STMicroelectronics Reports 2014 Fourth Quarter and Full Year Financial Results

• Fourth quarter in line with expectations with net revenues of $1.83 billion and gross margin of 33.8%

• Net income turnaround to positive $128 million in 2014

• Free cash flow turnaround to positive $197 million in 2014*

STMicroelectronics (NYSE: STM), a global semiconductor leader serving customers across the spectrum of electronics applications, reported financial results for the fourth quarter and full year ended December 31, 2014.

Fourth quarter net revenues totaled $1.83 billion, gross margin was 33.8%, and net income per share was $0.05. For the full year 2014, net revenues totaled $7.40 billion, gross margin was 33.7%, and net income per share was $0.14.

“Overall, 2014 was a year in which we made significant steps forward,” commented Carlo Bozotti, STMicroelectronics President and Chief Executive Officer.

“Thanks to the talent and product leadership drive of our employees, we have built a more focused, market-driven portfolio of sense, power, automotive products and embedded processing solutions. New flagship products during this past year included our 32-bit microcontrollers for general purpose and automotive applications, MEMS microphones, touch-screen controllers, ultra-HD products for set-top box and low voltage power MOSFETs and IGBTs. On a year-over-year basis, revenues in 2014 for the Microcontrollers and Automotive Groups increased by 10% and 8% respectively, with the Industrial & Power Discrete Group growing as well.  

“We captured numerous key design wins for new products and functionality at existing customers. We also enlarged our customer base, through an expansion of market reach and our ability to seize opportunities for application diversification, including the Internet of Things. Our customer base expansion was demonstrated by the strong performance from distribution that grew to 31% of revenues in 2014 from 26% in 2013.

“ST is making solid progress on key performance and financial metrics. We met our operating expense target levels earlier than planned, achieved a significant turnaround in operating income, net income and cash flow, improved gross margin and operating margin and maintained our financial flexibility.”

(*)Free cash flow is a non-U.S. GAAP measure. Please refer to Attachment A for additional information explaining why the Company believes these measures are important and reconciliation to U.S. GAAP.

Summary Financial Highlights

1. Net revenues include sales recorded by ST-Ericsson as consolidated by ST. ST-Ericsson was deconsolidated on September 1, 2013.

Fourth Quarter Review

Net revenues decreased 3.0% sequentially. By region of shipment, Greater China & South Asia increased 3.2%, while the Americas, Japan & Korea, and EMEA decreased by 6.8%, 8.1%, and 8.9%, respectively, on a sequential basis. As anticipated, net revenues in the fourth quarter benefited from a one-time $13 million licensing payment.

On a year-over-year basis, net revenues decreased 9.2%, reflecting the combination of the phase-out of legacy ST-Ericsson products as well as lower DCG sales, specifically set-top box, and AMS sales on product pruning and product generation transition.

Fourth quarter gross profit was $619 million and gross margin was 33.8%. On a sequential basis, gross margin decreased 50 basis points, primarily reflecting price pressure and higher unused capacity charges in digital technology partially offset by manufacturing efficiencies and favorable currency effects. On a year-over-year basis, gross margin improved 90 basis points, reflecting the combined benefits of manufacturing efficiencies and favorable currency effects, offset in part by price pressure and unused capacity charges.

Combined R&D and SG&A in the fourth quarter increased 1.3% to $611 million from $603 million in the third quarter, principally due to a longer calendar. On a year-over-year basis, combined R&D and SG&A expenses decreased 6.9% mainly reflecting the ST-Ericsson wind-down, cost reduction initiatives and favorable currency effects.

Other income and expenses, net in the fourth quarter, increased to $50 million from $32 million in the third quarter, with the $18 million increase mainly reflecting the catch-up of R&D funding.

Impairment, restructuring and other related closure costs for the fourth quarter were $20 million, compared to $38 million and $29 million in the prior and year-ago quarter.

