NXP SEMICONDUCTORS N.V. Management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 as filed with theSEC onFebruary 25, 2021 .
Our MD&A is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows:
•Overview - Overall analysis of financial and other highlights to provide context for the MD&A
•Results of Operations - An analysis of our financial results
•Financial Condition, Liquidity and Capital Resources - An analysis of changes in our balance sheets and cash flows and a discussion of our financial condition and potential sources of liquidity
•Critical Accounting Estimates - Accounting estimates that management believes are the most important to understanding the assumptions and judgments incorporated in our financial results and forecasts
•Use of Certain Non-GAAP Financial Measures - A discussion of the non-GAAP measures used
NXP has one reportable segment representing the entity as a whole. Our segment represents groups of similar products that are combined on the basis of similar design and development requirements, product characteristics, manufacturing processes and distribution channels, and how management allocates resources and measures results. See Note 1 to the consolidated financial statements for more information regarding our segment.
Overview
($ in millions, unless otherwise
stated) Three Months Ended Years Ended
December 31, 2021 October 3, 2021 Increase/(decrease) December 31, 2021 December 31, 2020 Increase/(decrease)
Revenue 3,039 2,861 178 11,063 8,612 2,451
Gross profit 1,707 1,583 124 6,067 4,235 1,832
Operating income (loss) 807 711 96 2,583 418 2,165
Cash flow from operating
activities 785 924 (139) 3,077 2,482 595
Total debt 10,572 9,593 979 10,572 7,609 2,963
Net debt 7,742 7,290 452 7,742 5,334 2,408
Diluted weighted average number
of shares outstanding 268,545 271,359 (2,814) 275,646 283,809 (8,163)
Diluted net income per share 2.24 1.91 0.33 6.79 0.18 6.61
Dividends per common share 0.5625 0.5625 - 2.25 1.50 0.75
Revenue for 2021 was $11,063 million as compared to the $8,612 million reported
in 2020, an increase of $2,451 million or an increase of 28.5% year-on-year, as
a result of resurgent growth across all of the Company's four focus end markets,
with substantial growth in our strategic focused Automotive and Industrial & IoT
end markets. The growth NXP experienced in 2021 was due to a combination of
rebounding end market demand from the initial shock and widespread market
disruption caused by the emergence of the COVID-19 pandemic in the first half of
2020 and accelerating adoption of the Company's innovative new products and
solutions. The year-on-year growth was due to higher unit volumes, as well as a
higher average selling prices resulting from increases in input costs from NXP's
supplier base, which were passed onto our customers. The growth NXP experienced
in 2021 began to clearly emerge at the end of the third quarter of 2020 and has
continued to steadily accelerate through the fourth quarter of 2021. Even with
the strong growth experienced in 2021, the Company believes customer demand will
continue to outpace material supply, resulting in another positive year of
growth into 2022.
Our gross profit percentage for 2021 increased to 54.8% from 49.2%, primarily
due to the significant acceleration of revenue during the second half of 2021,
after the drop of sales in 2020 due to the COVID-19 pandemic, which led to
improved utilization, cost reductions and efficiencies, partly offset by higher
personnel-related costs.
Revenue for the fourth quarter, which ended December 31, 2021 was $3,039 million
as compared to $2,507 million for the fourth quarter ended December 31, 2020 , an
increase of $532 million or an increase of 21.2%. Revenue
33
--------------------------------------------------------------------------------in the fourth quarter of 2021 represented a historical record for NXP, the result of strong demand in a supply constrained market which was consistent with the trends seen in the first three quarters of 2021.
We continue to generate strong operating cash flows, with$3,077 million in cash flows from operations for 2021. We returned$4,577 million to our shareholders during the year in dividends and repurchases of common stock. Our cash position at the end of 2021 was$2,830 million . OnNovember 18, 2021 , the NXP Board of Directors approved a cash dividend of$0.5625 per common share for the fourth quarter of 2021. Our global communities continue to face unprecedented challenges posed by the COVID-19 pandemic, but NXP has continued to actively respond by addressing the COVID-19 situation and its impact globally with global crisis response teams, working to mitigate the potential impacts to our people and our business. With our strong business model and with demonstrated financial discipline, which is a keystone of our culture, we continue to believe that we will emerge from this time well positioned for long-term growth as we continue to see strong customer interest in the breadth of our product portfolio, combined with solid design win awards. However, we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy and our business and results. Demand has come back more rapidly than we expected and our current focus is on looking after our customers and ensuring we ship as much product to them as possible. While we are encouraged by the rapid rebound in demand, we are still challenged by the impact of the global pandemic, including supply chain constraints and COVID outbreaks, and resulting government responses, in areas in which we operate. We are still of the view that the best course of action is to continue to focus on enabling our customers' success while simultaneously assuring the safety and health of all of our employees.
Results of Operations
The following table presents the composition of operating income for the years
ended
($ in millions, unless otherwise stated) 2021
2020
Revenue 11,063 8,612
% nominal growth 28.5 (3.0)
Gross profit 6,067 4,235
Research and development (1,936) (1,725)
Selling, general and administrative (SG&A) (956) (879)
Amortization of acquisition-related intangible assets (592)
(1,327)
Other income - 114
Operating income 2,583 418
Revenue
Revenue for the year-ended December 31, 2021 was $11,063 million compared to
$8,612 million for the year-ended December 31, 2020 , an increase of $2,451
million or 28.5% year-on-year, as a result of resurgent growth across all of the
Company's four focus end markets, with substantial growth in our strategic
focused Automotive and Industrial end markets.
