STMicroelectronics N.V. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, dated November 7, 2013, reports the unaudited interim consolidated financial results for STMicroelectronics N.V. for the third quarter and nine months ended September 28, 2013. The company is a global independent semiconductor manufacturer. A significant event during this period was the completion of the break-up of the ST-Ericsson joint venture with Ericsson. STMicroelectronics ceased consolidating ST-Ericsson SA (JVS) as of September 1, 2013, moving to equity method accounting, and sold its stake in ST-Ericsson AT SA (JVD) to Ericsson in August 2013.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net Revenues | $2,013 million | $2,166 million | $6,067 million | $6,331 million |
| Gross Margin | 32.4% | 34.8% | 32.2% | 32.9% |
| Operating Loss | $(66) million | $(792) million | $(453) million | $(1,352) million |
| Net Loss (Parent) | $(142) million | $(478) million | $(464) million | $(730) million |
| EPS (Diluted) | $(0.16) | $(0.54) | $(0.52) | $(0.82) |
| Net Cash Position | $739 million | $369 million | $739 million | $369 million |
| Free Cash Flow (9M) | $(270) million | $(112) million | $(270) million | $(112) million |
Segment Performance (Q3 2013):
- Sense & Power and Automotive (SP&A): Revenues of $1,205 million; Operating Income of $75 million.
- Embedded Processing Solutions (EPS): Revenues of $802 million; Operating Loss of $(18) million.
Material Changes vs. Prior Period
- Revenue Decline: Q3 revenues decreased 1.6% sequentially and 7.1% year-over-year. The decline was driven by a 23.6% drop in Wireless product line revenues (due to the ST-Ericsson exit) and a 13.6% drop in Digital Convergence Group (DCG) revenues. Excluding Wireless, revenues increased 3.9% year-over-year.
- Margin Compression: Gross margin decreased 240 basis points year-over-year to 32.4%, primarily due to lower selling prices and a less favorable product mix, partially offset by manufacturing efficiencies.
- Operating Loss Improvement: The operating loss improved significantly to $(66) million from $(792) million in Q3 2012. This improvement was driven by reduced operating expenses, gains from the sale of businesses (GNSS and Portland Compiler Group), and lower impairment charges compared to the prior year.
- Impairment Charges: The company recorded $120 million in impairment and restructuring charges in Q3 2013. This included a $56 million impairment on DCG goodwill and intangible assets, $35 million for manufacturing consolidation, and $22 million for restructuring related to headcount reduction.
- ST-Ericsson Deconsolidation: The exit from ST-Ericsson resulted in the removal of significant debt and restructuring costs from the consolidated balance sheet, improving the net financial position.
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). Net operating expenses are targeted in the range of $600 million to $650 million per quarter.
- Free Cash Flow: While Q3 free cash flow was negative, the company anticipates a return to positive free cash flow in Q4 2013 due to the wind-down of ST-Ericsson.
- Long-term Targets: The company aims to reach an operating margin of about 10%, now expected in 2015, dependent on revenue levels.
- Risks and Contingencies:
- Legal Proceedings: Ongoing patent litigation with Tessera (trial scheduled for August 2014) and potential IP claims. Estimated possible losses for known claims range from $30 million to $50 million.
- Equity Investments: Continued monitoring of equity method investments (e.g., 3Sun, MicroOLED) which have incurred impairment charges.
- Market Conditions: Softness in high-end smartphones and mass market demand in Asia.
Key Facts for Investor Verification
- ST-Ericsson Exit Impact: Verify the full financial impact of the deconsolidation of ST-Ericsson, including the $55 million fair value of the retained interest and the $130-$170 million estimated cash cost to complete the wind-down.
- DCG Impairment: Confirm the $56 million impairment charge related to the Digital Convergence Group (DCG) goodwill and intangible assets and its impact on future EPS segment profitability.
- Restructuring Progress: Monitor the execution of the $600-$650 million quarterly net operating expense target and the associated headcount reduction initiatives.
- Legal Exposure: Track the status of the Tessera patent litigation and any new IP claims, given the estimated $30-$50 million range of possible losses.
- Cash Flow Turnaround: Validate the projected return to positive free cash flow in Q4 2013 against actual results.