STMicroelectronics Reports 2014 Third Quarter and Nine Month Financial Results

  • Sequential improvement in net revenues and gross margin: to $1.89 billion and 34.3%, respectively
  • $72 million net income in the third quarter
  • Positive free cash flow of $140 million in the third quarter*
  • Plan for the digital business to achieve $100 million of annualized savings

STMicroelectronics (NYSE: STM), a global semiconductor leader serving customers across the spectrum of electronics applications, reported financial results for the third quarter and nine months ended September 27, 2014.

Third quarter net revenues totaled $1.89 billion, gross margin was 34.3%, operating margin excluding impairment and restructuring was 4.0%, net income was $72 million and positive free cash flow was $140 million.

“We had a solid quarter in terms of performance across a number of metrics STMicroelectronics-Allows-Mobile-Devices-to-Stream-Full-HD-Video-to-TVs-2and year-over-year improvement: from gross margin to operating margin progression and from net income to cash flow generation. At the same time, the softening of demand towards the end of the quarter, specifically in the mass market and in microcontrollers, slowed our anticipated sequential revenue progress,” said ST President and CEO Carlo Bozotti.

“Our Analog, MEMS and Sensors group returned to sequential revenue growth, as anticipated, with the ramp-up of new MEMS products including our high-performance microphones and high-accuracy pressure sensors, and touch-screen controllers for volume markets. Our Digital Convergence Group grew sequentially driven principally by our latest generation of broadcast set-top-box products.

“We are progressing in moving our digital businesses towards self-sustainability, with a sharper focus on developing and bringing to our customers our latesthome gateway and set-topbox products as well as our FD-SOI and mixed process ASICs. In order to maintain the path of progress towards turning these businesses to profit, and in light of slower than expected future revenue growth in a weaker than anticipated market, we have launched a series of actions targeting an estimated $100 million of operating expense savings. We are discontinuing our commodity camera module products, while reinforcing our imaging efforts on prioritized customer projects and opportunities. We are also combining our DCG and IBP product groups to extract synergies. Finally, we are reviewing the implications to our process technology following the recent announcements by our Research Alliance partners.”

Summary Financial Highlights

U.S. GAAP

(Million US$)

Q3 2014 Q2 2014 Q3 2013(a)
Net Revenues 1,886 1,864 2,013
Gross Margin 34.3% 34% 32.4%
Operating Income (Loss), as reported 37 98 (66)
Net Income (Loss) attributable to parent company 72 38 (142)

(a)    Net revenues include sales recorded by ST-Ericsson as consolidated by ST. ST-Ericsson was deconsolidated on September 1, 2013.

 

Non-U.S. GAAP*

Before impairment and restructuring charges (Million US$)

Q3 2014 Q2 2014 Q3 2013
Operating Income (Loss) 75 118 54
Operating Margin 4.0% 6.3% 2.7%

 Digital BusinessOrganization and Strategy

Effective in the fourth quarter of 2014, the existing Digital Convergence Group (DCG) and Imaging, Bi-CMOS and Silicon Photonics Group (IBP) will be combined under one single organization, called Digital Product Group (DPG).DPG will focus on ASSPs addressing home gateway and set-top box, as well as FD-SOI ASICs for consumer applications; FD-SOI and mixed process ASICs, including silicon photonics, addressing communication infrastructure; and differentiated imaging products.
In parallel, ST announced a plan to achieve $100 million in annualized savings, upon completion of the planduring the course of the third quarter of 2015. A portion of the savings coming from the identified initiatives will leverage the synergies from the combination of the DCG and IBP product groups. Other new initiatives include the disengagement from ST’s commodity camera module products as part of the re-positioning of ST’s imaging strategy and a global workforce review within the Embedded Processing Solutions perimeter to affect about450 employees worldwide.
Total restructuring costs are expected to be about $50 million through completion of the plan, of which $13 million were posted in the third quarter of 2014.
Third Quarter Review
ST’s third quarter net revenues increased 1.2% on a sequential basis to $1.89 billion.

On a sequential basis, net revenues by region of shipment increased 7.4% and 2.8% in the Americas and Greater China & South Asia, respectively. EMEA and Japan & Korea decreased by 0.9% and 6.2%, respectively.

On a year-over-year basis, net revenues decreased 6.3% mainly due to the phase-out of legacy ST-Ericsson products.

