The following tables present summarized financial information of the Obligor Group on a varietycombined basis, with intercompany balances and transactions between entities of agreementsthe Obligor Group eliminated and investments and equity in the normal courseearnings of business, containing provisions that certain penalties may be charged if we do not fulfill our commitments. It is not possible to predict with certainty the maximum potential amount of future payments under these or similar provisionsNon-Guarantor Subsidiaries excluded. The Obligor Group’s amounts due from, amounts due to, and intercompany transactions with Non-Guarantor Subsidiaries have been disclosed below the conditional naturetable, when material.
Summarized Statements of our obligationsIncome
| | | | | |
($ in millions) | December 31, 2022 |
| |
Revenue | 7,674 | |
Gross Profit | 3,883 | |
Operating income | 1,406 | |
Net income | 542 | |
Summarized Balance Sheets
| | | | | |
| As of |
($ in millions) | December 31, 2022 |
| |
Current assets | 3,740 | |
Non-current assets | 11,572 | |
Total assets | 15,312 | |
| |
Current liabilities | 1,067 | |
Non-current liabilities | 11,528 | |
Total liabilities | 12,595 | |
| |
Obligor's Group equity | 2,717 | |
Total liabilities and Obligor's Group equity | 15,312 | |
NXP Semiconductors N.V. is the head of a fiscal unity for the corporate income tax and VAT that contains the most significant Dutch wholly-owned group companies. The Company is therefore jointly and severally liable for the tax liabilities of the tax entity as a whole, and as such the income tax expense of the Dutch fiscal unity has been included in the Net income of the Obligor Group.
The financial information of the Obligor Group includes sales executed through a Non-Guarantor Subsidiary single-billing entity as a sales agent on behalf of an entity in the Obligor Group. The Obligor Group has sales to non-guarantors (2022: $813 million). The Obligor Group has amounts due from equity financing (2022: $5,210) and due to debt financing (2022: $2,629) with non-guarantor subsidiaries.
Recent Legislation
US CHIPS Act
On August 9, 2022, the CHIPS and Science Act of 2022, H.R. 4346 (the “CHIPS Act”) was signed into law. The CHIPS Act provides for a 25% refundable tax credit on certain investments in domestic semiconductor manufacturing. The credit is provided for qualifying property, which is placed in service after December 31, 2022. The CHIPS Act also provides for certain other financial incentives to further investments in domestic semiconductor manufacturing. The Company is evaluating the provisions of the new law and its potential impact to the Company.
Inflation Reduction Act
On August 16, 2022, the Inflation Reduction Act of 2022, H.R. 5376 (the “IRA”), was signed into law. The IRA introduces a 15% Corporate Alternative Minimum Tax (“CAMT”) for corporations whose average annual adjusted financial statement income for any consecutive three-tax-year period preceding the applicable tax year exceeds $1 billion and a 1% excise tax on certain stock repurchases The CAMT and the unique factsexcise tax are effective in taxable years beginning after December 31, 2022. The Company is evaluating the provisions of the new law and circumstancesits potential impact to the Company.
EU Chips Act
The EU Commission proposed its “EU Chips Act” in February 2022. The announced budget is €43 billion, with approximately €30 billion for potential manufacturing projects coming from EU member states national funds. The remaining €13 billion are foreseen for RD&I programs and initiatives like the new “Chips Joint Undertaking”. The EU Chips Act is still in the legislative process and is expected to become effective in late 2023. As a reaction to the U.S. Inflation Reduction Act, the EU Commission has stated that it would come up with a legislative package itself by the summer of 2023. The Company continues to monitor the progress of this potential legislation and will evaluate the provisions and its potential impact to the Company at such a time when enacted.
EU IPCEI on Microelectronics and Communication Technologies (“IPCEI”) program
During 2021 several European member states formally pre-notified the European Commission of the new Important Project of Common European Interest on Microelectronics and Communication Technologies (“IPCEI”) to support transnational cooperation projects on microelectronics. By joining forces, member states and industry intend to enhance the resilience of Europe’s supply chain in semiconductors. The IPCEI program requires the approval of the European Commission under state aid law: companies and EU member states must prove in a dedicated notification process that the IPCEI follows an overriding European interest and that projects would not be realized under market forces alone. The Company is currently involved in each particular case. Historically, payments pursuantdifferent notification processes in multiple member states, and expects to such provisions have not been material and we believereceive allocation of the related funding budgets that any future payments required pursuant to such provisions would not have a material adverse effect on our consolidated financial condition. However, such payments may be material to our Consolidated Statement of Operations for a specific period.typically run over five years during 2023.
We sponsor pension plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. These are defined-benefit pension plans, defined contribution pension plans and multi-employer plans. Contributions to funded pension plans are made as necessary, to provide sufficient
assets to meet future benefits payable to plan participants. These contributions are determined by various factors, including funded status, legal and tax considerations and local customs. The expected cash outflows in 2020 and subsequent years are uncertain and may change as a consequence of statutory funding requirements as well as changes in actual versus currently assumed discount rates, estimations of compensation increases and returns on pension plan assets.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with U.S. GAAP requires our management to make judgments, assumptions and estimates that affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. Our management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our Consolidated Financial Statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:
•the valuation of inventory, which impacts gross margin;
•the assessment of recoverability of goodwill, identified intangible assets and tangible fixed assets, which impacts gross margin or operating expenses when we record asset impairments or accelerate their depreciation or amortization;
•revenue recognition, which impacts our results of operations;
•the recognition of current and deferred income taxes (including the measurement of uncertain tax positions), which impacts our provision for income taxes;
•the assumptions used in the determination of postretirement benefit obligations, which impacts operating expenses;
•the assumptions used in the determination of share based compensation, which impacts gross margin and operating expenses; and
•the recognition and measurement of loss contingencies, which impacts gross margin or operating expenses when we recognize a loss contingency or revise the estimates for a loss contingency.
In the following section, we discuss these policies further, as well as the estimates and judgments involved.
Inventories
Inventories are valued at the lower of cost or market.net realizable value. We regularly review our inventories and write down our inventories for estimated losses due to obsolescence. This allowance is determined for groups of products based on sales of our products in the recent past and/or expected future demand. Future demand is affected by market conditions, technological obsolescence, new products and strategic plans, each of which is subject to change with little or no forewarning. In estimating obsolescence, we utilize information that includes projecting future demand.
The need for strategic inventory levels to ensure competitive delivery performance to our customers are balanced against the risk of inventory obsolescence due to rapidly changing technology and customer requirements.
The change in our reserves for inventories was primarily due to the normal review and accrual of obsolete or excess inventory. If actual future demand or market conditions are less favorable than those projected by our management, additional inventory write-downs may be required.
Goodwill
Goodwill is required to be testedassessed for impairment at least once annually, or sooner whenever events or changes in circumstances indicate thatmore frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the assets may be impaired.likelihood of an impairment of a reporting unit’s goodwill. Such events or changes in circumstances can be significant changes in business climate, operating performance or competition, or upon the disposition of a significant portion of a reporting unit. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual test dates. ThisWe perform impairment review compares thetests using a fair value for each reporting unit containing goodwill to its carrying value.approach when necessary. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions, including projected future cash flows, discount rates based on weighted average cost of capital and future economic and market conditions. We base our fair-value estimates on assumptions we believe to be reasonable. Actual cash flow amounts for future periods may differ from estimates used in impairment testing.
For theWe perform our annual impairment assessmenttest for goodwill in the year-ended December 31, 2019, we determinedfourth quarter of each fiscal year. We did not recognize any impairment charges for goodwill in the years presented, as our annual impairment testing indicated that for our reporting unit,the fair value exceeded the carrying value. Duringrecorded value for the third and fourth quarter of each of the prior two fiscal years, respectively, we have completed our annual impairment assessments and concluded that goodwill was not impaired in any of these years.respective reporting unit.
