filings.toolsItem 5. Operating and Financial Review and Prospects
96K characters. Original on sec.gov ·
Item 5. Operating and Financial Review and Prospects
A. Operating Results
Basis of Presentation
Reporting Segments
We are a global semiconductors company and leading provider of High Performance Mixed Signal and Standard Product solutions that leverage our leading RF, Analog, power management, interface, security and digital processing expertise. These innovations are used in a wide range of automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications.
We have operations in more than 27 countries and our business is organized into three reportable segments: two market-oriented business segments, High Performance Mixed Signal (“HPMS”) and Standard Products (“SP”), and one other reportable segment, Manufacturing Operations. Corporate and Other represents the remaining portion to reconcile to the consolidated statements along with the divested Home activities, which were divested in 2010. For additional information refer to “Reporting Segments” within Part I, Item 4A. History and Development of the Company.
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Recent Developments
Management Change
Effective January 7, 2013, Hans Rijns and Dave French became jointly responsible for research and development. Mr Rijns has been appointed chief technology officer and has combined that role with his current position of senior vice president and head of research. Mr French has been appointed executive vice president of research and development in combination with his role as general manager of High-Performance Mixed-Signal portable and computing.
Private offering of 5.75% senior notes due 2021 to institutional investors
On February 1, 2013, we announced the pricing of a private offering to institutional investors of $500 million aggregate principal amount of U.S. dollar-denominated 5.75% senior notes due 2021 by our wholly-owned subsidiaries NXP B.V. and NXP Funding LLC. This offering closed on February 14, 2013. We will use the net proceeds of this private offering to repay amounts outstanding under our Second 2017 Term Loan.
Secondary offering of common shares
On February 4, 2013, we announced a secondary offering of 30,000,000 shares of our common stock to be sold by certain of our principal stockholders, pursuant to our shelf registration statement on Form F-3, at a price to the public of $30.35 per share. The offering was settled and closed on February 7, 2013. Subsequent to the settlement and closing, the consortium of funds advised by KKR, Bain, Silver Lake, APAX and Alpinvest collectively beneficially owns 42% of our shares of common stock as of that date. NXP did not receive any proceeds from the sale of shares in the offering.
Treasury shares
As announced on July 29 and August 17, 2011, we started a stock repurchase program to repurchase shares to cover in part employee stock options and equity rights under our long term incentive plans. Under the repurchase program, we may repurchase up to 8 million shares of our common stock from time to time in both privately negotiated and open market transactions, subject to management’s evaluation of market conditions, terms of private transactions, the best interests of our shareholders, applicable legal requirements and other factors. There is no guarantee as to the exact number of shares that will be repurchased under the stock repurchase program, and we may terminate the repurchase program at any time. In connection with our share repurchase programs, shares that have been repurchased are held in treasury for delivery upon exercise of options and under restricted share programs and are accounted for as a reduction of stockholders’ equity. As at December 31, 2012, 2,726,000 shares were held in treasury under this program.
Factors Affecting Comparability
Economic Situation
In 2012, amidst a renewed global economic slowdown, the semiconductor market faced an uncertain economic and demand environment which negatively impacted our more cyclically exposed or economically sensitive businesses. In 2011, the massive earthquake in Japan followed by a tsunami, a major flood in Thailand and the global weakening of the economic climate had an impact on the demand and supply in the semiconductor market and has negatively impacted our revenues and profitability in the year 2011. In the year 2010, an overall market recovery from the global economic downturn, which started in the second half of 2008 and continued through 2009, had a positive impact on our revenues and profitability. For more information on trends and other factors affecting our business see Part I, Item 3D. Risk Factors.
Restructuring Programs
During the fourth quarter of 2012, we announced a cost savings and restructuring initiative designed to improve operational efficiency and to competitively position the Company for sustainable growth. In aforementioned quarter, we recognized a restructuring charge of $98 million associated with a restructuring initiative (including but not limited to the OPEX Reduction Program). The components of the restructuring initiative were: $55 million in selling, general and administrative (SG&A) costs to assist in driving such costs down to 12 percent of revenue; $23 million in R&D to refocus resources; and $20 million in cost of goods sold, mainly related to the consolidation of MOS technologies from our German fabrication facility to the company’s 8-inch Dutch facility.
Since our separation from Philips, we have taken significant steps to reposition our businesses and operations through a number of acquisitions, divestments and restructurings. Between 2008 and 2011, we executed a restructuring program to refocus and resize our business in response to a challenging economic environment. As a result, costs were reduced significantly, driven by lower costs in manufacturing, research and development and selling, general and administrative activities.
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Net investment hedge accounting
The Company has applied net investment hedge accounting since May, 2011. The U.S. dollar exposure of the $1.7 billion net investment in U.S. dollar functional currency subsidiaries has been hedged by our U.S. dollar denominated notes. As a result, in 2012, a benefit of $26 million, before tax, (2011: a charge of $203 million) was recorded in other comprehensive income, relating to the foreign currency result on the U.S. dollar notes that are recorded in a euro functional currency entity. Absent the application of net investment hedge accounting this amount would have been recorded as a gain within financial income (expense) in the statement of operations.
Capital Structure
In 2012 we entered into the 2019 and the 2020 Term Loan, dated February 16, 2012 and December 10, 2012, respectively and concluded the Senior Secured Revolving Credit Facility (the proceeds of which were used to settle and close the pre-existing revolving credit facility).
In 2012, through a combination of individually negotiated buybacks and debt redemptions described in B.Liquidity and Capital Resources, we were able to reduce the book value of our total debt to $3,492 million consisting of short-term debt of $307 million and long-term debt of $3,185 million reflecting a reduction of $307 million from the prior year.
Effect of Acquisition Accounting
Our Formation
On September 29, 2006, Philips sold 80.1% of its semiconductor business to the Private Equity Consortium in a multi-step transaction. We refer to this acquisition as our “Formation”.
The Formation has been accounted for using the acquisition method. Accordingly, the $10,601 million purchase price has been “pushed down” within the NXP group and allocated to the fair value of assets acquired and liabilities assumed.
The carrying value of the net assets acquired and liabilities assumed, as of the Formation date on September 29, 2006, amounted to $3,302 million. This resulted in an excess of the purchase price over the carrying value of $7,299 million. The excess of the purchase price was allocated to intangible assets, step-up on tangible assets and liabilities assumed, using the estimated fair value of these assets and liabilities.
An amount of $3,096 million, being the excess of the purchase price over the estimated fair value of the net assets acquired, was allocated to goodwill. This goodwill is not amortized, but is tested for impairment at least annually.
Other Significant Acquisitions
Since its Formation, NXP has acquired various companies and businesses. These acquisitions have been accounted for using the acquisition method, and the respective purchase prices have been “pushed down” within the NXP group and allocated to the fair value of the assets acquired and the liabilities assumed. This has also resulted in an allocation to goodwill for the excess of the purchase price over the estimated fair value of the net assets acquired. The related goodwill is not amortized but included in the annual impairment test.
Adjusting the carrying value of the assets acquired in the Formation and subsequent acquisitions to their fair value has had an adverse effect on our operating income for various reporting periods, stemming from amortization charges on intangible assets and higher depreciation charges on tangible fixed assets that are the result of acquisition accounting effects.
The cumulative net effect resulting from the application of acquisition accounting is recorded in the financial statements with the term “PPA effect”. This effect is calculated taking into account the fact that any divestments and impairments in any particular reporting period reduce the amortization and depreciation charges going forward. Impairment losses are not part of the PPA effect.
Divestments
| • | 2012 |
|---|
On July 19, 2012, we sold the High Speed Data Converter business (a product line of the High Performance Mixed Signal segment) to Integrated Device Technology (IDT). The positive deal result of $19 million, as included in other income (expense), is calculated as the excess of the selling price of $31 million over the carrying value of the business transferred less any transaction-related direct costs.
| • | 2011 |
|---|
On July 4, 2011, we sold our Sound Solutions business (formerly included in our SP segment) to Knowles Electronics for $855
million in cash. The transaction resulted in a gain of $414 million, net of post-closing settlements, transaction-related costs, including working capital settlements, cash divested and taxes, which is included in income from discontinued operations. The Consolidated Financial Statements have been reclassified for all periods presented to reflect the Sound Solutions business as a discontinued operation.
| • | 2010 |
|---|
On December 20, 2010, we completed the sale of our 55% shareholding in the NuTune joint venture. This joint venture represented the combination of our can tuner modules operation with those of Technicolor (formerly Thomson S.A.).
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In September 2010, we sold all of the Virage Logic Corporation (“Virage Logic”) shares that we held.
