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 1, 2017, its second quarter ended on July 1, its third quarter will end on September 30 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, 2016. 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 shares and per-share amounts.
The accompanying Unaudited Interim Consolidated Financial Statements do not include certain footnotes and financial presentation normally required on an annual basis under U.S. GAAP. Therefore, these 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, 2016, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 3, 2017.
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:
|
·
|
sales returns and allowances,
|
|
·
|
inventory obsolescence reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory,
|
|
·
|
recognition and measurement of loss contingencies,
|
|
·
|
valuation at fair value of assets acquired or sold, including intangibles, goodwill, investments and tangible assets,
|
|
·
|
annual and trigger-based impairment review of goodwill and intangible assets, as well as the assessment, in each reporting period, of events, which could trigger impairment testing on long-lived assets,
|
|
·
|
assessment of other-than-temporary impairment charges on financial assets, including equity-method investments,
|
|
·
|
recognition and measurement of restructuring charges and other related exit costs,
|
|
·
|
assumptions used in assessing the number of awards expected to vest on stock-based compensation plans,
|
|
·
|
assumptions used in calculating pension obligations and other long-term employee benefits, and
|
|
·
|
determination of the income tax expense estimated on the basis of the projected tax amount for the full year, including deferred income tax assets, valuation allowance and provisions for uncertain tax positions and claims.
|
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. While the Company regularly evaluates its estimates and assumptions, the actual results experienced by the Company could differ materially and adversely from those estimates.
|
5.
|
Recent Accounting Pronouncements
|
Accounting pronouncements effective in 2017
The Company adopted on January 1, 2017 the simplified presentation guidance on the balance sheet classification of deferred taxes. The new guidance requires that deferred tax assets and liabilities be classified as non-current elements in a classified balance sheet. Former guidance requires an entity to separate deferred income tax assets and liabilities into current and non-current amounts. The new guidance does not change current practice for offsetting and presenting as a single amount deferred tax assets and liabilities of a tax-paying component of an entity. The Company adopted the new guidance retrospectively and changed the presentation of deferred tax assets and liabilities accordingly for the consolidated balance sheet as at December 31, 2016. Upon adoption, the Company reclassified $95 million from the line “Deferred tax assets” of total current assets and $4 million from the line “Long-term deferred tax liabilities” to the line “Non-current deferred tax assets” on the consolidated balance sheet as at December 31, 2016.
The Company adopted on January 1, 2017 the new guidance on employee share-based payment accounting. The guidance includes multiple provisions intended to simplify accounting, which impacts income tax accounting, earnings per share, estimates relating to forfeitures and the statement of cash flows. The Company has elected to continue to use assumptions to estimate forfeitures. The recognition of all excess tax benefits and tax deficiencies as income tax expense, the simplification of the calculation of diluted EPS and the presentation of excess tax benefits as operating activities were applied prospectively and had no significant impact on the Company’s financial statements. The elimination of the requirement that excess tax benefits be realized before they can be recognized and the presentation of employee taxes paid as financing activities were applied retrospectively, with no significant impact on the Company’s consolidated financial statements. Upon adoption, the Company reclassified $1 million cash outflows from the line “Other assets and liabilities, net” of Net cash from operating activities to the line “Payment for withholding tax on vested shares” of Net cash used in financing activities in the consolidated statement of cash flows for the six months ended July 2, 2016.
The Company adopted on January 1, 2017 the simplified guidance on subsequent measurement of inventory. The new guidance requires inventory to be measured at the lower of cost and net realizable value, instead of at the lower of cost and market in previous guidance. Net realizable value, which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation, was one of the three measures to be calculated in previous guidance to be compared to cost. The new guidance changes neither the calculation of net realizable value nor the way inventory cost is measured. The simplified guidance was applied prospectively and has had no impact on the Company’s subsequent measurement of inventory.
Accounting pronouncements that are not yet effective and have not been adopted by the Company
In May 2014, the FASB issued the converged guidance on revenue from contracts with customers, updated in 2016 with finalized amendments addressing implementation issues. The new guidance sets forth a single revenue accounting model, which calls for more professional judgment and includes expanded disclosures. Revenue recognition depicts the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled for these goods and services. Revenue is recognized when (or as) control of the goods and services is transferred to the customer. Even if the revenue recognition guidance is not a five-step model, the following steps can be identified in order to apply the new revenue accounting model: (i) identification of the contracts with customers; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to performance obligations; and (v) revenue recognition for each performance obligation. The new guidance will be effective for the Company’s first interim period within the annual reporting period beginning on January 1, 2018, as the Company did not elect on January 1, 2017 early adoption. The areas in which the new revenue recognition may create significant changes are: (i) changes in the timing of revenue recognition; (ii) inclusion of variable consideration in the transaction price; and (iii) allocation of the transaction price based on relative standalone selling prices. The Company is currently in the process of assessing the anticipated impact of the amended standard on existing revenue streams, contracts, transactions, and business practices. Based on procedures performed to date, the Company generally anticipates substantially similar performance conditions under the amended guidance, as such no material impact on the Company’s revenue recognition practices is expected. The guidance provides companies with alternative methods of adoption and the Company is in the process of determining the method of adoption, which depends in part upon the completion of the evaluation of remaining revenue arrangements.
In January 2016, the FASB issued new guidance on the recognition and measurement of financial instruments. Changes to current practice primarily affect the accounting for investments in equity securities, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance relating to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. All equity investments in unconsolidated entities other than those accounted for using the equity method of accounting will generally be measured at fair value through earnings (the available-for-sale classification disappears for these financial assets). For equity investments without readily determinable fair values, the cost method is also eliminated. Additionally, when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The new guidance is effective for public companies for fiscal years beginning December 15, 2017, including interim periods within those years. The Company will adopt the new guidance when effective and does not expect any impact of the new guidance on financial liabilities since the fair value option has not been elected on any existing debt. Concerning financial assets, the new guidance on equity investments without readily determinable fair values will impact the cost-method investment portfolio of the Company, which amounts to $12 million as at July 1, 2017. The Company is currently assessing whether it will elect the measurement alternative, permitted on an investment by investment basis, consisting in reporting these investments at cost, less impairment, adjusted for subsequent observable price changes.
In February 2016, the FASB issued new guidance on lease accounting. As a lessee, an entity will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. Additionally, when applying the new guidance, lessees will have to identify leases embedded in a contract. For income statement purposes, the new guidance is still based on a dual model, requiring leases to be classified as either operating or finance leases. Classification criteria are largely similar to current lease accounting guidance, except that the new guidance does not contain explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition guidance. Existing sale-leaseback guidance has been replaced with a new model applicable to both lessees and lessors. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those years. The guidance is required to be applied with a modified retrospective approach and requires application at the beginning of the earliest comparative period presented. The Company will adopt the new guidance when effective and is currently assessing its impact on its consolidated financial statements.
In June 2016, the FASB issued new guidance on measuring credit losses for financial instruments. The objective of the new guidance is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, primarily financial assets measured at amortized cost and available-for-sale debt securities, and other commitments to extend credit held by a reporting entity at each reporting date. The amended guidance replaces the incurred loss impairment methodology applied in current practice with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit losses estimates. The new guidance is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company will adopt the new guidance when effective and is currently assessing its impact on its consolidated financial statements.
