STMicroelectronics N.V.
Notes to Interim Consolidated Financial Statements (Unaudited)
STMicroelectronics N.V. (the "Company") is registered in the Netherlands with its corporate legal seat in Amsterdam, the Netherlands, and its corporate headquarters located in Geneva, Switzerland.
The Company is a global independent semiconductor company that designs, develops, manufactures and markets a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, the Company participates in the manufacturing value chain of smartcard products, which includes the production and sale of both silicon chips and smartcards.
The Company’s fiscal year ends on December 31. Interim periods are established for accounting purposes on a thirteen-week basis.
The Company’s first quarter ended on April 2, its second quarter ended on July 2, its third quarter will end on October 1, 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, 2021 except for the change in accounting guidance related to financial instruments with characteristics of liabilities and equity, as discussed 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 unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 20-F for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2022.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. The primary areas that require significant estimates and judgments by management include, but are not limited to:
|
• |
sales allowances and returns, |
|
• |
inventory obsolescence reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory, |
|
• |
recognition and measurement of loss contingencies, |
|
• |
valuation at fair value of assets acquired and liabilities assumed on business acquisitions, and measurement of any contingent consideration, |
F-9
|
• |
annual and trigger-based impairment review of goodwill and intangible assets, as well as the assessment of events which could trigger impairment testing on long-lived assets, |
|
• |
assessment of the Company’s long-lived assets economic useful lives, |
|
• |
assumptions used in measuring expected credit losses and impairment charges on financial assets, |
|
• |
assumptions used in assessing the number of awards expected to vest on stock-based compensation plans, |
|
• |
assumptions used in calculating pension obligations and other long-term employee benefits, |
|
• |
determination of the amount of tax expected to be paid and tax benefit expected to be received, including deferred income tax assets, valuation allowance and provisions for uncertain tax positions and claims. |
The Company bases the estimates and assumptions on historical experience and on various other factors such as market trends, market information used by market participants and the latest available business plans that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While the Company regularly evaluates its estimates and assumptions, the actual results experienced by the Company could differ materially and adversely from those estimates. COVID-19 pandemic did not result in significant impacts on these estimates.
5. |
Recent Accounting Pronouncements |
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. The guidance could be adopted either on a full retrospective basis or by applying the modified retrospective approach, with the impact upon transition recorded in equity for existing instruments outstanding as of the adoption date.
The guidance became effective for the Company on January 1, 2022. The Company adopted the new guidance by applying the modified retrospective method on the dual-tranche senior unsecured convertible bonds issued on August 4, 2020, which are convertible instruments with cash conversion features in the scope of the new guidance. The impact of the new guidance on the Company’s consolidated financial statements was a $107 million increase in Long-term debt, to reflect the convertible debt at its $1,500 million nominal value, less $6 million of unamortized debt issuance costs, and a $15 million decrease in Long-term deferred tax liabilities, with a corresponding $92 million decrease in equity (composed of a $117 million decrease in Additional paid-in capital and a $25 million increase in Retained earnings). In subsequent periods, the carrying value of the convertible bonds is incremented up to its nominal value over the amortization pattern of the $6 million unamortized debt issuance costs. The Company has also determined the dilutive effect of the convertible bonds by applying the if-converted method under which the convertible bonds are dilutive for the total 33,825,000 number of underlying shares based on the original share conversion price.
In November 2021, the FASB issued new guidance on disclosures about government assistance, to increase the transparency in reporting government assistance, including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The new guidance is effective for public companies for annual periods beginning after December 15, 2021. These disclosures are not required on an interim reporting basis but only annually. The guidance became effective for the Company on January 1, 2022, with no significant impact expected on the Company’s annual consolidated financial statements since they already include specific disclosures about public funding, including: the nature of the grants (e.g. investment and research tax credits, R&D and capital grants); a description of the main programs to which the Company participates; the accounting policies applied to these transactions, and the effect of those transactions on the entity’s annual consolidated financial statements.
F-10
6. |
Other Income and Expenses, Net |
Other income and expenses, net consisted of the following:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
R&D funding |
|
39 |
|
43 |
|
102 |
|
84 |
Exchange gain (loss), net |
|
5 |
|
1 |
|
7 |
|
3 |
Start-up and phase-out costs |
|
(1) |
|
— |
|
(1) |
|
— |
Patent costs |
|
(1) |
|
(1) |
|
(4) |
|
(3) |
Gain on sale of non-current assets |
|
2 |
|
3 |
|
2 |
|
3 |
COVID-19 incremental costs |
|
(3) |
|
(4) |
|
(8) |
|
(9) |
Other, net |
|
(1) |
|
— |
|
(2) |
|
(2) |
Total |
|
40 |
|
42 |
|
96 |
|
76 |
The Company receives public funding from governmental bodies in several jurisdictions. Public funding for research, development, and other innovation programs is recognized ratably as the related costs are incurred once the agreement with the respective governmental body has been signed and all applicable conditions have been met.
Exchange gains and losses, net represent the portion of exchange rate changes on transactions denominated in currencies other than an entity’s functional currency and the changes in fair value of derivative instruments which are not designated as hedges, as described in Note 26.
Start-up costs represent costs incurred in the start-up and testing of the Company’s new manufacturing facilities. Phase-out costs are costs incurred during the closing stage of a Company’s manufacturing facility. They are treated in the same manner as start-up costs.
Patent costs mainly 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 six months of 2022, the Company sold certain non-strategic assets, which generated a gain of $2 million.
COVID-19 incremental costs are mainly composed of purchases of medical disposables, such as masks and sanitizers, and other expenses related to sanitary measures undertaken to protect employees.
7. |
Interest Income (Expense), Net |
Interest expense, net consisted of the following:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Income |
|
9 |
|
5 |
|
12 |
|
9 |
Expense |
|
(3) |
|
(13) |
|
(5) |
|
(25) |
Total |
|
6 |
|
(8) |
|
7 |
|
(16) |
Interest income is related to cash and cash equivalents, short-term deposits, and marketable securities held by the Company.
On January 1, 2022 the Company adopted the new guidance on distinguishing liabilities from equity and EPS by applying the modified retrospective method, under which comparative periods are not restated. Under the previous guidance, the Company amortized through earnings the debt discount resulting from the initial allocation of proceeds between debt and equity components. Interest expense recorded in the first half of 2021 included a charge of $11 million on the senior unsecured convertible bonds issued on July 3, 2017 and a charge of $11 million on the senior unsecured convertible bonds issued on August 4, 2020, mainly resulting from the non-cash accretion
F-11
of the discount on the liability component, as recorded under the previous accounting guidance. With the adoption of the new guidance, the financial cost of the convertible debt instruments outstanding at the date of adoption is limited to the amortization expense of debt issuance costs, resulting in interest expense recorded in the first half of 2022 including a charge of $1 million on the senior unsecured convertible bonds issued on August 4, 2020. Convertible debt is further described in Note 20.
