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Third Quarter 2018 vs. Second Quarter 2018 and Third Quarter 2017

 

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

 

 

Net revenues

 

Our third quarter 2018 net revenues increased sequentially by 11.2%, 120 basis points above the mid-point of our guidance. The sequential increase resulted from an increase of approximately 6% in average selling prices, which was driven by improved product mix, partially offset by pure pricing effect, and an increase of approximately 5% in volumes.

 

On a year-over-year basis, our net revenues increased by 18.1% as a result of an approximate 22% increase in average selling prices, entirely due to the product mix, while volumes decreased by approximately 4%.

 

Net revenues by product group

 

On a sequential basis, ADG revenues increased 3.6%, with growth in both Power Discrete and Automotive. The increase in ADG revenues was driven by an approximate 2% increase in average selling prices, mainly due to a better product mix, and an approximate 2% increase in volumes. AMS revenues increased 46.6% sequentially due to higher sales in Imaging. The increase in AMS revenues was due to an approximate 35% increase in average selling prices, entirely due to a more favorable product mix, while volumes increased by approximately 12%. MDG revenues decreased 8.1%, with average selling prices decreasing by approximately 10%, mainly impacted by unfavorable product mix, partially offset by an approximate 2% increase in volumes.

 

On a year-over-year basis, third quarter net revenues increased by 18.1%, mainly driven by double-digit growth in ADG and AMS. ADG revenues increased 16.3% compared to the year-ago period, reflecting double-digit growth in both Automotive and Power Discrete products. The increase was entirely due to higher average selling prices of approximately 28%, driven by a more favorable product mix, while volumes decreased by approximately 12%. AMS revenues increased 36.7% compared to the year-ago period driven by higher sales in Imaging as well as growth in Analog and MEMS. The increase was due to improved product mix resulting in higher average selling prices of approximately 26% and higher volumes of approximately 11%. MDG revenues increased 2.5% mainly driven by Digital ICs. The increase in MDG revenues was driven by higher average selling prices of approximately 4%, entirely due to a better product mix, partially offset by lower volumes of approximately 2%.

 

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, our third quarter net revenues in Distribution amounted to 32% of our total revenues, decreasing from 39% in the prior quarter and from 34% in the prior-year quarter.

 

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.

 

On a sequential basis, Asia Pacific revenues grew 20.8% with Imaging being the main contributor to the increase. Americas revenues remained substantially flat and EMEA revenues decreased 3.4%, mainly impacted by unfavorable quarter seasonality. On a year-over-year basis, all regions experienced a revenue increase mainly driven by Imaging in Asia Pacific and by ADG in the three regions.

 

Gross profit

 

In the third quarter of 2018, gross margin was 39.8%, 20 basis points below the mid-point of our guidance, primarily as a result of a less favorable product group mix. Sequentially, gross margin decreased by 40 basis points, negatively impacted by a less favorable product mix, sale price pressure and lower licensing revenues, partially offset by overall improved efficiency.

 

On a year-over-year basis, gross margin increased by 20 basis points, due to a better product mix and improved manufacturing efficiency.

 

		Three Months Ended												Variation
		September 29, 2018				June 30, 2018				September 30, 2017				Sequential				Year-Over-Year
		(In millions)
Selling, general and administrative expenses		$	(268	)		$	(277	)		$	(244	)			3.3	%			(10.1	)%
Research and development expenses			(348	)			(356	)			(312	)			2.1				(11.7	)
Total operating expenses		$	(616	)		$	(633	)		$	(556	)			2.6	%			(11.0	)%
As percentage of net revenues			(24.4	)%			(27.9	)%			(26.0	)%		+350bps				+160bps

		Three Months Ended
		September 29, 2018				June 30, 2018				September 30, 2017
		(In millions)
Research and development funding		$	13			$	10			$	13
Exchange gain, net			1				1				1
Phase-out and start-up costs			-				-				(7	)
Patent costs			(2	)			(2	)			(3	)
Gain on sale of businesses and non-current assets			-				1				1
Other, net			(1	)			1				-
Other income and expenses, net		$	11			$	11			$	5
As percentage of net revenues			0.4	%			0.4	%			0.2	%

		Three Months Ended
		September 29, 2018				June 30, 2018				September 30, 2017
		(In millions)
Impairment, restructuring charges and other related closure costs		$	-			$	-			$	(14	)

		Three Months Ended
		September 29, 2018				June 30, 2018				September 30, 2017
		(In millions)
Operating income		$	398			$	289			$	281
As percentage of net revenues			15.8	%			12.7	%			13.1	%

Operating income by product group ⁽¹⁾

 

____________

(1)	Certain amounts in the prior periods have been adjusted to reflect the January 1, 2018 adoption of ASU 2017-07 related to the reclassification of certain pension costs.

