STMicroelectronics N.V. — Form 20-F Summary
Filing date: March 3, 2015. The filing covers the fiscal year ended December 31, 2014, prepared under U.S. GAAP. The requested 2014 fourth-quarter information is unaudited and covers the three months ended December 31, 2014.
Business Context and Reporting Period
STMicroelectronics is a global semiconductor designer, manufacturer and marketer serving automotive, industrial, consumer, communications, microcontroller, MEMS, sensor, power-management and embedded-processing markets. Its principal reportable segments are Sense & Power and Automotive Products (SP&A) and Embedded Processing Solutions (EPS).
The company continued repositioning its portfolio after exiting and winding down legacy ST-Ericsson activities. It also discontinued its commodity camera-module business, consolidated manufacturing operations, launched EPS restructuring actions and combined its DCG and IBP organizations into the Digital Product Group beginning in the first quarter of 2015.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenues | $7,404 million | $8,082 million | Down 8.4% |
| Gross profit | $2,498 million | $2,614 million | Down 4.4% |
| Gross margin | 33.7% | 32.3% | Up 140 basis points |
| Operating income (loss) | $168 million | $(465) million | Improved $633 million |
| Net income (loss) attributable to parent | $128 million | $(500) million | Improved $628 million |
| Basic and diluted EPS | $0.14 | $(0.56) | Returned to profit |
| Net cash from operating activities | $715 million | $366 million | Up $349 million |
| Free cash flow | $197 million | $(179) million | Improved $376 million |
| Capital expenditures, net | $496 million | $531 million | Down $35 million |
Operating expenses declined to $2,447 million from $2,882 million, primarily because of the ST-Ericsson exit and cost-control initiatives. Research and development expense was $1,520 million, or 20.5% of revenue, compared with $1,816 million, or 22.5%, in 2013. Other income and expenses, net, increased to $207 million, including $231 million of R&D funding, principally following approval of the Nano2017 program.
Fourth-Quarter 2014
| Metric | Q4 2014 | Q3 2014 | Q4 2013 |
|---|---|---|---|
| Net revenues | $1,829 million | $1,886 million | $2,015 million |
| Gross profit | $619 million | $646 million | $662 million |
| Gross margin | 33.8% | 34.3% | 32.9% |
| Operating income (loss) | $38 million | $37 million | $(11) million |
| Net income (loss) attributable to parent | $43 million | $72 million | $(36) million |
| EPS | $0.05 | $0.08 | $(0.04) |
Fourth-quarter revenue decreased 3.0% sequentially and 9.2% year over year; excluding legacy ST-Ericsson products, revenue declined 4.6% year over year. Gross margin declined 50 basis points sequentially but improved 90 basis points year over year. Unused-capacity charges were $29 million, compared with $14 million in the preceding quarter and $7 million in Q4 2013.
The filing contains one apparent table inconsistency in a quarterly reconciliation that displays Q4 2014 consolidated operating income as $(38) million; the surrounding discussion and the primary quarterly results table report operating income of $38 million, which is the consistent value.
Material Changes Versus Prior Comparable Period
- Revenue declined largely because legacy ST-Ericsson product sales were phased out. Excluding those products, full-year revenue declined 1.8%.
- SP&A revenue was essentially flat at $4,774 million. Automotive revenue increased 8.3% and Industrial & Power Discrete revenue increased 3.6%, offset by a 15.7% decline in Analog & MEMS.
- EPS revenue declined 20.2% to $2,608 million. DCG declined 49.3% and IBP declined 19.4%, while MMS increased 10.2%.
- Operating income improved substantially due to lower operating expenses, improved manufacturing efficiency, higher R&D funding and lower impairment and restructuring charges.
- Impairment, restructuring and closure costs declined to $90 million from $292 million. The 2014 amount included $24 million of intangible-asset impairment and $66 million of restructuring and closure costs.
- Net cash increased by $181 million, compared with a $414 million decrease in 2013, although net financial position declined because dividends, share repurchases and increased debt offset free cash flow.
Debt, Liquidity and Capital Resources
- Total liquidity and capital resources were $2.351 billion, comprising $2.017 billion of cash and cash equivalents and $334 million of U.S. Treasury securities.
- Total financial debt was $1.805 billion, including $202 million of current debt and $1.603 billion of long-term debt. Net financial position was net cash of $546 million, down from $741 million in 2013.
- In July 2014, the company issued $1.0 billion of senior unsecured convertible bonds, generating approximately $994 million of net proceeds. Carrying value of the liability component at year-end was $888 million.
- The company had $583 million of unutilized committed medium-term credit facilities. Debt ratings were Baa3 from Moody’s and BBB- from S&P and Fitch, each with a stable outlook.
- Management expected to redeem $202 million of EIB debt in 2015 and stated that available resources were sufficient for projected requirements over the following twelve months.
Guidance, Outlook, Risks and Unusual Items
For the first quarter of 2015, management forecast revenue to decline approximately 5% sequentially at the midpoint, with a range of plus or minus 3.5 percentage points, and gross margin of approximately 33.2%, with a range of plus or minus 2.0 percentage points. The outlook assumed an effective exchange rate of approximately $1.24 per euro and included existing hedging contracts. Management’s broader 2015 objectives were to return to revenue growth and continue improving the cost structure.
Capital expenditure was expected to be approximately $600 million in 2015, subject to demand. The Nano2017 program provided for an overall funding budget of approximately €400 million for 2013–2017, subject to annual agreements and achievement of technical, employment and investment conditions.
- Semiconductor demand is cyclical, with risks from price erosion, excess capacity, inventory corrections and underutilization of manufacturing facilities.
- Results are sensitive to U.S. dollar movements because substantial revenue is dollar-denominated while significant costs are incurred in euros and other currencies. At year-end, hedging contracts produced approximately $73 million of deferred pre-tax losses in accumulated other comprehensive income.
- Major unusual items included $231 million of R&D funding, $90 million of impairment and restructuring charges, a $51 million loss related to the 3Sun investment and a $23 million impairment of DCG intangible assets.
- ST agreed to transfer its 3Sun stake to Enel Green Power, pay up to €15 million for release from obligations and forgive a €13 million shareholder loan, subject to closing conditions.
- ST-Ericsson remained in liquidation. ST’s funding commitment for residual wind-down operations was capped at $149 million, although management stated the expected effect on consolidated cash flows was not material based on available visibility.
- Unrecognized tax benefits were $313 million, and the company held $512 million of long-term government receivables, primarily from France and Italy.
- Legal, intellectual-property, tax, environmental, supply-chain, manufacturing, cybersecurity and public-funding compliance risks could produce additional costs or disruptions. Probable legal loss provisions were not considered material at year-end.
Most Important Facts for Investors to Verify
- Whether the expected return to revenue growth in 2015 occurred, particularly in EPS, AMS, DCG/DPG and legacy-product replacement programs.
- Whether cost reductions and the EPS restructuring plan delivered the targeted approximately $100 million of annualized savings.
- Whether gross-margin improvement was sustained despite price pressure, unused capacity and foreign-exchange volatility.
- The status and cash-flow impact of ST-Ericsson liquidation and the 3Sun transfer agreement.
- Actual use of cash, including the $202 million debt repayment, approximately $600 million of 2015 capital expenditure, dividends and employee-related share obligations.
- Realization of deferred tax assets and tax credits, including the $313 million of unrecognized tax benefits and $1.607 billion valuation allowance against deferred tax assets.
- Compliance with Nano2017 and other public-funding conditions, including potential repayment exposure.
- Any material developments in patent litigation, customer concentration, manufacturing capacity, supplier availability or cybersecurity incidents.