On February 8, 2010, we completed the transaction to sell the television systems and set-top-box business lines, which were included in our former business segment Home, to Trident Microsystems, Inc. in exchange for outstanding common stock of Trident. The transaction consisted of the sale of our television systems and set-top-box business lines, together with an additional net payment of $54 million (of which $7 million was paid subsequent to the closing date) to Trident, for a 60% shareholding in Trident, valued at $177 million based on the quoted market price at the transaction date. Trident was listed on the NASDAQ in the United States at that time. On January 4, 2012, Trident filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and was subsequently delisted from the NASDAQ. The U.S. Bankruptcy Court approved the plan of liquidation under Chapter 11 of the Bankruptcy Code and entered an order confirming such plan on December 13, 2012. An initial distribution to shareholders took place on December 21, 2012. In view of the aforementioned distribution, NXP B.V. returned its shares in Trident.
Statement of Operations Items
Revenue
Our revenue is primarily derived from sales of our semiconductor and other components to OEMs and similar customers, as well as from sales to distributors. Our revenue also includes sales from wafer foundry and packaging services to our divested businesses, which are reported under our segment Manufacturing Operations.
Cost of Revenue
Our cost of revenue consists primarily of the cost of semiconductor wafers and other materials, and the cost of assembly and test. Cost of revenue also includes personnel costs and overhead related to our manufacturing and manufacturing engineering operations, related occupancy and equipment costs, manufacturing quality, order fulfillment and inventory adjustments, including write-downs for inventory obsolescence, gains and losses due to conversion of accounts receivable and accounts payable denominated in currencies other than the functional currencies of the entities holding the positions, gains and losses on cash flow hedges that hedge the foreign currency risk in anticipated transactions and subsequent balance sheet positions, and other expenses.
Gross Profit
Gross profit is our revenue less our cost of revenue, and gross margin is our gross profit as a percentage of our revenue. Our revenue includes sales from wafer foundry and packaging services to our divested businesses, which are reported under our segment Manufacturing Operations. In accordance with the terms of our divestment agreements, because the sales to our divested businesses are at a level approximately equal to their associated cost of revenue, there is not a significant contribution to our gross profit from these specific sales and hence they are dilutive to our overall company gross margin. As these divested businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources is expected to decline, and, therefore, the dilutive impact on gross profit is expected to decrease over time.
Research and Development
Research and development expenses consist primarily of personnel costs for our engineers engaged in the design, development and technical support of our products and related developing technologies and overhead. These expenses include third-party fees paid to consultants, prototype development expenses and computer services costs related to supporting computer tools used in the engineering and design process.
Selling, General and Administrative
Our sales and marketing expense consists primarily of compensation and associated costs for sales and marketing personnel including field application engineers and overhead, revenue commissions paid to our independent sales representatives, costs of advertising, trade shows, corporate marketing, promotion, travel related to our sales and marketing operations, related occupancy and equipment costs and other marketing costs. Our general and administrative expense consists primarily of compensation and associated costs for management, finance, human resources and other administrative personnel, outside professional fees, allocated facilities costs and other corporate expenses. General and administrative expenses also include amortization and impairment charges for identified intangibles assets, impairment charges for goodwill and impairment charges for assets held for sale.
Other Income (Expense)
Other income (expense) primarily consists of gains and losses related to divestment of activities and subsidiaries, as well as gains and losses related to the sale of long-lived assets and other non-recurring items.
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Operating Income (Loss)
Operating income (loss) from operations is our gross profit less our operating expenses (which consist of selling expenses, general and administrative expenses, research and development expenses and write-offs of acquired in-process research and development activities), plus other income (expense).
Extinguishment of Debt
Extinguishment of debt is the gain or loss arising from the exchange or repurchase of our debt.
Other Financial Income (Expense)
Other financial income (expense) consists of interest earned on our cash, cash equivalents and investment balances, interest expense on our debt (including amortization of debt issuance costs and write downs of proportionate debt issuance costs upon the extinguishment of debt), results on the sale of securities, gains and losses due to foreign exchange rates, other than those included in cost of revenue, and certain other miscellaneous financing costs and income.
Benefit (Provision) for Income Taxes
We have significant net deferred tax assets resulting from net operating loss carry forwards, tax credit carry forwards and deductible temporary differences that reduce our taxable income. Our ability to realize our deferred tax assets depends on our ability to generate sufficient taxable income within the carry back or carry forward periods provided for in the tax law for each applicable tax jurisdiction. The main component of the provision for income taxes relates to the tax expense in jurisdictions where we are in a tax paying position and have not recorded a valuation allowance, and withholding taxes.
Results Relating to Equity-Accounted Investees
Results relating to equity-accounted investees consist of our equity in all gains and losses of joint ventures and alliances that are accounted for under the equity method.
Income (Loss) from Discontinued Operations
For businesses classified as discontinued operations, the results of operations are reclassified from their historical presentation to income (loss) from discontinued operations in the consolidated statements of operations. Any gain (loss) on the sale of a discontinued operation is also included.
Net Income (Loss)
Net income (loss) is the aggregate of operating income (loss), financial income (expense), benefit (provision) for income taxes, results relating to equity-accounted investees, gains or losses resulting from a change in accounting principles, extraordinary income (loss) and gains or losses related to discontinued operations.
Use of Certain Non-GAAP Financial Measures
Net debt is a non-GAAP financial measure and represents total debt (short-term and long-term debt) after deduction of cash and cash equivalents. Management believes this measure is a good reflection of our net leverage.
We understand that, although net debt is used by investors and securities analysts in their evaluation of companies, this concept has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results of operations as reported under U.S. GAAP.
Net debt should not be used as an alternative to any other measure in accordance with U.S. GAAP.
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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Results of Operations
The following table presents the composition of operating income (loss) for the years ended December 31, 2012 and 2011.
| ($ in millions, unless otherwise stated) | 2012 | 2011 | ||||||
| Revenue | 4,358 | 4,194 | ||||||
| % nominal growth | 3.9 | (4.7 | ) | |||||
| Gross profit | 1,988 | 1,906 | ||||||
| Research and development | (628 | ) | (635 | ) | ||||
| Selling, general and administrative (SG&A) | (977 | ) | (918 | ) | ||||
| Other income (expense) | 29 | 4 | ||||||
| Operating income (loss) | 412 | 357 |
Revenue
The following table presents revenue by segment for the years ended December 31, 2012 and 2011.
| ($ in millions, unless otherwise stated) | For the year ended December 31, | |||||||||||||||
| 2012 | 2011 | |||||||||||||||
| Revenue | % nominal growth | Revenue | % nominal growth | |||||||||||||
| High Performance Mixed Signal | 3,282 | 12.9 | 2,906 | 2.1 | ||||||||||||
| Standard Products | 832 | (10.1 | ) | 925 | 9.1 | |||||||||||
| Manufacturing Operations | 211 | (33.2 | ) | 316 | (39.8 | ) | ||||||||||
| Corporate and Other | 33 | (29.8 | ) | 47 | (65.4 | ) | ||||||||||
| Total | 4,358 | 3.9 | 4,194 | (4.7 | ) |
Revenue was $4,358 million in the full year of 2012 compared to $4,194 million for the full year of 2011. Revenue of our two market oriented segments, HPMS and SP, increased $283 million or 7.4% compared to the full year of 2011 despite an uncertain economic and demand environment. This increase was partly offset by a decline in revenue from our Manufacturing Operations segment and Corporate and Other.
Our HPMS segment revenue grew 13% in 2012 to $3,282 million compared to $2,906 million in 2011. Within HPMS we saw robust growth within our Identification business, which was up 41% to $986 million, primarily driven by the accelerated ramp of our mobile transactions solutions and volume increases associated with our security identity product line. Our Portable & Computing business grew 14 percent year-on-year to $753 million as a result of increased volumes associated with specific design wins in the mobility market. Revenue from our Auto business grew one-percent versus 2011 to $939 million – with weakness in the European area offsetting very favorable results in North America and Asia. Our Industrial & Infrastructure business revenue declined 2 percent to $604 million versus the prior year primarily as a result of weak demand throughout most of the year for high-performance RF devices, even though design win momentum continues to be strong. We also faced price declines across most of our product lines and unfavorable foreign currency effects.
Revenue for our SP segment decreased $93 million to $832 million in 2012, compared to $925 million in 2011. The decrease was primarily due to lower sales volumes in our small signal diode, integrated discrete and power business resulting from weakening demand with our distribution partners and the overall automotive market. Our SP segment was also impacted by competitive pricing pressure in 2012 compared to 2011.
Revenue from our Manufacturing Operations segment was $211 million in 2012 compared to $316 million in 2011. The decline in revenue was primarily due to the expiration of contractual obligations to provide manufacturing services for previously divested businesses. As these divested businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources is further declining.
Revenue in Corporate and Other during 2012 was $33 million compared to $47 million in 2011. This decrease was primarily due to lower NXP Software sales.