(2)

Operating results of “Others” include items such as unused capacity charges, impairment & restructuring charges and other related closure costs, management reorganization expenses, phase out and start-up costs, and other unallocated expenses such as strategic or special research and development programs, certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to product groups, as well as assembly services and other revenue.

 

In the third quarter of 2018, ADG’s operating income increased by $32 million sequentially, mainly driven by increased level of revenues, both in Automotive and Power Discrete, and lower level of operating expenses. Sequentially, AMS more than doubled its operating income to reach $157 million, driven by increased revenues from Imaging. MDG’s operating income decreased sequentially to $119 million from $159 million, due to lower level of revenues and a less favorable product mix in the period.

 

Compared to a year ago, ADG’s operating profit improved by $31 million, increasing its operating margin from 10.9% to 12.8%. Both Automotive and Power Discrete contributed to the progression. AMS’s operating income improved to $157 million compared to $86 million in the prior-year quarter, mainly driven by Imaging. MDG’s operating income decreased by $7 million.

 

Reconciliation to consolidated operating income

 

(1)	Includes unallocated income and expenses such as certain corporate-level operating expenses and other costs/income that are not allocated to the product segments.

 

Operating income before impairment and restructuring charges (non-U.S. GAAP measure)

 

Operating income before impairment and restructuring charges, which is a non-U.S. GAAP measure, is defined as (i) operating income plus (ii) impairment and restructuring charges. We believe operating income before impairment and restructuring charges, a non-U.S. GAAP measure, provides useful information for investors and management because it presents our capacity to generate profits from our business operations, excluding the 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 U.S. 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. Our definition of operating income before impairment and restructuring charges may differ from definitions used by other companies. Operating income before impairment and restructuring charges is determined from our Consolidated Statements of Income as follows:

 

Interest expense, net

 

In the third quarter of 2018, we recorded a net interest expense of $2 million, flat sequentially and decreasing on a year-over-year basis, composed of interest expense on our borrowings and banking fees of $14 million, partially offset by $12 million of interest income.

 

Interest expense recorded in the third and second quarters of 2018 included a $10 million charge, mainly non-cash, entirely related to the senior unsecured convertible bonds issued on July 3, 2017. Interest expense recorded in the third quarter of 2017 included a $13 million charge on the senior unsecured convertible bonds, mainly non-cash, of which $4 million was related to the senior unsecured convertible bonds issued on July 3, 2014 and $9 million was related to the senior unsecured convertible bonds issued on July 3, 2017.

 

Income tax expense

 

During the third quarter of 2018, we registered an income tax expense of $24 million, reflecting the estimated annual effective tax rate in each of our jurisdictions, applied to the third quarter of 2018 consolidated result before taxes. In addition, our income tax included a tax benefit from provisions on the estimated impact of potential tax positions in light of favorable conclusion of certain positions that have been considered uncertain.

Net income attributable to parent company

 

For the third quarter of 2018, we reported a net income attributable to parent company of $369 million. The third quarter 2018 net income represented diluted earnings per share of $0.41 compared to $0.29 in the prior quarter and $0.26 in the prior-year quarter.

 

We also present Adjusted Diluted Earnings per Share, which is a non U.S. GAAP measure. Adjusted Diluted Earnings per Share is used to help management and investors understand our operations and to highlight the impact of excluded items like impairment, restructuring charges and other related closure costs and other one-time items, net of the estimated relevant tax impact. We believe Adjusted Diluted Earnings per Share provides useful information for management and investors because they measure our capacity to generate profits from our business operations, excluding the 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 U.S. 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 Diluted Earnings per Share may differ from definitions used by other companies and therefore comparability may be limited. Therefore, when assessing the Company’s operating performance, investors should not consider this data in isolation, or as a substitute for the Company’s net income, operating income, earnings per share or any other operating performance measure that is calculated in accordance with U.S. GAAP.

 

Adjusted Diluted Earnings per Share (non U.S. GAAP measure) are determined as follows:

 

Net revenues

 

Our first nine months 2018 net revenues increased compared to the year-ago period by 19.3% as a result of an approximate 18% increase in average selling prices, entirely due to a more favorable product mix and to an approximate 1% increase in volumes.

