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 May 4, 2023

Commission File Number:  1‑13546

 

STMicroelectronics N.V.
(Name of Registrant)

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

 

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

Form 20‑F ☒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):

Yes ☐No ☒

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):

Yes ☐No ☒

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:

Yes ☐No ☒

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 First Quarter ended April 1, 2023:

 

 

 

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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 ended April 1, 2023 and Notes thereto included elsewhere in this Form 6‑K, and our annual report on Form 20‑F for the year ended December 31, 2022 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on February 23, 2023 (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:

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At STMicroelectronics N.V. (“ST” or the “Company”), we are over 50,000 creators and makers of semiconductor technologies mastering the semiconductor supply chain with state-of-the-art manufacturing facilities. As an integrated device manufacturer, we work with more than 200,000 customers and thousands of partners to design and build products, solutions, and ecosystems that address their challenges and opportunities, and the need to support a more sustainable world. Our technologies enable smarter mobility, more efficient power and energy management, and the wide-scale deployment of the Internet of Things and connectivity. We are committed to achieving our goal to become carbon neutral by 2027.

Critical Accounting Policies Using Significant Estimates

There were no material changes in the first three months of 2023 to the information provided under the heading “Critical Accounting Policies Using Significant Estimates” included in our Form 20-F for the year ended December 31, 2022, as described in Note 5, Recent Accounting Pronouncements, of the Consolidated Financial Statements for the three months ended April 1, 2023.

Fiscal Year

Under Article 35 of our Articles of Association, our fiscal year extends from January 1 to December 31. The first quarter of 2023 ended on April 1. The second quarter will end on July 1, the third quarter will end on September 30 and the fourth quarter will end on December 31, 2023. 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 2023 and 2022.

 

 

Business Overview

Our results of operations for each period were as follows:

Our total available market is defined as “TAM”, while our serviceable available market is defined as “SAM” and represents the market for products sold by us (i.e., TAM excluding major devices such as microprocessors, DRAM and flash-memories, optoelectronics devices other than optical sensors, video processing and wireless application specific market products, such as baseband and application processors).

Based on industry data published by World Semiconductor Trade Statistics (“WSTS”), on a sequential basis, semiconductor industry revenues in the first quarter of 2023 decreased by approximately 9% for our TAM and decreased by approximately 3% for our SAM to reach approximately $119 billion and $69 billion, respectively. On a year-over-year basis, our TAM decreased by approximately 21% and our SAM decreased by approximately 1%.

Our first quarter 2023 net revenues amounted to $4,247 million, decreasing 4.0% sequentially, about 110 basis points better than the mid-point of our released guidance. On a sequential basis, Automotive and Discrete Group (ADG) revenues increased 6.5%, driven by higher sales in Automotive. Analog, MEMS and Sensors Group

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(AMS) revenues decreased 20.3%, due to lower Imaging revenues. Microcontrollers and Digital ICs Group (MDG) revenues decreased 1.1%.

On a year-over-year basis, first quarter net revenues increased 19.8% with higher sales in ADG and MDG while AMS revenues slightly decreased. ADG revenues increased 43.9% with both Automotive and Power Discrete contributing to the increase. AMS revenues decreased 0.9% and MDG revenues increased 13.2%, on higher sales of both RF Communications and Microcontrollers.

Our revenue performance was below the SAM on a sequential basis and above the SAM on a year-over-year basis.

Our effective average exchange rate for the first quarter of 2023 was $1.06 for €1.00, compared to $1.04 in the fourth quarter of 2022 and $1.15 for €1.00 in the first quarter of 2022. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates”.

Our first quarter of 2023 gross profit was $2,110 million and gross margin was 49.7%, 170 basis points above the mid-point of our guidance, mainly due to product mix in a price environment that remained favorable. On a sequential basis, gross margin increased 220 basis points, mainly due to product mix and favorable pricing. On a year-over-year basis, gross margin increased 300 basis points, mainly due to product mix, favorable pricing, positive currency effects, net of hedging, partially offset by higher manufacturing costs.

