STMicroelectronics N.V. — 2015 Form 20-F Summary
Business context and reporting period
STMicroelectronics N.V. is a Netherlands-incorporated global semiconductor company reporting under U.S. GAAP in U.S. dollars. The filing was submitted March 16, 2016 and covers the fiscal year ended December 31, 2015. Fourth-quarter figures are unaudited and cover the three months ended December 31, 2015.
The company designs, manufactures and markets analog, digital, mixed-signal, automotive, industrial, power, microcontroller, MEMS, imaging, smartcard and other semiconductor products. The 2015 reporting structure comprised Sense & Power and Automotive Products (SP&A) and Embedded Processing Solutions (EPS).
Key financial metrics
| Metric | FY 2015 | FY 2014 | Q4 2015 | Q4 2014 |
|---|---|---|---|---|
| Net revenues | $6,897 million | $7,404 million | $1,668 million | $1,829 million |
| Gross profit | $2,332 million | $2,498 million | $559 million | $619 million |
| Gross margin | 33.8% | 33.7% | 33.5% | 33.8% |
| Operating income | $109 million | $168 million | $25 million | $38 million |
| Net income attributable to parent | $104 million | $128 million | $2 million | $43 million |
| Basic and diluted EPS | $0.12 | $0.14 | $0.00 | $0.05 |
| Net cash from operating activities | $842 million | $715 million | Not provided | Not provided |
| Free cash flow | $327 million | $197 million | Not provided | Not provided |
FY 2015 net revenues declined 6.8% year over year. Net sales were $6,866 million and other revenues were $31 million. Operating expenses were $2,322 million, including $897 million of SG&A and $1,425 million of R&D, or approximately 21% of revenue. Income before tax was $89 million and the company recorded a $21 million income tax benefit.
At December 31, 2015, cash and cash equivalents were $1,771 million, marketable securities were $335 million and total liquidity was $2,106 million. Total financial debt was $1,612 million, consisting of $191 million of short-term debt and $1,421 million of long-term debt. Net financial position was positive $494 million, compared with positive $550 million at year-end 2014. The debt-to-equity ratio was 0.35.
Total assets were $8,195 million and parent-company stockholders’ equity was $4,632 million. Inventories were $1,251 million and trade receivables, net, were $820 million. Capital expenditures, net of proceeds, were $467 million. Dividends paid to stockholders totaled $350 million.
Material changes versus comparable periods
- FY 2015 revenue decreased 6.8% from 2014, reflecting weak semiconductor-market conditions, unfavorable currency effects, lower legacy ST-Ericsson and set-top-box revenues, imaging-module reductions and portfolio pruning.
- Excluding unfavorable currency effects and legacy ST-Ericsson products, revenue declined 3.3%.
- Average selling prices declined approximately 10%, consisting of approximately 7% pricing pressure, including currency effects, and approximately 3% from product mix; volume increased approximately 3%.
- SP&A revenue declined approximately 8% to $4,401 million. EPS revenue declined approximately 5% to $2,473 million.
- Microcontrollers, Memory and Secure MCU revenue increased 7.2% to $1,616 million, while Digital Products Group revenue declined 21.1% to $857 million.
- FY 2015 gross margin improved 10 basis points despite $63 million of unused-capacity charges, compared with $53 million in 2014. Operating income declined 35% on a reported basis, but management stated that operating income increased more than 50% excluding the $97 million 2014 catch-up of Nano2017 grants.
- Operating cash flow increased $127 million, and free cash flow increased $130 million. Financing cash flow changed from a $262 million inflow in 2014 to a $556 million outflow in 2015, primarily because 2014 included $994 million of convertible-bond proceeds.
- Q4 2015 revenue declined 5.5% sequentially and 8.8% year over year. Gross margin declined 130 basis points sequentially to 33.5%, mainly due to higher unused-capacity charges and pricing pressure. Q4 operating income declined to $25 million and parent-company net income declined to $2 million.
