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

FORM 6‑K

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

Report on Form 6‑K dated August 5, 2020

Commission File Number: 1‑13546

 

STMicroelectronics N.V.
(Name of Registrant)

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

 

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

Form 20‑F Form 40‑F

Indicate by check mark if the registrant is submitting the Form 6‑K in paper as permitted by Regulation S‑T Rule 101(b)(1):

Yes No 

Indicate by check mark if the registrant is submitting the Form 6‑K in paper as permitted by Regulation S‑T Rule 101(b)(7):

Yes No 

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3‑2(b) under the Securities Exchange Act of 1934:

Yes No

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3‑2(b):  82‑ __________

Enclosure:  STMicroelectronics N.V.’s Second Quarter and First Half ended June 27, 2020:

 

Operating and Financial Review and Prospects;

 

Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flow, and Statements of Equity and related Notes for the three and six months ended June 27, 2020; and

 

Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the Sarbanes‑Oxley Act of 2002, submitted to the Commission on a voluntary basis.

 

 


 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

The following discussion should be read in conjunction with our Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flows and Statements of Equity for the three and six months ended June 27, 2020 and Notes thereto included elsewhere in this Form 6‑K, and our annual report on Form 20‑F for the year ended December 31, 2019 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on February 26, 2020 (the “Form 20‑F”). The following discussion contains statements of future expectations and other forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “Business Overview” and “Liquidity and Capital Resources—Financial Outlook: Capital Investment”. Our actual results may differ significantly from those projected in the forward‑looking statements. For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward‑looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward‑Looking Statements” and “Item 3. Key Information—Risk Factors” included in the Form 20‑F. We assume no obligation to update the forward‑looking statements or such risk factors.

Our Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited interim consolidated financial statements (“Consolidated Financial Statements”) and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:

 

Critical Accounting Policies using Significant Estimates.

 

Business Overview, a discussion of our business and overall analysis of financial and other relevant highlights of the three and six months ended June 27, 2020 designed to provide context for the other sections of the MD&A, including our expectations for selected financial items for the third quarter of 2020.

 

Other Developments.

 

Results of Operations, containing a year-over-year and sequential analysis of our financial results for the three and six months ended June 27, 2020, as well as segment information.

 

Legal Proceedings.

 

Discussion of the impact of changes in exchange rates, interest rates and equity prices on our activity and financial results.

 

Liquidity and Capital Resources, presenting an analysis of changes in our balance sheets and cash flows, and discussing our financial condition and potential sources of liquidity.

 

Impact of Recently Issued U.S. Accounting Standards.

 

Backlog and Customers, discussing the level of backlog and sales to our key customers.

 

Disclosure Controls and Procedures.

 

Cautionary Note Regarding Forward-Looking Statements.

2


 

At STMicroelectronics N.V. (“ST” or the “Company”), we are 46,000 creators and makers of semiconductor technologies mastering the semiconductor supply chain with state-of-the-art manufacturing facilities. An independent device manufacturer, we work with our 100,000 customers and thousands of partners to design and build products, solutions, and ecosystems that address their challenges and opportunities, and the need to support a more sustainable world. Our technologies enable smarter mobility, more efficient power and energy management, and the wide-scale deployment of the Internet of Things and 5G technology.

Critical Accounting Policies Using Significant Estimates

There were no material changes in the first half of 2020 to the information provided under the heading “Critical Accounting Policies Using Significant Estimates” included in our Form 20-F for the year ended December 31, 2019.

Fiscal Year

Under Article 35 of our Articles of Association, our fiscal year extends from January 1 to December 31. The first quarter of 2020 ended on March 28 and the second quarter ended on June 27. The third quarter will end on September 26 and the fourth quarter will end on December 31, 2020. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year and can also differ from equivalent prior years’ periods, as illustrated in the below table for the years 2019 and 2020.

