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

FORM 6‑K

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

Report on Form 6‑K dated November 4, 2021

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 Third Quarter and Nine Months ended October 2, 2021:

 

 

 

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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 and nine months ended October 2, 2021 and Notes thereto included elsewhere in this Form 6‑K, and our annual report on Form 20‑F for the year ended December 31, 2020 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on February 24, 2021 (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 46,000 creators and makers of semiconductor technologies mastering the semiconductor supply chain with state-of-the-art manufacturing facilities. An independent device manufacturer, we work with more than 100,000 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 5G technology.

Critical Accounting Policies Using Significant Estimates

There were no significant changes in the first nine months of 2021 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, 2020.

Fiscal Year

Under Article 35 of our Articles of Association, our fiscal year extends from January 1 to December 31. The first quarter of 2021 ended on April 3, the second quarter ended on July 3 and the third quarter ended on October 2. The fourth quarter will end on December 31, 2021. 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 2020 and 2021.

 

Business Overview

Our results of operations for each period were as follows:

 

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

Based on the data published by World Semiconductor Trade Statistics, semiconductor industry revenues in the third quarter of 2021 increased sequentially by approximately 7% for our TAM and by approximately 6% for our SAM to reach approximately $145 billion and $67 billion, respectively. On a year-over-year basis, our TAM increased by approximately 28% and our SAM increased by approximately 27%.

Our third quarter 2021 net revenues amounted to $3,197 million, increasing 6.9% sequentially, substantially in line with the mid-point of our released guidance. The revenue performance was driven by strong global demand and by our engaged customer programs in Personal Electronics. This was partially offset by lower-than-expected revenues in Automotive, caused by more severe than anticipated reduced operations at our Malaysian manufacturing facility due to COVID-19. On a sequential basis, Automotive and Discrete Group (ADG) revenues decreased 6.7%, due to lower revenues in Automotive, partially offset by higher revenues in Power Discrete. Analog, Micro-Electro-Mechanical Systems (“MEMS”) and Sensors Group (AMS) revenues increased 25.2%, driven by higher Imaging revenues. Microcontrollers and Digital ICs Group (MDG) revenues increased 2.6%, driven by higher sales of Microcontrollers.

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On a year-over-year basis, third quarter net revenues increased 19.9%, with all product groups contributing to the increase. ADG revenues increased 18.1%, mainly driven by Power Discrete. AMS revenues increased 27.1%, with all sub-groups contributing and MDG revenues increased 12.9%, driven by higher sales of Microcontrollers.

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

Our effective average exchange rate for the third quarter of 2021 was $1.19 for €1.00, compared to $1.19 in the second quarter of 2021 and $1.13 for €1.00 in the third quarter of 2020. 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 third quarter of 2021 gross profit was $1,330 million and gross margin was 41.6%, 60 basis points above the mid-point of our guidance, mainly due to product mix. On a sequential basis, gross margin increased 110 basis points, mainly due to favorable product mix and improved manufacturing efficiencies. Gross margin increased 560 basis points year-over-year, mainly driven by better product mix, favorable pricing, improved manufacturing efficiencies and lower unloading charges, partially offset by negative currency effects, net of hedging.

Our aggregated selling, general & administrative (“SG&A”) and research & development (“R&D”) expenses amounted to $757 million, compared to $767 million and $652 million in the prior and year-ago quarters, respectively. On a sequential basis, operating expenses decreased, positively impacted by favorable seasonality associated with higher vacation days. On a year-over-year basis, operating expenses increased mainly due to higher labor costs and negative currency effects, net of hedging.

 

Other income and expenses, net, amounted to $33 million income, decreasing by $9 million sequentially, mainly due to lower R&D funding. On a year-over-year basis, other income and expenses, net, increased by $9 million mainly due to higher R&D funding.

In the third quarter of 2021, our operating income was $605 million, equivalent to 18.9% of net revenues, compared to $489 million in the previous quarter (16.3% of net revenues), and to $329 million (12.3% of net revenues) in the year-ago quarter. On a sequential basis, our operating income was positively impacted by the combination of higher volumes and improved gross margin profitability. On a year-over-year basis, the increase was mainly driven by the combined effect of higher revenues and improved gross margin profitability, partially offset by higher labor costs and negative currency effects, net of hedging.

In the third quarter of 2021, our net cash from operating activities was $895 million, entirely covering our net payment for purchase of tangible, intangible and financial assets of $475 million, resulting in a positive free cash flow (non-U.S. GAAP measure) of $420 million. Despite positive free cash flow, $200 million proceeds from long-term debt and net proceeds from short-term deposits of $150 million, our net cash and cash equivalents decreased by $637 million, mainly impacted by $1.26 billion cash used for the settlement of Tranche B of our 2017 Senior Unsecured Convertible Bonds, $87 million used in the repurchase of common stock and $55 million of cash dividends paid to our shareholders.

Our net financial position (non-U.S. GAAP measure) was $798 million as at October 2, 2021 and reflected total liquidity of $3.46 billion and total financial debt of $2.66 billion.

Looking at the fourth quarter, we expect a revenue increase of approximately 6.3% sequentially, plus or minus 350 basis points. Gross margin is expected to be approximately 43.0%, plus or minus 200 basis points.

This outlook is based on an assumed effective currency exchange rate of approximately $1.18 = €1.00 for the fourth quarter of 2021 and includes the impact of existing hedging contracts. The fourth quarter will close on December 31, 2021.

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 August 17, we announced the expansion of an existing multi-year, long-term silicon carbide wafer supply agreement with Cree. The amended agreement, which calls for Cree to supply us with 150mm silicon carbide bare and epitaxial wafers over the next several years, is now worth more than $800 million.

On August 18, we published our IFRS 2021 Semi Annual Accounts for the six-month period ended July 3, 2021 on our website and filed them with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten).

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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 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”. Those comprise unused capacity charges, including reduced manufacturing activity due to COVID-19, impairment, restructuring charges and other related closure costs, management reorganization expenses, phase-out and start-up 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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Third Quarter 2021 vs. Second Quarter 2021 and Third Quarter 2020

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

 

Net revenues

 

Sequentially, our third quarter 2021 net revenues increased 6.9%, 10 basis points below the mid-point of our released guidance. The sequential increase resulted from higher volumes of approximately 12%, partially offset by a decrease of approximately 5% in average selling prices, driven by a less favorable product mix.

On a year-over-year basis, net revenues increased 19.9% as a result of higher volumes of approximately 22%, partially offset by lower average selling prices of approximately 2%, mainly driven by a less favorable product mix, partially offset by higher selling prices.

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Net revenues by product group

 

On a sequential basis, ADG revenues decreased 6.7%, driven by an approximate 23% decrease in average selling prices, due to a less favorable product mix, partially offset by higher volumes of approximately 16%, driven by Power Discrete. AMS revenues increased 25.2% as a result of higher average selling prices of approximately 15%, mainly due to a better product mix, and higher volumes of approximately 10%. MDG revenues increased 2.6% due to higher volumes of approximately 8%, partially offset by lower average selling prices of approximately 5%, as a result of a less favorable product mix.

On a year-over-year basis, ADG revenues increased 18.1% due to higher volumes of approximately 23%, partially offset by lower average selling prices of approximately 5%, due to a less favorable product mix. AMS revenues increased 27.1% compared to the year-ago period, driven by higher volumes of approximately 22% and higher average selling prices of approximately 5%, mainly due to a more favorable product mix and higher selling prices. MDG revenues increased 12.9% due to higher volumes of approximately 18%, while average selling prices decreased by approximately 5%, due to a less favorable product mix.

Net Revenues by Market Channel ⁽¹⁾

 

By market channel, our third quarter net revenues in Distribution amounted to 32% of our total revenues, decreasing from 36% and increasing from 26% in the prior and year-ago quarters, respectively.

Net Revenues by Location of Shipment ⁽¹⁾

 

On a sequential basis, EMEA and Americas revenues decreased 10.0% and 4.8%, respectively, mainly due to lower sales in Automotive. Asia Pacific revenues increased 14.6%, mainly driven by higher sales in Imaging.

On a year-over-year basis, all regions registered double-digits revenue growth. EMEA revenues grew 16.8%, mainly driven by higher sales in Microcontrollers, Power Discrete and Analog. Americas revenues increased 24.7%, mainly due to higher sales in Microcontrollers and Power Discrete. Asia Pacific revenues increased 20.0%, mainly due to higher sales in Imaging, Power Discrete and Microcontrollers.

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Gross profit

 

In the third quarter of 2021, gross margin was 41.6%, 60 basis points above the mid-point of our guidance mainly due to product mix. On a sequential basis, gross margin increased 110 basis points, mainly due to favorable product mix and improved manufacturing efficiencies.

On a year-over-year basis, gross margin increased 560 basis points, mainly driven by better product mix, favorable pricing, improved manufacturing efficiencies and lower unloading charges, partially offset by negative currency effects, net of hedging.

