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STM ST Microelectronics - New York Shares

Filed: 26 Feb 20, 4:21pm

Table of Contents

 

As filed with the Securities and Exchange Commission on February 26, 2020

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report          

 

For the transition period from                 to

 

Commission file number:  1-13546

 

STMicroelectronics N.V.

(Exact name of registrant as specified in its charter)

 

Not Applicable

The Netherlands

(Translation of registrant’s

name into English)

(Jurisdiction of incorporation

or organization)

 

WTC Schiphol Airport

Schiphol Boulevard 265

1118 BH Schiphol

The Netherlands

(Address of principal executive offices)

Jean-Marc Chery

39, Chemin du Champ des Filles

1228 Plan-Les-Ouates

Geneva

Switzerland

Tel:  +41 22 929 29 29

Fax:  +41 22 929 29 88

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class:

Trading Symbol(s)

Name of Each Exchange on Which Registered:

Common shares, nominal value €1.04 per share

STM

New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:  None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

911,186,920 common shares at December 31, 2019

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See the definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP

International Financial Reporting Standards as issued

 

Other

 

 

 

by the International Accounting Standards Board   

 

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17      Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

 

 

PART I

4

 

 

 

 

 

 

Item 1.

 

Identity of Directors, Senior Management and Advisers

4

 

Item 2.

 

Offer Statistics and Expected Timetable

4

 

Item 3.

 

Key Information

4

 

Item 4.

 

Information on the Company

18

 

Item 5.

 

Operating and Financial Review and Prospects

32

 

Item 6.

 

Directors, Senior Management and Employees

64

 

Item 7.

 

Major Shareholders and Related Party Transactions

85

 

Item 8.

 

Financial Information

86

 

Item 9.

 

Listing

87

 

Item 10.

 

Additional Information

87

 

Item 11.

 

Quantitative and Qualitative Disclosures About Market Risk

100

 

Item 12.

 

Description of Securities Other than Equity Securities

102

 

 

 

 

 

PART II

104

 

 

 

 

 

 

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

104

 

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

104

 

Item 15.

 

Controls and Procedures

104

 

Item 16.

 

 

 

 

Item 16A.

 

Audit Committee Financial Expert

107

 

Item 16B.

 

Code of Ethics

107

 

Item 16C.

 

Principal Accountant Fees and Services

107

 

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

108

 

Item 16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

108

 

Item 16F.

 

Change in Registrant’s Certifying Accountant.

108

 

Item 16G.

 

Corporate Governance

109

 

 

 

 

 

PART III

111

 

 

 

 

 

 

Item 17.

 

Financial Statements

111

 

Item 18.

 

Financial Statements

111

 

Item 19.

 

Exhibits

111

 

 

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report on Form 20-F (the “Form 20-F”), references to “we”, “us” and “Company” are to STMicroelectronics N.V. together with its consolidated subsidiaries, references to “EU” are to the European Union, references to “€” and the “Euro” are to the Euro currency of the EU, references to the “United States” and the “U.S.” are to the United States of America and references to “$” and to “U.S. dollars” are to United States dollars.  References to “mm” are to millimeters and references to “nm” are to nanometers.

We have compiled market size and our market share data in this Form 20-F using statistics and other information obtained from several third-party sources.  Except as otherwise disclosed herein, all references to trade association data are references to World Semiconductor Trade Statistics (“WSTS”).  Certain terms used in this Form 20-F are defined in “Certain Terms”.

We report our financial statements in U.S. dollars and prepare our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  We also report certain non-U.S. GAAP financial measures (free cash flow and net financial position), which are derived from the amounts presented in the financial statements prepared under U.S. GAAP.  Furthermore, we are required by Dutch law to report our Statutory and Consolidated Financial Statements, in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union.  The IFRS financial statements are reported separately and can differ materially from the statements reported in U.S. GAAP.

Various amounts and percentages used in this Form 20-F have been rounded and, accordingly, they may not total 100%.

We and our affiliates own or otherwise have rights to the trademarks and trade names, including those mentioned in this Form 20-F, used in conjunction with the marketing and sale of our products.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Form 20-F that are not historical facts, particularly in “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” and “— Business Outlook” are statements of future expectations and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended) that are based on management’s current views and assumptions, and are conditioned upon and also involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those anticipated by such statements due to, among other factors:

 

changes in global trade policies, including the adoption and expansion of tariffs and trade barriers, that could affect the macro-economic environment and adversely impact the demand for our products;

 

uncertain macro-economic and industry trends, which may impact end-market demand for our products;

 

customer demand that differs from projections;

 

the ability to design, manufacture and sell innovative products in a rapidly changing technological environment;

 

changes in economic, social, public health, labor, political, or infrastructure conditions in the locations where we, our customers, or our suppliers operate, including as a result of macro-economic or regional events, military conflicts, social unrest, labor actions, or terrorist activities;

 

unanticipated events or circumstances, which may impact our ability to execute our plans and/or meet the objectives of our R&D and manufacturing programs, which benefit from public funding;

 

the Brexit vote and the impact of the withdrawal of the U.K. may adversely affect business activity, political stability and economic conditions in the U.K., the Eurozone, the EU and elsewhere. The U.K. withdrawal from the EU took place on January 31, 2020 and the UK majority government is expected to complete Brexit even if no formal withdrawal agreement is in place with the EU by the end of the transition period running until December 31, 2020. The specific terms of the U.K. withdrawal from the EU are still uncertain and while we do not have material operations in the U.K.

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and have not experienced any material impact from Brexit on our underlying business to date, we cannot predict its future implications;

 

financial difficulties with any of our major distributors or significant curtailment of purchases by key customers;

 

the loading, product mix, and manufacturing performance of our production facilities and/or our required volume to fulfill capacity reserved with suppliers or third party manufacturing providers;

 

availability and costs of equipment, raw materials, utilities, third-party manufacturing services and technology, or other supplies required by our operations;

 

the functionalities and performance of our IT systems, which are subject to cybersecurity threats and which support our critical operational activities including manufacturing, finance and sales, and any breaches of our IT systems or those of our customers or suppliers;

 

theft, loss, or misuse of personal data about our employees, customers, or other third parties, and breaches of global and local privacy legislation, including the EU’s General Data Protection Regulation (“GDPR”);

 

the impact of intellectual property (“IP”) claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions;

 

changes in our overall tax position as a result of changes in tax rules, new or revised legislation, the outcome of tax audits or changes in international tax treaties which may impact our results of operations as well as our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;

 

variations in the foreign exchange markets and, more particularly, the U.S. dollar exchange rate as compared to the Euro and the other major currencies we use for our operations;

 

the outcome of ongoing litigation as well as the impact of any new litigation to which we may become a defendant;

 

product liability or warranty claims, claims based on epidemic or delivery failure, or other claims relating to our products, or recalls by our customers for products containing our parts;

 

natural events such as severe weather, earthquakes, tsunamis, volcano eruptions or other acts of nature, the effects of climate change, health risks and epidemics such as the novel coronavirus COVID-19 in locations where we, our customers or our suppliers operate;

 

industry changes resulting from vertical and horizontal consolidation among our suppliers, competitors, and customers; and

 

the ability to successfully ramp up new programs that could be impacted by factors beyond our control, including the availability of critical third party components and performance of subcontractors in line with our expectations.

Such forward-looking statements are subject to various risks and uncertainties, which may cause actual results and performance of our business to differ materially and adversely from the forward-looking statements.  Certain forward-looking statements can be identified by the use of forward-looking terminology, such as “believes”, “expects”, “may”, “are expected to”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions.  Some of these risk factors are set forth and are discussed in more detail in “Item 3. Key Information — Risk Factors”.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 20-F as anticipated, believed or expected.  We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set forth in this Form 20-F to reflect subsequent events or circumstances.

Unfavorable changes in the above or other factors listed under “Item 3. Key Information — Risk Factors” from time to time in our Securities and Exchange Commission (“SEC”) filings, could have a material adverse effect on our business and/or financial condition.

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Part I

Item 1.

Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

Item 3.

Key Information

Selected Financial Data

The table below sets forth our selected consolidated financial data for each of the years in the five-year period ended December 31, 2019.  Such data have been derived from our audited Consolidated Financial Statements.  Audited Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2019, including the Notes thereto (collectively, the “Consolidated Financial Statements”), are included elsewhere in this Form 20-F, while data for prior periods have been derived from our audited Consolidated Financial Statements used in such periods.

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The following information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the audited Consolidated Financial Statements and the related Notes thereto included in “Item 18. Financial Statements” in this Form 20-F.

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(In millions except per share and ratio data)

 

Consolidated Statements of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

9,529

 

 

$

9,612

 

 

$

8,308

 

 

$

6,944

 

 

$

6,866

 

Other revenues

 

 

27

 

 

 

52

 

 

 

39

 

 

 

29

 

 

 

31

 

Net revenues

 

 

9,556

 

 

 

9,664

 

 

 

8,347

 

 

 

6,973

 

 

 

6,897

 

Cost of sales(1)

 

 

(5,860

)

 

 

(5,803

)

 

 

(5,075

)

 

 

(4,514

)

 

 

(4,561

)

Gross profit(1)

 

 

3,696

 

 

 

3,861

 

 

 

3,272

 

 

 

2,459

 

 

 

2,336

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative(1)

 

 

(1,093

)

 

 

(1,095

)

 

 

(981

)

 

 

(907

)

 

 

(894

)

Research and development(1)

 

 

(1,498

)

 

 

(1,398

)

 

 

(1,296

)

 

 

(1,331

)

 

 

(1,420

)

Other income and expenses, net

 

 

103

 

 

 

53

 

 

 

55

 

 

 

99

 

 

 

164

 

Impairment, restructuring charges and other related

   closure costs

 

 

(5

)

 

 

(21

)

 

 

(45

)

 

 

(93

)

 

 

(65

)

Operating income (1)

 

 

1,203

 

 

 

1,400

 

 

 

1,005

 

 

 

227

 

 

 

121

 

Interest income (expense), net

 

 

1

 

 

 

(7

)

 

 

(22

)

 

 

(20

)

 

 

(22

)

Other components of pension benefit costs(1)

 

 

(16

)

 

 

(11

)

 

 

(12

)

 

 

(13

)

 

 

(12

)

Income (loss) on equity-method investments

 

 

1

 

 

 

8

 

 

 

(2

)

 

 

7

 

 

 

2

 

Gain (loss) on financial instruments, net

 

 

 

 

 

(1

)

 

 

(16

)

 

 

 

 

 

 

Income before income taxes and noncontrolling interest

 

 

1,189

 

 

 

1,389

 

 

 

953

 

 

 

201

 

 

 

89

 

Income tax (expense)/benefit

 

 

(156

)

 

 

(96

)

 

 

(143

)

 

 

(31

)

 

 

21

 

Net income

 

 

1,033

 

 

 

1,293

 

 

 

810

 

 

 

170

 

 

 

110

 

Net income attributable to noncontrolling interest

 

 

(1

)

 

 

(6

)

 

 

(8

)

 

 

(5

)

 

 

(6

)

Net income attributable to parent company

 

 

1,032

 

 

 

1,287

 

 

 

802

 

 

 

165

 

 

 

104

 

Earnings per share (basic) attributable to parent company

   stockholders

 

 

1.15

 

 

 

1.43

 

 

 

0.91

 

 

 

0.19

 

 

 

0.12

 

Earnings per share (diluted) attributable to parent company

   stockholders

 

 

1.14

 

 

 

1.41

 

 

 

0.89

 

 

 

0.19

 

 

 

0.12

 

Number of shares used in calculating earnings per share

   (basic)

 

 

894.3

 

 

 

899.4

 

 

 

884.7

 

 

 

881.2

 

 

 

876.5

 

Number of shares used in calculating earnings per share

   (diluted)

 

 

903.6

 

 

 

911.0

 

 

 

906.1

 

 

 

886.3

 

 

 

880.6

 

Consolidated Balance Sheets Data (end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

2,597

 

 

 

2,266

 

 

 

1,759

 

 

 

1,629

 

 

 

1,771

 

Restricted cash

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Short-term deposits

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

133

 

 

 

330

 

 

 

431

 

 

 

335

 

 

 

335

 

Total assets

 

 

11,868

 

 

 

10,867

 

 

 

9,681

 

 

 

8,004

 

 

 

8,195

 

Net assets

 

 

7,111

 

 

 

6,424

 

 

 

5,467

 

 

 

4,596

 

 

 

4,693

 

Short-term debt

 

 

173

 

 

 

146

 

 

 

118

 

 

 

117

 

 

 

191

 

Long-term debt

 

 

1,899

 

 

 

1,764

 

 

 

1,583

 

 

 

1,334

 

 

 

1,421

 

Total parent company stockholders’ equity

 

 

7,043

 

 

 

6,359

 

 

 

5,404

 

 

 

4,535

 

 

 

4,632

 

Common stock and capital surplus

 

 

4,149

 

 

 

4,000

 

 

 

3,875

 

 

 

3,975

 

 

 

3,936

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend per share

 

 

0.24

 

 

 

0.24

 

 

 

0.24

 

 

 

0.24

 

 

 

0.40

 

Capital expenditures, net of proceeds from sales

 

 

(1,174

)

 

 

(1,262

)

 

 

(1,298

)

 

 

(607

)

 

 

(467

)

Net cash from operating activities

 

 

1,869

 

 

 

1,845

 

 

 

1,677

 

 

 

1,043

 

 

 

846

 

Depreciation and amortization

 

 

854

 

 

 

791

 

 

 

650

 

 

 

696

 

 

 

736

 

Debt-to-equity ratio(2)

 

 

0.29

 

 

 

0.30

 

 

 

0.31

 

 

 

0.32

 

 

 

0.35

 

 

(1)

The comparative amounts as of December 31, 2017, December 31, 2016 and December 31, 2015 were restated to reflect the new guidance adopted on January 1, 2018 on the presentation of net periodic benefit cost in the consolidated statement of income. See Note 16 to our Consolidated Financial Statements.

(2)

Debt-to-equity ratio is the ratio between our total financial debt (short-term debt, including bank overdrafts, and long-term debt) and our total parent company stockholder’s equity.

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Risks Related to the Semiconductor Industry which Impact Us

We, and the semiconductor industry as a whole, may be impacted by changes in, or uncertainty about, global, regional and local economic, political, legal, regulatory and social environments as well as climate change.

Changes in, and uncertainty about, economic, political, legal, regulatory and social conditions pose a risk as consumers and businesses may postpone spending in response to factors such as curtailment of trade and other business restrictions, financial market volatility, interest rate fluctuations, shifts in inflationary and deflationary expectations, lower capital and productivity growth, unemployment, negative news, declines in income or asset values and/or other factors.  Such global, regional and local conditions could have a material adverse effect on customer and end-market demand for our products, thus materially adversely affecting our business and financial condition.  

The institution of trade tariffs globally could negatively impact economic conditions, which could have negative repercussions for our business. In 2019, both the U.S. Administration as well as several foreign governments have been undertaking significant trade policy changes, in some cases followed by legislative or executive action. For instance, the more recent phase one deal signed by U.S. and China in January 2020 still leaves in place a significant number of tariffs until the second phase of the deal is agreed and there is no assurance that further tariffs would not be applied in the future. Trade policy changes could trigger retaliatory actions by affected countries, which could have a negative impact on our ability to do business in affected countries or lead to reduced purchases of our products by foreign customers, leading to increased costs of components contained in our products, increased manufacturing costs of our products, and higher prices for our products in foreign markets. Further, protectionist measures, laws or governmental policies may encourage our customers to relocate their manufacturing capacity or supply chain to their own respective countries or require their respective contractors, subcontractors and relevant agents to do so, which could impair our ability to sustain our current level of productivity and manufacturing efficiency.    

We, and the semiconductor industry as a whole, face greater risks due to the international nature of the semiconductor business, including in the countries where we, our customers or our suppliers operate, such as:

 

instability of foreign governments, including the threat of war, military conflict, civil unrest, regime changes, mass migration and terrorist attacks;

 

natural events such as severe weather, earthquakes and tsunamis, or the effects of climate change;

 

epidemics such as disease outbreaks or more recently the novel coronavirus COVID-19, pandemics and other health related issues;

 

changes in, or uncertainty about, laws, regulations (including executive orders) and policies affecting trade and investment, including following Brexit and including through the imposition of trade and travel restrictions, government sanctions, local practices which favor local companies and constraints on investment;

 

complex and varying government regulations and legal standards, particularly with respect to export control regulations and restrictions, customs and tax requirements, data privacy, intellectual property and anti-corruption; and

 

differing practices of regulatory, tax, judicial and administrative bodies, including with regards to the interpretation of laws, governmental approvals, permits and licenses.

The semiconductor industry is cyclical and downturns in the semiconductor industry can negatively affect our results of operations and financial condition.

The semiconductor industry is cyclical and has been subject to significant downturns from time to time, as a result of global economic conditions as well as industry-specific factors, such as built-in excess capacity, fluctuations in product supply, product obsolescence and changes in end-customer preferences.  Downturns are typically characterized by reduction in overall demand, accelerated erosion of selling prices, reduced revenues and high inventory levels, any of which could result in a significant deterioration of our results of operations.  Such macroeconomic trends typically relate to the semiconductor industry as a whole rather than to the individual semiconductor markets to which we sell our products.  To the extent that industry downturns are concurrent with the timing of new increases in production capacity or introduction of new advanced technologies in our industry, the negative effects on our business from such industry downturns may also be more severe.  We have experienced revenue volatility and market downturns in the past and expect to experience them in the future, which could have a material adverse impact on our results of operations and financial condition.

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We may not be able to match our production capacity to demand.

As a result of the cyclicality and volatility of the semiconductor industry, it is difficult to predict future developments in the markets we serve, and, in turn, to estimate requirements for production capacity.  If our markets, major customers or certain product designs or technologies do not perform as well as we have anticipated, we risk unused capacity charges, write-offs of inventories and losses on products, and we could be required to undertake restructuring and transformation measures that may involve significant charges to our earnings.  Furthermore, during certain periods, we have also experienced increased demand in certain market segments and product technologies, which has led to a shortage of capacity, an increase in the lead times of our delivery to customers and, in certain instances, being required to enter into agreements with our suppliers with onerous terms, such as take-or-pay arrangements.  See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Impairment, restructuring charges and other related closure costs”.

Competition in the semiconductor industry is intense, and we may not be able to compete successfully if our product design technologies, process technologies and products do not meet market requirements.  Furthermore, the competitive environment of the industry has resulted, and is expected to continue to result, in vertical and horizontal consolidation among our suppliers, competitors and customers, which may lead to erosion of our market share, impact our ability to compete and require us to restructure our operations.

We compete in different product lines to various degrees on certain characteristics, for example, price, technical performance, product features, product design, product availability, process technology, manufacturing capabilities and sales and technical support.  Given the intense competition in the semiconductor industry, if our products do not meet market requirements based on any of these characteristics, our business, financial condition and results of operations could be materially adversely affected.  Our competitors may have a stronger presence in key markets and geographic regions, greater name recognition, larger customer bases, greater government support and greater financial, research and development, sales and marketing, manufacturing, distribution, technical and other resources than we do.  These competitors may be able to adapt more quickly to changes in the business environment, to new or emerging technologies and to changes in customer requirements.

The semiconductor industry is intensely competitive and characterized by the high costs associated with developing marketable products and manufacturing technologies as well as high levels of investment in production capabilities.  As a result, the semiconductor industry has experienced, and is expected to continue to experience, significant vertical and horizontal consolidation among our suppliers, competitors and customers.  Consolidation in the semiconductor industry could erode our market share, negatively impact our ability to compete and require us to increase our R&D effort, engage in mergers and acquisitions and/or restructure our operations.

Risks Related to Our Operations

Our high fixed costs could adversely impact our results.

Our operations are characterized by high fixed or other costs which are difficult to reduce, including costs related to manufacturing, particularly as we operate our own manufacturing facilities, and the employment of our highly skilled workforce.  When demand for our products decreases, competition increases or we fail to forecast demand accurately, we are driven to reduce prices and we are not always able to decrease our total costs in line with resulting revenue declines. As a result, the costs associated with our operations may not be fully absorbed, leading to unused capacity charges, higher average unit costs and lower gross margins, adversely impacting our results.

Our capital needs are high compared to those competitors who do not manufacture their own products and we may need additional funding in the coming years to finance our investments, to purchase other companies or technologies developed by third parties or to refinance our maturing indebtedness.

As a result of our choice to maintain control of a large portion of our manufacturing technologies and capabilities, we may require significant capital expenditure to maintain or upgrade our facilities in the event that our facilities become inadequate in terms of capacity, flexibility and location.  We monitor our capital expenditures taking into consideration factors such as trends in the semiconductor market, customer requirements and capacity utilization.  These capital expenditures may increase in the future if we decide to upgrade or expand the capacity of our manufacturing facilities, purchase or build new facilities or increase investments supporting key strategic initiatives.  For instance, we may be unable to successfully maintain and operate large infrastructure projects. Such increased capital expenditures associated with large infrastructure

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projects and strategic initiatives might not achieve profitability or we may be unable to utilize infrastructure projects to full capacity.  There can also be no assurance that future market demand and products required by our customers will meet our expectations.  We also may need to invest in other companies, in IP and/or in technology developed either by us or by third parties to maintain or improve our position in the market or to reinforce our existing business.  Failure to invest appropriately and in a timely manner or to successfully integrate any recent or future business acquisitions may prevent us from achieving the anticipated benefits and could have a material adverse effect on our business and results of operations.

The foregoing may require us to secure additional financing, including through the issuance of debt, equity or both.  The timing and the size of any new share or bond offering would depend upon market conditions as well as a variety of other factors.  In addition, the capital markets may from time to time offer terms of financing that are particularly favorable.  We cannot exclude that we may access the capital markets opportunistically to take advantage of market conditions.  Any such transaction or any announcement concerning such a transaction could materially impact the market price of our common shares.  If we are unable to access capital on acceptable terms, this may adversely affect our business and results of operations.

Our operating results depend on our ability to obtain quality supplies on commercially reasonable terms.  As we depend on a limited number of suppliers for materials, equipment and technology, we may experience supply disruptions if suppliers interrupt supply, increase prices or experience material adverse changes in their financial condition.

Our ability to meet our customers’ demand to manufacture our products depends upon obtaining adequate supplies of quality materials on a timely basis and on commercially reasonable terms.  Certain materials are available from a limited number of suppliers or only from a limited number of suppliers in a particular region.  We purchase certain materials whose prices on the world markets have fluctuated significantly in the past and may fluctuate significantly in the future.  Although supplies for most of the materials we currently use are adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry.  For instance, the novel coronavirus COVID-19 outbreak could cause disruptions from the temporary closure of suppliers’ facilities in China or delays and reduced export or shipment of various materials. In addition, the costs of certain materials may increase due to market pressures and we may not be able to pass on such cost increases to our customers.

We also purchase semiconductor manufacturing equipment and third party licensed technology from a limited number of suppliers and providers and, because such equipment and technology are complex, it is difficult to replace one supplier or provider with another or to substitute one piece of equipment or type of technology for another.  In addition, suppliers and providers may extend lead times, limit our supply, increase prices or change contractual terms related to certain manufacturing equipment and third party licensed technology, any of which could adversely affect our results.  Furthermore, suppliers and technology providers tend to focus their investments on providing the most technologically advanced equipment, materials and technology and may not be in a position to address our requirements for equipment, materials or technology of older generations.  Although we work closely with our suppliers and providers to avoid such shortages, there can be no assurance that we will not encounter these problems in the future.

Consolidation among our suppliers or vertical integration among our competitors may limit our ability to obtain sufficient quantities of materials, equipment and/or technology on commercially reasonable terms and engage in mergers and acquisitions.  In certain instances, we may be required to enter into agreements with our suppliers with onerous terms, such as take-or-pay arrangements.  If we are unable to obtain supplies of materials, equipment or technology in a timely manner or at all, or if such materials, equipment or technology prove inadequate or too costly, our results of operations could be adversely affected.

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Our financial results can be affected by fluctuations in exchange rates, principally in the value of the U.S. dollar.

Currency exchange rate fluctuations affect our results of operations because our reporting currency is the U.S. dollar, in which we receive the major portion of our revenues, while, more importantly, we incur a limited portion of our revenue and a significantly higher portion of our costs in currencies other than the U.S. dollar.  A significant variation of the value of the U.S. dollar against the principal currencies that have a material impact on us (primarily the Euro, but also certain other currencies of countries where we have operations, such as the Singapore dollar) could result in a favorable impact, net of hedging, on our net income in the case of an appreciation of the U.S. dollar, or a negative impact, net of hedging, on our net income if the U.S. dollar depreciates relative to these currencies, in particular with respect to the Euro.

In order to reduce the exposure of our financial results to the fluctuations in exchange rates, our principal strategy has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of purchases from our suppliers denominated in U.S. dollars and to reduce the weight of the other costs, including depreciation, denominated in Euros and in other currencies.  In order to further reduce our exposure to U.S. dollar exchange rate fluctuations, we have hedged certain line items on our Consolidated Statements of Income, in particular with respect to a portion of the cost of sales, the majority of the R&D expenses and certain SG&A expenses located in the Euro zone.  We also hedge certain manufacturing costs, included within the cost of sales, denominated in Singapore dollars.  There can be no assurance that our hedging transactions will prevent us from incurring higher Euro-denominated manufacturing costs and/or operating expenses when translated into our U.S. dollar-based accounts.  See “Item 5. Operating and Financial Review and Prospects — Impact of Changes in Exchange Rates” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Our operating results may vary significantly from quarter to quarter and annually and may also differ significantly from our expectations or guidance.

Our operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability or lead to significant variability of our operating results from one period to the next.  These factors include changes in demand from our key customers, capital requirements, inventory management, availability of funding, competition, new product developments, start of adoption of our new products by customers, technological changes, manufacturing or supplier issues and effective tax rates.  In addition, in periods of industry overcapacity or when our key customers encounter difficulties in their end-markets or product ramps, orders are more exposed to cancellations, reductions, price renegotiation or postponements, which in turn reduce our ability to forecast the next quarter or full year production levels, revenues and margins.  For these reasons and others that we may not yet have identified, our revenues and operating results may differ materially from our expectations or guidance as visibility is reduced.  See “Item 4. Information on the Company — Backlog”.

If our external silicon foundries or back-end subcontractors fail to perform, this could adversely affect our business prospects.

We currently use external silicon foundries and back-end subcontractors for a portion of our manufacturing activities.  If our external silicon foundries or back-end subcontractors are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. Likewise, if we are unable to meet our commitments to silicon foundries and back-end subcontractors, our results of operations could suffer. Prices for these services also vary depending on capacity utilization rates at our external silicon foundries and back-end subcontractors, quantities demanded and product and process technology.  Such outsourcing costs can vary materially and, in cases of industry shortages, they can increase significantly, negatively impacting our business prospects.

Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities, disruptions or inefficient implementation of production changes or interruptions that can significantly increase our costs and delay product shipments to our customers.

Our manufacturing processes are highly complex, require advanced and increasingly costly equipment and are continuously modified or maintained in an effort to improve yields and product performance and lower the cost of production.  

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Furthermore, impurities or other difficulties in the manufacturing process can lower yields, interrupt production or result in scrap.  As system complexity and production changes have increased and sub-micron technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become even more demanding.  We have from time to time experienced bottlenecks and production difficulties that have caused delivery delays and quality control problems.  There can be no assurance that we will not experience bottlenecks or production, transition or other difficulties in the future.

In addition, we are exposed to risks related to interruptions of our manufacturing processes.  If any of our property or equipment is damaged or otherwise rendered unusable or inoperable due to accident, cyberattack or otherwise this could result in interruptions which could have a material adverse effect on our business, financial condition and results of operations.

We may experience quality problems from time to time that can result in decreased sales and operating margin and product liability or warranty claims.

We sell complex products that may not in each case comply with specifications or customer requirements, or may contain design or manufacturing defects, that could cause personal injury, property damage or security risks that could be exploited by unauthorized third parties hacking, corrupting or otherwise obtaining access to our products, including the software loaded thereon by us, our suppliers or our customers.  Although our general practice is to contractually limit our liability to the repair, replacement or refund of defective products, we occasionally agree to contractual terms with key customers in which we provide extended warranties and accordingly we may face product liability, warranty, delivery failure, and/or other claims relating to our products that could result in significant expenses relating to compensation payments, product recalls or other actions related to such extended warranties and/or to maintain good customer relationships, which could result in decreased sales and operating margin and other material adverse effects on our business.  Costs or payments we may make in connection with warranty and other claims or product recalls may adversely affect our results of operations.  There can be no assurance that we will be successful in maintaining our relationships with customers with whom we incur quality problems.  Furthermore, if litigation occurs we could incur significant costs and liabilities to defend ourselves against such claims and, if damages are awarded against us, there can be no assurance that our insurance policies will be available or adequate to protect us against such claims.

 

Disruptions in our relationships with any one of our key customers or distributors, and/or material changes in their strategy or financial condition or business prospects, could adversely affect our results of operations.

A substantial portion of our sales is derived from a limited number of customers and distributors.  There can be no assurance that our customers or distributors will continue to book the same level of sales with us that they have in the past, will continue to succeed in the markets they serve and will not purchase competing products over our products.  Many of our key customers and distributors operate in cyclical businesses that are also highly competitive, and their own market positions may vary considerably.  In recent years, some of our customers have vertically integrated their businesses.  Such vertical integrations may impact our business.  Our relationships with the newly formed entities could be either reinforced or jeopardized by the integration.  If we are unable to maintain or increase our market share with our key customers or distributors, or if they were to increase product returns or fail to meet payment obligations, our results of operations could be materially adversely affected.  Certain of our products are customized to our customers’ specifications.  If customers do not purchase products made specifically for them, we may not be able to recover a cancellation fee from our customers or resell such products to other customers.  In addition, the occurrence of epidemic outbreaks such as the novel coronavirus COVID-19 could affect our customers.  While the geographic spread of the novel coronavirus cannot COVID-19 be predicted and its future developments are uncertain, if its severity increases, the adverse public health impact on our customers could negatively affect our results.

We may experience delays in delivering our product and technology roadmaps as well as transformation initiatives.

Our industry adapts to technological advancements and it is likely that new products, equipment, processes and service methods, including transformation initiatives related to digitalization, are in the process of being implemented. Any failure by us to react to changes or advances in existing technologies and processes as we develop and invest in our product, technology and transformation roadmaps could materially delay the introduction of new solutions.  If we are not able to execute on these roadmaps on a timely basis or at an acceptable cost this could result in loss of competitiveness of our solutions, decreased revenue and a loss of market share.

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Our computer systems, including hardware, software, information and cloud-based initiatives, are subject to attempted security breaches and other cybersecurity threats, which, if successful, could adversely impact our business.

