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 March 28, its second quarter ended on June 27, its third quarter ended on September 26, 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, 2019, except for the effects of adopting new accounting guidance effective on January 1, 2020, as described in Note 5. 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 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, 2019, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 26, 2020. However, they include mandatory disclosures required by accounting pronouncements effective on January 1, 2020, as further described in Note 5.
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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•
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sales returns and allowances,
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•
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inventory obsolescence reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory,
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•
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recognition and measurement of loss contingencies,
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F-8
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•
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valuation at fair value of assets acquired, including intangibles, goodwill, investments, tangible assets, and liabilities assumed, including deferred consideration on business acquisitions,
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•
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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,
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•
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assumptions used in measuring expected credit losses and impairment charges on financial assets,
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•
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recognition and measurement of restructuring charges and other related exit costs,
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•
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assumptions used in assessing the number of awards expected to vest on stock-based compensation plans,
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•
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assumptions used in calculating pension obligations and other long-term employee benefits,
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|
•
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allocation between debt and equity of the various components of an issued hybrid instrument and measurement at fair value of the liability component based on an income approach, and
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|
•
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determination of the income tax expense estimated on the basis of the projected taxable amount for the full year, including deferred income tax assets, valuation allowance and provisions for uncertain tax positions and claims.
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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. 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 2020
Expected credit losses on financial assets
The Company adopted on January 1, 2020 ASC 326 new guidance on measuring credit losses for financial instruments, by applying the transitional modified-retrospective approach, which requires that any cumulative-effect adjustment is recorded in retained earnings as at transition date. 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 (“AFS”) debt securities, and other commitments to extend credit held by a reporting entity at each reporting date. The amended guidance replaces the past methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to communicate credit losses estimates. The new guidance defines a current expected credit losses (“CECL”) model for financial assets measured at amortized cost, including held-to-maturity (“HTM”) debt securities; net investments in leases; and other off-balance sheet credit exposures not accounted for as insurance. It also defines an impairment model for AFS debt securities and the initial recognition of purchased credit-deteriorated (“PCD”) financial assets. Finally, the new guidance sets forth the impairment of beneficial interests in securitized financial assets.
The Company did not report upon adoption and as at September 26, 2020 any PCD financial assets, beneficial interests in securitized financial assets, HTM debt securities, net investments in leases, reinsurance receivables, receivables that relate to repurchase agreements and securities lending transactions or any off-balance sheet credit exposures. The main categories of financial assets measured at amortized cost within the scope of the new CECL model, as reported by the Company at adoption and quarter-end dates, were cash equivalents, short-term deposits, trade accounts receivable and other receivables. Concerning instruments for which the new AFS debt security impairment model applies, the Company only reported U.S. Treasury Bonds held as marketable securities and classified as AFS debt securities. The Company applied the zero-nonpayment risk practical expedient permitted by the new guidance when measuring CECL on state receivables. The same zero-credit loss assumption will be applied on U.S. Treasury Bonds in case of future decline in fair value. Allowances recorded, in compliance with prior practice, on financial assets measured at amortized cost, including the allowance account for trade accounts
F-9
receivable, already represented the best estimate of expected credit losses reported at transition date. Based on these facts, no cumulative effect adjustment was recorded in retained earnings upon adoption since the new guidance did not have, as expected, any material impact on the measurement of the financial assets held by the Company. Current expected credit losses allowance for trade accounts receivable, which amounted to $16 million as at January 1, 2020 and September 26, 2020, is further detailed in Note 13.
Implementation costs incurred in a cloud computing arrangement (“CCA”)
The Company adopted on January 1, 2020, the new guidance which clarifies the accounting for costs of implementation activities performed in a CCA that is a service contract. The amended guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company elected to apply the new guidance prospectively to all implementation costs incurred in CCA existing on or after January 1, 2020. The new guidance did not have, as expected, any material impact on the Company’s consolidated financial statements since the major part of existing and new CCA that are service contracts did not generate significant implementation costs. The new guidance is similar to past practice when applied to the most significant implementation activities incurred in existing CCA.
Accounting for goodwill impairment
The Company adopted on January 1, 2020, the new guidance which simplifies the accounting for goodwill impairment. The new guidance removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value. The Company applied the amended guidance during the third quarter of 2020 when it performed its annual impairment campaign. The new guidance did not have any material impact on the outcome of the annual impairment test and no material impact is expected on future accounting for goodwill from the application of the new guidance.
Accounting pronouncements that are not yet effective and have not been adopted by the Company
In March 2020, the FASB provided optional guidance for a limited period of time 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 other interest rate indexes at the end of 2021. The transition away from those rates will impact 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 optional 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 modification of critical terms in the hedge relationship. 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 is not expected 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 an issuer’s accounting for 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, with early adoption permitted in fiscal years beginning after December 15, 2020. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements, as Tranche B senior unsecured convertible bonds issued on July 3, 2017 and the dual-tranche senior unsecured convertible bonds issued on August 4, 2020 are convertible instruments with cash conversion features in the scope of the new guidance.
F-10
6.
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Other Income and Expenses, Net
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Other income and expenses, net consisted of the following:
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|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Research and development funding
|
|
28
|
|
14
|
|
88
|
|
64
|
Exchange gain (loss), net
|
|
2
|
|
(1)
|
|
6
|
|
(1)
|
Phase-out and start-up costs
|
|
—
|
|
(15)
|
|
(8)
|
|
(22)
|
Patent costs
|
|
(2)
|
|
(1)
|
|
(5)
|
|
(1)
|
Gain on sale of non-current assets
|
|
2
|
|
—
|
|
14
|
|
6
|
COVID-19 incremental costs
|
|
(5)
|
|
—
|
|
(23)
|
|
—
|
Other, net
|
|
(1)
|
|
1
|
|
(1)
|
|
3
|
Total
|
|
24
|
|
(2)
|
|
71
|
|
49
|
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.
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 27.
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.
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 2020 and 2019, the Company sold certain non-strategic assets, which generated a gain of $14 million and $6 million, respectively.
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 COVID-19 pandemic.
7.
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Impairment, Restructuring Charges and Other Related Closure Costs
|
Impairment, restructuring charges and other related closure costs incurred in the first nine months of 2020 are summarized as follows:
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|
Nine Months Ended on September 26,
2020
|
|
|
Impairment
|
|
Restructuring
charges
|
|
Other
related
closure costs
|
|
Total
impairment,
restructuring
charges and
other related
closure costs
|
Set-top Box restructuring plan
|
|
—
|
|
—
|
|
—
|
|
—
|
Bouskoura restructuring plan
|
|
—
|
|
(8)
|
|
—
|
|
(8)
|
Long-lived assets impairment charge
|
|
(4)
|
|
—
|
|
—
|
|
(4)
|
Total
|
|
(4)
|
|
(8)
|
|
—
|
|
(12)
|
The Company did not incur any significant impairment, restructuring charges and other related closure costs in the first nine months of 2019.
F-11
Impairment charges
In the first nine months of 2020, the Company recorded a $4 million impairment charge, primarily on licenses dedicated exclusively to certain development projects that were canceled, while no alternative future use was identified internally.
During the third quarter of 2020 and 2019, the Company conducted its annual impairment test, which did not result in any significant impairment loss.