Operating expenses

 

On a sequential basis, operating expenses decreased by $10 million, positively impacted by favorable seasonality associated with higher vacation days.

On a year-over-year basis, operating expenses increased by 105 million, mainly due to higher labor costs and negative currency effects, net of hedging.

As a percentage of net revenues, our operating expenses amounted to 23.6% in the third quarter of 2021, decreasing compared to 25.6% in the prior quarter and 24.4% in the year-ago quarter.

R&D expenses were net of research tax credits, which amounted to $31 million in the third quarter of 2021, compared to $35 million and $31 million, in the prior and year-ago quarters, respectively.

Other income and expenses, net

 

In the third quarter of 2021, other income and expenses, net, amounted to $33 million income, decreasing by $9 million sequentially, mainly due to lower R&D funding.

On a year-over-year basis, other income and expenses, net, increased by $9 million mainly due to higher R&D funding.

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Impairment, restructuring charges and other related closure costs

 

The timing of our annual impairment test was changed from the third quarter to the fourth quarter, starting 2021, to consider the availability of relevant information prepared as part of the budgeting and forecasting cycle.

In the third quarter of 2021, we recorded $1 million of impairment, restructuring charges and other related closure costs, related to the impairment charge on licenses with no alternative future use.

In the second quarter of 2021, we recorded a $2 million reversal as an adjustment to accrued restructuring charges when compared to actual amounts paid.

In the third quarter of 2020, we recorded $2 million of impairment, restructuring charges and other related closure costs, mainly consisting of restructuring charges related to the restructuring plan in Bouskoura, Morocco.

Operating income

 

In the third quarter of 2021, operating income was $605 million, compared to an operating income of $489 million and $329 million in the prior and year-ago quarters, respectively.

On a sequential basis, our operating income was positively impacted by the combination of higher volumes and improved gross margin profitability.

On a year-over-year basis, the increase is mainly driven by the combined effect of higher revenues and improved gross margin profitability, partially offset by higher labor costs and negative currency effects, net of hedging.

Operating income by product group

 

For the third quarter of 2021, ADG operating income was $108 million, increasing sequentially by $6 million. AMS operating income increased sequentially by $115 million, reaching $304 million, mainly driven by higher profitability in Imaging. MDG operating income increased by $14 million sequentially, reaching $220 million, driven by Microcontrollers.

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ADG operating income increased by $59 million year-over-year reflecting higher profitability in both Power Discrete and Automotive. AMS operating income increased by $129 million, with all sub-groups contributing to the increase. MDG operating income increased by $78 million, due to Microcontrollers higher profitability.

Reconciliation to consolidated operating income

 

Interest expense, net

 

In the third quarter of 2021, we recorded a net interest expense of $8 million, substantially flat compared to the prior and year-ago quarters. The third quarter net interest expense was composed of $10 million of interest expense on our borrowings and banking fees, partially offset by $2 million of interest income.

Net interest expense recorded in the third quarter of 2021 included a $8 million non-cash charge related to our Senior Unsecured Convertible Bonds compared to a $11 million charge in the second quarter of 2021 and a $13 million charge in the third quarter of 2020.

Loss on financial instruments, net

 

During the third quarter of 2021, we recorded a $45 million loss on financial instruments generated on the settlement of Tranche B of our 2017 Senior Unsecured Convertible Bonds. This loss was associated with the fair value measurement of the liability component of Tranche B upon settlement and the write-off of unamortized debt issuance costs.

 

During the third quarter of 2020, we recorded a $26 million loss on financial instruments, of which $25 million generated on the settlement of Tranche A of our 2017 Senior Unsecured Convertible Bonds. This loss was associated with the fair value measurement of the liability component of Tranche A upon settlement and the write-off of unamortized debt issuance costs.

 

Income tax expense

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During the third quarter of 2021, we registered an income tax expense of $73 million, reflecting a 15% estimated annual effective tax rate at consolidated level, applied to the first nine months of 2021 consolidated income before income tax, consistent with the actual annual tax rate of 2020.

Net income attributable to parent company

 

For the third quarter of 2021, we reported net income of $474 million, representing diluted earnings per share of $0.51, compared to $0.44 in the prior quarter and $0.26 in the prior-year quarter.

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Nine Months of 2021 vs. Nine Months of 2020

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

 

Net revenues

 

Our first nine months 2021 net revenues increased 31.8% compared to the year‑ago period, as a result of an approximate 26% increase in volumes and an approximate 6% increase in average selling prices, due to a more favorable product mix, higher selling prices and favorable currency effect.

Net revenues by product group

 

By product group, ADG revenues were up 34.1% with higher volumes of approximately 22% and higher average selling prices of approximately 12%, mainly due to more favorable product mix and higher selling prices. AMS revenues increased 36.0%, due to higher volumes of approximately 31% and more favorable average selling prices

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of approximately 5%, mainly as a result of a better product mix. MDG revenues increased 24.5% compared to the prior period, driven by higher volumes of approximately 26%, partially offset by less favorable average selling prices of approximately 2%, due to a less favorable product mix, partially offset by higher selling prices.

Net Revenues by Market Channel ⁽¹⁾

 

By market channel, Distribution reached 34% share of total revenues in the first nine months of 2021, compared to approximately 28% in the first nine months of 2020.

Net Revenues by Location of Shipment ⁽¹⁾

 

By location of shipment, EMEA revenues grew 33.9%, mainly driven by higher sales in Automotive and Microcontrollers. Americas revenues increased 35.7%, mainly due to higher sales in Power Discrete, Microcontrollers and Automotive. Asia Pacific revenues increased 30.5% with all sub-groups except RFC contributing to the increase.

Gross profit

 

Gross margin was 40.4% for the first nine months of 2021, increasing by approximately 410 basis points compared to the year‑ago period, mainly due to more favorable product mix, higher selling prices, better manufacturing efficiencies and lower unloading charges.

Operating expenses

 

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Our operating expenses increased compared to the year-ago period, mainly due to unfavorable currency effects, net of hedging and higher labor costs.

As a percentage of net revenues, our operating expenses amounted to 24.9% decreasing from 27.6% in the prior year-ago period.

Total R&D expenses were net of research tax credits, which amounted to $97 million in the first nine months of 2021 compared to $89 million in the first nine months of 2020.

Other income and expenses, net

 

In the first nine months of 2021, we recognized other income, net, of $109 million, increasing compared to $71 million in the first nine months of 2020. The increase was mainly due to higher income from R&D funding.

Impairment, restructuring charges and other related closure costs

 

In the first nine months of 2021, we recorded a $2 million reversal as an adjustment to accrued restructuring charges when compared to actual amounts paid, and a $1 million impairment charge on licenses with no alternative future use.

In the first nine months of 2020, we recorded $12 million of impairment, restructuring charges and other related closure costs, mainly composed of $8 million restructuring charges in association with the restructuring plan in Bouskoura, Morocco and $4 million consisting of impairment of licenses with no alternative future use.

Operating income

 

Operating income in the first nine months of 2021 increased by $868 million to $1,534 million, compared to the prior year period, mainly as a result of higher revenues, improved manufacturing efficiencies and lower unloading charges, partially offset by higher labor costs and negative currency effects, net of hedging.

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Operating income by product group

 

In the first nine months of 2021, ADG operating income increased by $208 million to $296 million, with higher profitability of both Automotive and Power Discrete. AMS operating income was $679 million, increasing by $271 million with all sub-groups contributing to the increase. MDG operating income was $598 million and increased by $268 million due to Microcontrollers.

Reconciliation to consolidated operating income

 

Interest expense, net

 

In the first nine months of 2021, net interest expense on our borrowings and banking fees was $24 million, comprised of $35 million interest expense, of which $30 million non-cash related to our Senior Unsecured Convertible Bonds, partially offset by $11 million of interest income.

In the first nine months of 2020, net interest expense on our borrowings and banking fees was $12 million, comprised of $40 million interest expense, mainly related to the non-cash expense on our Senior Unsecured Convertible Bonds, partially offset by $28 million of interest income.

Loss on financial instruments, net

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During the first nine months of 2021, we recorded a net $43 million loss on financial instruments, of which $45 million loss on the settlement of Tranche B of our 2017 Senior Unsecured Convertible Bonds. This loss was associated with the fair value measurement of the liability component of Tranche B upon settlement and the write-off of unamortized debt issuance costs. In addition, we recorded a $2 million gain on the sale of one of our non-strategic investments.

 

During the first nine months of 2020, we recorded a $26 million loss on financial instruments, of which $25 million generated on the settlement of Tranche A of our 2017 Senior Unsecured Convertible Bonds. This loss was associated with the fair value measurement of the liability component of Tranche A upon settlement and the write-off of unamortized debt issuance costs.