We have, from time to time, experienced attempts by others to gain unauthorized access to our computer systems and networks.  The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies, including to transition to cloud-based technologies, in response to our changing needs is critical to our business.  In the current environment, there are numerous and evolving risks to cybersecurity, including criminal hackers, state-sponsored intrusions, terrorism, industrial espionage, employee malfeasance, vandalism and human or technological error.  Computer hackers and others routinely attempt to breach the security of technology products, services, and systems, and those of our customers, suppliers and providers of third party licensed technology, and some of those attempts may be successful.  Such breaches could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of our, our customer, or other third party data or systems, theft of our trade secrets and other sensitive or confidential data, including personal information and intellectual property, system disruptions, and denial of service. The attempts to breach our systems, including cloud-based systems, and gain unauthorized access to our information technology systems are becoming increasingly more sophisticated.  These attempts may include covertly introducing malware to our computers, including those in our manufacturing operations, and impersonating unauthorized users, among others.  For instance, employees and former employees, in particular former employees who become employees of our competitors or customers, may misappropriate, use, publish or provide to our competitors or customers our intellectual property and/or proprietary or confidential business information.  Also, third parties may attempt to register domain names similar to our brands or website, which could cause confusion and divert online customers away from our products.  In the event of such breaches, we, our customers or other third parties could be exposed to potential liability, litigation, and regulatory action, as well as the loss of existing or potential customers, damage to our reputation, and other financial loss and such breaches could also result in losing existing or potential customers in connection with any actual or perceived security vulnerabilities in our systems. In addition, the cost and operational consequences of responding to breaches and implementing remediation measures could be significant.  As these threats continue to develop and grow, we have been adapting and strengthening our security measures.  We continue to increase the resources we allocate to implementing, maintaining and/or updating security systems to protect data and infrastructure and to raising security awareness among those having access to our systems. However, these security measures cannot provide absolute security and there can be no assurance that our employee training, operational, and other technical security measures or other controls will detect, prevent or remediate security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations.  We regularly evaluate our IT systems to make enhancements and periodically implement new or upgraded systems, as for instance the transition and migration of our data systems to cloud-based platforms.  Any delay in the implementation of, or disruption in the transition to different systems could adversely affect our ability to record and report financial and management information on a timely and accurate basis. In addition, a miscalculation of the level of investment needed to ensure our technology solutions are current and up-to-date as technology advances and evolves could result in disruptions in our business should the software, hardware or maintenance of such items become out-of-date or obsolete and the costs of upgrading our cybersecurity systems and remediating damages could be substantial. We may also be adversely affected by security breaches related to our equipment providers and providers of third party licensed technology.  As a global enterprise, we could also be impacted by existing and proposed laws and regulations, as well as government policies and practices related to cybersecurity, privacy and data protection.  Additionally, cyberattacks or other catastrophic events resulting in disruptions to or failures in power, information technology, communication systems or other critical infrastructure could result in interruptions or delays to us, our customers, or other third party operations or services, financial loss, potential liability, and damage our reputation and affect our relationships with our customers and suppliers.

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We may be subject to theft, loss, or misuse of personal data about our employees, customers, or other third parties, which could increase our expenses, damage our reputation, or result in legal or regulatory proceedings.

The theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business could result in significantly increased security costs or costs related to defending legal claims.  Global privacy legislation, including various EU regulations and directives regulating data privacy and security, such as the General Data Protection Regulation (“GDPR”) and the transmission of content using the Internet involving residents of the EU, enforcement, and policy activity in this area are rapidly expanding and creating a complex compliance regulatory environment.  

In particular, the requirements of the GDPR impose a higher compliance burden on us and materially increase the maximum level of fines for compliance failures from their current levels relating to, among other things, consent to process personal data of individuals, the information provided to individuals regarding the processing of their personal data, the security and confidentiality of personal data, and notifications in the event of data breaches and use of third party processors. Costs to comply with and implement these privacy-related and data protection measures may increase and may necessitate changes to our business.  In addition, our failure to comply with local and international privacy or data protection laws and regulations could result in proceedings against us by governmental entities or others. Failure to comply with the GDPR or other data privacy regimes could subject us to significant fines and reputational harm.

Further, privacy-related legislation is rapidly evolving which may have a negative impact on our business if interpreted or implemented in a manner that is inconsistent from country to country and inconsistent with the current policies and practices of our customers or business partners. We may also have to change the manner in which we contract with our business partners, store and transfer information and otherwise conduct our business, which could increase our costs and reduce our revenues. In particular, the requirements of the GDPR will impose a higher compliance burden on us and materially increase the maximum level of fines for compliance failures from their current levels. Costs to comply with and implement these privacy-related and data protection measures could be significant.  In addition, our failure to comply with local and international privacy or data protection laws and regulations could result in proceedings against us by governmental entities or others.

Our business is dependent in large part on continued growth in the industries and segments into which our products are sold and on our ability to retain existing customers and attract new ones.  A market decline in any of these industries, our inability to retain and attract customers, or customer demand for our products which differs from our projections, could have a material adverse effect on our results of operations.

The demand for our products depends significantly on the demand for our customers’ end products.  Growth of demand in the industries and segments into which our products are sold fluctuates significantly and is driven by a variety of factors, including consumer spending, consumer preferences, the development and acceptance of new technologies and prevailing economic conditions.  Changes in our customers’ markets and in our customers’ respective shares in such markets could result in slower growth and a decline in demand for our products.  In addition, if projected industry growth rates do not materialize as forecasted, our spending on process and product development ahead of market acceptance could have a material adverse effect on our business, financial condition and results of operations.

Our business is dependent upon our ability to retain existing customers.  In 2019 our largest customer, Apple, accounted for 17.6% of our revenues. While we do not believe to be dependent on any one customer or group of customers, the loss of key customers or important sockets at key customers could have an adverse effect on our results of operations.  Our existing customers’ product strategy may change from time to time and/or product specifications may change on short-time product life cycles and we have no certainty that our business, financial position and results of operations will not be affected.  Our business is also dependent upon our ability to attract new customers.  There can be no assurance that we will be successful in attracting and retaining new customers, or in adequately projecting customer demand for our products.  Our failure to do so could materially adversely affect our business, financial position and results of operations.

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Market dynamics have driven, and continue to drive us, to a strategic repositioning.

In recent years, we have undertaken several initiatives to reposition our business.  Our strategies to improve our results of operations and financial condition have led us, and may in the future lead us, to acquire businesses that we believe to be complementary to our own, or to divest ourselves of or wind down activities that we believe do not serve our longer term business plans.  Our potential acquisition strategies depend in part on our ability to identify suitable acquisition targets, finance their acquisition, obtain approval by our shareholders and obtain required regulatory and other approvals.  Our potential divestiture strategies depend in part on our ability to compete and to identify the activities in which we should no longer engage, obtain the relevant approvals pursuant to our governance process and then determine and execute appropriate methods to divest of them.

We are constantly monitoring our product portfolio and cannot exclude that additional steps in this repositioning process may be required.  Furthermore, we cannot assure that any strategic repositioning of our business, including executed and possible future acquisitions or dispositions, will be successful and will not result in impairment, restructuring charges and other related closure costs.

Acquisitions and divestitures involve a number of risks that could adversely affect our operating results and financial condition, including:  we may be unable to successfully integrate businesses or teams we acquire with our culture and strategies on a timely basis or at all; and we may be required to record charges related to the goodwill or other long-term assets associated with the acquired businesses.  There can be no assurance that we will be able to achieve the full scope of the benefits we expect from a particular acquisition, divestiture or investment.  Our business, financial condition and results of operations may suffer if we fail to coordinate our resources effectively to manage both our existing businesses and any acquired businesses.  In addition, the financing of future acquisitions or divestitures may negatively impact our financial position, including our ability to pay a dividend and/or repurchase our shares, and credit rating and we could be required to raise additional funding.

Other risks associated with acquisitions include:  assumption of potential liabilities, disclosed or undisclosed, associated with the business acquired, which liabilities may exceed the amount of indemnification available from the seller; potential inaccuracies in the financials of the business acquired; and our ability to retain customers of an acquired entity, its business or industrialize an acquired process or technology.  Identified risks associated with divestitures include:  loss of activities and technologies that may have complemented our remaining businesses or operations; and loss of important services provided by key employees that are assigned to divested activities.

We depend on collaboration with other semiconductor industry companies, research organizations, universities, customers and suppliers to further our R&D efforts, and our business and prospects could be materially adversely affected by the failure or termination of such alliances.

Our success depends on our ability to introduce innovative new products and technologies to the marketplace on a timely basis.  In light of the high levels of investment required for R&D activities, we depend in certain instances on collaborations with other semiconductor industry companies, research organizations, universities, customers and suppliers to develop or access new technologies.

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Such collaboration provides us with a number of important benefits, including the sharing of costs, reductions in our own capital requirements, acquisitions of technical know-how and access to additional production capacities.  However, there can be no assurance that our collaboration efforts will be successful and allow us to develop and access new technologies in due time, in a cost-effective manner and/or to meet customer demands.  If a particular collaboration terminates before our intended goals are accomplished we may incur additional unforeseen costs, and our business and prospects could be adversely affected.  Furthermore, if we are unable to develop or otherwise access new technologies, whether independently or in collaboration with another industry participant, we may fail to keep pace with the rapid technology advances in the semiconductor industry, our participation in the overall semiconductor industry may decrease and we may also lose market share.

We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others.

We depend on patents and other IP rights to protect our products and our manufacturing processes against misappropriation by others.  The process of seeking patent protection can be long and expensive, and there can be no assurance that that we will receive patents from currently pending or future applications.  Even if patents are issued, they may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage.  In addition, effective IP protection may be unavailable or limited in some countries.  Our ability to enforce one or more of our patents could be adversely affected by changes in patent laws, laws in certain foreign jurisdictions that may not effectively protect our intellectual property rights or by ineffective enforcement of laws in such jurisdictions.  Competitors may also develop technologies that are protected by patents and other IP and therefore either be unavailable to us or be made available to us subject to adverse terms and conditions.  We have in the past used our patent portfolio to negotiate broad patent cross-licenses with many of our competitors enabling us to design, manufacture and sell semiconductor products, without concern of infringing patents held by such competitors.  We may not in the future be able to obtain such licenses or other rights to protect necessary IP on favorable terms for the conduct of our business, and such failure may adversely impact our results of operations.  Such cross-license agreements expire from time to time and there is no assurance that we can or we will extend them.

We have from time to time received, and may in the future receive, communications alleging possible infringement of third party patents and other IP rights.  Some of those claims are made by so-called non-practicing entities against which we are unable to assert our own patent portfolio to lever licensing terms and conditions.  Competitors with whom we do not have patent cross-license agreements may also develop technologies that are protected by patents and other IP rights and which may be unavailable to us or only made available on unfavorable terms and conditions.  We may therefore become involved in costly litigation brought against us regarding patents and other IP rights.  See Note 26 to our Consolidated Financial Statements.  IP litigation may also involve our customers who in turn may seek indemnification from us should we not prevail and/or who may decide to curtail their orders for those of our products over which claims have been asserted.  Such lawsuits may therefore have a material adverse effect on our business.  We may be forced to stop producing substantially all or some of our products or to license the underlying technology upon economically unfavorable terms and conditions or we may be required to pay damages for the prior use of third party IP and/or face an injunction.

The outcome of IP litigation is inherently uncertain and may divert the efforts and attention of our management and other specialized technical personnel.  Such litigation can result in significant costs and, if not resolved in our favor, could materially and adversely affect our business, financial condition and results of operations.

We operate in many jurisdictions with highly complex and varied tax regimes.  Changes in tax rules, new or revised legislation or the outcome of tax assessments and audits could cause a material adverse effect on our results.

We operate in many jurisdictions with highly complex and varied tax regimes.  Changes in tax rules, new or revised legislation or the outcome of tax assessments and audits could have a material adverse effect on our results.  Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events.  We currently receive certain tax benefits or benefit from net operating losses cumulated in prior years in some countries, and these benefits may not be available in the future due to changes in the local jurisdictions or credits on net operating losses being no longer available due to either full utilization or expiration of the statute of limitations in such jurisdictions.  As a result, our effective tax rate could increase and/or our benefits from carrying forward net operating losses could affect our deferred tax assets in certain countries in the coming years.  In addition, the acquisition or divestiture of businesses in certain jurisdictions could materially affect our effective tax rate.

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We evaluate our deferred tax asset position and the need for a valuation allowance on a regular basis.  The ultimate realization of deferred tax assets is dependent upon, among other things, our ability to generate future taxable income that is sufficient to utilize in certain jurisdictions loss carry-forwards or tax credits before their expiration or our ability to implement prudent and feasible tax optimization strategies.  The recorded amount of total deferred tax assets could be reduced, which could have a material adverse effect on our results of operations and financial position, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in business condition or in management’s plans or due to other factors, such as changes in tax laws and regulations.  

We are subject to the possibility of loss contingencies arising out of tax claims, assessment of uncertain tax positions and provisions for specifically identified income tax exposures.  We are also subject to tax audits in certain jurisdictions.  There can be no assurance that we will be successful in resolving potential tax claims that result from these audits, which could result in material adjustments in our tax positions.  We record provisions on the basis of the best current understanding; however, we could be required to record additional provisions in future periods for amounts that cannot currently be assessed.  Our failure to do so and/or the need to increase our provisions for such claims could have a material adverse effect on our results of operations and our financial position.

Our operating results can also vary significantly due to impairment of goodwill and other intangible assets incurred in the course of acquisitions and equity investments, as well as to impairment of tangible assets due to changes in the business environment.

Our operating results can vary significantly due to impairment of goodwill, other intangible assets and equity investments booked pursuant to acquisitions, joint venture agreements and the purchase of technologies and licenses from third parties, as well as to impairment of tangible assets due to changes in the business environment.  Because the market for our products is characterized by rapidly changing technologies, significant changes in the semiconductor industry, and the potential failure of our business initiatives, our future cash flows may not support the value of goodwill, tangible assets and other intangibles registered in our Consolidated Balance Sheets.  See “Item 5. Operating and Financial Review and Prospects — Overview — Critical Accounting Policies Using Significant Estimates — Impairment of goodwill”, “— Intangible assets subject to amortization”, “— Tangible assets” and “— Income (loss) on Equity-method Investments”.

We receive public funding, and a reduction in the amount available to us or demands for repayment could increase our costs and impact our results of operations.

To support our proprietary R&D for technology investments and investments in cooperative R&D ventures, we have in the past obtained public funding and expect to obtain public funding in the future, mainly from French, Italian and EU governmental entities.  The public funding we receive is subject to periodic review by the relevant authorities and there can be no assurance that we will continue to benefit from such programs at current levels or that sufficient alternative funding will be available if we lose such support.  If any of the public funding programs we participate in are curtailed or discontinued and we do not reduce the relevant R&D costs, this could have a material adverse effect on our business.  Furthermore, to receive public funding, we enter into agreements which require compliance with extensive regulatory requirements and set forth certain conditions relating to the funded programs.  If we fail to meet the regulatory requirements or applicable conditions, we may, under certain circumstances, be required to refund previously received amounts, which could have a material adverse effect on our results of operations.  If there are changes in the public funding we receive this could increase the net costs for us to continue investing in R&D at current levels and could result in a material adverse effect on our results of operations.

Some of our production processes and materials are environmentally sensitive, which could expose us to liability and increase our costs due to environmental, health and safety laws and regulations or because of damage to the environment.

We are subject to environmental, health and safety laws and regulations that govern various aspects, including the use, storage, discharge and disposal of chemicals, gases and other hazardous substances used in our operations.  Compliance with such laws and regulations could adversely affect our manufacturing costs or product sales by requiring us to acquire costly equipment, materials or greenhouse gas allowances, or to incur other significant expenses in adapting our manufacturing processes or waste and emission disposal processes.  Furthermore, environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of operations.  Failure by us to control the use of, or adequately restrict the discharge of, chemicals or hazardous substances could subject us to future liabilities.

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Climate change and related sustainability initiatives could place additional burden on us and our operations.

As climate change issues become more pronounced, we may correspondingly face increased expectations from our stakeholders to take actions beyond existing regulatory requirements to minimize our impact on the environment and mitigate climate change related effects.  To meet these additional requirements, we may need to deploy additional equipment, introduce process changes, utilize alternative suppliers and materials, and take other similar actions, some or all of which may require us to incur additional costs which could result in a material adverse effect on our results of operations and our financial position.  In addition, if we fail to meet these expectations, or foster additional sustainability initiatives, we may experience reputational risk which could impact our ability to attract and retain customers, employees, and investors.

Loss of key employees and the inability to continuously recruit and retain qualified employees could hurt our competitive position.

Our success depends to a significant extent upon our key executives and R&D, engineering, marketing, sales, manufacturing, support and other personnel.  Our success also depends upon our ability to continue to identify, attract, retain and motivate highly trained and skilled engineering, technical and professional personnel in a competitive recruitment environment.  For instance, in highly specialized areas, it may become more difficult to retain employees.  We intend to continue to devote significant resources to recruit, train and retain qualified employees, however, we may not be able to attract, obtain and retain these employees, which may affect our growth in future years and the loss of the services of any of these key personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on us.

The interests of our controlling shareholder, which is in turn indirectly controlled by the French and Italian governments, may conflict with other investors’ interests.  In addition, our controlling shareholder may sell our existing common shares or issue financial instruments exchangeable into our common shares at any time.

We have been informed that as of December 31, 2019, STMicroelectronics Holding N.V. (“ST Holding”), owned 250,704,754 shares, or approximately 27.5%, of our issued common shares.  ST Holding may therefore be in a position to effectively control the outcome of decisions submitted to the vote at our shareholders’ meetings, including but not limited to the appointment of the members of our Managing and Supervisory Boards.

We have been informed that ST Holding’s shareholders, each of which is ultimately controlled by the French or Italian government, are party to a shareholders agreement (the “STH Shareholders Agreement”), which governs relations between them.  We are not a party to the STH Shareholders Agreement.  See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders”.  The STH Shareholders Agreement includes provisions requiring the unanimous approval by the shareholders of ST Holding before ST Holding can vote its shares in our share capital, which may give rise to a conflict of interest between our interests and investors’ interests, on the one hand, and the (political) interests of ST Holding’s shareholders, on the other hand.  Our ability to issue new shares or other securities giving access to our shares may be limited by ST Holding’s desire to maintain its shareholding at a certain level and our ability to buy back shares may be limited by ST Holding due to a Dutch law requiring one or more shareholders acquiring 30% or more of our voting rights to launch a tender offer for our outstanding shares.

The STH Shareholders Agreement also permits our respective French and Italian indirect shareholders to cause ST Holding to dispose of its stake in us at any time, thereby reducing the current level of their respective indirect interests in our common shares.  Sales of our common shares or the issuance of financial instruments exchangeable into our common shares or any announcements concerning a potential sale by ST Holding could materially impact the market price of our common shares depending on the timing and size of such sale, market conditions as well as a variety of other factors.

Our shareholder structure and our preference shares may deter a change of control.

We have an option agreement in place with an independent foundation, whereby the foundation can acquire preference shares in the event of actions which the board of the independent foundation determines would be contrary to our interests, our shareholders and our other stakeholders and which in the event of a creeping acquisition or offer for our common shares are not supported by our Managing Board and Supervisory Board.  In addition, our shareholders have authorized us to issue additional capital within the limits of the authorization by our General Meeting of Shareholders, subject to the requirements of our Articles of

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Association, without the need to seek a specific shareholder resolution for each capital increase.  Accordingly, an issue of preference shares or new shares may make it more difficult for a shareholder to obtain control over our General Meeting of Shareholders.  These anti-takeover provisions could substantially impede the ability of our shareholders to benefit from a change in control and, as a result, may materially adversely affect the market price of our ordinary shares and our investors’ ability to realize any potential change of control premium.  See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders — Preference Shares”.

Any decision to reduce or discontinue paying cash dividends to our shareholders could adversely impact the market price of our common shares.

On an annual basis, our Supervisory Board, upon the proposal of the Managing Board, may propose the distribution of a cash dividend to the general meeting of our shareholders.  See “Item 8. Dividend Policy”.  Any reduction or discontinuance by us of the payment of cash dividends at historical levels could cause the market price of our common shares to decline.

We are required to prepare financial statements under IFRS and we also prepare Consolidated Financial Statements under U.S. GAAP, and such dual reporting may impair the clarity of our financial reporting.

We use U.S. GAAP as our primary set of reporting standards.  Applying U.S. GAAP in our financial reporting is designed to ensure the comparability of our results to those of our competitors, as well as the continuity of our reporting, thereby providing our stakeholders and potential investors with a clear understanding of our financial performance.  As we are incorporated in The Netherlands and our shares are listed on Euronext Paris and on the Borsa Italiana, we are subject to EU regulations requiring us to also report our results of operations and financial statements using IFRS.

As a result of the obligation to report our financial statements under IFRS, we prepare our results of operations using both U.S. GAAP and IFRS, which are currently not consistent.  Such dual reporting can materially increase the complexity of our financial communications.  Our financial condition and results of operations reported in accordance with IFRS will differ from our financial condition and results of operations reported in accordance with U.S. GAAP, which could give rise to confusion in the marketplace.

There are inherent limitations on the effectiveness of our controls.

There can be no assurance that a system of internal control over financial reporting, including one determined to be effective, will prevent or detect all misstatements.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance regarding financial statement preparation and presentation.  Projections of the results of any evaluation of the effectiveness of internal control over financial reporting into future periods are subject to inherent risk.  The relevant controls may become inadequate due to changes in circumstances or the degree of compliance with the underlying policies or procedures may deteriorate.

Because we are subject to the corporate law of The Netherlands, U.S. investors might have more difficulty protecting their interests in a court of law or otherwise than if we were a U.S. company.

Our corporate affairs are governed by our Articles of Association and by the laws governing corporations incorporated in The Netherlands.  The rights of our investors and the responsibilities of members of our Managing and Supervisory Boards under Dutch law are not as clearly established as under the rules of some U.S. jurisdictions.  Therefore, U.S. investors may have more difficulty in protecting their interests in the face of actions by our management, members of our Managing and Supervisory Boards or our controlling shareholders than U.S. investors would have if we were incorporated in the United States.

Our executive offices and a substantial portion of our assets are located outside the United States.  In addition, ST Holding and most members of our Managing and Supervisory Boards are residents of jurisdictions other than the United States.  As a result, it may be difficult or impossible for shareholders to effect service within the United States upon us, ST Holding, or members of our Managing or Supervisory Boards.  It may also be difficult or impossible for shareholders to enforce outside the United States judgments obtained against such persons in U.S. courts, or to enforce in U.S. courts judgments obtained against such persons in courts in jurisdictions outside the United States.  This could be true in any legal action, including actions predicated upon the civil liability provisions of U.S. securities laws.  In addition, it may be difficult or impossible for shareholders to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon U.S. securities laws.

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We have been advised by Dutch counsel that the United States and The Netherlands do not currently have a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.  With respect to choice of court agreements in civil or commercial matters, it is noted that the Hague Convention on Choice of Court Agreements entered into force in the Netherlands, but has not entered into force in the United States.  As a consequence, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws of the United States, will not be enforceable in The Netherlands.  However, if the party in whose favor such final judgment is rendered brings a new suit in a competent court in The Netherlands, such party may submit to The Netherlands court the final judgment that has been rendered in the United States.  If The Netherlands court finds that the jurisdiction of the federal or state court in the United States has been based on grounds that are internationally acceptable and that proper legal procedures that are in accordance with the Dutch standards of proper administration of justice including sufficient safeguards (behoorlijke rechtspleging) have been observed, the court in The Netherlands would, under current practice, in principle give binding effect to the final judgment that has been rendered in the United States unless such judgment contradicts The Netherlands’ public policy and provided that the judgment by the foreign court is not incompatible with a decision rendered between the same parties by a Dutch court, or with a previous decision rendered between the same parties by a foreign court in a dispute that concerns the same subject and is based on the same cause, provided that the previous decision qualifies for acknowledgment in the Netherlands. Even if such a foreign judgment is given binding effect, a claim based thereon may, however, still be rejected if the foreign judgment is not or no longer formally enforceable.

Item 4.

Information on the Company

History and Development of the Company

STMicroelectronics N.V. was formed and incorporated in 1987 as a result of the combination of the semiconductor business of SGS Microelettronica (then owned by Società Finanziaria Telefonica (S.T.E.T.), an Italian corporation) and the non-military business of Thomson Semiconducteurs (then owned by the former Thomson-CSF, now Thales, a French corporation).  We completed our initial public offering in December 1994 with simultaneous listings on the Bourse de Paris (now known as “Euronext Paris”) and the New York Stock Exchange (“NYSE”).  In 1998, we also listed our shares on the Borsa Italiana S.p.A. (“Borsa Italiana”).

We operated as SGS-Thomson Microelectronics N.V. until May 1998, when we changed our name to STMicroelectronics N.V.  We are organized under the laws of The Netherlands, with our corporate legal seat in Amsterdam, The Netherlands, and our head offices at WTC Schiphol Airport, Schiphol Boulevard 265, 1118 BH Schiphol, The Netherlands.  Our telephone number there is +31-20-654-3210.  Our headquarters and operational offices are managed through our wholly owned subsidiary, STMicroelectronics International N.V., and are located at 39 Chemin du Champ des Filles, 1228 Plan-Les-Ouates, Geneva, Switzerland.  Our main telephone number there is +41-22-929-2929.  Our agent for service of process in the United States related to our registration under the U.S. Securities Exchange Act of 1934, as amended, is Corporation Service Company (CSC), 80 State Street, Albany, New York, 12207. Our operations are also conducted through our various subsidiaries, which are organized and operated according to the laws of their country of incorporation, and consolidated by STMicroelectronics N.V.

Business Overview

We are a global independent semiconductor company that designs, develops, manufactures and markets a broad range of products, including discrete and general purpose 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.  

Our diverse product portfolio benefits from a unique, strong foundation of proprietary and differentiated leading-edge technologies. We use all of the prevalent function-oriented process technologies, including complementary metal-on silicon oxide semiconductors (“CMOS”), bipolar and non-volatile memory technologies.  In addition, by combining basic processes, we have developed advanced systems-oriented technologies that enable us to produce differentiated and application-specific products, including our pioneering fully depleted silicon-on-insulator (“FD-SOI”) technology offering superior performance and power efficiency compared to bulk CMOS, bipolar CMOS technologies (“Bi-CMOS”) and radio frequency silicon-on-insulator (“RF-SOI”) for mixed-signal and high-frequency applications, as well as a combination of Bipolar, CMOS and DMOS (“BCD”) and vertically integrated power (“VIPower”) technologies for smart power applications, silicon carbide (“SiC”) and gallium-nitride (“GaN”) for high-efficiency systems, Micro-Electro-Mechanical Systems (“MEMS”) technologies for sensors and Actuators, embedded memory technologies for our microcontrollers and differentiated Imaging Technologies for our imaging solutions.  For our 2019 Results of Operations, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information”.

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Strategy

 

We are a global semiconductor leader, serving over 100,000 customers across a broad range of markets: automotive, industrial, personal electronics, and communications equipment, computers and peripherals. We develop industry-leading technologies that allow us to provide products and solutions that meet and exceed the needs and expectations of our customers now and into the future.

 

Our strategy focuses on long-term value creation for the Company and its affiliated enterprises and takes into account the short-, medium- and longer-term evolution of the markets we serve and the environment and opportunities we see.

 

We are focused on application areas which are expected to experience solid growth rates driven by broad, long-term trends in electronic systems. Key for us among these trends are Smart Mobility, power and energy applications, Internet of Things (“IoT”) and 5G. These trends require enablers such as autonomous systems, robotics, securely connected machines and personal devices, electrification of automobiles and infrastructure, advanced communications equipment and networks and more power efficient systems. These enablers drive in turn the demand for the electronic components we develop and manufacture.

 

Our products are used in a wide variety of applications for the four end-markets we address: automotive, industrial, personal electronics and communications equipment, computers and peripherals.  For the automotive and industrial markets we address a wide customer base, particularly in industrial, with a broad and deep product portfolio. In personal electronics and communications equipment, computers and peripherals we have a selective approach both in terms of the customers we serve, as well as in the technologies and products we offer.

 

Together with our customers we enable smarter driving by making vehicles safer, more environmentally friendly and more connected.  We enable smart industry helping to make factories and workplaces more efficient, more flexible and safer.  We enable smarter homes and cities making houses, buildings and city infrastructure more efficient, move convenient and more secure.  We help make everything more intelligent, more connected and more secure. In doing this we ensure that ST is found everywhere microelectronics make a positive and innovative contribution to people’s lives.  By getting more from technology to get more from life, ST stands for life.augmented.

Product Information

Semiconductors are electronic components that serve as the building blocks inside modern electronic systems and equipment.  Semiconductors, generally known as “chips,” combine multiple transistors on a single piece of material to form a complete electronic circuit.  With our portfolio of semiconductor products, we serve customers across the spectrum of electronics applications with innovative solutions.

We have a portfolio of analog products, including sensors, signal channel devices and output power stages - discrete and/or integrated - as well as complete power management blocks. Our analog products can fulfill the needs of a wide range of designs and systems.  

We also have digital products that are at the heart of electronics systems, including microcontrollers, ASICs and specialized imaging sensors.  Our full set of microcontrollers includes one of the industry’s broadest ranges of general-purpose devices serving all market segments, secure microcontrollers for mobile devices, wearables, banking, identification, industrial, automotive and IoT markets and a series of embedded microprocessors for our strategic end-markets (automotive, industrial, personal electronics and communications equipment, computers and peripherals).

In addition, we have historically been one of the leading suppliers and innovators in the domain of semiconductor devices dedicated to automotive applications.  We have a portfolio spanning complex power train, audio and infotainment devices and body and convenience dedicated and standard functions as well as a broad offering of components for advanced driver assistance systems (“ADAS”), dedicated automotive microcontrollers, MEMS automotive sensors and power driver, including SiC devices for hybrid and electric cars.  The products designed and manufactured specifically for automotive applications are complemented by a large range of “automotive grade” standard products, both tested and guaranteed to perform under stringent automotive environmental conditions.

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On top of the product design R&D spending, our principal investment and resource allocation decisions in the semiconductor business area are for expenditures on technology R&D as well as capital investments in front-end and back-end manufacturing facilities, which are planned at the corporate level; therefore, our product groups share common R&D for process technology and manufacturing capacity for some of their products.

Our reportable segments are as follows:

 

Automotive and Discrete Group (ADG), comprised of dedicated automotive ICs (both digital and analog), and discrete and power transistor products for all market segments.