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Gross Profit
The following table presents gross profit by segment for the years ended December 31, 2012 and 2011.
| 2012 | 2011 | |||||||||||||||
| ($ in millions, unless otherwise stated) | Gross Profit | % of segment revenue | Gross Profit | % of segment revenue | ||||||||||||
| HPMS | 1,745 | 53.2 | 1,573 | 54.1 | ||||||||||||
| SP | 238 | 28.6 | 336 | 36.3 | ||||||||||||
| Manufacturing Operations | (22 | ) | (10.4 | ) | (48 | ) | (15.2 | ) | ||||||||
| Corporate and Other | 27 | 81.8 | 45 | 95.7 | ||||||||||||
| Total | 1,988 | 45.6 | 1,906 | 45.4 |
Gross profit in 2012 increased $82 million to $1,988 million, or 45.6% of revenue, compared to $1,906 million or 45.4% of revenue in 2011. The increase was mainly attributable to volume increases, the reversal of partial accounts receivable valuation allowance of $51 million as a result of collection of accounts receivable amounts following a legal award, lower restructuring and related costs of $14 million and lower PPA effects of $7 million. This was partially offset by price declines and unfavorable foreign currency effects. Our gross profit as a percentage of our revenue was also impacted by the dilutive effect of product sales at cost to divested businesses by our Manufacturing Operations.
Our HPMS segment had a gross profit of $1,745 million or 53.2% of revenue in 2012, compared to $1,573 million or 54.1% in 2011. The improvement in gross profit was primarily attributed to higher revenue in the segment and to the reversal of partial accounts receivable valuation allowance of $51 million as a result of collection of accounts receivable amounts following a legal award, partially offset by price declines, and unfavorable foreign currency. Also included in our 2012 gross profit were restructuring and related costs of $1 million compared to 2011, where gross profit was reduced by $20 million due to actions taken to reduce headcount.
Our SP segment gross profit in 2012 was $238 million or 28.6% of revenue compared to $336 million or 36.3% of revenue in 2011. The decrease in gross profit was primarily due to lower revenue, higher product cost due to underutilized capacity capitalized in prior periods and price reductions. Restructuring and related costs were $15 million in 2012 mainly related to headcount restructuring, compared to $5 million in 2011.
Operating Expenses
The following table presents operating expenses by segment for the years ended December 31, 2012 and 2011.
| 2012 | 2011 | |||||||||||||||
| ($ in millions, unless otherwise stated) | Operating expenses | % of segment revenue | Operating expenses | % of segment revenue | ||||||||||||
| HPMS | 1,238 | 37.7 | 1,234 | 42.5 | ||||||||||||
| SP | 204 | 24.5 | 197 | 21.3 | ||||||||||||
| Manufacturing Operations | 17 | 8.1 | 24 | 7.6 | ||||||||||||
| Corporate and Other | 146 | — | 98 | — | ||||||||||||
| Total | 1,605 | 36.8 | 1,553 | 37.0 |
The following table below presents the composition of operating expenses by line item in the statement of operations.
| ($ in millions, unless otherwise stated) | 2012 | 2011 | ||||||
| Research and development | 628 | 635 | ||||||
| Selling, general and administrative | 977 | 918 | ||||||
| Operating expenses | 1,605 | 1,553 |
Operating expenses amounted to $1,605 million, or 36.8% of revenue in 2012 compared to $1,553 million, or 37.0% of revenue in 2011. The increase in 2012 was primarily related to increased restructuring and related costs of $36 million, bonus of $30 million, and stock based compensation of $20 million. This was partially offset by lower PPA effects of $21 million, reduced research and development expenses due to our ongoing efforts to focus our resources towards our most profitable and growing businesses, the absence of $11 million of operating expenses after selling our high speed data converter business during 2012 and favorable foreign currency effects.
In our HPMS segment operating expenses amounted to $1,238 million, or 37.7% of revenue in 2012 compared to $1,234 million or 42.5% of revenue in 2011. The increase was driven by higher salary and benefit cost including bonus of $27 million and stock based compensation of $18 million. This was partially offset by reduced research and development expenses due to our ongoing efforts to focus our resources towards our most profitable and growing businesses, the absence of $11 million of operating expenses after selling our high speed data converter business during 2012 and favorable foreign currency.
Operating expenses in our SP segment were $204 million, or 24.5% of revenue in 2012 compared to $197 million or 21.3% of revenue in 2011. The increase in operating expenses was mainly driven by increased headcount and benefit related expenses including bonus of $3 million and stock based compensation of $2 million, investments in product and process innovation, and higher restructuring and other items of $3 million. This was partially offset by lower consultancy cost and PPA effects.
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Operating expenses in our Manufacturing Operations segment amounted to $17 million in 2012 compared to $24 million in 2011 and were mainly related to PPA effects in both years.
Operating expenses in Corporate and Other were $146 million in 2012 compared to $98 million in 2011. The increase was primarily due to a restructuring charge of $62 million recognized during 2012 primarily to support the announced cost savings and restructuring initiative compared to $29 million recognized for restructuring initiatives in 2011.
Other Income (Expense)
The following table presents other income (expense) for the years ended December 31, 2012 and 2011.
| ($ in millions, unless otherwise stated) | 2012 | 2011 | ||||||
| Other income (expense) | 29 | 4 |
Other income (expense) reflects income of $29 million for 2012 compared to $4 million of income in 2011, primarily due to a gain of $19 million on the sale of our high speed data converter business during the third quarter of 2012 and the absence of $10 million loss on the sale of assets in 2011.
Restructuring Charges
Net restructuring and restructuring related costs that affected our operating income in 2012 were $111 million compared to $90 million in 2011.
In 2012, we had net restructuring charges of $99 million, recorded in the liabilities, which were mainly associated with a restructuring initiative during the fourth quarter of 2012, designed to improve operational efficiency and to competitively position the company for sustainable growth. In addition, we incurred $12 million of restructuring related costs in 2012 which were directly charged to our operating income. In 2011, we had restructuring charges of $66 million which were mainly related to the future closure of our ICN 4 wafer fabrication facility in Nijmegen, the Netherlands and actions to reduce headcount. These charges were partially offset by a release of restructuring liabilities of $8 million related to previous restructuring programs. Furthermore, we incurred $32 million of restructuring related costs in 2011 which were directly charged to our operating income. For additional information, see Note 14 to the Consolidated Financial Statements included in Part III, Item 18.
Operating Income (Loss)
The following table presents operating income (loss) by segment for the years ended December 31, 2012 and 2011.
| 2012 | 2011 | |||||||||||||||
| ($ in millions, unless otherwise stated) | Operating income (loss) | % of segment revenue | Operating income (loss) | % of segment revenue | ||||||||||||
| HPMS | 527 | 16.1 | 339 | 11.7 | ||||||||||||
| SP | 37 | 4.4 | 141 | 15.2 | ||||||||||||
| Manufacturing Operations | (36 | ) | (17.1 | ) | (60 | ) | (19.0 | ) | ||||||||
| Corporate and Other | (116 | ) | — | (63 | ) | — | ||||||||||
| Total | 412 | 9.5 | 357 | 8.5 |
The table below summarizes the PPA effects for the years ended December 31, 2012 and 2011 on operating income (loss) by segment.
| ($ in millions, unless otherwise stated) | 2012 | 2011 | ||||||
| HPMS | (198 | ) | (218 | ) | ||||
| SP | (52 | ) | (57 | ) | ||||
| Manufacturing Operations | (23 | ) | (26 | ) | ||||
| Total | (273 | ) | (301 | ) |
The table below depicts the PPA effects within the Statement of Operations for the years ended December 31, 2012 and 2011.
| ($ in millions) | For the years ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Gross profit | (20 | ) | (27 | ) | ||||
| Selling, general and administrative | (253 | ) | (274 | ) | ||||
| Operating income (loss) | (273 | ) | (301 | ) |
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“PPA effects” reflect the amortization in the period related to fair value adjustments resulting from acquisition accounting and other acquisition adjustments charged to the income statement applied to the formation of NXP on September 29, 2006 and all subsequent acquisitions. The PPA effect on the Company’s gross profit refers to additional depreciation charges on tangible fixed assets, resulting from the step-up in fair values. The amortization charges related to long-lived intangible assets are reflected in general and administrative expenses.
Financial Income (Expense)
| ($ in millions) | For the years ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Interest income | 4 | 5 | ||||||
| Interest expense | (270 | ) | (312 | ) | ||||
| Foreign exchange rate results | 28 | 128 | ||||||
| Net gain (loss) on extinguishment of debt | (161 | ) | (32 | ) | ||||
| Other | (38 | ) | (46 | ) | ||||
| Total | (437 | ) | (257 | ) |
Financial income (expense) (including the extinguishment of debt) was an expense of $437 million in 2012, compared to an expense of $257 million in 2011. Extinguishment of debt in 2012 amounted to a loss of $161 million compared to a loss of $32 million in 2011. In 2012, financial income (expense) included a gain of $28 million as a result of changes in foreign exchange rates mainly applicable to re-measurement of our U.S. dollar-denominated notes and short term loans, which reside in a euro functional currency entity, compared to a gain of $128 million in 2011. The net interest expense amounted to $266 million in 2012 compared to $307 million in 2011. This mainly related to lower average debt outstanding in 2012, compared to 2011.
