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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6‑K

 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a‑16 OR 15d‑16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

Report on Form 6‑K dated November 10, 2016

 

Commission File Number:  1‑13546

 

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STMicroelectronics N.V.
(Name of Registrant)

 

WTC Schiphol Airport
Schiphol Boulevard 265
1118 BH Schiphol Airport
The Netherlands
(Address of Principal Executive Offices)

 

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Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20‑F or Form 40‑F:

 

 

Indicate by check mark if the registrant is submitting the Form 6‑K in paper as permitted by Regulation S‑T Rule 101(b)(1):

 

 

Indicate by check mark if the registrant is submitting the Form 6‑K in paper as permitted by Regulation S‑T Rule 101(b)(7):

 

 

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3‑2(b) under the Securities Exchange Act of 1934:

 

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3‑2(b):  82‑ __________

 

 Enclosure:  STMicroelectronics N.V.’s Third quarter and Nine Months ended October 1, 2016:

 

·

Operating and Financial Review and Prospects;

 

·

Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flow, and Statements of Equity and related Notes for the three months and nine months ended October 1, 2016; and

 

·

Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the Sarbanes‑Oxley Act of 2002, submitted to the Commission on a voluntary basis.

 

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Overview

 

The following discussion should be read in conjunction with our Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flows and Statements of Equity for the three months and nine months ended October 1, 2016 and Notes thereto included elsewhere in this Form 6‑K, and our annual report on Form 20‑F for the year ended December 31, 2015 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on March 16, 2016 (the “Form 20‑F”). The following discussion contains statements of future expectations and other forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “Business Overview” and “Liquidity and Capital Resources—Financial Outlook: Capital Investment”. Our actual results may differ significantly from those projected in the forward‑looking statements. For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward‑looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward‑Looking Statements” and “Item 3. Key Information—Risk Factors” included in the Form 20‑F. We assume no obligation to update the forward‑looking statements or such risk factors.

 

Our Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited interim consolidated financial statements (“Consolidated Financial Statements”) and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:

 

·

Critical Accounting Policies using Significant Estimates.

 

·

Business Overview, a discussion of our business and overall analysis of financial and other relevant highlights of the three months and nine months ended October 1, 2016 designed to provide context for the other sections of the MD&A, including our expectations for selected financial items for the fourth quarter of 2016.

 

·

Other Developments in the third quarter of 2016.

 

·

Results of Operations, containing a year-over-year and sequential analysis of our financial results for the three months and nine months ended October 1, 2016, as well as segment information.

 

·

Legal Proceedings.

 

·

Discussion of the impact of changes in exchange rates, interest rates and equity prices on our activity and financial results.

 

·

Liquidity and Capital Resources, presenting an analysis of changes in our balance sheets and cash flows, and discussing our financial condition and potential sources of liquidity.

 

·

Impact of Recently Issued U.S. Accounting Standards.

 

·

Backlog and Customers, discussing the level of backlog and sales to our key customers.

 

·

Disclosure Controls and Procedures.

 

·

Cautionary Note Regarding Forward-Looking Statements.

 

STMicroelectronics N.V. (“ST” or the “Company”) is a global semiconductor leader delivering intelligent and energy-efficient products and solutions that power the electronics at the heart of everyday life. ST’s products are found everywhere today, and together with our customers, we are enabling smarter driving and smarter factories, cities and homes, along with the next generation of mobile and Internet of Things devices. By getting more from technology to get more from life, ST stands for life.augmented.

 

Critical Accounting Policies Using Significant Estimates

 

There were no material changes in the first nine months of 2016 to the information provided under the heading “Critical Accounting Policies Using Significant Estimates” included in our Form 20-F.

 

Fiscal Year

 

Under Article 35 of our Articles of Association, our fiscal year extends from January 1 to December 31. The first quarter of 2016 ended on April 2, 2016, the second quarter ended on July 2, 2016 and the third quarter ended on October 1, 2016. The fourth quarter will end on December 31, 2016. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year and can also differ from equivalent prior-years’ periods, as illustrated in the below table for the years 2015 and 2016.

 

 

Business Overview

 

Our results of operations for each period were as follows:

 

 

The total available market is defined as the “TAM”, while the serviceable available market, the “SAM”, is defined as the market for products sold by us (which consists of the TAM and excludes major devices such as Microprocessors (MPUs), Dynamic random-access memories (DRAMs), optoelectronics devices, Flash Memories and the Wireless Application Specific market products such as Baseband and Application Processor).

 

Based on the data published by World Semiconductor Trade Statistics (WSTS), semiconductor industry revenues increased in the third quarter of 2016 on a sequential basis by approximately 11% for the TAM and 10% for the SAM, to reach approximately $88 billion and $42 billion, respectively. On a year-over-year basis, the TAM increased by approximately 4% while the SAM increased by 9%.

 

Third quarter 2016 revenues amounted to $1,797 million, a 5.5% sequential increase, at the midpoint of our released guidance. Analog and MEMS Group (AMG) revenues increased sequentially 7.1% driven by motion MEMS and microphones. Microcontrollers and Digital ICs Group (MDG) increased 5.5% on a sequential basis driven by general purpose microcontrollers and digital ASICs for networking. Automotive and Discrete Group (ADG) revenues decreased 2.3% on a sequential basis due to seasonality in automotive products and substantially flat revenues in power discretes. Specialized image sensors, reported in Others, registered a strong sequential revenue growth due to new products, based on our Time-of-Flight technology, ramping in wireless applications.

On a year-over-year basis, third quarter net revenues increased 1.9%, or 3.4% excluding businesses undergoing a phase-out (mobile legacy products, camera modules and set-top box). Growth was driven by MEMS and sensors, microcontrollers, automotive, specialized image sensors and digital ASICs partially offset by analog and power discretes - both negatively impacted by the weak computer and peripheral market - and by the discontinued product lines.

 

Compared to the served market, our performance was below the SAM on a sequential and year-over-year basis.

 

Our effective average exchange rate for the third quarter of 2016 was $1.12 for €1.00 substantially stable compared to the rate of the second quarter of 2016 and decreasing compared to $1.16 for €1.00 in the third quarter of 2015. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates” below.

 

Our third quarter 2016 gross margin was at 35.8% of revenues, 30 basis points above the mid-point of our guidance, including a negative impact of about 60 basis points from unused capacity charges. Gross margin increased sequentially by 190 basis points, favorably impacted by manufacturing efficiencies together with improved product mix for a total of around 310 basis points, partially offset by normal price pressure, higher unused capacity charges ($11 million compared to $8 million in the second quarter of 2016) and slight unfavorable currency effects, net of hedging for a total of around 100 basis points. Year-over-year, our third quarter 2016 gross margin improved by 100 basis points, benefitting from improved manufacturing efficiencies and favorable currency effects, net of hedging, partially offset by normal price pressure.

 

Our aggregated selling, general and administrative (SG&A) and research and development (R&D) costs amounted to $542 million, decreasing compared to $565 million in the prior quarter benefitting from favorable seasonality and the progressive savings of the set-top box restructuring plan launched at the beginning of the year, partially offset by annual salary increases. On a year-over-year basis, operating expenses decreased by about 1.3% compared to $549 million in the prior-year quarter, mainly due to the benefits of the set-top box restructuring plan and to favorable currency effects, net of hedging, partially offset by annual salary increases.

 

Other income and expenses, net, amounted to $18 million, decreasing from $28 million in the previous quarter and from $38 million in the year-ago quarter, in both cases due to a lower level of R&D grants.