Impairment or disposal of identified intangible assets and tangible fixedlong-lived assets
We perform reviews of long-lived assets including property, plant and equipment, and certain identifiable intangibles, excluding goodwill,intangible assets subject to determine ifamortization, whenever facts and circumstances indicate that the useful life is shorter than what we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of the long-lived assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. Impairment losses, if any, are based
on the excess of the carrying amount over the fair value of those assets. Long-lived assets to be disposed of by sale are reported at the lower of their carrying amounts or their estimated fair values less costs to sell and are not depreciated.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines. In 2019 and 2018, we had no impairments. In 2017,2021, we recognized impairment charges of $23$36 million as a result of which $16the discontinuation of an IPR&D project. In 2020, we recognized impairment charges of $36 million, relative to IPR&D that was acquired from Freescale.
Revenue recognition
The Company recognizes revenue under the core principle to depict the transfer of control to customers in an amount reflecting the consideration the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The vast majority of the Company’s revenue is derived from the sale of semiconductor products to distributors, Original Equipment Manufacturers (“OEMs”) and similar customers. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the consideration to which the Company expects to be entitled. Variable consideration is estimated and includes the impact of discounts, price protection, product returns and distributor incentive programs. The estimate of variable consideration is dependent on a variety of factors, including contractual terms, analysis of historical data, current economic conditions, industry demand and both the current and forecasted pricing environments. The estimate of variable consideration is not constrained because the Company has extensive experience with these contracts.
Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment. In determining whether
control has transferred, the Company considers if there is a present right to payment and legal title, and whether risks and rewards of ownership having transferred to the customer.
For sales to distributors, revenue is recognized upon transfer of control to the distributor. For some distributors, contractual arrangements are in place which allow these distributors to return products if certain conditions are met. These conditions generally relate to the time period during which a return is allowed and reflect customary conditions in the particular geographic market. Other return conditions relate to circumstances arising at the end of a product life cycle, when certain distributors are permitted to return products purchased during a pre-defined period after the Company has announced a product’s pending discontinuance. These return rights are a form of variable consideration and are estimated using the most likely method based on historical return rates in order to reduce revenues recognized. However, long notice periods associated with these announcements prevent significant amounts of product from being returned. For sales where return rights exist, the Company has determined, based on historical data, that only a very small percentage of the sales of this type to distributors is actually returned. Repurchase agreements with OEMs or distributors are not entered into by the Company.
Sales to most distributors are made under programs common in the semiconductor industry whereby distributors receive certain price adjustments to meet individual competitive opportunities. These programs may include credits granted to distributors, or allow distributors to return or scrap a limited amount of product in accordance with contractual terms agreed upon with the distributor, or receive price protection credits when our standard published prices are lowered from the price the distributor paid for product still in its inventory. In determining the transaction price, the Company considers the price adjustments from these programs to be variable consideration that reduce the amount of revenue recognized. The Company’s policy is to estimate such price adjustments using the most likely method based on rolling historical experience rates, as well as a prospective view of products and pricing in the distribution channel for distributors who participate in our
volume rebate incentive program. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends in pricing environments and inventory levels. The estimates are also adjusted when recent historical data does not represent anticipated future activity. Historically, actual price adjustments for these programs relative to those estimated have not materially differed.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. Measurement of deferred tax assets and liabilities is based upon the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax liabilities for withholding taxes on dividends from subsidiaries are recognized in situations where the companyCompany does not consider the earnings indefinitely reinvested and to the extent that these withholding taxes are not expected to be refundable.
Deferred tax assets, including assets arising from loss carryforwards, are recognized, net of a valuation allowance, if based upon the available evidence it is more likely than not that the asset will be realized.
The income tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities. The income tax benefit recognized is measured based on the largest benefit that is moregreater than 50% likely to be realized upon resolution of the uncertainty. Unrecognized tax benefits are presented as a reduction to the deferred tax asset for related temporary differences, tax credits or net operating loss carryforwards, unless these would not be available, in which case the uncertain tax benefits are presented together with the related interest and penalties as a liability, under accrued liabilities and other non-current liabilities based on the timing of the expected payment. PenaltiesRelated penalties are recorded as income tax expense, whereas related interest is reported as financial expense in the statement of operations.
Postretirement benefits
The Company’s employees participate in pension and other postretirement benefit plans in many countries. The costs of pension and other postretirement benefits and related assets and liabilities with respect to the Company’s employees participating in defined-benefit plans are based upon actuarial valuations.
The projected defined-benefit obligation is calculated annually by qualified actuaries using the projected unit credit method. For the Company’s major plans, the discount rate is derived from market yields on high quality corporate bonds. Plans in countries without a deep corporate bond market use a discount rate based on the local government bond rates.
In calculating obligation and expense, the Company is required to select actuarial assumptions. These assumptions include discount rate, expected long-term rate of return on plan assets and rates of increase in compensation costs determined based on current market conditions, historical information and consultation with and input from our actuaries. Changes in the key assumptions can have a significant impact to the projected benefit obligations, funding requirements and periodic pension cost incurred.
The Company determines the fair value of plan assets based on quoted prices or comparable prices for non-quoted assets. For a defined-benefit pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement defined benefit plan it is the accumulated postretirement benefit obligation.
Share-based compensation
We recognize compensation expense for all share-based awards based on the grant-date estimated fair values, net of an estimated forfeiture rate. We use the Black-Scholes option pricing model to determine the estimated fair value for certain awards. Share-based compensation cost for restricted share units (“RSUs”) with time-based vesting is measured based on the closing fair market value of our common stock on the date of the grant, reduced by the present value of the estimated expected future dividends, and then multiplied by the
number of RSUs granted. Share-based compensation cost for performance-based share units (“PSUs”) granted with performance or market conditions is measured using a Monte Carlo simulation model on the date of grant.
Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. When establishing the expected life assumption, we used 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. We also estimate a forfeiture rate at the time of grant and revise this rate in subsequent periods if actual forfeitures or vesting differ from the original estimates.
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellation of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
Litigation and claims
We are regularly involved as plaintiffs or defendants in claims and litigation related to our past and current business operations. The claims can cover a broad range of topics, including intellectual property, reflecting the Company’s identity as a global manufacturing and technology business. The Company vigorously defends itself against improper claims, including those asserted in litigation. Due to the unpredictable nature of litigation, there can be no assurance that the Company’s accruals will be sufficient to cover the extent of its potential exposure to losses but, historically, legal actions have not had a material adverse effect on the Company’s business, results of operations or financial condition.
The estimated aggregate range of reasonably possible losses is based on currently available information in relation to the claims that have arisen and on the Company’s best estimate of such losses for those cases for which such estimate can be made. For certain claims, the Company believes that an estimate cannot currently be made. The estimated aggregate range requires significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants (including the Company) in such claims whose share of liability has yet to be determined, the numerous yet-unresolved issues in many of the claims, and the attendant uncertainty of the various potential outcomes of such claims. Accordingly, the Company’s estimate will change from time to time, and actual losses may be more than the current estimate.
Use of Certain Non-GAAP Financial Measures
In addition to disclosing financial results in accordance with U.S. GAAP, this document contains references to net debt. Net debt is a non-GAAP financial measure and represents total debt (short-term and long-term) after deduction of cash and cash equivalents. Management believesWe believe this measure is appropriateprovides investors with useful supplemental information about the financial performance of our business, enables comparison of financial results between periods where certain items may vary independent of business performance, and allows for greater transparency with respect to calculatecalculating our net leverage.