Benefit (Provision) for Income Taxes
The provision for income taxes was $1 million for the year ended December 31, 2012, compared to $21 million for the year ended December 31, 2011, and the effective income tax rates were negative 4.0% and positive 21%, respectively. The change in the effective tax rate for the year ended December 31, 2012 compared to the same period in the previous year was primarily due to an increase in losses recorded in jurisdictions where a full valuation allowance was recognized and in addition the year 2012 included more benefits for the effect of tax incentives in certain jurisdictions.
Results Relating to Equity-accounted Investees
Results relating to the equity-accounted investees amounted to a loss of $27 million, compared to a loss of $77 million in 2011. The loss in 2012 primarily reflects extra provisions to the amount of $46 million for litigations, claims and proceedings which were offset by gains related to our investments in Trident, ASMC and ASEN. In 2011 the loss was mainly related to our investment in Trident.
Income (Loss) on Discontinued Operations
The income of discontinued operations, net of taxes was $1 million in 2012, compared to a gain of $434 million in 2011. This related entirely to the results of our Sound Solutions business, which was sold during 2011.
Non-controlling Interests
Non-controlling interests are related to the third party share in the results of consolidated companies, predominantly, SSMC. The share of non-controlling interests amounted to a profit of $63 million in 2012, compared to a profit of $46 million in 2011.
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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Results of Operations
The following table presents the composition of operating income (loss) for the years ended December 31, 2011 and 2010.
| ($ in millions, unless otherwise stated) | 2011 | 2010 | ||||||
| Revenue | 4,194 | 4,402 | ||||||
| % nominal growth | (4.7 | ) | 25.1 | |||||
| Gross profit | 1,906 | 1,823 | ||||||
| Research and development | (635 | ) | (568 | ) | ||||
| Selling, general and administrative (SG&A) | (918 | ) | (966 | ) | ||||
| Other income (expense) | 4 | (16 | ) | |||||
| Operating income (loss) | 357 | 273 |
Revenue
The following table presents revenue by segment for the years ended December 31, 2011 and 2010.
| ($ in millions, unless otherwise stated) | For the years ended December 31, | |||||||||||||||
| 2011 | 2010 | |||||||||||||||
| Revenue | % nominal growth | Revenue | % nominal growth | |||||||||||||
| High Performance Mixed Signal | 2,906 | 2.1 | 2,846 | 41.5 | ||||||||||||
| Standard Products | 925 | 9.1 | 848 | 49.6 | ||||||||||||
| Manufacturing Operations | 316 | (39.8 | ) | 525 | 62.0 | |||||||||||
| Corporate and Other | 47 | (65.4 | ) | 136 | (17.6 | ) | ||||||||||
| Divested Home Activities | — | — | 47 | — | ||||||||||||
| Total | 4,194 | (4.7 | ) | 4,402 | 25.1 |
Revenue was $4,194 million in 2011 compared to $4,402 million in 2010, a nominal decline of 4.7%. The decline in revenue was primarily due to lower revenues from Manufacturing Operations as contractual obligations to provide manufacturing services for previously divested businesses expired. Revenue from Corporate and Others, which we no longer treat as a separate segment (see “Reporting Segments” within Part I, Item 4A. History and Development of the Company) was also lower due to the divestment of the NuTune business in 2010 for which there was no corresponding revenue in 2011. Revenue for the NuTune business in 2010 amounted to $91 million. Furthermore, revenue in 2010 included $47 million related to our Divested Home Activities. This decline in revenue was partially offset by increased revenue from our two market oriented segments, HPMS and SP, which, on a combined basis, increased by $137 million or 3.7% in 2011 compared to 2010. This increase was led by our Identification business within HPMS and strong performance across our SP portfolio.
HPMS segment revenue was $2,906 million in 2011 compared to $2,846 million in 2010, an increase of 2.1% on a nominal basis. This increase was mainly driven by higher revenue in our Identification business and high-performance RF products. Partially offsetting these increases was lower revenue through the distribution channel, soft market conditions in the TV front end tuner business and the interface products business
SP segment revenue was $925 million in 2011, compared to $848 million in 2010, an increase of 9.1% on a nominal basis. The increase in revenue across the SP product portfolio was mainly within our General Application business. Revenue growth slowed in the fourth quarter of 2011 due to reduced demand resulting from uncertain economic situation.
Revenue of our segment Manufacturing Operations was $316 million in 2011 compared to $525 million in 2010. The decline in revenue was primarily due to the expiration of contractual obligations to provide manufacturing services for previously divested businesses. As these divested businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources is further declining.
Revenue within Corporate and Other in 2011 was $47 million compared to $136 million in 2010. The decline in revenue was due to the divestment of NuTune business in 2010 for which there was no corresponding revenue in 2011. Revenue for NuTune business in 2010 amounted to $91 million.
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Gross Profit
The following table presents gross profit by segment for segment for the years ended December 31, 2011 and 2010.
| 2011 | 2010 | |||||||||||||||
| ($ in millions, unless otherwise stated) | Gross Profit | % of segment revenue | Gross Profit | % of segment revenue | ||||||||||||
| HPMS | 1,573 | 54.1 | 1,525 | 53.6 | ||||||||||||
| SP | 336 | 36.3 | 280 | 33.0 | ||||||||||||
| Manufacturing Operations | (48 | ) | (15.2 | ) | (24 | ) | (4.6 | ) | ||||||||
| Corporate and Other | 45 | — | 26 | — | ||||||||||||
| Divested Home Activities | — | — | 16 | — | ||||||||||||
| Total | 1,906 | 45.4 | 1,823 | 41.4 |
Our gross profit increased to $1,906 million in 2011, or 45.4% of our revenue, from $1,823 million in 2010, or 41.4% of our revenue. Our gross profit as a percentage of our revenue was impacted by the dilutive effect of product sales at cost to divested businesses by our Manufacturing Operations. The increase in gross profit in 2011 was largely due to higher revenues in HPMS and SP, better product mix, cost efficiencies and lower process and product transfer costs of $14 million. Partially offsetting these increases were higher costs associated with our restructuring initiatives of $25 million.
HPMS segment gross profit in 2011 was $1,573 million, or 54.1% of revenue, compared to $1,525 million in 2010, or 53.6% of revenue. The improvement in gross margin in 2011 resulted primarily from higher-margin product mix, as compared to 2010, partially offset by higher restructuring and related costs of $25 million.
SP segment gross profit in 2011 was $336 million, or 36.3% of revenue, compared to $280 million in 2010, or 33.0% of revenue. The increase in gross profit was mainly due to higher revenues supported by favorable prices.
Operating Expenses
The following table presents operating expenses by segment for the years ended December 31, 2011 and 2010.
| 2011 | 2010 | |||||||||||||||
| ($ in millions, unless otherwise stated) | Operating expenses | % of segment revenue | Operating expenses | % of segment revenue | ||||||||||||
| HPMS | 1,234 | 42.5 | 1,133 | 39.8 | ||||||||||||
| SP | 197 | 21.3 | 192 | 22.6 | ||||||||||||
| Manufacturing Operations | 24 | 7.6 | 37 | 7.0 | ||||||||||||
| Corporate and Other | 98 | — | 154 | — | ||||||||||||
| Divested Home Activities | — | — | 18 | — | ||||||||||||
| Total | 1,553 | 37.0 | 1,534 | 34.8 |
The following table below presents the composition of operating expenses by line item in the statement of operations.
| ($ in millions, unless otherwise stated) | 2011 | 2010 | ||||||
| Research and development | 635 | 568 | ||||||
| Selling, general and administrative | 918 | 966 | ||||||
| Operating expenses | 1,553 | 1,534 |
Operating expenses were $1,553 million in 2011, or 37.0% of revenue, compared to $1,534 million in 2010, or 34.8% of revenue. The increase in 2011 was primarily due to investments in HPMS applications in research and development and selling activities for our Identification business and higher restructuring and related costs of $40 million. This was partially offset by lower divestment and acquisition related costs of $24 million, lower annual performance based incentive costs and lower PPA effects of $7 million.
HPMS segment operating expenses amounted to $1,234 million in 2011, or 42.5% of revenue, compared to $1,133 million in 2010, or 39.8% of revenue. The increase in operating expenses was mainly due to the additional investments in research and development activities and increased selling expenses in our Identification business. Operating expenses in 2011 also included costs related to actions taken for headcount reductions partially offset by lower PPA effects of $9 million.
SP segment operating expenses amounted to $197 million in 2011, or 21.3% of revenue, compared to $192 million in 2010, or 22.6% of revenue. The increase in operating expenses was mainly driven by increased research and development expenses.
Operating expenses in our Manufacturing Operations segment amounted to $24 million in 2011 compared to $37 million in 2010. The decline was primarily due to lower costs related to process technology development.
