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As filed with the Securities and Exchange Commission on March 1, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number 001-34841
NXP Semiconductors N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands
(Jurisdiction of incorporation or organization)
High Tech Campus 60, Eindhoven 5656 AG, the Netherlands
(Address of principal executive offices)
Jean Schreurs, SVP and Senior Corporate Counsel, High Tech Campus 60, 5656 AG, Eindhoven, the Netherlands
Telephone: +31 40 2728686 / E-mail: jean.schreurs@nxp.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class |
Name of each exchange on which registered | |
| Common shares—par value euro (EUR) 0.20 per share | The NASDAQ Global Select Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Common shares—par value EUR 0.20 per share
(Title of class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.
| Class |
Outstanding at December 31, 2012 | |
| Ordinary shares, par value EUR 0.20 per share | 251,751,500 shares |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP x | International Financial Reporting Standards as issued | Other ¨ | ||||
| by the International Accounting Standards Board ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
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This Annual Report contains forward-looking statements that contain risks and uncertainties. Our actual results may differ significantly from future results as a result of factors such as those set forth in Part I. Item 3D. Risk Factors and Part I, Item 5G. Safe Harbor.
The financial information included in this Annual Report is based on United States Generally Accepted Accounting Principles (U.S. GAAP), unless otherwise indicated.
In presenting and discussing our financial position, operating results and cash flows, management uses certain non-U.S. GAAP financial measures. These non-U.S. GAAP financial measures should not be viewed in isolation or as alternatives to the equivalent U.S. GAAP measures and should be used in conjunction with the most directly comparable U.S. GAAP measures. A discussion of non-U.S. GAAP measures included in this Annual Report and a reconciliation of such measures to the most directly comparable U.S. GAAP measures are set forth under “Use of Certain Non-U.S. GAAP Financial Measures” contained in this report under Part I, Item 5A. Operating Results.
Unless otherwise required, all references herein to “we”, “our”, “us”, “NXP” and the “Company” are to NXP Semiconductors N.V. and its consolidated subsidiaries.
A glossary of abbreviations and technical terms used in this Annual Report is set forth on page 82.
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Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
The following table presents a summary of our selected historical consolidated financial data. We prepare our financial statements in accordance with U.S. GAAP.
The results of operations for prior years are not necessarily indicative of the results to be expected for any future period.
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The selected historical consolidated financial data should be read in conjunction with the discussion under Part I, Item 5A. Operating Results and the Consolidated Financial Statements and the accompanying Notes included elsewhere in this Annual Report.
| As of and for the years ended December 31, | ||||||||||||||||||||
| ($ in millions unless otherwise stated) | 2012 | 2011 | 2010 | 2009(1) | 2008(1) | |||||||||||||||
| Consolidated Statements of Operations: |
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| Revenue |
4,358 | 4,194 | 4,402 | 3,519 | 5,104 | |||||||||||||||
| Operating income (loss) |
412 | 357 | 273 | (931 | ) | (2,643 | ) | |||||||||||||
| Financial income (expense)-net |
(437 | ) | (257 | ) | (628 | ) | 682 | (614 | ) | |||||||||||
| Income (loss) from continuing operations attributable to stockholders |
(116 | ) | (44 | ) | (515 | ) | (199 | ) | (3,593 | ) | ||||||||||
| Income (loss) from discontinued operations attributable to stockholders |
1 | 434 | 59 | 32 | 36 | |||||||||||||||
| Net income (loss) attributable to stockholders |
(115 | ) | 390 | (456 | ) | (167 | ) | (3,557 | ) | |||||||||||
| Per share data(2)(3): |
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| Basic and diluted earnings per common share attributable to stockholders in $ |
||||||||||||||||||||
| - Income (loss) from continuing operations |
(0.46 | ) | (0.17 | ) | (2.25 | ) | (0.93 | ) | (19.94 | ) | ||||||||||
| - Income (loss) from discontinued operations |
— | 1.74 | 0.26 | 0.15 | 0.20 | |||||||||||||||
| - Net income (loss) |
(0.46 | ) | 1.57 | (1.99 | ) | (0.78 | ) | (19.74 | ) | |||||||||||
| Weighted average number of shares of common stock outstanding during the year (in thousands)(4) |
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| - Basic and diluted |
248,064 | 248,812 | 229,280 | 215,252 | 180,210 | |||||||||||||||
| Consolidated balance sheet data: |
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| Cash and cash equivalents |
617 | 743 | 898 | 1,026 | 1,781 | |||||||||||||||
| Total assets |
6,439 | 6,612 | 7,637 | 8,579 | 10,213 | |||||||||||||||
| Net assets |
1,284 | 1,357 | 1,219 | 1,041 | 1,182 | |||||||||||||||
| Working capital(5) |
765 | 969 | 811 | 870 | 1,355 | |||||||||||||||
| Total debt(6) |
3,492 | 3,799 | 4,551 | 5,283 | 6,367 | |||||||||||||||
| Total stockholders’ equity |
1,049 | 1,145 | 986 | 843 | 969 | |||||||||||||||
| Common stock |
51 | 51 | 51 | 42 | 42 | |||||||||||||||
| Other operating data: |
||||||||||||||||||||
| Capital expenditures |
(251 | ) | (221 | ) | (258 | ) | (92 | ) | (356 | ) | ||||||||||
| Depreciation and amortization(7) |
533 | 591 | 684 | 887 | 1,924 | |||||||||||||||
| Consolidated statements of cash flows data: |
||||||||||||||||||||
| Net cash provided by (used for): |
||||||||||||||||||||
| Operating activities |
722 | 175 | 361 | (701 | ) | (638 | ) | |||||||||||||
| Investing activities |
(243 | ) | (202 | ) | (269 | ) | 63 | 1,046 | ||||||||||||
| Financing activities |
(574 | ) | (926 | ) | (157 | ) | (109 | ) | 299 | |||||||||||
| Net cash provided by (used for) continuing operations |
(95 | ) | (953 | ) | (65 | ) | (747 | ) | 707 | |||||||||||
| Net cash provided by (used for) discontinued operations |
(45 | ) | 809 | (5 | ) | — | 2 | |||||||||||||
| (1) | All years prior to 2010 have been restated to reflect the effect of the sale of the Sound Solutions business in 2011 as discontinued operations. |
| (2) | On February 29, 2008, through a multi-step transaction, the nominal value of the common shares was decreased from €1.00 to €0.01 and all preference shares were converted into common shares, which resulted in an increase of outstanding common shares from 100 million to 4.3 billion. On August 2, 2010, we amended our articles of association in order to effect a 1-for-20 reverse stock split, decreasing the number of shares of common stock outstanding from approximately 4.3 billion to approximately 215 million and increasing the par value of the shares of common stock from €0.01 to €0.20. In all periods presented, basic and diluted weighted average shares outstanding and earnings per share have been calculated to reflect the 1-for-20 reverse stock split. |
| (3) | The Company has not paid any dividends during the periods presented. |
| (4) | Due to our net losses from continuing operations attributable to stockholders in the periods from 2008 to 2012, all potentially dilutive securities have been excluded from the calculation of diluted earnings per common share because their effect would be anti-dilutive. |
| (5) | Working capital is calculated as current assets less current liabilities (excluding short-term debt). |
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| (6) | As adjusted for our cash and cash equivalents our net debt was calculated as follows: |
| ($ in millions) | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
| Long-term debt |
3,185 | 3,747 | 4,128 | 4,673 | 5,964 | |||||||||||||||
| Short-term debt |
307 | 52 | 423 | 610 | 403 | |||||||||||||||
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| Total debt |
3,492 | 3,799 | 4,551 | 5,283 | 6,367 | |||||||||||||||
| Less: cash and cash equivalents |
(617 | ) | (743 | ) | (898 | ) | (1,026 | ) | (1,781 | ) | ||||||||||
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| Net debt |
2,875 | 3,056 | 3,653 | 4,257 | 4,586 | |||||||||||||||
Net debt is a non-GAAP financial measure. See “Use of Certain Non-GAAP Financial Measures” under Part I, 5A. Operating Results.
| (7) | Depreciation and amortization includes the cumulative net effect of purchase price adjustments related to a number of acquisitions and divestments, including the purchase by a consortium of private equity investors of an 80.1% interest in our business, described elsewhere in this Annual Report as our “Formation.” The cumulative net effects of purchase price adjustments in depreciation and amortization aggregated to $273 million in 2012, $301 million in 2011, $302 million in 2010, $371 million in 2009 and $658 million in 2008. In 2012, depreciation and amortization included $2 million (2011: $5 million; 2010: $40 million) related to disposals that occurred in connection with our restructuring activities and $2 million (2011: $1 million; 2010: $6 million) relating to other incidental items. For a detailed list of the acquisitions and a discussion of the effect of acquisition accounting, see the “Effect of Acquisition Accounting” section in Part I, Item 5 A. Operating Results. Depreciation and amortization also includes impairments to goodwill and other intangibles, as well as write-offs in connection with acquired in-process research and development, if any. |
The majority of our expenses are incurred in euros, while most of our revenue is denominated in U.S. dollars. As used in this Annual Report, “euro”, or “€” means the single unified currency of the European Monetary Union. “U.S. dollar”, “USD”, “U.S. $” or “$” means the lawful currency of the United States of America. As used in this Annual Report, the term “noon buying rate” refers to the exchange rate for euro, expressed in U.S. dollars per euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in the city of New York for cable transfers in foreign currencies.
The table below shows the average noon buying rates for U.S. dollars per euro for the five years ended December 31, 2012. The averages set forth in the table below have been computed using the noon buying rate on the last business day of each month during the periods indicated.
| Year ended December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| Average $ per € |
1.2859 | 1.3931 | 1.3261 | 1.3935 | 1.4726 | |||||||||||||||
The following table shows the high and low noon buying rates for U.S. dollars per euro for each of the six months in the six-month period ended February 22, 2013:
| Month | High | Low | ||||||
| ($ per €) | ||||||||
| 2012 |
||||||||
| August |
1.2583 | 1.2149 | ||||||
| September |
1.3142 | 1.2566 | ||||||
| October |
1.3133 | 1.2876 | ||||||
| November |
1.3010 | 1.2715 | ||||||
| December |
1.3260 | 1.2930 | ||||||
| 2013 |
||||||||
| January |
1.3584 | 1.3047 | ||||||
On February 22, 2013, the noon buying rate was $1.3166 per €1.00.
Fluctuations in the value of the euro relative to the U.S. dollar have had a significant effect on the translation into U.S. dollar of our euro denominated assets, liabilities, revenue and expenses, and may continue to do so in the future. For further information on the impact of fluctuations in exchange rates on our operations, see the “Fluctuations in Foreign Rates May Have An Adverse Effect On Our Financial Results” section in Part I, Item 3D. Risk Factors and the “Foreign Currency Risks” section in Part I, Item 11. Quantitative and Qualitative Disclosures About Market Risk.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
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The following section provides an overview of the risks to which our business is exposed. You should carefully consider the risk factors described below and all other information contained in this Annual Report, including the Consolidated Financial Statements and related Notes. The occurrence of the risks described below could have a material adverse impact on our business, financial condition or results of operations. Various statements in this Annual Report, including the following risk factors, contain forward-looking statements. Please also refer to Part I, Item 5G. Safe Harbor, contained elsewhere in this Annual Report.
The semiconductor industry is highly cyclical.
Historically, the relationship between supply and demand in the semiconductor industry has caused a high degree of cyclicality in the semiconductor market. Semiconductor supply is partly driven by manufacturing capacity, which in the past has demonstrated alternating periods of substantial capacity additions and periods in which no or limited capacity was added. As a general matter, semiconductor companies are more likely to add capacity in periods when current or expected future demand is strong and margins are, or are expected to be, high. Investments in new capacity can result in overcapacity, which can lead to a reduction in prices and margins. In response, companies typically limit further capacity additions, eventually causing the market to be relatively undersupplied. In addition, demand for semiconductors varies, which can exacerbate the effect of supply fluctuations. As a result of this cyclicality, the semiconductor industry has in the past experienced significant downturns, such as in 1997/1998, 2001/2002 and in 2008/2009, often in connection with, or in anticipation of, maturing life cycles of semiconductor companies’ products and declines in general economic conditions. These downturns have been characterized by diminishing demand for end-user products, high inventory levels, under-utilization of manufacturing capacity and accelerated erosion of average selling prices. The foregoing risks have historically had, and may continue to have, a material adverse effect on our business, financial condition and results of operations.
Significantly increased volatility and instability and unfavorable economic conditions may adversely affect our business.
Since early 2008, Europe, the United States and international markets have experienced increased volatility and instability. More recently, this volatility and instability intensified because of the sovereign debt crisis in Europe and the debt-ceiling crisis in the United States and the related financial restructuring efforts, the ratings downgrade of certain major economies , including the United States and France, continued hostilities in the Middle East and tensions in North Africa and other world events. This could further adversely affect the economies of the European Union, the United States and those of other countries and may exacerbate the cyclicality of our business. Among other factors, we face risks attendant to declines in general economic conditions, changes in demand for end-user products and changes in interest rates.
In January 2013, the International Monetary Fund projected global world output growth of 3.3% and 3.5% in 2012, and 2013, respectively, a decrease of 0.4% from its 3.9% estimated growth for 2013 released in January 2012. Official forecasts have been fluctuating as of late and negative economic trends may become worse, in particular amidst concerns that the euro crisis may further deepen. Despite indications of stabilization and aggressive measures taken by governments and central banks, there is a significant risk that the global economy could enter into a deeper and longer lasting recession. If economic conditions remain uncertain or deteriorate, our business, financial condition and results of operations could be materially adversely affected.
As a consequence of the significantly increased volatility and instability and the unfavorable economic conditions, it is increasingly difficult for us, our customers and suppliers to forecast demand trends, we are unable to accurately predict the extent or duration of cycles or their effect on our financial condition or result of operations and can give no assurance as to the timing, extent or duration of the current or future business cycles. A recurrent decline in demand or the failure of demand to return to prior levels could place pressure on our results of operations. The timing and extent of any changes to currently prevailing market conditions is uncertain and supply and demand may be unbalanced at any time.
The semiconductor industry is highly competitive. If we fail to introduce new technologies and products in a timely manner, this could adversely affect our business.
The semiconductor industry is highly competitive and characterized by constant and rapid technological change, short product lifecycles, significant price erosion and evolving standards. Accordingly, the success of our business depends to a significant extent on our ability to develop new technologies and products that are ultimately successful in the market. The costs related to the research and development necessary to develop new technologies and products are significant and any reduction of our research and development budget could harm our competitiveness. Meeting evolving industry requirements and introducing new products to the market in a timely manner and at prices that are acceptable to our customers are significant factors in determining our competitiveness and success. Commitments to develop new products must be made well in advance of any resulting sales, and technologies and standards may change during development, potentially rendering our products outdated or uncompetitive before their introduction. If we are unable to successfully develop new products, our revenue may decline substantially. Moreover, some of our competitors are well-established entities, are larger than us and have greater resources than we do. If these competitors increase the resources they devote to developing and marketing their products, we may not be able to compete effectively. Any consolidation among our competitors could enhance their product offerings and financial resources, further strengthening their competitive position. In addition, some of our competitors operate in narrow business areas relative to us, allowing them to concentrate their research and development efforts directly on products and services for those areas, which may give them a competitive advantage. As a result of these competitive pressures, we may face declining sales volumes or lower prevailing prices
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for our products, and we may not be able to reduce our total costs in line with this declining revenue. If any of these risks materialize, they could have a material adverse effect on our business, financial condition and results of operations.
In many of the market segments in which we compete, we depend on winning selection processes, and failure to be selected could adversely affect our business in those market segments.
One of our business strategies is to participate in and win competitive bid selection processes to develop products for use in our customers’ equipment and products. These selection processes can be lengthy and require us to incur significant design and development expenditures, with no guarantee of winning a contract or generating revenue. Failure to win new design projects and delays in developing new products with anticipated technological advances or in commencing volume shipments of these products may have an adverse effect on our business. This risk is particularly pronounced in markets where there are only a few potential customers and in the automotive market, where, due to the longer design cycles involved, failure to win a design-in could prevent access to a customer for several years. Our failure to win a sufficient number of these bids could result in reduced revenue and hurt our competitive position in future selection processes because we may not be perceived as being a technology or industry leader, each of which could have a material adverse effect on our business, financial condition and results of operations.
The demand for our products depends to a significant degree on the demand for our customers’ end products.
The vast majority of our revenue is derived from sales to manufacturers in the automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing markets. Demand in these markets fluctuates significantly, driven by consumer spending, consumer preferences, the development of new technologies and prevailing economic conditions. In addition, the specific products in which our semiconductors are incorporated may not be successful, or may experience price erosion or other competitive factors that affect the price manufacturers are willing to pay us. Such customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times. This is particularly common during periods of low demand. This can make managing our business difficult, as it limits the predictability of future revenue. It can also affect the accuracy of our financial forecasts. Furthermore, developing industry trends, including customers’ use of outsourcing and new and revised supply chain models, may affect our revenue, costs and working capital requirements. Additionally, a significant portion of our products is made to order.
If customers do not purchase products made specifically for them, we may not be able to resell such products to other customers or may not be able to require the customers who have ordered these products to pay a cancellation fee. The foregoing risks could have a material adverse effect on our business, financial condition and results of operations.
The semiconductor industry is characterized by significant price erosion, especially after a product has been on the market for a significant period of time.
One of the results of the rapid innovation that is exhibited by the semiconductor industry is that pricing pressure, especially on products containing older technology, can be intense. Product life cycles are relatively short, and as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis.
In turn, demand for older technology falls, causing the price at which such products can be sold to drop, in some cases precipitously. In order to continue profitably supplying these products, we must reduce our production costs in line with the lower revenue we can expect to receive per unit. Usually, this must be accomplished through improvements in process technology and production efficiencies. If we cannot advance our process technologies or improve our efficiencies to a degree sufficient to maintain required margins, we will no longer be able to make a profit from the sale of these products. Moreover, we may not be able to cease production of such products, either due to contractual obligations or for customer relationship reasons, and as a result may be required to bear a loss on such products. We cannot guarantee that competition in our core product markets will not lead to price erosion, lower revenue growth rates and lower margins in the future. Should reductions in our manufacturing costs fail to keep pace with reductions in market prices for the products we sell, this could have a material adverse effect on our business, financial condition and results of operations.
Our substantial amount of debt could adversely affect our financial health, which could adversely affect our results of operations.
We are highly leveraged. Our substantial indebtedness could have a material adverse effect on us by: making it more difficult for us to satisfy our payment obligations under our senior secured revolving credit facility that we entered into on April 27, 2012 (the “Secured Revolving Credit Facility”) or the secured term credit agreement that we entered into on March 4, 2011 (the “First 2017 Term Loan”), the joinder and amendment agreement to the secured term credit agreement that we entered into on November 18, 2011 (the “Second 2017 Term Loan” and, together with the First 2017 Term Loan the “2017 Term Loans”) and the joinder and amendment agreement to the secured term credit agreement that we entered into on February 16, 2012 (the “2019 Term Loan”) and the joinder and amendment to the secured term credit agreement that we entered into on December 10, 2012 (the “2020 Term Loan” and, together with the 2017 Term Loans and the 2019 Term Loan, the “Term Loans”) and under our euro-denominated floating rate senior secured notes due 2013 (the “Euro Floating Rate Secured Notes”), U.S. dollar-denominated floating rate senior secured notes due 2013 and the U.S. dollar-denominated floating rate senior secured notes due 2016 (together the “Dollar Floating Rate Secured Notes”), U.S. dollar-denominated 9 3/4% senior secured notes due 2018 (the “2018 Dollar Fixed Rate Secured Notes”) and U.S. dollar-denominated 5.75% senior notes due 2021 (the “2021 Dollar Fixed Rate Senior Notes” and, together with the Euro Floating Rate Secured Notes, the Dollar Floating Rate Secured Notes and the 2018 Dollar Fixed
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Rate Secured Notes, the “Notes”), limiting our ability to borrow money for working capital, restructurings, capital expenditures, research and development, investments, acquisitions or other purposes, if needed, and increasing the cost of any of these borrowings; requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, which reduces the funds available for operations and future business opportunities; limiting our flexibility in responding to changing business and economic conditions, including increased competition and demand for new services; placing us at a disadvantage when compared to those of our competitors that have less debt and by making us more vulnerable than those of our competitors who have less debt to a downturn in our business, industry or the economy in general. Despite our substantial indebtedness, we may still incur significantly more debt, which could further exacerbate the risks described above.
We may not be able to generate sufficient cash to service and repay all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
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 the principal, premium, if any, and interest on our indebtedness. We have seen substantial negative cash flows from operations in periods of adverse economic developments. Our business may not generate sufficient cash flow from operations and future borrowings under our Secured Revolving Credit Facility or from other sources may not be available to us, in an amount sufficient to enable us to repay our indebtedness, including the Secured Revolving Credit Facility, the Term Loans, or the Notes, or to fund our other liquidity needs, and working capital and capital expenditure requirements, and we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness.
A substantial portion of our indebtedness currently bears interest at floating rates, and therefore if interest rates increase, our debt service requirements will increase. We may therefore need to refinance or restructure all or a portion of our indebtedness, including the Secured Revolving Credit Facility, the Term Loans, the Notes, on or before maturity.
If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity investments or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could have a material adverse effect on our business, or seeking to restructure our debt through compromises, exchanges or insolvency processes.
If we cannot make scheduled payments on our debt, we will be in default and, as a result:
| • | holders of our debt securities could declare all outstanding principal and interest to be due and payable; |
| • | the lenders under our Secured Revolving Credit Facility could terminate their commitments to lend us money and/or foreclose against the assets securing any outstanding borrowings; and |
| • | we could be forced into bankruptcy or liquidation. |
Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.
Goodwill and other identifiable intangible assets are recorded at fair value on the date of acquisition. We review our goodwill and other intangible assets balance for impairment upon any indication of a potential impairment, and in the case of goodwill, at a minimum of once a year. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services we sell, challenges to the validity of certain registered intellectual property, reduced sales of certain products incorporating registered intellectual property and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of impairment of goodwill or other identifiable intangible assets could have a material adverse effect on our financial position, results of operations and net worth.
As our business is global, we need to comply with laws and regulations in countries across the world and are exposed to international business risks that could adversely affect our business.
We operate globally, with manufacturing, assembly and testing facilities in several continents, and we market our products globally.
As a result, we are subject to environmental, labor and health and safety laws and regulations in each jurisdiction in which we operate. We are also required to obtain environmental permits and other authorizations or licenses from governmental authorities for certain of our operations and have to protect our intellectual property worldwide. In the jurisdictions where we operate, we need to comply with differing standards and varying practices of regulatory, tax, judicial and administrative bodies.
There is new U.S. legislation to improve the transparency and accountability concerning the supply of minerals coming from the conflict zones of the Democratic Republic of Congo and adjoining countries. Such legislation requires that, starting the calendar year
beginning January 1, 2013, reporting companies that determine that conflict minerals are necessary to the functionality or production of a product they manufactured or contracted to be manufactured over a calendar year to file a Conflict Minerals Report as an exhibit to a Form SD report. The Conflict Minerals Report is required to set out the due diligence efforts and procedures exercised on the source and chain of custody of such conflict minerals, in accordance with a nationally or internationally recognized due diligence framework, and a description of the company’s products containing such conflict minerals. The implementation of these requirements could increase our legal
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compliance costs and affect the sourcing and availability of minerals used in the manufacture of our products. As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. Also, since our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all metals used in our products.
In addition, the business environment is also subject to many economic and political uncertainties, including the following international business risks:
| • | negative economic developments in economies around the world and the instability of governments, such as the sovereign debt crisis in certain European countries and the debt-ceiling crisis in the United States or the recent downgrade of certain major economies, including the United States and France; |
| • | social and political instability in a number of countries around the world, including continued hostilities in the Middle East, including the threat of war. Although we have no direct investments in North Africa and the Middle East, the ongoing changes may have, for instance via our customers, the energy prices and the financial markets, a negative effect on our business, financial condition and operations; |
| • | potential terrorist attacks in the US and Europe; |
| • | epidemics and pandemics, which may adversely affect our workforce, as well as our local suppliers and customers in particular in Asia; |
| • | adverse changes in governmental policies, especially those affecting trade and investment; |
| • | our customers or other groups of stakeholders might impose requirements that are more stringent than the laws in the countries in which we are active; |
| • | foreign currency exchange, in particular with respect to the U.S. dollar, and transfer restrictions, in particular in Greater China; and |
| • | threats that our operations or property could be subject to nationalization and expropriation. |
No assurance can be given that we have been or will be at all times in complete compliance with the laws and regulations to which we are subject or that we have obtained or will obtain the permits and other authorizations or licenses that we need. If we violate or fail to comply with laws, regulations, permits and other authorizations or licenses, we could be fined or otherwise sanctioned by regulators. In this case, or if any of the international business risks were to materialize or become worse, they could have a material adverse effect on our business, financial condition and results of operations.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, further increasing legal and financial compliance costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure.
Interruptions in our information technology systems could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex information technology applications, systems and networks to operate our business. Any significant interruption in our business applications, systems or networks, including but not limited to new system implementations, computer viruses, cyber attacks, security breaches, facility issues or energy blackouts could have a material adverse impact on our operations, sales and operating results. For example, from time to time, our information technology systems and networks have been attacked by unauthorized parties. Any system or network disruption could result in a loss of our intellectual property, the release of commercially sensitive information or partner, customer or employee personal data, or the loss of production capabilities at one of our manufacturing sites. Therefore, any such severe incident could harm our competitive position, result in a loss of customer confidence, and cause us to incur significant costs to remedy the damages caused by the system or network disruptions, whether caused by cyber attacks, security breaches or otherwise. The protective measures that we are adopting to avoid system or network disruptions may be insufficient to prevent or limit the damage from any future disruptions and any disruption could have a material adverse impact on our business, operations and financial results.
In difficult market conditions, our high fixed costs combined with low revenue negatively affect our results of operations.
The semiconductor industry is characterized by high fixed costs and, notwithstanding our significant utilization of third-party manufacturing capacity, most of our production requirements are met by our own manufacturing facilities. In less favorable industry environments, like we faced in the second half in 2011, we are generally faced with a decline in the utilization rates of our manufacturing facilities due to decreases in product demand. During such periods, our fabrication plants operate at a lower loading level, while the fixed costs associated with the full capacity continue to be incurred, resulting in lower gross profits.
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The semiconductor industry is capital intensive and if we are unable to invest the necessary capital to operate and grow our business, we may not remain competitive.
To remain competitive, we must constantly improve our facilities and process technologies and carry out extensive research and development, each of which requires investment of significant amounts of capital. This risk is magnified by the relatively high level of debt we currently have, since we are required to use a portion of our cash flow to service that debt. If we are unable to generate sufficient cash or raise sufficient capital to meet both our debt service and capital investment requirements, or if we are unable to raise required capital on favorable terms when needed, this could have a material adverse effect on our business, financial condition and results of operations.
We are bound by the restrictions contained in the Secured Revolving Credit Facility, the Term Loans and the indentures related to the Notes, which may restrict our ability to pursue our business strategies.
Restrictive covenants in our Secured Revolving Credit Facility, the Term Loans and the indentures related to the Notes (collectively, the “Indentures”) limit our ability, among other things, to:
| • | incur additional indebtedness or issue preferred stock; |
| • | pay dividends or make distributions in respect of our capital stock or make certain other restricted payments or investments; |
| • | repurchase or redeem capital stock; |
| • | sell assets, including capital stock of restricted subsidiaries; |
| • | agree to limitations on the ability of our restricted subsidiaries to make distributions; |
| • | enter into transactions with our affiliates; |
| • | incur liens; |
| • | guarantee indebtedness; and |
| • | engage in consolidations, mergers or sales of substantially all of our assets. |
These restrictions could restrict our ability to pursue our business strategies. We are currently in compliance with all of our restrictive covenants.
Our failure to comply with the covenants contained in our Secured Revolving Credit Facility, the Term Loans or the Indentures or our other debt agreements, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.
Our Secured Revolving Credit Facility, the Term Loans and the Indentures require us to comply with various covenants. Even though we are currently in compliance with all of our covenants, if there were an event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could terminate commitments to lend and cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn could result in cross defaults under our other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon an event of default.
If, when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our Secured Revolving Credit Facility or if a default otherwise occurs, the lenders under our Secured Revolving Credit Facility could elect to terminate their commitments thereunder, cease making further loans and issuing or renewing letters of credit, declare all outstanding borrowings and other amounts, together with accrued interest and other fees, to be immediately due and payable, institute enforcement proceedings against those assets that secure the extensions of credit under our Secured Revolving Credit Facility and thereby prevent us from making payments on our debt. Any such actions could force us into bankruptcy or liquidation.
We rely to a significant extent on proprietary intellectual property. We may not be able to protect this intellectual property against improper use by our competitors or others.
We depend significantly on patents and other intellectual property rights to protect our products and proprietary design and fabrication processes against misappropriation by others. We may in the future have difficulty obtaining patents and other intellectual property rights, and the patents we receive may be insufficient to provide us with meaningful protection or commercial advantage. We may not be able to obtain patent protection or secure other intellectual property rights in all the countries in which we operate, and under the laws of such countries, patents and other intellectual property rights may be or become unavailable or limited in scope. The protection offered by intellectual property rights may be inadequate or weakened for reasons or circumstances that are out of our control. Further, our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. In particular, intellectual property rights are difficult to enforce in the People’s Republic of China (PRC) and certain other countries,
since the application and enforcement of the laws governing such rights may not have reached the same level as compared to other jurisdictions where we operate, such as the United States, Germany and the Netherlands. Consequently, operating in some of these nations may subject us to an increased risk that unauthorized parties may attempt to copy or otherwise use our intellectual property or the intellectual property of our suppliers or other parties with whom we engage. There is no assurance that we will be able to protect our intellectual property rights or have adequate legal recourse in the event that we seek legal or judicial enforcement of our intellectual property rights under the laws of such countries.
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Any inability on our part to adequately protect our intellectual property may have a material adverse effect on our business, financial condition and results of operations.
The intellectual property that was transferred or licensed to us from Philips may not be sufficient to protect our position in the industry.
In connection with our separation from Philips in 2006, Philips transferred approximately 5,300 patent families to us subject to certain limitations, including (1) any prior commitments to and undertakings with third parties entered into prior to the separation and (2) certain licenses retained by Philips. The licenses retained by Philips give Philips the right to sublicense to third parties in certain circumstances, which may divert revenue opportunities from us. Approximately 800 of the patent families transferred from Philips were transferred to ST-NXP Wireless (and subsequently to ST-Ericsson, its successor) in connection with the contribution of our wireless operations to ST-NXP Wireless in 2008. Approximately 400 of the patent families transferred from Philips were transferred to Trident Microsystems, Inc. (“Trident”) in connection with the divestment of our television systems and set-top box business lines to Trident in 2010. Further, a number of other patent families have been transferred in the context of other transactions. In addition, the sale of our Sound Solutions business to Knowles Electronics has lead to the transfer of certain patent families to them.
Philips granted us a non-exclusive license to: (1) all patents Philips holds but has not assigned to us, to the extent that they are entitled to the benefit of a filing date prior to the separation and for which Philips is free to grant licenses without the consent of or accounting to any third party and (2) certain know-how that is available to us, where such patents and know-how relate to: (i) our current products and technologies, as well as successor products and technologies, (ii) technology that was developed for us prior to the separation and (iii) technology developed pursuant to contract research co-funded by us. Philips has also granted us a non-exclusive royalty-free and irrevocable license under: (1) certain patents for use in giant magneto-resistive devices outside the field of healthcare and bio applications, and (2) certain patents relevant to polymer electronics resulting from contract research work co-funded by us in the field of radio frequency identification tags. Such licenses are subject to certain prior commitments and undertakings. However, Philips retained ownership of certain intellectual property related to our business, as well as certain rights with respect to intellectual property transferred to us in connection with the separation. There can be no guarantee that the patents transferred to us will be sufficient to assert offensively against our competitors, to be used as leverage to negotiate future cross-licenses or to give us freedom to operate and innovate in the industry. The strength and value of our intellectual property may be diluted if Philips licenses or otherwise transfers such intellectual property or such rights to third parties, especially if those third parties compete with us. The foregoing risks could have a material adverse effect on our business, financial condition and results of operations.
We may become party to intellectual property claims or litigation that could cause us to incur substantial costs, pay substantial damages or prohibit us from selling our products.
We have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other intellectual property rights of others. Further, we may become involved in costly litigation brought against us regarding patents, copyrights, trademarks, trade secrets or other intellectual property rights. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be able to obtain any or all of the necessary licenses on satisfactory terms, if at all. In the event that we cannot obtain or take the view that we don’t need a license, these parties may file lawsuits against us seeking damages (and potentially treble damages in the United States) or an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted. Such lawsuits, if successful, could result in an increase in the costs of selling certain of our products, our having to partially or completely redesign our products or stop the sale of some of our products and could cause damage to our reputation. Any litigation could require significant financial and management resources regardless of the merits or outcome, and we cannot assure you that we would prevail in any litigation or that our intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. The award of damages, including material royalty payments, or the entry of an injunction against the manufacture and sale of some or all of our products, could affect our ability to compete or have a material adverse effect on our business, financial condition and results of operations.
We rely on strategic partnerships, joint ventures and alliances for manufacturing and research and development. However, we often do not control these partnerships and joint ventures, and actions taken by any of our partners or the termination of these partnerships or joint ventures could adversely affect our business.
As part of our strategy, we have entered into a number of long-term strategic partnerships with other leading industry participants. For example, we have entered into a joint venture with Taiwan Semiconductor Manufacturing Company Limited (“TSMC”) called Systems on Silicon Manufacturing Company Pte. Ltd. (“SSMC”), and we jointly operate with Jilin Sino-Microelectronics Company Ltd. the joint venture Jilin NXP Semiconductors Ltd. (“Jilin”). We established Advanced Semiconductor Manufacturing Corporation Limited (“ASMC”) together with a number of Chinese partners, and together with Advanced Semiconductor Engineering Inc. (“ASE”), we established the assembly and test joint venture ASEN Semiconductors Co. Ltd. (“ASEN”).
If any of our strategic partners in industry groups or in any of the other alliances we engage with were to encounter financial difficulties or change their business strategies, they may no longer be able or willing to participate in these groups or alliances, which could have a material adverse effect on our business, financial condition and results of operations. We do not control some of these strategic partnerships, joint ventures and alliances in which we participate. We may also have certain obligations, including some limited funding
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obligations or take or pay obligations, with regard to some of our strategic partnerships, joint ventures and alliances. For example, we have made certain commitments to SSMC, in which we have a 61.2% ownership share, whereby we are obligated to make cash payments to SSMC should we fail to utilize, and TSMC does not utilize, an agreed upon percentage of the total available capacity at SSMC’s fabrication facilities if overall SSMC utilization levels drop below a fixed proportion of the total available capacity.
We have made and may continue to make acquisitions and engage in other transactions to complement or expand our existing businesses. However, we may not be successful in acquiring suitable targets at acceptable prices and integrating them into our operations, and any acquisitions we make may lead to a diversion of management resources.
Our future success may depend on acquiring businesses and technologies, making investments or forming joint ventures that complement, enhance or expand our current portfolio or otherwise offer us growth opportunities. If we are unable to identify suitable targets, our growth prospects may suffer, and we may not be able to realize sufficient scale advantages to compete effectively in all markets. In addition, in pursuing acquisitions, we may face competition from other companies in the semiconductor industry. Our ability to acquire targets may also be limited by applicable antitrust laws and other regulations in the United States, the European Union and other jurisdictions in which we do business. To the extent that we are successful in making acquisitions, we may have to expend substantial amounts of cash, incur debt, assume loss-making divisions and incur other types of expenses. We may also face challenges in successfully integrating acquired companies into our existing organization. Each of these risks could have a material adverse effect on our business, financial condition and results of operations.
We may from time to time desire to exit certain product lines or businesses, or to restructure our operations, but may not be successful in doing so.
From time to time, we may decide to divest certain product lines and businesses or restructure our operations, including through the contribution of assets to joint ventures. We have, in recent years, exited several of our product lines and businesses, and we have closed several of our manufacturing and research facilities. We may continue to do so in the future. However, our ability to successfully exit product lines and businesses, or to close or consolidate operations, depends on a number of factors, many of which are outside of our control. For example, if we are seeking a buyer for a particular business line, none may be available, or we may not be successful in negotiating satisfactory terms with prospective buyers. In addition, we may face internal obstacles to our efforts. In particular, several of our operations and facilities are subject to collective bargaining agreements and social plans or require us to consult with our employee representatives, such as work councils which may prevent or complicate our efforts to sell or restructure our businesses. In some cases, particularly with respect to our European operations, there may be laws or other legal impediments affecting our ability to carry out such sales or restructuring.
If we are unable to exit a product line or business in a timely manner, or to restructure our operations in a manner we deem to be advantageous, this could have a material adverse effect on our business, financial condition and results of operations. Even if a divestment is successful, we may face indemnity and other liability claims by the acquirer or other parties.
We may from time to time restructure parts of our processes. Any such restructuring may impact customer satisfaction and the costs of implementation may be difficult to predict.
Between 2008 and 2011, we executed our redesign program (the “Redesign Program”). We plan to continue to restructure and make changes to parts of the processes in our organization. Furthermore, if the global economy remains as volatile or unstable or if the global economy reenters into a deeper and longer lasting recession, our revenues could decline, and we may be forced to take additional cost savings steps that could result in additional charges and materially affect our business. The costs of implementing any restructurings, changes or cost savings steps may differ from our estimates and any negative impacts on our revenues or otherwise of such restructurings, changes or steps, such as situations in which customer satisfaction is negatively impacted, may be larger than originally estimated. During the fourth quarter of 2012 we announced a restructuring initiative designed to improve operational efficiency and to competitively position the company for sustainable growth.
If we fail to extend or renegotiate our collective bargaining agreements and social plans with our labor unions as they expire from time to time, if regular or statutory consultation processes with employee representatives such as works councils fail or are delayed, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.
We are a party to collective bargaining agreements and social plans with our labor unions. We are also required to consult with our employee representatives, such as works councils, on items such as restructurings, acquisitions and divestitures. Although we believe that our relations with our employees, employee representatives and unions are satisfactory, no assurance can be given that we will be able to successfully extend or renegotiate these agreements as they expire from time to time or to conclude the consultation processes in a timely and favorable way. The impact of future negotiations and consultation processes with employee representatives could have a material impact on our financial results. Also, if we fail to extend or renegotiate our labor agreements and social plans, if significant disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business.
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Our working capital needs are difficult to predict.
Our working capital needs are difficult to predict and may fluctuate. The comparatively long period between the time at which we commence development of a product and the time at which it may be delivered to a customer leads to high inventory and work-in-progress levels. The volatility of our customers’ own businesses and the time required to manufacture products also makes it difficult to manage inventory levels and requires us to stockpile products across many different specifications.
Our business may be adversely affected by costs relating to product defects, and we could be faced with product liability and warranty claims.
We make highly complex electronic components and, accordingly, there is a risk that defects may occur in any of our products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused by such defects. If we release defective products into the market, our reputation could suffer and we may lose sales opportunities and incur liability for damages. Moreover, since the cost of replacing defective semiconductor devices is often much higher than the value of the devices themselves, we may at times face damage claims from customers in excess of the amounts they pay us for our products, including consequential damages. We also face exposure to potential liability resulting from the fact that our customers typically integrate the semiconductors we sell into numerous consumer products, which are then sold into the marketplace. We are exposed to product liability claims if our semiconductors or the consumer products based on them malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence that our products caused the damage in question, and such claims could result in significant costs and expenses relating to attorneys’ fees and damages. In addition, our customers may recall their products if they prove to be defective or make compensatory payments in accordance with industry or business practice or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations.
Our business has suffered, and could in the future suffer, from manufacturing problems.
We manufacture, in our own factories as well as subcontracted, our products using processes that are highly complex, require advanced and costly equipment and must continuously be modified to improve yields and performance. Difficulties in the production process can reduce yields or interrupt production, and, as a result of such problems, we may on occasion not be able to deliver products or do so in a timely or cost-effective or competitive manner. As the complexity of both our products and our fabrication processes has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become more demanding. As is common in the semiconductor industry, we have in the past experienced manufacturing difficulties that have given rise to delays in delivery and quality control problems. There can be no assurance that any such occurrence in the future would not materially harm our results of operations. Further, we may suffer disruptions in our manufacturing operations, either due to production difficulties such as those described above or as a result of external factors beyond our control. We may, in the future, experience manufacturing difficulties or permanent or temporary loss of manufacturing capacity due to the preceding or other risks. Any such event could have a material adverse effect on our business, financial condition and results of operations.
We rely on the timely supply of equipment and materials and could suffer if suppliers fail to meet their delivery obligations or raise prices. Certain equipment and materials needed in our manufacturing operations are only available from a limited number of suppliers.
Our manufacturing operations depend on deliveries of equipment and materials in a timely manner and, in some cases, on a just-in-time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity constraints or other factors. Supply disruptions may also occur due to shortages in critical materials, such as silicon wafers or specialized chemicals. Because the equipment that we purchase is complex, it is frequently difficult or impossible for us to substitute one piece of equipment for another or replace one type of material with another. A failure by our suppliers to deliver our requirements could result in disruptions to our manufacturing operations. Our business, financial condition and results of operations could be harmed if we are unable to obtain adequate supplies of quality equipment or materials in a timely manner or if there are significant increases in the costs of equipment or materials.
Failure of our outside foundry suppliers to perform could adversely affect our ability to exploit growth opportunities.
We currently use outside suppliers or foundries for a portion of our manufacturing capacity. Outsourcing our production presents a number of risks. If our outside suppliers are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. In addition, purchasing rather than manufacturing these products may adversely affect our gross profit margin if the purchase costs of these products are higher than our own manufacturing costs would have been. Our internal manufacturing costs include depreciation and other fixed costs, while costs for products outsourced are based on market conditions. Prices for foundry products also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter to quarter and, in cases of industry shortages, they can increase significantly, negatively affecting our gross profit.
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Loss of our key management and other personnel, or an inability to attract such management and other personnel, could affect our business.
We depend on our key management to run our business and on our senior engineers to develop new products and technologies. Our success will depend on the continued service of these individuals. Although we have several share based compensation plans in place, we cannot be sure that these plans will help us in our ability to retain key personnel, especially considering the fact that participants under some of our plans are allowed to exercise stock options and sell the shares so acquired pro rata upon a sale of shares of common stock by the co-investors, including the Private Equity Consortium (as defined below) and that all of the stock options under some of our plans become exercisable upon a change of control (in particular, the Private Equity Consortium no longer jointly holding 30% of our shares of common stock). The loss of any of our key personnel, whether due to departures, death, ill health or otherwise, could have a material adverse effect on our business. The market for qualified employees, including skilled engineers and other individuals with the required technical expertise to succeed in our business, is highly competitive and the loss of qualified employees or an inability to attract, retain and motivate the additional highly skilled employees required for the operation and expansion of our business could hinder our ability to successfully conduct research activities or develop marketable products. The foregoing risks could have a material adverse effect on our business.
Disruptions in our relationships with any one of our key customers could adversely affect our business.
A substantial portion of our revenue is derived from our top customers, including our distributors. We cannot guarantee that we will be able to generate similar levels of revenue from our largest customers in the future. Should one or more of these customers substantially reduce their purchases from us, this could have a material adverse effect on our business, financial condition and results of operations.
We receive subsidies and grants in certain countries, and a reduction in the amount of governmental funding available to us or demands for repayment could increase our costs and affect our results of operations.
As is the case with other large semiconductor companies, we receive subsidies and grants from governments in some countries. These programs are subject to periodic review by the relevant governments, and if any of these programs are curtailed or discontinued, this could have a material adverse effect on our business, financial condition and results of operations. As the availability of government funding is outside our control, we cannot guarantee that we will continue to benefit from government support or that sufficient alternative funding will be available if we lose such support. Moreover, should we terminate any activities or operations, including strategic alliances or joint ventures, we may face adverse actions from the local governmental agencies providing such subsidies to us. In particular, such government agencies could seek to recover such subsidies from us and they could cancel or reduce other subsidies we receive from them. This could have a material adverse effect on our business, financial condition and results of operations.
Legal proceedings covering a range of matters are pending in various jurisdictions. Due to the uncertainty inherent in litigation, it is difficult to predict the final outcome. An adverse outcome might affect our results of operations.
We and certain of our businesses are involved as plaintiffs or defendants in legal proceedings in various matters. Although the ultimate disposition of asserted claims and proceedings cannot be predicted with certainty, our financial position and results of operations could be affected by an adverse outcome.
For example, on January 7, 2009, the European Commission issued a release in which it confirmed it had started an investigation in the smart card chip sector. The European Commission has reason to believe that the companies concerned may have violated European Union competition rules, prohibiting certain practices such as price fixing, customer allocation and the exchange of commercially sensitive information. As one of the companies active in the smart card chip sector, we are subject to the ongoing investigation and assisting the regulatory authorities in this investigation. If the European Commission were to find that we violated European Union competition laws, it could impose fines and penalties on our company that, while the amounts cannot be predicted with certainty, we believe would not have a material adverse effect on our consolidated financial position. However, any such fines or penalties may be material to our consolidated statement of operations for a particular period.
Fluctuations in foreign exchange rates may have an adverse effect on our financial results.
A majority of our expenses are incurred in euro, while most of our revenue is denominated in U.S. dollars. Accordingly, our results of operations may be affected by changes in exchange rates, particularly between the euro and the U.S. dollar. In addition, we have euro denominated assets and liabilities and, since our reporting currency is the U.S. dollar, the impact of currency translation adjustments to such assets and liabilities may have a negative effect on our equity position. In addition, the U.S. dollar-denominated debt held by our Dutch subsidiary with functional currency euro may generate adverse currency results in our financial income and expenses. Part of this effect is mitigated due to the application of net investment hedge accounting, since May 2011, pursuant to which the currency results on (part of) the U.S. dollar denominated debt is reported as part of other comprehensive income within equity instead of financial income and expense in the income statement. Absent the application of net investment hedge accounting, we would have recorded an additional benefit of $26 million, before tax, within financial income and expense in the 2012 statement of operations. We continue to hold or convert a part of our cash in euros as a hedge for euro expenses and euro interest payments. We are exposed to fluctuations in exchange rates when we convert U.S. dollars to euro. The current European sovereign debt crisis and the uncertainties as to its resolution or outcome intensify these currency exchange risks.
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We are exposed to a variety of financial risks, including currency risk, interest rate risk, liquidity risk, commodity price risk, credit risk and other non-insured risks, which may have an adverse effect on our financial results.
We are a global company and, as a direct consequence, movements in the financial markets may impact our financial results. We are exposed to a variety of financial risks, including currency fluctuations, interest rate risk, liquidity risk, commodity price risk and credit risk and other non-insured risks. We enter into diverse financial transactions with several counterparties to mitigate our currency risk. Derivative instruments are only used for hedging purposes. The rating of our debt by major rating agencies may further improve or deteriorate. As a result, our additional borrowing capacity and financing costs may be impacted.
We are also a purchaser of certain base metals, precious metals and energy used in the manufacturing process of our products. Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform upon their agreed payment obligations. Credit risk is present within our trade receivables. Such exposure is reduced through ongoing credit evaluations of the financial conditions of our customers and by adjusting payment terms and credit limits when appropriate. We invest available cash and cash equivalents with various financial institutions and are in that respect exposed to credit risk with these counterparties. We actively manage concentration risk on a daily basis adhering to a treasury management policy. Cash is invested and financial transactions are concluded where possible with financial institutions with a strong credit rating. If we are unable to successfully manage these risks, they could have a material adverse effect on our business, financial condition and results of operations.
The impact of a negative performance of financial markets and demographic trends on our defined benefit pension liabilities and costs cannot be predicted and may be severe.
