# NXP Semiconductors N.V. (NXPI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NXP Semiconductors N.V.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1413447/000141344724000013/nxpi-20231231.htm
Accession: 0001413447-24-000013
Filing date: 2024-02-22
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NXPI/
All MD&A years: /company/NXPI/mda/
Previous year: /company/NXPI/mda/fy2022/ (FY 2022)
Next year: /company/NXPI/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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 ended December 31, 2022 as filed with the SEC on March 1, 2023.

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

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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

Revenue for the year-ended ended December 31, 2023 was $13,276 million compared to $13,205 million for the year-ended December 31, 2022, an increase of $71 million or 0.5% year-on-year.

Our gross profit percentage for 2023 and 2022 remained flat at 56.9%, as both revenue and cost of revenue were impacted by inflationary effect of increased input costs which were passed along to end customers.

We continue to generate strong operating cash flows, with $3,513 million in cash flows from operations for 2023. We returned $2,059 million to our shareholders during the year in dividends and repurchases of common stock. Our cash and short-term deposit position at the end of 2023 was $4,271 million.

Q4 2023 compared to Q3 2023

Revenue for the three months ended December 31, 2023 was $3,422 million compared to $3,434 million for the three months ended October 1, 2023, a decrease of $12 million or 0.3% quarter-on-quarter. NXP experienced growth in the Industrial IoT end market of $55 million or 9.1%, Mobile end market of $29 million or 7.7%, and Automotive end market of $8 million or 0.4%. The positive trends were offset by declines in the Communications Infrastructure & Other end market of $104 million or 18.6%.

When aggregating all end markets together and reviewing sales channel performance, revenues through NXP’s third party distribution partners was $2,078 million, an increase of $131 million or 6.7% compared to the previous period. Revenues through NXP’s third party direct OEM and EMS customers was $1,310 million, a decline of $153 million or 10.5% versus the previous period.

From a geographic perspective, revenue increased across the China and the Americas regions. Offsetting the positive growth trends, were declines in revenues in the EMEA and the Asia Pacific regions.

The gross profit percentage for the fourth quarter of 2023 decreased to 56.6% from 57.2% in the third quarter of 2023, primarily due to higher restructuring costs for specific targeted actions under new global restructuring programs in the fourth quarter of 2023.

Operating cash flows for the three months ended December 31, 2023 was $1,137 million compared to $988 million for the three months ended October 1, 2023, an increase of $149 million or 15.1% quarter-on-quarter. Under the financing section of the cash flow, there was a $409 million investment in short-term deposit that was made in the fourth quarter of 2023.

Q4 2023 compared to Q4 2022

Revenue for the three months ended December 31, 2023 was $3,422 million compared to $3,312 million for the three months ended December 31, 2022, an increase of $110 million or 3.3% versus the year ago period. NXP experienced growth in its Automotive end market of $94 million or 5.2% and Industrial IoT end market of $57 million or 9.4% versus the year ago period. Offsetting these positive growth trends were declines of revenues in the Communication Infrastructure & Other end market of $39 million or 7.9% and the Mobile end market of $2 million or 0.5% versus the year ago period.

When aggregating all end markets together, and reviewing sales channel performance, NXP’s third party distribution partners was $2,078 million, an increase of $202 million or 10.8% versus the year ago period. Business transacted through direct OEM and EMS customers was $1,310 million, a decrease of $87 million or 6.2% versus the year ago period.

From a geographic perspective, revenue increased across most regions, with declines in our Asia Pacific regions.

The gross profit percentage for the fourth quarter of 2023 decreased to 56.6% from 57.1% in the fourth quarter of 2022, primarily due to higher restructuring costs for specific targeted actions under new global restructuring programs in the fourth quarter of 2023.