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Operating expenses within Corporate and Other amounted to $98 million in 2011 compared to $154 million in 2010. The decline was primarily due to lower annual performance based incentive costs and lower divestments and acquisition related costs of $24 million.
Other Income (Expense)
The following table presents other income (expense) for the years ended December 31, 2011 and 2010.
| ($ in millions, unless otherwise stated) | 2011 | 2010 | ||||||
| Other income (expense) | 4 | (16 | ) |
Other income and expense was a gain of $4 million in 2011, compared to a loss of $16 million in 2010. Included are incidental items, amounting to an aggregate cost of $13 million in 2011, compared to $19 million in 2010. The gains resulting from various transactions in 2011 were partially offset by the loss on sale of various tangible fixed assets. The loss in 2010 was mainly related to the divestment of a major portion of our former Home segment, partially offset by gains on sale of certain tangible fixed assets.
Restructuring Charges
In 2011, we incurred restructuring charges of $66 million which were mainly related to the future closure of the ICN 4 wafer fabrication facility in Nijmegen, the Netherlands and actions to reduce headcount. These charges were partially offset by a release of restructuring liabilities of $8 million related to previous restructuring initiatives. Furthermore, we incurred $32 million of restructuring related costs in 2011 which were directly charged to our operating income. In 2010, we had restructuring charges of $7 million mainly related to the divestment of a major portion of our former Home segment. These charges were more than offset by a release of restructuring liabilities of $40 million related to previous restructuring initiatives. In addition, we incurred $53 million of restructuring related costs in 2010 (excluding product transfer cost charged to cost of sales) which were directly charged to operating income.
Net restructuring and restructuring related costs that affected our operating income in 2011 were $90 million compared to $20 million in 2010.
Operating Income (Loss)
The following table presents operating income (loss) by segment for the years ended December 31, 2011 and 2010.
| 2011 | 2010 | |||||||||||||||
| ($ in millions, unless otherwise stated) | Operating income (loss) | % of segment revenue | Operating income (loss) | % of segment revenue | ||||||||||||
| HPMS | 339 | 11.7 | 387 | 13.6 | ||||||||||||
| SP | 141 | 15.2 | 91 | 10.7 | ||||||||||||
| Manufacturing Operations | (60 | ) | (19.0 | ) | (57 | ) | (10.9 | ) | ||||||||
| Corporate and Other | (63 | ) | — | (117 | ) | - | ||||||||||
| Divested Home Activities | — | — | (31 | ) | (66.0 | ) | ||||||||||
| Total | 357 | 8.5 | 273 | 6.2 |
The table below summarizes the PPA effects for the years ended December 31, 2011 and 2010 on operating income (loss) by segment.
| ($ in millions, unless otherwise stated) | 2011 | 2010 | ||||||
| HPMS | (218 | ) | (222 | ) | ||||
| SP | (57 | ) | (54 | ) | ||||
| Manufacturing Operations | (26 | ) | (25 | ) | ||||
| Corporate and Other | — | (1 | ) | |||||
| Total | (301 | ) | (302 | ) |
The table below depicts the PPA effects within the Statement of Operations for the years ended December 31, 2011 and 2010.
| ($ in millions) | For the years ended December 31, | |||||||
| 2011 | 2010 | |||||||
| Gross profit | (27 | ) | (21 | ) | ||||
| Selling, general and administrative | (274 | ) | (281 | ) | ||||
| Operating income (loss) | (301 | ) | (302 | ) |
“PPA effects” reflect the amortization in the period related to fair value adjustments resulting from acquisition accounting and other acquisition adjustments charged to the income statement applied to the formation of NXP on September 29, 2006 and all subsequent acquisitions. The PPA effect on the Company’s gross profit refers to additional depreciation charges on tangible fixed assets, resulting from the step-up in fair values. The amortization charges related to long-lived intangible assets are reflected in general and administrative expenses.
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Financial Income (Expense)
| ($ in millions) | For the years ended December 31, | |||||||
| 2011 | 2010 | |||||||
| Interest income | 5 | 2 | ||||||
| Interest expense | (312 | ) | (320 | ) | ||||
| Foreign exchange rate results | 128 | (331 | ) | |||||
| Net gain (loss) on extinguishment of debt | (32 | ) | 57 | |||||
| Other | (46 | ) | (36 | ) | ||||
| Total | (257 | ) | (628 | ) |
Financial income (expense) (including the extinguishment of debt) was a net expense of $257 million in 2011, compared to a net expense of $628 million in 2010. In 2011, financial income (expense) included a gain of $128 million as a result of changes in foreign exchange rates mainly applicable to remeasurement of our U.S. dollar-denominated notes and short-term loans, which reside in a euro functional currency entity, compared to a loss of $331 million in 2010. Extinguishment of debt in 2011 amounted to a loss of $32 million compared to a gain of $57 million in 2010. The net interest expense amounted to $307 million in 2011 compared to $318 million in 2010. The reduction in net interest costs was related to lower gross debt during 2011, compared to gross debt as at end of 2010.
Benefit (Provision) for Income Taxes
The provision for income taxes was $21 million for the year ended December 31, 2011, compared to $24 million for the year ended December 31, 2010, and the effective income tax rates were 21.0% and negative 6.8% respectively. The change in the effective tax rate for the year ended December 31, 2011 compared to the same period in the previous year was primarily due to a decrease in losses recorded in jurisdictions where a full valuation allowance was recognized. The effective tax rate for the year ended December 31, 2011, also included a benefit from a reversal of a provision and a decrease in unrecognized tax benefits.
Results Relating to Equity-accounted Investees
Results relating to the equity-accounted investees amounted to a loss of $77 million in 2011, compared to a loss of $86 million in 2010. The loss in 2011 and 2010 was mainly related to our investment in Trident.
Income (Loss) on Discontinued Operations
The income on discontinued operations, net of taxes was $434 million in 2011 compared to $59 million in 2010. This related entirely to the results of our Sound Solutions business, which was sold during 2011.
Non-controlling Interests
The share of non-controlling interests was a profit of $46 million in 2011, compared to a profit of $50 million 2010. This was related to the third-party share in the results of consolidated companies, predominantly SSMC.
B. Liquidity and Capital Resources
Liquidity and Capital Resources
At the end of 2012 our cash balance was $617 million. Taking into account the available undrawn amount of the Secured Revolving Credit Facility, we had access to $1,197 million of liquidity as of December 31, 2012.
We started 2012 with a cash balance of $743 million and during the year our cash decreased by $126 million.
Capital expenditures were $251 million in 2012, approximately in line with our guidance of 5% of revenues over the semiconductors business cycle, compared to $221 million in 2011.
On a going-forward basis we expect our capital expenditures to be approximately 5% of revenues.
Since December 31, 2011, the book value of our total debt has been reduced from $3,799 million to $3,492 million as of December 31, 2012.
Several cash buybacks and debt redemptions partially offset by the entry into new term loans resulted in a total debt reduction of $307 million.
The total amount of cash used for financing activities amounted to $574 million.
At the end of 2012, we had a capacity of $580 million remaining under our Secured Revolving Credit Facility, net of
outstanding bank guarantees, based on the end of year exchange rate. However, the amount of this availability varies with fluctuations between the euro and the U.S. dollar as the total amount of the facility, €620 million, is denominated in euro and the amounts drawn are denominated in U.S. dollars.
For the year ended December 31, 2012, we incurred total net interest expense of $266 million and the weighted average interest rate on our debt instruments as of the end of December 2012 was 5.4% compared to $307 million and 7.4% respectively in 2011.
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As of December 31, 2012, our cash balance was $617 million, of which $288 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. In 2012, a dividend of $100 million was distributed, of which $39 million was paid to the joint venture partner.
The Company’s cash balance is subject to certain restrictions in select countries that cannot be repatriated. The amount of cash that cannot be repatriated is inconsequential to our total liquidity.
We repurchased $40 million of our common stock pursuant to our share buyback program during 2012.
Our sources of liquidity include cash on hand, cash flow from operations and amounts available under the Secured Revolving Credit Facility. We believe that, based on our current level of operations as reflected in our results of operations for the year ended December 31, 2012, these sources of liquidity will be sufficient to fund our operations, capital expenditures, and debt service for at least the next twelve months.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions. In the future, we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness. Our business may not generate sufficient cash flow from operations, or we may not have enough capacity under our Secured Revolving Credit Facility, or from other sources in an amount sufficient to enable us to repay our indebtedness, including the Secured Revolving Credit Facility, the Term Loans, the Secured Notes and the Unsecured Notes or to fund our other liquidity needs, including working capital and capital expenditure requirements. In any such case, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. See Part I, Item 3D. Risk Factors.
Cash Flow from Operating Activities
In 2012, we generated $722 million of cash from operating activities compared to $175 million in 2011. The operating cash flows are directly impacted by the net loss of $52 million (2011: a gain of $2 million). The net loss includes non-cash items such as depreciation and amortization of $533 million (2011: $591 million) and the decrease in operating assets and liabilities of $28 million (2011: increase of $458 million).
