Item 5. Operating and Financial Review and Prospects

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Item 5. Operating and Financial Review and Prospects

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A. Operating Results

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.

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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.

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 an appropriate 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 used as an alternative to any other measure in accordance with U.S. GAAP.

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Results of Operations

The following table presents the composition of operating income for the years ended December 31, 2014 and 2013.

($ in millions, unless otherwise stated)20142013
Revenue5,6474,815
% nominal growth17.310.5
Gross profit2,6402,177
Research and development(763)(639)
Selling, general and administrative (SG&A)(838)(896)
Other income (expense)109
Operating income1,049651

Revenue

The following table presents revenue by segment for the years ended December 31, 2014 and 2013.

20142013
($ in millions, unless otherwise stated)Revenue% nominal growthRevenue% nominal growth
High Performance Mixed Signal (“HPMS”)4,20819.13,53318.7
Standard Products (“SP”)1,27511.41,145(2.0)
Corporate and Other16419.7137(36.0)
Total5,64717.34,81510.5

Revenue increased by $832 million to $5,647 million in 2014 compared to $4,815 million in 2013, a nominal increase of 17.3%. The increase was driven by strong growth in all of our business lines, highlighted by the growth in our HPMS segment.

Our HPMS segment saw an increase in revenue of $675 million to $4,208 million in 2014 compared to $3,533 million in 2013. The increase was primarily driven by increased demand in all four business lines - Automotive, Identification, Infrastructure & Industrial and Portable & Computing. The increase in Automotive was driven by our In-Vehicle Networking products. The increase in Identification was primarily driven by our embedded secure solutions associated with the ramp up of mobile transactions used in high-end smartphone and tablet platforms and continued demand for banking dual-interface cards. The increase in Infrastructure & Industrial was mainly in RF Power, in connection with the roll out of 4G base stations. The increase in Portable & Computing was driven by our microcontrollers and interface products.

Revenue for our SP segment increased by $130 million to $1.275 million in 2014, compared to $1,145 million in 2013. The increase was primarily due to increased demand in general applications, as a result of market share gains.

Revenue for Corporate and Other amounted to $164 million in 2014, compared to $137 million in 2013 and mainly related to our manufacturing operations.

Gross Profit

The following table presents gross profit by segment for the years ended December 31, 2014 and 2013.

20142013
($ in millions, unless otherwise stated)Gross Profit% of segment revenueGross Profit% of segment revenue
HPMS2,25353.51,90553.9
SP38230.028524.9
Corporate and Other53.0(13)(9.5)
Total2,64046.82,17745.2

Gross profit in 2014 was $2,640 million, or 46.8% of revenue compared to $2,177 million, or 45.2% of revenue in 2013, an increase of $463 million. This increase was primarily attributable to market share gains in all business lines but primarily in our HPMS segment. Our gross profit rate, up 1.6 points when compared to 2013, is heavily influenced by our product mix and the end customer mix in our business lines.

Our HPMS segment had a gross profit of $2,253 million, or 53.5% of revenue in 2014, compared to $1,905 million, or 53.9% of revenue in 2013. The decrease in the gross profit percentage of 0.4 points was driven by changes in our product mix primarily in our Identification business line as well as new product introduction costs.

Gross profit in our SP segment was $382 million, or 30.0% of revenue in 2014, compared to $285 million, or 24.9% of revenue in 2013. The increase in the gross profit percentage of 5.1 points was driven by the benefit of market share gains, favorable pricing, product mix and improved manufacturing costs, partly from lower depreciation expenses.

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Operating Expenses

The following table presents operating expenses by segment for the years ended December 31, 2014 and 2013.

20142013
($ in millions, unless otherwise stated)Operating expenses% of segment revenueOperating expenses% of segment revenue
HPMS1,27830.41,19333.8
SP26220.524721.6
Corporate and Other61—95—
Total1,60128.41,53531.9

The following table below presents the composition of operating expenses by line item in the statement of operations.

($ in millions, unless otherwise stated)20142013
Research and development763639
Selling, general and administrative838896
Operating expenses1,6011,535

Operating expenses were $1,601 million, or 28.4% of revenue in 2014, compared to $1,535 million, or 31.9% of revenue in 2013, an increase of $66 million, or a decrease of 3.5 points as a percentage of revenue. The increase in operating expenses was primarily due to higher share-based compensation costs and an increased investment in research and development. The increase was offset by lower PPA expenses mainly due to certain intangible assets becoming fully amortized in the course of 2014. The decrease of operating expenses as a percentage of revenue was primarily driven by our continued focus on cost controls in SG&A.

In our HPMS segment, operating expenses amounted to $1,278 million, or 30.4% of revenue in 2014, compared to $1,193 million, or 33.8% of revenue in 2013. The increase was primarily driven by increased investment in research and development and increased share-based compensation costs.

Operating expenses in our SP segment increased to $262 million, or 20.5% of revenue in 2014 compared to $247 million or 21.6% of revenue in 2013. The increase in operating expenses was mainly driven by higher share-based compensations costs.

Operating expenses in Corporate and Other decreased by $34 million to $61 million in 2014 compared to $95 million in 2013. The decrease compared to the prior year period was primarily due to lower restructuring and restructuring-related costs.

Other Income (Expense)

The following table presents other income (expense) for the years ended December 31, 2014 and 2013.

($ in millions, unless otherwise stated)20142013
Other income (expense)109

Other income (expense) reflects income of $10 million for 2014 compared to $9 million of income in 2013.