Revenue by end market was as follows:
($ in millions, unless otherwise stated) 2021 2020 Increase/(decrease) % Automotive 5,493 3,825 1,668 43.6 % Industrial & IoT 2,410 1,836 574 31.3 % Mobile 1,412 1,248 164 13.1 % Communication Infrastructure & Other 1,748 1,703 45 2.6 % Revenue 11,063 8,612 2,451 28.5 %
Revenue by sales channel was as follows:
($ in millions, unless otherwise stated) 2021 2020 Increase/(decrease) %
Distributors 6,325 4,720 1,605 34.0 %
OEM/EMS 4,587 3,728 859 23.0 %
Other 151 164 (13) (7.9) %
Revenue 11,063 8,612 2,451 28.5 %
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Revenue by geographic region, which is based on the customer's shipped-to location, was as follows:
($ in millions, unless otherwise stated) 2021 2020 Increase/(decrease) % Greater China and Asia Pacific 6,374 5,124 1,250 24.4 % EMEA (Europe, the Middle East and Africa) 2,036 1,538 498 32.4 % Americas 1,376 977 399 40.8 % Japan 810 647 163 25.2 % South Korea 467 326 141 43.3 % Revenue 11,063 8,612 2,451 28.5 % [[Image Removed: nxpi-20211231_g4.jpg]][[Image Removed: nxpi-20211231_g5.jpg]] n Automotive n Mobile n Distributors n Other n Industrial & IoT n Comm Infra & Other n OEM/EMS Revenue in the Automotive end market was$5,493 million , an increase of 43.6% versus the year ago period due to a significant increase in demand for NXP's embedded automotive processing solutions, including solutions to address the shift toward domain and zonal processing. Additionally, customer adoption of NXP's radar products for ADAS safety products, and a rebound in demand for advanced analog products, including demand for solutions to enable electric vehicle power trains contributed to the strong year-on-year growth. From a channel perspective, NXP's distribution partners inGreater China andAsia Pacific , theAmericas , andJapan were responsible for the majority of the year-on-year growth, though the Company experienced solid growth from direct OEM/EMS customers across all geographic regions. Revenue in the Industrial & IoT end market was$2,410 million , an increase of 31.3% versus the year ago period primarily due to strong demand for NXP's embedded processing solutions, especially industrial application processors and next generation crossover processors. Additionally, NXP experienced positive year-on-year trends within our advanced analog and connectivity solutions. From a channel perspective, NXP's distribution channel partners in theGreater China andAsia Pacific region enabled NXP to service demands of the long-tail of Industrial & IoT customers. Revenue in the Mobile end market was$1,412 million , an increase of 13.1% versus the year ago period due to continued demands for NXP's unique Secure Mobile Wallet solutions, as well as early ramps of the Company'sUltra-Wide Band (UWB) solutions and continued adoption ofMobile Embedded Power products, offset by declines in custom interface. From a channel perspective, NXP's distribution partners inGreater China andAsia Pacific facilitated the year-on-year growth, servicing the concentrated mobile manufacturing centers inAsia . Revenue in the Communication Infrastructure & Other end market was$1,748 million , an increase of 2.6% versus the year ago period due to a combination of Secure Tagging and Smart Transit products, as well as strength fromRF Power products levered to the secular build-out of 5G base stations, offset by declines in legacy multi-core processing solutions. From a channel perspective, NXP's distribution partners inGreater China andAsia Pacific facilitated the year-on-year growth. 35
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Gross Profit
Gross profit for the year-endedDecember 31, 2021 was$6,067 million , or 54.8% of revenue, compared to$4,235 million , or 49.2% of revenue, for the year-endedDecember 31, 2020 . The increase of$1,832 million was primarily driven by the significantly higher revenue in 2021 compared to 2020 resulting from accelerating demand and as such, improved loading and manufacturing efficiencies, offset by higher personnel-related cost, including variable compensation cost, and a less favorable product mix. As a result, the gross margin percentage increased to 54.8% from 49.2%.
[[Image Removed: nxpi-20211231_g6.jpg]]
Operating Expenses
Operating expenses for the year-endedDecember 31, 2021 totaled$3,484 million , or 31.5% of revenue, compared to$3,931 million , or 45.6% of revenue, for the year-endedDecember 31, 2020 .
The following table below presents the composition of operating expenses by line item in the statement of operations.
% of % of
($ in millions, unless otherwise stated) 2021 revenue 2020 revenue % change
Research and development 1,936 17.5 % 1,725 20.0 % 12.2 %
Selling, general and administrative 956 8.6 % 879 10.2 % 8.8 %
Amortization of acquisition-related
intangible assets 592 5.4 % 1,327 15.4 % (55.4) %
Operating expenses 3,484 31.5 % 3,931 45.6 % (11.4) %
[[Image Removed: nxpi-20211231_g7.jpg]]
n R&D n SG&A n Amortization acquisition-related
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The decrease in operating expenses was a result of the following items:
Research and development (R&D) costs primarily consist of engineer salaries and wages (including share based compensation and other variable compensation), engineering related costs (including outside services, fixed-asset, IP and other licenses related costs), shared service center costs and other pre-production related expenses.
•R&D costs for the year-ended
+ personnel-related costs, including variable compensation costs; and
- lower restructuring cost due to the absence of restructurings in 2021.
Selling, general and administrative (SG&A) costs primarily consist of personnel salaries and wages (including share based compensation and other variable compensation), communication and IT related costs, fixed-asset related costs and sales and marketing costs (including travel expenses).