Restructuring charges and other related closure costs
Provisions for restructuring charges and other related closure costs as at September 26, 2020 are summarized as follows:
|
|
Set-top Box
restructuring
plan
|
|
Bouskoura
restructuring
plan
|
|
Total
|
Provision as at December 31, 2019
|
|
11
|
|
—
|
|
11
|
Charges incurred in 2020
|
|
—
|
|
8
|
|
8
|
Amounts paid
|
|
(6)
|
|
(4)
|
|
(10)
|
Provision as at September 26, 2020
|
|
5
|
|
4
|
|
9
|
|
•
|
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 of 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 $133 million, were incurred as of September 26, 2020. The plan was substantially completed in 2018 in all locations. The Company still incurs payments related to the voluntary plan in France.
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•
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Bouskoura restructuring plan
|
In the fourth quarter of 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 in the first nine months of 2020 a restructuring charge totaling $8 million for this plan, corresponding to the voluntary termination benefits to be paid to 179 employees who signed the offer for voluntary leave in the first nine months ended September 26, 2020.
The Bouskoura restructuring plan was expected to result in pre-tax charges of approximately $7 million. It has been substantially completed at the end of the third quarter of 2020.
8.
|
Interest Income (Expense), Net
|
Interest income (expense), net consisted of the following:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Income
|
|
6
|
|
13
|
|
28
|
|
43
|
Expense
|
|
(15)
|
|
(14)
|
|
(40)
|
|
(41)
|
Total
|
|
(9)
|
|
(1)
|
|
(12)
|
|
2
|
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 2020 included a charge of $31 million on the senior unsecured convertible bonds issued on July 3, 2017 and a charge of $3 million on the senior unsecured
F-12
convertible bonds issued on August 4, 2020, that was mainly a non-cash interest expense resulting from the accretion of interest on the liability component.
Convertible debt, including the settlement of Tranche A of the senior unsecured convertible bonds issued on July 3, 2017, is further described in Note 22.
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
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Income tax expense
|
|
(50)
|
|
(28)
|
|
(96)
|
|
(93)
|
The annual estimated effective tax rate method was applied, as management believes it provides a reliable estimate of the expected 2019 and 2020 income tax expense on an interim basis. The Company registered an income tax expense of $50 million and $96 million during the third quarter and first nine months of 2020, respectively, reflecting the estimated annual effective tax rate in each of its jurisdictions, applied to the first nine months of 2020 consolidated profit before taxes. In addition, the Company’s income tax expense included the estimated impact of provisions related to potential tax positions which have been considered uncertain.
In the third quarter of 2020, the Company recorded a deferred tax liability amounting to $30 million upon initial recognition of the senior unsecured convertible bonds issued on August 4, 2020. Both the premium received upon issuance and the debt discount recorded on the liability component have been identified as temporary differences for tax purposes. The $30 million deferred tax liability was recorded as a deduction of the equity component reported in capital surplus in the consolidated statements of equity. The initial recognition of the senior unsecured convertible bonds is further described in Note 22.
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 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 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
F-13
pursuant to the exercise of stock options outstanding, unvested shares granted and the conversion of convertible debt.
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to parent company
|
|
242
|
|
302
|
|
525
|
|
640
|
Weighted average number of shares outstanding
|
|
893,846,468
|
|
895,133,698
|
|
890,760,418
|
|
895,032,334
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
0.27
|
|
0.34
|
|
0.59
|
|
0.71
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Net income attributable to parent company
|
|
242
|
|
302
|
|
525
|
|
640
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
893,846,468
|
|
895,133,698
|
|
890,760,418
|
|
895,032,334
|
Dilutive effect of stock awards
|
|
6,266,152
|
|
4,964,050
|
|
8,971,818
|
|
6,539,875
|
Dilutive effect of convertible bonds
|
|
21,397,369
|
|
—
|
|
16,630,350
|
|
—
|
Number of shares used in calculating diluted EPS
|
|
921,509,989
|
|
900,097,748
|
|
916,362,586
|
|
901,572,209
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
0.26
|
|
0.34
|
|
0.57
|
|
0.71
|
In application of the treasury method implying that the Company intends to settle the convertible bonds on a net-share basis, there was no dilutive effect of the senior unsecured convertible bonds issued on August 4, 2020 in the first nine months diluted Earnings per Share since the conversion features were out-of-the-money. Dilutive effect of convertible bonds presented in the table above is related to the senior unsecured convertible bonds issued on July 3, 2017.
For the nine months ended September 28, 2019, there was no dilutive effect of the senior unsecured convertible bonds issued on July 3, 2017, since the conversion features were out-of-the-money.
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 nine months ended September 26, 2020:
|
|
Gains
(Losses)
on Cash
Flow
Hedges
|
|
Gains
(Losses)
on
Available-
For-Sale
Debt
Securities
|
|
Defined
Benefit
Pension
Plan
Items
|
|
Foreign
Currency
Translation
Adjustments
(“CTA”)
|
|
Total
|
December 31, 2019
|
|
(3)
|
|
1
|
|
(223)
|
|
646
|
|
421
|
Cumulative tax impact
|
|
—
|
|
—
|
|
54
|
|
—
|
|
54
|
December 31, 2019, net of tax
|
|
(3)
|
|
1
|
|
(169)
|
|
646
|
|
475
|
OCI before reclassifications
|
|
13
|
|
1
|
|
—
|
|
66
|
|
80
|
Amounts reclassified from AOCI
|
|
17
|
|
—
|
|
10
|
|
—
|
|
27
|
OCI for the Nine Months Ended September 26, 2020
|
|
30
|
|
1
|
|
10
|
|
66
|
|
107
|
Cumulative tax impact
|
|
(4)
|
|
—
|
|
(2)
|
|
—
|
|
(6)
|
OCI for the Nine Months Ended September 26, 2020, net of tax
|
|
26
|
|
1
|
|
8
|
|
66
|
|
101
|
September 26, 2020
|
|
27
|
|
2
|
|
(213)
|
|
712
|
|
528
|
Cumulative tax impact
|
|
(4)
|
|
—
|
|
52
|
|
—
|
|
48
|
September 26, 2020, net of tax
|
|
23
|
|
2
|
|
(161)
|
|
712
|
|
576
|
F-14
Items reclassified out of Accumulated Other Comprehensive Income for the nine months period ended September 26, 2020 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
|
|
(2)
|
|
Research and development
|
|
|
2
|
|
Income tax benefit (expense)
|
|
|
(15)
|
|
Net of tax
|
Defined benefit pension plan items
|
|
|
|
|
Amortization of actuarial gains (losses)
|
|
(10)
|
|
Other components of pension
benefit costs(1)
|
|
|
2
|
|
Income tax benefit (expense)
|
|
|
(8)
|
|
Net of tax
|
Total reclassifications for the period attributable to the
Company’s stockholders
|
|
(23)
|
|
Net of tax
|
(1)These items are included in the computation of net periodic pension cost, as described in Note 23.
12.
|
Marketable Securities
|
Changes in the balance of marketable securities, as reported in current assets on the consolidated balance sheets as at September 26, 2020 and December 31, 2019 are detailed in the table below:
|
|
December 31,
2019
|
|
Purchase
|
|
Sale /
Redemption
|
|
Change in
fair value
included
in OCI* for
available
-for-sale
marketable
securities
|
|
September 26,
2020
|
U.S. Treasury debt securities
|
|
133
|
|
—
|
|
—
|
|
1
|
|
134
|
Total
|
|
133
|
|
—
|
|
—
|
|
1
|
|
134
|
* Other Comprehensive Income
As at September 26, 2020, the Company held $134 million of U.S. Treasury Bonds, all transferred to financial institutions with high credit rating. These transactions were concluded in compliance with the Company’s policy to optimize the return yield on its short-term investments, always placed with institutions with high credit rating. The Company, acting as the securities lender, does not hold any collateral on the unsecured securities lending transactions.
