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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
of  the
Securities Exchange Act of 1934

March 3, 2010
Commission File Number: 333-142287

NXP B.V.

(Exact name of registrant as specified in charter)

The Netherlands
(Jurisdiction of  incorporation or organization)

60 High Tech Campus, 5656 AG, Eindhoven, The Netherlands
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission

Dr. Jean A.W. Schreurs
60 High Tech Campus
5656 AG Eindhoven — The Netherlands

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This report contains the annual report of NXP B.V. (the “Company”) for the fiscal year 2009, as furnished to the holders of the Company’s debt securities.

Exhibits

1.                                       Annual report of NXP Semiconductors fiscal year 2009

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized at Eindhoven, on the 3rd day of March 2010.

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Exhibit 1

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Forward-looking statements

This document includes forward-looking statements which include statements regarding our business strategy, financial condition, results of operations, and market data, as well as any other statements which are not historical facts. By their nature, forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include the following: market demand and semiconductor industry conditions, our ability to successfully introduce new technologies and products, the demand for the goods into which our products are incorporated, our ability to generate sufficient cash, raise sufficient capital or refinance our debt at or before maturity to meet both our debt service and research and development and capital investment requirements, our ability to accurately estimate demand and match our production capacity accordingly or obtain supplies from third-party producers, our access to production from third-party outsourcing partners, and any events that might affect their business or our relationship with them, our ability to secure adequate and timely supply of equipment and materials from suppliers, our ability to avoid operational problems and product defects and, if such issues were to arise, to rectify them quickly, our ability to form strategic partnerships and joint ventures and successfully cooperate with our alliance partners, our ability to win competitive bid selection processes to develop products for use in our customers’ equipment and products, our ability to successfully establish a brand identity, our ability to successfully hire and retain key management and senior product architects, and our ability to maintain good relationships with our suppliers.

Except for any ongoing obligation to disclose material information as required by the United States federal securities laws, we do not have any intention or obligation to update forward-looking statements after we distribute this document. In addition, this document contains information concerning the semiconductor industry and our business segments generally, which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which the semiconductor industry, our market segments and product areas will develop. We have based these assumptions on information currently available to us. If any one or more of these assumptions turn out to be incorrect, actual market results may differ from those predicted. While we do not know what impact any such differences may have on our business, if there are such differences, our future results of operations and financial condition, and the market price of the notes, could be materially adversely affected.

Fair value information

In presenting the NXP Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that we consider to be reliable. Users are cautioned that these values are subject to change over time and are only valid as of the balance sheet date. When a readily determinable market value does not exist, we estimate fair values using valuation models which we believe are appropriate for their purpose. These require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. In certain cases independent valuations are obtained to support management’s determination of fair values.

Reporting currency

As from January 1, 2008, NXP changed its reporting currency from Euro to US dollar in order to be more aligned with the Semiconductor market. Prior periods of the Financial Statements have been revised to reflect this change.

US GAAP basis of presentation

The financial information included in this document is based on US GAAP, unless otherwise indicated.

Use of non-US GAAP information

In presenting and discussing the NXP Group’s financial position, operating results and cash flows, management uses certain non-US GAAP financial measures. These non-US GAAP financial measures should not be viewed in isolation or as alternatives to the equivalent US GAAP measure(s) and should be used in conjunction with the most directly comparable US GAAP measure(s).

A discussion of non-US GAAP measures included in this document and a reconciliation of such measures to the most directly comparable US GAAP measure(s) are contained in this document in the chapter “Reconciliation of non-US GAAP information”.

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Financial highlights

all amounts in millions of USD unless otherwise stated

(1)          For a reconciliation to the most directly comparable US GAAP measures, see “Management discussion and analysis - Reconciliation of non-US GAAP information”.

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Letter of the CEO

NXP Annual Report 2009

Dear Stakeholders,

I am pleased to present our 2009 Annual Report, which sets out the results of our activities in 2009 and the measures taken to improve our business basis going forward.

For NXP, it is key to maintain the greatest possible flexibility and speed in execution, since our industry is marked by fast-paced change, an ongoing cyclical pattern, and continuous innovation. In 2009, NXP’s flexibility and rigorous execution were critical factors in dealing competitively with the effects of the severe global economic and financial crisis. We took the challenges head-on, made many bold decisions, and will continue to do so. We adapted our organization to focus on key technologies where we have the opportunity to win with our customers. We also defined a clear way forward with our High Performance Mixed Signal strategy.

Looking back at 2009

Swift execution of NXP’s Redesign program

In 2009 we continued to execute on the Redesign of the company in order to achieve industry benchmark processes, and cost, quality and operational excellence. I am pleased to share that the Redesign Program is ahead of schedule. It is also delivering more savings than originally anticipated, and the program has been expanded to cover additional areas. The annual savings that will be realized in the course of 2011 are expected to exceed USD 650 million. This compares with the original target of USD 550 million by the end of 2010. The costs for the Redesign Program are now estimated to be no greater than USD 750 million by the end of 2011 as opposed to 700 million by the end of 2010, of which USD 433 million has been paid out through the end of 2009. In terms of the acceleration of activities, our wafer fab in Caen was sold in June, while production in Fishkill stopped in July, both ahead of the original schedule. The process and product transfer programs related to the fabs in Hamburg and ICN 5 in Nijmegen are on track.

The program has been expanded to include, among others, the employee termination costs relating to the combination of our television systems and set-top box business lines with Trident Microsystems, which we completed on February 8, 2010. We have also expanded the Program to include the closing of an additional wafer fab, our ICN 6 facility in Nijmegen, which is scheduled for early 2011.

Improvement in capital structure

In addition to the operational restructuring we realized a substantial improvement in our capital structure, despite the difficult market circumstances. We began this process in March/ April when we succeeded in reducing our debt by over half a billion dollars by means of bond exchanges. In the third quarter we reduced our total debt by USD 814 million as a result of our tender offer and several privately negotiated transactions. The combined result of all debt restructuring transactions in 2009 was a reduction of our gross debt by more than USD 1.3 billion. The net interest expense was reduced from USD 475 million in 2008 to USD 359 million in 2009 as a result of these debt exchanges, buy-backs, and favorable interest rates. The full effect of these debt exchanges and buy-backs with the resulting reduced interest will be visible in 2010. We feel we achieved a great deal on the restructuring of our balance sheet last year and are very pleased with the results so far.

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Clearly defined and focused strategy

We had a very active year in 2009 in building our strategy for true leadership in the business areas in which we chose to participate. We held global deep dives in all of our company’s business lines focused on core competencies, market potential, market opportunities, competition, technologies, key product status and the specific requirements to win in the selected businesses. This provided the market and customer intelligence that led to the definition of our High Performance Mixed Signal strategy; a strategy which will take NXP to true leadership in the areas of our core strengths, supported by a strong Standard Products business. Our offering of High Performance Mixed Signal products is based on the ability to deliver a versatile portfolio with an optimized mix of analog and digital that offers high performance, low power, cost efficiency, and robustness.

We have been able to validate our High Performance Mixed Signal strategy through in-depth discussions with our customers who confirm the market opportunity and support our participation. This market opportunity is a result of societal trends such as energy efficiency, low power, mobility, safety and security, which can best be addressed through the optimized combination of analog and digital technologies. In addition, our customers tell us that today’s designers want to be able to mix and combine analog and digital circuitry in their system designs to achieve the greatest precision, highest bandwidth, lowest power consumption, or lowest cost solution available.

This High Performance Mixed Signal strategy combines the very important analog and digital design techniques, proprietary process and manufacturing capabilities in which NXP has deep technology expertise, operational excellence and a proven track record. Overall, two-thirds of NXP’s revenue already comes from products with some mixed-signal technology, and we have been very successful with mixed-signal solutions in our RF products, interface devices, identification and automotive subsystems. But we have not chosen this area purely because of our existing strength in it. These mixed-signal businesses have shown healthy growth over the past years at attractive margins. In addition, there are fewer viable competitors, because the design competencies required to make these products are scarce. Our existing strengths in this area, therefore, coupled with attractive market opportunities, make High Performance Mixed Signal precisely the right focus for us.

Rolling out the new strategy

To be able to focus our business on driving leadership in High Performance Mixed Signal and to give our Home business the best capital structure to win, we combined our digital television and set-top box businesses with Trident, with NXP retaining 60% ownership. The combination of NXP and Trident, which was concluded on February 8, 2010, creates a global industry leader in the digital home market with the customer relationships, IP, low cost infrastructure and focus that we believe are required to drive leadership.