•SG&A costs for the year-ended
+ higher personnel-related costs, including variable compensation costs;
+ higher legal expense;
- lower share-based compensation expenses as a result of the CEO transition in 2020; and
- lower restructuring costs due to the absence of restructuring in 2021.
•Amortization of acquisition-related intangible assets decreased by
- certain intangibles became fully amortized during 2020;
- an impairment charge in 2020 relative to IPR&D acquired as part of the
acquisition of
+ an impairment charge in 2021 as a result of the discontinuation of an IPR&D project.
Other Income (Expense)
Income and expenses derived from manufacturing service arrangements ("MSA") and
transitional service arrangements ("TSA") that are put into place when we divest
a business or activity, are included in other income (expense). These
arrangements are expected to decrease as the divested business or activity
becomes more established.
The following table presents the split of other income (expense) for the years
ended
($ in millions) 2021 2020
Result from MSA and TSA arrangements (2) -
Other, net 2 114
Total - 114
Other income (expense) reflects nil for 2021, compared to $114 million of income
in 2020. Included in 2020 is $110 million relating to the net gain on the sale
of the Voice and Audio Solutions (VAS) assets.
37
--------------------------------------------------------------------------------Financial Income (Expense)
($ in millions)
For the years ended
2021 2020
Interest income 4 13
Interest expense (369) (362)
Total interest expense, net (365) (349)
Foreign exchange rate results 5 (16)
Extinguishment of debt (22) (60)
Miscellaneous financing income (expense) and other, net (21) 8
Total other financial income (expense) (38) (68)
Total (403) (417)
Financial income (expense) was an expense of $403 million in 2021, compared to
an expense of $417 million in 2020. The change in financial income (expense) is
primarily attributable to foreign exchange results, which resulted in a profit
of $5 million in 2021 versus a loss of $16 million in 2020 and lower debt
extinguishment costs in 2021 versus 2020 of $38 million . This was partially
offset by lower interest income of $9 million as a result of lower interest
rates, an increase of interest expense of $7 million and a change in
miscellaneous financial income/expense of $29 million , mainly driven by a loss
of $2 million on investments in 2021, where 2020 resulted in a profit of $24
million .
Benefit (Provision) for Income Taxes
We recorded an income tax expense of$272 million for the year-endedDecember 31, 2021 , which reflects an effective tax rate of 12.5% compared to a benefit of$83 million ((8300.0)%) for the year-endedDecember 31, 2020 . 2021 2020 $ % $ % Statutory income tax in the Netherlands 545 25.0 - 25.0 Rate differential local statutory rates versus statutory rate of the Netherlands (42) (1.9) 22 2,175.0 Net change in valuation allowance (20) (0.9) 35 3,500.0 Non-deductible expenses/losses 53 2.5 61 6,100.0 Netherlands tax incentives (69) (3.2) (48) (4,800.0) Foreign tax incentives (163) (7.5) (117) (11,700.0) Changes in estimates of prior years' income taxes (21) (1.0) (13) (1,300.0) Sale of non-deductible goodwill - - 10 1,000.0 Withholding taxes (8) (0.4) (31) (3,100.0) Other differences (3) (0.1) (2) (200.0) Effective tax rate 272 12.5 (83) (8,300.0) The effective tax rate reflects the impact of tax incentives, a portion of our earnings being taxed in foreign jurisdictions at rates different thanthe Netherlands statutory tax rate, changes in estimates of prior years' income taxes, change in valuation allowance and non-deductible expenses, sale of non-deductible goodwill and withholding taxes. The impact of these items results in offsetting factors that attribute to the change in the effective tax rate between the two periods, with the significant drivers outlined below: •The Company benefits from certain tax incentives, which reduce the effective tax rate. The dollar amount of the incentive in any given year is commensurate with the taxable income in that same period. For 2021, the foreign tax andNetherlands tax incentives were higher than 2020 by$67 million , mainly due to the fact that NXP increased its investment expenditures and benefited from higher qualifying income. 38 -------------------------------------------------------------------------------- •The difference in valuation allowance in 2021 as compared with 2020 is mainly due to the fact thatthe Netherlands released its valuation allowance related to carried forward interest expenses impacted by the interest limitation rules as a result of higher qualifying income.
•The difference in withholding taxes is mainly due to changes in the applicable deferred tax liability rate regarding future remittances of the earnings of foreign subsidiaries in 2020.
•The tax effect of the non-deductible goodwill of
Results Relating to Equity-accounted Investees
Results relating to equity-accounted investees amounted to a loss of
Non-controlling Interests
Non-controlling interests are related to the third-party share in the results of consolidated companies, predominantly SSMC. Their share of non-controlling interests amounted to a profit of$35 million for the year-endedDecember 31, 2021 , compared to a profit of$28 million for the year-endedDecember 31, 2020 .
Financial Condition, Liquidity and Capital Resources
We derive our liquidity and capital resources primarily from our cash flows from operations. We continue to generate strong positive operating cash flows, and we currently use cash to fund operations, meet working capital requirements, for capital expenditures and for potential common stock repurchases, dividends and strategic investments. Based on past performance and current expectations, we believe that our current available sources of funds (including cash and cash equivalents, RCF Agreement, plus anticipated cash generated from operations) will be adequate to finance our operations, working capital requirements, capital expenditures and potential dividends for at least the next year.
Cash
As ofDecember 31, 2021 , our cash balance was$2,830 million , an increase of$555 million compared toDecember 31, 2020 ($2,275 million ), of which$208 million (2020,$185 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. During 2021, no dividend (2020,$90 million ) was declared. Taking into account the available undrawn amount of the RCF Agreement of$1,500 million , we had access to$4,330 million of liquidity as ofDecember 31, 2021 .