The debt securities had an average rating of Aaa/AA+/AAA from Moody’s, S&P and Fitch, respectively and an average maturity of 0.8 years. The debt securities were reported as current assets on the line “Marketable Securities” on the consolidated balance sheet as at September 26, 2020, 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 September 26, 2020. This fair value measurement corresponds to a Level 1 fair value hierarchy measurement. The aggregated amortized cost basis of these securities totaled $132 million as at September 26, 2020.
The Company adopted on January 1, 2020 the new ASC 326 guidance which provides a modified impairment model applicable to available-for-sale debt securities. The new credit impairment model does not significantly differ from the previous “Other-than-temporary impairment” model (“OTTI”) defined in prior guidance. The new model retains the same criteria, while it does not take into consideration the length of time during which the fair value has been lower than amortized cost when assessing the existence of a credit loss. At adoption date and as at
F-15
September 26, 2020, the fair value of the U.S. Treasury Bonds was higher than the amortized cost of the debt securities. Consequently, no impairment had occurred, and no allowance was recognized as at September 26, 2020.
To optimize the return yield on its short-term investments, the Company also invested $679 million of available cash in short-term deposits in the first nine months of 2020. These short-term deposits represent cash equivalents with original maturity beyond three months and no significant risk of changes in fair value.
13.
|
Trade Accounts Receivable, Net
|
Trade accounts receivable, net consisted of the following:
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Trade accounts receivable
|
|
1,449
|
|
1,396
|
Current expected credit losses allowance ("CECLA")*
|
|
(16)
|
|
(16)
|
Total
|
|
1,433
|
|
1,380
|
* Allowance for doubtful accounts as at December 31, 2019
Prior to the adoption of the new ASC 326 guidance, the Company reported trade accounts receivable net of allowance for doubtful accounts. The Company evaluated its customers’ financial condition periodically and recorded an allowance for any specific account it considered as doubtful. Additionally, the Company maintained an allowance for doubtful accounts for estimated losses resulting from its customers’ inability to make required payments. The carrying amount of the receivable was thus reduced by an allowance account, and the amount of the corresponding charge was recognized in the line “Selling, general and administrative” in the consolidated statements of income. Subsequent recoveries, if any, of amounts previously provided for were credited against the same line in the consolidated statements of income. When a trade receivable was uncollectible, it was written-off against the allowance account for trade accounts receivable.
With the adoption of the ASC 326 guidance starting January 1, 2020, the Company uses a lifetime expected losses allowance for all trade receivables. Adjustments to the expected credit losses allowance are still reported in the line “Selling general and administrative” in the consolidated statements of income. To measure the expected credit losses, trade receivables are grouped within six credit risk categories, according to their credit limits and in line with credit risk determined by independent credit agencies on these categories. The Company has concluded that the expected loss rates for trade receivables reasonably approximate failure rates as determined by these independent agencies.
Based on the new ASC 326 requirement, the 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 determined by independent credit agencies, 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 factors are weighted into four 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). At adoption date, major weight was given to the baseline and mild downside scenarios, with no significant adjustment to the allowance for doubtful accounts. As at September 26, 2020, following the uncertainties arising from COVID-19 pandemic and the impact it may have on future economic and market conditions, major weight was given to the mild downside and severe downside scenarios, with no significant adjustments to the expected credit losses rates as used in the measurement of the allowance for trade accounts receivable.
On that basis, the changes in reported CECLA for the period ended September 26, 2020 are presented below:
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
Allowance for doubtful accounts as at December 31, 2019 (under prior ASC 326)
|
|
(16)
|
Amount recognized through opening retained earnings upon new ASC 326
|
|
—
|
CECLA as at December 31, 2019 (under new ASC 326)
|
|
(16)
|
Current-period adjustment to CECLA
|
|
—
|
CECLA as at September 26, 2020
|
|
(16)
|
F-16
From time to time, the Company enters into factoring transactions to accelerate the realization in cash of some trade accounts receivable. During the first nine months of 2020, no trade accounts receivable were sold without recourse as compared to $75 million of trade accounts receivable sold without recourse during the first nine months of 2019.
Inventories consisted of the following:
|
|
September 26,
2020
|
|
December 31,
2019
|
Raw materials
|
|
175
|
|
137
|
Work-in-process
|
|
1,157
|
|
1,104
|
Finished products
|
|
599
|
|
450
|
Total
|
|
1,931
|
|
1,691
|
Reserve for obsolescence is estimated for excess uncommitted inventories based on the previous quarter’s sales, backlog of orders and production plans.
15.
|
Business Combinations
|
2020 Acquisitions
In the second quarter of 2020, the Company closed the acquisition of French Gallium Nitride (GaN) innovator Exagan. Exagan’s expertise in epitaxy, product development and application know-how will broaden and accelerate ST’s power GaN roadmap and business for automotive, industrial and consumer applications. Exagan acquisition has been accounted for as a business combination. The activities of this business are included in the Automotive and Discrete Group (ADG) reportable segment.
In the third quarter of 2020, the Company closed the acquisitions of the entire share capital of Ultra Wide Band specialist BeSpoon, of the cellular IoT connectivity assets of Riot Micro and of the radio-frequency assets of Somos. After closing these transactions, the Company will further strengthen its offer for wireless connectivity in the roadmap for STM32 microcontrollers and secure MCUs. These three acquisitions have been accounted for as business combinations. The activities of these businesses are included in the Microcontrollers and Digital ICs Group (MDG) reportable segment.
As of September 26, 2020, the purchase price allocation of the above business acquisitions was subject to finalization. The preliminary fair value at acquisition date of the identifiable assets acquired and liabilities assumed were as follows:
|
|
Fair value recognized
at acquisition date
|
Property, plant and equipment
|
|
1
|
Technologies and licenses
|
|
117
|
Deferred tax assets
|
|
5
|
Deferred tax liabilities
|
|
(18)
|
Net working capital
|
|
(4)
|
Goodwill(1)
|
|
142
|
Total net assets at fair value
|
|
243
|
Purchase consideration
|
|
243
|
|
(1)
|
The items that generated goodwill are workforce, synergies, future products and access to new markets. The goodwill is allocated to the ADG and MDG reportable segments as described in Note 16.
|
For these business acquisitions, the Company reported $97 million cash outflow in the line “Payment for business acquisitions, net of cash and cash equivalents acquired” in the consolidated statement of cash flows for the period ended September 26, 2020.
2019 Acquisitions
In 2019, the Company acquired the Swedish silicon carbide (SiC) wafer manufacturer Norstel AB (“Norstel”). This acquisition extends the Company’s silicon carbide ecosystem and strengthens the Company’s flexibility to
F-17
serve fast growing automotive and industrial applications. The purchase consideration, net of $1 million of cash acquired, was funded with available cash. The full acquisition was executed in two stages. On February 6, 2019, the Company acquired 55% of Norstel’s common stock, obtaining control over the entity. The fair value of the business as a whole was estimated at $138 million, of which $77 million was paid by the Company for its majority stake, with an option to acquire the remaining 45% at a later date, subject to certain conditions. On December 2, 2019, the Company exercised its option to acquire the remaining 45% stake. The Company paid $51 million to complete the closing of the full acquisition. An amount of $10 million was held in an escrow account as protection for any claims, and reported as current restricted cash in the consolidated balance sheet as at December 31, 2019. The escrow amount was released to the seller in 2020 and the amount paid was reported in the line “Payment for business acquisitions, net of cash and cash equivalents acquired” in the consolidated statement of cash flows for the period ended September 26, 2020.