At the end of 2009 we entered into a strategic alliance with technology partner Virage Logic, to whom we transferred a part of our digital System on Chip IP, personnel and expertise. This is also in line with our focus on mixed-signal solutions, rather than primarily on System on Chip devices. This move enables NXP to completely focus innovation efforts on our High Performance Mixed Signal competence, while continuing to have access to leading edge CMOS technology without bearing the full R&D cost burden.

We are also pleased to report success in several growth market segments such as:

·                  RF Base stations, thanks to our ability to offer many of the key High Performance Mixed Signal products needed for complete solutions;

·                  Lighting, with our new driver and controller ICs for Compact Fluorescent and Solid State lighting that enable dimming and consumer-friendly form factors;

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·                  Computing, where our GreenChip family is making it easier and more cost-effective for power supply manufacturers to comply with energy efficiency specifications such as 80PLUSÒ and ENERGY STARÒ;

·                  Smart metering, home automation, white goods and digital power with some significant 32-bit microcontroller design wins with application specific microcontrollers based on the new ARM cortex M3 and M0 technologies;

·                  Consumer electronics, where our market leading Silicon Tuners and HDMI interfaces enable new features, connectivity, and convenience;

·                  Automotive, with our solutions enabling new features and capabilities such as HD radio, toll road pricing, and low power in vehicle networking and sensors;

·                  Medical applications, with ultra-low power radios that enable implantable devices and RFID solutions that ensure secure and cost effective delivery of pharmaceuticals; and

·                  Identification, where we won a supply contract for Chinese ePassport based on our SmartMX chips, where we were rated # 1 in the Contactless Transaction IC Vendor Matrix for the third year in a row and ranked # 1 in the Top 10 of the most influential foreign RFID brands from RFID World.

Financial performance 2009

Full year total sales amounted to USD 3,843 million compared to USD 5,443 million in 2008. Sales in 2009 were lower by USD 792 million due to the divestment of our wireless activities in July 2008. The remaining decline in sales was mainly related to the severe global financial crisis and the weak economic environment that affected all business segments in the first half of the year. In the fourth quarter however, we saw for the first time in the last 6 quarters a year on year growth on a comparable basis. We built on the momentum of Q3 and saw continued growth in almost all business segments.

Adjusted EBITDA for 2009 was USD 336 million compared to USD 485 million in 2008. The decrease is attributable to the lower gross margin resulting from lower sales due to the economic downturn. I am pleased to report, however, that we managed to partly offset this by the reduction in operating expenses as a result of the ongoing Redesign program, and saw an improvement in performance each quarter in 2009.

Net income for the year 2009 amounted to a loss of USD 161 million compared to a loss of USD 3,574 million in 2008. The decrease in net loss was attributable to the higher financial income as a result of the bond exchange and bond buy-back transactions in 2009, much lower incidental costs and lower impairment charges.

At the end of 2009 our cash balance was USD 1,041 million. We ended 2008 with a cash balance of USD 1,796 million. The difference in cash position is mainly explained by the Redesign payments for the full year 2009, which amounted to USD 385 million and USD 286 million which was spent on bond buy backs.

Going forward

As we move forward we plan to increase our commitment to becoming the customer-focused leader in High Performance Mixed Signal solutions, supported by a strong Standard Products business. More specifically, we intend to prioritize investment in High Performance Radio Frequency, TV Front End, Identification, Interface, and Automotive Analog Mixed Signal segments, and selectively invest in high growth opportunities such as Lighting, green power supplies, 32-bit ARM Microcontrollers and Sensors. We will keep current levels of investment in discrete devices, general purpose logic, microcontrollers, sound solutions and can tuners. Our applications focus will be on automotive, identification, mobile,

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consumer, computing, wireless infrastructure, lighting and industrial. We believe the combination of our High Performance Mixed Signal technologies, our broad Standard Products portfolio, and our insight into specific applications will give us the unique ability to offer our customers the solutions they need to be successful.

The priorities to make this happen in 2010 are clear:

1                  Unleash our passion and talent in order to create a simple, fast, decisive organization with a customer-focused passion to win;

2                  Drive high-performance innovation with leading customers, which builds on our talent, IP and process capabilities;

3                  Excite our customers by delivering high-performance products, combining deep application insight with unrivalled customer support; and

4                  Achieve leadership in world-class margins through improvement of our products, operations, processes, and organization.

Effective January 1, 2010, NXP has decided to regroup its reportable business segments reflecting the decision to build leadership in High Performance Mixed Signal technology while maintaining a strong position in Standard Products. We will be reporting our numbers split by High Performance Mixed Signal and Standard Products. We will also provide breakdowns split for our Manufacturing Operations segment and ‘Corporate and Other’.

Thank you

Overall, 2009 has been a sober year full of hard work, which presented NXP and our industry with extreme challenges. It is extremely unfortunate that we had to say goodbye to some of our employees as part of this difficult process, and we did this with great regret. Our best wishes go out to them for the future.  We however also observed how these challenges have brought out the best in the company’s employees. Dedication to leadership and, above all, an unparalleled customer focus have resulted in teamwork that goes beyond functions, regions, or positions.  NXP has taken significant steps towards becoming a leader in a well-defined and growing market. Our customers’ feedback indicates that our qualifications for this leadership position in High Performance Mixed Signal are recognized and appreciated. We will continue to work side-by-side with them to meet new challenges, and welcome new opportunities. My thanks go to all of our customers and partners, and especially to all of NXP’s employees, past and present, for making it possible for us to achieve our goals in 2009.

However, we still have much more to do to achieve a position of true leadership in the business areas we have selected, and to complete the execution of the Redesign program. We believe our focus on leading technology to deliver solutions that allow our customers to have a more robust or lower-cost solution will provide us with the basis to further improve our strong customer relationships, with the returns appropriate to leaders in the industry.

While our Redesign efforts have not been easy, I am confident that our resulting structure, our competitive cost basis, and one of the industry’s largest and most talented teams of design engineers and field application engineers give us the ability to continue to strengthen our leadership. I look forward to continuing our exciting journey with you in 2010.

Rick Clemmer

President and CEO of NXP

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Information on the NXP Group

Structure

We, NXP B.V. (the “Company”, “NXP” or “NXP Semiconductors”), are the parent company of the NXP Group (the “Group”,  the “NXP Group” or the “NXP Semiconductors Group”), headquartered in the Netherlands. The NXP Group in its current form was established on September 29, 2006, when Koninklijke Philips Electronics N.V. (“Philips”) sold 80.1% of its semiconductors businesses to a consortium of private equity investors in a two -step transaction. In a first step, Philips transferred on September 28, 2006, 100% of its semiconductor businesses to NXP. In a second step, on September 29, 2006 all of NXP’s issued and outstanding shares were acquired by KASLION Acquisition B.V. (“KASLION”), an acquisition vehicle formed by the private equity consortium and by Philips.

We have a two-tier corporate structure under Dutch law, consisting of, on the one hand, our board of management embedded in the management team and, on the other hand, our supervisory board. Under the chairmanship of the chief executive officer (“CEO”), our board of management is entrusted with the general management of the NXP Group including setting its strategies and policies.  Our management team is responsible for the deployment of the NXP Group’s strategies and policies, in order for NXP Group to achieve its objectives and results. In addition to the board of management members, our management team is composed of the heads of NXP’s business segments, core processes and support functions. Members of the management team, other than members of the board of management, report to and are appointed and dismissed by the board of management and hold office until they are removed or replaced by the board of management. The board of management, whose members are appointed and dismissed by the general meeting of shareholders upon proposal by the supervisory board, is accountable to our supervisory board and to our general meeting of shareholders. Major decisions of the board of management require the approval of the supervisory board, including decisions relating to NXP Group’s operational and financial objectives and the strategies it uses to achieve those objectives. The supervisory board supervises the policies of the board of management and the general course of affairs of the NXP Group and advises the executive management thereon. The supervisory board, in the two-tier corporate structure, is a separate body that is independent of the board of management. The supervisory board, acting in our interests and our Group and taking into account the relevant interest of the Company’s stakeholders, supervises and advises the board of management in performing its management tasks and setting the direction of the Group’s business, including (a) achievement of our objectives, (b) our corporate strategy and the risks inherent in the business activities, (c) the structure and operation of the internal risk management and control systems, (d) the financial reporting process, and (e) compliance with legislation and regulations. Major management decisions and the Group’s strategy are discussed with and approved by the supervisory board.