In August and November 2016, the FASB issued amended guidance on clarifying the cash flow classification of certain topics in order to avoid diversity in practice. The issues addressed in August 2016 are debt prepayment or debt extinguishment costs (Issue 1); settlement of zero-coupon debt instruments (Issue 2); contingent consideration payments made after a business combination (Issue 3); proceeds from the settlement of insurance claims (Issue 4); proceeds from settlement of corporate-owned life insurance (COLI) policies, including bank-owned life insurance (BOLI) policies (Issue 5); distributions received from equity method investments (Issue 6); beneficial interests in securitization transactions (Issue 7) and separately identifiable cash flows and application of the predominance principle (Issue 8). The new guidance issued in November 2016 addressed the presentation of restricted cash in the cash flow statement, by requiring that the financial statement explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents, with a mandatory reconciliation of this total to amounts on the balance sheet and disclosure about the nature of the restrictions. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. The Company will adopt the new guidance when effective. The Company is currently assessing the impact those amendments may have on its consolidated statement of cash flows. Those impacts are primarily related to Issues 2, 3 and 6 and restricted cash.
In January 2017, and after issuing in October 2016 a narrow-scope amendment to the consolidation guidance, the FASB revised the definition of a business. In the amended guidance, an acquisition, to be considered as a business, will have to include an input and a substantive process that together significantly contribute to the ability to create outputs. Businesses without outputs will need to have an organized workforce to qualify as a business. Additionally, the amended guidance will narrow the term “outputs”. The amended guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company will adopt the new guidance when effective.
In January 2017, the FASB simplified the accounting for goodwill impairment by removing step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The amended guidance is effective for public companies for annual and interim periods in fiscal years beginning after December 15, 2019, with early application permitted for goodwill impairment tests with measurement dates after January 1, 2017.
In March 2017, the FASB issued new guidance about the presentation of net periodic benefit cost in the consolidated statement of income. The service cost component of net periodic benefit cost will be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. The other components of the net periodic benefit cost will be presented separately from the line items that include the service cost and outside of any subtotal of operating income. These components will not be eligible for capitalization in assets. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, with early application permitted only starting January 1, 2017. The new guidance must be applied retrospectively, except for the limitation on the capitalization in assets, which will be applied prospectively. The Company has not elected early adoption, will adopt the new guidance when effective and is currently assessing its impact on its consolidated financial statements.
|
6.
|
Other Income and Expenses, Net
|
Other income and expenses, net consisted of the following:
|
Three months ended
|
Six months ended
|
|
July 1, 2017
|
July 2, 2016
|
July 1, 2017
|
July 2, 2016
|
Research and development funding
|
16
|
26
|
32
|
51
|
Phase-out and start-up costs
|
-
|
-
|
-
|
(3)
|
Exchange gain, net
|
1
|
2
|
2
|
4
|
Patent costs, net of reversal of unused provisions
|
(3)
|
(1)
|
(3)
|
(2)
|
Gain on sale of long-lived assets, net
|
1
|
-
|
2
|
1
|
Other, net
|
-
|
1
|
(1)
|
4
|
Total
|
15
|
28
|
32
|
55
|
The Company receives significant public funding from governmental agencies in several jurisdictions. Public funding for research and development 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.
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. 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.
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 trading derivative instruments which are not designated as hedge and which have a cash flow effect related to operating transactions, as described in Note 25.
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.
|
7.
|
Impairment, Restructuring Charges and Other Related Closure Costs
|
Impairment, restructuring charges and other related closure costs incurred in the second quarter and first half of 2017 are summarized as follows:
|
Three months ended on July 1, 2017
|
|
Impairment
|
Restructuring
charges
|
Other related
closure costs
|
Total impairment,
restructuring charges
and other related
closure costs
|
Set-top Box restructuring plan
|
-
|
(3)
|
-
|
(3)
|
Other restructuring initiatives
|
-
|
(3)
|
-
|
(3)
|
Total
|
-
|
(6)
|
-
|
(6)
|
|
Six months ended on July 1, 2017
|
|
Impairment
|
Restructuring
charges
|
Other related
closure costs
|
Total impairment,
restructuring charges
and other related
closure costs
|
Set-top Box restructuring plan
|
-
|
(11)
|
-
|
(11)
|
EPS restructuring plan
|
-
|
5
|
-
|
5
|
Other restructuring initiatives
|
-
|
(5)
|
-
|
(5)
|
Total
|
-
|
(11)
|
-
|
(11)
|
Impairment, restructuring charges and other related closure costs incurred in the second quarter and first half of 2016 are summarized as follows:
|
Three months ended on July 2, 2016
|
|
Impairment
|
Restructuring
charges
|
Other related
closure costs
|
Total impairment,
restructuring charges
and other related
closure costs
|
Set-top Box restructuring plan
|
-
|
(6)
|
(3)
|
(9)
|
Long-lived asset impairment charge
|
(3)
|
-
|
-
|
(3)
|
Total
|
(3)
|
(6)
|
(3)
|
(12)
|
|
Six months ended on July 2, 2016
|
|
Impairment
|
Restructuring
charges
|
Other related
closure costs
|
Total impairment,
restructuring charges
and other related
closure costs
|
Set-top Box restructuring plan
|
-
|
(27)
|
(8)
|
(35)
|
EPS restructuring plan
|
-
|
(1)
|
-
|
(1)
|
Long-lived asset impairment charge
|
(4)
|
-
|
-
|
(4)
|
Total
|
(4)
|
(28)
|
(8)
|
(40)
|
Impairment charges
No significant impairment charges were incurred in the first half of 2017.
During the first half of 2016, the Company impaired $3 million of acquired technologies for which it was determined that they had no alternative future use.
Restructuring charges and other related closure costs
Provisions for restructuring charges and other related closure costs as at July 1, 2017 are summarized as follows:
|
Set-top Box
restructuring
plan
|
$600-650
million net
opex plan
|
EPS
restructuring
plan
|
Other
restructuring
initiatives
|
Total
|
Provision as at December 31, 2016
|
37
|
5
|
8
|
4
|
54
|
Charges incurred in 2017
|
13
|
-
|
-
|
5
|
18
|
Adjustments for unused provisions
|
(2)
|
-
|
(5)
|
-
|
(7)
|
Amounts paid
|
(18)
|
-
|
-
|
(5)
|
(23)
|
Currency translation effect
|
3
|
-
|
-
|
-
|
3
|
Provision as at July 1, 2017
|
33
|
5
|
3
|
4
|
45
|
|
·
|
$600-650 million net opex plan
|
In 2013, the Company committed to restructuring actions to reduce operating expenses, net of R&D grants to the level of $600 to $650 million on a quarterly basis.
