STMicroelectronics Reports 2017 Third Quarter and Nine Months Financial Results

Third quarter gross profit was $845 million and gross margin was 39.5%, 50 basis points above the mid-point of the Company's guidance. On a sequential basis, gross margin increased 120 basis points, mainly due to improved manufacturing efficiency and better product mix, partially offset by normal price pressure and negative currency effects, net of hedging.

Gross margin increased substantially on a year-over-year basis, increasing 370 basis points due to improved manufacturing efficiency and better product mix as well as improved fab loading, partially offset by normal price pressure.

Combined R&D and SG&A expenses were $558 million, decreasing by $9 million on a sequential basis, mainly benefiting from favorable seasonality. Combined R&D and SG&A increased $16 million, or 2.9%, in comparison to the year-ago quarter reflecting inflationary dynamics.

Third quarter other income and expenses, net, registered income of $5 million compared to $15 million and $18 million in the prior and year-ago quarter, respectively, mainly due to anticipated lower R&D funding.

Impairment and restructuring charges in the third quarter were $14 million compared to $6 million and $29 million in the prior and year-ago quarter, respectively, mainly related to the set-top box restructuring plan announced in January 2016.

Operating income of $278 million in the third quarter increased by $100 million and $188 million compared to the prior and year-ago quarter, respectively. By product group, MDG operating income had a very sharp sequential improvement of $54 million, resulting in an increase in its operating margin to 17.9% from 11.6% in the prior quarter. AMG operating income improved sequentially by $21 million, and expanded its operating margin to 18.1% from 14.5% in the prior period, benefiting from an improved product mix, as well as leveraging higher revenues and improved manufacturing performance. ADG operating income increased sequentially by $20 million from the prior quarter, and the operating margin improved to 10.9% compared to 8.6% in the prior period. Others, including the Imaging Product Division, reduced its losses to $23 million from $28 million in the prior quarter.

Third quarter operating income before impairment and restructuring charges(1) was $292 million, equivalent to 13.7% of net revenues compared to $184 million, equivalent to 9.6% of net revenues in the prior quarter driven by a higher level of revenues and improved gross margin. On a year-over-year basis, operating income before impairment and restructuring charges(1) increased by $173 million reflecting higher revenues, manufacturing efficiencies, improved product mix and better fab loading.

Third quarter net income was $236 million, equivalent to $0.26 per share, compared to net income of $151 million, equivalent to $0.17 per share, in the prior quarter. On a year-over-year basis, net income increased by $165 million, equivalent to $0.18 per share, from net income of $71 million, equivalent to $0.08 per share, in the year-ago quarter.

(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.

First Nine Months Financial Summary By Product Group (US$ Million)

Net Revenues By Product Group 9M 2017 9M 2016
Automotive and Discrete Group (ADG) 2,238 2,096
Analog and MEMS Group (AMG) 1,427 1,148
Microcontrollers and Digital ICs Group
(MDG)
1,905 1,676
Others 310 193
Total 5,880 5,113

Nine Months 2017 Review

Net revenues in the first nine months 2017 increased 15.0% to $5.88 billion from $5.11 billion in the first nine months 2016, or 16.4% excluding businesses undergoing a phase-out (mobile legacy products and set-top box). By product group, first nine months 2017 Analog and MEMS Group (AMG) revenues were up 24.3%, on strong growth in both Analog and MEMS. Microcontrollers and Digital ICs Group (MDG) revenues increased 13.7% compared to the prior period on strong growth in general purpose microcontrollers partially offset by lower revenues for products undergoing phase-out. Automotive and Discrete Group (ADG) revenues increased 6.8% in the first nine months 2017 compared to the first nine months 2016 on growth in both Automotive and Discrete. Imaging Product Division revenues, included in Others, increased very significantly in the first nine months 2017 compared to the prior year period.

Year-to-date gross profit was $2.27 billion. Gross margin in the first nine months 2017 improved by 410 basis points to 38.5% from 34.4% in the year-ago period. Specifically, the first nine-months 2017 gross margin benefited from manufacturing efficiencies, better product mix, and improved fab loading partially offset by normal price pressure.

Combined R&D and SG&A expenses were $1.69 billion in the first nine months 2017 compared to $1.68 billion in the year-ago period.

Other income and expenses, net, registered income of $37 million compared to $73 million in the year-ago period mainly due to a lower level of R&D grants.

On a year-to-date basis, impairment and restructuring charges were $25 million compared to $69 million in the year-ago period, mostly related to the set-top box restructuring plan.

Operating income in the first nine months of 2017 improved significantly by $500 million to $585 million compared to the prior year period.

Year-to-date operating income and operating margin before impairment and restructuring charges(1) increased sharply to $610 million or 10.4% of net revenues, compared to $154 million or 3.0% of net revenues, in the first nine months of 2016 mainly due to higher revenues and gross margin, improved product mix, manufacturing efficiencies and better fab loading.

First nine months 2017 net income was $494 million, equivalent to $0.55 per share, compared to net income of $53 million, or $0.06 per share in the year-ago period.

(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.

Cash Flow and Balance Sheet Highlights

Capital expenditure payments, net of proceeds from sales, were $365 million and $891 million during the third quarter and first nine months of 2017, respectively. First nine months 2016 capital expenditures, net of proceeds from sales, were $379 million.

Inventory was $1.32 billion at quarter end, up 4.7% from the prior quarter. Inventory in the third quarter of 2017 was at 3.9 turns or 92 days.

The Company paid cash dividends totaling $59 million and $160 million for the third quarter and first nine months of 2017, respectively.

ST's net financial position(1) was $446 million at September 30, 2017 compared to $524 million at July 1, 2017. At September 30, 2017, ST's total financial resources were $2.62 billion; total financial debt was $2.18 billion; and total equity, including non-controlling interest, was $5.15 billion.

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