The supervisory board consists of eight members, appointed and dismissed by the general meeting of shareholders. Six of the members are nominated by KASLION Holding B.V., one is nominated by Philips, and one is an independent chairman, who is appointed and dismissed jointly by KASLION Holding B.V. and Koninklijke Philips Electronics N.V. The members of the supervisory board hold office until they are removed or replaced by the general meeting of shareholders.

This Annual Report contains the consolidated financial statements of NXP B.V. based on US GAAP.

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Business overview

NXP Semiconductors, with over 50 years of operating history, is one of the longest established companies in the semiconductor industry. NXP provides High Performance Mixed Signal and Standard Product solutions that leverage our leading Radio Frequency (RF), Analog, Power, Digital Processing and manufacturing expertise. These innovations are used in a wide range of automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial applications. We serve our customers worldwide. Headquartered in Europe, we have approximately 28,000 employees working in more than 25 countries and recorded sales of USD 3.8 billion in 2009. We have Research and Development activities in Europe, Asia and the US and our manufacturing facilities are based in Asia and Europe.

Strategy

Our vision is to contribute to a sustainable world where trusted NXP technology makes life safe, entertaining and convenient. We want to delight our customers with innovative, high performance mixed signal solutions for a wide range of automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial applications based on our technology leadership in RF, Analog, Power and Digital processing and deep application insight. We aspire to become a leading High Performance Mixed-Signal (HPMS) company with strong standard product businesses, while remaining a simple, fast and cost-efficient organization with a “customer-focused passion to win”. In order to meet these goals, we have adopted the strategies described below:

·               Build true leadership in HPMS areas that leverage our core technical strengths.

As we move forward we plan to increase our commitment to becoming the customer-focused leader in High Performance Mixed Signal solutions, supported by a strong standard products business. More specifically, we intend to prioritize investment in the High-Performance Radio Frequency, TV Front End, Identification, Interface and Auto Analog Mixed Signal segments, and selectively invest in high growth opportunities such as Lighting, Green Power Supplies and 32-bit ARM Microcontrollers. We will maintain the current level of investments in our other businesses. Our focus applications will be automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial. We believe the combination of our High Performance Mixed Signal technologies, our broad standard products portfolio, and our insight into specific applications will give us a unique ability to offer our customers superior solutions.

·               Deepen the relationships with our key customers.

We intend to increase our share of the demand of our customers for semiconductors, with a particular focus on our top 120 Original Equipment Manufacturers (OEM) and Electronics Manufacturing Services (EMS) customers and our top 25 distribution partners. We have created dedicated account teams that work across regions in order to better accommodate our customers increasing geographical diversity. We seek to deepen our customer relationships by continuing to expand the application engineering support we provide close to our customers and by increasing the amount of product development work that we conduct jointly with our leading customers.

·               Improve operational excellence.

We want to maintain in-house Front End manufacturing for specialty processes at world-class cost levels. We continue on our comprehensive multi-year performance improvement program intended

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to drive revenue growth and increase profitability. As part of this program, we aim to reduce costs in manufacturing, selling, general and administrative activities, increase our effectiveness in  R&D, and improve our organizational efficiency, manufacturing and supply chain performance, time-to-market of new products, product quality and customer service.

·               Pursue our asset-light manufacturing strategy.

We will continue with our asset-light manufacturing strategy. By concentrating on our in-house production in fewer sites and outsourcing demand beyond that, we will be able to ensure that the remaining facilities can operate at higher utilization levels. For all advanced CMOS manufacturing, we will leverage a number of foundry partners. We expect to maintain a major part of our assembly and test processes in house, as we believe that our internal facilities are highly competitive in terms of quality and cost. We believe that our asset-light strategy helps limit capital investment and thus reduces the fixed component of our cost structure and increases our return on invested capital. It also improves our operational flexibility throughout the industry cycle, while ensuring our continued access to world-class manufacturing capacity and leading-edge process technology.

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Redesign Program

During 2009 there has been continued progress on the execution of our redesign program (the Redesign Program), which we announced in September of 2008. This program was initially intended to right-size our cost base to match our revenue profile following the disposition of our wireless business.

Due to the expanded continuing adverse market conditions in the first half of 2009, steps were taken to both accelerate certain aspects of the Redesign Program and expand it to include other restructuring initiatives. Our wafer fab in Caen was sold in June 2009, while production in Fishkill was stopped in July 2009, ahead of schedule. The process and product transfer programs related to the redesign of fabs in Hamburg and Nijmegen are on track.

Furthermore, the expanded program includes, among others, the employee termination costs related to the sale of our television systems and set-top box business lines to Trident Microsystems, Inc., which transaction was completed on February 8, 2010, and the closing of an additional wafer fab in Nijmegen, which is scheduled for early 2011.

The Redesign Program was intended to be completed by the end of 2010 and originally targeted a reduction in annual operating costs of USD 550 million, compared against our 2008 forecast cost base, adjusted for the disposition of our wireless business. This reduction was to be delivered mainly through a significant restructuring of our manufacturing base, the refocusing and resizing of central research and development (“R&D”), and reductions in support functions.

The Company has been able to accelerate certain aspects of the program compared to the original schedule. It is delivering more savings than originally anticipated, and the program has been expanded to cover additional areas. The annual savings that will be realized in the course of 2011 are expected to exceed USD 650 million (compared with the original target of USD 550 million by the end of 2010). We estimate the total costs of the ongoing program to be no greater than USD 750 million by the end of 2011 (as opposed to USD 700 million by the end of 2010).

Since the beginning of the Redesign Program, USD 433 million of restructuring costs related to the Redesign Program and other restructuring activities have been paid out until the end of 2009.

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Business activities

As from January 1, 2009, we have distinguished five segments as reportable segments in compliance with FASB Accounting Standard Codification (ASC) Topic 280 “Segment Reporting” (SFAS 131). The Company is structured in three market-oriented business segments: Automotive & Identification, MultiMarket Semiconductors and Home, which each represent a reportable operating segment. The two other reportable segments are Manufacturing Operations and Corporate and Other.

The former Mobile & Personal segment has been regrouped as from January 1, 2009. The remaining part of the business segment, after the contribution of key activities into the joint venture ST-NXP Wireless and their subsequent deconsolidation, has been moved into the segments MultiMarket Semiconductors and Corporate and Other.

The products sold by our remaining three business segments encompass two categories. The first category consists of highly differentiated application-specific semiconductors and system solutions. Our Home and Automotive & Identification business segments primarily sell products in this category. The profitability of these products depends to a significant degree on our ability to innovate and develop new technologies and customer solutions.

The second of our product categories consists of standard products, which are devices that can be incorporated in many different types of electronic equipment and which are typically sold to a wide variety of customers, both directly and through distributors. Our MultiMarket Semiconductors business segment carries a large range of standard products and application specific standard products, the profitability of which is driven by manufacturing cost, supply chain efficiency and continuous improvement of manufacturing processes.

Across our business segments, we leverage both our application insight and our technical expertise in the areas of radio frequency communications, analog, power management and security technologies to create and deliver semiconductor solutions that enable our customers - design engineers - to rapidly and cost-efficiently develop highly competitive products in ever faster changing end-application markets.

Segment regrouping in 2010

Effective January 1, 2010, following the decision to further deliver on its strategy of building leadership in High Performance Mixed Signal (HPMS) technology and maintaining a strong position in Standard Products (SP) and culminating with the divestment of a major portion of the Home business segment to Trident Microsystems, Inc. in February 2010, the Company has decided to regroup its reportable segments.

Reporting will be done in the following segments: HPMS, SP, Manufacturing Operations and Corporate and Other. The historical figures will be restated accordingly in 2010.

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Business segments

Automotive & Identification

The Automotive & Identification business segment provides system solutions and semiconductor components for the automotive and identification application markets.

Our automotive business focuses on the markets for Car Entertainment and Safety & Comfort, including in-vehicle networks, car access & immobilizers, and sensors.

These markets are driven by the increasing prevalence of semiconductor devices within vehicles, which in turn has been the result of the further integration of consumer electronics in cars, an increasing focus on electronically enabled safety and comfort and the replacement of mechanics by electronics.