In 2014, the Company committed to a plan affecting around 450 employees worldwide and targeting savings in the former Embedded Processing Solutions business. The Company recorded in the first half of 2017 a positive adjustment totaling $5 million for unused provisions.
|
·
|
Set-top Box restructuring plan
|
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 that may affect approximately 1,400 employees worldwide, which includes about 430 in France through a voluntary departure plan, about 670 in Asia and about 120 in the United States of America. The Company recorded in the first half of 2017 $11 million of restructuring charges for this plan relating to employee termination benefits, primarily for voluntary terminations in France, including a positive adjustment totaling $2 million for unused provisions.
|
·
|
Other restructuring initiatives
|
In 2017, the Company announced a restructuring plan affecting approximately 300 employees through voluntary leaves in one of its back-end operations. The Company recorded in the first half of 2017 $5 million of restructuring charges for this plan.
Total impairment, restructuring charges and other related closure costs
The $600-650 million net opex plan resulted in a total pre-tax charge of $115 million. The plan was substantially completed in 2014.
The EPS restructuring plan resulted in a total pre-tax charge of $62 million. The plan was substantially completed in 2015.
The Set-top Box restructuring plan is expected to result in pre-tax charges of approximately $170 million, of which $94 million were incurred as of July 1, 2017. In certain locations, the restructuring actions may last until 2018.
The total actual costs that the Company will incur may differ from these estimates based on the timing required to complete the restructuring plan, the number of employees involved, the final agreed termination benefits and the costs associated with the transfer of equipment, products and processes.
Interest expense, net consisted of the following:
|
Three months ended
|
Six months ended
|
|
July 1, 2017
|
July 2, 2016
|
July 1, 2017
|
July 2, 2016
|
Income
|
6
|
4
|
11
|
9
|
Expense
|
(10)
|
(10)
|
(20)
|
(20)
|
Total
|
(4)
|
(6)
|
(9)
|
(11)
|
Interest income is related to the cash and cash equivalents held by the Company. Interest expense recorded in the first half of 2017 included a $12 million charge on the senior unsecured convertible bonds issued in July 2014, of which $10 million was a non-cash interest expense resulting from the accretion of the discount on the liability component. Net interest includes also charges related to the banking fees and the sale of trade and other receivables.
Income tax expense is as follows:
|
Three months ended
|
Six months ended
|
|
July 1, 2017
|
July 2, 2016
|
July 1, 2017
|
July 2, 2016
|
Income tax benefit (expense)
|
(19)
|
(6)
|
(34)
|
(8)
|
In the second quarter and first half of 2016, income tax expense was estimated applying the discrete method as opposed to the estimated annual effective tax rate method due to significant uncertainty in estimating the annual effective tax rate. In the second quarter and first half of 2017, the annual estimated effective tax rate method was applied, as management believes it provides a better estimate of the expected 2017 income tax expense on an interim basis. During the second quarter and first half of 2017, we registered an income tax expense of $19 million and $34 million, respectively, reflecting the estimated annual effective tax rate in each of our jurisdictions, applied to the first half of 2017 consolidated result before taxes. In addition, our income tax included the estimated impact of provisions related to potential tax positions which have been considered uncertain.
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 determining whether a benefit may be recognized; the assessment is based on a sustainability threshold. If the sustainability is lower than 50%, a full provision should be accounted for. In case of a sustainability threshold in step one higher than 50%, the Company must perform a second step in order to measure the amount of recognizable tax benefit, net of any liability for tax uncertainties. 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 authority. All unrecognized tax benefits affect the effective tax rate, if recognized
.
Basic net earnings per share (“EPS”) is computed based on net income (loss) attributable to parent company stockholders using the weighted-average number of common shares outstanding during the reported 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 the exercise of stock options outstanding, unvested shares granted and the conversion of convertible debt.
|
Three months ended
|
Six months ended
|
|
July 1, 2017
|
July 2, 2016
|
July 1, 2017
|
July 2, 2016
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to parent company
|
151
|
23
|
258
|
(18)
|
Weighted average shares outstanding
|
884,838,611
|
879,826,115
|
884,165,669
|
879,187,101
|
|
|
|
|
|
Basic EPS
|
0.17
|
0.03
|
0.29
|
(0.02)
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to parent company adjusted
|
151
|
23
|
258
|
(18)
|
Weighted average shares outstanding
|
884,838,611
|
879,826,115
|
884,165,669
|
879,187,101
|
Dilutive effect of stock awards
|
7,698,596
|
5,640,401
|
7,978,681
|
-
|
Dilutive effect of convertible debt
|
18,576,528
|
-
|
14,402,463
|
-
|
Number of shares used in calculating diluted earnings per share
|
911,113,735
|
885,466,516
|
906,546,813
|
879,187,101
|
|
|
|
|
|
Diluted EPS
|
0.17
|
0.03
|
0.28
|
(0.02)
|
For the first half of 2016, there was no dilutive effect of the convertible bonds issued on July 3, 2014 since the conversion was out-of-the-money. Terms and conditions are described in Note 20.
For the first half of 2016, there was no dilutive effect of 5,499,209 dilutive potential shares, relating to Company’s stock awards plans.
|
11.
|
Accumulated Other Comprehensive Income (“AOCI”)
|
The table below details the changes in AOCI attributable to the company’s stockholders by component, net of tax, for the six months ended July 1, 2017:
|
Gains (Losses)
on Cash Flow
Hedges
|
Gains (Losses) on
Available-For-Sale
Securities
|
Defined
Benefit
Pension Plan
Items
|
Foreign Currency
Translation
Adjustments
(“CTA”)
|
Total
|
December 31, 2016
|
(47)
|
2
|
(170)
|
544
|
329
|
Cumulative tax impact
|
-
|
-
|
42
|
-
|
42
|
December 31, 2016, net of tax
|
(47)
|
2
|
(128)
|
544
|
371
|
OCI before reclassifications
|
77
|
-
|
-
|
136
|
213
|
Amounts reclassified from AOCI
|
20
|
-
|
5
|
-
|
25
|
OCI for the six months ended July 1, 2017
|
97
|
-
|
5
|
136
|
238
|
Cumulative tax impact
|
-
|
-
|
(1)
|
-
|
(1)
|
OCI for the six months ended July 1, 2017, net of tax
|
97
|
-
|
4
|
136
|
237
|
July 1, 2017
|
50
|
2
|
(165)
|
680
|
567
|
Cumulative tax impact
|
-
|
-
|
41
|
-
|
41
|
July 1, 2017, net of tax
|
50
|
2
|
(124)
|
680
|
608
|
Items reclassified out of Accumulated Other Comprehensive Income for the six months period ended July 1, 2017 are listed in the table below:
Details about AOCI components
|
Amounts reclassified from
AOCI
|
Affected line item in the statement
where net income (loss) is presented
|
Gains (losses) on cash flow hedges
|
|
|
Foreign exchange derivative contracts
|
(14)
|
Cost of sales
|
Foreign exchange derivative contracts
|
(1)
|
Selling, general and administrative
|
Foreign exchange derivative contracts
|
(5)
|
Research and development
|
|
-
|
Income tax benefit (expense)
|
|
(20)
|
Net of tax
|
Defined benefit pension plan items
|
|
|
Amortization of actuarial gains (losses)
|
(2)
|
Research and development
(1)
|
Amortization of actuarial gains (losses)
|
(3)
|
Selling, general and administrative
(1)
|
|
1
|
Income tax benefit (expense)
|
|
(4)
|
Net of tax
|
Total reclassifications for the period attributable to the Company’s stockholders
|
(24)
|
Net of tax
|
|
(1)
|
These items are included in the computation of net periodic pension cost, as described in Note 21.