Capital return
The common stock repurchase activity was as follows:
($ in millions, unless otherwise stated) 2021 2020
Shares repurchased 20,628,901 4,828,913
Cost of shares repurchased 4,015 627
Average price per share $194.63 Under Dutch corporate law and our articles of association, NXP may acquire its own shares if the general meeting of shareholders has granted the board of directors the authority to effect such acquisitions. It is our standard practice to request our annual general meeting of shareholders (the "AGM") every year to renew this authorization for a period of 18 months from the AGM. For repurchases of shares in 2020 and 2021, the board of directors made use of the authorizations renewed by the AGM onJune 17, 2019 ,May 27, 2020 andMay 26, 2021 , respectively. InNovember 2019 , the board of directors approved the additional repurchase of shares up to a maximum of$2 billion (the "2019 Share Repurchase Program") and the purchase of shares from participants in NXP's equity programs who trade shares as trade for tax. InMarch 2021 , the board of directors approved the 39
-------------------------------------------------------------------------------- additional repurchase of shares up to a maximum of$2 billion (the "2021 Share Repurchase Program"), and inAugust 2021 , the board of directors increased the 2021 Share Repurchase Program authorization by$2 billion , for a total of$4 billion approved for the repurchase of shares under the 2021 Share Repurchase Program. During the fiscal year-endedDecember 31, 2020 NXP repurchased 4.8 million shares, for a total of approximately$0.6 billion and during the fiscal year-endedDecember 31, 2021 NXP repurchased 20.6 million shares, for a total of approximately$4 billion . Under Dutch tax law, the repurchase of a company's shares by an entity domiciled inthe Netherlands results in a taxable event (unless exemptions apply). The tax on the repurchased shares is attributed to the shareholders, with NXP making the payment on the shareholders' behalf. As such, the tax on the repurchased shares is accounted for within stockholders' equity. Subject to Dutch corporate law and our articles of association, the board of directors of NXP may cancel shares acquired if authorized by the general meeting of shareholders. As with repurchases of our shares, it is our standard practice to request our annual general meeting of shareholders (the "AGM") every year to renew this authorization for a period of 18 months from the AGM. For cancellations of shares in 2020 and 2021, the board of directors made use of the authorizations renewed onMay 27, 2020 andMay 26, 2021 , respectively. As approved by the board of directors, onDecember 15, 2020 , NXP cancelled 26 million shares and onNovember 30, 2021 , NXP cancelled 15 million shares. As a result, the number of issued NXP shares as perNovember 30, 2021 is 274,519,638.
In
Under our Quarterly Dividend Program, interim dividends of$0.375 per ordinary share were paid onApril 6 ,July 6 ,October 5, 2020 ; andJanuary 5, 2021 , and dividends of$0.5625 per ordinary share were paid onApril 5 ,July 6 ,October 6, 2021 ; andJanuary 6, 2022 . 2021 2020 Dividends declared (per share) 2.25 1.50 Dividends declared (in millions) 606 420 Debt Our total debt, inclusive of aggregate principal, unamortized discounts, premiums, debt issuance costs and fair value adjustments, amounted to$10,572 million as ofDecember 31, 2021 , an increase of$2,963 million compared toDecember 31, 2020 ($7,609 million ). OnMay 11, 2021 , NXP issued$1 billion of 2.5% Senior Unsecured Notes due 2031 and$1 billion of 3.25% Senior Unsecured Notes due 2041. OnNovember 30, 2021 , NXP issued$1 billion of 2.65% Senior Unsecured Notes due 2032,$500 million of 3.125% Senior Unsecured Notes due 2042 and$500 million of 3.25% Senior Unsecured Notes due 2051. OnDecember 1, 2021 ,$1 billion of 3.875% Senior Notes due 2022 were redeemed in full.
As of
40
--------------------------------------------------------------------------------Additional capital requirements
We believe our current cash and cash equivalents position, our expected cash flow generated from operations and our expected financing activities will satisfy our working and other capital requirements for at least the next 12 months based on our current business plans. Recent and expected working and other capital requirements, in addition to the above matters, also include the items described below: •The Company maintains purchase commitments with certain suppliers, primarily for raw materials, semi-finished goods and manufacturing services and for some non-production items. Purchase commitments for inventory materials are generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary for different suppliers. As ofDecember 31, 2021 , the Company had purchase commitments of$4,354 million , of which$1,377 million is expected to be paid in the next 12 months. We expect an increase in operating cash outflows as compared to 2021 as we make payments under these purchase commitments. •Amounts related to future lease payments for operating lease obligations atDecember 31, 2021 totaled$256 million , with$60 million expected to be paid within the next 12 months. •The Company enters into certain technology license arrangements which are used in conjunction with research and development activities for product development. Payments for these technology licenses are made over varying time periods. Outstanding unpaid balances for technology licenses total$281 million as ofDecember 31, 2021 , of which$85 million is expected to be paid in the next 12 months. •Cash outflows for capital expenditures were$767 million in 2021, compared to$392 million in 2020. We expect capital expenditures to increase in 2022, consistent with our long-term financial model, to support the increase in our manufacturing and production capacity needs. •Our research and development expenditures were$1,936 million in 2021 and$1,725 million in 2020, and we expect to maintain our investment in research and development as a percentage of revenues in 2022 consistent with our long-term financial model. From time to time, we engage in discussions with third parties regarding potential acquisitions of, or investments in, businesses, technologies and product lines. Any such transaction could require significant use of our cash and cash equivalents, or require us to arrange for new debt and equity financing to fund the transaction. 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 the RCF Agreement, or from other sources in an amount sufficient to enable us to repay our indebtedness, including the RCF Agreement, 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 1A. Risk Factors. 2021 Financing Activities
2032, 2042 and 2051 Senior Unsecured Notes
OnNovember 30, 2021 ,NXP B.V ., together withNXP USA Inc. andNXP Funding LLC , issued$1 billion of 2.65% Senior Unsecured Notes due 2032,$500 million of 3.125% Senior Unsecured Notes due 2042 and$500 million of 3.25% Senior Unsecured Notes due 2051. The Company used a portion of the net proceeds of the offering of these notes to redeem the$1 billion aggregate principal amount of outstanding 3.875% Senior Notes due 2022. The remaining net proceeds will be used for general corporate purposes, which may include capital expenditures or equity buyback transactions.