Third quarter gross profit was $646 million and gross margin was 34.3%. Gross margin improved 30 basis points sequentially, mostly reflecting manufacturing efficiencies partially offset by price pressure. On a year-over-year basis, gross margin improved 190 basis points, mainly due to manufacturing efficiencies and product mix partially offset by pressure on prices and higher unsaturation charges.

(*)Operating income (loss) before impairment and restructuring chargesand operating margin before impairment and restructuring charges are non-U.S. GAAP measures. For additional information and reconciliation to U.S. GAAP, please refer to Attachment A.

Combined R&D and SG&A expenses totaled $603 million compared to $626 million in the second quarter and $676 million in the year-ago quarter. In the third quarter, R&D expenses were $377 million and SG&A expenses were $226 million, representing a sequential decrease of 3.2% and 4.7%, respectively, principally due to seasonality. R&D and SG&A expenses declined by 10.9% and 10.5%, respectively, compared to the year-ago period, mainly due to the ST-Ericsson wind-down and cost-reduction initiatives.

Other income and expenses, net in the third quarter, wasan income of $32 million, compared to $110 million and $78 million in the second and year-ago quarter, respectively. The second quarter of 2014 included $100 million related to the catch-up of funding of the Nano2017 R&D program which started January 1, 2013. The third quarter of 2013 included the sale of ST-Ericsson’s Global Navigation Satellite System business to a third party and other sale of assets for an $80 million gain.
Impairment, restructuring and other related closure costs for the third quarter were $38 million mainly due toa non-cash charge of $23 million for the impairment of Digital Convergence Groupintangible assets and restructuring costs of $14 million, compared to $20 million in the prior quarter.

Income tax benefit in the third quarter was $42 million, mainly due to a favorable interpretation of income tax law related to previous years income tax and to the signature of an advanced pricing agreement with a local revenue service.

Third quarter net income was $72 million or $0.08 per share, compared to net income of $0.04 anda net loss of $(0.16) per share in the prior and year-ago quarter, respectively. On an adjusted basis, net of related taxes, ST reported non-U.S. GAAP net income per share of $0.13 in the third quarter, excluding impairment and restructuring charges and one-time items, compared to net income of $0.11 and a net loss of $(0.03) per share in the prior and year-ago quarter, respectively.*

For the third quarter of 2014, the effective average exchange rate for the Company was approximately $1.34 to €1.00 compared to $1.36 to €1.00 for the second quarter of 2014 and $1.31 to €1.00 for the third quarter of 2013.

Quarterly Net Revenues Summary

 

 

Net Revenues By Product Line and Segment

(Million US$)

Q3 2014 Q2 2014 Q3 2013
Analog & MEMS (AMS) 268 264 329
Automotive (APG) 464 463 418
Industrial & Power Discrete (IPD) 486 475 458
Sense &Power and Automotive Products (SP&A) 1,218 1,202 1,205
Digital Convergence Group (DCG) (a) 202 184 314
Imaging, Bi-CMOS ASIC and Silicon Photonics (IBP) (a) 84 76 128
Microcontroller, Memory & Secure MCU (MMS) 377 396 360
Other EPS 1
Embedded Processing Solutions (EPS) 663 657 802
Others 5 5 6
Total 1,886 1,864 2,013

(a)    Reflecting the transfer of Wireless (legacy ST-Ericsson products) and the Image Signal Processor business unit from IBP to DCG as of January 1, 2014, the Company has reclassified prior period revenues.

 —–

(*)Adjusted net earnings per share is a non-U.S. GAAP measure. For additional information and reconciliation to U.S. GAAP, please refer to Attachment A.

Net Revenues by Market Channel

 

Net Revenues By Market Channel(%) Q3 2014 Q2 2014 Q3 2013
Total OEM 68% 69% 75%
Distribution 32% 31% 25%

 Revenues and Operating Results by ST Product Segment

 

Operating Segment                                                                                (Million US$) Q3 2014                   Net           Revenues Q3 2014    Operating      Income (Loss) Q2 2014                   Net           Revenues Q2 2014    Operating      Income (Loss) Q3 2013                   Net           Revenues Q3 2013    Operating      Income (Loss)
Sense & Power and

AutomotiveProducts

(SP&A)