We sponsor defined benefit pension plans in a number of countries and a significant number of our employees are covered by our defined benefit pension plans. As of December 31, 2012, we had recognized a net accrued benefit liability of $257 million, representing the unfunded benefit obligations of our defined pension plans. The funding status and the liabilities and costs of maintaining such defined benefit pension plans may be impacted by financial market developments. For example, the accounting for such plans requires determining discount rates, expected rates of compensation and expected returns on plan assets, and any changes in these variables can have a significant impact on the projected benefit obligations and net periodic pension costs. Negative performance of the financial markets could also have a material impact on funding requirements and net periodic pension costs. Our defined benefit pension plans may also be subject to demographic trends. Accordingly, our costs to meet pension liabilities going forward may be significantly higher than they are today, which could have a material adverse impact on our financial condition.
Changes in the tax deductibility of interest may adversely affect our financial position and our ability to service the obligations under our indebtedness.
Effective January 1, 2013 certain new limitations will apply to the tax deductibility of interest expense in the Netherlands. A Netherlands company that is considered to be financed with excessive debt, may not be entitled to deduct interest expense on such excessive debt. Existing debt is not grandfathered under these rules. The measurement of whether there is excessive debt is based on mechanical tests that focus on the amount of equity of the company in relation to the acquisition cost of and capital invested in Netherlands and foreign subsidiaries of the Netherlands consolidated group. When the equity of the company is below a certain minimum threshold, the company may be considered to have excessive debt. Certain safe harbor rules apply when new operational businesses are acquired by the company. The application of this limitation on tax deductibility of interest expense may adversely affect our financial position and our ability to service the obligations under our indebtedness.
We are exposed to a number of different tax uncertainties, which could have an impact on tax results.
We are required to pay taxes in multiple jurisdictions. We determine the taxation we are required to pay based on our interpretation of the applicable tax laws and regulations in the jurisdictions in which we operate. We may be subject to unfavorable changes in the respective tax laws and regulations to which we are subject. Tax controls, audits, change in controls and changes in tax laws or regulations or the interpretation given to them may expose us to negative tax consequences, including interest payments and potentially penalties. We have issued transfer-pricing directives in the areas of goods, services and financing, which are in accordance with the Guidelines of the Organization of Economic Co-operation and Development. As transfer pricing has a cross border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country.
In order to mitigate the transfer pricing uncertainties within our deployment, measures have been taken and a monitoring system has been put in place. On a regular basis, internal reviews are executed to test the correct implementation of the transfer pricing directives.
Uncertainties can also result from disputes with local tax authorities about transfer pricing of internal deliveries of goods and services or related to financing, acquisitions and divestments, the use of tax credits and permanent establishments, and tax losses carried forward. These uncertainties may have a significant impact on local tax results. We have various tax assets resulting from acquisitions. Tax assets can also result from the generation of tax losses in certain legal entities. Tax authorities may challenge these tax assets. In addition, the value of the tax assets resulting from tax losses carried forward depends on having sufficient taxable profits in the future.
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There may from time to time exist deficiencies in our control systems that could adversely affect the accuracy and reliability of our periodic reporting.
We are required to establish and periodically assess the design and operating effectiveness of our internal control over financial reporting. In connection with our assessment of the internal control over financial reporting for the year ended December 31, 2009, we identified a deficiency related to the accounting and disclosure for income taxes, which we concluded constituted a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that we identified related to the execution of the procedures surrounding the preparation and review of our income tax provision as of December 31, 2009. In particular, the execution of our controls did not ensure the accuracy and validity of our acquisition accounting adjustments and the determination of the valuation allowance for deferred tax assets. Part of the identified issue was caused by the complexity that resulted from the fact that step-ups from acquisitions were accounted for centrally. During the year ended December 31, 2010, we updated our internal controls and concluded that we had remediated this material weakness. However, despite the compliance procedures that we adopted, there may from time to time exist deficiencies in our control systems that could adversely affect the accuracy and reliability of our periodic reporting. Our periodic reporting is the basis of investors’ and other market professionals’ understanding of our businesses. Imperfections in our periodic reporting could create uncertainty regarding the reliability of our results of operations and financial results, which in turn could have a material adverse impact on our reputation or share price.
Environmental laws and regulations expose us to liability and compliance with these laws and regulations, and any such liability may adversely affect our business.
We are subject to many environmental, health and safety laws and regulations in each jurisdiction in which we operate, which govern, among other things, emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and ground water contamination and the health and safety of our employees. We are also required to obtain environmental permits from governmental authorities for certain of our operations. We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.
As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical manufacturing facilities. Certain environmental laws impose strict, and in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. Certain of these laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. Soil and groundwater contamination has been identified at some of our current and former properties resulting from historical, ongoing or third-party activities. We are in the process of investigating and remediating contamination at some of these sites. While we do not expect that any contamination currently known to us will have a material adverse effect on our business, we cannot assure you that this is the case or that we will not discover new facts or conditions or that environmental laws or the enforcement of such laws will not change such that our liabilities would be increased significantly. In addition, we could also be held liable for consequences arising out of human exposure to hazardous substances or other environmental damage. In summary, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, regulated materials, will not have a material adverse effect on our business, financial conditions and results of operations.
Scientific examination of, political attention to and rules and regulations on issues surrounding the existence and extent of climate change may result in an increase in the cost of production due to increase in the prices of energy and introduction of energy or carbon tax. A variety of regulatory developments have been introduced that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Enterprises may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These developments and further legislation that is likely to be enacted could affect our operations negatively. Changes in environmental regulations could increase our production costs, which could adversely affect our results of operations and financial condition.
Certain natural disasters, such as flooding, large earthquakes, volcanic eruptions or nuclear or other disasters, may negatively impact our business. There is increasing concern that climate change is occurring and may cause a rising number of natural disasters.
Environmental and other disasters, such as flooding, large earthquakes, volcanic eruptions or nuclear or other disasters, or a combination thereof may negatively impact our business. If flooding, a large earthquake, volcanic eruption or other natural disaster were to directly damage, destroy or disrupt our manufacturing facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business. Even if our manufacturing facilities are not directly damaged, a large natural disaster may result in disruptions in distribution channels or supply chains and significant increases in the prices of raw materials used for our manufacturing process. For instance, the nuclear incident following the tsunami in Japan impacted the supply chains of our customers and suppliers. Furthermore, any disaster affecting our customers (or their respective customers) may significantly negatively impact the demand for our products and our revenues.
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The impact of any such natural disasters depends on the specific geographic circumstances but could be significant, as some of our factories are located in islands with known earthquake fault zones, including the Philippines, Singapore, Taiwan or Thailand. There is increasing concern that climate change is occurring that may cause a rising number of natural disasters with potentially dramatic effects on human activity. We cannot predict the economic impact, if any, of natural disasters or climate change.
The Private Equity Consortium is able to influence or has control over us and this control limits your ability to influence our significant corporate transactions. The Private Equity Consortium may have conflicts of interest with other stakeholders, including our stockholders.
The consortium of funds advised by Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Bain Capital Partners, LLC (“Bain”), Silver Lake Technology Management Company, L.L.C. (“Silver Lake”), Apax Partners LLP (“Apax”) and AlpInvest Partners N.V. (“AlpInvest”), and collectively, the “Private Equity Consortium”, controls us and, following a secondary offering of shares by certain selling shareholders which settled on February 7, 2013, beneficially owns 42% of our common stock. The Private Equity Consortium will continue to be able to influence or control matters requiring approval by our stockholders, including the election and removal of our directors, our corporate and management policies, potential mergers or acquisitions, payment of dividends, asset sales and other significant corporate transactions. We cannot assure you that the interests of the Private Equity Consortium will coincide with the interests of other holders of our common stock, particularly if we encounter financial difficulties or are unable to pay our debts when due. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their shares as part of such a takeover and might ultimately affect the market price of our common stock.
United States civil liabilities may not be enforceable against us.
We are incorporated under the laws of the Netherlands and substantial portions of our assets are located outside of the United States. In addition, certain members of our board, our officers and certain experts named herein reside outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such other persons residing outside the United States, or to enforce outside the United States judgments obtained against such persons in U.S. courts in any action. In addition, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon the U.S. laws.
There is no treaty between the United States and the Netherlands for the mutual recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be enforceable in the Netherlands unless the underlying claim is re-litigated before a Dutch court. Under current practice however, a Dutch court will generally grant the same judgment without a review of the merits of the underlying claim if (i) that judgment resulted from legal proceedings compatible with Dutch notions of due process, (ii) that judgment does not contravene public policy of the Netherlands and (iii) the jurisdiction of the United States federal or state court has been based on internationally accepted principles of private international law. Based on the foregoing, there can be no assurance that U.S. investors will be able to enforce against us or members of our board of directors, officers or certain experts named herein who are residents of the Netherlands or countries other than the United States any judgments obtained in U.S. courts in civil and commercial matters.
In addition, there is doubt as to whether a Dutch court would impose civil liability on us, the members of our board of directors, our officers or certain experts named herein in an original action predicated solely upon the U.S. laws brought in a court of competent jurisdiction in the Netherlands against us or such members, officers or experts, respectively.
We are a Dutch public company with limited liability. The rights of our stockholders may be different from the rights of stockholders governed by the laws of U.S. jurisdictions.
We are a Dutch public company with limited liability (naamloze vennootschap). Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The rights of stockholders and the responsibilities of members of our board of directors may be different from the rights and obligations of stockholders in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board of directors is required by Dutch law to consider the interests of our company, its stockholders, its employees and other stakeholders, in all cases with due observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a stockholder. See Part II, Item 16G. Corporate Governance.
Our articles of association, Dutch corporate law and our current and future debt instruments contain provisions that may discourage a takeover attempt.
Provisions contained in our articles of association and the laws of the Netherlands, the country in which we are incorporated, could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our articles of association impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions.
Our general meeting of stockholders has empowered our board of directors to issue additional shares or to restrict or exclude pre-
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emptive rights on existing shares for a period of five years from August 2, 2010 until August 2, 2015. An issue of new shares may make it more difficult for a stockholder to obtain control over our general meeting.
In addition, our debt instruments contain, and future debt instruments may also contain, provisions that require prepayment or offers to prepay upon a change of control. These clauses may also discourage takeover attempts.
We are a foreign private issuer and, as a result, are not subject to U.S. proxy rules but are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. issuer.
We report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as a non-U.S. company with foreign private issuer status. Because we qualify as a foreign private issuer under the Exchange Act and although we follow Dutch laws and regulations with regard to such matters, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including: (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (iii) the rules under the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, foreign private issuers are required to file their Annual Report on Form 20-F by 120 days after the end of each fiscal year while U.S. domestic issuers that are large accelerated filers are required to file their Annual Report on Form 10-K within 60 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, even though we are contractually obligated and intend to make interim reports available to our stockholders, copies of which we are required to furnish to the Securities and Exchange Commission (the “SEC”) on a Form 6-K, and even though we are required to file reports on Form 6-K disclosing whatever information we have made or are required to make public pursuant to Dutch law or distribute to our stockholders and that is material to our company, you may not have the same protections afforded to stockholders of companies that are not foreign private issuers.
We are a foreign private issuer and, as a result, in accordance with the listing requirements of the NASDAQ Global Select Market we rely on certain home country governance practices rather than the corporate governance requirements of the NASDAQ Global Select Market.
We are a foreign private issuer. As a result, in accordance with the listing requirements of the NASDAQ Global Select Market we rely on home country governance requirements and certain exemptions there under rather than relying on the corporate governance requirements of the NASDAQ Global Select Market. For an overview of our corporate governance principles, see Part II, Item 16G. Corporate Governance, including the section describing the differences between the corporate governance requirements applicable to common stock listed on the NASDAQ Global Select Market and the Dutch corporate governance requirements. Accordingly, you may not have the same protections afforded to stockholders of companies that are not foreign private issuers.
As per January 1, 2013, the new Management and Supervision Act (the “Supervision Act”) has come into effect in the Netherlands. The Supervision Act provides for certain changes in Dutch company law. As a result of the Supervision Act, Dutch company law no longer contains restrictions on the powers of directors to represent the company in case of a conflict of interest, but provides that a member of the board of directors may not participate in the discussion and decision-making of the board about the conflicted subject. If all members of the board of directors have a conflict of interest, the resolution concerned will be adopted by the general meeting of shareholders, unless the articles of association provide otherwise. Our articles of association do not contain such alternative arrangements. If an executive director or a non-executive director does not comply with the provisions on conflicts of interest, the resolution concerned is subject to nullification (vernietigbaar) and the director concerned may be held liable towards us.
In addition, the Supervision Act introduces a limitation on the number of supervisory positions that managing/executive and supervisory/non-executive directors of so called large entities may hold. We qualify as a large entity. Aside from the new restrictions on the number of supervisory positions, the Supervision Act also contains a required gender balance. This means that for large entities the seats in a managing, supervisory or one tier board are to be divided among individuals, and the balanced participation is deemed to exist if at least 30% of the seats are taken by men and at least 30% by women. Pursuant to the Supervision Act, if we do not comply with the gender diversity rules, we will be required to explain this in our annual report.
The market price of our common stock may be volatile.
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock in spite of our operation performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our common stock could decrease significantly.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the operation and expansion of our business and in the repayment of our debt. Accordingly, investors must rely on sales of their shares of common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
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Future sales of our shares of common stock could depress the market price of our outstanding shares of common stock.
The market price of our shares of common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of February 7, 2013, there were 251,751,500 shares of our common stock outstanding, of which approximately 51% were freely tradable on the NASDAQ Global Select Market following the sale of shares of our common stock by the Private Equity Consortium on February 7, 2013.
In the future, we may issue additional shares of common stock in connection with acquisitions and other investments, as well as in connection with our current or any revised or new equity plans for management and other employees. The amount of our common stock issued in connection with any such transaction could constitute a material portion of our then outstanding common stock.
Our actual operating results may differ significantly from our guidance.
From time to time, we release guidance regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information contained or referred to in such release and the factors described under “Forward-Looking Statements”. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in, or incorporated by reference into, this annual report could result in the actual operating results being different than the guidance, and such differences may be adverse and material.
Item 4. Information on the Company
A. History and Development of the Company
Name and History
Our legal name is NXP Semiconductors N.V. and our commercial name is “NXP” or “NXP Semiconductors”.
We were incorporated in the Netherlands as a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) under the name KASLION Acquisition B.V. on August 2, 2006, in connection with the sale by Philips of 80.1% of its semiconductor business to the “Private Equity Consortium”. For a list of the specific funds that hold our common stock and their respective share ownership, see Part I, Item 7A. Major Shareholders elsewhere in this document. Initially, the Private Equity Consortium invested in our Company through KASLION Holding B.V., a Dutch private company with limited liability.
On May 21, 2010, we converted into a Dutch public company with limited liability (naamloze vennootschap) and changed our name to NXP Semiconductors N.V. Concurrently, we amended our articles of association in order to effect a 1-for-20 reverse stock split of our shares of common stock.
In August 2010, we made an initial public offering of 34 million shares of our common stock and listed our common stock on the NASDAQ Global Select Market.
On March 31, 2011, certain of our stockholders offered 30 million shares of our common stock, priced at $30.00 per share. The underwriters of the offering exercised in full their option to purchase from the selling stockholders 4,431,000 additional shares of common
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stock at the secondary offering price. We did not receive any proceeds from this secondary offering. The settlement date for the offering was April 5, 2011. On February 4, 2013, certain of our stockholders offered 30 million shares of our common stock, priced at $30.35 per share. We did not receive any proceeds from this secondary offering either. The settlement date for the offering was February 7, 2013.
We are a holding company whose only material assets are the direct ownership of 100% of the shares of NXP B.V., a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid).
Our corporate seat is in Eindhoven, the Netherlands. Our principal executive office is at High Tech Campus 60, 5656 AG Eindhoven, the Netherlands, and our telephone number is +31 40 2729233. Our registered agent in the United States is NXP Semiconductors USA, Inc., 411 East Plumeria Drive, San Jose, CA 95134, United States of America, phone number +1 408 5185400.
NXP Repositioning
Since our separation from Philips in 2006, we have significantly repositioned our business and market strategy. Further, between 2008 and 2011, we executed our Redesign Program to better align our costs with our more focused business scope, and in November 2012 we announced the introduction of our OPEX Reduction Program focusing specifically on selling, general and administrative expenses and aimed at finding ways to run our company more efficiently in our cyclical industry. Key elements of our repositioning are:
| • | Focus on High Performance Mixed Signal solutions. We have implemented our strategy of focusing on High Performance Mixed Signal solutions because we believe it to be an attractive market in terms of growth, barriers to entry, relative market share, relative business and pricing stability, and capital intensity. Several transactions have been core to our strategic realignment and focus on High Performance Mixed Signal: in September 2007, we divested our cordless phone system-on-chip business to DSP Group, Inc. (“DSPG”); in July 2008, we contributed our wireless activities to the ST-NXP Wireless joint venture (our stake in which was subsequently sold, with the business being renamed “ST-Ericsson”); and in February 2010, we merged our television systems and set-top box business with Trident. Our primary motivations for exiting the system-on-chip markets for wireless activities and consumer applications were the significant research and development investment requirements and high customer concentration inherent in these markets. In addition, we sold two non-semiconductor component businesses. On December 14, 2010, we sold NuTune Singapore Pte. Ltd. (“NuTune”), our joint venture with Technicolor S.A. that produces can tuner modules for all segments related to broadcast transmission, to AIAC. In July 2011, we sold our Sound Solutions business (formerly included in our Standard Products segment), which makes mobile speakers and receivers, to Knowles Electronics, an affiliate of Dover Corporation. This has enabled us to significantly increase our research and development investments in the High-Performance Mixed-Signal applications on which we focus. To further strengthen our High Performance Mixed Signal position, we have made a number of acquisitions in recent years, such as the acquisition on July 21, 2010 of Jennic Ltd., a developer of low power RF solutions for wireless applications. On April 12, 2012 we acquired Catena Holding B.V., a design and IP company, specialized in radio frequency communication, analog, mixed signal and digital signal processing. |
| • | New customer engagement strategy. We have implemented a new approach to serving our customers and have invested in significant additional resources in our sales and marketing organizations. We have created “application marketing” teams that focus on delivering solutions that include as many suitable NXP components as possible in their system reference designs, which helps us achieve greater cross-selling between our various product lines, while helping our customers accelerate their time to market. With an increased number of application engineers and our applications marketing approach, we are able to engage with more design locations ranging from our largest, highest volume customers to the mid-size customers who typically have lower volumes but more attractive margins. |
During the fourth quarter of 2012 NXP adopted a cost savings and restructuring initiative designed to improve operational efficiency and to competitively position the Company for sustainable growth. This initiative primarily relates to a worldwide workforce reduction of approximately 650 employees, with the majority of the headcount reductions in Europe and the U.S. For additional information regarding our restructuring initiatives please refer to Note 14 to the Consolidated Financial Statements included in Part III, Item 18 of this Report.
Reporting Segments
NXP is organized into three reportable segments in compliance with Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting”.
The Company is structured in two market oriented business segments, High Performance Mixed Signal and Standard Products and one other reportable segment, Manufacturing Operations.
Corporate and Other is not a separate reporting segment anymore because it no longer meets the criteria for being separately reported. Particularly the quantitative thresholds are not met after the divestment of NuTune in 2010 and the reallocation of the remaining activities that used to belong to the Home segment. Items under Corporate and Other in this Annual Report represent the
remaining portion of our former Corporate and Other segment to reconcile to the Consolidated Financial Statements along with the Divested Home activities, which were divested in 2010.
Our High Performance Mixed Signal businesses deliver High Performance Mixed Signal solutions to our customers to satisfy their system and sub systems needs across application areas such as: automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial.
Our Standard Products business segment offers standard products for use across many applications markets, as well as application-
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specific standard products predominantly used in application areas such as mobile handsets, computing, consumer and automotive.
Our Manufacturing Operations are conducted through a combination of wholly owned manufacturing facilities, manufacturing facilities operated jointly with other semiconductor companies and third-party foundries and assembly and test subcontractors, which together form our Manufacturing Operations segment. While the main function of our Manufacturing Operations segment is to supply products to our High Performance Mixed Signal and Standard Products segments, revenue and costs in this segment are to a large extent derived from sales of wafer foundry and packaging services to our divested businesses in order to support their separation and, on a limited basis, their ongoing operations. As these divested businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources is declining.
Corporate and Other includes unallocated research expenses not related to any specific business segment, corporate restructuring charges not allocated to High Performance Mixed Signal and Standard Products and other expenses, as well as some operations not included in our two business segments, such as software solutions for mobile phones (the “NXP Software” business). Revenue recorded in Corporate and Other is primarily generated by the NXP Software business.
Our Company
We are a global semiconductor company and a long-standing supplier in the industry, with over 50 years of innovation and operating history. We provide leading High Performance Mixed Signal and Standard Product solutions that leverage our deep application insight and our technology and manufacturing expertise in RF, analog, power management, interface, security and digital processing products. Our product solutions are used in a wide range of applications such as: automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing. We engage with leading original equipment manufacturers (“OEMs”) worldwide and 62% of our revenue in 2012 was derived from Asia Pacific (excluding Japan).
Since our separation from Koninklijke Philips Electronics N.V. (“Philips”) in 2006, we have significantly repositioned our business to focus on High Performance Mixed Signal solutions and have implemented a restructuring program and taken other restructuring initiatives aimed at achieving a world-class cost structure and streamlined processes. As of December 31, 2012, we had 25,358 full-time equivalent employees located in over 25 countries, with research and development activities in Asia, Europe and the United States, and manufacturing facilities in Asia and Europe. For the year ended December 31, 2012, we generated revenue of $4,358 million.
Markets, applications and products
We sell two categories of products, High Performance Mixed Signal product solutions and Standard Products. The first category, which consists of highly differentiated application-specific High Performance Mixed Signal semiconductors and system solutions, accounted for 80% of our total product revenue in 2012. We believe that High Performance Mixed Signal is an attractive market in terms of growth, barriers to entry, relative business and pricing stability and capital intensity. The second of our product categories, Standard Products, accounted for 20% of our total product revenue in 2012, and consists of devices that can be incorporated in many different types of electronics equipment and that are typically sold to a wide variety of customers, both directly and through distributors. Manufacturing cost, supply chain efficiency and continuous improvement of manufacturing processes drive the profitability of our Standard Products.
High Performance Mixed Signal
We focus on developing products and system and sub-system solutions that are innovative and allow our customers to bring their end products to market more quickly. Our products, particularly our application system and sub-system solutions, help our customers design critical parts of their end products and thus help many of them to differentiate themselves based on feature performance, advanced functionality, cost or time-to-market.
We leverage our technical expertise in the areas of RF, analog, power management, interface, security technologies and digital processing across our priority applications markets. Our strong RF capabilities are utilized in our high performance RF for wireless infrastructure and industrial applications, television tuners, car security and car radio products and contactless identification products. Our power technologies and capabilities are applied in our lighting products, AC-DC power conversion and audio power products, while our ability to design ultra-low power semiconductors is used in a wide range of our products including our consumer, mobile, identification, healthcare products and our microcontrollers. Our high-speed interface design skills are applied in our interface products business, and our security solutions are used in our identification, microcontroller, telematics and smart metering products and solutions. Finally, our digital processing capabilities are used in our Auto DSPs, the products leveraging our Coolflux ultra-low power DSPs, such as in our mobile audio and hearing aid business, and our microcontroller based products. In addition, our digital processing knowledge is used to design High Performance Mixed Signal solutions that leverage other suppliers’ digital processing products.
In 2012, we organized the High Performance Mixed Signal segment in four Business Units named: Automotive, Identification, Infrastructure & Industrial and Portable & Computing. The below table provides an overview of the key applications per Business Unit, the leading market positions and our key customers.
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| Automotive |
Identification |
Infrastructure & |
Portable & Computing | |||||
| Key applications |
• Car access & immobilizers • In vehicle networking • Car entertainment • Telematics • ABS • Transmission/throttle control • Automotive Lighting |
• Secure identity • Secure transactions • Tagging & authentication |
• Wireless base stations • Satellite & CATV infra • Radar • Power supplies • Lighting • Personal Healthcare • TV & Set-top boxes • Mobile Handsets |
• Mobile handset • Tablet • Monitor • Personal computer • Smart metering • White goods & home appliances • Pachinko machines • Medical • Industrial • Consumer | ||||
| Selected market leading positions |
• #1 Can/LIN/ Flex Ray in-vehicle networking • #1 passive keyless entry/ immobilizers • #1 car radio • #3 magnetic sensors |
• #1 e-Government • #1 Transport & Access management • #2 Banking • #1 NFC |
• #2 in RF Power • #1 in silicon tuners |
• #2 Standard Logic • # 3 in interface | ||||
| Key OEM customers |
• Alpine • Becker • Bosch • Clarion • Continental • Delphi • Hyundai • Panasonic • Valeo • Visteon |
• Bundesdrucker • Giesecke • Gemalto • HTC • KEBT • Oberthur • ORGA • Samsung • Smartrac • Sony |
• Ericsson • Huawei • Lite-on • LGE • Motorola • NSN • Philips • Samsung • TCL • ZTE |
• Apple • Bosch • Continental • Cisco • Foxconn • HP • Huawei • Nintendo • Philips • Samsung | ||||
The customers listed above represent our key OEM and electronic manufacturing services customers based on 2012 revenue. Key distributors across these applications are Arrow, Avnet, Vitec and WPG. These distributors represent our top four distributors in terms of revenue in 2012 in the High Performance Mixed Signal segment.
Automotive. In the automotive market we are a leader in in-vehicle networking, car passive keyless entry and immobilization, and car radio and car audio amplifiers. We also hold a number 3 position1,2 in the automotive magnetic field sensors market based on worldwide revenues for 2011 and have an emerging business in telematics and car solid state lighting drivers.
In the can/LIN/FlexRay in-vehicle networking market, we are the market leader, having played a defining role in setting the can/LIN and more recently FlexRay standards. We are a leading supplier to major OEMs and continue to drive new system concepts, such as partial networking for enhanced energy efficiency. In the car access and immobilizers market, we lead the development of new passive keyless entry/start and two-way key concepts with our customers and, as a result, we are a key supplier to almost all car OEMs for those products. We are the market leader in AM/FM car radio chip sets.
Our leadership in mid- and high-end car radio is driven by excellent reception performance, whereas in the low-end and after-market car radio, our leadership is driven by our one-chip radio solutions that offer ease of implementation and low cost of ownership. In digital reception, we have developed multi-standard radios based on our software-defined radio implementation. In addition, we provide class-AB and class-D audio amplifiers and power analog products for car entertainment. In telematics, we have developed a complete and secure systems solution for implementation in car on-board units, which we supply in a module that is small in size and delivers good performance. We leverage our proprietary processes for automotive, high-voltage, RF and non-volatile processes as well as our technology standards and leading edge security IP developed by our identification business, to deliver our automotive solutions. We are compliant with all globally relevant automotive quality standards (such as ISO/TS16949 and VDA6.3)
For the full year 2012, we had High Performance Mixed Signal revenue of $939 million in automotive applications, compared to $930 million in 2011, which represents a 1% year over year increase. According to Strategy Analytics, the total market for automotive semiconductors was $23.7 billion in 2011, and projects it will grow at a compounded annual growth rate of 9.5% between 2011 and 2015. According to Strategy Analytics’ estimates we were the fifth largest supplier of automotive semiconductors worldwide in 2011, with a market share of 6.4%.
Identification. Based on our 2012 revenue, we are number 1 in the overall identification chip market, and are especially well positioned in the faster growing contactless identification IC market.
We address all segments of the market, except for the commodity SIM market. We are the largest supplier world-wide of IC’s for e-government, transportation and access management and NFC. For example, we supply to approximately 85% of worldwide e-passport
| 1 | Source: Gartner, Inc., Market Share, Semiconductor Applications, Worldwide, 2011, March 27, 2012. |
| 2 | The Gartner Report(s) described herein, (the “Gartner Report(s)”) represent(s) data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Filing) and the opinions expressed in the Gartner Report(s) are subject to change without notice. |
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projects, and our MIFARE product is used in approximately 70% of the public transport systems that have adopted electronic ticketing. We have led the development and standard setting of near field communications (NFC), which is a rapidly growing standard for secure short-range connectivity that has been established to enable secure transactions between mobile devices and point-of-sale terminals or other devices, and are pursuing the fast-growing product authentication market. Our leadership in the identification market is based on the strength of our security, end-to-end system contactless read speed performance, our ability to drive new standard settings and the breadth of our product portfolio. Key growth drivers will be the adoption of new security standards in existing smart card markets, the implementation of security ICs in a range of devices to enable secure mobile transactions and product authentication, and the increase in new radio frequency identification applications such as supply chain management.
For the full year 2012, we had High Performance Mixed Signal revenue of $986 million in identification applications, compared to $698 million in 2011, which represents a 41.3% year over year growth. According to ABI Research, the market size for identification ICs was $2.2 billion in 2011, and is expected to grow at a compounded annual rate of 20% to $4.6 billion in 2015.
Infrastructure and Industrial. We have a leading market position in high-performance radio frequency solutions, are the market leader in silicon tuners, have a broad portfolio in lighting drivers and strong positions in selected niche segments of the AC-DC power conversion and personal healthcare markets. In addition, we have an emerging business in low power connectivity and mobile audio. Our overall revenue in these businesses was $604 million in 2012 versus $617 million in 2011, which represents a decline of 2.1% year over year.
Our leading high-performance radio frequency business mainly provides RF front-end solutions for markets, such as mobile base stations, wireless connectivity, satellite and CATV infrastructure and receivers, industrial applications, and to a lesser extent addresses the military and aerospace markets. We have a leading position in RF Power Amplifiers and significant sales in Small Signal RF discretes and RF ICs for consumer electronics and cable television infrastructure, while we have emerging businesses in RF ICs for mobile base stations and monolithic microwave ICs (“MMICs”). Our leadership is based on our world-class proprietary RF process technologies and technology advancements that drive overall system performance, such as power scaling in mobile base stations. We are engaged with the majority of the largest customers in mobile base stations and in several other application areas. Key growth drivers for our high-performance RF business include infrastructure build-outs driven by the substantial growth in mobile data use and digital broadcast adoption, infrastructure development of developing countries, including China, new radar implementations, and our expansion into new product markets such as wireless communications LNAs and infrastructure MMICs. The market for RF Power Amplifiers, is estimated to be $1.3 billion in 2012.
We are the leader in silicon tuners for televisions and set-top boxes. Our market strengths are our specialty RF process technology, decades of experience in designing tuners that work under all broadcasting standards and conditions across the world, and our innovations in new broadcasting standards. Key growth drivers for our products in these markets include the adoption of silicon tuners by TV manufacturers, penetration of new broadcast standards such as DVB-T2, DVB-C2 and DOCSIS 3.0, and the adoption of multi-tuner applications. The market for silicon tuners was$0.3 billion in 2011, and is expected to grow at a compounded annual growth rate of 2.7% between 2011 and 2015.
In lighting, we have a broad driver portfolio serving all main segments in general lighting applications. Our strength in lighting ICs is based on our leading-edge high-voltage power analog process technologies and system optimization concepts, such as our patented technology to develop sensors-less temperature-controlled LED drivers. The lighting IC market is a high growth market, partly driven by government regulations around the world that ban or discourage the use of incandescent light bulbs and encourage or mandate CFL and LED lighting solutions and by energy-savings conscious customers. We have doubled our sales in LED drivers from 2011 to 2012.
We are a key player in high efficiency AC-DC power conversion ICs for notebook personal computers (our “green chip” solutions), and are expanding our offering into mobile device chargers. Our strength in AC-DC power conversion is based on our leading edge high-voltage power analog process technologies and engineering capabilities in designing high efficiency power conversion products. Due to worldwide conservation efforts, many countries, states and local governments have adopted regulations that increase the demand for higher power efficiency solutions in computing and consumer applications, especially in power conversion.
Our personal healthcare revenue is generated by our hearing aid products, which leverage our proprietary ultra low power Coolflux DSP, our low power audio IC design capabilities and our magnetic induction radio technology. We design customer-specific ICs for major hearing aid OEMs, and many of these customers fund our product development efforts.
In addition, we have two emerging product development areas, one focused on the mobile audio market and the other on the low power connectivity market. Our mobile audio business focuses on smart speaker drivers and leverages many of the same core technologies and competencies as our personal healthcare business. In 2012 we started shipping to a key smart phone OEMs. Our low power connectivity business started in 2010 through the acquisition of Jennic, which brought us a portfolio of 802.15.4-based low power connectivity ICs with a broad range of both the Zigbee standard-based as well as proprietary protocol stacks. With this portfolio we target the emerging Internet of Things market, starting with application solutions for smart lighting, smart energy, wireless remote controls & switches and healthcare monitoring.
Portable and Computing. We are a leader in digital logic, a top three supplier in the fragmented interface market and have a strong portfolio in 32-bit ARM microcontrollers. Our overall High Performance Mixed Signal revenue in these businesses was $753 million in 2012, compared to $661 million in 2011, which represents a 13.9% year over year growth.
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In microcontrollers, we have a strong position in multi-purpose 32-bit ARM microcontrollers serving a broad array of applications. ARM processor cores have been gaining momentum in the general purpose MCU market during the past few years. Our competitive advantage is based on having been a launching partner for several low power ARM microcontroller cores, our rich portfolio of analog and security IP, which we integrate with the ARM core into a family of microcontroller products, and our distribution leverage based on our ability to offer a full microcontroller software development kit. Our ARM Cortex M0-based products achieve pricing levels that places it squarely in competition with 8-bit microcontrollers, while offering better performance in terms of processing speed and system power consumption, expanding the addressable market for 32-bit ARM microcontrollers at the expense of 8-bit ARM microcontrollers. Gartner estimates the worldwide market for Microcontrollers 32-bit to be $5.0 billion in 2011, and expects a compounded annual growth rate of 7.6% between 2011 and 20153. The interface products market is highly fragmented with niche markets around each of the established interface standards, where overall we are the 3rd ranked player1 in 2011 for worldwide shipments of Interface ICs. Our products address many interface standards and we serve various applications across the mobile, computing, industrial, consumer and automotive markets. We have broad product portfolios in five interface segments, being UARTs and bridges, I2C and SPI LED controllers, low power real-time clocks and watch ICs, HDMI switches and transceivers, and display port multiplexers. Our core competencies are the design of high speed interfaces, high voltage design needed for LED and LCD drivers, ultra low power design for real-time clocks and watch ICs, and our ability to engage with leading OEMs in defining new interface standards and product designs. While we successfully engage with leading OEMs to drive our innovation roadmaps, we generate a large part of our revenue by subsequently selling these products to a very broad customer base, which we serve through our distribution channel. We are engaged in development activities and standard setting initiatives with many of the innovation leaders in each of these markets. Key growth drivers will be the adoption rate of new high-speed interface standards such as display port and USB, and application specific interface products for the mobile market. In 2012 we ramped up a major design win with one of the leading smart phone OEMs. According to Gartner, the worldwide Interface IC market is projected to grow at a 1.8% compounded annual rate between 2011 and 2015, from a revenue base of $1.6 billion in 20113.
We have a number 2 position in Standard Logic IC markets based on worldwide revenue for 20111, which we leverage in a large number of our High Performance Mixed Signal solutions. We offer several product families for low-voltage applications in communication equipment, personal computers, personal computer peripherals and consumer and portable electronics. Our 3V and 5V families hold a leading share of the logic market. We are currently expanding the higher margin product range in this business by expanding, among others, our switches and translators (or custom logic) portfolio and optimizing our manufacturing. Gartner sizes the worldwide Standard Logic market at $1.6 billion in 2011, and is estimated to grow with compound annual rate of 1% between 2011 and 20153.
Standard Products
Our Standard Products business supplies a broad range of standard semiconductor components, such as small signal discretes, power discretes, protection and signal conditioning devices and linear devices, which we largely produce in dedicated in-house high-volume manufacturing operations. Our portfolio consists of a large variety of catalog products, using widely-known production techniques, with characteristics that are largely standardized throughout the industry as well as leading discrete solutions especially in the field of ESD protection / EMI filtering and low loss rectification and power switching. Our Standard Products are often sold as separate components, but in many cases, are used in conjunction with our High Performance Mixed Signal solutions, often within the same subsystems. Further, we are able to leverage customer engagements where we provide standard products devices, as discrete components, within a system to identify and pursue potential High Performance Mixed Signal opportunities.
Our products are sold both directly to OEMs as well as through distribution, and are primarily differentiated on cost, packaging type and miniaturization, and supply chain performance. Alternatively, our innovative products include “design-in” products, which require significant engineering effort to be designed into an application solution. For these products, our efforts make it more difficult for a competitor to easily replace our product, which makes these businesses more predictable in terms of revenue and pricing than is typical for standard products.
| 3 | Source: Gartner, Inc., Semiconductor Forecast Database, 4Q12 Update, December 7, 2012. |
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Our key product applications, markets and customers are described in the table below.
| Key applications |
• SS Transistors and Diodes • SS MOS • Power MOS • Bipolar Power Transistors • Thyristors • Rectifiers • Interface protection devices • Voltage Regulators | |
| Key product markets |
• All applications | |
| Key OEM and electronic manufacturing services (EMS) customers |
• Apple • Asustek • Bosch • Continental • Delphi • Delta Electronics • Foxconn • Nokia • Philips • Samsung | |
The customers listed above represent our key OEM and electronic manufacturing services customers based on 2012 revenue. Key distributors across these applications are Arrow, Avnet, Future and WPG. These distributors represent our top four distributors in terms of revenue in 2012 in the Standard Products segment.
In 2012, our Standard Products business generated net revenue of $832 million, compared to $925 million in 2011, which represents a 10.1% year over year decline. The market for discretes, excluding RF & Microwave, is expected to grow at a compounded annual rate of 3%, from $20 billion in 2011 to $22 billion in 2015.
We are the number two global supplier of small-signal discretes with one of the broadest product portfolios in the industry. We have a strong position due to our strong cost competitiveness, supply chain performance, leverage of our OEM relationships and a broadening portfolio. We are focusing on expanding our share of higher margin products in this business. In addition, we are also building a small signal MOSFET product line, which leverages our small signal transistors and diodes packaging operations and strong customer relationships. In addition to our small signal discretes products, we have a Power MOSFET product line, which is focused on the low-voltage segment of the market. The majority of our revenue in Power MOSFETs is to automotive customers. We have recently introduced a new range of Automotive Power MOSFET products in our Trench 6 manufacturing process. Finally, we have small bipolar power, thyristor and rectifier product lines, which are focused on specific applications, such as white goods and power supplies, and are sold as part of our overall High Performance Mixed Signal application solutions.
We have invested significantly into developing a competitive range of LDO’s especially for use in mobile devices. In the coming year we will further enhance our portfolio in this area and complement it with state-of-the-art DC/DC devices as well. Our range of ICs also includes ESD protection and filtering solutions for standard interfaces in consumer products, computing, and mobile devices.
Manufacturing
We manufacture integrated circuits and discrete semiconductors through a combination of wholly owned manufacturing facilities, manufacturing facilities operated jointly with other semiconductor companies and third-party foundries and assembly and test subcontractors. Our manufacturing operations primarily focus on manufacturing and supplying products to our High Performance Mixed Signal and Standard Products businesses. We manage our manufacturing assets together through one centralized organization to ensure we realize scale benefits in asset utilization, purchasing volumes and overhead leverage across businesses.
In addition, on a limited basis, we also produce and sell wafers and packaging services to our divested businesses (currently Entropic Communications, Sigma Designs, IDT and DSPG) in order to support their separation and, on a limited basis, their ongoing operations. As these divested businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources is declining. Our agreement with DSPG expired in December 2010 (although we have an ongoing obligation to supply services relating to certain specialty processes until December 2014), the supplies to ST-Ericsson have effectively been terminated except for a small number of identified products and the former agreement with Trident Microsystems was converted into two separate agreements with Entropic and Sigma after Trident’s bankruptcy. The agreement with IDT is the result of the sale of our high-speed dataconverter activity to IDT.
In the future, we expect to outsource an increased part of our internal demand for wafer foundry and packaging services to third-party manufacturing sources in order to increase our flexibility to accommodate increased demand mainly in our High Performance Mixed Signal and to a lesser extent in Standard Products businesses.
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The manufacturing of a semiconductor involves several phases of production, which can be broadly divided into “front-end” and “back-end” processes. Front-end processes take place at highly complex wafer manufacturing facilities (called fabrication plants or “wafer fabs”), and involve the imprinting of substrate silicon wafers with the precise circuitry required for semiconductors to function. The front-end production cycle requires high levels of precision and involves as many as 300 process steps. Back-end processes involve the assembly, test and packaging of semiconductors in a form suitable for distribution. In contrast to the highly complex front-end process, back-end processing is generally less complicated, and as a result we tend to determine the location of our back-end facilities based more on cost factors than on technical considerations.
We primarily focus our internal and joint venture wafer manufacturing operations on running proprietary specialty process technologies that enable us to differentiate our products on key performance features, and we generally outsource wafer manufacturing in process technologies that are available at third-party wafer foundries when it is economical to do so. In addition, we increasingly focus our in-house manufacturing on our competitive 8-inch facilities, which predominantly run manufacturing processes in the 140 nanometer, 180 nanometer and 250 nanometer process nodes, and have concentrated the majority of our manufacturing base in Asia. This focus increases our return on invested capital and reduces capital expenditures.
Our front-end manufacturing facilities use a broad range of production processes and proprietary design methods, including CMOS, bipolar, bipolar CMOS (“BiCMOS”) and double-diffused metal on silicon oxide semiconductor (“DMOS”) technologies. Our wafer fabs produce semiconductors with line widths ranging from 140 nanometers to 3 microns for integrated circuits and 0.5 microns to greater than 4 microns for discretes. This broad technology portfolio enables us to meet increasing demand from customers for system solutions, which require a variety of technologies.
Our back-end manufacturing facilities test and package many different types of products using a wide variety of processes. To optimize flexibility, we use shared technology platforms for our back-end assembly operations. Most of our assembly and test activities are maintained in-house, as internal benchmarks indicate that we achieve a significant cost advantage over outsourcing options due to our scale and operational performance. In addition, control over these processes enables us to deliver better supply chain performance to our customers. Finally, a number of our High Performance Mixed Signal products enjoy significant packaging cost and innovation benefits due to the scale of our Standard Products business, which manufactures tens of billions of units per year.
The following table shows selected key information with respect to our major front-end and back-end facilities:
| Site |
Ownership | Wafer sizes used | Line widths used (vm) | Technology | ||||||||||
| (Microns) | ||||||||||||||
| Front-end |
||||||||||||||
| Singapore(1) |
61.2 | % | 8” | 0.14-0.25 | CMOS | |||||||||
| Jilin, China(2) |
60 | % | 5” | >4 | Bipolar | |||||||||
| Nijmegen, the Netherlands |
100 | % | 8” | 0.14-0.80 | CMOS, BiCMOS, LDMOS | |||||||||
| Nijmegen, the Netherlands(3) |
100 | % | 6” | 0.50-3.0 | CMOS | |||||||||
| Hamburg, Germany |
100 | % | 6”/8” | 0.5-3.0 | Discretes, Bipolar | |||||||||
| Manchester, United Kingdom |
100 | % | 6” | 0.5 | Power discretes | |||||||||
|
Back-end(4) |
||||||||||||||
| Kaohsiung, Taiwan |
100 | % | — | — | Leadframe-based packages and ball grid arrays | |||||||||
| Bangkok, Thailand |
100 | % | — | — | Low-pin count leadframes | |||||||||
| Hong Kong, China(5) |
100 | % | — | — | Pilot factory discrete devices | |||||||||
| Guangdong, China |
100 | % | — | — | Discrete devices | |||||||||
| Seremban, Malaysia |
100 | % | — | — | Discrete devices | |||||||||
| Cabuyao, Philippines |
100 | % | — | — | Power discretes, sensors and RF modules processes | |||||||||
| (1) | Joint venture with TSMC; we are entitled to 60% of the joint venture’s annual capacity. |
| (2) | Joint venture with Jilin Sino-Microelectronics Co. Ltd.; we own 60% of the joint venture’s annual capacity. |
| (3) | Closure foreseen for 2013. |
| (4) | In back-end manufacturing we entered into a joint venture with ASE in Suzhou (ASEN), in which we currently hold a 40% interest. |
| (5) | Closure foreseen for 2013. |
We use a large number of raw materials in our front- and back-end manufacturing processes, including silicon wafers, chemicals, gases, lead frames, substrates, molding compounds and various types of precious and other metals. Our most important raw materials are the raw, or substrate, silicon wafers we use to make our semiconductors. We purchase these wafers, which must meet exacting specifications, from a limited number of suppliers in the geographic region in which our fabrication facilities are located. At our wholly owned fabrication plants, we use raw wafers ranging from 6 inches to 8 inches in size, while our joint venture plants use wafers ranging from 5 inches to 8 inches. In addition, our SSMC wafer fab facility, which produces 8 inch wafers, is jointly owned by TSMC and ourselves. We are leveraging our experience in that fab facility in optimizing our remaining wholly owned Nijmegen and Hamburg wafer fabs. Our other two remaining fabs are small and are focused exclusively on manufacturing power discretes. Emerging fabrication technologies employ larger wafer sizes and, accordingly, we expect that our production requirements will in the future shift towards larger substrate wafers.
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We typically source our other raw materials in a similar fashion as our wafers, although our portfolio of suppliers is more diverse. Some of our suppliers provide us with materials on a just-in-time basis, which permits us to reduce our procurement costs and the negative cash flow consequences of maintaining inventories, but exposes us to potential supply chain interruptions. We purchase most of our raw materials on the basis of fixed price contracts, but generally do not commit ourselves to long-term purchase obligations, which permits us to renegotiate prices periodically.
Corporate and Other
We also sell software solutions for mobile phones through our NXP Software business.
The NXP Software solutions business develops audio and video multimedia solutions that enable mobile device manufacturers to produce differentiated hand held products that enhance the end-user experience. Our software has been incorporated into over 1 billion mobile devices produced by the world’s leading mobile device manufacturers.
Sales, Marketing and Customers
We market our products worldwide to a variety of OEMs, ODMs, contract manufacturers and distributors. We generate demand for our products by delivering High Performance Mixed Signal solutions to our customers, and supporting their system design-in activities by providing application architecture expertise and local field application engineering support. We have 36 sales offices worldwide.
Our sales and marketing teams are organized into six regions, which are EMEA (Europe, the Middle East and Africa), the Americas, Japan, South Korea, Greater China and Asia Pacific. These sales regions are responsible for managing the customer relationships, design-in and promotion of new products. We seek to further expand the presence of application engineers closely supporting our customers and to increase the amount of product development work that we can conduct jointly with our leading customers. Our web-based marketing tool is complementary to our direct customer technical support.
Our sales and marketing strategy focuses on deepening our relationship with our top OEMs and electronic manufacturing service customers and distribution partners and becoming their preferred supplier, which we believe assists us in reducing sales volatility in challenging markets. We have long-standing customer relationships with most of our customers. Our 10 largest OEM customers are Apple, Bosch, Continental, Delphi, Gemalto, Giesecke/Devrient, Huawei, NSN, Panasonic and Samsung. When we target new customers, we generally focus on companies that are leaders in their markets either in terms of market share or leadership in driving innovation. We also have a strong position with our distribution partners, being the number two semiconductor supplier (other than microprocessors) through distribution worldwide. Our 3 largest distribution partners are Arrow, Avnet and WPG.
Based on total revenue during 2012, excluding the revenue from Manufacturing Operations, our top 40 OEM customers, of which some are supplied via distributors, accounted for 49% of our total revenue, our ten largest OEM customers accounted for approximately 28% of our total revenue and no customer represented more than 7% of our total revenue. We generated approximately 27% of our total revenue through our 3 largest distribution partners, of which WPG was the only larger than 10% customer with 12% of total revenues, and another 20% with our other distributors.
Our sales and marketing activities are regulated by certain laws and government regulations, including antitrust laws, legislation governing our customers’ privacy and regulations prohibiting or restricting the transfer of technology to foreign nationals and the export of certain electronic components that may have a military application. For example, we are required to obtain licenses and authorizations under the U.S. Export Administration Regulations and the International Traffic in Arms Regulations, in order to export some of our products and technology. Further, some of our products that contain encrypted information are required to undergo a review by the Bureau of Industry and Security of the U.S. Department of Commerce prior to export. While we believe that we have been and continue to be in compliance with these laws and regulations, if we fail to comply with their requirements, we could face fines or other sanctions. We do not believe any such fines or sanctions would be material to our business. In addition, we do not believe that such laws and government regulations impact on the time-to-market of our products. However, any changes in export regulations may impose additional licensing requirements on our business or may otherwise impose restrictions on the export of our products.