 

Income tax expense

 

During the first nine months of 2021, we registered an income tax expense of $204 million, reflecting a 15% estimated annual effective tax rate at consolidated level, applied to the first nine months of 2021 consolidated income before income tax.

In the first nine months of 2020, we registered an income tax expense of $96 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 estimates on our tax provisions. Our income tax amounts and rates also depend on our loss carry-forwards and their relevant valuation allowance, which are based on estimated projected plans and available tax planning strategies. In the case of material changes in these plans, the valuation allowance could be adjusted accordingly, with an impact on our income tax expense (benefit). In addition, our annual income tax expense includes the estimated impact of provisions related to potential tax positions which have been considered as uncertain.

Net income attributable to parent company

 

For the first nine months of 2021, we reported net income of $1,251 million, representing diluted earnings per share of $1.35, compared to net income of $525 million in the prior period, representing diluted earnings per share of $0.57.

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Legal Proceedings

For a discussion of legal proceedings, see Note 27 Contingencies, Claims and Legal Proceedings to our Unaudited 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 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 Unaudited Interim 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 Statements of Income for the nine months ended October 2, 2021 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 third quarter of 2021 was $1.19 for €1.00, compared to $1.19 for €1.00 in the second quarter of 2021 and $1.13 for €1.00 in the third quarter of 2020. 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 at October 2, 2021, the outstanding hedged amounts were €848 million to cover manufacturing costs and €565 million to cover operating expenses, at an average exchange rate of approximately $1.21 and $1.22 for €1.00 (considering the collars at upper strike), respectively, maturing from October 6, 2021 to August 31, 2022. As at October 2, 2021, measured in respect to the exchange rate at period closing of about $1.16 to €1.00, these outstanding hedging contracts and certain settled contracts covering manufacturing expenses capitalized in inventory resulted in a deferred loss of approximately $37 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statement of equity, compared to a deferred gain of approximately $57 million before tax at December 31, 2020.

We also hedge certain manufacturing costs denominated in Singapore dollars (SGD); as at October 2, 2021, the outstanding hedged amounts were SGD 162 million at an average exchange rate of approximately SGD 1.34 to $1.00 maturing from October 7, 2021 to September 1, 2022. As at October 2, 2021, these outstanding hedging contracts resulted in a deferred loss of $1 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statements of equity, compared to a deferred gain of approximately $4 million before tax at December 31, 2020.

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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 2021, as a result of our cash flow hedging, we recycled to earnings a loss of $2 million, of which approximately $1 million impacted R&D and $1 million impacted SG&A expenses, while in the comparable quarter of 2020, we recorded a gain of $8 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 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 resulted in a net gain of $2 million recorded in “Other income and expenses, net” in our Unaudited Interim Consolidated Statement of Income for the third quarter of 2021.

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. The balance sheet impact, as well as the income statement and cash flow impact, of these currency translations 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 at October 2, 2021, 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 expense, 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 and marketable securities and interest expense recorded on our financial liabilities or on the sale without recourse of receivables, if any, 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 (“EIB”) and Cassa Depositi e Prestiti SpA (“CDP”) Floating Rate Loans at Libor and Euribor plus variable spreads. See Note 22 to our Unaudited Interim Consolidated Financial Statements.

As at October 2, 2021, our total financial resources, including cash and cash equivalents and short-term deposits generated an average annual interest rate of 0.22%. At the same date, the average annual interest rate on our outstanding debt was 0.87% including the non-cash effective interest on our 2017 and 2020 Senior Unsecured Convertible Bonds, while the average coupon interest rate was 0.06%.

Impact of Changes in Equity Prices

As at October 2, 2021, 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 20 to our Unaudited Interim Consolidated Financial Statements.

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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.

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 nine months of 2021, our cash and cash equivalents increased by $106 million. The components of the net cash increase for the reporting and comparable periods 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. The net cash from operating activities for the first nine months of 2021 was $2,179 million, increasing compared to $1,171 million in the prior-year period mainly due to higher net income.

Net cash used in investing activities. Investing activities used $1,010 million of cash in the first nine months of 2021, decreasing compared to $1,730 million used in the prior-year period, mainly due to lower net investments in short-term deposits, partially offset by higher net payments for purchase of tangible assets which totaled $1,280 million in the first nine months of 2021 compared to $897 million in the prior-year period.

Net cash from (used in) financing activities. Net cash used in financing activities was $1,058 million for the first nine months of 2021, compared to net cash from financing activities of $668 million in the first nine months of 2020, and consisted mainly of $1.22 billion used to settle Tranche B of our 2017 Senior Unsecured Convertible Bonds, $399 million repurchase of common stock, $145 million of dividends paid to stockholders and $30 million repayment of long-term debt, partially offset by $602 million proceeds from the drawdowns of our credit facility signed with the EIB and $182 million proceeds from the drawdown of our credit facility signed with CDP.

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 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 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

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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 consolidated statements of cash flows as follows:

 

 

Free Cash Flow increased in the first nine months of 2021 compared to the year-ago period, mainly due to higher cash from operating activities, partially offset by higher payments for purchase of tangible assets.

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, restricted cash, 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, restricted cash, 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 at October 2, 2021 was $798 million, decreasing compared to $1,099 million as at December 31, 2020 and increasing compared to $662 million as at September 26, 2020.

Cash and cash equivalents amounted to $3,112 million as at October 2, 2021.

Short-term deposits amounted to $350 million as at October 2, 2021 and consisted of available liquidity with original maturity over three months.

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Marketable securities, which consisted of U.S. Treasury Bonds classified as available-for-sale, reached maturity in the first half of 2021.

Financial debt was $2,664 million as at October 2, 2021 and was composed of (i) $205 million of short-term debt and (ii) $2,459 million of long‑term debt. The breakdown of our total financial debt included (i) $1,103 million in EIB loans, (ii) $174 million in the CDP loan, (iii) $1,380 million in our 2020 Senior Unsecured Convertible Bonds, and (iv) $7 million in loans from other funding programs.

The EIB Loans are comprised of three long-term amortizing credit facilities as part of our R&D funding programs. The first, signed in 2013, is a €350 million multi-currency loan which also supports our R&D programs. It was fully drawn in U.S. dollars for an amount of $471 million, of which $59 million was outstanding as at October 2, 2021. The second, 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 $464 million was outstanding as at October 2, 2021. The third, signed in 2020, is a €500 million facility agreement with EIB to support R&D and capital expenditure programs in Italy and France. It was drawn in the first quarter of 2021 for an amount of €335 million and in the third quarter of 2021 for an amount of €165 million, representing $580 million outstanding as at October 2, 2021.

In the first half of 2021, we signed a new Facility Agreement with CDP for an amount of €150 million, fully drawn in Euros, of which $174 million was outstanding as at October 2, 2021.

On July 3, 2017, we issued a $1.5 billion offering of senior unsecured bonds convertible into new or existing ordinary shares of the Company, for net proceeds of $1,502 million. The 2017 Senior Unsecured Convertible Bonds were issued in two $750 million principal amount tranches, Tranche A with a maturity of 5 years (37.5% conversion premium, negative 0.25% yield to maturity, 0% coupon) and Tranche B with a maturity of 7 years (37.5% conversion premium, 0.25% yield to maturity, 0.25% coupon). The conversion price was $20.54 on each tranche corresponding approximately to 36.5 million underlying shares per tranche. The 2017 Senior Unsecured Convertible Bonds were convertible by the bondholders or callable by us, following contractual terms and schedule, if certain conditions were satisfied. Under the terms of the 2017 Senior Unsecured Convertible Bonds, the conversion rights could be satisfied either in cash or shares, or a combination of the two, at our election. Upon initial recognition, the proceeds were allocated between debt and equity by determining first the fair value of the liability component using an income approach.

The call option available to us for the early redemption of Tranche A was exercised in July 2020. As a consequence, bondholders exercised their conversion rights on the full Tranche A. As we elected to net share settle the bonds, each conversion exercised by the bondholders followed the process defined in the original terms and conditions of the 2017 Senior Unsecured Convertible Bonds, which determined the actual number of shares to be transferred upon each conversion. We settled Tranche A of the 2017 Senior Unsecured Convertible Bonds upon conversion by redeeming through cash the $750 million principal amount and by settling the residual consideration through the delivery of approximately 11.4 million treasury shares. The net-share settlement was fully completed as at October 1, 2020.

 

The call option available to us for the early redemption of Tranche B was exercised in July 2021. As a consequence, bondholders exercised their conversion rights on the full Tranche B. Each conversion exercised by the bondholders followed the process defined in the original terms and conditions of the 2017 Senior Unsecured Convertible Bonds, which determined the actual consideration to be transferred to bondholders upon each conversion. Out of the 3,750 bonds composing Tranche B, we elected to settle 1,238 bonds on a net-share basis for a total consideration of $479 million, through the payment of the $248 million nominal value in cash and the delivery of approximately 5.8 million treasury shares. The remaining 2,512 bonds were settled on a full cash basis for a total consideration of $1,015 million. The settlement was fully completed during the third quarter of 2021.

