Overview
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
|
|
|
Revenue
|
2,021
|
|
2,094
|
|
Gross profit
|
997
|
|
1,072
|
|
Operating income (loss)
|
68
|
|
|
54
|
|
Cash flow from operating activities
|
512
|
|
296
|
|
Total debt
|
7,366
|
|
7,340
|
|
Net debt
|
6,287
|
|
5,148
|
|
Diluted weighted average number of shares outstanding
|
279,933
|
|
|
287,227
|
|
Diluted net income per share
|
(0.08)
|
|
(0.07
|
)
|
Dividends per common share
|
0.375
|
|
|
0.25
|
|
Revenue for the three months ended March 29, 2020 was down 3.5% from the three months ended March 31, 2019 against a very challenging economic backdrop, due to the COVID-19 pandemic. Revenues decreased by 4% in our largest end market, Automotive, and 10% in the Communications & Infrastructure end market, which were slightly offset by an increase of 2% in our Industrial and IOT end market and a 2.5% increase in the Mobile end market. When aggregating all end markets, the decrease in revenue was mostly related to lower sales to Original Equipment Manufacturers, in particular in Japan and Greater China (including Asia Pacific).
Our gross profit percentage for the first quarter of 2020 decreased from 51.2% in the first quarter of 2019 to 49.3%, essentially due to lower revenue as a result of the COVID-19 crisis, a less favorable product mix and the purchase accounting effect on inventory ($17 million) due to the Marvell acquisition.
Notwithstanding the challenging operating environment we currently face, we continue to execute on our strategy within our target markets and focus on driving profitability.
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.
We continue to generate strong operating cash flows, with $512 million in cash flows from operations for the first three months ended 2020. We returned $460 million to our shareholders during the first quarter of 2020 in dividends and repurchases of common stock. Our cash position at the end of the first quarter of 2020 was $1,079 million. On March 5, 2020, the NXP Board of Directors approved a cash dividend of $0.375 per common share for the first quarter of 2020.
Our Response to a Global Pandemic
We are beholding the profound impact that the novel coronavirus (“COVID-19”) is having on our employees and their families, the communities that we operate in, the global economy and society at large. NXP has responded by actively 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 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:
Taking Care of our People
Our top priority during the COVID-19 pandemic is protecting the health and safety of our employees. As governments institute new restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for essential operations in our factories. We have significantly reduced the number of people in our offices, helping to protect our employees who work in our labs and factories and who are essential to keeping our business running. Daily, our employees are taking initiative, intensely collaborating, and focusing on delivering to our customers. We remain open, our factories continue to operate around the world in accordance with guidance issued by local and national government authorities.
Taking Care of our Communities
NXP was built to adapt, to respond to unknown challenges and to support the communities that we operate in. We believe with our global presence we have a responsibility to the families of our 29,000 employees and their communities to find ways to be a supportive neighbour. Our team members are assuring that our customers in the healthcare and medical areas have critical MCU and sensor products to enable the increased
production of respirators. Globally we are donating PPE material where it is needed and providing laptops to students, NGOs and nursing home patients. Our team members are also independently raising funds and donating back in their local communities to help the less privileged.
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. This includes limiting 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
We saw the deterioration of customer demand begin to accelerate in March and has continued through April. We find ourselves navigating a challenging and fluid environment, attempting to make accurate projections of OEM customer demand, especially in the global automotive markets. In North America and Europe, automotive OEMs and Tier-One suppliers are struggling with full or partial factory shut downs and disrupted extended supply chains. While the demand environment in China has clearly improved, especially in the industrial and mobile end markets, it is still below long-term normal demand trend-lines. In our opinion, the key to determining when growth will return to some level of normalcy, will be the widespread re-opening and the move to full operating capacity of manufacturing sites, especially in the automotive industry outside of China. As our customers begin to recalibrate their demand signals throughout the supply chain, we anticipate we will see improved build plans, as well as seeing the benefits from the ramp of NXP specific programs.
Facilities and Supply Chain
From an operational perspective all our manufacturing facilities are up and running, and we have not experienced any major supply chain issues. We have been extremely fortunate that the virus has not significantly impacted our broad employee base. We will continue to work closely with local governmental agencies to support cautious return to work efforts as we look towards getting back to full capacity.
Moving Forward
The overall impact of COVID-19 on our consolidated results of operations for the three months ended March 29, 2020 was consequential to our revenue and operating margin, but we were still able to generate robust cash and keep a strong balance sheet. As we move into the second quarter, we expect our revenue to decline further and, in order to maintain appropriate levels of inventory, plan to run our internal front-end factories at a much lower utilization rate, below our normal capacity. The combined effect will result in lower gross margin, especially as we recognize under absorption of fixed costs in period.