Operating cash flows for the three months ended December 31, 2023 was $1,137 million compared to $1,076 million for the three months ended December 31, 2022, an increase of $61 million or 5.7% versus the

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year ago period. Under the financing section of the cash flow, there was a $409 million investment in short-term deposit that was made in the fourth quarter of 2023. Dividends paid to common stockholders increased 18%, from $221 million in the fourth quarter of 2022 to $261 million in the fourth quarter of 2023.

Results of Operations

The following table presents the composition of operating income for the years ended December 31, 2023 and December 31, 2022.

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022"],["Revenue","13,276","","","13,205"],["% nominal growth","0.5","","","19.4"],["Gross profit","7,553","","","7,517"],["Research and development","(2,418)","","","(2,148)"],["Selling, general and administrative (SG&A)","(1,159)","","","(1,066)"],["Amortization of acquisition-related intangible assets","(300)","","","(509)"],["Other income","(15)","","","3"],["Operating income","3,661","","","3,797"]]
[[/GREPCENT_TABLE]]

Revenue

Revenue for the year-ended December 31, 2023 was $13,276 million compared to $13,205 million for the year-ended December 31, 2022, an increase of $71 million or 0.5% year-on-year.

Revenue by end market was as follows:

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022","","Increase/(decrease)","","%"],["Automotive","7,484","","","6,879","","","605","","","8.8","%"],["Industrial & IoT","2,351","","","2,713","","","(362)","","","(13.3)","%"],["Mobile","1,327","","","1,607","","","(280)","","","(17.4)","%"],["Communication Infrastructure & Other","2,114","","","2,006","","","108","","","5.4","%"],["Revenue","13,276","","","13,205","","","71","","","0.5","%"]]
[[/GREPCENT_TABLE]]

Revenue by sales channel was as follows:

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022","","Increase/(decrease)","","%"],["Distributors","7,195","","","7,261","","","(66)","","","(0.9)","%"],["OEM/EMS","5,963","","","5,775","","","188","","","3.3","%"],["Other","118","","","169","","","(51)","","","(30.2)","%"],["Revenue","13,276","","","13,205","","","71","","","0.5","%"]]
[[/GREPCENT_TABLE]]

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Revenue by geographic region, which is based on the customer’s shipped-to location, was as follows:

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022","","Increase/(decrease)","","%"],["China 1)","4,366","","","4,700","","","(334)","","","(7.1)","%"],["APAC, excluding China","3,741","","","4,165","","","(424)","","","(10.2)","%"],["EMEA (Europe, the Middle East and Africa)","3,096","","","2,582","","","514","","","19.9","%"],["Americas","2,073","","","1,758","","","315","","","17.9","%"],["Revenue","13,276","","","13,205","","","71","","","0.5","%"],["1) China includes Mainland China and Hong Kong"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["n","Automotive","n","Mobile","","n","Distributors","n","Other"],["n","Industrial & IoT","n","Comm Infra & Other","","n","OEM/EMS"]]
[[/GREPCENT_TABLE]]

The year-to-date change in revenue was due to a combination of higher average selling prices, offset by lower shipment volumes. The higher average selling prices at 8.1% of revenues or the year-ended December 31, 2023, were a result of increased inflationary input costs from NXP suppliers which were passed along to end customers. The lower shipment volumes at 7.6% of revenues for the year-ended December 31, 2023, were a result of cyclical headwinds, resulting in lower revenue in various end markets. The combination of these two effects resulted in a net increase of $71 million revenue. All end markets reflected declines in volume, offset by higher average selling prices in our Automotive, Industrial IoT, and Communication & Infra end markets.

From an end market perspective, NXP experienced growth in its Automotive and Communication Infrastructure & Other end markets which were offset by declines in the Industrial IoT and the Mobile end markets versus the year ago period.

Revenue in the Automotive end market was $7,484 million, an increase of $605 million or 8.8% versus the year ago period. Within the Automotive end market our processor, advanced analog and connectivity products contributed to the growth, with offsets in our ADAS – Safety products.