Norstel acquisition has been accounted for as a business combination. The activities of this business are included in the Automotive and Discrete Group (ADG) reportable segment. The purchase price allocation was finalized in 2020, and resulted in recognition of a deferred tax liability of $18 million associated with the acquired technology in process, as well as a deferred tax asset of $4 million arising from Norstel’s net operating losses. A corresponding $14 million increase in goodwill was recorded in the first nine months of 2020, resulting in $57 million of total goodwill recognized on the acquisition. The fair value of the identifiable assets acquired and liabilities assumed from Norstel were as follows:
|
|
Fair value recognized
at acquisition date
|
|
Measurement period adjustments
|
|
Fair value recognized
as a result of acquisition
|
Property, plant and equipment
|
|
11
|
|
—
|
|
11
|
Technology in process
|
|
86
|
|
—
|
|
86
|
Deferred tax assets
|
|
—
|
|
4
|
|
4
|
Deferred tax liabilities
|
|
—
|
|
(18)
|
|
(18)
|
Net working capital
|
|
(2)
|
|
—
|
|
(2)
|
Goodwill(1)
|
|
43
|
|
14
|
|
57
|
Total net assets at fair value
|
|
138
|
|
—
|
|
138
|
Purchase consideration
|
|
138
|
|
—
|
|
138
|
|
(1)
|
The primary item that generated goodwill is the value of the future synergies between Norstel technology in silicon carbide and the Company, which do not qualify as a separately identified intangible asset. The goodwill is allocated to the ADG reportable segment.
|
Goodwill allocated to reportable segments and changes in the carrying amount of goodwill were as follows:
|
|
Automotive
and Discrete
Group (ADG)
|
|
Analog,
MEMS &
Sensors
Group
(AMS)
|
|
Microcontrollers
and Digital ICs
Group (MDG)
|
|
Total
|
December 31, 2019
|
|
43
|
|
2
|
|
117
|
|
162
|
Business combinations
|
|
37
|
|
—
|
|
119
|
|
156
|
Foreign currency translation
|
|
1
|
|
—
|
|
2
|
|
3
|
September 26, 2020
|
|
81
|
|
2
|
|
238
|
|
321
|
As described in Note 15, the 2020 acquisitions resulted in the recognition of $142 million in goodwill which has been included in the ADG and MDG segments to align the goodwill of the acquired businesses with the segments for which the related activities will be reported.
In addition, changes in the carrying amount of goodwill in the first nine months of 2020 include $14 million increase related to the 2019 acquisition of Norstel following finalization of the purchase price allocation in 2020.
F-18
17.
|
Other Intangible Assets
|
Other intangible assets consisted of the following:
September 26, 2020
|
|
Gross Cost
|
|
Accumulated Amortization
|
|
Net Cost
|
Technologies & licenses
|
|
916
|
|
(606)
|
|
310
|
Purchased & internally developed software
|
|
520
|
|
(450)
|
|
70
|
Technologies in progress
|
|
42
|
|
—
|
|
42
|
Other intangible assets
|
|
69
|
|
(69)
|
|
—
|
Total
|
|
1,547
|
|
(1,125)
|
|
422
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross Cost
|
|
Accumulated Amortization
|
|
Net Cost
|
Technologies & licenses
|
|
699
|
|
(578)
|
|
121
|
Purchased & internally developed software
|
|
486
|
|
(427)
|
|
59
|
Technologies in progress
|
|
119
|
|
—
|
|
119
|
Other intangible assets
|
|
70
|
|
(70)
|
|
—
|
Total
|
|
1,374
|
|
(1,075)
|
|
299
|
As described in Note 15, the acquisitions completed in the first nine months of 2020 resulted in the recognition of technologies of $117 million, reported in the line “Technologies & licenses” as at September 26, 2020. Furthermore, the 2019 acquisition of Norstel resulted in the recognition of technology in process of $86 million, reported in the line “Technologies in progress” as at December 31, 2019. The acquired technology is reported in the line “Technologies & licenses” as at September 26, 2020.
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 $56 million and $50 million for the first nine months of 2020 and 2019, respectively.
The estimated amortization expense of the existing intangible assets for each period is expected to be as follows:
Year
|
|
|
Remainder of 2020
|
|
25
|
2021
|
|
87
|
2022
|
|
72
|
2023
|
|
55
|
2024
|
|
42
|
Thereafter
|
|
141
|
Total
|
|
422
|
F-19
18.
|
Property, Plant and Equipment
|
Property, plant and equipment consisted of the following:
September 26, 2020
|
|
Gross Cost
|
|
Accumulated
Depreciation
|
|
Net Cost
|
Land
|
|
82
|
|
—
|
|
82
|
Buildings
|
|
955
|
|
(538)
|
|
417
|
Facilities & leasehold improvements
|
|
3,367
|
|
(2,895)
|
|
472
|
Machinery and equipment
|
|
16,033
|
|
(13,329)
|
|
2,704
|
Computer and R&D equipment
|
|
388
|
|
(340)
|
|
48
|
Operating lease right-of-use assets
|
|
294
|
|
(105)
|
|
189
|
Other tangible assets
|
|
121
|
|
(95)
|
|
26
|
Construction in progress
|
|
374
|
|
—
|
|
374
|
Total
|
|
21,614
|
|
(17,302)
|
|
4,312
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross Cost
|
|
Accumulated
Depreciation
|
|
Net Cost
|
Land
|
|
78
|
|
—
|
|
78
|
Buildings
|
|
905
|
|
(505)
|
|
400
|
Facilities & leasehold improvements
|
|
3,193
|
|
(2,762)
|
|
431
|
Machinery and equipment
|
|
15,336
|
|
(12,790)
|
|
2,546
|
Computer and R&D equipment
|
|
382
|
|
(335)
|
|
47
|
Operating lease right-of-use assets
|
|
266
|
|
(60)
|
|
206
|
Other tangible assets
|
|
110
|
|
(93)
|
|
17
|
Construction in progress
|
|
282
|
|
—
|
|
282
|
Total
|
|
20,552
|
|
(16,545)
|
|
4,007
|
The line “Construction in progress” in the table above includes property, plant and equipment under construction and equipment under qualification before operating.
The depreciation charge was $612 million and $584 million for the first nine months of 2020 and 2019, respectively.
As described in Note 15, in 2019, the acquisition of Norstel resulted in the recognition of property, plant and equipment of $11 million.
A lease contract is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets within plant, property and equipment. Current operating lease liabilities are included in other payables and accrued liabilities, while noncurrent operating lease liabilities are included in other long-term liabilities in the Company’s consolidated balance sheet. Finance leases are included in property and equipment and long-term debt.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The right-of-use asset is a nonmonetary asset while the lease liability is a monetary liability. When accounting for a lease that is denominated in a foreign currency, the lease liability is remeasured using the current exchange rate, while the right-of-use asset is measured using the exchange rate as of the commencement date.
The Company leases land, buildings, cars and certain equipment (including IT equipment) which have remaining lease terms between less than one year and 50 years. Certain lease contracts contain options to extend the leases by up to 30 years, which the Company has included in the lease term when it is reasonably certain for the Company
F-20
to exercise that option. In addition, the Company made an accounting policy election for all the asset classes to not account for the short-term leases. A short-term lease is defined as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. The short-term lease election can only be made at the commencement date.