Interest expense also includes charges related to the banking fees and the sale without recourse of trade and other receivables, if any.
Income tax expense is as follows:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Income tax expense |
|
(139) |
|
(65) |
|
(268) |
|
(131) |
The annual estimated effective tax rate method was applied, as management believes it provides a reliable estimate of the expected yearly income tax expense on an interim basis. The Company registered an income tax expense of $139 million and $268 million during the second quarter and first half of 2022, respectively, reflecting the estimated annual effective tax rate at consolidated level, applied to the consolidated income before income tax.
At each reporting date, the Company assesses the recoverability of deferred tax assets and all material open income tax positions in all jurisdictions to determine any uncertain tax position. The Company uses a two-step process for the evaluation of uncertain tax positions. The first step assesses whether the tax benefit must be recognized. The second step measures the amount of tax benefit to be recognized on each uncertain tax position. In step one, only tax positions with a sustainability threshold higher than 50% are recognized. In step two, the Company determines the amount of recognizable tax benefit. The measurement methodology in step two is based on a “cumulative probability” approach, resulting in the recognition of the largest amount greater than 50% likely to be realized upon settlement with the taxing authorities.
Basic net earnings per share (“EPS”) is computed based on net income attributable to parent company stockholders using the weighted average number of common shares outstanding during the reporting period; the number of outstanding shares does not include treasury shares. Diluted EPS is computed using the weighted average number
F-12
of common shares and dilutive potential common shares outstanding during the period, such as stock issuable pursuant to unvested shares granted and stock used in the settlement of the convertible debt.
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to parent company |
|
867 |
|
412 |
|
1,614 |
|
776 |
Weighted average number of shares outstanding |
|
905,073,119 |
|
901,032,915 |
|
905,212,243 |
|
902,214,804 |
|
|
|
|
|
|
|
|
|
Basic EPS |
|
0.96 |
|
0.46 |
|
1.78 |
|
0.86 |
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
Net income attributable to parent company |
|
867 |
|
412 |
|
1,614 |
|
776 |
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
905,073,119 |
|
901,032,915 |
|
905,212,243 |
|
902,214,804 |
Dilutive effect of stock awards |
|
7,867,002 |
|
9,956,953 |
|
8,553,524 |
|
10,415,975 |
Dilutive effect of convertible bonds |
|
33,825,000 |
|
16,409,667 |
|
33,825,000 |
|
16,839,099 |
Number of shares used in calculating diluted EPS |
|
946,765,121 |
|
927,399,535 |
|
947,590,767 |
|
929,469,878 |
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
0.92 |
|
0.44 |
|
1.70 |
|
0.84 |
On January 1, 2022, the Company adopted the new guidance on distinguishing liabilities from equity and EPS by applying the modified retrospective method, under which prior periods are not restated.
Under the previous guidance, the Company applied the treasury stock method to determine the dilutive effect of convertible bonds as past experience, existing stated policies and the contractual terms of the bonds provided a reasonable basis to expect that the settlement would include cash, shares, or a mix of both.
With the adoption of the new guidance, the treasury stock method is no longer applied. The Company applies the if-converted method to determine the dilutive effect of convertible bonds, as reporting entities are required to assume share settlement, even when an instrument can be settled in cash or shares at the issuer’s option. The senior unsecured convertible bonds issued on August 4, 2020 are consequently fully dilutive, with the total underlying shares presented in the line “Dilutive effect of convertible bonds” of the table above for the three and six months ended on July 2, 2022.
F-13
10. |
Accumulated Other Comprehensive Income (“AOCI”) |
The table below details the changes in AOCI attributable to the Company’s stockholders by component, net of tax, for the six months ended July 2, 2022:
|
|
Gains
(Losses)
on Cash
Flow
Hedges |
|
Gains
(Losses)
on
Available-
For-Sale
Securities |
|
Defined
Benefit
Pension
Plan
Items |
|
Foreign
Currency
Translation
Adjustments
(“CTA”) |
|
Total |
December 31, 2021 |
|
(48) |
|
— |
|
(162) |
|
660 |
|
450 |
Cumulative tax impact |
|
6 |
|
— |
|
40 |
|
— |
|
46 |
December 31, 2021, net of tax |
|
(42) |
|
— |
|
(122) |
|
660 |
|
496 |
OCI before reclassifications |
|
(169) |
|
(1) |
|
— |
|
(210) |
|
(380) |
Amounts reclassified from AOCI |
|
77 |
|
— |
|
3 |
|
— |
|
80 |
OCI for the six months ended July 2, 2022 |
|
(92) |
|
(1) |
|
3 |
|
(210) |
|
(300) |
Cumulative tax impact |
|
12 |
|
— |
|
— |
|
— |
|
12 |
OCI for the six months ended July 2, 2022, net of tax |
|
(80) |
|
(1) |
|
3 |
|
(210) |
|
(288) |
July 2, 2022 |
|
(140) |
|
(1) |
|
(159) |
|
450 |
|
150 |
Cumulative tax impact |
|
18 |
|
— |
|
40 |
|
— |
|
58 |
July 2, 2022, net of tax |
|
(122) |
|
(1) |
|
(119) |
|
450 |
|
208 |
Items reclassified out of Accumulated Other Comprehensive Income for the six month period ended July 2, 2022 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 |
|
(47) |
|
Cost of sales |
Foreign exchange derivative contracts |
|
(7) |
|
Selling, general and
administrative |
Foreign exchange derivative contracts |
|
(23) |
|
Research and development |
|
|
10 |
|
Income tax benefit (expense) |
|
|
(67) |
|
Net of tax |
Defined benefit pension plan items |
|
|
|
|
Amortization of actuarial gains (losses) |
|
(3) |
|
Other components of pension
benefit costs(1) |
|
|
— |
|
Income tax benefit (expense) |
|
|
(3) |
|
Net of tax |
Total reclassifications for the period attributable to the
Company’s stockholders |
|
(70) |
|
Net of tax |
(1)These items are included in the computation of net periodic pension cost, as described in Note 21.
11. |
Short-Term Deposits and Marketable Securities |
To optimize the return yield on its short-term investments, the Company invested $186 million of available cash in short-term deposits as of July 2, 2022. These short-term deposits represent cash equivalents with original maturity beyond three months and no significant risk of changes in fair value.