 

Impairment, restructuring charges and other related closure costs in the third quarter of 2016 were $29 million, compared to $12 million and $11 million in the prior and year-ago quarter, respectively, and related principally to the set-top box restructuring plan.

 

In the third quarter of 2016, our operating income was $90 million, improving from an income of $28 million in the second quarter of 2016 and basically flat compared to an income of $91 million in the year-ago quarter. Excluding restructuring and impairment charges, third quarter of 2016 operating income was $119 million, compared to an income of $40 million in the previous quarter and an income of $102 million in the year-ago period. Sequentially, the improvement of our operating result before impairment and restructuring charges was mainly due to higher revenues, higher gross profit and lower operating expenses. Compared to the year-ago period, the improvement of our operating result before impairment and restructuring charges was mainly due to favorable currency exchange rates, net of hedging, improved manufacturing efficiencies, better product mix, and the benefits resulting from our set-top box restructuring plan, partially offset by reduced sale price, lower R&D grants and annual salary increases.

 

Our net cash from operating activities was positive at $330 million and net cash used in investing activities was $230 million, allowing us to generate a positive free cash flow (non U.S GAAP measure) of $100 million for the third quarter of 2016. In the period, our net cash variation, including the cash outflow of $78 million for the acquisition of ams’ NFC and RFID reader business and the net cash used in financial activities which included $53 million of dividend and $54 million repayment of long-term debt, was negative $7 million.

 

Demand is currently strong in the smartphone market and we continue to see positive trends in automotive and industrial. Thanks to our strategic focus on Smart Driving and Internet of Things, the increased traction we are seeing with our new products and positive market trends, ST is positioned to achieve year-over-year revenue growth for 2016 driven by automotive, specialized image sensors and microcontrollers. In addition, we expect for 2016 to improve our profitability and continue to generate solid free cash flow. While we remain mindful of macroeconomic factors and their potential impact on our customers and the semiconductor market, we see less macro risk than we did earlier in the year. Based on these factors, we anticipate, for the fourth quarter of 2016, a sequential increase in net revenues by about 3.2% plus or minus 3.5 percentage points and the gross margin to be about 37.0% plus or minus 2.0 percentage points.

This outlook is based on an assumed effective currency exchange rate of approximately $1.11= €1.00 for the 2016 fourth quarter and includes the impact of existing hedging contracts. The fourth quarter will close on December 31, 2016.

 

These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key Information — Risk Factors” in our Form 20-F as may be updated from time to time in our SEC filings.

 

Other Developments in the third quarter of 2016

 

On July 29, 2016, we announced the acquisition of ams’ (SIX: AMS) assets related to Near-Field Communication (NFC) and Radio-frequency identification (RFID) reader business. In exchange of $78 million in cash plus an earn-out contingent to future results up to $37 million, we acquired intellectual property, technologies, products and business highly complementary to our secure microcontroller solutions serving mobile devices, wearables, banking, identification industrial, automotive and IoT markets. For further information, see Note 15 Business Combinations

 

On August 23, 2016 we published our IFRS 2016 Semi Annual Accounts for the six-month period ended July 2, 2016 on our website and filed them with the AFM (Autoriteit Financiële Markten), the Netherlands Authority for the Financial Markets.

 

In October 2016, the Company extended for another 10-year period the existing option agreement with Stichting Continuiteït ST, an independent Dutch foundation.

 

Results of Operations

 

Segment Information

 

We operate in two business areas: Semiconductors and Subsystems.

 

In the Semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full‑custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products, which include the production and sale of both silicon chips and Smartcards.

 

During the first quarter of 2016, our internal organization changed to align with our strategic focus on Smart Driving and on Internet of Things applications. Comparative numbers were restated accordingly.

 

Our reportable segments are as follows:

 

·

Automotive and Discrete Group (ADG), comprised of all automotive dedicated ICs, both digital and analog, and discrete products.

 

·

Analog and MEMS Group (AMG), comprised of low-power analog ICs, both general purpose and high-end, smart power products for industrial and power conversion, and micro-machinery activity.

 

·

Microcontrollers and Digital ICs Group (MDG), comprised of general purpose and secure microcontrollers, EEPROM memories, and digital ICs outside of automotive.

 

“Others” includes all the financial values related to the Imaging Product Division, Subsystems and other products, as well as items not allocated to the segments such as impairment, restructuring charges and other related closure costs, unused capacity charges, strategic or special research and development programs and other minor unallocated expenses such as: certain corporate-level operating expenses, patent claims and litigation, and other costs that are not allocated to the segments.

In the Subsystems business area, we design, develop, manufacture and market subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to our business as a whole, the Subsystems business area does not meet the requirements for a reportable segment as defined in the U.S. GAAP guidance.

 

For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses and a part of research and development expenses. In compliance with our internal policies, certain costs are not allocated to the segments, including impairment, restructuring charges and other related closure costs, unused capacity charges, phase-out and start-up costs of certain manufacturing facilities, certain one-time corporate items, strategic and special research and development programs or other corporate-sponsored initiatives, including certain corporate-level operating expenses and certain other miscellaneous charges. In addition, depreciation and amortization expense is part of the manufacturing costs allocated to the segments and is neither identified as part of the inventory variation nor as part of the unused capacity charges; therefore, it cannot be isolated in the costs of goods sold. Finally, R&D grants are allocated to our segments proportionally to the incurred R&D expenses on the sponsored projects.

 

Wafer costs are allocated to the segments based on actual cost. From time to time, with respect to specific technologies, wafer costs are allocated to segments based on market price.

 

 

 

 

 

Third Quarter 2016 vs. Second Quarter 2016 and Third Quarter 2015

 

The following table sets forth certain financial data from our Unaudited Interim Consolidated Statements of Income:

 

		Three Months Ended
		October 1, 2016								July 2, 2016								September 26, 2015
		$ million				% of net revenues				$ million				% of net revenues				$ million				% of net revenues
Net sales		$	1,794				99.8	%		$	1,698				99.7	%		$	1,755				99.5	%
Other revenues			3				0.2				5				0.3				9				0.5
Net revenues			1,797				100.0				1,703				100.0				1,764				100.0
Cost of sales			(1,154	)			(64.2	)			(1,126	)			(66.1	)			(1,151	)			(65.2	)
Gross profit			643				35.8				577				33.9				613				34.8
Selling, general and administrative			(224	)			(12.5	)			(229	)			(13.5	)			(218	)			(12.4	)
Research and development			(318	)			(17.7	)			(336	)			(19.7	)			(331	)			(18.8	)
Other income and expenses, net			18				1.0				28				1.6				38				2.2
Impairment, restructuring charges and other related closure costs			(29	)			(1.6	)			(12	)			(0.7	)			(11	)			(0.6	)
Operating income			90				5.0				28				1.6				91				5.2
Interest expense, net			(5	)			(0.3	)			(6	)			(0.3	)			(5	)			(0.3	)
Income (loss) on equity‑method investments			(1	)			(0.0	)			9				0.5				(1	)			(0.1	)
Income before income taxes and noncontrolling interest			84				4.7				31				1.8				85				4.8
Income tax benefit (expense)			(12	)			(0.7	)			(6	)			(0.4	)			8				0.5
Net income			72				4.0				25				1.4				93				5.3
Net income attributable to noncontrolling interest			(1	)			(0.1	)			(2	)			-				(3	)			(0.2	)
Net income attributable to parent company		$	71				3.9	%		$	23				1.4	%		$	90				5.1	%

 

Net revenues

 

		Three Months Ended												% Variation
		October 1, 2016				July 2, 2016				September 26, 2015				Sequential				Year‑Over‑Year
						(In millions)
Net sales		$	1,794			$	1,698			$	1,755				5.6	%			2.2	%
Other revenues			3				5				9				-29.2				-62.6
Net revenues		$	1,797			$	1,703			$	1,764				5.5	%			1.9	%

Our third quarter 2016 net revenues increased sequentially by 5.5%, at the midpoint of our guidance. The sequential increase resulted from an increase in volume of approximately 16%, partially offset by a decrease of approximately 11% in average selling prices.