 

 

Q1

Q2

Q3

Q4

 

Days

2019

89

91

91

94

2020

88

91

91

96

 

Business Overview

Our results of operations for each period were as follows:

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

Sequential

 

 

Year

Over

Year

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

Net revenues

 

$

2,087

 

 

$

2,231

 

 

$

2,173

 

 

 

(6.5

)%

 

 

(4.0

)%

Gross profit

 

 

730

 

 

 

846

 

 

 

830

 

 

 

(13.8

)

 

 

(12.2

)

Gross margin as percentage of net revenues

 

 

35.0

%

 

 

37.9

%

 

 

38.2

%

 

-290 bps

 

 

-320 bps

 

Operating income

 

 

106

 

 

 

231

 

 

 

196

 

 

 

(53.9

)

 

 

(45.8

)

Operating margin

 

 

5.1

%

 

 

10.4

%

 

 

9.0

%

 

-530 bps

 

 

-390 bps

 

Net income attributable to parent company

 

 

90

 

 

 

192

 

 

 

160

 

 

 

(53.1

)

 

 

(43.7

)

Earnings per share (Diluted)

 

$

0.10

 

 

$

0.21

 

 

$

0.18

 

 

 

(52.4

)%

 

 

(44.4

)%

 

The total available market is defined as the “TAM”, while the serviceable available market, the “SAM”, is defined as the market for products sold by us (which consists of the TAM and excludes major devices such as Microprocessors (MPUs), Dynamic random-access memories (DRAMs), optoelectronics devices, Flash Memories and the Wireless Application Specific market products such as Baseband and Application Processor).

Based on the data published by World Semiconductor Trade Statistics (WSTS), semiconductor industry revenues in the second quarter of 2020 decreased sequentially by approximately 1% for the TAM and 3% for the SAM to reach approximately $104 billion and $46 billion, respectively. On a year-over-year basis, the TAM increased by approximately 5% and the SAM decreased by approximately 3%.

The quarter was impacted by a weak demand environment, especially in Automotive, as well as some continuing operational and logistics challenges due to governmental regulations related to the COVID-19 outbreak that started in the first quarter of 2020. During the quarter, we returned to normal operations, supporting our customers’ demand and continuing to ensure the health and safety of our employees.

Second quarter 2020 net revenues amounted to $2,087 million, decreasing sequentially by 6.5%, about 380 basis points higher than the mid-point of our released guidance. On a sequential basis, Automotive and Discrete Group

3


 

(ADG) revenues decreased 3.5%, reflecting lower revenues in Automotive, partially offset by growth in Power Discrete. Analog, MEMS and Sensors Group (AMS) revenues decreased 26.8% primarily attributable to lower Imaging and Analog revenues. Microcontrollers and Digital ICs Group (MDG) revenues increased 17.7% with both Microcontrollers and Digital contributing to the increase.

On a year-over-year basis, second quarter net revenues decreased 4.0%. ADG revenues declined 17.8% with revenue decrease in Automotive and increase in Power Discrete. AMS revenues decreased 10.1%, with lower revenues in Imaging and MEMS and higher revenues in Analog. MDG revenues increased 24.1% on higher sales of Microcontrollers and Digital.

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

Our effective average exchange rate for the second quarter of 2020 was $1.10 for €1.00, compared to 1.11 in the first quarter of 2020 and $1.14 for €1.00 in the second quarter of 2019. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates”.

Our second quarter of 2020 gross profit was $730 million and gross margin was 35.0%, 40 basis points above the mid-point of our guidance, reflecting lower than expected unloading charges, mainly associated with a better than anticipated presence of our direct workforce during the lockdown period in Europe. Unused capacity charges were $64 million in the second quarter, impacting our gross margin by 310 basis points. On a sequential basis, gross margin decreased 290 basis points, mainly due to higher unloading charges, including the impact of COVID-19 workforce related restrictions, and lower manufacturing efficiency, mainly impacted by higher logistic costs. Gross margin decreased 320 basis points year-over-year, primarily due to higher unloading charges, including the impact of COVID-19 workforce related restrictions, and price pressure, partially offset by favorable product mix and positive currency effects, net of hedging.

Our aggregated selling, general & administrative (SG&A) and research & development (R&D) costs amounted to $632 million, compared to $645 million and $650 million in the prior and year-ago quarter respectively. The sequential decrease was mainly due to lower discretionary spending associated with the lockdown period in Europe, partially offset by calendar effect (91 days in the second quarter of 2020 compared to 88 days in the first quarter of 2020). On a year-over-year basis, operating expenses decreased mainly due to lower discretionary spending associated with the lockdown period in Europe and positive currency effects, net of hedging, partially offset by increased activities on R&D programs.