Changes in the balance of marketable securities, as reported in current assets on the consolidated balance sheets as of July 2, 2022, are detailed in the table below:
|
|
December 31,
2021 |
|
Purchase |
|
Accretion |
|
Change in fair value included
in OCI for available-for-sale marketable securities* |
|
July 2,
2022 |
U.S. Treasury debt securities |
|
— |
|
229 |
|
(1) |
|
1 |
|
229 |
Total |
|
— |
|
229 |
|
(1) |
|
1 |
|
229 |
F-14
* Other Comprehensive Income
In the first half of 2022, the Company invested $229 million available cash in U.S. Treasury bonds. The debt securities have an average rating of Aaa/AA+/AAA from Moody’s, S&P and Fitch, respectively, with a weighted average maturity of 3.5 years. The debt securities are reported as current assets on the line “Marketable securities” on the consolidated balance sheet as of July 2, 2022, since they represented investments of funds available for current operations. The bonds are classified as available-for-sale financial assets and recorded at fair value as of July 2, 2022. The fair value measurement corresponds to a Level 1 fair value hierarchy measurement. The aggregate amortized cost basis of these securities totaled $230 million as of July 2, 2022.
The Company did not hold debt securities as of December 31, 2021.
12. |
Trade Accounts Receivable, Net |
Trade accounts receivable, net consisted of the following:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Trade accounts receivable |
|
2,096 |
|
1,778 |
Current expected credit losses allowance ("CECLA") |
|
(22) |
|
(19) |
Total |
|
2,074 |
|
1,759 |
The Company uses a lifetime expected losses allowance for all trade receivables based on failure rates, as applied to the gross amounts of trade accounts receivable. The allowance also includes reasonable assumptions about future credit trends. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the Company’s customers to settle the receivables. In addition to the factors already embedded in the failure rates, as applied to trade accounts receivable, the Company has identified cyclicality and uncertainties around continued growth for the semiconductor industry and its serviceable available market as the most relevant factors. These macroeconomic factors are weighted into different economic scenarios, in line with estimates and methodologies applied by other business entities, including financial institutions.
On that basis, the changes in reported CECLA for the period ended July 2, 2022 are presented below:
|
|
Six Months Ended |
|
|
July 2,
2022 |
CECLA as of December 31, 2021 |
|
(19) |
Current-period adjustment to CECLA |
|
(3) |
CECLA as of July 2, 2022 |
|
(22) |
Adjustments to the expected credit losses allowance are reported in the line “Selling, general and administrative” in the consolidated statements of income.
There were no significant write-offs in 2022 and 2021.
Inventories consisted of the following:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Raw materials |
|
296 |
|
223 |
Work-in-process |
|
1,395 |
|
1,235 |
Finished products |
|
616 |
|
514 |
Total |
|
2,307 |
|
1,972 |
F-15
Reserve for obsolescence is estimated for excess uncommitted inventories based on history of sales, backlog of orders and production plans.
Goodwill allocated to reportable segments and changes in the carrying amount of goodwill were as follows:
|
|
ADG |
|
AMS |
|
MDG |
|
Total |
December 31, 2021 |
|
83 |
|
2 |
|
228 |
|
313 |
Foreign currency translation |
|
(9) |
|
— |
|
(10) |
|
(19) |
July 2, 2022 |
|
74 |
|
2 |
|
218 |
|
294 |
15. |
Other Intangible Assets, net |
Other intangible assets, net consisted of the following:
July 2, 2022 |
|
Gross Value |
|
Accumulated
Depreciation |
|
Net Book Value |
Technologies & licenses |
|
1,022 |
|
(706) |
|
316 |
Purchased & internally developed software |
|
575 |
|
(495) |
|
80 |
Technologies in progress |
|
55 |
|
— |
|
55 |
Other intangible assets |
|
71 |
|
(70) |
|
1 |
Total |
|
1,723 |
|
(1,271) |
|
452 |
|
|
|
|
|
|
|
December 31, 2021 |
|
Gross Value |
|
Accumulated
Depreciation |
|
Net Book Value |
Technologies & licenses |
|
978 |
|
(675) |
|
303 |
Purchased & internally developed software |
|
567 |
|
(485) |
|
82 |
Technologies in progress |
|
52 |
|
— |
|
52 |
Other intangible assets |
|
72 |
|
(71) |
|
1 |
Total |
|
1,669 |
|
(1,231) |
|
438 |
The line “Technologies in progress” in the table above also includes internally developed software under construction and software not ready for their intended use.
Amortization expense related to intangible assets subject to amortization was $51 million and $46 million for the first half of 2022 and 2021, respectively.
Estimated future amortization expense related to intangible assets as of July 2, 2022, is as follows:
Year |
|
|
Remainder of 2022 |
|
60 |
2023 |
|
105 |
2024 |
|
91 |
2025 |
|
65 |
2026 |
|
43 |
Thereafter |
|
88 |
Total |
|
452 |
F-16
16. |
Property, Plant and Equipment, net |
Property, plant and equipment, net consisted of the following:
July 2, 2022 |
|
Gross Value |
|
Accumulated
Depreciation |
|
Net Book Value |
Land |
|
82 |
|
— |
|
82 |
Buildings |
|
935 |
|
(542) |
|
393 |
Facilities & leasehold improvements |
|
3,381 |
|
(2,801) |
|
580 |
Machinery and equipment |
|
17,161 |
|
(13,517) |
|
3,644 |
Computer and R&D equipment |
|
368 |
|
(310) |
|
58 |
Operating lease right-of-use assets |
|
304 |
|
(128) |
|
176 |
Other tangible assets |
|
154 |
|
(93) |
|
61 |
Construction in progress |
|
1,799 |
|
— |
|
1,799 |
Total |
|
24,184 |
|
(17,391) |
|
6,793 |
|
|
|
|
|
|
|
December 31, 2021 |
|
Gross Value |
|
Accumulated
Depreciation |
|
Net Book Value |
Land |
|
84 |
|
— |
|
84 |
Buildings |
|
951 |
|
(562) |
|
389 |
Facilities & leasehold improvements |
|
3,490 |
|
(2,936) |
|
554 |
Machinery and equipment |
|
17,085 |
|
(13,786) |
|
3,299 |
Computer and R&D equipment |
|
395 |
|
(333) |
|
62 |
Operating lease right-of-use assets |
|
314 |
|
(114) |
|
200 |
Other tangible assets |
|
147 |
|
(97) |
|
50 |
Construction in progress |
|
1,022 |
|
— |
|
1,022 |
Total |
|
23,488 |
|
(17,828) |
|
5,660 |
The line “Construction in progress” in the table above includes property, plant and equipment under construction and equipment under qualification not yet ready for their intended use.