Restructuring Charges

Restructuring and restructuring related costs amounted to $57 million in 2014 compared to $40 million in 2013.

In 2014, we had restructuring charges, which related to a workforce reduction charge as a result of redundancy at our ICN 8 wafer fab in Nijmegen of $16 million and for our wafer fab in Hamburg of $5 million. The remaining restructuring and restructuring related costs were for the cumulative impact of specific targeted actions.

In 2013, we had restructuring charges related mainly to a charge of $16 million associated with onerous contracts relating to leased office buildings in the Netherlands and France. The remaining restructuring and restructuring related costs were for the cumulative impact of specific targeted actions.

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Operating Income (Loss)

The following table presents operating income (loss) by segment for the years ended December 31, 2014 and 2013.

20142013
($ in millions, unless otherwise stated)Operating income (loss)% of segment revenueOperating income (loss)% of segment revenue
HPMS98323.471220.2
SP1209.4393.4
Corporate and Other(54)—(100)—
Total1,04918.665113.5

The table below summarizes the PPA effects for the years ended December 31, 2014 and 2013 on operating income (loss) by segment.

($ in millions, unless otherwise stated)20142013
HPMS(84)(163)
SP(58)(59)
Corporate and Other(25)(24)
Total(167)(246)

The table below depicts the PPA effects within the Statement of Operations for the years ended December 31, 2014 and 2013.

($ in millions)20142013
Gross profit(12)(14)
Selling, general and administrative(152)(232)
Other income (expense)(3)—
Operating income (loss)(167)(246)

“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.

The decrease in PPA effects results in part from certain items becoming fully amortized during the course of 2014.

Financial Income (Expense)

For the years ended December 31,
($ in millions)20142013
Interest income33
Interest expense(145)(182)
Foreign exchange rate results(246)62
Net gain (loss) on extinguishment of debt(3)(114)
Other(19)(43)
Total(410)(274)

Financial income (expense) was an expense of $410 million in 2014, compared to an expense of $274 million in 2013. Extinguishment of debt in 2014 amounted to a loss of $3 million compared to a loss of $114 million in 2013. In 2014, financial income (expense) included a loss of $246 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 $62 million in 2013. The net interest expense amounted to $142 million in 2014 compared to $179 million in 2013. This was mainly attributable to a lower average interest rate on our long-term debt of 3.9% in 2014 compared to 5.2% in 2013.

Benefit (Provision) for Income Taxes

The provision for income taxes was $40 million for the year ended December 31, 2014, compared to $20 million for the year ended December 31, 2013, and the effective income tax rates were 6.3% and 5.3%, respectively. The effective income tax rates were impacted by foreign earnings taxed at lower rates than the Netherlands statutory rate, tax incentives in certain jurisdictions, and the mix of income and losses in various jurisdictions.

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Results Relating to Equity-accounted Investees

Results relating to the equity-accounted investees amounted to a gain of $8 million in 2014, compared to a gain of $58 million in 2013. The gain in 2013 primarily reflects a $46 million release of the contingent liability related to an arbitration commenced by ST. By ruling of April 2, 2013, the ICC arbitration tribunal dismissed all claims made by ST in this arbitration. No appeal is available to ST. Based on this award, the provision amounting to $46 million, established in 2012 was released.

Non-controlling Interests

Non-controlling interests are related to the third party share in the results of consolidated companies, predominantly SSMC. Their share of non-controlling interests amounted to a profit of $68 million in 2014, compared to a profit of $67 million in 2013.

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Results of Operations

The following table presents the composition of operating income (loss) for the years ended December 31, 2013 and 2012.

($ in millions, unless otherwise stated)20132012
Revenue4,8154,358
% nominal growth10.53.9
Gross profit2,1771,988
Research and development(639)(628)
Selling, general and administrative (SG&A)(896)(977)
Other income (expense)929
Operating income (loss)651412

Revenue

The following table presents revenue by segment for the years ended December 31, 2013 and 2012.

For the year ended December 31,
20132012
($ in millions, unless otherwise stated)Revenue% nominal growthRevenue% nominal growth
High Performance Mixed Signal3,53318.72,97612.2
Standard Products1,145(2.0)1,168(3.9)
Corporate and Other137(36.0)214(34.2)
Total4,81510.54,3583.9

Revenue increased by $457 million to $4,815 million in 2013 compared to $4,358 million in 2012, a nominal increase of 10.5%. The increase was driven by strong growth in HPMS which was partly offset by a decline in revenue from our SP segment and from Corporate and Other.

Our HPMS segment saw an increase in revenue of $557 million to $3,533 million in 2013 compared to $2,976 million in 2012. The increase was primarily driven by increased volumes in all four business lines (Automotive, Identification, Infrastructure & Industrial and Portable & Computing). The highest volume increase was associated with our banking business within our Identification portfolio and within our Portable & Computing portfolio.

Revenue for our SP segment declined by $23 million to $1,145 million in 2013, compared to $1,168 million in 2012. The decline was primarily due to competitive pricing pressure in our protection and signal conditioning devices business.

Revenue from Corporate and Other amounted to $137 million in 2013, compared to $214 million in 2012 and mainly related to our manufacturing operations. The decline in revenue was primarily due to the expiration of contractual obligations to provide manufacturing services for previously divested businesses. As these businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources will further decline.

Gross Profit

The following table presents gross profit by segment for the years ended December 31, 2013 and 2012.