The Company does not separate lease and non-lease components and instead accounts for each separate lease component and the non-lease components associated with that lease component as a single lease component. This practical expedient is applied to the real estate (land and buildings), equipment, IT and cars.
Variable lease payments that depend on an index or a rate are included in the lease payments and are measured using the prevailing index or rate at the measurement date (January 1, 2019 for initial measurement of the leases existing at new lease accounting adoption date and commencement date for subsequent lease contracts). Changes to index and rate-based variable lease payments are recognized in profit or loss in the period of the change.
Lease contracts with a sum of lease payments not exceeding $5,000 have been excluded from the capitalization in the balance sheet.
Significant assumptions and judgements may be made in applying the requirements of lease accounting, such as the exercise of extension options and determination of discount rates.
Discount rates
The rate implicit in the lease should be used whenever that rate is readily determinable. In most cases, this rate is not readily determinable and the Company used its incremental borrowing rate, which was derived from information available at the lease commencement date, in determining the present value of lease payments. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. Due to immateriality of any intra-quarter discount rate changes, the Company determines the discount rate based on the mid-quarter date.
As of September 26, 2020 and December 31, 2019, finance lease right-of-use assets were less than $1 million. The below information is presented for the operating leases only.
Operating leases consisted of the following:
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Assets
|
|
|
|
|
Right-of-use assets
|
|
189
|
|
206
|
Total right-of-use assets
|
|
189
|
|
206
|
|
|
|
|
|
Lease liabilities
|
|
|
|
|
Current
|
|
54
|
|
55
|
Noncurrent
|
|
136
|
|
152
|
Total lease liabilities
|
|
190
|
|
207
|
Maturities of operating lease liabilities are as follows:
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
2020
|
|
19
|
|
60
|
2021
|
|
52
|
|
44
|
2022
|
|
38
|
|
31
|
2023
|
|
27
|
|
23
|
2024
|
|
18
|
|
17
|
Thereafter
|
|
83
|
|
83
|
Total future undiscounted cash outflows
|
|
237
|
|
258
|
Effect of discounting
|
|
(47)
|
|
(51)
|
Total lease liabilities
|
|
190
|
|
207
|
F-21
Operating lease term and discount rate are as follows:
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Weighted average remaining lease term (in years)
|
|
9.10
|
|
9.26
|
Weighted average discount rate
|
|
2.77%
|
|
2.79%
|
Operating lease cost and cash paid for the first nine months of 2020 and 2019 are as follows:
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
Operating lease cost
|
|
48
|
|
49
|
Operating lease cash paid
|
|
47
|
|
48
|
Right-of-use assets obtained in exchange for new operating lease liabilities in the first nine months of 2020 and 2019 are as follows:
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
Operating leases
|
|
24
|
|
23
|
20.
|
Long-Term Investments
|
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Long-term investments
|
|
10
|
|
11
|
Total
|
|
10
|
|
11
|
Long-term investments are equity securities with no readily determinable fair value for which the Company has elected to apply the cost alternative measurement. It includes principally 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 losses 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 nine months of 2020 and currently has no requirement or intent to provide further financial support to the joint venture.
21.
|
Other Non-Current Assets
|
Other non-current assets consisted of the following:
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Equity securities
|
|
23
|
|
23
|
Long-term State receivables
|
|
493
|
|
358
|
Deposits and other non-current assets
|
|
64
|
|
56
|
Total
|
|
580
|
|
437
|
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 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 2020 and 2019, the Company entered into factoring transactions to accelerate the realization in cash of some non-current assets. As at September 26, 2020, $95 million of the non-current assets were sold without recourse, with a financial cost of less than $1 million, as compared to $131 million of the non-current assets sold without recourse in the year-ago period, with a financial cost of less than $1 million.
F-22
With the adoption on January 1, 2020 of the ASC 326 accounting guidance, the Company applies a current expected credit losses (CECL) model on all financial assets measured at amortized cost, including deposits, loans and receivables. The major portion of other non-current assets to which the CECL model applies corresponds to 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 not significant at January 1, 2020 and September 26, 2020. Other non-current assets presented in the table above within the line "Deposits and other non-current assets" are composed of individually insignificant amounts at exposure of default. Consequently, no significant loss allowance was reported on other non-current assets as at adoption date and reporting date.
Long-term debt consisted of the following:
|
|
As at
|
|
As at
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Funding program loans from European Investment Bank:
|
|
|
|
|
1.36% due 2020, floating interest rate at Libor + 1.099%
|
|
13
|
|
13
|
1.20% due 2020, floating interest rate at Libor + 0.956%
|
|
28
|
|
28
|
0.37% due 2020, floating interest rate at Euribor + 0.817%
|
|
15
|
|
14
|
1.45% due 2021, floating interest rate at Libor + 0.525%
|
|
60
|
|
60
|
1.15% due 2021, floating interest rate at Libor + 0.572%
|
|
58
|
|
58
|
0.40% due 2028, floating interest rate at Euribor + 0.589%
|
|
267
|
|
258
|
0.22% due 2029, floating interest rate at Euribor + 0.564%
|
|
257
|
|
275
|
Dual tranche senior unsecured convertible bonds
|
|
|
|
|
Zero-coupon due 2022 (Tranche A)
|
|
141
|
|
700
|
0.25% due 2024 (Tranche B)
|
|
669
|
|
654
|
Zero-coupon due 2025 (Tranche A)
|
|
700
|
|
—
|
Zero-coupon due 2027 (Tranche B)
|
|
657
|
|
—
|
Other funding program loans:
|
|
|
|
|
0.41% (weighted average), due 2020-2023, fixed interest rate
|
|
—
|
|
12
|
Total long-term debt
|
|
2,865
|
|
2,072
|
Less current portion
|
|
(983)
|
|
(173)
|
Total long-term debt, less current portion
|
|
1,882
|
|
1,899
|
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 at issuance was $20.54 dollar, equivalent to a 37.5% premium on both tranches, which corresponds to 9,737 equivalent shares per each $200,000 bond 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 $1,502 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 shareholders’ 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 full Tranche A. As the Company 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 senior unsecured convertible bonds, which determined the actual number of shares to be transferred upon each conversion. The Company settled the bonds upon conversion, by redeeming through cash the $750 million principal amount, of which $609 million were paid in the third quarter of 2020, and by settling the residual consideration through the delivery of 11.4 million treasury shares, of which 9.2 million were
F-23
released in the third quarter of 2020. The net-share settlement was fully completed as of October 1, 2020. The Company allocated the total consideration transferred between debt and equity by measuring at fair value the liability component of Tranche A 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 0.8%, 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 $739 million for the full Tranche A, which generated a loss amounting to $25 million reported on the line “Loss on financial instruments, net” in the consolidated statement of income for the period ended September 26, 2020.
In line with the contractual terms of the convertible bonds, bondholders have full conversion rights on Tranche B, which original maturity is 2024, starting July 26, 2021. Therefore, the liability component of Tranche B was reclassified as short-term debt on the consolidated balance sheet as at September 26, 2020.
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 at issuance was $43.62 for Tranche A equivalent to a 47.5% conversion premium and $45.10 for Tranche B, equivalent to a 52.5% conversion premium. 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 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 allocation of $1 million issuance costs and $30 million deferred tax effect, was recorded in shareholders’ equity as the value of the conversion features of the instruments.
Unamortized debt discount and issuance costs on the issued convertible debt totaled $224 million as at September 26, 2020. As at September 26, 2020, the Company stock price exceeded the conversion price of the senior unsecured convertible bonds issued on July 3, 2017 and did not exceed the conversion price of the senior unsecured convertible bonds issued on August 4, 2020.