 

Analog, MEMS and Sensors Group (AMS), comprised of low-power high-end analog ICs (both custom and general purpose) for all markets, smart power products for Industrial, Computer and personal electronics markets, Touch Screen Controllers, Low Power Connectivity solutions (both wireline and wireless) for IoT, power conversion products, metering solutions for Smart Grid, specialized imaging sensors and modules, and all MEMS products for sensors or Actuators.

 

Microcontrollers and Digital ICs Group (MDG), comprised of general purpose and secure microcontrollers, EEPROM memories, Digital ASICs, Aerospace and Defense products including components for microwave and millimeter wave.

“Others” includes items such as unused capacity charges, impairment and restructuring charges and other related closure costs, phase out and start-up costs, and other unallocated expenses such as: management reorganization expenses, 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 Subsystems, assembly services and other revenue.

Below is a description of our main categories of products.

Automotive and Discrete Group (ADG)

Dedicated Automotive ICs

We are a top automotive semiconductor vendor supplying solutions to leading suppliers of carmakers worldwide.  We combine an unparalleled platform of advanced technologies with an unswerving commitment to quality, and a thorough understanding of the automotive market gained through close collaboration with leading customers.  Our automotive-solutions portfolio covers all key application areas in the car:  Powertrain, Chassis, Safety and Security, including ADAS, Body Electronics, Infotainment and Connectivity.

For Powertrain, we provide silicon solutions for the full range of engine-management systems:  from motorbikes and scooters to the most advanced drive-by-wire solutions.  Developments in engine management are driven by both government emission regulations and energy concerns.  We continue to work closely with major automotive OEMs, as we have for decades, to reduce fuel consumption and CO2 emission via advanced technologies such as Variable Valve Timing and Gasoline Direct Injection and Battery Management for hybrid and full electric cars.  Due to the cooperation with certain leading car makers, our microcontrollers are currently in the electrical engines of leading hybrid and electric cars.

With regards to Chassis, we provide a broad range of solutions to increase vehicle-occupant safety, including devices for airbags, anti-lock brakes, traction control, electric power steering and active suspension systems.  We are a leading supplier of chips for automotive airbags and anti-lock braking systems, which currently represent the largest portion of automotive safety electronics.

We are a leading player in ADAS that help avoid or minimize the severity of traffic accidents.  We manufacture leading-edge products for vision and radar (both short range 24GHz and long range 77GHz) based systems that assist the driver with capabilities such as lane-departure warning, forward-collision warning, vision/radar fusion and pedestrian detection including specific modular solutions for the mass market.  We are also working on our first-generation modular offering for V2X (vehicle-to-vehicle and vehicle-to-infrastructure) as society progresses toward semi- and fully-autonomous vehicles and Imaging Technologies for vehicles.

Today’s car body electronics involve a myriad of inter-networked electronic systems, from dome and door-zone controls, HVAC (heating, ventilation, and air-conditioning) systems, and seat controls to wiper and lighting controls.  The penetration of electronics in the car is increasing all the time, as are the requirements for improved reliability and diagnostic capabilities.  We address the concept of the “smart” junction box, which is an intelligent power and switching center for the vehicle that integrates functions and features from exterior and cabin lighting to wipers, with a comprehensive architecture that consists of upgradable hardware and software modules.  With our proprietary VIPower silicon technology and thorough application knowledge, we have become a market leader in automotive lighting electronics, offering solutions for both exterior and interior lighting, from incandescent bulbs to LED- or HID -based systems.

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Our car infotainment and navigation portfolio includes complete turnkey solutions for digital radio, navigation and telematics, and wireless connectivity in the car.  We have leveraged our experience of more than 30 years, at the forefront of AM/FM radio technology to lead in digital radio.  We produce all of the semiconductor components for car radios — from the tuner through the baseband to multimedia processing and playback.  Our car-radio systems are optimized for harsh reception environments and minimized power consumption.  Our portfolio of products for navigation also includes a family of System-on-Chip solutions capable of receiving signals from multiple satellite navigation systems, including BeiDou, GPS, GALILEO, GLONASS and QZSS, to improve user position accuracy and navigation in poor satellite visibility conditions, such as in urban canyons.

Discrete and Power Transistor

Discrete and power transistors families include both power products and protection devices serving our strategic end markets (automotive, industrial, personal electronics and communications equipment, computers and peripherals).

Leading-edge power technologies for both high-voltage and low-voltage applications combined with a full package range and innovative die bonding technologies exemplify our innovation in power transistors.  Our portfolio includes MOSFETs ranging from 35V to 1800 V, SiC MOSFETs featuring the industry’s highest temperature rating of 200 °C, IGBTs with breakdown voltages ranging from 350 V to 1300 V and a wide range of power bipolar transistors and, more recently, GaN–on- silicon components to address the 5G market. Our portfolio of protection devices supports all industry requirements for electrical overstress and electrostatic surge protection, lightning surge protection and automotive protection.  Our protection devices have passed all certifications, meeting or exceeding international protection standards for electrical hazards on electronics boards found in the demanding automotive, industrial, personal electronics and communications equipment, computers and peripherals.

Analog, MEMS and Sensors Group (AMS)

Analog, Smart Power, Low Power RF, Touch Screen Controllers

We develop a broad range of innovative Power, Smart Power and Analog ICs, to serve markets such as those relating to smart grid, cloud computing, automation, portable electronics and power conversion.  These product families include:  Industrial ASICs and ASSPs, covering motion control, power and energy management and automation; General Purpose Analog Products, which includes high end analog front-end products as well as RF ICs; and Custom Analog ICs, mainly power management ICs (“PMIC”) for data storage, servers and portable power management devices.  In 2019, we made a large inroad in the market of wireless charging ICs for smartphones and we expanded our presence in the automotive and industrial markets with our Galvanic Isolated Gate Drivers (STGAP product family).

We also develop a comprehensive range of operational amplifiers (both low-voltage and high-voltage), comparators and current-sense amplifiers.  In addition to our portfolio of mainstream operational amplifiers and comparators, we offer specific products for healthcare, industrial, and automotive applications, as well as a range of high-performance products specifically designed to meet the strict requirements of the wearable market.

Our connectivity ICs range from wireline to wireless solutions.  We optimize our products for reliability of the communication channel and low power consumption.  For wireline communication, we offer a complete family of transceivers compatible with different protocol standards used in the industry (PRIME, Meters and More, IEC 61334-5-1, CAN and others).  Our ultra-low power wireless solutions include Sub-1GHz RF chips (aka SPIRIT Family), latest generation Bluetooth Low Energy (aka BlueNRG Family) and Wi-Fi technologies.  We sell to OEMs and Mass Market both Standard and Dedicated RF solutions, either chips or certified modules.

Our FingerTip® family of Touch Screen Controllers provides true multi-touch capability, supporting unlimited simultaneous touches, and it is optimized for the extreme low power consumption.  FingerTip also enhances multi-touch actions such as pinch-to-zoom, supports stylus operations and is compatible with both flat and curved display panel.

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MEMS Sensors and Actuators

Our MEMS portfolio includes both Sensors and Actuators.  We sell our MEMS products in a broad range of application fields, including mobile, gaming, computer, automotive, industrial, healthcare and IoT.

MEMS Sensors include Motion MEMS (accelerometers, gyroscopes, magnetic sensors), Environmental Sensors (pressure, humidity and temperature) and Microphones.  We offer a unique sensor portfolio, from discrete to fully-integrated solutions, high performance sensor fusion to improve the accuracy of multi-axis sensor systems in order to enable highly-demanding applications, such as indoor navigation and location-based services, optical image stabilization and high-level quality products.

MEMS Actuators include: (i) Thermal and Piezoelectric Actuators for 2D and 3D Printing in Consumer, Commercial and Industrial market applications; (ii) Piezoelectric Actuators for applications such as smartphone camera Auto Focus and MEMS loudspeakers; and (iii) Piezoelectric, Electrostatic and Electromagnetic Actuators for emerging VR/AR applications, ultra-low power depth cameras and LIDAR Systems for assisted Smart Driving.

Specialized Imaging Sensors

We also have a broad portfolio of Imaging solutions based on ST proprietary differentiated technologies such as FlightSenseTM, addressing various markets, and in particular the fast growing 3D sensing consumer and automotive applications. ST Imaging solutions are composed of both specialized components developed for dedicated customers’ systems; and full optical sense and illumination system solutions targeting multiple customers.

Microcontrollers and Digital ICs Group (MDG)

MDG is comprised of general purpose and secure microcontrollers, microprocessors, EEPROM and RF memories, RF wireless and wired communication ASICs for 4G/5G terminals and infrastructure, and for satellite constellations and defense systems, based on ST proprietary silicon technologies.

Microcontroller, Memory & Secure MCU

We have microcontrollers for general purpose and secure applications, microprocessors as well as small density serial non-volatile memories.  Our general purpose microcontroller product portfolio largely contains families of products based on 32-bit ARM®-based Cortex®-M0 and M0+, Cortex®-M3, Cortex®-M4 and Cortex®-M7 cores. For each product family a broad selection of features is available with respect to MCU performance, ultra-low-power, memory size, peripherals, and packaging. Numerous dedicated families include features such as our TouchGFX® advanced 3D graphics, dedicated peripherals for industrial motor controls, security features, and low-power wireless connectivity.  During 2019, we launched 10 new families including a new line of microprocessors (MPU) targeting industrial applications, which allows us to enter a new embedded market segment.  The MPU product line is based on 32-bit ARM®-based® Cortex®-A Core, complemented by an integrated Cortex®-M4 and a dedicated Linux distribution.  We continue to offer a well-established family of 8-bit microcontrollers, using ST proprietary core architecture targeting consumer, automotive and ultra-low power simpler applications.

The STM32 family based on the ARM® Cortex®-M and Cortex®-A processors are designed to offer significant degrees of freedom to microcontroller and microprocessors users.  The product range combines very high performance, real-time capabilities, digital signal processing, and low-power, low-voltage operation, while maintaining full integration and ease of development.

The unparalleled and large range of STM32 devices, accompanied by a vast choice of tools and software including support for Industrial Safety Standard IEC 61508 SIL2/3, Human Machine Interface (HMI), and Artificial Intelligence including Machine learning and Neural Networks, makes this family of products an ideal choice for an increasingly broad range of applications.

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We offer leading products for secure applications in traditional smartcard applications and embedded security applications.  Throughout our 20+ year presence in the smartcard security industry, we have supplied the market’s most advanced technologies and solutions, with a continuous focus on innovation and the highest levels of security certification.  Our expertise in security is key to our leadership in the mobile communications, banking, digital identity, IoT security, pay-TV, identity, and transport fields.  We also actively contribute to the emergence of new applications such as Embedded SIM and secure mobile transactions using Near Field Communication (“NFC”) for mobile phones, trusted computing, brand protection and security for IoT devices.  Our secure microcontroller product portfolio offers compliance with the latest security standards up to Common Criteria EAL6+, ICAO, and TCG1.2.  Our secure microcontrollers cover a complete range of interfaces for both contact and contactless communication, including ISO 7816, ISO 14443 Type A & B, NFC, USB, SPI and I²C.

Our secure-microcontroller platforms rely on a highly secure architecture combined with leading‑edge CPUs, such as ARM®’s SC300 and SC000, and advanced embedded non-volatile memory technologies such as 40 nm embedded Flash and 80 nm embedded EEPROM technologies.

Our wide range of small density serial non-volatile memories has among the highest industry performance.  The serial EEPROM family ranges from 1 Kbit to 4 Mbits and offers the most common serial interfaces to facilitate adoption:  I²C, SPI, Microwire.  Our wide range of products are also automotive compliant.  Very small packages options are available for applications where space is critical, such us in camera modules for consumer and mobile devices.

We offer RF memory and transceiver products that are key for logistic and retail applications and are based on the largest industry standard for short range High-Frequency RFID standard by ISO14443.  The products are compatible with all NFC technology standards, as defined by the NFC Forum, where ST plays a key role.  We offer one of the most comprehensive portfolios, which includes NFC/RFID readers, Dynamic NFC/RFID tags, also known as Dual Interface NFC/RFID tags, and Standalone RFID tags.  We also offer RFID Readers operating in the UHF bands for longer range logistics operation.

RF, Wireless and Wired Communication

 

We offer RF, digital and mixed ASICs, based on our proprietary FD-SOI, RF-SOI, and SiGe technology, for wireless, particularly for RF Front-End Modules, and wired communications infrastructure and terminals.  Our RF mmWave components serve the market for satellite links, 5G infrastructure RF front-end, and transceivers for very-short range, ultra-low-power, 60GHz multi-Gigabit speed links.

Alliances with Customers and Industry Partnerships

We believe that alliances with customers and industry partnerships are critical to our success in the semiconductor industry.  Customer alliances provide us with valuable systems and application know-how and access to markets for key products, while allowing our customers to gain access to our process technologies and manufacturing infrastructure.  We are actively working to expand the number of our customer alliances, targeting key global OEMs.

From time to time we collaborate with other semiconductor industry companies, research organizations, universities and suppliers to further our R&D efforts.  Such collaboration provides us with a number of important benefits, including the sharing of costs, reductions in our own capital requirements, acquisitions of technical know-how and access to additional production capacities.

Customers and Applications

We design, develop, manufacture and market thousands of products that we sell to over 100,000 customers.  We emphasize balance in our product portfolio, in the applications we serve and in the regional markets we address.  Our major customers include Apple, Robert Bosch, Ciena, Continental, Hewlett-Packard, Huawei, Mobileye, Samsung, Seagate and Tesla.  In addition, our broad portfolio helps foster close relationships with customers, which provides opportunities to enable application solutions and to supply such customers’ requirements for multiple products, including analog, digital, and power products applications.  We also sell our products through distributors and retailers.

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Sales, Marketing and Distribution

Our sales and marketing is organized by a combination of country/area coverage and key accounts coverage with the primary objective of accelerating sales growth and gaining market share, particularly with regards to: strengthening the effectiveness of the development of our global and major local accounts; boosting demand creation through an enhanced focus on geographical coverage with strong technical expertise, supported in the mass market by our distribution channel and local initiatives; and establishing regional sales and marketing teams that are fully aligned with our strategic end-markets: automotive, industrial, personal electronics and communications equipment, computers and peripherals.

We have three regional sales organizations reporting to a global head of Sales & Marketing: Americas; Asia Pacific; and EMEA. Our regional sales organizations have a similar structure to enhance coordination in global strategy alignment and go-to-market activities.  The sales and marketing teams are strongly focused on profitable revenue growth and business performance as well as on fostering demand, expanding the customer base, maximizing market share, developing new product-roadmaps and providing the best technical support in the field for our customers.  The sales and marketing activities are supported by system marketing, product marketing, application labs, field application engineers and quality engineers.

We engage distributors and sales representatives to distribute and promote our products around the world.  Typically, distributors handle a wide variety of products, including those that compete with ours, and fulfill orders and service many of our customers.  Most of our sales to distributors are made under agreements allowing for price protection and some with the right of return on unsold merchandise.  Sales representatives, on the other hand, generally do not offer products that compete directly with our products, but may carry complementary items manufactured by others.  Sales representatives do not maintain a product inventory and their customers place large quantity orders directly with us and are referred to distributors for smaller orders.

At the request of certain customers, we also sell and deliver our products to electronics manufacturing services (“EMS”) companies, which, on a contractual basis with our customers, incorporate our products into the application specific products they manufacture for our customers.  

In furtherance of our strong commitment to quality, our sales organizations include personnel dedicated to close monitoring and resolution of quality related issues.  

For a breakdown of net revenues by segment and geographic region for the last three fiscal years, see “Item 5. Operating and Financial Review and Prospects”.

Research and Development

Since our formation, we have maintained a solid commitment to innovation.  About one-sixth of our employees work in R&D on product design/development and technology and, in 2019, we spent approximately 15.7% of our net revenues on R&D.  Our innovations in semiconductor technology as well as in hardware and software contribute to the creation of successful products that generate value for us and our customers.  Our complete design platforms, including a large selection of IP and silicon-proven models and design rules, enable the fast development of products designed to meet customer expectations in terms of reliability, quality, competitiveness in price and time-to-market.  Through our R&D efforts, we contribute to making our customers’ products more efficient, more appealing, more reliable and safer.  Our technology R&D strategy is based on the development of differentiated technologies, allowing for a unique offer in terms of new products and enabling new applications opportunities.

We draw on a rich pool of chip fabrication technologies, including advanced CMOS, FD-SOI, RF-SOI, specialized imaging, embedded non-volatile memories, mixed-signal, analog, MEMS, Smart power, SiC and GaN processes.  This is well embedded in our strong packaging technologies portfolio such as high pin count BGA, Wafer level packaging, highly integrated sensor packages and leadframe package power products.  We combine both front-end and back-end manufacturing and technology R&D under the same organization to ensure a smooth flow of information between our R&D and manufacturing organizations.  We leverage significant synergies and shared activities between our product groups to cross-fertilize them.  We also use silicon foundries, especially for advanced CMOS beyond the 28 nm node that we do not plan to manufacture nor develop internally.

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We have advanced R&D centers which offer us a significant advantage in quickly and cost effectively introducing products.  Furthermore, we have established a strong culture of partnerships and through the years have created a network of strategic collaborations with key customers, suppliers, competitors, and leading universities and research institutes around the world.  See “Item 4. Information on the Company — Alliances with Customers and Industry Partnerships”.  We also play leadership roles in numerous projects running under the European Union’s IST (Information Society Technologies) programs. We also participate in certain R&D programs established by the EU, individual countries and local authorities in Europe (primarily in France and Italy).  See “Item 4. Information on the Company — Public Funding”.

We believe that market driven R&D based on leading‑edge products and technologies is critical to our success.  We devote significant effort to R&D because we believe such investment can be leveraged into competitive advantages.  New developments in semiconductor technology can make end products significantly cheaper, smaller, faster, more reliable and embedded than their predecessors, with differentiated functionalities.  They can enable significant value creation opportunities with their timely appearance on the market.  The total amount of our R&D expenses in the past three fiscal years was $1,498 million, $1,398 million and $1,296 million in 2019, 2018 and 2017, respectively.  For more information on our R&D expenses, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Research and Development Expenses”.

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Property, Plants and Equipment

We currently operate 13 main manufacturing sites around the world.  The table below sets forth certain information with respect to our current manufacturing facilities, products and technologies.  Front-end manufacturing facilities are fabs and back-end facilities are assembly, packaging and final testing plants.

 

Location

 

Products

 

Technologies

Front-end facilities

 

 

 

 

Agrate, Italy(1)

 

Non-volatile memories, microcontrollers and application-specific products MEMS

 

Fab 1:  200 mm, BCD, MEMS, Microfluidics

Fab 2:  200 mm, research and development on non-volatile memories and Advanced BCD

 

 

 

 

 

Ang Mo Kio, Singapore(2)

 

Analog, microcontrollers, power transistors, commodity products, non-volatile memories, and application-specific products

 

Fab 1:  150 mm, Bipolar, Power metal-on silicon oxide semiconductor process technology (“MOS”) and BCD, EEPROM, Smartcard, Microcontrollers, CMOS logic, Microfluidics, MEMS, Bi-CMOS

Fab 2:  200 mm, BCD, Advanced BCD, VIPpowerTM and Power MOS; EEPROM, embedded non-volatile microcontrollers

 

 

 

 

 

Catania, Italy(3)

 

Power transistors, Smart Power and analog ICs and application-specific products, MEMS

 

Fab 1:  150 mm, Power MOS, VIPpowerTM, SiC and Power RF/technologies

Fab 2:  200 mm, Advanced BCD, Power MOS, VIPpowerTM

 

 

 

 

 

Crolles, France(4)

 

Application-specific products and leading edge logic products; non-volatile memories and microcontrollers

 

Fab 1:  200 mm, manufacturing on CMOS and Bi-CMOS, Analog/RF

Fab 2:  300 mm, research and development and manufacturing on advanced CMOS Bulk, Bi-CMOS and FD-SOI, Time-of-Flight, imaging, Analog/RF, embedded non-volatile memories and microcontrollers

 

 

 

 

 

Rousset, France

 

Non-volatile memories and secure microcontrollers, application-specific products

 

Fab: 200 mm, manufacturing on CMOS, embedded non-volatile memories, EEPROM and Analog/RF

 

 

 

 

 

Tours, France

 

Protection thyristors, diodes and ASDTM power transistors, IPADTM

 

Fab 1:  150 mm and 200 mm Triacs, rectifiers, IPD and Power Schottky diodes

Pilot line RF

 

 

 

 

 

Back-end facilities

 

 

 

 

Bouskoura, Morocco

 

Discrete and standard products, micro modules, RF and subsystems

 

Power, Power Automotive, SOIC, Micromodules

 

 

 

 

 

Calamba, Philippines

 

Application specific products and standard products, MEMS

 

Ball and Land Grid Array, QFN, Micromodules, Optical Sensors Module

 

 

 

 

 

Kirkop, Malta

 

Application-specific products, MEMS, Microcontrollers

 

Ball and Land Grid Array, QFP, FC Ball Grid Array

 

 

 

 

 

Muar, Malaysia

 

Application-specific and standard products, microcontrollers

 

Ball Grid Array, Power Automotive, SOIC, QFP

 

 

 

 

 

Rennes

 

Application specific products

 

Various technologies

 

 

 

 

 

Shenzhen, China(5)

 

Non-volatile memories, optical packages, discrete, application-specific and standard products

 

SOIC, Power, Power Automotive, Optical Sensors

 

 

 

 

 

Toa Payoh, Singapore

 

Packaging research and development, EWS

 

 

 

(1)

In 2018, we started construction of a new 300 mm fab to support next generation mixed signal, IGBT and power technologies.

(2)

During 2017, we acquired from Micron the 200 mm fab we previously contributed to Numonyx as part of its creation in 2008 (Micron subsequently acquired Numonyx in 2010).  Micron fully transferred the fab to us in May 2019. The fab is ramping several technologies, including Smart Power, VIPpowerTM and others.

(3)

A majority of Fab 1 was converted into 200 mm and merged with Fab 2 at the end of 2019.  A portion of Fab 1 remains in 150 mm and is devoted to SiC and RF.

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(4)

Our 300 mm fab is expanding capacity within the existing infrastructure to support the production ramp up of new technologies.

(5)

Jointly owned with SHIC, a subsidiary of Shenzhen Electronics Group.

At December 31, 2019, our front-end facilities had a total maximum capacity of approximately 130,380 200 mm equivalent wafer starts per week.  The number of wafer starts per week varies from facility to facility and from period to period as a result of changes in product mix.

We own all of our manufacturing facilities, but certain facilities (Muar, Malaysia; Shenzhen, China; and Toa Payoh and Ang Mo Kio, Singapore) are built on land subject of long-term leases.

We have historically subcontracted a portion of total manufacturing volumes to external suppliers.  In 2019, we subcontracted approximately 18% of the value of our total silicon production to external foundries.  Our plan is to continue sourcing silicon from external foundries to give us flexibility in supporting our growth.

At December 31, 2019, we had approximately $514 million in outstanding commitments for purchases of equipment and other assets for delivery in 2020.  In 2019, our capital spending, net of proceeds, was $1,174 million compared to $1,262 million in 2018.  In the 2017-2019 period the ratio of capital investment spending to net revenues was about 13.6%. For more information, see “Item 5. Operating and Financial Review and Prospects — Financial Outlook:  Capital Investment”.

Intellectual Property (IP)

Our success depends in part on our ability to obtain patents, licenses and other IP rights to protect our proprietary technologies and processes.  IP rights that apply to our various products include patents, copyrights, trade secrets, trademarks and mask work rights.  We currently own approximately 18,000 patents and pending patent applications, corresponding to approximately 9,600 patent families (each patent family containing all patents originating from the same invention), including over 588 original new patent applications filed in 2019.

We believe that our IP represents valuable assets.  We rely on various intellectual property laws, confidentiality procedures and contractual provisions to protect our IP assets and enforce our IP rights.  To optimize the value of our IP assets, we have engaged in licensing our design technology and other IP, including patents, when consistent with our competitive position and our customers’ interests.  We have also entered into broad-scope cross-licenses and other agreements which enable us to design, manufacture and sell semiconductor products using the IP rights of third parties and/or operating within the scope of IP rights owned by third parties.

From time to time, we are involved in IP litigation and infringement claims.  See Note 26 to our Consolidated Financial Statements and Item 3. “Key Information — Risk Factors”.  Regardless of the validity or the successful assertion of such claims, we may incur significant costs with respect to the defense thereof, which could have a material adverse effect on our results of operations, cash flow or financial condition.

Backlog

Our sales are made primarily pursuant to standard purchase orders that are generally booked from one to twelve months in advance of delivery.  Quantities actually purchased by customers, as well as prices, are subject to variations between booking and delivery and, in some cases, to cancellation due to changes in customer needs or industry conditions.  During periods of economic slowdown and/or industry overcapacity and/or declining selling prices, customer orders are not generally made far in advance of the scheduled shipment date.  Such reduced lead time can diminish management’s ability to forecast production levels and revenues.  When the economy rebounds, our customers may strongly increase their demands, which can result in capacity constraints due to a time lag when matching manufacturing capacity with such demand.

In addition, our sales are affected by seasonality, with the first quarter generally showing lowest revenue levels in the year, and the third or fourth quarter historically generating higher amounts of revenues partly as a result of the seasonal dynamics for smartphone applications dynamics  

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We also sell certain products to key customers pursuant to frame contracts.  Frame contracts are annual contracts with customers setting forth quantities and prices on specific products that may be ordered in the future.  These contracts allow us to schedule production capacity in advance and allow customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required to produce ordered products.  Orders under frame contracts are also subject to a high degree of volatility, because they reflect expected market conditions which may or may not materialize.  Thus, they are subject to risks of price reduction, order cancellation and modifications as to quantities actually ordered resulting in inventory build-ups.

Furthermore, developing industry trends, including customers’ use of outsourcing and their deployment of new and revised supply chain models, may reduce our ability to forecast changes in customer demand and may increase our financial requirements in terms of capital expenditures and inventory levels.

We entered 2019 with a backlog lower than we had entering 2018.  For 2020, we entered the year with a backlog higher than what we had entering 2019.

Competition

Markets for our products are intensely competitive.  We compete with major international semiconductor companies and while only a few companies compete with us in all of our product lines, we face significant competition from each of them. Smaller niche companies are also increasing their participation in the semiconductor market, and semiconductor foundry companies have expanded significantly, particularly in Asia.  Competitors include manufacturers of standard semiconductors, ASICs and fully customized ICs, including both chip and board-level products, as well as customers who develop their own IC products and foundry operations.  Some of our competitors are also our customers.  We compete in different product lines to various degrees on the basis of price, technical performance, product features, product system compatibility, customized design, availability, quality and sales and technical support.  In particular, standard products may involve greater risk of competitive pricing, inventory imbalances and severe market fluctuations than differentiated products.  Our ability to compete successfully depends on factors both within and outside our control, including successful and timely development of new products and manufacturing processes, product performance and quality, manufacturing yields and product availability, customer service, pricing, industry trends and general economic trends.

The semiconductor industry is characterized by the high costs associated with developing marketable products and manufacturing technologies as well as high levels of investment in production capabilities.  As a result, the semiconductor industry has experienced, and is expected to continue to experience, significant vertical and horizontal consolidation among our suppliers, competitors and customers, which could lead to erosion of our market share, impact our capacity to compete and require us to restructure our operations.  See Item 3. “Key Information — Risk Factors”.

Organizational Structure and History

We are organized in a matrix structure with geographic regions interacting with product lines, both supported by shared technology and manufacturing operations and by central functions, designed to enable us to be closer to our customers and to facilitate communication among the R&D, production, marketing and sales organizations.

While STMicroelectronics N.V. is the parent company, we conduct our global business through STMicroelectronics International N.V. and also conduct our operations through service activities from our subsidiaries.  We provide certain administrative, human resources, legal, treasury, strategy, manufacturing, marketing and other overhead services to our consolidated subsidiaries pursuant to service agreements for which we recover the cost.

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The following table lists our consolidated subsidiaries and our percentage ownership as of December 31, 2019:

 

Legal Seat

 

Name

 

Percentage

Ownership

(Direct or Indirect)

 

Australia, Sydney

 

STMicroelectronics PTY Ltd

 

 

100

 

Austria, Vienna

 

STMicroelectronics Austria GmbH

 

 

100

 

Belgium, Diegem

 

Proton World International N.V.

 

 

100

 

Brazil, Sao Paulo

 

Incard do Brazil Ltda

 

 

100

 

Brazil, Sao Paulo

 

South America Comércio de Cartões Inteligentes Ltda

 

 

100

 

Brazil, Sao Paulo

 

STMicroelectronics Ltda

 

 

100

 

Canada, Ottawa

 

STMicroelectronics (Canada), Inc.

 

 

100

 

Canada, St. John, New Brunswick

 

Genesis Microchip Limited Partnership

 

 

100

 

China, Beijing

 

STMicroelectronics (Beijing) R&D Co. Ltd

 

 

100

 

China, Shanghai

 

STMicroelectronics (Shanghai) Co. Ltd

 

 

100

 

China, Shanghai

 

STMicroelectronics (China) Investment Co. Ltd

 

 

100

 

China, Shenzhen

 

Shenzhen STS Microelectronics Co. Ltd

 

 

60

 

China, Shenzhen

 

STMicroelectronics (Shenzhen) R&D Co. Ltd

 

 

100

 

Czech Republic, Prague

 

STMicroelectronics Design and Application s.r.o.

 

 

100

 

Denmark, Aarhus

 

STMicroelectronics A/S

 

 

100

 

Finland, Nummela

 

STMicroelectronics Finland OY

 

 

100

 

France, Crolles

 

STMicroelectronics (Crolles 2) SAS

 

 

100

 

France, Grenoble

 

STMicroelectronics (Alps) SAS

 

 

100

 

France, Grenoble

 

STMicroelectronics (Grenoble 2) SAS

 

 

100

 

France, Le Mans

 

STMicroelectronics (Grand Ouest) SAS

 

 

100

 

France, Montrouge

 

STMicroelectronics S.A.

 

 

100

 

France, Rousset

 

STMicroelectronics (Rousset) SAS

 

 

100

 

France, Tours

 

STMicroelectronics (Tours) SAS

 

 

100

 

Germany, Aschheim-Dornach

 

STMicroelectronics GmbH

 

 

100

 

Germany, Aschheim-Dornach

 

STMicroelectronics Application GmbH

 

 

100

 

Hong Kong

 

STMicroelectronics Ltd

 

 

100

 

India, New Delhi

 

ST-Ericsson India Pvt Ltd

 

 

100

 

India, Noida

 

STMicroelectronics Pvt Ltd

 

 

100

 

Israel, Netanya

 

STMicroelectronics Ltd

 

 

100

 

Italy, Agrate Brianza

 

STMicroelectronics S.r.l.