Earnings on equity investments in the fourth quarter were $17 million and mostly related to the sale of certain patents by ST-Ericsson SA, in liquidation.

(*)Operating income (loss) before impairment and restructuring charges and operating margin before impairment and restructuring charges are non-U.S. GAAP measures. For additional information and reconciliation to U.S. GAAP, please refer to Attachment A.

Fourth quarter net income was $43 million or $0.05 per share, compared to a net income of $0.08 and a net loss of $(0.04) per share in the prior and year-ago quarter, respectively. On an adjusted basis, net of related taxes, ST reported non-U.S. GAAP net income per share of $0.07 in the fourth quarter excluding impairment and restructuring charges, compared to a net income per share of $0.13 and a net loss of $(0.01) per share in the prior and year-ago quarter, respectively.*

For the fourth quarter of 2014, the effective average exchange rate for the Company was approximately $1.29 to €1.00, compared to $1.34 to €1.00 for the third quarter of 2014 and $1.34 to €1.00 for the fourth quarter of 2013.

Also, during the fourth quarter of 2014, ST notified IBM of its intention to end participation in the IBM Technology Development Alliance.

Quarterly Net Revenues Summary

As previously announced, in the fourth quarter of 2014 the Digital Convergence Group (DCG) and Imaging, Bi-CMOS and Silicon Photonics (IBP) Group have been combined under one single organization, called Digital Product Group (DPG). DPG’s focus is on ASSPs addressing home gateway and set-top box, as well as FD-SOI ASICs for consumer applications; FD-SOI and mixed process ASICs, including silicon photonics, addressing communication infrastructure; and differentiated imaging products. Effective in the first quarter of 2015, DPG will be reported as a standalone product group.

(a) Reflecting the transfer of Wireless (legacy ST-Ericsson products) and the Image Signal Processor business unit from IBP to DCG as of January 1, 2014, the Company has reclassified prior period revenues.

Net Revenues By Market Channel (%)	Q4 2014	Q3 2014	Q4 2013
Total OEM	68%	68%	73%
Distribution	32%	32%	27%

(*) Adjusted net earnings per share is a non-U.S. GAAP measure. For additional information and reconciliation to U.S. GAAP, please refer to Attachment A.

Quarterly Revenues and Operating Results by ST Product Segment

^(a) Net revenues of “Others” include revenues from sales of Subsystems, assembly services, and other revenues.

^(b) Operating income (loss) of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure 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 the Subsystems and Other Products Group. “Others” includes $29 million, $14 million, and $7 million of unused capacity charges in the fourth and third quarters of 2014 and fourth quarter of 2013, respectively; and $20 million, $38 million, and $29 million of impairment, restructuring charges, and other related closure costs in the fourth and third quarters of 2014 and fourth quarter of 2013, respectively. 

Sense & Power and Automotive Products (SP&A) fourth quarter net revenues decreased 4.4% sequentially, reflecting the market slowdown in IPD, and a temporary manufacturing delay which affected APG sales. In addition, AMS revenues were substantially flat with growth in acoustic MEMS microphones offset by a decrease in prior-generation motion MEMS and in analog products. SP&A revenues decreased 5.7% compared to the year-ago quarter reflecting lower AMS sales. SP&A operating margin was 8.8% in the 2014 fourth quarter compared to 9.4% and 7.7% in the prior and year-ago quarter, respectively.

Embedded Processing Solutions (EPS) fourth quarter net revenues decreased 0.4% sequentially mainly due to lower DCG sales largely offset by growth in IBP and MMS. EPS decreased 14.9% on a year-over-year basis mainly reflecting the decrease in ST-Ericsson legacy products. Excluding ST-Ericsson, EPS net revenues decreased 2.6% compared to the year-ago quarter. EPS segment operating margin improved to a negative 1.5% in the 2014 fourth quarter compared to negative 4.1% and negative 8.5% in the prior and year-ago quarter, respectively.

