Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 10-K for the year ended December 31, 2022, and the financial statements and the related notes that appear elsewhere in this document. 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 Part I, Item 1A “Risk Factors” of our Annual Report on Form 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.

Overview

Q1 2023 compared to Q1 2022

Revenue for the three months ended April 2, 2023 was $3,121 million compared to $3,136 million for the three months ended April 3, 2022, a decrease of $15 million or 0.5% year-on-year. At end market level the year-on-year comparisons are mixed, with lower demand in the Industrial IoT and the Mobile end markets resulting in a revenue decline in these end markets of $178 million or 26.1% and $141 million or 35.2%, respectively. The year-on-year revenue of the Automotive and the Communications Infrastructure & Other end markets increased by $271 million or 17.4% and $33 million or 6.7%, respectively.

Our gross profit percentage remained flat, 56.7% in both first quarters of 2023 and 2022.

We continue to generate strong operating cash flows, with $632 million in cash flows from operations for the first quarter of 2023. We returned $230 million to our shareholders during the first quarter of 2023. Our cash position at the end of the first quarter of 2023 was $3,930 million.

Results of operations

The following table presents operating income for each of the three month periods ended April 2, 2023 and April 3, 2022, respectively:

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Increase/decrease
Revenue			3,121						3,136						(15)
% nominal growth			(0.5)						22.2						(22.7)
Gross profit			1,770						1,777						(7)
Gross margin			56.7		%				56.7		%				—		ppt
Research and development			(577)						(518)						(59)
Selling, general and administrative			(280)						(251)						(29)
Amortization of acquisition-related intangible assets			(85)						(135)						50
Other income (expense)			(3)						—						(3)
Operating income (loss)			825						873						(48)
Financial income (expense)			(82)						(105)						23
Benefit (provision) for income taxes			(118)						(114)						(4)
Results relating to equity-accounted investees			(2)						12						(14)
Net income (loss)			623						666						(43)
Less: Net income (loss) attributable to non-controlling interests			8						9						(1)
Net income (loss) attributable to stockholders			615						657						(42)
Diluted earnings per share			2.35						2.48						(0.13)

Revenue

Q1 2023 compared to Q1 2022

Revenue for the three months ended April 2, 2023 was $3,121 million compared to $3,136 million for the three months ended April 3, 2022, a decrease of $15 million or 0.5%. NXP experienced lower demand in the Industrial IoT and the Mobile end markets and higher demand in NXP’s Automotive and Communication Infrastructure & Other end markets versus the year ago period.

Revenue by end market was as follows:

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Change
Automotive			1,828						1,557						17.4		%
Industrial & IoT			504						682						(26.1)		%
Mobile			260						401						(35.2)		%
Communication Infrastructure & Other			529						496						6.7		%
Revenue			3,121						3,136						(0.5)		%

n			Automotive						n			Mobile
n			Industrial IoT						n			Comm Infra & Other

\

Revenue by sales channel was as follows:

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Change
Distributors			1,491						1,680						(11.3)		%
OEM/EMS			1,594						1,412						12.9		%
Other			36						44						(18.2)		%
Revenue			3,121						3,136						(0.5)		%

n			Distributors						n			Other
n			OEM/EMS

Revenue by geographic region, which is based on the customer’s shipped-to location was as follows:

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Change
China 1)			947						1,069						(11.4)		%
APAC, excluding China			975						998						(2.3)		%
EMEA (Europe, the Middle East and Africa)			725						638						13.6		%
Americas			474						431						10.0		%
Revenue			3,121						3,136						(0.5)		%
1) China includes Mainland China and Hong Kong

Q1 2023 compared to Q1 2022

The year-on-year change in revenues was driven by a decline in shipment volumes, offset by higher average selling prices due to increased input costs from its suppliers which were passed along to end customers.

When aggregating all end markets together, and reviewing sales channel performance, revenues through direct OEM and EMS customers was $1,594 million, an increase of 12.9% versus the year ago period. Revenues through NXP's third party distribution partners was $1,491 million, a decrease of 11.3%.

From a geographic perspective, revenue declined in China and to a lesser extent in Asia Pacific, while revenue increased across the EMEA regions and the Americas regions.

