STMicroelectronics N.V. — 2018 Fourth-Quarter and Full-Year Summary
Business context and reporting period
STMicroelectronics N.V. is a global semiconductor manufacturer serving automotive, industrial, personal electronics, communications equipment, and computers and peripherals. The Form 20-F was filed on February 28, 2019, covers the fiscal year ended December 31, 2018, and presents fourth-quarter information for the three months ended December 31, 2018. Consolidated financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
The company reports three principal product groups: Automotive and Discrete Group (ADG), Analog, MEMS and Sensors Group (AMS), and Microcontrollers and Digital ICs Group (MDG).
Key financial metrics
| Metric | Q4 2018 | Q3 2018 | Q4 2017 | FY 2018 | FY 2017 |
|---|---|---|---|---|---|
| Net revenues | $2,648 million | $2,522 million | $2,466 million | $9,664 million | $8,347 million |
| Gross profit | $1,059 million | $1,003 million | $1,003 million | $3,861 million | $3,272 million |
| Gross margin | 40.0% | 39.8% | 40.7% | 40.0% | 39.2% |
| Operating income | $443 million | $398 million | $411 million | $1,400 million | $1,005 million |
| Operating margin | 16.8% | 15.8% | 16.7% | 14.5% | 12.0% |
| Net income attributable to parent | $418 million | $369 million | $308 million | $1,287 million | $802 million |
| Diluted EPS | $0.46 | $0.41 | $0.34 | $1.41 | $0.89 |
Q4 revenue increased 5.0% sequentially and 7.4% year over year. Q4 operating income increased 11.3% sequentially and 7.8% year over year. Q4 net income attributable to the parent increased 13.3% sequentially and 35.7% year over year.
- FY revenue: $9.664 billion, up 15.8% year over year.
- FY gross profit: $3.861 billion; gross margin expanded 80 basis points to 40.0%.
- FY operating income: $1.400 billion; operating margin expanded 250 basis points to 14.5%.
- FY operating income before impairment and restructuring charges: $1.421 billion, or 14.7% of revenue, compared with $1.050 billion, or 12.6%, in 2017. This is a non-U.S. GAAP measure.
- FY research and development: $1.398 billion, or 14.5% of revenue, compared with $1.296 billion in 2017.
- FY capital expenditures: $1.262 billion, compared with $1.298 billion in 2017.
- FY free cash flow: $533 million, compared with $308 million in 2017. Free cash flow is a non-U.S. GAAP measure.
- FY net cash from operating activities: $1.845 billion, compared with $1.677 billion in 2017.
Liquidity, debt and balance sheet
| Balance-sheet item | December 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $2,266 million | $1,759 million |
| Marketable securities | $330 million | $431 million |
| Total financial resources | $2,596 million | $2,190 million |
| Total financial debt | $1,910 million | $1,701 million |
| Net financial position | $686 million net cash | $489 million net cash |
| Parent-company stockholders' equity | $6,359 million | $5,404 million |
The company reported a debt-to-equity ratio of 0.30 at year-end 2018. It had $572 million of unused committed medium-term credit facilities. Long-term debt included $1.316 billion of senior unsecured convertible bonds and $577 million of European Investment Bank loans. Long-term debt obligations at redemption value totaled $2.094 billion, including $146 million due in 2019.
2018 financing cash flows included $216 million of dividends, $103 million of long-term debt repayment, $62 million of share repurchases, and $281 million of proceeds from long-term debt. Management stated that existing resources should fund projected requirements for the next twelve months, including capital expenditures, working capital, dividends and scheduled debt repayments.
Material changes versus comparable periods
- All product groups delivered double-digit full-year revenue growth: ADG revenue rose 16.2% to $3.556 billion, AMS rose 19.9% to $3.154 billion, and MDG rose 11.1% to $2.940 billion.
- Full-year revenue growth was driven principally by approximately 16% higher average selling prices, reflecting an approximately 18% favorable product-mix effect, while volumes were substantially flat. Reported pricing declined approximately 2%.
- Q4 ADG revenue increased 17.8% year over year and AMS revenue increased 9.5%; MDG revenue declined 6.9%, mainly because of lower microcontroller and memory volumes.
- Full-year operating expenses increased 9.5% to $2.493 billion, but declined as a percentage of revenue to 25.8% from 27.3% due to revenue leverage.