 

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. Under the terms of the 2020 Senior Unsecured Convertible Bonds, we can satisfy the conversion rights either in cash or shares, or a combination of the two, at our election. Proceeds from the issuance of the bonds, net of $10 million transaction costs, amounted to $1,567 million.

 

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Our long-term debt contains standard conditions but does not impose minimum financial ratios. We had unutilized committed medium-term credit facilities with core relationship banks totaling $574 million as at October 2, 2021.

 

As at October 2, 2021, debt payments at redemption value by period were as follows:

 

 

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 stable outlook; Moody’s: “Baa3” with positive outlook; Fitch: “BBB” with stable outlook.

Financial Outlook: Capital Investment

Our policy is to modulate our capital spending according to the evolution of the semiconductor market. To support the strong market demand and our strategic initiatives, we plan to invest about $2.1 billion in capital expenditures in 2021. A portion of these capital expenditures will be devoted to support strategic initiatives: (i) in Agrate, Italy the progression of our new R3 300mm fab to support next generation mixed signal and power technologies; (ii) R&D for gallium nitride (“GaN”) power technologies in Tours 200mm and prototyping for GaN RF devices in Catania 150mm and (iii) investments for Silicon Carbide (“SiC”) substrates activities. In addition to our strategic initiatives, our main capital investments in front-end are in (i) our 300mm fab in Crolles, optimizing existing infrastructures and extending the cleanroom to support production ramp up on our main runner technologies; (ii) increase capacity for SiC power mosfet in our Catania and Singapore facilities; and (iii) mix evolution, and a few selected programs of capacity growth and infrastructure preparation in some of our most advanced 200mm fabs including the Singapore fab we acquired from Micron. The most important 2021 capital investments for our back-end facilities are expected to be: (i) capacity growth on certain package families, including the SiC technology and automotive related packages, next generation optical sensing technologies and the new generation of Intelligent Power Modules for Automotive and Industrial applications; (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 part to support our commitment to be carbon neutral in 2027. We will invest in overall capacity adjustment in final testing and wafer probing to support demand and a changed product mix as well as invest in quality, safety, maintenance, productivity, cost savings and direct emission reduction plan in both 150mm, 200mm front-end fabs and back-end plants.

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 with 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.

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 debt in line with maturity dates.

Contractual Obligations, Commercial Commitments and Contingencies

Our contractual obligations, commercial commitments and contingencies are mainly comprised of: long term purchase commitments for material, equipment and software license, 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.

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Off‑Balance Sheet Arrangements

We had no material off‑balance sheet arrangements as at October 2, 2021.

Impact of Recently Issued U.S. Accounting Standards

See Note 5 Recent Accounting Pronouncements to our Unaudited Interim Consolidated Financial Statements.

Backlog and Customers

During the third quarter of 2021, our booking plus net frame orders decreased compared to the second quarter of 2021. We entered the fourth quarter of 2021 with a backlog higher than the level we had when entering in the third quarter of 2021. Backlog (including frame orders) is subject to possible cancellation, push back and lower ratio of frame orders being translated into firm orders. Consequently, backlog 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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures 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. 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. In 2021, we have successfully migrated our accounting system to S/4HANA. This migration has not required significant changes to our system of internal controls.

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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 SEC.

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:

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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” 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” from time to time in our SEC filings, could have a material adverse effect on our business and/or financial condition.

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STMICROELECTRONICS N.V.

UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

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STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

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STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

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STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

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STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

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STMicroelectronics N.V.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

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STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF EQUITY

 

 

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STMicroelectronics N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

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STMicroelectronics N.V.

Notes to Interim Consolidated Financial Statements (Unaudited)

STMicroelectronics N.V. (the "Company") is registered in the Netherlands with its corporate legal seat in Amsterdam, the Netherlands, and its corporate headquarters located in Geneva, Switzerland.

The Company is a global independent semiconductor company that designs, develops, manufactures and markets 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, the Company participates in the manufacturing value chain of smartcard products, which includes the production and sale of both silicon chips and smartcards.

The Company’s fiscal year ends on December 31. Interim periods are established for accounting purposes on a thirteen-week basis.

The Company’s first quarter ended on April 3, its second quarter ended on July 3, its third quarter ended on October 2, and its fourth quarter will end on December 31.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), consistent in all material respects with those applied for the year ended December 31, 2020. The interim financial information is unaudited but reflects all normal adjustments which are, in the opinion of management, necessary to provide a fair statement of results for the periods presented. The results of operations for the interim period are not necessarily indicative of the results to be expected for the entire year.

All balances and values in the current and prior periods are in millions of U.S. dollars, except share and per-share amounts.

The accompanying unaudited interim consolidated financial statements do not include certain footnotes and financial disclosures normally required on an annual basis under U.S. GAAP. Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 20-F for the year ended December 31, 2020, as filed with the SEC on February 24, 2021.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. The primary areas that require significant estimates and judgments by management include, but are not limited to:

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The Company bases the estimates and assumptions on historical experience and on various other factors such as market trends, market information used by market participants and the latest available business plans that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. COVID-19 did not result in significant impacts on these estimates. While the Company regularly evaluates its estimates and assumptions, the actual results experienced by the Company could differ materially and adversely from those estimates.

In March 2020, the FASB provided optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The reference rate reform is expected to result in the discontinuance of LIBOR and certain other interest rate indexes at the end of 2021. The transition away from those rates may impact the valuation and measurement of debt instruments, derivatives and other contracts with payments based on those rates, as existing contracts will be modified. These contractual modifications may have accounting implications on the measurement of contracts referring to those rates and on existing hedging transactions on which hedge accounting is applied. The guidance provides relief through optional exemptions on the transition to new reference rates. One optional exemption is to account for a modified contract as a continuation of an existing contract without performing a detailed analysis. Other exemptions are permitted on hedge accounting in order to avoid discontinuance of existing hedge accounting transactions due to the modification of critical terms in the hedge relationship. The guidance is effective from March 12, 2020 through December 31, 2022. The Company will apply the first optional exemption described above on outstanding debt and other contracts for which the change in reference rates will imply a modification of existing contractual terms. The Company does not expect to be further impacted by the reference rate reform as it does not report any hedging relationship (e.g, hedge of debt instruments) that are directly affected by the interest rate benchmark reform.

In August 2020, the FASB issued new guidance on distinguishing liabilities from equity and EPS, to simplify accounting for issued convertible instruments, by eliminating the cash conversion and beneficial conversion feature models in ASC 470-20 that require separate accounting for embedded conversion features. The guidance also simplifies the settlement assessment that issuers perform to determine whether a contract in their own equity qualifies for equity classification. Finally, the guidance requires entities to use in the calculation of the diluted EPS the if-converted method for all convertible instruments and to include the effect of share settlement for instruments that may be settled in cash or shares. The new guidance is effective for public companies for annual periods beginning after December 15, 2021. The guidance can be adopted either on a full retrospective basis or by applying the modified retrospective approach, with the impact upon transition recorded in retained earnings for existing instruments outstanding as of the adoption date. The Company will adopt the new guidance when effective using the modified retrospective method on instruments outstanding as at January 1, 2022. The Company is currently finalizing its assessment of the impact upon transition.

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Other income and expenses, net consisted of the following:

 

The Company receives significant public funding from governmental agencies in several jurisdictions. Public funding for research, development and other innovation programs is recognized ratably as the related costs are incurred once the agreement with the respective governmental agency has been signed and all applicable conditions have been met.

Exchange gains and losses, net, represent the portion of exchange rate changes on transactions denominated in currencies other than an entity’s functional currency and the changes in fair value of derivative instruments which are not designated as hedges and which have a cash flow effect related to operating transactions, as described in Note 28.

Start-up costs represent costs incurred in the start-up and testing of the Company’s new manufacturing facilities, before reaching the earlier of a minimum level of production or six months after the fabrication line’s quality certification. Phase-out costs are costs incurred during the closing stage of a Company’s manufacturing facility. They are treated in the same manner as start-up costs.

Patent costs include legal and attorney fees and payment for claims, patent pre-litigation consultancy and legal fees. They are reported net of settlements, if any, which primarily include reimbursements of prior patent litigation costs.

During the first nine months of 2021, the Company sold certain non-strategic assets, which generated a gain of $5 million.

COVID-19 incremental costs are mainly composed of purchases of medical disposables, such as masks and sanitizers, and other expenses related to sanitary measures undertaken to protect employees during the global outbreak of COVID-19.

The timing of the Company’s annual impairment test was changed from the third quarter to the fourth quarter, starting 2021, to consider the availability of relevant information prepared as part of the budgeting and forecasting cycle.