|
|
12.
|
Marketable Securities
|
Changes in the value of marketable securities, as reported in current assets on the consolidated balance sheets as at July 1, 2017 and December 31, 2016 are detailed in the table below:
|
December 31, 2016
|
Purchase
|
Sale /
Settlement
|
Change in
fair value
included in
OCI* for
available-for-sale
marketable
securities
|
Change in
fair value
recognized
in earnings
|
Foreign
exchange
result
through OCI*
|
July 1, 2017
|
U.S. Treasury Bonds
|
335
|
-
|
-
|
-
|
-
|
-
|
335
|
Total
|
335
|
-
|
-
|
-
|
-
|
-
|
335
|
*Other Comprehensive Income
As at July 1, 2017, the Company held $335 million in U.S. Treasury bonds. The bonds had an average rating of Aaa/AA+/AAA from Moody’s, S&P and Fitch, respectively, with a weighted average maturity of 2.8 years. The debt securities were reported as current assets on the line “Marketable Securities” on the consolidated balance sheet as at July 1, 2017, since they represented investments of funds available for current operations. The bonds were classified as available-for-sale and recorded at fair value as at July 1, 2017. This fair value measurement corresponds to a Level 1 fair value hierarchy measurement.
|
13.
|
Trade Accounts Receivable, Net
|
Trade accounts receivable, net consisted of the following:
|
As at July 1, 2017
|
As at December 31, 2016
|
Trade accounts receivable
|
1,025
|
951
|
Allowance for doubtful accounts
|
(13)
|
(12)
|
Total
|
1,012
|
939
|
The Company enters from time to time into factoring transactions to accelerate the realization in cash of some trade accounts receivable. As at July 1, 2017 and December 31, 2016, there were no trade accounts receivable sold without recourse.
Inventories are stated at the lower of cost and net realizable value. Cost is based on the weighted average cost by adjusting standard cost to approximate actual manufacturing costs on a quarterly basis; the cost is therefore dependent on the Company’s manufacturing performance. In the case of underutilization of manufacturing facilities, the costs associated with the unused capacity are not included in the valuation of inventories but charged directly to cost of sales.
Reserve for obsolescence is estimated for excess uncommitted inventories based on the previous quarter’s sales, backlog of orders and production plans.
Inventories, net of reserve, consisted of the following:
|
|
|
|
As at July 1, 2017
|
As at December 31, 2016
|
Raw materials
|
96
|
81
|
Work-in-process
|
808
|
756
|
Finished products
|
358
|
336
|
Total
|
1,262
|
1,173
|
Goodwill allocated to reportable segments and changes in the carrying amount of goodwill were as follows:
|
Automotive
and Discrete
Group
(ADG)
|
Microcontrollers
and Digital ICs
Group (MDG)
|
Analog and
MEMS Group
(AMG)
|
Others
|
Total
|
December 31, 2016
|
-
|
114
|
2
|
-
|
116
|
Foreign currency translation
|
-
|
4
|
-
|
-
|
4
|
July 1, 2017
|
-
|
118
|
2
|
-
|
120
|
|
16.
|
Other intangible assets
|
Other intangible assets consisted of the following:
July 1, 2017
|
Gross Cost
|
Accumulated Amortization
|
Net Cost
|
Technologies & licences
|
625
|
(550)
|
75
|
Contractual customer relationships
|
4
|
(4)
|
-
|
Purchased & internally developed software
|
422
|
(366)
|
56
|
Construction in progress
|
54
|
-
|
54
|
Other intangible assets
|
65
|
(65)
|
-
|
Total
|
1,170
|
(985)
|
185
|
December 31, 2016
|
Gross Cost
|
Accumulated Amortization
|
Net Cost
|
Technologies & licences
|
618
|
(534)
|
84
|
Contractual customer relationships
|
4
|
(4)
|
-
|
Purchased & internally developed software
|
407
|
(347)
|
60
|
Construction in progress
|
51
|
-
|
51
|
Other intangible assets
|
65
|
(65)
|
-
|
Total
|
1,145
|
(950)
|
195
|
The line “Construction in progress” in the table above includes internally developed software under construction and software not ready for use.
Amortization expense was $30 million for both the first half of 2017 and 2016.
The estimated amortization expense of the existing intangible assets for each period is expected to be as follows:
Year
|
|
Remainder of 2017
|
38
|
2018
|
61
|
2019
|
44
|
2020
|
25
|
2021
|
11
|
Thereafter
|
6
|
Total
|
185
|
|
17.
|
Property, plant and equipment
|
Property, plant and equipment consisted of the following:
July 1, 2017
|
Gross Cost
|
Accumulated Depreciation
|
Net Cost
|
|
|
|
|
Land
|
77
|
-
|
77
|
Buildings
|
834
|
(449)
|
385
|
Facilities & leasehold improvements
|
2,912
|
(2,651)
|
261
|
Machinery and equipment
|
13,791
|
(12,083)
|
1,708
|
Computer and R&D equipment
|
378
|
(338)
|
40
|
Other tangible assets
|
106
|
(101)
|
5
|
Construction in progress
|
165
|
-
|
165
|
Total
|
18,263
|
(15,622)
|
2,641
|
|
|
|
|
December 31, 2016
|
Gross Cost
|
Accumulated Depreciation
|
Net Cost
|
|
|
|
|
Land
|
73
|
-
|
73
|
Buildings
|
788
|
(412)
|
376
|
Facilities & leasehold improvements
|
2,713
|
(2,474)
|
239
|
Machinery and equipment
|
12,808
|
(11,415)
|
1,393
|
Computer and R&D equipment
|
362
|
(324)
|
38
|
Other tangible assets
|
105
|
(96)
|
9
|
Construction in progress
|
159
|
-
|
159
|
Total
|
17,008
|
(14,721)
|
2,287
|
The line “Construction in progress” in the table above includes property, plant and equipment under construction and equipment under qualification before operating.
Facilities & leasehold improvements, machinery and equipment and other tangible assets include assets acquired under capital lease. The net cost of assets under capital lease was less than $1 million both at July 1, 2017 and December 31, 2016.