F-24
The Company’s long-term debt contained standard conditions but does not impose minimum financial ratios. Committed credit facilities amounted to $1.2 billion as of September 26, 2020, including a €500 million long-term line signed with the EIB in the first quarter of 2020, undrawn as at September 26, 2020.
23.
|
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 on September 26, 2020, 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:
|
|
Pension Benefits
|
|
Pension Benefits
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Service cost
|
|
(8)
|
|
(7)
|
|
(24)
|
|
(21)
|
Interest cost
|
|
(5)
|
|
(6)
|
|
(15)
|
|
(19)
|
Expected return on plan assets
|
|
6
|
|
5
|
|
17
|
|
16
|
Amortization of actuarial net (loss) gain
|
|
(3)
|
|
(2)
|
|
(9)
|
|
(7)
|
Settlements
|
|
—
|
|
(2)
|
|
(1)
|
|
(2)
|
Net periodic benefit cost (1)
|
|
(10)
|
|
(12)
|
|
(32)
|
|
(33)
|
(1)
|
Defined benefit plan expense components other than service cost, representing $8 million and $12 million in the first nine months of 2020 and 2019, respectively, were recognized outside Operating income in “Other components of pension benefit costs” in the Consolidated Statements of Income. Service cost was recognized within Operating income.
|
|
|
Other long-term benefits
|
|
Other long-term benefits
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Service cost
|
|
(1)
|
|
(1)
|
|
(3)
|
|
(3)
|
Interest cost
|
|
—
|
|
—
|
|
(1)
|
|
(1)
|
Net periodic benefit cost
|
|
(1)
|
|
(1)
|
|
(4)
|
|
(4)
|
Employer contributions paid and expected to be paid in 2020 are consistent with the amounts disclosed in the consolidated financial statements for the year ended December 31, 2019.
The Annual General Meeting of Shareholders 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. The amount of $35 million corresponding to the first installment and $34 million corresponding to the second installment were paid during the first nine months of 2020. The remaining portion of the second installment and the cash dividend corresponding to the last two installments totaled $82 million and are presented in the line “Dividends payable to stockholders” in the consolidated balance sheet as of September 26, 2020.
The Annual General Meeting of Shareholders 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. The amount of $53 million corresponding to the first installment, $53 million corresponding to the second installment and $48 million
F-25
corresponding to the third installment were paid as of 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 Annual General Meeting of Shareholders held on May 31, 2018 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 2018 and first quarter of 2019. The amount of $54 million corresponding to the first installment, $54 million corresponding to the second installment and $48 million corresponding to the third installment were paid as of December 31, 2018. The remaining portion of the third installment amounting to $6 million and the fourth installment of $54 million were paid in the first half of 2019.
As of September 26, 2020, the Company owned 8,055,022 shares classified as treasury stock in the consolidated statement of equity compared to 19,752,431 shares as of December 31, 2019.
The treasury shares have been originally designated for allocation under the Company’s share-based remuneration programs of unvested shares. As of September 26, 2020, 60,431,054 of these treasury shares were transferred to employees under the Company’s share-based remuneration programs, of which 7,206,942 were transferred in the first nine months of 2020.
During the first nine months of 2020, the Company also repurchased 4.8 million shares of its common stock for a total of $125 million under the share buy-back program announced on November 5, 2018.
As described in Note 22, bondholders exercised in the third quarter of 2020 their conversion rights on full Tranche A of the senior unsecured convertible bonds issued on July 3, 2017, which the Company elected to net-share settle. The full settlement of Tranche A represented 11.4 million shares, of which 9.2 million were released from treasury shares as of September 26, 2020.
26.
|
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: 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 such customer. 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,
F-26
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.
As of September 26, 2020, provisions for estimated probable losses with respect to claims and legal proceedings were not considered material.
27.
|
Derivative Instruments and Risk Management
|
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 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
F-27
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 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 September 26, 2020, 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
|
|
198
|
|
332
|
Currency collars
|
|
239
|
|
285
|
|
|
|
|
|
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 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 following the adoption of new ASC 326 guidance is further described in each respective note. While cash and cash equivalents are also subject to ASC 326 new requirements, 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 on the Group basis. 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
F-28
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.
The Company’s investments in debt instruments primarily include U.S. Treasury Bonds and long-term 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 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, 2019.
Information on fair value of derivative instruments and their location in the consolidated balance sheets as at September 26, 2020 and December 31, 2019 is presented in the table below:
|
|
|
|
As at
|
|
As at
|
|
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Asset Derivatives
|
|
Balance sheet location
|
|
Fair value
|
|
Fair value
|
Derivatives designated as a hedge:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
21
|
|
4
|
Currency collars
|
|
Other current assets
|
|
7
|
|
1
|
Total derivatives designated as a hedge:
|
|
|
|
28
|
|
5
|
Derivatives not designated as a hedge:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
7
|
|
3
|
Total derivatives not designated as a hedge:
|
|
|
|
7
|
|
3
|
Total Derivatives
|
|
|
|
35
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at
|
|
As at
|
|
|
|
|
September 26,
2020
|
|
December 31,
2019
|
Liability Derivatives
|
|
Balance sheet location
|
|
Fair value
|
|
Fair value
|
Derivatives designated as a hedge:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other payables and accrued liabilities
|
|
(3)
|
|
(4)
|
Currency collars
|
|
Other payables and accrued liabilities
|
|
(2)
|
|
(2)
|
Total derivatives designated as a hedge:
|
|
|
|
(5)
|
|
(6)
|
Derivatives not designated as a hedge:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other payables and accrued liabilities
|
|
(1)
|
|
(1)
|
Total derivatives not designated as a hedge:
|
|
|
|
(1)
|
|
(1)
|
Total Derivatives
|
|
|
|
(6)
|
|
(7)
|
F-29
The effect on the consolidated statements of income for the three and nine months ended September 26, 2020 and September 28, 2019, respectively, and on the “Accumulated Other comprehensive income (loss)” (“AOCI”) as reported in the statements of equity as at September 26, 2020 and December 31, 2019 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
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
December 31,
2019
|
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Foreign exchange forward contracts
|
|
14
|
|
(1)
|
|
Cost of sales
|
|
3
|
|
(7)
|
|
(10)
|
|
(28)
|
Foreign exchange forward contracts
|
|
1
|
|
—
|
|
Selling, general and administrative
|
|
1
|
|
(1)
|
|
—
|
|
(3)
|
Foreign exchange forward contracts
|
|
6
|
|
(1)
|
|
Research and development
|
|
3
|
|
(3)
|
|
(1)
|
|
(12)
|
Currency collars
|
|
4
|
|
(1)
|
|
Cost of sales
|
|
—
|
|
(5)
|
|
(4)
|
|
(13)
|
Currency collars
|
|
—
|
|
—
|
|
Selling, general and administrative
|
|
—
|
|
—
|
|
(1)
|
|
(2)
|
Currency collars
|
|
2
|
|
—
|
|
Research and development
|
|
1
|
|
(1)
|
|
(1)
|
|
(5)
|
Total
|
|
27
|
|
(3)
|
|
|
|
8
|
|
(17)
|
|
(17)
|
|
(63)
|
A total $27 million gain deferred as at September 26, 2020 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 2020 and 2019. No ineffectiveness is to be reported on hedge transactions outstanding as at September 26, 2020.