Revenue in the Automotive end market was $1,828 million, an increase of $271 million or 17.4% versus the year ago period. The increase in Automotive revenue can be attributed to growth in automotive processing, advanced analog, automotive application processors and radar in support of the secular shift of electrification, and advanced driver safety and assistance.

Revenue in the Industrial & IoT end market was $504 million, a decrease of $178 million or 26.1% versus the year ago period. Within the Industrial & IoT market the year-on-year decline was driven by lower demand across the entire product portfolio.

Revenue in the Mobile end market was $260 million, a decrease of $141 million or 35.2% versus the year ago period. Declines within the Mobile end market were due to lower demand of our secure embedded transaction solutions, along with the company’s advanced analog high-speed interfaces and embedded power solutions.

Revenue in the Communication Infrastructure & Other end market was $529 million, an increase of $33 million or 6.7% versus the year ago period. The increase in revenue was due to increase demand of our network edge equipment, RFID tagging solutions, and transit and access solutions. Offsetting these positive growth trends were declines in demand for the company’s RF Power products, wireless access point solutions and smart antennae products.

Gross profit

Q1 2023 compared to Q1 2022

Gross profit for the three months ended April 2, 2023 was $1,770 million, or 56.7% of revenue, compared to $1,777 million, or 56.7% of revenue for the three months ended April 3, 2022, with increases in pricing offsetting increases in our foundry, subcontractor and other supplier sourcing costs.

Operating expenses

Research and development

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Percentage change
Research and development			577						518						11.4		%
As a percentage of revenue			18.5		%				16.5		%				2.0		ppt

Q1 2023 compared to Q1 2022

R&D costs for the three months ended April 2, 2023 increased by $59 million, or 11.4%, when compared to the three months ended April 3, 2022 mainly driven by:

+ higher personnel-related costs;

+ higher restructuring costs; and

- lower variable compensation costs.

Selling, general and administrative

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Percentage change
Selling, general and administrative			280						251						11.6		%
As a percentage of revenue			9.0		%				8.0		%				1.0		ppt

Q1 2023 compared to Q1 2022

SG&A costs for the three months ended April 2, 2023 increased by $29 million, or 11.6%, when compared to the three months ended April 3, 2022 mainly due to:

+ higher legal expense;

+ higher personnel-related costs;

+ higher restructuring costs; and

- lower variable compensation costs.

Amortization of acquisition-related intangible assets

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022						Percentage change
Amortization of acquisition-related intangible assets			85						135						(37.0)		%
As a percentage of revenue			2.7		%				4.3		%				(1.6)		ppt

Q1 2023 compared to Q1 2022

Amortization of acquisition-related intangible assets decreased by $50 million, or 37.0%, when compared to the three months ended April 3, 2022 driven by:

- certain intangibles became fully amortized during 2022.

Financial income (expense)

The following table presents the details of financial income and expenses:

($ in millions, unless otherwise stated)			Q1 2023						Q1 2022
Interest income			42						2
Interest expense			(111)						(104)
Other, net			(13)						(3)
Total			(82)						(105)

Interest income

Q1 2023 compared to Q1 2022

Interest income increased due to higher interest rates and to a lesser extent by a higher level of cash.

Interest expense

Q1 2023 compared to Q1 2022

Interest expense increased due to several debt restructurings, issuance of $1.5 billion of new debt and repayment of $900 million of debt in the second quarter of 2022.

Other, net

Q1 2023 compared to Q1 2022

Other, net, mainly increased due to higher foreign currency results (a loss of $5 million) and fair value adjustments in equity securities.

Benefit (provision) for income taxes

			Q1 2023						Q1 2022
Benefit (provision) for income taxes			(118)						(114)
Effective tax rate			15.9		%				14.8		%
Statutory income tax rate in the Netherlands			25.8		%				25.8		%

Q1 2023 compared to Q1 2022

Beginning with the first quarter of 2023, NXP was in a position to make a reliable estimate of its annual effective tax rate. This estimated annual effective tax rate ("EAETR") is then applied to the year-to-date Income (loss) before income taxes excluding discrete items, to determine the year-to-date benefit (provision) for income taxes. The income tax effects of any discrete items are recognized in the interim period in which they occur. As the year progresses, the Company continually refines the EAETR based upon actual events and the apportionment of our earnings (loss). This continual estimation process periodically may result in a change to our EAETR for the year. When this occurs, we adjust on an accumulated basis the benefit (provision) for income taxes during the quarter in which the change occurs.