 

On a year-over-year basis, our net revenues increased by 1.9% as a result of an approximate 17% increase in volume, which was partially offset by a 15% decrease in average selling prices, mainly due to the product mix and, to a lesser extent, to price pressure. Excluding businesses undergoing a phase-out (mobile legacy products, camera modules and set-top box), our revenues increased year-over-year by 3.4%.

 

No customer exceeded 10% of our total net revenues in the third quarter of 2016 or in the prior and year-ago quarters.

Net revenues by product group

 

		Three Months Ended												% Variation
		October 1, 2016				July 2, 2016				September 26, 2015				Sequential				Year-Over-Year
						(In millions)
Automotive and Discrete Group (ADG)		$	704			$	721			$	706				(2.3	)%			(0.2	)%
Analog and MEMS Group (AMG)			403				376				411				7.1				(2.0	)
Microcontrollers and Digital ICs Group (MDG)			587				556				590				5.5				(0.4	)
Others			103				50				57				106.8				78.2
Total consolidated net revenues		$	1,797			$	1,703			$	1,764				5.5	%			1.9	%

Sequentially, all product groups except ADG experienced a revenue increase.

 

On a sequential basis, ADG revenues decreased 2.3% mainly due to seasonality in automotive products and substantially flat revenues in power discretes. As a consequence of a higher weight of power discretes in the product mix, ADG registered a decrease of 24% in average selling prices, partially compensated by higher volumes. AMG revenues increased by 7.1% driven by motion MEMS and microphones. The increase in AMG revenues was principally due to a 14% increase in volumes, partially offset by a 7% decrease in average selling prices, resulting mainly from a less favorable product mix in Analog. MDG revenues increased 5.5% mainly due to higher volumes of 11%, partially offset by lower average selling prices of 5% mainly impacted by the product mix. The sequential revenue increase in MDG is mainly driven by general purpose microcontrollers, memories and digital ASICs for networking. Specialized image sensors, reported in Others, registered a strong sequential revenue growth due to new products, incorporating Time-of-Flight technology, ramping in wireless applications.

 

On a year-over-year basis, ADG revenues remained substantially flat supported by solid growth in volumes over 22% more than offset by a decrease in average selling prices, mainly due to a less favorable product mix. MDG revenues slightly decreased by 0.4% compared to the year-ago period. Microcontrollers & Memories continued to be strong, growing revenues by 4%, while digital decreased reflecting the discontinued product lines. As a result, MDG experienced an increase of 16% in volumes almost fully offset by a decrease in average selling prices. Despite the good performance of MEMS with revenues increasing over 7% on a year-over-year basis, AMG revenues decreased 2.0%, impacted by a decline of 16% in average selling prices, not fully compensated by higher volumes.

 

In the third quarter of 2016, “Others” included revenues from our Imaging Product Division ($96 million), the sales of Subsystems ($5 million) and sales of materials and other products not allocated to segments.

 

Net Revenues by Market Channel (1)

 

		Three Months Ended
		October 1, 2016				July 2, 2016				September 26, 2015
OEM			67	%			66	%			67	%
Distribution			33				34				33
Total			100	%			100	%			100	%

____________

(1)	Original Equipment Manufacturers (“OEM”) are the end-customers to which we provide direct marketing application engineering support, while Distribution customers refers to the distributors and representatives that we engage to distribute our products around the world.

 

By market channel, our third quarter revenues in Distribution amounted to 33% of our total revenues, slightly decreasing sequentially and flat compared to the prior-year quarter.

Net Revenues by Location of Shipment (1)

 

		Three Months Ended												% Variation
		October 1, 2016				July 2, 2016				September 26, 2015				Sequential				Year-Over-Year
		(In millions)
EMEA		$	459			$	485			$	453				(5.4	)%			1.4	%
Americas			269				270				300				(0.1	)			(10.2	)
Asia Pacific(2)			1,069				948				1,011				12.7				5.6
Total		$	1,797			$	1,703			$	1,764				5.5	%			1.9	%

 

(1)

Net revenues by location of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand. For example, products ordered by U.S.‑based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.

 

(2)

As of the first quarter of 2016, we have three regional sales organizations: EMEA; Americas; and Asia Pacific. Asia Pacific was created from the merger of the former Japan & Korea and Greater China-South Asia regional sales organizations.

 

By region, Asia Pacific grew revenues sequentially 12.7% while the Americas and EMEA were down 0.1% and 5.4%, respectively, the latter mainly impacted by seasonality. On a year-over-year basis, Asia Pacific and EMEA grew revenues 5.6% and 1.4%, respectively, while the Americas decreased by 10.2% mainly impacted by a weaker computer peripheral and networking market.

 

Gross profit

 

In the third quarter of 2016, gross margin was 35.8%, including a negative impact of about 60 basis points from unused capacity charges. Sequentially, gross margin increased by approximately 190 basis points, favorably impacted by manufacturing efficiencies together with improved product mix, partially offset by normal price pressure, higher unused capacity charges ($11 million compared to $8 million in the second quarter of 2016) and slight unfavorable currency effects, net of hedging for a total of around 100 basis points.

 

On a year-over-year basis, gross margin improved by approximately 100 basis points, benefitting from improved manufacturing efficiencies and favorable currency effects, net of hedging, partially offset by reductions in the sale prices. Unused capacity charges amounted to $6 million in the year-ago quarter.

 

Operating expenses

 

Third quarter 2016 operating expenses decreased sequentially mainly due to favorable seasonality (higher vacation days) and savings from the set-top box restructuring plan, partially offset by annual salary increases. On a year-over-year basis, our operating expenses decreased mainly due to the benefits of the set-top box restructuring plan and to favorable currency effects, net of hedging, partially offset by annual salary increases. As a percentage of revenues, our operating expenses amounted to 30.2%, decreasing both sequentially and year-over-year due to both higher revenues and reduced amount of operating expenses. 

 

R&D expenses were net of research tax credits, which amounted to $26 million in the third quarter 2016, compared to $27 million and $29 million in the prior and year-ago quarter, respectively.

Other income and expenses, net

 

In the third quarter of 2016, we recognized other income, net of $18 million, decreasing sequentially and on a year-over-year basis, mainly due to lower income from R&D funding mainly following the anticipated non-linearity of the R&D funding of the Nano2017 plan.

 

Impairment, restructuring charges and other related closure costs

 

In the third quarter of 2016, we recorded $29 million of impairment, restructuring charges and other related closure costs, consisting of: (i) $26 million of restructuring charges related to the set-top box restructuring plan; and (ii) $3 million of impairment charges of certain long-lived assets.