20132012
($ in millions, unless otherwise stated)Gross Profit% of segment revenueGross Profit% of segment revenue
HPMS1,90553.91,65655.6
SP28524.934629.6
Corporate and Other(13)(9.5)(14)(6.5)
Total2,17745.21,98845.6

Gross profit in 2013 was $2,177 million, or 45.2% of revenue compared to $1,988 million, or 45.6% of revenue in 2012, an increase of $189 million. The increase in gross profit was mainly driven by higher revenue in the HPMS segment, partly offset by lower revenue due to competitive pricing pressure in our SP segment and the absence of the favorable legal award recorded in the second quarter of 2012 that increased our margin percentage. We were awarded a favorable judgment involving a dispute over the collection of a receivable that we recorded an allowance for doubtful accounts that impacted costs of revenue in a prior year. The arbitration tribunal arrived at an award on April 5, 2012, in favor of NXP. No appeal was possible against the arbitration award.

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Following this award, we reversed the allowance for doubtful accounts previously established, again impacting our gross margin, and the invoices underlying the outstanding accounts received were collected in May 2012.

Our HPMS segment had a gross profit of $1,905 million, or 53.9% of revenue in 2013, compared to $1,656 million, or 55.6% of revenue in 2012. The increase in gross profit was primarily due to increased revenue. This was partly offset by the absence of the favorable legal award recorded in the second quarter of 2012 and lower margins within our Identification portfolio.

Gross profit in our SP segment was $285 million, or 24.9% of revenue in 2013, compared to $346 million, or 29.6% of revenue in 2012. The decrease in gross profit was mainly attributed to lower revenue due to competitive price pressure.

Operating Expenses

The following table presents operating expenses by segment for the years ended December 31, 2013 and 2012.

20132012
($ in millions, unless otherwise stated)Operating expenses% of segment revenueOperating expenses% of segment revenue
HPMS1,19333.81,19740.2
SP24721.626022.3
Corporate and Other95—148—
Total1,53531.91,60536.8

The following table below presents the composition of operating expenses by line item in the statement of operations.

($ in millions, unless otherwise stated)20132012
Research and development639628
Selling, general and administrative896977
Operating expenses1,5351,605

Operating expenses were $1,535 million, or 31.9% of revenue in 2013, compared to $1,605 million, or 36.8% of revenue in 2012, a decrease of $70 million. The decrease in operating expenses was primarily due to $73 million lower restructuring and restructuring related costs, $15 million lower IT systems reorganization costs, the absence of operating expenses associated with the divestment of our high speed data converter business that was sold in 2012 and cost savings associated with the restructuring activities. Also the PPA expenses decreased by $21 million mainly due to part of the intangible assets being fully amortized in the course of 2013. These decreases were partly offset by an increase of $30 million in share-based compensation costs and increased investments in research and development costs within our Identification business.

In our HPMS segment, operating expenses amounted to $1,193 million, or 33.8% of revenue in 2013, compared to $1,197 million, or 40.2% of revenue in 2012. The slight decrease was primarily driven by $24 million lower restructuring and restructuring related costs, the absence of operating expense associated with the divestment of our data converter business in 2012 and the current period cost savings associated with the restructuring activities. These decreases were partly offset by $26 million higher share-based compensation costs and increased investments in research and development costs within our Identification business.

Operating expenses in our SP segment decreased by $13 million to $247 million, or 21.6% of revenue in 2013 compared to $260 million or 22.3% of revenue in 2012. The decrease in operating expenses was mainly driven by the current period cost savings associated with the restructuring activities, partly offset by $7 million higher share-based compensation costs.

Operating expenses in Corporate and Other decreased by $53 million to $95 million in 2013 compared to $148 million in 2012. The strong decrease compared to the prior year period was primarily due to $45 million lower restructuring and restructuring related costs and $15 million lower IT systems reorganization costs.

Other Income (Expense)

The following table presents other income (expense) for the years ended December 31, 2013 and 2012.

($ in millions, unless otherwise stated)20132012
Other income (expense)929

Other income (expense) reflects income of $9 million for 2013 compared to $29 million of income in 2012. The decrease is primarily due to a gain of $19 million on the sale of our high speed data converter business during the third quarter of 2012.

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Restructuring Charges

Net restructuring and restructuring related costs that affected our operating income amounted to $40 million in 2013 compared to $111 million in 2012.

In 2013, we had net restructuring charges of $6 million, recorded in the liabilities, which related mainly to a charge of $16 million associated with onerous contracts relating to leased office buildings in the Netherlands and France, as part of the OPEX Reduction Program, partly offset by some releases related to previous restructuring programs. Furthermore $34 million of restructuring costs were directly charged to our operating income.

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. For additional information, see note 5 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, 2013 and 2012.

20132012
($ in millions, unless otherwise stated)Operating income (loss)% of segment revenueOperating income (loss)% of segment revenue
HPMS71220.247916.1
SP393.4897.6
Corporate and Other(100)—(156)—
Total65113.54129.5

The table below summarizes the PPA effects for the years ended December 31, 2013 and 2012 on operating income (loss) by segment.

($ in millions, unless otherwise stated)20132012
HPMS(163)(190)
SP(59)(60)
Corporate and Other(24)(23)
Total(246)(273)

The table below depicts the PPA effects within the Statement of Operations for the years ended December 31, 2013 and 2012.

For the years ended December 31,
($ in millions)20132012
Gross profit(14)(20)
Selling, general and administrative(232)(253)
Operating income (loss)(246)(273)

“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.