Research and Development, Patents and Licenses, etc.
See the discussion set forth under Part I, Item 5C. Research and Development, Patents and Licenses, etc.
Competition
We compete with many different semiconductor companies, ranging from multinational companies with integrated research and development, manufacturing, sales and marketing organizations across a broad spectrum of product lines, to “fabless” semiconductor companies, to companies that are focused on a single application market segment or standard product. Most of these competitors compete with us with respect to some, but not all, of our businesses. Few of our competitors have operations across our business lines.
Our key competitors in alphabetical order include Analog Devices Inc., Atmel Corporation, Entropic Communications Inc., Fairchild Semiconductors International Inc., Freescale, Infineon, International Rectifier Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc., MaxLinear, Renesas, ON Semiconductor Corporation, Power Integrations Inc., ROHM Co., Ltd., Silicon Laboratories Inc., STMicroelectronics and Texas Instruments Incorporated.
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The basis on which we compete varies across market segments and geographic regions. Our High Performance Mixed Signal businesses compete primarily on the basis of our ability to timely develop new products and the underlying intellectual property and on meeting customer requirements in terms of cost, product features, quality, warranty and availability. In addition, our High Performance Mixed Signal system solutions businesses require in-depth knowledge of a given application market in order to develop robust system solutions and qualified customer support resources. In contrast, our Standard Products business competes primarily on the basis of manufacturing and supply chain excellence and breadth of product portfolio.
Legal Proceedings
The information set forth under the “Litigation” caption of Note 10 of our Notes to the Consolidated Financial Statements included in Part III, Item 18 of this Report is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see Part I, Item 3D. Risk Factors above.
Environmental Regulation
The information set forth under the “Environmental remediation” caption of Note 10 of our Notes to the Consolidated Financial Statements included in Part III, Item 18 of this Report is incorporated herein by reference. For additional discussion of certain risks associated with environmental regulation, see Part I, Item 3D. Risk Factors above.
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A list of our significant subsidiaries, including name, country of incorporation or residence and proportion of ownership interest and voting power is provided as “Exhibit 21.1” under Part III, Item 19. Exhibits and is incorporated herein by reference.
CORPORATE STRUCTURE
The following chart reflects our corporate structure as of December 31, 2012.
| (1) | Includes the Private Equity Consortium, as well as certain co-investors. Some of our co-investors have recently sold all or part of their shares of our common stock, in accordance with the applicable securities law exemptions from registration. |
| (2) | On October 29, 2010, PPTL Investment LP purchased shares of common stock from Philips Pension Trustees Limited. The latter had purchased these shares of common stock from Royal Philips Electronics on September 7, 2010. |
| (3) | For a more detailed description of our management equity stock option plan (“Management Equity Stock Option Plan”) and our Long-Term Incentive Plans 2011 and 2012, see the discussion set forth under “Share Based Compensation Plans” contained in this Report in Part I, Item 6B. Compensation. |
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D. Property, Plant and Equipment
NXP uses 56 sites in 29 countries with approximately 25,300 full-time employees, 8.9 million square feet of total owned and leased building space of which 6.0 million square feet is owned property.
The following table sets out our principal real property holdings as of December 31, 2012:
| Location |
Use | Owned/leased | Building space (square feet) |
|||||||||
| Eindhoven, the Netherlands |
Headquarters | Leased | 248,736 | |||||||||
| Hamburg, Germany |
Manufacturing | Owned | 798,336 | |||||||||
| Nijmegen, the Netherlands |
Manufacturing | Owned | 2,031,242 | |||||||||
| Singapore |
Manufacturing | Owned | 739,502 | |||||||||
| Bangkok, Thailand |
Manufacturing | Owned | 560,493 | |||||||||
| Cabuyao, Philippines |
Manufacturing | Owned | 444,059 | |||||||||
| Kaohsiung, Taiwan |
Manufacturing | Owned | 342,971 | |||||||||
| Manchester, United Kingdom |
Manufacturing | Owned | 273,266 | |||||||||
| Jilin, China(1) |
Manufacturing | Leased | 138,850 | |||||||||
| Hong Kong, China |
Manufacturing | Leased | 289,971 | |||||||||
| Guangdong, China |
Manufacturing | Leased | 889,374 | |||||||||
| Seremban, Malaysia |
Manufacturing | Owned | 316,471 | |||||||||
| (1) | Leased by the Jilin joint venture. |
The following is a summary of the terms of our material lease agreements:
Manufacturing in Singapore (SSMC) leases the land at 70 Pasir Ris Drive 1 in Singapore from Jurong Town Corporation for use as a manufacturing facility. The lease commenced on June 1, 1999 for a term of 30 years at an annual rental rate of 1,484,584 Singapore Dollars ($1,146,378), which amount is subject to revision up to, but not exceeding, 5% of the yearly rent for the immediately preceding year, on the anniversary of the lease commencement date. The building has 739,502 square feet of floor space and is owned by us.
We lease 889,374 square feet of manufacturing space through our subsidiary, NXP Semiconductors Guangdong Ltd., at Tian Mei High Tech, Industrial Park, Huang Jiang Town, Dongguan City, Guangdong, China, from Huangjiang Investment Development Company (“Huangjiang”). The lease commenced on October 1, 2003 for a term of 13 years at an annual rental rate calculated to be the greater of: (a) a yearly rental rate of RMB96 ($15) per square meter or (b) a yearly rent equal to 13% of the actual construction cost of the leased facility. The rental amount is subject to revision on an annual basis, subject to the interest rate Huangjiang must pay for loans used in the construction of the facilities agreed upon in the lease.
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
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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Table of Contents
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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Table of Contents
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 $17 million related to the current portion of long-term debt.
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Table of Contents
Long-term Debt
As of December 31, 2012, the euro-denominated notes and U.S. dollar-denominated notes represented 6% and 94% respectively of the total principal amount of the notes outstanding. The fixed rate notes and floating rate notes represented 13% and 87% respectively of the total principal amount of the notes outstanding at December 31, 2012.
| ($ 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. |
| (2) | Interest accrues at a rate of three-month EURIBOR plus 2.75%. |
| (3) | Interest accrues at a rate of LIBOR plus 5.50%. |
| (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%. |
| (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%. |
| (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%. |
| (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%. |
| (8) | Other mainly includes the reclassification of the current portion of long-term debt. |
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.
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 | — | |||||||||||||||||||||
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| 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. |
| (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. |
| (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%. |
| (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. |
| (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. |
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.
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; |
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| • | 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.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following description sets forth certain information about management and management-related matters. We have a one-tier board structure.
Board of Directors
Set forth below are the names, ages and positions as of December 31, 2012, of the persons who serve as members of our board of directors.
| Name |
Age | Position | ||||
| Richard L. Clemmer |
61 | Executive director, president and chief executive officer | ||||
| Sir Peter Bonfield |
68 | Non-executive director and chairman of the board | ||||
| Johannes P. Huth |
52 | Non-executive director and vice-chairman of the board | ||||
| Vikram Bhatia |
65 | Non-executive director | ||||
| Nicolas Cattelain |
39 | Non-executive director | ||||
| Egon Durban |
39 | Non-executive director | ||||
| Kenneth A. Goldman |
63 | Non-executive director | ||||
| Josef Kaeser |
55 | Non-executive director | ||||
| Ian Loring |
46 | Non-executive director | ||||
| Michel Plantevin |
56 | Non-executive director | ||||
| Roy MacKenzie * |
41 | Non-executive director | ||||
| * | Mr. MacKenzie was appointed to replace Richard Wilson, who resigned as non-executive director of the Company on May 30, 2012. |
| • | Richard L. Clemmer (1951, American). Mr. Clemmer became executive director, president and chief executive officer on January 1, 2009. Prior to that, from December 2007, Mr. Clemmer was a member of the supervisory board of NXP B.V. and a senior advisor of Kohlberg Kravis Roberts & Co. Prior to joining NXP, he drove the turnaround and re-emergence of Agere, a spin-off from Lucent and a leader in semiconductors for storage, wireless data, and public and enterprise networks. He also served as Chairman of u-Nav Microelectronics Corporation, a leading GPS technology provider, and held a five-year tenure at Quantum Corporation where he was executive vice president and chief financial officer. Prior to that, Mr. Clemmer worked for Texas Instruments Incorporated as senior vice president and semiconductor group chief financial officer. Mr. Clemmer also serves on the board of NCR Corporation. |
| • | Sir Peter Bonfield CBE FREng (1944, British). Sir Peter has been appointed as a non-executive director and as the chairman of our board of directors in August 2010. Prior to that, Sir Peter was the chairman of the supervisory board of NXP B.V. from September 29, 2006. Sir Peter served as chief executive officer and chairman of the executive committee for British Telecom plc from 1996 to 2002 and prior to that was chairman and chief executive officer of ICL plc (now Fujitsu Services Holdings Ltd.). Sir Peter also worked in the semiconductor industry during his tenure as a divisional director at Texas Instruments Incorporated, for whom he held a variety of senior management positions around the world. Sir Peter currently holds non-executive directorships at Telefonaktiebolaget LM Ericsson, Taiwan Semiconductor Manufacturing Company Limited, Mentor Graphics Corporation and Sony Corporation. Sir Peter is Chair of Council and Senior Pro-Chancellor at Loughborough University, Advisor to Apax Partners LLP, Senior Advisor to N M Rothschild (both in London) and Board Mentor at CMi in Belgium. He is also Advisor to Longreach LLP in Hong Kong and NVP LLP in New Jersey. |
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| • | Johannes P. Huth (1960, German). Mr. Huth has been appointed as a non-executive director and vice-chairman of our board of directors in August 2010. Prior to that, Mr. Huth was a member and chairman of our supervisory board and a member and vice-chairman of NXP B.V.’s supervisory board from September 29, 2006. He is currently a member of the supervisory board of Bertelsmann Music Group (BMG), chairman of WMF AG and a director of Kohlberg Kravis Roberts & Co. Ltd, President of Kohlberg Kravis Roberts & Co. SAS, vice-chairman of the supervisory board of ProSieben Sat 1 Media AG and a member of the advisory board of Wild Flavors GmbH. Mr. Huth also serves on the supervisory board of KION Holding 1 GmbH. |
| • | Vikram Bhatia (1947, British). Mr. Bhatia has been appointed as a non-executive director of our board of directors effective May 26, 2011. He has held numerous senior positions and various assignments in the past years, including in iSoftGroup Plc, Monarch Holdings PLC, Page and Moy Travel Group and the Claverley Group of companies. In May 2006, working with PricewaterhouseCoopers, he was appointed the Turnaround Programme Director in the Hull and East Yorkshire Hospital NHS Trust. Prior to these assignments, he fulfilled various other senior roles, which included Sithe Energy, British Telecom, Philips and Deloitte. |
| • | Nicolas Cattelain (1973, French). Mr. Cattelain has been appointed as a non-executive director of our board of directors in August 2010. Mr. Cattelain became a member of our supervisory board and the supervisory board of NXP B.V. in February 2010 and was a director of Kohlberg Kravis Roberts & Co., Europe from 2000 to 2012. Before 2000, Mr. Cattelain was with the private equity firm Industri Kapital in London and prior to that he worked in the Mergers and Acquisitions Department of Merrill Lynch. Mr. Cattelain also serves on the board of Pagesjaunes Groupe where he sits in the remuneration and audit committees. |
| • | Egon Durban (1973, German). Mr. Durban has been appointed as a non-executive director of our board of directors in August 2010. Prior to that, Mr. Durban was a member of our supervisory board and a member of NXP B.V.’s supervisory board from September 29, 2006. Mr. Durban is a Managing Partner and Managing Director of Silver Lake. Mr. Durban joined Silver Lake in 1999 as a founding principal and has worked in the firm’s Menlo Park and New York offices and set-up and oversaw the Firm’s London office from 2005 to 2010. Mr. Durban serves on the board of directors of Intelsat S.A., MultiPlan, Inc., and on the Executive Committee of William Morris Endeavor Entertainment, LLC. Mr. Durban also oversees the firm’s investments in Groupon and Zynga and oversaw investments in Unity Media, Tandberg, and Intelsat debt. Previously, he served on the Board of Skype Global S.à r.l. and was the Chairman of its Operating Committee. Earlier, Mr. Durban worked in Morgan Stanley’s Corporate Finance Technology and Equity Capital Markets Group. Mr. Durban graduated from Georgetown University with a B.S. in Finance. |
| • | Kenneth A. Goldman (1949, American). Mr. Goldman has been appointed as a non-executive director of our board of directors effective August 6, 2010. Mr. Goldman is the chief financial officer of Yahoo!, Inc since October 2012. Prior to that, Mr. Goldman served as the senior vice president and chief financial officer of Fortinet, Inc, from 2006 to 2012 and as senior vice president, finance and administration, and chief financial officer of Siebel Systems, Inc. from 2000 to 2006. Mr. Goldman has also served as senior vice president and chief financial officer of Excite@Home Corporation and Sybase, Inc., as well as serving as chief financial officer of Cypress Semiconductor Corporation and VLSI. Technology, Inc. Mr. Goldman also serves on the board of directors of Infinera, Inc. and several private companies. Mr. Goldman also served as a member of the Treasury Advisory Committee on the Auditing Profession. He is also a member of the board of trustees of Cornell University. |
| • | Josef Kaeser (1957, German). Mr. Kaeser has been appointed as a non-executive director of our board of directors effective September 1, 2010. Mr. Kaeser is the executive vice president and chief financial officer of Siemens AG. Prior to this, Mr. Kaeser served as chief strategy officer for Siemens AG from 2004 to 2006 and as the chief financial officer for the mobile communications group from 2001 to 2004. Mr. Kaeser has additionally held various other positions within the Siemens group since he joined Siemens in 1980. Mr. Kaeser also serves on the managing board of Siemens AG and the board of directors of Siemens Ltd., India, Allianz AG, Germany and Nokia Siemens Networks B.V. |
| • | Ian Loring (1966, American). Mr. Loring has been appointed a non-executive director of our board of directors in August 2010. Mr. Loring became a member of our supervisory board and the supervisory board of NXP B.V. on September 29, 2006 and is a managing director of Bain Capital Partners, LLC. Prior to joining Bain Capital Partners in 1996, Mr. Loring worked at Berkshire Partners and has previously also worked at Drexel Burnham Lambert. He serves as a director of SkillSoft Limited, Clear Channel Communications Inc., The Weather Channel Inc., Denon & Marantz and Contec Co. Ltd. Mr. Loring previously served on the board of Warner Music Group Corporation, Cumulus Media Inc. and Echelon Telecom Inc. |
| • | Michel Plantevin (1956, French). Mr. Plantevin has been appointed a non-executive director of our board of directors in August 2010. Mr. Plantevin became a member of our supervisory board and the supervisory board of NXP B.V. on September 29, 2006 and is a managing director of Bain Capital, LLC. Prior to joining Bain Capital LLC. in 2003, Mr. Plantevin worked at Goldman Sachs in London, and prior to that he was a partner with Bain & Company in London and Paris. He also serves as a director of FCI, Bravida AB, Trinseo and IMCD. |
| • | Roy MacKenzie (1971, British). Mr. MacKenzie has been appointed as a non-executive director of our board of directors effective May 30, 2012. Mr. Mackenzie is a Partner of Apax Partners LP and has worked in Apax’s London and New York offices since joining the firm in 2003. He currently serves as a director of Epicor Software Corporation, Sophos Ltd, and King.com. Earlier in his career he was with McKinsey & Co in Palo Alto and served as a product manager at Psion Computers Ltd in London. |
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Management Team
Set forth below are the names, ages as of December 31, 2012, and positions of the executive officers who together with our chief executive officer, Mr. Clemmer, constitute our management team.
| Name |
Age | Position | ||||
| Richard L. Clemmer |
61 | Executive director, president and chief executive officer | ||||
| Chris Belden |
52 | Executive vice president and general manager of operations | ||||
| Guido Dierick |
53 | Executive vice president and general counsel | ||||
| Alexander Everke |
49 | Executive vice president and general manager HPMS Industrial and Infrastructure | ||||
| Dave French |
56 | Executive vice president of R&D, and general manager HPMS Portable and Computing | ||||
| Loh Kin Wah |
58 | Executive vice president sales & marketing | ||||
| Peter Kelly * |
55 | Executive vice president and chief financial officer | ||||
| Robert Rigby-Hall |
47 | Executive vice president and chief human resources officer | ||||
| Sean Hunkler |
50 | Executive president and general manager of operations | ||||
| Ruediger Stroh |
50 | Executive vice president and general manager HPMS Identification | ||||
| Frans Scheper |
50 | Executive vice president and general manager Standard Products | ||||
| Kurt Sievers |
43 | Executive vice president and general manager HPMS Automotive | ||||
| * | Mr. Kelly was appointed to replace Mr. Sundström, who resigned from the Company effective July, 2012. |
| • | Chris Belden (1960, American). Mr. Belden is executive vice president, general manager of operations and member of the management team. He joined NXP as senior vice president, global manufacturing on March 1, 2008. Previously Mr. Belden worked for Applied Materials Inc., where he was responsible for global operations. Before that, he spent the majority of his career at Motorola, Inc. and Freescale Semiconductor Inc., where he was responsible for Freescale’s global manufacturing operations. |
| • | Guido Dierick (1959, Dutch). Mr. Dierick is executive vice president, general counsel, secretary of our board of directors and member of the management team. Since 2000 he has been responsible for legal and intellectual property matters at NXP. He previously was employed by Philips from 1982 and worked in various legal positions. |
| • | Alexander Everke (1963, German). Mr. Everke is executive vice president, member of the management team and general manager of our High Performance Mixed Signal businesses focused on the industrial and infrastructure application markets. He previously served in various senior management positions within NXP. Mr. Everke joined NXP in 2006 from Infineon Technologies AG, where he served last as general manager of the Chip Card & Security ICs business unit. Before Infineon, Mr. Everke worked for several years at Siemens AG. |
| • | Dave French (1956, American). Mr. French is executive vice president of R&D, member of the management team and general manager of our High-Performance Mixed-Signal businesses focused on the portable and computing markets. Mr. French has more than 30 years experience in the semiconductor industry and has had direct experience in product development, marketing, manufacturing, strategic planning and business management. He started his career at Texas Instruments, working in microcontroller and DSP product line management and he later served as GM of logic products at Fairchild semiconductor, and GM of Analog Devices’ DSP business line. Mr. French also served as President and CEO of Cirrus Logic from 1999-2007 and joined NXP in April 2012, after working as an advisor to several venture-backed companies. |
| • | Loh Kin Wah (1954, Malaysian). Mr. Loh Kin Wah is executive vice president, member of the management team, responsible for sales & marketing. Mr. Loh joined NXP on October 1, 2011. He previously was the President and CEO of Qimonda AG following its spin-out from Infineon Technologies AG. Prior to this appointment, he was a member of the Infineon AG Executive Management Board responsible for the Communication Business Group and subsequently the Memories Product Group. Mr. Loh has held a series of management positions within Infineon AG and its parent company Siemens AG, both in Europe and Asia. |
| • | Peter Kelly (1957, American). Mr. Kelly is executive vice president and chief financial officer of NXP and a member of the management team. He joined NXP on March 1, 2011. He previously shared responsibility with Mr. Belden for managing our overall operations. Mr. Kelly has over 25 years of applicable experience in the global technology industry and has extensive financial expertise having worked in financial management positions in several other companies, including as CFO of UGI Corp. and Agere Systems Inc. Mr. Kelly also serves on the board of Plexus, Corp. |
| • | Robert Rigby-Hall (1965, British). Mr. Rigby-Hall is executive vice president, chief human resources officer and member of the management team since August 15, 2011. Previously, Mr. Rigby-Hall was chief HR officer of LexisNexis, a global provider of information and technology solutions, that is part of Anglo-Dutch group Reed Elsevier. |
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| • | Sean Hunkler (1962, American). Mr. Hunkler is executive vice president, general manager of operations and a member of the management team. He shares responsibility with Mr. Belden for managing the company’s Global Operations. Mr. Hunkler joined NXP on July 16, 2012 with more than 28 years of experience in the semiconductor and materials industries in the US and Asia, including leading roles in internal and external manufacturing operations for MEMC and Freescale. Previously, Mr. Hunkler also served as a non-executive director on the board of SMIC and is a founding trustee of the Virginia Commonwealth University Engineering Foundation Board. |
| • | Ruediger Stroh (1962, German). Mr. Stroh is executive vice president, member of the management team and general manager of our High Performance Mixed Signal businesses focused on the identification application markets. Before joining NXP on May 18, 2009, he led LSI Corporation’s Storage Peripherals business, overseeing silicon solutions for hard disk and solid state drives addressing consumer and enterprise markets. Previously, he headed Agere System Inc’s storage division and served as chief executive officer for a number of start-up companies. Mr. Stroh began his career at Siemens AG where he held multiple management positions before joining Infineon Technologies AG. |
| • | Frans Scheper (1962, Dutch). Mr. Scheper has been executive vice president and general manager for the Standard Products business since November, 2009, and has been a member of the management team since January 1, 2010. He has previously served as general manager of the general applications (discretes) business line within the multimarket business and served in various positions at Philips since 2000. |
| • | Kurt Sievers (1969, German). Mr. Sievers has been executive vice president and general manager of our High Performance Mixed Signal businesses focused on the automotive application markets since November, 2009 and since January 2010 he has been a member of the management team. He has previously managed the automotive safety and comfort business line and served in various positions at Philips since 1995. |
In accordance with Dutch law, our stockholders have adopted a compensation policy for the board of directors. The remuneration of our executive directors is resolved upon by our board of directors, with due observance of our compensation policy. The respective executive director does not participate in the discussions of our board of directors on his compensation, nor does the chief executive officer vote on such a matter. Our chief executive officer is our only executive director. The remuneration of the non-executive directors has been resolved upon by our stockholders at a stockholder meeting at the proposal of our board of directors, prior to the consummation of the initial public offering in August 2010. To the extent the stockholders at a future stockholder meeting do not adopt the proposal of the board, the board must prepare a new proposal. After adoption of a proposal, only subsequent amendments will require stockholder approval. Furthermore, any proposed share or option-based director compensation (including any performance conditions relating to such compensation) must be submitted by our board to the general meeting of stockholders for its approval, detailing the number of shares or options over shares that may be awarded to the directors and the criteria that apply to such award or any modification of such rights. Prior to the consummation of the initial public offering in August 2010, our stockholders have approved such equity-based director compensation.
Compensation Policy and Objectives
The objective in establishing the compensation policies for our chief executive officer, the other members of our management team and our other executives, will be to provide a compensation package that is aligned with our strategic goals and that enables us to attract, motivate and retain highly qualified professionals. We believe that the best way to achieve this is by linking executive compensation to individual performance targets, on the one hand, and to NXP’s performance, on the other hand. Our executive compensation package will therefore include a significant variable part, consisting of an annual cash incentive, shares and stock options. Executive performance targets will be determined annually, at the beginning of the year, and assessed at the end of the year by, respectively, our nominating and compensation committee, our executive officers or the other members of our management team. The compensation package for our chief executive officer, the other members of our management team and our NXP executives is benchmarked on a regular basis against other companies in the high-tech and semiconductors industry.
Base Salary
We currently pay our chief executive officer an annual base salary of €1,142,000, the chairman of our board of directors an annual fixed fee of €275,000 and the other members of our board of directors an annual fixed fee of $85,000 gross. Members of our Audit Committee and the Nominating & Compensation Committee receive an additional annual fixed fee of $6,000 gross and the chairmen of both committees receive an additional annual fixed fee of $10,000 and $8,000 gross, respectively. For the year ended December 31, 2012, the members of our management team as a group (in total 14 members) received a total aggregate compensation of €7,800,000, compared to a total aggregate compensation of €6,900,000 (in total 14 members) in 2011.
Our chief executive officer, the other members of our management team and most of our executives have a contract of employment for an indefinite term. The main elements of any new employment contract that we will enter into with a member of the board of directors will be made public no later than the date of the public notice convening the general meeting of stockholders at which the appointment of such member of the board of directors will be proposed.
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Annual Incentive
Each year, our chief executive officer, the other members of our management team and our other executives can qualify to earn a variable cash incentive, subject to whether certain specific and challenging performance targets have been met. For our chief executive officer, the on-target cash incentive percentage as of 2011 was set at 75% of the base salary, with the maximum cash incentive set at 150% of the annual base salary (previously: 100% and 200%, respectively). The cash incentive pay-out in any year relates to the achievements of the preceding financial year in relation to agreed targets. In 2012, no annual cash incentive has been paid to our chief executive officer as annual incentive bonus for our performance in 2011. The total annual incentive bonus amount paid in 2012 to members of our management team, including our chief executive officer, is €70,200. In 2011, an amount of €2,284,000 has been paid to our chief executive officer, and a total amount of €9,290,000 has been paid as annual incentive bonus amount to members of our management team, including our chief executive officer.
Share Based Compensation Plans
The purpose of our share based compensation plans, including the Management Equity Stock Option Plan implemented prior to the consummation of our initial public offering in August 2010 and the Long-Term Incentive Plan 2010, 2011 and 2012 introduced in November 2010 and 2011 and October 2012, respectively, is to align the interests of management with those of our stockholders by providing additional incentives to improve our medium and long term performance, by offering the participants an opportunity to share in the success of NXP.
We granted stock options to the members of our management team and to approximately 135 of our other executives in 2007 and 2008 under the Management Equity Stock Option Plan. In May 2009, we executed a stock option exchange program, under which stock options, with new exercise prices, different volumes and—in certain cases—revised vesting schedules, were granted to eligible individuals, in exchange for their owned stock options. By accepting the new stock options all previously granted stock options (vested and unvested) owned by the eligible individual were cancelled. As of May 2009, when the stock options exchange program was consummated, stock options have been granted to eligible individuals under the revised Management Equity Stock Option Plan. Under this stock option plan the participants acquire the right to purchase a certain number of shares of common stock at a predetermined price, i.e. exercise price, provided that certain conditions are met. The stock options have a vesting schedule as specified upon the grant to the individuals. Pursuant to our Management Equity Stock Option Plan, members of our management team and certain other executives will be allowed to exercise, from time to time, their vested options. The proportion of options available for exercise cannot exceed the proportion of the aggregate number of shares of common stock sold by our co-investors, including the Private Equity Consortium, to the total number of shares of common stock owned by such co-investors. Following the completion of the secondary offering on April 5, 2011 by NXP Semiconductors N.V., in total up to 22% of the options under the Management Equity Stock Option Plan have become exercisable, subject to the applicable laws and regulations. As of December 31, 2012, a total of 15,114,216 stock options were granted and outstanding under the Management Equity Stock Option Plan to a group of approximately 110 (current and former) NXP executives (which includes our chief executive officer and other members of the management team and our chairman of the board of directors). These stock options can be exercised at exercise prices which vary from €2.00 to €50.00 per stock option.
In November 2010, we introduced a new Long Term Incentive Plan 2010, under which performance stock, restricted stock and stock options may be granted to the members of our board of directors, management team, our other executives, selected other key employees/talents of NXP and selected new hires. Under the Long Term Incentive Plan 2010, equity incentives may be granted on, or the day after, the dates NXP publishes its quarterly financials, beginning on November 2, 2010. Performance stock and restricted stock vest over a period of three years, subject to relevant performance criteria relating to operating income being met, and stock options vest over four years. The size of the annual equity pool available for Long Term Incentive Plan 2010 awards from November 2, 2010 up to the fourth quarter of 2011 is for an aggregate of up to 7,200,000 common shares in our share capital. On December 31, 2012, grants to 854 participants were outstanding, in total representing some 3,601,837 shares of common stock, consisting of 464,652 performance stock, 423,779 restricted stock units and 2,713,406 stock options.
In November 2011, we introduced a new Long Term Incentive Plan 2011, under which performance stock, restricted stock and stock options may be granted to the members of our board of directors, management team, our other executives, selected other key employees/talents of NXP and selected new hires. Under the Long Term Incentive Plan 2011, equity incentives may be granted on, or the day after, the dates NXP publishes its quarterly financials, beginning on November 1, 2011. Performance stock and restricted stock vest over a period of three years, subject to relevant performance criteria being met, and stock options vest over four years. The size of the annual equity pool available for Long Term Incentive Plan 2011 awards from November 1, 2011 up to the fourth quarter of 2012 is for an aggregate of up to 8,570,000 (including a number of 1,370,000 which remained from the 2010 LTIP pool) common shares in our share capital. On December 31, 2012, grants to 995 participants were outstanding, in total representing 6,548,734 shares of common stock, consisting of 1,170,322 performance stock, 1,229,154 restricted stock units and 4,149,258 stock options.
In October 2012, we introduced a new Long Term Incentive Plan 2012, under which performance stock, restricted stock and stock options may be granted to the members of our board of directors, management team, our other executives, selected other key employees/talents of NXP and selected new hires. Under the Long Term Incentive Plan 2012, equity incentives may be granted on, or the day after, the dates NXP publishes its quarterly financials, beginning on October 25, 2012. Performance stock and restricted stock vest over a period of three years, subject to relevant performance criteria being met, and stock options vest over four years. The size of the annual equity pool available for Long Term Incentive Plan 2012 awards from October 25, 2012 up to the fourth quarter of 2013 is for an aggregate of up to 9.3 million (including 2.1 million which remained from the 2011 LTIP pool) common shares in our share capital. On December 31,
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2012, grants to 1,079 participants were outstanding, in total representing 6,468,140 shares of common stock, consisting of 773,500 performance stock, 1,647,190 restricted stock units and 4,047,450 stock options.
Shares to be delivered under any equity program may be newly issued, for up to 10% of our share capital, or they may come out of treasury stock or be purchased from time to time upon the decision of our board of directors.
As of December 31, 2012, the following stock options, restricted stock, performance stock and shares of common stock were outstanding with members of our board of directors:
Richard L. Clemmer, CEO and president
As of December 31, 2012, our chief executive officer held 106,125 shares and had been granted the following stock options and performance stock units, which were outstanding:
| Series | Number of Stock Options |
Exercise Price (in $) |
Number of Stock Options per vesting schedule | |||||||||||||||||||||
| 10/25/13 | 10/25/14 | 10/25/15 | 10/25/16 | |||||||||||||||||||||
| 2012/October |
410,000 | 23.49 | 102,500 | 102,500 | 102,500 | 102,500 | ||||||||||||||||||
| Series | Number of Stock Options |
Exercise Price (in $) |
Number of Stock Options per vesting schedule | |||||||||||||||||||||
| 11/01/12 | 11/01/13 | 11/01/14 | 11/01/15 | |||||||||||||||||||||
| 2011/November |
410,000 | 16.84 | 102,500 | 102,500 | 102,500 | 102,500 | ||||||||||||||||||
| Series | Number of Stock Options |
Exercise Price (in $) |
Number of Stock Options per vesting schedule | |||||||||||||||||||||
| 11/02/11 | 11/02/12 | 11/02/13 | 11/02/14 | |||||||||||||||||||||
| 2010/November |
360,252 | 13.27 | 90,063 | 90,063 | 90,063 | 90,063 | ||||||||||||||||||
| Series | Number of Stock Options |
Exercise Price (in €) |
Number of Stock Options per vesting schedule | |||||||||||||||||||||
| 01/01/10 | 01/01/11 | 01/01/12 | 01/01/13 | |||||||||||||||||||||
| 2009/1 |
415,000 | 2.00 | 103,750 | 103,750 | 103,750 | 103,750 | ||||||||||||||||||
| 2009/2 |
1,400,000 | 15.00 | 350,000 | 350,000 | 350,000 | 350,000 | ||||||||||||||||||
| 2009/3 |
234,000 | 30.00 | 58,500 | 58,500 | 58,500 | 58,500 | ||||||||||||||||||
| 2009/4 |
374,252 | 40.00 | 93,563 | 93,563 | 93,563 | 93,563 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
2,423,252 | 605,813 | 605,813 | 605,813 | 605,813 | |||||||||||||||||||
| Series | Number of Performance Stock Units |
Number of Performance Stock Units per vesting schedule | ||||||||||||||||||
| 10/25/13 | 10/25/14 | 10/25/15 | 10/25/16 | |||||||||||||||||
| 2012/October |
300,000 |
|
Maximum 33% of total |
|
|
Maximum 67% of total |
|
|
Up to 100% of total |
|
|
Up to 100% of total |
| |||||||
| Series | Number of Performance Stock Units |
Number of Performance Stock Units per vesting schedule | ||||||||||||||
| 02/09/13 | 02/09/14 | 02/09/15 | ||||||||||||||
| 2011/November |
300,000 |
|
Maximum 33% of total |
|
|
Maximum 67% of total |
|
|
Up to 100% of total |
| ||||||
| Series | Number of Performance Stock Units |
Number of Performance Stock Units per vesting schedule | ||||||||
| 11/02/13 | ||||||||||
| 2010/November |
160,108 |
|
Up to 160,108 |
| ||||||
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Sir Peter Bonfield, chairman of the board of directors
As of December 31, 2012, the chairman of our board of directors held 9,999 shares from vested stock units, and the following stock options and restricted stock units had been granted to him and were outstanding:
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||||
| 10/25/13 | 10/25/14 | 10/25/15 | ||||||||||||||
| 2012/October |
10,000 | 3,333 | 3,333 | 3,334 | ||||||||||||
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||
| 11/01/13 | 11/01/14 | |||||||||||||
| 2011/November |
6,667 | 3,333 | 3,334 | |||||||||||
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||
| 11/02/13 | ||||||||||
| 2010/November |
3,334 | 3,334 | ||||||||
| Series | Number of Vested Stock Options |
Exercise Price (in €) |
||||||
| 2009/2 |
23,550 | 15.00 | ||||||
| 2009/3 |
23,550 | 30.00 | ||||||
|
|
|
|||||||
| Total |
47,100 | |||||||
Other members of our board of directors
As of December 31, 2012, the other members of our board of directors held the following number of shares:
Mr. Huth: 79,999 of which 9,999 are from vested stock units
Mr. Cattelain: 9,999 from vested stock units
Mr. Durban: 20,499 of which 9,999 are from vested stock units
Mr. Goldman: 14,999 of which 9,999 are from vested stock units
Mr. Kaeser: 9,999 from vested stock units
Mr. Loring: 9,999 from vested stock units
Mr. Plantevin: 9,999 from vested stock units
Mr. Bhatia: 3,333 from vested stock units
To each of Messrs. Huth, Cattelain, Durban, Goldman, Kaeser, Loring and Plantevin, all being member of our board of directors, the following restricted stock units had been granted and were outstanding as of December 31, 2012:
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||||
| 11/01/13 | 11/01/14 | 11/01/15 | ||||||||||||||
| 2012/October |
10,000 | 3,333 | 3,333 | 3,334 | ||||||||||||
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||
| 11/01/13 | 11/01/14 | |||||||||||||
| 2011/November |
6,667 | 3,333 | 3,334 | |||||||||||
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||
| 11/02/13 | ||||||||||
| 2010/November |
3,334 | 3,334 | ||||||||
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To Mr. Bhatia, in 2011 being appointed as member of our board of directors, the following restricted stock units had been granted and were outstanding as of December 31, 2012:
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||||
| 11/01/13 | 11/01/14 | 11/01/15 | ||||||||||||||
| 2012/October |
10,000 | 3,333 | 3,333 | 3,334 | ||||||||||||
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||
| 11/01/13 | 11/01/14 | |||||||||||||
| 2011/November |
6,667 | 3,333 | 3,334 | |||||||||||
To Mr. MacKenzie, in 2012 being appointed as member of our board of directors, the following restricted stock units had been granted and were outstanding as of December 31, 2012:
| Series | Number of Restricted Stock Units |
Number of Stock Units per vesting schedule | ||||||||||||||
| 11/01/13 | 11/01/14 | 11/01/15 | ||||||||||||||
| 2012/October |
10,000 | 3,333 | 3,333 | 3,334 | ||||||||||||
Pensions
Our chief executive officer and eligible members of the management team participate in the executives’ pension plan, which we set up in the Netherlands and which consists of a combination of a career average and a defined-contribution plan. The plan does not require employee contributions. We paid for our chief executive officer a total pension plan contribution of €572,369 in 2012 (2011: €569,340). We also paid a total pension plan contribution in the aggregate of €1,260,000 (2011: €1,540,000) to the members of our management team.
Additional Arrangements
In addition to the main conditions of employment, a number of additional arrangements apply to our chief executive officer and other members of the management team. These additional arrangements, such as housing compensation and relocation allowances, medical insurance, accident insurance, school fee compensation and company car arrangements are broadly in line with those for the NXP executives globally. In the event of disablement, our chief executive officer and other members of the management team are entitled to benefits in line with those for other NXP executives. In line with regulatory requirements, the Company’s policy forbids personal loans, guarantees or similar arrangements to members of our board, and consequently no loans, guarantees or similar arrangements were granted to such members since 2010, nor were any such loans outstanding as of December 31, 2012.
Unless the law provides otherwise, the members of our board of directors are expected to be reimbursed by us for various costs and expenses, such as reasonable costs of defending claims, as formalized in the articles of association. Under certain circumstances, described in the articles of association, such as an act or failure to act by a member of our board of directors that can be characterized as intentional (opzettelijk), intentionally reckless (bewust roekeloos) or seriously culpable (ernstig verwijtbaar), there will be no entitlement to this reimbursement.
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Summary Compensation Table
The following table sets forth the annual compensation paid or granted during the year ended December 31, 2012 to the members of our board of directors on an individual basis for services in all capacities.
| Salary and/ or fees |
Performance related compensation (€) |
Number of stock, stock options and stock units granted |
Non-equity incentive plan compensation or benefits in kind (€) |
Pension, retirement or similar benefits (€) |
||||||||||||||||
| Richard L. Clemmer |
1,142,000 | (1) | — | 710,000 | 840,000 | 572,369 | ||||||||||||||
| Sir Peter Bonfield |
275,000 | (1) | — | 10,000 | — | — | ||||||||||||||
| 6,000 | (2) | — | — | |||||||||||||||||
| Johannes P. Huth |
91,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Vikram Bhatia |
91,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Nicolas Cattelain |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Egon Durban |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Kenneth A. Goldman |
101,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Josef Kaeser |
91,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Ian Loring |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Michel Plantevin |
99,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Richard Wilson |
35,416 | (2) | — | — | — | — | ||||||||||||||
| Roy MacKenzie |
49,584 | (2) | — | 10,000 | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total: |
1,417,000 | (1) | — | 810,000 | 840,000 | 572,369 | ||||||||||||||
| 819,000 | (2) | |||||||||||||||||||
| 1) | in € |
| 2) | in $ |
The following table sets forth the annual compensation paid or granted during the year ended December 31, 2011 to the members of our board of directors on an individual basis for services in all capacities.
| Salary and/ or fees |
Performance related compensation (€) |
Number of stock, stock options and stock units granted |
Non-equity incentive plan compensation or benefits in kind (€) |
Pension, retirement or similar benefits (€) |
||||||||||||||||
| Richard L. Clemmer |
1,142,000 | (1) | 2,284,000 | 710,000 | 680,474 | 569,340 | ||||||||||||||
| Sir Peter Bonfield |
275,000 | (1) | — | 10,000 | — | — | ||||||||||||||
| 12,000 | (2) | — | — | — | — | |||||||||||||||
| Johannes P. Huth |
91,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Vikram Bhatia |
53,083 | (2) | — | 10,000 | — | — | ||||||||||||||
| Nicolas Cattelain |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Eric Coutinho |
35,417 | (2) | — | — | — | |||||||||||||||
| Egon Durban |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Kenneth A. Goldman |
101,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Josef Kaeser |
91,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Ian Loring |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Michel Plantevin |
99,000 | (2) | — | 10,000 | — | — | ||||||||||||||
| Richard Wilson |
85,000 | (2) | — | 10,000 | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total: |
1,417,000 | (1) | 2,284,000 | 810,000 | 680,474 | 569,340 | ||||||||||||||
| 822,500 | (2) | |||||||||||||||||||
| 1) | in € |
| 2) | in $ |
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Management Structure
We have a one-tier board structure, consisting of an executive director and non-executive directors.
Powers, Composition and Function
The number of executive and non-executive directors is determined by the board of directors. The board of directors will consist of one executive director and ten non-executive directors. The executive director, Mr. Clemmer, has been appointed as our chief executive officer.
The appointment of the directors will be made by our general meeting of stockholders upon a binding nomination of the board of directors. A resolution to appoint a director nominated by the board of directors shall be adopted by a simple majority of the votes cast. The board of directors shall make a list of candidates containing the names of at least the number of persons prescribed by law, which is currently two, for each vacancy to be filled. The nomination shall state whether the director is proposed to be an executive or non-executive director. The general meeting of stockholders may at all times overrule the binding nature of such a nomination by a resolution adopted by at least a two thirds majority of the votes cast, provided such majority represents more than half of our issued share capital. The board of directors may then make a new nomination, containing at least the number of persons prescribed by law, which currently is two. If a nomination has not been made or has not been made in due time, this shall be stated in the notice and the general meeting of stockholders shall be free to appoint a director at its discretion. The latter resolution of the general meeting of stockholders must also be adopted by at least two thirds majority of the votes cast, provided such majority represents more than half of our issued share capital.
After the offering of shares of common stock in February 2013, the Private Equity Consortium beneficially owns 42% of our common stock, and as a result will be able to influence or control matters requiring approval by our stockholders, including the election and removal of our directors, subject to any limitations in our shareholders’ agreement.
In addition, the Private Equity Consortium and Philips have entered into an amended and restated shareholders’ agreement that provides Philips with certain rights, including with respect to board representation, and requires the Private Equity Consortium to vote their shares in a manner that implements such rights. See the discussion set forth under “Shareholders’ Agreement” within Part I, Item 7B. Related Party Transactions.
Under our articles of association and Dutch corporate law, the members of the board of directors are collectively responsible for the management, general and financial affairs and policy and strategy of our company. Our executive director will be responsible for the day-to-day management of the Company and for the preparation and execution of board resolutions, to the extent these tasks are not delegated to a committee of the board of directors. Our chief executive officer or all directors acting jointly may represent our company with third parties.
A conflict of interest between the Company and one or more of our directors is not expected to have any impact on the authority of directors to represent the Company. Under our board regulations, a conflict needs to be reported to the board of directors and the board of directors shall resolve on the consequences, if any. Effective per January 1, 2013, Dutch law, in case of a conflict, does not allow directors to participate in discussions or vote on such matters.
Our non-executive directors will supervise the executive director and our general affairs and provide general advice to the executive director. Furthermore the non-executive directors will perform such acts that are delegated to them pursuant to our articles of association or by our board regulation. One of the non-executive directors has been appointed as chairman of the board and another non-executive director has been appointed as vice-chairman of the board of directors.
Each director owes a duty to us to properly perform the duties assigned to him and to act in the corporate interest of our company. Under Dutch law, the corporate interest extends to the interests of all corporate stakeholders, such as stockholders, creditors, employees, customers and suppliers.
Our directors are appointed for one year and will be re-electable each year at the general meeting of stockholders. The members of our board of directors may be suspended or dismissed at any time by the general meeting of stockholders. A resolution to suspend or dismiss a director will have to be adopted by at least a two thirds majority of the votes cast, provided such majority represents more than half of our issued share capital and unless the proposal to suspend or dismiss a member of the board of directors is made by the board of directors itself, in which case resolutions shall be adopted by a simple majority of votes cast. Effective per January 1, 2013, Dutch law facilitates the suspension of executive directors by the board.
In the event that one or more directors are prevented from acting or in the case of a vacancy or vacancies for one or more directors, the board of directors remains properly constituted. The board of directors is expected to have the power, without prejudice to its responsibility, to cause our company to be represented by one or more attorneys. These attorneys shall have such powers as shall be assigned to them on or after their appointment and in conformity with our articles of association, by the board of directors.
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The board of directors has adopted board regulations governing its performance, its decision making, its composition, the tasks and working procedure of the committees and other matters relating to the board of directors, the chief executive officer, the non-executive directors and the committees established by the board of directors. In accordance with our board regulations, resolutions of our board of directors will be adopted by a simple majority of votes cast in a meeting at which at least the majority of its members is present or represented. Each member of the board of directors has the right to cast one vote. In a tie vote, the proposal will be rejected.
Board Committees
While retaining overall responsibility, our board of directors has assigned certain of its tasks to permanent committees. Members of the permanent committees will be appointed by the board of directors. The board of directors will also determine the tasks of each committee. Our board of directors has established an audit committee and a nominating and compensation committee, each of which will have the responsibilities and composition described below:
| • | Audit Committee. Our audit committee consists of three independent non-executive directors, Messrs. Goldman, Kaeser and Bhatia. Mr. Goldman, who is appointed as chairman of the audit committee, will qualify as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K and as determined by our board of directors. Our audit committee will assist the board of directors in supervising, monitoring and advising the board of directors on financial reporting, risk management, compliance with relevant legislation and regulations and our business code of conduct. It will oversee the preparation of our financial statements, our financial reporting process, our system of internal business controls and risk management, our internal and external audit process and our internal and external auditor’s qualifications, independence and performance. Our audit committee also will review our annual and interim financial statements and other public disclosures, prior to publication. At least once per year, the non-executive directors who are part of the audit committee will report their findings to the plenary board of directors. Our audit committee also recommends to our stockholders the appointment of external auditors. The external auditor will attend most meetings of the audit committee. The findings of the external auditor, the audit approach and the risk analysis are also discussed at these meetings. |
| • | Nominating and Compensation Committee. Our nominating and compensation committee consists of three non-executive directors, Messrs. Huth and Plantevin and Sir Peter Bonfield, who is also an independent director. Mr. Plantevin is appointed as chairman of this committee. The nominating & compensation committee will determine selection criteria and appointment procedures for members of our board of directors, to periodically assess the scope and composition of our board of directors and to evaluate the performance of its individual members. It will be responsible for recommending to the board of directors the compensation package for our executive directors, with due observance of the remuneration policy adopted by the general meeting of stockholders. It will review employment contracts entered into with our executive directors, make recommendations to our board of directors with respect to major employment-related policies and oversee compliance with our employment and compensation-related disclosure obligations under applicable laws. |
Limitation of Liability and Indemnification Matters
Unless prohibited by law in a particular circumstance, our articles of association require us to reimburse the members of the board of directors and the former members of the board of directors for damages and various costs and expenses related to claims brought against them in connection with the exercise of their duties. However, there shall be no entitlement to reimbursement if and to the extent that (i) a Dutch court has established in a final and conclusive decision that the act or failure to act of the person concerned may be characterized as willful (opzettelijk), intentionally reckless (bewust roekeloos) or seriously culpable (ernstig verwijtbaar) conduct, unless Dutch law provides otherwise or this would, in view of the circumstances of the case, be unacceptable according to standards of reasonableness and fairness, or (ii) the costs or financial loss of the person concerned are covered by an insurance and the insurer has paid out the costs or financial loss. We may enter into indemnification agreements with the members of the board of directors and our officers to provide for further details on these matters. We expect to purchase directors’ and officers’ liability insurance for the members of the board of directors and certain other officers, substantially in line with that purchased by similarly situated companies.
At present, there is no pending litigation or proceeding involving any member of the board of directors, officer, employee or agent where indemnification will be required or permitted. We are not aware of any threatened litigation or proceedings that might result in a claim for such indemnification.
Insofar as indemnification of liabilities arising under the Securities Act of 1933, as amended, may be permitted to members of the board of directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is therefore unenforceable.