Revenue in the Industrial & IoT end market was $2,351 million, a decrease of $362 million or 13.3% versus the year ago period. Within the Industrial & IoT end market the year-to-date decline was across the entire product portfolio.

Revenue in the Mobile end market was $1,327 million, a decrease of $280 million or 17.4% versus the year ago period. Within the Mobile end market revenue our advanced analog and mobile wallet products caused the decline.

Revenue in the Communication Infrastructure & Other end market was $2,114 million, an increase of $108 million or 5.4% versus the year ago period. Within the Communication Infrastructure & Other end market our secure cards and processors products contributed to the growth, with offsets in our RF power and connectivity products.

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When aggregating all end markets together, and reviewing sales channel performance, revenues through NXP’s third party distribution partners was $7,195 million, a decrease of 0.9% versus the year ago period. Revenues through direct OEM and EMS customers was $5,963 million, an increase of 3.3% versus the year ago period.

From a geographic perspective, revenue increased in the EMEA and Americas regions and declined in the China and Asia Pacific regions versus the year ago period.

Gross Profit

Gross profit for the year-ended December 31, 2023 was $7,553 million, or 56.9% of revenue, compared to $7,517 million, or 56.9% of revenue, with inflationary effects of increased input costs from suppliers passed along to end customer resulting in a relatively flat gross margin year on year.

Operating Expenses

Operating expenses for the year-ended December 31, 2023 totaled $3,877 million, or 29.2% of revenue, compared to $3,723 million, or 28.2% of revenue, for the year-ended December 31, 2022.

•Research and development

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.

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022","","% change"],["Research and development","2,418","","","$","2,148","","","12.6","%"],["As a percentage of revenue","18.2","%","","16.3","%","","1.9","ppt"]]
[[/GREPCENT_TABLE]]

R&D costs for the year-ended December 31, 2023 increased by $270 million, or 12.6%, when compared to last year primarily driven by higher personnel-related costs of $269 million (including engineer salaries and wages of $169 million, higher restructuring costs of $59 million, mainly personnel related costs for specific targeted actions under new global programs, and higher share-based compensation costs of $27 million), partly offset by higher received government assistance due to subsidies and R&D tax credits of $33 million.

•Selling, general and administrative

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).

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022","","% change"],["Selling, general and administrative","1,159","","","$","1,066","","","8.7","%"],["As a percentage of revenue","8.7","%","","8.1","%","","0.6","ppt"]]
[[/GREPCENT_TABLE]]

SG&A costs for the year-ended December 31, 2023 increased by $93 million, or 8.7%, when compared to last year primarily driven by higher personnel-related costs of $60 million (including personnel salaries and wages of $28 million and higher restructuring costs of $28 million, mainly personnel related costs for specific targeted actions under new global programs) and higher legal expenses of $25 million (related to ongoing litigation, including the Impinj Patent Litigation).

•Amortization of acquisition-related intangible assets

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022","","% change"],["Amortization of acquisition-related intangible assets","300","","","509","","","(41.1)","%"],["As a percentage of revenue","2.3","%","","3.9","%","","(1.6)","ppt"]]
[[/GREPCENT_TABLE]]

Amortization of acquisition-related intangible assets decreased by $209 million, or 41.1%, when compared to last year mainly as the effect of fully amortized acquisition-related intangibles during 2022 (with regard to the former Freescale acquisition).

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Other Income (Expense)

Other income (expense) includes results from manufacturing service arrangements (“MSA”) and transitional service arrangements (“TSA”) that are put into place when we divest a business or activity, as well as other activity. These arrangements are expected to decrease as the divested business or activity becomes more established. Other income (expense) reflects a loss of $15 million for 2023, compared to an income of $3 million in 2022.