 

 

100

 

Italy, Naples

 

STMicroelectronics Services S.r.l.

 

 

100

 

Japan, Tokyo

 

STMicroelectronics KK

 

 

100

 

Malaysia, Kuala Lumpur

 

STMicroelectronics Marketing SDN BHD

 

 

100

 

Malaysia, Muar

 

STMicroelectronics SDN BHD

 

 

100

 

Malta, Kirkop

 

STMicroelectronics (Malta) Ltd

 

 

100

 

Mexico, Guadalajara

 

STMicroelectronics Marketing, S. de R.L. de C.V.

 

 

100

 

Morocco, Casablanca

 

Electronic Holding S.A.

 

 

100

 

Morocco, Casablanca

 

STMicroelectronics S.A.S. (Maroc)

 

 

100

 

The Netherlands, Amsterdam

 

STMicroelectronics Finance B.V.

 

 

100

 

The Netherlands, Amsterdam

 

STMicroelectronics Finance II N.V.

 

 

100

 

The Netherlands, Amsterdam

 

STMicroelectronics International N.V.

 

 

100

 

Philippines, Calamba

 

STMicroelectronics, Inc.

 

 

100

 

Philippines, Calamba

 

Mountain Drive Property, Inc.

 

 

40

 

Singapore, Ang Mo Kio

 

STMicroelectronics Asia Pacific Pte Ltd

 

 

100

 

Singapore, Ang Mo Kio

 

STMicroelectronics Pte Ltd

 

 

100

 

Slovenia, Ljubljana

 

STMicroelectronics d.o.o.

 

 

100

 

Spain, Barcelona

 

STMicroelectronics Iberia S.A.

 

 

100

 

Sweden, Jönköping

 

STMicroelectronics Software A.B.

 

 

100

 

Sweden, Kista

 

STMicroelectronics A.B.

 

 

100

 

Sweden, Norrkoping

 

STMicroelectronics Silicon Carbide A.B.

 

 

100

 

Switzerland, Geneva

 

STMicroelectronics S.A.

 

 

100

 

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Legal Seat

 

Name

 

Percentage

Ownership

(Direct or Indirect)

 

Switzerland, Geneva

 

INCARD S.A., in liquidation

 

 

100

 

Thailand, Bangkok

 

STMicroelectronics (Thailand) Ltd

 

 

100

 

United Kingdom, Bristol

 

STMicroelectronics (Research & Development) Limited

 

 

100

 

United Kingdom, Marlow

 

STMicroelectronics Limited

 

 

100

 

United Kingdom, Marlow

 

Synad Technologies Limited

 

 

100

 

United States, Coppell

 

STMicroelectronics Software Inc.

 

 

100

 

United States, Coppell

 

STMicroelectronics Inc.

 

 

100

 

United States, Coppell

 

Faroudja Laboratories Inc.

 

 

100

 

United States, Coppell

 

STMicroelectronics (North America) Holding, Inc.

 

 

100

 

Public Funding

We receive public funding mainly from French, Italian and EU governmental entities.  Such funding is generally provided to encourage R&D activities, industrialization and local economic development.  Public funding in France, Italy and Europe generally is open to all companies, regardless of their ownership structure or country of incorporation.  The conditions for the receipt of government funding may include eligibility restrictions, approval by EU authorities, annual budget appropriations, compliance with EU regulations, royalties or contingent return provisions as well as specifications regarding objectives and results.  The approval process for such funding may be quite long, up to several years.  Certain specific contracts require compliance with extensive regulatory requirements and set forth certain conditions relating to the funded programs.  There could be penalties if these objectives are not fulfilled.  Other contracts contain penalties for late deliveries or for breach of contract, which may result in repayment obligations.  Our funding programs are classified under three general categories:  funding for research and development activities, capital investment for pilot lines and loans.  We also benefit from tax credits for R&D activities in several countries which are generally available to all companies.  See “Item 5. Operating and Financial Review and Prospects — Results of Operations” and the Notes to our Consolidated Financial Statements.

The main programs for R&D in which we are involved include:  (i) Pan-European program on Nanoelectronics Technology and Applications (PENTA); (ii) EU R&D projects within Horizon 2020 (the European Union’s research and innovation framework); (iii) Electronic Components and Systems for European Leadership (ECSEL) initiative, which combines all electronics related R&D activities and is operated by joint undertakings formed by the European Union, certain member states and industry; and (iv) national or regional programs for R&D and for industrialization in the electronics industries involving many companies and laboratories. The pan- European programs cover a period of several years, while national or regional programs in France and Italy are subject mostly to annual budget appropriation.

In our role as Coordinator and Project Leader of Nano2017, we had been allocated an overall funding budget of about €400 million for the period 2013-2018, which was subject to the conclusion of agreements every year with the public authorities and linked to the achievement of technical parameters and objectives.  A portion of the Nano2017 program was subject to a payback clause (“financial return”), depending on the future accumulated sales for certain products within the scope of the funded program in the period from 2018 to 2023.  The financial return corresponded to the payment in 2024 of the original funded amount (€37 million) multiplied by a rate from 0% to 250%, depending on the cumulative amount of future sales.  As such, the criteria for granting income recognition were not met and an accrual amounting to $47 million was posted as of December 31, 2019.  We believe the Nano2017 R&D program, which expired in April 2018, has strengthened our leadership in key technologies such as FD-SOI (low-power, high-performance processing), imagers, RF SOI and photonic sensors and embedded non-volatile memories.  These technologies are at the core of our digital portfolio which includes, among others, microcontrollers, imaging, analog and mixed signal, digital automotive and ASICs.

In December 2018, the European Commission announced the approval of Important Projects of Common European Interest (“IPCEI”), a Pan-European project initiated to foster research and innovation in microelectronics to be funded by Germany, France, Italy and the U.K. We are participating in IPCEI for the period 2018 until 2022 in France and until 2024 in Italy.  In 2019 we also started recognizing €49 million (including catch up attributable to 2018) of grants related to our participation in IPCEI in Italy and €80.7 million (including catch up attributable to 2018) related to our participation in IPCEI in France.

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Suppliers

We use three primary critical types of suppliers in our business:  (i) equipment suppliers, (ii) material suppliers and (iii) external silicon foundries and back-end subcontractors.  We also purchase third party licensed technology from a limited number of providers.

In the front-end process, we use steppers, scanners, tracking equipment, strippers, chemo-mechanical polishing equipment, cleaners, inspection equipment, etchers, physical and chemical vapor-deposition equipment, implanters, furnaces, testers, probers and other specialized equipment.  The manufacturing tools that we use in the back-end process include bonders, burn-in ovens, testers and other specialized equipment.  The quality and technology of equipment used in the IC manufacturing process defines the limits of our technology.  Demand for increasingly smaller chip structures means that semiconductor producers must quickly incorporate the latest advances in process technology to remain competitive.  Advances in process technology cannot occur without commensurate advances in equipment technology, and equipment costs tend to increase as the equipment becomes more sophisticated.

Our manufacturing processes use many materials, including silicon and SiC wafers, lead frames, mold compound, ceramic packages and chemicals and gases.  The prices of many of these materials are volatile due to the specificity of the market.  We have therefore adopted a “multiple sourcing strategy” designed to protect us from the risk of price increases.  The same strategy applies to supplies for the materials used by us to avoid potential material disruption of essential materials.  Our “multiple sourcing strategy”, our Financial Risk Monitoring as well as the robustness of our supply chain and strong partnership with suppliers are intended to mitigate these risks. See Item 3. “Key Information — Risk Factors”.

Finally, we also use external subcontractors to outsource wafer manufacturing and assembly and testing of finished products.  See “— Property, Plants and Equipment” above.

Environmental Matters

We are subject to a variety of environmental, health and safety laws and regulations in the jurisdictions where we operate.  Such laws and regulations govern, among other things, the use, storage, discharge and disposal of chemicals and other hazardous substances, emissions and wastes, as well as the investigation and remediation of soil and ground water contamination.  We are also required to obtain environmental permits, licenses and other forms of authorization, or give prior notification, in order to operate.

We adopt a rigorous approach to managing our business operations in an environmentally responsible way.  Consistent with our sustainability strategy, we have established proactive environmental policies with respect to the handling of chemicals, emissions, waste disposals and other substances of concern from our manufacturing operations.  We are certified to be in compliance with quality standard ISO 9001on a Company‑wide basis.  We implement the highest standards across our manufacturing activities and supply chain.  The majority of our sites are ISO 14001 certified and EMAS validated.  Furthermore, all of our front-end manufacturing sites are ISO 50001 certified.

We believe that in 2019 our activities complied with then-applicable environmental regulations in all material respects.  We have engaged outside consultants to audit all of our environmental activities and have created environmental management teams, information systems and training.  We have also instituted environmental control procedures for processes used by us as well as our suppliers.  In 2019, there were no material environmental claims made against us.

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Item 5.

Operating and Financial Review and Prospects

Overview

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included elsewhere in this Form 20-F.  The following discussion contains statements of future expectations and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “— Critical Accounting Policies Using Significant Estimates”, “— Business Outlook”, “— Liquidity and Capital Resources” and “— Financial Outlook:  Capital Investment”.  Our actual results may differ significantly from those projected in the forward-looking statements.  For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key Information — Risk Factors”.  We assume no obligation to update the forward-looking statements or such risk factors.

Critical Accounting Policies Using Significant Estimates

The preparation of our Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions.  The primary areas that require significant estimates and judgments by us include, but are not limited to:

 

sales returns and allowances;

 

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 or sold, including intangibles, goodwill, investments and tangible assets;

 

annual and trigger-based impairment review of goodwill and intangible assets, as well as the assessment, in each reporting period, of events, which could trigger impairment testing on long-lived assets;

 

recognition and measurement of restructuring charges and other related closure costs;

 

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;

 

allocation between debt and equity of the various components of an issued, or converted, hybrid instrument and measurement at fair value of the liability component based on a discount rate adjustment technique income approach; and

 

determination of the amount of taxes 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.

We base 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 we believe 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 we regularly evaluate our estimates and assumptions, the actual results we experience could differ materially and adversely from our estimates.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our Consolidated Financial Statements:

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Revenue recognition.  Arrangements with customers are considered contracts if all the following criteria are met: (a) parties have approved the contract and are committed to perform their respective obligations; (b) each party’s rights regarding the goods or services to be transferred can be identified; (c) payment terms for the goods or services to be transferred can be identified; (d) the contract has commercial substance and (e) collectability of substantially all of the consideration is probable.  We recognize revenue from products sold to a customer, including distributors, when we satisfy a performance obligation by transferring control over a product to the customer. In certain circumstances, we may enter into agreements that concern principally 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 we expect to be entitled in exchange for transferring the promised goods or services to the customer. The payment terms typically range between 30 and 90 days.  Certain of our customers require us to hold inventory as consignment in their hubs and only purchase inventory when they require it.  Revenue for sales of such inventory is recognized when, at the customer’s option, the products are withdrawn from the consignment and we satisfy a performance obligation by transferring control over a product to the customer.

Consistent with standard business practice in the semiconductor industry, price protection is granted to distribution customers on their existing inventory of our products to compensate them for declines in market prices.  We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales.  This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor, adjusted if required, to accommodate a significant change in the current market price.  The short outstanding inventory time period, visibility into the inventory product pricing and long distributor pricing history have enabled us to reliably estimate price protection provisions at period-end.  We record the accrued amounts as a deduction of “Net sales” in the consolidated statements of income at the time of the sale.

Our customers occasionally return our products for technical reasons.  Our standard terms and conditions of sale provide that if we determine that products do not conform, we will repair or replace the non-conforming products, or issue a credit note or rebate of the purchase price.  Quality returns are identified shortly after sale in customer quality control testing.  Quality returns are usually associated with end-user customers, not with distribution channels.  We record the accrued amounts as a deduction of “Net sales” in the consolidated statements of income, using past history and current conditions to form a reasonable estimate of future returns.

Our insurance policy relating to product liability covers third party physical damages and bodily injury, indirect financial damages as well as immaterial non-consequential damages caused by defective products.  We record a provision for warranty costs as a charge against “Cost of sales” in the consolidated statements of income, based on historical trends of warranty costs incurred as a percentage of sales, which management had determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period.  Any potential warranty claims are subject to our determination that we are at fault for damages, and that such claims usually must be submitted within a short period of time following the date of sale.  This warranty is given in lieu of all other warranties, conditions or terms expressed or implied by statute or common law.  Our contractual terms and conditions typically limit our liability to the sales value of the products that gave rise to the claims.

In addition to product sales, we enter into arrangements with customers consisting in transferring licenses or related to license services. The revenue generated from these arrangements are reported on the line “Other revenues” of the consolidated statement of income. Other revenues also include patent royalty income, sale of scrap materials and manufacturing by-products.

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Trade accounts receivable.  We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’ inability to make required payments.  In addition, we record an allowance for any specific account we consider as doubtful.  In 2019, we did not record any new material specific charge related to doubtful customers.  If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, additional allowances could be required.

Business combinations and goodwill.  The acquisition method of accounting applied to business combinations requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the identifiable assets acquired and liabilities assumed.  If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required.  At December 31, 2019, the value of goodwill in our Consolidated Balance Sheet amounted to $162 million.

Impairment of goodwill.  Goodwill recognized in business combinations is not amortized but is tested for impairment annually as of the end of the third quarter, or more frequently if a triggering event indicating a possible impairment exists.  Goodwill subject to potential impairment is tested at a reporting unit level.  This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill.  If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess in the consolidated statements of income on the line “Impairment, restructuring charges and other related closure costs”.  Significant management judgments and estimates are used in forecasting the future discounted cash flows associated with the reporting unit, including:  the applicable industry’s sales volume forecast and selling price evolution, the reporting unit’s market penetration and its revenues evolution, the market acceptance of certain new technologies and products, the relevant cost structure, the discount rates applied using a weighted average cost of capital and the perpetuity rates used in calculating cash flow terminal values.  Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business.  It is possible, however, that the plans and estimates used may prove to be incorrect, and future adverse changes in market conditions, changes in strategies, lack of performance of major customers or operating results of acquired businesses that are not in line with our estimates may require impairments.

We performed our annual impairment test of goodwill as of the end of the third quarters of 2019, 2018 and 2017 and concluded that there was no goodwill impairment loss.  Impairment charges could result from new valuations triggered by changes in our product portfolio or strategic alternatives, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by, or equity transfers to, third parties at a value lower than the current carrying value.

Intangible assets subject to amortization.  Intangible assets subject to amortization include intangible assets purchased from third parties recorded at cost and intangible assets acquired in business combinations recorded at fair value, comprised of technologies and licenses, and computer software.  Intangible assets with finite useful lives are reflected net of any impairment losses and are amortized over their estimated useful lives. Amortization begins when the intangible asset is available for use and is calculated using the straight-line method to allocate the cost of the intangible assets over their estimated useful lives. The carrying value of intangible assets with finite useful lives is evaluated whenever changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized in the consolidated statements of income on the line “Impairment, restructuring charges and other related closure costs” for the amount by which the asset’s carrying amount exceeds its fair value. We evaluate the remaining useful life of an intangible asset at each reporting date to determine whether events and circumstances warrant a revision to the remaining period of amortization. Our evaluations are based on financial plans updated with the latest available projections of growth in the semiconductor market and our sales expectations.  They are consistent with the plans and estimates that we use to manage our business.  It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require us to recognize impairment charges on certain intangible assets.

In 2019 and 2018, respectively, we recorded a $4 million and $2 million impairment charge on acquired licenses and technologies for which it was determined that they had no future alternative use.  During 2017, we did not record any impairment charges on intangible assets.  

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We will continue to monitor the carrying value of our assets.  If market conditions deteriorate, this could result in future non-cash impairment charges against earnings.  Further impairment charges could also result from new valuations triggered by changes in our product portfolio or by strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by, or equity transfers to, third parties at a value lower than the one underlying the carrying amount.

At December 31, 2019, the value of intangible assets subject to amortization in our Consolidated Balance Sheet amounted to $299 million.

Property, plant and equipment.  Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution.  We estimate the useful life for the majority of our manufacturing equipment, the largest component of our long-lived assets, to be six years, except for our 300 mm manufacturing equipment whose useful life is estimated to be ten years.  This estimate is based on our experience using the equipment over time.  Depreciation expense is an important element of our manufacturing cost structure.  We begin to depreciate newly acquired equipment when it is placed into service.

We evaluate each period whether there is reason to suspect that tangible assets or groups of assets held and used might not be recoverable. Several impairment indicators exist for making this assessment, such as: restructuring plans, significant changes in the technology, market, economic or legal environment in which we operate, available evidence of obsolescence of the asset, or indication that its economic performance is, or will be, worse than expected.  In determining the recoverability of assets to be held and used, we initially assess whether the carrying value of the tangible assets or group of assets exceeds the undiscounted cash flows associated with these assets.  If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. We normally estimate this fair value based on independent market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies.  We also evaluate and adjust, if appropriate, the assets’ useful lives at each reporting date or when impairment indicators are identified.  Assets classified as held for sale are reported as current assets in the Consolidated Balance Sheets at the lower of their carrying amount and fair value less costs to sell and are no longer depreciated.  In 2019, we impaired $3 million of long-lived assets. In 2018 and 2017, no impairment charge was recorded on property, plant and equipment.  The impairment on the assets held for sale was nil for the years ended December 31, 2019, 2018 and 2017.

Our evaluations are based on financial plans updated with the latest projections of growth in the semiconductor market and our sales expectations, from which we derive the future production needs and loading of our manufacturing facilities, and which are consistent with the plans and estimates that we use to manage our business.  These plans are highly variable due to the high volatility of the semiconductor business and therefore are subject to continuous modifications.  If future growth differs from the estimates used in our plans, in terms of both market growth and production allocation to our manufacturing plants, this could require a further review of the carrying amount of our tangible assets and result in a potential impairment loss.

Inventory.  Inventory is stated at the lower of cost or net realizable value.  Cost is based on the weighted average cost by adjusting the standard cost to approximate actual manufacturing costs on a quarterly basis; therefore, the cost is dependent on our manufacturing performance.  In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the unused capacity.  These costs are not included in the valuation of inventory but are charged directly to cost of sales in the Consolidated Statements of Income.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

We perform, on a continuous basis, inventory write-offs of products, which have the characteristics of slow-moving, old production dates and technical obsolescence.  The valuation of inventory requires us to estimate a reserve for obsolete or slow-selling inventory as well as inventory that is not of saleable quality.  Reserve for obsolescence is estimated for excess uncommitted inventories based on the previous quarters’ sales, order backlog and production plans.  To the extent that future negative market conditions generate order backlog cancellations and declining sales, or if future conditions are less favorable than the projected revenue assumptions, we could record additional inventory reserve, which would have a negative impact on our gross margin.

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Restructuring charges.  We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities.  We recognize the fair value of a liability for costs associated with exiting an activity when we have a present obligation and the amount can be reasonably estimated.  Given the significance and timing of the execution of our restructuring activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken.  This process can require a significant amount of time due to requisite governmental and customer approvals and our capability to transfer technology and know-how to other locations.  As we operate in a highly cyclical industry, we monitor and evaluate business conditions on a regular basis.  If broader or newer initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may incur additional charges as well as change estimates of the amounts previously recorded.  The potential impact of these changes could be material and could have a material adverse effect on our results of operations or financial condition.  In 2019 the restructuring charges and other related closure costs were nil. In 2018 and 2017, the restructuring charges and other related closure costs amounted to $19 million and $45 million before taxes, respectively, mainly in connection with our set-top box restructuring plan.  

Share-based compensation.  We measure the cost of share-based service awards based on the fair value of the awards as of the grant date reflecting the market price of the underlying shares at the date of the grant, reduced by the present value of the dividends expected to be paid on the shares during the requisite service period.  Our share-based service awards are granted to senior executives and selected employees.  While the awards granted to selected employees are subject to a three-year service period, the awards granted to the senior executives are subject to both a three-year service period and the fulfillment of certain performance conditions, including our financial results when compared to industry performance.  The expense is recognized over the requisite service period.  In 2019, approximately one-half of the total amount of shares awarded were granted to senior executives and consequently were contingent on the achievement of performance conditions. In order to determine share-based compensation to be recorded for the period, we use significant estimates on the number of awards expected to vest, including the probability of achieving the fixed performance conditions including those relating to industry performance compared to our financial results, and our best estimates of award forfeitures and employees’ service periods.  Our assumptions related to industry performance are generally taken with a one quarter lag in line with the availability of market information.  In 2019, 2018 and 2017, we recorded a total charge of approximately $145 million, $125 million and $61 million relating to our outstanding stock award plans, respectively.

Financial assets.  We classify our financial assets in the following two categories, trading and available-for-sale.  The classification depends on the nature of the instruments and the purpose for which the financial assets were acquired.  We determine the classification of our financial assets at initial recognition.  Purchases and sales of financial assets are recognized on the trade date - the date on which we commit to purchase or sell the asset. Equity securities are measured at fair value through earnings and debt securities classified as available-for-sale are measured at fair value through other comprehensive income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and we have transferred substantially all risks and rewards of ownership; the relevant gain (loss) is reported as a non-operating element on the consolidated statements of income on the line “Gain (loss) on financial instruments, net”. The basis on which the cost of a security sold and the amount reclassified out of accumulated other comprehensive income into earnings, if any, are determined is the specific identification method.  

The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable, we measure fair value by using assumptions and estimates. In measuring fair value, we make maximum use of market inputs and minimize the use of unobservable inputs.

Income taxes.  We make estimates and judgments in determining income tax for the period, comprising current and deferred income tax.  We assess the income tax expected to be paid or the tax benefit expected to be received related to the current year taxable profit and loss in each individual tax jurisdiction and recognize deferred income tax for all temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the Consolidated Financial Statements.  Furthermore, at each reporting date, we assess all material open income tax positions in all tax jurisdictions to determine any uncertain tax positions which would require a provision for the amount of income tax benefits that we do not expect to reasonably sustain. As of December 31, 2019, we had $48 million of estimated liabilities on uncertain tax positions.

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We also assess the likelihood of realization of our deferred tax assets.  Their ultimate realization is dependent upon, among other things, our ability to generate future taxable profit available, or tax credits before their expiration, or our ability to implement prudent and feasible tax optimization strategies, or the possibility to settle uncertain tax positions against available net operating loss carry forwards, or similar tax losses and credits.  We record a valuation allowance against the deferred tax assets when we consider it is more likely than not that the deferred tax assets will not be realized.

As of December 31, 2019, we had non-current deferred tax assets of $695 million, net of valuation allowances.

We could be required to record further valuation allowances thereby reducing the amount of total deferred tax assets, resulting in an increase of our income tax charge, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in business conditions or in management’s plans or due to other factors, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize net operating losses and tax credit carry-forwards in the future.  Likewise, a change in the tax rates applicable in the various jurisdictions or unfavorable outcomes of any ongoing tax audits could have a material impact on our future tax provisions in the periods in which these changes could occur.

Pension and Post-Employment Benefits.  Our Consolidated Statements of Income and our Consolidated Balance Sheets include amounts for pension obligations and post-employment benefits that are measured using actuarial valuations.  At December 31, 2019, our pension and post-employment benefit obligations net of plan assets amounted to $455 million.  These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds, turnover rates and salary increase rates.  These assumptions used in the determination of the net periodic benefit cost are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events.  Any changes in the pension schemes or in the above assumptions can have an impact on our valuations.  The measurement date we use for our plans is December 31.

Patent and other Intellectual Property (“IP”) litigation or claims.  We record a provision when we believe that it is probable that a liability has been incurred at the date of the Consolidated Financial Statements and the amount of the loss can be reasonably estimated.  We regularly evaluate losses and claims to determine whether they need to be adjusted based on current information available to us.  Such estimates are difficult to the extent that they are largely dependent on the status of ongoing litigation that may vary based on positions taken by the court with respect to issues submitted, demands of opposing parties, changing laws, discovery of new facts or other matters of fact or law.  As of December 31, 2019, based on our current evaluation of ongoing litigation and claims we face, we have not estimated any amounts that could have a material impact on our results of operations and financial condition with respect to either probable or possible risks. In the event of litigation that is adversely determined with respect to our interests, or in the event that we need to change our evaluation of a potential third-party claim based on new evidence, facts or communications, unexpected rulings or changes in the law, this could have a material adverse effect on our results of operations or financial condition at the time it were to materialize.  We are in discussion with several parties with respect to claims against us relating to possible infringement of IP rights.  We are also involved in certain legal proceedings concerning such issues.  See “Item 8. Financial Information — Legal Proceedings” and Note 26 to our Consolidated Financial Statements.

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Other claims.  We are subject to the possibility of loss contingencies arising in the ordinary course of business.  These include but are not limited to:  warranty costs on our products not covered by insurance, breach of contract claims, tax claims beyond assessed uncertain tax positions as well as claims for environmental damages.  We are also exposed to numerous legal risks which until now have not resulted in legal disputes and proceedings.  These include risks related to product recalls, environment, anti-trust, anti-corruption and competition as well as other compliance regulations.  We may also face claims in the event of breaches of law committed by individual employees or third parties.  In determining loss contingencies, we consider the likelihood of a loss of an asset or the occurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability.  An estimated loss is recorded when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  We regularly re-evaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us.  As of December 31, 2019, based on our current evaluation of ongoing litigation and claims we face, we have not estimated any amounts that could have a material impact on our results of operations and financial condition with respect to either probable or possible risks.  In the event we are unable to accurately estimate the amount of such loss in a correct and timely manner, this could have a material adverse effect on our results of operations or financial condition at the time such loss was to materialize.  For further details of our legal proceedings refer to “Item 8. Financial Information — Legal Proceedings” and Note 26 to our Consolidated Financial Statements.

Fiscal Year 2019

Under Article 35 of our Articles of Association, our financial year extends from January 1 to December 31, which is the period end of each fiscal year.  In 2019, the first quarter ended on March 30, the second quarter ended on June 29, the third quarter ended on September 28 and the fourth quarter ended on December 31.  In 2020, the first quarter will end on March 28, the second quarter will end on June 27, the third quarter will end on September 26 and the fourth quarter will end on December 31.  Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year and can also differ from equivalent prior years’ periods, as illustrated in the below table for the years 2018, 2019 and 2020.

 

 

 

Q1

 

 

Q2

 

 

Q3

 

 

Q4

 

 

 

Days

 

2018

 

 

90

 

 

 

91

 

 

 

91

 

 

 

93

 

2019

 

 

89

 

 

 

91

 

 

 

91

 

 

 

94

 

2020

 

 

88

 

 

 

91

 

 

 

91

 

 

 

96

 

 

2019 Business Overview

Our results of operations for each period were as follows:

 

 

 

Year ended December 31,

 

 

Three Months Ended

 

 

 

2019

 

 

2018

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(In millions, except per

share amounts)

 

 

(Unaudited, in millions, except per share

amounts)

 

Net revenues

 

$

9,556

 

 

$

9,664

 

 

$

2,754

 

 

$

2,553

 

 

$

2,648

 

Gross profit

 

 

3,696

 

 

 

3,861

 

 

 

1,081

 

 

 

967

 

 

 

1,059

 

Gross margin as percentage of net

   revenues.

 

 

38.7

%

 

 

40.0

%

 

 

39.3

%

 

 

37.9

%

 

 

40.0

%

Operating income

 

 

1,203

 

 

 

1,400

 

 

 

460

 

 

 

336

 

 

 

443

 

Net income attributable to parent

   company

 

 

1,032

 

 

 

1,287

 

 

 

392

 

 

 

302

 

 

 

418

 

Diluted earnings per share

 

$

1.14

 

 

$

1.41

 

 

$

0.43

 

 

$

0.34

 

 

$

0.46

 

 

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

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Based on industry data published by WSTS, semiconductor industry revenues in 2019 decreased on a year-over-year basis by approximately 12% for the TAM, while it remains substantially flat for the SAM, to reach approximately $412 billion and $194 billion, respectively.  In the fourth quarter of 2019, on a year-over-year basis, the TAM decreased by approximately 6%, while the SAM increased by approximately 2%.  Sequentially, the TAM increased by approximately 1%, while the SAM decreased by approximately 3%.

Our 2019 financial performance, with net revenues of $9.56 billion, gross margin of 38.7% and operating margin of 12.6% is aligned with the full year expectations we provided in April 2019.

We closed 2019 with a solid fourth quarter sales and financial performance. In the fourth quarter, net revenues were up 4.0% year-over-year, gross margin reached 39.3%, and operating margin was 16.7%.  On a sequential basis, fourth quarter revenues grew by 7.9%, with all product group contributing to the growth, and 290 basis points above the mid-point of our guidance.  Our quarterly performance was above the SAM both sequentially and on a year-over-year basis.

Our effective average exchange rate was $1.14 for €1.00 for the full year 2019, as compared to $1.18 for €1.00 for the full year 2018.  Our effective average exchange rate for the fourth quarter of 2019 was $1.12 for €1.00, compared to $1.14 for €1.00 for the third quarter of 2019 and $1.17 for €1.00 in the fourth quarter of 2018.  For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates”.

Our 2019 gross margin decreased 130 basis points to 38.7% from 40.0% in 2018 mainly due to normal price pressure and increased unsaturation charges, partially offset by improved manufacturing efficiencies, better product mix, and favorable currency effects, net of hedging.

Our fourth quarter 2019 gross margin was 39.3%, 110 basis points above the mid-point of our guidance, improving sequentially by 140 basis points, mainly driven by improved product mix and better manufacturing efficiencies.  Our gross margin decreased 70 basis points year-over-year, mainly impacted by price pressure and unsaturation charges, partially offset by improved manufacturing efficiencies, better product mix and favorable currency effects, net of hedging.

Our operating expenses, comprised of SG&A and R&D expenses, amounted to $2,591 million in 2019, increasing by about 3.9% from $2,493 million in the prior year, mainly due to salary dynamic, increased spending in certain R&D programs and higher share-based compensation cost, partially offset by favorable currency effects, net of hedging.  Combined R&D and SG&A expenses were $672 million for the fourth quarter of 2019, compared to $629 million and $630 million in the prior and year-ago quarters, respectively. The sequential increase was mainly due to seasonality and salary dynamic.  The year-over-year increase of operating expenses was mainly due to salary dynamic and increased activity on certain R&D programs, and was partially offset by favorable currency effects, net of hedging.

Other income and expenses, net, was $103 million in 2019 compared to $53 million in 2018, mainly due to a higher level of R&D grants, mainly benefitting from the grants associated with the programs part of the European Commission IPCEI in Italy and in France. Fourth quarter other income and expenses, net, was $54 million compared to negative $2 million in the prior quarter and $16 million in the year-ago quarter, reflecting higher R&D grants in Italy associated with the IPCEI program.

In 2019, impairment and restructuring charges were $5 million compared to $21 million in 2018. Impairment and restructuring charges in the fourth quarter were $3 million compared to nil in the prior quarter and $2 million in the year-ago quarters.

Operating income in 2019 was $1,203 million, decreasing by $197 million compared to 2018, mainly driven by normal price pressure, increased unsaturation charges and higher R&D spending, partially offset by higher level of grants and favorable currency effects, net of hedging.  Operating income in the fourth quarter grew on a sequential and year-over-year basis to $460 million compared to $336 million and $443 million in the prior quarter and year-ago quarters, respectively, mainly driven by higher revenues, improved product mix and a higher level of grants.

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Full year 2019 net income was $1,032 million, or $1.14 diluted earnings per share, compared to net income of $1,287 million, or $1.41 diluted earnings per share for the full year 2018.  Fourth quarter net income increased on a sequential basis and decreased on a year-over-year basis to $392 million, or $0.43 diluted earnings per share, compared to net income of $302 million, or $0.34 diluted earnings per share, in the prior quarter, and a net income of $418 million, or $0.46 diluted earnings per share, in the year-ago quarter.

Capital expenditure payments, net of proceeds from sales, were $236 million and $1.17 billion during the fourth quarter and full year 2019, respectively.  Full year 2018 capital expenditures, net of proceeds from sales, were $1.26 billion.  

During 2019, our net cash increased by $341 million, with net cash from operating activities reaching $1.87 billion.  During 2019, we paid $127 million for the acquisition of Norstel, $214 million of cash dividends to shareholders, $144 million for long-term debt repayment and $250 million for the repurchase of common stock.

Our free cash flow, a non-U.S. GAAP measure, amounted to $497 million in 2019 compared to $533 million in 2018.  Refer to “Liquidity and Capital Resources” for the reconciliation of the free cash flow, a non-U.S. GAAP measure, to our cash flow statement.

Business Outlook

Our first quarter 2020 outlook reflects revenues of approximately $2.36 billion at the mid-point, increasing year-over-year by about 13.7%. Sequentially, this represents a decrease of approximately 14.3%, plus or minus 350 basis points. Gross margin is expected to be at approximately 38.0%, plus or minus 200 basis points, including 80 basis points of unsaturation charges. For 2020, we plan our capital investment at approximately $1.5 billion to support our strategic initiatives and revenue growth and to achieve our mid-term revenue target of $12 billion.

This outlook is based on an assumed effective currency exchange rate of approximately $1.12 = €1.00 for the 2020 first quarter and includes the impact of existing hedging contracts.  The first quarter will close on March 28, 2020.

These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and “Item 3. Key Information — Risk Factors” herein.

Other Developments

On January 15, 2020, we announced the signing of a multi-year silicon carbide (SiC) wafers supply agreement with SiCrystal, a ROHM group company. The agreement governs the supply of over $120 million of advanced 150 mm silicon carbide wafers by SiCrystal to us during this period of demand ramp-up for silicon carbide power devices.

In December 2019, our President, Human Resources and Corporate Social Responsibility, Mr. Philippe Brun left the Company.

On December 2, 2019, we announced the closing of the full acquisition of Swedish SiC wafer manufacturer Norstel AB (“Norstel”). We exercised our option to acquire the remaining 45% share capital, following the initial transaction with respect to the acquisition of 55% of Norstel’s share capital as previously announced on February 7, 2019. The total consideration for the acquisition of Norstel was $137.5 million, funded with available cash.

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On November 19, 2019 we announced the expansion and extension of an existing multi-year, long-term SiC wafer supply agreement with Cree, Inc (“Cree”) to more than $500 million. The extended agreement is a doubling in value of the original January 7, 2019 agreement for the supply of Cree’s advanced 150 mm silicon carbide bare and epitaxial wafers over the next several years. The increased wafer supply enables the semiconductor leaders to address the rapidly growing demand for silicon carbide power devices globally, particularly in automotive and industrial applications.

On August 21, 2019 we published our IFRS 2019 Semi Annual Accounts for the six-month period ended June 29, 2019 on our website and filed them with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten).

On May 23, 2019 we announced that all of the proposed resolutions were adopted at the Company's Annual General Meeting of Shareholders (“AGM”), which was held in Amsterdam, the Netherlands.  The main resolutions were:

 

The adoption of the Company's Statutory Annual Accounts for the year ended December 31, 2018, prepared in accordance with IFRS and filed with the AFM on March 27, 2019 and posted on the Company's website (www.st.com) and the AFM's website (www.afm.nl);

 

The distribution of a cash dividend of $0.24 per outstanding share of the Company's common stock, to be distributed in quarterly installments of $0.06 in each of the second, third and fourth quarters of 2019 and first quarter of 2020 to shareholders of record in the month of each quarterly payment;

 

The reappointment of Ms. Martine Verluyten, as member of the Supervisory Board, for a one-year term expiring at the 2020 AGM;

 

The reappointment of Ms. Janet Davidson, as member of the Supervisory Board, for a three-year term expiring at the 2022 AGM; and

 

The appointment of Ms. Lucia Morselli, in replacement of Mr. Salvatore Manzi, as member of the Supervisory Board, for a three-year term expiring at the 2022 AGM.

On May 22, 2019 we announced the publication of our 2018 Sustainability Report.

On March 27, 2019 we announced the main resolutions to be submitted for adoption at our AGM held in Amsterdam, the Netherlands, on May 23, 2019.

On January 7, 2019, Cree, Inc and ST announced signing of a multi-year agreement, in which Cree will produce and supply SiC wafers to STMicroelectronics.  The agreement governs the supply of Cree’s 150 mm SiC bare and epitaxial wafers to ST.

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Results of Operations

Segment Information

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

Our reportable segments are as follows:

 

Automotive and Discrete Group (ADG), comprised of dedicated automotive ICs (both digital and analog), and discrete and power transistor products for all market segments.

 

Analog, MEMS and Sensors Group (AMS), comprised of low-power high-end analog ICs (both custom and general purpose) for all markets, smart power products for Industrial, Computer and personal electronics markets, Touch Screen Controllers, Low Power Connectivity solutions (both wireline and wireless) for IoT, power conversion products, metering solutions for Smart Grid, specialized imaging sensors and modules, and all MEMS products for sensors or Actuators.

 

Microcontrollers and Digital ICs Group (MDG), comprised of general purpose and secure microcontrollers, EEPROM memories, Digital ASICs, Aerospace and Defense products including components for microwave and millimeter wave.

Effective January 1, 2018, the Subsystems business unit was transferred from Others to AMS. Prior periods have been restated accordingly.

For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, selling, general and administrative expenses and a part of research and development expenses.  In compliance with our internal policies, certain costs are not allocated to the segments, but reported in “Others” and include impairment, restructuring charges and other related closure costs, management reorganization expenses, unused capacity charges, phase-out and start-up costs of certain manufacturing facilities, certain one-time corporate items, strategic and special research and development programs or other corporate-sponsored initiatives, including certain corporate-level operating expenses, patent claims and litigations and certain other miscellaneous charges.  In addition, depreciation and amortization expense is part of the manufacturing costs allocated to the segments and is neither identified as part of the inventory variation nor as part of the unused capacity charges; therefore, it cannot be isolated in the costs of goods sold.  Finally, R&D grants are allocated to our segments proportionally to the incurred R&D expenses on the sponsored projects.

Wafer costs are allocated to the segments based on actual cost.  From time to time, with respect to specific technologies, wafer costs are allocated to segments based on market price.

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Table of Contents

 

Annual Results of Operations

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

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

Net sales

 

$

9,529

 

 

 

99.7

%

 

$

9,612

 

 

 

99.5

%

 

$

8,308

 

 

 

99.5

%

Other revenues

 

 

27

 

 

 

0.3

 

 

 

52

 

 

 

0.5

 

 

 

39

 

 

 

0.5

 

Net revenues

 

 

9,556

 

 

 

100.0

 

 

 

9,664

 

 

 

100.0

 

 

 

8,347

 

 

 

100.0

 

Cost of sales

 

 

(5,860

)

 

 

(61.3

)

 

 

(5,803

)

 

 

(60.0

)

 

 

(5,075

)

 

 

(60.8

)

Gross profit

 

 

3,696

 

 

 

38.7

 

 

 

3,861

 

 

 

40.0

 

 

 

3,272

 

 

 

39.2

 

Selling, general and administrative

 

 

(1,093

)

 

 

(11.4

)

 

 

(1,095

)

 

 

(11.3

)

 

 

(981

)

 

 

(11.8

)

Research and development

 

 

(1,498

)

 

 

(15.7

)

 

 

(1,398

)

 

 

(14.5

)

 

 

(1,296

)

 

 

(15.5

)

Other income and expenses, net

 

 

103

 

 

 

1.1

 

 

 

53

 

 

 

0.5

 

 

 

55

 

 

 

0.7

 

Impairment, restructuring charges and other

   related closure costs

 

 

(5

)

 

 

(0.1

)

 

 

(21

)

 

 

(0.2

)

 

 

(45

)

 

 

(0.6

)

Operating income

 

 

1,203

 

 

 

12.6

 

 

 

1,400

 

 

 

14.5

 

 

 

1,005

 

 

 

12.0

 

Interest expense, net

 

 

1

 

 

 

0.0

 

 

 

(7

)

 

 

(0.1

)

 

 

(22

)

 

 

(0.3

)

Other components of pension benefit costs

 

 

(16

)

 

 

(0.2

)

 

 

(11

)

 

(0.1)

 

 

 

(12

)

 

 

(0.1

)

Income (loss) on equity-method investments

 

 

1

 

 

 

0.0

 

 

 

8

 

 

 

0.1

 

 

 

(2

)

 

(0.0)

 

Loss on financial instruments, net

 

 

 

 

 

 

 

 

(1

)

 

(0.0)

 

 

 

(16

)

 

 

(0.2

)

Income before income taxes and

   noncontrolling interest

 

 

1,189

 

 

 

12.4

 

 

 

1,389

 

 

 

14.4

 

 

 

953

 

 

 

11.4

 

Income tax expense

 

 

(156

)

 

 

(1.6

)

 

 

(96

)

 

 

(1.0

)

 

 

(143

)

 

 

(1.7

)

Net income

 

 

1,033

 

 

 

10.8

 

 

 

1,293

 

 

 

13.4

 

 

 

810

 

 

 

9.7

 

Net income attributable to noncontrolling

   interest

 

 

(1

)

 

 

(0.0

)

 

 

(6

)

 

 

(0.1

)

 

 

(8

)

 

 

(0.1

)

Net income attributable to parent

   company

 

$

1,032

 

 

 

10.8

%

 

$

1,287

 

 

 

13.3

%

 

$

802

 

 

 

9.6

%

 

Net revenues

 

 

 

Year Ended December 31,

 

 

% Variation

 

 

 

2019

 

 

2018

 

 

2017

 

 

2019 vs 2018

 

 

2018 vs 2017

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Net sales

 

$

9,529

 

 

$

9,612

 

 

$

8,308

 

 

 

(0.9

)%

 

 

15.7

%

Other revenues

 

 

27

 

 

 

52

 

 

 

39

 

 

 

(49.0

)

 

 

36.1

 

Net revenues

 

$

9,556

 

 

$

9,664

 

 

$

8,347

 

 

 

(1.1

)%

 

 

15.8

%

 

Our 2019 net revenues decreased 1.1% compared to the prior year, primarily due to a decrease in volumes of approximately 8%, partially compensated by an increase in average selling prices of approximately 7%. The increase in the average selling prices was driven by favorable product mix of approximately 10%, partially offset by a negative pricing effect of approximately 3%.

Our 2018 net revenues increased 15.8% compared to the prior year, primarily due to increase in average selling prices of approximately 16%, while volumes remained substantially flat. The increase in the average selling prices was driven by favorable product mix of approximately 18%, partially offset by a negative pricing effect of approximately 2%. Our net revenues registered double-digit growth across all product groups and geographies.

In 2019, 2018 and 2017, our largest customer, Apple, accounted for 17.6%, 13.1% and 10.5% of our net revenues, respectively, reported within our three product groups.

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Table of Contents

 

Net revenues by product group

 

 

 

Year Ended

 

 

% Variation

 

 

 

2019

 

 

2018

 

 

2017

 

 

2019 vs 2018

 

 

2018 vs 2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Automotive and Discrete Group (ADG)

 

$

3,606

 

 

$

3,556

 

 

$

3,059

 

 

 

1.4

%

 

 

16.2

%

Analog MEMS and Sensors Group (AMS)

 

 

3,299

 

 

 

3,154

 

 

 

2,630

 

 

 

4.6

 

 

 

19.9

 

Microcontrollers and Digital ICs Group (MDG)

 

 

2,638

 

 

 

2,940

 

 

 

2,646

 

 

 

(10.3

)

 

 

11.1

 

Others

 

 

13

 

 

 

14

 

 

 

12

 

 

 

 

 

 

 

Total consolidated net revenues

 

$

9,556

 

 

$

9,664

 

 

$

8,347

 

 

 

(1.1

)%

 

 

15.8

%

 

For the full year 2019, our ADG revenues increased 1.4% compared to the previous period. The increase was primarily due to improved average selling prices of approximately 9%, which was entirely due to a better product mix, and partially offset by a decrease in volumes by approximately 8%. AMS revenues grew 4.6%, mainly due to the double-digits growth in Imaging. The increase was due to higher average selling prices of approximately 12%, as a result of a better product mix, and was partially offset by lower volumes of approximately 7%. MDG revenues were down by 10.3%, mainly due to Microcontrollers. The decrease was due to lower volumes of approximately 10% while average selling prices remained substantially flat.

In 2018, all product groups registered double-digit revenue increase.  Our ADG revenues increased 16.2% for the full year 2018 compared to the full year 2017 on growth in both Power Discrete and Automotive. The increase was primarily due to improved average selling prices of approximately 21% and volumes decreased by approximately 5%.  The increase in average selling prices was entirely due to improved product mix, while selling prices remained substantially flat.  AMS revenues grew 19.9%, mainly on the strong increase in Imaging.  The increase was due to higher volumes of approximately 12% and higher average selling prices of approximately 8%, which was entirely due to improved product mix of approximately 13%, while selling prices decreased by approximately 5%. MDG revenues were up by 11.1%, with Digital and Microcontrollers & Memories equally contributing.  The increase was primarily due to higher average selling prices of approximately 11%, while volumes remained substantially flat.  The increase in average selling prices was due to a better product mix of approximately 13%, while the selling prices effect was negative of approximately 2%.

Net revenues by Market Channel(1)

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(As percentage of net revenues)

 

OEM

 

 

70

%

 

 

65

%

 

 

66

%

Distribution

 

 

30

 

 

 

35

 

 

 

34

 

Total

 

 

100

%

 

 

100

%

 

 

100

%

 

(1)

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

Our revenues weight in Distribution registered a decrease of 5 percentage point compared to 2018, reaching a 30% share of total revenues in 2019. In 2018 as compared to 2017, our revenues weight in Distribution registered an increase of 1 percentage point.

Net Revenues by Location of Shipment(1)

 

 

 

Year Ended December 31,

 

 

% Variation

 

 

 

2019

 

 

2018

 

 

2017

 

 

2019 vs 2018

 

 

2018 vs 2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

EMEA

 

$

2,265

 

 

$

2,478

 

 

$

2,142

 

 

 

(8.6

)%

 

 

15.7

%

Americas

 

 

1,351

 

 

 

1,264

 

 

 

1,085

 

 

 

6.8

 

 

 

16.5

 

Asia Pacific

 

 

5,940

 

 

 

5,922

 

 

 

5,120

 

 

 

0.3

 

 

 

15.7

 

Total

 

$

9,556

 

 

$

9,664

 

 

$

8,347

 

 

 

(1.1

)%

 

 

15.8

%

 

(1)

Net revenues by location of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand.  For example, products ordered by U.S.-based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues.

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Table of Contents

 

By location of shipment, in 2019, revenues grew 6.8% in Americas, driven by Power Discrete, remained substantially flat in Asia and decreased 8.6% in EMEA, mainly due to lower sales of Microcontrollers and Power Discrete. In 2018 revenues grew across all regions, led by Asia Pacific and EMEA, mainly due to growth in Imaging and Automotive.  

Gross profit

 

 

 

Year Ended December 31,

 

 

Variation

 

 

 

2019

 

 

2018

 

 

2017

 

 

2019 vs 2018

 

 

2018 vs 2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

(5,860

)

 

$

(5,803

)

 

$

(5,075

)

 

 

1.0

%

 

 

(14.3

)%

Gross profit

 

$

3,696

 

 

$

3,861

 

 

$

3,272

 

 

 

(4.3

)%

 

 

18.0

%

Gross margin (as percentage of net revenues)

 

 

38.7

%

 

 

40.0

%

 

 

39.2

%

 

-130 bps

 

 

+80 bps

 

 

In 2019, gross margin decreased by 130 basis points to 38.7% from 40.0% in the full year 2018 mainly due to normal price pressure and increased unsaturation charges, partially offset by improved manufacturing efficiencies, better product mix, and favorable currency effects, net of hedging.  Unused capacity charges in 2019 were $65 million, impacting full year gross margin by 70 basis points.

In 2018, gross margin improved by 80 basis points to 40.0% from 39.2% in the full year 2017 benefiting from manufacturing efficiencies and better product mix, partially offset by normal price pressure and unfavorable currency effects, net of hedging.  In 2018 unused capacity charges were negligible.

Operating expenses

 

 

 

Year Ended December 31,

 

 

Variation

 

 

 

2019

 

 

2018

 

 

2017

 

 

2019 vs 2018

 

 

2018 vs 2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

$

(1,093

)

 

$

(1,095

)

 

$

(981

)

 

 

0.3

%

 

 

(11.7

)%

Research and development expenses

 

 

(1,498

)

 

 

(1,398

)

 

 

(1,296

)

 

 

(7.1

)

 

 

(7.9

)

Total operating expenses

 

$

(2,591

)

 

$

(2,493

)

 

$

(2,277

)

 

 

(3.9

)%

 

 

(9.5

)%

As percentage of net revenues

 

 

(27.1

)%

 

 

(25.8

)%

 

 

(27.3

)%

 

-130 bps

 

 

+150 bps

 

 

The 2019 operating expenses increased 3.9% compared to the prior year, mainly due to salary dynamic, increased spending in certain R&D programs and higher share-based compensation cost, partially offset by favorable currency effects, net of hedging.

The 2018 operating expenses increased 9.5% compared to the prior year, mainly due to unfavorable currency effects, net of hedging, salary dynamic, increased R&D activities and higher costs of the share-based compensation plans.

The R&D expenses were net of research tax credits in France and Italy, which amounted to $126 million in 2019, $138 million in 2018 and $124 million in 2017.

Other income and expenses, net

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Research and development funding

 

$

132

 

 

$

52

 

 

$

65

 

Phase-out and start-up costs

 

 

(38

)

 

 

(1

)

 

 

(8

)

Exchange gain (loss), net

 

 

 

 

 

4

 

 

 

4

 

Patent costs

 

 

(1

)

 

 

(8

)

 

 

(9

)

Gain on sale of businesses and non-current assets

 

 

7

 

 

 

8

 

 

 

4

 

Other, net

 

 

3

 

 

 

(2

)

 

 

(1

)

Other income and expenses, net

 

$

103

 

 

$

53

 

 

$

55

 

As percentage of net revenues

 

 

1.1

%

 

 

0.5

%

 

 

0.7

%

 

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In 2019 we recognized other income, net of expenses, of $103 million, increasing compared to $53 million in 2018, mainly benefitting from the grants associated with the programs part of the European Commission IPCEI in Italy and in France, partially offset by a higher level of start-up costs associated with the production ramp up of the 200 mm fab recently acquired from Micron Technology Inc. in Singapore.

In 2018 we recognized other income, net of expenses, of $53 million, slightly decreasing compared to $55 million in 2017, mainly due to lower level of R&D grants.

Impairment, restructuring charges and other related closure costs

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Impairment, restructuring charges and other related closure costs

 

$

(5

)

 

$

(21

)

 

$

(45

)

 

In 2019 we recorded $5 million of impairment, restructuring charges and other related closure costs, mainly consisting of impairment of equipment and licenses dedicated exclusively to certain development projects that were cancelled, while no alternative future use was identified internally.

In 2018 we recorded $21 million of impairment, restructuring charges and other related closure costs, consisting of: (i) $19 million related to the set-top box restructuring plan and (ii) $2 million of impairment of acquired technologies, for which it was determined that they had no future alternative use.

In 2017 we recorded $45 million of impairment, restructuring charges and other related closure costs, primarily consisting of:  (i) $34 million of net restructuring charges related to the set-top box restructuring plan; (ii) $13 million of restructuring charges related to the restructuring plan in Bouskoura, Morocco; (iii) $3 million charge relating to the update of the existing unused lease provision and (iv) $5 million income for the reversal of provisions related to previously announced restructuring plans, mainly the Embedded Processing Solutions business restructuring plan, for which accrued provisions were not fully used at completion of the plan.

Operating income

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Operating income

 

$

1,203

 

 

$

1,400

 

 

$

1,005

 

As percentage of net revenues

 

 

12.6

%

 

 

14.5

%

 

 

12.0

%

 

Operating income in 2019 was $1,203 million, decreasing by $197 million compared to 2018, reflecting normal price pressure, increased unsaturation charges and higher R&D spending, partially offset by higher level of grants and favorable currency effects, net of hedging.

Operating income in 2018 was $1,400 million, improved by $395 million compared to 2017, reflecting higher volumes, improved manufacturing efficiencies and product mix and lower restructuring charges, partially offset by unfavorable currency effects, net of hedging, normal price pressure and higher operating expenses.

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Operating income by product group

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

Automotive and Discrete Group (ADG)

 

$

357

 

 

 

9.9

%

 

$

431

 

 

 

12.1

%

 

$

291

 

 

 

9.5

%

Analog, MEMS and Sensors Group

   (AMS)

 

 

596

 

 

 

18.1

 

 

 

488

 

 

 

15.5

 

 

 

364

 

 

 

13.9

 

Microcontrollers and Digital ICs Group

   (MDG)

 

 

354

 

 

 

13.4

 

 

 

547

 

 

 

18.6

 

 

 

405

 

 

 

15.3

 

Total operating income of product

   segments

 

 

1,307

 

 

 

13.7

 

 

 

1,466

 

 

 

15.2

 

 

 

1,060

 

 

 

12.7

 

Others(1)

 

 

(104

)

 

 

 

 

 

(66

)

 

 

 

 

 

(55

)

 

 

 

Total operating income

 

$

1,203

 

 

 

12.6

%

 

$

1,400

 

 

 

14.5

%

 

$

1,005

 

 

 

12.0

%

 

(1)

Operating results of “Others” include items such as unused capacity charges, impairment and restructuring charges and other related closure costs, management reorganization expenses, 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 assembly services and other revenue.

In 2019, ADG operating income was $357 million compared to $431 million in 2018, with both Automotive and Power Discrete decreasing. AMS operating income increased by $108 million to $596 million, mainly driven by Imaging increased revenues. MDG operating income decreased to $354 million from $547 million in 2018, mainly due to Microcontrollers lower level of revenues.

In 2018, ADG improved its operating income to $431 million from $291 million in 2017, with both Automotive and Power Discrete contributing. AMS operating income increased by $124 million to $488 million, with all products contributing to the growth. MDG operating income increased by $142 million to $547 million, driven by both Microcontrollers and Digital.

Reconciliation to consolidated operating income

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

Total operating income of product segments

 

$

1,307

 

 

$

1,466

 

 

$

1,060

 

Impairment, restructuring charges and other

   related closure costs

 

 

(5

)

 

 

(21

)

 

 

(45

)

Unallocated manufacturing results

 

 

(90

)

 

 

1

 

 

 

7

 

Strategic and other research and development

   programs and other non-allocated provisions(1)

 

 

(9

)

 

 

(46

)

 

 

(17

)

Total operating loss Others

 

 

(104

)

 

 

(66

)

 

 

(55

)

Total consolidated operating income

 

$

1,203

 

 

$

1,400

 

 

$

1,005

 

 

(1)

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

 

Interest income (expense), net

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Interest income (expense), net

 

$

1

 

 

$

(7

)

 

$

(22

)

 

In 2019, interest expense and fees on our borrowings and our committed credit facilities amounted to $54 million, of which $37 million was a non-cash interest expense resulting from the accretion of the discount on the liability component of our dual tranche senior unsecured convertible bonds issued in 2017.  In 2019, the interest expense was more than offset by $55 million of interest income on cash and cash equivalents and marketable securities.

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In 2018, interest expense and fees on our borrowings and our committed credit facilities amounted to $54 million, of which $36 million was a non-cash interest expense resulting from the accretion of the discount on the liability component of our dual tranche senior unsecured convertible bonds issued in 2017.  In 2018, the interest expense was partially offset by $47 million of interest income on cash and cash equivalents and marketable securities.

In 2017, interest expense and fees on our borrowings and our committed credit facilities amounted to $52 million, of which $33 million was a non-cash interest expense related to the dual tranche senior unsecured convertible bonds issued in 2014 and 2017 partially offset by $30 million of interest income.

Income (loss) on equity-method investments

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Income (loss) on equity-method investments

 

$

1

 

 

$

8

 

 

$

(2

)

 

In 2019 we registered income of $1 million on our equity-method investments, mainly related to our investment in ST-Ericsson. On December 20, 2019, we agreed with Ericsson to complete the wind-down of ST-Ericsson. As part of the transaction, we acquired from ST-Ericsson SA 100% of the share capital of ST-Ericsson India Pvt Ltd, a wholly owned subsidiary of ST-Ericsson SA, and simultaneously sold our ST-Ericsson SA shares to Ericsson.

In 2018 we registered income of $8 million on our equity-method investments, related to our investment in ST-Ericsson and a complete reversal of a reserve associated with our indemnity obligation undertaken when selling Numonyx (an equity investment divested in 2010).  In addition, there was better than anticipated actual outcome of certain tax items, partially offset by a loss of $2 million on our equity investment in Incard do Brazil.

In 2017 we registered a loss of $2 million on our equity-method investments, mainly in relation to our investment in Incard do Brazil.

Income (loss) on financial instruments

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Income (loss) on financial instruments

 

$

 

 

$

(1

)

 

$

(16

)

 

In 2019 we did not recognize any income or loss on financial instruments.

In 2018 we recognized a $1 million loss on financial instruments corresponding to a loss on one of our investments.

In 2017 we recognized a $16 million loss on financial instruments relating to the net share settlement of the 2014 senior unsecured convertible bond, of which a $5 million loss related to Tranche A and $11 million related to Tranche B.

 

Income tax expense

��

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Income tax expense

 

$

(156

)

 

$

(96

)

 

$

(143

)

 

In 2019, we registered an income tax expense of $156 million, while we registered an income tax expense of $96 million in 2018 and $143 million in 2017. These amounts reflect the actual taxes calculated on our income before income taxes in each of our jurisdictions and tax benefits, net of valuation allowances, associated with our estimates of the net operating loss recoverability in certain jurisdictions, one-time tax benefits related to previous year positions and our best estimate on additional tax charges related to potential uncertain tax positions and claims.

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In 2019, the effective tax rate was 13%, including $24 million of tax benefit, mainly due to the revaluation of deferred tax assets and following the enactment of the Swiss tax reform which cancelled all favorable tax regimes and introduced a single tax rate for all companies.

In 2018, the effective tax rate was 7%, including $12 million of tax benefit from discrete items mainly due to settlement of local tax assessment.

In 2017, the effective tax rate was 15% and included the one-time impact related to the change in enacted income tax rate impacting deferred taxes, mainly in the United States for an amount of $46 million, reflecting the impact on deferred tax assets of the reduction of corporate tax rate from 35% to 21% enacted with the U.S. tax reform in December 2017.

Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimations of our tax provisions.  Our income tax amounts and rates depend also on our loss carry-forwards and their relevant valuation allowances, which are based on estimated projected plans and available tax optimization strategies; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges.  We currently enjoy certain tax benefits in some countries.  Such benefits may not be available in the future due to changes in the local jurisdictions; our effective tax rate could be different in future periods and may increase in the coming years.  In addition, our yearly income tax charges include the estimated impact of provisions related to tax positions which have been considered uncertain.

Net income attributable to noncontrolling interest

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Net income attributable to noncontrolling interest

 

$

(1

)

 

$

(6

)

 

$

(8

)

 

In 2019, 2018 and 2017, respectively, we recorded respectively $1 million, $6 million and $8 million of income attributable to noncontrolling interest.

Net income attributable to parent company

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Net income attributable to parent company

 

$

1,032

 

 

$

1,287

 

 

$

802

 

As percentage of net revenues

 

 

10.8

%

 

 

13.3

%

 

 

9.6

%

 

For 2019, we reported a net income of $1,032 million, compared to a net income of $1,287 million and $802 million for 2018 and 2017, respectively.

The 2019 net income represented diluted earnings per share of $1.14 compared to $1.41 and $0.89 for 2018 and 2017, respectively.

 

 

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Table of Contents

 

Quarterly Results of Operations

Certain quarterly financial information for the years 2019 and 2018 are set forth below.  Such information is derived from our unaudited Consolidated Financial Statements, prepared on a basis consistent with the Consolidated Financial Statements that include, in our opinion, all normal adjustments necessary for a fair statement of the interim information set forth therein.  Operating results for any quarter are not necessarily indicative of results for any future period.  In addition, in view of the significant volatility we have experienced in recent years, the increasingly competitive nature of the markets in which we operate, the changes in products mix and the currency effects of changes in the composition of sales and production among different geographic regions, we believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance.

Our quarterly and annual operating results are also affected by a wide variety of other factors that could materially and adversely affect revenues and profitability or lead to significant variability of operating results, please see “Item 3. Key Information — Risk Factors — Risks Related to Our Operations”.  As only a portion of our expenses varies with our revenues, there can be no assurance that we will be able to reduce costs promptly or adequately in relation to revenue declines to compensate for the effect of any such factors.  As a result, unfavorable changes in the above or other factors have in the past and may in the future adversely affect our operating results.  Quarterly results have also been and may be expected to continue to be substantially affected by the cyclical nature of the semiconductor and electronic systems industries, the speed of some process and manufacturing technology developments, market demand for existing products, the timing and success of new product introductions and the levels of provisions and other unusual charges incurred.  Certain additions of our quarterly results will not total our annual results due to rounding.

Net revenues

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

Sequential

 

 

Year-

Over-

Year

 

 

 

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,750

 

 

$

2,547

 

 

$

2,633

 

 

 

8.0

%

 

 

4.5

%

Other revenues

 

 

4

 

 

 

6

 

 

 

15

 

 

 

(45.0

)

 

 

(77.4

)

Net revenues

 

$

2,754

 

 

$

2,553

 

 

$

2,648

 

 

 

7.9

%

 

 

4.0

%

 

Our fourth quarter 2019 net revenues amounted to $2,754 million, registering a sequential increase of 7.9%, 290 basis points above the mid-point of our guidance, with all product groups contributing to the growth.  The sequential increase resulted from higher volumes of approximately 7% and an increase of approximately 1% in average selling prices, the latter entirely due to product mix, while selling prices remained substantially stable.

On a year-over-year basis, our net revenues increased by 4.0%. This increase was entirely due to an increase of approximately 6% in average selling prices, partially offset by an approximate 2% decrease in volumes. The average selling prices increase was entirely driven by improved product mix of approximately 9%, partially offset by lower selling prices of approximately 3%.

Net revenues by product group

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

Sequential

 

 

Year-

Over-

Year

 

 

 

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

Automotive and Discrete Group (ADG)

 

$

924

 

 

$

894

 

 

$

967

 

 

 

3.3

%

 

 

(4.5

)%

Analog, MEMS and Sensors Group (AMS)

 

 

1,085

 

 

968

 

 

 

988

 

 

 

12.1

 

 

 

9.9

 

Microcontrollers and Digital ICs Group (MDG)

 

 

742

 

 

688

 

 

 

689

 

 

 

7.9

 

 

 

7.6

 

Others

 

 

3

 

 

3

 

 

 

4

 

 

 

 

 

 

 

Total consolidated net revenues

 

$

2,754

 

 

$

2,553

 

 

$

2,648

 

 

 

7.9

%

 

 

4.0

%

 

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On a sequential basis, ADG revenues were up 3.3%, driven by an increase in volumes of approximately 8%, partially offset by a decrease in average selling prices of approximately 5%, mostly attributable to product mix.  AMS revenues increased 12.1% driven by Analog and Imaging products.  AMS increase was due to an increase of approximately 5% in average selling prices, entirely due to product mix, and to higher volumes of approximately of 7%.  MDG revenues increased by 7.9%, mainly driven by Microcontrollers, due to both higher average selling prices of approximately 6%, entirely due to product mix, and higher volumes of approximately 2%.

On a year-over-year basis, fourth quarter net revenues increased by 4.0%.  ADG revenues decreased 4.5% compared to the year-ago quarter on lower revenues in both Automotive and Power Discrete.  The decrease was entirely due to lower average selling prices of approximately 4%, while volumes remained substantially flat. The decrease in average selling prices was a combination of less favorable product mix and lower selling prices. AMS fourth quarter revenues grew 9.9% year-over-year, mainly driven by Analog and Imaging.  The increase was entirely due to higher average selling prices of approximately 18%, entirely attributable to product mix, partially offset by lower volumes of approximately 8%. MDG fourth quarter revenues increased by 7.6%, mainly driven by Microcontrollers. The increase was due to higher average selling prices of approximately 9%, entirely due to improved product mix.  

Net Revenues by Market Channel(1)

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in %)

 

OEM

 

 

72

%

 

 

72

%

 

 

69

%

Distribution

 

 

28

 

 

 

28

 

 

 

31

 

Total

 

 

100

%

 

 

100

%

 

 

100

%

 

(1)

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

By market channel, our fourth quarter revenues in Distribution amounted to 28% of our total revenues, flat compared to the previous quarter and decreasing on a year-over-year basis.

Net Revenues by Location of Shipment(1)

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

Sequential

 

 

Year-

Over-

Year

 

 

 

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

EMEA

 

$

538

 

 

$

549

 

 

$

617

 

 

 

(2.0

)%

 

 

(12.8

)%

Americas

 

 

360

 

 

 

326

 

 

 

342

 

 

 

10.5

 

 

 

5.4

 

Asia Pacific

 

 

1,856

 

 

 

1,678

 

 

 

1,689

 

 

 

10.6

 

 

 

9.9

 

Total

 

$

2,754

 

 

$

2,553

 

 

$

2,648

 

 

 

7.9

%

 

 

4.0

%

 

(1)

Net revenues by location of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand.  For example, products ordered by U.S.-based companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues.

By region of shipment, in the 2019 fourth quarter, Asia Pacific revenues grew sequentially by 10.6%, principally in Imaging, Analog and Microcontrollers, Americas was up by 10.5%, mainly driven by Digital and Power Discrete, and EMEA decreased by 2.0%.

On a year-over-year basis, revenues grew 9.9% in Asia Pacific, mainly due to Analog, Microcontrollers and Imaging. In Americas, revenues grew 5.4%, mainly driven by Digital and Power Discrete, while it decreased by 12.8% in EMEA, mainly due to lower sales in Automotive, Power Discrete and Analog.

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Table of Contents

 

Gross Profit

 

 

 

Three Months Ended

 

 

Variation

 

 

 

December 31,

2019

 

 

September 29,

2018

 

 

December 31,

2018

 

 

Sequential

 

 

Year-

Over-

Year

 

 

 

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

Gross profit

 

$

1,081

 

 

$

967

 

 

$

1,059

 

 

 

11.8

%

 

 

2.0

%

Gross margin (as percentage of net revenues)

 

 

39.3

%

 

 

37.9

%

 

 

40.0

%

 

+140 bps

 

 

-70 bps

 

 

Fourth quarter gross profit was $1,081 million and gross margin was 39.3%.  On a sequential basis, gross margin increased 140 basis points, mainly driven by improved product mix and better manufacturing efficiencies.

Gross margin decreased 70 basis points year-over-year, mainly impacted by price pressure and unsaturation charges, partially offset by improved manufacturing efficiencies, better product mix and favorable currency effects, net of hedging.

Operating expenses

 

 

 

Three Months Ended

 

 

% Variation

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

Sequential

 

 

Year-

Over-

Year

 

 

 

(Unaudited, in millions)

 

 

 

 

 

 

 

 

 

Selling, general and administrative

   expenses

 

$

(285

)

 

$

(267

)

 

$

(285

)

 

 

(6.3

)%

 

 

0.4

%

Research and development expenses

 

 

(387

)

 

 

(362

)

 

 

(345

)

 

 

(7.0

)

 

 

(12.3

)

Total operating expenses

 

$

(672

)

 

$

(629

)

 

$

(630

)

 

 

(6.7

)%

 

 

(6.6

)%

As percentage of net revenues

 

 

(24.4

)%

 

 

(24.7

)%

 

 

(23.8

)%

 

+30 bps

 

 

-60 bps

 

 

The amount of our operating expenses increased by $43 million on a sequential basis, mainly driven by seasonality and salary dynamic.

On a year-over-year basis, our operating expenses increased by $42 million, mainly due to salary dynamic and increased spending on certain R&D programs, partially offset by favorable currency effects, net of hedging.

Fourth quarter 2019 R&D expenses were net of research tax credits in France and Italy, which amounted to $37 million, compared to $29 million in the third quarter of 2019 and $39 million in the fourth quarter of 2018.

Other income and expenses, net

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Research and development funding

 

$

68

 

 

$

14

 

 

$

19

 

Phase-out and start-up costs

 

 

(16

)

 

 

(15

)

 

 

(1

)

Exchange gain (loss), net

 

 

1

 

 

 

(1

)

 

 

 

Patent costs

 

 

(1

)

 

 

(1

)

 

 

(1

)

Gain on sale of non-current assets

 

 

1

 

 

 

 

 

 

1

 

Other, net

 

 

1

 

 

 

1

 

 

 

(2

)

Other income and expenses, net

 

$

54

 

 

$

(2

)

 

$

16

 

As percentage of net revenues

 

 

2.0

%

 

 

(0.1

)%

 

 

0.6

%

 

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Table of Contents

 

In the fourth quarter of 2019, we recognized other income, net of expenses, of $54 million, increasing from a negative $2 million in the prior quarter and from an income of $16 million in the year-ago quarter, reflecting higher R&D grants in Italy associated with the IPCEI program.

Impairment, restructuring charges and other related closure costs

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Impairment, restructuring charges and other related closure costs

 

$

(3

)

 

$

 

 

$

(2

)

 

In the fourth quarter of 2019, we recorded $3 million of impairment, restructuring charges and other related closure costs, primarily consisting of impairment of licenses dedicated exclusively to certain development projects that were cancelled, while no alternative future use.

In the third quarter of 2019, we did not record any impairment, restructuring charges and other related closure costs.

In the fourth quarter of 2018, we recorded $2 million of impairment, restructuring charges and other related closure costs, related to the impairment of acquired technologies, for which it was determined that they had no future alternative use.

Operating income

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Operating income

 

$

460

 

 

$

336

 

 

$

443

 

As percentage of net revenues

 

 

16.7

%

 

 

13.1

%

 

 

16.8

%

 

Operating income in the fourth quarter grew on a sequential and year-over-year basis to $460 million compared to $336 million and $443 million in the prior and year-ago quarters, respectively.

Operating income by product group

 

 

 

Three Months Ended

 

 

 

December 31, 2019

 

 

September 29, 2019

 

 

December 31, 2018

 

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

 

$ million

 

 

% of net

revenues

 

 

 

(Unaudited)

 

Automotive and Discrete Group (ADG)

 

$

113

 

 

 

12.2

%

 

$

76

 

 

 

8.5

%

 

$

141

 

 

 

14.6

%

Analog, MEMS and Sensors Group (AMS)

 

 

281

 

 

 

25.9

 

 

 

198

 

 

 

20.5

 

 

 

202

 

 

 

20.5

 

Microcontrollers and Digital ICs Group

   (MDG)

 

 

119

 

 

 

16.0

 

 

 

108

 

 

 

15.7

 

 

 

122

 

 

 

17.7

 

Total operating income of product

   segments

 

 

513

 

 

 

18.6

 

 

 

382

 

 

 

15.0

 

 

 

465

 

 

 

17.6

 

Others(1)

 

 

(53

)

 

 

 

 

 

(46

)

 

 

 

 

 

(22

)

 

 

 

Total operating income

 

$

460

 

 

 

16.7

%

 

$

336

 

 

 

13.1

%

 

$

443

 

 

 

16.8

%

 

(1)

Operating results of “Others” include items such as unused capacity charges, impairment and restructuring charges and other related closure costs, management reorganization expenses, 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 assembly services and other revenue.

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Table of Contents

 

On a sequential basis, ADG fourth quarter operating income improved by $37 million, driven by both Automotive and Power Discrete.  AMS operating income increased by $83 million, with all products contributing to the increase, and MDG operating income improved by $11 million.

On a year-over-year basis, ADG operating income declined by $28 million, with both Automotive and Power Discrete decreasing.  AMS operating income increased by $79 million, mainly driven by Imaging and Analog, and MDG operating income decreased by $3 million.

Reconciliation to consolidated operating income

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Total operating income of product segments

 

$

513

 

 

$

382

 

 

$

465

 

Impairment, restructuring charges and other

   related closure costs

 

 

(3

)

 

 

 

 

 

(2

)

Unallocated manufacturing results

 

 

(42

)

 

 

(40

)

 

 

3

 

Strategic and other research and development

   programs and other non-allocated provisions

 

 

(8

)

 

 

(6

)

 

 

(23

)

Total operating loss Others

 

 

(53

)

 

 

(46

)

 

 

(22

)

Total consolidated operating income

 

$

460

 

 

$

336

 

 

$

443

 

 

Interest income (expense), net

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Interest income (expense), net

 

$

(1

)

 

$

(1

)

 

$

1

 

 

We recorded a net interest expense of $1 million in the fourth quarter, substantially flat on a sequential basis and compared to an interest income of $1 million on a year-over-year basis.

Income (loss) on equity-method investments

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

(Unaudited, in millions)

 

Income (loss) on equity-method investments

 

$

 

 

$

 

 

$

6

 

 

In the fourth and third quarters of 2019, we recorded nil income, compared to $6 million income in the fourth quarter in 2018, mainly related to a $7 million complete reversal of a reserve associated with our indemnity obligation undertaken when selling Numonyx.  In addition, there was a better than anticipated actual outcome of certain tax items.

Income (loss) on financial instruments

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Income (loss) on financial instruments

 

$

 

 

$

 

 

$

(1

)

 

In the fourth and third quarters of 2019, we recorded nil income or loss on financial instruments. In the fourth quarter of 2018, we recognized a $1 million loss corresponding to a loss on one of our investments.

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Table of Contents

 

Income tax expense

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Income tax expense

 

$

(62

)

 

$

(28

)

 

$

(28

)

 

During the fourth and third quarters of 2019 and the fourth quarter of 2018, we recorded an income tax expense of $62 million, $28 million and $28 million, respectively, reflecting (i) in the third quarter of 2019 the estimated annual effective tax rate in each of our jurisdictions, applied to the consolidated results before taxes in the third quarter of 2019 and (ii) in both fourth quarters the actual tax charges and benefits in each jurisdiction as well as the true-up of tax provisions based upon the most updated visibility on open tax matters in several jurisdictions.  

Net income attributable to parent company

 

 

 

Three Months Ended

 

 

 

December 31,

2019

 

 

September 29,

2019

 

 

December 31,

2018

 

 

 

(Unaudited, in millions)

 

Net income attributable to parent company

 

$

392

 

 

$

302

 

 

$

418

 

As percentage of net revenues

 

 

14.2

%

 

 

11.8

%

 

 

15.8

%

 

For the fourth quarter of 2019, we reported a net income of $392 million, compared to a net income of $302 million and $418 million in the prior and year-ago quarters, respectively.  The fourth quarter 2019 net income represented diluted earnings per share of $0.43 compared to $0.34 in the prior quarter and $0.46 in the prior-year quarter.

 

Impact of Changes in Exchange Rates

 

Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.

 

As a market practice, the reference currency for the semiconductor industry is the U.S. dollar and the market prices of semiconductor products are mainly denominated in U.S. dollars.  However, revenues for some of our products are quoted in currencies other than the U.S. dollar and as such are directly affected by fluctuations in the value of the U.S. dollar.  As a result of currency variations, the appreciation of the Euro compared to the U.S. dollar could increase our level of revenues when reported in U.S. dollars or the depreciation of the Euro compared to the U.S. dollar could decrease our level of revenues when reported in U.S. dollars.  Over time and depending on market conditions, the prices in the industry could align to the equivalent amount in U.S. dollars, except that there is a lag between the changes in the currency rate and the adjustment in the price paid in local currency, which is proportional to the amplitude of the currency swing, and such adjustment could be only partial and/or delayed, depending on market demand.  Furthermore, certain significant costs incurred by us, such as manufacturing costs, SG&A expenses, and R&D expenses, are largely incurred in the currency of the jurisdictions in which our operations are located.  Given that most of our operations are located in the Euro zone and other non-U.S. dollar currency areas, including Singapore, our costs tend to increase when translated into U.S. dollars when the U.S. dollar weakens or to decrease when the U.S. dollar strengthens.

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Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues.  Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our Consolidated Statements of Income, in particular with respect to a portion of the costs of sales, most of the R&D expenses and certain SG&A expenses, located in the Euro zone, which we account for as cash flow hedging contracts.  We use two different types of hedging contracts:  forward and options (including collars).

Our Consolidated Statements of Income included income and expense items translated at the average U.S. dollar exchange rate for the period, plus the impact of the hedging contracts expiring during the period.  Our effective average exchange rate was $1.14 for €1.00 for the full year 2019 and $1.18 for €1.00 for the full year 2018.  Our effective exchange rate was $1.12 for €1.00 for the fourth quarter of 2019, $1.14 for €1.00 for the third quarter of 2019 and $1.17 for €1.00 for the fourth quarter of 2018.  These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.

The time horizon of our cash flow hedging for manufacturing costs and operating expenses may run up to 24 months, for a limited percentage of our exposure to the Euro, depending on currency market circumstances.  As of December 31, 2019, the outstanding hedged amounts were €642 million to cover manufacturing costs and €446 million to cover operating expenses, both at an average exchange rate of about $1.16 to €1.00 (considering the collars at upper strike), maturing over the period from January 6, 2020 to April 9, 2021.  As of December 31, 2019, measured in respect to the exchange rate at period closing of about $1.12 to €1.00, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory resulted in a deferred loss of approximately $4 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity, compared to a deferred loss of approximately $38 million before tax at December 31, 2018, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity.

We also hedge certain manufacturing costs denominated in Singapore dollars (SGD); as of December 31, 2019, the outstanding hedged amounts were SGD 143 million at an average exchange rate of about SGD 1.36 to $1.00 maturing over the period from January 9, 2020 to November 27, 2020.  As of December 31, 2019, these outstanding hedging contracts resulted in $1 million deferred gain, compared to a deferred loss of approximately $1 million before tax at December 31, 2018, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity.

Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a declining portion of our exposure in the next four quarters.  In 2019, as a result of our cash flow hedging, we recorded a net loss of $79 million, consisting of a loss of about $51 million to cost of sales, a loss of $22 million to research and development and a loss of $6 million to selling, general and administrative, while in 2018, we recorded a net profit of $1 million.

In addition to our cash flow hedging, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates, which we account for as fair value instruments.  We may in the future purchase or sell similar types of instruments.  See “Item 12. Quantitative and Qualitative Disclosures About Market Risk”.  Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment.  No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar.  Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates.  The net effect of our consolidated foreign exchange exposure resulted in a net gain of less than $1 million recorded in “Other income and expenses, net” in our 2019 Consolidated Statement of Income compared to net gains of $4 million and $4 million recorded in 2018 and 2017, respectively.

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The assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate.  Income and expenses, as well as cash flows, are translated at the average exchange rate for the period.  The balance sheet impact, as well as the income statement and cash flow impact, of such translations have been, and may be expected to be, significant from period to period since a large part of our assets and liabilities and activities are accounted for in Euros as they are located in jurisdictions where the Euro is the functional currency.  Adjustments resulting from the translation are recorded directly in equity, and are shown as “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity.  At December 31, 2019, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.

For a more detailed discussion, see “Item 3. Key Information — Risk Factors — Risks Related to Our Operations”.

Impact of Changes in Interest Rates

Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results of operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and marketable securities, as well as the total interest expense paid on our financial debt.

Our interest income (expense), net, as reported in our Consolidated Statements of Income, is the balance between interest income received from our cash and cash equivalents and marketable securities investments and interest expense paid on our financial liabilities (including the sale without recourse of receivables), non-cash interest expense on the Senior Convertible Bonds and bank fees (including fees on committed credit lines).  Our interest income is dependent upon fluctuations in interest rates, mainly in U.S. dollars and Euros, since we invest primarily on a short-term basis; any increase or decrease in the market interest rates would mean a proportional increase or decrease in our interest income.  Our interest expenses are also dependent upon fluctuations in interest rates, since our financial liabilities include European Investment Bank Floating Rate Loans at Libor and Euribor plus variable spreads.

At December 31, 2019, our total financial resources, including cash and cash equivalents and marketable securities, generated an average interest income rate of 1.83%.  At the same date, the average interest rate on our outstanding debt was 2.21% including the non-cash effective interest of the senior unsecured convertible bonds issued in 2017, while the average cash interest rate was only 0.24%.

Impact of Changes in Equity Prices

As of December 31, 2019, we did not hold any significant equity participations, which could be subject to a material impact in changes in equity prices.  However, on these equity participations, carrying value could be reduced due to further losses or impairment charges.  See Note 12 to our Consolidated Financial Statements.

Liquidity and Capital Resources

Treasury activities are regulated by our policies, which define procedures, objectives and controls.  Our policies focus on the management of our financial risk in terms of exposure to currency rates and interest rates.  Most treasury activities are centralized, with any local treasury activities subject to oversight from our head treasury office.  The majority of our cash and cash equivalents are held in U.S. dollars and Euros and are placed with financial institutions rated at least a single A long-term rating, meaning at least A3 from Moody’s Investors Service (“Moody’s”) and A- from Standard & Poor’s (“S&P”) or Fitch Ratings (“Fitch”), or better.  Marginal amounts are held in other currencies.  See “Item 12. Quantitative and Qualitative Disclosures About Market Risk”.

Our total liquidity and capital resources were $2,744 million as of December 31, 2019, increasing compared to $2,596 million at December 31, 2018.  As of December 31, 2019, our total liquidity and capital resources were comprised of $2,597 million in cash and cash equivalents, $133 million in marketable securities, $10 million in restricted cash and $4 million in short-term deposits, all considered as current assets.

As of December 31, 2019, marketable securities were $133 million invested in U.S. Government debt securities, including Treasury Bonds, with a rating of Aaa/AA+/AAA from Moody’s, S&P and Fitch, respectively, and a weighted average maturity of 1.5 years.  The securities are classified as available-for-sale and reported at fair value.  This fair value measurement corresponds to a Level 1 fair value hierarchy measurement.

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Liquidity

We maintain a significant cash position and a low debt-to-equity ratio, which provide us with adequate financial flexibility.  As in the past, our cash management policy is to finance our investment needs mainly with net cash generated from operating activities.

During 2019, our net cash increased by $341 million, due to net cash from operating activities exceeding net cash used in investing and financing activities.

The components of our cash flow for the last three years are set forth below:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Net cash from operating activities

 

$

1,869

 

 

$

1,845

 

 

$

1,677

 

Net cash used in investing activities

 

 

(1,172

)

 

 

(1,212

)

 

 

(1,468

)

Net cash used in financing activities

 

 

(343

)

 

 

(122

)

 

 

(106

)

Effect of changes in exchange rates

 

 

(13

)

 

 

(4

)

 

 

27

 

Net cash increase

 

$

341

 

 

$

507

 

 

$

130

 

 

Net cash from operating activities.  Net cash from operating activities is the sum of (i) net income (loss) adjusted for non-cash items and (ii) changes in net working capital.  The net cash from operating activities in 2019 was $1,869 million, increasing compared to $1,845 million in the prior year, mainly due to more favorable changes in net working capital, compensating lower net income.

 

Net cash used in investing activities.  Investing activities used $1,172 million of cash in 2019, decreasing from $1,212 million in the prior year. Payments for purchase of tangible assets, net of proceeds, totaled $1,174 million, compared to $1,262 million registered in the prior-year period. The 2019 numbers also included the proceeds from matured marketable securities of $200 million and the net cash outflow of $127 million for the acquisition of Norstel.

Net cash used in financing activities.  Net cash used in financing activities was $343 million for 2019, compared to the $122 million used in 2018.  The 2019 amount included $281 million proceeds from long-term debt, $144 million of long-term debt repayment, $250 million of repurchase of common stock and $214 million of dividends paid to stockholders.

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Free Cash Flow (non-U.S. GAAP measure).  We also present Free Cash Flow, which is a non-U.S. GAAP measure, defined as (i) net cash from operating activities plus (ii) net cash used in investing activities, excluding payment for purchases (and proceeds from the sale) of marketable securities, and net cash variation for joint ventures deconsolidation, which are considered as temporary financial investments.  The result of this definition is ultimately net cash from operating activities plus payment for purchase and proceeds from sale of tangible, intangible and financial assets, proceeds received in the sale of businesses and cash paid for business acquisitions.  We believe Free Cash Flow, a non-U.S. GAAP measure, provides useful information for investors and management because it measures our capacity to generate cash from our operating and investing activities to sustain our operations.  Free Cash Flow is not a U.S. GAAP measure and does not represent total cash flow since it does not include the cash flows generated by or used in financing activities.  Free Cash Flow reconciles with the total cash flow and the net cash increase (decrease) by including the payment for purchases (and proceeds from the sale) of marketable securities and net cash variation from joint ventures deconsolidation, the net cash from (used in) financing activities and the effect of changes in exchange rates.  In addition, our definition of Free Cash Flow may differ from definitions used by other companies.  Free Cash Flow is determined from our Consolidated Statements of Cash Flows as follows:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Net cash from operating activities

 

$

1,869

 

 

$

1,845

 

 

$

1,677

 

Net cash used in investing activities

 

 

(1,172

)

 

 

(1,212

)

 

 

(1,468

)

Excluding:

 

 

 

 

 

 

 

 

 

 

 

 

Payment for purchase and proceeds from sale of

   marketable securities, and net cash variation for

   joint ventures deconsolidation

 

 

(200

)

 

 

(100

)

 

 

99

 

Payment for purchase and proceeds from sale of

   tangible and intangible assets, payment for

   business acquisitions(1)

 

 

(1,372

)

 

 

(1,312

)

 

 

(1,369

)

Free Cash Flow (non-U.S. GAAP measure)

 

$

497

 

 

$

533

 

 

$

308

 

 

(1)

Reflects the total of the following line items reconciled with our Consolidated Statements of Cash Flows relating to the investing activities:  Payment for purchase of tangible assets, Proceeds from sale of tangible assets, Payment for purchase of intangible assets, Payment for purchase of financial assets, Proceeds from sale of financial assets, Payment for disposal of equity investment, Proceeds received in sale of businesses, Payment for business acquisitions, net of cash and cash equivalents acquired.

Free Cash Flow was positive $497 million in 2019, compared to positive $533 million and positive $308 million in 2018 and 2017, respectively.

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Capital Resources

Net Financial Position (non-U.S. GAAP measure).  Our Net Financial Position represents the difference between our total financial resources and our total financial debt.  Our total financial resources include cash and cash equivalents, marketable securities, restricted cash and short-term deposits, and our total financial debt includes short-term debt, including bank overdrafts, and long-term debt, as represented in our Consolidated Balance Sheets.  Net Financial Position is not a U.S. GAAP measure, but we believe it provides useful information for investors and management because it gives evidence of our global position either in terms of net indebtedness or net cash by measuring our capital resources based on cash and cash equivalents and marketable securities and the total level of our financial indebtedness.  In addition, our definition of Net Financial Position may differ from definitions used by other companies and therefore comparability may be limited.  Our Net Financial Position for each period has been determined from our Consolidated Balance Sheets as follows:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Cash and cash equivalents

 

$

2,597

 

 

$

2,266

 

 

$

1,759

 

Restricted cash

 

 

10

 

 

 

 

 

 

 

Short-term deposits

 

 

4

 

 

 

 

 

 

 

Marketable securities

 

 

133

 

 

 

330

 

 

 

431

 

Total financial resources

 

 

2,744

 

 

 

2,596

 

 

 

2,190

 

Short-term debt, including bank overdrafts

 

 

(173

)

 

 

(146

)

 

 

(118

)

Long-term debt

 

 

(1,899

)

 

 

(1,764

)

 

 

(1,583

)

Total financial debt

 

 

(2,072

)

 

 

(1,910

)

 

 

(1,701

)

Net Financial Position

 

$

672

 

 

$

686

 

 

$

489

 

 

Our Net Financial Position as of December 31, 2019 was a net cash position of $672 million, decreasing compared to the net cash position of $686 million at December 31, 2018.

At December 31, 2019, our financial debt was $2,072 million, composed of (i) $173 million of current portion of long-term debt and (ii) $1,899 million of long-term debt.  The breakdown of our total financial debt included: (i) $1,354 million in the senior unsecured convertible bonds issued in 2017, (ii) $706 million in European Investment Bank loans (the “EIB Loans”), and (iii) $12 million in loans from other funding programs and other long-term loans.  The EIB Loans are comprised of three long-term amortizing credit facilities as part of our R&D funding programs.  The first, signed in 2010, is a €350 million multi-currency loan to support our industrial and R&D programs.  It was drawn mainly in U.S. dollars for an amount of $321 million and only partially in Euros for an amount of €100 million, of which $55 million remained outstanding as of December 31, 2019.  The second, signed in 2013, is a €350 million multi-currency loan which also supports our R&D programs.  It was drawn in U.S. dollars for an amount of $471 million, of which $118 million is outstanding as of December 31, 2019.  The third, signed in August 2017 for a total aggregate amount of €500 million in relation to R&D and capital expenditure investments in the European Union. It was fully drawn in Euros corresponding to $533 million outstanding as of December 31, 2019.

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On July 3, 2014, we issued $1,000 million principal amount of dual tranche senior unsecured convertible bonds (Tranche A for $600 million and Tranche B for $400 million), due 2019 and 2021, respectively.  Tranche A bonds were issued as zero-coupon bonds while Tranche B bonds bore a 1% per annum nominal interest, payable semi-annually.  The conversion price at issuance was approximately $12, equivalent to a 30% and a 31% premium, respectively, on each tranche.  On October 3, 2016, the conversion price was adjusted up to 1.24% on each tranche, pursuant to a dividend adjustment symmetric provision, which corresponded to 16,491 and 16,366 equivalent shares per each $200,000 bond par value for Tranche A and Tranche B, respectively.  On October 2, 2017, the conversion price was adjusted up to 1.16% on Tranche B, pursuant to a dividend adjustment symmetric provision, which corresponded to 16,178 equivalent shares per each $200,000 bond par value.  The bonds were convertible by the bondholders or were callable by the issuer upon certain conditions, an in each case on a full-cash, full-shares or net-share settlement basis at issuer’s decision.  The net proceeds from the bond offering were approximately $994 million, after deducting issuance costs payable by us. The proceeds were allocated between debt and equity by first measuring the liability component and then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement. The fair value of the liability component at initial recognition totaled $878 million and was estimated by calculating the present value of cash flows using a discount rate of 2.40% and 3.22% (including 1% per annum nominal interest), respectively, on each tranche, which was determined to be consistent with the market rates at the time for similar instruments with no conversion rights. An amount of $121 million, net of allocated issuance costs of $1 million, was recorded in shareholders’ equity as the value of the conversion features of the instruments.

In the second quarter of 2017, we issued a redemption notice to inform bondholders of the early redemption of the Tranche A bonds in July 2017. As a consequence, bondholders exercised their conversion rights for $598 million nominal value on the total of $600 million of the Tranche A. The remainder amount of $2 million was early redeemed in cash by us.  Each conversion exercised by the bondholders was net-share settled, upon our election. As a result, we settled $600 million in cash and approximately 13.0 million shares from treasury shares. We allocated the total consideration transferred between debt and equity by measuring at fair value the liability component of Tranche A prior to settlement then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement and consisted in calculating the present value of cash flows using an average estimated discount rate of 2.09%, which corresponds to current market rates for similar bonds that have no conversion rights. The fair value of the liability component, as measured prior to extinguishment was $574 million for Tranche A bonds, which generated a loss amounting to $5 million, reported on the line “Loss on financial instruments, net” in the consolidated statement of income for the period ended December 31, 2017.

Between September 13, 2017 and October 10, 2017, bondholders exercised their conversion rights for $340 million nominal value on the total of $400 million of the Tranche B bonds. On October 11, 2017, we issued a redemption notice to inform bondholders of the early redemption of the remaining $60 million nominal value of the Tranche B on November 10, 2017. As a consequence, bondholders exercised their conversion rights for $59 million nominal value on the remaining $60 million of the Tranche B. The remainder amount of $1 million was early redeemed in cash by us.  As we elected to net share settle the bonds, each conversion followed the process defined in the original terms and conditions of the convertible bonds, which determined the actual number of shares to be transferred upon each conversion. As a result, we settled $400 million in cash and approximately 13.7 million shares from treasury shares.  We allocated the total consideration transferred between debt and equity by measuring at fair value the liability component of Tranche B prior to settlement then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement and consisted in calculating the present value of cash flows using an average estimated discount rate of 2.47%, which corresponds to current market rates for similar bonds that have no conversion rights. The fair value of the liability component, as measured prior to extinguishment was $370 million for Tranche B bonds, which generated a loss amounting to $11 million, reported on the line “Loss on financial instruments, net” in the consolidated statement of income for the period ended December 31, 2017.

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On July 3, 2017, we issued a $1.5 billion principal amount of dual tranche senior unsecured convertible bonds (Tranche A and Tranche B for $750 million each tranche), due 2022 and 2024, respectively. Tranche A bonds were issued at 101.265% as zero-coupon bonds while Tranche B bonds were issued at par and bear a 0.25% per annum nominal interest, payable semi-annually. The conversion price at issuance was $20.54, equivalent to a 37.5% premium on both tranches, which corresponds to 9,737 equivalent shares per each $200,000 bond par value. The bonds are convertible by the bondholders or are callable by the issuer upon certain conditions, on a net-share settlement basis, except if the issuer elects a full-cash or full-share conversion as an alternative settlement. The net proceeds from the bond offering were $1,502 million, after deducting issuance costs payable by us. Proceeds were allocated between debt and equity by measuring first the liability component and then determining the equity component as a residual amount. The liability component was measured at fair value based on a discount rate adjustment technique (income approach), which corresponded to a Level 3 fair value hierarchy measurement. The fair value of the liability component at initial recognition totaled $1,266 million before allocation of issuance costs, and was estimated by calculating the present value of cash flows using a discount rate of 2.70% and 3.28% (including 0.25% per annum nominal interest), respectively, on each tranche, which were determined to be consistent with the market rates at the time for similar instruments with no conversion rights. An amount of $242 million, net of allocated issuance costs of $1 million, was recorded in shareholders’ equity as the value of the conversion features of the instruments. Unamortized debt discount and issuance costs on the newly issued convertible debt totaled $146 million as at December 31, 2019. As at December 31, 2019, our stock price exceeded the conversion price of the new convertible bonds.

On August 7, 2017 we announced the completion of the repurchase of 18.6 million shares of our common stock for a total of $297 million under the share buy-back program announced on June 22, 2017. The repurchased shares are held as treasury shares and will be used to meet our obligations arising from debt financial instruments that are exchangeable into equity instruments and to meet our obligations arising from share award programs.

On November 5, 2018 we announced the launch of a share buy-back program of up to $750 million to be executed within a three-year period. Shares repurchased under the buy-back program are disclosed on a weekly basis and are held as treasury shares and will be used to meet our obligations in relation to our employee stock award plans. As of December 31, 2019, we held 19.8 million treasury shares.

Additionally, we had unutilized committed medium-term credit facilities with core relationship banks of $568 million.

Our long-term debt contains standard conditions, but does not impose minimum financial ratios.

As of December 31, 2019, debt payments at redemption value by period were as follows:

 

 

 

Payments Due by Period

 

 

 

Total

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

 

(In millions)

 

Long-term debt (including current portion)

 

$

2,218

 

 

$

173

 

 

$

118

 

 

$

809

 

 

$

59

 

 

$

807

 

 

$

252

 

 

Our current ratings with the three major rating agencies that report on us on a solicited basis, are as follows:  S&P:  “BBB” with stable outlook; Moody’s:  “Baa3” with stable outlook; Fitch: “BBB” with stable outlook.

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Contractual Obligations, Commercial Commitments and Contingencies

Our contractual obligations, commercial commitments and contingencies as of December 31, 2019, and for each of the five years to come and thereafter, were as follows:(1)

 

 

 

Total

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

Purchase obligations(2)

 

$

1,576

 

 

$

1,003

 

 

$

202

 

 

$

165

 

 

$

72

 

 

$

69

 

 

$

65

 

of which:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment and other asset

   purchases

 

 

514

 

 

 

514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foundry purchases

 

 

905

 

 

 

372

 

 

 

165

 

 

 

162

 

 

 

72

 

 

 

69

 

 

 

65

 

Software, design, technologies

   and licenses

 

 

157

 

 

 

117

 

 

 

37

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Other obligations(2)

 

 

436

 

 

 

338

 

 

 

45

 

 

 

25

 

 

 

17

 

 

 

8

 

 

 

3

 

Lease obligations (including

   current portion)(3)

 

 

207

 

 

 

55

 

 

 

40

 

 

 

28

 

 

 

21

 

 

 

15

 

 

 

48

 

Long-term debt obligations

   (including current portion)(3)(4)

 

 

2,218

 

 

 

173

 

 

 

118

 

 

 

809

 

 

 

59

 

 

 

807

 

 

 

252

 

Pension obligations (including

   current portion)(3)

 

 

455

 

 

 

34

 

 

 

29

 

 

 

33

 

 

 

42

 

 

 

52

 

 

 

265

 

Other long-term liabilities(3)(5)

 

 

178

 

 

 

 

 

 

48

 

 

 

7

 

 

 

9

 

 

 

11

 

 

 

103

 

Total

 

$

5,070

 

 

$

1,603

 

 

$

482

 

 

$

1,067

 

 

$

220

 

 

$

962

 

 

$

736

 

 

(1)

Contingent liabilities which cannot be quantified are excluded from the table above.

(2)

Items not reflected on the Consolidated Balance Sheet at December 31, 2019.

(3)

Items reflected on the Consolidated Balance Sheet at December 31, 2019.

(4)

For long-term debt obligations the difference between the total obligations and the total carrying amount of long-term debt is due to the unamortized discount on the dual tranche senior unsecured convertible bonds. See Note 15 to our Consolidated Financial Statements at December 31, 2019 for additional information related to long-term debt.

(5)

For other long-term liabilities, the difference with the amount reported on the Consolidated Balance Sheet at December 31, 2019 is related to the long-term portion of the lease obligation of $152 million reported in line “Lease obligations”. See Note 11 to our Consolidated Financial Statements at December 31, 2019 for additional information related to leasing.

Purchase obligations are primarily comprised of purchase commitments for equipment, for outsourced foundry wafers and for software licenses.

Other obligations primarily relate to firm contractual commitments with respect to partnership and cooperation agreements.

Long-term debt obligations mainly consist of bank loans and senior unsecured convertible bonds.  In 2020 we expect to repay with available cash and cash equivalents a $169 million loan received from the European Investment Bank as an annual installment.  See “— Net financial position (non-U.S. GAAP measure)” above.

Pension obligations amounting to $455 million consist of our best estimates of the amounts projected to be payable by us for the pension and post-employment plans.  The final actual amount to be paid and related timing of such payments may vary significantly due to early retirements, terminations and changes in assumptions rates.  See Note 16 to our Consolidated Financial Statements.

Other long-term liabilities mainly include future obligations related to other long-term employees benefits and miscellaneous contractual obligations.  In accordance with the authoritative guidance for accounting for uncertainty in income taxes, as of December 31, 2019, we had $48 million of estimated liabilities on uncertain tax positions.

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Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at December 31, 2019.

Financial Outlook:  Capital Investment

Our policy is to modulate our capital spending according to the evolution of the semiconductor market. Based on current market visibility and the combination of new products, customer demand in 2020 and ongoing strategic initiatives, we plan our capital investment in 2020 at approximately $1.5 billion. A portion of this capital expenditure will be devoted to support strategic initiatives: (i) in Agrate, Italy the construction of a new 300 mm fab to support next generation mixed signal, IGBT and power technologies; (ii) R&D for GaN power technologies in Tours 200 mm and production ramp-up for GaN RF devices in Catania 150 mm and (iii) investments for Silicon Carbide. These include the substrates activities, following the Norstel acquisition. In addition to our strategic initiatives, our main capital investment in front-end is in (i) our 300 mm fab in Crolles, optimizing existing infrastructure to support production ramp up on our main runner technologies; (ii) mix evolution, and a few selected programs of capacity growth and infrastructure preparation. The most important 2020 capital investments for our back-end facilities are expected to be: (i) capacity growth on certain package families, including the SiC technology, next generation Imaging sensor technologies and new products for Automotive and Industrial, to sustain market demand; (ii) modernization and rationalization of package lines targeting cost savings benefits; and (iii) specific investments in the areas of factory automation, quality, environment and energy savings. In addition, we will invest in overall capacity adjustment in final testing and wafers probing (EWS) to meet increased demand and a changed product mix as well as invest in quality, safety, maintenance, productivity and cost savings in both 150 mm, 200 mm front-end fabs and back-end plants.

We will continue to invest to support revenues growth and new products introduction, taking into consideration factors such as trends in the semiconductor industry and capacity utilization. We expect to need significant financial resources in the coming years for capital expenditures and for our investments in manufacturing and R&D. We plan to fund our capital requirements from cash provided by operating activities, available funds and support from third parties, and may have recourse to borrowings under available credit lines and, to the extent necessary or attractive based on market conditions prevailing at the time, the issuance of debt, convertible bonds or additional equity securities. A substantial deterioration of our economic results, and consequently of our profitability, could generate a deterioration of the cash generated by our operating activities. Therefore, there can be no assurance that, in future periods, we will generate the same level of cash as in prior years to fund our capital expenditure plans for expanding/upgrading our production facilities, our working capital requirements, our R&D and manufacturing costs.

We believe that we have the financial resources needed to meet our currently projected business requirements for the next twelve months, including capital expenditures for our manufacturing activities, working capital requirements, approved dividend payments and the repayment of our debts in line with their maturity dates.

Impact of Recently Issued U.S. Accounting Standards

See Note 2 to our Consolidated Financial Statements.

Equity-method investments

See Note 12 to our Consolidated Financial Statements.

Backlog and Customers

See “Item 4. Information on the Company — Backlog”.

Item 6.

Directors, Senior Management and Employees

Directors and Senior Management

The management of our Company is entrusted to the Managing Board under the supervision of the Supervisory Board.

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Supervisory Board

Our Supervisory Board advises our Managing Board and is responsible for supervising the policies pursued by our Managing Board, the manner in which the Managing Board implements the long-term value creation strategy and the general course of our affairs and business.  Our Supervisory Board consists of such number of members as is resolved by our AGM upon a non-binding proposal of our Supervisory Board, with a minimum of six members.  Decisions by our AGM concerning the number and the identity of our Supervisory Board members are taken by a simple majority of the votes cast at a meeting, provided quorum conditions are met.

Our Supervisory Board was composed of the following nine members as of December 31, 2019:

 

Name

 

Position

 

Year First

Appointed

 

Term

Expires

 

Age

Nicolas Dufourcq

 

Chairman

 

2015

 

2021

 

56

Maurizio Tamagnini

 

Vice Chairman

 

2014

 

2020

 

54

Janet Davidson

 

Member

 

2013

 

2022

 

63

Heleen Kersten

 

Member

 

2014

 

2020

 

54

Jean-Georges Malcor

 

Member

 

2011

 

2020

 

63

Lucia Morselli

 

Member

 

2019

 

2022

 

63

Alessandro Rivera

 

Member

 

2011

 

2020

 

49

Frédéric Sanchez

 

Member

 

2017

 

2020

 

59

Martine Verluyten

 

Member

 

2012

 

2020

 

68

 

Resolutions of our Supervisory Board require the approval of at least three-quarters of its members in office.  Our Supervisory Board must meet upon request by two or more of its members or by our Managing Board.  Our Supervisory Board meets at least five times a year, including once per quarter to approve our quarterly, semi-annual and annual accounts and their release.  In 2019, the average attendance rate for the meetings of our Supervisory Board was 91%.  Our Supervisory Board has adopted a Supervisory Board Charter, which is available on our website (www.st.com).

Our Supervisory Board may make a proposal to our AGM for the suspension or dismissal of one or more of its members.  Each member of our Supervisory Board must resign no later than three years after appointment, as described in our Articles of Association, but may be reappointed following the expiration of his/her term of office.  Pursuant to Dutch law, there is no mandatory retirement age for members of our Supervisory Board.  Members of the Supervisory Board may be suspended or dismissed by our AGM.  Certain of our Supervisory Board members are proposed by and may retain certain relationships with our direct or indirect shareholders represented through our major shareholder.  See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders”.

In accordance with the best practice provisions of the Dutch Corporate Governance Code our Supervisory Board undertakes to perform an evaluation of the performance of our Managing Board as well as its own functioning, its members and its committees.  The evaluation for the year ended December 31, 2019 was completed on December 3, 2019 and concluded that both our Supervisory Board and our Managing Board are functioning adequately.

Biographies of our Current Supervisory Board Members

Nicolas Dufourcq has been a member of our Supervisory Board since May 2015 and its Chairman since June 2017.  He serves on our Supervisory Board’s Nominating and Corporate Governance Committee and chairs its Compensation Committee and Strategic Committee.  Mr. Dufourcq is a graduate of HEC (Hautes Etudes Commerciales) and ENA (Ecole Nationale d’Administration).  He began his career at the French Ministry of Finance and Economics before joining the Ministry of Health and Social affairs in 1992.  In 1994, he joined France Telecom, where he created the Multimedia division, before going on to chair Wanadoo, the firm’s listed Internet and Yellow Pages subsidiary.  After joining the Capgemini Group in 2003, he was made responsible for the Central and Southern Europe region, successfully leading their financial turnaround.  He was appointed Chief Financial Officer of the Group and member of the Executive Committee in September 2004.  In 2005, he was named deputy Chief Executive Officer in charge of finance, risk management, IT, delivery, purchases and LEAN program and, in 2007, also in charge of the follow-up of the group’s major contracts.  On February 7, 2013, Mr. Dufourcq was appointed Chief Executive Officer of Bpifrance (Banque Publique d’Investissement), which is indirectly controlled by the French Government and is one of the indirect shareholders of ST Holding.  Mr. Dufourcq is also a member of the strategic advisory board of Euler Hermes Group and the board of directors of Orange Group.

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Maurizio Tamagnini has been a member of our Supervisory Board since June 2014 and has been its Vice Chairman since June 2017.  He was the Supervisory Board's Chairman from 2014 until June 2017. Mr. Tamagnini serves on our Supervisory Board’s Nominating and Corporate Governance Committee, Compensation Committee and Strategic Committee.  Mr. Tamagnini is currently Chief Executive Officer of FSI Sgr Spa, an asset management company participated, with a significant stake, among others, by Cassa depositi e prestiti Spa (CDP), which is 82.7% controlled by the Italian Government. FSI Sgr Spa manages “FSI I”, a private equity closed-end fund with approximately €1.4 billion capital endowment, specialized on growth equity investments in Italian midmarket companies with development potential.  Until April 2019, he was non-executive Chairman of FSI Investimenti Spa, which is controlled 77% by CDP.  Until March 2016, Mr. Tamagnini was Chief Executive Officer and Chairman of the Investment Committee of Fondo Strategico Italiano Spa (now CDP Equity Spa), an investment company controlled by CDP.  Until 21 April 2016, he was Chairman of the Joint Venture between CDP Equity and Qatar Holding (IQ Made in Italy Investment Company Spa) with capital endowment of up to €2 billion in total for investments in the food, brands, furniture & design and tourism sectors.  He was previously Southern European Manager of the Corporate & Investments Banking division of Bank of America Merrill Lynch and a member of the Executive Committee of Bank of America Merrill Lynch for the EMEA region.  Mr. Tamagnini has gained over 25 years of experience in the financial sector specializing in the areas of Corporate Finance, Private Equity, Debt and Equity.  Mr. Tamagnini is also a member of the International Advisory Board of BIDMC Harvard Medical School.  He holds a degree in International Monetary Economics from Bocconi University in Milan and has also studied at the Rensselaer Polytechnic Institute — Troy in New York, USA.

Janet Davidson has been a member of our Supervisory Board since June 2013. She serves on our Supervisory Board’s Audit Committee and Strategic Committee. She began her career in 1979 as a member of the Technical Staff of Bell Laboratories, Lucent Technologies (as of 2006 Alcatel Lucent), and served from 1979 through 2011 in several key positions, most recently as Chief Strategy Officer (2005 – 2006), Chief Compliance Officer (2006 – 2008) and EVP Quality & Customer Care (2008 – 2011). From 2005 through 2012, Ms. Davidson was a member of the Lehigh University Board of Trustees. In 2007 she served on the Riverside Symphonia Board of Trustees and in 2005 and 2006, Ms. Davidson was a member of the Liberty Science Center Board of Trustees. Ms. Davidson was a member of the board of the Alcatel Lucent Foundation from 2011 until 2014. Ms. Davidson is also a member of the board of directors of Millicom, since April 2016, and The AES Corporation, since February 2019.  Ms. Davidson is a graduate of the Georgia Institute of Technology (Georgia Tech), Atlanta, GA, USA, and Lehigh University, Bethlehem, PA, USA and holds a Master’s degree in Electrical Engineering.

Heleen Kersten has been a member of our Supervisory Board since June 2014.  She serves on our Supervisory Board’s Audit Committee and Compensation Committee and chairs its Nominating and Corporate Governance Committee.  Ms. Kersten is a partner at Stibbe in Amsterdam, where she held the position of managing partner from 2008 to 2013.  Stibbe is a Benelux law firm with offices in Amsterdam, Brussels, Luxembourg, London, New York and Dubai.  She began her career in 1989 with Stibbe before joining Davis Polk in New York and London (1992-1993).  After her return to Stibbe Amsterdam, she rose through the ranks to become a partner in 1997.  As a member of the Bar of Amsterdam since 1989, Ms. Kersten specializes in mergers and acquisitions, equity capital markets, corporate law and corporate governance.  Ms. Kersten was a supervisory board member of the Dutch listed bank Van Lanschot N.V. until May 2015 and the Chairman of the supervisory board of Egeria Investment B.V. until April 2016.  She is currently Chairman of the board of the Dutch Red Cross (Vereniging Het Nederlandse Rode Kruis), since January 2020, and a supervisory board member of the Rijksmuseum (Stichting Het Rijksmuseum), since 2015.  She is also a board member of the Foundation Donors of the Royal Concertgebouw Ochestra (Stichting Donateurs Koninklijk Concertgebouworkest), since 2010.  Ms. Kersten holds master’s degrees in Dutch law and tax law, both from Leiden University in the Netherlands.

Jean-Georges Malcor has been a member of our Supervisory Board since May 2011. He serves on our Supervisory Board’s Audit Committee. Until his retirement on October 1, 2018, Mr. Malcor was the Chief Executive Officer of CGG. He is a graduate of Ecole Centrale de Paris. He also holds a Master of Sciences degree from Stanford University, and a Doctorat from Ecole des Mines. Mr. Malcor began his career at the Thales group as an acoustic engineer in the Underwater Activities division where he was particularly in charge of hydrophone and geophone design and towed streamer programs. He then moved to the Sydney based Thomson Sintra Pacific Australia, becoming Managing Director of the company in 1990. Back in France, he became Director of Marketing and Communications (1991), then Director, Foreign Operations of Thomson Sintra Activités Sous Marines (1993). In 1996, he was appointed Managing Director of Thomson Marconi Sonar Australia which was, in addition to its military activities, the lead developing company for the solid

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geophysical streamer. In 1999, Mr. Malcor became the first Managing Director of the newly formed joint venture Australian Defense Industry. During this time he operated the Sydney based Woolloomooloo Shipyard (the largest dry dock in the southern hemisphere). In 2002, he became Senior Vice President, International Operations of Thales International. From 2004 to 2009, he was Senior Vice President in charge of the Naval Division, supervising all naval activities in Thales including ship design, building and maintenance. In January 2009, he became Senior Vice President, in charge of the Aerospace Division. In June 2009, he moved to the position of Senior Vice President, Continental Europe, Turkey, Russia, Asia, Africa, Middle East, and Latin America. Mr. Malcor joined CGG in January 2010 as President and became CEO in June 2010 until his retirement in October 2018.  Since June 2013, Mr. Malcor has been a member of the Supervisory Board of the Fives Group.  He is also a member of the board of directors and the audit committee of Atlas Arteria (since November 2018), a member of the board of directors of Ortec Expansion (since April 2018) and chairman of Cubik Partners (since July 2019).

Lucia Morselli has been a member of our Supervisory Board since 2019.  She serves on our Supervisory Board’s Audit Committee and Compensation Committee.  Ms. Morselli is a member of the board of directors and President of the Related Party Committee and member of the Audit Committee of Telecom Italia. She is a member of the board of directors of EssilorLuxottica (Paris), of Sisal S.p.A., and member of the advisory board of Veneranda Fabbrica del Duomo di Milano.  She is also in charge of the degree course in Economics of the Link Campus University (Rome).  Ms. Morselli graduated with the highest grades in Mathematics at the University of Pisa.  She completed a PhD in Mathematical Physics at the University of Rome and she holds two master degrees, the first one in Business Administration at the University of Turin and the second one in European Public Administration at the University of Milan.  She started her career at Olivetti as an assistant to the CFO; from 1985 to 1990 she was senior manager Strategic and Manufacturing Service with Accenture; from 1990 to 1995 she was CFO of the Aircraft Division at Finmeccanica S.p.A. Subsequently she was CEO of Telepiù Group (1995-1998), of News Corporate Europe and Stream (Sky) S.p.A. (1998-2003), of Tecnosistemi S.p.A. (2004), of Mikado S.p.A. and Compagnia Finanziaria S.p.A. (2009), of Bioera S.p.A. (2010-2011), of Berco Group (2013-2014), of Acciai Speciali Terni (2014-2016) and of Acciaitalia spa (2016). She also served as chairman of the board and CEO of Magiste International SA (2006), and of Scorpio Shipping Group Ltd (2011-2013).  She was a member of the board of directors of NDS (2004-2005) and IPI S.p.A. (2007-2008).  In 2003 she funded the consulting firm Franco Tatò & Partner.  Since 2009 she has been a member of the advisory board (restructuring fund) of DGPA & TATO’ Investment Fund.  In October 2019 Ms. Morselli was appointed chairman of the board of directors and CEO of ArcelorMittal Italia.

Alessandro Rivera has been a member of our Supervisory Board since May 2011.  Mr. Rivera serves on our Supervisory Board’s Strategic Committee and Nominating and Corporate Governance Committee.  Prior to his appointment as Director General of the Treasury in August 2018, Mr. Rivera was the Head of Directorate IV “Financial Sector Policy and Regulation Legal Affairs” at the Department of the Treasury, Ministry of Economy and Finance, from 2008 to 2018.  He served as Head of Unit in the Department of the Treasury from 2000 to 2008 and was responsible for a variety of policy matters:  financial services and markets, banking foundations, accounting, finance, corporate governance and auditing.  Since 2008, Mr. Rivera has been the Government representative in the “Consiglio Superiore” of the Bank of Italy, and in the Financial Services Committee.  Since 2013 he has been a member of the board of directors and compensation committee of Cassa Depositi e Prestiti.  Since 2017, he is also the chairman of SGA S.p.A. From 2011 to 2014 he was a member of the board of directors and compensation committee of Poste Italiane S.p.A.  From 2008 to 2011 he was a member of the European Securities Committee.  He was a member of the Accounting Regulatory Committee from 2002 to 2008 and a member of the Audit Regulatory Committee from 2005 to 2008.  He served on the board of Italia Lavoro S.p.A. from 2005 to 2008 and was a member of the audit committee and the compensation committee.  Mr. Rivera was also the chairman of the audit committee of the “Fondo nazionale di garanzia degli intermediari finanziari” (Italian investor compensation scheme) from 2003 to 2008.  From 2001 to 2010, he was the Project Leader and Deputy Project Leader in several twinning projects with Eastern European Countries (the Russian Federation, the Czech Republic, Lithuania, and Bulgaria).  He also served on the board of Mediocredito del Friuli — Venezia Giulia S.p.A from 2001 to 2003.

Frédéric Sanchez has been a member of our Supervisory Board since June 2017.  He serves on our Supervisory Board’s Compensation Committee, Strategic Committee and Nominating and Corporate Governance Committee. Mr. Sanchez is the chairman of the executive board of Fives, an industrial engineering group with heritage of over 200 years of engineering excellence and expertise.  Fives designs and supplies machines, process equipment and production lines for the world’s largest industrial groups in various sectors such as aluminum, steel, glass, automotive, logistics, aerospace, cement and energy, in both developing and developed countries. Mr. Sanchez started his career in 1985 with Renault in Mexico, then in the USA.  In 1987

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he became a mission manager at Ernst & Young.  In 1990 he joined Fives-Lille group, in which he held various positions before being appointed chief financial officer in 1994 and becoming chief operating officer in 1997.  In 2002, the “Compagnie de Fives-Lille” (renamed Fives in 2007) became a company with a management board and supervisory board chaired by Mr. Sanchez.  In 2018, Fives became a French simplified joint stock company (société par actions simplifiéee) and Mr. Sanchez its chairman and CEO.  Within MEDEF (French Business Confederation), Mr. Sanchez is President of MEDEF International and President of the Council of Entrepreneurs France-Vietnam, France-Cambodia and France-Saudi Arabia and UAE. Mr. Sanchez is also a member of the Supervisory Board of Mirion, an administrator of Thea, Primagaz and Bureau Veritas and honorary co-president of the Alliance Industrie du Futur. Mr. Sanchez graduated from HEC Business School (1983) and Sciences-Po Paris (1985) and he also holds a Master Degree in Economics from Université Paris-Dauphine (1984).

Martine Verluyten has been a member of our Supervisory Board since May 2012. Ms. Verluyten serves on our Supervisory Board’s Audit Committee and has been its Chair since April 2013. Until 2011, Ms. Verluyten acted as CFO of Umicore N.V. based in Brussels. Previously she was CFO of Mobistar N.V. (2001-2006), having initially joined Mobistar in 2000 as Group Controller. She had earlier worked at Raychem since 1976, holding various management positions during her 23-year tenure, from Manager European Consolidations (1976-1979), to General Accounting Manager based in the US (1979-1983). She was then promoted to Division Controller Telecom Division Europe from 1983 to 1990. In 1990, she was appointed Finance & Administration Director back in Europe, then in 1995, Europe Controller Finance & Administration Director until 1999. Ms. Verluyten is also member of the board of directors of Thomas Cook plc until January 18, 2020. She is also a member of the board of directors of and GBL (group Bruxelles Lambert). Ms. Verluyten began her career in 1973 at KPMG as an Auditor.

Supervisory Board Committees

Membership and Attendance.  As of December 31, 2019, the composition of the four standing committees of our Supervisory Board was as follows:  (i) Ms. Martine Verluyten is the Chair of the Audit Committee, and Ms. Janet Davidson, Ms. Heleen Kersten, Mr. Jean-Georges Malcor and Ms. Lucia Morselli are members of the Audit Committee; (ii) Mr. Nicolas Dufourcq is the Chairman of the Compensation Committee, and Mr. Maurizio Tamagnini, Ms. Heleen Kersten, Ms. Lucia Morselli and Mr. Frédéric Sanchez are members of the Compensation Committee; (iii) Ms. Heleen Kersten is the Chair of the Nominating and Corporate Governance Committee, and Messrs. Nicolas Dufourcq, Alessandro Rivera, Frédéric Sanchez and Maurizio Tamagnini are members of the Nominating and Corporate Governance Committee; and (iv) Mr. Nicolas Dufourcq is the Chairman of the Strategic Committee, and Ms. Janet Davidson and Messrs. Frédéric Sanchez, Maurizio Tamagnini and Alessandro Rivera are members of the Strategic Committee.

Detailed information on attendance at full Supervisory Board and Supervisory Board Committee meetings during 2019 is as follows:

 

Number of Meetings attended in 2019

 

Supervisory

Board

 

%

Attendance

 

Audit

Committee

 

 

%

Attendance

 

 

Compensation

Committee

 

 

%

Attendance

 

 

Strategic

Committee

 

 

%

Attendance

 

 

Nominating

& Corporate

Governance

Committee

 

 

%

Attendance

 

Nicolas Dufourcq

 

9

 

90

 

 

 

 

 

 

 

2

 

 

100

 

 

3

 

 

100

 

 

6

 

 

100

 

Maurizio Tamagnini

 

9

 

90

 

 

 

 

 

 

 

2

 

 

100

 

 

3

 

 

100

 

 

5

 

 

83

 

Janet Davidson

 

10

 

100

 

9

 

 

90

 

 

 

 

 

 

 

 

3

 

 

100

 

 

 

 

 

 

 

Heleen Kersten

 

10

 

100

 

9

 

 

90

 

 

2

 

 

100

 

 

 

 

 

 

 

 

6

 

 

100

 

Jean-Georges Malcor

 

10

 

100

 

10

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salvatore Manzi(1)

 

5

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lucia Morselli(2)

 

3

 

60

 

5

 

 

100

 

 

 

 

 

 

 

 

2

 

 

67

 

 

 

 

 

 

 

Alessandro Rivera

 

7

 

70

 

4

 

 

80

 

 

2

 

 

100

 

 

 

 

 

 

 

 

5

 

 

83

 

Frédéric Sanchez

 

10

 

100

 

 

 

 

 

 

 

2

 

 

100

 

 

3

 

 

100

 

 

6

 

 

100

 

Martine Verluyten

 

10

 

100

 

9

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Mr. Manzi stepped down on May 23, 2019

 

(2)

Ms. Morselli was appointed on May 23, 2019

 

Audit Committee.  Our Audit Committee assists the Supervisory Board in fulfilling its oversight responsibilities relating to corporate accounting, reporting practices, and the quality and integrity of our financial reports as well as our auditing practices, legal and regulatory related risks, execution of our auditors’ recommendations regarding corporate auditing rules and the independence of our external auditors.

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Our Audit Committee met ten times during 2019.  At many of the Audit Committee’s meetings, the committee received presentations on current financial and accounting issues and had the opportunity to discuss with our CEO, CFO, Chief Accountant, Chief Audit and Risk Executive, President, Legal Counsel, Chief Compliance Officer and external auditors.  Our Audit Committee also discussed with outside U.S. legal counsel corporate requirements pursuant to NYSE’s corporate governance rules and the Sarbanes Oxley Act.  Our Audit Committee also proceeded with its annual review of our internal audit function.  Our Audit Committee reviewed our annual Consolidated Financial Statements in U.S. GAAP for the year ended December 31, 2019, and the results press release was published on January 23, 2020.

