STMicroelectronics N.V. — 2017 Fourth Quarter and Fiscal-Year Summary
Business context and reporting period
STMicroelectronics is a global semiconductor designer, manufacturer and marketer serving automotive, industrial, consumer, connected-device and other electronics markets. The Form 20-F was filed March 1, 2018 and covers the fiscal year ended December 31, 2017. Fourth-quarter figures are unaudited and cover the three months ended December 31, 2017. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Reportable groups are Automotive and Discrete Group (ADG), Analog, MEMS and Sensors Group (AMS), and Microcontrollers and Digital ICs Group (MDG). Imaging was transferred from Others into AMS beginning in the fourth quarter, and comparative segment figures were restated.
Key financial metrics
| Metric | Q4 2017 | Q3 2017 | Q4 2016 | FY 2017 | FY 2016 |
|---|---|---|---|---|---|
| Net revenues | $2,466 million | $2,136 million | $1,859 million | $8,347 million | $6,973 million |
| Gross profit | $1,002 million | $845 million | $698 million | $3,268 million | $2,455 million |
| Gross margin | 40.6% | 39.5% | 37.5% | 39.2% | 35.2% |
| Operating income | $408 million | $278 million | $129 million | $993 million | $214 million |
| Operating margin | 16.5% | 13.0% | 6.9% | 11.9% | 3.1% |
| Net income attributable to parent | $308 million | $236 million | $112 million | $802 million | $165 million |
| Diluted EPS | $0.34 | $0.26 | $0.13 | $0.89 | $0.19 |
Q4 net revenue increased 15.5% sequentially and 32.6% year over year, exceeding the high end of management’s guidance by 200 basis points. The increase reflected approximately 4% volume growth and approximately 11% average selling-price growth, principally from favorable product mix. Q4 operating income before impairment and restructuring charges was $428 million, or 17.3% of revenue.
- Q4 ADG revenue was $821 million, up 5.9% sequentially and 14.6% year over year; operating income was $101 million.
- Q4 AMS revenue was $896 million, up 37.4% sequentially and 70.1% year over year, led by Imaging; operating income was $187 million and operating margin was 20.9%.
- Q4 MDG revenue was $740 million, up 5.6% sequentially and 21.4% year over year; operating income was $145 million.
For the full year, revenue growth was driven by approximately 22% volume growth, partly offset by approximately 2% average selling-price pressure. AMS revenue increased 41.4%, MDG increased 15.8% and ADG increased 8.8%.
Cash flow, capital spending, debt and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net cash from operating activities | $1,707 million | $1,043 million |
| Capital expenditures, net of proceeds | $1,298 million | $607 million |
| Free cash flow | $338 million | $316 million |
| Cash and cash equivalents | $1,759 million | $1,629 million |
| Marketable securities | $431 million | $335 million |
| Total financial debt | $1,701 million | $1,451 million |
| Net financial position | $489 million net cash | $513 million net cash |
| Debt-to-equity ratio | 0.31 | 0.32 |
Cash increased by $130 million during 2017. Financing uses included $214 million of dividends, $1.0 billion of repayment of issued convertible debt, $297 million of share repurchases and $119 million of long-term debt repayment. These were partly offset by $1.5 billion of proceeds from new senior unsecured convertible bonds due 2022 and 2024.
The company reported $2.19 billion of total liquidity and capital resources at year-end, including cash and marketable securities, and had $580 million of unused committed medium-term bank facilities. Average cash interest on debt was 0.44%, compared with an average stated interest rate of 2.74% including non-cash convertible-bond accretion.
Material changes versus comparable periods
- FY 2017 revenue rose 19.7%, gross margin expanded 400 basis points, operating margin increased 880 basis points and net income attributable to the parent increased by $637 million.
- Q4 gross margin improved 110 basis points sequentially and 310 basis points year over year, mainly from manufacturing efficiency and product mix.
- Operating expenses were $2.285 billion for 2017, up approximately 2%, but declined to 27.4% of revenue from 32.2% in 2016 because of operating leverage.
- Restructuring and related charges declined to $45 million from $93 million, principally reflecting lower set-top-box restructuring costs. The company had achieved approximately $143 million of the targeted $170 million in annualized savings by year-end.
- Capital spending more than doubled to $1.298 billion, primarily to support growth, new products and manufacturing capacity.
- Debt increased following the issuance of the 2022 and 2024 convertible bonds, while the prior 2019 and 2021 convertible bonds were converted or redeemed during 2017.
- Apple represented 10.5% of FY 2017 revenue; no customer exceeded 10% in either 2016 or 2015.
Guidance, outlook, risks and unusual items
Management expected Q1 2018 revenue to decline approximately 10% sequentially, plus or minus 3.5 percentage points, implying approximately 22% year-over-year growth at the midpoint. Q1 gross margin guidance was approximately 39.5%, plus or minus 2.0 percentage points. Management forecast 2018 capital investment of approximately $1.0 billion to $1.1 billion, focused on 300mm and 200mm front-end capacity, back-end assembly and testing, mixed-signal products, silicon carbide and other growth programs.
- Management cited solid demand across product groups and geographies, with strength in Smart Driving and IoT applications partly offset by seasonal weakness in smartphone applications.
- Q4 included $20 million of impairment, restructuring and related closure charges, primarily related to the set-top-box plan and Bouskoura, Morocco.
- The 2017 tax expense was $143 million, including a $46 million charge from the U.S. tax-law change and its effect on deferred tax assets. The effective tax rate was 15%.
- Nano2017 funding included a potential 2024 financial return linked to future product sales. The company recorded a $33 million liability and estimated the return rate at 108%.
- At year-end, estimated liabilities for uncertain tax positions were $310 million. The company stated that no material probable or possible legal-loss amounts were estimated, but noted continuing exposure to intellectual-property, tax, product-liability, environmental and other claims.
- Key operating risks include semiconductor cyclicality, demand volatility, pricing pressure, high fixed manufacturing costs, capacity utilization, supply constraints, reliance on key customers and suppliers, foreign-exchange movements, cybersecurity, intellectual-property litigation and changing tax or public-funding regimes.
- Carlo Bozotti and CFO Carlo Ferro were expected to step down after the 2018 AGM, with Jean-Marc Chery proposed as President and CEO and sole Managing Board member.
Important facts for investors to verify
- Reconcile Q4 revenue and margin performance with the company’s guidance and assess the sustainability of Imaging-related growth and AMS margins.
- Review 2018 capital spending, capacity-ramp execution and the effect of higher depreciation and manufacturing costs on free cash flow.
- Monitor the $1.5 billion convertible-bond structure, potential dilution, maturity schedule and the company’s ability to maintain a net-cash position.
- Evaluate customer concentration, particularly Apple’s 10.5% contribution, and the volatility of distributor orders, returns and price protection.
- Assess tax exposures, the $310 million uncertain-tax-position liability, the Nano2017 repayment obligation and the availability of public R&D funding after the program’s expiration.
- Track remaining set-top-box and other restructuring obligations, including the $52 million restructuring provision at year-end.
- Confirm the effect of the Imaging reclassification into AMS when comparing segment results with earlier company disclosures.