NXP SEMICONDUCTORS N.V.
We prepared our interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in our Annual Report on Form 20‑F10‑K for the year ended December 31, 2018.2019.
We have made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates. The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the consolidated financial statements in our Annual Report on Form 20-F10-K for the year ended December 31, 2018.2019.
Except for the changes below, no material changes have been made to the Company's significant accounting policies disclosed in Note 2 Significant Accounting Policies in our Annual Report on Form 20-F10-K for the year ended December 31, 2018.2019. The accounting policy information below is to aid in the understanding of the financial information disclosed.
In August 2018, the FASB issued ASU 2018-13, Fair Value measurement (Topic 820): Disclosure Framework –- Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds disclosure requirements, including changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted. The amendments on changes in unrealized gains and losses, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 became effective for us on January 1, 2020. The Company does not expect the adoption of this guidance toupdate did not have a material impact on ourthe Company's consolidated financial statementstatements and related disclosures.
customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Therefore, a customer in a hosting arrangement that is a service contract determines which project stage an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. ASU 2018-15 also requires the customer to expense the capitalized implementation costs over the term of the hosting arrangement, and to apply the existing impairment guidance in Subtopic 350-40 to the capitalized implementation costs as if the costs were long-lived assets. ASU 2018-15 can be applied either retrospectively or prospectively and is effective for annual reporting periods beginning after December 15, 2019, and interim periods therein, with early adoption permitted. ASU 2018-15 became effective for us on January 1, 2020. We have elected to apply the standard prospectively. The Company does not expect the adoption of this guidanceupdate did not have a material impact on the Company's consolidated financial statements and related disclosures.
On March 27, 2019, we sold our remaining equity interest in WeEn, receiving net cash proceeds of $37 million.
Our effective tax rate reflects the impact of tax incentives, non-deductible expenses, change in valuation allowance, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate and the mix of income and losses in various jurisdictions. Our effective tax rate for the first ninesix months of 20192020 was 21.4%a benefit of 12.4% on a pre-tax loss compared with an expense of 14.2%30.8% on a pre-tax profitincome for the first ninesix months of 2018.2019. The movementmovements in our effective tax rate, reflectsapart from being in an expense position in 2019 and a benefit in 2020, relate mainly to the net effect of the decrease in tax incentivesthe valuation allowance when compared to the same period in 2019 as there were no Netherlands related interest expense that was impacted by the interest limitation rules ($15213 million), offset by the increase in non deductible goodwill ($10 million), both linked to the divestiture of the VAS business, as well as a decrease of tax incentives ($14 million) mainly driven by a lower qualifying income in 2020 and our related adjustments for changes in estimates of prior year adjustmentspositions ($195 million) andexpense for the increase infirst six months of 2020 compared to a $9 million benefit for the change in valuation allowance ($32 million)first six months of 2019).
The estimated amortization expense for these identified intangible assets for each of the five succeeding years is:
All intangible assets, excluding IPR&D and goodwill, are subject to amortization and have no assumed residual value.
The expected weighted average remaining life of identified intangibles is 3 years as of September 29, 2019June 28, 2020 (December 31, 2018: 42019: 3 years).
109 Leases
Operating and finance lease assets relate to buildings (corporate offices, research and development and manufacturing facilities and datacenters), land, machinery and installations and other equipment (vehicles and certain office equipment). These leases, except for land leases, have remaining lease terms of 1 to 30 years (land leases 48 to 90 years), some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year. As of September 29, 2019,June 28, 2020, assets recorded under finance leases were $29$82 million and accumulated depreciation associated with finance leases was $4$11 million. Finance lease liabilities amount to $25 million as of June 28, 2020 ($25 million as of December 31, 2019).
The components of operating lease expense were as follows:
|
| | | | | |
| For the three months ended |
| | For the nine months ended |
|
| September 29, 2019 |
| | September 29, 2019 |
|
Operating lease cost | 15 |
| | 41 |
|
| | | |
Finance lease cost: | | | |
Amortization of right-of-use assets | — |
| | 1 |
|
Interest on lease liabilities | — |
| | 1 |
|
Total finance lease cost | — |
| | 2 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | | | For the six months ended | | |
| June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Operating lease cost | 16 | | | 13 | | | 32 | | | 26 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other information related to operating leases was as follows:
|
| | | | | |
| For the three months ended |
| | For the nine months ended |
|
| September 29, 2019 |
| �� | September 29, 2019 |
|
Supplemental cash flows information: | | | |
Operating cash flows from operating leases | 15 |
| | 41 |
|
Operating cash flows from finance leases | (1 | ) | | 1 |
|
Financing cash flows from finance leases | 2 |
| | 2 |
|
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases 1) | 62 |
| | 260 |
|
Finance leases | — |
| | — |
|
| | | |
1) $188 million recorded on January 1, 2019 in accordance with the adoption of ASC 842. | | | |
| | | |
Weighted average remaining lease term: | | | |
Operating leases | | | 6.0 years |
|
Finance leases | | | 12.7 years |
|
| | | |
Weighted average discount rate: | | | |
Operating leases | | | 3.1 | % |
Finance leases | | | 4.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | | | For the six months ended | | |
| June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases 1) | 14 | | | 10 | | | 19 | | | 198 | |
| | | | | | | |
1) $188 million recorded on January 1, 2019 in accordance with the adoption of ASC 842. | | | | | | | |
Weighted average remaining lease term: | | | | | | | |
Operating leases | | | | | 6 years | | 5 years |
| | | | | | | |
Weighted average discount rate: | | | | | | | |
Operating leases | | | | | 3 | % | | 3 | % |
| | | | | | | |
Future minimum lease payments as of September 29, 2019June 28, 2020 were as follows:
|
| | | | | |
| As of |
| September 29, 2019 |
| Operating leases | | Finance leases |
2019 (remaining) | 16 |
| | 1 |
|
2020 | 57 |
| | 3 |
|
2021 | 46 |
| | 3 |
|
2022 | 32 |
| | 3 |
|
2023 | 27 |
| | 3 |
|
Thereafter | 67 |
| | 22 |
|
Total future minimum lease payments | 245 |
| | 35 |
|
Less: imputed interest | (22 | ) | | (9 | ) |
Total | 223 |
| | 26 |
|
| | | | | | | |
| As of | | |
| June 28, 2020 | | |
| Operating leases | | |
2020 (remaining) | 32 | | | |
2021 | 54 | | | |
2022 | 41 | | | |
2023 | 33 | | | |
2024 | 23 | | | |
Thereafter | 59 | | | |
Total future minimum lease payments | 242 | | | |
Less: imputed interest | (20) | | | |
Total | 222 | | | |
Lease liabilities related to leases are split between current and non-current:
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| | | | | |
| As of |
| September 29, 2019 |
| Operating leases | | Finance leases |
Other current liabilities | 55 |
| | 2 |
|
Other non-current liabilities | 168 |
| | 24 |
|
Total | 223 |
| | 26 |
|
| | | | | | | | | | | | | | | |
| Operating leases | | | | | | |
| As of | | | | | | |
| June 28, 2020 | | | | December 31, 2019 | | |
| | | | | | | |
Other current liabilities | 59 | | | | | 62 | | | |
Other non-current liabilities | 163 | | | | | 176 | | | |
Total | 222 | | | | | 238 | | | |
Operating lease right-of-use assets are $220$216 million as of September 29, 2019June 28, 2020 (December 31, 2019: $226 million) and are included in other non-current assets in the condensed consolidated balance sheet.
1110 Related-Party Transactions
The Company's related parties are the members of the board of directors of NXP, the executive officers of NXP and equity-accounted investees and, up to July 26, 2018, Qualcomm Incorporated ("Qualcomm").investees. As of the divestment of the SP business on February 7, 2017, the newly formed Nexperia has become a related party.
We have a number of strategic alliances and joint ventures. We have relationships with certain of our alliance partners in the ordinary course of business whereby we enter into various sale and purchase transactions, generally on terms comparable to transactions with third parties. However, in certain instances upon divestment of former businesses where we enter into supply arrangements with the former owned business, sales are conducted at cost.
The following table presents the amounts related to revenue and other income and purchase of goods and services incurred in transactions with these related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended | | | | For the six months ended | | |
| June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Revenue and other income | 18 | | | 21 | | | 36 | | | 44 | |
Purchase of goods and services | 14 | | | 16 | | | 26 | | | 35 | |
|
| | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 29, 2019 |
| | September 30, 2018 |
| | September 29, 2019 |
| | September 30, 2018 |
|
Revenue and other income | 19 |
| | 26 |
| | 63 |
| | 105 |
|
Purchase of goods and services | 15 |
| | 25 |
| | 50 |
| | 77 |
|
The following table presents the amounts related to receivable and payable balances with these related parties:
| | | | | | | | | | | |
| June 28, 2020 | | December 31, 2019 |
Receivables | 7 | | | 21 | |
Payables | 10 | | | 9 | |
|
| | | | | |
| September 29, 2019 |
| | December 31, 2018 |
|
Receivables | 22 |
| | 25 |
|
Payables | 13 |
| | 49 |
|
We haveAs part of the divestment of the SP business, we entered into a lease commitmentscommitment and related services to Nexperia, which are $48is $59 million as of September 29, 2019,June 28, 2020, and committed $50 million to an investment fund affiliated with Nexperia’s owners. The lease commitments are reflected in our recorded lease liabilities in other current and non-current liabilities.