Furthermore, the net loss includes losses related to equity-accounted investees of $27 million (2011: $77 million), losses related to stock-based compensation of $52 million (2011: $31 million), losses related to extinguishment of debt of $161 million (2011: $32 million) and other losses of $22 million (2011: $18 million).
Furthermore, the net loss includes gains on sale of assets of $20 million (2011: a loss of $10 million) and a gain related to exchange differences of $28 million (2011: $128 million).
In 2011, we generated $175 million of cash from operating activities. This was mainly driven by an increase in working capital needs for inventories and receivables and accounts payable.
In 2010, we had a positive cash inflow of $361 million from operating activities mainly driven by our operational performance in the year through higher revenues and cost savings as a result of our Redesign Program.
Cash Flow from Investing Activities
Net cash used for investing activities amounted to $243 million in 2012, compared to net cash used of $202 million in 2011. Our capital expenditures increased to $251 million in 2012 compared to $221 million in 2011.
Net cash used for investing activities in 2012 also included $29 million for the purchase of identified intangible assets, mainly related to the purchase of software, proceeds from sale of interests in our data converters business of $26 million and $12 million of proceeds related to the partial recovery of our equity investments in Trident.
Net cash used for investing activities in 2011 was $202 million and included $11 million of proceeds from the disposal of assets held for sale, related to the sale of our Southampton assets, and proceeds from the disposal of property, plant and equipment of $15 million, mainly related to the sale of our San José buildings.
Net cash used for investing activities in 2010 was $269 million. Included are gross capital expenditures of $258 million, proceeds from the sale of property, plant and equipment of $31 million and $8 million from the disposal of assets held for sale. The cash payments related to the sale of our businesses in 2010 (Trident and NuTune) amounted to $60 million. Due to the acquisition of Virage Logic by Synopsis in 2010 we sold our shares to Virage Logic for a consideration of $25 million in 2010.
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Cash Flow from Financing Activities
Net cash used for financing activities in 2012 was $574 million compared to $926 million in 2011. Cash flows related to financing transactions in 2012 and 2011 are primarily related to the financing activities described below under the captions 2012 Financing Activities and 2011 Financing Activities, respectively_._ In addition to the financing activities described below, net cash used for financing activities in 2012 also includes the use of $40 million for dividends paid to non-controlling interests and $40 million used for the purchase of treasury shares partially offset by $14 million of proceeds from the exercise of stock options. The 2011 period also reflects the use of $67 million to pay dividends to non-controlling interests and $57 million used for the purchase of treasury shares partially offset by $10 million of proceeds from the exercise of stock options.
Net cash used for financing activities in 2011 was $926 million compared to $157 million in 2010. Cash flows related to financing transactions in 2012 and 2011 are primarily related to the financing activities described below under the captions 2011 Financing Activities and 2010 Financing Activities, respectively_._ The 2011 period also reflects the use of $67 million to pay dividends to non-controlling interests and $57 million used for the purchase of treasury shares partially offset by $10 million of proceeds from the exercise of stock options.
2012 Financing Activities
2019 Term Loan
On February 16, 2012, our subsidiary, NXP B.V. together with NXP Funding LLC entered into a new $475 million aggregate principal amount Senior Secured Term Loan Facility due March 19, 2019. The Term Loan was issued with an original issue discount at 98.5% of par and was recorded at its fair value of $468 million on the accompanying Interim Consolidated Balance Sheet. The net proceeds of this issuance, together with a $330 million draw-down under our existing Revolving Credit Facility and approximately $52 million of cash on hand, were used to redeem $510 million of the U.S. dollar-denominated 9 1/2% Senior Notes due October 2015, €203 million of the euro-denominated 8 5/8% Senior Notes due October 2015, and pay related call premiums of $36 million and accrued interest of $31 million.
2017 Revolving Credit Facility
On April 27, 2012, NXP B.V. and NXP Funding LLC concluded a new Senior Secured Revolving Credit Agreement (“RCA”) under which it borrowed $330 million to settle and close its existing Revolving Credit Facility. It subsequently reduced its outstanding drawings to $230 million as of December 31, 2012.
On October 24, 2012, NXP B.V. and NXP Funding LLC agreed with certain participating banks to increase the borrowing capacity under the RCA subject to an effective date of October 29, 2012. The borrowing capacity under the RCA was increased by €120 million (approximately $155 million) up to a total amount of €620 million ($818 million). The RCA will expire on March 1, 2017 and will be used for general corporate purposes.
2013 Super Priority Notes
During 2012, NXP B.V. and NXP Funding LLC redeemed all Euro denominated Super Priority Notes 2013 for a principal amount of €29 million and all USD denominated Super Priority Notes 2013 for a principal amount of $221 million.
2020 Term Loan
On December 10, 2012, our subsidiary, NXP B.V. together with NXP Funding LLC entered into a new $500 million aggregate principal amount Senior Secured Term Loan Facility due January 11, 2020. The Term Loan was issued with an original issue discount at 99.5% of par and was recorded at its fair value of $498 million on the accompanying Consolidated Balance Sheet. The net proceeds of this issuance, together with a $100 million draw-down under our existing Revolving Credit Facility and approximately $12 million of cash on hand, were used to settle our tender offer for $500 million of the U.S. dollar-denominated 9 3/4% Senior Notes due 2018, and pay related call premiums of $86 million, accrued interest of $18 million and debt issuance costs of $6 million.
2011 Financing Activities
2016 Floating Rate Notes
During the fourth quarter 2011, NXP, in a two-step private exchange transaction, issued an additional $615 million principal amount of U.S. dollar-denominated senior secured floating rate notes due 2016. These notes were exchanged for $333 million principal amount of existing U.S. dollar-denominated floating rate notes due 2013 and €202 million principal amount of existing euro-denominated floating rate notes due 2013.
2017 Term Loans
On March 4, 2011, our subsidiary, NXP B.V. together with NXP Funding LLC entered into a $500 million aggregate principal amount Senior Secured Term Loan Facility due April 3, 2017, which was drawn in the second quarter of 2011, on April 5, 2011. The First 2017 Term Loan was issued with an original issue discount at 99.5% of par and was recorded at its fair value of $497 million on the accompanying Consolidated Balance Sheet. The net proceeds of this issuance, together with available borrowing capacity under the Secured Revolving Credit Facility of $200 million, were used to redeem all $362 million of outstanding 2014 Dollar Fixed Rate Notes, $100 million of 2013 Dollar Floating Rate Secured Notes and €143 million of 2013 Euro Floating Rate Secured Notes as well as pay related call premiums of $14 million and accrued interest of $16 million.
During the fourth quarter 2011, NXP entered into a second $500 million Senior Secured Term Loan Facility due 2017. The Second 2017 Term Loan was issued with an original issue discount at 96% of par and was recorded at its fair value of $480 million on the
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accompanying Consolidated Balance sheet. NXP redeemed $275 million of its U.S. dollar-denominated Senior Secured Floating Rate Notes due 2013 and €150 million of its Euro-denominated Senior Secured Floating Rate Notes due 2013.
2012 Revolving Credit Facility
In the third quarter of 2011, the utilized borrow capacity of $600 million under the Secured Revolving Credit Facility was repaid, mainly from the proceeds of $855 million related to the divestment of NXP’s Sound Solutions business.
Senior Notes 2015/2018
In the third quarter of 2011, as a result of various open market transactions we repurchased €32 million principal amount of Euro denominated Senior Notes due in 2015, $96 million principal amount of US dollar denominated Senior Notes due in 2015 and $78 million principal amount of US dollar denominated Senior Secured Notes due in 2018.
The net cash used for financing activities in 2010 amounted to $157 million. Cash used for financing activities mainly consisted of the buyback of $1,383 million of our debt in the market and the repayment of $200 million on our revolving credit facility. Cash provided by financing activities mainly consisted of $448 million proceeds through the initial public offering of the Company’s stock and the issuance of a new long-term bond of $1,000 million due in 2018 with net cash proceeds of $974 million.
2010 Financing Activities
Senior Secured Notes, due 2018 and Initial Public Offering
In 2010 we issued $1,000 million principal amount of U.S. dollar-denominated 9 3/4% Senior Notes due October 2018 and received net cash proceeds of $974 million. In addition, in 2010, we completed an initial public offering of the Company on the NASDAQ Global Select Market and raised $448 million of net proceeds. These funds, together with cash on hand were used to retire $1,383 million of our debt and to pay $200 million on our Secured Revolving Credit Facility. The debt repayments consists of €206 million principal amount of Euro-denominated Floating Rate Senior Secured Notes due in 2013, €61 million principal amount of Euro-denominated 8 5/8 % Senior Notes due in 2015, $483 million principal amount of U.S. dollar-denominated 7 7/8% Senior Secured Notes due in 2014, $435 million principal amount of U.S. dollar-denominated Floating Rate Senior Secured Notes due in 2013 and $183 million principal amount of U.S. dollar-denominated 9 1/2 % Senior Notes due in 2015.