Financial Income (Expense)

[[GREPCENT_TABLE]]
[["($ in millions)","For the years ended December 31,"],["","2023","","2022"],["Interest income","187","","","61"],["Interest expense","(438)","","","(427)"],["Extinguishment of debt","\u2014","","","(18)"],["Total other financial income (expense)","(58)","","","(50)"],["Total","(309)","","","(434)"]]
[[/GREPCENT_TABLE]]

Financial income (expense) was an expense of $309 million in 2023, compared to an expense of $434 million in 2022. The change in financial income (expense) is attributable to an increase in interest income of $126 million as a result of higher interest rates and to a lesser extent by a higher level of cash, and no debt extinguishment costs in 2023 (2022: $18 million). Interest expense increased slightly by $11 million as a result of financing activities in fiscal year 2022 including the issuance of debt.

Benefit (Provision) for Income Taxes

We recorded an income tax expense of $523 million for the year-ended December 31, 2023, which reflects an effective tax rate of 15.6% compared to an expense of $529 million (15.7%) for the year-ended December 31, 2022.

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","$","","%","","$","","%"],["Statutory income tax in the Netherlands","865","","","25.8","","","868","","","25.8"],["Rate differential local statutory rates versus statutory rate of the Netherlands","(77)","","","(2.3)","","","(80)","","","(2.4)"],["Net change in valuation allowance","(3)","","","(0.1)","","","\u2014","","","\u2014"],["Non-deductible expenses/losses","60","","","1.8","","","56","","","1.7"],["Netherlands tax incentives","(111)","","","(3.3)","","","(113)","","","(3.4)"],["Foreign tax incentives","(251)","","","(7.5)","","","(266)","","","(7.9)"],["Changes in estimates of prior years\u2019 income taxes","(17)","","","(0.5)","","","(2)","","","(0.1)"],["Withholding taxes","13","","","0.4","","","8","","","0.3"],["Other differences","44","","","1.3","","","58","","","1.7"],["Effective tax rate","523","","","15.6","","","529","","","15.7"]]
[[/GREPCENT_TABLE]]

The effective tax rate reflects the impact of tax incentives, a portion of our earnings being taxed in foreign jurisdictions at rates different than the Netherlands statutory tax rate, changes in estimates of prior years' income taxes, change in valuation allowance non-deductible expenses 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. In 2023, the foreign tax incentives are lower compared to 2022 primarily due to less qualifying investments.

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•The higher favorable changes in estimates of prior years' income taxes in 2023 is primarily as a result of new guidance released by the Internal Revenue Service to clarify the treatment of specified research and experimental expenditures under Section 174.

•The other differences tax expense in 2023 and 2022 are mainly relating to excess tax benefits, unrecognized tax benefits, FX-effects and taxes due on Global Intangible Low-Taxed Income (GILTI) inclusions in U.S. GILTI is recognized as a current period expense when incurred.

Results Relating to Equity-accounted Investees

Results relating to equity-accounted investees amounted to a loss of $7 million in 2023, whereas in 2022 results relating to equity-accounted investees amounted to a loss of $1 million.

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 $25 million for the year-ended December 31, 2023, compared to a profit of $46 million for the year-ended December 31, 2022.

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, short-term deposits, 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 and short-term deposits

As of December 31, 2023, our cash and short-term deposit balance was $4,271 million, an increase of $426 million compared to December 31, 2022 ($3,845 million), of which $214 million (2022, $227 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 2023 and 2022, no dividend was declared. Taking into account the available undrawn amount of the RCF Agreement of $2,500 million, we had access to $6,771 million of liquidity as of December 31, 2023.