The line “Machinery and equipment” in the table above includes $37 million leased equipment as of July 2, 2022, related to an arrangement signed in June 2022. The arrangement qualifies as a finance lease.
Total depreciation charge was $522 million and $468 million for the first half of 2022 and 2021, respectively.
As of July 2, 2022, finance lease right-of-use assets amounted to $37 million, corresponding mainly to a new finance lease agreement signed in June 2022, as described in Note 16. As of December 31, 2021, finance lease right-of-use assets were less than $1 million. The below information is presented for operating leases only.
Operating leases consisted of the following:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Assets |
|
|
|
|
Right-of-use assets |
|
176 |
|
200 |
Total right-of-use assets |
|
176 |
|
200 |
|
|
|
|
|
Lease liabilities |
|
|
|
|
Current |
|
48 |
|
55 |
Non-current |
|
126 |
|
148 |
Total lease liabilities |
|
174 |
|
203 |
F-17
Maturities of operating lease liabilities are as follows:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
2022 |
|
27 |
|
59 |
2023 |
|
47 |
|
46 |
2024 |
|
30 |
|
30 |
2025 |
|
19 |
|
18 |
2026 |
|
13 |
|
13 |
Thereafter |
|
82 |
|
84 |
Total future undiscounted cash outflows |
|
218 |
|
250 |
Effect of discounting |
|
(44) |
|
(47) |
Total operating lease liabilities |
|
174 |
|
203 |
Operating lease term and discount rate are as follows:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Weighted average remaining lease term (in years) |
|
9.73 |
|
9.38 |
Weighted average discount rate |
|
2.78% |
|
2.69% |
Operating lease cost and cash paid for the first half of 2022 and 2021 are as follows:
|
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
Operating lease cost |
|
38 |
|
34 |
Operating lease cash paid |
|
39 |
|
33 |
Right-of-use assets obtained in exchange for new operating lease liabilities in the first half of 2022 and 2021 are as follows:
|
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
Operating leases |
|
16 |
|
38 |
18. |
Long-Term Investments |
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Long-term investments |
|
10 |
|
10 |
Total |
|
10 |
|
10 |
Long-term investments are equity securities with no readily determinable fair value for which the Company has elected to apply the cost method as a measurement alternative. It includes principally the Company’s investment in DNP Photomask Europe S.p.A (“DNP”). The Company has identified DNP as a VIE but has determined that it is not the primary beneficiary. The significant activities of DNP revolve around creation of masks and development of high level mask technology. The Company does not have the power to direct these activities. The Company’s current maximum exposure to losses as a result of its involvement with DNP is limited to its investment. The Company has not provided additional financial support to DNP in the first half of 2022 and currently has no current requirement or intent to provide further financial support to DNP.
F-18
19. |
Other Non-Current Assets |
Other non-current assets consisted of the following:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Equity securities |
|
24 |
|
29 |
Long-term State receivables |
|
476 |
|
506 |
Deposits and other non-current assets |
|
205 |
|
104 |
Total |
|
705 |
|
639 |
Long-term State receivables include receivables related to funding and receivables related to tax refunds. Funding are mainly public grants to be received from governmental agencies in Italy and France as part of long-term research, development, innovation, industrialization and capital investment projects. Long-term receivables related to tax refund correspond to tax benefits claimed by the Company in certain of its local tax jurisdictions, for which collection is expected beyond one year.
From time to time, the Company enters into factoring transactions to accelerate the realization in cash of some non-current assets. As of July 2, 2022, $107 million of these receivables were sold without recourse, with a financial cost of less than $1 million, as compared to $118 million receivables sold without recourse in the year-ago period, with a financial cost of less than $1 million.
The major portion of other non-current assets to which the expected credit loss model applies are long-term State receivables. Due to the existing history of zero-default on receivables originated by governments, the expected credit losses are assumed to be negligible as of July 2, 2022, and December 31, 2021. Other non-current assets presented in the table above on the line "Deposits and other non-current assets" are composed of individually insignificant amounts not deemed to have exposure of default. Consequently, no significant expected credit loss allowance was reported on other non-current assets at reporting date.
20. Financial Debt
Financial debt consisted of the following:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Funding program loans from European Investment Bank: |
|
|
|
|
0.26% due 2028, floating interest rate at Euribor + 0.589% |
|
187 |
|
202 |
0.04% due 2029, floating interest rate at Euribor + 0.564% |
|
179 |
|
222 |
0.12% due 2031, floating interest rate at Euribor + 0.583% |
|
315 |
|
379 |
0.12% due 2031, floating interest rate at Euribor + 0.660% |
|
172 |
|
187 |
Credit Facility from Cassa Depositi e Prestiti SpA ("CDP"): |
|
|
|
|
0.72% due 2027, floating interest rate at Euribor + 0.690% |
|
130 |
|
156 |
Dual tranche senior unsecured convertible bonds |
|
|
|
|
Zero-coupon due 2025 (Tranche A) |
|
747 |
|
713 |
Zero-coupon due 2027 (Tranche B) |
|
747 |
|
674 |
Finance leases: |
|
|
|
|
3.86% due 2027, fixed interest rate |
|
37 |
|
— |
Other funding program loans: |
|
|
|
|
0.43% (weighted average), due 2022-2028, fixed interest rate |
|
5 |
|
6 |
Total long-term debt |
|
2,519 |
|
2,539 |
Less current portion |
|
(134) |
|
(143) |
Total long-term debt, less current portion |
|
2,385 |
|
2,396 |
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
F-19
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 with $200,000 par value and an equivalent of 4,435 shares per each Tranche B bond with $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.
On January 1, 2022 the Company adopted the new guidance on distinguishing liabilities from equity to simplify an issuer’s accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models in ASC 470-20. The Company adopted the new guidance by applying the modified retrospective method on instruments outstanding at transition date. These instruments correspond solely to the dual-tranche senior unsecured convertible bonds issued on August 4, 2020, which are convertible instruments with cash conversion features in the scope of the new guidance.
Under previous guidance, proceeds were allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount. The fair value of the liability component at initial recognition totaled $1,362 million before allocation of issuance costs and deferred tax effect. An amount of $215 million, before allocation of $1 million issuance costs and $30 million deferred tax effect, was recorded in equity as the value of the conversion features of the instruments. Under the new guidance, the Company is no longer required to separately present in equity the cash conversion features embedded in the convertible bonds. Instead, the convertible bonds are wholly accounted for as debt and thus, are stated at principal amount less unamortized debt issuance costs. The new guidance does not affect the separation model for embedded conversion features of convertible debt instruments issued with substantial premium, for which the premium is required to be recorded as additional paid-in capital. The premium received by the Company upon issuance of the convertible bonds remains therefore in equity and amounts to $77 million, net of the corresponding deferred tax effect. The impact upon adoption on the Company’s consolidated financial statements was a $107 million increase in Long-term debt, to reflect the convertible debt at its $1,500 million nominal value, less $6 million of unamortized debt issuance costs, and a $15 million decrease in Long-term deferred tax liabilities, with a corresponding $92 million decrease in equity (composed of a $117 million decrease in Additional paid-in capital and a $25 million increase in Retained earnings).