The following is a reconciliation of net debt to the most directly comparable GAAP measure, total debt, as adjusted for our cash and cash equivalents our net debt was calculated as follows:
| | | | | | | | | | | | | | |
($ in millions) | | 2022 | | 2021 |
Long-term debt | | 11,165 | | | 10,572 | |
Short-term debt | | — | | | — | |
Total debt | | 11,165 | | | 10,572 | |
Less: cash and cash equivalents | | (3,845) | | | (2,830) | |
Net debt | | 7,320 | | | 7,742 | |
We understand that, although net debt is used by investors and securities analysts in their evaluation of companies, this concept has limitations as an analytical tool and it should not be used as an alternative to any other measure in accordance with U.S. GAAP.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and denominate our transactions in a variety of foreign currencies. Changes in these rates may have an impact on future cash flow and earnings. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not enter into financial instruments for trading or speculative purposes.
By using derivative instruments, we are subject to credit and market risk. The fair market value of the derivative instruments is determined by using valuation models whose inputs are derived using market observable inputs, including interest rate yield curves, as well as foreign exchange and commodity spot and forward rates, and reflects the asset or liability position as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty owes us, thus creating a receivable risk for us. We are exposed to counterparty credit risk in the event of non-performance by counterparties to our derivative agreements. We minimize counterparty credit (or repayment) risk by entering into transactions with major financial institutions of investment grade credit rating. Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow.
Interest Rate Risk
Our RCF Agreement has a $1,500$2,500 million borrowing capacity with a floating rate interest. As there are currently no borrowings under this facility, a hypothetical increase in LIBOR based interest rates would not have caused any change to our interest expense on our floating rate debt.
Additional information regarding our notes is provided in Note 2 - Significant Accounting Policies, and Note 1413 - Debt, of our notes to the Consolidated Financial Statements included in Item 8. of this Annual Report and is incorporated herein by reference.
Foreign Currency Risks
We are also exposed to market risk from changes in foreign currency exchange rates, which could affect operating results as well as our financial position and cash flows. We monitor our exposures to these market risks and generally employ operating and financing activities to offset these exposures where appropriate. If we do not have operating or financing activities to sufficiently offset these exposures, from time to time, we may employ derivative financial instruments such as swaps, collars, forwards, options or other instruments to limit the volatility to earnings and cash flows generated by these exposures. Derivative financial instruments are only used for hedging purposes and not for trading or speculative purposes. CounterpartiesAll counterparties to our derivatives
contracts are all major banking institutions. In the event of financial insolvency or distress of a counterparty to our derivative financial instruments, we may be unable to settle transactions if the counterparty does not provide us with sufficient collateral to secure its net settlement obligation to us, which could have a negative impact on our results. The Company measures all derivative financial instruments based on fair values derived from market prices of the instruments or from option pricing models, as appropriate and record these as assets or liabilities in the balance sheet. Changes in the fair values are recognized in the statement of operations immediately unless cash flow hedge accounting is applied. A summary of our foreign currency accounting policies is provided in Note 2 - Significant Accounting Policies, of our notes to the Consolidated Financial Statements included in Item 8. of this Annual Report and is incorporated herein by reference.
At December 31, 20192022 our net asset related to foreign currency forward contracts designated as hedges of foreign currency risk on certain operating expenditure transactions was $9$2 million. If our forecasted operating
expenditures for currencies in which we hedge were to decline by 20% and foreign exchange rates were to change unfavorably by 20% in our hedged foreign currency, we would incur a negligible loss.
Financial assets and liabilities held by consolidated subsidiaries that are not denominated in the functional currency of those entities are subject to the effects of currency fluctuations and may affect reported earnings. As a global company, we face exposure to adverse movements in foreign currency exchange rates. We may hedge currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and certain anticipated nonfunctional currency transactions. As a result, we could experience unanticipated gains or losses on anticipated foreign currency cash flows, as well as economic loss with respect to the recoverability of investments.
Our primary foreign currency exposure relates to the U.S. dollar to euro exchange rate. However, our foreign currency exposures also relate, but are not limited, to the Chinese Yuan, the Japanese Yen, the Pound Sterling, the Malaysian Ringgit, the Singapore Dollar, the New Taiwan Dollar, the Thai Baht and the Thailand Baht.Swiss Franc.
Item 8. Financial Statements and Supplementary Data
List of Financial Statements
|
| | | | | | | |
Report of independent registered public accounting firm | | |
- Ernst & Young Accountants LLP; Eindhoven, the Netherlands; PCAOB ID: | 1396 | |
Consolidated Statements of Operations | | |
Consolidated Statements of Comprehensive Income | | |
Consolidated Balance Sheets | | |
Consolidated Statements of Cash Flows | | |
Consolidated Statements of Changes in Equity | | |
Notes to the Consolidated Financial Statements | | |
Supplementary Financial Data (unaudited) | |
Report of Independent Registered Public Accounting Firm
To the StockholdersShareholders and the Board of Directors
of NXP Semiconductors N.V.
OpinionsOpinion on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of NXP Semiconductors N.V. and subsidiaries (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive income, cash flows and changes in equity for each of the three years in the three-year period ended December 31, 2019,2022, and the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofat December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles. Also
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission “(2013 framework)”, and our report dated March 1, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | |
| Effect on our financial statement audit of prior year material weakness in internal control over financial reporting
|
Description of the Matter | As disclosed in management’s report on internal control over financial reporting, the Company identified a material weakness as of December 31, 2021 associated with ineffective information technology general controls (ITGCs) in the areas of user access, change-management and IT operations over certain information technology (IT) systems that support the Company’s financial reporting processes. Automated and manual business process controls that are dependent on the affected ITGCs were also deemed ineffective, because they could have been adversely impacted to the extent that they rely upon information and configurations from the affected IT systems. This prior year material weakness affected our current year audit of substantially all financial statement accounts, as due to the timing of remediation, automated and manual business process controls that are dependent on the affected ITGCs could not be relied upon during 2022 for the purpose of our financial statement audit.
Auditing the significant financial statement accounts affected by the material weakness was determined to be a critical audit matter, because significant auditor judgment, including the assistance of IT professionals, was required to design and execute the incremental audit procedures related to the financial statement accounts that are reliant on IT systems impacted by the ineffective ITGCs and to assess the sufficiency of the procedures performed and evidence obtained. |
How We Addressed the Matter in Our Audit |
We used significant judgment and involved our IT professionals to determine the timing, nature and extent of incremental procedures to be performed over financial statement accounts that are reliant on IT systems impacted by the ineffective ITGCs, including the impacted automated and manual business process controls. These incremental procedures were performed closer to the balance sheet date and included, among others, lowering our testing thresholds, increasing sample sizes and manually testing the completeness and accuracy of system reports or other information generated by the Company’s impacted IT systems, including increasing the extent to which items selected for testing were agreed to source documents.
|
/s/ Ernst & Young Accountants LLP
We have served as the Company’s auditor since 2020.
Eindhoven, the Netherlands
March 1, 2023
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of NXP Semiconductors N.V.
Opinion on Internal Control Over Financial Reporting
We have audited NXP Semiconductors N.V. internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, NXP Semiconductors N.V. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 20192022, based on criteria establishedthe COSO criteria.
We also have audited, in Internal Control - Integrated Framework (2013) issued byaccordance with the Committee of Sponsoring Organizationsstandards of the Treadway Commission.Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2022 and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 1, 2023 expressed an unqualified opinion thereon.
