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‑F for the year ended December 31, 2018. 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. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and in “Risk Factors” in Part I, Item 3D of our Annual Report on Form 20-F. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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
|
|
Q3 2019 compared to Q3 2018
In the quarter ended September 29, 2019, revenue declined by $180 million as compared to the quarter ended September 30, 2018. Included in the latter is $32 million of revenue related to divested businesses or activities. As of January 1, 2019, 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 decreased in the third quarter of 2019 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 businesses or activities as discussed above. Other income (expense) in the third quarter of 2018 includes the $2 billion termination compensation received from Qualcomm.
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 growth 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
|
|
|
Revenue
|
|
|
Growth %
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Growth %
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
2,265
|
|
|
(7.4
|
)
|
|
2,445
|
|
|
6,576
|
|
|
(6.1
|
)
|
|
7,004
|
|
Q3 2019 compared to Q3 2018
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 2019 compared to YTD 2018
Revenue decreased $428 million to $6,576 million in the first nine months of 2019 compared to $7,004 million in the first nine months of 2018, a year-on-year decrease of 6.1%. Included in the first nine months of 2018 is the revenue related to divested businesses or activities, $107 million. The decline is mainly related to lower sales to distributors due to lower end-customer demand, with Greater China region representing close to two-thirds of the compression and in particular in our Automotive, Industrial & IOT and Mobile end markets.
Gross Profit
The following table presents gross profit for each of the three and nine month periods ended September 29, 2019 and September 30, 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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
|
)
|
Q3 2019 compared to Q3 2018
Financial income (expense) was an expense of $85 million in the third quarter of 2019, compared to an expense of $119 million in the third quarter of 2018. The decrease was mainly the result of one time charges ($60 million) on certain financial instruments for compensation related to an adjustment event required by the termination of the Qualcomm merger agreement and the origination fees ($11 million) related to the $1 billion bridge facility entered into in the third quarter of 2018, partly offset by the result of incremental interest expense, due to incremental debt raised in the fourth quarter of 2018.
YTD 2019 compared to YTD 2018
Financial income (expense) was an expense of $257 million in the first nine months of 2019, compared to an expense of $258 million in the first nine months of 2018. As a result of incremental debt in the fourth quarter of 2018, interest expense increased, partly offset by lower debt extinguishment costs and the absence of the one time charges and origination fee incurred in the first nine months of 2018.
Benefit (provision) for income taxes
Q3 2019 compared to Q3 2018
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 third quarter of 2019 was an expense of 18.9% compared with an expense of 14.9% for the third quarter of 2018. The movement in our effective tax rate reflects mainly the decrease in tax incentives ($160 million), the increase in the prior year adjustments ($26 million) and the increase in the change in valuation allowance ($9 million).
YTD 2019 compared to YTD 2018
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 nine months of 2019 was a tax expense of 21.4% compared with an expense of 14.2% for the first nine months of 2018. The movement in our effective tax rate reflects mainly the decrease in tax incentives ($152 million), the increase in the prior year adjustments ($19 million) and the increase in the change in valuation allowance ($32 million).
Results relating to equity-accounted investees
Q3 2019 compared to Q3 2018
Results relating to equity-accounted investees 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 nine months of 2018 included the net gain of $51 million resulting from the sale of ASEN in July 2018.
Net income (loss)
The following table presents the composition of net income for the periods reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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 third quarter of 2019, our cash balance was $3,537 million, an increase of $748 million compared to December 31, 2018. Taking into account the available amount of the Unsecured Revolving Credit Facility of $1,500 million, we had access to $5,037 million of liquidity as of September 29, 2019.
We currently use cash to fund operations, meet working capital requirements, for capital expenditures and for potential common stock repurchases, dividends and strategic investments. Based on past performance and current expectations, we believe that our current available sources of funds (including cash and cash equivalents, RCF Agreement, plus anticipated cash generated from operations) will be adequate to finance our operations, working capital requirements, capital expenditures and potential dividends for at least the next twelve months. Our capital expenditures were $388 million in the first nine months of 2019, compared to $441 million in the first nine months of 2018. During the nine month period ended September 29, 2019, we repurchased $1,369 million, or 15.2 million shares of our common stock pursuant to our share buyback program at a weighted average price of $90.16 per share.
Our total debt amounted to $8,505 million as of Q3 2019, an increase of $1,151 million compared to December 31, 2018 ($7,354 million). The fixed rate 1% convertible debt of $1,150 million is due December 2019.
At September 29, 2019, our cash balance was $3,537 million of which $169 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 dividend has been declared by SSMC in the first nine months of 2019 (during the second quarter of 2018: $139 million).
Cash flows
Our cash and cash equivalents during the first nine months of 2019 increased by $753 million (excluding the effect of changes in exchange rates on our cash position of $5 million) as follows:
|
|
|
|
|
|
|
($ 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
|
)
|
During the nine months ended September 29, 2019, cash generated by operating activities of $1,559 million was primarily the result of $149 million of net income, non-cash adjustments to net income of $1,687 million and a decrease in the net change in operating assets and liabilities of $282 million. Cash used in investing activities of $418 million during the nine months ended September 29, 2019 consisted of cash used to acquire property, plant 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, offset by cash provided by the sale 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 by operating activities of $3,638 million was primarily the result of $1,969 million of net income, non-cash adjustments to net income of $1,557 million and an increase in the net change in operating assets and liabilities of $99 million. Cash used in investing activities of $348 million during the nine months ended September 30, 2018 consisted primarily of cash used to acquire property, plant and equipment of $441 million, cash used to purchase interests in a business of $18 million and cash used to acquire intangible assets of $46 million, offset by cash proceeds from the sale of 40% of our equity interest in ASEC of $127 million and the sale of 24% of our equity interest in WeEn of $32 million. Cash used in financing activities of $4,885 million during the nine months ended September 30, 2018 consisted primarily of cash used to repurchase common stock of $4,582 million 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.
Contractual Obligations
During the first nine months of 2019, our contractual obligations decreased by $40 million resulting from normal business operations.
Off-balance Sheet Arrangements
At the end of the third quarter of 2019, 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.