As of July 2, 2022, the Company stock price did not exceed the conversion price of the senior unsecured convertible bonds issued on August 4, 2020.
In the first half of 2022, the Company finalized the signature of a long-term credit facility with the European Investment Bank (“EIB”) for a total of €600 million. Out of the €600 million, no amount had been drawn as of July 2, 2022.
The Company’s long-term debt contained standard conditions but does not impose minimum financial ratios. The Company had unutilized committed medium-term credit facilities with core relationship banks totaling $1,261 million as of July 2, 2022.
F-20
21. |
Post-Employment and Other Long-Term Employee Benefits |
The Company and its subsidiaries have a number of defined benefit pension plans, mainly unfunded, and other long-term employees’ benefits covering employees in various countries. The defined benefit plans provide pension benefits based on years of service and employee compensation levels. The other long-term employees’ plans provide benefits due during the employees’ period of service after certain seniority levels. The Company uses December 31 as measurement date for its plans. Eligibility is generally determined in accordance with local statutory requirements. For the Italian termination indemnity plan (“TFR”) generated before July 1, 2007, the Company continues to measure the vested benefits to which Italian employees are entitled as if the amounts were immediately due as of July 2, 2022, 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 |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Service cost |
|
(14) |
|
(9) |
|
(22) |
|
(18) |
Interest cost |
|
(12) |
|
(6) |
|
(20) |
|
(11) |
Expected return on plan assets |
|
12 |
|
6 |
|
18 |
|
12 |
Amortization of actuarial net (loss) gain |
|
(2) |
|
(3) |
|
(3) |
|
(6) |
Settlements |
|
- |
|
— |
|
— |
|
— |
Net periodic benefit cost (1) |
|
(16) |
|
(12) |
|
(27) |
|
(23) |
(1) |
Defined benefit plan expense components other than service cost, representing $5 million and $5 million in the first six months of 2022 and 2021, 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 |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Service cost |
|
(2) |
|
(1) |
|
(3) |
|
(2) |
Interest cost |
|
— |
|
— |
|
— |
|
— |
Net periodic benefit cost |
|
(2) |
|
(1) |
|
(3) |
|
(2) |
Employer contributions paid and expected to be paid in 2022 are consistent with the amounts disclosed in the consolidated financial statements for the year ended December 31, 2021.
22. |
Other Long-Term Liabilities |
Other long-term liabilities consisted of the following:
|
|
As of |
|
As of |
|
|
July 2,
2022 |
|
December 31,
2021 |
Non-current operating lease liabilities |
|
126 |
|
148 |
Contingent consideration for business combinations |
|
62 |
|
70 |
Other long-term employee benefits |
|
87 |
|
90 |
Long-term liability related to public funding |
|
38 |
|
44 |
Long-term advances from customers |
|
69 |
|
- |
Long-term derivatives |
|
35 |
|
- |
Others |
|
75 |
|
64 |
Total |
|
492 |
|
416 |
Lease liabilities are further described in Note 17. Deferred and contingent consideration related to business acquisitions are further described in Note 27.
F-21
The Annual General Meeting of Shareholders (“AGM”) held on May 25, 2022 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 2022 and first quarter of 2023. An amount of $48 million corresponding to the first installment was paid during the second quarter of 2022. The remaining portion of the first installment and the $0.18 per share cash dividend corresponding to the last three installments totaled $169 million and were reported in the line “Dividends payable to stockholders” in the consolidated balance sheet as of July 2, 2022.
The AGM held on May 27, 2021 authorized the distribution of a cash dividend of $0.24 per outstanding share of the Company’s common stock, to be distributed in quarterly installments of $0.06 in each of the second, third and fourth quarters of 2021 and first quarter of 2022. The amounts of $54 million corresponding to the first installment, $55 million corresponding to the second installment, $54 million corresponding to the third installment were paid as of December 31, 2021. An amount of $55 million corresponding to the fourth installment was paid in the first half of 2022.
The AGM held on June 17, 2020 authorized the distribution of a cash dividend of $0.168 per outstanding share of the Company’s common stock, to be distributed in quarterly installments of $0.042 in each of the second, third and fourth quarters of 2020 and first quarter of 2021. An amount of $37 million corresponding to the first installment, $38 million corresponding to the second installment and $34 million corresponding to the third installment were paid as of December 31, 2020. The remaining $4 million portion of the third installment and the fourth installment of $38 million, were paid in the first half of 2021.
The authorized share capital of the Company is Euro 1,810 million consisting of 1,200,000,000 common shares and 540,000,000 preference shares, each with a nominal value of €1.04. As of July 2, 2022, the number of shares of common stock issued was 911,281,920 shares (911,276,920 as of December 31, 2021).
As of July 2, 2022, the number of shares of common stock outstanding was 907,613,201 (906,518,057 as of December 31, 2021).
As of July 2, 2022, the Company owned 3,668,719 shares classified as treasury stock in the consolidated statement of equity compared to 4,758,863 shares as of December 31, 2021.
The treasury shares have been originally designated for allocation under the Company’s share-based remuneration programs. As of July 2, 2022, 73,240,833 of these treasury shares were transferred to employees under the Company’s share-based remuneration programs, of which 5,307,620 were transferred in the first half of 2022.
On July 1, 2021, the Company announced the launch of a share buy-back program of up to $1,040 million to be executed within a three-year period. The Company intends to carry out the buy-back program and holds the shares bought back as treasury stock for the purpose of meeting the Company’s obligations in relation to its employee stock award plans and to support the potential settlement of its outstanding convertible debt. During the first half of 2022, as part of the share buy-back program announced on July 1, 2021, the Company repurchased approximately 4.2 million shares of its common stock for a total amount of $173 million.
25. |
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, anti-trust, anti-corruption, competition, other compliance regulations, tax claims beyond assessed uncertain tax positions, environmental damages as well as claims arising out of theft, loss, or misuse of personal data. 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
F-22
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, 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 or insurance policies will be sufficient to cover the extent of its potential liabilities. Legal costs associated with claims are expensed as incurred. In the event of litigation which is adversely determined with respect to the Company’s interests, or in the event the Company needs to change its evaluation of a potential third-party claim, based on new evidence or communications, a material adverse effect could impact its operations or financial condition at the time it were to materialize.