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The following table provides an overview of the number of full time employees we had per segment:
| As of December 31, | ||||||||
| 2012 | 2011 | |||||||
| High Performance Mixed Signal |
3,224 | 3,037 | ||||||
| Standard Products |
1,654 | 1,747 | ||||||
| Manufacturing Operations |
16,490 | 14,860 | ||||||
| Corporate: |
||||||||
| Central research and development |
608 | 624 | ||||||
| Sales and marketing |
761 | 775 | ||||||
| Information technology |
333 | 337 | ||||||
| Other shared services |
1,914 | 1,911 | ||||||
| Other (including NXP Software) |
374 | 369 | ||||||
|
|
|
|
|
|||||
| Total |
25,358 | 23,660 | ||||||
The following table indicates the number of full time employees per geographic area:
| As of December 31, | ||||||||
| 2012 | 2011 | |||||||
| Europe and Africa |
6,957 | 6,932 | ||||||
| Americas |
552 | 532 | ||||||
| Greater China |
7,243 | 6,805 | ||||||
| Asia Pacific |
10,606 | 9,391 | ||||||
|
|
|
|
|
|||||
| Total |
25,358 | 23,660 | ||||||
We have not experienced any material strikes or labor disputes in the past. A number of our employees are members of a labor union. In various countries, local law requires us to inform and consult with employee representatives on matters relating to labor conditions. We consider our employee relations to be good.
Information with respect to share ownership of members of our board of directors is included in Part I, Item 7. Major Shareholders and Related Party Transactions and Notes 11 and 12 to our Consolidated Financial Statements, which are incorporated herein by reference. Information with respect to the grant of shares and stock options to employees is included in Note 13 to our Consolidated Financial Statements which are incorporated herein by reference.
Item 7. Major Shareholders and Related Party Transactions
The following table shows the amount of our common stock beneficially owned as of December 31, 2012 (unless otherwise noted), by (i) each person who is known by us to own beneficially more than 5% of our common stock, (ii) each member of our board of directors, (iii) each director nominee, (iv) each of the named executive officers, (v) certain former members of management and (vi) all members of the board, director nominees and all of our executive officers as a group. A person is a “beneficial owner” of a security if that person has or shares voting or investment power over the security or if he has the right to acquire beneficial ownership within 60 days. Unless otherwise noted, these persons may be contacted at our executive offices and, to our knowledge, have sole voting and investment power over the shares listed.
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Percentage computations are based on 251,751,500 shares of our common stock issued and outstanding as of February 7, 2013. As shown in the table below, funds advised by KKR, Bain and Silver Lake are considered U.S. beneficial holders and collectively beneficially owned 28.14% of our shares of common stock
| Common Stock Beneficially Owned | ||||||||
| Number | % | |||||||
| Funds advised by KKR(1)(6) |
32,197,150 | 12.79 | ||||||
| Funds advised by Bain(2)(6) |
25,756,791 | 10.23 | ||||||
| Funds advised by Silver Lake(3)(6) |
12,879,469 | 5.12 | ||||||
| Funds advised by Apax(4)(6) |
14,487,057 | 5.75 | ||||||
| Funds advised by Alpinvest(5) |
6,438,284 | 2.56 | ||||||
| NXP Co-Investment Partners L.P.(6) |
15,029,155 | 5.97 | ||||||
| PPTL Investment LP(7) |
16,549,097 | 6.57 | ||||||
| Richard L. Clemmer |
1,309,587 | 0.52 | ||||||
| Sir Peter Bonfield |
27,897 | 0.01 | ||||||
| Johannes P. Huth |
79,999 | 0.03 | ||||||
| Nicolas Cattelain |
9,999 | 0.004 | ||||||
| Egon Durban(8) |
12,899,968 | 5.12 | ||||||
| Ian Loring(9) |
25,766,790 | 10.24 | ||||||
| Kenneth Goldman |
14,999 | 0.01 | ||||||
| Michel Plantevin |
9,999 | 0.004 | ||||||
| Roy MacKenzie |
— | — | ||||||
| Josef Kaeser |
9,999 | 0.004 | ||||||
| Vikram Bhatia |
3,333 | 0.001 | ||||||
| All directors and executive officers as a group(10) |
40,132,570 | 15.94 | ||||||
| (1) | KKR’s affiliates and certain funds advised by KKR, through various KKR-affiliated entities, hold shares of our common stock through a newly organized Luxembourg holding company. As per December 31, 2012, the following KKR-affiliated entities (the “KKR Entities”) had an indirect interest in 40,028,656 (as per February 7, 2013: 32,197,150) shares of our common stock through their ownership of such Luxembourg holding company: KKR NXP (2006) Limited (3,121,680 shares); KKR NXP (European II) Limited (20,010,767 shares); KKR NXP (Millennium) Limited (16,896,200 shares); and KKR Associates Europe II Limited Partnership (9 shares). As the designated members of KKR Management LLC (which may be deemed to indirectly control one or more general partners, stockholders or members of the entities that own or control the KKR Entities), Henry R. Kravis and George R. Roberts may be deemed to beneficially own the shares of our common stock indirectly held by the KKR Entities, but disclaim beneficial ownership of such shares. In addition, as the voting partner of certain affiliates of the KKR Entities, KKR SP Limited may be deemed to beneficially own the shares of our common stock indirectly held by the KKR Entities, but disclaims beneficial ownership of such shares. The principal business address of each of the entities and persons identified in this footnote except Mr. Roberts is c/o Kohlberg Kravis Roberts & Co. L.P., 9 West 57th Street, New York, NY 10019, U.S.A. The principal business office for Mr. Roberts is c/o Kohlberg Kravis Roberts & Co. L.P., 2800 Sand Hill Road, Suite 200, Menlo Park, CA 94025, U.S.A. |
| (2) | As per February 7, 2013, Bain Pumbaa LuxCo S.à.r.l. owns 25,756,791 shares of our common stock. As a shareholder of Bain Pumbaa LuxCo S.à.r.l., Bain Capital Lion Holdings, L.P. (“Lion Holdings”) has voting and dispositive power over 25,756,791 shares of our common stock held by Bain Pumbaa LuxCo S.à.r.l. and may be deemed to beneficially own all shares of our common stock held by Bain Pumbaa LuxCo S.à.r.l. Bain Capital Investors, LLC (“BCI”) is the managing general partner of Lion Holdings. As a result, BCI may be deemed to beneficially own all of the shares of our common stock held by Lion Holdings, but disclaims beneficial ownership of such shares of our common stock. BCI is controlled by an investment committee composed of 22 members, Andrew Balson, Steven Barnes, Joshua Bekenstein, Louis Bremer, John Connaughton, Todd Cook, Paul Edgerley, Christopher Gordon, Blair Hendrix, Jordan Hitch, David Humphrey, John Kilgallon, Lewis Klessel, Matthew Levin, Ian Loring, Philip Loughlin, Seth Meisel, Mark Nunnelly, Stephen Pagliuca, Ian Reynolds, Mark Verdi and Stephen Zide. Each such investment committee member disclaims beneficial ownership of shares indirectly held by Lion Holdings. In addition, the Bain-affiliated funds and individuals named above may be deemed by virtue of their rights under the shareholders’ agreement with respect to the Company to share voting power with respect to the shares of our common stock held by the other parties to the shareholders’ agreement, but disclaim beneficial ownership of such shares. The address of BCI and Lion Holdings is John Hancock Tower, 200 Clarendon Street, Boston, MA 02116, U.S.A. |
| (3) | As per February 7, 2013, SL II NXP S.à r.l. owns 12,879,469 shares of our common stock. SLP II Cayman NXP, Ltd. owns 99.57% of the outstanding shares of our common stock held by SL II NXP S.à r.l. and may be deemed to beneficially own all shares of our common stock held by SL II NXP S.à r.l. Silver Lake Partners II Cayman, L.P. is the sole shareholder of SLP II Cayman NXP, Ltd. Silver Lake (Offshore) AIV GP II, Ltd. is the general partner of Silver Lake Technology Associates II Cayman, L.P. Because of the foregoing relationships, each of SLP II Cayman NXP, Ltd., Silver Lake Partners II Cayman, L.P., Silver Lake Technology Associates II Cayman, L.P. and Silver Lake (Offshore) AIV GP II, Ltd. (together, the “Silver Lake Funds”) may be deemed to beneficially own all of the shares of our common stock held by SL II NXP S.à r.l. Messrs. James A. Davidson, Glenn H. Hutchins, David J. Roux, Alan K. Austin, Michael J. Bingle, Gregory Keith Mondre, Charles Giancarlo, Andrew Wagner and Kenneth Y. Hao and Mses. Karen King and Yolande A. Jun serve as directors of Silver Lake (Offshore) AIV GP II, Ltd. They disclaim beneficial ownership of the ordinary shares indirectly owned by the Silver Lake Funds. In addition, the Silver Lake-affiliated funds and individuals named above may be deemed by virtue of their rights under the shareholders’ agreement with respect to the Company to share voting power with respect to the shares of our common stock held by the other parties to the shareholders’ agreement, but disclaim beneficial ownership of such shares. Silver Lake’s address is c/o 2775 Sand Hill Road, Suite 100 Menlo Park, CA 94025, USA. |
| (4) | As per February 7, 2013, Meridian Holding S.à.r.l. owns 14,487,057shares of our common stock. Apax NXP VI A L.P. is an English limited partnership and owns 66.59% of the outstanding shares of Meridian Holding S.à.r.l. Apax NXP (UK) VI A1 GP Co. Ltd, and English private limited company, is the general partner of Apax NXP VI A L.P. Apax WW Nominees Ltd, and English company, holds, directly or indirectly, 100% of the interests in Apax NXP (UK) VI A1 GP Co. Ltd as nominee for Apax Partners Europe Managers Ltd, the custodian of Apax Europe VI-A, L.P., an English limited partnership. Apax Europe VI GP L.P. Inc., a Guernsey limited partnership, is the general partner of Apax Europe VI-A, L.P. Apax Europe VI GP Co. Limited, a Guernsey company, is the general partner of Apax Europe VI GP L.P. Inc. Apax Partner Europe Managers Ltd, an English company, holds 100% of the interests in Apax WW Nominees Ltd. Apax Partners Europe Managers Ltd has also been appointed by Apax Europe VI GP L.P. Inc. (acting by Apax Europe VI GP Co. Limited, its general partner) as discretionairy investment manager of the investments of Apax Europe VI-A, L.P. Apax Partners Europe Managers Ltd, Apax Europe VI GP Co. Limited and Apax Europe VI GP L.P. Inc. are responsible for the investments and general administration of Apax Europe VI-A, L.P. Because of the foregoing relationships, each of Apax NXP VI A L.P., Apax NXP (UK) VI A1 GP Co. Ltd, Apax Europe VI-A, L.P., Apax Europe VI GP L.P. Inc., Apax Europe VI GP Co. Limited and Apax Partners Europe Managers Ltd—may be deemed to beneficially own all of the shares of our common stock held by Meridian Holding S.à.r.l. As directors and shareholders of Apax Partners Europe Managers Ltd., Martin Halusa, Nico Hansen, Michael Phillips and Ian Jones may be deemed to beneficially own the shares of our common stock indirectly held by Apax Europe VI, but disclaim ownership of such shares. In addition, the Apax-affiliated |
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| funds and individuals named above may be deemed by virtue of their rights under the shareholders’ agreement with respect to the Company to share voting power with respect to the shares of our common stock held by the other parties to the shareholders’ agreement, but disclaim beneficial ownership of such shares. The address of Apax Partners LLP and Apax Partners Europe Managers Ltd. is 33 Jermyn Street, London SW1Y 6DN, England, and the address of Apax Partners L.P. is 601 Lexington Avenue, 53rd Floor, New York, NY 10022, U.S.A. |
| (5) | As per December 31, 2012, AlpInvest Partners CSI 2006 Lion C.V. owned 7,938,871 shares in our common stock and AlpInvest Partners Later Stage II-A Lion C.V. owned 65,435 shares of our common stock (combined these two entities own 6,438,284shares as per February 7, 2013). As the managing director of AlpInvest Partners Beheer 2006 B.V. (which manages AlpInvest Partners CSI 2006 Lion C.V. and AlpInvest Partners Later Stage II-A Lion C.V.), AlpInvest Partners B.V. may be deemed to hold voting and dispositive power with respect to the shares in our common stock beneficially owned by AlpInvest Partners CSI 2006 Lion C.V. and AlpInvest Partners Later Stage II-A Lion C.V., but disclaims beneficial ownership of such shares. As managing directors of AlpInvest Partners B.V. Volkert Doeksen and Johan Paul de Klerk may be deemed to beneficially own the shares of our common stock owned by AlpInvest Partners Later Stage II-A Lion C.V. and AlpInvest Partners CSI 2006 Lion C.V., but disclaim beneficial ownership of such shares. |
| In addition, the Alpinvest-affiliated funds and individuals named above may be deemed by virtue of their rights under the shareholders’ agreement with respect to the Company to share voting power with respect to the shares of our common stock held by the other parties to the shareholders’ agreement, but disclaim beneficial ownership of such shares. Alpinvest’s address is c/o Alpinvest Beheer, Jachthavenweg 118, 1081 KJ Amsterdam, the Netherlands. |
| (6) | As the general partner of NXP Co-Investment Partners L.P., NXP Co-Investment GP Ltd. beneficially owns the shares held indirectly by NXP Co-Investment Partners L.P. Funds and entities advised by KKR, Bain, Silver Lake and Apax own NXP Co-Investment GP Ltd., but none of them own a majority, and none may be deemed to beneficially own them. |
| (7) | PPTL Investment LP and the individuals named above may be deemed by virtue of their rights under the shareholders’ agreement with respect to the Company to share voting power with respect to the shares of our common stock held by the other parties to the shareholders’ agreement, but disclaim beneficial ownership of such shares. PPTL Investment LP is a Scottish law limited partnership of which PPTL Investment Limited is the general partner and Philips Pension Trustees Limited (in its capacity as the trustee of the Philips Pension Fund) is the sole limited partner investor. The business address of PPTL Investment LP is 15 Atholl Crescent Edinburgh EH3 8HA, United Kingdom. |
| (8) | Mr. Durban is a director of our Company, as well as a director of SLP II Cayman NXP, Ltd. Amounts disclosed for Mr. Durban include shares beneficially owned by the funds advised by Silver Lake. Mr. Durban disclaims beneficial ownership of any shares owned directly or indirectly by funds advised by Silver Lake. |
| (9) | Mr. Loring is a director of our Company, as well as a member of the investment committee of Bain Capital Investors, LLC. Amounts disclosed for Mr. Loring include shares beneficially owned by the funds advised by Bain. Mr. Loring disclaims beneficial ownership of any shares owned directly or indirectly by funds advised by Bain. |
| (10) | Reflects shares that may be beneficially owned by our directors. However, each director disclaims beneficial ownership of such shares. In addition, as of December 31, 2012, our directors and executive officers beneficially owned as a group options or equity rights representing 8,852,272 shares of our common stock. If exercised, these shares would represent 3.5% of the shares of our common stock. At any time that the Private Equity Consortium reduces its shareholding in us or in the event that the Private Equity Consortium no longer holds in the aggregate at least 30% of our common stock, vested stock options granted under our Management Equity Stock Option Plan would become exercisable. The stock options, performance related stock units and the restricted stock units granted under our Long Term Incentive Plan 2010 and 2011 vest over a three or four year period, subject to certain conditions and are exercisable immediately after vesting. Under the post-IPO Long Term Incentive Plan 2010, 2011 and 2012 implemented in November 2010, November 2011 and November 2012, respectively, our directors and executive officers have been awarded with restrictive or performance related stock, vesting between one and three-years from when such stock was awarded. |
Private Equity Consortium, Philips and Philips Pension Trustees
Advisory Services Agreements
The members of the Private Equity Consortium will provide certain advisory services to us. We have entered into separate agreements in this regard with the respective parties, under which each of the various legal entities will receive an annual advisory fee of $25,000 (with an aggregate total amount of $125,000 annually).
Shareholders’ Agreement
Prior to the consummation of the initial public offering in August 2010, the members of the Private Equity Consortium restructured their indirect shareholding in our common stock such that each of them holds directly, or indirectly through a separate Luxembourg holding company, shares of our common stock. At the same time, KASLION Holding B.V. ceased to hold shares of our common stock. In connection with this restructuring, the members of the Private Equity Consortium, Philips and the Management Foundation (together, the “Existing Shareholders”) entered into a new shareholders’ agreement among themselves, which replaced the shareholders’ agreement entered into on September 29, 2006. We are not a party to the new shareholders’ agreement.
Under the terms of the new shareholders’ agreement, the Existing Shareholders and any affiliate to which the Existing Shareholders transfer common stock are only allowed to sell shares of our common stock after having received approval from an investors committee consisting of representatives of the Private Equity Consortium. These restrictions will terminate upon the Existing Shareholders collectively ceasing to hold a percentage of shares of our common stock equal to at least (i) 25% of their shareholding immediately prior to the initial public offering and (ii) 10% (or, with respect to restrictions on sales by Philips, its affiliate transferees and transferees pursuant to clause (ii) of the following paragraph (collectively, the “Philips Parties”), 20%) of the shares of our common stock outstanding at any time, whichever occurs earlier. Any approved sale, other than sales by any Philips Party, will also be subject to pro rata tag-along rights for other Existing Shareholders.
The transfer restrictions do not apply to (i) transfers of shares of our common stock by the Existing Shareholders to their respective affiliates, (ii) transfers of shares of our common stock held by Philips to affiliated entities or one or more pension funds operated for the
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benefit of Philips’ current and former employees, provided such persons enter into the new shareholders’ agreement, and (iii) transfers of shares in our common stock held by Philips Parties, provided that the aggregate number of shares of our common stock that can be sold by Philips Parties may not exceed (a) 4% of the Outstanding Share Amount during the twelve-month period immediately preceding the date of the consummation of the relevant transfer or (b) 2% of the Outstanding Share Amount during the three-month period immediately preceding the date of the consummation of the relevant transfer. For purposes of these restrictions, “Outstanding Share Amount” shall mean (i) with respect to any transfer in respect of which a Form 144 has been filed with the SEC, the number of shares of common stock outstanding as shown on such form and (ii) with respect to any other transfer, that number of shares of common stock outstanding that we shall have most recently disclosed in our public filings with the SEC.
Existing Shareholders proposing to sell at least 40% of the shares of our common stock outstanding at any time to a third party purchaser can also require the other Existing Shareholders to sell to such third party purchaser.
The new shareholders’ agreement also contains voting agreements among the Existing Shareholders with respect to, among other matters, the election of certain non-executive members to our board of directors. The shareholders’ agreement provides that our board of directors shall be comprised of, among others, seven non-executive members and that certain stockholders have the right to designate such non-executive members, subject to their election by our general meeting of stockholders. So long as any fund advised by KKR, Bain, Silver Lake, Apax or AlpInvest beneficially owns at least 2.5% of the outstanding shares of our common stock, such fund shall have the right to designate either one or two members to our board of directors. The funds advised by KKR and Bain each have the right to designate two members of our board of directors and the funds advised by Silver Lake and Apax each have the right to designate one member to our board of directors. If any party’s shareholding falls below the relevant threshold, it will cause the board member(s) nominated by it to promptly resign from the board of directors, unless otherwise agreed.
The new shareholders agreement will terminate upon the occurrence of certain events, including: (i) with respect to the individual parties to the agreement, upon such party ceasing to hold shares of common stock, (ii) with respect to Philips, upon the date that is three years after the consummation of the initial public offering in August 2010 and (iii) with respect to all parties, upon certain parties’ collective shareholdings falling below specified thresholds.
Registration Rights Agreement
In connection with the restructuring, the Existing Shareholders and certain other investors have entered into a registration rights agreement with us. In accordance with the registration rights agreement, we have filed a shelf registration statement on Form F-3 with the SEC on August 23, 2011. In addition, the registration rights agreement provides the Existing Shareholders with an unlimited number of demand registration rights and with piggyback registration rights, with a right to participate for certain other investors, which, in either case if exercised, would impose on us an obligation to register for public resale with the SEC shares of our common stock that are held by the Existing Shareholders or such other investors. The demand registration rights can be exercised at any time after the expiration of the lockup period. The piggyback registration rights may be exercised whenever we propose to register any of our securities under the Securities Act or equivalent non-U.S. securities laws, other than the initial public offering on August 5, 2010 or a registration pursuant to demand registration rights, on Form F-4 or S-4 or any successor form or solely relating to an offering and sale to our employees or directors pursuant to any employee stock option plan or any other benefit plan arrangement. In each such event, we are required to pay the registration expenses.
Philips, Philips Pension Trustees Limited and PPTL Investment LP
On September 7, 2010, Philips Pension Trustees Limited purchased Philips’ 42,715,650 shares of common stock in the Company (“Transfer Shares”) in a private transaction. In a subsequent private transaction, on October 29, 2010, PPTL Investment LP purchased the Transfer Shares from Philips Pension Trustees Limited by way of a transfer agreement, to which also Philips is a party (“Amended Transfer Agreement”). PPTL Investment LP acquired the Transfer Shares for the purpose of owning and managing such assets as may be contributed to Philips Pension Trustees Limited. In connection with this transaction, PPTL Investment LP was required to join the new shareholders agreement, to which Philips and Philips Pension Trustees Limited were already a party. Under the terms of the new shareholders agreement, PPTL Investment LP is required to vote the Transfer Shares in favor of certain other parties’ nominees to the Company’s board of directors. In addition, PPTL Investment LP may be required in the future to sell the Transfer Shares and to vote in favor of a sale of control of the Company pursuant to drag-along provisions contained in the new shareholders agreement, and may, if joining together with other parties thereto to form the percentage of common stock required to trigger such drag-along provisions, similarly require the other parties thereto to sell common stock and vote in favor of a sale of control of the Issuer. Philips may appoint the majority of the board of directors of Philips Pension Trustees Limited. In addition, the Amended Transfer Agreement limits the ability of PPTL Investment LP as the holder of the Transfer Shares to dispose of the Transfer Shares without the consent of Philips. Furthermore, the shareholders’ agreement grants Philips the right to nominate one non-executive member of the Issuer’s board of directors and requires PPTL Investment LP to vote the Transfer Shares in favor of such nominee. In the secondary offering of shares of our common stock, consummated on April 5, 2011, PPTL Investment LP sold 7,182,436 shares of common stock. In addition, on July 6, 2011, PPTL Investment LP entered into a sales plan with a broker. On the basis of that plan PPTL Investment LP disposed of 2.5 million shares of common stock. On November 1, 2011, it entered into a sales plan on the basis of which plan it disposed of 2,515,915 shares of common stock. On February 17, 2012, PPTL Investment LP entered into a sales plan with a broker on the basis of which plan it disposed 4,940,316 shares of common stock. On July 30, 2012 PPTL Investment LP entered into a sales plan with a broker on the basis of which plan it disposed of 2,405,524 shares of common stock. On November 7, 2012 PPTL Investment LP entered into a sales plan with a broker in order to enable the disposition of 2,597,026 shares of common stock within a three month period.
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Private Equity Consortium and Certain Co-investors
We have been advised by the Private Equity Consortium that it has entered into an agreement relating to shares of our common stock with certain co-investors that participated with the Private Equity Consortium in connection with its purchase from Philips of 80.1% of its semiconductor business in 2006. Pursuant to this agreement, until November 5, 2011, 15 months after the initial public offering on August 5, 2010, the co-investors were restricted from selling the shares of our common stock held by them as of the date of the initial public offering on August 5, 2010. These volume and other limitations terminated on November 5, 2011, and the co-investors may now freely sell their shares without restriction under the agreement. As of December 31, 2012, the aggregate number of shares of our common stock beneficially owned by these co-investors was 19,314,431, representing approximately 7.67% of our outstanding 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. Funds advised by KKR, Bain and Silver Lake are considered U.S. beneficial holders and collectively beneficially owned 28.14% of our shares of common stock as of that date. NXP did not receive any proceeds from the sale of shares in the offering. As of February 7, 2013, the aggregate number of shares of our common stock beneficially owned by these co-investors was 15,658,799, representing approximately 6.22% of our outstanding shares.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Statements and Other Financial Information
Consolidated Statements
See Part III, Item 18. Financial Statements.
Dividend Policy
Our ability to pay dividends on our common stock is limited by the covenants of our Secured Revolving Credit Facility, the Term Loans and the Indentures and may be limited by the terms of any future debt or preferred securities. As a result, we currently expect to retain future earnings for use in the operation and expansion of our business and the repayment of our debt, and do not anticipate paying any cash dividends in the foreseeable future. Whether or not dividends will be paid in the future will depend on, among other things, our results of operations, financial condition, level of indebtedness, cash requirements, contractual restrictions and other factors that our board of directors and our stockholders may deem relevant. If, in the future, our board of directors decides not to allocate profits to our reserves (making such profits available to be distributed as dividends), any decision to pay dividends on our common stock will be at the discretion of our stockholders.
No significant changes have occurred since the date of our Consolidated Financial Statements.
Not applicable.
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The following table shows the high and low closing sales prices of the common stock on the stock market of NASDAQ as reported in the Official Price List since its introduction on August 6, 2010. The introduction price was fixed on August 5, 2010 at $14.00 per share.
| Most recent six months |
||||||||||||||||||||||||||||||||||||||||||||
| January 2013 |
December 2012 | November 2012 | October 2012 | September 2012 | August 2012 | |||||||||||||||||||||||||||||||||||||||
| High |
Low | High | Low | High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||||||||||
| 30.50 |
26.55 | 26.32 | 23.31 | 26.19 | 22.69 | 25.28 | 20.93 | 26.67 | 22.96 | 26.04 | 21.55 | |||||||||||||||||||||||||||||||||
On February 22, 2013, the closing sales price of the common stock on the stock market of NASDAQ was $31.55.
| 2012 | 2011 | 2010 | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
|
1st quarter |
26.97 | 16.01 | 31.95 | 21.43 | ||||||||||||||||||||
|
2nd quarter |
26.32 | 18.81 | 34.18 | 22.65 | ||||||||||||||||||||
|
3rd quarter |
26.67 | 20.03 | 27.51 | 14.03 | 14.00 | 10.68 | ||||||||||||||||||
|
4th quarter |
26.32 | 20.93 | 19.66 | 13.68 | 20.93 | 11.85 | ||||||||||||||||||
Not applicable.
The shares of common stock of the Company are listed on the stock market of the NASDAQ Global Select Market in New York under the ticker symbol “NXPI”.
The Notes, co-issued by NXP Funding LLC and NXP B.V. both of which are wholly-owned subsidiaries of us, and which are guaranteed by certain of our other wholly-owned subsidiaries, are listed on the Global Exchange Market of the Irish Stock Exchange.
Not applicable.
Not applicable.
Not applicable.
Item 10. Additional Information
Not applicable.
B. Memorandum and Articles of Association
The information required by this section is incorporated by reference to Exhibit 3.2 of Amendment No. 7 to the Company’s Registration Statement on Form F-1, filed on August 5, 2010 (File No. 333-166128).
Other than the material contracts described below, we have not entered into any material contracts other than in the ordinary course of business.
On February 16, 2012, our wholly owned subsidiary NXP B.V. and NXP Funding LLC entered into the $475 million 2019 Term Loan. This new long-term debt has a seven year maturity, has a margin of 4% above LIBOR, with a LIBOR floor of 1.25%, and was priced at 98.5% of par. The covenants of this term loan are substantially the same as those contained in our 2017 Term Loans. The proceeds from this new term loan, together with available borrowing capacity under the Secured Revolving Credit Facility, were used to redeem all of our outstanding euro-denominated 8 5/8% Senior Notes due October 2015 and U.S. dollar-denominated 9 1/2% Senior Notes due October 2015, for a total amount of approximately $775 million.
On April 27, 2012, NXP B.V. and NXP Funding LLC entered into €500 million Secured Revolving Credit Facility with Morgan Stanley Senior Funding, Inc. as global collateral agent and administrative agent and Mizuho Corporate Bank, Ltd. as Taiwan collateral agent, replacing the 2006 secured Revolving Credit Facility. This Secured revolving Credit Facility has a five year maturity. Its covenants
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are substantially the same as those contained in the 2006 Secured Revolving Credit Facility. On October 24, 2012, NXP has agreed with certain participating banks to increase the borrowing capacity of the Secured Revolving Credit Agreement entered into on April 27, 2012, to €620 million.
On December 10, 2012, NXP B.V. and NXP Funding LLC entered into the $500 million 2020 Term Loan. This new long term debt has a seven year maturity, a margin of 3.5% above LIBOR, with a LIBOR floor of 1.25% and was priced at 99.5% of par. The covenants of this term loan are substantially the same as those under the 2017 Term Loans and the 2019 Term Loan. The proceeds were used to repurchase part of our outstanding U.S. dollar denominated 9 3/4% Dollar Fixed Rate Secured Notes due in 2018.
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 February 14, 2013. We will use the net proceeds of this private offering to repay amounts outstanding under our Second 2017 Term Loan.
Cash dividends payable on our ordinary shares and cash interest payments to holders of our debt securities may be remitted from the Netherlands to nonresidents without legal restrictions imposed by the laws of the Netherlands, except that (i) such payments must be reported to the Dutch Central Bank for statistical purposes only and (ii) the transfer of funds to jurisdictions subject to general economic sanctions adopted in connection with policies of the United Nations, European Commission or similar measures imposed directly by the Government of the Netherlands may be restricted.
Certain Tax Considerations-Holder of Common Stock
Summary of Dutch Tax Considerations
The following summary describes the material Dutch tax consequences of the ownership and disposition of our shares of common stock as of the date hereof and is intended as general information only. This summary does not contain a detailed description of all the Dutch tax law consequences to you as a holder of shares of common stock in the Company in light of your particular circumstances and does not address the effects of any non-Dutch tax laws. For Dutch tax purposes, a holder of our shares may include an individual who or an entity that does not have the legal title of the shares, but to whom nevertheless the shares are attributed based either on such individual or entity holding a beneficial interest in the shares or based on specific statutory provisions, including statutory provisions pursuant to which shares are attributed to an individual who is, or who has directly or indirectly inherited from a person who was, the settlor, grantor or similar originator of a trust, foundation or similar entity that holds the shares.
If you are considering the purchase, ownership or disposition of our shares, you should consult your own tax advisors concerning the Dutch tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
The following summary is based on the Dutch tax law as applied and interpreted by Dutch tax courts and as published and in effect on the date hereof, without prejudice to any amendments introduced at a later date and implemented with or without retroactive effect. For the purpose of this paragraph, “Dutch taxes” means taxes of whatever nature levied by or on behalf of the Netherlands or any of its subdivisions or taxing authorities. The Netherlands means the part of the Kingdom of the Netherlands located in Europe and does not include Bonaire, St. Eustatius and Saba. Any reference hereafter made to a treaty for the avoidance of double taxation concluded by the Netherlands includes the Tax Regulation for the Kingdom of the Netherlands (Belastingregeling voor het Koninkrijk), the Tax Regulation for the country of the Netherlands (Belastingregeling voor het land Nederland) and the Agreement between the Taipei Representative Office in the Netherlands and the Netherlands Trade and Investment Office in Taipei for the avoidance of double taxation.
Withholding Tax
A stockholder is generally subject to Dutch dividend withholding tax at a rate of 15 percent on dividends distributed by us. Generally, we are responsible for the withholding of such dividend withholding tax at source; the dividend withholding tax is for the account of the stockholder.
Dividends distributed by us include, but are not limited to:
| (i) | distributions of profits in cash or in kind, whatever they be named or in whatever form; |
| (ii) | proceeds from the liquidation of the Company, or proceeds from the repurchase of shares by the Company, in excess of the average paid-in capital recognized for Dutch dividend withholding tax purposes; |
| (iii) | the par value of shares issued to a stockholder or an increase in the par value of shares, to the extent that no contribution, recognized for Dutch dividend withholding tax purposes, has been made or will be made; and |
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| (iv) | partial repayment of paid-in capital, that is not recognized for Dutch dividend withholding tax purposes, or recognized for Dutch dividend withholding tax purposes, to the extent that we have net profits (zuivere winst) and unless (a) the general meeting of stockholders has resolved in advance to make such repayment, and (b) the par value of the shares concerned has been reduced with an equal amount by way of an amendment to our articles of association. The term net profits includes anticipated profits that have yet to be realized. |
Notwithstanding the above, no withholding is required in the event of a repurchase of shares, if certain conditions are fulfilled.
Furthermore, subject to certain exceptions under Dutch domestic law, we may not be required to transfer to the Dutch tax authorities the full amount of Dutch dividend withholding tax withheld in respect of dividends distributed by us, if we have received a profit distribution from a qualifying foreign subsidiary (including a subsidiary resident on Bonaire, St. Eustatius or Saba), which distribution is exempt from Dutch corporate income tax and has been subject to a foreign withholding tax of at least 5 percent. The amount that does not have to be transferred to the Dutch tax authorities can generally not exceed the lesser of (i) 3 percent of the dividends distributed by us and (ii) 3 percent of the profit distributions that we received from qualifying foreign subsidiaries in the calendar year in which we distribute the dividends (up to the moment of such dividend distribution) and in the two previous calendar years. Further limitations and conditions apply. We will, upon request, provide stockholders with information regarding the Dutch dividend withholding tax that was retained by us.
If a stockholder is resident in a country other than the Netherlands under the provisions of a treaty for the avoidance of double taxation between the Netherlands and such country, such stockholder may, depending on the terms of such treaty, be entitled to an exemption from, reduction in or refund of Dutch dividend withholding tax on dividends distributed by us.
If a stockholder is subject to Dutch corporate income tax and is entitled to the participation exemption in relation to the benefits derived from the shares held by it and such shares are attributable to an enterprise carried out in the Netherlands, such stockholder will generally be entitled to an exemption from Dutch dividend withholding tax on dividends distributed by us.
If a stockholder (i) is resident in another member state of the European Union or an appointed state of the European Economic Area, i.e. Iceland, Norway and Liechtenstein, according to the tax laws of that state and, under the terms of a double taxation agreement concluded by that state with a third state, is not considered to be resident for tax purposes outside the European Union, Iceland, Norway or Liechtenstein; and (ii) owns an interest in us to which the Dutch participation exemption would be applicable if the stockholder were resident in the Netherlands; such stockholder will generally be eligible for an exemption from Dutch dividend withholding tax on dividends distributed by us.
Furthermore, if a stockholder:
| (a) | is an entity which is resident for Dutch tax purposes in a member state of the European Union, Iceland, Norway or Liechtenstein or which is a qualifying stockholders resident elsewhere; |
| (b) | is not subject to a tax levied by reference to its profits in its country of residence; and |
| (c) | would not have been subject to Dutch corporate income tax had the stockholder been resident in the Netherlands for Dutch tax purposes; |
such stockholder will be eligible for a full refund of Dutch dividend withholding tax on dividends distributed by us, unless such stockholder is comparable to an exempt investment institution (vrijgestelde beleggingsinstelling) or fiscal investment institution (fiscale beleggingsinstelling), as defined respectively in article 6a and 28 of the Dutch corporate income tax act 1969 (Wet op de vennootschapsbelasting 1969). For purposes of (a) above, a qualifying stockholder is an entity that (i) is resident for Dutch tax purposes in a jurisdiction which has an arrangement for the exchange of tax information with the Netherlands and (ii) holds its shares as a portfolio investment, i.e. such shares are not held with a view to the establishment or maintenance of lasting and direct economic links between the stockholder and the company and the shares do not allow the stockholder to participate effectively in the management or control of the company.
A stockholder who is considered to be resident in the United States and is entitled to the benefits of the convention between the United States and the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, dated December 18, 1992, as amended most recently by the Protocol signed March 8, 2004 (the “Treaty”), will be entitled to a reduction in the Dutch withholding tax by way of an exemption, reduction or refund, as follows:
| • | if the U.S. stockholder is an exempt pension trust, as described in article 35 of the Treaty, or an exempt organization, as described in article 36 of the Treaty, the U.S. stockholder will be exempt from Dutch dividend withholding tax; |
| • | if the U.S. stockholder is a company which holds directly at least 10 percent of the voting power in the company, the U.S. stockholder will be subject to Dutch withholding tax at a rate not exceeding 5 percent; |
| • | if the U.S. stockholder is a company which holds directly at least 80 percent of the voting power in the company and certain other conditions are met, the U.S. stockholder will be exempt from Dutch dividend withholding tax; and |
| • | in all other cases, the U.S. stockholder will be subject to Dutch dividend withholding tax at a rate of 15 percent. |
According to Dutch domestic anti-dividend stripping rules, no credit against Dutch (corporate) income tax, exemption from, reduction in or refund of, Dutch dividend withholding tax will be granted if the recipient of the dividend paid by us is not considered to be the beneficial owner (uiteindelijk gerechtigde) of such dividends as meant in these rules.
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Taxes on Income and Capital Gains
The description of taxation set out in this section of the Report does not apply to any stockholder who is an individual for whom the income or capital gains derived from our shares of common stock are attributable to employment activities, the income from which is taxable in the Netherlands.
A stockholder will not be subject to Dutch taxes on income or capital gains in respect of the ownership and disposal of our shares, other than Dutch dividend withholding tax as described above, except if:
| (i) | the stockholder is, or is deemed to be, resident in the Netherlands for Dutch (corporate) income tax purposes; |
| (ii) | the stockholder is an individual and the stockholder has opted to be treated as resident in the Netherlands for purposes of Dutch income tax; |
| (iii) | the stockholder derives profits from an enterprise, whether as entrepreneur (ondernemer) or pursuant to a co—entitlement to the net worth of such enterprise other than as an entrepreneur or a stockholder, which enterprise is, in whole or in part, carried on through a permanent establishment (vaste inrichting) or a permanent representative (vaste vertegenwoordiger) in the Netherlands, to which the shares are attributable; |
| (iv) | the stockholder is an individual and derives benefits from miscellaneous activities (resultaat uit overige werkzaamheden) carried out in the Netherlands in respect of the shares, including, without limitation, activities which are beyond the scope of active portfolio investment activities; |
| (v) | the stockholder is an individual and has a substantial interest (aanmerkelijk belang) or a fictitious substantial interest (fictief aanmerkelijk belang) in the company, which is not attributable to the assets of an enterprise; |
| (vi) | the stockholder is not an individual and has a substantial interest or a fictitious substantial interest in the company, which (fictitious) substantial interest is not attributable to the assets of an enterprise and (one of) the main purposes of the chosen ownership structure is the evasion of Dutch income tax or dividend withholding tax; |
| (vii) | the stockholder is not an individual and is entitled to a share in the profits of an enterprise or a co-entitlement to the net-worth of an enterprise, other than by way of the holding of securities, which enterprise is effectively managed in the Netherlands and to which enterprise the shares are attributable; or |
| (viii) | the stockholder is an individual and is entitled to a share in the profits of an enterprise, other than by way of the holding of securities, which enterprise is effectively managed in the Netherlands and to which enterprise the shares are attributable. |
Generally, a stockholder has a substantial interest if such stockholder, alone or together with its partner, directly or indirectly (a) owns, or holds certain rights on, shares representing five percent or more of the total issued and outstanding capital of the company, or of the issued and outstanding capital of any class of shares of the company; (b) holds rights, directly or indirectly, to acquire shares, whether or not already issued, representing five percent or more of the total issued and outstanding capital of the company, or of the issued and outstanding capital of any class of shares of the company; or (c) owns, or holds certain rights on, profit participating certificates that relate to five percent or more of the annual profit of the company or to five percent or more of the liquidation proceeds of the company. A stockholder will also have a substantial interest if its partner or one of certain relatives of the stockholder or of its partner has a substantial interest.
Generally, a stockholder has a fictitious substantial interest in the company if, without having an actual substantial interest in the company (i) an enterprise has been contributed to the company in exchange for shares on an elective non-recognition basis; (ii) the shares have been obtained under inheritance law or matrimonial law, on a non-recognition basis, while the disposing stockholder had a substantial interest in the company; (iii) the shares have been acquired pursuant to a share merger, legal merger or legal demerger, on an elective non-recognition basis, while the stockholder prior to this transaction had a substantial interest in an entity that was party thereto; or (iv) the shares held by the stockholder, prior to dilution, qualified as a substantial interest and, by election, no gain was recognized upon disqualification of these shares.
Gift Tax and Inheritance Tax
No Dutch gift or inheritance tax is due in respect of any gift of the shares by, or inheritance of the shares on the death of, a stockholder, except if:
| (i) | at the time of the gift or death of the stockholder, the stockholder is resident, or is deemed to be resident, in the Netherlands; |
| (ii) | the stockholder passes away within 180 days after the date of the gift of the shares and is not, or not deemed to be, at the time of the gift, but is, or deemed to be, at the time of its death, resident in the Netherlands; or |
| (iii) | the gift of the shares is made under a condition precedent and the stockholder is resident, or is deemed to be resident, in the Netherlands at the time the condition is fulfilled. |
For purposes of Dutch gift or inheritance tax, an individual who is of Dutch nationality will be deemed to be resident in the Netherlands if he has been resident in the Netherlands at any time during the ten years preceding the date of the gift or its death. For purposes of Dutch gift tax, any individual, irrespective of its nationality, will be deemed to be resident in the Netherlands if he has been resident in the Netherlands at any time during the 12 months preceding the date of the gift.
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Other Taxes and Duties
No other Dutch Taxes, including turnover tax and taxes of a documentary nature, such as capital tax, stamp or registration tax or duty, are payable by or on behalf of a stockholder by reason only of the purchase, ownership and disposal of the shares.
Residency
A stockholder will not become resident, or deemed resident in the Netherlands for tax purposes by reason only of holding the shares.
United States Federal Income Tax Considerations
The following summary describes the material United States federal income tax consequences of the ownership and disposition of our shares as of the date hereof. The discussion set forth below is applicable only to United States Holders (as defined below) (i) who are residents of the United States for purposes of the Treaty, (ii) whose shares do not, for purposes of the Treaty, form part of the business property of a permanent establishment, or pertain to a fixed base, in the Netherlands, and (iii) who otherwise qualify for the full benefits of the Treaty. Except where noted, this summary deals only with shares held as capital assets. As used herein, the term “United States Holder” means a beneficial owner of a share that is for United States federal income tax purposes:
| • | an individual citizen or resident of the United States; |
| • | a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| • | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| • | a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
This summary does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
| • | a dealer in securities or currencies; |
| • | a financial institution; |
| • | a regulated investment company; |
| • | a real estate investment trust; |
| • | an insurance company; |
| • | a tax-exempt organization; |
| • | a person holding our shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle; |
| • | a trader in securities that has elected the mark-to-market method of accounting for your securities; |
| • | a person liable for alternative minimum tax; |
| • | a person who owns or is deemed to own 10% or more of our voting stock; |
| • | a person holding our shares in connection with a trade or business conducted outside of the United States; |
| • | a partnership or other pass-through entity for United States federal income tax purposes; or |
| • | a person whose “functional currency” is not the United States dollar. |
The discussion below is based upon the provisions of the United States Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below.
If a partnership holds our shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding our shares, you should consult your tax advisors.
This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our shares, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
Taxation of Dividends
The gross amount of distributions on the shares (including any amounts withheld in respect of Dutch withholding taxes to the extent such amounts are actually transferred to the Dutch tax authorities, as described under “Withholding Tax” above) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles.
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Such income (including withheld taxes paid over to the Dutch tax authorities) will be includable in your gross income as ordinary income on the day actually received by you or on the day received by your nominee or agent that holds the shares on your behalf. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.
With respect to non-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The United States Treasury Department has determined that the Treaty meets these requirements. We believe we are currently eligible for the benefits of the Treaty. A foreign corporation is also treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our shares, which are listed on the NASDAQ Global Select Market, are considered readily tradable on an established securities market in the United States. There can be no assurance that our shares will be considered readily tradable on an established securities market in later years. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from a risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. For this purpose, the minimum holding period requirement will not be met if a share has been held by a holder for 60 days or less during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend, appropriately reduced by any period in which such holder is protected from risk of loss. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of this legislation to your particular circumstances.
The maximum rate of withholding tax on dividends paid to you pursuant to the Treaty is 15 percent. You may be required to properly demonstrate to the Company and the Dutch tax authorities your entitlement to the reduced rate of withholding under the Treaty. Subject to certain conditions and limitations, Dutch withholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. However, amounts withheld to reflect Dutch withholding taxes will not be creditable to the extent that we are allowed to reduce the amount of the withholding tax that is actually transferred to the Dutch tax authorities, as described under “Withholding Tax” above. For purposes of calculating the foreign tax credit, dividends paid on the shares will be treated as income from sources outside the United States and will generally constitute passive category income. Further, in certain circumstances, if you:
| • | have held shares for less than a specified minimum period during which you are not protected from risk of loss, or |
| • | are obligated to make payments related to the dividends, |
you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on the shares. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).
Passive Foreign Investment Company
Based on the composition of our income and valuation of our assets, including goodwill, we do not believe we were a passive foreign investment company (a “PFIC”) for the 2012 taxable year, and we do not expect to become one in the future, although there can be no assurance in this regard. If, however, we are or become a PFIC, you could be subject to additional United States federal income taxes on gain recognized with respect to the shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of a share in an amount equal to the difference between the amount realized for the share and your tax basis in the share. Such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss.
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Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our shares and the proceeds from the sale, exchange or redemption of our shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. Backup withholding may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service.
F. Dividends and Paying Agents
Not applicable.
Not applicable.
It is possible to read and copy documents referred to in this Report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.
The Company’s SEC filings are also publicly available through the SEC’s website at www.sec.gov.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and denominate our transactions in a variety of foreign currencies. Changes in these rates may have an impact on future cash flow and earnings. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not enter into financial instruments for trading or speculative purposes.
By using derivative instruments, we are subject to credit and market risk. The fair market value of the derivative instruments is determined by using valuation models whose inputs are derived using market observable inputs, including interest rate yield curves, as well as foreign exchange and commodity spot and forward rates, and reflects the asset or liability position as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty owes us, thus creating a receivable risk for us. We are exposed to counterparty credit risk in the event of non-performance by counterparties to our derivative agreements. We minimize counterparty credit (or repayment) risk by entering into transactions with major financial institutions of investment grade credit rating. Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow.
Interest Rate Risk
Given the leveraged nature of our Company, we have inherent exposure to changes in interest rates. Our Secured Revolving Credit Facility has a floating rate interest. We have issued several Term Loans that have a floating rate interest and have issued several series of notes with maturities ranging from 4 to 8 years and a mix of floating and fixed rates. From time to time, we may execute a variety of interest rate derivative instruments to manage interest rate risk. Consistent with our risk management objective and strategy, we have no interest rate risk hedging transactions in place.
For additional information regarding our interest rate risks see the discussion set for under “Interest rate risk” of Note 6 to the Consolidated Financial Statements included in Part III, Item 18 of this Report.
Foreign Currency Risks
We are also exposed to market risk from changes in foreign currency exchange rates, which could affect operating results as well as our financial position and cash flows. We monitor our exposures to these market risks and generally employ operating and financing activities to offset these exposures where appropriate. If we do not have operating or financing activities to sufficiently offset these exposures, from time to time, we may employ derivative financial instruments such as swaps, collars, forwards, options or
other instruments to limit the volatility to earnings and cash flows generated by these exposures. Derivative financial instruments are only used for hedging purposes and not for trading or speculative purposes. The Company measures all derivative financial instruments based on fair values derived from market prices of the instruments or from option pricing models, as appropriate and record these as assets or liabilities in the balance sheet. Changes in the fair values are recognized in the statement of operations immediately unless cash flow hedge accounting is applied.
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Our primary foreign currency exposure relates to the U.S. dollar to euro exchange rate. However, our foreign currency exposures also relate, but are not limited, to the Chinese Yuan, the Japanese Yen, the Pound Sterling, the Malaysian Ringit, the Singapore Dollar, the Taiwan Dollar and the Thailand Baht.
For additional information regarding our foreign currency risks see the discussion set for under “Currency risk” of Note 6 to the Consolidated Financial Statements included in Part III, Item 18 of this Report.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
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Item 13. Defaults, Dividend Arrearages and Delinquencies
None
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None
Item 15. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this Report, our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the end of the period covered by this Report such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in reports we filed or submitted under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and included controls and procedures designed to ensure that information required to be disclosed in such reports was accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance, not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 based on the criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment our management concluded that our internal control over financial reporting was effective as at December 31, 2012.