Other income and expenses, net, amounted to $12 million income, decreasing by $23 million sequentially, mainly due to higher non-recurring expenses associated with the COVID-19 pandemic and lower gain on sale of non-current assets. On a year-over-year basis, other income and expenses, net decreased by $6 million, mainly due to non-recurring expenses associated with the COVID-19 pandemic, partially offset by higher R&D funding.

In the second quarter of 2020, our operating income was $106 million, equivalent to 5.1% of net revenues, compared to $231 million in the previous quarter (10.4% of net revenues), and to $196 million (9.0% of net revenues) in the year-ago quarter. On a sequential basis, the operating income was negatively impacted by lower revenues and higher level of unloading charges. On a year-over-year basis, operating income was negatively impacted by a combination of lower revenues, higher level of unloading charges, partially offset by favorable currency effects, net of hedging and a more favorable product mix.

In the second quarter of 2020, our net cash from operating activities of $387 million covered net payment for purchase of tangible and intangible assets of $328 million and net payment for business combinations of $31 million, generating a positive free cash flow (non-U.S. GAAP measure) of $28 million. Our net cash and cash equivalent decreased $238 million, including $150 million invested in short-term deposits and net cash used in financing activities of $117 million (comprised mainly of the repurchase of common stock of $63 million and dividends payment of $37 million).

Looking at the third quarter, we expect a revenue growth of approximately 17.4%, plus or minus 350 basis points. This growth will be driven by engaged customer programs, new products and improved market conditions. Gross margin is expected to be approximately 36.0%, plus or minus 200 basis points, including about 200 basis points of unsaturation charges.

Our CAPEX plan for 2020 is now about $1.2 billion.

4


 

This outlook is based on an assumed effective currency exchange rate of approximately $1.12 = €1.00 for the 2020 third quarter and includes the impact of existing hedging contracts. The third quarter will close on September 26, 2020.

These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key Information — Risk Factors” in our Form 20-F as may be updated from time to time in our SEC filings.

Other Developments

On July 28, 2020, we launched and priced a $1.5 billion dual-tranche offering of new convertible bonds. The Bonds were launched in two $750 million tranches, one with a maturity of 5 years (47.5% conversion premium, negative 1.12% yield to maturity, 0% coupon) and the other with a maturity of 7 years (52.5% conversion premium, negative 0.63% yield to maturity, 0% coupon). Under the terms of the Bonds, we can satisfy the conversion rights either in cash or shares, or a combination of the two, at our selection. Proceeds from the issuance of the Bonds will be used for general corporate purposes, including the early redemption of the outstanding $750 million convertible bond due 2022. The issuance of the new Bonds occurred on August 4, 2020.

On July 28, 2020, we also announced the issuance of a redemption notice to inform bondholders that we will redeem all of the Tranche A bonds issued in July 2017 at their principal amount on August 27, 2020. We intend to settle the bonds through the payment of cash for the principal amount and the residual consideration through the delivery of shares. For such delivery of shares in connection with the net share settlement, we will use existing shares held as treasury stock as of June 27, 2020.

On July 16, we announced the signature of two M&A agreements related to the acquisitions of the entire share capital of Ultra Wide Band specialist BeSpoon and of the cellular IoT connectivity assets of Riot Micro. After closing of the two transactions, subject to customary regulatory approvals, we will further strengthen our offer for wireless connectivity and, in particular, the roadmap for our STM32 microcontrollers and secure MCUs.