Capital return

The common stock repurchase activity was as follows:

[[GREPCENT_TABLE]]
[["($ in millions, unless otherwise stated)","2023","","2022"],["Shares repurchased","5,460,135","","","8,330,021"],["Cost of shares repurchased","1,049","","","1,429"],["Average price per share","$192.16","","$171.59"]]
[[/GREPCENT_TABLE]]

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 2022 and 2023, the board of directors made use of the authorizations renewed by the AGM on May 26, 2021, June 1, 2022 and May 24, 2023, respectively. Our board of directors has approved the purchase of shares from participants in NXP's equity programs to satisfy participants' tax withholding obligations ("trade for tax") and this authorization will remain in effect until terminated by the board of directors. In March 2021, the board of directors approved the additional repurchase of shares up to a maximum of $2 billion (the "2021 Share Repurchase Program"), and in August 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. In January 2022,

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the board of directors approved the additional repurchase of shares up to a maximum of $2 billion (the "2022 Share Repurchase Program"). During the fiscal year-ended December 31, 2022, NXP repurchased 8.3 million shares, for a total of approximately $1.4 billion under the trade for tax and 2021 Share Repurchase Program and during the fiscal year-ended December 31, 2023, NXP repurchased 5.5 million shares, for a total of approximately $1 billion under the trade for tax 2021 and 2022 Share Repurchase Program. Under Dutch tax law, the repurchase of a company’s shares by an entity domiciled in the 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. The board of directors did not make use of the authorization during the fiscal year-ended December 31, 2023.

Under our Quarterly Dividend Program, interim dividends of $0.845 per ordinary share were paid on April 6, July 6, October 6, 2022 and January 6, 2023; and dividends of $1.014 were paid on April 5, July 6, October 5, 2023 and January 5, 2024.

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Dividends declared (per share)","4.056","","","3.380"],["Dividends declared (in millions)","1,048","","","885"]]
[[/GREPCENT_TABLE]]

Debt

Our total debt, inclusive of aggregate principal, unamortized discounts, premiums, debt issuance costs and fair value adjustments, amounted to $11,175 million as of December 31, 2023, an increase of $10 million compared to December 31, 2022 ($11,165 million).

As of December 31, 2023, the Company had outstanding fixed-rate notes with varying maturities for an aggregate principal amount of $11,250 million (collectively the “Notes”), with $1,000 million payable within 12 months. Future interest payments associated with the Notes total $3,135 million, with $402 million payable within 12 months.

The Company had a net debt position (see section Use of Certain Non-GAAP Financial Measures) at December 31, 2023 of $6,904 million compared to $7,320 million as of December 31, 2022.

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Additional capital requirements

We believe our current positions in cash and cash equivalents and short-term deposits, together with 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 of December 31, 2023, the Company had purchase commitments of $4,184 million, of which $1,026 million is expected to be paid in the next 12 months. We expect operating cash outflows to remain elevated as we make payments under these purchase agreements.

•Amounts related to future lease payments for operating lease obligations at December 31, 2023 totaled $299 million, with $64 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 $159 million as of December 31, 2023, of which $127 million is expected to be paid in the next 12 months.

•The Company has committed to invest approximately $550 million in the newly founded European Semiconductor Manufacturing Company (ESMC) GmbH, over the coming five years, of which approximately $83 million is expected to be paid in the next 12 months.

•Cash outflows for capital expenditures were $827 million in 2023, compared to $1,063 million in 2022. We expect to maintain similar levels of capital expenditures as a percentage of revenue in 2024, to support current and future manufacturing and production capacity needs.

•Our research and development expenditures were $2,418 million in 2023 and $2,148 million in 2022, and we expect to maintain similar levels of investment in research and development as a percentage of revenue in 2024.

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 and short term deposits, 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.

2023 Financing Activities

There were no significant financing activities during 2023.

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2022 Financing Activities

Revolving Credit Facility

On August 26, 2022, NXP B.V., together with NXP Funding LLC, amended and restated its revolving credit agreement entered into on June 11, 2019. The amended and restated revolving credit agreement provides for $2.5 billion of senior unsecured revolving credit commitments and is scheduled to mature on August 26, 2027.

Exchange Offers

On April 14, 2022, we initiated a registered exchange offering of our outstanding Senior Unsecured Notes for new issues of substantially identical registered debt securities (the “Exchange Offers”). The Exchange Offers expired on May 16, 2022, at which time substantially all of the Notes were exchanged for registered senior unsecured notes.