In the first nine months of 2021, the Company recorded a $2 million reversal as an adjustment to accrued restructuring charges when compared to actual amounts paid, and a $1 million impairment charge on licenses with no alternative future use.

In the first nine months of 2020, the Company recorded $12 million of impairment, restructuring charges and other related closure costs, mainly composed of $8 million restructuring charges in association with the restructuring plan in Bouskoura, Morocco, and $4 million consisting of impairment of licenses with no alternative future use.

 

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Provisions for restructuring charges and other related closure costs as at October 2, 2021 are summarized as follows:

 

In 2016, the Company announced its decision to cease the development of new platforms and standard products for set-top-box and home gateway products. This decision implied a global workforce review affecting approximately 1,400 employees worldwide, which included about 430 employees in France through a voluntary departure plan, about 670 employees in Asia and about 120 employees in the United States of America.

The Set-top Box restructuring plan was expected to result in pre-tax charges of approximately $170 million. Since inception, restructuring charges, totaling $130 million, were incurred. The plan was substantially completed in 2018 in all locations. The Company still incurs payments related to the voluntary plan in France.

In 2019, management committed to a restructuring plan impacting its back-end activities. A voluntary plan involving a reduction in force representing approximately 150 employees was announced in Bouskoura, Morocco, in December 2019, in compliance with local legislation. The Company recorded a restructuring charge of $8 million since inception, including $5 million recorded in the first nine months of 2020, corresponding to the voluntary termination benefits to be paid to employees who signed the offer for voluntary leave in 2020.

Interest expense, net consisted of the following:

 

Interest income is related to the cash and cash equivalents, short-term deposits and marketable securities held by the Company.

 

Interest expense recorded in the first nine months of 2021 included a charge of $14 million on the senior unsecured convertible bonds issued on July 3, 2017 and a charge of $17 million on the senior unsecured convertible bonds issued on August 4, 2020, mainly resulting from the non-cash accretion of the discount on the liability component. Convertible debt is further described in Note 22.

 

Interest expense also includes charges related to the banking fees and the sale of trade and other receivables, if any.

Income tax expense is as follows:

 

The annual estimated effective tax rate method was applied, as management believes it provides a reliable estimate of the expected yearly income tax expense on an interim basis. The Company recorded an income tax expense of

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$73 million and $204 million during the third quarter and first nine months of 2021, respectively, reflecting the estimated annual effective tax rate at consolidated level, applied to the first nine months of 2021 consolidated income before income tax.

At each reporting date, the Company assesses all material open income tax positions in all tax jurisdictions to determine any uncertain tax position. The Company uses a two-step process for the evaluation of uncertain tax positions. The first step consists in assessing whether the tax benefit must be recognized. The second step consists in measuring the amount of tax benefit to be recognized on each uncertain tax position. In step one, only tax positions with a sustainability threshold higher than 50% are recognized. In step two, the Company determines the amount of recognizable tax benefit. The measurement methodology in step two is based on a “cumulative probability” approach, resulting in the recognition of the largest amount that is greater than 50% likely of being realized upon settlement with the taxing authorities.

Basic net earnings per share (“EPS”) is computed based on net income attributable to parent company stockholders using the weighted average number of common shares outstanding during the reporting period; the number of outstanding shares does not include treasury shares. Diluted EPS is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period, such as stock issuable pursuant to unvested shares granted and stock used in the settlement of convertible debt.

 

 

The Company applies the treasury method to determine the dilutive effect of convertible bonds as past experience, existing stated policies and the contractual terms of the bonds provide a reasonable basis to expect that the settlement will include cash, shares or a mix of both.

 

The senior unsecured convertible bonds issued on August 4, 2020 did not have any dilutive effect in the third quarter and first nine months of 2021, since the conversion features were out-of-the-money.

 

The dilutive effect of convertible bonds presented in the table above is related to the senior unsecured convertible bonds issued on July 3, 2017, for which the average stock market price exceeded the $20.54 conversion price for the period before settlement. The effect of the settlement is further described in Note 22.

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The table below details the changes in AOCI attributable to the Company’s stockholders by component, net of tax, for the nine months ended October 2, 2021:

 

Items reclassified out of Accumulated Other Comprehensive Income for the nine months ended October 2, 2021 are listed in the table below:

(1)These items are included in the computation of net periodic pension cost, as described in Note 23.

 

To optimize the return yield on its short-term investments, the Company invested $350 million of available cash in short-term deposits as at October 2, 2021. These short-term deposits represent cash equivalents with original maturity beyond three months and no significant risk of changes in fair value.

Changes in the balance of marketable securities during the first nine months of 2021 are detailed in the table below:

* Other Comprehensive Income

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In 2021, marketable securities held by the Company, which consisted of U.S. Treasury Bonds classified as available-for-sale, reached maturity. Proceeds from matured marketable securities totaled $132 million and were reported in the line “Proceeds from matured marketable securities” in the consolidated statement of cash flows for the nine months ended October 2, 2021.

Trade accounts receivable, net consisted of the following:

The Company uses a lifetime expected losses allowance for all trade receivables based on failure rates, as applied to the gross amounts of trade accounts receivable.

CECLA also includes reasonable assumptions about future credit trends. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the Company’s customers to settle the receivables. In addition to the factors already embedded in the failure rates, as applied on trade accounts receivable, the Company has identified cyclicality and uncertainties around continued growth for the semiconductor industry and its serviceable available market to be the most relevant factors. These macroeconomic factors are weighted into different economic scenarios, in line with estimates and methodologies applied by other business entities, including financial institutions. These scenarios range from upside scenario (above-trend economic growth) to severe downside (recession).

On that basis, the changes in reported CECLA for the period ended October 2, 2021 are presented below:

Inventories consisted of the following:

 

Reserve for obsolescence is estimated for excess uncommitted inventories based on the previous quarter’s sales, backlog of orders and production plans.

In the first half 2020, the Company closed the acquisition of French Gallium Nitride (GaN) innovator Exagan. Exagan’s expertise in epitaxy, product development and application know-how broaden and accelerate ST’s power GaN roadmap and business for automotive, industrial and consumer applications. The activities of this business are included in the Automotive and Discrete Group (ADG) reportable segment.

In the second half of 2020, the Company closed the acquisitions of the entire share capital of Ultra-wideband specialist BeSpoon, of the cellular IoT connectivity assets of Riot Micro and of the radio-frequency assets of SOMOS. With these acquisitions, the Company further strengthens its offer for wireless connectivity in

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the roadmap for STM32 microcontrollers and secure microcontrollers. The activities of these businesses are included in the Microcontrollers and Digital ICs Group (MDG) reportable segment.

In 2020, the Company also completed another minor acquisition in the Microcontrollers and Digital ICs Group (MDG) reportable segment. This acquisition has also been accounted for as a business combination.

In 2021, the purchase price allocation of the above business acquisitions was finalized and resulted in the recognition of $1 million related to a defined benefit pension obligation, with the corresponding increase in goodwill. The fair value of the identifiable assets acquired and liabilities assumed was as follows:

 

 

The total consideration transferred in relation to the business acquisitions concluded in 2020 after finalization of the purchase price allocation consisted of cash paid of $104 million, before cash acquired of $1 million, deferred consideration of $18 million and contingent consideration of $117 million. The fair value of the consideration transferred was determined by the Company with the assistance of a third party as part of the purchase price allocation. The contingent consideration comprised variable payment components contingent upon meeting certain financial and/or technical targets by the acquired businesses. The fair value measurement of the acquisition-date contingent consideration was based on the probability that the milestones defining the variable components of the consideration will be achieved and was estimated by calculating the present value of the future expected cash flows. The estimates were based on discount rates ranging between 1.55% and 4.07%, reflecting the term-specific cost of debt plus, where appropriate, an additional risk premium.  

 

As at October 2, 2021, deferred and contingent consideration recognized on business combinations amounted to $19 million and $119 million, respectively. The Level 3 fair value measurement of, and changes in, the contingent consideration are further described in Note 29.

Goodwill allocated to reportable segments as at October 2, 2021, and December 31, 2020, and changes in the carrying amount of goodwill during the first nine months of 2021 were as follows:

 

 

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Other intangible assets, net consisted of the following:

The line “Technologies in progress” in the table above also includes internally developed software under construction and software not ready for use.

Amortization expense was $70 million and $56 million for the first nine months of 2021 and 2020, respectively.

The estimated amortization expense of the existing intangible assets for each period is expected to be as follows:

 

 

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Property, plant and equipment, net consisted of the following:

 

 

The line “Construction in progress” in the table above includes property, plant and equipment under construction and equipment under qualification before operating and not ready for their intended use.

The depreciation charge was $708 million and $612 million for the first nine months of 2021 and 2020, respectively.

As at October 2, 2021 and December 31, 2020, finance lease right-of-use assets were less than $1 million. The below information is presented for operating leases only.