We believe that significant barriers to entry in the automobile market, such as long product lifecycles, domain-specific application know-how and stringent zero-defect and quality service requirements, give us a competitive advantage.

Governmental regulations including car safety obligations (such as tire pressure monitoring and Electronic Stability Program in the US) and new governmental initiatives such as emergency-call in the EU as well as various tolling and traffic management initiatives have positive effects on our business as they require increasingly advanced products and drive faster adoption rates.

Also the automotive industry’s move towards reduction of CO2 emissions matches NXP’s automotive portfolio. We have a number of products that are especially geared to help automotive manufacturers building more energy efficient vehicles. Our partial networking ICs help reducing the electrical power consumption in vehicles by allowing entire units of the in-vehicle-network to be deactivated when not in use but immediately reactivated when needed. Our FlexRay networking transceivers enable “Drive-by-Wire” applications which allow to replace heavy mechanics in a.o. braking and steering by electronics in order to reduce the overall vehicle weight. Our Class-D Audio Power Amplifiers are designed to maintain high-efficiency and flawless sound quality even as the car’s electrical systems are switching between normal operation and low-power operation when the engine is off. Innovations in our Magneto-Resistive Sensor technology are specifically targeted for use in throttle, eGas and air control valves which all boost the efficiency of combustion engines.

We are closely working together with the leading automotive first tier suppliers, selected Original Equipment Manufacturers (OEMs) and other partners to further strengthen our leading positions in the above market application segments.

In Identification our ambition is to strengthen our market leadership in the overall Identification market - both differentiated and high volume segments. We have well established positions in Government, Banking, Pay TV, Automatic Fare Collection (AFC), Radio Frequency Identification (RFID), and Near-Field Communication (NFC). Our business plays an important role in creating the markets for RFID, AFC, Government and NFC technologies. The primary factors driving growth are new governmental requirements for secure identity documents, the increasing prevalence of cashless transactions and more sophisticated supply chain management models.

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In 2009 we have reached significant milestones in our Identification business. We have shipped over 500 million SmartMX security chips enabling a wide range of solutions for identifying people, managing access rights and enabling secure transactions in our customers’ security systems. In addition we are making significant progress to speed up worldwide adoption of next-generation NFC mobile phone and contactless banking applications based on our contactless MIFARE technology. Furthermore we won various supply contracts this year. Examples are Chinese ePassport chips and the Family Card for the Egyptian government — a welfare scheme which offers subsidies on food and other goods to low-income families. Finally we have been rated number 1 in Contactless Transaction IC Vendor Matrix for the third year in a row by ABI Research based on our ability to innovate and implement our technology.

Our key customers in Automotive & Identification include Alpine, Bosch, Bundesdruckerei, Clarion, Continental, Delphi, Gemalto, G&D, Harmann/Becker, Oberthur Card Systems, Panasonic, Smartrac, Sony, Valeo and Visteon.

MultiMarket Semiconductors

Our MultiMarket Semiconductors business segment supplies both a broad range of standard products and a wide range of application-specific standard products. The standard product offering includes:

·                  small signal diodes,

·                  medium power rectifiers and protection devices,

·                  BISS and RET transistors,

·                  complex discretes and ESD protection devices,

·                  bipolar power transistors, diodes, triacs and MOSFETs,

·                  general purpose logic devices;

Differentiation in the market for standard products is achieved through portfolio width, product performance, availability and supply chain support, customer service and costs.

MultiMarket Semiconductors also supplies a wide range of application-specific standard products including:

·                  8051-based 8 and ARM-based 32 bit microcontrollers,

·                  radio frequency devices for power amplifiers, satellite tuners and cable television,

·                  analog-to-digital and digital-to-analog data converters for mid and high end applications,

·                  power management devices for lighting and power control

·                  interface products, clocks, watches and graphic devices and amplifiers,

·                  speakers, receivers, MEMS microphones and headsets for audio applications.

The MultiMarket Semiconductors business segment has its own manufacturing and assembly & test sites. Integrated circuit components marketed and sold by MultiMarket Semiconductors are produced within our Manufacturing Operations business.

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MultiMarket Semiconductors includes Jilin NXP Semiconductor Ltd. (JNS), a joint venture based in China which we operate jointly with Jilin Sino-Microelectronics Co. Ltd. We currently hold a 60% ownership interest in JNS. JNS was founded in 2003 and manufactures bipolar discrete power products.

Approximately 38% of our total MultiMarket Semiconductors products are sold through distribution channels. The main distributors are Arrow, Avnet, Future, and WPI.  The main Original Equipment Manufacturers, that are customers of NXP, account for 48% of our total MultiMarket Semiconductors sales. The main customers are Bosch, Continental, Nokia, Philips and Samsung.

Home

The Home business segment provides system solutions for digital and analog television, set top boxes (STB) and PC-TV application markets, as well as related semiconductor components for a broad range of consumer products. The Home business segment also consolidates NuTune, a joint venture in the area of Can tuners. NXP has a 55% ownership in NuTune, and Thomson S.A. holds the remaining 45%.

The TV market is characterized by the transition from Analog to Digital TV. Accordingly, the Company has released the world’s first Digital TV platform in 45nm advanced CMOS technology. The STB market is moving from Standard Definition (SD) to High Definition (HD) and from Analog to Digital technology. In this market NXP provides semiconductors for Cable, Internet Protocol (IP) and Satellite Set Top boxes.

On October 5, 2009, NXP announced the sale of the system business of TV and STB with Trident Microsystems, a publicly listed company in the United States in the field of Digital television. This transaction was closed on February 8, 2010, after which NXP owns approximately 60% of the outstanding common stock of Trident. As a result of the terms and conditions agreed between the parties, primarily that NXP will only retain a 30% voting interest in participatory rights and 60% voting interest for protective rights only, NXP will account for its investment in Trident under the equity method. With this transaction, the new combination is aiming to become a leader in the field of digital consumer markets. It will help to further leverage the significant investments into advanced technologies and complex systems across a larger customer base.

The tuner business was not part of the Trident transaction, and remains part of NXP.

Our key customers in Home include Philips, Samsung, Sony, Humax and Broadcom.

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Manufacturing Operations

The Operations segment serves as central source for integrated circuit manufacturing, test and packaging for our three business segments. The integration of our manufacturing operations across our business segments permits NXP to reduce the volatility in production demand that would result from independent operations. Manufacturing Operations is split in front-end (wafer) manufacturing and in back-end (assembly and test) manufacturing.

Manufacturing and Materials

The manufacturing of integrated circuits within NXP is similar to the approaches in other leading semiconductor companies: the production equipment, the starting material (silicon substrates), the chemicals, the photo masks are all sourced from a limited set of commercial suppliers and the manufacturing process flows show a high degree of similarity across the industry. The details of the process flow in combination with the product design that is embedded in the photo-masks determines the differentiating nature of the product.

Front-end manufacturing is a highly complex process, with as many as 300 physical and chemical process steps, with a typical production time of up to 60 days. Therefore the majority of wafer production is built on forecast, in contrast to back-end manufacturing which is typically customer order driven.

Back-end manufacturing comprises wafer test (electrical test of all ICs prior to assembly), assembly (packaging the silicon dies into a package that can be soldered onto a printed circuit board) and final testing of the individual packaged products. The throughput time of back-end manufacturing is typically 2 weeks. Also in back-end manufacturing, materials and equipment are sourced from a limited set of suppliers that are serving our competitors as well in the industry.

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The table below shows selected key information with respect to our major front-end and back-end facilities:

(1)          Joint venture with TSMC; we are entitled to 60% of SSMC’s annual capacity.

(2)          Joint venture with Jilin Sino-Microelectronics Co. Ltd. (JSMC); we are entitled to 60% of JNS’s annual capacity.

(3)          In back-end manufacturing we entered into a joint venture with ASE in Suzhou (ASEN), in which we currently hold 40%.

Notes:

CMOS (complementary metal on silicon oxide semiconductor): technology applied for logic products and systems-on-chip

Bipolar: technology applied for analog products with high voltage or high power requirements

BiCMOS: combination of bipolar and CMOS, applied for high-frequency application

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RF specialties: technologies applied for special radio-frequent applications

BCDMOS: bipolar-CMOS-DMOS. DMOS (double-diffused metal on silicon oxide semiconductor) gives high-voltage option up to 500V and above.