It should be noted that any control system, regardless of how well it is designed and operated, can provide only reasonable, not absolute, assurance that its objectives will be met. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Remediation of Material Weakness in Prior Period
In connection with our assessment of the internal control over financial reporting for the year ended December 31, 2009, NXP B.V., which was an SEC registrant for a number of years and of which we own 100% of the shares, identified and reported a material weakness related to the accounting and disclosure for income taxes, specifically relating to the execution of the procedures surrounding the preparation and review of our income tax provision. The execution of our controls did not ensure the accuracy and validity of our acquisition accounting adjustments and the determination of the valuation allowance for deferred tax assets. Part of the identified issue was caused by the complexity that resulted from the fact that step-ups from acquisitions are accounted for centrally.
In the Report for the year ended December 31, 2010, we described the controls that were implemented to improve our internal control over financial reporting and to remediate the material weakness described above. Based on our evaluation of these enhanced controls and increased staffing levels, our management believes that, as of December 31, 2010, we had remediated the material weakness in internal control over financial reporting that we identified as of December 31, 2009. During the year ended December 31, 2011 we have improved the process by removing the complexities resulting from the step-ups from acquisitions being accounted for centrally.
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Attestation Report of the Registered Public Accounting Firm
For the year ended December 31, 2012 an attestation report regarding internal control over financial reporting of the Company’s registered public accounting firm is required. The attestation is included in Part III, Item 18. Financial Statements.
Item 16A. Audit Committee Financial Expert
Mr. Goldman, chairman of our audit committee, qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K and as determined by our board of directors.
The NXP Code of Conduct outlines our general commitment to be a responsible social partner and the way in which we attempt to interact with our stakeholders, including stockholders, suppliers, customers, employees and the market. The Code of Conduct expresses our commitment to an economically, socially and ethically sustainable way of working. It covers our policy on a diverse array of subjects, including corporate gifts, child labor, International Labor Organization conventions, working hours, sexual harassment, free-market competition, bribery and the integrity of financial reporting.
We have also adopted a Financial Code of Ethics applicable to certain of our senior employees, which constitutes a “code of ethics” as such term is defined by the Securities and Exchange Commission. Both the NXP Code of Conduct and our Financial Code of Ethics are available on our website at www.nxp.com/investor/governance. The information contained on our website or that can be accessed through our website neither constitutes part of this Report on Form 20-F nor is incorporated by reference herein.
Item 16C. Principal Accountant Fees and Services
The Company has instituted a comprehensive auditor independence policy that regulates the relation between the Company and its external auditors and is available on our website (www.nxp.com/investor/governance). The policy includes rules for the pre-approval by the audit committee of all services to be provided by the external auditor. The policy also describes the prohibited services that may not be provided. Proposed services may be pre-approved at the beginning of the year by the audit committee (annual pre-approval) or may be pre-approved during the year by the audit committee in respect of a particular engagement (specific pre-approval). The annual pre-approval is based on a detailed, itemized list of services to be provided, designed to ensure that there is no management discretion in determining whether a service has been approved and to ensure the audit committee is informed of each service it is pre-approving. Unless pre-approval with respect to a specific service has been given at the beginning of the year, each proposed service requires specific pre-approval during the year. Any annually pre-approved services where the fee for the engagement is expected to exceed pre-approved cost levels or budgeted amounts will also require specific pre-approval. The term of any annual pre-approval is 12 months from the date of the pre-approval unless the audit committee states otherwise. During 2012, there were no services provided to the Company by the external auditors which were not pre-approved by the audit committee.
The external auditor attends, in principle, all meetings of the audit committee. The findings of the external auditor, the audit approach and the risk analysis are also discussed at these meetings. The external auditor attends the meeting of the board of directors at which the report of the external auditor with respect to the audit of the annual accounts is discussed, and at which the annual accounts are approved. In its audit report on the annual accounts to the board of directors, the external auditor refers to the financial reporting risks and issues that were identified during the audit, internal control matters, and any other matters, as appropriate, requiring communication under the auditing standards generally accepted in the Netherlands and the United States.
Our Consolidated Financial Statements included in this Report have been audited by KPMG Accountants N.V., an independent registered public accounting firm. These financial statements have been approved by the relevant boards.
The aggregate fees billed for professional services rendered for the fiscal periods 2012 and 2011 were as follows:
Aggregate fees KPMG
| ($ in millions) | 2012 | 2011 | ||||||
| Audit fees |
3.3 | 3.7 | ||||||
| Audit-related fees |
0.9 | 1.4 | ||||||
| Tax fees |
— | — | ||||||
| Other fees |
0.2 | 0.1 | ||||||
|
|
|
|
|
|||||
| 4.4 | 5.2 | |||||||
Audit fees consist of fees for the examination of both the consolidated and statutory financial statements.
Audit-related fees consist of fees in connection with audits of acquisitions, divestments and registration statements.
Tax fees consist of fees for professional services in relation to tax compliance, tax advice and tax planning.
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Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides a summary of shares repurchased by the Company in 2012:
| Date |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Programs |
|||||||||
| April 26, 2012 |
79,513 | $ | 25.0100 | 79,513 | ||||||||
| April 27, 2012 |
100,000 | $ | 26.3721 | 100,000 | ||||||||
| May 1, 2012 |
4,100 | $ | 25.6856 | 4,100 | ||||||||
| May 2, 2012 |
98,641 | $ | 25.7805 | 98,641 | ||||||||
| May 3, 2012 |
200,000 | $ | 25.5676 | 200,000 | ||||||||
| May 4, 2012 |
100,000 | $ | 25.5832 | 100,000 | ||||||||
| May 8, 2012 |
46,485 | $ | 24.3642 | 46,485 | ||||||||
| May 9, 2012 |
44,150 | $ | 23.3674 | 44,150 | ||||||||
| June 7, 2012 |
300,000 | $ | 20.2950 | 300,000 | ||||||||
| June 8, 2012 |
248,845 | $ | 20.1082 | 248,845 | ||||||||
| June 11, 2012 |
285,243 | $ | 20.0183 | 285,243 | ||||||||
| June 12, 2012 |
40,688 | $ | 19.9171 | 40,688 | ||||||||
| June 14, 2012 |
146,089 | $ | 20.0378 | 146,089 | ||||||||
| June 24, 2012 |
149,940 | $ | 21.6354 | 149,940 | ||||||||
In 2012, the General Meeting of Shareholders authorized the Board of Directors to repurchase shares of our common stock. On that basis, the Board of Directors resolved to repurchase shares to cover in part employee stock options and equity rights under its long term incentive plans. The purchases identified in the table were all pursuant to this authorization.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
The Dutch Corporate Governance Code
Since our initial public offering in August 2010, we have been required to comply with the Dutch corporate governance code. The Dutch corporate governance code, as revised, became effective on January 1, 2009, and applies to all Dutch companies listed on a government-recognized stock exchange, whether in the Netherlands or elsewhere. The code is based on a “comply or explain” principle. Accordingly, companies are required to disclose in their Annual Reports filed in the Netherlands whether or not they are complying with the various rules of the Dutch corporate governance code that are addressed to the board of directors or, if any, the supervisory board of the company and, if they do not apply those provisions, to give the reasons for such non-application. The code contains principles and best practice provisions for managing boards, supervisory boards, stockholders and general meetings of stockholders, financial reporting, auditors, disclosure, compliance and enforcement standards.
We expect to take various actions towards compliance with the provisions of the Dutch corporate governance code.
The Dutch corporate governance code provides that if a company indicates to what extent it applies the best practice provisions, such company will deemed to have applied the Dutch corporate governance code.
The following discussion summarizes the primary differences between our corporate governance structure and best practice provisions of the Dutch corporate governance code:
| • | Best practice provisions II.2.4 and II.2.5 state that stock options granted to members of our board shall, in any event, not be exercised in the first three years after the date of granting and shares granted to board members without financial consideration shall be retained for a period of at least five years or until at least the end of the employment, if this period is shorter. Under our equity incentive schemes, part of the stock options granted to our chief executive officer in November 2010, November 2011 and November 2012 are exercisable one year after the date of grant, and members of our board who received restrictive shares and performance shares in November 2010, November 2011 and November 2012 are not required to retain these shares for at least five years. Although a deviation from the Corporate Governance Code, we hold the view that the combination of equity incentives granted to our chief executive officer, in relation to his obligation to invest in the Company and the applicable strict vesting and performance criteria, as well as the limited exercise possibility for pre-IPO MEP stock options granted to him, will enhance the goal of promoting long-term investments in the Company. The same is true for the equity grants made to other members of our board, which also have very strict vesting criteria with the purpose of creating long-term commitment to the Company. |
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| • | Best practice provision III.8.4 states that the majority of the members of the board shall be independent. In our board of directors, four non-executive members are independent. It is our view that given the nature of our business and the practice in our industry and considering our stockholder structure, it is justified that only four non-executive directors are independent. |
| • | Pursuant to best practice provision IV.1.1, a general meeting of stockholders is empowered to cancel binding nominations of candidates for the board, and to dismiss members of the board by a simple majority of votes of those in attendance, although the company may require a quorum of at least one third of the voting rights outstanding. If such quorum is not represented, but a majority of those in attendance vote in favor of the proposal, a second meeting may be convened and its vote will be binding, even without a one-third quorum. Our articles of association currently state that the general meeting of stockholders may at all times overrule a binding nomination by a resolution adopted by at least a two-thirds majority of the votes cast, if such majority represents more than half of the issued share capital. Although a deviation from provision IV.1.1 of the Dutch Corporate Governance Code, we hold the view that these provisions will enhance the continuity of the Company’s management and policies. |
Effective January 1, 2012, Dutch law does not allow directors to vote on a matter with regard to which they have an interest.
The NASDAQ Global Select Market Corporate Governance Rules
NASDAQ rules provide that NASDAQ may provide exemptions from its corporate governance standards to a foreign issuer when those standards are contrary to a law, rule or regulation of any public authority exercising jurisdiction over such issuer or contrary to generally accepted business practices in the issuer’s country of domicile. We are exempt from certain NASDAQ corporate governance standards that are contrary to the laws, rules, regulations or generally accepted business practices of the Netherlands. These exemptions and the practices followed by our company are described below:
| • | We are exempt from NASDAQ’s quorum requirements applicable to meetings of stockholders. Pursuant to Dutch corporate law, the validity of a resolution by the general meeting of stockholders does not depend on the proportion of the capital or stockholders represented at the meeting (i.e. quorum), unless the law or articles of association of a company provide otherwise. Our articles of association provide that a resolution proposed to the general meeting of stockholders by the board of directors shall be adopted by a simple majority of votes cast, unless another majority of votes or quorum is required under Dutch law or our articles of association. All other resolutions shall be adopted by a two thirds majority of the votes cast, provided such majority represents at least half of the issued share capital, unless another majority of votes or quorum is required under Dutch law. To this extent, our practice varies from the requirement of Listing Rule 5620(c), which requires an issuer to provide in its bylaws for a quorum, and that such quorum may not be less than one-third of the outstanding voting stock. |
| • | We are exempt from NASDAQ’s requirements regarding the solicitation of proxies and provision of proxy statements for meetings of stockholders. We inform stockholders of meetings in a public notice. We prepare a proxy statement and solicit proxies from the holders of our listed stock. Our practice in this regard, however, differs from the typical practice of U.S. corporate issuers in that the advance record date for determining the holders of record entitled to attend and vote at our stockholder meetings is determined by Dutch law (currently 28 days prior to the meeting). As an administrative necessity, we establish a mailing record date in advance of each meeting of stockholders for purposes of determining the stockholders to which the proxy statement and form of proxy will be sent. However, only stockholders of record on the specified record date are entitled to attend and vote, directly or by proxy, at the meeting. |
| • | NASDAQ requires stockholder approval prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees or consultants. Under Dutch law and the Dutch corporate governance code, stockholder approval is only required for equity compensation plans (or changes thereto) for members of the board, and not for equity compensation plans for other groups of employees. However, we note that under Dutch law, the stockholders have the power to issue shares or rights to subscribe for shares at the general meeting of the stockholders unless such power has been delegated to the board. Our board is designated for a period of five years from the date of the public offering in August 2010 to issue shares and rights to subscribe for shares. |
| • | NASDAQ requires the majority of the board of directors to be comprised of independent directors. Although the Dutch corporate governance code provides that the majority of the members of the board be independent, it also provides that if a company expressly indicates the reasons and the extent to which it does not apply the provisions of the Dutch corporate governance code, such company will deemed to have applied the code. As described under “—Corporate Governance—The Dutch Corporate Governance Code” above, four non-executive members of our board of directors will be independent. It is our view that given the nature of our business and the practice in our industry and considering our stockholder structure, it is justified that only four non-executive directors will be independent. |
| • | We are exempt from NASDAQ’s requirement to have independent director oversight of executive officer compensation. Although the SEC has recently proposed new rules directing national securities exchanges, including NASDAQ, to adopt listing standards requiring that issuers’ compensation committees be comprised exclusively of independent directors, we, as a foreign private issuer, remain exempt from this requirement provided that we disclose the reasons for not having such an independent compensation committee. Under Dutch law and the Dutch corporate governance code, the general meeting of stockholders must adopt a policy in respect of the remuneration of the board. In accordance with our articles of association and our board rules, the remuneration of the |
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| executive directors is determined by the board of directors upon the recommendation of our nominating and compensation committee. Accordingly, applicable laws, regulations and corporate governance rules and practices do not require independence of the members of our nominating and compensation committee. |
| • | We are exempt from NASDAQ’s requirement to have independent director oversight of director nominations. In accordance with Dutch law, our articles of association require that our directors will be appointed by the general meeting of stockholders upon the binding nomination of the board. In accordance with our board rules, the nominating and compensation committee will recommend the nomination of directors to our board. |
| • | NASDAQ requires us to adopt a nominations committee charter or a board resolution addressing the nominations process. In accordance with the Dutch corporate governance code, we have adopted the committee’s charter. However, the nominations process has been set out in our articles of association and board rules. |
Moreover, we will not distribute Annual Reports to all of our stockholders in accordance with NASDAQ rules. Dutch law requires that the external auditors be appointed at the general meeting of stockholders and not by the audit committee. Our audit committee, which consists of members of our board of directors, shall only make a recommendation to the stockholders through the board of directors for the appointment and compensation of the independent registered public accounting firm and shall oversee and evaluate the work of our independent registered public accounting firm.
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We are furnishing the financial statements pursuant to the instructions of Part III, Item 18. Financial Statements of this Report.
See pages F-1 to F-50
| Exhibit Number |
Description of Document | |
| 2.1# | Sale and Purchase Agreement, dated as of December 22, 2010, between NXP Semiconductors N.V., NXP B.V., the Dover Corporation, Knowles Electronics, LLC and EFF Acht Beteiligungsverwaltung GmbH (incorporated by reference to Exhibit 2.1 of the Form 20-F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 3.1 | Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of Amendment No. 7 to the Registration Statement on Form F-1 of NXP Semiconductors N.V., filed on August 2, 2010 (File No. 333-166128)) | |
| 3.2 | Articles of Association of NXP Semiconductors N.V. (incorporated by reference to Exhibit 3.2 of Amendment No. 7 to the Registration Statement on Form F-1 of NXP Semiconductors N.V., filed on August 2, 2010 (File No. 333-166128)) | |
| 4.1 | Senior Secured Indenture dated as of October 12, 2006 among NXP B.V. and NXP Funding LLC as Issuers, each of the Guarantors named on the signature pages thereto, Deutsche Bank Trust Company Americas as Trustee, Morgan Stanley Senior Funding Inc. as Global Collateral Agent and Mizuho Corporate Bank Ltd. as Taiwan Collateral Agent (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form F-4 of NXP B.V. filed on April 23, 2007 (File No. 333-142287)) | |
| 4.2 | Collateral Agency Agreement dated as of September 29, 2006 among NXP Semiconductors N.V. (formerly known as KASLION Acquisition B.V.), NXP B.V., the Guarantors named therein, the Secured Parties as defined therein and from time to time parties thereto, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent and Mizuho Corporate Bank Ltd. as Taiwan Collateral Agent (incorporated by reference to Exhibit 4.3 of the Registration Statement on Form F-4 of NXP B.V. filed on April 23, 2007 (File No. 333-142287)) | |
| 4.3 | Senior Secured Indenture dated as of July 20, 2010 among NXP B.V. and NXP Funding LLC as Issuers, each of the Guarantors named on the signature pages thereto, Deutsche Bank Trust Company Americas as trustee, Morgan Stanley Senior Funding Inc. as Global Collateral Agent and Mizuho Corporate Bank Ltd. as Taiwan Collateral Agent (incorporated by reference to Exhibit 4.5 of Amendment No. 5 to the Registration Statement on Form F-1 of NXP Semiconductors N.V., filed on July 22, 2010 (File No. 333-166128)) | |
| 4.4 | Amended and Restated Shareholders’ Agreement dated August 5, 2010 among the AlpInvest Parties, Apax Parties, Bain Capital Parties, Co-Invest Parties, Kaslion S.à r.l., KASLION Holding B.V., the KKR Parties, Koninklijke Philips Electronics N.V., the Silver Lake Parties and Stichting Management Co-Investment NXP (incorporated by reference to Exhibit 2 of the current report on Form 6-K of NXP Semiconductors N.V. filed on August 10, 2010) | |
| 4.5 | Registration Rights Agreement dated August 5, 2010 among NXP Semiconductors N.V., AlpInvest Partners CSI 2006 Lion C.V., AlpInvest Partners Later Stage II-A Lion C.V., Meridian Holding S.à.r.l., Bain Pumbaa Luxco S.à.r.l., KKR NXP Investor S.à.r.l., NXP Co-Investment Investor S.à.r.l., SLII NXP S.à.r.l., Koninklijke Philips Electronics N.V., Stichting Management Co-Investment NXP and certain hedge funds party to the agreement (incorporated by reference to Exhibit 3 of the current report on Form 6-K of NXP Semiconductors N.V. filed on August 10, 2010) | |
| 4.6 | Secured Term Credit Agreement dated March 4, 2011 among NXP B.V. and NXP Funding LLC as borrower, Barclays Bank PLC as Administrative Agent, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent, Mizuho Corporate Bank, Ltd. as Taiwan Collateral Agent, and the lenders party thereto. (incorporated by reference to Exhibit 4.8 of the Form 20-F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 4.7 | Joinder and Amendment Agreement dated November 18, 2011 amending the Secured Term Credit Agreement dated March 4, 2011 among NXP B.V. and NXP Funding LLC as borrower, Barclays Bank PLC as Administrative Agent, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent, Mizuho Corporate Bank, Ltd. as Taiwan Collateral Agent, and the lenders party thereto. (incorporated by reference to Exhibit 4.9 of the Form 20-F of NXP Semiconductors N.V. filed on March 13, 2012) | |
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| Exhibit Number |
Description of Document | |
| 4.8 | New Term Loan Joinder Agreement dated February 16, 2012 amending the Secured Term Credit Agreement dated March 4, 2011 among NXP B.V. and NXP Funding LLC as borrower, Barclays Bank PLC as Administrative Agent, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent, Mizuho Corporate Bank, Ltd. as Taiwan Collateral Agent, and the lenders party thereto. (incorporated by reference to Exhibit 4.10 of the Form-20F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 4.9 | Senior Secured Indenture dated as of November 10, 2011 among NXP B.V. and NXP Funding LLC as Issuers, each of the Guarantors named on the signature pages thereto, Deutsche Bank Trust Company Americas as trustee, registrar, paying agent, calculation agent and transfer agent, Morgan Stanley Senior Funding Inc. as Global Collateral Agent, and Mizuho Corporate Bank Ltd. as Taiwan Collateral Agent. (incorporated by reference to Exhibit 4.10 of the Form-20F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 4.10 | Secured Revolving Credit Agreement dated April 27, 2012 among NXP Semiconductors N.V., NXP B.V. and NXP Funding LLC as borrower, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent and Administrative Agent, Mizuho Corporate Bank, Ltd. as Taiwan Collateral Agent and the lenders party thereto | |
| 4.11 | Incremental Joinder Agreement, dated October 24, 2012, to the Secured Revolving Credit Agreement dated April 27, 2012 among NXP Semiconductors N.V., NXP B.V. and NXP Funding LLC as borrower, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent and Administrative Agent, Mizuho Corporate Bank, Ltd. as Taiwan Collateral Agent and the lenders party thereto | |
| 4.12 | New Term Loan Joinder Agreement dated December 10, 2012 amending the Secured Term Credit Agreement dated March 4, 2011 among NXP B.V. and NXP Funding LLC as borrower, Barclays Bank PLC as Administrative Agent, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent, Mizuho Corporate Bank, Ltd. as Taiwan Collateral Agent, and the lenders party thereto | |
| 4.13 | Senior Unsecured Indenture dated as of February 14, 2013 among NXP B.V. and NXP Funding LLC as Issuers, each of the Guarantors named on the signature page thereto as borrower and Deutsche Bank Trust Company Americas as trustee | |
| 10.1 | Intellectual Property Transfer and License Agreement dated as of September 28, 2006 between Koninklijke Philips Electronics N.V. and NXP B.V. (incorporated by reference to Exhibit 10.1 of the Amendment No. 3 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 30, 2010 (File No. 333-166128)) | |
| 10.2 | Intellectual Property Transfer and License Agreement dated as of November 16, 2009 among NXP B.V., Virage Logic Corporation and VL C.V. (incorporated by reference to Exhibit 10.2 of the Amendment No. 3 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 30, 2010 (File No. 333-166128)) | |
| 10.3 | Secured Revolving Credit Facility dated as of September 29, 2006 among NXP Semiconductors N.V., NXP B.V. and NXP Funding LLC as borrowers, Morgan Stanley Senior Funding, Inc. as Global Collateral Agent and Mizuho Corporate Bank, Ltd., as Taiwan Collateral Agent, Deutsche Bank AG, London Branch, as Syndication Agent, Merrill Lynch Capital Corporation as Documentation Agent and Morgan Stanley Bank International Limited, Deutsche Bank AG, London Branch and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Joint-lead arrangers and Joint bookrunners (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form F-4 of NXP B.V. filed on April 23, 2007 (File No. 333-142287)) | |
| 10.4 | Shareholders’ agreement dated as of March 30, 1999, as amended among EBD Investments Pte. Ltd., Koninklijke Philips Electronics N.V. and Taiwan Semiconductor Manufacturing Company Ltd. (incorporated by reference to Exhibit 10.4 of the Amendment No. 3 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 30, 2010 (File No. 333-166128)) | |
| 10.5 | Lease Agreement dated as of December 23, 2004 between Jurong Town Corporation and Systems on Silicon Manufacturing Company Pte. Ltd. for the property at No. 70 Pasir Ris Drive 1, Singapore (incorporated by reference to Exhibit 10.8 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
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| Exhibit Number |
Description of Document | |
| 10.6 | Lease Agreement dated September 26, 2003 between Huangjiang Investment Development Company and NXP Semiconductors (Guangdong) Company Ltd. for the property at Tian Mei High Tech Industrial Park, Huang, Jiang Town, Dongguan City, China (incorporated by reference to Exhibit 10.9 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.7 | Building Lease Contract dated as of May 12th, 2000 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.10 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.8 | Agreement with regard to the Lease of a Single (vehicle) Shelter dated as of October 30, 2009 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.11 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.9 | Agreement with regard to the Lease of Standard Plant Basements dated as of July 1, 2011 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. | |
| 10.10 | Agreement with regard to the Lease of a Single (vehicle) Shelter dated as of March 8, 2010 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.13 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.11 | Agreement with regard to the Lease of Additional Land dated as of July 1, 2008 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.14 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.12 | Agreement with regard to the Lease of a Dangerous Goods Warehouse dated as of November 27, 2009 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.15 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.13 | Agreement with regard to the Lease of Land at Property Number AL012 dated as of July 1, 2008 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.18 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.14 | Agreement with regard to the Lease of Land at Property Number AL020 dated as of July 1, 2008 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.19 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.15 | Agreement with regard to the Lease of Land at Property Number AL071 dated as of July 1, 2008 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.20 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.16 | Agreement with regard to the Lease of Land at Property Number CL102 dated as of July 1, 2008 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.21 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.17 | Agreement with regard to the Lease of Land dated as of September 30, 2008 between the Export Processing Zone Administration (Ministry of Economic Affairs) and NXP Semiconductors Taiwan Ltd. (incorporated by reference to Exhibit 10.22 of the Amendment No. 2 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 10, 2010 (File No. 333-166128)) | |
| 10.18 | Management Equity Stock Option Plan Terms and Conditions dated August 2010 (incorporated by reference to Exhibit 10.19 of the Form-20F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 10.19 | Management Equity Stock Option Plan Terms and Conditions dated January 2011 (incorporated by reference to Exhibit 10.20 of the Form-20F of NXP Semiconductors N.V. filed on March 13, 2012) | |
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| Exhibit Number |
Description of Document | |
| 10.20 | Long Term Incentive Plan 2010 Terms and Conditions with regard to the Stock Option Plan, the Performance Stock Unit Plan, Restricted Stock Unit Plan and Share Plan (incorporated by reference to Exhibit 10.21 of the Form-20F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 10.21 | NXP Global Equity Incentive Program (incorporated by reference to Exhibit 10.26 of the Amendment No. 3 to the Registration Statement on Form F-1 of NXP Semiconductors N.V. filed on June 30, 2010 (File No. 333-166128)) | |
| 10.22 | Long Term Incentive Plan 2011 Terms and Conditions with regard to the Stock Option Plan, the Performance Stock Unit Plan, Restricted Stock Unit Plan and Share Plan (incorporated by reference to Exhibit 4.8 of the Form-20F of NXP Semiconductors N.V. filed on March 13, 2012) | |
| 10.23 | Long Term Incentive Plan 2012/3 Terms and Conditions with regard to the Stock Option Plan, the Performance Stock Unit Plan, Restricted Stock Unit Plan and Share Plan | |
| 12.1 | Certification of R. Clemmer filed pursuant to 17 CFR 240. 13a-14(a) | |
| 12.2 | Certification of P. Kelly filed pursuant to 17 CFR 240. 13a-14(a) | |
| 13.1 | Certification of R. Clemmer furnished pursuant to 17 CFR 240. 13a-14(b) | |
| 13.2 | Certification of P. Kelly furnished pursuant to 17 CFR 240. 13a-14(b) | |
| 21.1 | List of Significant Subsidiaries of the Registrant | |
| 22 | Consent of KPMG Accountants N.V. | |
| # | Confidential treatment previously requested and granted |
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| 32 bit ARM microcontrollers | Microcontroller based on a 32-bit processor core developed and licensed by ARM Technologies. | |
| AC-DC | Conversion of alternating current to direct current. | |
| Analog | A form of transmission that is a continuous wave of an electrical signal that varies in frequency and/or amplitude in response to variations of physical phenomena such as human speech or music. | |
| Back-end | The packaging, assembly and testing stages of the semiconductors manufacturing process, which takes place after electronic circuits are imprinted on silicon wafers in the front-end process. | |
| BCDMOS | Bipolar CMOS DMOS. A process technology that combines elements of bipolar, CMOS and DMOS technology and is capable of handling high voltages. | |
| BiCMOS | A process technology that combines bipolar and CMOS processes, typically by combining digital CMOS circuitry with higher voltage or higher speed bipolar circuitry. | |
| Bipolar | A process technology used to create semiconductors for applications involving the use of higher power levels than are possible with a CMOS chip. Due to the geometry of a bipolar circuit, these devices are significantly larger than CMOS devices. The speed of the most advanced bipolar devices exceeds those attainable with CMOS, but only at very large electrical currents. As a result, the number of bipolar devices that can be integrated into a single product is limited. | |
| Can tuner | A module component used in television systems to convert broadcasts into a format suitable for television projection. Can tuners are rapidly being replaced by silicon tuners. | |
| CAN | Controller Area Network. A network technology used in automotive network architecture. | |
| CATV | An abbreviation for cable television. | |
| Car access and immobilizers | An automobile technology segment focused on keyless entry and car immobilization applications. An automobile immobilizer is an electronic device fitted to an automobile which prevents the engine from running unless the correct key (or other token) is present. | |
| Chip | Semiconductor device. | |
| CFL | Compact Fluorescent Light. A type of fluorescent lamp designed to replace an incandescent lamp, while using less power and increasing rated life. | |
| CMOS | Complementary Metal Oxide Semiconductor. The most common integrated circuit fabrication technology in the semiconductor industry. The technology is used to make integrated circuits where small size and high speed are important. As a result of the very small feature sizes that can be attained through CMOS technology, however, the ability of these integrated circuits to cope with high electrical currents and voltages is limited. | |
| Coolflux DSP | A low power digital signal processor designed for mobile audio applications. | |
| Digital | A form of transmission where data is represented by a series of bits or discrete values such as 0 and 1. | |
| Diode | A semiconductor that allows currents to flow in one direction only. | |
| Discrete semiconductors | Unlike integrated circuits, which contain up to tens of millions of transistors, discrete semiconductors are single devices, usually with two terminals (diodes) or three terminals (transistors). These are either applied as peripheral components on printed circuit boards, or used for special purposes such as very high power applications. | |
| DMOS | Diffused Metal on Silicon Oxide Semiconductor. A process technology used to manufacture integrated circuits that can operate at high voltage. | |
| DOCSIS 3.0 | Data Over Cable Service Interface Specification (DOCSIS). Methods for transporting data over a cable (CATV) plant utilizing QAM and/or QPSK RF modulation. | |
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| DSP | Digital signal processor. A specialized microprocessor optimized to process sequences of numbers or symbols which represent signals. | |
| DVB-C2 | Digital Video Broadcasting—the DVB European consortium standard for the broadcast transmission of digital television over cable. | |
| DVB-T2 | Digital Video Broadcasting—Second Generation Terrestrial. A television broadcasting standard used to transmit compressed digital audio, video and other data using land based (terrestrial) signals. | |
| EMI filtering | Electromagnetic interference (or EMI, also called radio frequency interference or RFI when in high frequency or radio frequency) is disturbance that affects an electrical circuit due to either electromagnetic induction or electromagnetic radiation emitted from an external source. | |
| e-passport | A passport with secure data source chip used in providing personalized information. | |
| ESD | Electrostatic discharge. The sudden and momentary electric current that flows between two objects caused by direct contact or induced by an electrostatic field. This term is used in the context of electronics to describe momentary unwanted currents that may cause damage to electronic equipment. | |
| EURIBOR | Euro Interbank Offered Rate. The benchmark rate at which euro interbank term deposits within the eurozone are offered by one prime bank to another prime bank. | |
| Fab (or wafer fab) | A semiconductor fabrication facility in which front-end manufacturing processes take place. | |
| Fabless semiconductor company | A semiconductor company that does not have any internal wafer fab manufacturing capacity but instead focuses on designing and marketing its products, while outsourcing manufacturing to an independent foundry. | |
| FlexRay | A new communications protocol designed for the high data transmission rates required by advanced automotive control systems. | |
| Foundry | A semiconductor manufacturer that manufactures chips for third parties. | |
| Front-end | The wafer processing stage of the semiconductors manufacturing process in which electronic circuits are imprinted onto raw silicon wafers. This stage is followed by the packaging, assembly and testing stages, which together comprise the back-end process. | |
| GPS | Global Positioning System. | |
| HDMI | High-Definition Multimedia Interface. A compact audio/video interface for transmitting uncompressed digital data. | |
| I2 C | A multi-master serial single-ended computer bus that is used to attach low-speed peripherals to a motherboard, embedded system or mobile phone. | |
| Integrated Circuit | Integrated Circuit. A miniaturized electronic circuit that has been manufactured in the surface of a thin substrate of semiconductor material. | |
| ICN5,6,8 | NXP wafer fab facilities located in Nijmegen, Netherlands, processing 5”, 6” or 8” diameter wafers. | |
| In-process research and development |
The value allocated to incomplete research and development projects in acquisitions treated as purchases. | |
| Leadframe | A thin layer of metal that connects the wiring from tiny electrical technicals on the semiconductor surface to the large scale circuitry on electrical devices and circuit boards. Leadframes are used in almost all semiconductor packages. | |
| LDMOS | Laterally Diffused Metal Oxide Semiconductor. A transistor used in RF/microwave power amplifiers. | |
| LDOs | low-dropout or LDO regulator is a DC linear voltage regulator which can operate with a very small input–output differential voltage. The advantages of a low dropout voltage include a lower minimum operating voltage, higher efficiency operation and lower heat dissipation. | |
| LED | Light Emitting Diode. A semiconductor device which converts electricity into light. | |
| LIN | Local Interconnect Network. A network technology used in automotive network architecture. | |
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| LNA | Low-Noise Amplifier. An electronic amplifier used to amplify very weak signals. | |
| Magneto-resistive device | A device fabricated with magneto-resistive material (material that has the ability to change the value of its electrical resistance when an external magnetic field is applied to it). | |
| Memory | Any device that can store data in machine readable format. Usually used synonymously with random access memory and read only memory. | |
| Microcontroller | A microprocessor combined with memory and interface integrated on a single circuit and intended to operate as an embedded system. | |
| Micron | A metric unit of linear measure which equals one millionth of a meter. A human hair is about 100 microns in diameter. | |
| MIFARE | Trademarked name, owned by NXP, for the most widely used contactless smart card, or proximity card, technology, for payment in transportation systems. | |
| Mixed-signal | The mixed-signal part of an application solution refers to the devices and sub-system solutions that translate real world analog signals and phenomena such as radio frequency communication and power signals, sound, light, temperature, pressure, acceleration, humidity and chemical characteristics into digital or power signals that can be fed into the central microprocessing or storage devices at the heart of an application system solution. | |
| MMIC | Monolithic Microwave Integrated Circuit. A type of integrated circuit device that operates at microwave frequencies. | |
| MOS | Metal Oxide Semiconductor. A metal insulator semiconductor structure in which the insulating layer is an oxide of the substrate material. | |
| MOSFET | Metal Oxide Semiconductor Field Effect Transistor. A device used for amplifying or switching electronic signals. | |
| Nanometer | A metric unit of linear measure which equals one billionth of a meter. There are 1,000 nanometers in 1 micron. | |
| NFC | Near field communication. A technology which allows devices to establish a secure point-to-point wireless connection at very close ranges (within several centimeters), and which is being increasingly adopted in mobile devices and point-of-sale terminals or other devices. | |
| ODM | Original Design Manufacturer. A company which manufactures a product which ultimately will be branded by another firm for sale. | |
| OEM | Original Equipment Manufacturer. A manufacturer that designs and manufactures its products for the end consumer market. | |
| Power MOS | A specific type of metal oxide semiconductor designed to handle large amounts of power. | |
| Power scaling | Design technique used to increase output power without changing the geometry, shape, or principle of operation. | |
| Process technologies | The technologies used in front-end processes to convert raw silicon wafers into finished wafers containing hundreds or thousands of chips. | |
| QAM | Quadrature-Amplitude Modulation | |
| QPSK | Quadrature phase shift keying | |
| Rectifier | An electrical device that converts alternating current to direct current. | |
| RF | Radio Frequency. A high frequency used in telecommunications. The term radio frequency refers to alternating current having characteristics such that, if the current is input to an antenna, an electromagnetic (EM) field is generated suitable for wireless broadcasting and/or communications. | |
| Radio Frequency Identification | An RF chip used for identification. | |
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| Semiconductors | Generic term for devices such as transistors and integrated circuits that control the flow of electrical signals. The most common semiconductor material for use in integrated circuits is silicon. | |
| Silicon | A type of semiconducting material used to make wafers. Silicon is widely used in the semiconductor industry as a base material. | |
| Silicon tuners | Semiconductor devices for receiving broadcast television signals. Silicon tuners are expected to displace mechanical can tuners as the dominant technology in television receivers. | |
| SIM | Subscriber Identity Module. A smart card that stores the key identifying a cellular phone service subscriber and related information. | |
| Solid State Lighting |
A type of lighting that uses semiconductor light-emitting diodes (LEDs), organic light-emitting diodes (OLED), or polymer light-emitting diodes (PLED) as sources of illumination rather than electrical filaments, plasma or gas. | |
| SPI | Serial Peripheral Interface Bus. A synchronous serial data link standard that operates in full duplex mode. | |
| SS MOS | Small signal power discrete including a metal oxide semiconductor field effect transistor. | |
| SS Transistor | A small signal transistor. | |
| Substrate | The base material made from silicon on which an integrated circuit is printed. | |
| Telematics | The science of sending, receiving and storing information via telecommunication devices. | |
| Thyristor | A four-layer semiconductor that is often used for handling large amounts of electrical power. | |
| UART | Universal Asynchronous Receiver/Transmitter. An integrated circuit used for serial communications over a computer or peripheral device serial port. | |
| USB | Universal Serial Bus. A standard that provides a serial bus standard for connecting devices, usually to a computer. | |
| WACC | Weighted Average Cost of Capital. A calculation of a company’s cost of capital in which each category of capital is proportionally weighted. | |
| Wafer | A disk made of a semiconducting material, such as silicon, usually either 100, 125, 150, 200 or 300 millimeters in diameter, used to form the substrate of a chip. A finished wafer may contain several thousand chips. | |
| White goods | A term which refers to large household appliances such as refrigerators, stoves, dishwashers and other similar items. | |
| Yield | The ratio of the number of usable products to the total number of manufactured products. | |
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| NXP Semiconductors N.V. (Registrant) | ||||
| /s/ RICK CLEMMER | /s/ PETER KELLY | |||
| Rick Clemmer | Peter Kelly | |||
| Chief Executive Officer (Principal Executive Officer) |
Chief Financial Officer (Principal Financial and Accounting Officer) | |||
Date: March 1, 2013
86
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements and related schedules, together with the report of independent registered public accounting firms thereon, are filed as part of this Annual Report:
Consolidated Financial Statements
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of NXP Semiconductors N.V.:
We have audited the accompanying consolidated balance sheets of NXP Semiconductors N.V. and subsidiaries (“the Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2012. We also have audited the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 15 of this Form 20-F. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG Accountants N.V.
Amstelveen, the Netherlands
March 1, 2013
Table of Contents
Consolidated Statements of Operations of NXP Semiconductors N.V.
| ($ in millions unless otherwise stated) | For the years ended December 31, | |||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Revenue |
4,358 | 4,194 | 4,402 | |||||||||
| Cost of revenue |
(2,370 | ) | (2,288 | ) | (2,579 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Gross profit |
1,988 | 1,906 | 1,823 | |||||||||
| Research and development |
(628 | ) | (635 | ) | (568 | ) | ||||||
| Selling, general and administrative |
(977 | ) | (918 | ) | (966 | ) | ||||||
| Other income (expense) |
29 | 4 | (16 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Operating income (loss) |
412 | 357 | 273 | |||||||||
| Financial income (expense): |
||||||||||||
| Extinguishment of debt |
(161 | ) | (32 | ) | 57 | |||||||
| Other financial income (expense) |
(276 | ) | (225 | ) | (685 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) before income taxes |
(25 | ) | 100 | (355 | ) | |||||||
| Benefit (provision) for income taxes |
(1 | ) | (21 | ) | (24 | ) | ||||||
| Results relating to equity-accounted investees |
(27 | ) | (77 | ) | (86 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations |
(53 | ) | 2 | (465 | ) | |||||||
| Income (loss) on discontinued operations, net of tax |
1 | 434 | 59 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
(52 | ) | 436 | (406 | ) | |||||||
| Attribution of net income (loss) for the period: |
||||||||||||
| Net income (loss) attributable to stockholders |
(115 | ) | 390 | (456 | ) | |||||||
| Net income (loss) attributable to non-controlling interests |
63 | 46 | 50 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
(52 | ) | 436 | (406 | ) | |||||||
| Earnings per share data: |
||||||||||||
| Basic and diluted earnings per common share attributable to stockholders in $ |
||||||||||||
| – Income (loss) from continuing operations |
(0.46 | ) | (0.17 | ) | (2.25 | ) | ||||||
| – Income (loss) from discontinued operations |
— | 1.74 | 0.26 | |||||||||
| – Net income (loss) |
(0.46 | ) | 1.57 | (1.99 | ) | |||||||
| Weighted average number of shares of common stock outstanding during the year (in thousands) |
||||||||||||
| – Basic and diluted |
248,064 | 248,812 | 229,280 | |||||||||
See accompanying notes to the consolidated financial statements.
F-3
Table of Contents
Consolidated Statements of Comprehensive Income of NXP Semiconductors N.V.
| ($ in millions ) | For the years ended December 31, | |||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Net income (loss) |
(52 | ) | 436 | (406 | ) | |||||||
| Other comprehensive income (loss), net of tax: |
||||||||||||
| Net investment hedge, net of deferred taxes of $(8), $0 and $0 |
18 | (203 | ) | — | ||||||||
| Foreign currency translation adjustments |
10 | (19 | ) | 160 | ||||||||
| Net actuarial gain (loss), net of deferred taxes of $3, $(2) and $1 |
(51 | ) | 7 | (19 | ) | |||||||
| Reclassification adjustments: |
||||||||||||
| Foreign currency translation adjustments |
— | (2 | ) | (2 | ) | |||||||
| Amortization of net actuarial gain (loss) |
— | 2 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total other comprehensive income (loss) |
(23 | ) | (215 | ) | 139 | |||||||
|
|
|
|
|
|
|
|||||||
| Total comprehensive income (loss) |
(75 | ) | 221 | (267 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Attribution of comprehensive income (loss) for the period: |
||||||||||||
| Comprehensive income (loss) attributable to stockholders |
(138 | ) | 175 | (317 | ) | |||||||
| Comprehensive income (loss) attributable to non-controlling interests |
63 | 46 | 50 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total comprehensive income (loss) |
(75 | ) | 221 | (267 | ) | |||||||
See accompanying notes to the consolidated financial statements.
F-4
Table of Contents
Consolidated Balance Sheets of NXP Semiconductors N.V.
| ($ in millions unless otherwise stated) | As of December 31, | |||||||
| 2012 | 2011 | |||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
617 | 743 | ||||||
| Receivables, net |
510 | 479 | ||||||
| Assets held for sale |
10 | 39 | ||||||
| Inventories, net |
715 | 618 | ||||||
| Deferred tax assets |
12 | 5 | ||||||
| Other current assets |
90 | 82 | ||||||
|
|
|
|
|
|||||
| Total current assets |
1,954 | 1,966 | ||||||
|
|
|
|
|
|||||
| Non-current assets: |
||||||||
| Investments in equity-accounted investees |
45 | 37 | ||||||
| Other non-current assets |
128 | 144 | ||||||
| Property, plant and equipment, net |
1,070 | 1,063 | ||||||
| Identified intangible assets, net |
965 | 1,171 | ||||||
| Goodwill |
2,277 | 2,231 | ||||||
|
|
|
|
|
|||||
| Total non-current assets |
4,485 | 4,646 | ||||||
|
|
|
|
|
|||||
| Total assets |
6,439 | 6,612 | ||||||
|
|
|
|
|
|||||
| Liabilities and equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
562 | 455 | ||||||
| Liabilities held for sale |
— | 21 | ||||||
| Restructuring liabilities—current |
138 | 47 | ||||||
| Accrued liabilities |
489 | 474 | ||||||
| Short-term debt |
307 | 52 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
1,496 | 1,049 | ||||||
|
|
|
|
|
|||||
| Non-current liabilities: |
||||||||
| Long-term debt |
3,185 | 3,747 | ||||||
| Pension and postretirement benefits |
269 | 218 | ||||||
| Restructuring liabilities |
32 | 52 | ||||||
| Other non-current liabilities |
173 | 189 | ||||||
|
|
|
|
|
|||||
| Total non-current liabilities |
3,659 | 4,206 | ||||||
|
|
|
|
|
|||||
| Equity: |
||||||||
| Non-controlling interests |
235 | 212 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, par value €0.20 per share: |
||||||||
| Authorized: 430,503,000 shares (2011: 430,503,000 shares) |
||||||||
| Issued and fully paid: 251,751,500 shares (2011: 251,751,500 shares) |
51 | 51 | ||||||
| Capital in excess of par value |
6,090 | 6,047 | ||||||
| Treasury shares, at cost: 2,726,000 shares (2011: 3,915,144 shares) |
(58 | ) | (57 | ) | ||||
| Accumulated deficit |
(5,334 | ) | (5,219 | ) | ||||
| Accumulated other comprehensive income (loss) |
300 | 323 | ||||||
|
|
|
|
|
|||||
| Total Stockholders’ equity |
1,049 | 1,145 | ||||||
|
|
|
|
|
|||||
| Total equity |
1,284 | 1,357 | ||||||
|
|
|
|
|
|||||
| Total liabilities and equity |
6,439 | 6,612 | ||||||
|
|
|
|
|
|||||
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
Consolidated Statements of Cash Flows of NXP Semiconductors N.V.
| ($ in millions) | For the years ended December 31, | |||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net income (loss) |
(52 | ) | 436 | (406 | ) | |||||||
| (Income) loss from discontinued operations, net of tax |
(1 | ) | (434 | ) | (59 | ) | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
||||||||||||
| Depreciation and amortization |
533 | 591 | 684 | |||||||||
| Stock-based compensation |
52 | 31 | 12 | |||||||||
| Net (gain) loss on sale of assets |
(20 | ) | 10 | 21 | ||||||||
| (Gain) loss on extinguishment of debt |
161 | 32 | (57 | ) | ||||||||
| Results relating to equity-accounted investees |
27 | 77 | 86 | |||||||||
| Changes in operating assets and liabilities: |
||||||||||||
| (Increase) decrease in receivables and other current assets |
2 | (32 | ) | 109 | ||||||||
| (Increase) decrease in inventories |
(61 | ) | (104 | ) | 8 | |||||||
| Increase (decrease) in accounts payable and accrued liabilities |
61 | (373 | ) | (237 | ) | |||||||
| Decrease (increase) in other non-current assets |
26 | 51 | (157 | ) | ||||||||
| Exchange differences |
(28 | ) | (128 | ) | 353 | |||||||
| Other items |
22 | 18 | 4 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used for) operating activities |
722 | 175 | 361 | |||||||||
| Cash flows from investing activities: |
||||||||||||
| Purchase of identified intangible assets |
(29 | ) | (10 | ) | (7 | ) | ||||||
| Capital expenditures on property, plant and equipment |
(251 | ) | (221 | ) | (258 | ) | ||||||
| Proceeds from disposals of property, plant and equipment |
2 | 15 | 31 | |||||||||
| Proceeds from disposals of assets held for sale |
— | 11 | 8 | |||||||||
| Purchase of interests in businesses |
(2 | ) | — | (8 | ) | |||||||
| Proceeds from (consideration related to) sale of interests in businesses |
26 | — | (60 | ) | ||||||||
| Proceeds from return of equity investment |
12 | — | — | |||||||||
| Decrease (increase) in non-current assets and deposits |
(1 | ) | 3 | 25 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used for) investing activities |
(243 | ) | (202 | ) | (269 | ) | ||||||
| Cash flows from financing activities: |
||||||||||||
| Net (repayments) borrowings of short-term debt |
— | 17 | 8 | |||||||||
| Amounts drawn under the revolving credit facility |
760 | 200 | — | |||||||||
| Repayments under the revolving credit facility |
(530 | ) | (600 | ) | (200 | ) | ||||||
| Repurchase of long-term debt |
(1,676 | ) | (1,997 | ) | (1,383 | ) | ||||||
| Principal payments on long-term debt |
(20 | ) | (10 | ) | (2 | ) | ||||||
| Net proceeds from the issuance of long-term debt |
958 | 1,578 | 974 | |||||||||
| Dividends paid to non-controlling interests |
(40 | ) | (67 | ) | (2 | ) | ||||||
| Net proceeds from the issuance of common stock |
— | — | 448 | |||||||||
| Cash proceeds from exercise of stock options |
14 | 10 | — | |||||||||
| Purchase of treasury shares |
(40 | ) | (57 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used for) financing activities |
(574 | ) | (926 | ) | (157 | ) | ||||||
| Net cash provided by (used for) continuing operations |
(95 | ) | (953 | ) | (65 | ) | ||||||
| Cash flows from discontinued operations: |
||||||||||||
| Net cash provided by (used for) operating activities |
— | 20 | 10 | |||||||||
| Net cash provided by (used for) investing activities |
(45 | ) | 791 | (17 | ) | |||||||
| Net cash provided by (used for) financing activities |
— | (2 | ) | 2 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used for) discontinued operations |
(45 | ) | 809 | (5 | ) | |||||||
| Net cash provided by (used for) continuing and discontinued operations |
(140 | ) | (144 | ) | (70 | ) | ||||||
| Effect of changes in exchange rates on cash positions |
14 | (21 | ) | (63 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Increase (decrease) in cash and cash equivalents |
(126 | ) | (165 | ) | (133 | ) | ||||||
| Cash and cash equivalents at beginning of period |
743 | 908 | 1,041 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of period |
617 | 743 | 908 | |||||||||
| Less: cash and cash equivalents at end of period-discontinued operations |
— | — | 10 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of period-continuing operations |
617 | 743 | 898 | |||||||||
See accompanying notes to the consolidated financial statements.
