NXP Semiconductors, NV Earnings: Car Chips Lead the Way Again

By Markets Fool.com

Image source: NXP.

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NXP Semiconductors (NASDAQ: NXPI) reported third-quarter results after the close of extended trading on Wednesday night. The company exceeded its own operating income targets while navigating through a plethora of unusual complications.

NXP Semiconductors' third-quarter results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (Year Over Year)

Revenue

$2.47 billion

$1.52 billion

63%

Net income attributable to shareholders

$91 million

$361 million

(75%)

GAAP EPS (diluted)

$0.26

$1.49

(83%)

Source: NXP.

What happened with NXP Semiconductors this quarter?

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The GAAP figures in that table may look troublesome, but they include large non-cash adjustments related to last December's acquisition of Freescale Semiconductor. The business looks much healthier when the results are adjusted to account for that game-changing deal.

  • Backing out these items, which mostly fall under the category known as amortization of acquisition-related intangible assets, and the usual bevy of stock-related compensation, etc., the resulting non-GAAP operating income was a 54% improvement over the year-ago period.
  • The embedded chip specialist's third-quarter revenue came in just above the midpoint of management's own guidance, while operating profits landed near the top end of management's target ranges -- both adjusted and unadjusted.
  • The third quarter's free cash flows increased from $266 million to $620 million, which works out to a 133% year-over-year jump.
  • Comparing this quarter to the combined revenue of Freescale and NXP a year ago, automotive product sales increased by 5%. Secure identification systems saw revenues plunge 34% lower, accelerating from a 22% annual decrease in the second quarter. All other reportable divisions saw their apples-to-apples sales fall between 1% and 5%.

For the fourth quarter, NXP's management offered guidance ranges where the midpoints were as follows:

  • Total revenue should rise 48% year over year, landing at $2.39 billion. As a reminder, this will be the last time NXP's year-over-year trends have to weigh a Freescale-boosted quarter against a pre-acquisition period. The deal closed with one month left in the fourth quarter of fiscal year 2015.
  • Operating income should be approximately $126 million on a GAAP basis, or $690 million in adjusted terms. The year-ago quarter saw GAAP operating income of $1.01 billion but only $433 million after running through non-GAAP adjustments. The Freescale acquisition and simultaneous sale of a few non-core NXP operations makes for some tricky annual comparisons once again.

Image source: NXP.

What management had to say

In a prepared statement, NXP CEO Rick Clemmer celebrated a slate of "very good results" in the third quarter, allowing the company to reward shareholders with strong share buybacks. The company spent 90% of its $620 million free cash flows on these buybacks, retiring 6.5 million shares from market circulation -- a 2% share count reduction.

Then Clemmer turned his sights to signs of improving business trends across NXP's product portfolio.

"We believe we have begun to see incremental positive trends in most of our businesses with comparable sequential revenue up over four percent into the third quarter," Clemmer said. "Customer feedback on the benefits the combined portfolio can deliver are very encouraging, and we believe we are ideally positioned to achieve our long term goals."

Clemmer will have more to say on Thursday, at 8 a.m. Eastern time, when the Netherlands-based company holds an earnings call with management and analysts.

Looking ahead

NXP is up to its knees in several game-changing business transformations.

The so-called standard products division is awaiting a handful of regulatory approvals before moving to Chinese ownership under the Nexperia brand name. That's a $2.75 billion deal, designed to help NXP pay down its acquisition-bloated debt balances.

When that deal is complete, management plans to start up a dividend policy in 2017. All of these step-by-step changes assume that the entire company isn't first acquired by a larger semiconductor rival.

None of these topics were discussed in Wednesday's earnings release, and management is likely to brush off such questions in the earnings call with little more than a "no comment" statement.

Still, these are just some of the many irons NXP has in the fire right now. All are important issues and investors should keep a close eye on them, as the opportunity arises.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NXP Semiconductors. Try any of our Foolish newsletter services free for 30 days.

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