 

Net revenues by product group

 

By product group, the first nine months of 2018 ADG revenues were up 15.7% mainly driven by average selling prices increase of about 21%, entirely due to product mix improvements, partially offset by an approximate 5% decrease in volumes. AMS revenues increased 25.4%, mainly supported by Imaging. AMS experienced an approximate 10% increase in volumes and an approximate 15% increase in average selling prices, the latter entirely driven by improved product mix, partially offset by pure pricing effect. MDG revenues increased 18.1% compared to the prior period supported by an approximate increase of 14% in average selling prices and an approximate increase of 4% in volumes.

 

Net Revenues by Market Channel ⁽¹⁾

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
OEM			64	%			66	%
Distribution			36				34
Total			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, Distribution reached 36% share of total revenues in the first nine months of 2018, compared to approximately 34% in the first nine months of 2017.

 

Net Revenues by Location of Shipment ⁽¹⁾

 

		Nine Months Ended
		September 29, 2018				September 30, 2017				% Variation
		(In millions)
EMEA		$	1,861			$	1,576				18.1	%
Americas			922				797				15.7
Asia Pacific			4,233				3,507				20.7
Total		$	7,016			$	5,880				19.3	%

____________

(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.

 

By location of shipment, all three regions registered double-digit revenue growth.

 

Gross profit

 

		Nine Months Ended
		September 29, 2018				September 30, 2017				% Variation
		(In millions)
Gross profit		$	2,802			$	2,269				23.5	%
Gross margin (as percentage of net revenues)			39.9	%			38.6	%		+130bps

Gross margin was 39.9% for the first nine months of 2018, increasing by approximately 130 basis points compared to the year‑ago period mainly due to improved manufacturing efficiencies and a more favorable product mix, partially offset by normal price pressure and unfavorable currency effects, net of hedging.

 

Operating expenses

 

		Nine Months Ended
		September 29, 2018				September 30, 2017				% Variation
		(In millions)
Selling, general and administrative expenses		$	(810	)		$	(717	)			(13.1	)%
Research and development expenses			(1,054	)			(970	)			(8.6	)
Total operating expenses		$	(1,864	)		$	(1,687	)			(10.5	)%
As percentage of net revenues			(26.6	)%			(28.7	)%		+210bps

Our operating expenses increased compared to the year-ago period, negatively impacted by unfavorable currency effects, net of hedging, salary dynamic, higher costs of the share based compensation plans, one-time costs related to a loss in one jurisdiction and post-employment benefits associated with several of our former executives.

 

Total R&D expenses were net of research tax credits, which amounted to $100 million in the first nine months of 2018 and $83 million in the first nine months of 2017.

 

Other income and expenses, net

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Research and development funding		$	34			$	45
Phase-out and start-up costs			-				(7	)
Exchange gain, net			4				3
Patent costs			(7	)			(6	)
Gain on sale of businesses and non‑current assets			7				3
Other, net			-				(1	)
Other income and expenses, net		$	38			$	37
As percentage of net revenues			0.5	%			0.6	%

In the first nine months of 2018, we recognized net other income of $38 million, substantially flat compared to the first nine months of 2017.

 

Impairment, restructuring charges and other related closure costs

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Impairment, restructuring charges and other related closure costs		$	(20	)		$	(25	)

In the first nine months of 2018, we recorded $20 million of impairment, restructuring charges and other related closure costs, entirely related to the completed set-top box plan.

 

In the first nine months of 2017, we recorded $25 million of impairment, restructuring charges and other related closure costs, consisting of: (i) $19 million of net restructuring charges related to the set-top box plan; (ii) $11 million of restructuring charges related to the restructuring plan in Bouskoura, Morocco; and (iii) $5 million reversal on provisions related to previously announced restructuring plans, mainly the EPS restructuring plan, for which accrued provisions were not fully used at completion of the plan.

 

Operating income

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Operating income		$	956			$	594
As percentage of net revenues			13.6	%			10.1	%

 

Operating income in the first nine months of 2018 improved significantly compared to the prior period by $362 million to $956 million driven by higher revenues, a more favorable product mix and improved manufacturing efficiencies.