Forward Start Revolving Credit Facility
On May 10, 2010, we entered into a €458 million forward start revolving credit facility to refinance our existing secured revolving credit facility. This facility would have become available to NXP on September 28, 2012. On April 27, 2012 NXP concluded the RCA, which settled and closed the existing Revolving Credit Facility.
Cash Flow from Discontinued Operations
Net cash used for discontinued operations in 2012 was $45 million reflecting a payment of $45 million to Dover Corporation related to outstanding commitments on the sale of the Sound Solution business.
On July 4, 2011, we executed an agreement with Dover Corporation pursuant to which Dover Corporation’s Knowles Electronics business acquired our Sound Solutions business. The divestiture of our Sound Solutions business resulted in net cash provided by investing activities from discontinued operations of $791 million in 2011.
Debt Position
Short-term Debt
In 2012, our short-term debt of $307 million included other short-term bank borrowings of $36 million, related to a local bank loan in China, and the current portion of our Senior Secured notes due 2013 of $245 million which is due within one year and is classified within short-term debt.
In 2011, short-term debt of $52 million consisted of other short-term bank borrowings of $35 million, related to a local bank loan in China and $17 million related to the current portion of long-term debt.
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Long-term Debt
As of December 31, 2012, the euro-denominated notes and U.S. dollar-denominated notes represented 6% and 94% respectively of the total principal amount of the notes outstanding. The fixed rate notes and floating rate notes represented 13% and 87% respectively of the total principal amount of the notes outstanding at December 31, 2012.
| ($ in millions) | December 31, 2011 | Currency Effects | Accrual of Debt Discount | Debt Exchanges/ Repurchases/New Borrowings | Other(8) | December 31, 2012 | ||||||||||||||||||
| Euro-denominated 10% super priority notes due July 2013(1) | 29 | (1 | ) | 3 | (31 | ) | — | |||||||||||||||||
| U.S. dollar-denominated 10% super priority notes due July 2013 | 193 | 12 | (205 | ) | — | |||||||||||||||||||
| Euro-denominated floating rate senior secured notes due October 2013(1)(2) | 184 | 3 | (187 | ) | — | |||||||||||||||||||
| U.S. dollar-denominated floating rate senior secured notes due October 2013(2) | 58 | (58 | ) | — | ||||||||||||||||||||
| Euro-denominated 8 5/8% senior notes due October 2015(1) | 263 | 6 | (269 | ) | — | |||||||||||||||||||
| U.S. dollar-denominated 9 1/2% senior notes due October 2015 | 510 | (510 | ) | — | ||||||||||||||||||||
| U.S. dollar-denominated floating senior secured notes due November 2016 (3) | 606 | 2 | 608 | |||||||||||||||||||||
| U.S. dollar-denominated secured term credit agreement due April 2017 (4) | 489 | 1 | (5 | ) | 485 | |||||||||||||||||||
| U.S. dollar-denominated secured term credit agreement due April 2017 (5) | 474 | 3 | (5 | ) | 472 | |||||||||||||||||||
| U.S. dollar-denominated 9 3/4% senior secured notes due August 2018 | 922 | (500 | ) | 422 | ||||||||||||||||||||
| U.S. dollar-denominated secured term credit agreement due March 2019 (6) | — | 1 | 464 | (5 | ) | 460 | ||||||||||||||||||
| U.S. dollar-denominated secured term credit agreement due April 2020 (7) | — | 498 | (5 | ) | 493 | |||||||||||||||||||
| 3,728 | 8 | 22 | (563 | ) | (255 | ) | 2,940 | |||||||||||||||||
| Revolving Credit Facility | — | 230 | 230 | |||||||||||||||||||||
| Other long-term debt | 19 | (5 | ) | 1 | 15 | |||||||||||||||||||
| Total long-term debt | 3,747 | 8 | 22 | (338 | ) | (254 | ) | 3,185 |
| (1) | Converted into U.S. dollars at $1.3190 per €1.00, the exchange rate in effect at December 31, 2012. |
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| (2) | Interest accrues at a rate of three-month EURIBOR plus 2.75%. |
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| (3) | Interest accrues at a rate of LIBOR plus 5.50%. |
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| (4) | On March 4, 2011, we entered into the First 2017 Term Loan for an initial $500 million at a rate of interest of LIBOR plus 3.25% with a floor of 1.25%. |
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| (5) | On November 18, 2011, we entered into the Second 2017 Term Loan for a second tranche of $500 million at a rate of interest of LIBOR plus 4.25% with a floor of 1.25%. |
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| (6) | On February 16, 2012 we entered into the 2019 Term Loan for an initial $475 million at a rate of interest of LIBOR plus 4% with a floor of 1.25%. |
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| (7) | On December 10, 2012, we entered into the 2020 Term Loan for an initial $500 million at a rate of interest of LIBOR plus 3.5% with a floor of 1.25%. |
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| (8) | Other mainly includes the reclassification of the current portion of long-term debt. |
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On February 1, 2013, we announced the pricing of a private offering to institutional investors of $500 million aggregate principal amount of U.S. dollar-denominated 5.75% senior notes due 2021 by our wholly-owned subsidiaries NXP B.V. and NXP Funding LLC. This offering closed on February 14, 2013. We will use the net proceeds of this private offering to repay amounts outstanding under our Second 2017 Term Loan.
We may from time to time continue to seek to retire or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. See the discussion in the “Recent Developments” section in Part I, Item 5A. Operating Results and Part II, Item 10C. Material Contracts.
Certain Terms and Covenants of the Notes
We are not required to make mandatory redemption payments or sinking fund payments with respect to the Secured Notes.
The Indentures governing the Existing Secured Notes contain covenants that, among other things, limit our ability and that of our restricted subsidiaries to incur additional indebtedness, create liens, pay dividends, redeem capital stock, make certain other restricted payments or investments, enter into agreements that restrict dividends from restricted subsidiaries, sell assets, including capital stock of restricted subsidiaries, engage in transactions with affiliates, and effect a consolidation or merger. As of December 31, 2012, and as of the date of filing of this Annual Report on Form 20-F, we are in compliance with our restrictive covenants contained in the Indentures.
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The Term Loans and the Secured Notes are fully and unconditionally guaranteed jointly and severally, on a senior basis by certain of our current and future material wholly owned subsidiaries.
Pursuant to various security documents related to the Term Loans, the Secured Notes and the Secured Revolving Credit Facility, we have granted first priority liens and security interests over substantially all of our assets, including the assets of our material wholly owned subsidiaries.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with U.S. GAAP requires our management to make judgments, assumptions and estimates that affect the amounts reported in our Consolidated Financial Statements and the accompanying Notes. Our management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies where management believes the nature of the estimates or assumptions involved is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change are as follows: Inventories, Goodwill, Impairment or disposal of identified intangible assets and tangible fixed assets, Revenue recognition, Income taxes, Postretirement benefits and Share-based compensation.
If actual results differ significantly from management’s estimates, there could be a material adverse effect on our results of operations, financial condition and liquidity.
C. Research and Development, Patents and Licenses, etc.
Research and Development
We believe that our future success depends on our ability to both improve our existing products and to develop new products for both existing and new markets. We direct our research and development efforts largely to the development of new High Performance Mixed Signal semiconductor solutions where we see significant opportunities for growth. We target applications that require stringent overall system and subsystem performance. As new and challenging applications proliferate, we believe that many of these applications will benefit from our solutions. We have assembled a team of highly skilled semiconductor and embedded software design engineers with expertise in RF, analog, power management, interface, security and digital processing. As of December 31, 2012, we had approximately 3,500 employees in research and development, of which approximately 3,200 support our High Performance Mixed Signal businesses and approximately 300 support our Standard Products businesses. Our engineering design teams are located in India (Bangalore), China (Shanghai, Beijing), the United States (San Jose, Tempe), France (Caen, Suresnes), Germany (Hamburg, Dresden), Austria (Gratkorn), the Netherlands (Nijmegen, Eindhoven), Hong Kong, Singapore, the United Kingdom (Manchester, Sheffield), Switzerland (Zurich) and Belgium (Leuven). Our research and development expenses were $628 million in 2012 (of which 86% related to our High Performance Mixed Signal businesses), $635 million in 2011 and $568 million in 2010.
To outpace market growth we invest in research and development to extend or create leading market positions, with an emphasis on fast growing sizable market segments, such as identification and smart mobile, and emerging segments, such as the Internet of Things, automotive telematics and automotive solid state lighting. Finally, we invest around 4% of our total research and development expenditures in research activities that develop fundamental new technologies or product categories that could contribute significantly to our company growth in the future.
We annually perform a fundamental review of our business portfolio and our related new product and technology development opportunities in order to decide on changes in the allocation of our research and development resources. For products targeting established markets, we evaluate our research and development expenditures based on clear business need and risk assessments. For break-through technologies and new market opportunities, we look at the strategic fit and synergies with the rest of our portfolio and the size of the potential addressable market. Overall, we allocate our research and development to maintain a healthy mix of emerging growth and mature businesses.