As of July 2, 2022 and December 31, 2021, provisions for estimated probable losses with respect to claims and legal proceedings were not considered material.
26. |
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
F-23
and are marked-to-market at each period-end with the associated changes in fair value recognized in “Other income and expenses, net” in the consolidated statements of income.
Cash Flow Hedge
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company hedges through the use of currency forward contracts and currency options, including collars, certain Euro-denominated forecasted intercompany transactions that cover at reporting date a large part of its R&D, SG&A expenses as well as a portion of its front-end manufacturing costs of semi-finished goods within cost of sales. The Company also hedges through the use of currency forward contracts certain forecasted manufacturing transactions denominated in Singapore dollars.
These derivative instruments are designated as and qualify for cash flow hedge. They are reflected at fair value in the consolidated balance sheets. The criteria for designating a derivative as a hedge include the instrument’s effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction, which enables the Company to conclude, based on the fact that the critical terms of the hedging instruments match the terms of the hedged transactions, that changes in cash flows attributable to the risk being hedged are expected to be completely offset by the hedging derivatives. Currency forward contracts and currency options, including collars, used as hedges are highly effective at reducing the Euro/U.S. dollar and the Singapore dollar/U.S. dollar currency fluctuation risk and are designated as a hedge at the inception of the contract and on an ongoing basis over the duration of the hedge relationship. Effectiveness on transactions hedged through purchased currency options and collars is measured on the full fair value of the instrument, including the time value of the options. Ineffectiveness appears if the hedge relationship is not perfectly effective or if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change on the expected cash flows on the hedged transactions. The whole change in fair value recorded on the hedging instrument is reported as a component of “Accumulated other comprehensive income (loss)” in the consolidated statements of equity and is reclassified into earnings in the same period in which the hedged transaction affects earnings, and within the same consolidated statement of income line item as the impact of the hedged transaction.
The principles regulating the hedging strategy for derivatives designated as cash flow hedge are established as follows: (i) for R&D and Corporate costs, up to 80% of the total forecasted transactions; (ii) for manufacturing 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 of July 2, 2022, 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 |
|
500 |
|
986 |
Currency collars |
|
490 |
|
832 |
|
|
|
|
|
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 |
|
— |
|
218 |
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.
F-24
Credit risk
The expected credit loss and impairment methodology applied on each category of financial assets is further described in each respective note. While cash and cash equivalents are also subject to the expected credit loss model, the identified expected credit loss is deemed to be immaterial. The maximum exposure for all financial assets is their carrying amount.
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract leading to a financial loss. Credit risk typically arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortized cost, the counterparty of derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure to customers, including outstanding receivables.
The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. Credit risk is managed at the level of the Group. The Company selects banks and/or financial institutions that operate with the Company based on the criteria of long-term rating from at least two major Rating Agencies and keeping a maximum outstanding amount per instrument with each bank not to exceed 20% of the total. For derivative financial instruments, management has established limits so that, at any time, the fair value of contracts outstanding is not concentrated with any individual counterparty.
The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. If certain customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, considering its financial position, past experience and other factors. Individual risk limits are set based on internal and external ratings in accordance with limits set by management. The utilization of credit limits is regularly monitored. Sales to customers are primarily settled in cash, which mitigates credit risk. There is no major concentration of credit risk, whether through exposure to individual customers, specific industry sectors or regions. Any remaining concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and their dispersion across many geographic areas.
The Company’s investments in instruments carried at amortized cost primarily include receivables towards government bodies. As such, they are investments with immaterial credit loss. Any remaining receivable is of low credit risk and is individually not significant. The credit ratings of the investments are monitored for credit deterioration.
Other market risk
For a complete description of exposure to market risks, these 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, 2021.
F-25
Information on fair value of derivative instruments and their classification in the consolidated balance sheets as of July 2, 2022 and December 31, 2021 is presented in the tables below:
|
|
|
|
As of |
|
As of |
|
|
|
|
July 2,
2022 |
|
December 31,
2021 |
Asset Derivatives |
|
Balance sheet location |
|
Fair value |
|
Fair value |
Derivatives designated as a hedge: |
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
— |
|
2 |
Currency collars |
|
Other current assets |
|
— |
|
1 |
Total derivatives designated as a hedge: |
|
|
|
— |
|
3 |
Derivatives not designated as a hedge: |
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other current assets |
|
5 |
|
3 |
Total derivatives not designated as a hedge: |
|
|
|
5 |
|
3 |
Total Derivatives |
|
|
|
5 |
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
|
|
July 2, |
|
December 31, |
|
|
|
|
2022 |
|
2021 |
Liability Derivatives |
|
Balance sheet location |
|
Fair value |
|
Fair value |
Derivatives designated as a hedge: |
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other payables and accrued liabilities |
|
(61) |
|
(29) |
Foreign exchange forward contracts |
|
Other non-current liabilities |
|
(22) |
|
— |
Currency collars |
|
Other payables and accrued liabilities |
|
(29) |
|
(13) |
Currency collars |
|
Other non-current liabilities |
|
(13) |
|
— |
Total derivatives designated as a hedge: |
|
|
|
(125) |
|
(42) |
Derivatives not designated as a hedge: |
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Other payables and accrued liabilities |
|
(7) |
|
(1) |
Total derivatives not designated as a hedge: |
|
|
|
(7) |
|
(1) |
Total Derivatives |
|
|
|
(132) |
|
(43) |
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 less than $1 million and liabilities for a net amount of $42 million (composed of $10 million asset net of a $53 million liability) as of July 2, 2022. 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 consolidated balance sheets, and representing total assets of $5 million and total liabilities of $90 million as of July 2, 2022.
The effect of derivative instruments designated as cash flow hedge on the consolidated statements of income for the three and six months ended July 2, 2022 and July 3, 2021 and on the “Accumulated other comprehensive income (loss)” (“AOCI”) as reported in the consolidated statements of equity as of July 2, 2022 and December 31, 2021 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 |
|
|
As of |
|
As of |
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
December 31,
2021 |
|
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Foreign exchange forward contracts |
|
(61) |
|
(20) |
|
Cost of sales |
|
(20) |
|
8 |
|
(32) |
|
18 |
Foreign exchange forward contracts |
|
(7) |
|
(2) |
|
Selling, general and administrative |
|
(3) |
|
1 |
|
(4) |
|
2 |
Foreign exchange forward contracts |
|
(21) |
|
(9) |
|
Research and development |
|
(8) |
|
3 |
|
(14) |
|
7 |
Currency collars |
|
(34) |
|
(11) |
|
Cost of sales |
|
(9) |
|
1 |
|
(15) |
|
5 |
Currency collars |
|
(4) |
|
(1) |
|
Selling, general and administrative |
|
(2) |
|
— |
|
(3) |
|
1 |
Currency collars |
|
(13) |
|
(5) |
|
Research and development |
|
(6) |
|
— |
|
(9) |
|
3 |
Total |
|
(140) |
|
(48) |
|
Total |
|
(48) |
|
13 |
|
(77) |
|
36 |
A total $105 million loss deferred in AOCI is expected to be reclassified to earnings within the next twelve months.