 

Operating income by product group⁽¹⁾

 

		Nine Months Ended
		September 29, 2018								September 30, 2017
		$ million				% of net revenues				$ million				% of net revenues
Automotive and Discrete Group (ADG)		$	289				11.2	%		$	189				8.4	%
Analog, MEMS and Sensors Group (AMS)			286				13.2				177				10.2
Microcontrollers and Digital ICs Group (MDG)			425				18.9				259				13.6
Total operating income of product segments			1,000				14.3				625				10.6
Others(2)			(44	)			-				(31	)			-
Total consolidated operating income		$	956				13.6	%		$	594				10.1	%

____________

(1)

Certain amounts in the prior periods have been adjusted to reflect the January 1, 2018 adoption of ASU 2017-07 related to the reclassification of certain pension costs.

(2)

Operating results of “Others” include items such as unused capacity charges, impairment & restructuring charges and other related closure costs, management reorganization expenses, phase out and start-up costs, and other unallocated expenses such as strategic or special research and development programs, certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to product groups, as well as assembly services and other revenue.

ADG’s operating income increased by $100 million, resulting in an operating margin of 11.2% compared to 8.4% in the year-ago period, with both Automotive and Power Discrete contributing. AMS’s operating margin increased from 10.2% to 13.2% with all subgroups contributing to the increase. MDG’s operating income increased by $166 million, mainly driven by Microcontrollers.

 

Reconciliation to consolidated operating income (loss)

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Total operating income of product segments		$	1,000			$	625
Impairment, restructuring charges and other related closure costs			(20	)			(25	)
Unallocated manufacturing results			(2	)			4
Strategic and other research and development programs and other non-allocated provisions(1)			(22	)			(10	)
Total operating loss Others			(44	)			(31	)
Total consolidated operating income		$	956			$	594

(1)

Includes unallocated income and expenses such as certain corporate-level operating expenses and other costs/income that are not allocated to the product segments.

 

 

Interest expense, net

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Interest expense, net		$	(8	)		$	(16	)

 

In the first nine months of 2018, net interest expense was $8 million, composed of $40 million interest expense on our borrowings and banking fees, mainly non-cash and related to the senior unsecured convertible bonds issued on July 3, 2017, partially offset by $32 million of interest income.

 

In the first nine months of 2017, net interest expense was $16 million, composed of $37 million interest expense on our borrowings and banking fees, mainly non-cash and related to the senior unsecured convertible bonds issued on July 3, 2014 and on July 3, 2017, partially offset by $21 million of interest income.

 

Income tax expense

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Income tax expense		$	(68	)		$	(63	)

During the first nine months of 2018, we registered an income tax expense of $68 million, reflecting an estimated annual tax rate. 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 2017, we registered an income tax expense of $63 million.

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 certain 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

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In millions)
Net income attributable to parent company		$	869			$	494
As percentage of net revenues			12.4	%			8.4	%

For the first nine months of 2018, we reported net income of $869 million, representing diluted earnings per share of $0.95, compared to a net income of $494 million, representing diluted earnings per share of $0.55.

 

We also present Adjusted Diluted Earnings per Share, which is a non U.S. GAAP measure. Adjusted Diluted Earnings per Share is used to help management and investors understand our operations and to highlight the impact of excluded items like impairment, restructuring charges and other related closure costs and other one-time items, net of the estimated relevant tax impact. We believe Adjusted Diluted Earnings per Share provides useful information for management and investors because they measure our capacity to generate profits from our business operations, excluding the 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 U.S. 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 Diluted Earnings per Share may differ from definitions used by other companies and therefore comparability may be limited. Therefore, when assessing the Company’s operating performance, investors should not consider this data in isolation, or as a substitute for the Company’s net income, operating income, earnings per share or any other operating performance measure that is calculated in accordance with U.S. GAAP.

 

Adjusted Diluted Earnings per Share (non U.S. GAAP measure) are determined as follows:

 

		Nine Months Ended
		September 29, 2018				September 30, 2017
		(In million, except U.S. dollars per share and shares outstanding)
Net income attributable to parent company		$	869			$	494
Impairment, restructuring and other related closure costs and one-time charges effect, net of tax			18				23
Adjusted net income attributable to parent company		$	887			$	517
Weighted average shares outstanding			912,775,430				904,707,065
Adjusted Diluted Earnings per Share (non U.S. GAAP measure)		$	0.97			$	0.57

 

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 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 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 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 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 sales, 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 September 29, 2018 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 $1.18 for €1.00 in the third quarter of 2018 compared to $1.19 for €1.00 in the second quarter of 2018 and $1.13 for €1.00 in the third quarter of 2017. 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 September 29, 2018, the outstanding hedged amounts were €845 million to cover manufacturing costs and €499 million to cover operating expenses, both at an average exchange rate of about $1.23 for €1.00 (considering the collars at upper strike), maturing over the period from October 3, 2018 to January 3, 2020. As of September 29, 2018, measured with respect to the exchange rate at period closing of about $1.16 to €1.00, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory resulted in a deferred loss before tax of approximately $42 million, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity, compared to a deferred profit before tax of approximately $43 million at December 31, 2017.

