Stmicroelectronics N.V. current report, Q3 FY2017

STMicroelectronics N.V. Form 6-K Summary

Business Context and Reporting Period

This filing covers the second quarter and first half of fiscal year 2017, ended July 1, 2017. STMicroelectronics is a global semiconductor leader providing intelligent and energy-efficient products for automotive, industrial, consumer, and IoT markets. The company operates through three primary reportable segments: Automotive and Discrete Group (ADG), Analog and MEMS Group (AMG), and Microcontrollers and Digital ICs Group (MDG).

Key Financial Metrics

MetricQ2 2017Q2 2016Y/Y Change
Net Revenues$1,923 million$1,703 million+12.9%
Gross Profit$736 million$577 million+27.6%
Gross Margin38.3%33.9%+440 bps
Operating Income$178 million$28 million+535.7%
Net Income (Parent)$151 million$23 million+556.5%
Diluted EPS$0.17$0.03+466.7%
Free Cash Flow (Q2)$52 millionN/AN/A

Liquidity and Debt: As of July 1, 2017, the company held a net cash position of $524 million (Total Financial Resources of $1,989 million less Total Financial Debt of $1,465 million). Total financial debt includes $117 million in short-term debt and $1,348 million in long-term debt.

Material Changes vs. Prior Period

  • Revenue Growth: Q2 revenues increased 12.9% year-over-year, driven by a 25% volume increase partially offset by a 12% decrease in average selling prices due to product mix. All product groups contributed to growth, with AMG leading at +28.3% and MDG at +10.0%.
  • Margin Expansion: Gross margin improved significantly by 440 basis points year-over-year to 38.3%, attributed to manufacturing efficiencies, improved fab loading, favorable product mix, and currency effects.
  • Operating Leverage: Operating income surged to $178 million from $28 million in the prior year, reflecting higher revenues and improved margins. Operating expenses remained flat year-over-year at $567 million.
  • Restructuring: Impairment and restructuring charges were $6 million in Q2 2017, down from $12 million in Q2 2016, primarily related to the set-top box restructuring plan.

Guidance, Outlook, and Risks

  • Q3 2017 Guidance: Management expects Q3 revenues to increase approximately 9.0% sequentially (+/- 3.5 percentage points), representing year-over-year growth of about 16.6% at the midpoint. Gross margin is expected to be approximately 39.0% (+/- 2.0 percentage points).
  • Full Year 2017 Outlook: Revenues are expected to be at the high-end of the previously stated range (14% year-over-year growth +/- 1.5 percentage points).
  • Capital Investment: Capital spending for 2017 is revised upward to a range of $1.25 billion to $1.3 billion (from an initial $1.0-$1.1 billion) to support new product ramps and capacity expansion.
  • Debt Refinancing: On June 22, 2017, the company priced a $1.5 billion offering of senior unsecured convertible bonds to refinance existing debt and fund general corporate purposes. A share buy-back program of up to $297 million was also launched.
  • Risks: Key risks include foreign exchange fluctuations (particularly USD/EUR), customer demand volatility, supply chain constraints, and the successful ramp-up of new programs. The company notes that forward-looking statements are subject to uncertainties including macro-economic trends and geopolitical events like Brexit.

Investor Verification Checklist

  • Verify the execution and settlement of the $1.5 billion convertible bond offering and the subsequent redemption of the $600 million Tranche A bonds due in 2019.
  • Monitor the ramp-up of the new Time-of-Flight imaging programs and the newly won automotive program expected to drive H2 2017 revenue.
  • Track the progress of the set-top box restructuring plan and the realization of targeted annualized savings.
  • Assess the impact of the revised capital expenditure plan ($1.25B-$1.3B) on future free cash flow generation.
  • Review the effectiveness of hedging strategies given the company's significant exposure to Euro-denominated costs and USD-denominated revenues.