Basis for OpinionsOpinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of fair value of certain intangible assets acquired in Marvell business acquisition
As discussed in Note 3 to the consolidated financial statements, on December 6, 2019, the Company acquired Marvell’s Wireless WiFi Connectivity Business Unit, Bluetooth technology portfolio and related assets (“Marvell”) in a business combination for net consideration of $1,705 million. The assets acquired included amongst others $324 million of developed technology and $170 million of in-process R&D. Management valued these intangible assets on a preliminary basis using the multi-period excess earnings method under the income approach. This method reflects the present values of the projected cash flows that are expected to be generated by the developed technology and in-process R&D less charges representing the contribution of other assets to those cash flows.
We identified the evaluation of the preliminary acquisition date fair values of the developed technology and in-process R&D as a critical audit matter. There was a high degree of subjectivity in evaluating the discounted cash flow models used to calculate the acquisition-date fair value of these intangible assets including the allocation of projected cash flows between developed technology and in-process R&D. In addition, the discounted cash flow models included internally-developed assumptions such as expected revenue growth rates, profitability and discount rates, and the calculated fair values of such assets were sensitive to possible changes to these assumptions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process including controls related to the development of the assumptions based on comparable market data. We compared the assumptions, including the Company’s forecasted growth rates and profitability, to those of market participants. We also involved valuation professionals with specialized skills and knowledge, who assisted in developing an estimate of the fair value of the acquired business using the Company’s cash flow forecast and an independently developed discount rate, and
evaluating the Company’s discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities and transactions.
Evaluation of the accrued liability and disclosure of range of reasonably possible losses related to personal injury claims
As discussed in Note 16 to the consolidated financial statements, the Company is involved as a defendant in personal injury claims. Specifically, the Company is involved in legal proceedings claiming personal injuries to the children of former employees as a result of the employees’ alleged exposure to chemicals used in semiconductor manufacturing clean room environments operated by the Company or former parent companies Philips and Motorola. These personal injury claims allege a link between working in semiconductor manufacturing clean room facilities and birth defects. As at December 31, 2019, the Company has accrued $44 million and disclosed the aggregate range of reasonably possible losses in excess of the amount accrued between $0 million and $66 million for potential and current legal proceedings, of which a portion relates to personal injury claims.
We identified the evaluation of the accrued liability and the disclosure of the aggregate range of reasonably possible losses in excess of the amount accrued related to personal injury claims as a critical audit matter, because it required subjective auditor judgment. This is due to the nature of the estimate resulting from the varying stages of the proceedings, the existence of multiple defendants in such claims whose share of liability has yet to be determined, the numerous unresolved issues in many of the claims, and the attendant uncertainty of the various potential outcomes of such claims.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s personal injury claims accrual and disclosure process, including controls related to the evaluation of information from external and internal legal counsel and controls related to the development of assumptions and review of other information used in the Company’s calculations. We inspected letters received directly from the Company’s external legal counsel to confirm underlying information used by the Company in its calculation of the accrual and the range of reasonably possible losses. We inquired of management and its internal legal counsel and evaluated key inputs and assumptions used in its calculation. We evaluated the Company’s ability to estimate its monetary exposure to personal injury claims by comparing historically recorded liabilities to actual amounts incurred through settlement agreements.
/s/ KPMGErnst & Young Accountants N.V.
LLP
We have served as the Company’s auditor since 2009.
Amstelveen,Eindhoven, the Netherlands
February 27, 2020March 1, 2023
NXP Semiconductors N.V.
Consolidated Statements of Operations
| | ($ in millions, unless otherwise stated) | For the years ended December 31, | ($ in millions, unless otherwise stated) | For the years ended December 31, |
| 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
Revenue | 8,877 |
| | 9,407 |
| | 9,256 |
| Revenue | 13,205 | | | 11,063 | | | 8,612 | |
Cost of revenue | (4,259 | ) | | (4,556 | ) | | (4,637 | ) | Cost of revenue | (5,688) | | | (4,996) | | | (4,377) | |
| | | | | | | | | | | |
Gross profit | 4,618 |
| | 4,851 |
| | 4,619 |
| Gross profit | 7,517 | | | 6,067 | | | 4,235 | |
| | | | | | |
Research and development | (1,643 | ) | | (1,700 | ) | | (1,554 | ) | Research and development | (2,148) | | | (1,936) | | | (1,725) | |
Selling, general and administrative | (924 | ) | | (993 | ) | | (1,090 | ) | Selling, general and administrative | (1,066) | | | (956) | | | (879) | |
Amortization of acquisition-related intangible assets | (1,435 | ) | | (1,449 | ) | | (1,448 | ) | Amortization of acquisition-related intangible assets | (509) | | | (592) | | | (1,327) | |
Total operating expenses | (4,002 | ) | | (4,142 | ) | | (4,092 | ) | Total operating expenses | (3,723) | | | (3,484) | | | (3,931) | |
Other income (expense) | 25 |
| | 2,001 |
| | 1,575 |
| Other income (expense) | 3 | | | — | | | 114 | |
| | | | | | |
Operating income (loss) | 641 |
| | 2,710 |
| | 2,102 |
| Operating income (loss) | 3,797 | | | 2,583 | | | 418 | |
| | | | | | |
Financial income (expense): | | | | | | Financial income (expense): | |
Extinguishment of debt | (11 | ) | | (26 | ) | | (41 | ) | Extinguishment of debt | (18) | | | (22) | | | (60) | |
Other financial income (expense) | (339 | ) | | (309 | ) | | (325 | ) | Other financial income (expense) | (416) | | | (381) | | | (357) | |
| | | | | | | | | | | |
Income (loss) before income taxes | 291 |
| | 2,375 |
| | 1,736 |
| Income (loss) before income taxes | 3,363 | | | 2,180 | | | 1 | |
| | | | | | |
Benefit (provision) for income taxes | (20 | ) | | (176 | ) | | 483 |
| Benefit (provision) for income taxes | (529) | | | (272) | | | 83 | |
Results relating to equity-accounted investees | 1 |
| | 59 |
| | 53 |
| Results relating to equity-accounted investees | (1) | | | (2) | | | (4) | |
| | | | | | | | | | | |
Net income (loss) | 272 |
| | 2,258 |
| | 2,272 |
| Net income (loss) | 2,833 | | | 1,906 | | | 80 | |
| | | | | | |
Less: Net income (loss) attributable to non-controlling interests | 29 |
| | 50 |
| | 57 |
| Less: Net income (loss) attributable to non-controlling interests | 46 | | | 35 | | | 28 | |
Net income (loss) attributable to stockholders | 243 |
| | 2,208 |
| | 2,215 |
| Net income (loss) attributable to stockholders | 2,787 | | | 1,871 | | | 52 | |
| | | | | | |
Earnings per share data: | | | | | | Earnings per share data: | |
Net income (loss) per common share attributable to stockholders in $: | | | | | | Net income (loss) per common share attributable to stockholders in $: | |
– Basic | 0.86 |
| | 6.78 |
| | 6.54 |
| – Basic | 10.64 | | | 6.91 | | | 0.19 | |
– Diluted | 0.85 |
| | 6.72 |
| | 6.41 |
| – Diluted | 10.55 | | | 6.79 | | | 0.18 | |
| | | | | | |
Weighted average number of shares of common stock outstanding during the year (in thousands): | | | | | | Weighted average number of shares of common stock outstanding during the year (in thousands): | |
– Basic | 282,056 |
| | 325,781 |
| | 338,646 |
| – Basic | 261,879 | | | 270,687 | | | 279,763 | |
– Diluted | 285,911 |
| | 328,606 |
| | 345,802 |
| – Diluted | 264,053 | | | 275,646 | | | 283,809 | |
See accompanying notes to the Consolidated Financial Statements.
NXP Semiconductors N.V.