On June 17, we held our Annual General Meeting of Shareholders (AGM) in Schiphol, the Netherlands. The main resolutions, approved by the Shareholders, were:

 

The adoption of the Company's statutory annual accounts for the year ended December 31, 2019, prepared in accordance with International Financial Reporting Standards (IFRS). The 2019 statutory annual accounts were filed with the Dutch Authority for the Financial Markets (AFM) on March 25, 2020 and are posted on the Company’s website (www.st.com) and on the AFM’s website (www.afm.nl);

 

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 authorization to the Supervisory Board to consider during September 2020 to increase such authorized dividend up to a maximum of $0.24 per outstanding share of the Company’s common stock;

 

The appointment of Ms. Ana de Pro Gonzalo as member of the Supervisory Board, for a three-year term expiring at the 2023 AGM, in replacement of Ms. Martine Verluyten whose mandate expired at the end of the 2020 AGM;

 

The appointment of Mr. Yann Delabrière as member of the Supervisory Board, for a three-year term expiring at the 2023 AGM, in replacement of Mr. Jean-Georges Malcor whose mandate expired at the end of the 2020 AGM;

 

The reappointment, for a three-year term expiring at the 2023 AGM, of the following members of the Supervisory Board: Ms. Heleen Kersten and Messrs. Alessandro Rivera, Frédéric Sanchez and Maurizio Tamagnini;

5


 

 

The adoption of the Company’s remuneration policy for the members of the Supervisory Board, in line with recent changes in Dutch corporate law and the EU’s shareholder rights directive; and

 

The re-appointment of EY as external auditor for the 2020, 2021, 2022 and 2023 financial years.

Following the conclusion of the AGM, the members of the Supervisory Board appointed Mr. Maurizio Tamagnini as the Chairman and Mr. Nicolas Dufourcq as the Vice-Chairman of the Supervisory Board, respectively, for a 3-year term to expire at the end of the 2023 AGM.

 

On May 12, we announced the publication of our 2020 Sustainability Report.

6


 

Results of Operations

 

Segment Information

We design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits, full‑custom devices and semi-custom devices and application-specific standard products for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products, which includes the production and sale of both silicon chips and Smartcards.

Our reportable segments are as follows:

 

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 and Defense products including components for microwave and millimeter wave.

For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses and a part of research and development expenses. In compliance with our 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 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.

7


 

Second Quarter 2020 vs. First Quarter 2020 and Second Quarter 2019

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

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

Net sales

 

$

2,084

 

 

 

99.9

%

 

$

2,228

 

 

 

99.9

%

 

$

2,160

 

 

 

99.4

%

Other revenues

 

 

3

 

 

 

0.1

 

 

 

3

 

 

 

0.1

 

 

 

13

 

 

 

0.6

 

Net revenues

 

 

2,087

 

 

 

100.0

 

 

 

2,231

 

 

 

100.0

 

 

 

2,173

 

 

 

100.0

 

Cost of sales

 

 

(1,357

)

 

 

(65.0

)

 

 

(1,385

)

 

 

(62.1

)

 

 

(1,343

)

 

 

(61.8

)

Gross profit

 

 

730

 

 

 

35.0

 

 

 

846

 

 

 

37.9

 

 

 

830

 

 

 

38.2

 

Selling, general and administrative

 

 

(259

)

 

 

(12.4

)

 

 

(270

)

 

 

(12.1

)

 

 

(269

)

 

 

(12.4

)

Research and development

 

 

(373

)

 

 

(17.9

)

 

 

(375

)

 

 

(16.8

)

 

 

(381

)

 

 

(17.5

)

Other income and expenses, net

 

 

12

 

 

 

0.6

 

 

 

35

 

 

 

1.6

 

 

 

18

 

 

 

0.8

 

Impairment, restructuring charges and other

   related closure costs

 

 

(4

)

 

 

(0.2

)

 

 

(5

)

 

 

(0.2

)

 

 

(2

)

 

 

(0.1

)

Operating income

 

 

106

 

 

 

5.1

 

 

 

231

 

 

 

10.4

 

 

 

196

 

 

 

9.0

 

Interest income (expense), net

 

 

(4

)

 

 

(0.2

)

 

 

1

 

 

 

 

 

 

 

 

 

 

Other components of pension benefit costs

 

 

(3

)

 

 

(0.1

)

 

 

(3

)

 

 

(0.1

)

 

 

(3

)

 

 

(0.1

)

Income before income taxes and

   noncontrolling interest

 

 

99

 

 

 

4.7

 

 

 

229

 

 

 

10.3

 

 

 

193

 

 

 