Guidance, outlook, commentary and unusual items
- For Q1 2016, management expected revenue to decrease approximately 3% sequentially, with a range of plus or minus 3.5 percentage points, and gross margin of approximately 33.0%, with a range of plus or minus 2.0 percentage points.
- The Q1 outlook assumed an effective exchange rate of approximately $1.10 per euro and continued to include unused-capacity charges because digital manufacturing capacity was not fully utilized.
- Management identified automotive, industrial and Internet of Things applications as expected long-term semiconductor growth drivers.
- In January 2016, the company discontinued development of new set-top-box and home-gateway platforms and announced a workforce review affecting approximately 1,400 employees, including redeployment of about 600 employees. Estimated annualized savings were approximately $170 million upon completion, with estimated restructuring costs of approximately $170 million.
- FY 2015 impairment, restructuring and related closure costs were $65 million, including $36 million for the EPS restructuring plan, $11 million for manufacturing consolidation and $16 million of intangible-asset impairments. No goodwill impairment was recorded.
- The company recognized $144 million of R&D funding in other income and expenses, compared with $231 million in 2014. FY 2015 also included a $46 million one-time tax benefit from settlement of a local tax assessment.
- Foreign-exchange hedging generated a $170 million net loss recognized in cost of sales, SG&A and R&D in 2015, compared with a $2 million net loss in 2014.
- At December 31, 2015, the company had approximately $150 million of equipment and other asset purchase commitments for 2016. Total contractual obligations were $3,306 million, including $1,707 million of debt obligations.
- Capital expenditures for 2016 were estimated at $600 million to $670 million, subject to demand. The company stated that it had sufficient resources for projected requirements over the next twelve months, including capital expenditures, working capital, dividends and scheduled debt repayments.
Principal risks and contingencies
- Semiconductor cyclicality, excess capacity, price erosion, inventory obsolescence and volatile customer demand may pressure revenue and margins.
- High fixed manufacturing costs and underutilized fabs may result in unused-capacity charges, higher unit costs and additional restructuring or impairment charges.
- Foreign-exchange exposure is significant because revenue is largely dollar-denominated while substantial costs are incurred in euros and other currencies; hedging does not eliminate this risk.
- The company is exposed to intellectual-property claims, product-liability and warranty claims, tax audits, environmental obligations, supply interruptions, manufacturing disruptions, cybersecurity incidents and loss of key employees.
- Public funding supports portions of R&D activity. The Nano2017 program provided an overall funding budget of approximately €400 million for 2013–2017, subject to annual agreements and achievement of technical objectives; funding reductions or repayment obligations could increase costs.
- Net pension and post-employment obligations were $351 million. Unrecognized tax benefits were $226 million at year-end, and the company could not reliably estimate when those benefits would be recognized.
- Probable legal and claims provisions were not considered material at December 31, 2015, but management stated that adverse litigation, IP claims or changes in claim assessments could materially affect future results.
- STMicroelectronics Holding N.V. owned approximately 27.5% of issued common shares and may influence shareholder votes and board appointments. The company also has an option arrangement allowing issuance of up to 540 million preference shares in specified hostile-change-of-control circumstances.
Most important facts for investors to verify
- Whether the planned set-top-box exit and workforce actions deliver approximately $170 million of annualized savings and whether restructuring costs remain near the estimated $170 million.
- Utilization of digital manufacturing capacity, unused-capacity charges and the effect on gross margin.
- Revenue trends in automotive, microcontrollers, industrial and IoT products versus continuing declines in DPG, imaging and legacy products.
- Cash generation after capital expenditures, dividends and the scheduled $186 million 2016 EIB loan repayment.
- Progress toward the $600 million to $670 million 2016 capital-spending plan and the company’s ability to maintain a positive net cash position.
- Foreign-exchange movements and the performance and accounting impact of the company’s hedging portfolio.
- Utilization and recoverability of deferred tax assets, the $226 million of unrecognized tax benefits and outcomes of open tax audits.
- Developments in ST-Ericsson liquidation obligations, IP litigation, product claims and public-funding compliance.
- Any changes in the 27.5% ST Holding stake, dividend policy or preference-share protections.