Other Business Activities

Certain business activities are reported outside of our primary business segments, and are accounted for in the “Corporate & Other” reporting segment. These include:

IP Licensing

We license and cross-license our intellectual property to semiconductor companies and other technology firms.  Apart from the revenues these licensing activities generate, we also view active intellectual property licensing as an important means to promote our businesses and technologies.  Our cross-licensing activities are typically conducted with other large semiconductor companies, who have resources and research and development activities similar to ours.

Software Solutions

Our Software Solutions business develops audio and video multimedia solutions that enable mobile device manufacturers to produce differentiated hand-held products that enhance the end-user experience. Our software has been incorporated into around 700 million mobile devices produced by the world’s leading mobile device manufacturers.

Software Solutions is particularly focused on partnerships with the top OEM handset manufacturers. The major part of the revenue is generated via royalties or license deals, the remaining part stems from integration and maintenance services.

There is seasonality in the mobile markets with one-third of the revenue generated in the fourth quarter.

Global Sales and Marketing

We market and sell our products worldwide to a variety of Original Equipment Manufacturers, Original Design Manufacturers, contract manufacturers and distributors. We focus on generating demand for our products by adding value to our customers and leveraging our long-standing customer relationships and providing high quality customer support.

Our sales and marketing teams are organized into six regions: EMEA, the Americas, Japan, South Korea, Greater China and Asia Pacific. These sales regions are responsible for managing the customer relationships, design-in and promotion of new products. Our web-based marketing tool is complementary to our direct customer technical support. Our sales and marketing strategy focuses on adding value to our customers, building lasting relationships with them and becoming their preferred supplier.

Research & Development

Our research and development activities are critical to the corporate goal of winning in High Performance Mixed Signal. It means our R&D solutions stand out in bringing maximum functional performance, efficiency, robustness and versatility in the analog and mixed signal applications of our customers.  We conduct product-specific development and differentiating system and process

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technology research. Our product-specific research and development is aligned with our business segments.

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System and process technology research is conducted centrally to efficiently leverage Intellectual Property (IP) and know-how across our businesses. Focus areas include the development of improved manufacturing options and enabling technology to be utilized and shared by our business segments. Process-related research is conducted in conjunction with TSMC in our joint Research Center in Leuven, Belgium.

To further strengthen our research and development activities, we completed a strategic alliance with Virage Logic Corp. based in USA, in the 4th quarter of 2009. As a part of the transaction our Advanced CMOS semiconductors IP technology and development activities were transferred to Virage Logic Corp. in exchange for the rights to use Virage’s IP and services.

Divested Wireless activities

In August 2008, NXP and STMicroelectronics established a joint venture in order to combine their key wireless operations. The majority of the activities of our former Mobile & Personal business segment were transferred to this joint venture. Included in this segment are activities of the former Mobile & Personal segment, which provided application-specific semiconductors, selected components and complete system solutions applied in mobile and portable devices, such as cellular handsets and portable media players.

On December 31, 2008, NXP held a 20% share in this joint venture. Effective February 2, 2009, STM exercised its option to buy our remaining stake of 20%.

Environmental Regulation

In each jurisdiction in which we operate, we are subject to many environmental, health and safety laws and regulations, which govern, among other things, emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and ground water contamination and the health and safety of our employees. We are also required to obtain environmental permits from governmental authorities for certain of our operations.

As with other companies engaged in similar activities or that own or operate real property, we face inherent risks of environmental liability at our current and historical manufacturing facilities. Certain environmental laws impose liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances. Certain of these laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. Soil and groundwater contamination has been identified at some of our current and former properties resulting from historical, ongoing or third-party activities. As a result, we are currently in the process of investigating and remediating contamination at some of our current and former facilities.

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Significant acquisitions and divestments

2009

On November 16, 2009, we completed our strategic alliance with Virage Logic Corporation (“Virage Logic”) and obtained approximately 9.8% of Virage Logic’s outstanding common stock. This transaction included the transfer of our Advanced CMOS Semiconductor Horizontal IP Technology and Development Team in exchange for the rights to use Virage’s intellectual property (“IP”) and services. Virage Logic is a leading provider of both functional and physical semiconductor intellectual property (IP) for the design of complex integrated circuits. Shares of Virage Logic are listed on the NASDAQ in the United States.

On October 5, 2009, we signed an agreement to sell the television systems and set-top-box business lines, which were included in our business segment Home, with Trident Microsystems, Inc., which is listed on the NASDAQ in the United States. This transaction was completed on February 8, 2010. After completion of this transaction, we own approximately 60% of the outstanding common stock of Trident (refer to note 13 of the financial statements). As a result of the terms and conditions agreed between the parties, primarily that NXP will only retain a 30% voting interest in participatory rights and 60% voting interest for protective rights only, NXP will account for its investment in Trident under the equity method.

2008

On September 1, 2008, we completed the combination of our can tuner modules operation with those of Thomson, operating in a new venture named NuTune, which is included in our Home business segment. We have a 55% ownership stake in NuTune and Thomson holds the remaining 45%.

On August 11, 2008, we completed our acquisition of the Broadband Media Processing (BMP) business of Conexant Systems, Inc. which provides industry-leading solutions for satellite, cable and IPTV applications. These activities were included in our Home business segment and were transferred to Trident in February 2010.

On July 28, 2008, we and STMicroelectronics (STM) combined our wireless operations to form a new joint-venture company named ST-NXP Wireless, into which we contributed businesses and assets forming a substantial portion of our Mobile & Personal business segment (the Sound Solutions, Mobile Infrastructure and amplifiers business were not contributed). We received a 20% ownership interest in the joint venture and cash consideration of USD 1.55 billion in connection with the divestment. Effective February 2, 2009, STM exercised its option to buy our remaining stake in the joint venture for an agreed purchase price of USD 92 million.

In January 2008, we completed the acquisition of GloNav Inc., a U.S.-based fabless semiconductor company, developing single-chip solutions for global positioning systems (GPS) and other satellite navigation systems. The activities of this new acquisition were included in the former Mobile & Personal business segment and subsequently transferred to the newly established ST-NXP Wireless joint-venture.

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2007

In March 2007, we completed the acquisition of the Cellular Communications business of Silicon Laboratories Inc., a leader in Radio Frequency technology for mobile phones. As from the acquisition date, this business was consolidated within the former Mobile & Personal segment and subsequently transferred to the in 2008 new established ST-NXP Wireless joint venture.

In September 2007, we completed the divestment of the Cordless & VoIP Terminal operations from the former Mobile & Personal business segment to DSP Group Inc. (DSPG). We obtained a 13% interest in DSPG as consideration for this divestment. As of December 31, 2008, we held an approximate 16% interest in DSPG. In March 2009, DSPG repurchased our shares in DSPG for a cash consideration of approximately USD 20 million.

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Alliances and investments

At the end of 2009, apart from Jilin NXP Semiconductor Ltd. (JNS) and Systems on Silicon Manufacturing Co. Pte. Ltd. (SSMC), which are consolidated and described in previous sections, we participate in the following alliances:

Advanced Semiconductor Manufacturing Company

We established the Advanced Semiconductor Manufacturing Company (ASMC) in Shanghai in 1995 together with a number of Chinese joint venture partners.  ASMC currently operates three wafer fabs, producing five-, six- and eight-inch wafers of primarily analog integrated circuits with line widths in the 0.35 to 3 micron range using CMOS and bipolar process technologies. We currently own approximately 27% of the outstanding shares of ASMC, which are listed on the Hong Kong Stock Exchange.

ASEN

Together with Advanced Semiconductor Engineering Inc. (ASE) we established an assembly and test joint venture (ASEN) in China in September 2007. ASEN is jointly owned by ASE (60%) and NXP (40%). ASEN is positioned to serve the global semiconductor assembly and test market and has initially focused on mobile communications; it is expected to expand into other segments in the future.

Moversa

Moversa, established as a joint venture with Sony Corporation in November 2007, drives global adoption of contactless smart card applications in mobile phones using Near Field Communication (NFC). It incorporates both MIFARE and FeliCa™ operating systems and applications, two of the most widely installed contactless smart card technologies in the world. Both parties hold a 50% interest in the joint venture, which is headquartered in Vienna, Austria.