The decrease in PPA effects results in part from the PPA being fully amortized in the course of 2013.

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Financial Income (Expense)

For the years ended December 31,
($ in millions)20132012
Interest income34
Interest expense(182)(270)
Foreign exchange rate results6228
Net gain (loss) on extinguishment of debt(114)(161)
Other(43)(38)
Total(274)(437)

Financial income (expense) (including the extinguishment of debt) was an expense of $274 million in 2013, compared to an expense of $437 million in 2012. Extinguishment of debt in 2013 amounted to a loss of $114 million compared to a loss of $161 million in 2012. In 2013, financial income (expense) included a gain of $62 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 $28 million in 2012. The net interest expense amounted to $179 million in 2013 compared to $266 million in 2012. This mainly related to a lower average interest percentage of 5.2% and 7.2%, respectively and lower average debt outstanding of $3.4 billion and $3.7 billion, respectively in 2013 compared to 2012.

Benefit (Provision) for Income Taxes

The provision for income taxes was $20 million for the year ended December 31, 2013, compared to $1 million for the year ended December 31, 2012, and the effective income tax rates were positive 5.3% and negative 4.0%, respectively. The change in the effective tax rate for the year ended December 31, 2013 compared to the same period in the previous year was primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates including jurisdictions where a full valuation allowance was recognized and in addition the year 2013 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 gain of $58 million in 2013, compared to a loss of $27 million in 2012. The gain in 2013 primarily reflects a $46 million release of the contingent liability related to an arbitration commenced by STMicroelectronics (ST). By ruling of April 2, 2013, the ICC arbitration tribunal dismissed all claims made by ST in this arbitration. No appeal is available to ST. Based on this award, the provision amounting to $46 million, established in 2012 was released. In 2012, a loss of $46 million related to extra provisions for the above mentioned legal claim of ST and a gain of $12 million related to a partial recovery of our equity investment in Trident are included.

Non-controlling Interests

Non-controlling interests are related to the third party share in the results of consolidated companies, predominantly SSMC. Their share of non-controlling interests amounted to a profit of $67 million in 2013, compared to a profit of $63 million in 2012.

B. Liquidity and Capital Resources

Liquidity and Capital Resources

At the end of 2014 our cash balance was $1,185 million, an increase of $515 million compared to prior year. Taking into account the available undrawn amount of the Secured Revolving Credit Facility, we had access to $1,938 million of liquidity as of December 31, 2014.

Our capital expenditures were $329 million in 2014, compared to $215 million in 2013.

The total amount of cash used for financing activities amounted to $554 million.

In November 2014, we issued $1,150 million aggregate principal amount of cash convertible senior notes due 2019 (the “2019 Cash Convertible Senior Notes”). The 2019 Cash Convertible Senior Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015. The 2019 Cash Convertible Senior Notes will mature on December 1, 2019. In connection with the pricing of the 2019 Cash Convertible Senior Notes, NXP entered into separate privately negotiated cash convertible note hedge and warrant transactions with counterparties that include the initial purchasers of the 2019 Cash Convertible Senior Notes or their respective affiliates (the “hedge counterparties”). The cash convertible note hedge transactions will be cash settled upon exercise and are expected generally to offset any cash payments NXP is required to make in excess of the principal amount of the 2019 Cash Convertible Senior Notes upon conversion. The warrant transactions will be net share settled upon exercise and could therefore have a dilutive effect with respect to NXP’s common stock to the extent that the market price per share of NXP’s common stock exceeds the strike price of the warrants. The strike price of the warrant transactions will initially be approximately $133.32 per share, which represents a premium of approximately 75% over the

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last reported sale price of NXP’s common stock on the closing date, November 24, 2014, and is subject to certain adjustments under the terms of the warrant transactions.

At the end of 2014, we had an undrawn availability of $753 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, 2014, we incurred total net interest expense of $142 million compared to $179 million during 2013. The weighted average interest rates on our debt instruments as of December 31, 2014 and December 31, 2013 were 3.3% and 4.3%, respectively.

As of December 31, 2014, our cash balance was $1,185 million, of which $426 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 2014, a dividend of $130 million was distributed, of which $50 million was distributed to the joint venture partner.

We repurchased $1,435 million of our common stock pursuant to our share buyback program during 2014 at a weighted average price of $61.73 per share.

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, 2014, 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 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 2014 our operating activities provided $1,468 million in cash. This was primarily the result of net income of $607 million and changes in operating assets and liabilities of $96 million. The net income includes non-cash items, such as depreciation and amortization, of $765 million.

In 2013 our operating activities provided $891 million in cash. This was primarily the result of net income of $415 million and changes in operating assets and liabilities of $120 million. The net income includes non-cash items, such as depreciation and amortization, of $596 million.

Operating activities provided $722 million in cash in 2012. This was primarily the result of a net loss of $52 million and changes in operating assets and liabilities of $28 million. The net income includes non-cash items, such as depreciation and amortization, of $747 million.

Cash Flow from Investing Activities

Net cash used for investing activities amounted to $387 million in 2014 and principally consisted of cash outflows for capital expenditures of $329 million and $36 million for the purchase of identified intangible assets, mainly related to the purchase of software.

Net cash used for investing activities amounted to $240 million in 2013 and principally consisted of cash outflows for capital expenditures of $215 million and $35 million for the purchase of identified intangible assets, mainly related to the purchase of software.