 

In the second quarter of 2016, we recorded $12 million of impairment, restructuring charges and other related closure costs, consisting of: (i) $9 million of restructuring charges related to the set-top box restructuring plan; and (ii) $3 million of impairment charges of certain long-lived assets.

In the third quarter of 2015, we recorded $11 million of impairment, restructuring charges and other related closure costs, consisting of: (i) $13 million of a non-monetary impairment of intangibles following our yearly impairment test; (ii) $3 million reversal of unused provision for the EPS restructuring plan and (iii) $1 million lease termination costs.

 

For further information, see Note 7 Impairment, Restructuring Charges and Other Related Closure Costs.

 

Operating income

 

Third quarter of 2016 operating income was $90 million, compared to an operating income of $28 million in the prior quarter and an operating income of $91 million in the year-ago quarter. Sequentially, the improvement in our operating results was mainly due to higher revenues, higher gross profit and lower operating expenses, partially offset by higher restructuring charges. Compared to the year-ago period, our operating results were flat mainly driven by favorable currency exchange rates, net of hedging, improved manufacturing efficiency, better product mix and the benefit from our set-top-box restructuring plan, partially offset by higher restructuring charges, reduced sale price, lower R&D grants and annual salary increases.

Operating income by product group

 

____________

(1)

Operating result of “Others” includes operating earnings of the Imaging Product Division, Subsystems and other products, as well as items not allocated to the segments such as impairment, restructuring charges and other related closure costs, unused capacity charges, strategic or special research and development programs and other minor unallocated expenses such as: certain corporate-level operating expenses, patent claims and litigation, and other costs that are not allocated to the segments.

 

On a sequential basis, ADG’s third quarter operating income slightly decreased to $58 million from $61 million, mainly due to power discrete, while automotive remained substantially stable. AMG’s operating income improved to $23 million, largely driven by higher sales in MEMS. MDG registered an operating income of $44 million mainly due to improvements in digital as a result of our cost savings initiatives, but also due to higher operating income in microcontrollers.

 

On a year-over-year basis, ADG’s operating income decreased by $10 million impacted by declined performance in power discrete. MDG’s operating income increased by $22 million due to improvements in digital as a result of our cost savings initiatives, while AMG deteriorated by $11 million.

 

Reconciliation to consolidated operating income

 

 

Interest expense, net

 

In the third quarter of 2016, we recorded a net interest expense of $5 million, substantially flat both sequentially and on a year-over-year basis. Interest expense recorded in the third quarter of 2016 included a $6 million charge on the senior unsecured convertible bonds issued in July 2014, of which $5 million was a non-cash interest expense resulting from the accretion of the discount on the liability component.

Income (loss) on equity-method investments

 

In the third quarter of 2016, we recorded a $1 million loss on our equity investment in Incard do Brazil (IdB).

 

During the second quarter of 2016, we recorded a $9 million income mainly due to a partial reverse of a reserve associated with our indemnity obligation undertaken when selling Numonyx, amid a better than anticipated actual outcome of certain tax items.

In the third quarter of 2015, we recorded a $1 million loss on our equity investment in Incard do Brazil (IdB).

 

Income tax benefit (expense)

 

During the third quarter of 2016, we registered an income tax expense of $12 million, reflecting the discrete effective tax rate estimated in each of our jurisdictions, applied to the first nine months of 2016 consolidated result before taxes, as opposed to an estimated effective tax rate due to significant uncertainty in estimating the effective tax rate. In addition, our income tax included the estimated impact of provisions related to potential tax positions which have been considered uncertain.

 

During the third quarter of 2015, we registered an income tax benefit of $8 million, including a one-time income tax benefit of $14 million related to the positive settlement of a local tax assessment.

 

Net income attributable to parent company

 

For the third quarter of 2016, we reported a net income attributable to parent company of $71 million, compared to a $23 million income in the prior quarter and a $90 million income in the year-ago quarter.

 

Earnings per share for the third quarter of 2016 was $0.08 compared to $0.03 in the prior quarter and $0.10 in the year-ago quarter.

 

We also present Adjusted Earnings per Share, which is a non U.S. GAAP measure. Adjusted Earnings per Share is used to help enhance investors’ understanding of our ongoing operations and to communicate the impact of the excluded items like impairment, restructuring charges and other related closure costs attributable to us and other one-time items, net of the relevant tax impact. We believe Adjusted Earnings per Share provides useful information for investors because they measure our capacity to generate profits from our business operations, excluding the effect of acquisitions and expenses related to the rationalizing of our activities and sites that we do not consider to be part of our on-going operating results, thereby offering, when read in conjunction with our GAAP financials, (i) the ability to make more meaningful period-to-period comparisons of our on-going operating results, (ii) the ability to better identify trends in our business and perform related trend analysis, and (iii) an easier way to compare our results of operations against investor and analyst financial models and valuations, which usually exclude these items. In addition, our definition of Adjusted Earnings per Share may differ from definitions used by other companies.

In the third quarter of 2016, the impact of impairment, restructuring charges and one-time charges, net of tax, a non U.S. GAAP measure, was estimated to be approximately $25 million or $(0.03) per share, compared to approximately $10 million or $(0.01) per share in the prior quarter and $11 million or $(0.02) per share in the year-ago quarter.

 

Adjusted Earnings per Share are determined as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Nine Months of 2016 vs. First Nine Months of 2015

 

The following table sets forth consolidated statements of operations data for the periods indicated:

 

 

Net revenues

 

Our first nine months 2016 net revenues decreased compared to the year‑ago period by 2.2% as a result of an approximate 3% increase in volume, more than offset by a 5% decrease in average selling prices. Excluding businesses undergoing a phase-out (mobile legacy products, camera modules and set-top box), our revenues decreased by 0.9%.

 

Net revenues by product group

 

 

Net Revenues by Market Channel (1)

 

____________

(1)	Original Equipment Manufacturers (“OEM”) are the end-customers to which we provide direct marketing application engineering support, while Distribution customers refers to the distributors and representatives that we engage to distribute our products around the world.

 

By market channel, in the first nine months of 2016, Distribution reached 33% share of total revenues compared to approximately 32% in the first nine months of 2015.

 

Net Revenues by Location of Shipment (1)

 

____________

(1)

Net revenues by location of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand. For example, products ordered by U.S.‑based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.

 

(2)

As of the first quarter of 2016, we have three regional sales organizations: EMEA; Americas; and Asia Pacific. Asia Pacific was created from the merger of the former Japan & Korea and Greater China-South Asia regional sales organizations.

 

By location of shipment, the Americas and Asia Pacific registered a drop in revenues of 7.3% and 3.2%, respectively, while EMEA grew revenues by 3.0%, mainly driven by good performance in automotive.

 

Gross profit

 

Gross margin was 34.4% for the first nine months of 2016, increasing by approximately 50 basis points compared to the year‑ago period mainly due to favorable currency effects, net of hedging, and improved manufacturing efficiencies, almost fully offset by decreasing selling prices. Unused capacity charges amounted to $29 million in the first nine months of 2016 compared to $34 million in the year-ago period.

Operating expenses

 

Our operating expenses decreased, mainly driven by favorable currency effects, net of hedging, and the benefit of our restructuring plans, partially offset by annual salary and variable incentive increases and more days  in the first nine months of 2016 (275 days compared to 269 days in the year ago period).

 

Total R&D expenses were net of research tax credits, which amounted to $79 million in the first nine months of 2016 and $85 million in the year-ago period.