1,218 114 1,202 126 1,205 75
Embedded Processing

Solutions (EPS)(a)

663 (27) 657 14 802 (18)
Others (b)(c) 5 (50) 5 (42) 6 (123)
TOTAL 1,886 37 1,864 98 2,013

 

impairment, restructuring charges and other related closure costs, phase out and start-up costs, and other unallocated expenses such as: strategic or special research and development programs, certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to product groups, as well as operating earnings of the Subsystems and Other Products Group. “Others” includes $14million, $5 million, and $0 million of unused capacity charges in the third and second quarters of 2014 and third quarter of 2013, respectively; and $38 million, $20 million, and $120 million of impairment, restructuring charges, and other related closure costs in the third and second quarters of 2014 and third quarter of 2013, respectively.

Sense & Power and Automotive Products (SP&A) third quarter net revenues increased 1.3% sequentially, driven by industrial and power products within IPD and new acoustic MEMS within AMS.On a year-over-year basis, net revenues increased 1.0% driven by APG and IPD offset by AMS. SP&A operating margin was 9.4% in the 2014 third quarter compared to 10.5% and 6.2% in the prior and year-ago quarter, respectively. Excluding the non-recurring Nano2017 catch-up of funding recorded in the second quarter of 2014, the SP&A operating margin increased 50 basis points sequentially.

Embedded Processing Solutions (EPS) third quarter net revenuesincreased 1.0% on a sequential basis driven by set-top box products within DCG and IBP. On a year-over-year basis, EPS net revenues decreased17.3% largely reflecting the phase-out of ST-Ericsson legacy products and excluding ST-Ericsson legacy products, the decrease was 4.6%. EPS segment operating margin was negative 4.1% in the 2014 third quarter, compared topositive 2.1% and negative 2.2% in the prior and year-ago quarter, respectively. Excluding the $97 million of non-recurring Nano2017 catch-up recorded in the second quarter of 2014, the EPS operating lossesimproved by $56 million sequentially.

Cash Flow and Balance Sheet Highlights

Net cash from operating activities was $281 million in the third quarter, compared to $71 million and $14 million in the prior and year-ago quarter.

Capital expenditure payments, net of proceeds from sales, were $137 million during the third quarter and for the first nine months of the year totaled $388 million.

Free cash flow* was positive $140 million in the third quarter, compared to a negative $99 million in the prior quarter and negative $72 million in the year-ago quarter.

Inventory decreased by $60 million to $1.26 billion at quarter end. Inventory in the third quarter of 2014 was at 3.9 turns or 92 days,compared to 3.7 turns or 97 daysinthe prior quarter.

In the third quarter, the Company used $93 million to repurchase11 million shares of common stock as well as pay cash dividends totaling $89 million.

ST’s net financial position was $494 million at September 27, 2014 compared to $423million at June 28, 2014.*ST’s financial resources equaled $2.46 billion and total debt was $1.97 billion at September 27, 2014.

Total equity, including non-controlling interest, was $5.40 billion at quarter end.

The resolution in respect to the distribution of a dividend for the fourth quarter of 2014 and first quarter of 2015 will be resolved upon by ST’s Supervisory Board on December 4, 2014.

NineMonths 2014 Results

Net revenuesfor the first nine months of 2014 decreased 8.1% to $5.58 billion from $6.07 billion in the year-ago periodandexcluding ST-Ericssonlegacy products, decreased 0.8%. ST’s net revenues benefited from strong growth in APG and MMS as well assupport from IPD.

Gross marginimproved to33.7% of net revenues, compared to 32.2% of net revenues for the first nine months of 2013, principally due tomanufacturing efficiencies and product mix partially offset by pressure on prices and volumes as well as negative currency effects.

Sense & Power and Automotive revenues for the first nine months of 2014 totaled $3.61 billion, an increase of 1.9% compared to the first nine months of 2013 on mixed performance with growth in APG and IPD while AMS recorded a decrease reflecting portfolio pruning and product generation transition. SP&A operating margin increased to 9.5% in the first nine months of2014 up from4.9% in the first nine months of 2013 on improvement across all three product groups.