Operating leases consisted of the following:

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Maturities of operating lease liabilities are as follows:

 

Operating lease term and discount rate are as follows:

 

Operating lease cost and cash paid for the first nine months of 2021 and 2020 are as follows:

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities in the first nine months of 2021 and 2020 are as follows:

 

 

Long-term investments are equity securities with no readily determinable fair value for which the Company has elected to apply the cost method as a measurement alternative. It includes principally the Company’s investment in DNP Photomask Europe S.p.A (“DNP”). The Company has identified DNP as a VIE but has determined that it is not the primary beneficiary. The significant activities of DNP revolve around creation of masks and development of high level mask technology. The Company does not have the power to direct these activities. The Company’s current maximum exposure to losses as a result of its involvement with DNP is limited to its investment. The Company has not provided additional financial support in the first nine months of 2021 and currently has no requirement or intent to provide further financial support to DNP.

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Other non-current assets consisted of the following:

Long-term State receivables include receivables related to funding and receivables related to tax refunds. Funding are mainly public grants to be received from governmental agencies in Italy and France as part of long-term research, development, innovation, industrialization and capital investment projects. Long-term receivables related to tax refund correspond to tax benefits claimed by the Company in certain of its local tax jurisdictions, for which collection is expected beyond one year.

During the first nine months of 2021 and 2020, the Company entered into a factoring transaction to accelerate the realization in cash of certain long-term receivables. As at October 2, 2021, $118 million of these receivables were sold without recourse, with a financial cost of less than $1 million, as compared to $95 million receivables sold without recourse in the year-ago period, with a financial cost of less than $1 million.

The major portion of other non-current assets to which the expected credit loss model applies are long-term State receivables. Due to the existing history of zero-default on receivables originated by governments, the expected credit losses are assumed to be negligible as at October 2, 2021, and December 31, 2020. Other non-current assets presented in the table above on the line "Deposits and other non-current assets" are composed of individually insignificant amounts not deemed to have exposure of default. Consequently, no significant loss allowance was reported on other non-current assets at reporting date.

22. Financial Debt

Financial debt consisted of the following:

On July 3, 2017, the Company issued a $1.5 billion principal amount of dual tranche senior unsecured convertible bonds (Tranche A and Tranche B for $750 million each tranche), due 2022 and 2024, respectively. Tranche A bonds were issued at 101.265% as zero-coupon bonds, while Tranche B bonds were issued at par and bear a 0.25% per annum nominal interest, payable semi-annually. The conversion price was $20.54, equivalent to a 37.5%

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premium on both tranches, which corresponded to 9,737 equivalent shares per each $200,000 bond par value. The bonds were convertible by the bondholders or were callable by the issuer upon certain conditions, on a net-share settlement basis, except if the issuer elected a full-cash or full-share conversion as an alternative settlement. The net proceeds from the bond offering were $1,502 million, after deducting issuance costs payable by the Company. Proceeds were allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement. The fair value of the liability component at initial recognition totaled $1,266 million before allocation of issuance costs and was estimated by calculating the present value of cash flows using a discount rate of 2.70% and 3.28% (including 0.25% per annum nominal interest), respectively, on each tranche, which were determined to be consistent with the market rates at the time for similar instruments with no conversion rights. An amount of $242 million, net of allocated issuance costs of $1 million, was recorded in equity as the value of the conversion features of the instruments.

The call option available to the Company for the early redemption of Tranche A was exercised in July 2020. As a consequence, bondholders exercised their conversion rights on the full Tranche A. The Company elected to net share settle the bonds and redeemed through cash the $750 million principal amount, settling the residual consideration through the delivery of approximately 11.4 million treasury shares. The net-share settlement was completed as at October 1, 2020.

 

The call option available to the Company for the early redemption of Tranche B was exercised in July 2021. As a consequence, bondholders exercised their conversion rights on the full Tranche B. Each conversion exercised by the bondholders followed the process defined in the original terms and conditions of the convertible bonds, which determined the actual consideration to be transferred to bondholders upon each conversion. Out of the 3,750 bonds composing Tranche B, the Company elected to settle 1,238 bonds on a net-share basis for a total consideration of $479 million, through the payment of the $248 million nominal value in cash and the delivery of approximately 5.8 million treasury shares. The remaining 2,512 bonds were settled on a full cash basis for a total consideration of $1,015 million. The settlement was fully completed during the third quarter of 2021. The Company allocated the total consideration transferred between debt and equity by measuring at fair value the liability component of Tranche B prior to settlement, then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement and consisted in calculating the present value of cash flows using an average estimated discount rate of 1.1%, which fairly approximated current market rates for similar bonds that have no conversion rights. The fair value of the liability component as measured prior to extinguishment was $689 million for the full Tranche B, which generated a loss amounting to $44 million, in addition to $1 million write-off of unamortized debt issuance costs, reported on the line “Loss on financial instruments, net” in the consolidated statement of income for the period ended October 2, 2021.

On August 4, 2020, the Company issued a $1.5 billion principal amount of dual tranche senior unsecured convertible bonds (Tranche A and Tranche B for $750 million each tranche), due 2025 and 2027, respectively. Tranche A bonds were issued at 105.8% as zero-coupon bonds while Tranche B bonds were issued at 104.5% as zero-coupon bonds. The conversion price is $43.62 for Tranche A equivalent to a 47.5% conversion premium at issuance and $45.10 for Tranche B, equivalent to a 52.5% conversion premium at issuance. These conversion features correspond to an equivalent of 4,585 shares per each Tranche A bond ($200,000 par value) and an equivalent of 4,435 shares per each Tranche B bond ($200,000 par value). The bonds are convertible by the bondholders or are callable by the issuer upon certain conditions, on a net-share settlement basis, except if the issuer elects a full-cash or full-share conversion as an alternative settlement. The net proceeds from the bond offering were $1,567 million, after deducting issuance costs paid by the Company. Proceeds were allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement. The fair value of the liability component at initial recognition totaled $1,362 million before allocation of issuance costs and deferred tax effect and was estimated by calculating the net present value of cash flows using a discount rate of 1.30% and 1.85%, respectively, on each tranche, which were determined to be consistent with the market rates at the time for similar instruments with no conversion rights. An amount of $215 million, before $1 million issuance costs allocated to the equity component, and $30 million deferred tax effect, was recorded in equity as the value of the conversion features of the instruments.

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Unamortized debt discount and issuance costs on the issued convertible debt totaled $119 million as at October 2, 2021. As at October 2, 2021, the Company stock price had not exceeded the conversion price of the senior unsecured convertible bonds issued on August 4, 2020.

In 2020, the Company signed a long-term credit facility with the EIB for a total of €500 million. It was drawn in the first quarter of 2021 for an amount of €335 million and in the third quarter of 2021 for an amount of €165 million, representing $580 million outstanding as at October 2, 2021.

In June 2021, the Company signed a new Facility Agreement with CPD for an amount of €150 million, fully drawn in Euros, of which $174 million was outstanding as at October 2, 2021.

The Company’s long-term debt contained standard conditions but does not impose minimum financial ratios. The Company had unutilized committed medium-term credit facilities with core relationship banks totaling $574 million as at October 2, 2021.

The Company and its subsidiaries have a number of defined benefit pension plans, mainly unfunded, and other long-term employee benefits covering employees in various countries. The defined benefit plans provide pension benefits based on years of service and employee compensation levels. The other long-term employees’ plans provide benefits due during the employees’ period of service after certain seniority levels. The Company uses December 31 as measurement date for its plans. Eligibility is generally determined in accordance with local statutory requirements. For the Italian termination indemnity plan (“TFR”) generated before July 1, 2007, the Company continues to measure the vested benefits to which Italian employees are entitled as if the amounts were immediately due as at October 2, 2021, in compliance with U.S. GAAP guidance on determining vested benefit obligations for defined benefit pension plans.

The components of the net periodic benefit cost included the following:

 

 

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Employer contributions paid and expected to be paid in 2021 are consistent with the amounts disclosed in the consolidated financial statements for the year ended December 31, 2020.

Other long-term liabilities consisted of the following:

Lease liabilities are further described in Note 19. Deferred and contingent consideration related to business acquisitions are further described in Note 15 and Note 29.

The Annual General Meeting of Shareholders (“AGM”) held on May 27, 2021 authorized the distribution of a cash dividend of $0.24 per outstanding share of the Company’s common stock, to be distributed in quarterly installments of $0.06 in each of the second, third and fourth quarters of 2021 and first quarter of 2022. An amount of $54 million corresponding to the first installment and $49 million corresponding to the second installment were paid during the first nine months of 2021. The remaining portion of the second installment and the $0.12 per share cash dividend corresponding to the last two installments totaled $115 million and were reported in the line “Dividends payable to stockholders” in the consolidated balance sheet as at October 2, 2021.

