STMicroelectronics N.V. — 2013 Form 20-F Summary
Filing date: March 5, 2014. The filing covers the fiscal year ended December 31, 2013, with additional unaudited fourth-quarter information for the three months ended December 31, 2013. Financial statements are presented in U.S. dollars under U.S. GAAP. STMicroelectronics designs, manufactures and sells semiconductor products across automotive, industrial, consumer, telecommunications and computer applications.
Business context and reporting period
- The company operates primarily through Sense & Power and Automotive Products (SP&A) and Embedded Processing Solutions (EPS).
- 2013 was a transition year following the split-up and wind-down of the ST-Ericsson joint venture. ST-Ericsson was deconsolidated beginning September 1, 2013 and is thereafter accounted for under the equity method.
- Management’s strategy emphasizes automotive products, smart power, MEMS and sensors, microcontrollers, and digital consumer and ASIC products.
- The semiconductor market remained cyclical. Management reported that the company gained market share in its served markets in 2013, excluding the effects of the ST-Ericsson exit.
Key financial metrics
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenues | $8,082 million | $8,493 million | Down 4.8% |
| Gross profit | $2,614 million | $2,783 million | Down 6.1% |
| Gross margin | 32.3% | 32.8% | Down 50 basis points |
| Operating income (loss) | $(465) million | $(2,081) million | Improved by $1,616 million |
| Operating margin | (5.8)% | (24.5)% | Improved |
| Net income (loss) | $(629) million | $(2,188) million | Improved |
| Net loss attributable to parent | $(500) million | $(1,158) million | Improved |
| Basic and diluted EPS | $(0.56) | $(1.31) | Improved |
| Net cash from operating activities | $366 million | $612 million | Down $246 million |
| Free cash flow | $(179) million | $33 million | Declined |
| Capital expenditures | $531 million | $476 million | Up $55 million |
| Balance-sheet and liquidity metric | December 31, 2013 |
|---|---|
| Cash and cash equivalents | $1,836 million |
| Total liquidity and capital resources | $1,894 million |
| Total financial debt | $1,153 million |
| Net financial position | $741 million net cash |
| Parent company stockholders’ equity | $5,643 million |
| Unutilized committed bank facilities | $730 million |
R&D expense was $1,816 million, or 22.5% of revenue, compared with $2,413 million, or 28.4%, in 2012. SG&A expense was $1,066 million, or 13.2% of revenue, compared with $1,166 million, or 13.8%, in 2012. Combined SG&A and R&D expense declined to $2,882 million from $3,579 million.
Fourth-quarter 2013 performance
| Metric | Q4 2013 | Q3 2013 | Q4 2012 |
|---|---|---|---|
| Net revenues | $2,015 million | $2,013 million | $2,162 million |
| Sequential / year-over-year revenue change | +0.1% / (6.8)% | — | — |
| Gross profit | $662 million | $652 million | $697 million |
| Gross margin | 32.9% | 32.4% | 32.3% |
| Operating income (loss) | $(11) million | $(66) million | $(730) million |
| Net loss attributable to parent | $(36) million | $(142) million | $(428) million |
| EPS | $(0.04) | $(0.16) | $(0.48) |
Q4 revenue was within management’s guidance of flat, plus or minus 3.5 percentage points. Excluding the Wireless product line, revenue increased 3.9% year over year. SP&A revenue increased approximately 4.2% year over year, while EPS revenue decreased 19.4%, primarily because of the ST-Ericsson wind-down and weaker legacy set-top-box demand. Q4 free cash flow was positive, although the filing does not provide a clear quarterly free-cash-flow amount.
Material changes versus the prior comparable period
- FY 2013 revenue declined 4.8%, principally because of the ST-Ericsson exit, lower licensing revenue and unfavorable pricing. Excluding Wireless, revenue increased 3.2%.
- Average selling prices declined approximately 9%, including a 6% pure price effect and a 3% unfavorable mix effect, partly offset by approximately 4% higher volume.
- SP&A revenue increased approximately 3%; Automotive revenue increased approximately 7% and Industrial & Power Discrete increased approximately 3%. EPS revenue declined approximately 15%; Wireless revenue declined approximately 48% and DCG declined approximately 17%, while MMS increased approximately 19% and IBP increased approximately 6%.
- Operating losses improved substantially because of lower operating expenses, lower impairment charges and the ST-Ericsson exit. However, SP&A operating income declined to $270 million from $409 million, while EPS operating loss improved to $399 million from $883 million.