Investing activities in 2012 used $243 million of net cash in 2012. This net use of cash primarily included $251 million for capital expenditures, and $29 million for the purchase of identified intangible assets, mainly related to the purchase of software, partially offset by 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.

Cash Flow from Financing Activities

Net cash used for financing activities was $554 million in 2014, $598 million in 2013 and $574 million in 2012. The cash flows related to financing transactions in 2014, 2013 and 2012 are primarily related to the financing activities described below under the captions 2014 Financing Activities, 2013 Financing Activities and 2012 Financing Activities, respectively.

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In addition to the financing activities described below, net cash used for financing activities by year included:

Year ended December 31,
201420132012
Dividends paid to non-controlling interests(50)(48)(40)
Purchase of non-controlling interest shares—(12)—
Cash proceeds from exercise of stock options14517714
Purchase of treasury shares(1,435)(405)(40)
Cash paid for Notes hedge derivatives(208)——
Proceeds from the sale of warrants134——
Net (repayments) borrowings under revolving credit facility(150)(80)230

2014 Financing Activities

2017 Term Loan

On February 18, 2014, our subsidiary, NXP B.V. together with NXP Funding LLC entered into a new $400 million aggregate principal amount Senior Secured Term Loan Facility due March 4, 2017 (the “2017 Term Loan”). Concurrently, NXP repaid the $486 million principal amount Senior Secured Term Loan Facility due March 4, 2017. A $100 million draw-down under our existing Revolving Credit Facility and approximately $5 million of cash on hand were used to settle the combined transactions, as well as pay the related call premium of $5 million and accrued interest of $4 million.

2019 Cash Convertible Senior Notes

On November 24, 2014, NXP issued 2019 Cash Convertible Senior Notes with an aggregate principal amount of $1,150 million, which mature December 1, 2019. The 2019 Cash Convertible Senior Notes were issued at par and were recorded at their fair value of $1,150 million on the accompanying Consolidated Balance Sheet. We used the net proceeds of $1,134 million (i) to fund the cost of entering into the cash convertible note hedge transactions (the cost of which were partially offset by the proceeds that NXP received from entering into warrant transactions) with certain hedge counterparties, as described below, (ii) to repay up to €225 million in respect of intercompany loans to our subsidiary NXP B.V., (iii) to fund the repurchase of $150 million of our common stock in the offering in privately negotiated transactions through one of the initial purchasers or its affiliate conducted concurrently with the pricing of the 2019 Cash Convertible Senior Notes, and (iv) for general corporate purposes, including additional share repurchases and potential acquisitions.

In connection with the pricing of the 2019 Cash Convertible Senior Notes, NXP entered into separate privately negotiated cash convertible note hedge and warrant transactions with counterparties that include the initial purchasers of the 2019 Cash Convertible Senior Notes or their respective affiliates (the “hedge counterparties”). The cash convertible note hedge transactions will be cash settled upon exercise and are expected generally to offset any cash payments NXP is required to make in excess of the principal amount of the 2019 Cash Convertible Senior Notes upon conversion. The warrant transactions will be net share settled upon exercise and could therefore have a dilutive effect with respect to NXP’s common stock to the extent that the market price per share of NXP’s common stock exceeds the strike price of the warrants. The strike price of the warrant transactions will initially be approximately $133.32 per share, which represents a premium of approximately 75% over the last reported sale price of NXP’s common stock on November 24, 2014, and is subject to certain adjustments under the terms of the warrant transactions.

2013 Financing Activities

2021 Senior Unsecured Notes

On February 14, 2013 our subsidiary, NXP B.V. together with NXP Funding LLC issued U.S. dollar-denominated 5.75% Senior Unsecured Notes with an aggregate principal amount of $500 million, which mature February 15, 2021 (the “2021 Unsecured Notes”). The 2021 Unsecured Notes were issued at par and were recorded at their fair value of $500 million on the accompanying Consolidated Balance Sheet. On March 4, 2013, we used the net proceeds of $495 million together with approximately $14 million of cash on hand to fully repay the outstanding principal amount of $494 million under the Senior Secured Term Loan Facility due April 3, 2017, as well as to pay related call premiums of $10 million and accrued interest of $5 million.

2023 Senior Unsecured Notes

On March 12, 2013 our subsidiary, NXP B.V. together with NXP Funding LLC issued U.S. dollar-denominated 5.75% Senior Unsecured Notes with an aggregate principal amount of $500 million, which mature March 15, 2023 (the “2023 Unsecured Notes”). The 2023 Unsecured Notes were issued at par and were recorded at their fair value of $500 million on the accompanying Consolidated Balance Sheet. On March 12, 2013, we used the net proceeds of $495 million to fully repay the $471 million principal amount Senior Secured Term Loan Facility due March 19, 2019, to pay related call premiums of $5 million and accrued interest of $5 million. We used the balance of $14 million for general corporate purposes.

2018 Senior Unsecured Notes

On May 20, 2013 our subsidiary, NXP B.V. together with NXP Funding LLC issued U.S. dollar-denominated 3.75% Senior Unsecured Notes with an aggregate principal amount of $750 million, which mature June 1, 2018 (the “2018 Unsecured Notes”).