F-6
Table of Contents
Consolidated Statements of Changes in Equity for the years ended December 31, 2012, 2011 and 2010
| ($ in millions) | Outstanding number of shares (in thousands) |
Common stock |
Capital in excess of par value |
Treasury shares at cost |
Accumulated deficit |
Accumulated other comprehensive income (loss) |
Total stockholders’ equity |
Non- controlling interests |
Total equity | |||||||||||||||||||||||||||
| Balance as of January 1, 2010 |
215,252 | 42 | 5,555 | — | (5,153 | ) | 399 | 843 | 198 | 1,041 | ||||||||||||||||||||||||||
| Net income (loss) |
(456 | ) | (456 | ) | 50 | (406 | ) | |||||||||||||||||||||||||||||
| Other comprehensive income |
139 | 139 | 139 | |||||||||||||||||||||||||||||||||
| Share-based compensation plans |
12 | 12 | 12 | |||||||||||||||||||||||||||||||||
| Net proceeds from the issuance of common stock (IPO) |
34,000 | 9 | 439 | 448 | 448 | |||||||||||||||||||||||||||||||
| Issuance of additional shares |
1,500 | — | — | |||||||||||||||||||||||||||||||||
| Dividends non-controlling interests |
(2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||
| Changes in participations |
(13 | ) | (13 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance as of December 31, 2010 |
250,752 | 51 | 6,006 | — | (5,609 | ) | 538 | 986 | 233 | 1,219 | ||||||||||||||||||||||||||
| Net income (loss) |
390 | 390 | 46 | 436 | ||||||||||||||||||||||||||||||||
| Other comprehensive income |
(215 | ) | (215 | ) | (215 | ) | ||||||||||||||||||||||||||||||
| Share-based compensation plans |
31 | 31 | 31 | |||||||||||||||||||||||||||||||||
| Issuance of additional shares |
1,000 | — | — | |||||||||||||||||||||||||||||||||
| Treasury shares |
(5,689 | ) | (57 | ) | (57 | ) | (57 | ) | ||||||||||||||||||||||||||||
| Shares issued pursuant to stock awards |
1,774 | 10 | 10 | 10 | ||||||||||||||||||||||||||||||||
| Dividends non-controlling interests |
(67 | ) | (67 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance as of December 31, 2011 |
247,837 | 51 | 6,047 | (57 | ) | (5,219 | ) | 323 | 1,145 | 212 | 1,357 | |||||||||||||||||||||||||
| Net income (loss) |
(115 | ) | (115 | ) | 63 | (52 | ) | |||||||||||||||||||||||||||||
| Other comprehensive income |
(23 | ) | (23 | ) | (23 | ) | ||||||||||||||||||||||||||||||
| Share-based compensation plans |
52 | 52 | 52 | |||||||||||||||||||||||||||||||||
| Treasury shares |
(1,245 | ) | 8 | (34 | ) | (26 | ) | (26 | ) | |||||||||||||||||||||||||||
| Shares issued pursuant to stock awards |
2,434 | (19 | ) | 33 | 14 | 14 | ||||||||||||||||||||||||||||||
| Equity classified financial instruments |
2 | 2 | 2 | |||||||||||||||||||||||||||||||||
| Dividends non-controlling interests |
(40 | ) | (40 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance as of December 31, 2012 |
249,026 | 51 | 6,090 | (58 | ) | (5,334 | ) | 300 | 1,049 | 235 | 1,284 | |||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
F-7
Table of Contents
Notes to the Consolidated Financial Statements of NXP Semiconductors N.V.
All amounts in millions of $ unless otherwise stated
1 Basis of Presentation
The Company
NXP Semiconductors N.V. (including our subsidiaries, referred to collectively herein as “NXP”, “NXP Semiconductors”, “we”, “our”, “us” and the “Company”) is a global semiconductors company and leading provider of High Performance Mixed Signal and Standard Product solutions We provide leading High Performance Mixed Signal and Standard Product solutions that leverage our deep application insight and our technology and manufacturing expertise in RF, analog, power management, interface, security and digital processing products. Our product solutions are used in a wide range of automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing applications.
NXP was incorporated in the Netherlands as a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) under the name KASLION Acquisition B.V. on August 2, 2006, in connection with the sale by Philips of 80.1% of its semiconductor business to the “Private Equity Consortium”. For a list of the specific funds that hold our common stock and their respective share ownership, see Part I, Item 7A. Major Shareholders elsewhere in this document. Initially, the Private Equity Consortium invested in our Company through KASLION Holding B.V., a Dutch private company with limited liability.
On May 21, 2010, we converted into a Dutch public company with limited liability (naamloze vennootschap) and changed our name to NXP Semiconductors N.V. Concurrently, we amended our articles of association in order to effect a 1-for-20 reverse stock split of our shares of common stock.
In August 2010, we made an initial public offering of 34 million shares of our common stock and listed our common stock on the NASDAQ Global Select Market.
On March 31, 2011, certain of our stockholders offered 30 million shares of our common stock, priced at $30.00 per share. The underwriters of the offering exercised in full their option to purchase from the selling stockholders 4,431,000 additional shares of common stock at the secondary offering price. We did not receive any proceeds from this secondary offering.
Reverse stock split
In connection with the IPO, the Company amended its Articles of Association on August 2, 2010 in order to effect a 1-for-20 reverse stock split of its shares of common stock. As a consequence, the number of shares outstanding on August 2, 2010 (4,305,030,000 shares) has been adjusted to 215,251,500 shares retrospectively to reflect the reverse stock-split in all periods presented. Basic and diluted weighted average shares outstanding and earnings per share have been adjusted retrospectively to reflect the reverse stock split in all periods presented. Also, the exercise price and the number of shares of common stock issuable under the Company’s share based compensation plans were proportionately adjusted retrospectively to reflect the reverse stock split. In addition, authorized and issued share capital has been adjusted retrospectively to reflect the reverse stock split.
Conversion
In addition to the reverse stock split, the Company has also amended its Articles of Association in order to convert a certain percentage of previously authorized common stock to preferred stock. Including the shares issued upon the public offering in August 2010 and the subsequent issuance of shares of common stock under equity incentive plans in November 2010 and 2011, the stock capital of the Company as of December 31, 2011 consists of 1,076,257,500 authorized shares, including 430,503,000 authorized shares of common stock (of which 251,751,500 are issued and outstanding), as well as 645,754,500 authorized but unissued shares of preferred stock.
Accounting policies
The Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). Historical cost is used as the measurement basis unless otherwise indicated.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items previously reported under specific financial statement captions have been reclassified to conform to the current period presentation.
F-8
Table of Contents
Pension and Post-retirement benefits amounts previously reflected on the Consolidated Balance Sheets within the captions Long-term provisions and Other non-current liabilities have been reclassified for all periods presented to a separate caption in the current year presentation. The remaining balance within Long-term provisions was reclassified and is now reflected in Other non-current liabilities for all periods presented.
Discontinued operations
During 2011, the Company sold its Sound Solutions business. See Note 17 “Discontinued Operations”.
2 Significant Accounting Policies
Principles for consolidated financial statements
The Consolidated Financial Statements include the accounts of the Company together with its consolidated subsidiaries, including NXP B.V and all entities in which the Company holds a direct or indirect controlling interest, in such a way that the Company would have the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb the losses or the right to receive benefits of the entity that could be potentially significant to the Company. Investments in companies in which the Company exercises significant influence but does not control, are accounted for using the equity method. The Company’s share of the net income of these companies is included in results relating to equity-accounted investees in the consolidated statements of operations.
All intercompany balances and transactions have been eliminated in the Consolidated Financial Statements. Net income (loss) includes the portion of the earnings of subsidiaries applicable to non-controlling interests. The income (loss) and equity attributable to non-controlling interests are disclosed separately in the consolidated statements of operations and in the consolidated balance sheets under non-controlling interests.
Business combinations are accounted for using the acquisition method. Under the acquisition method, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized as at the acquisition date, which is the date on which control is transferred to the Company. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
For acquisitions on or after January 1, 2010, the Company measures goodwill at the acquisition date as:
| • | The fair value of the consideration transferred; plus |
| • | The recognized amount of any non-controlling interest in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less |
| • | The net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed |
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.
Any contingent consideration payable is recognized at fair value at the acquisition date. The contingent consideration is remeasured at fair value and changes in the fair value of the contingent consideration are recognized in the statement of operations.
Fair value measurements
Fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for an identical asset or liability, we develop assumptions based on market observable data and, in the absence of such data, utilize internal information that we consider to be consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Priority is given to observable inputs. These two types of inputs form the basis for the following fair value hierarchy.
| • | Level 1: Quoted prices for identical assets or liabilities in active markets. |
| • | Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and valuations based on models where the inputs are observable or where the significant value drivers are observable. |
| • | Level 3: Significant inputs to the valuation model are unobservable. |
Accounting for capital transactions of a subsidiary or an equity-accounted investee
The Company recognizes dilution gains or losses related to changes in ownership of consolidated entities directly in equity. In the case of loss of control of a subsidiary any dilution gain or loss is recognized in the consolidated statement of operations in the line item other income and expense. Dilution gains and losses related to equity-accounted investees are presented in the line item results relating to equity-accounted investees.
F-9
Table of Contents
Foreign currencies
The Company uses the U.S. dollar as its reporting currency. The functional currency of the Holding company is the euro. For consolidation purposes, the financial statements of the entities within the Company with a functional currency other than the U.S. dollar, are translated into U.S. dollars. Assets and liabilities are translated using the exchange rates on the applicable balance sheet dates. Income and expense items in the statements of operations, statements of comprehensive income and statements of cash flows are translated at monthly exchange rates in the periods involved.
The effects of translating the financial position and results of operations from functional currencies are recognized in other comprehensive income and presented as a separate component of accumulated other comprehensive income (loss) within stockholder’s equity. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the translation difference is recorded under non-controlling interests. When the Company’s ownership in a foreign operation is disposed of such that control, significant influence or joint control is lost, the related cumulative translation adjustments are recognized as income or expense as part of the gain or loss on the disposal. However, when the Company disposes only a part of its ownership interest in a foreign subsidiary while retaining control, the relevant proportion of the cumulative translation adjustments is reattributed to non-controlling interests. When the Company disposes of only part of its investment in a foreign equity-accounted investee, while retaining significant influence or joint control, the relevant proportion of the cumulative translation adjustments is recognized as income or expense as part of the gain or loss on the disposal. However, translation results from the Company’s functional currency (euro) into the Company’s reporting currency (U.S. dollar) will not be recycled to the statement of operations as long as there is the assumption that the proceeds from the sale will be reinvested.
The following table sets out the exchange rates for euros into U.S. dollars applicable for translation of NXP’s financial statements for the periods specified.
| $ per € 1 | ||||||||||||||||
| period end | average 1) | high | low | |||||||||||||
| 2012 |
1.3190 | 1.2887 | 1.2238 | 1.3347 | ||||||||||||
| 2011 |
1.2938 | 1.3908 | 1.2938 | 1.4531 | ||||||||||||
| 2010 |
1.3370 | 1.3326 | 1.2183 | 1.4402 | ||||||||||||
| (1) | The average rates are the average rates based on monthly quotations. |
The functional currency of foreign entities is generally the local currency, unless the primary economic environment requires the use of another currency. When foreign entities conduct their business in economies considered to be highly inflationary, they record transactions in the Company’s reporting currency instead of their local currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of operations, except when the foreign exchange exposure is part of a qualifying cash flow or net investment hedge accounting relationship, in which case the related foreign exchange gains and losses are recognized directly in other comprehensive income to the extent that the hedge is effective and presented as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. To the extent that the hedge is ineffective, such differences are recognized in the statement of operations. Currency gains and losses on intercompany loans that have the nature of a permanent investment are recognized as translation differences in other comprehensive income and are presented as a separate component of accumulated other comprehensive income (loss) within equity.
Derivative financial instruments including hedge accounting
The Company uses derivative financial instruments in the management of its foreign currency risks and the input costs of gold for a portion of our anticipated purchases within the next 12 months.
The Company measures all derivative financial instruments based on fair values derived from market prices of the instruments or from option pricing models, as appropriate, and records these as assets or liabilities in the balance sheet. Changes in the fair values are immediately recognized in the statement of operations unless cash flow hedge accounting is applied.
Changes in the fair value of a derivative that is highly effective and designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income (loss), until earnings are affected by the variability in cash flows of the designated hedged item. The application of cash flow hedge accounting for foreign currency risks is limited to transactions that represent a substantial currency risk that could materially affect the financial position of the Company.
Foreign currency gains or losses arising from the translation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized directly in other comprehensive income, to the extent that the hedge is effective, and are presented as a separate component of accumulated other comprehensive income (loss) within stockholders equity.
To the extent that a hedge is ineffective, the ineffective portion of the fair value change is recognized in the consolidated statement of operations. When the hedged net investment is disposed of, the corresponding amount in the accumulated other comprehensive income is transferred to the statement of operations as part of the profit or loss on disposal.
F-10
Table of Contents
On initial designation of the hedge relationship between the hedging instrument and hedged item, the Company documents this relationship, including the risk management objectives and strategy in undertaking the hedge transaction and the hedged risk, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Company makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, of whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items attributable to the hedged risk, and whether the actual results of each hedge are within a range of 80-125 percent.
When cash flow hedge accounting is discontinued because it is not probable that a forecasted transaction will occur within a period of two months from the originally forecasted transaction date, the Company continues to carry the derivative on the consolidated balance sheets at its fair value, and gains and losses that were accumulated in other comprehensive income are recognized immediately in earnings. In situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the consolidated balance sheets, and recognizes any changes in its fair value in earnings.
Cash and cash equivalents
Cash and cash equivalents include all cash balances and short-term highly liquid investments with a maturity of three months or less at acquisition that are readily convertible into known amounts of cash. It also includes cash balances that cannot be freely repatriated based on certain country restrictions. Cash and cash equivalents are stated at face value which approximates fair value.
Receivables
Receivables are carried at amortized cost, net of allowances for doubtful accounts and net of rebates and other contingent discounts granted to distributors. When circumstances indicate a specific customer’s ability to meet its financial obligation to us is impaired, we record an allowance against amounts due and value the receivable at the amount reasonably expected to be collected. For all other customers, we evaluate our trade accounts receivable for collectability based on numerous factors including objective evidence about credit-risk concentration, collective debt risk based on average historical losses, and specific circumstances such as serious adverse economic conditions in a specific country or region.
Inventories
Inventories are stated at the lower of cost or market, less advance payments on work in progress. The cost of inventories is determined using the first-in, first-out (FIFO) method. An allowance is made for the estimated losses due to obsolescence. This allowance is determined for groups of products based on purchases in the recent past and/or expected future demand and market conditions. Abnormal amounts of idle facility expense and waste are not capitalized in inventory. The allocation of fixed production overheads to the inventory cost is based on the normal capacity of the production facilities.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Depreciation is calculated using the straight-line method over the expected economic life of the asset. Depreciation of special tooling is also based on the straight-line method unless a depreciation method other than the straight-line method better represents the consumption pattern. Gains and losses on the sale of property, plant and equipment are included in other income and expense. Plant and equipment under capital leases are initially recorded at the lower of the fair value of the leased property or the present value of minimum lease payments. These assets and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
Goodwill
The Company accounts for goodwill in accordance with the provisions of ASC 350 “Intangibles-Goodwill and Other”. Accordingly, goodwill is not amortized but tested for impairment annually in the fourth quarter or more frequently if events and circumstances indicate that goodwill may be impaired.
An impairment loss is recognized to the extent that the carrying amount of goodwill exceeds the asset’s implied fair value. This determination is made at the business operating segment level, which is for the Company the reporting unit level in accordance with ASC 350. The Company has used the option to assess first qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, it is required to perform the first step of the two-step impairment test. The Company then determines the carrying value of each reporting unit by assigning the assets and liabilities, including the goodwill and intangible assets, to the reporting units. Furthermore, the Company determines the fair value of each reporting unit and compares it to the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, the Company performs the second step of the impairment test. In the second step, the Company compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to acquisition accounting in a business combination. The residual fair
F-11
Table of Contents
value after this allocation is the implied fair value of the reporting unit’s goodwill. The Company generally determines the fair value of the reporting units based on discounted projected cash flows in the absence of other observable inputs such as quoted prices.
The determination of the fair value of the reporting unit requires us to make significant judgments and estimates including projections of future cash flows from the business. These estimates and required assumptions include estimated revenue and revenue growth rates, operating margins used to calculate projected future cash flows, estimated future capital expenditures, future economic and market conditions, determination of market comparables and the estimated weighted average cost of capital (“WACC”).
We base our estimates on assumptions we believe to be reasonable but any such estimates are unpredictable and inherently uncertain. Actual future results may differ from these estimates. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting segments.
Identified Intangible assets
Identified Intangible assets with definitive lives arising from acquisitions are amortized using the straight-line method over their estimated useful lives. Remaining useful lives are evaluated every year to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company considers renewal and extension options in determining the useful life. However, based on experience the Company concluded that these assets have no extension or renewal possibilities. In-process research and development (“IPR&D”) projects acquired as part of a business combination with no alternative use are capitalized and indefinitely lived until completion or abandonment of the associated R&D efforts in accordance with ASC 350 “Intangibles-Goodwill and Other”. Upon completion of each project, IPR&D assets are amortized over their estimated useful lives. During development IPR&D, assets are not amortized but tested annually for impairment. There are currently no intangible assets with indefinite lives. Patents, trademarks and other intangible assets acquired from third parties are capitalized at cost and amortized over their estimated remaining useful lives.
Certain costs relating to the development and purchase of software for internal use are capitalized and subsequently amortized over the estimated useful life of the software in conformity with ASC 350.
Impairment or disposal of identified intangible assets and tangible fixed assets
The Company accounts for intangible assets other than goodwill and tangible fixed assets in accordance with the provisions of ASC 360 “Property, Plant and Equipment”. Long-lived assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company determines the fair value based on discounted projected cash flows. The review for impairment is carried out at the level where discrete cash flows occur that are largely independent of other cash flows in the absence of other observable inputs such as quoted prices. Management must make significant judgments and apply a number of assumptions in estimating the future cash flows. The estimated cash flows are determined based on, among other things, our strategic plans, long-range forecasts, estimated growth rates and assumed profit margins. For the Manufacturing Operations segment, the review of impairment of long-lived assets is carried out on a Company-wide basis, as Manufacturing Operations is the shared manufacturing base for the other business segments with, for this purpose, no discrete cash flows that are largely independent of other cash flows. Assets held for sale are reported at the lower of the carrying amount or fair value less cost to sell.
Non-current assets held for sale and disposal groups
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. For this to be the case the asset (or disposal group) must be available for immediate sale in its present condition and the sale must be highly probable.
Non-current assets (or disposal groups) classified as held for sale are measured at the lower of the asset’s carrying amount and the fair value less costs to sell. The Company determines the fair value based on discounted projected cash flows in the absence of other observable inputs such as quoted prices. Depreciation or amortization of an asset ceases when it is classified as held for sale, or included within a disposal group that is classified as held for sale.
Discontinued operations
A discontinued operation is a component of the Company that either has been disposed of, or that is classified as held for sale, and: (i) represents a separate major line of business or geographical area of operations that can be clearly distinguished from the rest of the Company in terms of operations and cash flows or (ii) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. Generally, a major line of business is a segment or business unit. Discontinued operations are carried at the lower of carrying amount or fair value less cost to sell. The Company determines the fair value based on discounted projected cash flows in the absence of other observable inputs such as quoted prices. Results from discontinued operations until the date of disposal are presented separately as a single amount in the consolidated statements of operations together with any gain or loss from disposal. Results from discontinued operations are reclassified for all periods presented and reflected as income (loss) from discontinued operations, net of tax, within the consolidated statements of operations.
F-12
Table of Contents
Research and development
Costs of research and development are expensed in the period in which they are incurred, except for in-process research and development assets acquired in business combinations, which are capitalized and, after completion, are amortized over their estimated useful lives.
Advertising
Advertising costs are expensed when incurred.
Guarantees
The Company complies with ASC 460 “Guarantees”. The Company recognizes, at the inception of a guarantee, a liability at the fair value of the obligation incurred, for guarantees within the scope of the recognition criteria. The Company determines the fair value based on either quoted prices for similar guarantees or discounted projected cash flows, whichever is available.
Debt Issuance Costs
Direct costs incurred to obtain financings are capitalized and subsequently amortized over the term of the debt using the effective interest rate method. Upon extinguishment of any related debt, any unamortized debt issuance costs are expensed immediately.
Earnings per share
Basic earnings per share attributable to stockholders is calculated by dividing net income or loss attributable to stockholders of the Company by the weighted average number of common shares outstanding during the period.
Diluted earnings per share attributable to stockholders is determined using the weighted-average number of common and potentially dilutive common shares outstanding during the period using the treasury stock method for outstanding stock options, performance share unit and restricted stock unit awards. Under the treasury stock method, the amount the employee must pay for exercising stock options, performance share unit and restricted stock unit awards, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of excess tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
Revenue recognition
The Company’s revenue is primarily derived from made-to-order sales to Original Equipment Manufacturers (“OEMs”) and similar customers. The Company’s revenue is also derived from sales to distributors.
The Company applies the guidance in SEC Staff Accounting Bulletin (SAB) Topic 13 ‘Revenue Recognition’ and recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or the service has been provided, the sales price is fixed or determinable, and collection is reasonably assured, based on the terms and conditions of the sales contract. For made-to-order sales, these criteria are met at the time the product is shipped and delivered to the customer and title and risk have passed to the customer. Examples of delivery conditions typically meeting these criteria are ‘Free on board point of delivery’ and ‘Costs, insurance paid point of delivery’. Generally, the point of delivery is the customer’s warehouse. Acceptance of the product by the customer is generally not contractually required, since, for made-to-order customers, design approval occurs before manufacturing and subsequently delivery follows without further acceptance protocols. Payment terms used are those that are customary in the particular geographic market. When management has established that all aforementioned conditions for revenue recognition have been met and no further post-shipment obligations exist, revenue is recognized.
For sales to distributors, revenue is recognized upon sale to the distributor (sell-in accounting). The same recognition principles apply and similar terms and conditions as for sales to other customers are applied. However, for some distributors contractual arrangements are in place, which allow these distributors to return products if certain conditions are met. These conditions generally relate to the time period during which return is allowed and reflect customary conditions in the particular geographic market. Other return conditions relate to circumstances arising at the end of a product life cycle, when certain distributors are permitted to return products purchased during a pre-defined period after the Company has announced a product’s pending discontinuance. Long notice periods associated with these announcements prevent significant amounts of product from being returned, however. Repurchase agreements with OEMs or distributors are not entered into by the Company.
For sales where return rights exist, the Company has determined, based on historical data, that only a very small percentage of the sales to this type of distributor is actually returned. In accordance with these historical data, a pro rata portion of the sales to these distributors is not recognized but deferred until the return period has lapsed or the other return conditions no longer apply.
Revenue is recorded net of sales taxes, customer discounts, rebates and other contingent discounts granted to distributors. Shipping and handling costs billed to customers are recognized as revenue. Expenses incurred for shipping and handling costs of internal movements of goods are recorded as cost of revenue. Shipping and handling costs related to revenue to third parties are reported as selling expenses within selling, general and administrative.
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Royalty income, which is generally earned based upon a percentage of revenue or a fixed amount per product sold, is recognized on an accrual basis. Royalty income and other license income that is received in the form of non-refundable upfront payments is recognized as revenue pro rata over the term of the contract unless a separate earnings process has been completed. Income from the sale of patents is also reported as revenue. The carrying value of the sold patents is reported as cost of sales. Government grants, other than those relating to purchases of assets, are recognized as income as qualified expenditures are made. Software revenue is recognized in accordance with ASC 985 “Software Revenue Recognition” when the 4 criteria of SAB Topic 13 are met.
Financial income and expense
Financial income comprises interest income on funds invested and the net gain on the disposal of other financial assets.
Financial expense comprises interest expense on borrowings, accretion of the discount on provisions and contingent consideration, losses on disposal of financial assets, impairment losses recognized on financial assets (other than trade receivables) and losses on hedging instruments recognized in the statement of operations.
Borrowing costs that are not directly attributable to the acquisition, construction or production of property, plant and equipment are recognized in the statement of operations using the effective interest method.
Foreign currency gains and losses, not related to accounts receivable, accounts payable and intercompany current accounts, are reported on a net basis as either financial income or financial expense in the statement of operations depending on whether foreign currency movements are in a net gain or net loss position. Foreign currency gains and losses on accounts receivable, accounts payable and intercompany current accounts that are not hedged in a net investment hedge are reported under cost of revenue in the statement of operations.
Income taxes
Income taxes are accounted for using the asset and liability method. Income tax is recognized in the statement of operations except to the extent that it relates to an item that is initially recognized directly within equity or other comprehensive income (loss), in which case the related tax effect is also recognized there.
Current tax is the expected tax payable on the taxable income for the year, using the tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. Measurement of deferred tax assets and liabilities is based upon the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date of the change. Deferred tax assets and liabilities are not discounted. Deferred tax liabilities for withholding taxes on dividends from subsidiaries are recognized in situations where the company does not consider the earnings permanently reinvested and to the extent that these withholding taxes are not expected to be refundable.
Deferred tax assets, including assets arising from loss carryforwards, are recognized, net of a valuation allowance, if it is more likely than not that the asset will be realized. The Company has significant deferred tax assets primarily related to net operating losses in the Netherlands, France, Germany, the USA and other countries. The realization of deferred tax assets is not assured and is dependent on the generation of sufficient taxable income in the future. We have exercised judgment in determining whether it is more likely than not that we will realize the benefit of these net operating losses and other deductible temporary differences, based upon estimates of future taxable income in the various jurisdictions and any feasible tax planning strategies.
The income tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. The income tax benefit recognized in the financial statements from such position is measured based on the largest benefit that is more than 50% likely to be realized upon settlement with a taxing authority that has full knowledge of all relevant information. The liability for unrecognized tax benefits and the related interest and penalties is recorded under accrued liabilities and other non-current liabilities in the balance sheet based on the timing of the expected payment. Penalties are recorded as income tax expense, whereas interest is reported as financial expense in the statement of operations.
Postretirement benefits
The Company accounts for the cost of pension plans and postretirement benefits other than pensions in accordance with ASC 715 “Compensation-Retirement Benefits”.
The Company’s employees participate in pension and other postretirement benefit plans in many countries. The costs of pension and other postretirement benefits and related assets and liabilities with respect to the Company’s employees participating in defined-benefit plans are based upon actuarial valuations. Some of the Company’s defined-benefit pension plans are funded with plan assets
that have been segregated and restricted in a trust, foundation or insurance company to provide for the pension benefits to which the Company has committed itself.
The net pension liability or asset recognized in the balance sheet in respect of defined benefit pension plans is the present value of the projected defined-benefit obligation less the fair value of plan assets at the balance sheet date.
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Most of the Company’s plans are unfunded and result in a pension provision or a net pension liability.
The projected defined-benefit obligation is calculated annually by qualified actuaries using the projected unit credit method. For the Company’s major plans, the discount rate is derived from market yields on high quality corporate bonds. Plans in countries without a deep corporate bond market use a discount rate based on the local government bond rates.
Pension costs in respect of defined-benefit pension plans primarily represent the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return on plan assets and net of employee contributions.
Actuarial gains and losses arise mainly from changes in actuarial assumptions and differences between actuarial assumptions and what has actually occurred. They are recognized in the statement of operations, over the expected average remaining service periods of the employees only to the extent that their net cumulative amount exceeds 10% of the greater of the present value of the obligation or of the fair value of plan assets at the end of the previous year (the corridor). Events which invoke a curtailment or a settlement of a benefit plan will be recognized in our statement of operations.
In calculating obligation and expense, the Company is required to select actuarial assumptions. These assumptions include discount rate, expected long-term rate of return on plan assets and rates of increase in compensation costs determined based on current market conditions, historical information and consultation with and input from our actuaries. Changes in the key assumptions can have a significant impact to the projected benefit obligations, funding requirements and periodic pension cost incurred. A sensitivity analysis is provided in Note 9, “Postretirement Benefit Plans”.
Unrecognized prior-service costs related to pension plans and postretirement benefits other than pensions are amortized to the statements of operations over the average remaining service period of the active employees.
Contributions to defined-contribution and multi-employer pension plans are recognized as an expense in the statements of operations as incurred.
In accordance with the requirements of ASC 715, if the projected benefit obligation exceeds the fair value of plan assets, we recognize in the consolidated balance sheet a liability that equals the excess. If the fair value of plan assets exceeds the projected benefit obligation, we recognize in the balance sheet an asset that equals the excess.
The Company determines the fair value based on quoted prices for the plan assets or comparable prices for non-quoted assets. For a defined-benefit pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement defined benefit plan it is the accumulated postretirement benefit obligation.
The Company recognizes as a component of other comprehensive income, net of taxes, the gains or losses and prior service costs that arise during the year but are not recognized as a component of net periodic benefit cost pursuant to ASC 715. Amounts recognized in accumulated other comprehensive income, including the gains or losses and the prior services costs are adjusted as they are subsequently recognized as components of net periodic benefit costs pursuant to the recognition provisions of ASC 715.
For all of the Company’s defined pension benefit plans, the measurement date is year-end.
Share-based compensation
Share-based payment plans were first introduced by NXP Semiconductors N.V. for NXP employees in 2007 and new plans were introduced after NXP’s initial public offering of common shares in the United States in 2010. All plans are accounted for in accordance with the provisions of ASC 718 “Compensation, Stock Compensation” at the estimated fair value of the equity instruments measured at the grant date. For the grants issued up to August 2010 under the 2007 plans, the Company used a binomial option-pricing model to determine the estimated fair value of the options and determined the fair value of the equity rights on the basis of the estimated fair value of the Company, using a discounted cash flow technique. For grants issued since August 2010 the Company uses the Black-Scholes-Merton method. The estimated fair value of the equity instruments is recognized as compensation expense over the vesting period on a straight-line basis taking into account estimated forfeitures. For performance share units the recognition of cost is based on graded vesting of the performance share units.
The share-based compensation plans that the Company’s employees participate in contain contingent cash settlement features upon an exit or change in control in combination with a termination of employment. The Company has concluded that the likelihood of these events occurring is remote and therefore not probable. Also, upon death or disablement the Company may offer cash settlement, but the employee or his dependents must consent. Therefore, the Company has concluded that the requirement in ASC 718 that share options and restricted shares that have contingent cash settlement features that are outside the control of the employee, such as a change in control or the death or disability of an employee, to be accounted for as liabilities rather than equity if the contingent event is probable of occurring, is not applicable to the Company. However, if it is determined that vested share-based payment rights will become cash settled such instruments will be recorded as liabilities at fair value at the date of such event.
During 2009, NXP executed an option exchange program for options granted in 2007, 2008 and 2009 which were estimated to be deeply out of the money. Under this option exchange program, options with new exercise prices, different volumes and—in certain cases—revised vesting schedules were granted to eligible individuals, in exchange for their owned options. By accepting the new options, all options (vested and unvested) owned by the eligible individuals were cancelled. As of May 2009 until August 2010, options were granted to
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eligible individuals under the revised stock option program. In accordance with the provisions of ASC 718 the unrecognized portion of the compensation costs of the cancelled options continues to be recognized over their remaining requisite vesting period. For the replacement options, the compensation cost was determined as the difference between the fair value of the cancelled options immediately before the grant date of the replacement options and the fair value of these replacement options at the grant date. This compensation cost was recognized in accordance with the vesting schedule over the remaining vesting period. Since November 2010, following NXP Semiconductors N.V. becoming a listed company, new option programs and share programs were launched in addition to the option program and equity rights program launched before November 2010.
Accounting standards adopted in 2012
The following accounting pronouncements became effective in 2012 and were adopted by the Company
| • | ASU No. 2011-04 “Fair Value Measurement (Topic 820). Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” |
In May 2011 the FASB issued ASU 2011-04, which provides guidance about fair value measurements and related disclosures.
The guidance changes some fair value measurement principles and disclosure requirements. The key changes to U.S. GAAP that impact NXP are:
| – | The guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of non-financial assets (that is, it does not apply to financial assets or any liabilities). |
| – | The guidance extends the prohibition on using a blockage factor to all fair value measurements. Premiums or discounts related to size as a characteristic of the entity’s holding (that is, a blockage factor) instead of as a characteristic of the asset or liability (for example, a control premium), are not permitted. |
| – | The guidance does not apply to instruments issued as share-based compensation. |
| – | The most significant change requires disclosure of quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements for recurring Level 3 fair value measurements. New disclosures are required about the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. |
| – | The ASU became effective for NXP as of January 1, 2012. It did not have a significant impact on the Company’s fair value measurements or result in more extensive disclosures about valuation processes and sensitivity analysis. |
| • | ASU No. 2011-05 “Comprehensive Income (Topic 220). Presentation of Comprehensive Income” and ASU No. 2011-12 “Comprehensive Income (Topic 220). Deferral of the Effective date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” |
ASU 2011-05 requires presenting comprehensive income either in one single statement of comprehensive income or in 2 consecutive statements. The latter is currently the presentation manner of NXP.
The FASB issued ASU 2011-12 in December 2011, which deferred certain requirements of ASU No. 2011-05. These amendments were made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income for all periods presented. The new guidance is to be applied retrospectively.
ASU 2011-05 does not provide new requirements for the components of other comprehensive income or other accounting-related matters. The ASUs became effective for NXP beginning January 1, 2012.
| • | ASU No. 2011-08 “Intangibles – Goodwill and Other (Topic 350). Testing Goodwill for Impairment” |
Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. This update became effective for NXP on January 1, 2012.
In 2012, NXP has used the option to first assess qualitative factors and has determined, based on this assessment, it is not more likely than not that the fair value of the reporting units is less than the carrying value of the reporting units.
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| • | ASU No. 2011-11 “Balance Sheet (Topic 210). Disclosures about Offsetting Assets and Liabilities” |
ASU 2011-11 was issued by the FASB in December 2011 with an effective date for NXP of January 1, 2013. It requires retrospective application to prior periods reported.
The ASU primarily requires more extensive disclosures about financial assets and financial liabilities that have been offset in the statement of financial position or that were allowed to be offset but for which the Company made an accounting policy choice not to offset. The disclosures are either by type of financial asset and financial liability or by counterparty. The offsetting conditions were not changed by the ASU. The ASU has no significant impact on the Company’s financial statements.
New standards to be adopted after 2012
| • | ASU 2012-04 “Technical Corrections and Improvements” |
The amendments in this Update make technical corrections, clarifications and limited-scope improvements to various Topics throughout the Codification. The ASU has no significant impact on the Company’s financial statements.
3 Supplemental Financial Information
Statement of Operations Information
Revenue composition
| 2012 | 2011 | 2010 | ||||||||||
| Goods |
4,346 | 4,170 | 4,392 | |||||||||
| Patents and licenses |
12 | 24 | 10 | |||||||||
|
|
|
|
|
|
|
|||||||
| 4,358 | 4,194 | 4,402 | ||||||||||
Depreciation, amortization and impairment
Depreciation and amortization, including impairment charges, are as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Depreciation of property, plant and equipment |
247 | 290 | 359 | |||||||||
| Impairment of assets held for sale |
— | — | 30 | |||||||||
| Amortization of internal use software |
24 | 10 | 14 | |||||||||
| Amortization of identified intangible assets |
262 | 291 | 281 | |||||||||
|
|
|
|
|
|
|
|||||||
| 533 | 591 | 684 | ||||||||||
Depreciation of property, plant and equipment in 2012 includes an additional write-off in connection with the retirement of property, plant and equipment of $1 million (2011: $1 million; 2010: $7 million). Depreciation of property, plant and equipment resulting from the acquisition accounting of $11 million (2011: $10 million; 2010: $21 million) is also included. Furthermore, depreciation of property, plant and equipment in 2012 includes $2 million relating to write-downs and impairment charges (2011: $6 million; 2010: $21 million). The 2010 write-downs related to additional depreciation of our ICN5 and ICN6 wafer fabs in Nijmegen, the Netherlands.
In 2010 an impairment of $30 million for real estate and other property was recognized as a result of classifying certain tangible fixed assets as held-for-sale.
Amortization of identified intangible assets in 2012 reflects amortization of identified intangible assets resulting from acquisition accounting of $262 million (2011: $291 million; 2010: $281 million).
Depreciation of property, plant and equipment is primarily included in cost of revenue. Amortization of intangible assets is primarily reported in the selling, general and administrative expenses.
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Other income and expense
Other income and expense consists of the following:
| 2012 | 2011 | 2010 | ||||||||||
| Result on disposal of property, plant and equipment: |
||||||||||||
| - income |
1 | 8 | 8 | |||||||||
| - expense |
— | (18 | ) | — | ||||||||
| Result on disposal of businesses: |
||||||||||||
| - income |
19 | — | — | |||||||||
| - expense |
— | — | (37 | ) | ||||||||
| Result on other items: |
||||||||||||
| - income |
10 | 17 | 19 | |||||||||
| - expense |
(1 | ) | (3 | ) | (6 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total other income |
30 | 25 | 27 | |||||||||
| Total other expense |
(1 | ) | (21 | ) | (43 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total other income (expense) |
29 | 4 | (16 | ) | ||||||||
In 2012, the result on disposal of properties consists of various smaller items. In 2011, the result on disposal of properties mainly related to the sale of land and buildings in San Jose, USA (a loss of $17 million) and the sale of equipment in Nijmegen, the Netherlands (a gain of $5 million). Furthermore, the sale of a building in Southampton, UK, which was classified as assets held for sale, resulted in a gain of $2 million. In 2010, the result on disposal of properties mainly related to the sale of a building in Hamburg, Germany ($5 million), which was classified as assets held for sale.
In 2012, the result on disposal of businesses related to the sale of our High Speed Data Converter business. In 2011, no results on disposal of businesses were recorded. In 2010, the result on disposal of businesses mainly related to the divestment of the Home business to Trident (loss $26 million) and the divestment of NuTune (loss $7 million).
The remaining income and expense on other items consists of various smaller items for all periods reported.
Foreign exchange differences
In 2012, cost of revenue included foreign exchange differences amounting to a loss of $4 million (2011: a gain of $9 million; 2010: a loss of $20 million).
Financial income and expense
| 2012 | 2011 | 2010 | ||||||||||
| Interest income |
4 | 5 | 2 | |||||||||
| Interest expense |
(270 | ) | (312 | ) | (320 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total interest expense, net |
(266 | ) | (307 | ) | (318 | ) | ||||||
| Net gain (loss) on extinguishment of debt |
(161 | ) | (32 | ) | 57 | |||||||
| Sale of securities and other financial assets |
— | — | 8 | |||||||||
| Foreign exchange rate results |
28 | 128 | (331 | ) | ||||||||
| Miscellaneous financing costs/income, net |
(38 | ) | (46 | ) | (44 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total other financial income and expense |
(171 | ) | 50 | (310 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total |
(437 | ) | (257 | ) | (628 | ) | ||||||
In 2012, interest expense, net, of $266 million (2011: $307 million; 2010: $318 million) was mainly related to the interest expense on the euro-denominated and U.S. dollar-denominated notes. The lower interest expense in 2012 resulted from several transactions to optimize our debt portfolio. See Note 5 “Debt”.
Furthermore in 2012, a net loss on extinguishment of debt of $161 million (2011: a loss of $32 million; 2010: a gain of $57 million) was recorded in connection with the various bond exchange and repurchase offers. See Note 5 “Debt”.
Included in the sale of securities and other financial assets is the sale of Virage shares in 2010 (a gain of $7 million).
In 2012 foreign exchange results amounted to a gain of $28 million (2011: a gain of $128 million; 2010: a loss of $331 million) and are composed of the following exchange rate fluctuations:
| • | the remeasurement of the U.S. dollar-denominated notes and short-term loans, which reside in a euro functional currency entity, of a gain of $9 million (2011: a gain of $124 million; 2010: a loss of $307 million); |
| • | intercompany financing resulting in a gain of $3 million (2011: a loss of $7 million; 2010: a gain of $16 million); |
| • | the Company’s foreign currency cash and cash equivalents resulting in a gain of $16 million (2011: a gain of $10 million; 2010: a loss of $43 million); |
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| • | foreign currency contracts resulting in a loss of $1 million (2011: a gain of $1 million; 2010: a gain of $2 million); |
| • | remaining items, a gain of $1 million in 2012 (2011: no material results; 2010: a gain of $1 million). |
Included in miscellaneous financing costs in 2012 is the amortization of capitalized debt issuance costs of $32 million (2011: $27 million; 2010: $31 million). In 2011 and 2010, this position also included incidental interest on capital lease obligations of $10 million and $13 million, respectively.
The Company has applied net investment hedging since May, 2011. The U.S. dollar exposure of the net investment in U.S. dollar functional currency subsidiaries of $1.7 billion has been hedged by our U.S. dollar-denominated notes. As a result in 2012 a benefit of $26 million (2011: a charge of $203 million) was recorded in other comprehensive income (loss) relating to the foreign currency result on the U.S. dollar-denominated notes that are recorded in a euro functional currency entity.
Earnings per share
The computation of earnings per share (EPS) is presented in the following table:
| 2012 | 2011 | 2010 | ||||||||||
| Income (loss) from continuing operations |
(53 | ) | 2 | (465 | ) | |||||||
| Less: Net income (loss) attributable to non-controlling interests |
63 | 46 | 50 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income (loss) from continuing operations attributable to stockholders |
(116 | ) | (44 | ) | (515 | ) | ||||||
| Income (loss) from discontinued operations attributable to stockholders |
1 | 434 | 59 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) attributable to stockholders |
(115 | ) | 390 | (456 | ) | |||||||
| Weighted average number of shares outstanding (after deduction of treasury shares) during the year (in thousands): |
||||||||||||
| Basic and diluted |
248,064 | 248,812 | 229,280 | |||||||||
| Basic and diluted EPS attributable to stockholders in $: 1) |
||||||||||||
| Income (loss) from continuing operations |
(0.46 | ) | (0.17 | ) | (2.25 | ) | ||||||
| Income (loss) from discontinued operations |
— | 1.74 | 0.26 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
(0.46 | ) | 1.57 | (1.99 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| 1) | In 2012, 32,394,794 securities (2011: 27,789,634 securities; 2010: 24,350,650 securities) that could potentially dilute basic EPS were not included in the computation of dilutive EPS because the effect would have been anti-dilutive for the periods presented. |
Balance Sheet Information
Cash and cash equivalents
At December 31, 2012, our cash balance was $617 million (2011: $743 million), of which $288 million (2011: $261 million) was held by SSMC, our joint venture company with TSMC. A portion of this cash can be distributed by way of dividend to us, but 38.8% of the dividend will be paid to our joint venture partner as well. In 2012, there was a dividend distribution from SSMC amounting to $100 million (2011: $170 million) of which $39 million (2011: $66 million) was paid to TSMC.
Receivables, net
Accounts receivable are summarized as follows:
| 2012 | 2011 | |||||||
| Accounts receivable from third parties |
463 | 425 | ||||||
| Allowance for doubtful accounts |
(4 | ) | (4 | ) | ||||
| Accounts receivable from equity-accounted investees (net) |
— | 20 | ||||||
| Other receivables |
51 | 38 | ||||||
|
|
|
|
|
|||||
| 510 | 479 | |||||||
The current portion of income taxes receivable of $3 million (2011: $14 million) is included under other receivables.
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Inventories, net
Inventories are summarized as follows:
| 2012 | 2011 | |||||||
| Raw materials |
70 | 69 | ||||||
| Work in process |
515 | 415 | ||||||
| Finished goods |
130 | 134 | ||||||
|
|
|
|
|
|||||
| 715 | 618 | |||||||
The portion of the finished goods stored at customer locations under consignment amounted to $20 million as of December 31, 2012 (2011: $15 million).
The amounts recorded above are net of an allowance for obsolescence of $61 million as of December 31, 2012 (2011: $62 million).
Property, plant and equipment, net
The following table presents details of the Company’s property, plant and equipment, net of accumulated depreciation:
| Useful Life (in years) |
2012 | 2011 | ||||||||||
| Land |
59 | 62 | ||||||||||
| Buildings |
9 to 50 | 452 | 432 | |||||||||
| Machinery and installations |
2 to 7 | 1,338 | 1,332 | |||||||||
| Other Equipment |
1 to 5 | 186 | 185 | |||||||||
| Prepayments and construction in progress |
68 | 54 | ||||||||||
|
|
|
|
|
|||||||||
| 2,103 | 2,065 | |||||||||||
| Less accumulated depreciation |
(1,033 | ) | (1,002 | ) | ||||||||
|
|
|
|
|
|||||||||
| Property, plant and equipment, net of accumulated depreciation |
1,070 | 1,063 | ||||||||||
Land with a book value of $59 million (2011: $62 million) is not depreciated.
Property and equipment includes $77 million (2011: $75 million) related to assets acquired under capital leases. Accumulated depreciation related to these assets was $65 million (2011: $57 million). See Note 10 for information regarding capital lease obligations.
There was no significant construction in progress and therefore no related capitalized interest.
Accrued liabilities
Accrued liabilities are summarized as follows:
| 2012 | 2011 | |||||||
| Payroll and related benefits |
193 | 143 | ||||||
| Pension-related benefits |
21 | 21 | ||||||
| Utilities, rent and other |
28 | 17 | ||||||
| Income tax payable (refer to Note 15) |
29 | 36 | ||||||
| Deferred tax liabilities (refer to Note 15) |
4 | 1 | ||||||
| Liability for unrecognized tax benefits |
— | 6 | ||||||
| Communication & IT costs (including accruals related to EDA contracts) |
25 | 10 | ||||||
| Distribution costs |
9 | 7 | ||||||
| Sales-related costs |
12 | 13 | ||||||
| Purchase-related costs |
4 | 5 | ||||||
| Interest accruals |
25 | 74 | ||||||
| Derivative instruments—liabilities (refer to Note 6) |
2 | 3 | ||||||
| Other accrued liabilities |
137 | 138 | ||||||
|
|
|
|
|
|||||
| 489 | 474 | |||||||
Other accrued liabilities in 2012 include approximately $50 million relating to legal claims.
Other accrued liabilities in 2011 include approximately $45 million of liabilities incurred in connection with the sale of the Sound Solutions business. The settlement of these liabilities in 2012 was reported as cash flows from discontinued operations.
The remaining other accrued liabilities in 2012 and 2011 consist of various smaller items.