The depreciation charge, which includes amortization for capital leases, was $276 million and $333 million for the first half of 2017 and 2016, respectively.
|
18.
|
Long-Term Investments
|
Long-Term Investments consisted of the following:
|
July 1, 2017
|
December 31, 2016
|
Equity-method investments
|
45
|
45
|
Cost-method investments
|
12
|
12
|
Total
|
57
|
57
|
Equity-method investments
Equity-method investments as at July 1, 2017 and December 31, 2016 were as follows:
|
July 1, 2017
|
December 31, 2016
|
Carrying value
|
Ownership percentage
|
Carrying value
|
Ownership percentage
|
ST-Ericsson SA, in liquidation
|
45
|
50.0%
|
45
|
50.0%
|
Total
|
45
|
|
45
|
|
ST-Ericsson SA, in liquidation
On February 3, 2009, the Company announced the closing of a transaction to combine the businesses of Ericsson Mobile Platforms and ST-NXP Wireless into a new venture, named ST-Ericsson. As part of the transaction, the Company received an interest in ST-Ericsson Holding AG in which the Company owned 50% plus a controlling share. In 2010, ST-Ericsson Holding AG was merged in ST-Ericsson SA.
The Company evaluated that ST-Ericsson SA was a variable interest entity (VIE). The Company determined that it controlled ST-Ericsson SA and therefore consolidated ST-Ericsson SA.
On September 9, 2013, the Company sold 1 ST-Ericsson SA share to Ericsson for its nominal value changing the ownership structure of ST-Ericsson SA to bring both partners to an equal ownership proportion. As a result and in combination with the new shareholder agreement, the Company lost the control of ST-Ericsson SA and as such ST-Ericsson SA was deconsolidated from the Company’s financial statements. The deconsolidation of ST-Ericsson SA did not result in a gain or loss for the Company. The fair value of the Company’s retained noncontrolling interest was evaluated at $55 million. In addition, the Company and its partner signed funding commitment letters, capped at $149 million for each partner, to the residual joint wind-down operations to ensure solvency. These were not drawn as of July 1, 2017.
Before the deconsolidation of ST-Ericsson SA, certain assets and companies of the ST-Ericsson SA group of companies were transferred to both partners for their net book value which was representative of their fair value. The transactions did not result in cash exchange between the partners. ST-Ericsson SA entered into liquidation on April 15, 2014.
Cost-method investments
Cost-method investments as at July 1, 2017 are equity securities with no readily determinable fair value. It mainly includes the Company’s investment in DNP Photomask Europe S.p.A (“DNP”). The Company has identified the joint venture as a VIE, but has determined that it is not the primary beneficiary. The significant activities of DNP revolve around the creation of masks and development of high level mask technology. The Company does not have the power to direct such activities. The Company’s current maximum exposure to loss as a result of its involvement with the joint venture is limited to its investment. The Company has not provided additional financial support in the first half of 2017 and currently has no requirement or intent to provide further financial support to the joint venture.
|
19.
|
Other Non-current Assets
|
Other non-current assets consisted of the following:
|
As at July 1, 2017
|
As at December 31, 2016
|
Available-for-sale equity securities
|
12
|
11
|
Trading equity securities
|
8
|
8
|
Long-term State receivables
|
358
|
388
|
Long-term receivables from third parties
|
1
|
1
|
Deposits and other non-current assets
|
27
|
26
|
Total
|
406
|
434
|
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 and development, industrialization and capital investment projects. Long-term receivables related to tax refunds 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 second quarter of 2017 the Company entered into a factoring transaction to accelerate the realization in cash of some non-current assets. As at July 1, 2017, $118 million of the non-current assets were sold without recourse, with a financial cost of less than $1 million.
Long-term debt consisted of the following:
|
July 1, 2017
|
December 31, 2016
|
|
|
|
Funding program loans from European Investment Bank:
|
|
|
2.35% due 2020, floating interest rate at Libor + 1.199%
|
50
|
50
|
2.28% due 2020, floating interest rate at Libor + 1.056%
|
110
|
110
|
0.59% due 2020, floating interest rate at Euribor + 0.917%
|
57
|
53
|
1.96% due 2021, floating interest rate at Libor + 0.525%
|
150
|
150
|
1.99% due 2021, floating interest rate at Libor + 0.572%
|
144
|
144
|
Dual tranche senior unsecured convertible bonds
|
|
|
Zero-coupon, due 2019 (Tranche A)
|
571
|
564
|
1.0% due 2021 (Tranche B)
|
366
|
362
|
Other funding program loans:
|
|
|
0.32% (weighted average), due 2018-2023, fixed interest rate
|
14
|
14
|
Other long-term loans:
|
|
|
1.95% (weighted average), due 2017, fixed interest rate
|
-
|
1
|
0.44% (weighted average), due 2018, fixed interest rate
|
1
|
1
|
0.87% (weighted average), due 2020, fixed interest rate
|
2
|
2
|
Total long-term debt
|
1,465
|
1,451
|
Less current portion
|
(117)
|
(117)
|
Total long-term debt, less current portion
|
1,348
|
1,334
|
On July 3, 2014, the Company issued $1,000 million principal amount of dual tranche senior unsecured convertible bonds (Tranche A for $600 million and Tranche B for $400 million), due 2019 and 2021, respectively. Tranche A bonds were issued as zero-coupon bonds while Tranche B bonds bear a 1% per annum nominal interest, payable semi-annually. The conversion price at issuance was approximately $12 dollar, equivalent to a 30% and a 31% premium, respectively, on each tranche. On October 3, 2016, the conversion price was adjusted up to 1.24% on each tranche, pursuant to a dividend adjustment symmetric provision, which corresponds to 16,491 and 16,366 equivalent shares per each $200,000 bond par value for Tranche A and Tranche B, respectively. The bonds are convertible by the bondholders if certain conditions are satisfied or are callable by the issuer upon certain conditions, in both cases on a full-cash, full-shares or net-share settlement basis at issuer’s decision
.
The net proceeds from the bond offering were approximately $994 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 $878 million and was estimated by calculating the present value of cash flows using a discount rate of 2.40% and 3.22% (including 1% 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 $121 million, net of allocated issuance costs of $1 million, was recorded in shareholders’ equity as the value of the conversion features of the instruments. Unamortized debt discount and issuance costs totalled $63 million as at July 1, 2017 and $74 million as at December 31, 2016.
In the second quarter of 2017, the Company released an optional redemption notice to inform bondholders of its intention to early redeem the Tranche A bonds in July 2017. As a consequence, most bondholders have exercised their conversion right. The Company elected to net share settle the bonds, thus each conversion will thus follow the process defined in the original terms and conditions of the convertible bonds, which will determine the actual number of shares to be transferred upon settlement of each conversion. No significant conversions were effectively settled as of the end of the second quarter of 2017. The conversion will consequently be reported in the third quarter of 2017, when the actual number of shares is determined and consideration is transferred to the bondholders. Notwithstanding the conversion of the $600 million tranche A of the $1 billion convertible bond, the contemporaneous issuance of $1.5 billion convertible debt on July 3, 2017 was treated as refinancing and in consequence the tranche A remained classified as “Long-term debt” as at July 1, 2017. The issuance of the new debt is further described in Note “Subsequent events”.
|
21.
|
Post Employment and Other Long-term Employee Benefits
|
The Company and its subsidiaries have a number of defined benefit pension plans, mainly unfunded, and other long-term employees’ 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 a December 31 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 they left the company immediately as of July 1, 2017.