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | For the years ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income (loss) | 2,833 | | | 1,906 | | | 80 | |
| | | | | |
Other comprehensive income (loss), net of tax: | | | | | |
Change in fair value cash flow hedges * | (1) | | | (11) | | | 9 | |
Change in foreign currency translation adjustment | (72) | | | (74) | | | 78 | |
Change in net actuarial gain (loss) | 101 | | | 16 | | | (45) | |
| | | | | |
| | | | | |
Total other comprehensive income (loss) | 28 | | | (69) | | | 42 | |
| | | | | |
Total comprehensive income (loss) | 2,861 | | | 1,837 | | | 122 | |
| | | | | |
Less: Comprehensive income (loss) attributable to non-controlling interests | 46 | | | 35 | | | 28 | |
| | | | | |
Total comprehensive income (loss) attributable to stockholders | 2,815 | | | 1,802 | | | 94 | |
|
| | | | | | | | |
($ in millions, unless otherwise stated) | For the years ended December 31, |
| 2019 | | 2018 | | 2017 |
Net income (loss) | 272 |
| | 2,258 |
| | 2,272 |
|
| | | | | |
Other comprehensive income (loss), net of tax: | | | | | |
Change in fair value cash flow hedges * | 5 |
| | (11 | ) | | 10 |
|
Change in foreign currency translation adjustment * | (15 | ) | | (51 | ) | | 156 |
|
Change in net actuarial gain (loss) | (38 | ) | | 5 |
| | (16 | ) |
Change in net unrealized gains (losses) available-for-sale securities * | — |
| | 3 |
| | (7 | ) |
| | | | | |
Total other comprehensive income (loss) | (48 | ) | | (54 | ) | | 143 |
|
| | | | | |
Total comprehensive income (loss) | 224 |
| | 2,204 |
| | 2,415 |
|
| | | | | |
Less: Comprehensive income (loss) attributable to non-controlling interests | 29 |
| | 50 |
| | 57 |
|
| | | | | |
Total comprehensive income (loss) attributable to stockholders | 195 |
| | 2,154 |
| | 2,358 |
|
| |
* | * Reclassification adjustments included in Cost of revenue, Selling, general and administrative, Research and development and Results relating to equity-accounted investees in the Consolidated Statements of Operations. |
See accompanying notes to the Consolidated Financial Statements.
NXP Semiconductors N.V.
Consolidated Balance Sheets |
| | | | | |
($ in millions, unless otherwise stated) | As of December 31, |
| 2019 | | 2018 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | 1,045 |
| | 2,789 |
|
Accounts receivables, net | 667 |
| | 792 |
|
Assets held for sale | 50 |
| | — |
|
Inventories, net | 1,192 |
| | 1,279 |
|
Other current assets | 313 |
| | 365 |
|
Total current assets | 3,267 |
| | 5,225 |
|
| | | |
Non-current assets: | | | |
Other non-current assets | 732 |
| | 545 |
|
Property, plant and equipment, net | 2,448 |
| | 2,436 |
|
Identified intangible assets, net | 3,620 |
| | 4,467 |
|
Goodwill | 9,949 |
| | 8,857 |
|
Total non-current assets | 16,749 |
| | 16,305 |
|
| | | |
Total assets | 20,016 |
| | 21,530 |
|
Liabilities and equity | | | |
Current liabilities: | | | |
Accounts payable | 944 |
| | 999 |
|
Restructuring liabilities - current | 32 |
| | 60 |
|
Accrued liabilities | 815 |
| | 1,219 |
|
Short-term debt | — |
| | 1,107 |
|
Total current liabilities | 1,791 |
| | 3,385 |
|
| | | |
Non-current liabilities: | | | |
Long-term debt | 7,365 |
| | 6,247 |
|
Restructuring liabilities | — |
| | 5 |
|
Deferred tax liabilities | 282 |
| | 450 |
|
Other non-current liabilities | 923 |
| | 753 |
|
Total non-current liabilities | 8,570 |
| | 7,455 |
|
Equity: | | | |
Non-controlling interests | 214 |
| | 185 |
|
Stockholders’ equity: | | | |
Preferred stock, par value €0.20 per share: | | | |
Authorized: 645,754,500 (2018: 645,754,500 shares) | | | |
Issued: none | | | |
Common stock, par value €0.20 per share: | | | |
Authorized: 430,503,000 shares (2018: 430,503,000 shares) | | | |
Issued and fully paid: 315,519,638 shares (2018: 328,702,719 shares) | 64 |
| | 67 |
|
Capital in excess of par value | 15,184 |
| | 15,460 |
|
Treasury shares, at cost: 34,082,242 shares (2018: 35,913,021 shares) | (3,037 | ) | | (3,238 | ) |
Accumulated other comprehensive income (loss) | 75 |
| | 123 |
|
Accumulated deficit | (2,845 | ) | | (1,907 | ) |
Total Stockholders’ equity | 9,441 |
| | 10,505 |
|
Total equity | 9,655 |
| | 10,690 |
|
Total liabilities and equity | 20,016 |
| | 21,530 |
|
See accompanying notes to the Consolidated Financial Statements.
NXP Semiconductors N.V.
Consolidated Balance Sheets
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | As of December 31, |
| 2022 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | 3,845 | | | 2,830 | |
Accounts receivables, net | 960 | | | 923 | |
| | | |
Inventories, net | 1,782 | | | 1,189 | |
Other current assets | 348 | | | 286 | |
Total current assets | 6,935 | | | 5,228 | |
| | | |
Non-current assets: | | | |
Other non-current assets | 1,942 | | | 1,346 | |
Property, plant and equipment, net | 3,105 | | | 2,635 | |
Identified intangible assets, net | 1,311 | | | 1,694 | |
Goodwill | 9,943 | | | 9,961 | |
Total non-current assets | 16,301 | | | 15,636 | |
| | | |
Total assets | 23,236 | | | 20,864 | |
Liabilities and equity | | | |
Current liabilities: | | | |
Accounts payable | 1,617 | | | 1,252 | |
Restructuring liabilities - current | 19 | | | 25 | |
Other current liabilities | 1,634 | | | 1,175 | |
Total current liabilities | 3,270 | | | 2,452 | |
| | | |
Non-current liabilities: | | | |
Long-term debt | 11,165 | | | 10,572 | |
Restructuring liabilities | 1 | | | 12 | |
Deferred tax liabilities | 45 | | | 57 | |
Other non-current liabilities | 1,015 | | | 1,001 | |
Total non-current liabilities | 12,226 | | | 11,642 | |
Equity: | | | |
Non-controlling interests | 291 | | | 242 | |
Stockholders’ equity: | | | |
Preferred stock, par value €0.20 per share: | | | |
Authorized: 645,754,500 (2021: 645,754,500 shares) | | | |
Issued: none | | | |
Common stock, par value €0.20 per share: | | | |
Authorized: 430,503,000 shares (2021: 430,503,000 shares) | | | |
Issued and fully paid: 274,519,638 shares (2021: 274,519,638 shares) | 56 | | | 56 | |
Capital in excess of par value | 14,091 | | | 13,727 | |
Treasury shares, at cost: 15,056,232 shares (2021: 9,569,359 shares) | (2,799) | | | (1,932) | |
Accumulated other comprehensive income (loss) | 76 | | | 48 | |
Accumulated deficit | (3,975) | | | (5,371) | |
Total Stockholders’ equity | 7,449 | | | 6,528 | |
Total equity | 7,740 | | | 6,770 | |
Total liabilities and equity | 23,236 | | | 20,864 | |
See accompanying notes to the Consolidated Financial Statements.
NXP Semiconductors N.V.