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The 2018 Unsecured Notes were issued at par and were recorded at their fair value of $750 million on the accompanying Consolidated Balance Sheet. On May 21, 2013, we used the net proceeds of $743 million together with cash on hand to redeem €142 million aggregate principal amount of Senior Secured Floating Rate Notes due October 2013 for $184 million, to repurchase $58 million aggregate principal amount of Senior Secured Floating Rate Notes due October 2013, and to redeem $615 million aggregate principal amount of Senior Secured Floating Rate Notes due November 2016, as well as to pay related call premiums of $16 million and accrued interest of $2 million.

2016 Senior Unsecured Notes

On September 24, 2013 our subsidiary, NXP B.V. together with NXP Funding LLC issued U.S. dollar-denominated 3.5% Senior Unsecured Notes with an aggregate principal amount of $500 million, which mature September 15, 2016 (the “2016 Unsecured Notes”, and together with the 2021 Unsecured Notes, the 2023 Unsecured Notes and the 2018 Unsecured Notes, the “Unsecured Notes”, and together with the 2019 Cash Convertible Senior Notes, the “Notes”). The 2016 Unsecured Notes were issued at par and were recorded at their fair value of $500 million on the accompanying Consolidated Balance Sheet. On October 15, 2013, we used the net proceeds of $495 million to redeem $422 million aggregate principal amount of Senior Secured Notes due August 2018, as well as to pay related call premiums of $51 million and accrued interest of $8 million. We used the balance of $14 million for general corporate purposes.

2020 Term Loan

On November 27, 2013 our subsidiary, NXP B.V. together with NXP Funding LLC entered into a new $400 million aggregate principal amount Senior Secured Term Loan Facility due January 11, 2020 (the “2020 Term Loan”, and together with the 2017 Term Loan, the “Term Loans”). Concurrently, NXP repaid the $496 million principal amount Senior Secured Term Loan Facility due January 11, 2020. A $100 million draw-down under our existing Revolving Credit Facility and approximately $6 million of cash on hand were used to settle the combined transactions, as well as pay the related call premium of $5 million and accrued interest of $5 million. The exchange of the First 2020 Term Loan for the 2020 Term Loan was a non-cash financing transaction.

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 Secured Revolving Credit Facility and approximately $52 million of cash on hand, were used to redeem $510 million aggregate principal amount of the U.S. dollar-denominated 9.5% Senior Notes due October 2015, €203 million aggregate principal amount 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. The 2019 Term Loan was fully repaid on March 12, 2013.

Secured Revolving Credit Facility

On April 27, 2012, NXP B.V. and NXP Funding LLC concluded the Secured Revolving Credit Facility under which it borrowed $330 million to settle and close its existing revolving credit facility (the “Initial Secured Revolving Credit Facility”). It subsequently reduced its outstanding drawings to $230 million as of December 31, 2012.

On October 24, 2012, NXP B.V., NXP Funding LLC and certain participating banks entered into an incremental joinder agreement to increase the borrowing capacity under the Initial Secured Revolving Credit Facility subject to an effective date of October 29, 2012 (the “Incremental Joinder Agreement”, and together with the Initial Secured Revolving Credit Facility, the “Secured Revolving Credit Facility”). The borrowing capacity under the Secured Revolving Credit Facility was increased by €120 million (approximately $155 million) up to a total amount of €620 million ($818 million). The Secured Revolving Credit Facility 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 2013 Super Priority Notes, which had an aggregate principal amount of €29 million and all U.S. dollar-denominated 2013 Super Priority Notes, which had an aggregate principal amount of $221 million.

First 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 “First 2020 Term Loan”). The First 2020 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 9.75% Senior Notes due 2018, and pay related call premiums of $86 million, accrued interest of $18 million and debt issuance costs of $6 million.

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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.

Debt Position

Short-term Debt

In 2014, our short-term debt of $20 million included other short-term bank borrowings of $8 million, related to a local bank loan in China.

In 2013, our short-term debt of $40 million included other short-term bank borrowings of $24 million, related to a local bank loan in China.

Long-term Debt

As of December 31, 2014, we had outstanding debt of:

($ in millions)December 31, 2013Accrual of Debt DiscountDebt Exchanges/ Repurchases/ New BorrowingsOther(9)December 31, 2014
U.S. dollar-denominated secured term credit agreement due March 2017 (1)—395(4)391
U.S. dollar-denominated secured term credit agreement due April 2017 (2)480(480)—
U.S. dollar-denominated secured term credit agreement due April 2020 (3)394(4)390
U.S. dollar-denominated 3.5% senior unsecured notes due September 2016(4)500500
U.S. dollar-denominated 3.75% senior unsecured notes due June 2018(5)750750
U.S. dollar-denominated 5.75% senior unsecured notes due February 2021(6)500500
U.S. dollar-denominated 5.75% senior unsecured notes due March 2023(7)500500
U.S. dollar-denominated 1.00% cash convertible senior notes due December 2019(8)—(205)1,150945
3,124(205)1,061(4)3,976
Secured Revolving Credit Facility150(150)—
Other long-term debt7(4)3
Total long-term debt3,281(205)911(8)3,979
(1)On February 18, 2014, we entered into a new 2017 Term Loan for an aggregate principal amount of $400 million at a rate of interest of LIBOR plus 2% with a floor of 0.75%.
(2)On March 4, 2011, we entered into the First 2017 Term Loan for an initial principal amount of $500 million at a rate of interest of LIBOR plus 3.25% with a floor of 1.25%.
(3)On November 27, 2013, we entered into the 2020 Term Loan for an initial principal amount of $400 million at a rate of interest of LIBOR plus 2.5% with a floor of 0.75%.
(4)On September 24, 2013, we issued $500 million aggregate principal amount of 3.5% Senior Unsecured Notes due 2016.
(5)On May 20, 2013, we issued $750 million aggregate principal amount of 3.75% Senior Unsecured Notes due 2018.
(6)On February 14, 2013, we issued $500 million aggregate principal amount of 5.75% Senior Unsecured Notes due 2021.
(7)On March 15, 2013, we issued $500 million aggregate principal amount of 5.75% Senior Unsecured Notes due 2023.
(8)On November 24, 2014, we issued $1,150 million aggregate principal amount of 1.00% Cash Convertible Senior Notes due 2019.
(9)Other mainly concerns the reclassification of the current portion of long-term debt.

