STM

STMicroelectronics N.V. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K, dated October 23, 2013, reports the financial results for STMicroelectronics N.V. for the third quarter and nine months ended September 28, 2013. The period was defined by the completion of the transaction to split the ST-Ericsson joint venture in August 2013, resulting in the deconsolidation of ST-Ericsson effective September 1, 2013. Approximately 1,000 employees and specific product lines were integrated into STMicroelectronics.

Key Financial Metrics

Nine Months 2013 Highlights: Net revenues totaled $6.07 billion (down 4.2% year-over-year). Net loss attributable to the parent company was $464 million, compared to a loss of $730 million in the prior year period.

Material Changes vs. Prior Period

• Revenue Trends: Q3 revenues decreased 7.1% year-over-year and 1.6% sequentially. Excluding the Wireless product line, revenues increased 3.9% year-over-year and 0.5% sequentially, driven by growth in Imaging, Microcontrollers, MEMS, and Automotive segments.
• Profitability: GAAP operating loss narrowed significantly to $66 million from $792 million in Q3 2012, primarily due to the absence of massive impairment charges recorded in the prior year. On a non-GAAP basis (excluding impairment and restructuring), the company returned to operating profitability with $54 million in income.
• Impairment Charges: The company recorded $120 million in impairment, restructuring, and closure costs in Q3 2013, including a $56 million non-cash charge for Digital Convergence Group goodwill and a $33 million charge for tangible assets.
• Expense Reduction: R&D expenses decreased 27% year-over-year to $423 million, and SG&A expenses decreased 8% to $253 million, benefiting from the ST-Ericsson wind-down.
• Asset Sales: Other income included an $80 million gain from the sale of ST-Ericsson's Global Navigation Satellite System (GNSS) business and other assets.

Guidance, Outlook, and Risks

• Q4 2013 Outlook: Management expects revenues to be flat sequentially, plus or minus 3.5 percentage points. Gross margin is expected to be approximately 33.0%, plus or minus 2.0 percentage points.
• Cash Flow: The company anticipates a return to positive free cash flow generation in Q4 2013 due to the wind-down of ST-Ericsson.
• Margin Target: The target to reach an operating margin of about 10% has been delayed to mid-2015, approximately six months later than originally expected, dependent on revenue levels.
• Dividends: A cash dividend of $0.10 per share for Q4 2013 and Q1 2014 was proposed for shareholder approval.
• Risks: Key risks include uncertain macro-economic trends, demand corrections in the semiconductor industry (specifically high-end smartphones in Asia), foreign exchange rate variations, and the execution of cost reduction initiatives.

Investor Verification Checklist

• Verify the reconciliation of Non-GAAP operating income ($54 million) to GAAP operating loss ($(66) million) to understand the impact of the $120 million impairment charge.
• Confirm the details of the ST-Ericsson split, specifically the assets retained by STMicroelectronics versus those sold or transferred to Ericsson.
• Monitor the inventory levels ($1.32 billion) and inventory turns (4.1) to assess potential future write-down risks given the softness in the wireless market.
• Review the timeline for achieving the 10% operating margin target, noting the delay to mid-2015.
• Assess the impact of the $1.31 to $1.00 USD/EUR exchange rate on future earnings, as the company operates globally.