For the rest of the year, the impact that COVID-19 will have on our consolidated results of operations remains uncertain. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, liquidity and capital resources.
Results of operations
The following table presents operating income for each of the three month periods ended March 29, 2020 and March 31, 2019, respectively:
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|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
|
|
|
Revenue
|
2,021
|
|
2,094
|
|
% nominal growth
|
(3.5
|
)
|
|
(7.7
|
)
|
Gross profit
|
997
|
|
1,072
|
|
Research and development
|
(425)
|
|
(415
|
)
|
Selling, general and administrative
|
(233)
|
|
(248
|
)
|
Amortization of acquisition-related intangible assets
|
(381)
|
|
(357
|
)
|
Other income (expense)
|
110
|
|
2
|
|
Operating income (loss)
|
68
|
|
|
54
|
|
Revenue
Revenue for the three months ended March 29, 2020 was $2,021 million compared to $2,094 million for the three months ended March 31, 2019, a decrease of $73 million or 3.5%. The decrease is attributed to the impact of the COVID-19 pandemic in our primary end-markets, including quarter over quarter decreases in our Automotive and Communications & Infrastructure end-markets.
Revenue by end-market was as follows:
|
|
|
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
Change
|
|
Automotive
|
994
|
|
|
1,036
|
|
|
(4.1
|
)%
|
Industrial & IoT
|
376
|
|
|
368
|
|
|
2.2
|
%
|
Mobile
|
247
|
|
|
241
|
|
|
2.5
|
%
|
Communication Infrastructure & Other
|
404
|
|
|
449
|
|
|
(10.0
|
)%
|
Revenue
|
2,021
|
|
|
2,094
|
|
|
(3.5
|
)%
|
Revenue by sales channel was as follows:
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|
|
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
Change
|
|
Distributors
|
984
|
|
|
962
|
|
|
2.3
|
%
|
OEM/EMS
|
1,000
|
|
|
1,114
|
|
|
(10.2
|
)%
|
Other
|
37
|
|
|
18
|
|
|
105.6
|
%
|
Revenue
|
2,021
|
|
|
2,094
|
|
|
(3.5
|
)%
|
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) was as follows:
|
|
|
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
Change
|
|
Greater China (including Asia Pacific)
|
1,068
|
|
|
1,098
|
|
|
(2.7
|
)%
|
EMEA (Europe, the Middle East and Africa)
|
441
|
|
|
441
|
|
|
—
|
%
|
Americas
|
254
|
|
|
268
|
|
|
(5.2
|
)%
|
Japan
|
170
|
|
|
207
|
|
|
(17.9
|
)%
|
South Korea
|
88
|
|
|
80
|
|
|
10.0
|
%
|
Revenue
|
2,021
|
|
|
2,094
|
|
|
(3.5
|
)%
|
|
|
|
n
|
Automotive
|
n
|
Industrial IoT
|
n
|
Mobile
|
n
|
Comm Infra & Other
|
|
|
|
n
|
Distributors
|
n
|
OEM/EMS
|
n
|
Other
|
Revenue associated with the Automotive market declined $42 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 Japan. 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 offset by positive trends in our auto growth products, including ADAS safety and processors for digital clusters.
Revenue derived from the Industrial and IoT market increased $8 million year-on-year due to the first full quarter contribution of revenue associated with the recently acquired Marvell wireless connectivity assets for connected IoT solutions. This positive contribution was offset by declines in demand for general purpose microcontroller and application processors, primarily in the distribution channel as result of COVID-19 related market weakness.
Within the Mobile end-market, revenue increased $6 million year-on-year. During the first quarter, 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. These increases were substantially offset by the year-on-year comparisons associated with the divestment of the Voice and Audio Solutions, which closed early in the first quarter of 2020. Additionally, mobile customers delayed the resumption of production in China after the Chinese Lunar New Year due to the COVID-19 pandemic.
Revenue in the Communication Infrastructure and Other end-market declined $45 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 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
Gross profit for the three months ended March 29, 2020 was $997 million, or 49.3% of revenue, compared to $1,072 million, or 51.2% of revenue for the three months ended March 31, 2019. The decrease of $75 million was primarily driven by lower revenue resulting from lower demand due to COVID-19, a less favorable product mix as well as the purchase accounting effect on inventory ($17 million) resulting from the Marvell acquisition.