2031 and 2041 Senior Unsecured Notes
On
41
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projects. Pending the allocation of an amount equal to the net proceeds of the
2031 Notes to finance these eligible green projects, the remaining net proceeds
of the 2031 Notes, together with the net proceeds of the 3.25% Senior Notes due
2041, are temporarily being held as cash and other short-term securities or are
being used for general corporate purposes, including capital expenditures,
short-term debt repayment or equity buyback transactions.
2020 Financing Activities
2025, 2027 and 2030 Senior Unsecured Notes
OnMay 1, 2020 ,NXP B.V ., together withNXP USA Inc. andNXP Funding LLC , issued$500 million of 2.7% Senior Unsecured Notes due 2025,$500 million of 3.15% Senior Unsecured Notes due 2027 and$1 billion of 3.4% Senior Unsecured Notes due 2030. NXP used the net proceeds of the offering of these notes to repay in full onSeptember 28, 2020 , the$1,350 million aggregate principal amount of outstanding 4.125% Senior Notes due 2021 and the$400 million aggregate principal amount of outstanding 4.625% Senior Notes due 2022. Debt Position Short-term Debt
As of
Long-term Debt
As of
42
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($ in millions) Accrual/release
Original Debt
Issuance/Debt Exchanges/
Discount and Repurchase/
December 31, Debt New December 31,
2020 Issuance Cost Borrowings 2021
U.S. dollar-denominated 3.875% senior unsecured
notes due September 2022 (1) 998 2 (1,000) -
U.S. dollar-denominated 4.625% senior unsecured
notes due June 2023 (2) 897 1 - 898
U.S. dollar -denominated 4.875% senior unsecured
notes due March 2024 (3) 996 1 - 997
U.S. dollar -denominated 2.7% senior unsecured
notes due May 2025 (4) 497 1 - 498
U.S. dollar -denominated 5.35% senior unsecured
notes due March 2026 (3) 498 - - 498
U.S. dollar -denominated 3.875% senior unsecured
notes due June 2026 (5) 746 1 - 747
U.S. dollar -denominated 3.15% senior unsecured
notes due May 2027 (4) 497 - - 497
U.S. dollar -denominated 5.55% senior unsecured
notes due December 2028 (3) 496 1 - 497
U.S. dollar -denominated 4.3% senior unsecured
notes due June 2029 (5) 992 1 - 993
U.S. dollar -denominated 3.4% senior unsecured
notes due May 2030 (4) 992 1 - 993
U.S. dollar -denominated 2.5% senior unsecured
notes due May 2031 (6) - 1 991 992
U.S. dollar -denominated 2.65% senior unsecured
notes due Feb 2032 (7) - - 992 992
U.S. dollar -denominated 3.25% senior unsecured
notes due May 2041 (6) - - 987 987
U.S. dollar -denominated 3.125% senior unsecured
notes due Feb 2042 (7) - - 492 492
U.S. dollar -denominated 3.25% senior unsecured
notes due Nov 2051 (7) - - 491 491
7,609 10 2,953 10,572
RCF Agreement (8) $ - $ - $ - $ -
Total long-term debt $ 7,609 $ 10 $ 2,953 $ 10,572 (1) On
(2) On
(3) OnDecember 6, 2018 , we issued$1,000 million aggregate principal amount of 4.875% Senior Unsecured Notes due 2024,$500 million aggregate principal amount of 5.35% Senior Unsecured Notes due 2026 and$500 million aggregate principal amount of 5.55% Senior Unsecured Notes due 2028. (4) OnMay 1, 2020 , we issued$500 million aggregate principal amount of 2.7% Senior Unsecured Notes due 2025,$500 million aggregate principal amount of 3.15% Senior Unsecured Notes due 2027 and$1 billion aggregate principal amount of 3.4% Senior Unsecured Notes due 2030.
(5) On
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(6) On May 11, 2021 , we issued $1,000 million aggregate principal amount of 2.5%
Senior Unsecured Notes due 2031 and $1,000 million aggregated principal amount
of 3.25% Senior Unsecured Notes due 2041.
(7) On November 30, 2021 , we issued $1,000 million aggregate principal amount of
2.65% Senior Unsecured Notes due 2032, $500 million aggregate principal amount
of 3.125% Senior Unsecured Notes due 2042 and $500 million aggregated principal
amount of 3.25% Senior Unsecured Notes due 2051.
(8) On
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 Part II, Item 7. Financial Condition, Liquidity and Capital Resources above.