 

Other income and expenses, net

 

In the first nine months of 2016, we recognized other income, net, of $73 million, decreasing compared to $110 million in the first nine months of 2015. The decrease is mainly due to lower income from R&D funding following the anticipated non-linearity of the Nano2017 R&D funding plan.

 

Impairment, restructuring charges and other related closure costs

 

In the first nine months of 2016, we recorded $69 million of impairment, restructuring charges and other related closure costs, primarily consisting of: (i) $60 million of restructuring charges related to the set-top box restructuring plan; (ii) $8 million of impairment charges of certain long-lived assets; and (iii) $1 million of other restructuring charges related to former restructuring plans.

 

In the first nine months of 2015, we recorded $61 million of impairment, restructuring charges and other related closure costs, primarily consisting of: (i) $35 million of restructuring charges related to the EPS restructuring plan; (ii) $13 million of a non-monetary impairment of intangibles following our yearly impairment test and (iii) $11 million of restructuring charges related to the manufacturing consolidation plan.

 

For further information, see Note 7 Impairment, Restructuring Charges and Other Related Closure Costs.

Operating income

 

 

Our operating result slightly increased at 1.7% of net revenues in the first nine months of 2016 compared to 1.6% of net revenues in the first nine months of 2015.

 

Operating income by product group

 

____________

(1)

Operating result of “Others” includes operating earnings of the Imaging Product Division, Subsystems and other products, as well as items not allocated to the segments such as impairment, restructuring charges and other related closure costs, unused capacity charges, strategic or special research and development programs and other minor unallocated expenses such as: certain corporate-level operating expenses, patent claims and litigation, and other costs that are not allocated to the segments.

 

ADG’s operating performance improved principally due to mix improvements in comparison to the year-ago period. MDG’s operating margin turned positive due to higher sales of general purpose microcontrollers, lower sales of low margin set-top box products and the savings from the set-top box restructuring plan. AMG’s operating results decreased mainly due to lower sales.

 

 

Reconciliation to consolidated operating income

 

 

Interest expense, net

 

In the first nine months of 2016, interest expense, net was $15 million, of which $30 million was interest expense on our borrowings, mainly non-cash, related to the Senior Bonds issued on July 3, 2014 and banking fees, partially balanced by $15 million of interest income. In the first nine months of 2015, interest expense on our borrowings, mainly non-cash, and banking fees was $29 million, partially balanced by $13 million of interest income.

Income on equity-method investments

 

During the first nine months of 2016, we recorded $8 million of income mainly due to a partial reverse of a reserve associated with our indemnity obligation undertaken when selling Numonyx, amid a better than anticipated actual outcome of certain tax items.

In the first nine months of 2015, we recorded income of $1 million due to the sale of our participation in 3Sun to Enel Green Power, which was realized on more favorable conditions than originally expected, partially offset by a loss in Incard do Brazil (IdB).

 

Income tax benefit (expense)

 

During the first nine months of 2016, we registered an income tax expense of $21 million, reflecting a discrete effective tax method as opposed to an estimated effective tax rate due to significant uncertainty in estimating the effective tax rate. Income tax expense is offset by a benefit relating to a one-time income of $2 million associated with the re-measurement of a local tax provision. Our income tax also included the estimated impact of provisions related to potential tax positions which have been considered uncertain.

 

In the first nine months of 2015, we registered an income tax benefit of $38 million including a one-time income of $46 million related to a local tax settlement.

Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimations of our tax provisions. Our income tax amounts and rates also depend on our loss carry-forwards and their relevant valuation allowances, which are based on estimated projected plans and available tax planning strategies. In the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries. Such benefits may not be available in the future due to changes in the local jurisdictions; our estimated tax rate could be different in future quarters and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of provisions related to potential tax positions which have been considered uncertain.

 

Net income attributable to parent company

For the first nine months of 2016, we reported net income of $53 million, representing earnings per share of $0.06, compared to income of $102 million in the year-ago period, representing earnings per share of $0.12.

Legal Proceedings

 

For a discussion of legal proceedings, see Note 25 Contingencies, Claims and Legal Proceedings to our Interim Consolidated Financial Statements.

 

Impact of Changes in Exchange Rates

 

Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.

 

As a market practice, the reference currency for the semiconductor industry is the U.S. dollar and the market prices of semiconductor products are mainly denominated in U.S. dollars. However, revenues for some of our products (primarily certain of our products sold in Europe) are quoted in currencies other than the U.S. dollar and as such are directly affected by fluctuations in the value of the U.S. dollar. As a result of currency variations, the appreciation of the Euro compared to the U.S. dollar could increase our level of revenues when reported in U.S. dollars or the depreciation of the Euro compared to the U.S. dollar could decrease our level of revenues when reported in U.S. dollars. Over time the prices in the industry tend to align to the equivalent amount in U.S. dollars, except that there is a lag between the changes in the currency rate and the adjustment in the price paid in local currency, which is proportional to the amplitude of the currency swing, and such adjustment could be only partial. Furthermore, certain significant costs incurred by us, such as manufacturing costs, SG&A expenses, and R&D expenses, are largely incurred in the currency of the jurisdictions in which our operations are located. Given that most of our operations are located in the Euro zone and other non-U.S. dollar currency areas, including Singapore, our costs tend to increase when translated into U.S. dollars when the dollar weakens or to decrease when the U.S. dollar strengthens.

 

In summary, as our reporting currency is the U.S. dollar, exchange rate fluctuations affect our results of operations: in particular, if the U.S. dollar weakens, our results are negatively impacted since we receive only a limited part of our revenues, and more importantly, we incur a significant part of our costs, in currencies other than the U.S. dollar. On the other hand, our results are favorably impacted when the dollar strengthens. The impact on our accounts could therefore be material, in the case of a material variation of the U.S. dollar exchange rate.

 

Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues. Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our Interim Consolidated Statements of Income, in particular with respect to a portion of the costs of goods sold, most of the R&D expenses and certain SG&A expenses, located in the Euro zone, which we account for as cash flow hedging contracts. We use two different types of hedging contracts: forward and options (including collars).

 

Our Interim Consolidated Statements of Income for the nine months ended October 1, 2016 included income and expense items translated at the average U.S. dollar exchange rate for the period, plus the impact of the hedging contracts expiring during the period. Our effective exchange rate was $1.12 for €1.00 in the third quarter of 2016 compared to $1.12 for €1.00 in the second quarter of 2016 and $1.16 for €1.00 in the third quarter of 2015. These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.

 

The time horizon of our cash flow hedging for manufacturing costs and operating expenses may run up to 24 months, for a limited percentage of our exposure to the Euro, depending on currency market circumstances. As of October 1, 2016, the outstanding hedged amounts were €654 million to cover manufacturing costs and €429 million to cover operating expenses, at an average exchange rate of about $1.15 for €1.00 (considering the collars at upper strike), maturing over the period from October 4, 2016 to August 29, 2017. As of October 1, 2016, measured with respect to the exchange rate at period closing of about $1.12 to €1.00, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory resulted in a deferred profit of approximately $2 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity, compared to a deferred loss of approximately $21 million before tax at December 31, 2015.

We also hedge certain manufacturing costs denominated in Singapore dollars (SGD); as of October 1, 2016, the outstanding hedged amounts were SGD 89 million at an average exchange rate of about SGD 1.38 to $1.00 maturing over the period from October 6, 2016 to August 17, 2017. As of October 1, 2016, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory resulted in a deferred profit of approximately $1 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity, compared to a deferred loss of approximately $2 million before tax at December 31, 2015.