8.9

 

Income tax expense

 

 

(8

)

 

 

(0.4

)

 

 

(39

)

 

 

(1.7

)

 

 

(33

)

 

 

(1.5

)

Net income

 

 

91

 

 

 

4.4

 

 

 

190

 

 

 

8.6

 

 

 

160

 

 

 

7.4

 

Net (income) loss attributable to

   noncontrolling interest

 

 

(1

)

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Net income attributable to parent

   company

 

$

90

 

 

 

4.3

%

 

$

192

 

 

 

8.6

%

 

$

160

 

 

 

7.4

%

 

Net revenues

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

Sequential

 

 

Year

Over

Year

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,084

 

 

$

2,228

 

 

$

2,160

 

 

 

(6.5

)%

 

 

(3.5

)%

Other revenues

 

 

3

 

 

 

3

 

 

 

13

 

 

 

(9.1

)

 

 

(76.6

)

Net revenues

 

$

2,087

 

 

$

2,231

 

 

$

2,173

 

 

 

(6.5

)%

 

 

(4.0

)%

 

Our second quarter 2020 net revenues decreased sequentially by 6.5%, about 380 basis points higher than the mid-point of our released guidance. The sequential decrease resulted from a decrease of approximately 25% in average selling prices, driven by a less favorable product mix, partially offset by higher volumes of approximately 18%.

On a year-over-year basis, net revenues decreased by 4.0% as a result of an approximate decrease of 12% in average selling prices, mainly due to a less favorable product mix and, to a lower extent, to pure pricing effect, partially offset by an approximate 8% increase in volumes.

8


 

Net revenues by product group

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

Sequential

 

 

Year

Over

Year

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Automotive and Discrete Group (ADG)

 

$

727

 

 

$

753

 

 

$

885

 

 

 

(3.5

)%

 

 

(17.8

)%

Analog, MEMS and Sensors Group (AMS)

 

 

624

 

 

 

852

 

 

 

694

 

 

 

(26.8

)

 

 

(10.1

)

Microcontrollers and Digital ICs Group (MDG)

 

 

733

 

 

 

623

 

 

 

591

 

 

 

17.7

 

 

 

24.1

 

Others

 

 

3

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

Total consolidated net revenues

 

$

2,087

 

 

$

2,231

 

 

$

2,173

 

 

 

(6.5

)%

 

 

(4.0

)%

 

On a sequential basis, ADG revenues decreased 3.5%. The decrease in ADG revenues was driven by an approximate 34% decrease in average selling prices, mainly due to a less favorable product mix, partially offset by higher volumes of approximately 30%. AMS revenues declined 26.8% with Imaging being the main contributor to the decrease. This decline is explained almost entirely by a decrease in average selling prices, mainly due to a less favorable product mix, while volumes remained substantially flat. MDG revenues increased 17.7%, almost entirely due to a higher volumes of approximately 19%, while average selling prices decreased by approximately 1%.

On a year-over-year basis, ADG revenues decreased 17.8%, due to lower average selling prices of approximately 29%, mainly due to a less favorable product mix, partially offset by higher volumes of approximately 11%. AMS revenues decreased 10.1% compared to the year-ago period, due to lower volumes of approximately 6% and lower average selling prices of approximately 4%. MDG revenues increased 24.1% compared to the year-ago period, due to a combination of higher volumes of approximately 19% and higher average selling prices of approximately 5%.

Net Revenues by Market Channel (1)

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

OEM

 

 

66

%

 

 

75

%

 

 

70

%

Distribution

 

 

34

 

 

 

25

 

 

 

30

 

Total

 

 

100

%

 

 

100

%

 

 

100

%

 

(1)

Original Equipment Manufacturers (“OEM”) are the end-customers to which we provide direct marketing application engineering support, while Distribution customers refers to the distributors and representatives that we engage to distribute our products around the world.

By market channel, our second quarter net revenues in Distribution amounted to 34% of our total revenues, increasing from 25% and 30% in the prior and year-ago quarters, respectively.