2019 Cash Convertible Senior Notes
We repaid the Cash Convertible Notes upon their maturity onDecember 1, 2019 through a combination of available cash and payments made by the counterparties under privately negotiated convertible note hedge transactions (the "Cash Convertible Notes Hedges"), as further described in Note 13 of the notes to consolidated financial statements in this report. For a detailed description of the Warrants underlying the Cash Convertible Notes Hedge, refer to Note 13 of the notes to the consolidated financial statements included in this report.
Cash flows
Our cash and cash equivalents in 2021 increased by$558 million (excluding the effect of changes in exchange rates on our cash position of$(3) million ) as follows: ($ in millions) Year ended December 31, 2021 2020 Net cash provided by (used for) operating activities 3,077 2,482 Net cash (used for) provided by investing activities (934) (418) Net cash provided by (used for) financing activities (1,585) (835) Increase (decrease) in cash and cash equivalents 558 1,229
•Cash Flow from Operating Activities
For the year-endedDecember 31, 2021 our operating activities provided$3,077 million in cash. This was primarily the result of net income of$1,906 million , adjustments to reconcile the net income of$1,628 million and changes in operating assets and liabilities of$(437) million . Adjustments to net income include offsetting non-cash items, such as depreciation and amortization of$1,262 million , share-based compensation of$353 million , amortization of the discount on debt and debt issuance costs of$8 million , a gain on sale of assets of$1 million , a loss on extinguishment of debt of$22 million , a loss on equity securities of$2 million , results relating to equity-accounted investees of$2 million and changes in deferred taxes of$(20) million .
The change in operating assets and liabilities was attributable to the following:
The$176 million increase in receivables and other current assets was primarily due to the increase in trade accounts receivable, net, which was driven by the increasing linearity of revenue between the two periods, customer mix, and the related timing of cash collections in 2021 compared with the same period in 2020.
The
The$248 million increase in accounts payable and other liabilities was primarily related to increases in trade accounts payable of$262 million , and$163 million related to accruals for employee compensation; partially offset by the decrease of other liabilities of$57 million related to income and social taxes payable,$37 44
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million related to restructuring liabilities and
The
For the year-endedDecember 31, 2020 our operating activities provided$2,482 million in cash. This was primarily the result of net income of$80 million , adjustments to reconcile the net income of$1,959 million and changes in operating assets and liabilities of$438 million . Net income includes offsetting non-cash items, such as depreciation and amortization of$1,988 million , share-based compensation of$384 million , amortization of the discount on debt and debt issuance costs of$8 million , a gain on sale of assets of$(115) million , a loss on extinguishment of debt of$60 million , a gain on equity securities of$(21) million , results relating to equity-accounted investees of$4 million and changes in deferred taxes of$(349) million .
•Cash Flow from Investing Activities
Net cash used for investing activities amounted to$934 million for the year-endedDecember 31, 2021 and principally consisted of the cash outflows for capital expenditures of$767 million ,$132 million for the purchase of identified intangible assets,$33 million for the purchase of equipment leased to others,$23 million purchases of interests in businesses (net of cash acquired) and$8 million purchase of investments, partly offset by proceeds of$10 million from insurance recoveries received for equipment damage,$10 million from proceeds from return of equity investments and$8 million from proceeds from sale of investments. Net cash used for investing activities amounted to$418 million for the year-endedDecember 31, 2020 and principally consisted of the cash outflows for capital expenditures of$392 million ,$130 million for the purchase of identified intangible assets,$34 million purchases of interests in businesses (net of cash acquired), and$30 million purchase of investments, partly offset by proceeds of$161 million from the sale of our Voice and Audio Solution assets (net of cash).
•Cash Flow from Financing Activities
Net cash used for financing activities was$1,585 million for the year-endedDecember 31, 2021 compared to$835 million for the year-endedDecember 31, 2020 . The cash flows related to financing transactions in 2021 and 2020 are primarily related to the financing activities described below under the captions 2021 Financing Activities and 2020 Financing Activities.
In addition to the financing activities described below, net cash used for financing activities by year included:
($ in millions) Year ended
2021 2020
Dividends paid to non-controlling interests - (35)
Dividends paid to common stockholders (562) (420)
Cash proceeds from exercise of stock options 62 72
Purchase of treasury shares (4,015) (627)
Other, net (2) (1)
Information Regarding Guarantors of NXP (unaudited)
Summarized Combined Financial Information for Guarantee of Securities of Subsidiaries
The following debt instruments are guaranteed, fully and unconditionally, jointly and severally, byNXP Semiconductors N.V. and issued or guaranteed byNXP USA, Inc. ,NXP B.V . andNXP LLC , (together, the "Subsidiary Obligors" and together withNXP Semiconductors N.V. , the "Obligor Group "): 4.625% Senior Notes due 2023, 4.875% Senior Notes due 2024, 2.700% Senior Notes due 2025, 5.350% Senior Notes due 2026, 3.875% Senior Notes due 2026, 3.150% Senior Notes due 2027, 5.550% Senior Notes due 2028, 4.300% Senior Notes due 2029, 3.400% Senior Notes due 2030, 2.500% Senior Notes due 2031, 2.650% Senior Notes 45 -------------------------------------------------------------------------------- due 2032, 3.250% Senior Notes due 2041, 3.125% Senior Notes due 2042, and the 3.250% Senior Notes due 2051 (together the " Notes"). Other than the Subsidiary Obligors, none of the Company's subsidiaries (together the "Non-Guarantor Subsidiaries") guarantee the Notes. The Company consolidates the Subsidiary Obligors in its consolidated financial statements and each of the Subsidiary Obligors are wholly owned subsidiaries of the Company. All of the existing guarantees by the Company rank equally in right of payment with all of the existing and future senior indebtedness of theObligor Group . There are no significant restrictions on the ability of theObligor Group to obtain funds from respective subsidiaries by dividend or loan. The following tables present summarized financial information of theObligor Group on a combined basis, with intercompany balances and transactions between entities of theObligor Group eliminated and investments and equity in the earnings of the Non-Guarantor Subsidiaries excluded.The Obligor Group's amounts due from, amounts due to, and intercompany transactions with Non-Guarantor Subsidiaries have been disclosed below the table, when material.