Virage Logic

We established a strategic alliance with Virage Logic on November 16, 2009 and obtained approximately 9.8% of Virage Logic’s outstanding common stock. Under this alliance, NXP transferred its Advanced CMOS Semiconductor Horizontal IP Technology and related development team to Virage Logic in exchange to use Virage Logic’s IP rights and services.

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Management discussion and analysis

The following discussion is based on the US GAAP consolidated financial statements and should be read in conjunction with these statements and the other financial information contained herein.

Basis of presentation

The discussion and analysis of the financial results and condition of NXP Semiconductors Group (NXP) is based on the audited US GAAP financial statements of the Company for the years ended December 31, 2007, 2008 and 2009.  This discussion should be read in conjunction with those audited financial statements, which have been included in this Annual Report.

On September 29, 2006, Koninklijke Philips Electronics N.V. (“Philips”) sold 80.1% of its Semiconductors business to a consortium of private equity investors in a multi-step transaction. In order to carry out this transaction, Philips transferred 100% of these businesses to NXP on September 28, 2006. All of our issued and outstanding shares were then acquired on September 29, 2006 by KASLION Acquisition B.V. (“KASLION”), which was established as an acquisition vehicle by the Consortium and Philips. We refer to our acquisition by KASLION as the “Acquisition”.

Because our accounting basis changed upon the abovementioned Acquisition, we have described the impact on our results of the acquisition accounting used in connection with this Acquisition and subsequent acquisitions and divestments (see “Effect of Acquisition Accounting”, below) and have also provided 2007, 2008 and 2009 adjusted financial results whereby the impact of these accounting effects (“Purchase Price Adjustments”, or “PPA”) has been eliminated.

During 2008, we were organized into four business segments and two other segments.

On July 28, 2008 our key wireless operations from the former segment Mobile & Personal were contributed to a new joint venture ST-NXP Wireless, and as such all assets and liabilities involved in this transaction have been deconsolidated from this segment. The operations until July 28, 2008 remained consolidated in the consolidated accounts under a new segment named “Divested Wireless activities”.

The former Mobile & Personal segment has been regrouped as from 2009. The remaining part of the business segment, after the contribution of activities into the joint venture ST-NXP Wireless and subsequent divestment, have been moved into the segments MultiMarket Semiconductors and Corporate and Other. All previous periods reported have been restated accordingly.

As from January 1, 2009, five segments are distinguished as reportable segments in compliance with FASB ASC Topic 280 (formerly SFAS 131). The Company is structured in three market-oriented business segments: Automotive & Identification, MultiMarket Semiconductors and Home, which each represent a reportable operating segment. The two other reportable segments are Manufacturing Operations and Corporate and Other.

We have decided to enhance the assessment of the performance of our three business segments by allocating certain costs that were previously unallocated and were reported in the segments Corporate and Other and Manufacturing Operations, to these operating segments. This allocation better reflects the performance of the operating segments and enables among others a better assessment of the contribution of these segments to our cash flows. The allocated costs include among others costs related to corporate activities that are for the benefit of the business segments and the capacity costs of the segment Manufacturing Operations. Also, the elimination of unrealized results on intercompany transactions is allocated to the related operating segments.

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The segment information for prior periods has been restated to reflect this reallocation as from the earliest period presented in this report.

The presentation of non-controlling interests has been brought in line with FASB ASC Topic 810 (formerly  SFAS 160), which Statement became effective on January 1, 2009 for the Company.

Effect of acquisition accounting

KASLION

Our Acquisition by KASLION has been accounted for using the acquisition method.  Accordingly, the USD 10,601 million purchase price has been “pushed down” to NXP and allocated to the fair value of assets acquired and liabilities assumed.

The carrying value of the net assets acquired and liabilities assumed of NXP, as of the Acquisition date on September 29, 2006, amounted to USD 3,302 million, resulting in an excess of the purchase price over the carrying value of USD 7,299 million. The excess of the purchase price was allocated to intangible assets, step-up on tangible assets and liabilities assumed, using the estimated fair value of these assets and liabilities.

An amount of USD 3,096 million, being the excess of the purchase price over the estimated fair value of the net assets acquired, was allocated to goodwill. This goodwill is not amortized but is tested for impairment at least annually.

In 2008 this has led to an impairment of USD 714 million in the segments Home and in Corporate and Other.

The cumulative effect of this acquisition accounting on our financial results is referred to as the ‘PPA effect’.

Other acquisitions

In addition, acquisition accounting is also applied to other acquisitions such as Silicon Laboratories Inc. in 2007 and the acquisitions of GloNav Inc., the BMP business of Conexant Systems Inc. and our NuTune joint venture with Thomson in 2008.

As used in this discussion, the term ‘PPA effect’ includes the net effect of the acquisition accounting applied to these transactions.

Adjustments in fair values associated with these acquisitions had a negative impact on 2009 income from operations of USD 391 million (2008: USD 713 million, 2007: USD 791 million,) due to additional amortization and depreciation charges. This was partly offset in 2009 net income by the tax effect on the purchase price adjustments amounting to USD 189 million (2008: USD 349 million, 2007: USD 247 million).

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Use of certain non-US GAAP financial measures

The following non-US GAAP financial measures are presented in the discussion because they are used by management in evaluating our performance and our reporting segments or because management believes the measure provides investors with useful information about our financial results.

Comparable Sales Growth

As reported in the statement of operations, sales are translated from foreign currencies into our reporting currency, the US dollar, at the exchange rate on transaction dates during the respective years. The comparable sales growth measure reflects the relative changes in sales between periods adjusted for the effects of foreign currency exchange rate changes, material acquisitions and divestments and reclassified product line (consolidation changes). As a result of significant currency movements throughout the year and the impact of material acquisitions and divestments and comparable sales figures, management believes that an understanding of sales performance is enhanced after these effects are excluded.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)

EBITDA represents net income excluding income taxes; financial income and expenses; amortization (including impairments); and depreciation, and as such is eliminating all purchase price accounting (PPA) effects. EBITDA is used by management to evaluate our performance of the group since it believes that using EBITDA facilitates the comparison between periods of the underlying performance of our business. Furthermore, management uses the EBITDA measure when comparing our performance with our peers.

Adjusted EBITDA

Adjusted EBITDA refers to EBITDA adjusted for incidental items such as restructuring, litigation, IT system reorganization costs, exit of product lines, other non operations-related items and the remaining effects of purchase price accounting (PPA). Management uses Adjusted EBITDA to evaluate our performance of the group and to make comparisons over different fiscal periods, since it eliminates the effect of certain items management deems less relevant to our continuing operations. Furthermore, the Adjusted EBITDA measure is used as target-setting for remuneration purposes of management and employees.

Adjusted IFO

Adjusted IFO refers to Income from operations adjusted for incidental items such as restructuring, litigation, IT system reorganization costs, exit of product lines, other non operations-related items, impairments and the effects of purchase price accounting (PPA). Adjusted IFO is used by management to better evaluate the underlying performance of our business segments on an ongoing basis.

Cash flows before financing activities

Cash flows before financing activities, which are defined as the sum of net cash from operating activities and net cash from investing activities, are presented separately to facilitate investors’ understanding of our funding requirements.

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Net debt : total equity ratio

The total net debt position as a percentage of the sum of total equity (shareholder’s equity and minority interests) and net debt is presented as a measure, since management considers this a measure of our solvency.

For a reconciliation of non-US GAAP financial measures to the nearest US GAAP financial measure, refer to “Reconciliation of non-US GAAP information”.

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Management Summary

Economic and financial crisis

The effects from the economic financial crisis had an impact on both sales and profitability of the current year. The nominal sales in 2009 declined by 29.4% compared to last year and this deterioration affected all business segments. The lower sales, and limited visibility, also affected the utilization of our factories during the first half of the year. However, during the second half of the year, the supply chain replenishment and government stimulus packages provided by some governments resulted in an uptake in sales. This also improved our factory utilization which increased from 36% in the first quarter to 71% in the fourth quarter of the year. The average utilization for the full year 2009 was at 56% compared to 72% in 2008. The semiconductor industry has shown recovery in the past few quarters from the steep decline that was prevailing in the second half of 2008 and the start of 2009.