 

We also hedge certain manufacturing costs denominated in Singapore dollars (SGD); as of September 29, 2018, the outstanding hedged amounts were SGD 144 million at an average exchange rate of about SGD 1.34 to $1.00 maturing over the period from October 4, 2018 to August 29, 2019. As of September 29, 2018, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory resulted in a deferred loss before tax of approximately $1 million, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity, compared to a deferred profit before tax of approximately $2 million at December 31, 2017.

 

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 third quarter of 2018, as a result of our cash flow hedging, we recorded a net loss of $20 million consisting of a loss of about $14 million to costs of goods sold, $5 million to research and development and $1 million in selling, general and administrative expenses, while in the comparable quarter in 2017, we recorded a net gain of $26 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 resulted in a net gain of $1 million recorded in “Other income and expenses, net” in our Interim Consolidated Statements of Income for the third quarter of 2018.

 

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 September 29, 2018, 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, non-cash interest expense on the senior unsecured 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 September 29, 2018, our total financial resources, including cash and cash equivalents and marketable securities generated an average interest income annual rate of 2.27%. At the same date, the average interest annual rate on our outstanding debt was 2.93% including the non-cash effective interest of the convertible bonds, while the average cash interest annual rate was only 0.61%.

Impact of Changes in Equity Prices

 

As of September 29, 2018, 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. 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 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”). 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 2018, our net cash increased by $76 million, due to the net cash from operating activities exceeding the net cash used in investing and financing activities.

 

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

		Nine Months Ended
		September 29, 2018				September 30, 2017 (1)
		(In millions)
Net cash from operating activities		$	1,189			$	1,091
Net cash used in investing activities			(928	)			(1,026	)
Net cash from (used in) financing activities			(182	)			470
Effect of changes in exchange rates			(3	)			24
Net cash increase		$	76			$	559

 

(1)	Following new 2018 accounting guidance, $30 million implied interest paid in the settlement of our 2014 convertible bonds have been reclassified from financing activities to operating activities.

 

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 2018 was $1,189 million, increasing compared to $1,091 million in the prior-year period mainly due to higher net income, partially offset by negative change in the net working capital.

 

Net cash used in investing activities. Investing activities used $928 million of cash in the first nine months of 2018, decreasing compared to $1,026 million in the prior-year period. Payments for purchase of tangible assets, net of proceeds, totaled $983 million, compared to $891 million registered in the prior-year period.

 

Net cash used in financing activities. Net cash used in financing activities was $182 million for the first nine months of 2018 and consisted mainly of dividends paid to stockholders. Net cash from financing activities was $470 million for the first nine months of 2017 and consisted mainly of $1,502 million from the net proceeds from issuance of senior unsecured convertible bonds issued on July 3, 2017, partially offset by the early repayment of issued debt (Tranche A of the senior unsecured convertible bonds issued on July 3, 2014 and due 2019) for $570 million, the repurchase of 18.6 million shares of ST common stock for $297 million and $160 million of cash dividends paid to shareholders.

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 (and proceeds from sale) of marketable securities, investment in short-term deposits and restricted cash. 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, proceeds received in the sale of businesses and 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 (and proceeds from the sale) of marketable securities, the change in short-term deposits and restricted cash, 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:

 

		Three Months Ended				Nine Months Ended
		September 29, 2018				September 29, 2018				September 30, 2017 (2)
		(In millions)
Net cash from operating activities		$	373			$	1,189			$	1,091
Net cash used in investing activities			(152	)			(928	)			(1,026	)
Excluding:
Payment for purchase and proceeds from sale of marketable securities, change in short term deposits and restricted cash			(107	)			(91	)			99
Payment for purchase and proceeds from sale of tangible and intangible assets (1)			(259	)			(1,019	)			(927	)
Free Cash Flow (non U.S. GAAP measure)		$	114			$	170			$	164

 

(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, Proceeds received in sale of businesses, payment for business acquisition, net of cash and cash equivalents acquired.

 

(2)	Following new 2018 accounting guidance, $30 million implied interest paid in the settlement of our convertible bonds have been reclassified from financing activities to operating activities.

 

Free Cash Flow increased in the first nine months of 2018 compared to the year-ago period, mainly due to higher cash from operating activities, partially offset by higher cash used in purchase of tangible assets.