Net Revenues by Location of Shipment (1)

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

Sequential

 

 

Year

Over

Year

 

 

 

(In millions)

 

 

 

 

 

EMEA

 

$

386

 

 

$

500

 

 

$

558

 

 

 

(22.8

)%

 

 

(30.9

)%

Americas

 

 

247

 

 

 

283

 

 

 

318

 

 

 

(12.7

)

 

 

(22.2

)

Asia Pacific

 

 

1,454

 

 

 

1,448

 

 

 

1,297

 

 

 

0.4

 

 

 

12.1

 

Total

 

$

2,087

 

 

$

2,231

 

 

$

2,173

 

 

 

(6.5

)%

 

 

(4.0

)%

 

(1)

Net revenues by location of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand. For example, products ordered by U.S.‑based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.

9


 

On a sequential basis, EMEA and Americas revenues decreased 22.8% and 12.7%, respectively, mainly due to lower sales in Automotive, while Asia Pacific revenues remained substantially flat. On a year-over-year basis, EMEA and Americas revenues decreased 30.9% and 22.2%, respectively, driven by lower sales in Automotive, while Asia Pacific revenues increased 12.1% mainly due to Microcontrollers.

Gross profit

 

 

 

Three Months Ended

 

 

Variation

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

Sequential

 

 

Year

Over

Year

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Gross profit

 

$

730

 

 

$

846

 

 

$

830

 

 

 

-13.8

%

 

 

-12.2

%

Gross margin

(as percentage of net revenues)

 

 

35.0

%

 

 

37.9

%

 

 

38.2

%

 

-290 bps

 

 

-320 bps

 

 

In the second quarter of 2020, gross margin was 35.0%, 40 basis points above the mid-point of our guidance, reflecting lower than expected unloading charges, mainly associated with a better than anticipated presence of our direct workforce during the lockdown period in Europe. On a sequential basis, gross margin decreased 290 basis points, primarily due to higher unloading charges, including the impact of COVID-19 workforce related restrictions, and lower manufacturing efficiency, mainly impacted by higher logistic costs.

On a year-over-year basis, gross margin decreased 320 basis points year-over-year, mainly due to higher unloading charges, including the impact of COVID-19 workforce related restrictions, and price pressure, partially offset by favorable product mix and positive currency effects, net of hedging.

Operating expenses

 

 

 

Three Months Ended

 

 

Variation

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

Sequential

 

 

Year

Over

Year

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

$

(259

)

 

$

(270

)

 

$

(269

)

 

 

4.0

%

 

 

3.7

%

Research and development expenses

 

 

(373

)

 

 

(375

)

 

 

(381

)

 

 

0.7

 

 

 

2.2

 

Total operating expenses

 

$

(632

)

 

$

(645

)

 

$

(650

)

 

 

2.1

%

 

 

2.8

%

As percentage of net revenues

 

 

(30.3

)%

 

 

(28.9

)%

 

 

(29.9

)%

 

-140 bps

 

 

-40 bps

 

 

The second quarter of 2020 operating expenses decreased to $632 million compared to $645 million in the previous quarter, mainly due to lower discretionary spending associated with the lockdown period in Europe, partially offset by calendar effect (91 days in the second quarter of 2020 compared to 88 days in the first quarter of 2020).

On a year-over-year basis, operating expenses decreased by $18 million, mainly due to lower discretionary spending associated with the lockdown period in Europe and positive currency effects, net of hedging, partially offset by increased activities on R&D programs.

As a percentage of revenues, our operating expenses amounted to 30.3% in the second quarter of 2020, increasing compared to 28.9% in the prior and 29.9% in the year-ago quarter.

R&D expenses were net of research tax credits in France, which amounted to $30 million in the second quarter of 2020, compared to $28 million and $29 million in the prior and year-ago quarters, respectively.