Fourth Quarter and Full Year Cash Flow and Balance Sheet Highlights

Net cash from operating activities was $311 million in the fourth quarter compared to $281 million and $270 million in the prior and year-ago quarter. For the full year, net cash from operating activities was $715 million in 2014, compared to $366 million in 2013.

Capital expenditure payments, net of proceeds from sales, were $108 million in the fourth quarter, compared to $137 million and $133 million in the prior and year-ago quarter. Capital expenditure payments, net of proceeds from sales, were $496 million for 2014, compared to $531 million for 2013. The ratio of capital investment spending to net revenues was stable at 6.7% for 2014 compared to 6.6% for 2013.

Free cash flow was $208 million in the fourth quarter, compared to $140 million in the prior quarter and $91 million in the year-ago quarter. For the full year 2014, free cash flow significantly improved by $376 million to positive $197 million in 2014 from negative $179 million in 2013.*

(*)Free cash flow is a non-U.S. GAAP measure. For additional information and reconciliation to U.S. GAAP, please refer to Attachment A.

Inventory increased by $6 million sequentially to $1.27 billion at quarter end. Inventory in the fourth quarter of 2014 was at 3.8 turns or 95 days, compared to 3.9 turns or 92 days in the prior quarter.

In the fourth quarter, the Company paid cash dividends to shareholders of $90 million and used cash of $63 million to repurchase shares. For the full year, ST paid cash dividends to shareholders totaling $354 million and used cash of $156 million to repurchase 20 million shares of common stock.

ST’s net financial position improved to $546 million at December 31, 2014 compared to $494 million at September 27, 2014.* ST’s financial resources equaled $2.35 billion and total debt was $1.80 billion at December 31, 2014.

Total equity, including non-controlling interest, was $5.06 billion at quarter end.

Full Year 2014 Results

Net revenues of $7.40 billion for the full year 2014, represented a decrease of 8.4% in total and a decrease of 1.8% excluding the phase-out of legacy ST-Ericsson products, with solid growth experienced in MMS and APG supported by IPD.

Gross margin improved 140 basis points to 33.7% of net revenues for the full year 2014, compared to 32.3% of net revenues in 2013, with the margin expansion reflecting manufacturing efficiencies and favorable currency effects.

Operating income in 2014 improved significantly to positive $168 million from negative $465 million in 2013 mainly driven by lower operating expenses as a result of the exit of the ST-Ericsson joint venture and cost savings initiatives.

Sense & Power and Automotive revenues for the full year 2014 totaled $4.77 billion, flat compared to 2013 with growth in APG and IPD offset by lower AMS sales principally reflecting portfolio pruning and product generation transition. SP&A operating margin increased to 9.4% in 2014 from 5.7% in 2013 principally reflecting significant improvement across a number of product families.

Embedded Processing Solutions revenues were $2.61 billion, a decrease of 20.2% in total and a decrease of 4.4% excluding the phase-out of ST-Ericsson legacy products, with a strong increase in MMS product sales offset by a significant decline of DCG and IBP revenues. EPS operating margin in 2014 improved to a negative 3.9% compared to negative 12.2% in 2013 mainly due to the wind down of ST-Ericsson, cost reduction initiatives and funding for Nano2017.

Net income, as reported, was $128 million in the full year 2014, or $0.14 per share, compared to a net loss of $500 million, or $(0.56) per share in the full year 2013. On an adjusted basis, ST reported a non-U.S. GAAP net income per share estimated at $0.29 excluding impairment and restructuring charges and one-time items, net of estimated income tax effect, in the full year 2014, compared to $(0.23) in the full year 2013.*

The effective average exchange rate for the Company was approximately $1.34 to €1.00 for the full year 2014, compared to $1.31 to €1.00 for the full year 2013.

(*)Net financial position and adjusted net earnings per share are non-U.S. GAAP measures. For additional information and reconciliation to U.S. GAAP, please refer to Attachment A.

Full Year Net Revenues Summary