Our aggregated selling, general & administrative (“SG&A”) and research & development (“R&D”) expenses amounted to $900 million, compared to $850 million and $835 million in the prior and year-ago quarters, respectively. The sequential increase was mainly due to calendar impact, net of vacation, increased level of R&D activity and negative currency effects. On a year-over-year basis, operating expenses increased by $65 million, mainly due to higher labor cost and increased level of R&D activity, partially offset by positive currency effects, net of hedging.

 

Other income and expenses, net, amounted to a net $9 million expense, decreasing from $35 million and $57 million of other income, net, in the prior and year-ago quarters respectively, primarily due to start-up costs related to the new 300mm fab in Agrate (Italy) and lower income from public funding.

In the first quarter of 2023, our operating income was $1,201 million, equivalent to 28.3% of net revenues, compared to $1,287 million (29.1% of net revenues) in the previous quarter, and to $877 million (24.7% of net revenues) in the year-ago quarter. On a sequential basis, our operating income decrease of $86 million was mainly due to lower revenues, partially offset by improved gross margin profitability. On a year-over-year basis, the increase of $324 million is mainly driven by the combining effect of higher revenues and improved gross margin profitability, partially offset by higher operating expenses.

In the first quarter of 2023, our net cash from operating activities amounted to $1,320 million. Our net cash used in investing activities was at $786 million with capital expenditure payments, net of proceeds from sales, at $1,090 million, compared to $920 million and $840 million during prior and year-ago quarters respectively.

Our free cash flow, a non-U.S. GAAP measure, amounted to $206 million in the first quarter of 2023 compared to $82 million in the first quarter of 2022. Refer to “Liquidity and Capital Resources” for the reconciliation of the free cash flow, a non-U.S. GAAP measure, to our Consolidated Statements of Cash Flows.

Looking at the second quarter, net revenues are expected to be $4.28 billion, an increase of 0.8% sequentially, plus or minus 350 basis points. Gross margin is expected to be approximately 49%, plus or minus 200 basis points.

This outlook is based on an assumed effective currency exchange rate of approximately $1.08 = €1.00 for the 2023 second quarter and includes the impact of existing hedging contracts. The second quarter will close on July 1, 2023.

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.

 

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Other Developments

On April 20, we published our 2023 Sustainability Report detailing 2022 performance, strategy and ongoing action plans.

 

On April 13, we signed a multi-year agreement with ZF Group to supply a volume of double-digit millions of silicon carbide devices to be integrated in ZF Group’s new modular inverter architecture going into series production in 2025.

 

On March 28, we announced the resolutions to be submitted for adoption at the Company’s Annual General Meeting of Shareholders (AGM), which will be held in Schiphol, the Netherlands, on May 24, 2023. The resolutions, proposed by the Supervisory Board, are:

 

On March 23, we published our IFRS 2022 Annual Report for the twelve-month period ended December 31, 2022 on our website and filed them with the Netherlands Authority for the Financial Markets (AFM). The Annual Report, prepared in accordance with International Financial Reporting Standards (IFRS-EU) and a complete audited financial statement, is available at our website.

On February 23, we published our Annual Report on Form 20-F for the year ended December 31, 2022 and filed it with the United States Securities and Exchange Commission (SEC). The Company’s Form 20-F based on U.S. GAAP and complete audited financial statements is available at our website.

 

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On February 7, we announced a 20-year collaboration with Gridspertise S.r.l to empower smart-meter technologies.  

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Results of Operations

 

Segment Information

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 includes the production and sale of both silicon chips and smartcards.

Our reportable segments are as follows:

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, SG&A expenses and a part of R&D expenses. In compliance with our internal policies, certain costs are not allocated to the segments, but reported in “Others”. Net revenues of “Others” include revenues from sales assembly services and other revenues. Operating income (loss) of Others includes items such as unused capacity charges, including reduced manufacturing activity due to COVID-19 and incidents leading to power outage, impairment, restructuring charges and other related closure costs, management reorganization expenses, start-up and phase-out costs of certain manufacturing facilities, and other unallocated expenses such as: strategic or special R&D 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 other products. 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 cost of sales. Finally, public grants are allocated to our segments proportionally to the incurred 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.