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Accumulated other comprehensive income (loss), net of tax
Total comprehensive income (loss) represents net income (loss) plus the results of certain equity changes not reflected in the Consolidated Statements of Operations. The after-tax components of accumulated other comprehensive income (loss) and their corresponding changes are shown below:
| Net investment hedge |
Currency translation differences |
Net actuarial gain/(losses) |
Accumulated Other Comprehensive Income (loss) |
|||||||||||||
| As of December 31, 2009 |
— | 367 | 32 | 399 | ||||||||||||
| 2010 other comprehensive income (loss) |
— | 158 | (19 | ) | 139 | |||||||||||
|
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|
|
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|
|
|||||||||
| As of December 31, 2010 |
— | 525 | 13 | 538 | ||||||||||||
| 2011 other comprehensive income (loss) |
(203 | ) | (21 | ) | 9 | (215 | ) | |||||||||
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|
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| As of December 31, 2011 |
(203 | ) | 504 | 22 | 323 | |||||||||||
| 2012 other comprehensive income (loss) |
18 | 10 | (51 | ) | (23 | ) | ||||||||||
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|
|||||||||
| As of December 31, 2012 |
(185 | ) | 514 | (29 | ) | 300 | ||||||||||
Cash Flow Information
| ($ in millions) | For the years ended December 31, | |||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Net cash paid during the period for: |
||||||||||||
| Interest |
292 | 301 | 278 | |||||||||
| Income taxes |
28 | 25 | 19 | |||||||||
| Net gain (loss) on sale of assets: |
||||||||||||
| Cash proceeds from the sale of assets |
31 | 30 | 6 | |||||||||
| Book value of these assets |
(12 | ) | (40 | ) | (142 | ) | ||||||
| Non-cash gains (losses) |
1 | — | 115 | |||||||||
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|||||||
| 20 | (10 | ) | (21 | ) | ||||||||
| Non-cash investing information: |
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| Assets received in lieu of cash from the sale of businesses: |
||||||||||||
| Trident shares |
— | — | 177 | |||||||||
| Others |
3 | — | — | |||||||||
| Other items: |
||||||||||||
| Other items consist of the following non-cash elements in income: |
||||||||||||
| Value adjustments/impairment financial assets |
— | — | (4 | ) | ||||||||
| Non-cash interest cost due to applying effective interest method |
22 | 18 | 15 | |||||||||
| Others |
— | — | (7 | ) | ||||||||
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| 22 | 18 | 4 | ||||||||||
4 Fair Value of Financial Assets and Liabilities
The following table summarizes the estimated fair value and carrying amount of our financial instruments measured on a recurring basis:
| December 31, 2012 | December 31, 2011 | |||||||||||||||||||
| Fair
value hierarchy1) |
Carrying amount |
Estimated fair value |
Carrying amount |
Estimated fair value |
||||||||||||||||
| Assets: |
||||||||||||||||||||
| Other financial assets |
2 | 18 | 18 | 17 | 17 | |||||||||||||||
| Derivative instruments-assets |
2 | 1 | 1 | 2 | 2 | |||||||||||||||
| Liabilities: |
||||||||||||||||||||
| Short-term debt |
2 | (42 | ) | (42 | ) | (52 | ) | (52 | ) | |||||||||||
| Short-term debt (bonds) |
1 | (265 | ) | (267 | ) | — | — | |||||||||||||
| Long-term debt (bonds) |
1 | (2,332 | ) | (2,453 | ) | (3,122 | ) | (3,296 | ) | |||||||||||
| Long-term debt (bonds) 2) |
2 | (608 | ) | (635 | ) | (606 | ) | (609 | ) | |||||||||||
| Other long-term debt |
2 | (245 | ) | (245 | ) | (19 | ) | (19 | ) | |||||||||||
| Derivative instruments-liabilities |
2 | (2 | ) | (2 | ) | (3 | ) | (3 | ) | |||||||||||
| 1) | Transfers between the levels of fair value hierarchy are recognized when a change in circumstances would require it. There were no transfers during the reporting periods presented in the table above. |
| 2) | Represent bonds which are privately held (floating rate secured notes 2016). |
The following methods and assumptions were used to estimate the fair value of financial instruments:
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Other financial assets
For other financial assets, the fair value is based upon significant other observable inputs depending on the nature of the other financial asset.
Debt
The fair value is estimated on the basis of the quoted market prices for certain issues, or on the basis of discounted cash flow analyses based upon the incremental borrowing rates for similar types of borrowing arrangements with comparable terms and maturities. Accrued interest is included under accounts payable and not within the carrying amount or estimated fair value of debt.
Assets and liabilities recorded at fair value on a non-recurring basis
We measure and record our non-marketable equity investments (non-marketable equity method and cost method investments) and non-financial assets, such as intangible assets and property, plant and equipment, at fair value when an impairment charge is required.
5 Debt
Short-term debt
| 2012 | 2011 | |||||||
| Other short-term bank borrowings |
36 | 35 | ||||||
| Current portion of long-term debt |
271 | 17 | ||||||
|
|
|
|
|
|||||
| Total |
307 | 52 | ||||||
At December 31, 2012, other short-term bank borrowings of $36 million (2011: $35 million) consisted of a local bank borrowing by our Chinese subsidiary.
The applicable weighted average interest rate during 2012 was 3.6% (2011: 4.4%).
Long-term debt
| Range of interest rates |
Average rate of interest |
Amount outstanding 2012 |
Due in 2013 |
Due after 2013 |
Due after 2017 |
Average remaining term (in years) |
Amount outstanding December 31, 2011 |
|||||||||||||||||||||||||
| EUR notes |
3.0 | 3.0 | 187 | 187 | — | — | 0.8 | 476 | ||||||||||||||||||||||||
| USD notes |
3.1-9.8 | 5.8 | 3,018 | 78 | 2,940 | 1,336 | 5.0 | 3,262 | ||||||||||||||||||||||||
| Revolving Credit Facility |
2.7 | 2.7 | 230 | — | 230 | — | 4.2 | — | ||||||||||||||||||||||||
| Bank borrowings |
2.0 | 2.0 | 5 | — | 5 | — | 2.0 | 4 | ||||||||||||||||||||||||
| Liabilities arising from capital lease transactions |
2.6-13.8 | 5.8 | 16 | 6 | 10 | — | 2.0 | 22 | ||||||||||||||||||||||||
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|
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| 5.4 | 3,456 | 271 | 3,185 | 1,336 | 4.7 | 3,764 | ||||||||||||||||||||||||||
| Corresponding data of previous year |
7.4 | 3,764 | 17 | 3,747 | 1,846 | 4.7 | ||||||||||||||||||||||||||
The following amounts of long-term debt at book value as of December 31, 2012 are due in the next 5 years:
| 2013 |
271 | |||
| 2014 |
28 | |||
| 2015 |
25 | |||
| 2016 |
629 | |||
| 2017 |
1,167 | |||
| Due after 5 years |
1,336 | |||
|
|
|
|||
| 3,456 |
As of December 31, 2012, the Company’s euro-denominated notes and U.S. dollar-denominated notes represented 6% and 94% respectively, of the total principal amount of the notes outstanding with maturities ranging from 1 to 8 years. 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. The remaining tenor of secured debt is on average 4.7 years.
Debt exchange and repurchase
At December 31, 2012 long-term debt has been reduced to $3,185 million from $3,747 million at December 31, 2011 and $4,128 million at December 31, 2010.
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In 2012, the book value of our long-term debt decreased by $562 million to $3,185 million, mainly due to the full repayment of the Senior Notes 2015, the full repayment of the Super Priority Notes 2013 and the partial repayment of the Senior Notes 2018 offset in part by issuance of a new Term Loan due 2019, a new Term Loan due 2020 and borrowings under a new Revolving Credit Facility due 2017. Extinguishment of debt in 2012 amounted to a loss of $161 million compared to a loss of $32 million in 2011. The Senior Secured notes due 2013, outstanding as of December 31, 2012 and due within one year are classified within short-term debt.
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 Consolidated Balance Sheet. The net proceeds of this issuance, together with a $330 million draw-down under our pre-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 pre-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, we repurchased all of our 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.
The Company may from time to time continue to seek to retire or purchase its outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise.
Other effects on the total long-term debt position relate to the translation of euro-denominated notes outstanding.
Euro notes
The Euro note outstanding as of the end of December 2012 consists of the following:
| • | a €142 million aggregate principal amount of floating rate senior secured notes due 2013 with an interest rate of three-month EURIBOR plus 2.75%. |
U.S. dollar-denominated notes
The U.S. dollar-denominated notes consist of the following seven series:
| • | a $58 million aggregate principal amount of floating rate senior secured notes due 2013 with an interest rate of three-month LIBOR plus 2.75%; and |
| • | a $616 million aggregate principal amount of floating rate senior secured notes due 2016 with an interest rate of three-month LIBOR plus 5.5%; and |
| • | a $491 million aggregate principal amount of floating rate senior secured term loan due 2017 with an interest rate of LIBOR plus 3.25% with a floor of 1.25%; and |
| • | a $494 million aggregate principal amount of floating rate senior secured term loan due 2017 with an interest rate of LIBOR plus 4.25% with a floor of 1.25%; and |
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| • | a $422 million aggregate principal amount of 9.75% senior secured notes due 2018; and |
| • | a $471 million aggregate principal amount of floating rate senior secured term loan due 2019 with an interest rate of LIBOR plus 4% with a floor of 1.25%; and |
| • | a $500 million aggregate principal amount of floating rate senior secured term loan due 2020 with an interest rate of LIBOR plus 3.50% with a floor of 1.25%. |
Certain terms and Covenants of the Euro and U.S. dollar-denominated notes
The Company is not required to make mandatory redemption payments or sinking fund payments with respect to the notes. With respect to the Term Loans, the Company is required to repay $20 million annually ($5 million per Term Loan).
The indentures governing the notes contain covenants that, among other things, limit the Company’s ability and that of restricted subsidiaries to incur additional indebtedness, create liens, pay dividends, redeem capital stock or 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.
Certain portions of long-term and short-term debt as of December 31, 2012 in the principal amount of $3,470 million (2011: $3,033 million) have been secured by collateral on substantially all of the Company’s assets and of certain of its subsidiaries.
The notes are fully and unconditionally guaranteed jointly and severally, on a senior basis by certain of the Company’s current and future material wholly owned subsidiaries (“Guarantors”).
Pursuant to various security documents related to the above mentioned secured notes and the $818 million (denominated €620 million) committed revolving credit facility, the Company and each Guarantor has granted first priority liens and security interests in, amongst others, the following, subject to the grant of further permitted collateral liens:
| (a) | all present and future shares of capital stock of (or other ownership or profit interests in) each of its present and future direct subsidiaries, other than SMST Unterstützungskasse GmbH, and material joint venture entities; |
| (b) | all present and future intercompany debt of the Company and each Guarantor; |
| (c) | all of the present and future property and assets, real and personal, of the Company, and each Guarantor, including, but not limited to, machinery and equipment, inventory and other goods, accounts receivable, owned real estate, leaseholds, fixtures, general intangibles, license rights, patents, trademarks, trade names, copyrights, chattel paper, insurance proceeds, contract rights, hedge agreements, documents, instruments, indemnification rights, tax refunds, but excluding cash and bank accounts; and |
| (d) | all proceeds and products of the property and assets described above. |
Notwithstanding the foregoing, certain assets may not be pledged (or the liens not perfected) in accordance with agreed security principles, including:
| • | if the cost of providing security is not proportionate to the benefit accruing to the holders; and |
| • | if providing such security requires consent of a third party and such consent cannot be obtained after the use of commercially reasonable efforts; and |
| • | if providing such security would be prohibited by applicable law, general statutory limitations, financial assistance, corporate benefit, fraudulent preference, “thin capitalization” rules or similar matters or providing security would be outside the applicable pledgor’s capacity or conflict with fiduciary duties of directors or cause material risk of personal or criminal liability after using commercially reasonable efforts to overcome such obstacles; and |
| • | if providing such security would have a material adverse effect (as reasonably determined in good faith by such subsidiary) on the ability of such subsidiary to conduct its operations and business in the ordinary course as otherwise permitted by the indenture; and |
| • | if providing such security or perfecting liens thereon would require giving notice (i) in the case of receivables security, to customers or (ii) in the case of bank accounts, to the banks with whom the accounts are maintained. Such notice will only be provided after the secured notes are accelerated. |
Subject to agreed security principles, if material property is acquired by the Company or a Guarantor that is not automatically subject to a perfected security interest under the security documents, then the Company or relevant Guarantor will within 60 days provide security over this property and deliver certain certificates and opinions in respect thereof as specified in the indenture governing the notes.
6 Other Financial Instruments, Derivatives and Currency Risk
We conduct business in diverse markets around the world and employ a variety of risk management strategies and techniques to manage foreign currency exchange rate, interest rate and commodity price risks. Our risk management program focuses on the unpredictability of financial markets and seeks to minimize the potentially adverse effects that the volatility of these markets may have on our operating results. One way we achieve this is through the active hedging of risks through the selective use of derivative instruments.
F-24
Table of Contents
Derivatives are recorded on our Consolidated Balance Sheets at fair value which fluctuates based on changing market conditions.
The Company does not purchase or hold financial derivative instruments for trading purposes.
Currency risk
Currency fluctuations may impact the Company’s financial results. A higher proportion of our revenue is in U.S. dollars or U.S. dollar- related currencies, compared to our costs and expenses resulting in a structural currency mismatch. Accordingly, our results of operations may be affected by changes in foreign exchange rates, particularly between the euro and the U.S. dollar. A strengthening of the euro against the U.S. dollar during any reporting period will reduce the operating income of the Company.
In addition, the U.S. dollar-denominated debt held by our Dutch subsidiary which has a euro functional currency may generate adverse currency results in financial income and expenses depending on the exchange rate movement between the euro and the U.S. dollar. This exposure has been partially mitigated by the application of net investment hedge accounting. In accordance with the provisions in ASC 815, “Derivatives and Hedging”, the Company has applied net investment hedging since May 2011. The U.S. dollar exposure of our net investment in U.S. dollar functional currency subsidiaries has been hedged by our U.S. dollar denominated debt for an amount of $1.7 billion. The hedging relationship is assumed to be highly effective. Foreign currency gains or losses on this U.S. dollar debt that is recorded in a euro functional currency entity that are designated as, and to the extent they are effective as, a hedge of the net investment in our U.S. dollar foreign entities, are reported as a translation adjustment in other comprehensive income within equity, and offset in whole or in part the foreign currency changes to the net investment that are also reported in other comprehensive income. As a result, in 2012, a benefit of $26 million (2011: a charge of $203 million) was recorded in other comprehensive income relating to the foreign currency result on the U.S. dollar-denominated notes that are recorded in a euro functional currency entity. Absent the application of net investment hedging, this amount would have been recorded as a gain within financial income (expense) in the statement of operations. No amount resulting from ineffectiveness of net investment hedge accounting was recognized in the statement of operations in 2012 (2011: no amount).
The Company’s transactions are denominated in a variety of currencies. The Company uses financial instruments to reduce its exposure to the effects of currency fluctuations. The Company generally hedges foreign currency exposures in relation to transaction exposures, such as receivables/payables resulting from such transactions and part of anticipated sales and purchases. The Company generally uses forwards to hedge these exposures.
Changes in the fair value of foreign currency accounts receivable/payable as well as changes in the fair value of the hedges of accounts receivable/payable are reported in the statement of operations under cost of revenue. Cash flow hedge accounting for foreign currency risk is not applied.
Derivative instruments relate to
| • | hedged balance sheet items, |
| • | hedged anticipated currency exposures with a duration of up to 12 months. |
The fair value of our derivative assets at the end of 2012 was less than $1 million (December 31, 2011: $2 million) whereas the fair value of our derivative liabilities amounted to $1 million (December 31, 2011: $3 million) and are included in other current assets and accrued liabilities, respectively, in the Consolidated Balance Sheets.
It is the Company’s policy that transaction exposures are hedged. Accordingly, the Company’s organizations identify and measure their exposures from transactions denominated in other than their own functional currency.
We calculate our net exposure on a cash flow basis considering balance sheet items, actual orders received or made and anticipated revenue and expenses.
Interest rate risk
The Company has significant outstanding debt, which creates an inherent interest rate risk. Through a combination of several private and open market transactions since 2009, the Company’s long-term debt profile has been improved. At December 31, 2012, long-term debt has been reduced to $3,185 million from $3,747 million at December 31, 2011 and $4,128 million at December 31, 2010.
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The following table summarizes the outstanding notes as of December 31, 2012:
| Principal amount* |
Fixed/ floating |
Current coupon rate |
Maturity date |
|||||||||||||
| Senior Secured Notes |
$ | 422 | Fixed | 9.75 | % | 2018 | ||||||||||
| Senior Secured Notes |
$ | 616 | Floating | 5.81 | % | 2016 | ||||||||||
| Senior Secured Notes |
€ | 142 | Floating | 2.96 | % | 2013 | ||||||||||
| Senior Secured Notes |
$ | 58 | Floating | 3.09 | % | 2013 | ||||||||||
| Term Loan |
$ | 491 | Floating | 4.5 | % | 2017 | ||||||||||
| Term Loan |
$ | 494 | Floating | 5.5 | % | 2017 | ||||||||||
| Revolving Credit Facility |
$ | 230 | Floating | 2.71 | % | 2017 | ||||||||||
| Term Loan |
$ | 471 | Floating | 5.25 | % | 2019 | ||||||||||
| Term Loan |
$ | 500 | Floating | 4.75 | % | 2020 | ||||||||||
| * | amount in millions |
A sensitivity analysis in relation to our long-term debt shows that if interest rates were to increase by 1% from the level of December 31, 2012 with all other variables held constant, the annualized interest expense would increase by $12 million. If interest rates were to decrease by 1% from the level of December 31, 2012 with all other variables held constant, the annualized interest expense would decrease by $3 million. This impact is based on the outstanding debt position as of December 31, 2012.
Commodity Price Risk
We are exposed to price risk related to forecasted purchases of gold that we use as raw material in many of our products. Gold forward contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases exception. We do not, by policy, use financial instruments for speculative purposes.
We may use gold forward contracts to hedge the input costs of gold for a portion of our anticipated purchases within the next 12 months. During the second quarter of 2012, we entered into non-deliverable forward contracts for gold which require net-settlement. These derivative instruments are highly effective and qualify for hedge accounting treatment. As of and for the year ended December 31, 2012 the impact to our financial statements related our gold forward contracts designated as cash flow hedges was not material. As of December 31, 2012, the notional value of our gold futures contracts was less than $1 million.
7 Identified Intangible Assets
Intangible assets, net of accumulated amortization and impairments of $965 million and $1,171 million as of December 31, 2012 and 2011 respectively were composed of the following:
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| Gross | Accumulated amortization and impairments |
Gross | Accumulated amortization and impairments |
|||||||||||||
| Marketing-related |
18 | (16 | ) | 18 | (16 | ) | ||||||||||
| Customer-related |
427 | (177 | ) | 411 | (143 | ) | ||||||||||
| Technology-based |
2,053 | (1,383 | ) | 2,044 | (1,156 | ) | ||||||||||
|
|
|
|
|
|
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|
|
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| Other intangible assets |
2,498 | (1,576 | ) | 2,473 | (1,315 | ) | ||||||||||
| Software |
113 | (70 | ) | 63 | (50 | ) | ||||||||||
|
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|
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| Identified intangible assets |
2,611 | (1,646 | ) | 2,536 | (1,365 | ) | ||||||||||
The estimated amortization expense for these identified intangible assets for each of the five succeeding years is:
| 2013 |
232 | |||
| 2014 |
153 | |||
| 2015 |
132 | |||
| 2016 |
127 | |||
| 2017 |
113 |
All intangible assets, excluding goodwill, are subject to amortization and have no assumed residual value.
The expected weighted average remaining life of identified intangibles is 6 years as of December 31, 2012.
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The estimated amortization expense for software as of December 31, 2012 for each of the five succeeding years is:
| 2013 |
21 | |||
| 2014 |
20 | |||
| 2015 |
2 | |||
| 2016 |
— | |||
| 2017 |
— |
The expected weighted average remaining lifetime of software is 2 years as of December 31, 2012.
8 Goodwill
The changes in goodwill in 2012 and 2011 were as follows:
| 2012 | 2011 | |||||||
| Balances as of January 1 |
||||||||
| Cost |
2,454 | 2,529 | ||||||
| Accumulated impairment |
(223 | ) | (230 | ) | ||||
|
|
|
|
|
|||||
| Book value |
2,231 | 2,299 | ||||||
| Changes in book value: |
||||||||
| Acquisitions |
11 | — | ||||||
| Divestments |
(6 | ) | — | |||||
| Translation differences |
41 | (68 | ) | |||||
|
|
|
|
|
|||||
| Total changes |
46 | (68 | ) | |||||
| Balances as of December 31 |
||||||||
| Cost |
2,502 | 2,454 | ||||||
| Accumulated impairment |
(225 | ) | (223 | ) | ||||
|
|
|
|
|
|||||
| Book value |
2,277 | 2,231 | ||||||
Acquisitions in 2012 relate to the acquisition of the Catena Group. Divestments in 2012 relate to the divestment of the High Speed Data Converter business.
No goodwill impairment charges were required to be recognized in 2012 or 2011.
The fair value of the reporting units substantially exceeds the carrying value of the reporting units.
See Note 19, “Segment and Geographical Information”, for goodwill by segment and Note 16, “Acquisitions and Divestments”.
9 Postretirement Benefit Plans
Pensions
Our employees participate in employee pension plans in accordance with the legal requirements, customs and the local situation in the respective countries. These are defined-benefit pension plans, defined-contribution plans and multi-employer plans.
The Company’s employees in The Netherlands participate in a multi-employer plan, implemented for the employees of the Metal and Electrical Engineering Industry (“Bedrijfstakpensioenfonds Metalektro or PME”) in accordance with the mandatory affiliation to PME effective for the industry in which NXP operates. As this affiliation is a legal requirement for the Metal and Electrical Engineering Industry it has no expiration date. This PME multi-employer plan (a career average plan) covers approximately 1,250 companies and 630,000 participants. The plan monitors its risk on an aggregate basis, not by company or participant and can therefore not be accounted for as a defined benefit plan. The pension fund rules state that the only obligation for affiliated companies will be to pay the annual plan contributions. There is no obligation for affiliated companies to fund plan deficits. Affiliated companies are also not entitled to any possible surpluses in the pension fund.
Every participating company contributes the same fixed percentage of its total pension base, being pensionable salary minus an individual offset. The Company’s pension cost for any period is the amount of contributions due for that period.
The coverage ratio of the PME plan was 93.9% as of December 31, 2012. Regulations require PME to have a coverage ratio (ratio of the plan’s assets to its obligations) of 104.3% for the total plan as of December 31, 2013, which needs to be achieved via a Recovery Plan. As the coverage ratio as of December 31, 2012 is below the path indicated in the Recovery Plan, PME has announced a reduction of pension rights of 5.1% as of April 1, 2013. In case the coverage ratio is still lower than 104.3% as of December 31, 2013 an additional reduction of the pension rights may be required. The contribution rate will increase from 26.5% (2012) to 27.0% (2013) to meet the funding requirements for the accrual of new pension rights.
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| PME multi-employer plan | 2012 | 2011 | 2010 | |||||||||
| NXP’s contributions to the plan |
53 | 59 | 53 | |||||||||
| (including employees’ contributions) |
4 | 2 | 2 | |||||||||
| Average number of NXP’s active employees participating in the plan |
3,229 | 3,256 | 3,537 | |||||||||
| NXP’s contribution to the plan exceeded more than 5 percent of the total contribution (as of December 31 of the plan’s year end) |
No | No | No | |||||||||
The amount for pension costs included in the statement of operations for the year 2012 was $84 million (2011: $90 million; 2010: $83 million) of which $19 million (2011: $16 million; 2010: $15 million) represents defined-contribution plans and $47 million (2011: $54 million; 2010: $48 million) represents the PME multi-employer plans.
Defined-benefit plans
The benefits provided by defined-benefit plans are based on employees’ years of service and compensation levels. Contributions are made by the Company, as necessary, to provide assets sufficient to meet the benefits payable to defined-benefit pension plan participants.
These contributions are determined based upon various factors, including funded status, legal and tax considerations as well as local customs. The Company funds certain defined-benefit pension plans as claims are incurred.
The total cost of defined-benefit plans amounted to $18 million in 2012 (2011: $20 million; 2010: $20 million) consisting of $20 million ongoing cost (2011: $21 million; 2010: $20 million) and a gain of $2 million from special events resulting from restructurings, curtailments and settlements.
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The table below provides a summary of the changes in the pension benefit obligations and defined-benefit pension plan assets for 2012 and 2011, associated with the Company’s dedicated plans, and a reconciliation of the funded status of these plans to the amounts recognized in the consolidated balance sheets.
| 2012 | 2011 | |||||||
| Projected benefit obligation |
||||||||
| Projected benefit obligation at beginning of year |
342 | 347 | ||||||
| Additions |
— | 3 | ||||||
| Service cost |
11 | 12 | ||||||
| Interest cost |
14 | 15 | ||||||
| Actuarial (gains) and losses |
60 | (5 | ) | |||||
| Curtailments and settlements |
(2 | ) | (6 | ) | ||||
| Plan amendments |
— | (1 | ) | |||||
| Benefits paid |
(18 | ) | (13 | ) | ||||
| Exchange rate differences |
12 | (10 | ) | |||||
|
|
|
|
|
|||||
| Projected benefit obligation at end of year |
419 | 342 | ||||||
| Plan assets |
||||||||
| Fair value of plan assets at beginning of year |
147 | 148 | ||||||
| Actual return on plan assets |
14 | 10 | ||||||
| Employer contributions |
14 | 13 | ||||||
| Curtailments and settlements |
— | (6 | ) | |||||
| Benefits paid |
(18 | ) | (13 | ) | ||||
| Exchange rate differences |
5 | (5 | ) | |||||
|
|
|
|
|
|||||
| Fair value of plan assets at end of year |
162 | 147 | ||||||
| Funded status |
(257 | ) | (195 | ) | ||||
|
|
|
|
|
|||||
| Classification of the funded status is as follows |
||||||||
| - Prepaid pension cost within other non-current assets |
13 | 25 | ||||||
| - Accrued pension cost within other non-current liabilities |
(260 | ) | (211 | ) | ||||
| - Accrued pension cost within accrued liabilities |
(10 | ) | (9 | ) | ||||
|
|
|
|
|
|||||
| Total |
(257 | ) | (195 | ) | ||||
| Accumulated benefit obligation |
||||||||
| Accumulated benefit obligation for all Company-dedicated benefit pension plans |
364 | 299 | ||||||
| Plans with assets less than accumulated benefit obligation |
||||||||
| Funded plans with assets less than accumulated benefit obligation |
||||||||
| - Fair value of plan assets |
24 | 22 | ||||||
| - Accumulated benefit obligations |
65 | 60 | ||||||
| - Projected benefit obligations |
85 | 79 | ||||||
| Unfunded plans |
||||||||
| - Accumulated benefit obligations |
174 | 140 | ||||||
| - Projected benefit obligations |
194 | 153 | ||||||
| Amounts recognized in accumulated other comprehensive income (before tax) |
||||||||
| Total AOCI at beginning of year |
(30 | ) | (21 | ) | ||||
| - Net actuarial loss (gain) |
52 | (9 | ) | |||||
| - Prior service cost (credit) |
— | (1 | ) | |||||
| - Exchange rate differences |
— | 1 | ||||||
|
|
|
|
|
|||||
| Total AOCI at end of year |
22 | (30 | ) | |||||
| Changes in accumulated other comprehensive income (before tax) consist of |
||||||||
| Total net actuarial loss (gain) at beginning of year |
(30 | ) | (22 | ) | ||||
| - Net actuarial loss (gain) arising during the year |
52 | (9 | ) | |||||
| - Net actuarial (loss) gain recognized in income during the year |
— | — | ||||||
| - Exchange rate difference |
— | 1 | ||||||
|
|
|
|
|
|||||
| Total net actuarial loss (gain) at end of year |
22 | (30 | ) | |||||
| Total prior service cost (credit) at beginning of year |
— | 1 | ||||||
| - Prior service cost (credit) arising during the year |
— | (1 | ) | |||||
|
|
|
|
|
|||||
| Total prior service cost (credit) at end of year |
— | — | ||||||
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The weighted average assumptions used to calculate the projected benefit obligations were as follows:
| 2012 | 2011 | |||||||
| Discount rate |
3.5 | % | 4.4 | % | ||||
| Rate of compensation increase |
2.4 | % | 3.1 | % | ||||
The weighted average assumptions used to calculate the net periodic pension cost were as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Discount rate |
4.4 | % | 4.3 | % | 4.8 | % | ||||||
| Expected returns on plan assets |
4.1 | % | 4.2 | % | 4.3 | % | ||||||
| Rate of compensation increase |
3.1 | % | 3.1 | % | 3.0 | % | ||||||
For the Company’s major plans, the discount rate used is based on high quality corporate bonds (iBoxx Corporate Euro AA 10+).
Plans in countries without a deep corporate bond market use a discount rate based on the local sovereign rate and the plans maturity (Bloomberg Government Bond Yields).
Expected returns per asset class are based on the assumption that asset valuations tend to return to their respective long-term equilibria. The Expected Return on Assets for any funded plan equals the average of the expected returns per asset class weighted by their portfolio weights in accordance with the fund’s strategic asset allocation.
The components of net periodic pension costs were as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Service cost |
11 | 12 | 12 | |||||||||
| Interest cost on the projected benefit obligation |
14 | 15 | 15 | |||||||||
| Expected return on plan assets |
(6 | ) | (6 | ) | (6 | ) | ||||||
| Amortization of prior service cost |
— | — | — | |||||||||
| Amortization of net (gain) loss |
— | — | (1 | ) | ||||||||
| Curtailments & settlements |
(2 | ) | (1 | ) | (1 | ) | ||||||
| Other |
1 | — | 1 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net periodic cost |
18 | 20 | 20 | |||||||||
A sensitivity analysis shows that if the discount rate increases by 1% from the level of December 31, 2012, with all other variables held constant, the net periodic pension cost would increase by $2 million. If the discount rate decreases by 1% from the level of December 31, 2012, with all other variables held constant, the net periodic pension cost would decrease by $2 million.
The estimated net actuarial loss (gain) and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year (2013) are $1 million and nil, respectively.
Plan assets
The actual pension plan asset allocation at December 31, 2012 and 2011 is as follows:
| 2012 | 2011 | |||||||
| Asset category: |
||||||||
| Equity securities |
26 | % | 21 | % | ||||
| Debt securities |
58 | % | 64 | % | ||||
| Insurance contracts |
3 | % | 4 | % | ||||
| Other |
13 | % | 11 | % | ||||
|
|
|
|
|
|||||
| 100 | % | 100 | % | |||||
We met our target plan asset allocation. The investment objectives for the pension plan assets are designed to generate returns that, along with the future contributions, will enable the pension plans to meet their future obligations. The investments in our major defined benefit plans largely consist of government bonds, “Level 2” Corporate Bonds and cash to mitigate the risk of interest fluctuations. The asset mix of equity, bonds, cash and other categories is evaluated every three years by an asset-liability modeling study for our largest plan. The assets of funded plans in other countries mostly have a large proportion of fixed income securities with return characteristics that are aligned with changes in the liabilities caused by discount rate volatility. Total pension plan assets of $162 million include $149 million related to the German, Swiss and Philippine pension funds.
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The following table summarizes the classification of these assets.
| 2012 | 2011 | |||||||||||||||||||||||
| Level I | Level II | Level III | Level I | Level II | Level III | |||||||||||||||||||
| Equity securities |
3 | 38 | — | 1 | 29 | — | ||||||||||||||||||
| Debt securities |
20 | 68 | — | 17 | 71 | — | ||||||||||||||||||
| Other |
13 | 4 | 3 | 7 | 5 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 36 | 110 | 3 | 25 | 105 | 4 | |||||||||||||||||||
From the remaining assets of $13 million an amount of $4 million relates to assets held by insurance companies.
The Company currently expects to make cash contributions of $84 million in 2013, consisting of $4 million of employer contributions to defined-benefit pension plans, $22 million of employer contributions to defined-contribution pension plans, $49 million of employer contributions to multi-employer plans and $9 million of expected cash payments in relation to unfunded pension plans.
Estimated future pension benefit payments
The following benefit payments are expected to be made (including those for funded plans):
| 2013 |
16 | |||
| 2014 |
13 | |||
| 2015 |
15 | |||
| 2016 |
14 | |||
| 2017 |
14 | |||
| Years 2018-2022 |
95 |
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company provides other postretirement benefits, primarily retiree healthcare benefits in the United States accounted for as defined-benefit plans. The Company funds these other postretirement benefit plans as claims are incurred.
The amounts included in the consolidated statements of operations for 2012 are an expense of $1 million (2011: $1 million; 2010: $1 million).
The accumulated postretirement benefit obligation other than pensions at the end of 2012 equals $9 million (2011: $7 million).
10 Commitments and Contingencies
Lease Commitments
Property, plant and equipment includes $12 million as of December 31, 2012 (2011: $18 million) for capital leases and other beneficial rights of use, such as building rights and hire purchase agreements. The financial obligations arising from these contractual agreements are reflected in long-term debt. Long-term operating lease commitments totaled $153 million as of December 31, 2012 (2011: $171 million). The long-term operating leases are mainly related to the rental of buildings. These leases expire at various dates during the next 30 years. Future minimum lease payments under operating and capital leases are as follows:
| Operating Leases | Capital Leases | |||||||
| 2013 |
30 | 7 | ||||||
| 2014 |
29 | 7 | ||||||
| 2015 |
27 | 2 | ||||||
| 2016 |
18 | 1 | ||||||
| 2017 |
12 | 1 | ||||||
| Thereafter |
37 | — | ||||||
|
|
|
|
|
|||||
| Total future minimum leases payments |
153 | 18 | ||||||
| Less: amount representing interest |
2 | |||||||
|
|
|
|||||||
| Present value of future minimum lease payments |
16 | |||||||
Rent expense amounted to $54 million in 2012 (2011: $51 million; 2010: $60 million).
Guarantees
At the end of 2012 there were no material guarantees recognized by the Company.
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Other commitments
The Company has made certain commitments to TSMC, whereby the Company is obligated to make cash payments to TSMC with respect to long-term obligations for a joint development process should it fail to purchase an agreed-upon accumulative volume of wafers. The maximum commitment is $18 million and expires at the end of 2015.
Environmental remediation
In each jurisdiction in which we operate, we are subject to many environmental, health and safety laws and regulations that govern, among other things, emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and ground water contamination and the health and safety of our employees. We are also required to obtain environmental permits from governmental authorities for certain of our operations.
As with other companies engaged in similar activities or that own or operate real property, the Company faces inherent risks of environmental liability at our current and historical manufacturing facilities. Certain environmental laws impose liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances. Certain of these laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated.
Soil and groundwater contamination has been identified at our properties in Hamburg, Germany and Nijmegen, the Netherlands. The remediation processes have been ongoing for several years and are expected to continue for several years.
Our former property in Lent, the Netherlands, is affected by trichloroethylene contamination. ProRail B.V., owns certain property located nearby and has claimed that we have caused trichloroethylene contamination on their property. We have rejected ProRail’s claims, as we believe that the contamination was caused by a prior owner of our property in Lent. While we are currently not taking any remediation or other actions, we estimate that our aggregate potential liability, if any, in respect of this property will not be material.
Asbestos contamination has been found in certain parts of our properties in Manchester in the United Kingdom and in Nijmegen, the Netherlands. Both in the United Kingdom and the Netherlands, we will be required to dispose of the asbestos when the buildings currently standing on the property are demolished or divested. We estimate our potential liability will not be material. Additionally, in the Netherlands, we will be required to remediate the asbestos contamination at a leased property, upon termination of the lease. The lease is not expected to end soon and we estimate the cost of remediation will not be material.
Litigation
We are regularly involved as plaintiffs or defendants in claims and litigation relating to matters such as commercial transactions and intellectual property rights. In addition, our divestments sometimes result in, or are followed by, claims or litigation by either party. From time to time, we also are subject to alleged patent infringement claims. We rigorously defend ourselves against these alleged patent infringement claims, and we rarely participate in settlement discussions. Although the ultimate disposition of asserted claims and proceedings cannot be predicted with certainty, it is our belief that the outcome of any such claims, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position. However, such outcomes may be material to our consolidated statement of operations for a particular period.
With the support from its in-house and outside counsel and based on its best estimate, the Company records an accrual for any claim that arises whenever it considers that it is probable that it is exposed to a loss contingency and the amount of the loss contingency can be reasonably estimated. Based on the most current information available to it and based on its best estimate, the Company also reevaluates at least on a quarterly basis the claims that have arisen to determine whether any new accruals need to be made or whether any accruals made need to be adjusted.
Based on the procedures described above, the Company has an aggregate amount of approximately $59 million accrued for legal proceedings pending as of December 31, 2012, compared to approximately $15 million as of December 31, 2011. Such accruals are part of the “Other accrued liabilities,” as referred to in Note 3, “Supplemental Financial Information”. There can be no assurance that the Company’s accruals will be sufficient to cover the extent of its potential exposure to losses. Historically, legal actions have not had a material adverse effect on the Company’s business, results of operations or financial condition.
Set forth below are descriptions of our most important legal proceedings pending as of December 31, 2012, for which the related loss contingency is either probable or reasonably possible, including the legal proceedings for which accruals have been made:
| * | Three former employees of Signetics Corp, a predecessor of NXP Semiconductors USA, Inc. and their respective children each separately filed various counts against NXP Semiconductors USA, Inc. (negligence, premises liability, strict liability, abnormal and ultrahazardous activity, willful and wanton misconduct and loss of consortium) asserting exposure to harmful chemicals and substances while the employees concerned were working in a factory “clean room” of Signetics Corp., resulting in alleged physical injuries and eventual birth defects to their children (cases No. N09C-10-032 JRJ, N10C-05-137 JRJ and 1-10-CV-188679). Initial discovery has commenced by both sides in above mentioned cases. Actual substantive responses are pending. Trial dates for Case No. N09C-10 032 and Case No. N10C-05-137 have been set at October 7, 2013 and April 28, 2014, respectively. In Case No. 1-10-CV-188679 a trial setting conference is scheduled for April 30, 2013. |
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| * | Norit Winkelsteeg B.V. and Vitens N.V. alleged that NXP Semiconductors Netherlands B.V. breached a contract it had entered into with them to build a so-called “permeate-water” factory or, in the alternative, had terminated negotiations to enter into such contract in bad faith. Claimants hold NXP Semiconductors Netherlands B.V. liable for all costs, expenses and damages, including loss of profit. In an interim judgment dated January 27, 2009, the Court of Appeal in Arnhem, the Netherlands, recognized that part of the claim related to costs and expenses could be awarded but the Court further stated that reticence must be observed in awarding compensation for loss of profits. Court ruling is adjourned to April 9, 2013. |
| * | In 2007, certain former employees of NXP Semiconductors France SAS employed by a subsidiary of the DSP Group, Inc. filed a claim against NXP Semiconductors France SAS before the Tribunal de Grande Instance in an emergency procedure (procédure de référé) to demand re-integration within NXP Semiconductors France SAS, following the closure of the DSP Group’s activities in France and the consequent termination of their employment agreements. The claim was rejected by the Tribunal de Grande Instance. The employees concerned then brought the same claim before the Social Court (Conseil de Prud’hommes) in Caen which, on April 27, 2010, also ruled in favor of NXP Semiconductors France SAS. The claimants filed for an appeal in last resort on May 18, 2010, which is still pending. |
In addition, on January 7, 2009, the European Commission issued a release in which it confirmed it had started an investigation in the smart card chip sector. The European Commission has reason to believe that the companies concerned may have violated European Union competition rules prohibiting certain practices such as price fixing, customer allocation and the exchange of commercially sensitive information. As one of the companies active in the smart card chip sector, NXP is subject to this ongoing investigation and is assisting the regulatory authorities in this investigation. The investigation is still ongoing and it is currently not possible to reliably estimate its outcome.
On April 5, 2012, the ICC arbitration tribunal arrived at an award in a dispute between NXP and STMicroelectronics (“ST”) about the interpretation of the contractual arrangements concerning underloading in the NXP wafer fabs and ST’s liability for the associated costs. Based on the award, ST paid NXP approximately $59 million in the second quarter of 2012. No appeal is available to ST on this award, however, ST commenced a separate arbitration aiming to convince the ICC Tribunal to reverse the economic effect of its award in the first arbitration. The hearing for this second arbitration took place from June 2 – 7, 2012; this second arbitration still continues.
The estimated aggregate range of reasonably possible losses is based on currently available information in relation to the claims that have arisen and on the Company’s best estimate of such losses for those cases for which such estimate can be made. For certain claims, the Company believes that an estimate cannot currently be made. The estimated aggregate range requires significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants (including the Company) in such claims whose share of liability has yet to be determined, the numerous yet-unresolved issues in many of the claims, and the attendant uncertainty of the various potential outcomes of such claims. Accordingly, the Company’s estimate will change from time to time, and actual losses may be more than the current estimate. As at December 31, 2012, the Company believes that for all litigation pending its aggregate exposure to loss in excess of the amount accrued could range between $0 and approximately $26 million.
11 Stockholders’ Equity
The Company amended its Articles of Association on August 2, 2010 in order to effect a 1-for-20 reverse stock split of its shares of common stock. As a consequence, the number of shares outstanding on August 2, 2010 (4,305,030,000 shares) has been adjusted to 215,251,500 shares. The exercise price and the number of shares of common stock issuable under the Company’s share-based compensation plans were proportionately adjusted to reflect the reverse stock split. Basic and diluted weighted average shares outstanding and earnings per share have been calculated to reflect the reverse stock split in all periods presented. The share capital of the Company as of December 31, 2012 and 2011 consists of 1,076,257,500 authorized shares, including 430,503,000 authorized shares of common stock, and 645,754,500 authorized but unissued shares of preferred stock.
In 2010, the Company completed its initial public offering of 34 million shares of common stock, priced at $14 per share, resulting in net proceeds of $448 million, after deducting underwriting discounts and commissions and offering expenses totaling $28 million. As a result, the number of common shares increased from 215,251,500 shares to 249,251,500 shares. In connection with long-term equity incentive plans introduced in November 2010 and 2011, the Company has issued a total number of 2,500,000 additional shares of common stock.
At December 31, 2012, the Company has issued and paid up 251,751,500 shares (2011: 251,751,500 shares) of common stock each having a par value of €0.20 or a nominal stock capital of €50 million.
Option rights/restricted share units/equity rights
The Company has granted stock options, restricted share units and equity rights to the employees of the Company and its subsidiaries to receive the Company’s shares or depository receipts in the future. See Note 13, “Share-based Compensation”.
Treasury shares
In connection with the Company’s share repurchase programs, which commenced in 2011, and in accordance with the Company’s policy to provide share awards from its treasury share inventory, shares which have been repurchased and are held in treasury for delivery upon exercise of options and under restricted share programs, are accounted for as a reduction of stockholders’ equity. Treasury shares are
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recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a first-in, first-out (FIFO) basis.
Differences between the cost and the proceeds received when treasury shares are reissued, are recorded in capital in excess of par value. Deficiencies in excess of net gains arising from previous treasury share issuances are charged to retained earnings.
The following transactions took place resulting from employee option and share plans in 2012:
| 2012 | ||||
| Total shares in treasury at beginning of year |
3,915,144 | |||
| Total cost |
57 | |||
| Shares acquired under repurchase program |
1,843,694 | |||
| Average price in $ per share |
21.70 | |||
| Amount paid |
40 | |||
| Shares delivered |
3,032,838 | |||
| Average price in $ per share |
12.97 | |||
| Amount received |
15 | |||
| Total shares in treasury at end of year |
2,726,000 | |||
| Total cost |
58 | |||
12 Related-party Transactions
The Company’s related parties are the Private Equity Consortium, the members of the board of directors of NXP Semiconductors N.V., Philips, the members of the management team of NXP Semiconductors N.V. and equity-accounted investees.
Advisory Services Agreements
The members of the Private Equity Consortium provide certain advisory services to NXP Semiconductors N.V. We have entered into separate agreements in this regard with the respective parties, under which each of the various legal entities receive an annual advisory fee of $25,000 (with an aggregate total amount of $125,000 annually).
Shareholders’ Agreement
Prior to the consummation of the initial public offering of NXP Semiconductors N.V. in August 2010, the members of the Private Equity Consortium restructured their indirect shareholding in the common stock of NXP Semiconductors N.V. such that each of them holds directly, or indirectly through a separate Luxembourg holding company, shares of its common stock. At the same time, KASLION Holding B.V. ceased to hold shares of common stock of NXP Semiconductors N.V. In connection with this restructuring, the members of the Private Equity Consortium, Philips and the Management Foundation (together, the “Existing Shareholders”) entered into a new shareholders’ agreement among themselves, which replaced the shareholders’ agreement entered into on September 29, 2006. We are not a party to the new shareholders’ agreement.
Other
We have a number of strategic alliances and joint ventures. We have relationships with certain of our alliance partners in the ordinary course of business whereby we enter into various sale and purchase transactions, generally on terms comparable to transactions with third parties. However, in certain instances upon divestment of former businesses where we enter into supply arrangements with the former owned business, sales are conducted at cost.
The following table presents the amounts related to revenue and expenses incurred in transactions with these related parties:
| 2012 | 2011 | 2010 | ||||||||||
| Revenue |
33 | 133 | 292 | |||||||||
| Purchase of goods and services |
204 | 137 | 139 | |||||||||
The following table presents the amounts related to accounts receivable and payable balances with these related parties:
| 2012 | 2011 | |||||||
| Receivables (net) |
— | 20 | ||||||
| Payables |
30 | 38 | ||||||
On September 7, 2010, Philips Pension Trustees Limited purchased Philips’ 42,715,650 shares of common stock in the Company (“Transfer Shares”) in a private transaction. In a subsequent private transaction, on October 29, 2010, PPTL Investment LP purchased the Transfer Shares from Philips Pension Trustees Limited by way of a transfer agreement, to which also Philips is a party (“Amended Transfer
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Agreement”). PPTL Investment LP acquired the Transfer Shares for the purpose of owning and managing such assets as may be contributed to Philips Pension Trustees Limited. In the period running from the aforementioned acquisition to December 31, 2012, PPTL Investment LP disposed of 22,141,217 shares of common stock in 6 separate transactions.
13 Share-based Compensation
We record share-based compensation arrangements in accordance with ASC 718 “Compensation-Stock Compensation”. All share-based payments, including grants of stock options, performance share units, restricted share units and equity rights are recognized in our Consolidated Financial Statements based upon their respective grant date fair value.
Share-based compensation plans for employees were introduced in 2007. Subsequent to becoming a listed company in August 2010, the Company introduced additional share-based compensation plans for eligible employees since November 2010. The plans introduced since November 2010 are referred to as the “Post-IPO Plans” and the plans introduced prior to November 2010 are referred to as the “Pre-IPO Plans”.
Share-based compensation expense is included in the following line items in our statement of operations:
| 2012 | 2011 | 2010 | ||||||||||
| Cost of revenue |
2 | 1 | 1 | |||||||||
| Research and development |
5 | 2 | — | |||||||||
| Selling, general and administrative |
45 | 28 | 11 | |||||||||
|
|
|
|
|
|
|
|||||||
| 52 | 31 | 12 | ||||||||||
Post-IPO Plan
Under the Post-IPO plan performance shares, stock options and restricted shares were granted to eligible employees. The options have a strike price equal to the closing share price on the grant date. The fair value of the options has been calculated with the Black-Scholes-Merton formula, using the following assumptions:
| • | an expected life of 6.25 years, calculated in accordance with the guidance provided in SEC Staff bulletin No. 110 for plain vanilla options using the simplified method, since our equity shares have been publicly traded for only a limited period of time and we do not have sufficient historical exercise data; |
| • | a risk-free interest rate varying from 0.8% to 1.3% (2011 grant 1.2% to 2.78%; 2010: 1.67%); |
| • | no expected dividend payments; and |
| • | a volatility of 45% based on the volatility of a set of peer companies. Peer company data has been used given the short period of time our shares have been publicly traded. |
Changes in the assumptions can materially affect the fair value estimate.
Stock options vest ratably on a yearly basis over 4 years from the date of grant. Performance share units and restricted share units vest, subject to relevant performance criteria being met, ratably on a yearly basis over 3 years from the date of grant.
A charge of $44 million was recorded in 2012 for Post-IPO Plans (2011: $17 million; 2010: $2 million).
A summary of the status of NXP’s Post-IPO stock options and share rights and changes during 2012 and 2011 is presented below.
Stock options
| 2012 | 2011 | |||||||||||||||
| Stock options | Weighted average exercise price in USD |
Stock options | Weighted average exercise price in USD |
|||||||||||||
| Outstanding at January 1 |
7,366,908 | 15.49 | 3,749,932 | 13.27 | ||||||||||||
| Granted |
4,972,081 | 23.36 | 4,045,537 | 17.35 | ||||||||||||
| Exercised |
(637,858 | ) | 14.14 | (71,542 | ) | 13.27 | ||||||||||
| Forfeited |
(791,017 | ) | 15.94 | (357,019 | ) | 13.65 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at December 31 |
10,910,114 | 19.12 | 7,366,908 | 15.49 | ||||||||||||
| Exercisable at December 31 |
1,819,243 | 15.05 | 853,732 | 13.27 | ||||||||||||
The weighted average per share grant date fair value of stock options granted in 2012 was $10.44 (2011: $7.81; 2010: $6.04).