10


 

Other income and expenses, net

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Research and development funding

 

$

29

 

 

$

31

 

 

$

16

 

Exchange gain (loss), net

 

 

1

 

 

 

3

 

 

 

 

Phase-out and start-up costs

 

 

(2

)

 

 

(6

)

 

 

(6

)

Patent costs

 

 

(2

)

 

 

(1

)

 

 

1

 

Gain on sale of non-current assets

 

 

1

 

 

 

11

 

 

 

6

 

COVID-19 incremental costs

 

 

(15

)

 

 

(3

)

 

 

 

Other, net

 

 

 

 

 

 

 

 

1

 

Other income and expenses, net

 

$

12

 

 

$

35

 

 

$

18

 

As percentage of net revenues

 

 

0.6

%

 

 

1.6

%

 

 

0.8

%

 

In the second quarter of 2020, other income and expenses, net, amounted to $12 million income, decreasing by $23 million sequentially, mainly due to higher non-recurring expenses associated with the COVID-19 pandemic and lower gain on sale of non-current assets, and decreasing by $6 million on a year-over-year basis mainly due to non-recurring expenses associated with the COVID-19 pandemic, partially offset by higher R&D funding.

Impairment, restructuring charges and other related closure costs

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Impairment, restructuring charges and other related closure costs

 

$

(4

)

 

$

(5

)

 

$

(2

)

 

In the second quarter of 2020, we recorded $4 million of impairment, restructuring charges and other related closure costs, mainly consisting of impairment of licenses with no alternative future use.

In the first quarter of 2020, we recorded $5 million of impairment, restructuring charges and other related closure costs, mainly consisting of restructuring charges in association with the restructuring plan in Bouskoura, Morocco.

In the second quarter of 2019, we recorded $2 million of impairment, restructuring charges and other related closure costs, mainly consisting of impairment of customized equipment used for a specific project with no alternative use.

Operating income

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Operating income

 

$

106

 

 

$

231

 

 

$

196

 

As percentage of net revenues

 

 

5.1

%

 

 

10.4

%

 

 

9.0

%

 

The second quarter of 2020, operating income was $106 million, compared to an operating income of $231 million and $196 million in the prior and year-ago quarters, respectively.

On a sequential basis, the operating income was negatively impacted by lower revenues and higher level of unloading charges. On a year-over-year basis, operating income was negatively impacted by a combination of lower revenues, higher level of unloading charges, partially offset by favorable currency effects, net of hedging and a more favorable product mix.

11


 

Operating income by product group

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

Automotive and Discrete Group (ADG)

 

$

16

 

 

 

2.3

%

 

$

23

 

 

 

3.0

%

 

$

73

 

 

 

8.2

%

Analog, MEMS and Sensors Group (AMS)

 

 

56

 

 

 

9.0

 

 

 

177

 

 

 

20.8

 

 

 

74

 

 

 

10.7

 

Microcontrollers and Digital ICs Group (MDG)

 

 

117

 

 

 

15.9

 

 

 

71

 

 

 

11.5

 

 

 

45

 

 

 

7.6

 

Total operating income of product segments

 

 

189

 

 

 

9.1

 

 

 

271

 

 

 

12.1

 

 

 

192

 

 

 

8.8

 

Others(1)

 

 

(83

)

 

 

 

 

 

(40

)

 

 

 

 

 

4

 

 

 

 

Total operating income

 

$

106

 

 

 

5.1

%

 

$

231

 

 

 

10.4

%

 

$

196

 

 

 

9.0

%

 

(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.

In the second quarter of 2020, ADG operating income was $16 million, decreasing sequentially by $7 million, mainly due to Automotive. AMS operating income was $56 million, decreasing sequentially by $121 million, mainly impacted by lower sales in personal electronics, especially in Imaging. MDG operating income was $117 million, increasing by $46 million compared to the prior quarter, mainly due to the higher level of sales mainly of Microcontrollers products.

Compared to a year ago, ADG operating income decreased by $57 million, mainly reflecting lower profitability in Automotive. AMS operating income decreased by $18 million, mainly driven by Imaging lower profitability. MDG operating income increased by $72 million, mainly due to Microcontrollers higher sales.