 

Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a portion of our exposure in the next four quarters and a declining percentage of our exposure in each quarter thereafter. In the third quarter of 2016, as a result of our cash flow hedging, we recorded a net loss of less than $1 million, while in the comparable quarter in 2015, we recorded a net loss of $36 million.

 

In addition to our cash flow hedging, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates, which we account for as fair value instruments. We may in the future purchase or sell similar types of instruments. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F. Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment. No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar. Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates. The net effect of our consolidated foreign exchange exposure was nil for the third quarter of 2016.

 

The assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate. Income and expenses, as well as cash flows, are translated at the average exchange rate for the period. The balance sheet impact, as well as the income statement and cash flow impact, of such translations have been, and may be expected to be, significant from period to period since a large part of our assets and liabilities and activities are accounted for in Euros as they are located in jurisdictions where the Euro is the functional currency. Adjustments resulting from the translation are recorded directly in equity, and are shown as “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity. At October 1, 2016, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.

 

For a more detailed discussion, see Item 3. “Key Information — Risk Factors — Risks Related to Our Operations” in our Form 20‑F, which may be updated from time to time in our public filings.

 

Impact of Changes in Interest Rates

 

Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results of operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and marketable securities, as well as the total interest expense paid on our financial debt.

 

Our interest income (expense), net, as reported in our Interim Consolidated Statements of Income, is the balance between interest income received from our cash and cash equivalents and marketable securities investments and interest expense paid on our financial liabilities (including the sale without recourse of receivables), non-cash interest expense on the Senior Convertible Bonds and bank fees (including fees on committed credit lines). Our interest income is dependent upon fluctuations in interest rates, mainly in U.S. dollars and Euros, since we invest primarily on a short-term basis; any increase or decrease in the market interest rates would mean a proportional increase or decrease in our interest income. Our interest expenses are also dependent upon fluctuations in interest rates, since our financial liabilities include European Investment Bank Floating Rate Loans at Libor and Euribor plus variable spreads.

 

At October 1, 2016, our total financial resources, including cash and cash equivalents and marketable securities, generated an average interest income rate of 0.99%. At the same date, the average interest rate on our outstanding debt was 2.23% including the non-cash effective interest of the convertible bonds, while the average cash interest rate was only 0.84%.

Impact of Changes in Equity Prices

 

As of October 1, 2016, we did not hold any significant equity participations, which could be subject to a material impact in changes in equity prices. However, we hold equity participations whose carrying value could be reduced due to further losses or impairment charges of our equity-method investments. See Note 19 to our Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

Treasury activities are regulated by our policies, which define procedures, objectives and controls. The policies focus on the management of our financial risk in terms of exposure to currency rates and interest rates. Most treasury activities are centralized, with any local treasury activities subject to oversight from our head treasury office. The majority of our cash and cash equivalents are held in U.S. dollars and are placed with financial institutions rated at least a single A long-term rating, meaning at least A3 from Moody’s Investors Service (“Moody’s”) and A- from Standard & Poor’s (“S&P”) or Fitch Ratings (“Fitch”), or better. Marginal amounts are held in other currencies. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F, which may be updated from time to time in our public filings.

 

Cash flow

 

We maintain a significant cash position and a low debt-to-equity ratio, which provide us with adequate financial flexibility. As in the past, our cash management policy is to finance our investment needs mainly with net cash generated from operating activities.

 

During the first nine months of 2016, our net cash decreased by $96 million, due to the net cash used in financing and investing activities exceeding the net cash from operating activities.

 

The components of our cash flow for the comparable periods are set forth below:

 

Net cash from operating activities. Net cash from operating activities is the sum of (i) net income (loss) adjusted for non-cash items and (ii) changes in net working capital. The net cash from operating activities for the first nine months of 2016 was $662 million, slightly increasing compared to $597 million in the prior-year period mainly due to more favorable changes in net working capital. At the end of the third quarter 2016, sales of accounts receivable with no recourse were $2 million, compared to $48 million at the end of the second quarter of 2016 and the end of the fourth quarter of 2015.

 

Net cash used in investing activities. Investing activities used $484 million of cash in the first nine months of 2016, increasing compared to $418 million in the prior-year period. This increase is mainly due to $78 million paid for the acquisition of ams’ NFC and RFID reader business. Payments for purchase of tangible assets, net of proceeds, totaled $379 million, compared to $378 million registered in the prior-year period.

 

Net cash used in financing activities. Net cash used in financing activities was $274 million for the first nine months of 2016, compared to $317 million used for the first nine months of 2015 and consisted mainly of a $76 million repayment of long-term debt and $197 million of dividends paid to stockholders.

Free Cash Flow (non U.S. GAAP measure)

 

We also present Free Cash Flow, which is a non U.S. GAAP measure, defined as (i) net cash from operating activities plus (ii) net cash used in investing activities, excluding payment for purchases (and proceeds from the sale) of marketable securities, which are considered as temporary financial investments. The result of this definition is ultimately net cash from operating activities plus payment for purchase and proceeds from sale of tangible, intangible and financial assets and proceeds received in the sale of businesses. We believe Free Cash Flow provides useful information for investors and management because it measures our capacity to generate cash from our operating and investing activities to sustain our operations. Free Cash Flow is not a U.S. GAAP measure and does not represent total cash flow since it does not include the cash flows generated by or used in financing activities. Free Cash Flow reconciles with the total cash flow and the net cash increase (decrease) by including the payment for purchases (and proceeds from the sale) of marketable securities and net cash variation from joint ventures deconsolidation, the net cash from (used in) financing activities and the effect of changes in exchange rates. In addition, our definition of Free Cash Flow may differ from definitions used by other companies. Free Cash Flow is determined as follows from our Consolidated Statements of Cash Flows:

 

_____________

(1)

Reflects the total of the following line items reconciled with our Consolidated Statements of Cash Flows relating to the investing activities: Payment for purchase of tangible assets, Proceeds from sale of tangible assets, Payment for purchase of intangible assets, Payment for purchase of financial assets, Proceeds from sale of financial assets, Cash paid for business combinations, Proceeds received in sale of businesses.

 

Free Cash Flow was positive $178 million for the first nine months of 2016, flat compared to positive $179 million for the first nine months of 2015.

 

Net Financial Position (non U.S. GAAP measure)

 

Our Net Financial Position, which is a non U.S. GAAP measure, represents the balance between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents, marketable securities, short-term deposits and restricted cash, and our total financial debt includes bank overdrafts, short-term debt and long-term debt, as represented in our Consolidated Balance Sheets. Net Financial Position is not a U.S. GAAP measure but we believe it provides useful information for investors and management because it gives evidence of our global position either in terms of net indebtedness or net cash by measuring our capital resources based on cash and cash equivalents and marketable securities and the total level of our financial indebtedness. Our Net Financial Position for each period has been determined as follows from our Consolidated Balance Sheets:

 

Our Net Financial Position as of October 1, 2016 was a net cash position of $464 million, decreasing compared to the net financial position of $494 million at December 31, 2015, mainly due to three quarterly dividend payments for an aggregate amount of $197 million and $78 million paid for the acquisition of ams’ NFC and RFID reader business.

Cash and cash equivalents amounted to $1,675 million as at October 1, 2016, as a result of our cash flow evolution as presented above.

 

Marketable securities amounted to $342 million as at October 1, 2016. Compared to December 31, 2015, the increase of $7 million is entirely due to the positive change of value of the U.S. Treasury Bonds available for sale.