Redesign Program

During the year 2009, significant progress has been made on the execution of the large scale Redesign Program announced in September 2008. The wafer fab in Caen, France, was sold in June 2009 and the wafer fab in Fishkill, USA, stopped production in early July 2009. The process and product transfer programs related to the redesign of fabs in Hamburg and Nijmegen are on track. The program has been expanded to include, among others, the employee termination costs related to the sale of our television systems and set-top box business lines, which were included in our business segment Home, to Trident Microsystems, Inc., which transaction was completed on February 8, 2010, and the closing of an additional wafer fab in Nijmegen, which is scheduled for early 2011.

The Company has been able to accelerate certain aspects of the program compared to the original schedule. It is delivering more savings than originally anticipated, and the program has been expanded to cover additional areas. The annual savings that will be realized in the course of 2011 are expected to exceed USD 650 million (compared with the original target of USD 550 million by the end of 2010). We estimate the total costs of the ongoing program to be no greater than USD 750 million by the end of 2011 (as opposed to USD 700 million by the end of 2010). By the end of 2009, USD 433 million of restructuring costs related to the Redesign Program and other restructuring activities have been paid out since the beginning of the Redesign Program.

Capital structure

Since the beginning of 2009, the book value of total debt has reduced from USD 6,367 million to USD 5,283 million. A combination of cash buy-backs and exchange offers resulted in total debt reduction of USD 1,331 million. The total amount of cash used as result of the debt buy-backs amounted to USD 286 million. A draw down of USD 200 million under the Revolving Credit Facility during the first quarter of 2009 increased the book value of total debt outstanding. Other effects on total debt relate to translation and exchange differences on the notes outstanding. The net interest expense for the full year was reduced from USD 475 million in 2008 to USD 359 million in 2009 as a result of these debt exchanges, buy-backs and favorable interest rates. The full effect of these debt exchanges and buy-backs will be visible in 2010. The Company may from time to time continue to seek opportunities to retire or purchase outstanding debt.

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Goodwill Impairments

The goodwill is tested for impairment on an annual basis each year in accordance with ASC 350 (FASB Statement 142). To assess for impairment, the fair value of each ‘reporting unit’, that has goodwill, is determined. If the carrying value of the net assets in the ‘reporting unit’ exceeds the fair value, there is an additional assessment performed to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds this implied fair value, we record impairment for the difference between the carrying value and the implied fair value. NXP’s business segments are considered as the ‘reporting unit’ as referred to in ASC 350 for the purpose of impairment analysis.

Below is the summary of the results of our step 1 goodwill impairment analysis completed as at end of September, 2009:

Valuation as at end of September, 2009

The determination of the fair value of the reporting unit requires us to make significant judgments and estimates including projections of future cash flows from the business. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units. The key assumptions considered for computing the fair value of reporting units include (a) cash flows based on financial projections for periods ranging from 2009 through 2012 and which were extrapolated until 2020, (b) terminal values based on terminal growth rates not exceeding 4%, (c) discount rates, based on WACC, ranging from 12.8% to 16.8%. An increase in WACC of approximately 1.0% would have resulted in an impairment loss in both our reporting units Automotive & Identification and Home and a decrease of 1% in the terminal growth rate would have resulted in an impairment in the Automotive & Identification. The assumptions for reporting unit Automotive & Identification were closely reviewed since the percentage of fair value exceeding the carrying value was the lowest amongst the reporting units. Sales and profitability in the 4th quarter of 2009 and the outlook for the Automotive & Identification business have improved significantly compared to the time the impairment analysis was executed. For the reporting unit Home, following the announcement to sell the television and set-top-box business lines, which were included in the reporting unit Home, to Trident Microsystems, Inc., the assets and liabilities to be divested are reported as held for sale at fair value less cost to sell, for which an impairment of USD 69 million was recorded in 2009. The assets held for sale include USD 38 million goodwill related to the divested portion of the Home business segment.

Based on the goodwill impairment analysis performed in 2009, management concluded that there is no additional impairment risk.

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Performance of the Group 2009 compared to 2008

Sales

The following table presents the aggregate by segment of sales for the years ended December 31, 2009 and 2008.

Sales

In millions of USD

Sales were USD 3,843 million in 2009 compared to USD 5,443 million in 2008, a nominal decrease of 29.4%, and a comparable decrease of 21.1%. Included are the wafer sales to ST-Ericsson of USD 149 million in 2009 compared to USD 85 million in 2008 (August — December 2008).The sales in 2009 were USD 792 million lower due to the divestment of wireless activities in July 2008. The remaining decline in sales was mainly attributable to the global financial crisis and the weak economic environment which affected all business segments. Especially in the first and second quarter of 2009, sales were severely affected by the crisis, whereas the sales in the third and fourth quarter partly recovered due to supply chain replenishment but were still lower than in the pre-crisis period. Furthermore, the sales of 2009 were affected by the unfavorable currency effects of USD 66 million compared to 2008.

The Automotive & Identification segment showed a 22.0% decline on a comparable basis, which was in line with the market development. The automotive market was affected by the continued low demand and related car production. The Identification sales were also weak following a slowdown in government related projects. The MultiMarket Semiconductors segment showed a 16.3% decline on a comparable basis. The decline was across the product portfolio especially in commodity products partly offset by sales of components for radio base stations and sales in the Sound Solution business. The Home segment sales declined by 27.4% on a comparable basis largely due to the decline in the end-customer demand and higher inventory levels at the distribution partners. The sales for the Home segment were also affected by the ongoing decline in the CRT TV market and the weakness in the mainstream (retail) STB market.

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Gross margin

Gross margin was USD 969 million in 2009 or 25.2% of total sales compared to USD 1,218 million or 22.4% of total sales for 2008. Included are PPA effects of USD 69 million in 2009 compared to USD 151 million in 2008.  Incidental items amounted to a loss of USD 158 million in 2009 and were mainly related to product transfer costs and exit of product lines, whereas incidental items in 2008 amounted to a loss of USD 402 million and were largely related to the restructuring charge of USD 348 million related to the Redesign Program and other costs associated with exiting product lines.

The decline in gross margin was largely due to the significantly lower sales during the first half of 2009 resulting from the economic downturn. This also reduced our factory utilization to 56% in 2009 compared to 72% in 2008. The divestment of wireless activities in July 2008 also resulted in lower gross margin. The divested wireless activities had a gross margin of USD 236 million in the year 2008. Furthermore, the gross margin was affected by the unfavorable currency effect of USD 48 million in 2009 compared to 2008. However, the decline in gross margin was mitigated to a large extent, due to the cost reductions achieved as a result of the ongoing Redesign Program.

Selling expenses

Selling expenses were USD 277 million in 2009 (or 7.2% of total sales) compared to USD 400 million in 2008 (7.3% of total sales). The decline in selling expenses was mainly due to the divestment of our wireless activities (USD 66 million in 2008) and incidental items of USD 19 million, related to restructuring costs, in 2008. The remaining reduction in the costs was mainly the result of the ongoing Redesign Program and favorable currency effects.

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General and Administrative expenses

General and Administrative expenses (‘‘G&A expenses’’) were USD 803 million in 2009 compared to USD 1,875 million in 2008. The decline in G&A expenses comes from the lower PPA amortization, lower impairment charges in 2009 compared to 2008, lower incidental costs, the divestment of wireless activities and as a result of the ongoing Redesign Program. The G&A expenses in 2009 included the PPA effects of USD 322 million compared to USD 536 million in 2008. The decline in PPA amortization is mainly due to the divestment of the wireless activities in 2008. The G&A expenses of 2009 included incidental items amounting to a loss of USD 88 million compared to USD 207 million in 2008. The incidental items in 2009 were mainly related to restructuring costs of USD 36 million, IT system reorganization costs of USD 35 million and merger & acquisition related costs. Incidental items of USD 207 million in 2008 included USD 124 million of restructuring costs, of which USD 83 million related to the Redesign Program and USD 79 million of IT system reorganization costs.

The G&A expenses in 2009 included an impairment of assets held for sale of USD 69 million in the Home segment, related to the transaction with Trident Microsystems, Inc. In 2008, the G&A expenses included impairment charges of goodwill and other intangibles of USD 714 million, which was mainly related to the Home segment (USD 665 million) and Corporate and Other.

The decline in G&A expenses was partly due to the divestment of our wireless activities, which had an impact of USD 84 million in 2008. In addition, the G&A expenses were impacted by higher costs in 2009 for the annual incentive program.

Research and Development expenses

Research and Development expenditures per sector

In millions of USD

(1) Not meaningful

The above data exclude the write-off of acquired In-Process R&D, nil in 2009 (2008: USD 26 million).