Our provision for income taxes for 2023 is based on our EAETR of 17.0%, which is lower than the Netherlands statutory tax rate of 25.8%, primarily due to tax benefits from the Netherlands and foreign tax incentives. The effective tax rate of 15.9% for the first quarter of 2023 was lower than the EAETR due to the income tax benefit for discrete items of $8 million. The discrete items are primarily related to changes in estimates for previous years and the impact of foreign currency on income tax related items. The effective tax rate of 14.8% for the first quarter of 2022 was lower compared to the current period due to higher foreign tax incentives as a result of an increase in qualifying investments and also due to a different mix of the benefit (provision) of income taxes in the locations that we operate in.

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 2023, our cash balance was $3,930 million, an increase of $85 million compared to December 31, 2022. Taking into account the available amount of the Unsecured Revolving Credit Facility of $2,500 million, we had access to $6,430 million of liquidity as of April 2, 2023. 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 of $2.5 billion, 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.

($ in millions, unless otherwise stated)			YTD 2023						YTD 2022
Cash from operations			632						856
Capital expenditures			251						280
Cash to shareholders			230						701

Cash and cash equivalents

At April 2, 2023, our cash balance was $3,930 million of which $234 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.

Capital expenditures

Our cash outflows for capital expenditures were $251 million in the first three months of 2023, compared to $280 million in the first three months of 2022.

Capital return

Under our Quarterly Dividend Program, interim dividends of $0.845 per ordinary share were paid on January 6, 2023 ($219 million) and dividends of $1.014 per ordinary share were paid on April 5, 2023.

Outstanding indebtedness

Our total debt amounted to $11,167 million as of Q1 2023, an increase of $2 million compared to December 31, 2022 ($11,165 million), with net debt amounting to $7,237 million.

Cash flows

Our cash and cash equivalents during the first three months of 2023 increased by $83 million (excluding the effect of changes in exchange rates on our cash position of $2 million) as follows:

($ in millions, unless otherwise stated)			YTD 2023						YTD 2022
Net cash provided by (used for) operating activities			632						856
Net cash (used for) provided by investing activities			(351)						(329)
Net cash provided by (used for) financing activities			(198)						(674)
Increase (decrease) in cash and cash equivalents			83						(147)

Cash Flow from Operating Activities

For the first three months of 2023 our operating activities provided $632 million in cash. This was primarily the result of net income of $623 million, adjustments to reconcile the net income of $326 million and changes in operating assets and liabilities of $(315) million. Adjustments to net income (loss) includes offsetting non-cash items, such as depreciation and amortization of $283 million, share-based compensation of $99 million and changes in deferred taxes of $(62) million. Changes in operating assets and liabilities were primarily driven by a $196 million increase in inventories due to increased production levels in order to align inventory on hand with expected demand, $138 million increase in receivables and other current assets due to the profile and timing of revenue by sales channel directly impacting outstanding receivables at the end of the period, $33 million increase in other non-current assets due to prepayments to secure long-term production supply; partially offset by $52 million increase in accounts payable and other liabilities as a result of timing related to payments.

For the first three months of 2022 our operating activities provided $856 million in cash. This was primarily the result of net income of $666 million, adjustments to reconcile the net income of $352 million and changes in operating assets and liabilities of $(164) million. Adjustments to net income (loss) includes offsetting non-cash items, such as depreciation and amortization of $310 million, share-based compensation of $89 million and changes in deferred taxes of $(33) million. Changes in operating assets and liabilities were primarily driven by a $122 million increase in inventories due to increased production levels in order to align inventory on hand with expected demand, $61 million increase in receivables and other current assets, $247 million increase in other non-current assets; partially offset by $266 million increase in accounts payable and other liabilities.