 

Financial debt was $1,553 million as at October 1, 2016, composed of: (i) $117 million of current portion of long-term debt and (ii) $1,436 million long‑term debt. The breakdown of our total financial debt included: (i) $623 million in European Investment Bank loans (the “EIB Loans”), (ii) $921 million in the Senior Bonds, and (iii) $9 million in other long-term loans and loans from other funding programs.

 

The EIB Loans are comprised of four long-term amortizing credit facilities as part of our R&D funding programs. The first, for R&D in France, drawn for a total amount of $341 million, was fully amortized as of October 1, 2016. The second, for R&D projects in Italy, drawn for a total amount of $380 million, was fully amortized as of October 1, 2016. The third, a €350 million multi-currency loan to support our industrial and R&D programs, was drawn mainly in U.S. dollars for an amount of $321 million and only partially in Euros for an amount of €100 million, of which the equivalent of $270 million remained outstanding as of October 1, 2016. The fourth, a €350 million multi-currency loan supporting our R&D programs, was drawn in U.S. dollars for an amount of $471 million, of which $353 million is outstanding as of October 1, 2016. At October 1, 2016, the amounts available under our back-up and uncommitted credit facilities were unutilized.

 

The Senior Bonds were issued on July 3, 2014, for a principal amount of $1,000 million (Tranche A for $600 million and Tranche B for $400 million), due 2019 and 2021, respectively, for net proceeds of approximately $994 million. Tranche A bonds were issued as zero-coupon bonds while Tranche B bonds bear a 1% per annum nominal interest, payable semi-annually. The conversion price at issuance was approximately $12 on each tranche. On October 3, 2016, the conversion price was adjusted up by 1.24% on each tranche, pursuant to the dividend adjustment symmetric provision. The Senior Bonds are convertible by the bondholders if certain conditions are satisfied on a net-share settlement basis, except if an alternative settlement is elected by us. We can also redeem the Senior Bonds prior to their maturity in certain circumstances. Upon initial recognition, the proceeds were allocated between debt and equity by determining the fair value of the liability component using an income approach. The liability component will accrete to par value until maturity based on the effective interest rate (Tranche A: 2.40% and Tranche B: 3.22%, including 1% p.a. nominal interest). In the computation of diluted EPS, the Senior Bonds will be dilutive only for the portion of net-share settlement underlying the conversion premium when the conversion option is in the money.

Our long-term debt contains standard conditions, but does not impose minimum financial ratios.

 

Our current ratings with the three major rating agencies that report on us on a solicited basis, are as follows: S&P: “BBB-” with stable outlook; Fitch: “BBB-” with stable outlook; Moody’s: “Ba1” with stable outlook.

 

As of October 1, 2016, debt payments at redemption value by period were as follows:

 

Financial Outlook: Capital Investment

 

Our policy is to modulate our capital spending according to the evolution of the semiconductor market. Based on increased demand and ongoing strategic initiatives, including new specialized products, we are accelerating our capital spending and our capital expenditure for 2016 is estimated to be within the range of $600 million to $620 million. The most important of our 2016 capital expenditure projects are expected to be : (a) for our front end facilities: (i) in our 300 mm fab in Crolles, R&D, technology evolution and new specialized capacity to support the production ramp up of new technologies; (ii) mix evolution, and a few selected programs of capacity growth and infrastructure preparation, mainly in the area of mixed signal and discrete processes, including the Silicon Carbide (SiC) technology; (iii) qualification and ramp-up of technologies in 200 mm in Singapore, Agrate, Italy and expansion of the 200 mm fab in Catania, Italy; and (iv) quality, safety, maintenance, and productivity and cost savings investments in both 150 mm and 200 mm front end fabs; (b) for our back end facilities: (i) capacity growth on certain package families, to sustain market demand and secure service and ramp up of specialty products for strategic customers; (ii) modernization and rationalization of package lines targeting cost savings benefits; and (iii) specific investments in the areas of factory automation, quality, environment and energy savings; and (c) an overall capacity adjustment in final testing and wafers probing (EWS) to meet increased demand and a changed product mix.

We will continue to monitor our level of capital spending by taking into consideration factors such as trends in the semiconductor industry and capacity utilization. We expect to need significant financial resources in the coming years for capital expenditures and for our investments in manufacturing and R&D. We plan to fund our capital requirements from cash provided by operating activities, available funds and support from third parties, and may have recourse to borrowings under available credit lines and, to the extent necessary or attractive based on market conditions prevailing at the time, the issuance of debt, convertible bonds or additional equity securities. A substantial deterioration of our economic results, and consequently our profitability, could generate a deterioration of the cash generated by our operating activities. Therefore, there can be no assurance that, in future periods, we will generate the same level of cash as in prior years to fund our capital expenditure plans for expanding/upgrading our production facilities, our working capital requirements, our R&D and manufacturing costs.

 

In support of our R&D activities, we signed the Nano2017 program with the French government, which was approved by the European Union in the third quarter of 2014 and, in our role as Coordinator and Project Leader of Nano2017, we have been allocated an overall funding budget of about €400 million for the period 2013-2017, subject to the conclusion of agreements every year with the public authorities and linked to the achievement of technical parameters and objectives. Based on the activity of each sponsored project, from the beginning of the program to the end of the third quarter of 2016, we have recognized grants for an aggregate amount of €332 million. The Nano2017 contract contains certain covenants which, in the event they are not fulfilled, may affect our ability to access such funding.

 

As a result of our exit from the ST-Ericsson joint venture, our exposure is limited to covering 50% of ST-Ericsson’s needs to complete the wind-down, which are estimated to be negligible, based on our current visibility of the ST-Ericsson liquidation balance.

 

We believe that we have the financial resources needed to meet our currently projected business requirements for the next twelve months, including capital expenditures for our manufacturing activities, working capital requirements, approved dividend payments and the repayment of our debts in line with their maturity dates.

 

Contractual Obligations, Commercial Commitments and Contingencies

 

Our contractual obligations, commercial commitments and contingencies are mainly comprised of: operating leases for land, buildings, plants and equipment; purchase commitments for equipment, outsourced foundry wafers and related purchase obligations and for software licenses; long-term debt obligations; earn-out associated with ams’ assets acquisition; pension obligations and other long-term liabilities.

 

Off‑Balance Sheet Arrangements

 

We had no material off‑balance sheet arrangements at October 1, 2016.

 

Impact of Recently Issued U.S. Accounting Standards

 

See Note 5 Recent Accounting Announcements to our Consolidated Financial Statements.

 

In the third quarter of 2016, no customer accounted for more than 10% of our total net revenues. There is no guarantee that any customer will continue to generate revenues for us at the same levels as in prior periods. If we were to lose one or more of our key customers, or if they were to significantly reduce their bookings, not confirm planned delivery dates on frame orders in a significant manner or fail to meet their payment obligations, our operating results and financial condition could be adversely affected.

 

Disclosure Controls and Procedures

 

Evaluation

 

Our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this periodic report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis.

 

The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and their effect on the information generated for use in this periodic report. In the course of the controls evaluation, we reviewed identified data errors, control problems or acts of fraud and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed at least on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 6‑K and Form 20‑F. The components of our Disclosure Controls are also evaluated on an ongoing basis by our Internal Audit Department, which reports directly to our Audit Committee. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

 

Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this periodic report, our Disclosure Controls were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls

 

No system of internal control over financial reporting, including one determined to be effective, may prevent or detect all misstatements. It can provide only reasonable assurance regarding financial statement preparation and presentation. Also, projections of the results of any evaluation of the effectiveness of internal control over financial reporting into future periods are subject to inherent risk that the relevant controls may become inadequate due to changes in circumstances or that the degree of compliance with the underlying policies or procedures may deteriorate.