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 of the 2019 Cash Convertible Senior Notes

We have issued $1,150 million aggregate principal amount of 2019 Cash Convertible Senior Notes, which bear interest at 1.00% per annum and mature on December 1, 2019, unless earlier converted, repurchased or redeemed. The 2019 Cash Convertible Senior Notes pay interest on June 1 and December 1 of each year, beginning on June 1, 2015. The 2019 Cash Convertible Senior Notes are senior unsecured obligations of NXP Semiconductor N.V. and will be settled solely in cash upon conversion. We may not redeem the 2019 Cash Convertible Senior Notes prior to their maturity date other than following the occurrence of certain tax law changes as set forth in the indenture governing the 2019 Cash Convertible Senior Notes (the “Convertible Notes Indenture”). Upon the

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occurrence of certain events which constitute a “fundamental change” under the Convertible Notes Indenture, such as certain change of control, the holders of 2019 Cash Convertible Senior Notes may require us to repurchase for cash all or part of their 2019 Cash Convertible Senior Notes at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest.

Prior to September 1, 2019, holders may convert their 2019 Cash Convertible Senior Notes only upon satisfaction of certain conditions specified in the Convertible Notes Indentures. On or after September 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may, at their option, convert their 2019 Cash Convertible Senior Notes solely into cash at any time.

Upon conversion, in lieu of receiving any shares of our common stock, a holder will receive, per $1,000 principal amount of 2019 Cash Convertible Senior Notes being converted, an amount in cash equal to the settlement amount, determined as described in the Convertible Notes Indenture. The conversion rate will initially be 9.7236 shares of our common stock per $1,000 principal amount (equivalent to an initial conversion price of approximately $102.84 per share). The conversion rate for the 2019 Cash Convertible Senior Notes is subject to customary anti-dilution adjustments and will also be adjusted for any fundamental change or tax redemption, each as described in the Convertible Notes Indenture.

Concurrently with the issuance of the 2019 Cash Convertible Senior Notes, we entered into cash convertible note hedge and warrant transactions. For further information on the cash convertible note hedge and warrant transactions, please see “—Financial Instruments.”

Certain Terms and Covenants of the Term Loans and Secured Revolving Credit Facility

The Term Loans are fully and unconditionally guaranteed jointly and severally, on a senior secured basis by certain of our current and future material wholly owned subsidiaries.

Pursuant to various security documents related to the Term Loans and the Secured Revolving Credit Facility, we have granted liens and security interests over substantially all of our assets, including the assets of our material wholly owned subsidiaries.

Cash Convertible Note Hedge Transactions and Warrant Transactions

On November 24, 2014 and November 25, 2014, in connection with our issuances of the 2019 Cash Convertible Senior Notes, we entered into cash convertible note hedge transactions with affiliates of the initial purchasers of the 2019 Cash Convertible Senior Notes (in such capacity, the “Option Counterparties”) to offset any cash payment we are required to make in excess of the principal amount of the 2019 Cash Convertible Senior Notes.

In these transactions, we paid approximately $208 million for call options relating to, subject to customary anti-dilution adjustments, approximately 11.18 million shares of NXP’s common stock (which is equal to the number of shares that initially underlie the 2019 Cash Convertible Senior Notes), with a strike price of approximately $102.84 per share. The Option Counterparties or their respective affiliates may enter into, or unwind, various over-the-counter derivatives and/or purchase or sell our common stock in open market and/or privately negotiated transactions prior to maturity of the 2019 Cash Convertible Senior Notes, including during any observation period for the settlement of conversions of the 2019 Cash Convertible Senior Notes, or upon any repurchase of the 2019 Cash Convertible Senior Notes by us, which could adversely impact the price of our common stock and of the 2019 Cash Convertible Senior Notes.

Separately, we sold warrants to the Option Counterparties for $134 million giving them the right to purchase from us, subject to customary anti-dilution adjustments, approximately 11.18 million shares of NXP’s common stock, with a strike price of $133.32 per share. The warrants will have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants on or prior to the expiration date of the warrants.

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, Share-based compensation and Litigation and claims.

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.

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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, 2014, we had approximately 3,447 employees in research and development, of which approximately 3,142 support our High Performance Mixed Signal businesses and approximately 305 support our Standard Products businesses. Our engineering design teams are located in India (Bangalore), China (Shanghai, Beijing), the United States (San Jose, Chandler), 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 $763 million in 2014 (of which 87% related to our High Performance Mixed Signal businesses) and $639 million in 2013.

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 markets, such as the Internet of Things and automotive solid state lighting. Finally, we invest around 3% 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, trademarks, domain names, 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 9,000 patents and patent applications, as well as our access via royalty-free licenses to a significant number of patents held by Philips, give us the benefit of a large 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.