Debt Issuance and redemption

On May 16, 2022, NXP B.V., together with NXP Funding LLC and NXP USA, Inc., issued $500 million of 4.4% senior unsecured notes due June 1, 2027 and $1 billion of 5.0% senior unsecured notes due January 15, 2033. On May 27, 2022 we redeemed the $900 million aggregate principal amount of outstanding dollar-denominated 4.625% Senior Unsecured Notes due 2023 in accordance with the terms of the indenture.

Debt Position

Short-term Debt

As of December 31, 2023, we had $1,000 million short-term debt outstanding (December 31, 2022: no short-term debt outstanding).

Long-term Debt

As of December 31, 2023 and 2022, we had outstanding debt of:

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[[GREPCENT_TABLE]]
[["($ in millions)","December 31, 2022","","Accrual/release Original Issuance/Debt Discount and Debt Issuance Cost","","Debt Exchanges/ Repurchase/ New Borrowings","","December 31, 2023"],["U.S. dollar-denominated 4.875% senior unsecured notes due March 2024 (1)","998","","","2","","","\u2014","","","1,000"],["U.S. dollar-denominated 2.7% senior unsecured notes due May 2025 (2)","498","","","1","","","\u2014","","","499"],["U.S. dollar-denominated 5.35% senior unsecured notes due March 2026 (1)","498","","","1","","","\u2014","","","499"],["U.S. dollar-denominated 3.875% senior unsecured notes due June 2026 (3)","748","","","\u2014","","","\u2014","","","748"],["U.S. dollar-denominated 3.15% senior unsecured notes due May 2027 (2)","498","","","\u2014","","","\u2014","","","498"],["U.S. dollar-denominated 4.4% senior unsecured notes due June 2027 (6)","496","","","1","","","\u2014","","","497"],["U.S. dollar-denominated 5.55% senior unsecured notes due December 2028 (1)","497","","","\u2014","","","\u2014","","","497"],["U.S. dollar-denominated 4.3% senior unsecured notes due June 2029 (3)","993","","","1","","","\u2014","","","994"],["U.S. dollar-denominated 3.4% senior unsecured notes due May 2030 (2)","994","","","\u2014","","","\u2014","","","994"],["U.S. dollar-denominated 2.5% senior unsecured notes due May 2031 (4)","993","","","1","","","\u2014","","","994"],["U.S. dollar-denominated 2.65% senior unsecured notes due Feb 2032 (5)","992","","","1","","","\u2014","","","993"],["U.S. dollar-denominated 5% senior unsecured notes due Jan 2033 (6)","989","","","1","","","\u2014","","","990"],["U.S. dollar-denominated 3.25% senior unsecured notes due May 2041 (4)","988","","","1","","","\u2014","","","989"],["U.S. dollar-denominated 3.125% senior unsecured notes due Feb 2042 (5)","492","","","\u2014","","","\u2014","","","492"],["U.S. dollar-denominated 3.25% senior unsecured notes due Nov 2051 (5)","491","","","\u2014","","","\u2014","","","491"],["","11,165","","","10","","","\u2014","","","11,175"],["RCF Agreement (7)","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total long-term debt","11,165","","","10","","","\u2014","","","11,175"]]
[[/GREPCENT_TABLE]]

(1)    On December 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.

(2)    On May 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.

(3)    On June 18, 2019, we issued $750 million of 3.875% Senior Unsecured Notes due 2026 and $1 billion of 4.3% Senior Unsecured Notes due 2029.

(4) 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.

(5) 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.

43

(6)    On May 16, 2022, we issued $500 million aggregate principal amount of 4.4% Senior Unsecured Notes due 2027 and $1,000 million aggregate principal amount of 5% Senior Unsecured Notes due 2033.