Operating expenses
Operating expenses for the three months ended March 29, 2020 totaled $1,039 million, or 51.4% of revenue, compared to $1,020 million, or 48.7% of revenue, for the three months ended March 31, 2019.
The following table below presents the composition of operating expenses by line item in the statement of operations:
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
Research and development
|
425
|
|
|
415
|
|
Selling, general and administrative
|
233
|
|
|
248
|
|
Amortization of acquisition-related intangible assets
|
381
|
|
|
357
|
|
Operating expenses
|
1,039
|
|
|
1,020
|
|
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 March 29, 2020 increased by $10 million, or 2.4%, when compared to the three months ended March 31, 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 on February 3, 2020; and
- lower 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 three months ended March 29, 2020 decreased by $15 million, or 6.0%, when compared to the three months ended March 31, 2019 mainly due to:
- lower professional service costs;
- lower restructuring charges and lower merger-related costs;
- lower variable compensation costs; and
+ higher share-based compensation expenses as a result of the announced CEO transition.
Amortization of acquisition-related intangible assets increased by $24 million, or 6.7%, when compared to the three months ended March 31, 2019 driven by:
+ the start of amortization of intangible assets related to the Marvell acquisition; and
- certain intangibles became fully amortized during 2019.
Other income (expense)
Income and expenses derived from manufacturing service arrangements (“MSA”) and transitional service arrangements (“TSA”) that are put into place when we divest a business or activity, are included in other income (expense). These arrangements are short-term in nature and are expected to decrease as the divested business or activity becomes more established.
The following table presents the split of other income (expense) for each of the three month periods ended March 29, 2020 and March 31, 2019:
|
|
|
|
|
|
|
($ in millions)
|
Q1 2020
|
|
|
Q1 2019
|
|
Income from MSA and TSA arrangements
|
33
|
|
|
26
|
|
Expenses from MSA and TSA arrangements
|
(33
|
)
|
|
(24
|
)
|
Result from MSA and TSA arrangements
|
—
|
|
|
2
|
|
Other, net
|
110
|
|
|
—
|
|
Total
|
110
|
|
|
2
|
|
Other income (expense) reflects income of $110 million for three month periods ended March 29, 2020, compared to $2 million of income for the three months ended March 31, 2019. Included in Q1 2020 is the net gain on the sale of the Voice and Audio Solutions (VAS) assets of $110 million.
Financial income (expense)
The following table presents the details of financial income and expenses:
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
|
|
|
Interest income
|
4
|
|
|
13
|
|
Interest expense
|
(82
|
)
|
|
(87
|
)
|
Total interest expense, net
|
(78
|
)
|
|
(74
|
)
|
Foreign exchange rate results
|
4
|
|
|
(6
|
)
|
Extinguishment of debt
|
—
|
|
|
—
|
|
Miscellaneous financing costs/income and other, net
|
(4
|
)
|
|
(3
|
)
|
Total other financial income (expense)
|
—
|
|
|
(9
|
)
|
Total
|
(78
|
)
|
|
(83
|
)
|
Financial income (expense) was an expense of $78 million in the first quarter of 2020 compared to an expense of $83 million in the first quarter of 2019. The change in financial income (expense) is primarily attributable to a decrease in interest expense ($5 million) as a result of refinancing activities, leading to lower debt issuance cost amortization as well as favorable foreign exchange results ($10 million). This is partially offset by a decrease in interest income ($9 million) as a result of lower cash balances and declining interest rates.
Benefit (provision) for income taxes
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 three months of 2020 was an expense of 20.0% on a pre-tax loss compared with a benefit of 31.0% on a pre-tax loss for the first three months of 2019. The movements in our effective tax rate relates mainly to the net effect of (1) the decrease in the 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 ($13 million), (2) offset by the increase in non deductible goodwill ($10 million), both linked to the divestiture of the VAS business. In addition, the taxable foreign exchange rate gain is higher ($10 million) in the first three months of 2020 compared to the first three months of 2019.
Net income (loss)
The following table presents the composition of net income for the periods reported:
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
|
|
|
Operating income (loss)
|
68
|
|
|
54
|
|
Financial income (expense)
|
(78
|
)
|
|
(83
|
)
|
Benefit (provision) for income taxes
|
(2
|
)
|
|
9
|
|
Results relating to equity-accounted investees
|
(1
|
)
|
|
4
|
|
Net income (loss)
|
(13
|
)
|
|
(16
|
)
|
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 first quarter of 2020, our cash balance was $1,079 million, an increase of $34 million compared to December 31, 2019. Taking into account the available amount of the Unsecured Revolving Credit Facility of $1,500 million, we had access to $2,579 million of liquidity as of March 29, 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 $143 million in the first three months of 2020, compared to $144 million in the first three months of 2019. During
the three month period ended March 29, 2020, we repurchased $355 million, or 2.9 million shares of our common stock pursuant to our share buyback program at a weighted average price of $120.89 per share.