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 technology partnerships, with universities across the world, particularly in Europe, China, Singapore and India, with application and infrastructure owners.

We own a number of trademarks and, where we consider it desirable, we develop names for our new products and secure trademark protection through enforcement for them.

D. Trend Information

Within the overall umbrella of Secure Connections for a Smarter World, NXP addresses four key macro growth trends: Intelligent Devices, Mobility, Hyper-connectivity and Security, that drive applications such as the Connected Car, Portable & Wearable and the Internet of Things, with Security being a requirement across all applications. Our innovative solutions are used in a wide range of applications. Many electronic payment and government ID services are enabled by our secure identification solutions and with the transition of those services to new form factors in secure connected devices, there is strong market demand for embedded security solutions such as mobile payment, cyber-security and authentication. Fast innovation in smart phones & tablets

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drives demand for our secure interface and power solutions while always-on requirements in secure connected devices further drive demand for our advanced mobile audio, sensing and connectivity solutions, with advanced magnetic induction radios for implantable medical devices such as hearing aids as an example. Cities, buildings and industrial production systems all want to become smart, connected and secure; they provide fertile new markets for our smart grid, intelligent logistics and industrial security solutions. Our new high-performance RF power amplifier products allow wireless network operators to expand network capacity with fewer base stations. The automotive industry brings fast trends in advanced driver assistance, seamless consumer electronics experience and energy efficiency, and we respond to those by delivering solutions for secure car access, car entertainment and in-vehicle networking. In addition, we leverage our core competencies to innovate in the transition to highly and eventually fully automated cars with ground breaking solutions in secure vehicle-to-infrastructure & vehicle-to-vehicle and radar.

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 68% of our revenue in 2014, compared to 64% of our revenue in 2013. In particular, Greater China represented 51% of our revenue in 2014, compared to 45% of our revenue in 2013.

E. Off-balance Sheet Arrangements

As of December 31, 2014, we had no off-balance sheet arrangements.

F. Tabular Disclosure of Contractual Obligations

Presented below is a summary of our contractual obligations as at December 31, 2014

($ in millions)Total201520162017201820192020 and thereafter
Long-term debt3,04211508(1)391(2)754(3)31,375(4)
2019 Cash Convertible Senior Notes (5)945————945—
Capital lease obligations4121———
Short-term debt88—————
Operating leases130422714121322
Interest on the notes (6)6901401341139781125
Software licences (7)49191614———
Long-term purchase contracts3361271722566—
Total contractual cash obligations (6)(8)5,2043488595588691,0481,522
(1)On September 24, 2013, we issued $500 million aggregate principal amount of 3.5% Senior Unsecured Notes due 2016.
(2)On February 18, 2014, we entered into a new 2017 Term Loan with an initial principal amount of $400 million at a rate of interest of LIBOR plus 2% with a floor of 0.75%.
(3)On May 20, 2013, we issued $750 million aggregate principal amount of 3.75% Senior Unsecured Notes due 2018.
(4)On November 27, 2013, we entered into a new $400 million aggregate principal amount senior secured term loan facility due January 11, 2020 at a rate of interest of LIBOR plus 2.5% with a floor of 0.75%. On February 14, 2013, we issued $500 million aggregate principal amount of 5.75% Senior Unsecured Notes due 2021 and on March 15, 2013, we issued $500 million aggregate principal amount of 5.75% Senior Unsecured Notes due 2023.
(5)On November 24, 2014, we issued $1,150 million aggregate principal amount of 1.00% Cash Convertible Senior Notes due 2019.
(6)The interest on the notes was determined on the basis of LIBOR interest rates for floating rate instruments and on the basis of contractual agreed interest rates for other debt instruments.
(7)As of December 31, 2014, we had $49 million of non-cancellable license obligations for software.
(8)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 $1.3285 per €1.00, in effect at December 31, 2014. As a result, the actual payments will vary based on any change in exchange rate.

Our debt instruments had accrued interest of $28 million as of December 31, 2014 (December 31, 2013: $27 million).

In addition to the above obligations, we enter into a variety of agreements in the normal course of business, containing provisions that certain penalties may be charged if we do not fulfill our commitments. It is not possible to predict with certainty the maximum potential amount of future payments under these or similar provisions due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular case. Historically, payments pursuant to such provisions have not been material and we believe that any future payments required pursuant to such provisions would not have a material adverse effect on our consolidated financial condition. However, such payments may be material to our consolidated statement of operations for a specific period.

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 $59 million in 2015, consisting of $4 million in employer contributions to defined-benefit pension plans and $55 million in employer contributions to defined-contribution pension plans and multi-employer plans. The expected cash outflows in 2015 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.

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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;
•our ability to successfully introduce new technologies and products;
•the demand for the goods into which our products are incorporated;
•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;
•our ability to accurately estimate demand and match our production capacity accordingly;
•our ability to obtain supplies from third-party producers;
•our access to production from third-party outsourcing partners, and any events that might affect their business or our relationship with them;
•our ability to secure adequate and timely supply of equipment and materials from suppliers;
•our ability to avoid operational problems and product defects and, if such issues were to arise, to rectify them quickly;
•our ability to form strategic partnerships and joint ventures and successfully cooperate with our alliance partners;
•our ability to win competitive bid selection processes;
•our ability to develop products for use in our customers’ equipment and products;
•our ability to successfully hire and retain key management and senior product engineers; and
•our ability to maintain good relationships with our suppliers.

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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