The components of the net periodic benefit cost included the following:
|
Pension Benefits
|
Pension Benefits
|
|
Three months ended
|
Six months ended
|
|
July 1, 2017
|
July 2, 2016
|
July 1, 2017
|
July 2, 2016
|
Service cost
|
(7)
|
(7)
|
(13)
|
(13)
|
Interest cost
|
(6)
|
(6)
|
(12)
|
(13)
|
Expected return on plan assets
|
5
|
5
|
9
|
10
|
Amortization of actuarial net (loss) gain
|
(2)
|
(2)
|
(5)
|
(4)
|
Net periodic benefit cost
|
(10)
|
(10)
|
(21)
|
(20)
|
|
Other long-term benefits
|
Other long-term benefits
|
|
Three months ended
|
Six months ended
|
|
July 1, 2017
|
July 2, 2016
|
July 1, 2017
|
July 2, 2016
|
Service cost
|
(1)
|
(1)
|
(1)
|
(1)
|
Interest cost
|
-
|
-
|
(1)
|
(1)
|
Net periodic benefit cost
|
(1)
|
(1)
|
(2)
|
(2)
|
Employer contributions paid and expected to be paid in 2017 are consistent with the amounts disclosed in the consolidated financial statements for the year ended December 31, 2016.
In the Annual General Meeting of Shareholders held on June 20, 2017, the distribution of a cash dividend of $0.24 per outstanding share of the Company’s common stock was authorized, to be distributed in quarterly installments of $0.06 in each of the second, third and fourth quarters of 2017 and first quarter of 2018. The amount of $42 million related to the first installment was paid during the second quarter of 2017. The remaining portion of the first instalment and the $0.18 per share cash dividend corresponding to the last three instalments totaled $171 million and is presented in the line “Dividends payable to stockholders” in the consolidated balance sheet as of July 1, 2017.
In the Annual General Meeting of Shareholders held on May 25, 2016, the distribution of a cash dividend of $0.24 per outstanding share of the Company’s common stock was authorized, to be distributed in quarterly installments of $0.06 in each of the second, third and fourth quarters of 2016 and first quarter of 2017. The amount of $53 million corresponding to the first installment, $53 million corresponding to the second installment and $47 million corresponding to the third installment were paid as of December 31, 2016. 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 2017.
The Annual General Meeting of Shareholders held on May 27, 2015 authorized the distribution of a cash dividend of $0.40 per outstanding share of the Company’s common stock, to be distributed in quarterly installments of $0.10 in each of the second, third and fourth quarters of 2015 and first quarter of 2016. The amount of $88 million corresponding to the first installment, $88 million corresponding to the second installment and $78 million corresponding to the third installment were paid during 2015. The remaining portion of $9 million related to the third installment and the fourth installment of $88 million were paid in the first half of 2016.
The treasury shares have been designated for allocation under the Company’s share based remuneration programs of unvested shares. Through July 1, 2017, 39,619,997 of these treasury shares were transferred to employees under the Company’s share based remuneration programs, of which 4,319,691 were transferred in the first half of 2017.
As of July 1, 2017, the Company held 23,300,223 treasury shares.
|
24.
|
Contingencies, Claims and Legal proceedings
|
The Company is subject to possible loss contingencies arising in the ordinary course of business. These include but are not limited to: warranty cost on the products of the Company, breach of contract claims, claims for unauthorized use of third-party intellectual property, 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 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 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 financial statements and when the amount of loss can be reasonably estimated. The Company regularly reevaluates 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 is otherwise also involved in various lawsuits, claims, investigations and proceedings incidental to its business and operations.
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.
As of July 1, 2017, provisions for estimated probable losses with respect to claims and legal proceedings were not considered material.
|
25.
|
Derivative Instruments and Hedging Activities
|
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 research and development, selling, general and administrative expenses as well as a portion of its front-end manufacturing costs of semi-finished goods. 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 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 gain or loss from the effective portion of the hedge 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. When a designated hedging instrument is either terminated early or an improbable or ineffective portion of the hedge is identified, or when it is probable that the forecasted transaction will not occur by the end of the originally specified time period, the cumulative gain or loss that was reported in “Accumulated other comprehensive income (loss)” is recognized immediately in earnings.
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 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 July 1, 2017, the Company had the following outstanding derivative instruments that were entered into to hedge Euro-denominated and Singapore dollar-denominated forecasted transactions:
In millions of Euros
|
Notional amount for hedge on
forecasted R&D and other
operating expenses
|
Notional amount for hedge on
forecasted manufacturing costs
|
|
|
|
Forward contracts
|
254
|
399
|
Currency collars
|
244
|
381
|
|
|
|
|
|
|
In millions of Singapore dollars
|
Notional amount for hedge on
forecasted R&D and other
operating expenses
|
Notional amount for hedge on
forecasted manufacturing costs
|
|
|
|
Forward contracts
|
-
|
130
|
|
|
|
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 the majority of 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.
Other market risk
As part of its ongoing investing activities, the Company might be exposed to equity security price risk. Therefore our procedures allow the Company to enter into certain hedging transactions.
For a complete description of exposure to market risks, including credit risk, these 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, 2016.
Information on fair value of derivative instruments and their location in the consolidated balance sheets as at July 1, 2017 and December 31, 2016 is presented in the table below:
|
|
As at July 1, 2017
|
As at December 31, 2016
|
Asset Derivatives
|
|
Balance sheet location
|
Fair value
|
Balance sheet location
|
Fair value
|
Derivatives designated as a hedge:
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
33
|
Other current assets
|
1
|
|
|
|
|
|
|
Currency collars
|
|
Other current assets
|
14
|
Other current assets
|
-
|
Currency collars
|
|
Other non-current assets
|
1
|
Other non-current assets
|
-
|
Total derivatives designated as a hedge:
|
|
|
48
|
|
1
|
Derivatives not designated as a hedge:
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
2
|
Other current assets
|
1
|
Total derivatives not designated as a hedge:
|
|
|
2
|
|
1
|
Total Derivatives
|
|
|
50
|
|
2
|
|
|
As at July 1, 2017
|
|
As at December 31, 2016
|
Liability Derivatives
|
|
Balance sheet location
|
Fair value
|
|
Balance sheet location
|
Fair value
|
Derivatives designated as a hedge:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other payables and accrued liabilities
|
-
|
|
Other payables and accrued liabilities
|
(31)
|
Currency collars
|
|
Other long-term liabilities
|
-
|
|
Other long-term liabilities
|
(1)
|
Currency collars
|
|
Other payables and accrued liabilities
|
-
|
|
Other payables and accrued liabilities
|
(11)
|
Total derivatives designated as a hedge:
|
|
|
-
|
|
|
(43)
|
Derivatives not designated as a hedge:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other payables and accrued liabilities
|
(1)
|
|
Other payables and accrued liabilities
|
(2)
|
Total derivatives not designated as a hedge:
|
|
|
(1)
|
|
|
(2)
|
Total Derivatives
|
|
|
(1)
|
|
|
(45)
|
The effect on the consolidated statements of income for the three months ended July 1, 2017 and July 2, 2016, respectively, and on the “Accumulated Other comprehensive income (loss)” (“AOCI”) as reported in the statements of equity as at July 1, 2017 and December 31, 2016 of derivative instruments designated as cash flow hedge is presented in the table below:
|
Gain (loss) deferred in
OCI on derivative
|
Location of gain (loss)
reclassified from OCI
into earnings
|
Gain (loss) reclassified from OCI
into earnings
|
|
|
|
|
Three months ended
|
Six months ended
|
|
July 1,
2017
|
December 31,
2016
|
|
July 1,
2017
|
July 2,
2016
|
July 1,
2017
|
July 2,
2016
|
Foreign exchange forward contracts
|
22
|
(24)
|
Cost of sales
|
(3)
|
4
|
(12)
|
(3)
|
Foreign exchange forward contracts
|
2
|
(2)
|
Selling, general and administrative
|
-
|
1
|
(1)
|
-
|
Foreign exchange forward contracts
|
10
|
(8)
|
Research and development
|
-
|
2
|
(3)
|
-
|
Currency collars
|
10
|
(8)
|
Cost of sales
|
-
|
-
|
(2)
|
(2)
|
Currency collars
|
1
|
(1)
|
Selling, general and administrative
|
-
|
-
|
-
|
-
|
Currency collars
|
5
|
(4)
|
Research and development
|
-
|
-
|
(2)
|
-
|
Total
|
50
|
(47)
|
|
(3)
|
7
|
(20)
|
(5)
|
A total $49 million gain deferred as at July 1, 2017 in AOCI is expected to be reclassified to earnings within the next twelve months.