Our total debt amounted to $7,366 million as of Q1 2020, an increase of $1 million compared to December 31, 2019 ($7,365 million).
At March 29, 2020, our cash balance was $1,079 million of which $201 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 three months of 2020 and 2019.
Cash flows
Our cash and cash equivalents during the first three months of 2020 increased by $44 million (excluding the effect of changes in exchange rates on our cash position of ($10) million) as follows:
|
|
|
|
|
|
|
($ in millions, unless otherwise stated)
|
Q1 2020
|
|
|
Q1 2019
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
512
|
|
|
296
|
|
Net cash provided by (used for) investing activities
|
(37
|
)
|
|
(136
|
)
|
Net cash provided by (used for) financing activities
|
(431
|
)
|
|
(756
|
)
|
Net cash increase (decrease) in cash and cash equivalents
|
44
|
|
|
(596
|
)
|
Cash Flow from Operating Activities
For the first three months of 2020 our operating activities provided $512 million in cash. This was primarily the result of net loss of ($13) million, adjustments to reconcile the net loss of $465 million and changes in operating assets and liabilities of $60 million. Adjustments to net loss includes offsetting non-cash items, such as depreciation and amortization of $540 million, share-based compensation of $107 million, amortization of the debt issuance costs of $2 million, a gain on sale of assets of assets of ($110) million, results relating to equity-accounted investees of $1 million and changes in deferred taxes of ($75) million.
The change in operating assets and liabilities (working capital accounts) was attributable to the following:
The $27 million decrease in receivables and other current assets was primarily due to the decrease in accounts receivable, net, which was driven by the linearity in revenue and the related timing of cash collections in the first quarter of 2019 compared with the same period in 2019.
The $35 million increase in inventories was primarily related to management's efforts to align inventory on hand with the current demand forecasts in the first quarter of 2020 compared with the same period in 2019.
The $64 million increase in accounts payable and other liabilities was primarily related to a net increase in income and social tax payables of $44 million, a net increase of $23 million in interest payable, a $21 million net increase related to the accruals for employee related compensation and restructuring and $25 million of other movements including the non-cash adjustment for capital expenditures, partially offset by a decrease of $49 million in trade accounts payable.
For the first three months of 2019 our operating activities provided $296 million in cash. This was primarily the result of net loss of ($16) million, adjustments to reconcile the net income of $535 million and changes in operating assets and liabilities of ($234) million. Net loss includes offsetting non-cash items, such as depreciation and amortization of $502 million, share-based compensation of $86 million, amortization of the discount on debt and debt issuance costs of $14 million, results relating to equity-accounted investees of ($4) million and changes in deferred taxes of ($63) million.
Cash Flow from Investing Activities
Net cash used for investing activities amounted to $37 million for the first three months of 2020 and principally consisted of the cash outflows for purchases of interests in businesses (net of cash) of $10 million, capital expenditures of $143 million and $45 million for the purchase of identified intangible assets, partly offset by proceeds of $161 million from the sale of businesses (net of cash), related to the the sale of our Voice and Audio Solutions assets.
Net cash used for investing activities amounted to $136 million for the first three months of 2019 and principally consisted of the cash outflows for capital expenditures of $144 million and $28 million for the purchase of identified intangible assets, partly offset by proceeds of $37 million from the sale of businesses (net of cash).
Cash Flow from Financing Activities
Net cash used for financing activities was $431 million for the first three months of 2020 compared to $756 million for the first three months of 2019, detailed in the table below:
|
|
|
|
|
|
|
|
Period ended
|
($ in millions)
|
Q1 2020
|
|
|
Q1 2019
|
|
Dividends paid to common stockholders
|
(105
|
)
|
|
(73
|
)
|
Cash proceeds from exercise of stock options and savings from ESPP
|
29
|
|
|
32
|
|
Purchase of treasury shares
|
(355
|
)
|
|
(715
|
)
|
Contractual Obligations
During the first three months of 2020, our contractual obligations decreased by $15 million resulting from normal business operations.
Off-balance Sheet Arrangements
At the end of the first quarter of 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.