Business Context and Reporting Period
STMicroelectronics N.V. is a global semiconductor designer, manufacturer and marketer serving automotive, industrial, personal electronics, communications equipment, computers and peripherals. This Form 20-F was filed on February 26, 2020 and covers the fiscal year ended December 31, 2019. Financial statements are prepared under U.S. GAAP in U.S. dollars; fourth-quarter figures are unaudited.
The reportable segments are Automotive and Discrete Group (ADG), Analog, MEMS and Sensors Group (AMS), and Microcontrollers and Digital ICs Group (MDG).
Key Financial Metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net revenues | $9,556 million | $9,664 million | Down 1.1% |
| Gross profit | $3,696 million | $3,861 million | Down 4.3% |
| Gross margin | 38.7% | 40.0% | Down 130 bps |
| Operating income | $1,203 million | $1,400 million | Down 14.1% |
| Operating margin | 12.6% | 14.5% | Down 190 bps |
| Net income attributable to parent | $1,032 million | $1,287 million | Down 19.8% |
| Diluted EPS | $1.14 | $1.41 | Down 19.1% |
| Net cash from operating activities | $1,869 million | $1,845 million | Up $24 million |
| Free cash flow | $497 million | $533 million | Down $36 million |
| Capital expenditures, net | $1,174 million | $1,262 million | Down $88 million |
FY 2019 net income margin was 10.8%, compared with 13.3% in 2018. Research and development expense increased to $1,498 million, or 15.7% of revenue, from $1,398 million, or 14.5%. SG&A was broadly stable at $1,093 million.
| Balance-sheet and liquidity metric | December 31, 2019 |
|---|---|
| Cash and cash equivalents | $2,597 million |
| Total financial resources | $2,744 million |
| Total financial debt | $2,072 million |
| Net financial position | $672 million net cash |
| Parent-company stockholders’ equity | $7,043 million |
| Debt-to-equity ratio | 0.29 |
| Unused committed credit facilities | $568 million |
Debt maturities at redemption value total $2,218 million, including $173 million due in 2020, $809 million in 2022 and $807 million in 2024. The company expects to repay a $169 million European Investment Bank loan installment in 2020 using available cash.
Fourth-Quarter 2019 Performance
| Metric | Q4 2019 | Q3 2019 | Q4 2018 |
|---|---|---|---|
| Net revenues | $2,754 million | $2,553 million | $2,648 million |
| Sequential/year-over-year revenue growth | 7.9% / 4.0% | — | — |
| Gross profit | $1,081 million | $967 million | $1,059 million |
| Gross margin | 39.3% | 37.9% | 40.0% |
| Operating income | $460 million | $336 million | $443 million |
| Operating margin | 16.7% | 13.1% | 16.8% |
| Net income attributable to parent | $392 million | $302 million | $418 million |
| Diluted EPS | $0.43 | $0.34 | $0.46 |
Q4 revenue growth was driven by higher volumes and favorable product mix. AMS revenue increased 9.9% year over year, MDG increased 7.6%, while ADG declined 4.5%. Q4 gross margin improved sequentially because of product mix and manufacturing efficiencies but remained below the prior-year quarter because of price pressure and unsaturation charges.
Material Changes Versus the Prior Comparable Period
- Annual revenue declined modestly despite approximately 7% higher average selling prices, as volumes fell approximately 8%. Product mix contributed positively, while pricing pressure reduced results.
- ADG revenue increased 1.4% and AMS revenue increased 4.6%; MDG revenue declined 10.3%, primarily because of lower microcontroller volumes.
- Unused-capacity charges increased to $65 million in 2019, reducing full-year gross margin by approximately 70 basis points; comparable charges were negligible in 2018.
- Operating income declined primarily because of pricing pressure, unused-capacity charges and higher R&D spending. Higher government R&D grants and favorable currency effects partly offset the decline.
- R&D grants included $132 million of funding in other income and expenses, compared with $52 million in 2018, principally from European Commission IPCEI programs in France and Italy.
- Cash from operations increased despite lower earnings, supported by more favorable working-capital movements. Free cash flow declined because of investment and acquisition spending.
- The company acquired the remaining 45% of Norstel AB, completing its acquisition of the Swedish silicon-carbide wafer manufacturer. Total consideration was approximately $137.5 million, funded with cash.
- The company repurchased $250 million of common stock in 2019 and paid $214 million of dividends. The approved annual dividend remained $0.24 per share, paid in quarterly installments.
- The company adopted U.S. GAAP lease accounting guidance in 2019, recognizing $206 million of operating lease right-of-use assets and $207 million of lease liabilities at year-end.
Guidance, Outlook, Risks and Unusual Items
Management guided to Q1 2020 revenue of approximately $2.36 billion at the midpoint, approximately 13.7% above Q1 2019 and approximately 14.3% below Q4 2019, with a sequential range of plus or minus 350 basis points. Expected gross margin was approximately 38.0%, plus or minus 200 basis points, including 80 basis points of unsaturation charges.
For 2020, management planned approximately $1.5 billion of capital investment to support strategic initiatives and its mid-term revenue target of $12 billion. Priorities include a new 300 mm fab in Agrate, GaN and silicon-carbide technologies, capacity expansion at Crolles, and automotive and industrial packaging capacity.
- Key risks include semiconductor cyclicality, demand volatility, price erosion, excess or insufficient capacity, high fixed costs and inventory obsolescence.
- Apple represented 17.6% of 2019 revenue, up from 13.1% in 2018, creating increased customer-concentration exposure despite the company’s broad customer base.
- Global trade restrictions, tariffs, Brexit, currency fluctuations and changing macroeconomic conditions may affect demand, costs and margins.
- The filing specifically identifies the novel coronavirus COVID-19 as a potential risk to suppliers, customers, manufacturing and logistics; the filing does not quantify its financial impact.
- Supply-chain risks include dependence on limited suppliers, external foundries and back-end subcontractors. The company had $905 million of foundry purchase commitments and $514 million of equipment and other asset purchase commitments.
- Public funding creates potential compliance and repayment obligations. A $47 million accrual was recorded for a potential 2024 financial return under the Nano2017 program.
- Deferred tax assets totaled $695 million net of valuation allowances, and uncertain tax positions totaled $48 million. Recoverability of deferred tax assets was identified as the critical audit matter.
- Probable losses from legal proceedings and claims were not considered material at year-end, but intellectual-property, product liability, warranty, tax and environmental claims could produce future charges.
- The filing reports effective internal control over financial reporting and an unqualified audit opinion from Ernst & Young AG.
Investor Verification Checklist
- Verify Q1 2020 revenue and gross-margin performance against the stated guidance, including the impact of COVID-19 and capacity utilization.
- Monitor MDG and ADG recovery, AMS growth, product mix and pricing trends.
- Assess whether the planned $1.5 billion capital program generates sufficient utilization and returns, particularly for Agrate, SiC and GaN investments.
- Review Apple concentration, distributor inventory, backlog quality and cancellation or price-protection exposure.
- Reconcile net cash, convertible-bond fair value and upcoming debt maturities with operating cash flow and shareholder returns.
- Track the realization of deferred tax assets, tax audits and the Nano2017 repayment obligation.
- Review the final accounting and operating performance of Norstel and the company’s multi-year SiC wafer commitments.