STMicroelectronics N.V. — 2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016. The filing was submitted March 3, 2017 and reports under U.S. GAAP in U.S. dollars. The requested 2016 fourth-quarter information is unaudited interim information included within the annual filing.
Business context
STMicroelectronics is a global semiconductor designer, manufacturer and marketer serving automotive, industrial, consumer, communications, smartcard and Internet of Things applications. Reportable product groups are Automotive and Discrete Group, Analog and MEMS Group, and Microcontrollers and Digital ICs Group. The company emphasizes Smart Driving and IoT applications, with substantial internal manufacturing and research and development.
Key financial metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net revenues | $6,973 million | $6,897 million | +1.1% |
| Gross profit | $2,455 million | $2,332 million | +5.3% |
| Gross margin | 35.2% | 33.8% | +140 bps |
| Operating income | $214 million | $109 million | +96% |
| Operating margin | 3.1% | 1.6% | +150 bps |
| Net income attributable to parent | $165 million | $104 million | +58% |
| Diluted EPS | $0.19 | $0.12 | +0.07 |
| Net cash from operating activities | $1,039 million | $842 million | +$197 million |
| Free cash flow | $312 million | $327 million | -$15 million |
| Capital expenditures, net | $607 million | $467 million | +$140 million |
Research and development expense was $1,336 million, or approximately 19.2% of net revenues, compared with $1,425 million in 2015. Selling, general and administrative expense was $911 million. Other income and expenses, net, declined to $99 million from $164 million, principally because of lower research and development grants and lower gains on asset sales.
| Fourth-quarter metric | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Net revenues | $1,859 million | $1,797 million | $1,668 million |
| Gross profit | $698 million | $643 million | $559 million |
| Gross margin | 37.5% | 35.8% | 33.5% |
| Operating income | $129 million | $90 million | $25 million |
| Net income attributable to parent | $112 million | $71 million | $2 million |
| Diluted EPS | $0.13 | $0.08 | $0.00 |
Fourth-quarter revenue increased 3.5% sequentially and 11.5% year over year. Management attributed the improvement to sustained demand, higher volumes, manufacturing efficiencies, improved product mix and lower unused-capacity charges. Fourth-quarter gross margin exceeded the midpoint of guidance by 50 basis points and included approximately 20 basis points of unused-capacity charges.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1,629 million and marketable securities were $335 million at December 31, 2016.
- Total liquidity and capital resources were $1,964 million, compared with $2,106 million at December 31, 2015.
- Total financial debt was $1,451 million, consisting of $117 million of short-term debt and $1,334 million of long-term debt.
- Net financial position was positive $513 million, compared with positive $494 million in 2015.
- The debt-to-equity ratio was 0.32, compared with 0.35 in 2015.
- The company had $558 million of unutilized committed medium-term credit facilities.
- Debt maturities at redemption value totaled $1,525 million, including $117 million due in 2017, $714 million in 2019 and $461 million in 2021.
- Cash dividends paid to shareholders were $251 million in 2016. The approved dividend was $0.24 per common share, paid in quarterly installments of $0.06.
Material changes versus the prior comparable period
- Revenue increased modestly despite approximately 9% average selling-price pressure, primarily because volumes increased approximately 10%.
- Excluding businesses being phased out, including mobile legacy products, camera modules and set-top-box products, revenue increased approximately 2.4%.
- ADG revenue increased 3.0% to $2,813 million, driven primarily by automotive products.
- AMG revenue declined 5.2% to $1,584 million, reflecting lower average selling prices and weakness earlier in the year in analog, power discrete and smartphone MEMS markets.
- MDG revenue was broadly flat at $2,285 million; microcontroller growth offset declines in digital products and discontinued businesses.
- Operating expenses declined 3.2% to $2,247 million, benefiting from currency effects, restructuring savings and the completed savings plan.
- Operating income before impairment and restructuring charges increased to $307 million from $174 million.
- Restructuring, impairment and related closure costs increased to $93 million from $65 million, primarily because of the set-top-box restructuring plan.
- Operating cash flow improved materially, but free cash flow declined because of higher capital spending and the $78 million NFC/RFID business acquisition.
Guidance, outlook and management commentary
- For the first quarter of 2017, management expected sequential revenue to decline approximately 2.4%, plus or minus 3.5 percentage points, implying approximately 12.5% year-over-year growth at the midpoint.
- First-quarter gross margin guidance was approximately 37.0%, plus or minus 2.0 percentage points, based on an assumed exchange rate of $1.08 per euro and existing hedging contracts.
- Management cited positive market forecasts, a favorable booking trend and strong distributor point-of-sale performance entering 2017.
- 2017 capital expenditures were expected to increase temporarily to approximately $1.0 billion to $1.1 billion, primarily for 300-millimeter front-end manufacturing and back-end assembly and testing capacity supporting a new program expected to ramp in the third quarter.
- Management expected capital spending to return from 2018 onward to a through-cycle level at or below 10% of sales.
- The set-top-box restructuring plan targeted approximately $170 million of annualized savings and approximately $170 million of total restructuring costs. By year-end, the company reported approximately $110 million of annualized savings run rate.
- In July 2016, the company acquired ams NFC and RFID reader assets and workforce for $78 million in cash plus contingent consideration. The transaction generated $42 million of goodwill and was reported in MDG.
Risks, contingencies and unusual items
- The semiconductor industry is cyclical and exposed to excess capacity, price erosion, product obsolescence, changing customer preferences and volatile end-market demand.
- High fixed manufacturing costs create risks from underutilized capacity, inventory write-downs, lower gross margins and additional restructuring charges.
- Key exposures include foreign-exchange movements, especially the U.S. dollar versus the euro, manufacturing yields, supply constraints, reliance on external foundries, technology execution and intense competition.
- The company had $238 million of unrecognized tax benefits and stated that certain positions could increase due to ongoing tax audits, although it did not expect to recognize these benefits in 2017.
- Net pension and post-employment obligations were approximately $347 million.
- Contractual obligations totaled approximately $3,199 million, including $619 million of purchase obligations, $1,525 million of debt obligations, $347 million of pension obligations and $168 million of operating leases.
- Management reported that probable loss provisions for litigation and legal proceedings were not material at December 31, 2016, but potential intellectual-property, product liability, tax, environmental and contract claims could materially affect future results if adversely resolved.
- The company reported no material off-balance-sheet arrangements and received an unqualified audit opinion on its 2016 financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether the 2017 revenue and gross-margin outlook was achieved, particularly the planned third-quarter ramp of the new program.
- Whether the $1.0 billion to $1.1 billion 2017 capital expenditure plan produced sufficient revenue and margin returns.
- The sustainability of the 2016 gross-margin improvement after accounting for price pressure, product mix, capacity utilization and currency effects.
- Progress and final cost of the set-top-box restructuring plan, including achievement of the remaining targeted savings.
- Exposure to the 2019 and 2021 convertible bond maturities and the $112 million European Investment Bank repayment expected in 2017.
- Resolution of uncertain tax positions, tax audits and the recoverability of deferred tax assets.
- Potential effects of semiconductor cyclicality, customer concentration, supply constraints, intellectual-property claims and manufacturing disruptions.