Cash Flow from Investing Activities

Net cash used for investing activities amounted to $351 million for the first three months of 2023 and principally consisted of the cash outflows for capital expenditures of $251 million, $42 million for the purchase of identified intangible assets, and $58 million for the purchase of investments.

Net cash used for investing activities amounted to $329 million for the first three months of 2022 and principally consisted of the cash outflows for capital expenditures of $280 million and $43 million for the purchase of identified intangible assets, $5 million for the purchase of equipment leased to others, $4 million for the net purchase of interests of businesses, partly offset by $2 million from the proceeds from return of equity investments and $1 million from the proceeds from disposals of property, plant and equipment.

Cash Flow from Financing Activities

Net cash used for financing activities was $198 million for the first three months of 2023 was primarily driven by the $219 million dividend payment to shareholders, partially offset by the $33 million proceeds from the issuance of common stock through stock plans.

Net cash used for financing activities was $674 million for the first three months of 2022 was primarily driven by the $552 million purchase of treasury shares and restricted stock unit withholdings and $149 million dividend payment to shareholders; partially offset by the $28 million proceeds from the issuance of common stock through stock plans.

Additional Capital Requirements

Expected working and other capital requirements are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. At April 2, 2023, other than for changes disclosed in the “Notes to Condensed Consolidated Financial Statements” and “Liquidity and Capital Resources” in this Quarterly Report, there have been no other material changes to our expected working and other capital requirements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Information Regarding Guarantors of NXP (unaudited)

Summarized Combined Financial Information for Guarantee of Securities of Subsidiaries

All debt instruments are guaranteed, fully and unconditionally, jointly and severally, by NXP Semiconductors N.V. and issued or guaranteed by NXP USA, Inc., NXP B.V. and NXP LLC, (together, the “Subsidiary Obligors” and together with NXP Semiconductors N.V., the “Obligor Group”). Other than the Subsidiary Obligors, none of the Company’s subsidiaries (together the “Non-Guarantor Subsidiaries”) guarantee the Notes. The Company consolidates the Subsidiary Obligors in its consolidated financial statements and each of the Subsidiary Obligors are wholly owned subsidiaries of the Company.

All of the existing guarantees by the Company rank equally in right of payment with all of the existing and future senior indebtedness of the Obligor Group. There are no significant restrictions on the ability of the Obligor Group to obtain funds from respective subsidiaries by dividend or loan.

The following tables present summarized financial information of the Obligor Group on a combined basis, with intercompany balances and transactions between entities of the Obligor Group eliminated and investments and equity in the earnings of the Non-Guarantor Subsidiaries excluded. The Obligor Group’s amounts due from, amounts due to, and intercompany transactions with Non-Guarantor Subsidiaries have been disclosed below the table, when material.

Summarized Statements of Income

			For the three months ended
($ in millions)			April 2, 2023
Revenue			1,948
Gross Profit			992
Operating income			413
Net income			229

Summarized Balance Sheets

			As of
($ in millions)			April 2, 2023						December 31, 2022
Current assets			3,885						3,740
Non-current assets			11,618						11,572
Total assets			15,503						15,312
Current liabilities			1,960						1,067
Non-current liabilities			10,562						11,528
Total liabilities			12,522						12,595
Obligor's Group equity			2,981						2,717
Total liabilities and Obligor's Group equity			15,503						15,312

NXP Semiconductors N.V. is the head of a fiscal unity for the corporate income tax and VAT that contains the most significant Dutch wholly-owned group companies. The Company is therefore jointly and severally liable for the tax liabilities of the tax entity as a whole, and as such the income tax expense of the Dutch fiscal unity has been included in the Net income of the Obligor Group.

The financial information of the Obligor Group includes sales executed through a Non-Guarantor Subsidiary single-billing entity as a sales agent on behalf of an entity in the Obligor Group. The Obligor Group has sales to non-guarantors (for the three months ended April 2, 2023: $225 million). The Obligor Group has amounts due from equity financing (April 2, 2023: $7,224 million; December 31, 2022: $5,210 million) and due to debt financing (April 2, 2023: $2,819 million; December 31, 2022: $2,629 million) with non-guarantor subsidiaries.