(7)    On August 26, 2022, we entered into a $2.5 billion unsecured revolving credit facility agreement.

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.

Cash flows

Our cash and cash equivalents in 2023 increased by $15 million (excluding the effect of changes in exchange rates on our cash position of $2 million) as follows:

[[GREPCENT_TABLE]]
[["($ in millions)","Year ended December 31,"],["","2023","","2022"],["Net cash provided by (used for) operating activities","3,513","","","3,895"],["Net cash (used for) provided by investing activities","(1,508)","","","(1,249)"],["Net cash provided by (used for) financing activities","(1,990)","","","(1,619)"],["Increase (decrease) in cash and cash equivalents","15","","","1,027"]]
[[/GREPCENT_TABLE]]

•Cash Flow from Operating Activities

For the year-ended December 31, 2023 our operating activities provided $3,513 million in cash. This was primarily the result of net income of $2,822 million, adjustments to reconcile the net income of $1,265 million and changes in operating assets and liabilities of $(594) million. Adjustments to net income include offsetting non-cash items, such as depreciation and amortization of $1,106 million, share-based compensation of $411 million, a loss on equity securities of $1 million, results relating to equity-accounted investees of $7 million and changes in deferred taxes of $(267) million. Changes in operating assets and liabilities were primarily driven by a $353 million increase in inventories due to improved supply capabilities, $138 million increase in receivables and other current assets from prepayments to secure production supply with multiple vendors, and $119 million decrease in accounts payable and other liabilities as a result of timing related to payments.

For the year-ended December 31, 2022 our operating activities provided $3,895 million in cash. This was primarily the result of net income of $2,833 million, adjustments to reconcile the net income of $1,410 million and changes in operating assets and liabilities of $(372) million. Adjustments to net income include offsetting non-cash items, such as depreciation and amortization of $1,250 million, share-based compensation of $364 million, amortization of the discount on debt and debt issuance costs of $9 million, a loss on extinguishment of debt of $18 million, a loss on equity securities of $4 million, results relating to equity-accounted investees of $1 million and changes in deferred taxes of $(236) million. Changes in operating assets and liabilities were primarily driven by a $593 million increase in inventories due increased production levels in order to align inventory on hand with expected demand, $106 million increase in receivables and other current assets from the accumulation of insignificant increases in numerous asset accounts within the "other" classification, and $633 million increase in accounts payable and other liabilities as a result of the increase of trade accounts payable to meet the increase in growth in our business and timing related to payments.

•Cash Flow from Investing Activities

Net cash used for investing activities amounted to $1,508 million for the year-ended December 31, 2023 and principally consisted of the cash outflows for capital expenditures of $827 million, $409 investments in short-term deposits, $179 million for the purchase of identified intangible assets, and $94 million for the purchase of investments.

Net cash used for investing activities amounted to $1,249 million for the year-ended December 31, 2022 and principally consisted of the cash outflows for capital expenditures of $1,063 million, $159 million for the purchase of identified intangible assets, $5 million for the purchase of equipment leased to others, $27 million purchases of interests in businesses (net of cash acquired), and $20 million purchase of investments, partly offset

44

by $10 million from proceeds from return of equity investments and $13 million from proceeds from sale of investments.

•Cash Flow from Financing Activities

Net cash used for financing activities was $1,990 million for the year-ended December 31, 2023. This was primarily driven by the dividend payment to common stockholders of $1006 million, and purchase of treasury shares and restricted stock unit holdings of $1,053 million; partially offset by the $71 million proceeds from the issuance of common stock through stock plans.

Net cash used for financing activities was $1,619 million for the year-ended December 31, 2022. This was primarily driven by purchase of treasury shares and restricted stock unit holdings of $1,426 million, repurchase of long-term debt of $917 million, the dividend payment to common stockholders of $815 million, cash paid for debt issuance costs of $14 million; partially offset by the $1,496 million proceeds from the issuance of long-term debt and $59 million proceeds from the issuance of common stock through stock plans.