Embedded Processing Solutions revenues were $1.95 billion, a decrease of 21.9%with a sharp increase in MMS offset by ST-Ericsson legacyproducts end of life and a significant decline of DCG and IBP revenues. EPS net revenues for the first nine months of 2014, excluding legacy ST-Ericsson products, decreased 5%. EPS operating margin in the first nine months of 2014 improved to a negative 4.8% compared to negative 13.4% in the first nine months of 2013 mainly due to the wind down of ST-Ericsson and funding for Nano2017.

Net income, as reported, was $85 million in the first nine months of 2014, or $0.10 per share, compared to a net loss of $464 million, or $(0.52) per share in the first nine months of 2013. On an adjusted basis, net of related taxes, ST reported a non-U.S. GAAP net income per share estimated at$0.23excluding impairment and restructuring chargesand one-time items in the first nine months of 2014.*

The effective average exchange rate for the Company was approximately $1.35 to €1.00 for the first nine months of 2014, compared to $1.30 to €1.00 for the first nine months of 2013.

Nine Months Revenue and Operating Results by Product Segment

Operating Segment                                                                                (In Million US$)

Nine Months 2014 Net           Revenues

Nine Months 2014 Operating      Income (Loss)

Nine Months 2013 Net           Revenues

Nine Months 2013 Operating      Income (Loss)

Sense & Power and AutomotiveProducts

(SP&A)

3,610

344

3,542

174

Embedded Processing Solutions (EPS)

1,947

(93)

2,493

(333)

 Others

18

(121)

32

(294)

 TOTAL

5,575

130

6,067

(453)

Fourth Quarter 2014 Business Outlook

Mr. Bozotti commented, “In the fourth quarter, due to the ongoing soft market conditions, we expect net revenues to decrease sequentiallyby about 3.5% at the mid-point with all product groups decreasing except our Analog, MEMS and Sensors group thanks to key product ramp-ups, such asanalog microphones,new 6-axis gyroscopes and touch controllers.

“Based upon our revenue growth outlook as well as product mix between analog and digital we anticipate that our fourth quarter gross margin will decrease to about 33.8% at the midpoint of the range,mainly driven by a higher level of unused capacity charges as our manufacturing capacity in digital technology is expected to be at a low level of utilization.”

The Company expects fourth quarter 2014 revenues to decrease about 3.5%on a sequential basis, plus or minus 3.5 percentage points. Gross margin in the fourth quarter is expected to be about33.8%, plus or minus 2.0 percentage points and reflects significantly higher unsaturation charges negatively impacting gross margin by about 150 to 200 basis points compared to the third quarter.

This outlook is based on an assumed effective currency exchange rate of approximately $1.30 =€1.00 for the 2014 fourth quarter and includes the impact of existing hedging contracts. The fourthquarter will close on December 31, 2014

Recent Corporate Developments

  •  On August 21, ST announced that it had posted its IFRS 2014 Semi Annual Accounts for the six-month period ended June 28, 2014, on its website and filed them with the Netherlands Authority for the Financial Markets.
  • On September 3, ST and Tessera Technologies announced that they had reached a settlement of all outstanding claims and litigation between them. The terms and conditions of the agreement between the companies are confidential.

 Q3 2014 – Product and Technology Highlights

During the quarter, ST made strong progress with important new-product introductions and significant design wins.

Embedded Processing Solutions (EPS)

Digital Convergence (DCG)

  • Disclosed and showed new 4Kp60 product line-up based on popular Cannes/Monaco product family at IBC.
  •  Announced design-wins for India market from multiple system operators Fastway and GTPL.
  • Demoed real-time hardware prototype of DOCSIS 3.1 modem with a major US OEM during the Cable-Tec Expo and MoCA 2.0 channel bonded chipset at IBC.
  • Revealed production-ready platform, using ST’s System-on-Chip, ideally suited for the analog switch off in Brazil and its adoption by a major customer.
  • Announced collaboration with NAGRA/SmarDTV offering a range of “Quickstart” modular solutions based on ST chipsets.

 Imaging, Bi-CMOS, ASIC and Silicon Photonics (IBP)

Collaborated with Finisar to design and fabricate a 3D (stacked die) 2-chip set using both silicon photonics and Bi-CMOS process technologies.

Microcontroller, Memory and Secure MCU (MMS)

Sustained the rate of STM32 microcontroller design wins, fueled especially by the ultra-low power and entry-range series.

Started ramping production of STM32L0 ultra-low-power MCU, built on the ARM® Cortex® M0+ processor core.

 

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