The AGM held on June 17, 2020 authorized the distribution of a cash dividend of $0.168 per outstanding share of the Company’s common stock, to be distributed in quarterly installments of $0.042 in each of the second, third and fourth quarters of 2020 and first quarter of 2021. An amount of $37 million corresponding to the first installment, $38 million corresponding to the second installment and $34 million corresponding to the third installment were paid as at December 31, 2020, of which an amount of $69 million was paid in the first nine months of 2020. The remaining portion of the third installment amounting to $4 million and the fourth installment of $38 million were paid in the first half of 2021.

The AGM held on May 31, 2019 authorized the distribution of a cash dividend of $0.24 per outstanding share of the Company’s common stock, to be distributed in quarterly installments of $0.06 in each of the second, third and fourth quarters of 2019 and first quarter of 2020. An amount of $53 million corresponding to the first installment, $53 million corresponding to the second installment and $48 million corresponding to the third installment were paid as at December 31, 2019. The remaining portion of the third installment amounting to $6 million and the fourth installment of $53 million were paid in the first half of 2020.

The authorized share capital of the Company is Euro 1,810 million consisting of 1,200,000,000 common shares and 540,000,000 preference shares, each with a nominal value of €1.04. As at October 2, 2021, the number of shares of common stock issued was 911,276,920 shares (911,239,420 as at December 31, 2020).

As at October 2, 2021, the number of shares of common stock outstanding was 908,312,878 (905,415,002 as at December 31, 2020).

As at October 2, 2021, the Company owned 2,964,042 shares classified as treasury stock in the consolidated statement of equity compared to 5,824,418 shares as at December 31, 2020.

The treasury shares have been originally designated for allocation under the Company’s share-based remuneration programs. As at October 2, 2021, 67,861,982 of these treasury shares were transferred to employees under the

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Company’s share-based remuneration programs, of which 7,377,384 were transferred in the first nine months of 2021.

During the first half of 2021, the Company completed its share buy-back program announced on November 5, 2018 by the repurchase of approximately 8.3 million shares of its common stock for a total of $313 million.

On July 1, 2021, the Company announced the launch of a share buy-back program of up to $1,040 million to be executed within a 3-year period. The Company intends to carry out the buy-back program, and hold the shares bought back as treasury stock for the purpose of meeting the Company’s obligations in relation to its employee stock award plans and to support the potential settlement of its outstanding convertible debt. During the third quarter of 2021, as part of the share buy-back program announced on July 1, 2021, the Company repurchased approximately 2.1 million shares of its common stock for a total of $87 million.

As described in Note 22, bondholders exercised in the third quarter of 2021 their conversion rights on full Tranche B of the senior unsecured convertible bonds issued on July 3, 2017. Out of the 3,750 bonds composing Tranche B, the Company elected to settle 1,238 bonds on a net-share basis through the delivery of approximately 5.8 million treasury shares.

The Company is subject to possible loss contingencies arising in the ordinary course of business. These include but are not limited to: product liability claims and/or warranty cost on the products of the Company, contractual disputes, indemnification claims, claims for unauthorized use of third-party intellectual property, employee grievances, tax claims beyond assessed uncertain tax positions as well as claims for environmental damages. In determining loss contingencies, the Company considers the likelihood of impairing an asset or the incurrence of a liability at the date of the consolidated financial statements as well as the ability to reasonably estimate the amount of such loss. The Company records a provision for a loss contingency when information available before the consolidated financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the consolidated financial statements and when the amount of loss can be reasonably estimated. The Company regularly re-evaluates claims to determine whether provisions need to be readjusted based on the most current information available to the Company. Changes in these evaluations could result in an adverse material impact on the Company’s results of operations, cash flows or its financial position for the period in which they occur.

The Company has received and may in the future receive communications alleging possible infringements of third party patents or other third party intellectual property rights. Furthermore, the Company from time to time enters into discussions regarding a broad patent cross license arrangement with other industry participants. There is no assurance that such discussions may be brought to a successful conclusion and result in the intended agreement. The Company may become involved in costly litigation brought against the Company regarding patents, mask works, copyrights, trademarks or trade secrets. In the event that the outcome of any litigation would be unfavorable to the Company, the Company may be required to take a license to third party patents and/or other intellectual property rights at economically unfavorable terms and conditions, and possibly pay damages for prior use and/or face an injunction, all of which individually or in the aggregate could have a material adverse effect on the Company’s results of operations, cash flows, financial position and/or ability to compete.

The Company has contractual commitments to various customers which could require the Company to incur costs to repair or replace defective products it supplies to these customers. The duration of these contractual commitments varies and, in certain cases, is indefinite. The Company is otherwise also involved in various lawsuits, claims, inquiries, inspections, investigations and/or proceedings incidental to its business and operations. Such matters, even if not meritorious, could result in the expenditure of significant financial or managerial resources. Any of the foregoing could have a material adverse effect on the Company’s results of operations, cash flows or its financial position.

The Company regularly evaluates claims and legal proceedings together with their related probable losses to determine whether they need to be adjusted based on the current information available to the Company. There can be no assurance that its recorded reserves will be sufficient to cover the extent of its potential liabilities. Legal costs associated with claims are expensed as incurred. In the event of litigation which is adversely determined with respect to the Company’s interests, or in the event the Company needs to change its evaluation of a potential third-party claim, based on new evidence or communications, a material adverse effect could impact its operations or financial condition at the time it were to materialize.

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As at October 2, 2021 provisions for estimated probable losses with respect to claims and legal proceedings were not considered material.

The Company is exposed to changes in financial market conditions in the normal course of business due to its operations in different foreign currencies and its ongoing investing and financing activities. The Company’s activities expose it to a variety of financial risks, such as market risk, credit risk and liquidity risk. The Company uses derivative financial instruments to hedge certain risk exposures. The primary risk managed by using derivative instruments is foreign currency exchange risk.

Foreign currency exchange risk

Currency forward contracts and currency options are entered into to reduce exposure to changes in exchange rates on the denomination of certain assets and liabilities in foreign currencies at the Company's subsidiaries and to manage the foreign exchange risk associated with certain forecasted transactions.

Derivative Instruments Not Designated as a Hedge

The Company conducts its business on a global basis in various major international currencies. As a result, the Company is exposed to adverse movements in foreign currency exchange rates, primarily with respect to the Euro. Foreign exchange risk mainly arises from future commercial transactions and recognized assets and liabilities in the Company’s subsidiaries. Management has set up a policy to require the Company’s subsidiaries to hedge their entire foreign exchange risk exposure with the Company through financial instruments transacted or overseen by Corporate Treasury. To manage their foreign exchange risk arising from foreign-currency-denominated assets and liabilities, the Company and its subsidiaries use forward contracts and purchased currency options. Foreign exchange risk arises from exchange rate fluctuations on assets and liabilities denominated in a currency that is not the entity’s functional currency. These instruments do not qualify as hedging instruments for accounting purposes and are marked-to-market at each period-end with the associated changes in fair value recognized in “Other income and expenses, net” in the consolidated statements of income.

Cash Flow Hedge

To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company hedges through the use of currency forward contracts and currency options, including collars, certain Euro-denominated forecasted intercompany transactions that cover at reporting date a large part of its R&D, SG&A expenses as well as a portion of its front-end manufacturing costs of semi-finished goods within cost of sales. The Company also hedges through the use of currency forward contracts certain forecasted manufacturing transactions denominated in Singapore dollars.

These derivative instruments are designated as and qualify for cash flow hedge. They are reflected at fair value in the consolidated balance sheets. The criteria for designating a derivative as a hedge include the instrument’s effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction, which enables the Company to conclude, based on the fact that the critical terms of the hedging instruments match the terms of the hedged transactions, that changes in cash flows attributable to the risk being hedged are expected to be completely offset by the hedging derivatives. Currency forward contracts and currency options, including collars, used as hedges are highly effective at reducing the Euro/U.S. dollar and the Singapore dollar/U.S. dollar currency fluctuation risk and are designated as a hedge at the inception of the contract and on an ongoing basis over the duration of the hedge relationship. Effectiveness on transactions hedged through purchased currency options and collars is measured on the full fair value of the instrument, including the time value of the options. Ineffectiveness appears if the hedge relationship is not perfectly effective or if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change on the expected cash flows on the hedged transactions. The whole change in fair value recorded on the hedging instrument is reported as a component of “Accumulated other comprehensive income (loss)” in the consolidated statements of equity and is reclassified into earnings in the same period in which the hedged transaction affects earnings, and within the same consolidated statement of income line item as the impact of the hedged transaction.

The principles regulating the hedging strategy for derivatives designated as cash flow hedge are established as follows: (i) for R&D and Corporate costs, up to 80% of the total forecasted transactions; (ii) for manufacturing

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costs, up to 70% of the total forecasted transactions. The maximum length of time over which the Company could hedge its exposure to the variability of cash flows for forecasted transactions is 24 months.