Summarized Statements of Income
($ in millions)December 31, 2021 Revenue 6,428 Gross Profit 3,179 Operating income 797 Net income 235 Summarized Balance Sheets As of ($ in millions)December 31, 2021 Current assets 2,535 Non-current assets 11,576 Total assets 14,111 Current liabilities 637 Non-current liabilities 10,792 Total liabilities 11,429 Obligor's Group equity 2,682 Total liabilities and Obligor's Group equity 14,111NXP Semiconductors N.V. is the head of a fiscal unity for the corporate income tax and VAT that contains the most significant Dutch wholly-owned group companies. The Company is therefore jointly and severally liable for the tax liabilities of the tax entity as a whole, and as such the income tax expense of the Dutch fiscal unity has been included in the Net income of theObligor Group . The financial information of theObligor Group includes sales executed through a Non-Guarantor Subsidiary single-billing entity as a sales agent on behalf of an entity in theObligor Group .The Obligor Group has sales to non-guarantors (2021:$563 million ).The Obligor Group has amounts due from equity financing (2021:$5,167 ) and due to debt financing (2021:$3,053 ) with non-guarantor subsidiaries.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance
with
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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 methods, estimates, and judgments that we use in applying our accounting
policies have a significant impact on the results that we report in our
Consolidated Financial Statements. Some of our accounting policies require us to
make difficult and subjective judgments, often as a result of the need to make
estimates regarding matters that are inherently uncertain. Our most critical
accounting estimates include:
•the valuation of inventory, which impacts gross margin;
•the assessment of recoverability of goodwill, identified intangible assets and tangible fixed assets, which impacts gross margin or operating expenses when we record asset impairments or accelerate their depreciation or amortization;
•revenue recognition, which impacts our results of operations;
•the recognition of current and deferred income taxes (including the measurement of uncertain tax positions), which impacts our provision for income taxes;
•the assumptions used in the determination of postretirement benefit obligations, which impacts operating expenses;
•the assumptions used in the determination of share based compensation, which impacts gross margin and operating expenses; and
•the recognition and measurement of loss contingencies, which impacts gross margin or operating expenses when we recognize a loss contingency or revise the estimates for a loss contingency.
In the following section, we discuss these policies further, as well as the estimates and judgments involved.
Inventories
Inventories are valued at the lower of cost or net realizable value. We regularly review our inventories and write down our inventories for estimated losses due to obsolescence. This allowance is determined for groups of products based on sales of our products in the recent past and/or expected future demand. Future demand is affected by market conditions, technological obsolescence, new products and strategic plans, each of which is subject to change with little or no forewarning. In estimating obsolescence, we utilize information that includes projecting future demand.
The need for strategic inventory levels to ensure competitive delivery performance to our customers are balanced against the risk of inventory obsolescence due to rapidly changing technology and customer requirements.
The change in our reserves for inventories was primarily due to the normal
review and accrual of obsolete or excess inventory. If actual future demand or
market conditions are less favorable than those projected by our management,
additional inventory write-downs may be required.
47
--------------------------------------------------------------------------------Goodwill is required to be assessed for impairment at least once annually, or more frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the likelihood of an impairment of a reporting unit's goodwill. Such events or changes in circumstances can be significant changes in business climate, operating performance or competition, or upon the disposition of a significant portion of a reporting unit. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual test dates. We perform impairment tests using a fair value approach when necessary. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions, including projected future cash flows, discount rates based on weighted average cost of capital and future economic and market conditions. We base our fair-value estimates on assumptions we believe to be reasonable. Actual cash flow amounts for future periods may differ from estimates used in impairment testing. We perform our annual impairment test for goodwill in the fourth quarter of each fiscal year. We did not recognize any impairment charges for goodwill in the years presented, as our annual impairment testing indicated that the fair value exceeded the recorded value for the respective reporting unit.