 

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First Quarter 2023 vs. Fourth Quarter 2022 and First Quarter 2022

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

 

 

Net revenues

 

Sequentially, our first quarter 2023 net revenues decreased 4.0%, 110 basis points above the mid-point of our released guidance. The sequential decrease resulted from lower volumes of approximately 10%, partially offset by an increase of approximately 6% in average selling prices, driven by a more favorable product mix and sales price increase.

On a year-over-year basis, net revenues increased 19.8%, as a result of higher average selling prices of approximately 29%, mainly driven by a more favorable product mix and sales price increase, partially offset by lower volumes of approximately 9%.

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Net revenues by product group

On a sequential basis, ADG revenues increased 6.5%, driven by an approximate 19% increase in average selling prices, mainly due to a more favorable product mix and higher selling prices, partially offset by lower volumes of approximately 12%. AMS revenues decreased 20.3%, as a result of lower average selling prices of approximately 12%, mainly due to a less favorable product mix and lower volumes of approximately 8%. MDG revenues decreased 1.1%, driven by lower volumes of approximately 10%, partially offset by higher average selling prices of approximately 9% due to a more favorable product mix.

On a year-over-year basis, ADG revenues increased 43.9%, due to higher average selling prices of approximately 54%, mainly due to a more favorable product mix and higher selling prices, partially offset by lower volumes of approximately 10%. AMS revenues decreased by 0.9%, with lower volumes of approximately 12%, offset by higher average selling prices of approximately 11%, mainly due to a more favorable product mix. MDG revenues increased 13.2% due to an increase in average selling prices of approximately 17%, mainly due to a more favorable product mix and higher selling prices, partially offset by lower volumes of approximately 4%.

Net Revenues by Market Channel ⁽¹⁾

 

By market channel, our first quarter net revenues in Distribution amounted to 36% of our total net revenues, increasing from 32% and 34% in the prior and year-ago quarters respectively.

Net Revenues by Location of Shipment ⁽¹⁾

 

On a sequential basis, EMEA revenues grew 11.4% mainly due to higher sales in Automotive. Americas revenues grew 2.7%, mainly due to higher sales in Microcontrollers. Asia Pacific revenues decreased 11.7%, mainly driven by lower sales in Imaging.

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On a year-over-year basis all regions registered revenue growth. EMEA revenues grew 49.9% mainly due to higher sales in Automotive and Microcontrollers. Americas revenues increased 39.1%, mainly due to higher sales in Power Discrete, Microcontrollers and RF Communication. Asia Pacific revenues increased 5.0%, mainly due to higher sales in Automotive, Imaging and Power Discrete partially offset by lower sales in Analog.

Gross profit

 

In the first quarter of 2023, gross margin was 49.7%, about 170 basis points above the mid-point of our guidance. On a sequential basis, gross margin increased 220 basis points, mainly due to product mix and favorable pricing.

On a year-over-year basis, gross margin increased 300 basis points, mainly due to product mix, favorable pricing, positive currency effects, net of hedging, partially offset by higher manufacturing costs.

Operating expenses

 

The first quarter of 2023 operating expenses increased to $900 million compared to $850 million in the previous quarter, due to calendar impact, net of vacation, increased level of R&D activity and negative currency effects.

On a year-over-year basis, operating expenses increased by $65 million, mainly due to higher labor cost and increased level of R&D activity, partially offset by positive currency effects, net of hedging.

As a percentage of revenues, our operating expenses amounted to 21.2% in the first quarter of 2023, increasing compared to 19.2% in the prior quarter and decreasing compared to 23.5% in the year-ago quarter.

R&D expenses were net of research tax credits, which amounted to $30 million in the first quarter of 2023, compared to $27 million in the prior and year-ago quarters.

Other income and expenses, net

 

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In the first quarter of 2023, other income and expenses, net, amounted to a net $9 million expense, decreasing from $35 million and $57 million of other income, net, in the prior and year-ago quarters, respectively, primarily due to start-up costs related to the new 300mm fab in Agrate (Italy) and lower income from public funding.