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R&D expenses and write-off of acquired in-process research and development were USD 777 million in 2009 compared to USD 1,225 million in 2008. The R&D expenses for 2009 did not include any PPA effects compared to USD 26 million included in 2008. The R&D expenses in 2009 include the incidental items amounting to a loss of USD 69 million. These were mainly related to the restructuring costs and merger & acquisition related costs. The incidental items in 2008 amounted to a loss of USD 107 million and were mainly related to the Redesign Program. The R&D expenses were 20.2% of total sales in 2009 compared to 22.0% in 2008.

The decline in R&D expenses was largely due to the divestment of wireless activities, which amounted to USD 315 million in 2008 and the result of the ongoing Redesign Program. Furthermore, R&D expenses were lower in 2009 due to the favorable currency effects of USD 34 million compared to 2008. These reductions were partly offset by USD 45 million additional R&D costs in 2009 due to last year’s acquisitions Conexant’s Broadband Media Processing activities and NuTune, which were only partially included in the consolidation of 2008.

Other income

Other income and expense was a loss of USD 12 million in 2009 compared to a loss of USD 364 million in 2008. The loss in 2009 was related to the losses on the sale of various smaller businesses and gains on disposal of various tangible fixed assets. The loss in 2008 was due to a loss of USD 413 million related to the sale of our wireless activities, partly offset by gains from divestments of other activities and various tangible fixed assets.

Restructuring charges

In 2009, a restructuring charge of USD 112 million was recorded, resulting from the new restructuring projects in 2009, which included the closure of the additional wafer fab in Nijmegen scheduled for early 2011, and employee termination costs consequent to the transaction with Trident Microsystems, Inc. This charge was offset by release of restructuring liabilities of USD 92 million related to earlier announced restructuring projects. In addition, cash expensed restructuring costs amounting to USD 83 million were directly charged to income statement in 2009. On aggregate, the net restructuring charges that affected the income from operations for 2009 amounted to USD 103 million. In 2008, a charge of USD 594 million was recorded for restructuring, of which USD 443 million was related to the Redesign Program, which was announced in September 2008 and related to employee termination costs. The remainder was largely related to the write downs of assets, costs related to the closure of businesses and various other restructuring charges.

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The following table presents restructuring charges by segment as included in income from operations for 2009 and 2008:

Restructuring charges

In millions of USD

The Redesign Program has now been significantly accelerated and expanded.

Income from operations (IFO)

The following tables present the aggregate by segment of income (loss) from operations for the years ended December 31, 2009 and 2008.

In millions of USD

(1) Not meaningful

In millions of USD

(1) Not meaningful

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Income from operations in 2009 was a loss of USD 900 million compared to a loss of USD 2,646 million in 2008. Included are the PPA effects of USD 391 million in 2009 compared to USD 713 million in 2008. The reduction in PPA effects was largely due to the divestment of wireless activities and write down of intangibles in the Home segment and Corporate and Other segment in 2008. The incidental items in 2009 amounted to a loss of USD 344 million and were mainly related to restructuring programs which included provisions and payments for severance, costs related to the exit of product lines (Fishkill, USA, and Caen, France) and product transfer costs. Furthermore, incidental items in 2009 included merger & acquisition related costs in relation to transactions with Trident and Virage Logic, and IT reorganization costs. In 2008 the incidental items amounted to a loss of USD 1,122 million and were mainly related to restructuring charges of USD 594 million and the result on the sale of the wireless activities of USD 413 million. The income from operations in 2009 also included an impairment charge for assets held for sale of USD 69 million consequent to the combination of our digital TV and set top box businesses with that of Trident Microsystems, Inc. The income from operations in 2008 included an impairment charge of USD 714 million related to write down of goodwill and intangibles assets.

Excluding the loss of USD 217 million of the divested wireless activities in 2008, the decline in income from operations was largely due to the global economic downturn which affected both sales and profitability of all the business segments. The lower sales led to a lower factory utilization which bottomed out at 36% in the first quarter of 2009. Since the majority of the costs are fixed by nature, the lower sales affected the gross margin for the year. The factory utilization for full year of 2009 was at 56% compared to 72% in 2008. The decline in gross margin was partly offset by reduction in operating expenses achieved by the ongoing Redesign Program that was announced in September 2008.

Financial income and expenses

Financial income and expenses

In millions of USD

Financial income and expenses was a net income of USD 682 million in 2009 compared to a net expense of USD 614 million in 2008.

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The financial income and expenses of 2009 included a gain of USD 1,020 million, net of a write-down of USD 25 million related to the capitalized initial bond issuing costs, as a result of a private offer to exchange existing unsecured and secured notes for new U.S. dollar and Euro-denominated super priority notes together with several privately negotiated transactions to purchase secured and unsecured notes for cash or in a combination of cash and exchange of existing notes for new super priority notes. As a result of these transactions, the net interest expense also decreased from USD 475 million in 2008 to USD 359 million in 2009. Furthermore, the financial income and expenses in 2009 included a gain of USD 39 million as a result of change in the foreign exchange rates applicable to our USD denominated notes and short-term loans, compared to a loss of USD 87 million in 2008.

Income tax benefit (expenses)

The income tax expense for 2009 was an expense of USD 17 million compared to the income tax expense of USD 46 million in 2008.

The Company’s effective income tax expense rate was 7.8% in 2009, compared to 1.4% in 2008. The change in the effective tax rate was primarily attributable to new loss carryforwards, not expected to be realized, plus an effect for recognized withholding taxes and higher non-tax deductible expenses.

Results relating to equity-accounted investees

Results relating to the equity-accounted investees in 2009 resulted in a gain of USD 74 million compared to a loss of USD 268 million in 2008. The gain in 2009 was largely due to the release of translation differences related to the sale of our 20% share in the ST-NXP Wireless joint venture.  The loss in 2008 was largely related to the revaluation of the fair market value of our 20% share in the ST-NXP Wireless joint venture.

Net income

The net income for the year 2009 amounted to a loss of USD 161 million compared to a loss of USD 3,574 million in 2008. The decrease in net loss was attributable to:

·                  lower incidental costs and lower impairment charges

·                  the higher financial income as a result of the bond exchange and bond buy-back transactions this year

·                  better results from equity-accounted investees.

Non-controlling interests

The share of non-controlling interests in the 2009 results amounted to a profit of USD 14 million compared to USD 26 million in 2008 related to the third-party share in the results of consolidated companies, predominantly Systems on Silicon Manufacturing Company Pte. Ltd. (‘‘SSMC’’) and NuTune. As a result, the net loss attributable to the Company’s shareholder amounted to USD 175 million (2008: USD 3,600 million).

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Reconciliation of certain non-GAAP measures

Certain non-US GAAP financial measures have been used when discussing the NXP Group’s financial position. The following table represents a reconciliation of IFO to Adjusted IFO and Adjusted EBITDA.

Adjusted EBITDA

Adjusted EBITDA for 2009 was USD 336 million, compared to USD 485 million in 2008. The decrease in EBITDA is attributable to the lower gross margin resulting from lower sales due to the economic downturn, partly offset by the reduction in the operating expenses as a result of the ongoing Redesign Program.

The adjustments made from 2009 EBITDA of USD 112 million (2008: a loss of USD 905 million), to arrive at Adjusted EBITDA of USD 336 million (2008: USD 485 million) consist of:

·                  restructuring costs of USD 99 million* (2008: USD 594 million)

·                  exit of product lines of USD 43 million* (2008: USD 15 million)

·                  other incidental items of USD 156 million* (2008: USD 513 million), mainly included process transfer costs, IT system reorganization costs and merger and acquisition related costs.

·                  results of equity-accounted investees amounting to a gain of USD 74 million (2008: a loss of USD 268 million), mainly related to the release of translation differences related to the sale of our 20% share in the ST-NXP Wireless joint venture.

*    In 2009, USD 46 million of depreciation property, plant and equipment have been excluded from exit of product lines (USD 21 million), restructuring costs (USD 4 million), and other incidental items (USD 21 million).

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Performance by segment 2009 compared to 2008

The following tables present total sales and income from operations by segment for the years ended December 31, 2009 and 2008.

Sales growth composition 2009 versus 2008

In %

(1) Not meaningful

Income (loss) from operations

In millions of USD

(1) Not meaningful

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Automotive & Identification

Key data

In millions of USD unless otherwise stated