F-26
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 half of 2022 and 2021. No ineffectiveness is to be reported on hedge transactions outstanding as of July 2, 2022.
The effect on the consolidated statements of income for the three months ended July 2, 2022 and July 3, 2021 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 |
|
Six Months Ended |
|
|
|
|
July 2, 2022 |
|
July 3, 2021 |
|
July 2, 2022 |
|
July 3, 2021 |
Foreign exchange
forward contracts |
|
Other income and
expenses, net |
|
8 |
|
(8) |
|
10 |
|
10 |
Total |
|
|
|
8 |
|
(8) |
|
10 |
|
10 |
The Company did not enter into any derivative instrument containing credit-risk-related contingent features.
27. |
Fair Value Measurements |
The table below details financial assets (liabilities) measured at fair value on a recurring basis as of July 2, 2022:
|
|
Fair Value Measurements using |
|
July 2,
2022 |
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 |
229 |
229 |
— |
— |
Short-term deposits |
186 |
186 |
— |
— |
Equity securities measured at fair value through earnings |
24 |
24 |
— |
— |
Derivative assets not designated as cash flow hedge |
5 |
— |
5 |
— |
Derivative liabilities designated as cash flow hedge |
(125) |
— |
(125) |
— |
Derivative liabilities not designated as cash flow hedge |
(7) |
— |
(7) |
— |
Contingent consideration for business acquisitions |
(69) |
— |
— |
(69) |
Total |
243 |
439 |
(127) |
(69) |
The table below details financial assets (liabilities) measured at fair value on a recurring basis as of December 31, 2021:
|
|
Fair Value Measurements using |
|
December 31,
2021 |
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) |
Significant
Other
Observable Inputs
(Level 2) |
Significant
Unobservable
Inputs
(Level 3) |
Short-term deposits |
291 |
291 |
— |
— |
Equity securities measured at fair value through earnings |
29 |
29 |
— |
— |
Derivative assets designated as cash flow hedge |
3 |
— |
3 |
— |
Derivative assets not designated as cash flow hedge |
3 |
— |
3 |
— |
Derivative liabilities designated as cash flow hedge |
(42) |
— |
(42) |
— |
Derivative liabilities not designated as cash flow hedge |
(1) |
— |
(1) |
— |
Contingent consideration for business acquisitions |
(77) |
— |
— |
(77) |
Total |
206 |
320 |
(37) |
(77) |
For liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2022 and July 2, 2022 is presented as follows:
F-27
|
|
|
Fair Value Measurements using Significant Unobservable Inputs (Level 3) |
January 1, 2022 |
77 |
Changes in fair value measurement |
(2) |
Currency translation adjustment |
(6) |
July 2, 2022 |
69 |
Contingent consideration reported as noncurrent liabilities on the consolidated balance sheets as of July 2, 2022 and December 31, 2021 is based on the probability that the milestones defining the variable components of the consideration will be achieved.
Contingent consideration is composed of $7 million reported in the line “Other payables and accrued liabilities” and $62 million reported in the line “Other long-term liabilities” in the consolidated balance sheet as of July 2, 2022, compared to $7 million reported in the line “Other payables and accrued liabilities” and $70 million reported in the line “Other long-term liabilities” in the consolidated balance sheet as of December 31, 2021.
For liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2021 and July 3, 2021 is presented as follows:
|
Fair Value Measurements using Significant Unobservable Inputs (Level 3) |
January 1, 2021 |
123 |
Changes in fair value measurement |
1 |
Currency translation adjustment |
(4) |
July 3, 2021 |
120 |
No asset (liability) was measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3) as of July 2, 2022 and July 3, 2021, respectively.
The following table includes additional fair value information on other financial assets and liabilities as of July 2, 2022 and December 31, 2021:
|
|
|
|
As of |
|
As of |
|
|
|
|
July 2,
2022 |
|
December 31,
2021 |
|
|
Level |
|
Carrying
Amount |
|
Estimated
Fair Value |
|
Carrying
Amount |
|
Estimated
Fair Value |
Cash equivalents(1) |
|
1 |
|
2,823 |
|
2,823 |
|
2,883 |
|
2,883 |
Short-term deposits |
|
1 |
|
186 |
|
186 |
|
291 |
|
291 |
Long-term debt |
|
|
|
|
|
|
|
|
|
|
- Bank loans (including current portion) |
|
2 |
|
988 |
|
988 |
|
1,152 |
|
1,152 |
- Finance leases (including current portion) |
|
2 |
|
37 |
|
37 |
|
— |
|
— |
- Senior unsecured convertible bonds issued on August 4, 2020(2) |
|
1 |
|
1,494 |
|
1,502 |
|
1,387 |
|
1,975 |
(1) |
Cash equivalents primarily correspond to deposits at call with banks. |
(2) |
The carrying amount as of July 2, 2022 of the senior unsecured convertible bonds as reported above corresponds to the nominal value of the bonds, net of $6 million unamortized debt issuance costs, in compliance with the new accounting guidance. The impact of the adoption is described in Note 5 and Note 20. The fair value represented the market price of the bonds trading on the Frankfurt Stock Exchange. |
The U.S Treasury Bonds held by the Company as marketable securities as of July 2, 2022, were in an unrealized loss position for less than twelve months. Marketable securities are further described in Note 11.
The Company did not report securities that were in an unrealized loss position as of December 31, 2021.
F-28
The methodologies used to estimate fair values are as follows:
Components |
|
Methodology used to estimate fair value |
Debt securities classified as available-for-sale |
|
Quoted market prices for identical instruments |
Foreign exchange forward contracts, currency options and collars |
|
Quoted market prices for similar instruments |
Equity securities measured at fair value through earnings |
|
Quoted market prices for identical instruments |
Equity securities carried at cost as a measurement alternative |
|
Upon liquidation or valuation of the underlying investments on a new round of third-party financing |
Convertible debt instruments |
|
Quoted market price of the bonds trading on the Frankfurt Stock Exchange |
Cash and cash equivalents, accounts receivable, short-term borrowings, and accounts payable |
|
The carrying amounts reflected in the consolidated financial statements are considered as reasonable estimates of fair value due to the relatively short period of time between the origination of the instruments and their expected realization. |
|
28.1 |
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 29.