 

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

 

Our Net Financial Position represents the difference between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents, marketable securities and short-term deposits, and our total financial debt includes short-term debt, including bank overdrafts, 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. In addition, 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 as follows from our Consolidated Balance Sheets:

 

		As at
		September 29, 2018				December 31, 2017				September 30, 2017
		(In millions)
Cash and cash equivalents		$	1,835			$	1,759			$	2,188
Short-term deposits			8				-				-
Marketable securities			328				431				433
Total financial resources			2,171				2,190				2,621
Short-term debt			(117	)			(118	)			(486	)
Long‑term debt			(1,607	)			(1,583	)			(1,689	)
Total financial debt			(1,724	)			(1,701	)			(2,175	)
Net Financial Position		$	447			$	489			$	446

 

Our Net Financial Position as of September 29, 2018 was $447 million, decreasing compared to $489 million at December 31, 2017.

 

Cash and cash equivalents amounted to $1,835 million as at September 29, 2018.

 

Marketable securities amounted to $328 million as at September 29, 2018, and consisted of U.S. Treasury Bonds available for sale.

 

Financial debt was $1,724 million as at September 29, 2018, composed of (i) $117 million of current portion of long-term debt and (ii) $1,607 million long‑term debt. The breakdown of our total financial debt included (i) $399 million in European Investment Bank (“EIB”) loans, (ii) $1,306 million in the senior unsecured convertible bonds, and (iii) $19 million in other long-term loans and loans from other funding programs.

 

The EIB Loans are comprised of two long-term amortizing credit facilities as part of our R&D funding programs. The first, signed in 2010, is a €350 million multi-currency loan to support our industrial and R&D programs. It was drawn mainly in U.S. dollars for an amount of $321 million and only partially in Euros for an amount of €100 million. The residual aggregate outstanding amount is $164 million as of September 29, 2018. The second, signed in 2013, is a €350 million multi-currency loan which also supports our R&D programs. It was drawn in U.S. dollars for an amount of $471 million, of which $235 million is outstanding as of September 29, 2018.

 

In August 2017, we signed a new medium term credit facility with the EIB for a total aggregate amount of €500 million in relation to R&D and capital expenditure investments in the European Union for the years 2017 and 2018. The medium term line is available for drawings in Euro and in U.S. dollars until the first quarter of 2019 and has terms and conditions determined at drawdown. As of September 29, 2018, no amount was drawn as part of this new credit facility.

 

On July 3, 2017, we issued a $1.5 billion offering of senior unsecured bonds convertible into new or existing ordinary shares of ST, for net proceeds of $1,502 million. The bonds were issued in two $750 million principal amount tranches, one with a maturity of 5 years (37.5% conversion premium, negative 0.25% yield to maturity, 0% coupon) and the other 7 years (37.5% conversion premium, 0.25% yield to maturity, 0.25% coupon). The conversion price at issuance was $20.54 on each tranche. The senior unsecured convertible bonds are convertible by the bondholders or callable by us, following a given time schedule, if certain conditions are satisfied. Under the terms of the bonds, we can satisfy the conversion rights either in cash or shares, or a combination of the two, at our selection. Assuming the exercise of the Issuer Soft Call at 130% of the Conversion Price after the initial lock-up period, the underlying shares under net shares settlement will be 16.9 million. Net proceeds from the issuance of the bonds of $1,502 million were used for general corporate purposes, including the early redemption of the outstanding $1 billion convertible bonds due 2019 and 2021, completed in the second half of 2017. Upon initial recognition, the proceeds were allocated between debt and equity by determining the fair value of the liability component using an income approach.

 

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 positive outlook; Fitch: “BBB” with stable outlook and Moody’s: “Baa3” with stable outlook. On October 9, 2018, Fitch upgraded ST’s Long-Term Issuer Default Rating and senior unsecured rating to “BBB” from “BBB-”, reflecting the Company’s stronger financial and operating performance.