Reconciliation to consolidated operating income

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Total operating income of product segments

 

$

189

 

 

$

271

 

 

$

192

 

Impairment, restructuring charges and other related closure costs

 

 

(4

)

 

 

(5

)

 

 

(2

)

Unused capacity charges

 

 

(64

)

 

 

(34

)

 

 

(7

)

Other unallocated manufacturing results

 

 

(11

)

 

 

(4

)

 

 

(3

)

Gain on sale of non-current assets

 

 

 

 

 

10

 

 

 

6

 

Strategic and other research and development programs

   and other non-allocated provisions(1)

 

 

(4

)

 

 

(7

)

 

 

10

 

Total operating income (loss) of Others

 

 

(83

)

 

 

(40

)

 

 

4

 

Total consolidated operating income

 

$

106

 

 

$

231

 

 

$

196

 

 

(1)

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

Interest income (expense), net

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Interest income (expense), net

 

$

(4

)

 

$

1

 

 

$

 

 

12


 

In the second quarter of 2020, we recorded a net interest expense of $4 million, compared to $1 million income in the prior quarter and nil in the year-ago quarter. The second quarter net interest expense was composed of $13 million of interest expense on our borrowings and banking fees, partially offset by $9 million of interest income.

Net interest income (expense) recorded in the second quarter of 2020, first quarter of 2020 and second quarter of 2019, respectively, included a $10 million charge, mainly non-cash, related to the senior unsecured convertible bonds issued on July 3, 2017.

Income tax expense

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Income tax expense

 

$

(8

)

 

$

(39

)

 

$

(33

)

 

During the second quarter of 2020, we registered an income tax expense of $8 million, reflecting the estimated annual effective tax rate in each of our jurisdictions, applied to the first half of 2020 consolidated result before taxes.

Net income attributable to parent company

 

 

 

Three Months Ended

 

 

 

June 27,

2020

 

 

March 28,

2020

 

 

June 29,

2019

 

 

 

(In millions)

 

Net income attributable to parent company

 

$

90

 

 

$

192

 

 

$

160

 

As percentage of net revenues

 

 

4.3

%

 

 

8.6

%

 

 

7.4

%

 

For the second quarter of 2020, we reported a net income attributable to parent company of $90 million, representing diluted earnings per share of $0.10, compared to $0.21 in the prior quarter and $0.18 in the prior-year quarter.

13


 

First Half of 2020 vs. First Half of 2019

The following table sets forth consolidated statements of operations data for the periods indicated:

 

 

 

Six Months Ended

 

 

 

June 27,

2020

 

 

June 29,

2019

 

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

Net sales

 

$

4,312

 

 

 

99.9

%

 

$

4,232

 

 

 

99.6

%

Other revenues

 

 

6

 

 

 

0.1

 

 

 

17

 

 

 

0.4

 

Net revenues

 

 

4,318

 

 

 

100.0

 

 

 

4,249

 

 

 

100.0

 

Cost of sales

 

 

(2,743

)

 

 

(63.5

)

 

 

(2,601

)

 

 

(61.2

)

Gross profit

 

 

1,575

 

 

 

36.5

 

 

 

1,648

 

 

 

38.8

 

Selling, general and administrative

 

 

(529

)

 

 

(12.3

)

 

 

(540

)

 

 

(12.7

)

Research and development

 

 

(748

)

 

 

(17.3

)

 

 

(749

)

 

 

(17.6

)

Other income and expenses, net

 

 

48

 

 

 

1.1

 

 

 

51

 

 

 

1.2

 

Impairment, restructuring charges and other

   related closure costs

 

 

(9

)

 

 

(0.2

)

 

 

(2

)

 

 

(0.1

)

Operating income

 

 

337

 

 

 

7.8

 

 

 

408

 

 

 

9.6

 

Interest income (expense), net

 

 

(3

)

 

 

 

 

 

2

 

 

 

0.1

 

Other components of pension benefit costs

 

 

(6

)

 

 

(0.2

)

 

 

(7

)

 

 

(0.2

)

Income (loss) on equity-method investments

 

 

 

 

 

 

 

 

1

 

 

 

 

Income before income taxes and

   noncontrolling interest

 

 

328

 

 

 

7.6

 

 

 

404

 

 

 

9.5

 

Income tax expense

 

 

(47

)

 

 

(1.1

)

 

 

(65

)

 

 

(1.5

)

Net income

 

 

281

 

 

 

6.5

 

 

 

339

 

 

 

8.0

 

Net (income) loss attributable to

   noncontrolling interest

 

 

1

 

 

 

 

 

 

(1

)