The effect on the consolidated statements of income for the three and nine months ended September 26, 2020 and September 28, 2019 of derivative instruments not designated as a hedge is presented in the table below:
|
|
Location of gain (loss) recognized in earnings
|
|
Gain (loss) recognized in earnings
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
September 26, 2020
|
|
September 28, 2019
|
|
September 26, 2020
|
|
September 28, 2019
|
Foreign exchange
forward contracts
|
|
Other income and
expenses, net
|
|
(3)
|
|
(1)
|
|
(10)
|
|
3
|
Total
|
|
|
|
(3)
|
|
(1)
|
|
(10)
|
|
3
|
The Company did not enter into any derivative instrument containing 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 $7 million (composed of $8 million asset with a $1 million liability) as at September 26, 2020. The fair value of these collars represented liabilities for a net amount of $2 million (composed of $1 million asset with a $3 million liability) as at September 26, 2020. 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 European Market Infrastructure Regulation (“EMIR”), which are not offset in the statement of financial position, and representing total assets of $28 million and total liabilities of $4 million as at September 26, 2020.
F-30
28.
|
Fair Value Measurements
|
The table below details financial assets (liabilities) measured at fair value on a recurring basis as at September 26, 2020:
|
|
Fair Value Measurements using
|
|
September 26,
2020
|
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 debt securities
|
134
|
134
|
—
|
—
|
Short-term deposits
|
679
|
679
|
—
|
—
|
Equity securities measured at fair value through earnings
|
23
|
23
|
—
|
—
|
Derivative assets designated as cash flow hedge
|
28
|
—
|
28
|
—
|
Derivative assets not designated as cash flow hedge
|
7
|
—
|
7
|
—
|
Derivative liabilities designated as cash flow hedge
|
(5)
|
—
|
(5)
|
—
|
Derivative liabilities not designated as cash flow hedge
|
(1)
|
—
|
(1)
|
—
|
Deferred consideration on business acquisitions
|
145
|
—
|
—
|
145
|
Total
|
1,010
|
836
|
29
|
145
|
The table below details financial assets (liabilities) measured at fair value on a recurring basis as at December 31, 2019:
|
|
Fair Value Measurements using
|
|
December 31,
2019
|
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 debt securities
|
133
|
133
|
—
|
—
|
Short-term deposits
|
4
|
4
|
—
|
—
|
Equity securities measured at fair value through earnings
|
23
|
23
|
—
|
—
|
Derivative assets designated as cash flow hedge
|
5
|
—
|
5
|
—
|
Derivative assets not designated as cash flow hedge
|
3
|
—
|
3
|
—
|
Derivative liabilities designated as cash flow hedge
|
(6)
|
—
|
(6)
|
—
|
Derivative liabilities not designated as cash flow hedge
|
(1)
|
—
|
(1)
|
—
|
Total
|
161
|
160
|
1
|
—
|
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:
|
Fair Value Measurements using Significant Unobservable Inputs (Level 3)
|
January 1, 2020
|
—
|
Contingent consideration on business combinations
|
(145)
|
September 26, 2020
|
(145)
|
The fair value measurement of the deferred consideration recorded on the business acquisitions concluded in the first nine months of 2020 has been determined jointly with independent experts as part of the preliminary purchase price allocation. The contingent consideration reported as noncurrent liabilities on the consolidated balance sheets as of September 26, 2020 is based on the probability that the milestones defining the variable components of the consideration will be achieved.
No asset (liability) was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 28, 2019.
No asset (liability) was measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3) as at September 26, 2020 and September 28, 2019 respectively.
F-31
In the first nine months ended September 26, 2020, the Company closed the acquisition of French Gallium Nitride (GaN) innovator Exagan and the acquisitions of the entire share capital of Ultra Wide Band specialist BeSpoon, of the cellular IoT connectivity assets of Riot Micro and of the radio-frequency assets of Somos, as detailed in Note 15. For these acquisitions, the purchase price allocation on the assets acquired and liabilities assumed, measured at fair value, was determined by the Company with the assistance of a third party. This corresponded to a Level 3 fair value measurement hierarchy. The main asset that was identified separately corresponded to technologies and amounted to $117 million. The fair value of the intangible asset was determined using the multi-period excess earnings method, consisting in discounting at a discount rate, which approximates 9%, the future earnings attributable to the asset.
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. 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 present value of cash flows using a discount rate of 1.30% and 1.85%, respectively, on each tranche. These applied discount rates were determined to be consistent with the market rates at the time for similar instruments with no conversion rights.
The call option available to the Company for the early redemption of Tranche A of the senior unsecured convertible bonds issued on July 3, 2017 was exercised in July 2020. As a consequence, bondholders exercised their conversion rights on full tranche A. The Company allocated the total consideration transferred between debt and equity by measuring at fair value the liability component of Tranche A 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 0.8%, which fairly approximated current market rates for similar bonds that have no conversion rights.
Further description on the senior unsecured convertible bonds issued by the Company is provided in Note 22, Long-term debt.
The following table includes additional fair value information on other financial assets and liabilities as at September 26, 2020 and December 31, 2019:
|
|
|
|
As at
|
|
As at
|
|
|
|
|
September 26,
2020
|
|
December 31,
2019
|
|
|
Level
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Cash equivalents(1)
|
|
1
|
|
2,347
|
|
2,347
|
|
1,691
|
|
1,691
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
- Bank loans (including current portion)
|
|
2
|
|
698
|
|
698
|
|
718
|
|
718
|
- Senior unsecured convertible bonds issued on July 3, 2017 (Tranche A)(2)
|
|
3
|
|
141
|
|
139
|
|
700
|
|
1,030
|
- Senior unsecured convertible bonds issued on July 3, 2017 (Tranche B)(3)
|
|
1
|
|
669
|
|
1,116
|
|
654
|
|
1,073
|
- Senior unsecured convertible bonds issued on August 4, 2020 (4)
|
|
1
|
|
1,357
|
|
1,611
|
|
—
|
|
—
|
(1)
|
Cash equivalents primarily correspond to deposits at call with banks.
|
(2)
|
The $1,030 million fair value of Tranche A as of December 31, 2019 represented the market price of the bonds trading on the Frankfurt Stock Exchange, which corresponded to a Level 1 fair value measurement. Following the exercise by the bondholders of their conversion rights in the third quarter of 2020, no observable market price was available on Tranche A as of September 26, 2020. Consequently, the $139 million fair value of Tranche A indicated in the table above was estimated based on an income approach, which corresponded to a Level 3 fair value measurement. The $141 million carrying amount of Tranche A as reported above corresponded to the principal amount of the outstanding bonds that were not settled as of September 26, 2020.
|
(3)
|
The carrying amount of Tranche B senior unsecured convertible bonds issued on July 3, 2017 as reported above corresponds to the liability component only, since, at initial recognition, the value of the equity
|
F-32
|
instrument embedded in the issued convertible bonds was recorded directly in shareholders’ equity. The initial recognition and subsequent measurements of the convertible bonds are further described in Note 22.
|
(4)
|
The carrying amount of the senior unsecured convertible bonds issued on August 4, 2020 as reported above corresponds to the liability component only, since, at initial recognition, an amount of $215 million before allocation of issuance costs and deferred tax effect was recorded directly in shareholders’ equity as the value of the equity instrument embedded in the issued convertible bonds. The initial recognition of the convertible bonds is further described in Note 22.
|
The senior unsecured convertible bonds have been trading on the open market segment of the Frankfurt Stock Exchange since their issuance on July 3, 2017 and August 4, 2020. The fair value of these instruments is the observable price of the bonds on that market, except for Tranche A of the senior unsecured convertible bonds issued on July 3, 2017, when measured as of September 26, 2020. For Tranche A of the senior unsecured convertible bonds issued on July 3, 2017, no market price was available on the Frankfurt Stock Exchange as of September 26, 2020, following the exercise by the Company of the call option for the early redemption of the whole Tranche and the subsequent conversion of the bonds by the bondholders during the third quarter of 2020. Fair value was estimated based on an income approach, which corresponds to a Level 3 measurement, consisting in discounting at current market rate for an equivalent nonconvertible debt the zero-coupon principal amount based on its 2022 original maturity.