 

As of September 29, 2018, debt payments at redemption value by period were as follows:

 

		Payments Due by Period
		Total				2018				2019				2020				2021				2022				Thereafter
		(In millions)
Long-term debt (including current portion)		$	1,918			$	116			$	117			$	117			$	62			$	753			$	753

 

Financial Outlook: Capital Investment

 

Our policy is to modulate our capital spending according to the evolution of the semiconductor market. Based on demand evolution and the healthy backlog for the remainder of the year supporting our expectations of net revenues growth of about 16% in 2018 compared to 2017, we anticipate our capital spending to be in the range of approximately $1.2 - $1.3 billion for 2018. Specifically, the Company is investing in 300mm front-end manufacturing and in back-end assembly and test to support technology and product mix flexibility and new products ramp up. The most important of our 2018 capital expenditure projects are expected to be for our front-end facilities: (i) in our 300 mm fab in Crolles (France), to support mix flexibility on our main high runner 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; (iii) qualification and ramp-up of technologies in 200 mm in Singapore, Agrate (Italy), as well as the expansion of facilities and the increase of capacity in our 200 mm fabs in Catania (Italy) and Singapore; and (iv) in Agrate (Italy) ground breaking of a 300 mm pilot line supporting the next generation of mixed signal products. The most important 2018 capital investments for our back-end facilities are expected to be: (i) capacity growth on certain package families, including the silicon carbide (SiC) technology, to sustain market demand; (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. In addition, we will invest in overall capacity adjustment in final testing and wafers probing (EWS) to meet increased demand and a changed product mix as well as invest in quality, safety, maintenance, productivity and cost savings in both 150 mm and 200 mm front-end fabs, and back-end plants. To accelerate increased capacity in 200 mm in Singapore, we are pursuing the progressive integration of the former Numonyx fab for which we signed a deferred acquisition from Micron in 2017.

We will continue to invest to support revenues growth and new products introduction, 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 of 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 second quarter of 2014 and, in our role as Coordinator and Project Leader of Nano2017, we were 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. Additionally, a portion of Nano2017 program is subject to a payback clause (“financial return”), depending on the future cumulative sales for certain products within the scope of the funded program on the period from 2018 to 2023. The financial return corresponds to the payment in 2024 of the original funded amount (€37 million) multiplied by a rate from 0% to 250%, depending on the cumulative amount of future sales. Based on current visibility, we estimate the return rate to reach 108% resulting in a contingent liability of $43 million as of September 29, 2018.

 

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, long term purchase commitments for material, equipment and software license, agreement to purchase the Singapore fab from Micron technologies, take or pay type of agreements to outsource wafers from foundries, commercial agreements with customers, long term debt obligations, pension obligations and other long term liabilities.

 

Off‑Balance Sheet Arrangements

 

We had no material off‑balance sheet arrangements at September 29, 2018.

 

Impact of Recently Issued U.S. Accounting Standards

 

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

 

Backlog and Customers

 

During the third quarter of 2018, our booking plus net frames orders decreased compared to the second quarter of 2018. We entered the fourth quarter 2018 with a backlog for the quarter higher than the level we had when entering in the third quarter 2018. Backlog (including frame orders) is subject to possible cancellation, push back and lower ratio of frame orders being translated into firm orders and, thus, it is not necessarily indicative of the amount of billings or growth to be registered in subsequent periods.

 

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 CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“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 Securities and Exchange Act of 1934, 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 certain 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, errors in process flow or delay in communication, 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.

 

Other Reviews

 

We have sent this report to our Audit Committee, which had an opportunity to raise questions with our management and independent auditors before we submitted it to the Securities and Exchange Commission.

 

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;

 

·

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;

 

·

Changes in global trade policies, including the adoption and expansion of tariffs and trade barriers, that could affect the macro-economic environment and adversely impact the demand for our products;

 

·

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;

 

·

Changes in our overall tax position as a result of changes in tax rules, new or revised legislation, the outcome of tax audits or changes in international tax treaties which may impact our results of operations as well as our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;

 

·

The outcome of ongoing litigation as well as the impact of any new litigation to which we may become a defendant;

 

·

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;

 

·

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

 

·

The ability to successfully ramp up new programs that could be impacted by factors beyond our control, including the availability of critical third party components and performance of subcontractors in line with our expectations; and

 

·

Theft, loss, or misuse of personal data about our employees, customers, or other third parties, and breaches of global privacy legislation, including the EU’s General Data Protection Regulation (“GDPR”).