Operating income

 

In the first quarter of 2023, operating income was $1,201 million, compared to an operating income of $1,287 million and $877 million in the prior and year-ago quarters, respectively.

On a sequential basis, our operating income decrease of $86 million was mainly due to lower revenues, partially offset by improved gross margin profitability.

On a year-over-year basis, the increase of $324 million is mainly driven by the combining effect of higher revenues and improved gross margin profitability, partially offset by higher operating expenses.

Operating income by product group

 

 

 

In the first quarter of 2023, ADG operating income was $577 million, increasing sequentially by $107 million driven by higher profitability in Automotive. AMS operating income was $218 million, decreasing sequentially by $128 million, mainly impacted by lower profitability in Imaging. MDG operating income was substantially flat at $495 million.

ADG operating income increased by $342 million year-over-year, mainly reflecting higher profitability in Automotive. AMS operating income decreased by $28 million, mainly due to MEMS and Analog lower profitability. MDG operating income increased by $88 million year-over-year, reaching $495 million, mainly driven by Microcontrollers.

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Reconciliation to consolidated operating income

 

Interest income, net

 

 

In the first quarter of 2023, we recorded a net interest income of $37 million, compared to $33 million in the prior quarter and $1 million in the year-ago quarter. Interest income, net was composed of $47 million of interest income partially offset by interest expense on borrowings and banking fees of $10 million.

Income tax expense

 

During the first quarter of 2023, we registered an income tax expense of $187 million, reflecting a 15.1% estimated annual effective tax rate at consolidated level, applied to the first three months of 2023 consolidated income before income tax, to be compared with 14.6% actual annual tax rate of 2022.

Net income attributable to parent company

 

 

For the first quarter of 2023, we reported a net income attributable to parent company of $1,044 million, representing diluted earnings per share of $1.10, compared to $1.32 in the prior quarter and $0.79 in the prior-year quarter.

Legal Proceedings

For a discussion of legal proceedings, see Note 27 Contingencies, Claims and Legal Proceedings to our Unaudited Interim Consolidated Financial Statements.

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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 are quoted in currencies other than the U.S. dollar, such as Euro-denominated sales, and consequently 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 translated into 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 and depending on market conditions, the prices in the industry could 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 and/or delayed, depending on market demand. 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 Eurozone and other non-U.S. dollar currency areas, including Singapore, our costs tend to increase when translated into U.S. dollars when the U.S. dollar weakens, or to decrease when the U.S. dollar strengthens.

Our principal strategy to reduce the risks associated with exchange rate fluctuations is 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 hedge certain line items on our Consolidated Statements of Income, in particular with respect to a portion of cost of sales, most of R&D expenses and certain SG&A expenses, located in the Eurozone, which we designate as cash flow hedge transactions. We use two different types of hedging instruments: forward contracts and currency options (including collars).

Our Unaudited Interim Consolidated Statement of Income for the three months ended April 1, 2023, included income and expense items translated at the average U.S. dollar exchange rate for the period, plus the impact of the hedging contracts settled during the period. Our effective average exchange rate for the first quarter of 2023 was $1.06 for €1.00, compared to $1.04 for €1.00 in the fourth quarter of 2022 and $1.15 for €1.00 in the first quarter of 2022. These effective exchange rates reflect the actual exchange rates combined with the effect of cash flow hedge transactions impacting earnings 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 April 1, 2023, the outstanding hedged amounts were €1,858 million to cover manufacturing costs and €900 million to cover operating expenses, at an average exchange rate of approximately $1.10 for €1.00 (considering the collars at upper strike), maturing from April 4, 2023 to August 28, 2024. As of April 1, 2023, measured using the period closing exchange rate of about $1.09 to €1.00, these outstanding hedging contracts and certain settled contracts covering manufacturing expenses capitalized in inventory resulted in a deferred unrealized gain of approximately $29 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statement of Equity, compared to a deferred unrealized gain of approximately $17 million before tax on December 31, 2022.