As at October 2, 2021, the Company had the following outstanding derivative instruments that were entered into to hedge Euro-denominated and Singapore dollar-denominated forecasted transactions:

 

 

Cash flow and fair value interest rate risk

The Company’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company analyzes its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. The Company invests primarily on a short-term basis and as such the Company’s liquidity is invested in floating interest rate instruments. As a consequence, the Company is exposed to interest rate risk due to potential mismatch between the return on its short-term floating interest rate investments and the portion of its long-term debt issued at fixed rate.

Credit risk

The expected credit loss and impairment methodology applied on each category of financial assets is further described in each respective note. While cash and cash equivalents are also subject to the expected credit loss model, the identified expected credit loss is deemed to be immaterial. The maximum exposure for all financial assets is their carrying amount.

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract leading to a financial loss. Credit risk typically arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortized cost, the counterparty of derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure to customers, including outstanding receivables.

The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. Credit risk is managed at the level of the Group. The Company selects banks and/or financial institutions that operate with the Company based on the criteria of long-term rating from at least two major Rating Agencies and keeping a maximum outstanding amount per instrument with each bank not to exceed 20% of the total. For derivative financial instruments, management has established limits so that, at any time, the fair value of contracts outstanding is not concentrated with any individual counterparty.

The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. If certain customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, considering its financial position, past experience and other factors. Individual risk limits are set based on internal and external ratings in accordance with limits set by management. The utilization of credit limits is regularly monitored. Sales to customers are primarily settled in cash, which mitigates credit risk. There is no major concentration of credit risk, whether through exposure to individual customers, specific industry sectors or regions. Any remaining concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and their dispersion across many geographic areas.

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The Company’s investments in instruments carried at amortized cost primarily include receivables towards government bodies. As such, they are investments with immaterial credit loss. Any remaining receivable is of low credit risk and is individually not significant. The credit ratings of the investments are monitored for credit deterioration.

Other market risk

For a complete description of exposure to market risks, these consolidated interim financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 20-F for the year ended December 31, 2020.

Information on fair value of derivative instruments and their location in the consolidated balance sheets as at October 2, 2021 and December 31, 2020 is presented in the tables below:

The Company entered into currency collars as combinations of two options, which are reported, for accounting purposes, on a net basis. The fair value of these collars represented liabilities for a net amount of $9 million (composed of $1 million asset net of a $10 million liability) as at October 2, 2021. In addition, the Company entered into other derivative instruments, primarily forward contracts, which are governed by standard International Swaps and Derivatives Association (“ISDA”) agreements and are compliant with Protocols of the

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European Market Infrastructure Regulation (“EMIR”), which are not offset in the consolidated balance sheets, and represented total assets of $1 million and total liabilities of $29 million as at October 2, 2021.

 

The effect on the consolidated statements of income for the three and nine months ended October 2, 2021 and September 26, 2020, respectively, and on the “Accumulated other comprehensive income (loss)” (“AOCI”) as reported in the consolidated statements of equity as at October 2, 2021 and December 31, 2020 of derivative instruments designated as cash flow hedge is presented in the table below:

 

 

A total $38 million loss deferred as at October 2, 2021 in AOCI is expected to be reclassified to earnings within the next twelve months.

No amount was excluded from effectiveness measurement on foreign exchange forward contracts and currency collars. No ineffective portion of the cash flow hedge relationships was recorded on the hedge transactions that were settled in the first nine months of 2021 and 2020. No ineffectiveness is to be reported on hedge transactions outstanding as at October 2, 2021.

The effect on the consolidated statements of income for the three and nine months ended October 2, 2021 and September 26, 2020 of derivative instruments not designated as a hedge is presented in the table below:

 

 

The Company did not enter into any derivative instrument containing credit-risk-related contingent features.

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The table below details financial assets (liabilities) measured at fair value on a recurring basis as at October 2, 2021:

 

The table below details financial assets (liabilities) measured at fair value on a recurring basis as at December 31, 2020:

 

For liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2021 and October 2, 2021 is presented as follows:

 

 

Contingent consideration reported as liabilities on the consolidated balance sheets as at October 2, 2021 and December 31, 2020 is based on the probability that the milestones defining the variable components of the consideration will be achieved. Contingent consideration is composed of $16 million reported in the line “Other payables and accrued liabilities” and $103 million reported in the line “Other long-term liabilities” in the consolidated balance sheet as at October 2, 2021.

 

For liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2020 and September 26, 2020 is presented as follows:

 

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No asset (liability) was measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3) as at October 2, 2021 and September 26, 2020, respectively.

 

In July 2021, the Company exercised its call option for the early redemption of Tranche B of the senior unsecured convertible bonds issued on July 3, 2017. As a consequence, bondholders exercised their conversion rights on Tranche B. The Company allocated the total consideration transferred between debt and equity by measuring at fair value the liability component of Tranche B prior to settlement, then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement and consisted in calculating the present value of cash flows using an average estimated discount rate of 1.1%, which approximated current market rates for similar bonds that have no conversion rights.

 

Further details on the senior unsecured convertible bonds issued by the Company are provided in Note 22.

The following table includes additional fair value information on other financial assets and liabilities as at October 2, 2021 and December 31, 2020:

 

F-29

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The Company did not report securities that were in an unrealized loss position as at October 2, 2021 and December 31, 2020.

 

The methodologies used to estimate fair value are as follows:

 

The Company designs, develops, manufactures and markets 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, the Company participates in the manufacturing value chain of smartcard products, which includes the production and sale of both silicon chips and smartcards.

The principal activities – separated by reportable segments – from which the Company generates its revenues are described in Note 31.

Other revenues consist of license revenue, service revenue related to transferring licenses, patent royalty income, sale of scrap materials and manufacturing by-products.

While the majority of the Company’s sales agreements contain standard terms and conditions, the Company may, from time to time, enter into agreements that contain multiple performance obligations or terms and conditions. Those agreements concern principally the revenues from services, where the performance obligation is satisfied over time. The objective when allocating the transaction price is to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.

The Company recognizes revenue from products sold to a customer, including distributors, when it satisfies a performance obligation at a point in time by transferring control over a product to the customer. This usually occurs at the time of shipment. The performance obligations linked to the sale of goods contracts have the original expected length of less than one year. The transaction price is determined based on the contract terms, adjusted for price protection if applicable. The revenues from services are usually linked to performance obligations transferred over time and are recognized in line with the contract terms.

The payment terms typically range between 30 and 90 days.

F-30

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The Company’s consolidated net revenues disaggregated by product group are presented in Note 31. The following tables present the Company’s consolidated net revenues disaggregated by geographical region of shipment, nature and market channel:

 

 

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.

The Company designs, develops, manufactures and markets a broad range of products, including discrete and standard commodity components, ASICs, full custom devices and semi-custom devices and ASSPs for analog, digital, and mixed-signal applications. In addition, the Company participates in the manufacturing value chain of smartcard products, which includes the production and sale of both silicon chips and smartcards.

The Company’s reportable segments are as follows:

For the computation of the segments’ internal financial measurements, the Company uses 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 the Company’s internal policies, certain costs are not allocated to the segments, but reported in “Others”. Those comprise unused capacity charges, including reduced manufacturing activity due to COVID-19, impairment, restructuring charges and other related closure costs, management reorganization expenses, phase-out and start-up costs of certain manufacturing facilities, and other unallocated expenses such as: strategic or special R&D programs, certain corporate-level operating expenses, patent claims

F-31

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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 the Company’s 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.

The following tables present the Company’s consolidated net revenues and consolidated operating income by reportable segment.

Net revenues by reportable segment:

 

Operating income by reportable segment:

 

Reconciliation of operating income by product segment to total consolidated operating income:

 

 

 

F-32

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EXHIBIT INDEX

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Exhibit 12.1

VOLUNTARY CERTIFICATION

I, Jean-Marc Chery, certify that:  

 

 

 

Exhibit 12.2

VOLUNTARY CERTIFICATION

I, Lorenzo Grandi, certify that:  

 

 

 

 

Exhibit 13.1

VOLUNTARY CERTIFICATION OF JEAN-MARC CHERY, PRESIDENT AND CHIEF EXECUTIVE OFFICER AND SOLE MEMBER OF THE MANAGING BOARD OF STMICROELECTRONICS N.V. AND LORENZO GRANDI, CHIEF FINANCIAL OFFICER AND PRESIDENT, FINANCE, INFRASTRUCTURE AND SERVICES OF STMICROELECTRONICS N.V., PURSUANT TO SECTION 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002

In connection with the Report on Form 6‑K of STMicroelectronics N.V. (the “Company”) for the period ending October 2, 2021, as submitted to the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify that to the best of our knowledge: