STMicroelectronics : Reports Fourth Quarter and Full Year 2016 Financial Results

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PR No. C2810C

Press release

STMicroelectronics Reports 2016 Fourth Quarter and Full Year Financial Results

• Fourth quarter net revenues up 3.5% sequentially and 11.5% year-over-year
• Fourth quarter gross margin of 37.5%, above our guidance, drives operating margin before impairment and restructuring(1) to 8.2%
• 2016 net revenues of $6.97 billion; net income of $165 million, free cash flow(1) of $312 million

Geneva, January 26, 2017 - 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, 2016.

Fourth quarter net revenues totaled $1.86 billion, gross margin was 37.5%, and net earnings were $112 million or $0.13 per share.

"In the fourth quarter we continued to see sustained demand, resulting in revenues and gross margin better than the midpoint of our guidance. Net revenues grew 3.5% sequentially and 11.5% year-over-year; our gross margin of 37.5% increased substantially both sequentially and year- over-year," commented Carlo Bozotti, STMicroelectronics President and Chief Executive Officer. "In 2016, revenues grew 1.1% compared to 2015. After a weak start to the year, reflecting both market and specific product transitions, revenues grew 6.5% in the second half of 2016 compared to the same period one year earlier. Importantly, by leveraging our strategic focus on Smart Driving and Internet of Things, we recorded year-over-year sales growth in the second half of 2016 across all of our product groups excluding discontinued businesses. Throughout 2016 we also further strengthened our technology and product portfolio, accelerating innovation and time- to-market to reinforce our leadership. Overall, we have improved our operating profitability through the combination of revenue growth, gross margin expansion and operating expense control."

U.S. GAAP (Million US$)	Q4 2016	Q3 2016	Q4 2015	FY 2016	FY 2015
Net Revenues	1,859	1,797	1,668	6,973	6,897
Gross Margin	37.5%	35.8%	33.5%	35.2%	33.8%
Operating Income	129	90	25	214	109
Net Income attributable to parent company	112	71	2	165	104
Net cash from operating activities	378	330	245	1,039	842

Non-U.S. GAAP(1) (Million US$)	Q4 2016	Q3 2016	Q4 2015	FY 2016	FY 2015
Operating Income before impairment & restructuring charges	153	119	29	307	174
Free cash flow	135	100	148	312	327
Net financial position	513	464	494	513	494

(1) Non-U.S. GAAP measure. See Appendix for reconciliation to U.S. GAAP and additional information explaining why the Company believes these measures are important.

Quarterly Financial Summary by Product Group

Product Group Revenues (Million US$)	Q4 2016	Q3 2016	Q4 2015	FY 2016	FY 2015
Automotive and Discrete Group (ADG)	716	704	637	2,813	2,731
Analog and MEMS Group (AMG)	436	403	370	1,584	1,671
Microcontrollers and Digital ICs Group (MDG)	610	587	614	2,285	2,292
Others (a)	97	103	47	291	203
Total	1,859	1,797	1,668	6,973	6,897

(a) Net revenues of "Others" includes revenues from sales of Imaging Product Division, Subsystems, assembly services, and other revenue.

Fourth Quarter Review

Fourth quarter net revenues increased 3.5% sequentially to $1.86 billion, 30 basis points above the midpoint of the Company's guidance. Analog and MEMS Group (AMG) revenues increased 8.2% sequentially driven by MEMS and analog products. Microcontrollers and Digital ICs Group (MDG) revenues increased 3.8% on a sequential basis driven by microcontrollers, memories and digital products. Automotive and Discrete Group (ADG) revenues increased 1.7% on a sequential basis driven by automotive microcontrollers and power discrete products.

On a year-over-year basis, fourth quarter net revenues increased 11.5% on strong growth across most product families. Analog and MEMS Group (AMG) revenues increased 17.8% compared to the year-ago period driven by both strong growth in MEMS and recovery in Analog. Automotive and Discrete Group (ADG) revenues increased 12.5% compared to the year-ago period driven by double-digit growth for both automotive and power discrete products. Microcontrollers and Digital ICs Group (MDG) revenues decreased 0.8% mainly due to lower sales of secure microcontrollers and discontinued businesses.

By region of shipment, Asia Pacific and EMEA grew revenues sequentially 5.5% and 1.4%, respectively, while the Americas was lower by 1.1%. On a year-over-year basis, Asia Pacific and EMEA grew 18.2% and 5.7%, respectively, while the Americas decreased by 2.8%.

Fourth quarter gross profit was $698 million. The gross margin was 37.5%, 50 basis points above the midpoint of the Company's guidance, and included about 20 basis points of unused capacity charges. On a sequential basis, gross margin increased 170 basis points on improved manufacturing efficiencies, lower unused capacity charges and improved product mix partially offset principally by normal price pressure.

Combined R&D and SG&A expenses were $570 million, increasing by $28 million on a sequential basis, mainly due to seasonality and increased level of R&D activity.

Fourth quarter other income and expenses, net, registered income of $25 million compared to $18 million in the prior quarter mainly due to higher R&D funding.

Impairment and restructuring charges in the fourth quarter were $24 million compared to $29 million in the prior quarter, both mostly related to the set-top box restructuring plan announced in January 2016. The Company continued to make progress on its restructuring of the set-top box business. Exiting 2016, the restructuring plan was on track and achieved about $110 million of the total $170 million of targeted annualized savings expected upon completion.

Fourth quarter operating income was $129 million compared to $90 million and $25 million in the prior quarter and year-ago quarter.

Fourth quarter operating income and operating margin before impairment and restructuring charges(1) improved sequentially to $153 million and 8.2% of revenues, respectively, from $119 million and 6.6%, respectively, mainly due to higher revenues and gross profit partially offset by higher operating expenses. On a year-over-year basis, operating income before impairment and restructuring charges improved by

$124 million mainly due to higher revenues, improved product mix, manufacturing efficiencies and fab loading.

Fourth quarter net income was $112 million, equivalent to $0.13 per share, compared to net income of

$71 million in the prior quarter and net income of $2 million in the year-ago quarter.

Full Year 2016 Review

Net revenues for the full year 2016 increased 1.1% to $6.97 billion from $6.90 billion in 2015. Net revenues, excluding businesses undergoing a phase-out (mobile legacy products, camera modules and set-top box), increased 2.4% with strong growth in specialized image sensors and solid growth in automotive and microcontrollers partially offset by market softness earlier in the year in both analog and power discrete sales for the computer peripheral market, and in MEMS sales for the smartphone market.

Full year 2016 gross margin improved 140 basis points to 35.2% from 33.8% in 2015 mainly benefiting from manufacturing efficiencies, favorable currency effects, net of hedging, lower unused capacity charges and improved product mix partially offset by normal price pressure.

Operating income increased substantially in 2016 to $214 million from $109 million in 2015. Similarly, operating income before impairment and restructuring charges(1) also increased sharply to $307 million, compared to $174 million in 2015 reflecting favorable currency effects, net of hedging, manufacturing efficiencies, improved product mix, and lower operating expenses partially offset mainly by price pressure and lower R&D grants. By product group, in 2016 both ADG and MDG operating performance improved in comparison to 2015 while AMG operating result decreased mainly due to lower sales.

Combined R&D and SG&A expenses decreased 3.2% to $2.25 billion compared to $2.32 billion in 2015 mainly reflecting lower R&D costs due to favorable currency effects, net of hedging, the benefits of the set-top box restructuring plan, and the savings plan completed in 2015.

Other income and expenses, net, registered income of $99 million compared to $164 million in 2015 mainly due to a lower level of R&D grants.

Impairment and restructuring charges were $93 million in 2016 compared to $65 million in 2015 and principally related to the set-top box restructuring plan.

Full Year 2016 net income increased 58% to $165 million, equivalent to $0.19 per share, compared to net income of $104 million, or $0.12 per share for the full year 2015.

Cash Flow and Balance Sheet Highlights

Net cash from operating activities was $378 million and $1.04 billion for the fourth quarter and full year 2016, respectively. Full Year 2015 net cash from operating activities was $842 million.

(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.

Capital expenditure payments, net of proceeds from sales, were $228 million and $607 million during the fourth quarter and full year of 2016, respectively. Full year 2015 capital expenditures were $467 million. Combined capital expenditures for the years 2015-2016 were 7.7% as a percentage of combined net revenues.

Free cash flow(1) was $135 million and $312 million (or $390 million before the NFC and RFID reader assets acquisition of $78 million) during the fourth quarter and full year of 2016, respectively. Full year 2015 free cash flow was $327 million.

Inventory was $1.17 billion at quarter end, down 5.3% from the prior quarter. Inventory in the fourth quarter of 2016 was at 4.0 turns or 90 days compared to 3.7 turns or 97 days in the third quarter.

The Company paid cash dividends to shareholders of $53 million and $251 million for the fourth quarter and full year 2016, respectively.

ST's total financial resources equaled $1.96 billion and total financial debt was $1.45 billion at December 31, 2016. ST's net financial position(1) was $513 million at December 31, 2016 compared to $464 million at October 1, 2016.

Total equity, including non-controlling interest, was $4.60 billion at December 31, 2016.

First Quarter 2017 Business Outlook

Mr. Bozotti commented, "Based on market forecasts, a positive booking trend, and a strong point- of-sales performance at our distributors, we see the momentum of the second half of 2016 to continue entering 2017.

"Based on these factors, we expect our first quarter to reflect better than normal seasonality, with a sequential net revenues decline of about 2.4% at the midpoint. On a year-over year basis, this would translate into a net revenues growth of about 12.5% at the mid-point. We expect a gross margin of about 37.0% at the midpoint. "In order to support ST's innovative product portfolio and to fuel significant revenue growth in 2017 and beyond, particularly from new specialized technologies and products, we expect to invest approximately $1 billion to $1.1 billion in 2017. Specifically, the Company is investing in 300mm front-end manufacturing and in back-end assembly and test to support new products. In particular, we anticipate a newly won program to ramp with substantial revenues in the second half of 2017."

The Company expects first quarter 2017 revenues to decrease about 2.4% on a sequential basis, plus or minus 3.5 percentage points. Gross margin in the first quarter is expected to be about 37.0% plus or minus 2.0 percentage points.

This outlook is based on an assumed effective currency exchange rate of approximately $1.08 = €1.00 for the 2017 first quarter and includes the impact of existing hedging contracts. The first quarter will close on April 1, 2017.

(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.