We also hedge certain manufacturing costs denominated in Singapore dollars (SGD); as of April 1, 2023, the outstanding hedged amounts were SGD 248 million at an average exchange rate of approximately SGD 1.35 to $1.00 maturing from April 6, 2023 to February 29, 2024. As of April 1, 2023, these outstanding hedging contracts resulted in a deferred unrealized gain of approximately $4 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statement of Equity, compared to a deferred unrealized gain of $6 million on December 31, 2022.

Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a declining portion of our exposure in the next four quarters. In the first quarter of 2023, as a result of our cash flow hedging, we recycled to earnings a gain of $17 million, of which approximately $13 million impacted cost of sales, $3 million impacted R&D and $1 million impacted SG&A expenses, while in the comparable quarter of 2022, we recorded a loss of $29 million.

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In addition to our cash flow hedging, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into foreign exchange forward contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates, which we do not designate for hedge accounting. 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 on a timely basis the amount of future transactions in the volatile industry environment. No assurance may be given that our hedging activities will sufficiently protect us against fluctuations 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 in payables and receivables at our affiliates is recorded in “Other income and expenses, net” in our Consolidated Statement of Income and was not significant for the first quarter of 2023.

The assets and liabilities of subsidiaries whose functional currency is different from the U.S. dollar reporting currency 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. These currency translation effects have been, and may 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 currency translation are recorded directly in equity and are reported as “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity. As of April 1, 2023, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.

For a more detailed discussion, see Item 3. “Key Information — 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, short-term deposits and marketable securities, as well as the total interest expense paid on our financial debt.

Our interest income, net, as reported in our Unaudited Interim Consolidated Statements of Income, is the balance between interest income received from our cash and cash equivalents, short-term deposits, marketable securities and interest expense recorded on our financial liabilities, including bank fees (including fees on committed credit lines or on the sale without recourse of receivables, if any). 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 (“EIB”) and Cassa Depositi e Prestiti SpA (“CDP SpA”) Floating Rate Loans at Euribor plus variable spreads. See Note 22 to our Unaudited Interim Consolidated Financial Statements.

As of April 1, 2023, our total financial resources, including cash and cash equivalents, marketable securities and short-term deposits generated an average annual interest rate of 4.56%. On the same date, the average annual interest rate on our outstanding debt was 1.52%.

Impact of Changes in Equity Prices

As of April 1, 2023, we did not hold any significant investments in equity securities with a material exposure to equity price risk. However, on these equity investments, carrying value could be reduced due to further losses or impairment charges. See Note 19 and Note 21 to our Unaudited Interim Consolidated Financial Statements.

Liquidity and Capital Resources

Treasury activities are regulated by our policies, which define procedures, objectives and controls. Our 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 Euros and are placed with financial institutions rated at least as 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”). 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.

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Cash flow

We maintain an adequate cash position and a low debt-to-equity ratio, to 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 three months of 2023, our net cash and cash equivalents increased by $314 million. The components of the net cash variation for the first quarter of 2023 and the comparable period are set forth below:

Net cash from operating activities. Net cash from operating activities is the sum of (i) net income adjusted for non-cash items and (ii) changes in net working capital. Net cash from operating activities for the first three months of 2023 was $1,320 million, increasing compared to $945 million in the prior-year period, mainly due to higher net income.

Net cash used in investing activities. Investing activities used $786 million of cash in the first three months of 2023, decreasing compared to $1,140 million in the prior-year period, mainly due to net proceeds from short-term deposits, partially offset by higher payment for net purchase of tangible assets, which totaled $1,090 million compared to $840 million in the prior year.

Net cash used in financing activities. Net cash used in financing activities was $221 million for the first three months of 2023, compared to $200 million in the first three months of 2022, and consisted of $87 million repurchase of common stock, $79 million repayment of long-term debt and $54 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 purchase of (and proceeds from matured) marketable securities, and net investment in (and proceeds from) short-term deposits, 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 net cash paid for business acquisitions. We believe Free Cash Flow, a non-U.S. GAAP measure, 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 net cash increase (decrease) by including the payment for purchase of (and proceeds from matured) marketable securities and net investment in (and proceeds from) short-term deposits, 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 from our Unaudited Interim Consolidated Statements of Cash Flows as follows:

 

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Free Cash Flow was positive $206 million in the first quarter of 2023, compared to positive $82 million in the prior-year period.