The intrinsic value of the exercised options was $7 million (2011: $0.3 million), whereas the amount received by NXP was $9 million (2011: $1 million).
The number of vested stock options at December 31, 2012 is 1,819,243 (2011: 853,732).
At December 31, 2012, there was a total of $64 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 3.3 years (2011: 3.5 years).
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The outstanding options issued under the Post-IPO Plans are categorized by exercise price as follows:
USD-denominated
| Year granted | Exercise price | Shares | Intrinsic value in millions |
Weighted average remaining contractual term |
||||||||||||
| 2012 |
23.49 | 4,047,450 | 11 | 9.8 | ||||||||||||
| 2012 |
22.62 | 197,550 | 1 | 9.6 | ||||||||||||
| 2012 |
26.32 | 158,930 | — | 9.3 | ||||||||||||
| 2012 |
21.63 | 493,865 | 2 | 9.1 | ||||||||||||
| 2011 |
25.01 | 86,492 | — | 8.1 | ||||||||||||
| 2011 |
31.81 | 61,040 | — | 8.3 | ||||||||||||
| 2011 |
19.78 | 82,365 | 1 | 8.6 | ||||||||||||
| 2011 |
16.84 | 3,298,913 | 31 | 8.8 | ||||||||||||
| 2010 |
13.27 | 2,483,509 | 32 | 7.8 | ||||||||||||
The aggregate intrinsic value in the tables and text above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if the options had been exercised on December 31, 2012.
Performance share units
| 2012 | 2011 | |||||||||||||||
| Shares | Weighted average grant date fair value in USD |
Shares | Weighted average grant date fair value in USD |
|||||||||||||
| Outstanding at January 1 |
1,487,149 | 16.00 | 846,819 | 13.27 | ||||||||||||
| Granted |
1,171,600 | 23.35 | 987,225 | 17.38 | ||||||||||||
| Vested |
(30,311 | ) | 22.66 | (249,962 | ) | 13.27 | ||||||||||
| Forfeited |
(219,964 | ) | 15.28 | (96,933 | ) | 13.27 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at December 31 |
2,408,474 | 19.55 | 1,487,149 | 16.00 | ||||||||||||
The weighted average grant date fair value of performance share units granted in 2012 was $23.35 (2011: $17.38; 2010: $13.27). The number of vested performance share units at December 31, 2012 is 280,273 (2011: 249,962). The fair value of the performance share units at the time of vesting was $1 million (2011: $4 million).
At December 31, 2012, there was a total of $29 million (2011: $19 million) of unrecognized compensation cost related to non-vested performance share units. This cost is expected to be recognized over a weighted-average period of 1.9 years (2011: 2.5 years).
Restricted share units
| 2012 | 2011 | |||||||||||||||
| Shares | Weighted average grant date fair value in USD |
Shares | Weighted average grant date fair value in USD |
|||||||||||||
| Outstanding at January 1 |
2,360,806 | 16.08 | 1,283,295 | 13.27 | ||||||||||||
| Granted |
2,021,918 | 23.31 | 1,571,236 | 17.52 | ||||||||||||
| Vested |
(849,289 | ) | 15.72 | (400,835 | ) | 13.27 | ||||||||||
| Forfeited |
(233,312 | ) | 16.74 | (92,890 | ) | 13.81 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at December 31 |
3,300,123 | 20.56 | 2,360,806 | 16.08 | ||||||||||||
The weighted average grant date fair value of restricted share units granted in 2012 was $23.31 (2011: $17.52; 2010: $13.27). The number of vested restricted share units at December 31, 2012 is 1,250,124 (2011: 400,835). The fair value of the restricted share units at the time of vesting was $21 million (2011: $7 million; 2010: $0 million).
At December 31, 2012, there was a total of $54 million (2011: $31 million) of unrecognized compensation cost related to non-vested restricted share units. This cost is expected to be recognized over a weighted-average period of 2.4 years (2011: 2.5 years).
Pre-IPO Plans
Under these plans, stock options were issued to certain employees of the Company. In addition, certain members of our management have the right to purchase depository receipts of shares of common stock of NXP Semiconductors N.V. upon exercise and payment of the exercise price, after these rights have vested and only upon a sale of shares by the Private Equity Consortium or upon a change of control (in particular, the Private Equity Consortium no longer jointly holding at least 30% of our common stock). In addition, exercise of stock options is also contingent upon a sale of shares by the Private Equity Consortium or upon a change of control as defined above.
F-36
Table of Contents
The exercise prices of stock options granted in 2007 and 2008 range from €20.00 to €50.00 after taking into account the reverse stock split in August, 2010. Also, equity rights were granted to certain non-executive employees containing the right to acquire our shares of common stock for no consideration after the rights have vested and upon a change of control (in particular, the Private Equity Consortium no longer jointly holding 30% of our common stock).
Since none of our stock options, equity rights or shares of common stock were traded on any stock exchange until August 2010, and exercise is dependent upon certain conditions, employees can receive no value nor derive any benefit from holding these options or rights without the fulfillment of the conditions for exercise. We have concluded that the fair value of the share-based payments could best be estimated by the use of a binomial option-pricing model because such model takes into account the various conditions and subjective assumptions that determine the estimated value. In addition to the estimated value of the Company based on projected cash flows, the assumptions used until 2010 were:
| • | Expected life of the options and equity rights is calculated as the difference between the grant dates and an exercise triggering event not before the end of 2012. For the options granted under the Pre-IPO Plans, expected lives varying from 4.25 to 3 years have been assumed; |
| • | Risk-free interest rate, varying from 4.1% to 1.6%; |
| • | Expected asset volatility, varying from 27% to 38% (based on the average volatility of comparable companies over an equivalent period from valuation date to exit date); |
| • | Dividend pay-out ratio of nil; |
| • | Lack of marketability discounts of 26% to 35%; |
| • | The Business Economic Value of the Company based on projected discounted cash flows as derived from our business plan for the next 3 years, extrapolated until 2021 with 3% terminal growth rates (the discount factor was based on a weighted average cost of capital of 12.4%). |
Because the options and rights are not traded, an option-based approach (the Finnerty model) was used to calculate an appropriate discount for lack of marketability. The expected life of the options and rights is an estimate based on the time period private equity on average takes to liquidate its investment. The volatility assumption has been based on the average volatility of comparable companies over an equivalent period from valuation date to exit date.
In May 2009, we executed a stock option exchange program for stock options previously granted which were deeply out of the money. Under this stock option exchange program, stock options with new exercise prices, different volumes and, in certain cases, revised vesting schedules, were granted to eligible individuals, in exchange for their owned stock options. By accepting the new stock options, all stock options (vested and unvested) owned by the eligible individuals were cancelled. The number of employees eligible for and affected by the stock option exchange program was approximately 120. Since May 2009, stock options have been granted to eligible individuals under the revised stock options program. The exercise prices of these stock options range from €2.00 to €40.00. No modifications occurred with respect to the equity rights of the non-executive employees.
After the Company’s initial public offering, it amended the terms of its Pre-IPO plan for those participants who voluntarily exchanged the right to accelerated vesting of their Pre-IPO options upon an exit event for a five year exercise period commencing upon the date of an exit event. This modification resulted in an additional cost of $4 million.
In accordance with the provisions of ASC 718, the unrecognized portion of the compensation costs of the cancelled options continues to be recognized over their remaining requisite vesting period. For the replacement options the incremental compensation costs are determined as the difference between the fair value of the cancelled options immediately before the grant date of the replacement options and the fair value of these replacement options at the grant date. This incremental compensation cost will be recognized over a weighted average period of 2.0 years.
A charge of $8 million was recorded in 2012 (2011: $14 million, 2010: $10 million) for Pre-IPO Plans, of which $8 million related to incremental compensation costs for the modified stock option scheme (2011: $6 million; 2010: $6 million) and including the $4 million modification described above.
The requisite service period for stock options is 4 years.
F-37
Table of Contents
The following table summarizes the information about NXP’s outstanding Pre-IPO stock options and changes during 2012 and 2011.
Stock options
| 2012 | 2011 | |||||||||||||||
| Stock options | Weighted average exercise price in EUR |
Stock options | Weighted average exercise price in EUR |
|||||||||||||
| Outstanding at January 1 |
16,128,196 | 24.46 | 18,050,123 | 23.30 | ||||||||||||
| Granted |
— | — | — | — | ||||||||||||
| Exercised |
(544,462 | ) | 7.65 | (1,051,993 | ) | 6.61 | ||||||||||
| Forfeited |
(469,518 | ) | 21.86 | (869,934 | ) | 22.08 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at December 31 |
15,114,216 | 25.14 | 16,128,196 | 24.46 | ||||||||||||
| Exercisable at December 31 |
2,372,254 | 11.96 | 2,875,053 | 12.46 | ||||||||||||
The exercise prices range from €2.00 to €50.00
The intrinsic value of exercised options was $8 million (2011: $19 million), whereas the amount received by NXP was $6 million (2011: $9 million).
The number of vested options at December 31, 2012 was 13,603,205 (2011: 12,194,166 vested options) with a weighted average exercise price of €22.96 (2011: €25.78 weighted average exercise price).
Upon completion of the secondary offering on April 5, 2011, in total up to 22% of the options under the Pre-IPO Plans became exercisable, subject to the applicable laws and regulations.
Upon completion of the secondary offering on February 7, 2013, in total up to 38% of the options under the Pre-IPO Plans became exercisable, subject to applicable laws and regulations. If the secondary offering had occurred before end of 2012, then the exercisable number of options would have been 5,173,338 with a weighted average exercise price of €14.65.
| Weighted average fair value in EUR |
||||
| Weighted average grant-date fair value in euros of options granted during: |
||||
| 2010 |
1.20 | |||
| 2009 |
1.80 | |||
None of the options will expire as a result of exceeding the maximum contractual term because such maximum term is not applicable.
The outstanding options issued under the Pre-IPO plans are categorized by exercise prices as follows:
Euro-denominated
| exercise price | Shares | Intrinsic value in millions |
||||||
| 2.00 – 9.50 |
1,260,268 | 29 | ||||||
| 15.00 |
4,957,155 | 32 | ||||||
| 20.00 |
1,479,889 | — | ||||||
| 30.00 |
3,083,343 | — | ||||||
| 40.00 |
3,612,921 | — | ||||||
| 50.00 |
720,640 | — | ||||||
|
|
|
|
|
|||||
| 15,114,216 | 61 | |||||||
The aggregate intrinsic value in the tables and text above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if the options had been exercised on December 31, 2012.
At December 31, 2012, there was a total of $1 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1 year.
A summary of the status of NXP’s Pre-IPO equity rights and changes during 2012 and 2011 is presented below. All equity rights have an exercise price of nil.
F-38
Table of Contents
Equity rights
| 2012 | 2011 | |||||||||||||||
| Shares | Weighted average grant date fair value in EUR |
Shares | Weighted average grant date fair value in EUR |
|||||||||||||
| Outstanding at January 1 |
444,395 | 9.34 | 472,742 | 9.13 | ||||||||||||
| Granted |
— | — | — | — | ||||||||||||
| Released |
(381,630 | ) | 9.10 | — | — | |||||||||||
| Forfeited |
— | — | (28,347 | ) | 5.80 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at December 31 |
62,765 | 10.80 | 444,395 | 9.34 | ||||||||||||
| Exercisable at December 31 |
— | — | — | — | ||||||||||||
In 2012 and 2011 there were no new equity rights issued. The number of vested equity rights at December 31, 2012 was 62,765 (December 31, 2011: 444,395).
At December 31, 2012, no amount of unrecognized compensation cost related to non-vested equity rights remains.
As resolved by the Board of Directors of the Company, the Equity Rights of participants still employed by the Company were automatically exercised on April 27, 2012. As a consequence, 381,630 NXP shares were delivered to these participants. The remaining equity rights outstanding as of December 31, 2012 relate to vested rights of former employees subject to the original terms and conditions of the Pre-IPO plan and are only exercisable upon a sale of shares by the Private Equity Consortium or upon a change of control (in particular, the Private Equity Consortium no longer jointly holding at least 30% of our common stock). The accelerated exercise of the equity rights was not foreseen in the terms and conditions of the Pre-IPO plan and was accounted for as a modification resulting in an additional cost of $1.0 million.
14 Restructuring Charges
The provision for restructuring relates to the estimated costs of initiated restructurings that have been approved by Management. When such plans require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are recorded at fair value when the liability has been incurred. The Company determines the fair value based on discounted projected cash flows in the absence of other observable inputs such as quoted prices. The restructuring liability includes the estimated cost of termination benefits provided to former or inactive employees after employment but before retirement, costs to terminate leases and other contracts, and selling costs associated with assets held for sale and other costs related to the closure of facilities. One-time employee termination benefits are recognized ratably over the future service period when those employees are required to render services to the Company, if that period exceeds 60 days or a longer legal notification period. However, generally, employee termination benefit are covered by a contract or an ongoing benefit arrangement and are recognized when it is probable that the employees will be entitled to the benefits and the amounts can be reasonably estimated. At each reporting date, we evaluate our restructuring liabilities, which consist primarily of severance and benefits, to ensure that our accruals are still appropriate.
The most significant projects for restructuring in 2012
In 2012 we announced a cost savings and restructuring initiative, designed to improve operational efficiency and to competitively position the Company for sustainable growth. We recorded a restructuring charge of $90 million in 2012 associated with this initiative classified within the statement of operations under cost of goods sold of $17 million, mainly relating to the consolidation of MOS technologies from our German fabrication facility in Hamburg to the Company’s 8-inch Dutch facility in Nijmegen, and selling, general and administrative of $52 million and research and development of $21 million, to consolidate resources. This charge primarily relates to a worldwide workforce reduction of approximately 650 employees, with the majority of the headcount reductions in Europe and the U.S. The restructuring liabilities of $90 million recognized for this initiative are reflected within current liabilities ($64 million) and non-current liabilities ($26 million) as of December 31, 2012 and primarily relate to severance and employee benefit related costs. The OPEX Reduction Program is expected to be completed mid 2015.
The most significant projects for restructuring in 2011
In 2011 NXP undertook restructuring actions which include:
| • | the future closure of ICN 4 wafer fabrication facilities in Nijmegen, the Netherlands. |
| • | actions to lower headcount, primarily in locations within Europe. |
The ICN 6 wafer fabrication facility in Nijmegen is expected to be closed in 2013.
The most significant projects for restructuring in 2010
There were no new restructuring projects in 2010. In 2010 the restructuring charges mainly related to the divestment of a major portion of our former Home business.
F-39
Table of Contents
The following table presents the changes in the position of restructuring liabilities in 2012 by segment:
| Balance January 1, 2012 |
Additions | Utilized | Released | Other changes(1) |
Balance December 31, 2012 |
|||||||||||||||||||
| HPMS |
59 | 27 | (4 | ) | (2 | ) | — | 80 | ||||||||||||||||
| SP |
4 | 17 | (3 | ) | (1 | ) | 1 | 18 | ||||||||||||||||
| Manufacturing Operations |
20 | 4 | (6 | ) | — | (9 | ) | 9 | ||||||||||||||||
| Corporate and Other |
16 | 55 | (16 | ) | (1 | ) | 9 | 63 | ||||||||||||||||
|
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|
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|
|
|||||||||||||
| 99 | 103 | (29 | ) | (4 | ) | 1 | 170 | |||||||||||||||||
| (1) | Other changes primarily related to translation differences and internal transfers |
The total restructuring liability as of December 31, 2012 of $170 million is classified in the balance sheet under current liabilities ($138 million) and non-current liabilities ($32 million).
The following table presents the changes in the position of restructuring liabilities in 2011 by segment:
| Balance January 1, 2011 |
Additions | Utilized | Released | Other changes(1) |
Balance December 31, 2011 |
|||||||||||||||||||
| HPMS |
24 | 43 | (3 | ) | (2 | ) | (3 | ) | 59 | |||||||||||||||
| SP |
1 | 4 | (1 | ) | — | — | 4 | |||||||||||||||||
| Manufacturing Operations |
44 | 11 | (30 | ) | (3 | ) | (2 | ) | 20 | |||||||||||||||
| Corporate and Other |
28 | 8 | (20 | ) | (3 | ) | 3 | 16 | ||||||||||||||||
|
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|
|
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|
|||||||||||||
| 97 | 66 | (54 | ) | (8 | ) | (2 | ) | 99 | ||||||||||||||||
| (1) | Other changes primarily related to translation differences. |
The total restructuring liability as of December 31, 2011 of $99 million is classified in the balance sheet under current liabilities ($47 million) and non-current liabilities ($52 million).
Releases of restructuring liabilities of $4 million were recorded in 2012 (2011: $8 million; 2010: $40 million), primarily attributable to lower severance payments due to attrition and employees that were transferred to other positions in NXP, who were originally expected to be laid off.
The utilization of the restructuring liabilities mainly reflects the execution of ongoing restructuring programs the Company initiated in earlier years.
The components of restructuring charges less releases recorded in the liabilities in 2012, 2011 and 2010 are as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Personnel lay-off costs |
101 | 66 | 5 | |||||||||
| Impairment of assets |
— | — | 2 | |||||||||
| Lease and Contract Terminations |
2 | — | — | |||||||||
| Release of provisions/accruals |
(4 | ) | (8 | ) | (40 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net restructuring charges |
99 | 58 | (33 | ) | ||||||||
The following table summarizes the significant activity within, and components of, the Company’s restructuring obligations:
| Personnel lay-off costs |
Lease and Contract Terminations |
Total | ||||||||||
| Balance at December 31, 2010 |
87 | 10 | 97 | |||||||||
| Expense |
58 | — | 58 | |||||||||
| Utilized 1) |
(45 | ) | (9 | ) | (54 | ) | ||||||
| Other changes 2) |
(2 | ) | — | (2 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2011 |
98 | 1 | 99 | |||||||||
| Expense |
97 | 2 | 99 | |||||||||
| Utilized 1) |
(29 | ) | — | (29 | ) | |||||||
| Other changes 2) |
1 | 1 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2012 |
167 | 3 | 170 | |||||||||
| 1) | Represents cash payments. |
| 2) | Other changes primarily related to translation differences. |
F-40
Table of Contents
The restructuring charges less releases recorded in operating income are included in the following line items in the statement of operations:
| 2012 | 2011 | 2010 | ||||||||||
| Cost of revenue |
18 | 24 | (14 | ) | ||||||||
| Selling, general and administrative |
59 | 15 | (10 | ) | ||||||||
| Research & development |
22 | 19 | (9 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net restructuring charges |
99 | 58 | (33 | ) | ||||||||
In addition, restructuring related costs (excluding product transfers) of $12 million were directly charged to operating income in 2012 (2011: $32 million; 2010: $53 million), and included in the following line items:
| 2012 | 2011 | 2010 | ||||||||||
| Cost of revenue |
5 | 13 | 26 | |||||||||
| Selling, general and administrative |
8 | 16 | 30 | |||||||||
| Research & development |
— | 3 | 2 | |||||||||
| Other income and expenses |
(1 | ) | — | (5 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| 12 | 32 | 53 | ||||||||||
The details by segment were as follows:
| 2012 | 2011 | 2010 | ||||||||||
| HPMS |
(1 | ) | 2 | — | ||||||||
| SP |
3 | 2 | 4 | |||||||||
| Manufacturing Operations |
3 | 4 | 23 | |||||||||
| Corporate and Other |
7 | 24 | 27 | |||||||||
| Divested Home activities |
— | — | (1 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| 12 | 32 | 53 | ||||||||||
In total, restructuring charges less releases and restructuring related costs charged to operating income for 2012 amounted to $111 million (2011: $90 million; 2010: $20 million).
15 Provision for Income Taxes
In 2012, NXP generated a loss before income taxes of $25 million (2011: $100 million income; 2010: $355 million loss). The components of income (loss) before income taxes are as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Netherlands |
(93 | ) | (27 | ) | (490 | ) | ||||||
| Foreign |
68 | 127 | 135 | |||||||||
|
|
|
|
|
|
|
|||||||
| (25 | ) | 100 | (355 | ) | ||||||||
The components of the provision for income taxes are as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Current taxes: |
||||||||||||
| Netherlands |
(1 | ) | (3 | ) | (12 | ) | ||||||
| Foreign |
(20 | ) | (29 | ) | (40 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| (21 | ) | (32 | ) | (52 | ) | |||||||
| Deferred taxes: |
||||||||||||
| Netherlands |
5 | (10 | ) | 3 | ||||||||
| Foreign |
15 | 21 | 25 | |||||||||
|
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|
|
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|
|||||||
| 20 | 11 | 28 | ||||||||||
|
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|
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|
|
|||||||
| Total provision for income taxes |
(1 | ) | (21 | ) | (24 | ) | ||||||
F-41
Table of Contents
A reconciliation of the statutory income tax rate in the Netherlands as a percentage of income (loss) before income taxes and the effective income tax rate is as follows:
| (in percentages) | 2012 | 2011 | 2010 | |||||||||
| Statutory income tax in the Netherlands |
25.0 | 25.0 | 25.5 | |||||||||
| Increase (reduction) in rate resulting from: |
||||||||||||
| Rate differential local statutory rates versus statutory rate of the Netherlands |
64.0 | (15.7 | ) | 1.6 | ||||||||
| Net change in valuation allowance |
(178.0 | ) | 12.7 | (16.7 | ) | |||||||
| Prior year adjustments |
5.2 | (2.0 | ) | (1.6 | ) | |||||||
| Non-taxable income |
41.6 | (10.8 | ) | 0.7 | ||||||||
| Non-tax-deductible expenses/losses |
(69.6 | ) | 19.6 | (12.3 | ) | |||||||
| Other taxes and tax rate changes |
18.2 | (1.0 | ) | 0.1 | ||||||||
| Withholding taxes |
(7.6 | ) | 6.9 | (4.1 | ) | |||||||
| Unrecognized tax benefits |
(24.8 | ) | (1.0 | ) | (2.5 | ) | ||||||
| Tax incentives |
122.0 | (12.7 | ) | 2.5 | ||||||||
|
|
|
|
|
|
|
|||||||
| Effective tax rate |
(4.0 | )% | 21.0 | % | (6.8 | )% | ||||||
The Company benefits from income tax holiday incentives in certain jurisdictions which provide that we pay reduced income taxes in those jurisdictions for a fixed period of time that varies depending on the jurisdiction. The income tax holiday of one of our subsidiaries is expected to expire at the end of 2021. The related tax benefit of 89% is recorded above within tax incentives.
The Company has considered all items of income (including items recorded in other comprehensive income) in determining the amount of tax benefit that should be allocated to a loss from continuing operations. As a result, we recorded $8 million non-cash tax benefit on a loss from continuing operations arising in one of our jurisdictions for the year ended December 31, 2012 which was exactly offset by $8 million income tax expense in other comprehensive income. Because the income tax expense on other comprehensive income is equal to the income tax benefit from continuing operations, our net deferred tax positions at December 31, 2012 were not impacted by this tax allocation.
Deferred tax assets and liabilities
The principal components of deferred tax assets and liabilities are presented below:
| 2012 | 2011 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| Intangible assets |
13 | (200 | ) | 22 | (245 | ) | ||||||||||
| Property, plant and equipment |
20 | (33 | ) | 25 | (28 | ) | ||||||||||
| Inventories |
2 | — | 1 | — | ||||||||||||
| Receivables |
1 | — | — | (13 | ) | |||||||||||
| Other assets |
3 | (5 | ) | — | (4 | ) | ||||||||||
| Liabilities: |
||||||||||||||||
| Pensions |
42 | (1 | ) | 27 | (2 | ) | ||||||||||
| Restructuring |
46 | — | 23 | — | ||||||||||||
| Other |
21 | — | 27 | (1 | ) | |||||||||||
| Long-term debt |
1 | (7 | ) | — | (22 | ) | ||||||||||
| Undistributed earnings of foreign subsidiaries |
— | (27 | ) | — | (27 | ) | ||||||||||
| Tax loss carryforwards (including tax credit carryforwards) |
659 | — | 694 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total gross deferred tax assets (liabilities) |
808 | (273 | ) | 819 | (342 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net deferred tax position |
535 | 477 | ||||||||||||||
| Valuation allowances |
(589 | ) | (545 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net deferred tax assets (liabilities) |
(54 | ) | (68 | ) | ||||||||||||
The Company has significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income in future periods. Valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. The realization of our deferred tax assets depends on our ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction.
The following possible sources of taxable income have been considered when assessing the realization of our deferred tax assets:
| • | Future reversals of existing taxable temporary differences; |
| • | Future taxable income exclusive of reversing temporary differences and carryforwards; |
| • | Taxable income in prior carryback years; and |
| • | Tax-planning strategies. |
F-42
Table of Contents
The valuation allowance increased by $44 million during 2012 (2011: $63 million increase).
When the Company’s operating performance improves on a sustained basis, our conclusion regarding the need for such valuation allowance could change.
Subsequently recognized tax benefits related to the valuation allowance for deferred tax assets as of December 31, 2012, will be allocated as follows: $582 million of income tax benefit that would be reported in the consolidated statement of comprehensive income, $7 million to additional paid-in capital.
After the recognition of the valuation allowance against deferred tax assets, a net deferred tax liability remains of $54 million at December 31, 2012 (2011: $68 million). This net deferred tax liability relates to certain taxable temporary differences reversing outside the tax loss carryforward periods, deferred tax liabilities recorded for profitable entities and deferred tax liabilities for withholding taxes on undistributed earnings of foreign subsidiaries.
At December 31, 2012 tax loss carryforwards of $2,515 million will expire as follows:
| Balance December 31, 2012 |
Scheduled expiration | |||||||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018-2022 | later | unlimited | |||||||||||||||||||||||||||||
| Tax loss carryforwards |
2,515 | 1 | 5 | 191 | 748 | 525 | 159 | 156 | 730 | |||||||||||||||||||||||||||
The Company also has tax credit carryforwards of $92 million, which are available to offset future tax, if any, and which will expire as follows:
| Balance December 31, 2012 |
Scheduled expiration | |||||||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018-2022 | later | unlimited | |||||||||||||||||||||||||||||
| Tax credit carryforwards |
92 | — | — | — | — | — | — | 10 | 82 | |||||||||||||||||||||||||||
The classification of the deferred tax assets and liabilities in the Company’s consolidated balance sheets is as follows:
| 2012 | 2011 | |||||||
| Deferred tax assets within current assets |
12 | 5 | ||||||
| Deferred tax assets within other non-current assets |
22 | 19 | ||||||
| Deferred tax liabilities within accrued liabilities |
(4 | ) | (1 | ) | ||||
| Deferred tax liabilities within other non-current liabilities |
(84 | ) | (91 | ) | ||||
|
|
|
|
|
|||||
| (54 | ) | (68 | ) | |||||
The net income tax payable (excluding the liability for unrecognized tax benefits) as of December 31, 2012 amounted to $26 million (2011: $33 million payable) and includes amounts directly payable to or receivable from tax authorities.
As from 2009 the Company intends to repatriate the undistributed earnings of subsidiaries. Consequently, the Company has recognized a deferred income tax liability of $27 million at December 31, 2012 (2011: $27 million) for the additional withholding taxes payable upon the future remittances of these earnings of foreign subsidiaries.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2012 | 2011 | 2010 | ||||||||||
| Balance as of January 1, |
169 | 195 | 52 | |||||||||
| Increases from tax positions taken during prior periods |
16 | — | 10 | |||||||||
| Decreases from tax positions taken during prior periods |
(25 | ) | (12 | ) | (7 | ) | ||||||
| Increases from tax positions taken during current period |
2 | 10 | 140 | |||||||||
| Decreases relating to settlements with the tax authorities |
(23 | ) | (24 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Balance as of December 31, |
139 | 169 | 195 | |||||||||
Of the total unrecognized tax benefits at December 31, 2012, $15 million, if recognized, would impact the effective tax rate. All other unrecognized tax benefits, if recognized, would not affect the effective tax rate as these would be offset by compensating adjustments in the Company’s deferred tax assets that would be subject to valuation allowance based on conditions existing at the reporting date.
The Company classifies interest related to unrecognized tax benefits as financial expense and penalties as income tax expense. The total related interest and penalties recorded during the year 2012 amounted to $(5) million (2011: $3 million; 2010: $5 million).
As of December 31, 2012 the Company has recognized a liability for related interest and penalties of $3 million (2011: $8 million; 2010: $11 million). It is reasonably possible that the total amount of unrecognized tax benefits may significantly increase/decrease within the next 12 months of the reporting date due to, for example, completion of tax examinations; however, an estimate of the range of reasonably possible change cannot be made.
Tax years that remain subject to examination by major tax jurisdictions (mainly related to the Netherlands, Germany, USA, China, Taiwan, Thailand and the Philippines) are 2007, 2008, 2009, 2010, 2011 and 2012.
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Table of Contents
16 Acquisitions and Divestments
2012
In April 2012, the Company acquired Catena, an electronic design and IP company. The purchase price consideration of $20 million, including the issuance of 599,000 treasury shares with a fair value of $14 million was allocated to goodwill of $11 million, other intangible assets with an amortization period of five years of $9 million, assets acquired of $7 million and liabilities assumed of $7 million. The goodwill is not deductible for income tax purposes.
The results of Catena are consolidated in the Automotive operating segment that is part of the reportable segment HPMS.
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 to Knowles Electronics, LLC, an affiliate of Dover Corporation for $855 million in cash. See Note 17 “Discontinued Operations” for additional information.
2010
On December 14, 2010, we sold our joint venture (55% shareholding) NuTune, formed in June 2008 with Technicolor, to combine NXP’s and Technicolor’s can tuner module operations, to affiliates of AIAC (American Industrial Acquisition Corporation). As a consequence, these divested operations (formerly included in Corporate and Other) were deconsolidated in our consolidated balance sheet as at December 31, 2010. The results of the divested business until the date of transaction, December 14, 2010, are included in our 2010 consolidated statements of operations and cash flows under Corporate and Other.
In September 2010 we sold all of the Virage Logic’s shares we held.
On July 26, 2010, we acquired 100% ownership of Jennic Ltd., a leading developer of low power RF solutions for wireless applications in smart energy, environment, logistics and consumer markets, for a consideration of approximately $8 million plus up to $8 million in additional contingent consideration over the next two years. In 2011, no additional payments were made and the additional contingent consideration has been canceled. As from the acquisition date it is consolidated within the segment HPMS.
On February 8, 2010, the Company sold its digital television and set-top-box business to Trident Microsystems, Inc., at that time publicly listed on the NASDAQ in the United States.
This 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 and included in our balance sheet as “Investments in equity accounted investees”. The transaction resulted in a net loss of $26 million and is reported under other income (expense) in 2010.
On January 4, 2012, Trident filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code and was subsequently delisted from the NASDAQ. 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. See Note 18 “Investments in Equity Accounted Investees” for an additional discussion of Trident.
17 Discontinued Operations
On July 4, 2011, we sold our Sound Solutions business (formerly included in our Standard Products segment) to Knowles Electronics, LLC (“Knowles Electronics”), an affiliate of Dover Corporation 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. In relation to the other costs of this disposal, liabilities were included in the accrued liabilities and provisions for continuing operations. Cash payments of $45 million made in 2012 related to these liabilities are reported as cash flows from discontinued operations. The Consolidated Financial Statements have been reclassified for all periods presented to reflect the Sound Solutions business as a discontinued operation.
F-44
Table of Contents
The following table summarizes the results of the Sound Solutions business included in the consolidated statements of income as discontinued operations for 2012, 2011 and 2010:
| 2012 | 2011 | 2010 | ||||||||||
| Revenue |
— | 140 | 354 | |||||||||
| Costs and expenses |
— | (116 | ) | (283 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Income attributable to discontinued operations |
— | 24 | 71 | |||||||||
| Provision for income taxes |
— | (4 | ) | (12 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Income attributable to discontinued operations, net of taxes, before disposal |
— | 20 | 59 | |||||||||
| Gain on disposal of discontinued operations (net of taxes) |
1 | 414 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Income from discontinued operations after disposal |
1 | 434 | 59 | |||||||||
18 Investments in Equity-accounted Investees
Results relating to equity-accounted investees
| 2012 | 2011 | 2010 | ||||||||||
| Company’s share in income (loss) |
7 | (77 | ) | (86 | ) | |||||||
| Other results |
(34 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| (27 | ) | (77 | ) | (86 | ) | |||||||
Company’s share in income (loss)
| 2012 | 2011 | 2010 | ||||||||||
| Trident |
— | (82 | ) | (94 | ) | |||||||
| ASMC |
3 | 3 | 4 | |||||||||
| ASEN |
4 | 2 | 4 | |||||||||
| Others |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| 7 | (77 | ) | (86 | ) | ||||||||
Other results
Other results in 2012 include a loss of $46 million related to extra provisions for litigations, claims and proceedings and a gain of $12 million related to a partial recovery of our equity investment in Trident.
Investments in equity-accounted investees
The changes in 2012 are as follows:
| Investments | ||||
| Balance as of January 1 |
37 | |||
| Changes: |
||||
| Acquisitions/additions |
— | |||
| Deductions |
— | |||
| Share in income (loss) |
7 | |||
| Translation and exchange rate differences |
1 | |||
|
|
|
|||
| Balance as of December 31 |
45 | |||
The total carrying value of investments in equity-accounted investees is summarized as follows:
| 2012 | 2011 | |||||||||||||||
| Shareholding % | Amount | Shareholding % | Amount | |||||||||||||
| ASMC |
27 | 17 | 27 | 14 | ||||||||||||
| ASEN |
40 | 28 | 40 | 23 | ||||||||||||
| Trident |
— | — | 57 | — | ||||||||||||
|
|
|
|
|
|||||||||||||
| 45 | 37 | |||||||||||||||
Investments in equity-accounted investees are included in Corporate and Other.
The fair value of NXP’s shareholding in the publicly listed company ASMC based on the quoted market price at December 31, 2012 is $18 million.
On January 4, 2012, Trident and one of its subsidiaries, Trident Microsystems (Far East) Ltd., filed voluntary petitions under Chapter 11 of the United States Bankruptcy code, in the U.S. Bankruptcy Court for the District of Delaware and was subsequently delisted from the NASDAQ. The U.S. Bankruptcy Court approved the plan of liquidation 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.
In 2011, the share in net loss of NXP’s equity accounted participation in Trident is based on the losses reported by Trident in its unaudited condensed consolidated financial information for the financial year ended December 31, 2011, which has been furnished to the SEC on a Form 8-K on March 8, 2012. Based on the equity accounting methodology used to account for NXP’s equity interest in Trident, and irrespective of the Chapter 11 filing, the carrying value of the investment on NXP’s balance sheet is written down to zero as of December 31, 2011, compared to a carrying value of $82 million as of the end of 2010.
F-45
Table of Contents
Trident condensed consolidated financial information (unaudited)
Trident’s 2011 condensed consolidated statements of operations (unaudited) are presented below:
| ($ in thousands) | For the year ended December 31, 2011 |
|||
| Net revenues |
298,349 | |||
| Cost of revenues |
(233,920 | ) | ||
|
|
|
|||
| Gross profit |
64,429 | |||
| Research and development expenses |
(138,972 | ) | ||
| Selling, general and administrative expenses |
(65,263 | ) | ||
| Goodwill impairment |
— | |||
| Restructuring charges |
(10,042 | ) | ||
|
|
|
|||
| Operating loss |
(149,848 | ) | ||
| Gain (loss) on investment |
2,098 | |||
| Gain on acquisition |
— | |||
| Interest and other income (expense), net |
5,089 | |||
|
|
|
|||
| Loss before income taxes |
(142,661 | ) | ||
| Provision for income taxes |
(7,689 | ) | ||
|
|
|
|||
| Net loss |
(150,350 | ) | ||
Trident’s 2011 condensed consolidated balance sheets (unaudited) are presented below:
| ($ in thousands) | December 31, 2011 | |||
| Cash and cash equivalents |
54,208 | |||
| Accounts receivable, net |
25,998 | |||
| Accounts receivable from related parties |
2,713 | |||
| Inventories |
12,783 | |||
| Note receivable from related party |
20,884 | |||
| Prepaid expenses and other current assets |
11,005 | |||
|
|
|
|||
| Total current assets |
127,591 | |||
| Property and equipment, net |
9,236 | |||
| Intangible assets, net |
43,913 | |||
| Long-term receivable from related party |
— | |||
| Other assets |
21,148 | |||
|
|
|
|||
| Total assets |
201,888 | |||
| Accounts payable |
13,152 | |||
| Accounts payable to related parties |
23,395 | |||
| Accrued expenses and other current liabilities |
49,857 | |||
| Income taxes payable |
3,085 | |||
|
|
|
|||
| Total current liabilities |
89,489 | |||
| Long-term income taxes payable |
23,471 | |||
| Deferred income tax liabilities |
301 | |||
| Other long-term liabilities |
7,878 | |||
|
|
|
|||
| Total liabilities |
121,139 | |||
| Common stock |
183 | |||
| Additional paid-in capital |
441,614 | |||
| Accumulated deficit |
(361,048 | ) | ||
|
|
|
|||
| Total stockholders’ equity |
80,749 | |||
|
|
|
|||
| Total liabilities and stockholders’ equity |
(201,888 | ) | ||
The unaudited condensed consolidated financial information of Trident included in the tables above is extracted from Trident’s Form 8-K, which information was furnished to the SEC on March 8, 2012. More recent audited Consolidated Financial Statements of Trident were not made available.
For other information related to equity-accounted investees, see Note 12, “Related Party Transactions”.
19 Segments and Geographical Information
NXP is organized into three reportable segments including 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 Financial Statements along with the Divested Home activities, which were divested in 2010.
F-46
Table of Contents
Our Chief Executive Officer, who is our Chief Operating Decision Maker, or CODM, regularly reviews financial information at the reporting segment level in order to make decisions about resources to be allocated to the segments and to assess their performance. Segment results that are reported to the CODM include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, head office expenses and deferred income tax assets and liabilities.
Our HPMS business segment delivers High Performance Mixed Signal solutions to our customers to satisfy their system and sub-systems needs across eight application areas: automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial.
Our SP business segment offers standard products for use across many application markets, as well as application-specific standard products predominantly used in application areas such as mobile handsets, computing, consumer and automotive.
Our manufacturing operations are conducted through a combination of wholly owned manufacturing facilities, manufacturing facilities operated jointly with other semiconductor companies and third-party foundries and assembly and test subcontractors, which together form our Manufacturing Operations segment. While the main function of our Manufacturing Operations segment is to supply products to our HPMS and SP segments, revenue and costs in this segment are to a large extent derived from revenue of wafer foundry and packaging services to our divested businesses in order to support their separation and, on a limited basis, their ongoing operations. As these divested businesses develop or acquire their own foundry and packaging capabilities, our revenue from these sources is declining.
Corporate and Other includes unallocated research expenses not related to any specific business segment, corporate restructuring charges and other expenses, as well as operations not included in our two business segments, such as manufacturing, marketing and selling of can tuners through our joint venture NuTune Singapore Pte. Ltd. (“NuTune”), which was sold on December 14, 2010, and software solutions for mobile phones “NXP Software” business. Revenue recorded in Corporate and Other is primarily generated by the NXP Software business.
On February 8, 2010, our wholly-owned subsidiary, NXP B.V., divested a major portion of our former Home segment to Trident Microsystems, Inc. (“Trident”). For the periods up to divestment on February 8, 2010, the results of the divested operations are presented in our consolidated accounts separately under “Divested Home Activities”. The continuing business of the former Home segment not divested has been regrouped into High Performance Mixed Signal and Corporate and Other. All previous periods have been restated accordingly.
Detailed information by segment for the years 2012, 2011 and 2010 is presented in the following tables.
| Segments | Revenue | Research and development |
Operating income (loss) |
Operating income (loss) as a % of revenue |
Results relating to equity-accounted investees |
|||||||||||||||
| 2012 |
||||||||||||||||||||
| HPMS |
3,282 | 539 | 527 | 16.1 | — | |||||||||||||||
| SP |
832 | 43 | 37 | 4.4 | — | |||||||||||||||
| Manufacturing Operations |
211 | 1 | (36 | ) | (17.1 | ) | — | |||||||||||||
| Corporate and Other (1) |
33 | 45 | (116 | ) | N.M. | (27 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| 4,358 | 628 | 412 | 9.5 | (27 | ) | |||||||||||||||
| 2011 |
||||||||||||||||||||
| HPMS |
2,906 | 554 | 339 | 11.7 | — | |||||||||||||||
| SP |
925 | 37 | 141 | 15.2 | — | |||||||||||||||
| Manufacturing Operations |
316 | — | (60 | ) | (19.0 | ) | — | |||||||||||||
| Corporate and Other (1) |
47 | 44 | (63 | ) | N.M. | (77 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| 4,194 | 635 | 357 | 8.5 | (77 | ) | |||||||||||||||
| 2010 |
||||||||||||||||||||
| HPMS |
2,846 | 454 | 387 | 13.6 | — | |||||||||||||||
| SP |
848 | 32 | 91 | 10.7 | — | |||||||||||||||
| Manufacturing Operations |
525 | 18 | (57 | ) | (10.9 | ) | — | |||||||||||||
| Corporate and Other (1) |
136 | 48 | (117 | ) | N.M. | (86 | ) | |||||||||||||
| Divested Home activities |
47 | 16 | (31 | ) | (66.0 | ) | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| 4,402 | 568 | 273 | 6.2 | (86 | ) | |||||||||||||||
| (1) | Corporate and Other is not a segment under ASC 280 “Segment Reporting”. |
N.M. Not meaningful
F-47
Table of Contents
Certain assets of the Company have been used jointly or managed at Corporate level. Arithmetical allocation of these assets to the various businesses is not deemed to be meaningful and as such total assets by segment has been omitted. Instead, inventories by segment are included.
| Segments | Inventories | Long-lived assets 1) |
Total liabilities excl. debt |
Gross capital expenditures property, plant and equipment |
Depreciation property, plant and equipment (2) |
|||||||||||||||
| 2012 |
||||||||||||||||||||
| HPMS |
388 | 2,248 | 300 | 12 | 12 | |||||||||||||||
| SP |
182 | 706 | 102 | 11 | 26 | |||||||||||||||
| Manufacturing Operations |
145 | 1,041 | 666 | 200 | 163 | |||||||||||||||
| Corporate and Other (3) |
— | 317 | 595 | 28 | 46 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 715 | 4,312 | 1,663 | 251 | 247 | ||||||||||||||||
| 2011 |
||||||||||||||||||||
| HPMS |
340 | 2,390 | 258 | 14 | 13 | |||||||||||||||
| SP |
161 | 760 | 152 | 17 | 41 | |||||||||||||||
| Manufacturing Operations |
117 | 1,014 | 489 | 162 | 179 | |||||||||||||||
| Corporate and Other (3) |
— | 301 | 557 | 28 | 57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 618 | 4,465 | 1,456 | 221 | 290 | ||||||||||||||||
| 2010 |
||||||||||||||||||||
| HPMS |
240 | 2,670 | 313 | 15 | 13 | |||||||||||||||
| SP |
136 | 828 | 127 | 15 | 35 | |||||||||||||||
| Manufacturing Operations |
137 | 1,055 | 748 | 209 | 220 | |||||||||||||||
| Corporate and Other (3) |
— | 396 | 599 | 19 | 91 | |||||||||||||||
| Divested Home activities |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 513 | 4,949 | 1,787 | 258 | 359 | ||||||||||||||||
| Discontinued operations |
80 | |||||||||||||||||||
|
|
|
|||||||||||||||||||
| 1,867 | ||||||||||||||||||||
| (1) | Long-lived assets include property, plant and equipment, goodwill and identified intangible fixed assets. |
| (2) | Excluding additional write down of property classified as held for sale (2010: $30 million). |
| (3) | Corporate and Other is not a segment under ASC 280 “Segment Reporting”. |
| Goodwill assigned to segments | Cost at January 1, 2012 |
Acquisitions | Divestments | Translation differences and other changes |
Cost at December 31, 2012 |
|||||||||||||||
| HPMS |
1,785 | 11 | (7 | ) | 32 | 1,821 | ||||||||||||||
| SP |
305 | — | — | 6 | 311 | |||||||||||||||
| Manufacturing Operations |
316 | — | 5 | 321 | ||||||||||||||||
| Corporate and Other (1) |
48 | — | (1 | ) | 2 | 49 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 2,454 | 11 | (8 | ) | 45 | 2,502 | |||||||||||||||
| Accumulated impairment at January 1, 2012 |
Divestments | Impairment | Translation differences and other changes |
Accumulated impairment at December 31, 2012 |
||||||||||||||||
| HPMS |
(175 | ) | 2 | — | (3 | ) | (176 | ) | ||||||||||||
| SP |
— | — | — | — | — | |||||||||||||||
| Manufacturing Operations |
— | — | — | — | — | |||||||||||||||
| Corporate and Other (1) |
(48 | ) | — | — | (1 | ) | (49 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (223 | ) | 2 | — | (4 | ) | (225 | ) | |||||||||||||
| (1) | Corporate and Other is not a segment under ASC 280 “Segment Reporting”. |
F-48
Table of Contents
Geographical Information
| Main countries | Total revenue |
Property, plant and equipment |
Gross capital expenditures property, plant and equipment |
Depreciation property, plant and equipment |
||||||||||||
| 2012 |
||||||||||||||||
| China |
1,699 | 131 | 43 | 31 | ||||||||||||
| Netherlands |
94 | 180 | 22 | 43 | ||||||||||||
| Taiwan |
112 | 80 | 32 | 23 | ||||||||||||
| United States |
303 | 8 | 2 | 3 | ||||||||||||
| Singapore |
436 | 226 | 58 | 47 | ||||||||||||
| Germany |
447 | 88 | 17 | 26 | ||||||||||||
| South Korea |
238 | — | — | — | ||||||||||||
| Other countries |
1,029 | 357 | 77 | 74 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 4,358 | 1,070 | 251 | 247 | |||||||||||||
| 2011 |
||||||||||||||||
| China |
1,514 | 120 | 40 | 32 | ||||||||||||
| Netherlands |
123 | 187 | 23 | 60 | ||||||||||||
| Taiwan |
80 | 70 | 18 | 25 | ||||||||||||
| United States |
329 | 9 | 2 | 3 | ||||||||||||
| Singapore |
383 | 229 | 64 | 45 | ||||||||||||
| Germany |
508 | 96 | 17 | 41 | ||||||||||||
| South Korea |
216 | — | — | — | ||||||||||||
| Other countries |
1,041 | 352 | 57 | 84 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 4,194 | 1,063 | 221 | 290 | |||||||||||||
| 2010 |
||||||||||||||||
| China |
1,496 | 112 | 33 | 31 | ||||||||||||
| Netherlands |
126 | 232 | 12 | 98 | ||||||||||||
| Taiwan |
115 | 81 | 29 | 25 | ||||||||||||
| United States |
337 | 34 | 4 | 6 | ||||||||||||
| Singapore |
480 | 210 | 62 | 53 | ||||||||||||
| Germany |
434 | 109 | 19 | 30 | ||||||||||||
| South Korea |
202 | — | — | — | ||||||||||||
| Other countries |
1,212 | 386 | 99 | 116 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 4,402 | 1,164 | 258 | 359 | |||||||||||||
Concentration of risk
A substantial portion of our revenue is derived from our top OEM customers, some of whom are supplied through distributors, in the automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing markets. No end customer accounted for greater than 10% of the Company‘s revenues for the years presented. However, sales to one of our distributors, WPG, in 2012, 2011 and 2010 represented 12%, 12% and 11%, respectively, of revenue.
Furthermore, the Company is using outside suppliers or foundries for a portion of its manufacturing capacity.
We have operations in Europe and Asia subject to collective bargaining agreements which could pose a risk to the Company in the near term but we do not expect that our operations will be disrupted if such is the case.
20 Subsequent Events
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.
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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.
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