STMicroelectronics N.V. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, dated August 3, 2018, reports the unaudited interim financial results for STMicroelectronics N.V. (ST) for the second quarter and first half ended June 30, 2018. ST is a global semiconductor leader providing intelligent and energy-efficient products for automotive, industrial, consumer, and mobile markets. The company operates through three reportable segments: Automotive and Discrete Group (ADG), Analog, MEMS and Sensors Group (AMS), and Microcontrollers and Digital ICs Group (MDG).
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Y/Y Change | H1 2018 | H1 2017 |
|---|---|---|---|---|---|
| Net Revenues ($ millions) | 2,269 | 1,923 | +18.0% | 4,494 | 3,744 |
| Gross Profit ($ millions) | 911 | 737 | +23.6% | 1,799 | 1,424 |
| Gross Margin | 40.2% | 38.3% | +190 bps | 40.0% | 38.0% |
| Operating Income ($ millions) | 289 | 181 | +59.7% | 558 | 313 |
| Operating Margin | 12.7% | 9.4% | +330 bps | 12.4% | 8.4% |
| Net Income to Parent ($ millions) | 261 | 151 | +72.8% | 500 | 258 |
| Diluted EPS ($) | 0.29 | 0.17 | +70.6% | 0.55 | 0.28 |
| Free Cash Flow ($ millions) | (40) | 113 | N/A | 56 | 113 |
| Net Financial Position ($ millions) | 411 | 524 | -21.6% | 411 | 524 |
Liquidity and Debt: As of June 30, 2018, total financial resources were $2,127 million (Cash: $1,683 million; Marketable Securities: $429 million). Total financial debt was $1,716 million, resulting in a net cash position of $411 million. Credit ratings remain investment grade (S&P: BBB-, Fitch: BBB-, Moody's: Baa3).
Material Changes vs. Prior Period
- Revenue Growth: Q2 revenues increased 18.0% year-over-year, driven by a ~20% increase in average selling prices due to favorable product mix, partially offset by a ~2% volume decrease. Sequentially, revenue grew 1.9%.
- Segment Performance:
- MDG: Strongest performer with 27.8% YoY revenue growth, driven by microcontroller sales.
- ADG: Revenue up 15.2% YoY, with double-digit growth in Automotive and Power Discrete.
- AMS: Revenue up 10.7% YoY, though down 6.4% sequentially due to lower smartphone activity.
- Margin Expansion: Gross margin improved 190 basis points YoY due to manufacturing efficiency and product mix. Operating margin expanded to 12.7% in Q2 from 9.4% in Q2 2017, aided by the absence of restructuring charges in the current quarter.
- Restructuring: No impairment or restructuring charges were recorded in Q2 2018. The set-top box restructuring plan was completed in the first half of 2018 with total charges of $20 million.
Guidance, Outlook, and Risks
- Q3 2018 Outlook: Management expects revenues to increase approximately 10.0% sequentially (plus or minus 350 basis points), driven by smartphone applications and automotive demand. Gross margin is expected to be around 40.0% (plus or minus 200 basis points).
- Capital Investment: Full-year 2018 capital spending is anticipated to be in the range of $1.2 billion to $1.3 billion, focusing on 300mm front-end manufacturing and back-end assembly/test capacity.
- Key Risks:
- Currency: Significant exposure to Euro/USD fluctuations. The effective exchange rate was $1.19/€1.00 in Q2 2018. Hedging contracts resulted in a deferred loss of approximately $47 million recorded in AOCI.
- Contingencies: A contingent liability of $43 million is estimated related to the Nano2017 government funding program, dependent on future cumulative sales.
- Market: Risks include macro-economic trends, customer demand volatility, and supply chain constraints.
Investor Verification Checklist
- Verify the sustainability of the 18% revenue growth given the ~2% volume decline, which indicates heavy reliance on product mix and pricing power.
- Monitor the impact of the $47 million deferred loss on hedging contracts and potential future volatility in the Euro/USD exchange rate.
- Assess the execution of the $1.2-$1.3 billion capital expenditure plan and its impact on future free cash flow.
- Review the status of the Nano2017 program and the potential $43 million payback liability based on future sales performance.
- Confirm the sequential recovery in the AMS segment, which declined 6.4% in Q2 due to smartphone weakness.