The Company did not report securities that were in an unrealized loss position as at September 26, 2020 and December 31, 2019.
The methodologies used to estimate fair value are as follows:
Debt securities classified as available-for-sale
The fair value of these debt securities is estimated based upon quoted market prices for identical instruments.
Foreign exchange forward contracts, currency options and collars
The fair value of these instruments is estimated based upon quoted market prices for similar instruments.
Equity securities measured at fair value through earnings
The fair value of these instruments is estimated based upon quoted market prices for identical instruments.
Equity securities carried at cost as a measurement alternative
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 is 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.
Cash and cash equivalents, short-term deposits, accounts receivable, 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.
|
29.1
|
Nature of goods and services
|
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 30.
F-33
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.
|
29.2
|
Revenue recognition and disaggregation
|
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.
The Company’s consolidated net revenues disaggregated by product group are presented in Note 30. The following tables present the Company’s consolidated net revenues disaggregated by geographical region of shipment, nature and market channel:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Net revenues by geographical region of shipment(1)
|
|
|
|
|
|
|
|
|
EMEA
|
|
495
|
|
549
|
|
1,380
|
|
1,727
|
Americas
|
|
289
|
|
326
|
|
820
|
|
990
|
Asia Pacific
|
|
1,882
|
|
1,678
|
|
4,784
|
|
4,085
|
Total revenues
|
|
2,666
|
|
2,553
|
|
6,984
|
|
6,802
|
Net revenues by nature
|
|
|
|
|
|
|
|
|
Revenues from sale of products
|
|
2,624
|
|
2,521
|
|
6,882
|
|
6,679
|
Revenues from sale of services
|
|
39
|
|
26
|
|
93
|
|
100
|
Other revenues
|
|
3
|
|
6
|
|
9
|
|
23
|
Total revenues
|
|
2,666
|
|
2,553
|
|
6,984
|
|
6,802
|
Net revenues by market channel(2)
|
|
|
|
|
|
|
|
|
Original Equipment Manufacturers (“OEM”)
|
|
1,977
|
|
1,840
|
|
5,027
|
|
4,731
|
Distribution
|
|
689
|
|
713
|
|
1,957
|
|
2,071
|
Total revenues
|
|
2,666
|
|
2,553
|
|
6,984
|
|
6,802
|
(1)
|
Net revenues by geographical region of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand. For example, products ordered by U.S.-based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues.
|
(2)
|
Original Equipment Manufacturers (“OEM”) are the end-customers to which the Company provides direct marketing application engineering support, while Distribution customers refers to the distributors and representatives that the Company engages to distribute its products around the world.
|
|
29.3
|
Practical Expedients and Exemptions
|
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.
F-34
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 dedicated automotive ICs (both digital and analog), and discrete and power transistor products for all market segments.
|
|
•
|
Analog, MEMS and Sensors Group (AMS), comprised of low-power high-end analog ICs (both custom and general purpose) for all markets, smart power products for Industrial, Computer and personal electronics markets, Touch Screen Controllers, Low Power Connectivity solutions (both wireline and wireless) for IoT, power conversion products, metering solutions for Smart Grid, specialized imaging sensors and modules, and all MEMS products for sensors or Actuators.
|
|
•
|
Microcontrollers and Digital ICs Group (MDG), comprised of general purpose and secure microcontrollers, EEPROM memories, Digital ASICs, Aerospace & Defense products including components for microwave and millimeter wave.
|
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, but reported in “Others”. Those include impairment, restructuring charges and other related closure costs, management reorganization expenses, unused capacity charges, including reduced manufacturing activity due to COVID-19, 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, patent claims and litigations 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 Company’s 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
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Automotive and Discrete Group (ADG)
|
|
851
|
|
894
|
|
2,330
|
|
2,682
|
Analog, MEMS and Sensors Group (AMS)
|
|
997
|
|
968
|
|
2,473
|
|
2,214
|
Microcontrollers and Digital ICs Group (MDG)
|
|
815
|
|
688
|
|
2,172
|
|
1,896
|
Total net revenues of product segments
|
|
2,663
|
|
2,550
|
|
6,975
|
|
6,792
|
Others
|
|
3
|
|
3
|
|
9
|
|
10
|
Total consolidated net revenues
|
|
2,666
|
|
2,553
|
|
6,984
|
|
6,802
|
F-35
Operating income by reportable segment:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Automotive and Discrete Group (ADG)
|
|
49
|
|
76
|
|
88
|
|
244
|
Analog, MEMS and Sensors Group (AMS)
|
|
175
|
|
198
|
|
408
|
|
315
|
Microcontrollers and Digital ICs Group (MDG)
|
|
142
|
|
108
|
|
330
|
|
235
|
Total operating income of product segments
|
|
366
|
|
382
|
|
826
|
|
794
|
Others(1)
|
|
(37)
|
|
(46)
|
|
(160)
|
|
(51)
|
Total consolidated operating income
|
|
329
|
|
336
|
|
666
|
|
743
|
(1)
|
Operating income (loss) of Others includes items such as unused capacity charges, including reduced manufacturing activity due to COVID-19, impairment, restructuring charges and other related closure costs, management reorganization costs, phase out and start-up costs, and other unallocated expenses such as: strategic or special research and development programs, certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to product groups, as well as operating earnings of other products.
|
Reconciliation of operating income of segments to the total operating income:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
2020
|
|
September 28,
2019
|
|
September 26,
2020
|
|
September 28,
2019
|
Total operating income of segments
|
|
366
|
|
382
|
|
826
|
|
794
|
Impairment, restructuring charges and other related closure costs
|
|
(2)
|
|
—
|
|
(12)
|
|
(2)
|
Unused capacity charges
|
|
(38)
|
|
(28)
|
|
(136)
|
|
(36)
|
Other unallocated manufacturing results
|
|
3
|
|
(12)
|
|
(12)
|
|
(12)
|
Gain on sale of non-current assets
|
|
—
|
|
—
|
|
10
|
|
6
|
Strategic and other research and development programs and other non-allocated provisions(1)
|
|
—
|
|
(6)
|
|
(10)
|
|
(7)
|
Total operating loss Others
|
|
(37)
|
|
(46)
|
|
(160)
|
|
(51)
|
Total consolidated operating income
|
|
329
|
|
336
|
|
666
|
|
743
|
(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.
|
F-36
EXHIBIT INDEX
|
|
Exhibit
|
Description
|
12.1
|
Certification of Jean-Marc Chery, President and Chief Executive Officer and Sole Member of the Managing Board of STMicroelectronics N.V., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
12.2
|
Certification of Lorenzo Grandi, President, Finance, Infrastructure and Services and Chief Financial Officer of STMicroelectronics N.V., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
13.1
|
Certification of Jean-Marc Chery, President and Chief Executive Officer and Sole Member of the Managing Board of STMicroelectronics N.V., and Lorenzo Grandi, President, Finance, Infrastructure and Services and Chief Financial Officer of STMicroelectronics N.V., pursuant to 18 U.S.C. §1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
|