- Impairment, restructuring and related closure costs fell to $21 million from $45 million in 2017. The 2018 charge primarily comprised $19 million for the substantially completed set-top-box restructuring plan and $2 million for acquired technologies without future alternative use.
- The largest customer, Apple, represented 13.1% of 2018 revenue, compared with 10.5% in 2017. Distribution represented 35% of full-year revenue, up from 34%.
- Inventories increased to $1.562 billion from $1.335 billion, while trade receivables increased to $1.277 billion from $1.149 billion.
- Stock-based compensation increased to $125 million from $61 million, contributing to higher operating expenses.
Guidance, outlook and unusual items
For the first quarter of 2019, management expected revenue of approximately $2.1 billion at the midpoint, down approximately 20.7% sequentially and 5.7% year over year, with a tolerance of plus or minus 350 basis points for the sequential comparison. Expected gross margin was approximately 39%, plus or minus 200 basis points. The outlook reflected first-quarter seasonality and weaker dynamics in smartphone applications, computer hard-disk drives, and distribution in China and Europe, partly offset by continued strength in automotive and power discrete.
Management forecast 2019 capital investment of approximately $1.2 billion to $1.3 billion, supporting a new 300mm fab in Agrate, silicon-carbide and gallium-nitride capacity, next-generation imaging technology, Crolles capacity expansion, and integration of the former Micron 200mm fab in Singapore.
- In February 2019, ST announced an agreement to acquire 55% of Swedish silicon-carbide wafer manufacturer Norstel, with an option for the remaining 45%; total consideration would be $137.5 million if the option is exercised.
- The company signed a multiyear agreement with Cree for silicon-carbide wafer supply and announced a three-year share-buyback program of up to $750 million. By December 31, 2018, it had repurchased 4.3 million shares for $62 million under the program.
- A $42 million accrual was recorded for potential financial returns associated with the Nano2017 public R&D funding program; the potential 2024 payment depends on future cumulative sales.
- The company adopted new U.S. GAAP revenue and financial-instrument guidance in 2018 without a significant effect on the financial statements. Adoption of the new lease standard in 2019 was expected to increase non-current assets and long-term liabilities by approximately $200 million.
Principal risks and contingencies
- Semiconductor industry cyclicality, excess capacity, pricing pressure, product obsolescence and rapid changes in end-market demand may cause significant revenue and margin volatility.
- High fixed manufacturing costs and substantial capital requirements create risks of underutilization, unused-capacity charges, inventory write-downs and impairment.
- Exposure to tariffs, trade barriers, geopolitical events, Brexit-related uncertainty, foreign exchange movements and changing tax regimes could affect demand, costs and reported results.
- The company depends on key customers and distributors; customer concentration, cancellations, price renegotiations and customer financial difficulties could adversely affect results. Apple represented 13.1% of 2018 revenue.
- Reliance on limited suppliers, external foundries and back-end subcontractors creates risks of shortages, higher costs, delays and manufacturing-yield problems.
- Cybersecurity, data privacy and GDPR compliance failures could result in operational disruption, fines, litigation and reputational damage.
- Patent and other intellectual-property disputes, product liability and warranty claims could require licensing payments, damages, recalls or changes to products.
- As of December 31, 2018, provisions for probable legal losses were not considered material, but management stated that adverse litigation outcomes could materially affect future results. The filing text does not provide a clear quantified exposure for possible IP claims.
- The company had $1.323 billion of purchase obligations, including $628 million for equipment and other assets and $525 million for foundry purchases, plus $214 million of operating lease commitments.
Important facts for investors to verify
- Whether the expected first-quarter 2019 revenue decline and approximately 39% gross-margin outlook were achieved.
- Progress, cost and capacity utilization of the Agrate, Crolles, silicon-carbide, gallium-nitride and Singapore fab projects.
- Execution and final consideration for the Norstel acquisition and the Cree wafer-supply agreement.
- MDG recovery prospects, particularly following the Q4 year-over-year decline in microcontroller and memory revenue.
- Inventory growth, customer demand, distributor inventory and pricing trends as semiconductor conditions weaken.
- Cash requirements for the $750 million buyback authorization, quarterly dividends, $1.2–$1.3 billion 2019 capital plan and scheduled debt maturities.
- Potential effects of foreign exchange movements, tariffs, export restrictions and changes in public funding or tax benefits.
- Future outcomes of IP, tax, warranty and other contingencies, including the Nano2017 financial-return obligation and unrecognized tax positions.