Intellectual Property
The creation and use of intellectual property is a key aspect of our strategy to differentiate ourselves in the marketplace. We seek to protect our proprietary technologies by obtaining patents, retaining trade secrets and defending, enforcing and utilizing our intellectual property rights, where appropriate. We believe this strategy allows us to preserve the advantages of our products and technologies, and helps us to improve the return on our investment in research and development. Our portfolio of approximately 10,000 patents and patent applications, as well as our royalty-free licenses to patents held by Philips, give us the benefit of one of the largest patent portfolio positions in the High Performance Mixed Signal and Standard Products markets. To protect confidential technical information that is not subject to patent protection, we rely on trade secret law and frequently enter into confidentiality agreements with our employees, customers, suppliers and partners. In situations where we believe that a third party has infringed on our intellectual property, we enforce our rights through all available legal means to the extent that we determine the benefits of such actions to outweigh any costs involved.
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We have engaged in licensing, selling and other activities aimed at generating income and other benefits from our intellectual property assets. We believe that there is an opportunity to generate additional income and other benefits from our intellectual property assets. This is a process that will take time before meaningful benefits can be reaped but the program has been further developed and is well underway.
While our patents and trade secrets constitute valuable assets, we do not view any one of them as being material to our operations as a whole. Instead, we believe it is the combination of our patents and trade secrets that creates an advantage for our business.
In addition to our own patents and trade secrets, we have entered into licensing, broad-scope cross licensing and other agreements authorizing us to use patents, trade secrets, confidential technical information, software and related technology owned by third parties and/or operate within the scope of patents owned by third parties. We are party to process technology partnerships, such as our collaboration with the Interuniversitair Microelektronica Centrum VZW, through which we jointly develop complex semiconductor-related process technology. We also maintain research partnerships with universities across the world, particularly in Europe, China, Singapore and India.
We own a number of trademarks and, where we consider it desirable, we develop names for our new products and secure trademark protection for them.
D. Trend Information
We focus our business development efforts on what we believe to be the fastest-growing product opportunities and geographic markets.
We address four key macro growth trends in electronics: security, mobility and connected mobile devices, energy efficiency and healthcare. Many new forms of mobile electronic payment, authentication and cyber security are enabled by our secure microcontrollers. Growth of smart phones and tablets drive demand for interface solutions. Our new high-performance RF power amplifier products allow wireless network operators to expand network capacity with fewer base stations. Our innovative magnetic induction radio enables wireless connectivity with implantable medical devices such as hearing aids. Recent development activities targeting the need for greater energy efficiency include our LED lighting products and “green chip” high-efficiency AC-DC power conversion ICs for notebook adaptors.
We believe that we are strategically positioned to capture rapid growth in emerging markets through our strong position in Asia Pacific (excluding Japan), which represented 62% of our revenue in 2012, compared to 57% of our revenue in 2011. In particular, Greater China represented 41% of our revenue in 2012, compared to 38% of our revenue in 2011.
E. Off-balance Sheet Arrangements
As of December 31, 2012, we had no off-balance sheet arrangements.
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F. Tabular Disclosure of Contractual Obligations
Presented below is a summary of our contractual obligations as at December 31, 2012
| ($ in millions) | Total | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 and thereafter | |||||||||||||||||||||
| Long-term debt | 3,440 | 265 | 21 | 23 | 628 | (1) | 1,167 | (2) | 1,336 | (3) | ||||||||||||||||||
| Capital lease obligations | 18 | 7 | 7 | 2 | 1 | 1 | — | |||||||||||||||||||||
| Short-term debt | 36 | 36 | — | — | — | — | — | |||||||||||||||||||||
| Operating leases | 153 | 30 | 29 | 27 | 18 | 12 | 37 | |||||||||||||||||||||
| Interest on the notes (4) | 923 | 189 | 181 | 180 | 180 | 97 | 96 | |||||||||||||||||||||
| Long-term purchase contracts | 115 | 82 | 21 | 8 | 2 | 2 | — | |||||||||||||||||||||
| Total contractual cash obligations (4)(5) | 4,685 | 609 | 259 | 240 | 829 | 1,279 | 1,469 |
| (1) | On November 10, 2011, we entered into a new senior secured indenture under which we issued a total of $616 million floating rate senior secured notes due 2016. |
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| (2) | On March 4, 2011, we entered into the First 2017 Term Loan, for an initial $500 million and on November 18, 2011, we entered into the Second 2017 Term Loan for a second tranche of $500 million. |
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| (3) | On February 16, 2012 we entered into the 2019 Term Loan for an initial $475 million at a rate of interest of LIBOR plus 4% with a floor of 1.25% and on December 10, 2012, we entered into the 2020 Term Loan for an initial $500 million at a rate of interest of LIBOR plus 3.5% with a floor of 1.25%. |
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| (4) | The interest on the notes was determined on the basis of LIBOR and EURIBOR interest rates for floating rate instruments and on the basis of contractual agreed interest rates for other debt instruments. The euro-denominated interest amounts were converted into U.S. dollars based on the balance sheet rate as at December 31, 2012 of $1,3190 per €1.00. |
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| (5) | Certain of these obligations are denominated in currencies other than U.S. dollars, and have been translated from foreign currencies into U.S. dollars based on an aggregate average rate of $1.2887 per €1.00, in effect at December 31, 2012. As a result, the actual payments will vary based on any change in exchange rate. |
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As of December 31, 2012, accrued interest on debt amounted to $25 million.
Certain contingent contractual obligations, which are not reflected in the table above, include contractual agreements, such as supply agreements, containing provisions that certain penalties may be charged if we do not fulfill our commitments.
We sponsor pension plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. These are defined-benefit pension plans, defined contribution pension plans and multi-employer plans. Contributions to funded pension plans are made as necessary, to provide sufficient assets to meet future benefits payable to plan participants. These contributions are determined by various factors, including funded status, legal and tax considerations and local customs. We currently estimate contributions to funded pension plans will be $75 million in 2013, consisting of $4 million in employer contributions to defined-benefit pension plans and $71 million in employer contributions to defined-contribution pension plans and multi-employer plans. The expected cash outflows in 2013 and subsequent years are uncertain and may change as a consequence of statutory funding requirements as well as changes in actual versus currently assumed discount rates, estimations of compensation increases and returns on pension plan assets.
G. Safe Harbor
This Annual Report includes forward-looking statements. When used in this Annual Report, the words “anticipate”, “believe”, “estimate”, “forecast”, “expect”, “intend”, “plan” and “project” and similar expressions, as they relate to us, our management or third parties, identify forward-looking statements. Forward-looking statements include statements regarding our business strategy, financial condition, results of operations and market data, as well as any other statements that are not historical facts. These statements reflect beliefs of our management, as well as assumptions made by our management and information currently available to us. Although we believe that these beliefs and assumptions are reasonable, these statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf and include, in addition to those listed under Part I, Item 3D. Risk Factors and elsewhere in this Report, the following:
| • | market demand and semiconductor industry conditions; |
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| • | our ability to successfully introduce new technologies and products; |
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| • | the demand for the goods into which our products are incorporated; |
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| • | our ability to generate sufficient cash, raise sufficient capital or refinance our debt at or before maturity to meet both our debt service and research and development and capital investment requirements; |
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| • | our ability to accurately estimate demand and match our production capacity accordingly; |
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| • | our ability to obtain supplies from third-party producers; |
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| • | our access to production from third-party outsourcing partners, and any events that might affect their business or our relationship with them; |
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| • | our ability to secure adequate and timely supply of equipment and materials from suppliers; |
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| • | our ability to avoid operational problems and product defects and, if such issues were to arise, to rectify them quickly; |
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| • | our ability to form strategic partnerships and joint ventures and successfully cooperate with our alliance partners; |
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| • | our ability to win competitive bid selection processes; |
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| • | our ability to develop products for use in our customers’ equipment and products; |
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| • | our ability to successfully hire and retain key management and senior product engineers; and |
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| • | our ability to maintain good relationships with our suppliers. |
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We do not assume any obligation to update any forward-looking statements and disclaim any obligation to update our view of any risks or uncertainties described herein or to publicly announce the result of any revisions to the forward-looking statements made in this Report, except as required by law.
In addition, this Report contains information concerning the semiconductor industry and business segments generally, which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which the semiconductor industry, our market and business segments will develop. We have based these assumptions on information currently available to us, including through the market research and industry reports referred to in this Report. Although we believe that this information is reliable, we have not independently verified and cannot guarantee its accuracy or completeness. If any one or more of these assumptions turn out to be incorrect, actual market results may differ from those predicted. While we do not know what impact any such differences may have on our business, if there are such differences, they could have a material adverse effect on our future results of operations and financial condition, and the trading price of our common stock.
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