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.
|
28.2 |
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.
F-29
The Company’s consolidated net revenues disaggregated by reportable segment are presented in Note 29. The following tables present the Company’s consolidated net revenues disaggregated by geographical region of shipment, nature and market channel:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Net revenues by geographical region of shipment(1) |
|
|
|
|
|
|
|
|
EMEA |
|
826 |
|
643 |
|
1,617 |
|
1,270 |
Americas |
|
562 |
|
378 |
|
1,055 |
|
753 |
Asia Pacific |
|
2,449 |
|
1,971 |
|
4,711 |
|
3,985 |
Total revenues |
|
3,837 |
|
2,992 |
|
7,383 |
|
6,008 |
Net revenues by nature |
|
|
|
|
|
|
|
|
Revenues from sale of products |
|
3,803 |
|
2,944 |
|
7,312 |
|
5,899 |
Revenues from sale of services |
|
27 |
|
41 |
|
58 |
|
96 |
Other revenues |
|
7 |
|
7 |
|
13 |
|
13 |
Total revenues |
|
3,837 |
|
2,992 |
|
7,383 |
|
6,008 |
Net revenues by market channel(2) |
|
|
|
|
|
|
|
|
Original Equipment Manufacturers (“OEM”) |
|
2,513 |
|
1,908 |
|
4,836 |
|
3,937 |
Distribution |
|
1,324 |
|
1,084 |
|
2,547 |
|
2,071 |
Total revenues |
|
3,837 |
|
2,992 |
|
7,383 |
|
6,008 |
(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 refers to the distributors and representatives that the Company engages to distribute its products around the world |
The Company designs, develops, manufactures and markets a broad range of products, including discrete and standard commodity components ASICs, full custom devices and semi-custom devices and ASSPs” for analog, digital, and mixed-signal applications. In addition, the Company 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, and discrete and power transistor products. |
|
• |
Analog, MEMS and Sensors Group (AMS), comprised of analog, smart power, low power RF, MEMS sensors and actuators, and optical sensing solutions. |
|
• |
Microcontrollers and Digital ICs Group (MDG), comprised of microcontrollers (general purpose and secure), memories (RF and EEPROM), and RF communications. |
For the computation of the segments’ internal financial measurements, the Company uses certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, SG&A expenses and a part of R&D expenses. In compliance with the Company’s internal policies, certain costs are not allocated to the segments, but reported in “Others”. Those comprise unused capacity charges, including reduced manufacturing activity due to COVID-19 and incidents leading to power outage, impairment, restructuring charges and other related closure costs, management reorganization expenses, phase-out and start-up costs of certain manufacturing facilities, and other unallocated income (expenses) such as: strategic or special R&D programs, certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to product groups, as well as operating earnings of other products. In addition, depreciation and amortization expense is part of the manufacturing costs allocated to the segments and is neither identified as part of the inventory variation nor as part of the unused capacity charges; therefore, it cannot be isolated in cost of sales. Finally, public grants are allocated to the Company’s segments proportionally to the incurred expenses on the sponsored projects.
F-30
Wafer costs are allocated to the segments based on actual cost. From time to time, with respect to specific technologies, wafer costs are allocated to segments based on market price.
The following tables present the Company’s consolidated net revenues and consolidated operating income by reportable segment.
Net revenues by reportable segment:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Automotive and Discrete Group (ADG) |
|
1,454 |
|
1,077 |
|
2,710 |
|
2,119 |
Analog, MEMS and Sensors Group (AMS) |
|
1,127 |
|
1,013 |
|
2,214 |
|
2,096 |
Microcontrollers and Digital ICs Group (MDG) |
|
1,251 |
|
897 |
|
2,449 |
|
1,783 |
Total net revenues of product segments |
|
3,832 |
|
2,987 |
|
7,373 |
|
5,998 |
Others |
|
5 |
|
5 |
|
10 |
|
10 |
Total consolidated net revenues |
|
3,837 |
|
2,992 |
|
7,383 |
|
6,008 |
Operating income by reportable segment:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Automotive and Discrete Group (ADG) |
|
359 |
|
102 |
|
595 |
|
188 |
Analog, MEMS and Sensors Group (AMS) |
|
269 |
|
189 |
|
514 |
|
376 |
Microcontrollers and Digital ICs Group (MDG) |
|
425 |
|
206 |
|
832 |
|
377 |
Total operating income of product segments |
|
1,053 |
|
497 |
|
1,941 |
|
941 |
Others(1) |
|
(49) |
|
(8) |
|
(60) |
|
(12) |
Total consolidated operating income |
|
1,004 |
|
489 |
|
1,881 |
|
929 |
(1) |
Operating income (loss) of “Others” includes items such as unused capacity charges, including reduced manufacturing activity due to COVID-19 and incidents leading to power outage, impairment, restructuring charges and other related closure costs, management reorganization costs, phase out and start-up costs of certain manufacturing facilities, and other unallocated income (expenses) such as: strategic or special R&D programs, certain corporate-level operating expenses, patent claims and litigations, and other costs that are not allocated to product groups, as well as operating earnings of other products. |
The reconciliation of operating income of reportable segments to the total consolidated operating income is presented in the below table:
|
|
Three Months Ended |
|
Six Months Ended |
|
|
July 2,
2022 |
|
July 3,
2021 |
|
July 2,
2022 |
|
July 3,
2021 |
Total operating income of segments |
|
1,053 |
|
497 |
|
1,941 |
|
941 |
Impairment, restructuring charges and other related closure costs |
|
— |
|
2 |
|
— |
|
2 |
Unused capacity charges |
|
(13) |
|
— |
|
(22) |
|
(2) |
Other unallocated manufacturing results |
|
(33) |
|
(6) |
|
(50) |
|
(1) |
Gain on sale of non-current assets |
|
2 |
|
1 |
|
2 |
|
1 |
Strategic and other research and development programs and other non-allocated provisions(1) |
|
(5) |
|
(5) |
|
10 |
|
(12) |
Total operating loss Others |
|
(49) |
|
(8) |
|
(60) |
|
(12) |
Total consolidated operating income |
|
1,004 |
|
489 |
|
1,881 |
|
929 |
(1) |
Includes unallocated income and expenses such as certain corporate-level operating expenses and other income (costs) that are not allocated to the product segments. |
F-31
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, Purchasing, ERM and Resilience 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. |