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | For the years ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income (loss) | 2,833 | | | 1,906 | | | 80 | |
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | | | | | |
Depreciation and amortization | 1,250 | | | 1,262 | | | 1,988 | |
Share-based compensation | 364 | | | 353 | | | 384 | |
Amortization of discount (premium) on debt, net | 2 | | | 1 | | | (1) | |
Amortization of debt issuance costs | 7 | | | 7 | | | 9 | |
Net (gain) loss on sale of assets | — | | | (1) | | | (115) | |
(Gain) loss on extinguishment of debt | 18 | | | 22 | | | 60 | |
Results relating to equity-accounted investees | 1 | | | 2 | | | 4 | |
(Gain) loss on equity securities, net | 4 | | | 2 | | | (21) | |
Deferred tax expense (benefit) | (236) | | | (20) | | | (349) | |
Changes in operating assets and liabilities: | | | | | |
(Increase) decrease in receivables and other current assets | (106) | | | (176) | | | (51) | |
(Increase) decrease in inventories | (593) | | | (159) | | | 163 | |
Increase (decrease) in accounts payable and accrued liabilities | 633 | | | 248 | | | 319 | |
Decrease (increase) in other non-current assets | (306) | | | (350) | | | 7 | |
Exchange differences | 17 | | | (5) | | | 16 | |
Other items | 7 | | | (15) | | | (11) | |
Net cash provided by (used for) operating activities | 3,895 | | | 3,077 | | | 2,482 | |
Cash flows from investing activities: | | | | | |
Purchase of identified intangible assets | (159) | | | (132) | | | (130) | |
Capital expenditures on property, plant and equipment | (1,063) | | | (767) | | | (392) | |
Purchase of equipment leased to others | (5) | | | (33) | | | — | |
Insurance recoveries received for equipment damage | — | | | 10 | | | — | |
Proceeds from disposals of property, plant and equipment | 2 | | | 1 | | | 4 | |
Purchase of interests in businesses, net of cash acquired | (27) | | | (23) | | | (34) | |
Proceeds from sale of interests in businesses, net of cash divested | — | | | — | | | 161 | |
Purchase of investments | (20) | | | (8) | | | (30) | |
Proceeds from the sale of investments | 13 | | | 8 | | | 2 | |
Proceeds from return of equity investments | 10 | | | 10 | | | 1 | |
Net cash provided by (used for) investing activities | (1,249) | | | (934) | | | (418) | |
Cash flows from financing activities: | | | | | |
Repurchase of long-term debt | (917) | | | (1,021) | | | (1,809) | |
| | | | | |
Proceeds from the issuance of long-term debt | 1,496 | | | 4,000 | | | 2,000 | |
Cash paid for debt issuance costs | (14) | | | (47) | | | (15) | |
Dividends paid to non-controlling interests | — | | | — | | | (35) | |
Dividends paid to common stockholders | (815) | | | (562) | | | (420) | |
Proceeds from issuance of common stock through stock plans | 59 | | | 62 | | | 72 | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | |
($ in millions, unless otherwise stated) | For the years ended December 31, |
| 2019 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | |
Net income (loss) | 272 |
| | 2,258 |
| | 2,272 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | | | | | |
Depreciation and amortization | 2,047 |
| | 1,987 |
| | 2,173 |
|
Share-based compensation | 346 |
| | 314 |
| | 281 |
|
Amortization of discount on debt | 42 |
| | 42 |
| | 40 |
|
Amortization of debt issuance costs | 11 |
| | 10 |
| | 12 |
|
Net (gain) loss on sale of assets | (20 | ) | | — |
| | (1,615 | ) |
(Gain) loss on extinguishment of debt | 11 |
| | 26 |
| | 41 |
|
Results relating to equity-accounted investees | (1 | ) | | (54 | ) | | (22 | ) |
Deferred tax expense (benefit) | (175 | ) | | (211 | ) | | (797 | ) |
Changes in operating assets and liabilities: | | | | | |
(Increase) decrease in receivables and other current assets | 116 |
| | 187 |
| | 31 |
|
(Increase) decrease in inventories | 128 |
| | (65 | ) | | (120 | ) |
Increase (decrease) in accounts payable and accrued liabilities | (460 | ) | | (129 | ) | | 225 |
|
Decrease (increase) in other non-current assets | 43 |
| | (22 | ) | | (100 | ) |
Exchange differences | 15 |
| | 14 |
| | 30 |
|
Other items | (2 | ) | | 12 |
| | (4 | ) |
Net cash provided by (used for) operating activities | 2,373 |
| | 4,369 |
| | 2,447 |
|
Cash flows from investing activities: | | | | | |
Purchase of identified intangible assets | (102 | ) | | (50 | ) | | (66 | ) |
Capital expenditures on property, plant and equipment | (526 | ) | | (611 | ) | | (552 | ) |
Proceeds from disposals of property, plant and equipment | 23 |
| | 1 |
| | 2 |
|
Purchase of interests in businesses, net of cash acquired | (1,698 | ) | | (18 | ) | | — |
|
Proceeds from sale of interests in businesses, net of cash divested | 37 |
| | 159 |
| | 2,682 |
|
Purchase of available-for-sale securities | (19 | ) | | (9 | ) | | — |
|
Proceeds from the sale of securities | 1 |
| | 2 |
| | — |
|
Proceeds from return of equity investment | — |
| | 4 |
| | — |
|
Other | — |
| | — |
| | 6 |
|
Net cash provided by (used for) investing activities | (2,284 | ) | | (522 | ) | | 2,072 |
|
Cash flows from financing activities: | | | | | |
Payment of cash convertible note | (1,150 | ) | | — |
| | — |
|
Proceeds from settlement of cash convertible note hedge | 144 |
| | — |
| | — |
|
Payment of bond hedge derivatives - convertible option | (145 | ) | | — |
| | — |
|
Repayment of Bridge Loan | — |
| | (1,000 | ) | | — |
|
Proceeds from Bridge Loan | — |
| | 1,000 |
| | — |
|
Repurchase of long-term debt | (600 | ) | | (1,273 | ) | | (2,728 | ) |
Principal payments on long-term debt | — |
| | (1 | ) | | (16 | ) |
Proceeds from the issuance of long-term debt | 1,750 |
| | 1,997 |
| | — |
|
Cash paid for debt issuance costs | (24 | ) | | (23 | ) | | — |
|
Cash paid for terminated acquisition adjustment event | — |
| | (60 | ) | | — |
|
Dividends paid to non-controlling interests | — |
| | (54 | ) | | (89 | ) |
Dividends paid to common stockholders | (319 | ) | | (74 | ) | | — |
|
Cash proceeds from exercise of stock options | 84 |
| | 39 |
| | 233 |
|
|
| | | | | | | | | |
| NXP Semiconductors N.V. Consolidated Statements of Cash Flows (Continued) |
|
|
| Purchase of treasury shares and restricted stock unit withholdings | (1,443 | ) | | (5,006 | ) | | (286 | ) |
| Cash paid on behalf of shareholders for tax on repurchased shares | (128 | ) | | (142 | ) | | — |
|
| Net cash provided by (used for) financing activities | (1,831 | ) | | (4,597 | ) | | (2,886 | ) |
| Effect of changes in exchange rates on cash positions | (2 | ) | | (8 | ) | | 20 |
|
| Increase (decrease) in cash and cash equivalents | (1,744 | ) | | (758 | ) | | 1,653 |
|
| Cash and cash equivalents at beginning of period | 2,789 |
| | 3,547 |
| | 1,894 |
|
| Cash and cash equivalents at end of period | 1,045 |
| | 2,789 |
| | 3,547 |
|
| Supplemental disclosures to the consolidated cash flows | | | | | |
| Net cash paid during the period for: | | | | | |
| Interest | 242 |
| | 177 |
| | 245 |
|
| Income taxes, net of refunds | 368 |
| | 188 |
| | 356 |
|
| Net gain (loss) on sale of assets: | | | | | |
| Cash proceeds from the sale of assets | 21 |
| | — |
| | 2,688 |
|
| Book value of these assets | (1 | ) | | — |
| | (1,073 | ) |
| | 20 |
| | — |
| | 1,615 |
|
| Non-cash adjustment related to the adoption of ASC 606: | | | | | |
| Receivables | — |
| | (36 | ) | | — |
|
| Inventories | — |
| | 22 |
| | — |
|
| | | | | | | | | | | | | | | | | |
NXP Semiconductors N.V. Consolidated Statements of Cash Flows (Continued) |
|
|
Purchase of treasury shares and restricted stock unit withholdings | (1,426) | | | (4,015) | | | (627) | |
Cash paid on behalf of shareholders for tax on repurchased shares | — | | | — | | | — | |
Other, net | (2) | | | (2) | | | (1) | |
Net cash provided by (used for) financing activities | (1,619) | | | (1,585) | | | (835) | |
Effect of changes in exchange rates on cash positions | (12) | | | (3) | | | 1 | |
Increase (decrease) in cash and cash equivalents | 1,015 | | | 555 | | | 1,230 | |
Cash and cash equivalents at beginning of period | 2,830 | | | 2,275 | | | 1,045 | |
Cash and cash equivalents at end of period | 3,845 | | | 2,830 | | | 2,275 | |
Supplemental disclosures to the consolidated cash flows | | | | | |
Net cash paid during the period for: | | | | | |
Interest | 323 | | | 356 | | | 336 | |
Income taxes, net of refunds | 558 | | | 353 | | | 148 | |
| | | | | |
Net gain (loss) on sale of assets: | | | | | |
Cash proceeds from the sale of assets | 2 | | | 1 | | | 165 | |
Book value of these assets | (2) | | | — | | | (50) | |
| | | | | |
Non-cash investing activities: | | | | | |
Non-cash capital expenditures | 232 | | | 243 | | | 119 | |
| | | | | |
See accompanying notes to the Consolidated Financial Statements.
