NXP Semiconductors N.V. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019. Financial figures are in U.S. dollars; dollar amounts below are in millions unless noted. The interim financial statements are unaudited. NXP reported one company-wide segment following an organizational change effective January 1, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $2,265 | $2,445 | $6,576 | $7,004 |
| Gross profit / margin | $1,186 / 52.4% | $1,256 / 51.4% | $3,409 / 51.8% | $3,608 / 51.5% |
| Operating expenses | $975 | $1,047 | $2,988 | $3,124 |
| Operating income | $233 | $2,211 | $444 | $2,486 |
| Net income | $119 | $1,833 | $149 | $1,969 |
| Net income attributable to stockholders | $109 | $1,820 | $129 | $1,932 |
| Diluted EPS | $0.38 | $5.60 | $0.45 | $5.69 |
Revenue declined 7.4% year over year in Q3 and 6.1% for the first nine months. Management attributed the decline mainly to lower distributor sales and weaker end-customer demand, particularly in Greater China and in Automotive and Industrial & IoT; Mobile also contributed to the YTD decline. Gross margin improved in Q3, which management attributed to cost control and customer mix.
Operating cash flow was $1,559 for the first nine months, versus $3,638 a year earlier. Investing cash flow was $(418), including $388 of capital expenditures; financing cash flow was $(388). Cash and cash equivalents were $3,537 at quarter-end, up $748 from year-end 2018, including a $(5) foreign-exchange impact. Management reported total available liquidity of $5,037, including the $1,500 revolving credit facility.
Total debt was $8,505 at September 29, 2019, up $1,151 from December 31, 2018; cash convertible notes of $1,150 were due in December 2019. The company issued $1,750 of long-term debt and repurchased $600 of long-term debt during the nine-month period. Management said cash, the revolving facility and anticipated operating cash flows were expected to fund operations, working capital, capital expenditures and potential dividends for at least the next 12 months.
Changes, unusual items and outlook
- The prior-year comparisons are heavily affected by the $2 billion Qualcomm merger-termination compensation recorded in Q3 2018. It is included in other income and explains much of the reported drop in operating income and net income; the comparison is not representative of recurring operating performance.
- Prior-period revenue included divested activities: $32 in Q3 2018 and $107 in YTD 2018. In 2018, the sale of an equity-accounted investee also generated a $51 gain.
- Management cited ongoing cost control and lower merger-related costs as drivers of lower operating expenses. YTD interest expense rose to $274 from $197, partly reflecting additional debt; the YTD effective tax rate rose to 21.4% from 14.2%, mainly due to reduced tax incentives and other tax adjustments.
- In May 2019, NXP agreed to acquire Marvell’s WiFi Connectivity business, Bluetooth portfolio and related assets for $1.76 billion in cash; closing was expected by Q1 2020, subject to customary conditions including regulatory approvals. NXP also agreed to sell its Voice and Audio Solutions assets to Goodix for $165 million; the assets were classified as held for sale.
- NXP repurchased $1,369 of common stock in the first nine months and paid $214 of common dividends. Its 1% convertible notes due December 2019 and the announced Marvell acquisition are important near-term capital-allocation considerations.
- The filing provides no specific revenue or earnings guidance. Management’s liquidity assessment is forward-looking and subject to risks and uncertainties; actual results may differ from expectations.
Risks and contingencies
NXP reported $85 of accrued legal liabilities and estimated reasonably possible losses above accruals of $0–$122, before insurance. It expected insurance reimbursement on certain claims that could offset up to $109 of potential maximum exposure. The filing discusses personal-injury lawsuits concerning alleged clean-room exposure, including claims involving NXP’s indemnity obligations to Motorola; plaintiffs have indicated they may seek substantial compensatory and punitive damages. NXP and Motorola deny liability. NXP stated that litigation outcomes could be material to results in a particular period, although it did not expect the claims, individually or collectively, to materially adversely affect consolidated financial position.
The company reported no material change in previously disclosed risk factors or market-risk exposures. Management concluded disclosure controls were effective as of September 29, 2019, and reported no materially affecting change in internal control over financial reporting during the period.
Key facts for investors to verify
- Underlying demand and revenue trends, especially distributor sales, Greater China, Automotive, Industrial & IoT and Mobile, and how much of the decline reflects divestitures.
- Cash conversion and working-capital movements behind the decline in YTD operating cash flow.
- Debt refinancing or repayment plans for the $1,150 convertible notes due December 2019, and funding and closing conditions for the Marvell acquisition.
- Whether the Goodix asset sale closes on the agreed terms and how the transaction affects reported results and cash flows.
- Developments in litigation, potential losses above accruals, and the availability and amount of insurance recoveries.