- Impairment, restructuring and closure costs decreased to $292 million from $1,376 million. The 2012 amount included a $1,234 million non-cash impairment related primarily to Wireless goodwill and intangible assets.
- Cash generation weakened: operating cash flow fell to $366 million and free cash flow became negative at $179 million. Cash declined by $414 million, partly because of the $455 million repayment of residual 2013 Senior Bonds, capital spending and dividends.
- Debt declined to $1,153 million from $1,301 million. The company repaid the residual 2013 Senior Bonds in March 2013 and drew a new $350 million European Investment Bank facility in the fourth quarter.
Guidance, outlook, unusual items and contingencies
- For Q1 2014, management expected revenue to decline approximately 9.5% sequentially at the midpoint, with a range of plus or minus 3.5 percentage points, and gross margin of approximately 32.4%, plus or minus 2 percentage points.
- Management attributed the expected Q1 decline to normal seasonality and a reduction of more than half in ST-Ericsson legacy-product revenue from the Q4 2013 level.
- Management continued to target an operating margin of approximately 10% by mid-2015, supported by revenue growth, gross-margin improvement and lower net operating expenses.
- 2014 capital expenditures were expected to be approximately $510 million to $550 million, subject to demand and capacity utilization.
- Nano-2017 R&D grants were expected to become effective in Q1 2014, subject to European Union approval. Failure, delay or modification of the program could affect R&D funding and strategy.
- Notable 2013 charges included $109 million of impairment, $178 million of restructuring charges and $5 million of other closure costs. The company also recorded a $122 million loss on equity-method investments, including $104 million related to 3Sun.
- The company recognized an $83 million gain on sales of businesses and non-current assets, including the sale of ST-Ericsson’s GNSS business and the Portland Compiler Group.
- STMicroelectronics estimated possible losses for known legal claims at $30 million to $50 million, while probable legal-loss provisions were not considered material. The Tessera litigation was scheduled for trial in August 2014; Tessera’s damages expert estimated $181 million, while the company’s estimate was $5 million to $8 million if it lost.
- The company’s exposure to the remaining ST-Ericsson wind-down was capped at $149 million per partner, with expected funding needs estimated at $30 million to $40 million for each partner. These commitments had not been drawn at December 31, 2013.
- The company stated that it may need to provide additional financial resources to 3Sun. Its identified exposure included a $13 million equity investment, a $17 million shareholder loan and, under certain conditions, participation in a capital increase of up to €7 million.
Principal investor risks
- Semiconductor cyclicality, pricing pressure, excess capacity, inventory volatility and high fixed manufacturing costs.
- Dependence on successful product launches, design wins, customer demand and intense competition in automotive, industrial, consumer and embedded-processing markets.
- Execution risk from restructuring, manufacturing consolidation, the ST-Ericsson wind-down and the targeted reduction in operating expenses.
- Foreign-exchange exposure, particularly the U.S. dollar versus the euro, despite hedging activities.
- Reliance on government R&D grants and tax credits, including Nano-2017, with potential repayment obligations if conditions are not met.
- Potential impairment of goodwill, intangible assets, manufacturing assets and equity-method investments.
- Intellectual-property litigation, product liability, warranty claims, cybersecurity incidents, supply constraints and manufacturing disruptions.
- Tax audits and uncertain tax positions. Unrecognized tax benefits totaled $255 million at December 31, 2013, and the company reported $513 million of long-term government receivables, primarily from France and Italy.
- Shareholder concentration and potential sales by ST Holding, which owned approximately 27.5% of the company’s shares, as well as potential dilution or defensive issuance of preference shares.
Facts investors should verify
- Whether the ST-Ericsson wind-down and related funding obligations remain within the company’s stated estimates.
- Actual 2014 revenue, gross-margin performance and progress toward the approximately 10% operating-margin target.
- European Union approval and cash realization of the Nano-2017 funding program.
- Cash conversion, free cash flow and capital-expenditure discipline given the negative FY 2013 free cash flow.
- Developments in the Tessera litigation and any changes to the estimated $30 million to $50 million range of possible legal losses.
- Further funding requirements or impairment risk related to 3Sun and other equity-method investments.
- Customer demand, pricing and product-mix trends excluding the discontinued Wireless business.
- Use of the $730 million committed credit facilities, debt maturities and the company’s ability to maintain its net-cash position while paying dividends and funding R&D.