No ineffective portion of the cash flow hedge relationships was recorded in earnings in the first six months of 2017 and 2016. No amount was excluded from effectiveness measurement on foreign exchange forward contracts and currency collars.
The effect on the consolidated statements of income for the three and six months ended July 1, 2017 and July 2, 2016 of derivative instruments not designated as a hedge is presented in the table below:
|
|
Location of gain (loss)
recognized in earnings
|
Gain recognized in earnings
|
|
|
|
Three months ended
|
Six months ended
|
|
|
|
July 1,
2017
|
July 2,
2016
|
July 1,
2017
|
July 2,
2016
|
Foreign exchange forward contracts
|
|
Other income and expenses, net
|
1
|
3
|
4
|
2
|
|
|
|
|
|
|
|
Total
|
|
|
1
|
3
|
4
|
2
|
The Company did not enter into any derivative instrument containing significant credit-risk-related contingent features.
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 assets for a net amount of $15 million (composed of a $15 million assets and an immaterial amount of liabilities) as at July 1, 2017. In addition, the Company entered into other derivative instruments, primarily forward contracts, which are governed by standard International Swaps and Derivatives Association (“ISDA”) agreements, which are not offset in the statement of financial position, and representing total assets of $35 million and total liabilities of $1 million as at July 1, 2017.
|
26.
|
Fair Value Measurements
|
The table below details financial assets (liabilities) measured at fair value on a recurring basis as at July 1, 2017:
|
|
Fair Value Measurements using
|
|
July 1,
2017
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
Marketable securities – U.S. Treasury Bonds
|
335
|
335
|
-
|
-
|
Equity securities classified as available-for-sale
|
12
|
12
|
-
|
-
|
Equity securities classified as held-for-trading
|
8
|
8
|
-
|
-
|
Derivative instruments designated as cash flow hedge
|
48
|
-
|
48
|
-
|
Derivative instruments not designated as cash flow hedge
|
2
|
-
|
2
|
-
|
Derivative instruments not designated as cash flow hedge
|
(1)
|
-
|
(1)
|
-
|
Contingent consideration on business combinations
|
(12)
|
-
|
-
|
(12)
|
Total
|
392
|
355
|
49
|
(12)
|
The table below details financial assets (liabilities) measured at fair value on a recurring basis as at December 31, 2016:
|
|
Fair Value Measurements using
|
|
December 31,
2016
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
Marketable securities – U.S. Treasury Bonds
|
335
|
335
|
-
|
-
|
Equity securities classified as available-for-sale
|
11
|
11
|
-
|
-
|
Equity securities classified as held-for-trading
|
8
|
8
|
-
|
-
|
Derivative instruments designated as cash flow hedge
|
1
|
-
|
1
|
-
|
Derivative instruments designated as cash flow hedge
|
(43)
|
-
|
(43)
|
-
|
Derivative instruments not designated as cash flow hedge
|
1
|
-
|
1
|
-
|
Derivative instruments not designated as cash flow hedge
|
(2)
|
-
|
(2)
|
-
|
Contingent consideration on business combinations
|
(12)
|
-
|
-
|
(12)
|
Total
|
299
|
354
|
(43)
|
(12)
|
For assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2017 and July 2, 2017 is presented as follows:
|
Fair Value Measurements using Significant
Unobservable Inputs (Level 3)
|
January 1, 2017
|
(12)
|
Revaluation of contingent consideration on business combination
|
-
|
July 1, 2017
|
(12)
|
|
|
Amount of total losses for the period included in earnings attributable to assets still held at the reporting date
|
-
|
No asset (liability) was measured at fair value on a non-recuring basis using significant unobservable inputs (Level 3) as at July 1, 2017.
No asset (liability) was measured at fair value on a recurring and non-recuring basis using significant unobservable inputs (Level 3) as at July 2, 2016.
The following table includes additional fair value information on other financial assets and liabilities as at July 1, 2017 and December 31, 2016:
|
|
As at July 1, 2017
|
As at December 31, 2016
|
|
Level
|
Carrying
Amount
|
Estimated Fair
Value
|
Carrying
Amount
|
Estimated Fair
Value
|
|
|
|
|
|
|
Cash equivalents (1)
|
1
|
1,180
|
1,180
|
960
|
960
|
Long-term debt
|
|
|
|
|
|
- Bank loans (including current portion)
|
2
|
528
|
528
|
525
|
525
|
- Senior unsecured convertible bonds (2)
|
1
|
937
|
1,219
|
926
|
1,127
|
|
(1)
|
Cash equivalents primarily correspond to deposits at call with banks.
|
|
(2)
|
The carrying amount of the senior unsecured convertible bonds as reported above corresponds to the liability component only, since, at initial recognition, an amount of $121 million was recorded directly in shareholders’ equity as the value of the equity instrument embedded in the issued convertible bonds.
|
No securities were in an unrealized loss position as at July 1, 2017 and July 2, 2016.
The methodologies used to estimate fair value are as follows:
Foreign exchange forward contracts, currency options and collars
The fair value of these instruments is estimated based upon quoted market prices for similar instruments.
Marketable securities
The fair value of these instruments is estimated based upon quoted market prices for identical instruments.
Equity securities classified as available-for-sale
The fair values of these instruments are estimated based upon market prices for the same instruments.
Trading equity securities
The fair value of these instruments is estimated based upon quoted market prices for the same instruments.
Equity securities carried at cost
The non-recurring fair value measurement is based on the valuation of the underlying investments on a new round of third party financing or upon liquidation.
Long-term debt and current portion of long-term debt
The fair value of bank loans was determined by estimating future cash flows on a borrowing-by-borrowing basis and discounting these future cash flows using the Company’s incremental borrowing rates for similar types of borrowing arrangements.