1211 Fair Value of Financial Assets and LiabilitiesMeasurements
The following table summarizes the estimated fair value and carrying amount of our financial instruments which are measured at fair value on a recurring basis:
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| | | | | | | | | | | | | |
| | | September 29, 2019 | | December 31, 2018 | |
| Fair value hierarchy | | Carrying amount |
| | Estimated fair value |
| | Carrying amount |
| | Estimated fair value |
|
Assets: | | | | | | | | | |
Money market funds | 1 | | 2,372 |
| | 2,372 |
| | 1,906 |
| | 1,906 |
|
Notes hedges | 3 | | 88 |
| | 88 |
| | 24 |
| | 24 |
|
Other financial assets | 2 | | 49 |
| | 49 |
| | 32 |
| | 32 |
|
Derivative instruments – assets | 2 | | 3 |
| | 3 |
| | 6 |
| | 6 |
|
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Short-term debt | 2 | | — |
| | — |
| | (2 | ) | | (2 | ) |
Short-term debt (2019 Cash Convertible Senior Notes) | 2 | | (1,142 | ) | | (1,232 | ) | | (1,105 | ) | | (1,327 | ) |
Long-term debt (bonds) | 2 | | (7,363 | ) | | (7,874 | ) | | (6,222 | ) | | (6,191 | ) |
Other long-term debt | 2 | | — |
| | — |
| | (25 | ) | | (25 | ) |
Notes Embedded Conversion Derivative | 3 | | (88 | ) | | (88 | ) | | (24 | ) | | (24 | ) |
Derivative instruments – liabilities | 2 | | (15 | ) | | (15 | ) | | (2 | ) | | (2 | ) |
| | | | | | | | | | | | | | | | | |
| | | Estimated fair value | | |
| Fair value hierarchy | | June 28, 2020 | | December 31, 2019 |
Assets: | | | | | |
Money market funds | 1 | | 2,007 | | | 6 | |
Marketable equity | 1 | | 12 | | | 1 | |
Derivative instruments-assets | 2 | | 6 | | | 10 | |
| | | | | |
Liabilities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Derivative instruments-liabilities | 2 | | (6) | | | (1) | |
The following methods and assumptions were used to estimate the fair value of financial instruments:
Financial assetsAssets and financial liabilities measured at fair value on a recurring basis
Investments in money market funds (as part of our cash and cash equivalents) and marketable equity securities have fair value measurements which are all based on quoted prices in active markets for identical assets or liabilities.
Other financial assets and derivatives
For other financial assets and derivatives the fair value is based upon significant other observable inputs depending on the nature of the other financial asset and derivative.
Notes hedges and Notes Embedded Conversion Derivative
At September 29, 2019, the Notes hedges and the Notes Embedded Conversion Derivative are measured at fair value using level 3 inputs. The instruments are not actively traded and are valued at the measurement date using an option pricing model that uses observable inputs for the share price of NXP’s common stock, risk-free interest rate, dividend yield and the term, in combination with a significant unobservable input for volatility. The volatility factor utilized at September 29, 2019 was 39.1% and at December 31, 2018 the volatility factor utilized was 34.8%. The change in the fair value of the Notes hedges and Notes Embedded Conversion Derivative was solely the gain and loss, respectively for each instrument that was recognized.
Debt
The fair value is estimated on the basis of observable inputs other than quoted market prices in active markets for identical liabilities for certain issues, or on the basis of discounted cash flow analyses. Accrued interest is included under accrued liabilities and not within the carrying amount or estimated fair value of debt.
Assets and liabilities recorded at fair value on a non-recurring basis
We measure and record our non-marketable equity investments (non-marketable securities, and costequity method investments)investments and non-financial assets, such as intangible assets and property, plant and equipment, at fair value when an impairment charge is required.
Assets and liabilities not recorded at fair value on a recurring basis 13Financial instruments not recorded at fair value on a recurring basis include non-marketable equity securities and equity method investments that have not been remeasured or impaired in the current period and debt.
As of June 28, 2020, the estimated fair value of debt, including the current portion, was $10.3 billion ($7.9 billion as of December 31, 2019). The fair value is estimated on the basis of broker-dealer quotes, which are Level 2 inputs. Accrued interest is included under accrued liabilities and not within the carrying amount or estimated fair value of debt.
12 Litigation
We are regularly involved as plaintiffs or defendants in claims and litigation relating to a variety of matters such as contractual disputes, personal injury claims, employee grievances and intellectual property litigation. In addition, our acquisitions, divestments and financial transactions sometimes result in, or are followed by, claims or litigation. Some of these claims may possibly be recovered from insurance reimbursements. Although the ultimate disposition of asserted claims cannot be predicted with certainty, it is our belief that the outcome of any such claims, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position. However, such outcomes may be material to our condensed consolidated statement of operations for a particular period. The Company records an accrual for any claim that arises whenever it considers that it is probable that it is exposed to a loss contingency and the amount of the loss contingency can be reasonably estimated. Legal fees are expensed when incurred.
Based on the most current information available to it and based on its best estimate, the Company also reevaluates at least on a quarterly basis the claims that have arisen to determine whether any new accruals need to be made or whether any accruals made need to be adjusted. Based on the procedures described above, the Company has an aggregate amount of $85$18 million accrued for potential and current legal proceedings pending as of September 29, 2019,June 28, 2020, compared to $123$44 million accrued (without reduction for any related insurance reimbursements) at December 31, 2018.2019. The accruals are included in “Other current liabilities” and “Other non-current liabilities”. As of September 29, 2019,June 28, 2020, the Company’s balance related to insurance reimbursements was $50$8 million (December 31, 2018: $652019: $25 million) and is included in “Other current assets” and “Other non-current assets”.
The Company also estimates the aggregate range of reasonably possible losses in excess of the amount accrued based on currently available information for those cases for which such estimate can 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. As at September 29, 2019,June 28, 2020, the Company believes that for all litigation pending its potential aggregate exposure to loss in excess of the amount accrued (without reduction for any amounts that may possibly be recovered under insurance programs) could range between $0 and $122$23 million. Based upon our past experience with these matters, the Company would expect to receive insurance reimbursement on certain of these claims that would offset the potential maximum exposure of up to $109$15 million.
In addition, the Company is currently assisting Motorola in the defense of personal injury lawsuits due to indemnity obligations included in the agreement that separated Freescale from Motorola in 2004. The Company is also defending a suit related to semiconductor operations that occurred prior to NXP’s separation from Philips. The multi-plaintiff Motorola lawsuits are pending in Cook County, Illinois, and the legacy NXP suit is pending in Santa Fe, New Mexico.Illinois. These claims allege a link between working in semiconductor manufacturing clean room facilities and birth defects in 2418 individuals. The Motorola suits allege exposures between 19651981 and 2006.2005. Each claim seeks an unspecified amount of damages for the alleged injuries; however, legal counsel representing the plaintiffs has indicated they will seek substantial compensatory and punitive damages from Motorola for the entire inventory of claims which, if proven and recovered, the Company considers to be material. In the Motorola suits, a portion of any indemnity due to Motorola will be reimbursed to NXP if Motorola receives an indemnification payment from its insurance coverage. Motorola has potential insurance coverage for many of the years indicated above, but with differing types and levels of coverage, self-insurance retention amounts and deductibles. We are in discussions with Motorola and their insurers regarding the availability of applicable insurance coverage for each of the individual cases. Motorola and NXP have denied liability for these alleged injuries based on numerous defenses.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This interim Management’s Discussion and Analysis ("MD&A") should be read in conjunction with our consolidated financial statements and notes and the MD&A in our Annual Report on Form 20‑F10-K for the year ended December 31, 2018.2019. This discussion contains forward-looking statements that involve a number of risks and uncertainties, including any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances.circumstances, including our response to the current global pandemic and the potential impact the pandemic will have on our operations, liquidity, customers, facilities and supply chain. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing, including the risk factor set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q specifically related to the coronavirus outbreak and measures taken in response thereto, and in “Risk Factors” in Part I, Item 3D1A of our Annual Report on Form 20-F.10-K. Our actual results may differ materially from those contained in any forward-looking statements. We undertake no obligation to update any forward-looking statement to reflect subsequent events or circumstances.