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

Our Net Financial Position represents the difference between our total liquidity and our total financial debt. Our total liquidity includes cash and cash equivalents, short-term deposits and marketable securities, and our total financial debt includes short-term debt and long-term debt, as reported 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, short-term deposits and marketable securities and the total level of our financial debt. Our definition of Net Financial Position may differ from definitions used by other companies and therefore comparability may be limited. Our Net Financial Position for each period has been determined from our Consolidated Balance Sheets as follows:

Our Net Financial Position as of April 1, 2023, was $1,855 million, increasing compared to $1,801 million as of December 31, 2022, and compared to $840 million as of April 2, 2022.

Cash and cash equivalents amounted to $3,572 million as of April 1, 2023.

Short-term deposits amounted to $106 million as of April 1, 2023, and consisted of available liquidity with original maturity over three months.

Marketable securities amounted to $841 million and consisted of U.S. Treasury Bonds classified as available-for-sale financial assets.

Financial debt was $2,664 million, as of April 1, 2023, and was composed of (i) $176 million of short-term debt and (ii) $2,488 million of long-term debt. The breakdown of our total financial debt included (i) $778 million in EIB loans, (ii) $323 million in the CDP SpA loans, (iii) $1,495 million in our 2020 Senior Unsecured Convertible Bonds, (iv) $63 million in finance leases and, (v) $5 million in loans from other funding programs.

The EIB loans are comprised of three long-term amortizing credit facilities as part of public funding programs. The first, signed in August 2017, is a €500 million loan, in relation to R&D and capital expenditures in the European Union, fully drawn in Euros, of which $326 million was outstanding as of April 1, 2023. The second one, signed in 2020, is a €500 million credit facility agreement with EIB to support R&D and capital expenditure programs in Italy and France. The amount was fully drawn in Euros representing $452 million outstanding as of April 1, 2023. In 2022, the Company signed a third long-term amortizing credit facility with EIB of €600 million, out of which, no amount had been drawn as of April 1, 2023.

The CDP SpA loans are comprised of two long-term credit facilities. The first, signed in 2021, is a €150 million loan, fully drawn in Euros, of which $122 million were outstanding as of April 1, 2023. The second one, signed in 2022, is a €200 million loan, fully drawn in Euros, of which $201 million was outstanding as of April 1, 2023.

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On August 4, 2020, we issued a $1.5 billion offering of senior unsecured convertible bonds convertible into new or existing ordinary shares of the Company. The 2020 Senior Unsecured Convertible Bonds were issued in two $750 million principal amount tranches, Tranche A with a maturity of 5 years (47.5% conversion premium, negative 1.12% yield to maturity, 0% coupon) and Tranche B with a maturity of 7 years (52.5% conversion premium, negative 0.63% yield to maturity, 0% coupon). The conversion price is $43.62 on Tranche A and $45.10 on Tranche B. The 2020 Senior Unsecured Convertible Bonds are convertible by the bondholders if certain conditions are satisfied, on a net-share settlement basis, except if we elect a full-cash or a full-share conversion as an alternative settlement. Proceeds from the issuance of the bonds, net of $10 million transaction costs, amounted to $1,567 million. Long-term debt as of April 1, 2023 reflects the nominal value of the 2020 senior unsecured convertible bonds less $5 million unamortized debt issuance costs, at $1,495 million.

Our long-term debt includes standard conditions but does not impose minimum financial ratios. We had unutilized committed medium-term credit facilities with core relationship banks totaling $1,346 million as of April 1, 2023.

As of April 1, 2023, debt payments at redemption value by period were as follows:

 

In the above table, our 2020 Senior Unsecured Convertible Bonds are presented at their nominal value with original maturity date of 2025 for Tranche A and 2027 for Tranche B, in line with contractual terms.

 

Our current ratings with the three major rating agencies that report on us on a solicited basis, are as follows: S&P: “BBB” with positive outlook; Moody’s: “Baa2” with positive outlook; Fitch: “BBB” with stable outlook.

 

Financial Outlook: Capital Investment

Our policy is to modulat