 

Cautionary Note Regarding Forward‑Looking Statements

 

Some of the statements contained in this Form 6-K that are not historical facts, particularly in “Business Overview” and in “Liquidity and Capital Resources—Financial Outlook: Capital Investment”, are statements of future expectations and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended) that are based on management’s current views and assumptions, and are conditioned upon and also involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those anticipated by such statements due to, among other factors:

 

·

Uncertain macro-economic and industry trends, which may impact end-market demand for our products;

 

·

Customer demand that differs from projections;

 

·

The ability to design, manufacture and sell innovative products in a rapidly changing technological environment;

 

·

Unanticipated events or circumstances, which may impact our ability to execute the planned reductions in our net operating expenses and / or meet the objectives of our R&D Programs, which benefit from public funding;

 

·

Changes in economic, social, labor, political, or infrastructure conditions in the locations where we, our customers, or our suppliers operate, including as a result of macro-economic or regional events, military conflicts, social unrest, labor actions, or terrorist activities;

 

·

The Brexit vote and the perceptions as to the impact of the withdrawal of the U.K. may adversely affect business activity, political stability and economic conditions in the U.K., the Eurozone, the EU and elsewhere. While we do not have material operations in the U.K. and have not experienced any material impact from Brexit on our underlying business to date, we cannot predict its future implications;

 

·

Financial difficulties with any of our major distributors or significant curtailment of purchases by key customers;

 

·

The loading, product mix, and manufacturing performance of our production facilities;

 

·

The functionalities and performance of our IT systems, which support our critical operational activities including manufacturing, finance and sales, and any breaches of our IT systems or those of our customers or suppliers;

 

·

Variations in the foreign exchange markets and, more particularly, the U.S. dollar exchange rate as compared to the Euro and the other major currencies we use for our operations;

 

·

The impact of intellectual property (“IP”) claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions;

 

·

Product liability or warranty claims, claims based on epidemic or delivery failure, or other claims relating to our products, or recalls by our customers for products containing our parts;

 

·

Natural events such as severe weather, earthquakes, tsunamis, volcano eruptions or other acts of nature, health risks and epidemics in locations where we, our customers or our suppliers operate;

 

·

Availability and costs of raw materials, utilities, third-party manufacturing services and technology, or other supplies required by our operations; and

 

·

Industry changes resulting from vertical and horizontal consolidation among our suppliers, competitors, and customers.

 

Such forward-looking statements are subject to various risks and uncertainties, which may cause actual results and performance of our business to differ materially and adversely from the forward-looking statements. Certain forward-looking statements can be identified by the use of forward-looking terminology, such as “believes”, “expects”, “may”, “are expected to”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Some of these risk factors are set forth and are discussed in more detail in “Item 3. Key Information — Risk Factors” in our Form 20-F. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in our Form 20-F as anticipated, believed or expected. We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set forth in this Form 6-K to reflect subsequent events or circumstances.

 

Unfavorable changes in the above or other factors listed under “Item 3. Key Information — Risk Factors” from time to time in our SEC filings, could have a material adverse effect on our business and/or financial condition.

 

 

 

 

STMICROELECTRONICS N.V.

 

UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

         

STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF INCOME
		Nine months ended
		(Unaudited)
		October 01,				September 26,
In million of U.S. dollars except per share amounts		2016				2015
Net sales			5,097				5,202
Other revenues			16				27
Net revenues			5,113				5,229
Cost of sales			(3,355	)			(3,455	)
Gross profit			1,758				1,774
Selling, general and administrative			(681	)			(666	)
Research and development			(996	)			(1,073	)
Other income and expenses, net			73				110
Impairment, restructuring charges and other related closure costs			(69	)			(61	)
Operating income			85				84
Interest expense, net			(15	)			(16	)
Income (loss) on equity-method investments			8				1
Income before income taxes and noncontrolling interest			78				69
Income tax benefit (expense)			(21	)			38
Net income			57				107
Net loss (income) attributable to noncontrolling interest			(4	)			(5	)
Net income attributable to parent company			53				102
Earnings per share (Basic) attributable to parent company stockholders			0.06				0.12
Earnings per share (Diluted) attributable to parent company stockholders			0.06				0.12

STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		Nine months ended
		(Unaudited)
		October 01,				September 26,
In million of U.S. dollars		2016				2015
Net income			57				107
Other comprehensive income (loss), net of tax :
Currency translation adjustments arising during the period			43				(159	)
Less : reclassification adjustment for gains on disposal of equity investment			-				(10	)
Foreign currency translation adjustments			43				(169	)
Unrealized gains (losses) arising during the period			7				3
Unrealized gains (losses) on securities			7				3
Unrealized gains (losses) arising during the period			21				(93	)
Less : reclassification adjustment for (income) losses included in net income			5				150
Unrealized gains (losses) on derivatives			26				57
Net gains (losses) arising during the period			4				4
Defined benefit pension plans			4				4
Other comprehensive income (loss), net of tax			80				(105	)
Comprehensive income (loss)			137				2
Less : comprehensive income (loss) attributable to noncontrolling interest			4				5
Comprehensive income (loss) attributable to the company’s stockholders			133				(3	)

 

 

STMicroelectronics N.V.
CONSOLIDATED BALANCE SHEETS
		As at
		October 01,				December 31,
In million of U.S. dollars		2016				2015
		(Unaudited)				(Audited)
Assets
Current assets :
Cash and cash equivalents			1,675				1,771
Restricted cash			-				4
Marketable securities			342				335
Trade accounts receivable, net			1,009				820
Inventories			1,238				1,251
Deferred tax assets			83				91
Assets held for sale			1				1
Other current assets			377				407
Total current assets			4,725				4,680
Goodwill			119				76
Other intangible assets, net			199				166
Property, plant and equipment, net			2,289				2,321
Non-current deferred tax assets			465				436
Long-term investments			57				57
Other non-current assets			424				459
			3,553				3,515
Total assets			8,278				8,195
Liabilities and equity
Current liabilities:
Short-term debt			117				191
Trade accounts payable			674				525
Other payables and accrued liabilities			728				703
Dividends payable to stockholders			112				97
Deferred tax liabilities			-				2
Accrued income tax			45				42
Total current liabilities			1,676				1,560
Long-term debt			1,436				1,421
Post-employment benefit obligations			362				351
Long-term deferred tax liabilities			8				12
Other long-term liabilities			151				158
			1,957				1,942
Total liabilities			3,633				3,502
Commitment and contingencies
Equity
Parent company stockholders’ equity
Common stock (preferred stock: 540,000,000 shares authorized, not issued; common stock: Euro 1.04 par value, 1,200,000,000 shares authorized, 911,015,420 shares issued, 883,333,039 shares outstanding)			1,157				1,157
Capital surplus			2,806				2,779
Retained earnings			320				525
Accumulated other comprehensive income			540				460
Treasury stock			(243	)			(289	)
Total parent company stockholders’ equity			4,580				4,632
Noncontrolling interest			65				61
Total equity			4,645				4,693
Total liabilities and equity			8,278				8,195