Information Regarding Guarantors of NXP (unaudited)

Summarized Combined Financial Information for Guarantee of Securities of Subsidiaries

All debt instruments are guaranteed, fully and unconditionally, jointly and severally, by NXP Semiconductors N.V. and issued or guaranteed by NXP USA, Inc., NXP B.V. and NXP LLC, (together, the “Subsidiary Obligors” and together with NXP Semiconductors N.V., the “Obligor Group”). 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 the Obligor Group. There are no significant restrictions on the ability of the Obligor Group to obtain funds from respective subsidiaries by dividend or loan.

The following tables present summarized financial information of the Obligor Group on a combined basis, with intercompany balances and transactions between entities of the Obligor 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

[[GREPCENT_TABLE]]
[["($ in millions)","December 31, 2023"],["Revenue","8,064"],["Gross Profit","4,075"],["Operating income","1,508"],["Net income","715"]]
[[/GREPCENT_TABLE]]

45

Summarized Balance Sheets

[[GREPCENT_TABLE]]
[["","As of"],["($ in millions)","December 31, 2023"],["Current assets","4,298"],["Non-current assets","11,773"],["Total assets","16,071"],["Current liabilities","2,005"],["Non-current liabilities","10,566"],["Total liabilities","12,571"],["Obligor's Group equity","3,500"],["Total liabilities and Obligor's Group equity","16,071"]]
[[/GREPCENT_TABLE]]

NXP 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 the Obligor Group.

The financial information of the Obligor Group includes sales executed through a Non-Guarantor Subsidiary single-billing entity as a sales agent on behalf of an entity in the Obligor Group. The Obligor Group has sales to non-guarantors (2023: $792 million). The Obligor Group has amounts due from equity financing (2023: $5,441 million) and due to debt financing (2023: $2,346 million) with non-guarantor subsidiaries.

Recent Legislation

Pillar Two

Many countries are implementing legislation and other guidance to align their international tax rules with the Organisation for Economic Co-operation and Development’s (“OECD”) Base Erosion and Profit Shifting recommendations and action plan that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer pricing documentation rules, and nexus-based tax incentive practices. Pillar Two legislation, focused on implementing a global minimum corporate tax, has been enacted in certain jurisdictions the Company operates. The legislation will be effective for the Company’s financial year beginning January 1, 2024. The Company is in scope of the enacted legislation and has performed an assessment of the Company’s potential exposure to Pillar Two income taxes. The assessment of the potential exposure to Pillar Two income taxes is based on the Company’s forecast for financial year-ended December 31, 2024 in combination with the most recent tax filings and country-by-country reporting for the constituent entities of the Company. Based on the assessment, the Pillar Two effective tax rates in most of the jurisdictions that the Company operates in are above 15%. However, there are a limited number of jurisdictions where the transitional safe harbor relief does not apply and the Pillar Two effective tax rate is close to 15%. The Company does not expect a material exposure to Pillar Two in those jurisdictions.

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 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

46

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.

Goodwill

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.

47

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.

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 typically constrained because the Company has extensive experience with these contracts.

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 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.

48

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 greater 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 temporary differences, tax credits or 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. Related penalties are recorded as income tax expense, whereas related interest is reported as financial expense in the statement of operations.

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.

49

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. 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.

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 with U.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 and short-term deposits. 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.

50

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:

[[GREPCENT_TABLE]]
[["($ in millions)","","2023","","2022"],["Long-term debt","","10,175","","","11,165"],["Short-term debt","","1,000","","","\u2014"],["Total debt","","11,175","","","11,165"],["Less: cash and cash equivalents","","(3,862)","","","(3,845)"],["Less: short-term deposits","","(409)","","","\u2014"],["Net debt","","6,904","","","7,320"]]
[[/GREPCENT_TABLE]]

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.