NXP Semiconductors N.V.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2019, 20182022, 2021 and 20172020 | | ($ in millions, unless otherwise stated) | | Outstan-ding number of shares (in thousands) | | Common stock | | Capital in excess of par value | | Treasury shares at cost | | Accumul-ated other compre-hensive income (loss) | | Accumu-lated deficit | | Total stockhol-ders’ equity | | Non- controll-ing interests | | Total equity | ($ in millions, unless otherwise stated) | | Out-standing number of shares (in thousands) | | Common stock | | Capital in excess of par value | | Treasury shares at cost | | Accumu-lated other compre-hensive income (loss) | | Accumu-lated deficit | | Total stock-holders’ equity | | Non- con-trolling interests | | Total equity |
Balance as of December 31, 2016 | | 335,392 |
| | 71 |
| | 15,679 |
| | (915 | ) | | 34 |
| | (3,934 | ) | | 10,935 |
| | 221 |
| | 11,156 |
| |
Balance as of January 1, 2020 | | Balance as of January 1, 2020 | | 281,437 | | | 64 | | | 15,184 | | | (3,037) | | | 75 | | | (2,845) | | | 9,441 | | | 214 | | | 9,655 | |
| | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | 2,215 |
| | 2,215 |
| | 57 |
| | 2,272 |
| Net income (loss) | | 52 | | | 52 | | | 28 | | | 80 | |
Other comprehensive income | | | | | | | | | | 143 |
| | | | 143 |
| | | | 143 |
| Other comprehensive income | | 42 | | | 42 | | | 42 | |
Share-based compensation plans | | | | | | 281 |
| | | | | | | | 281 |
| | | | 281 |
| Share-based compensation plans | | 384 | | | 384 | | | 384 | |
Shares issued pursuant to stock awards | | 10,054 |
| | | | | | 859 |
| | | | (626 | ) | | 233 |
| | | | 233 |
| Shares issued pursuant to stock awards | | 3,867 | | | 364 | | | (292) | | | 72 | | | 72 | |
Treasury shares and restricted stock unit withholdings | | (2,522 | ) | | | | | | (286 | ) | | | | | | (286 | ) | | | | (286 | ) | |
Treasury shares repurchased and retired | | Treasury shares repurchased and retired | | (4,829) | | | (5) | | | (1,267) | | | 1,636 | | | (991) | | | (627) | | | (627) | |
Expiration of stock purchase warrants | | Expiration of stock purchase warrants | | (168) | | | 168 | | | — | | | — | |
Dividends non-controlling interests | | | | | | | | | | | | | | — |
| | (89 | ) | | (89 | ) | Dividends non-controlling interests | | — | | | (35) | | | (35) | |
Cumulative effect adjustments | | | | | | | | | | | | 6 |
| | 6 |
| | | | 6 |
| |
Balance as of December 31, 2017 | | 342,924 |
| | 71 |
| | 15,960 |
| | (342 | ) | | 177 |
| | (2,339 | ) | | 13,527 |
| | 189 |
| | 13,716 |
| |
Dividends common stock | | Dividends common stock | | (420) | | | (420) | | | (420) | |
| Balance as of December 31, 2020 | | Balance as of December 31, 2020 | | 280,475 | | | 59 | | | 14,133 | | | (1,037) | | | 117 | | | (4,328) | | | 8,944 | | | 207 | | | 9,151 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | 2,208 |
| | 2,208 |
| | 50 |
| | 2,258 |
| Net income (loss) | | 1,871 | | | 1,871 | | | 35 | | | 1,906 | |
Other comprehensive income | | | | | | | | | | (57 | ) | | | | (57 | ) | | | | (57 | ) | Other comprehensive income | | (69) | | | (69) | | | (69) | |
Share-based compensation plans | | | | | | 311 |
| | | | | | | | 311 |
| | | | 311 |
| Share-based compensation plans | | 341 | | | 341 | | | 341 | |
Shares issued pursuant to stock awards | | 4,242 |
| | | | | | 457 |
| | | | (418 | ) | | 39 |
| | | | 39 |
| Shares issued pursuant to stock awards | | 5,104 | | | 525 | | | (463) | | | 62 | | | 62 | |
Treasury shares and restricted stock unit withholdings | | (37,076 | ) | | | | | | (3,353 | ) | | | | | | (3,353 | ) | | | | (3,353 | ) | |
Treasury shares, retired | | (17,300 | ) | | (4 | ) | | (811 | ) | | | | | | (838 | ) | | (1,653 | ) | | | | (1,653 | ) | |
Shareholder tax on repurchased shares | | | | | | | | | | | | (381 | ) | | (381 | ) | | | | (381 | ) | |
Dividends non-controlling interests | | | | | | | | | | | | | | — |
| | (54 | ) | | (54 | ) | |
Treasury shares repurchased and retired | | Treasury shares repurchased and retired | | (20,629) | | | (3) | | | (747) | | | (1,420) | | | (1,845) | | | (4,015) | | | (4,015) | |
| Dividends common stock | | | | | | | | | | | | (147 | ) | | (147 | ) | | | | (147 | ) | Dividends common stock | | (606) | | | (606) | | | (606) | |
Cumulative effect adjustments | | | | | | | | | | 3 |
| | 8 |
| | 11 |
| | | | 11 |
| |
Balance as of December 31, 2018 | | 292,790 |
| | 67 |
| | 15,460 |
| | (3,238 | ) | | 123 |
| | (1,907 | ) | | 10,505 |
| | 185 |
| | 10,690 |
| |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | | 264,950 | | | 56 | | | 13,727 | | | (1,932) | | | 48 | | | (5,371) | | | 6,528 | | | 242 | | | 6,770 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | |
|
| |
|
| |
|
| |
|
| |
|
| | 243 |
| | 243 |
| | 29 |
| | 272 |
| Net income (loss) | | 2,787 | | | 2,787 | | | 46 | | | 2,833 | |
Other comprehensive income | |
|
| |
|
| |
|
| |
|
| | (48 | ) | |
|
| | (48 | ) | |
|
| | (48 | ) | Other comprehensive income | | 28 | | | 28 | | | 28 | |
Share-based compensation plans | |
|
| |
|
| | 356 |
| |
|
| |
|
| |
|
| | 356 |
| |
|
| | 356 |
| Share-based compensation plans | | 364 | | | 364 | | | 364 | |
Shares issued pursuant to stock awards | | 4,513 |
| |
|
| |
|
| | 422 |
| |
|
| | (338 | ) | | 84 |
| |
|
| | 84 |
| Shares issued pursuant to stock awards | | 2,843 | | | 562 | | | (503) | | | 59 | | | 59 | |
Treasury shares and restricted stock unit withholdings | | (2,683 | ) | |
|
| |
|
| | (221 | ) | |
|
| |
|
| | (221 | ) | |
|
| | (221 | ) | |
Treasury shares, retired | | (13,183 | ) | | (3 | ) | | (632 | ) | |
|
| |
|
| | (587 | ) | | (1,222 | ) | |
|
| | (1,222 | ) | |
Shareholder tax on repurchased shares | |
|
| |
|
| |
|
| |
|
| |
|
| | 95 |
| | 95 |
| |
|
| | 95 |
| |
Treasury shares repurchased and retired | | Treasury shares repurchased and retired | | (8,330) | | | (1,429) | | | (1,429) | | | (1,429) | |
| Change in participation | | Change in participation | | (3) | | | (3) | | | 3 | | | — | |
Dividends common stock | |
|
| |
|
| |
|
| |
|
| |
|
| | (351 | ) | | (351 | ) | |
|
| | (351 | ) | Dividends common stock | | (885) | | | (885) | | | (885) | |
Balance as of December 31, 2019 | | 281,437 |
| | 64 |
| | 15,184 |
| | (3,037 | ) | | 75 |
| | (2,845 | ) | | 9,441 |
| | 214 |
| | 9,655 |
| |
December 31, 2022 | | December 31, 2022 | | 259,463 | | | 56 | | | 14,091 | | | (2,799) | | | 76 | | | (3,975) | | | 7,449 | | | 291 | | | 7,740 | |
See accompanying notes to the Consolidated Financial Statements.
NXP Semiconductors N.V.
The Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Net income (loss) includes the portion of the earnings of subsidiaries applicable to non-controlling interests. The income (loss) and equity attributable to non-controlling interests are disclosed separately in the Consolidated Statements of Operations and in the Consolidated Balance Sheets under non-controlling interests. We have reclassified certain prior period amounts to conform to current period presentation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment. In determining whether
We determine if an arrangement is a lease at inception of the arrangement. Once it is determined that an arrangement is, or contains, a lease, that determination should only be reassessed if the legal arrangement is modified. Changes to assumptions such as market-based factors do not trigger a reassessment. Determining whether a contract contains a lease requires judgement. In general, arrangements are considered to be a lease when all of the following apply:
The terms of a lease arrangement determine how a lease is classified and the resulting income statement recognition. When the terms of a lease effectively transfer control of the underlying asset, the lease represents an in substance financed purchase (sale) of an asset and the lease is classified as a finance lease by the lessee and a sales-type lease by the lessor. When a lease does not effectively transfer control of the underlying asset to the lessee, but the lessor obtains a guarantee for the value of the asset from a third party, the lessor would classify a lease as a direct financing lease. All other leases are classified as operating leases.
Lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at January 1, 2019, the date of the adoption of ASC 842, or commencement date, if later, in determining the present value of future payments. The lease payments that are included in the lease liability are comprised of fixed payments (including in-substance fixed payments), less any lease incentives receivable; variable lease payments that depend on an index or rate; amounts expected to be payable by the lessee under residual value guarantees; the exercise price of a purchase option that the lessee is reasonably certain to exercise; and payments for terminating the lease unless it is reasonably certain that early termination will not occur. The lease ROU asset includes any lease payment made and initial direct costs incurred. Our lease terms may include optionsthe non-cancelable period for which a lessee has the right to use an underlying asset, together with both periods covered by an option to extend orthe lease if the lessee is reasonably certain to exercise that option; and the periods covered by an option to terminate the lease which are included inif the measurement of the ROU assets and lease liabilities when itlessee is reasonably certain that we willnot to exercise thatthe option.
For operating leases, the lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For finance leases each lease payment is allocated between the liability and finance cost. The finance cost is charged to the Consolidatedconsolidated statement of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The finance lease asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
We have lease agreements with lease and non-lease components. Except for gas and chemical contracts, NXP did not make the election to treat the lease and non-lease components as a single component, and considers the non-lease components as a separate unit of account.
We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates and judgments that could materially affect the timing or amounts recognized in our financial statements.
Significant judgment is required in estimating the fair value of acquired intangible assets, including the valuation methodology, estimations of future cash flows, discount rates, market segment growth rates, and our assumed market segment share, as well as the estimated useful life of intangible assets. Further judgment is required in estimating the fair values of deferred tax assets and liabilities, uncertain tax positions and tax-related valuation allowances, which are initially estimated as of the acquisition date, as well as inventory, property, plant and equipment, pre-existing liabilities or legal claims, deferred revenue and contingent consideration, each as may be applicable.
The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies as well as the amount and timing of future cash flows (including expected revenue growth rates and profitability), the underlying product or technology life cycles, the economic barriers to entry and the discount rate applied to the cash flows. As such, acquired tangible and identified intangible assets are classified
as Level 3 assets. Unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptionsassumptions.
We record goodwill when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired. We assign the goodwill to our reporting unit based on the relative expected fair value provided by the acquisition. We perform an impairment assessment at least once annually, or more frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the likelihood of an impairment of a reporting unit’s goodwill. We perform impairment tests using a fair value approach when necessary. The reporting unit’s carrying value used in an impairment test represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments and debt.
Licensed technology and patents are generally amortized on a straight-line basis over the periods of benefit. We amortize all acquisition-related intangible assets that are subject to amortization over their estimated useful life based on economic benefit. Acquisition-related in-process R&D assets represent the fair value of incomplete R&D projects that had not reached technological feasibility as of the date of acquisition; initially, these assets are not subject to amortization. Assets related to projects that have been completed are subject to amortization, while assets related to projects that have been abandoned are impaired and expensed to R&D. In the quarter following the period in which identified intangible assets become fully amortized, we remove the fully amortized balances from the gross asset and accumulated amortization amounts.
The Company uses the U.S. dollar as its reporting currency. The functional currency of the holding companyCompany is the U.S. dollar. For consolidation purposes, the financial statements of the entities within the Company with a functional currency other than the U.S. dollar, are translated into U.S. dollars. Assets and liabilities are translated using the exchange rates on the applicable balance sheet dates. Income and expense items in the statements of operations, statements of comprehensive income and statements of cash flows are translated at monthly exchange rates in the periods involved.
Foreign currency gains or losses arising from the translation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized directly in other comprehensive income, to the extent that the hedge is effective, and are presented as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.
On initial designation of the hedge relationship between the hedging instrument and hedged item, the Company documents this relationship, including the risk management objectives, and strategy in undertaking the hedge transaction and the hedged risk, together withand the methods that will be used to assess the effectiveness of the hedging relationship. The Company makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, of whether the hedging instruments are expected to be “highly effective” in