Impairment or disposal of identified long-lived assets
We perform reviews of long-lived assets including property, plant and equipment, and intangible assets subject to amortization, whenever facts and circumstances indicate that the useful life is shorter than what we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of the long-lived assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets or based on appraisals. Impairment losses, if any, are based on the excess of the carrying amount over the fair value of those assets. Long-lived assets to be disposed of by sale are reported at the lower of their carrying amounts or their estimated fair values less costs to sell and are not depreciated. The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines. In 2021, we recognized impairment charges of$36 million as a result of the discontinuation of an IPR&D project. In 2020, we recognized impairment charges of$36 million , relative to IPR&D that was acquired fromFreescale . In 2019 we had no impairments. Revenue recognition The Company recognizes revenue under the core principle to depict the transfer of control to customers in an amount reflecting the consideration the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The vast majority of the Company's revenue is derived from the sale of semiconductor products to distributors, Original Equipment Manufacturers ("OEMs") and similar customers. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the consideration to which the Company expects to be entitled. Variable consideration is estimated and includes the impact of discounts, price protection, product returns and distributor incentive programs. The estimate of variable consideration is dependent on a variety of factors, including contractual terms, analysis of historical data, current economic conditions, industry demand and both the current and forecasted pricing environments. The estimate of variable consideration is not constrained because the Company has extensive experience with these contracts. 48 -------------------------------------------------------------------------------- Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company's performance obligation is satisfied), which typically occurs at shipment. In determining whether control has transferred, the Company considers if there is a present right to payment and legal title, and whether risks and rewards of ownership having transferred to the customer. For sales to distributors, revenue is recognized upon transfer of control to the distributor. 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 a 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. These return rights are a form of variable consideration and are estimated using the most likely method based on historical return rates in order to reduce revenues recognized. However, long notice periods associated with these announcements prevent significant amounts of product from being returned. For sales where return rights exist, the Company has determined, based on historical data, that only a very small percentage of the sales of this type to distributors is actually returned. Repurchase agreements with OEMs or distributors are not entered into by the Company. Sales to most distributors are made under programs common in the semiconductor industry whereby distributors receive certain price adjustments to meet individual competitive opportunities. These programs may include credits granted to distributors, or allow distributors to return or scrap a limited amount of product in accordance with contractual terms agreed upon with the distributor, or receive price protection credits when our standard published prices are lowered from the price the distributor paid for product still in its inventory. In determining the transaction price, the Company considers the price adjustments from these programs to be variable consideration that reduce the amount of revenue recognized. The Company's policy is to estimate such price adjustments using the most likely method based on rolling historical experience rates, as well as a prospective view of products and pricing in the distribution channel for distributors who participate in our volume rebate incentive program. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as appropriate to reflect trends in pricing environments and inventory levels. The estimates are also adjusted when recent historical data does not represent anticipated future activity. Historically, actual price adjustments for these programs relative to those estimated have not materially differed. Income taxes Income taxes are accounted for under the asset and liability method. 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. Deferred tax liabilities for withholding taxes on dividends from subsidiaries are recognized in situations where the Company does not consider the earnings indefinitely 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 based upon the available evidence it is more likely than not that the asset will be realized.
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. The income tax benefit recognized is
measured based on the largest benefit that is more than 50% likely to be
realized upon resolution of the uncertainty. Unrecognized tax benefits are
presented as a reduction to the deferred tax asset for related net operating
loss carryforwards, unless these would not be available, in which case the
uncertain tax benefits are presented together with the related interest and
penalties as a liability, under accrued liabilities and other non-current
liabilities 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.
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Postretirement 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.
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.
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.
The Company determines the fair value of plan assets based on quoted prices 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.
Share-based compensation
We recognize compensation expense for all share-based awards based on the
grant-date estimated fair values, net of an estimated forfeiture rate. We use
the Black-Scholes option pricing model to determine the estimated fair value for
certain awards. Share-based compensation cost for restricted share units
("RSUs") with time-based vesting is measured based on the closing fair market
value of our common stock on the date of the grant, reduced by the present value
of the estimated expected future dividends, and then multiplied by the number of
RSUs granted. Share-based compensation cost for performance-based share units
("PSUs") granted with performance or market conditions is measured using a Monte
Carlo simulation model on the date of grant.
Our valuation models and generally accepted valuation techniques require us to
make assumptions and to apply judgment to determine the fair value of our
awards. These assumptions and judgments include estimating the volatility of our
stock price, expected dividend yield, employee turnover rates and employee stock
option exercise behaviors. When establishing the expected life assumption, we
used the 'simplified' method prescribed in ASC Topic 718 for companies that do
not have adequate historical data. The risk-free interest rate is measured as
the prevailing yield for a U.S. Treasury security with a maturity similar to the
expected life assumption. We also estimate a forfeiture rate at the time of
grant and revise this rate in subsequent periods if actual forfeitures or
vesting differ from the original estimates.
We evaluate the assumptions used to value our awards on a quarterly basis. If
factors change and we employ different assumptions, share-based compensation
expense may differ significantly from what we have recorded in the past. If
there are any modifications or cancellation of the underlying unvested
securities, we may be required to accelerate, increase or cancel any remaining
unearned share-based compensation expense.
Litigation and claims
We are regularly involved as plaintiffs or defendants in claims and litigation
related to our past and current business operations. The claims can cover a
broad range of topics, including intellectual property, reflecting the Company's
identity as a global manufacturing and technology business. The Company
vigorously defends itself against improper claims, including those asserted in
litigation. Due to the unpredictable nature of litigation, there can be no
assurance that the Company's accruals will be sufficient to cover the extent of
its potential exposure to losses but, historically, legal actions have not had a
material adverse effect on the Company's business, results of operations or
financial condition.
50
-------------------------------------------------------------------------------- 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.
Use of Certain Non-GAAP Financial Measures
In addition to disclosing financial results in accordance withU.S. GAAP, this document contains references to net debt. Net debt is a non-GAAP financial measure and represents total debt (short-term and long-term) after deduction of cash and cash equivalents. We believe this measure provides investors with useful supplemental information about the financial performance of our business, enables comparison of financial results between periods where certain items may vary independent of business performance, and allows for greater transparency with respect to calculating our net leverage. The following is a reconciliation of net debt to the most directly comparable GAAP measure, total debt, as adjusted for our cash and cash equivalents our net debt was calculated as follows: ($ in millions) 2021 2020 Long-term debt 10,572 7,609 Short-term debt - - Total debt 10,572 7,609
Less: cash and cash equivalents (2,830) (2,275) Net debt
7,742 5,334
We understand that, although net debt is used by investors and securities
analysts in their evaluation of companies, this concept has limitations as an
analytical tool and it should not be used as an alternative to any other measure
in accordance with U.S. GAAP.
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