The senior unsecured convertible bonds have been trading on the open market segment of the Frankfurt Stock Exchange since issuance on July 3, 2014. The fair value of these instruments is the observable price of the bonds on that market.
Cash and cash equivalents, accounts receivable, bank overdrafts, short-term borrowings, and accounts payable
The carrying amounts reflected in the consolidated financial statements are reasonable estimates of fair value due to the relatively short period of time between the origination of the instruments and their expected realization.
The Company operates in two business areas: Semiconductors and Subsystems.
In the Semiconductors business area, 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 further 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:
|
·
|
Automotive and Discrete Group (ADG)
, comprised of all dedicated automotive ICs (both digital and analog), and discrete and power transistor products.
|
|
·
|
Analog and MEMS Group (AMG)
, comprised of low-power high-end analog ICs (both custom and general purpose) for all markets, smart power products for Industrial, Computer and Consumer markets, Touch Screen Controllers, Low Power Connectivity solutions (both wireline and wireless) for IoT, power conversion products, metering solutions for Smart Grid and all MEMS products, either sensors or actuators.
|
|
·
|
Microcontrollers and Digital ICs Group (MDG)
, comprised of general purpose and secure microcontrollers, EEPROM memories, and digital ASICs as well as restructured businesses such as Set-Top-box ICs or former ST-Ericsson products.
|
“Others” includes all the financial values related to the Imaging Product Division (including the sensors and modules from our Time of Flight technology), Subsystems and other products, as well as items not allocated to the segments such as impairment, restructuring charges and other related closure costs, unused capacity charges, strategic or special research and development programs and other minor unallocated expenses such as: certain corporate-level operating expenses, patent claims and litigation, and other costs that are not allocated to the segments.
In the Subsystems business area, the Company designs, develops, manufactures and markets subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to the business as a whole, the Subsystems business area does not meet the requirements for a reportable segment as defined in the U.S. GAAP guidance.
For the computation of the segments’ internal financial measurements, the Company uses certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses and a part of research and development expenses. In compliance with the Company’s internal policies, certain costs are not allocated to the segments, including impairment, restructuring charges and other related closure costs, unused capacity charges, phase-out and start-up costs of certain manufacturing facilities, certain one-time corporate items, strategic and special research and development programs or other corporate-sponsored initiatives, including certain corporate-level operating expenses and certain other miscellaneous charges. In addition, depreciation and amortization expense is part of the manufacturing costs allocated to the segments and is neither identified as part of the inventory variation nor as part of the unused capacity charges; therefore, it cannot be isolated in the costs of goods sold. Finally, R&D grants are allocated to the segments proportionally to the incurred R&D expenses on the sponsored projects.
Wafer costs are allocated to the segments based on actual cost. From time to time, with respect to specific technologies, wafer costs are allocated to segments based on market price.
The following tables present the Company’s consolidated net revenues and consolidated operating income by reportable segment.
Net revenues by reportable segment:
|
Three months ended
|
Six months ended
|
|
July 1,
2017
|
July 2,
2016
|
July 1,
2017
|
July 2,
2016
|
Automotive and Discrete Group (ADG)
|
755
|
721
|
1,463
|
1,392
|
Analog and MEMS Group (AMG)
|
482
|
376
|
925
|
745
|
Microcontrollers and Digital ICs Group (MDG)
|
612
|
556
|
1,204
|
1,089
|
Others
|
74
|
50
|
152
|
90
|
Total consolidated net revenues
|
1,923
|
1,703
|
3,744
|
3,316
|
Operating income (loss) by reportable segment:
|
Three months ended
|
Six months ended
|
|
July 1,
2017
|
July 2,
2016
|
July 1,
2017
|
July 2,
2016
|
Automotive and Discrete Group (ADG)
|
65
|
61
|
103
|
100
|
Analog and MEMS Group (AMG)
|
70
|
1
|
115
|
3
|
Microcontrollers and Digital ICs Group (MDG)
|
71
|
9
|
131
|
5
|
Total operating income of product segments
|
206
|
71
|
349
|
108
|
Others
(1)
|
(28)
|
(43)
|
(42)
|
(113)
|
Total consolidated operating income (loss)
|
178
|
28
|
307
|
(5)
|
|
(1)
|
Operating result of “Others” includes operating earnings of the Imaging Product Division (including the sensors and modules from our Time-of-Flight technology), Subsystems and other products, as well as items not allocated to the segments, such as impairment, restructuring charges and other related closure costs, unused capacity charges, strategic or special research and development programs and other minor unallocated expenses such as: certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to the segments.
|
Reconciliation of operating income (loss) of segments to the total operating income (loss):
|
Three months ended
|
Six months ended
|
|
July 1,
2017
|
July 2,
2016
|
July 1,
2017
|
July 2,
2016
|
Reconciliation to consolidated operating income (loss):
|
|
|
|
|
Total operating income
of segments
|
206
|
71
|
349
|
108
|
Impairment, restructuring charges and other related closure costs
|
(6)
|
(12)
|
(11)
|
(40)
|
Unallocated manufacturing results
|
2
|
(8)
|
3
|
(21)
|
Operating results of other businesses
|
(17)
|
(25)
|
(22)
|
(49)
|
Strategic and other research and development programs and other non-allocated provisions
(1)
|
(7)
|
2
|
(12)
|
(3)
|
Total operating loss Others
|
(28)
|
(43)
|
(42)
|
(113)
|
Total consolidated operating income
(loss)
|
178
|
28
|
307
|
(5)
|
|
(1)
|
Includes unallocated income and expenses such as certain corporate-level operating expenses and other costs/income that are not allocated to the product segments.
|
On June 22, 2017, the Company launched and priced a $1.5 billion offering of senior unsecured bonds convertible into new or existing ordinary shares of ST. The Company simultaneously launched a share buy-back program of up to 19 million shares for an amount up to $297 million intended to meet its obligations arising from debt financial instruments that are exchangeable into equity instruments and to meet obligations arising from employee share award programs. The Bonds were issued in two $750 million tranches, one with a maturity of 5 years (37.5% conversion premium, negative 0.25 yield to maturity, 0% coupon) and the other 7 years (37.5% conversion premium, 0.25 yield to maturity, 0.25% coupon). Under the terms of the Bonds, the Company can satisfy the conversion rights either in cash or shares, or a combination of the two, at its selection. Proceeds from the issuance of the Bonds will be used by the Company for general corporate purposes, including the early redemption of the outstanding $600 million convertible bond due 2019 which will be completed by the end of August and the future redemption of the outstanding $400 million convertible bond due 2021. The issuance of the new Bonds occurred on July 3, 2017, therefore the impact to financial reporting will be effective in the third quarter of 2017.
During the second quarter of 2017, a large portion of bondholders have delivered the Conversion Notice to exercise their conversion rights on Tranche A convertible bonds issued on July 3, 2014. At July 7, 2017, Tranche A convertible bonds for which a Conversion Notice has been received totaled $598 million principal amount. All of the conversions will be executed during the third quarter of 2017.