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
•Liquidity and Capital Resources - An analysis of changes in our balance sheets and cash flows
•Contractual Obligations - An update on contractual obligations as of December 31, 2019
•Off-balance Sheet Arrangements - An update on off-balance sheet arrangements as of December 31, 2019
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 |
| | Q3 2018 |
| | YTD 2019 |
| | YTD 2018 |
|
| | | | | | | |
Revenue | 2,265 |
| | 2,445 |
| | 6,576 |
| | 7,004 |
|
% nominal growth | (7.4 | ) | | 2.4 |
| | (6.1 | ) | | 3.0 |
|
Gross profit | 1,186 |
| | 1,256 |
| | 3,409 |
| | 3,608 |
|
Research and development | (396 | ) | | (433 | ) | | (1,219 | ) | | (1,297 | ) |
Selling, general and administrative | (221 | ) | | (252 | ) | | (699 | ) | | (742 | ) |
Amortization of acquisition-related intangible assets | (358 | ) | | (362 | ) | | (1,070 | ) | | (1,085 | ) |
Other income (expense) | 22 |
| | 2,002 |
| | 23 |
| | 2,002 |
|
Operating income (loss) | 233 |
| | 2,211 |
| | 444 |
| | 2,486 |
|
Overview
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | YTD 2020 | | YTD 2019 | | | | |
| | | | | | | | | | | |
Revenue | 1,817 | | 2,217 | | | 3,838 | | | 4,311 | | | | | |
Gross profit | 860 | | 1,151 | | | 1,857 | | | 2,223 | | | | | |
Operating income (loss) | (145) | | | 157 | | | (77) | | | 211 | | | | | |
Cash flow from operating activities | 414 | | 517 | | 926 | | 813 | | | | | |
Total debt | 9,353 | | 8,538 | | 9,353 | | 8,538 | | | | | |
Net debt | 6,087 | | 5,508 | | | 6,087 | | | 5,508 | | | | | |
Diluted weighted average number of shares outstanding | 279,142 | | | 285,088 | | | 279,533 | | | 286,858 | | | | | |
Diluted net income per share | (0.77) | | 0.14 | | | (0.84) | | | 0.07 | | | | | |
Dividends per common share | 0.375 | | 0.25 | | | 0.75 | | | 0.50 | | | | | |
Q3 2019
Q2 2020 compared to Q3 2018Q2 2019
Revenue for the three months ended June 28, 2020 was down 18.0% from the three months ended June 30, 2019 against a very challenging economic backdrop, due to the COVID-19 pandemic. Revenues decreased by 34.6% in our largest end market, Automotive, 14.1% in the Mobile end market, and 9.2% in the Communications & Infrastructure end market, which were slightly offset by an increase of 11.5% in our Industrial and IOT end market. When aggregating all end markets, the decrease in revenue was mostly related to lower sales to Original Equipment Manufacturers, across all regions, but in particular in EMEA, Americas and Japan.
Our gross profit percentage for the second quarter of 2020 decreased from 51.9% in the second quarter of 2019 to 47.3%, essentially due to lower revenue and the absorption of excess manufacturing fixed costs as a result of abnormal under-loading in our front-end factories due to the COVID-19 crisis.
Notwithstanding the challenging operating environment we currently face, we continue to execute on our strategy within our target markets and focus on driving profitability.
We continue to generate strong operating cash flows, with $414 million in cash flows from operations for the second quarter of 2020. We returned $108 million to our shareholders during the second quarter of 2020. Our cash position at the end of the second quarter of 2020 was $3,266 million. This includes the net proceeds of the $2 billion of senior unsecured debt issued by NXP on May 1, 2020. On May 28, 2020, the NXP Board of Directors approved a cash dividend of $0.375 per common share for the second quarter of 2020.
YTD 2020 compared to YTD 2019
Revenue for the six months ended June 28, 2020 was down 11.0% from the six months ended June 30, 2019 against a very challenging economic backdrop, due to the COVID-19 pandemic. Revenues decreased by 19.3% in our largest end market, Automotive, 6.7% in the Mobile end market, and 9.6% in the Communications & Infrastructure end market, which were slightly offset by an increase of 7.0% in our Industrial and IOT end market. When aggregating all end markets, the decrease in revenue was mostly related to lower sales to Original Equipment Manufacturers, across regions EMEA, Americas, Japan, and Greater China (including Asia Pacific).
Our gross profit percentage for the six months ended June 28, 2020 decreased from 51.6% for the six months ended June 30, 2019 to 48.4%, primarily due to lower revenue and the absorption of excess manufacturing fixed costs as a result of abnormal under-loading in our front-end factories due to the COVID-19 crisis and the purchase accounting effect on inventory ($17 million) due to the Marvell acquisition.
On February 3, 2020, we completed the sale of the Company's Voice and Audio Solutions (VAS) assets, receiving proceeds of $161 million resulting in a gain of $110 million.
Cash flow from operation for the first six months of 2020 was $926 million, remaining strong in a challenging environment. Total shareholder return for the first six months of 2020 was $568 million. Our cash position remains solid, with the net proceeds of the $2 billion in newly issued debt adding to our cash and cash equivalents.
Update on the impact of COVID-19
Our global communities continue to face unprecedented challenges posed by the COVID-19 pandemic, but NXP continues to respond actively by addressing the COVID-19 situation and its impact globally with global crisis response teams, working to mitigate the potential impacts to our people and our business.
With our strong business model and with demonstrated financial discipline, which is a keystone of our culture, we continue to believe that we will emerge from this time well positioned for long-term growth. That being said, we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business and results.
The impact of COVID-19 and measures to prevent its spread are affecting how we operate in a number of ways. In response, we have implemented measures to focus on the safety of our employees, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following:
Our People
Our top priority during the COVID-19 pandemic remains and always will be protecting the health and safety of our employees. As governments throughout the world evaluate and adjust their responses, we continue working to ensure that we comply with regulatory requirements balanced with maintaining business continuity for essential operations in our factories.We have significantly reduced the number of people working in our offices, helping to protect our employees who work in our labs and factories and who are essential to keeping our business running.
Facilities and Supply Chain
From an operational perspective all our manufacturing facilities continue to operate around the world in accordance with guidance issued by local and national government authorities, and we are not experiencing any major supply chain issues. We have been extremely fortunate that the virus has not significantly impacted our broad employee base.
Liquidity and Capital Resources
Thanks to our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment. As we operate our business in this uncertain environment, our priorities will remain the health and safety of our people, providing our essential products to consumers around the world, and remained focused on having our business deliver long-term growth. Over the years, NXP has created a business that generates significant cash, thanks to its large and diverse revenue stream. We therefore believe we have sufficient liquidity to satisfy our cash needs. However, we will continue to monitor, evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.
In May we had a well-received debt issuance, obtaining $2 billion in funds that will be used in part to finance or refinance eligible green products and in part to build cash and short-term investment reserves to opportunistically repay other outstanding debt or for certain corporate expenditures. In addition, as we have demonstrated as one of our strengths in the past, we continue to successfully constrain discretionary spending across the organization, re-prioritizing our capital projects, while simultaneously maintaining critical investments in areas that will assure NXP’s long-term success.
Customer Demand and Near-Term Business Outlook
For the second quarter, our revenue was modestly better than the mid-point of our original guidance. Our automotive end-market was significantly impacted by the effects of the COVID-19 pandemic on the global macro-economic environment, though we did experience better than anticipated sequential trends in our other end-markets. We are encouraged by the early positive trends we experienced in China and sales out of our distribution channel improved sequentially. We expect improved sales trends through the second half of this year, as a result of company specific program ramps and the ongoing stabilization of our end-markets. However, we want to balance our enthusiasm as it is too early to make a broad statement regarding a complete return to normalized demand or the specifics of the shape of the recovery. We note that several of ultimate end-customers of our products, especially the automotive OEMs in Europe, North America and Japan are not running at full capacity yet. Our best course of action remains to be focused on the aspects of our business we can directly control. For example, in order to maintain appropriate levels of inventory, we plan to continue to run our internal front-end factories at a much lower utilization rate, below our normal capacity, going into the third quarter.
In summary, we still find ourselves navigating a challenging and fluid environment, but we continue to have ample financial liquidity and strength to weather the current environment and maintain the critical investments in areas that will assure NXP’s long-term success in its chosen strategy.
Results of operations
The following table presents operating income for each of the three and six month periods ended September 29,June 28, 2020 and June 30, 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | YTD 2020 | | YTD 2019 | | | | |
| | | | | | | | | | | |
Revenue | 1,817 | | 2,217 | | | 3,838 | | 4,311 | | | | | |
% nominal growth | (18.0) | | | (3.2) | | | (11.0) | | | (5.4) | | | | | |
Gross profit | 860 | | 1,151 | | | 1,857 | | 2,223 | | | | | |
Research and development | (402) | | (408) | | | (827) | | (823) | | | | | |
Selling, general and administrative | (222) | | (230) | | | (455) | | (478) | | | | | |
Amortization of acquisition-related intangible assets | (380) | | (355) | | | (761) | | (712) | | | | | |
Other income (expense) | (1) | | (1) | | | 109 | | 1 | | | | | |
Operating income (loss) | (145) | | | 157 | | | (77) | | | 211 | | | | | |
Revenue
Q2 2020 compared to Q2 2019
Revenue for the three months ended June 28, 2020 was $1,817 million compared to $2,217 for the three months ended June 30, 2019, a decrease of $400 million or 18%. The decrease is essentially related to lower sales in our Automotive end market, followed by our Communication & Infrastructure and Mobile end markets, which were in particular impacted by COVID-19 pandemic; offset by an increase in Industrial IoT end market.
YTD 2020 compared to YTD 2019
Revenue for the six months ended June 28, 2020 was $3,838 million compared to $4,311 million for the six months ended June 30, 2019, a decrease of $473 million or 11%. The decrease is attributed to the impact of the COVID-19 pandemic in our primary end-markets, including YTD over YTD decreases in our Automotive, Communication & Infrastructure, and Mobile end markets.
Revenue by end-market was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | Change | | YTD 2020 | | YTD 2019 | | Change |
Automotive | 674 | | | 1,031 | | | (34.6) | % | | 1,668 | | | 2,067 | | | (19.3) | % |
Industrial & IoT | 435 | | | 390 | | | 11.5 | % | | 811 | | | 758 | | | 7.0 | % |
Mobile | 255 | | | 297 | | | (14.1) | % | | 502 | | | 538 | | | (6.7) | % |
Communication Infrastructure & Other | 453 | | | 499 | | | (9.2) | % | | 857 | | | 948 | | | (9.6) | % |
Revenue | 1,817 | | | 2,217 | | | (18.0) | % | | 3,838 | | | 4,311 | | | (11.0) | % |
Revenue by sales channel was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | Change | | YTD 2020 | | YTD 2019 | | Change |
Distributors | 1,059 | | | 1,083 | | | (2.2) | % | | 2,043 | | | 2,045 | | | (0.1) | % |
OEM/EMS | 712 | | | 1,112 | | | (36.0) | % | | 1,712 | | | 2,226 | | | (23.1) | % |
Other | 46 | | | 22 | | | 109.1 | % | | 83 | | | 40 | | | 107.5 | % |
Revenue | 1,817 | | | 2,217 | | | (18.0) | % | | 3,838 | | | 4,311 | | | (11.0) | % |
Revenue by geographic region, which is based on the customer’s shipped-to location (except for intellectual property license revenue which is attributable to the Netherlands or the USA) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | Change | | YTD 2020 | | YTD 2019 | | Change |
Greater China (including Asia Pacific) | 1,165 | | | 1,247 | | | (6.6) | % | | 2,233 | | | 2,345 | | | (4.8) | % |
EMEA (Europe, the Middle East and Africa) | 265 | | | 429 | | | (38.2) | % | | 706 | | | 870 | | | (18.9) | % |
Americas | 167 | | | 271 | | | (38.4) | % | | 421 | | | 539 | | | (21.9) | % |
Japan | 146 | | | 191 | | | (23.6) | % | | 316 | | | 398 | | | (20.6) | % |
South Korea | 74 | | | 79 | | | (6.3) | % | | 162 | | | 159 | | | 1.9 | % |
Revenue | 1,817 | | | 2,217 | | | (18.0) | % | | 3,838 | | | 4,311 | | | (11.0) | % |
| | | | | |
n | Automotive |
n | Industrial IoT |
n | Mobile |
n | Comm Infra & Other |
| | | | | |
n | Distributors |
n | OEM/EMS |
n | Other |
Q2 2020 compared to Q2 2019
Revenue associated with the Automotive market declined $357 million year-on-year. The decline was due to the COVID-19 pandemic, which impacted automotive supply chains and resulted in many auto OEMs outside of China shutting car production sites, especially in North America and within the European Union. During the second quarter revenue, we experienced year on year declines across all product lines, both in our core and growth areas due to the previously mentioned auto OEM factory closures.
Revenue derived from the Industrial and IoT market increased $45 million year-on-year due to the contribution of revenue associated with the recently acquired Marvell wireless connectivity assets for connected IoT solutions. Additionally, we saw an increase in demand for smart power, general purpose microcontroller and application processors, primarily in the distribution channel due to the increase in mass market demand resulting from improvements in Greater China recovery from COVID-19.
Within the Mobile end-market, revenue decreased $42 million year-on-year. The decrease was predominantly associated with the divestment of the Voice and Audio Solutions, which closed early in the first quarter of 2020. During the second quarter, NXP experienced continued customer adoption of secure mobile wallet solutions and decreased demand for embedded power solutions, both of which are primarily serviced through our global distribution channels.
Revenue in the Communication Infrastructure and Other end-market declined $46 million year-on-year. The decline was related to reduced demand for High-Performance Radio Frequency (HPRF) power amplifiers used in 4G cellular base stations as a result of strong customer network densification programs in the year ago period. This was modestly offset by $180a combination of year-on-year increased demand for network communication processors by OEM customers and new revenue contribution related to the acquisition of the Marvell wireless connectivity assets used in access solutions.
YTD 2020 compared to YTD 2019
Revenue associated with the Automotive market declined $399 million year-to-date. The decline was due to the COVID-19 pandemic, which impacted automotive supply chains and resulted in many auto OEMs outside of China shutting car production sites. The year on year declines were most notable in our core auto products which are more susceptible to variances in auto production rates, including our mainstream auto processors, advanced analog, and sensor products. The declines were partially offset by the increase in sales of connectivity solutions, stemming from the Marvell connectivity acquisition, for automotive applications, as well as early ramps of battery management solutions for electric vehicles.
Revenue derived from the Industrial and IoT market increased $53 million year-to-year date due to to a contribution of revenue from the recently acquired Marvell wireless connectivity assets for connected IoT solutions. Additionally, the increase in demand for smart power, general-purpose microcontrollers and high performance analog products, primarily in the distribution channel in Greater China supported the year to date revenue trends.
Within the Mobile end-market, revenue decreased $36 million year-to-date. The decrease was predominantly associated with the divestment of the Voice and Audio Solutions which closed early in the first quarter of 2020. During the first half, NXP experienced continued customer adoption of secure mobile wallet solutions and increased demand for embedded power solutions, both of which are primarily serviced through our global distribution channels.
Revenue in the Communication Infrastructure and Other end-market declined $91 million year-to-date. The decline was related to reduced demand for High-Performance Radio Frequency (HPRF) power amplifiers used in 4G cellular base stations, as well as lower demand for network communication processors by OEM customers in Europe and Greater China (including Asia Pacific). These declines were partially offset by a combination of demand for the company’s secure card solutions and new revenue contribution related to the acquisition of the Marvell wireless connectivity assets used in access solutions.
Gross profit
Q2 2020 compared to Q2 2019
Gross profit for the three months ended June 28, 2020 was $860 million, or 47.3% of revenue, compared to $1,151 million, or 51.9% of revenue for the three months ended June 30, 2019. The decrease of $291 million was essentially driven by lower revenue and the absorption of excess manufacturing fixed costs as a result of abnormal under-loading in our front-end factories due to the COVID-19 crisis.
YTD 2020 compared to YTD 2019
Gross profit for the six months ended June 28, 2020 was $1,857 million, or 48.4% of revenue, compared to $2,223 million, or 51.6% of revenue for the six months ended June 30, 2019. The decrease of $366 million was primarily driven by lower revenue and the absorption of excess manufacturing fixed costs as a result of abnormal under-loading in our front-end factories due to the COVID-19 crisis as well as the purchase accounting effect on inventory ($17 million) resulting from the Marvell acquisition.
Operating expenses
Q2 2020 compared to Q2 2019
Operating expenses for the three months ended June 28, 2020 totaled $1,004 million, or 55.3% of revenue, compared to $993 million, or 44.8% of revenue, for the three months ended June 30, 2019.
YTD 2020 compared to YTD 2019
Operating expenses for the six months ended June 28, 2020 totaled $2,043 million, or 53.2% of revenue, compared to $2,013 million, or 46.7% of revenue, for the six months ended June 30, 2019.
The following table below presents the composition of operating expenses by line item in the statement of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | YTD 2020 | | YTD 2019 | | | | |
Research and development | 402 | | | 408 | | | 827 | | | 823 | | | | | |
Selling, general and administrative | 222 | | | 230 | | | 455 | | | 478 | | | | | |
Amortization of acquisition-related intangible assets | 380 | | | 355 | | | 761 | | | 712 | | | | | |
Total operating expenses | 1,004 | | | 993 | | | 2,043 | | | 2,013 | | | | | |
Q2 2020 compared to Q2 2019
The increase 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 three months ended June 28, 2020 decreased by $6 million, or 1.5%, when compared to the quarterthree months ended SeptemberJune 30, 2018. Included2019 driven by:
-lower personnel-related costs, including variable compensation costs;
-lower engineering material costs;
-lower cost related to the sale of the Voice and Audio Solutions (VAS), which was divested on February 3, 2020; and
+ higher cost related to Marvell activities, which were acquired in the latter is $32last month of the fourth quarter of 2019.
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 three months ended June 28, 2020 decreased by $8 million, or 3.5%, when compared to the three months ended June 30, 2019 mainly due to:
-lower personnel-related costs, including variable compensation costs;
- lower travel costs;
-lower merger-related costs; and
+ higher share-based compensation expenses primarily as a result of revenuethe CEO transition.
Amortization of acquisition-related intangible assets increased by $25 million, or 7.0%, when compared to the three months ended June 30, 2019 driven by:
+ the start of amortization of intangible assets related to the Marvell acquisition; and
-certain intangibles became fully amortized during 2019.
YTD 2020 compared to YTD 2019
The increase 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 six months ended June 28, 2020 increased by $4 million, or 0.5%, when compared to the six months ended June 30, 2019 driven by:
+ higher cost related to Marvell activities, which were acquired in the last month of the fourth quarter of 2019;
-lower cost related to the sale of the Voice and Audio Solutions (VAS), which was divested businesseson February 3, 2020; and
-lower personnel-related costs, including variable compensation costs.
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 six months ended June 28, 2020 decreased by $23 million, or activities. As4.8%, when compared to the six months ended June 30, 2019 mainly due to:
-lower personnel-related costs, including variable compensation costs;
- lower travel costs;
-lower merger-related costs; and
+ higher share-based compensation expenses as a result of January 1,the CEO transition.
Amortization of acquisition-related intangible assets increased by $49 million, or 6.9%, when compared to the six months ended June 30, 2019 driven by:
+ the start of amortization of intangible assets related to the Marvell acquisition; and
-certain intangibles became fully amortized during 2019.
Other income (expense)
Income and expenses derived from manufacturing service arrangements (“MSA”) and transitional service arrangements (“TSA”) that are put into place when we divest a business or activity, are included in other income (expense). Gross profit decreasedThese arrangements are short-term in the third quarter of 2019nature and are expected to decrease as compared to the third quarter of 2018 primarily as a result of the decline in sales. Operating expenses in the third quarter of 2019 decreased as compared to the third quarter of 2018 both in research and development costs and selling, general and administrative. Other income (expense) in the third quarter of 2019 includes the result of the sale of assets ($20 million) and the net result of income and expenses derived from the divested businessesbusiness or activities as discussed above. Other income (expense) in the third quarter of 2018 includes the $2 billion termination compensation received from Qualcomm.
activity becomes more established.
YTD 2019 compared to YTD 2018
In the nine month period ended September 29, 2019, revenue declined by $428 million as compared to the nine month period ended September 30, 2018. Included in the latter is $107 million of revenue related to divested businesses or activities. Gross profit decreased in the first nine months of 2019 as compared to the first nine months of 2018 primarily as a result of the decline in sales. Operating expenses in the first nine months of 2019 decreased as compared to the first nine months of 2018 primarily as a result of decreased research and development costs. Other income (expense) in the first nine months of 2019 includes the result of the sale of assets ($20 million) and the net result of income and expenses derived from divested businesses or activities as discussed above. Other income (expense) in the first nine months of 2018 includes the $2 billion termination compensation received from Qualcomm.
The table below depicts the Purchase Price Accounting (“PPA”) effects (reflecting the amortization related to the fair value adjustments resulting from the acquisition of Freescale in addition to the formation of NXP) for each of the three and nine month periods ended September 29, 2019 and September 30, 2018, respectively, per line item in the statement of operations:
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 |
| | Q3 2018 |
| | YTD 2019 |
| | YTD 2018 |
|
| | | | | | | |
Gross profit | (19 | ) | | (20 | ) | | (56 | ) | | (59 | ) |
Selling, general and administrative | (5 | ) | | (2 | ) | | (8 | ) | | (6 | ) |
Amortization of acquisition-related intangible assets | (358 | ) | | (362 | ) | | (1,070 | ) | | (1,085 | ) |
Operating income (loss) | (382 | ) | | (384 | ) | | (1,134 | ) | | (1,150 | ) |
Prior to January 1, 2019, HPMS was our sole reportable segment. Corporate and Other represented the remaining portion to reconcile to the condensed consolidated financial statements. Effective January 1, 2019, NXP removed the reference to HPMS in its organizational structure in acknowledgement of the one reportable segment representing the entity as a whole.
Revenue
The following table presents revenue and revenue growththe split of other income (expense) for each of the three and ninesix month periods ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018, respectively:2019:
|
| | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 | | Q3 2018 |
| | YTD 2019 | | YTD 2018 |
|
| Revenue |
| | Growth % |
| | Revenue |
| | Revenue |
| | Growth % |
| | Revenue |
|
| | | | | | | | | | | |
Revenue | 2,265 |
| | (7.4 | ) | | 2,445 |
| | 6,576 |
| | (6.1 | ) | | 7,004 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | Q2 2020 | | Q2 2019 | | YTD 2020 | | YTD 2019 |
Income from MSA and TSA arrangements | 15 | | | 23 | | | 31 | | | 49 | |
Expenses from MSA and TSA arrangements | (16) | | | (23) | | | (32) | | | (47) | |
Result from MSA and TSA arrangements | (1) | | | — | | | (1) | | | 2 | |
Other, net | — | | | (1) | | | 110 | | | (1) | |
Total | (1) | | | (1) | | | 109 | | | 1 | |
Q3 2019
Q2 2020 compared to Q3 2018Q2 2019
Other income (expense) reflects an expense of $1 million for both three month periods ended June 28, 2020 and June 30, 2019.
Revenue decreased $180 million to $2,265 million in the third quarter of 2019 compared to $2,445 million in the third quarter of 2018, a year-on-year decrease of 7.4%. Included in the third quarter of 2018 is the revenue related to divested businesses or activities of $32 million. The decline is mainly related to lower sales to distributors due to lower end-customer demand, in particular in the Greater China region and in our Automotive and Industrial & IOT end markets.
YTD 20192020 compared to YTD 20182019
Revenue decreased $428Other income (expense) reflects income of $109 million to $6,576 million infor the first nine months of 2019six month period ended June 28, 2020, compared to $7,004income of $1 million infor the first nine months of 2018, a year-on-year decrease of 6.1%.six month period ended June 30, 2019. Included in the first nine months of 20182020 is the revenue related to divested businesses or activities, $107 million. The decline is mainly related to lower sales to distributors due to lower end-customer demand, with Greater China region representing close to two-thirdsnet gain on the sale of the compressionVoice and in particular in our Automotive, Industrial & IOT and Mobile end markets.Audio Solutions (VAS) assets of $110 million.
Gross Profit
The following table presents gross profit for each of the three and nine month periods ended September 29, 2019 and September 30, 2018, respectively:
|
| | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 | | Q3 2018 | | YTD 2019 | | YTD 2018 |
| Gross profit |
| | % of revenue | | Gross profit |
| | % of revenue | | Gross profit |
| | % of revenue | | Gross profit |
| | % of revenue |
| | | | | | | | | | | | | | | |
Gross Profit | 1,186 |
| | 52.4 | | 1,256 |
| | 51.4 | | 3,409 |
| | 51.8 | | 3,608 |
| | 51.5 |
Q3 2019 compared to Q3 2018
Gross profit in the third quarter of 2019 was $1,186 million, or 52.4% of revenue compared to $1,256 million, or 51.4% of revenue in the third quarter of 2018, a decrease of $70 million, primarily driven by lower revenue resulting from lower demand. The gross margin percentage increased from 51.4% to 52.4%, mainly as a result of focused cost control and customer mix in the third quarter of 2019.
YTD 2019 compared to YTD 2018
Gross profit in the first nine months of 2019 was $3,409 million, or 51.8% of revenue compared to $3,608 million, or 51.5% of revenue in the first nine months of 2018, a decrease of $199 million, primarily driven by lower revenue resulting from lower demand.
Operating expenses
The following table presents operating expenses for each of the three and nine month periods ended September 29, 2019 and September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 | | Q3 2018 | | YTD 2019 | | YTD 2018 |
| Operating expenses |
| | % of revenue | | Operating expenses |
| | % of revenue | | Operating expenses |
| | % of revenue | | Operating expenses |
| | % of revenue |
| | | | | | | | | | | | | | | |
Operating expenses | 975 |
| | 43.0 | | 1,047 |
| | 42.8 | | 2,988 |
| | 45.4 | | 3,124 |
| | 44.6 |
The following table below presents the composition of operating expenses by line item in the statement of operations:
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 |
| | Q3 2018 |
| | YTD 2019 |
| | YTD 2018 |
|
| | | | | | | |
Research and development | 396 |
| | 433 |
| | 1,219 |
| | 1,297 |
|
Selling, general and administrative | 221 |
| | 252 |
| | 699 |
| | 742 |
|
Amortization of acquisition-related intangible assets | 358 |
| | 362 |
| | 1,070 |
| | 1,085 |
|
Operating expenses | 975 |
| | 1,047 |
| | 2,988 |
| | 3,124 |
|
Q3 2019 compared to Q3 2018
Operating expenses decreased $72 million to $975 million in the third quarter of 2019, compared to $1,047 million in the third quarter of 2018. The decrease in operating expenses is mainly the result of ongoing cost control, resulting in lower expenditures in personnel and operating related costs due to lower merger-related expenses.
YTD 2019 compared to YTD 2018
Operating expenses decreased $136 million to $2,988 million in the first nine months of 2019, compared to $3,124 million in the first nine months of 2018. The decrease in operating expenses is mainly the result of ongoing cost control, resulting in lower expenditures in personnel and operating related costs due to lower merger-related expenses.
Operating income (loss)
The following table presents operating income (loss) for each of the three and nine month periods ended September 29, 2019 and September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 | | Q3 2018 | | YTD 2019 | | YTD 2018 |
| Operating income (loss) |
| | % of revenue | | Operating income (loss) |
| | % of revenue | | Operating income (loss) |
| | % of revenue | | Operating income (loss) |
| | % of revenue |
| | | | | | | | | | | | | | | |
Operating income (loss) | 233 |
| | 10.3 | | 2,211 |
| | 90.4 | | 444 |
| | 6.8 | | 2,486 |
| | 35.5 |
Q3 2019 compared to Q3 2018
Operating income (loss) decreased $1,978 million to $233 million in the third quarter of 2019, compared to $2,211 million in the third quarter of 2018. The decrease is the result of the $2 billion termination compensation received in the third quarter of 2018 from Qualcomm.
YTD 2019 compared to YTD 2018
Operating income (loss) decreased $2,042 million to $444 million in the first nine months of 2019, compared to $2,486 million in the first nine months of 2018. The decrease is mainly related to the $2 billion termination compensation received in the third quarter of 2018 from Qualcomm.
Financial income (expense)
The following table presents the details of financial income and expenses:
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 |
| | Q3 2018 |
| | YTD 2019 |
| | YTD 2018 |
|
| | | | | | | |
Interest income | 17 |
| | 13 |
| | 42 |
| | 38 |
|
Interest expense | (98 | ) | | (61 | ) | | (274 | ) | | (197 | ) |
Total interest expense, net | (81 | ) | | (48 | ) | | (232 | ) | | (159 | ) |
Foreign exchange rate results | 1 |
| | (1 | ) | | (6 | ) | | (1 | ) |
Extinguishment of debt | (1 | ) | | — |
| | (11 | ) | | (26 | ) |
Miscellaneous financing costs/income and other, net | (4 | ) | | (70 | ) | | (8 | ) | | (72 | ) |
Total other financial income (expense) | (4 | ) | | (71 | ) | | (25 | ) | | (99 | ) |
Total | (85 | ) | | (119 | ) | | (257 | ) | | (258 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | YTD 2020 | | YTD 2019 | | | | |
| | | | | | | | | | | |
Interest income | 4 | | | 12 | | | 8 | | | 25 | | | | | |
Interest expense | (94) | | | (89) | | | (176) | | | (176) | | | | | |
Total interest expense, net | (90) | | | (77) | | | (168) | | | (151) | | | | | |
Foreign exchange rate results | (5) | | | (1) | | | (1) | | | (7) | | | | | |
Extinguishment of debt | — | | | (10) | | | — | | | (10) | | | | | |
Miscellaneous financing costs/income and other, net | (1) | | | (1) | | | (5) | | | (4) | | | | | |
Total other financial income (expense) | (6) | | | (12) | | | (6) | | | (21) | | | | | |
Total | (96) | | | (89) | | | (174) | | | (172) | | | | | |
Q3 2019
Q2 2020 compared to Q3 2018Q2 2019
Financial income (expense) was an expense of $85$96 million in the thirdsecond quarter of 2019,2020 compared to an expense of $119$89 million in the thirdsecond quarter of 2018.2019. The change in financial income (expense) is primarily attributable to a decrease was mainly thein interest income ($8 million) as a result of one time chargeslower interest rates, an increase in interest expense ($605 million) on certain financial instruments for compensation related to an adjustment event requiredas a result of newly issued debt and more unfavorable foreign exchange rate results ($4 million) in Q2 2020. This is partially offset by the termination of the Qualcomm merger agreement and the origination feesdebt extinguishment cost ($1110 million) related to the $1 billion bridge facility entered intothat were paid in the thirdsecond quarter of 2018, partly offset by the result of incremental interest expense, due to incremental debt raised in the fourth quarter of 2018.
2019.
YTD 20192020 compared to YTD 20182019
Financial income (expense) was an expense of $257$174 million in the first ninesix months of 2019,2020 compared to an expense of $258$172 million in the first ninesix months of 2018. As2019. The change in financial income (expense) is primarily attributable to a decrease in interest income ($17 million) as a result of incremental debt in the fourth quarter of 2018,a lower average cash level and lower interest expense increased, partlyrates. This is partially offset by lower debt extinguishment costs and the absence of the one time charges and origination fee incurredless unfavorable foreign exchange rate results ($6 million) in the first ninesix months of 2018.2020 and debt extinguishment cost ($10 million) that were paid in the second quarter of 2019.
Benefit (provision) for income taxes
Q3 2019Q2 2020 compared to Q3 2018Q2 2019
Our effective tax rate reflects the impact of tax incentives, non-deductible expenses, change in valuation allowance, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate, and the mix of income and losses in various jurisdictions. Our effective tax rate for the thirdsecond quarter of 20192020 was an expensea benefit of 18.9%13.7% compared with an expense of 14.9%30.9% for the thirdsecond quarter of 2018.2019. The movement in our effective tax rate, apart from being in an expense position in 2019 and a benefit in 2020, reflects mainly the decrease in tax incentives ($16011 million), primarily driven by a lower qualifying income in second quarter of 2020 and our related adjustments for changes in estimates of prior positions ($7 million expense for the increase insecond quarter 2020 compared to a $10 million benefit for the prior year adjustments ($26 million) and the increase in the change in valuation allowance ($9 million)second quarter 2019).
YTD 20192020 compared to YTD 20182019
Our effective tax rate reflects the impact of tax incentives, non-deductible expenses, change in valuation allowance, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate and the mix of income and losses in various jurisdictions. Our effective tax rate for the first ninesix months of 20192020 was a tax expensebenefit of 21.4%12.4% on a pre-tax loss compared with an expense of 14.2%30.8% on a pre-tax income for the first ninesix months of 2018.2019. The movementmovements in our effective tax rate, reflectsapart from being in an expense position in 2019 and a benefit in 2020, relate mainly to the net effect of the decrease in tax incentivesthe valuation allowance when compared to the same period in 2019 as there were no Netherlands related interest expense that was impacted by the interest limitation rules ($15213 million), offset by the increase in non deductible goodwill ($10 million), both linked to the divestiture of the VAS business, as well as a decrease of tax incentives ($14 million) mainly driven by a lower qualifying income in 2020 and our related adjustments for changes in estimates of prior year adjustmentspositions ($195 million) andexpense for the increase in the change in valuation allowance ($32 million).
Results relating to equity-accounted investees
Q3 2019first six months of 2020 compared to Q3 2018
Results relating to equity-accounted investeesa $9 million benefit for the third quarter of 2018 included the net gain of $51 million resulting from the sale of ASEN in July 2018.
YTD 2019 compared to YTD 2018
Results relating to equity-accounted investees for the ninefirst six months of 2018 included the net gain of $51 million resulting from the sale of ASEN in July 2018.2019).
Net income (loss)
The following table presents the composition of net income for the periods reported:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q2 2020 | | Q2 2019 | | YTD 2020 | | YTD 2019 | | | | |
| | | | | | | | | | | |
Operating income (loss) | (145) | | | 157 | | | (77) | | | 211 | | | | | |
Financial income (expense): | (96) | | | (89) | | | (174) | | | (172) | | | | | |
Benefit (provision) for income taxes | 33 | | | (21) | | | 31 | | | (12) | | | | | |
Results relating to equity-accounted investees | (1) | | | (1) | | | (2) | | | 3 | | | | | |
Net income (loss) | (209) | | | 46 | | | (222) | | | 30 | | | | | |
|
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | Q3 2019 |
| | Q3 2018 |
| | YTD 2019 |
| | YTD 2018 |
|
| | | | | | | |
Operating income (loss) | 233 |
| | 2,211 |
| | 444 |
| | 2,486 |
|
Financial income (expense) | (85 | ) | | (119 | ) | | (257 | ) | | (258 | ) |
Benefit (provision) for income taxes | (28 | ) | | (311 | ) | | (40 | ) | | (317 | ) |
Results relating to equity-accounted investees | (1 | ) | | 52 |
| | 2 |
| | 58 |
|
Net income (loss) | 119 |
| | 1,833 |
| | 149 |
| | 1,969 |
|
Net income (loss) attributable to non-controlling interests
Q3 2019 compared to Q3 2018
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 $10 million in the third quarter of 2019, compared to $13 million in the third quarter of 2018.
YTD 2019 compared to YTD 2018
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 $20 million in the first nine months of 2019, compared to $37 million in the first nine months of 2018. The decrease is the result of lower sales due to lower customer demand, especially in the first half of 2019.
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. At the end of the thirdsecond quarter of 2019,2020, our cash balance was $3,537$3,266 million, an increase of $748$2,221 million compared to December 31, 2018.2019. Taking into account the available amount of the Unsecured Revolving Credit Facility of $1,500 million, we had access to $5,037$4,766 million of liquidity as of September 29, 2019.June 28, 2020.
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 twelve months. Our capital expenditures were $388$218 million in the first ninesix months of 2019,2020, compared to $441$250 million in the first ninesix months of 2018.2019. During the ninesix month period ended September 29, 2019,June 28, 2020, we repurchased $1,369$358 million, or 15.23 million shares of our common stock pursuant to our share buyback program at a weighted average price of $90.16$120.57 per share.
Our total debt amounted to $8,505$9,353 million as of Q3 2019,Q2 2020, an increase of $1,151 million$2 billion compared to December 31, 20182019 ($7,3547,365 million). On May 1, 2020, NXP issued 2.7% senior notes due in 2025 ($500 million), 3.15% senior notes due in 2027 ($500 million) and 3.4% senior notes due in 2030 ($1 billion). The fixed rate 1% convertible debtnet proceeds of $1,150the 3.4% Senior Notes due 2030 ("2030 Notes") will be used to finance or refinance eligible green projects. Pending allocation of these net proceeds to finance or refinance eligible green projects, the net proceeds of the 2030 Notes, together with the net proceeds of the 2.7% Senior Notes due 2025 and 3.15% Senior Notes due 2027, will temporarily be held as cash and other short-term securities or temporarily used for the repayment of indebtedness, which may include the refinancing of the $1,350 million isaggregate principal amount of outstanding 4.125% Senior Notes due December 2019.2021, and other corporate expenditures.
At September 29, 2019,June 28, 2020, our cash balance was $3,537$3,266 million of which $169$250 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. No dividendDuring the first six months of 2020, $90 million has been declared by SSMC, indistributed subsequent to the first nine monthsend of 2019 (during the second quarter of 2018: $139 million).2020, with 38.8% being paid to our joint venture partner. In 2019, no dividend was declared by SSMC.
Cash flows
Our cash and cash equivalents during the first ninesix months of 20192020 increased by $753$2,230 million (excluding the effect of changes in exchange rates on our cash position of $5$(9) million) as follows:
| | | | | | | | | | | |
($ in millions, unless otherwise stated) | YTD 2020 | | YTD 2019 |
| | | |
Net cash provided by (used for) operating activities | 926 | | | 813 | |
Net cash (used for) provided by investing activities | (150) | | | (280) | |
Net cash provided by (used for) financing activities | 1,454 | | | (293) | |
Increase (decrease) in cash and cash equivalents | 2,230 | | | 240 | |
|
| | | | | |
($ in millions, unless otherwise stated) | YTD 2019 |
| | YTD 2018 |
|
| | | |
Net cash provided by (used for) operating activities | 1,559 |
| | 3,638 |
|
Net cash provided by (used for) investing activities | (418 | ) | | (348 | ) |
Net cash provided by (used for) financing activities | (388 | ) | | (4,885 | ) |
Net cash increase (decrease) in cash and cash equivalents | 753 |
| | (1,595 | ) |
Cash Flow from Operating Activities
DuringFor the ninefirst six months ended September 29, 2019, cash generated byof 2020 our operating activities of $1,559provided $926 million in cash. This was primarily the result of $149net loss of ($222) million, of net income, non-cash adjustments to reconcile the net incomeloss of $1,687$1,034 million and changes in operating assets and liabilities of $113 million. Adjustments to net loss includes offsetting non-cash items, such as depreciation and amortization of $1,083 million, share-based compensation of $212 million, amortization of the discount (premium) on debt and debt issuance costs of $3 million, a decreasegain on sale of assets of assets of ($110) million, results relating to equity-accounted investees of $2 million and changes in the netdeferred taxes of ($156) million.
The change in operating assets and liabilities (working capital accounts) was attributable to the following:
The $251 million decrease in receivables and other current assets was primarily driven by the linearity in revenue and the related timing of $282 million. Cash usedcash collections in investing activitiesthe first six months of $4182020 compared with the same period in 2019.
The $35 million duringincrease in inventories was primarily related to management's efforts to align inventory on hand with the ninecurrent demand forecasts in the first six months of 2020 compared with the same period in 2019.
The $96 million decrease in accounts payable and other liabilities for the six months ended September 29, 2019 consistedJune 28, 2020 was primarily related to a decrease of cash used$215 million in trade accounts payable and a $32 million decrease related to acquire property, plantthe accruals for employee related compensation and equipment of $388 million, cash used to acquire intangible assets of $72 million and cash used to acquire available-for-sale securities of $19 million,restructuring, partially offset by cash provided bya net increase in income and social tax payables of $83 million, a net increase of $7 million in interest payable and $61 million of other movements including the salenon-cash adjustment for capital expenditures.
For the first six months of our remaining equity interest in WeEn, net of tax for $37 million and proceeds from the disposal of property, plant and equipment for $23 million. Cash used in financing activities of $388 million during the nine months ended September 29, 2019 consisted of cash used to repurchase long-term debt of $600 million, cash paid for debt issuance costs of $24 million, dividends paid to shareholders of $214 million and cash used to repurchase common stock of $1,369 million, offset by proceeds from the issuance of long-term debt of $1,750 million and the proceeds from the exercise of stock options of $70 million.
During the nine months ended September 30, 2018, cash generated byour operating activities of $3,638provided $813 million in cash. This was primarily the result of $1,969 million of net income, non-cash adjustments to net income of $1,557$30 million, adjustments to reconcile the net income of $1,124 million and an increase in the net changechanges in operating assets and liabilities of $99($351) million. Net loss includes offsetting non-cash items, such as depreciation and amortization of $1,008 million, share-based compensation of $173 million,
amortization of the discount on debt and debt issuance costs of $28 million, results relating to equity-accounted investees of ($3) million and changes in deferred taxes of ($93) million.
Cash Flow from Investing Activities
Net cash used infor investing activities amounted to $150 million for the first six months of $348 million during2020 and principally consisted of the nine months ended September 30, 2018consisted primarilycash outflows for purchases of cash used to acquire property, plant and equipment of $441 million, cash used to purchase interests in a businessbusinesses (net of $18cash) of $21 million, capital expenditures of $218 million and cash used to acquire$73 million for the purchase of identified intangible assets, of $46 million,partly offset by cash proceeds of $161 million from the sale of 40%businesses (net of our equity interest in ASEC of $127 million andcash), related to the the sale of 24%our Voice and Audio Solutions assets.
Net cash used for investing activities amounted to $280 million for the first six months of our equity interest in WeEn2019 and principally consisted of $32 million. the cash outflows for capital expenditures of $250 million and $51 million for the purchase of identified intangible assets, and cash used for purchase of investments of $17 million, partly offset by proceeds of $37 million from the sale of businesses (net of cash) and $1 million proceeds from sale of investments.
Cash Flow from Financing Activities
Net cash provided by financing activities was $1,454 million for the first six months of 2020 compared to net cash used infor financing activities of $4,885$293 million duringfor the ninefirst six months ended September 30, 2018 consisted primarily of cash used to repurchase common stock of $4,582 million2019, detailed in addition to cash used to repurchase long-term debt of $1,273 million, offset by net borrowings of short-term debt of $1,000 million.the table below:
| | | | | | | | | | | |
($ in millions) | YTD 2020 | | YTD 2019 |
| | | |
Repurchase of long-term debt | — | | | (553) | |
| | | |
Proceeds from the issuance of long-term debt | 2,000 | | | 1,750 | |
Cash paid for debt issuance costs | (15) | | | (23) | |
Dividends paid to common stockholders | (210) | | | (144) | |
Cash proceeds from exercise of stock options and savings from ESPP | 37 | | | 37 | |
Purchase of treasury shares | (358) | | | (1,360) | |
| | | |
| | | |
Contractual Obligations
During the first ninesix months of 2019,2020, our contractual obligations decreasedincreased by $40$100 million resulting from normal business operations.
Off-balance Sheet Arrangements
At the end of the thirdsecond quarter of 2019,2020, we had no off-balance sheet arrangements other than commitments resulting from normal business operations. None of these arrangements has or is likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk during the first ninethree months of 2019.2020. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part I,II, Item 3.D, “Risk Factors”, “Risks related to our business” of7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 20-F10-K for the year ended December 31, 2018.2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer (Certifying Officers), evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) on September 29, 2019.June 28, 2020. Based on that evaluation, the Certifying Officers concluded the Company's disclosure controls and procedures were effective as of September 29, 2019.June 28, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the three and nine month periodsperiod ended September 29, 2019,June 28, 2020, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
The extent to which the coronavirus (COVID-19) outbreak and measures taken in response thereto could materially adversely affect our financial condition and results of operations will depend on future developments, which are highly uncertain and are difficult to predict.
The novel strain of the coronavirus identified in China in late 2019 has globally spread throughout other areas such as Asia, Europe, the Middle East, and North America and has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. We have significant manufacturing operations in China, Malaysia, Thailand, Singapore, Taiwan, The Netherlands and the U.S., and each of these countries has been affected by the outbreak and taken measures to try to contain it. There is considerable uncertainty regarding such measures and potential future measures, and restrictions on our access to our manufacturing facilities or on our support operations or workforce, or similar limitations for our vendors and suppliers, and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures, could limit our capacity to meet customer demand and have been noa material changes fromadverse effect on our financial condition and results of operations.
The outbreak has significantly increased economic and demand uncertainty. The current outbreak has caused, and the continued spread of COVID-19 may exacerbate an economic slowdown, and it is possible that it could lead to a global recession. Risks related to a slowdown or recession are described in our risk factors previously disclosedfactor titled “Significantly increased volatility and instability and unfavorable economic conditions may adversely affect our business” under “Risk Factors” in our Annual Report on Form 20-F10-K for the year ended December 31, 2018.2019.
The spread of COVID-19 has 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 take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.
The degree to which COVID-19 impacts our 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. Even after the COVID-19 outbreak has subsided, we may experience material adverse impacts to our business as a result of the global economic impact and any recession that has occurred or may occur in the future. To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak on our operations and financial results is highly uncertain and subject to change. For a description of other applicable risk factors, please refer to Part I, Item 1A: “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended September 29, 2019 was as follows:
|
| | | | | | | | | | | | | | |
Period | |
Total Number of Shares Purchased | | Average Price Paid per Share | | Number of Shares Purchased as Part of Publicly Announced Buy Back Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Buy Back Program (1) | | Number of Shares Purchased as Trade for Tax (1) |
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 |
|
Total | | 88,894 |
| | | | — |
| | | | 88,894 |
|
(1)On June 18,In November 2019, the General Meetingboard of Shareholders extendeddirectors of NXP (the “Board”), as authorized by the authorization2019 annual general meeting of shareholders, authorized the repurchase of $2 billion of shares. In addition, the Board approved the purchase of Directors to resolve to repurchase shares of our common stock up to 50% of the issued share capital. Since the 20% buy back program announced in 2018, which program has been completed in the meantime, the Board did not resolve on a new buy back program. The only shares repurchased in Q3 2019 under an ongoing approval by the Board were purchased from participants in the Company's equity programs who tradedtrade shares as trade for tax. This authorization will remain in effect until terminated by the Board. 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.
The following share repurchase activity occurred under these programs during the three months ended June 28, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period |
Total Number
of Shares
Purchased | | Average Price
Paid per Share | | Number of Shares Purchased as Part of Publicly Announced Buy Back Programs | | Maximum Number of
Shares That May
Yet Be Purchased
Under the Buy Back Program | | Number of Shares Purchased as Trade for Tax (1) |
March 30, 2020 – May 3, 2020 | 28,695 | | | $96.30 | | — | | | 17,246,947 | | | 28,695 | |
May 4, 2020 – May 31, 2020 | 11,290 | | | $99.10 | | — | | | 17,127,623 | | | 11,290 | |
June 1, 2020 – June 28, 2020 | 90 | | | $113.26 | | — | | | 15,219,181 | | | 90 | |
Total | 40,075 | | | | | — | | | | | 40,075 | |
(1)Reflects shares surrendered by participants to satisfy tax withholding obligations in connection with the Company's equity programs.
Item 5. Other Information
The Compensation Committee of the Board of Directors of NXP Semiconductors N.V. (the “Company”) has approved (i) a form of Director Restricted Stock Unit Award Agreement (attached as Exhibit 10.1 to this quarterly report on Form 10-Q (this “Report”)) for the award of equity grants to the non-executive directors of the Company’s Board of Directors and (ii) a form of Restricted Stock Unit Award Agreement (attached as Exhibit 10.2 to this Report) and a form of Performance Restricted Stock Unit Award Agreement (attached as Exhibit 10.3 to this Report) for the award of equity grants to our Chief Executive Officer, Chief Financial Officer and other executive officers of the Company. These equity awards will be granted under the NXP Semiconductors N.V. 2019 Omnibus Incentive Plan which was previously approved by the Company’s annual general meeting of shareholders.Not applicable.
Item 6. Exhibits
|
| | | | | | | | | | |
Exhibit Number | | Exhibit Description | |
3.13.1* | | | |
4.1 | | | |
3.24.2 | | Articles of Association of NXP Semiconductors N.V.RegistrationRights Agreement, dated May1,2020,amongtheIssuers,theCompany and Goldman Sachs & Co. LLC, BofA Securities,Inc., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, as Initial Purchasers (incorporated by reference to Exhibit 3.2 of Amendment No. 74.2 to the Registration StatementCompany’s Current Report on Form F-18-K of NXP Semiconductors N.V., filed on August 2, 2010 (File No. 333-166128))May1, 2020) | |
10.1* +4.3 | | | |
4.4 | | | |
4.5 | | | |
10.2* +10.1 | | Purchase Agreement, dated April 29, 2020, among the Issuers, the Company and Goldman Sachs & Co. LLC, BofA Securities, Inc., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, as Initial Purchasers. (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K of Restricted Stock Unit Award AgreementNXP Semiconductors N.V., filed on May 1, 2020) | |
10.3* + | | | |
31.1* | | | |
31.2* | | | |
32.1** | | | |
101 | | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019,June 28, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and ninesix months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018;2019; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018;2019; (iii) Condensed Consolidated Balance Sheets as of September 29, 2019June 28, 2020 and December 31, 2018;2019; (iv) Condensed Consolidated Statements of Cash Flows for the ninesix months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018;2019; (v) Condensed Consolidated Statements of Changes in Equity for the three and ninesix months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018;2019; and (vi) Notes to the Unaudited Condensed Consolidated Financial Statements. | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
|
| | | | |
+* | Indicates management contractFiled or compensatory plan or arrangement. |
* | Filedfurnished herewith. |
** | Furnished herewith. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 29, 2019July 28, 2020
| | | | | |
NXP Semiconductors N.V. | |
| |
NXP Semiconductors N.V. |
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| /s/ P. Kelly |
Name: P. Kelly, CFO | |
| |
Exhibit 31.1
CERTIFICATION
I, Richard L. Clemmer,Kurt Sievers, certify that:
1.I have reviewed this quarterly report on Form 10-Q of NXP Semiconductors N.V.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: July 28, 2020
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1. | I have reviewed this quarterly report on Form 10-Q of NXP Semiconductors N.V.; |
| |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
| |
4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
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5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: October 29, 2019
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| | |
By: | | /s/ Richard L. ClemmerKurt Sievers |
| | Richard L. ClemmerKurt Sievers |
| | President & Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Peter Kelly, certify that:
1.I have reviewed this quarterly report on Form 10-Q of NXP Semiconductors N.V.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: July 28, 2020
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1. | I have reviewed this quarterly report on Form 10-Q of NXP Semiconductors N.V.; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
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4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| |
d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
| |
5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
| |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: October 29, 2019
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| | |
By: | | /s/ Peter Kelly |
| | Peter Kelly |
| | Chief Financial Officer |
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard L. Clemmer,Kurt Sievers, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of NXP Semiconductors N.V. on Form 10-Q for the period ended September 29, 2019June 28, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of NXP Semiconductors N.V. at the dates and for the periods indicated.
Date: October 29, 2019
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| | | | | | | |
By: | | /s/ Richard L. ClemmerKurt Sievers |
| | Richard L. ClemmerKurt Sievers |
| | President & Chief Executive Officer |
I, Peter Kelly, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of NXP Semiconductors N.V. on Form 10-Q for the period ended September 29, 2019June 28, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of NXP Semiconductors N.V. at the dates and for the periods indicated.
Date: October 29, 2019
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| | | | | | | |
By: | | /s/ Peter Kelly |
| | Peter Kelly |
| | Chief Financial Officer |