 

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

 

	Pages
Consolidated Statements of Income for the Three and Nine Months Ended September 29, 2018 and September 30, 2017 (unaudited)	F-1
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 29, 2018 and September 30, 2017 (unaudited)	F-3
Consolidated Balance Sheets as of September 29, 2018 (unaudited) and December 31, 2017 (audited)	F-5
Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2018 and September 30, 2017 (unaudited)	F-6
Consolidated Statements of Equity (unaudited)	F-7
Notes to Interim Consolidated Financial Statements (unaudited)	F-8

 

 

 

 

STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF INCOME
		Nine months ended
		(Unaudited)
		September 29,				September 30,
In million of U.S. dollars except per share amounts		2018				2017
Net sales			6,978				5,851
Other revenues			38				29
Net revenues			7,016				5,880
Cost of sales			(4,214	)			(3,611	)
Gross profit			2,802				2,269
Selling, general and administrative			(810	)			(717	)
Research and development			(1,054	)			(970	)
Other income and expenses, net			38				37
Impairment, restructuring charges and other related closure costs			(20	)			(25	)
Operating income			956				594
Interest expense, net			(8	)			(16	)
Other components of pension benefit costs			(9	)			(9	)
Income (loss) on equity-method investments			3				(2	)
Loss on financial instruments, net			-				(5	)
Income before income taxes and noncontrolling interest			942				562
Income tax expense			(68	)			(63	)
Net income			874				499
Net income attributable to noncontrolling interest			(5	)			(5	)
Net income attributable to parent company			869				494
Earnings per share (Basic) attributable to parent company stockholders			0.97				0.56
Earnings per share (Diluted) attributable to parent company stockholders			0.95				0.55
The accompanying notes are an integral part of these unaudited interim consolidated financial statements

 

 

 

 

 

 

STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF INCOME
		Three months ended
		(Unaudited)
		September 29,				September 30,
In million of U.S. dollars except per share amounts		2018				2017
Net sales			2,515				2,123
Other revenues			7				13
Net revenues			2,522				2,136
Cost of sales			(1,519	)			(1,290	)
Gross profit			1,003				846
Selling, general and administrative			(268	)			(244	)
Research and development			(348	)			(312	)
Other income and expenses, net			11				5
Impairment, restructuring charges and other related closure costs			-				(14	)
Operating income			398				281
Interest expense, net			(2	)			(7	)
Other components of pension benefit costs			(3	)			(3	)
Income (loss) on equity-method investments			2				-
Loss on financial instruments, net			-				(5	)
Income before income taxes and noncontrolling interest			395				266
Income tax expense			(24	)			(28	)
Net income			371				238
Net income attributable to noncontrolling interest			(2	)			(2	)
Net income attributable to parent company			369				236
Earnings per share (Basic) attributable to parent company stockholders			0.41				0.27
Earnings per share (Diluted) attributable to parent company stockholders			0.41				0.26
The accompanying notes are an integral part of these unaudited interim consolidated financial statements

 

 

 

 

STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		Nine months ended
		(Unaudited)
		September 29,				September 30,
In million of U.S. dollars		2018				2017
Net income			874				499
Other comprehensive income (loss), net of tax :
Currency translation adjustments arising during the period			(68	)			196
Foreign currency translation adjustments			(68	)			196
Net unrealized gains (losses) arising during the period			(4	)			-
Net unrealized gains (losses) on securities			(4	)			-
Net unrealized gains (losses) arising during the period			(62	)			111
Less : reclassification adjustment for (income) losses included in net income			(26	)			(6	)
Net unrealized gains (losses) on derivatives			(88	)			105
Net gains (losses) arising during the period			6				6
Defined benefit pension plans			6				6
Other comprehensive income (loss), net of tax			(154	)			307
Comprehensive income (loss)			720				806
Less : comprehensive income (loss) attributable to noncontrolling interest			5				6
Comprehensive income (loss) attributable to the company's stockholders			715				800
The accompanying notes are an integral part of these unaudited interim consolidated financial statements

 

 

 

 

STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		Three months ended
		(Unaudited)
		September 29,				September 30,
In million of U.S. dollars		2018				2017
Net income			371				238
Other comprehensive income (loss), net of tax :
Currency translation adjustments arising during the period			(13	)			60
Foreign currency translation adjustments			(13	)			60
Net unrealized gains (losses) arising during the period			-				-
Net unrealized gains (losses) on securities			-				-
Net unrealized gains (losses) arising during the period			(13	)			33
Less : reclassification adjustment for (income) losses included in net income			20				(26	)
Net unrealized gains (losses) on derivatives			7				7
Net gains (losses) arising during the period			2				2
Defined benefit pension plans			2				2
Other comprehensive income (loss), net of tax			(4	)			69
Comprehensive income (loss)			367				307
Less : comprehensive income (loss) attributable to noncontrolling interest			2				2
Comprehensive income (loss) attributable to the company's stockholders			365				305
The accompanying notes are an integral part of these unaudited interim consolidated financial statements