Our Audit Committee approved the compensation of our external auditors for 2019 and discussed the scope of their audit, audit related and non-audit related services for 2019.

At the end of each quarter, prior to each Supervisory Board meeting to approve our quarterly results, our Audit Committee reviewed our interim financial information and the proposed press release and had the opportunity to raise questions to management and the independent registered public accounting firm.  In addition, our Audit Committee reviewed our quarterly “Operating and Financial Review and Prospects” and Consolidated Financial Statements (and notes thereto) before they were furnished to the SEC and voluntarily certified by the CEO and the CFO (pursuant to sections 302 and 906 of the Sarbanes Oxley Act).  Our Audit Committee also reviewed Operating and Financial Review and Prospects and our Consolidated Financial Statements contained in this Form 20-F, prior to its approval by our Supervisory Board.  Furthermore, our Audit Committee monitored our compliance with the European Directive and applicable provisions of Dutch law that require us to prepare a set of accounts pursuant to IFRS in advance of our AGM, which was held on May 23, 2019.  See “Item 3. Key Information—Risk Factors—Risks Related to Our Operations”.

Also in 2019, our Audit Committee reviewed with our external auditors our compliance with Section 404 of the Sarbanes-Oxley Act.  In addition, our Audit Committee regularly reviewed management’s conclusions as to the effectiveness of internal control over financial reporting, supervised the implementation of our corporate Enterprise Risk Management (“ERM”) process, and reviewed our Compliance & Ethics program.

As part of each of its quarterly meetings, our Audit Committee also reviewed our financial results as presented by Management/ and whistleblowing reports, including independent investigative reports provided by internal audit or outside consultants on such matters.

Compensation Committee.  Our Compensation Committee advises our Supervisory Board in relation to the compensation of our President and Chief Executive Officer and sole member of our Managing Board, including the variable portion of such compensation based on performance criteria recommended by our Compensation Committee.  Our Compensation Committee also reviews the stock based compensation plans for our senior managers and key employees.  Our Compensation Committee met twice in 2019.

Among its main activities, in 2019 our Compensation Committee:  (i) reviewed the objectives met as compared to the performance criteria relating to the bonus of our President and CEO, Mr. Jean-Marc Chery, for the fiscal year ended on December 31, 2018; (ii) defined the performance targets relating to the bonus of our President and CEO for the fiscal year ending on December 31, 2019 (which targets are based on, inter alia, revenues growth, certain specific financial targets, the share price evolution versus PHLX Semiconductor Sector IndexSM (SOXSM) and a list of three special programs); and (iii) established, on behalf and with the approval of the entire Supervisory Board, the applicable performance criteria, which must be met by senior managers and selected key employees participating in the employee stock award plans to benefit from such awards. For the 2019 unvested stock awards plan, these performance criteria are based on sales evolution and operating income evolution, both as compared against a panel of ten semiconductor companies, and the return on net assets targets.

Strategic Committee.  Our Strategic Committee advises the Supervisory Board on and monitor key developments within the semiconductor industry and our overall strategy, and is, in particular, involved in supervising the execution of corporate strategies and in reviewing long-term planning and budgeting.  Our Strategic Committee met three times in 2019.  In addition, there were strategic discussions, many of which occurred at extended Supervisory Board meetings and involved all Supervisory Board members.

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Nominating and Corporate Governance Committee.  Our Nominating and Corporate Governance Committee advises the Supervisory Board on the selection criteria and procedures relating to the appointment of members to our Supervisory Board and Managing Board, and the review of principles relating to corporate governance.  Our Nominating and Corporate Governance Committee met six times during 2019 to discuss succession planning for our Supervisory Board and Managing Board, recent developments in Dutch and U.S. law, best practices regarding corporate governance, and the update of our corporate governance documents.

Secretariat and Controllers.  Our Supervisory Board appoints a Secretary and Vice Secretary.  Furthermore, the Managing Board makes an Executive Secretary available to our Supervisory Board, who is also appointed by the Supervisory Board.  The Secretary, Vice Secretary and Executive Secretary constitute the Secretariat of the Supervisory Board.  The mission of the Secretariat is primarily to organize meetings, to ensure the continuing education and training of our Supervisory Board members and to maintain record keeping.  Ms. Charlotte Fadlallah serves as Secretary and Mr. Gabriele Pagnotta serves as Vice Secretary.  Ms. Fadlallah and Mr. Pagnotta serve as a Managing Director of ST Holding.  Our Chief Compliance Officer, Philippe Dereeper, serves as Executive Secretary for our Supervisory Board, and for each of the four standing committees of our Supervisory Board.

Our Supervisory Board also appoints two financial experts (“Controllers”).  The mission of the Controllers is primarily to assist our Supervisory Board in evaluating our operational and financial performance, business plan, strategic initiatives and the implementation of Supervisory Board decisions, as well as to review the operational reports provided under the responsibility of the Managing Board.  The Controllers generally meet once a month with the management of the Company and report to our full Supervisory Board.  The current Controllers are Messrs. Samuel Dalens and Giorgio Ambrosini.  The STH Shareholders Agreement between our principal indirect shareholders contains provisions with respect to the appointment of the Secretary, Vice Secretary and Controllers.  See “Item 7.  Major Shareholders and Related Party Transactions”.

Managing Board

In accordance with Dutch law, our management is entrusted to the Managing Board under the supervision of our Supervisory Board.  Mr. Jean-Marc Chery who was appointed on May 31, 2018 for a three-year term expiring at the 2021 AGM, is currently the sole member of our Managing Board with the function of President and Chief Executive Officer. Under our Articles of Association, Managing Board members are appointed for a three-year term upon a non-binding proposal by our Supervisory Board at our AGM and adoption by a simple majority of the votes cast at the AGM, provided quorum conditions are met, which term may be renewed one or more times.

Our shareholders’ meeting may suspend or dismiss one or more members of our Managing Board, in accordance with the procedures laid down in our Articles of Association.  Under Dutch law, our Managing Board is entrusted with our general management and the representation of the Company. Our Managing Board must seek prior approval from our shareholders’ meeting for decisions regarding a significant change in the identity or nature of the Company. Under our Articles of Association and our Supervisory Board Charter, our Managing Board must also seek prior approval from our Supervisory Board for certain other decisions with regard to the Company and our direct or indirect subsidiaries.

In accordance with our Corporate Governance Charter, the sole member of our Managing Board and our senior managers may not serve on the board of a public company without the prior approval of our Supervisory Board.  Pursuant to the Supervisory Board Charter, the sole member of our Managing Board must inform our Supervisory Board of any (potential) conflict of interest and pursuant to such charter and Dutch law, any Managing Board resolution regarding a transaction in relation to which the sole member of our Managing Board has a conflict of interest must be approved and adopted by our Supervisory Board. Should our entire Supervisory Board also have a conflict of interest, the resolution must be adopted by our shareholders’ meeting pursuant to Dutch law. We are not aware of any potential conflicts of interests between the private interest or other duties of our sole Managing Board member and our senior managers and their duties to us.

Pursuant to our Articles of Association and the Supervisory Board Charter, the following decisions by our Managing Board with regard to the Company and any of our direct or indirect subsidiaries (an “ST Group Company”) require prior approval from our Supervisory Board:  (i) any modification of our or any ST Group Company’s Articles of Association or other constitutional documents, other than those of wholly owned subsidiaries; (ii) other than for wholly owned subsidiaries, any change in our or any ST Group Company’s authorized share capital or any issue, acquisition or disposal by us — with the exception of shares in our share capital acquired in order to transfer these shares under employee stock option or stock purchase plans — or any ST Group Company of own shares or change in share rights and any issue of instruments resulting in a share in the capital of any ST Group Company or its profits (iii) the liquidation or dissolution of the Company or any ST Group Company or the disposal of all or a substantial and material part of our business or assets, or those of any ST Group Company, or of any shares in any ST Group Company; (iv) any merger, acquisition or joint venture

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agreement (and, if substantial and material, any agreement relating to IP) to which we or any ST Group Company is, or is proposed to be, a party, as well as the formation of new companies by us or any ST Group Company (with the understanding that only acquisitions above $25 million per transaction are subject to prior Supervisory Board approval); (v) our draft Consolidated Balance Sheets and Consolidated Financial Statements, as well as our and any ST Group Company’s profit distribution policies; (vi) entering into any agreement that may qualify as a related party transaction, including any agreement between us or any ST Group Company and any of our major shareholders; (vii) the appointment of members of the Executive Committee; (viii) the key parameters of our pluri-annual plans and our consolidated annual budgets, as well as any significant modifications to said plans and budgets, or any one of the matters set forth in our Articles of Association and not included in the approved plans or budgets; (ix) operations which have to be submitted for Supervisory Board prior approval even if their financing was already provided for in the approved annual budget; (x) our quarterly, semi-annual and annual Consolidated Financial Statements prepared in accordance with U.S. GAAP and, as required, according to IFRS; (xi) the exercise of any shareholder right in a ST joint venture company, which is a company (a) with respect to which we hold directly or indirectly either a minority equity position in excess of 25% or a majority position without the voting power to adopt extraordinary resolutions, or (b) in which we directly or indirectly participate and such participation has a value of at least one-third of our total assets according to the Consolidated Balance Sheets and notes thereto in our most recently adopted (statutory) annual accounts, with the understanding, for the avoidance of doubt, that decisions of the Managing Board regarding the general management and/or operations of such ST joint venture company are not subject to Supervisory Board approval and that the Managing Board reports to the Supervisory Board on the operations of the ST joint venture companies as part of its regular reporting to the Supervisory Board and in principle at least every six months; (xii) the strategy of our company; (xiii) the annual internal audit plan and the appointment, replacement, reassignment and dismissal of our Chief Audit and Risk Executive; (xiv) all proposals to be submitted to a vote at the AGM; (xv) the formation of all companies, acquisition or sale of any participation and conclusion of any cooperation and participation agreement ; (xvi) all our pluri-annual plans and the budget for the coming year (covering investment policy, policy regarding research and development, and commercial policy and objectives, general financial policy and policy regarding personnel); and (xvii) all acts, decisions or operations covered by the foregoing and constituting a significant change with respect to decisions already approved by the Supervisory Board or not provided for in the above list and as specifically laid down by a Supervisory Board resolution to that effect.

Senior Management

Changes within 2019

In December 2019, our President, Human Resources and Corporate Social Responsibility, Philippe Brun, left the Company. We are currently considering various options for Mr. Brun's replacement and, in the interim, we have taken adequate measures to ensure continuity in the performance of his duties.

General management of our business

The sole member of our Managing Board, our President and Chief Executive Officer, is entrusted with our general management and is supported in his tasks by our Executive Committee and Executive Vice Presidents, who together constitute our Senior Management.

As a company committed to good governance, we hold corporate meetings on a regular basis. Such meetings, which involve the participation of several members of our Senior Management include:

Executive Committee, which meets once every month and oversees the general strategy and is responsible for the risk management of the Company.

Corporate Operations Review, which meets twice per quarter to review monthly results, short-term forecasts and monthly business results.

Corporate Staff Meeting, which meets once per quarter to review the business in its entirety and to plan and forecast for the next quarter and beyond.

Executive Committee

The Executive Committee was established on May 31, 2018.  The Executive Committee acts under the authority and responsibility of the Managing Board and in this respect manages the Company. The Managing Board remains legally responsible for the management of the Company. The responsibilities of the Executive Committee include overseeing the general strategy as well as the risk management in connection with the Company's activities, operational and financial objectives and financial reporting processes. The Executive Committee adopts resolutions based on consensus, or if no consensus can be reached, by a majority of the votes cast by the members of the Managing Board including the vote of the chairman of the Executive Committee.

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The chairman of the Executive Committee is the President and Chief Executive Officer of the Company. Members of the Executive Committee are appointed by the Managing Board subject to the approval of the Supervisory Board. Members of the Executive Committee can be suspended and dismissed by the Managing Board without prior approval by the Supervisory Board.

The Executive Committee was composed of the following eight members as of December 31, 2019 as set forth in the table below.  In December 2019, our former President, Human Resources and Corporate Social Responsibility, Philippe Brun, left the Company.

 

Name

 

Position

 

Years with

Company

 

Years in Semi-

Conductor Industry

 

Age

Jean-Marc Chery

 

President and Chief Executive Officer

 

35

 

35

 

59

Orio Bellezza

 

President, Technology, Manufacturing and

Quality

 

36

 

36

 

60

Marco Cassis

 

President, Sales, Marketing, Communications

& Strategy Development

 

32

 

32

 

56

Claude Dardanne

 

President, Microcontrollers and Digital ICs

Group

 

37

 

40

 

67

Lorenzo Grandi

 

President, Finance, Infrastructure and Services,

and Chief Financial Officer

 

32

 

32

 

58

Marco Monti

 

President, Automotive and Discrete Group

 

33

 

33

 

58

Steven Rose

 

President, Legal Counsel

 

28

 

28

 

57

Benedetto Vigna

 

President, Analog, MEMS and Sensors Group

 

25

 

25

 

50

 

Biographies of our Executive Committee Members

Jean-Marc Chery is STMicroelectronics’ President and Chief Executive Officer, and has held this position since May 31st, 2018. He is the Sole Member of ST’s Managing Board and chairs its Executive Committee. Mr. Chery began his career in the Quality organization of Matra, the French engineering group. In 1986, he joined Thomson Semiconducteurs, which subsequently became ST, and held various management positions in product planning and manufacturing, rising to lead ST’s wafer fabs in Tours, France, and later in Rousset, France. In 2005, Mr. Chery led the company-wide 6-inch wafer-production restructuring program before taking charge of ST’s Front-End Manufacturing operations in Asia Pacific. In 2008, he was promoted to Chief Technology Officer and assumed additional responsibilities for Manufacturing and Quality (2011) and the Digital Product Sector (2012). In 2014, Mr. Chery was appointed ST’s Chief Operating Officer responsible for Technology and Manufacturing operations. In July 2017, Mr. Chery was appointed Deputy CEO with overall responsibility for Technology and Manufacturing, as well as for Sales and Marketing operations. Mr. Chery is President of the European Semiconductor Industry Association (ESIA), President of the European microelectronics R&D program AENEAS, and Chairman of the France – Malaysia Business Council at Medef International. Mr. Chery was born in Orleans, France, in 1960, and graduated with a degree in Engineering from the ENSAM engineering school in Paris, France.

Orio Bellezza is STMicroelectronics’ President, Technology, Manufacturing and Quality, and has held this position since May 31, 2018.  He has been responsible for Front-End Manufacturing since 2008 and his mandate has been expanded to cover ST’s technology, manufacturing operations, supply chain, and quality. Mr. Bellezza is a member of ST’s Executive Committee since May 31, 2018. Mr. Bellezza joined SGS-ATES, a predecessor company to STMicroelectronics, in 1984 as a fab process engineer.  He soon moved to ST’s Central R&D organization and participated in several key projects, including the introduction of process technology modules for manufacturing sub-micron non-volatile memories.  In 1996, Mr. Bellezza was appointed Director of ST’s R&D facility in Agrate and led its upgrade and expansion into a manufacturing and development center for non-volatile memory and smart-power technologies.  In 2002, he became Vice President of Central R&D, and in 2005, was appointed Vice President and Assistant General Manager of Front-End Technology and before the establishment of the Executive Committee was also part of the senior management.  Mr. Bellezza also serves as Managing Director of the ST Italy legal entity.  Mr. Bellezza has published technical papers and earned several patents in non-volatile memories.  Mr. Bellezza was born in Bergamo, Italy, in 1959, and graduated cum laude with a degree in Chemistry from the University of Milan, Italy.

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Marco Cassis is STMicroelectronics’ President, Sales, Marketing, Communications and Strategy Development and has held this position since May 31, 2018.  He is a member of ST’s Executive Committee since May 31, 2018. Mr. Cassis joined SGS-Thomson Microelectronics (now STMicroelectronics) as a car-radio chip designer in 1987.  Six years later, he moved to Japan to help expand ST’s audio business with major Japanese players and contributed to the establishment of ST’s strategic alliance with Pioneer.  In 2000, Mr. Cassis took charge of the Audio Business Unit and was subsequently promoted to Director of Audio and Automotive Group. In 2004, Mr. Cassis was named Vice President of Marketing for automotive, computer peripheral, and telecom products and in 2005, he advanced to Vice President of the Automotive Segment Group and joined the Board of STMicroelectronics K.K., ST’s Japanese subsidiary. Mr. Cassis was promoted to lead ST’s operations in Japan in 2005 and his mandate was expanded to include Korea in 2010 and Greater China and South Asia in 2016, when he was appointed President of ST’s Asia Pacific Region.  In 2017, Mr. Cassis was promoted President, Global Sales and Marketing and was part of the senior management before the establishment of the Executive Committee. Mr. Cassis was born in Treviso, Italy, in 1963, and graduated with a degree in Electronic Engineering from the Polytechnic of Milan, Italy.

Claude Dardanne is STMicroelectronics’ President, Microcontrollers and Digital ICs Group, and has held this position since January 2016.  He is a member of ST’s Executive Committee since May 31, 2018 and before the establishment of the Executive Committee was also part of the senior management.  Mr. Dardanne started his career with Thomson Semiconducteurs, a predecessor company to ST.  From 1982, he was responsible for microcontroller and microprocessor marketing.  Between 1989 and 1994, Mr. Dardanne was Marketing Director at Apple Computer and Alcatel-Mietec.  In 1994, he rejoined ST as Director of Central Marketing for the Memory Products Group, became Head of the EEPROM Division in 1998, and was later appointed Group Deputy General Manager and Head of the Smart Card Division. ST consolidated its Microcontroller, Memory, and Secure MCU activities in 2007 and appointed Mr. Dardanne Corporate Vice President and the MMS General Manager.  Under his leadership, MMS has become a key asset in revenue and market-share growth and profitability and a worldwide leader in the microcontroller market.  Mr. Dardanne was born near Limoges, France, in 1952, and graduated with a degree in Electronic Engineering from the Ecole Supérieure d'Ingénieurs en Génie Electrique in Rouen, France.

Lorenzo Grandi is STMicroelectronics’ President, Finance, Infrastructure and Services, and Chief Financial Officer (CFO), and has held this position since May 31, 2018.  Mr. Grandi’s overall responsibilities at ST encompass, in addition to Finance, Treasury and Business Control, Capital Investment Control and Planning, Global Procurement, Information and Communication Technology, and Investor Relations. He is a member of ST’s Executive Committee since May 31, 2018.  Mr. Grandi joined SGS-THOMSON Microelectronics (now STMicroelectronics) in 1987 as a R&D process engineer. In 1990, he moved to ST’s Memory Product Group (MPG) as Financial Analyst.  In 1995, Mr. Grandi was promoted to the position of Group Controller of the Memory Product Group contributing to the expansion of ST’s flash memory business.  In 2005, Mr. Grandi joined the ST’s Corporate Finance organization taking responsibility for Budgeting and Reporting. In 2012, Mr. Grandi was promoted to Corporate Vice President in charge of Corporate Control and before the establishment of the Executive Committee was also part of the senior management.  Mr. Grandi was born in Sondrio, Italy, in 1961.  He graduated cum laude in Physics from the University of Modena, Italy, and holds a MBA from SDA Bocconi School of Management in Milan, Italy.

Marco Monti is STMicroelectronics’ President, Automotive and Discrete Group. The head of ST’s Automotive Product Group since 2012, his mandate was expanded to include discrete and power transistor products in January 2016.  Mr. Monti is a member of ST’s Executive Committee since May 31, 2018 and before the establishment of the Executive Committee was also part of the senior management. Mr. Monti joined ST in Central R&D in 1986 and transferred to the Automotive Division in 1988, where he designed automotive ICs incorporating smart-power technologies.  He moved to Japan in 1990 working on a co-development activity designing a noise-reduction system for audio applications.  Subsequently, Mr. Monti transferred into marketing, contributing to the expansion of ST’s automotive business in Japan.  In 2000, he became the marketing manager for ST’s Automotive Division and started the Company’s automotive microprocessor business two years later. In 2004, Mr. Monti was promoted to Division General Manager for Powertrain, Safety, and Chassis products, and he took responsibility for the Automotive Electronics Division in 2009.  Then, in 2012, Mr. Monti was appointed Executive Vice President, General Manager of ST’s Automotive Product Group. Mr. Monti was born in Milan, Italy, in 1961. He graduated cum laude in Electronic Engineering from the Polytechnic of Milan and earned a PhD in Electronics from the University of Pavia, Italy.

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Steven Rose is STMicroelectronics’ President, Legal Counsel, and has held this position since May 31, 2018. He has been in charge of ST’s legal affairs since 2013. Mr. Rose is a member of ST’s Executive Committee since May 31, 2018 and before the establishment of the Executive Committee was also part of the senior management. Mr. Rose started his career as a corporate attorney at the law firm Gardere & Wynne in Dallas, Texas, providing legal advice and services to public and private companies. He joined SGS-THOMSON Microelectronics (now STMicroelectronics) in 1991 as the Associate General Counsel for the U.S. subsidiary, STMicroelectronics, Inc. In 2006, Mr. Rose was appointed to serve as the Senior Associate General Counsel for the Americas, Greater China & South Asia, and Japan & Korea regions, in addition to serving as Vice President, Secretary & General Counsel and a Director of STMicroelectronics, Inc. Mr. Rose was born in Wichita, Kansas, United States of America, in 1962 and he obtained a degree in Accounting from Oklahoma State University and a Juris Doctor degree from the University of Oklahoma College of Law.

Benedetto Vigna is STMicroelectronics’ President, Analog, MEMS and Sensors Group, and has held this position since January 2016. He is a member of ST’s Executive Committee since May 31st, 2018. Mr. Vigna joined ST in 1995 and launched the Company’s efforts in MEMS. Under his guidance, ST’s MEMS sensors established the Company’s leadership with large OEMs in motion-activated user interfaces. Mr. Vigna has piloted ST’s successful moves into microphones, e-compasses, and touch-screen controllers, as well as environmental sensors, micro-actuators, industrial and automotive sensors, and low-power radios for IoT. Mr. Vigna’s mandate was further expanded with analog ICs and RF products (2011) and smart-power devices for OEMs and mass market (2016). ST’s Imaging division moved under his management in late 2017. Mr. Vigna has more than 200 patents on micromachining, authored numerous publications, and sits on the boards of several EU-funded programs. Mr. Vigna’s contributions to the industry have been recognized with the MEMS Industry Group’s Executive of the Year Award (2013), the European SEMI Award (2013), the IEEE Frederik Philips Award (2015), and Manager of the Year 2017 by German magazine Markt & Technik. He joined the MEMS & Sensor Industry Group board in June 2019. Mr. Vigna was born in Potenza, Italy, in 1969, and graduated cum laude with a degree in Subnuclear Physics from the University of Pisa, Italy.

Executive Vice Presidents

The group of Executive Vice Presidents consisted of the following people as of December 31, 2019:

 

Name

 

Position

 

Years with

Company

 

Years in Semi-

Conductor Industry

 

Age

Michael Anfang

 

Executive Vice President Sales &

Marketing, Europe, Middle East

and Africa Region

 

21

 

29

 

51

Eric Aussedat

 

Executive Vice President Imaging

Sub-Group General Manager

Analog, MEMS and Sensors Group

 

39

 

39

 

65

Stefano Cantù

 

Executive Vice President Automotive and Discrete Group

Supply Chain General Manager

Automotive Business Deputy

 

25

 

25

 

51

Alberto Della Chiesa

 

Executive Vice President, Supply

Chain

 

31

 

31

 

55

Paul Cihak

 

Executive Vice President, General

Manager, Sales and Marketing,

Americas Region

 

21

 

26

 

48

Fabio Gualandris

 

Executive Vice President, Head of

Back-End Manufacturing &

Technology

 

31

 

35

 

60

Joël Hartmann

 

Executive Vice President, Digital & Smart Power Technology and Digital Front-End Manufacturing

 

19

 

41

 

64

Michael Hummel

 

Executive Vice President, Front-End Manufacturing, Analog and Power

 

1(1)

 

29

 

60

Claudia Levo

 

Executive Vice President, Integrated

Marketing & Communications

 

8

 

10

 

54

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Name

 

Position

 

Years with

Company

 

Years in Semi-

Conductor Industry

 

Age

Matteo Lo Presti

 

Executive Vice President, Analog,

Sub-Group General Manager, Analog

MEMS and Sensors Group

 

26

 

26

 

55

Giuseppe Notarnicola

 

Executive Vice President, Corporate

Treasury, Insurance, M&A, IP BU,

Real Estate, and Italy Public Affairs

 

14

 

14

 

58

Jerome Roux

 

Executive Vice President, Sales and

Marketing, Asia Pacific Region

 

28

 

32

 

54

Thierry Tingaud

 

Executive Vice President Europe

and France Public Affairs

STMicroelectronics, President,

STMicroelectronics France

 

35

 

35

 

60

Nicolas Yackowlew

 

Executive Vice President

Product Quality & Reliability

 

24

 

25

 

50

 

 

(1)

Michael Hummel held the position of Executive Vice President of STMicroelectronics, Analog and Power Front-End Manufacturing since March 2019.

Biographies of our Executive Vice Presidents

Michael Anfang is Executive Vice President, Sales & Marketing for STMicroelectronics’ Europe, Middle East and Africa Region (EMEA), and has held this position since November 2018.  Mr. Anfang started his career with Siemens Semiconductor AG in 1990 in product engineering, followed by responsibilities in product design, automotive and strategic marketing.  In 1999, he joined ST as an automotive business development manager.  In 2002, Mr. Anfang was given responsibility for microcontroller product marketing at ST’s Automotive Division in Agrate, Italy and was promoted to Director of Marketing & Applications in 2005.  Four years later, he was appointed Digital Automotive Business Unit Director of the Automotive Product Group and became a member of the management team responsible for the MCU Joint Development Program between Freescale and STMicroelectronics.  In 2013, Mr. Anfang joined the EMEA regional organization of STMicroelectronics as Automotive Marketing & Applications Vice President.  Mr. Anfang was born in Kitzbühel, Austria, in 1968.  He graduated with a degree in Electronic Engineering from the Higher Technical School in Saalfelden, Austria, and a degree in Business Management and Marketing from the FU University in Hagen-Munich, Germany.

Eric Aussedat is Executive Vice President and General Manager of the Imaging Product Division, Analog, MEMS and Sensors Group and has held this position since October 2014.  Mr. Aussedat joined Thomson Semiconducteurs, a predecessor company to ST, as Product Engineer in 1981.  He held various positions in product engineering and planning and was promoted Planning Manager of the Video Products Group in 1986.  Later on, he was appointed to manage the product and manufacturing planning operations of INMOS, a UK company acquired by ST.  Subsequently, he supervised the Engineering and Test Strategy for the Programmable Product Group before his promotion to head ST’s Microcontroller Division in 1995.  In 2000-2004, Mr. Aussedat led the TV and Display Division and became General Manager of ST’s Cellular Communication Division in 2005.  Two years later, he was appointed General Manager of the Imaging Division.  In 2012, Mr. Aussedat was appointed ST’s Executive Vice President in charge of the Imaging, Bi-CMOS ASIC and Silicon Photonics Group.  Mr. Aussedat graduated with a degree in Electronic Engineering from the Institut National Polytechnique in Grenoble and earned a diploma from the Institut d’Administration des Entreprises of Grenoble.

Stefano Cantù is Executive Vice President, Supply Chain General Manager at STMicroelectronics’ Automotive and Discrete Group (ADG) and has held this position since April 2016. He was also nominated Automotive Business Deputy across all ADG organizations in April 2019.  After experiences at Italtel and the Italian Ministry of Defense, Mr. Cantù joined the Planning organization of STMicroelectronics’ Dedicated Product Group in 1994. Five years later, he was appointed Central Planning Manager for the Telecom, Peripheral, and Automotive Group. In 2003-2004, Mr. Cantù managed production control at ST’s manufacturing sites in Phoenix and Carrollton in Texas, US and in 2005, he moved to Planning Director at ST’s Automotive Product Group. Mr. Cantù was promoted to Automotive Product Group Vice President responsible for Supply Chain in 2009 and the Group Operations were added to his mandate in 2012. Mr. Cantù was born in Milan, Italy, in 1968, and he graduated with a degree in Electronic Engineering from the Polytechnic of Milan.

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Alberto Della Chiesa is Executive Vice President in charge of Supply Chain and has held this role since May 2012. Mr. Chiesa joined STMicroelectronics as a New Product Planning Engineer in 1988.  He was in charge of new product introductions in the Automotive and Hard Disk Drive market and pioneered a number of ST’s successful collaborative programs with major key customers.  In his tenure at STMicroelectronics, Mr. Chiesa has covered different positions in both Planning and Operations.  In 2005, he was appointed Director, Planning & Service for the Computer Peripherals Group, where he actively contributed to the creation of ST’s first operations and planning structure in Singapore.  Over time, Mr. Chiesa rose to become Group Vice President of Supply Chain, followed by the nomination of General Manager and consequently Head of Operations and Supply Chain for ST’s Computers and Communications Infrastructure Product Group. Mr. Chiesa was born in Varese, Italy, in 1964, and holds a Bachelor’s degree in Statistics from the Catholic University of Milan, with a specialization in the manufacturing processes.  He is also CPIM certified with the American Production and Inventory Control Society (APICS) in Paris, France.

Paul Cihak is Executive Vice President, Sales & Marketing for STMicroelectronics’ Americas Region, and has held this position since November 2018.  Mr. Cihak began his career with Hewlett Packard in 1994.  He spent five years working in HP’s Inkjet printing business before being hired into strategic account management by STMicroelectronics in 1999.  In 2003, Mr. Cihak managed an industry-leading e-Business supply chain project cited as one of the first successful B2B RosettaNet programs in the world. Mr. Cihak rose through the ranks to become Director of Sales in 2004, Vice President of Sales in 2007, and Vice President of ST’s Computer and Peripheral accounts in 2011.  He was promoted in 2012 to lead ST’s largest sales Business Unit managing three Global Key Accounts for the Company. In April 2014, Mr. Cihak was appointed Executive President, General Manager, Sales & Marketing for STMicroelectronics’ Europe, Middle East and Africa Region. Mr. Cihak was born in San Diego, CA, in 1971.  He graduated from the University of Oregon with a degree in History and Political Science and holds a MBA from Portland State University.

Fabio Gualandris is Executive Vice President, Head of ST’s Back-End Manufacturing & Technology organization and has held this position since January 2016.  Mr. Gualandris joined the R&D organization of SGS Microelettronica, a predecessor company to ST, in 1984.  He was promoted to R&D Director of Operations in 1989 and became Automotive Business Unit Director in 1996.  After two years in the US as President and CEO of Semitool, a semiconductor manufacturing equipment vendor, he rejoined ST in 2000 as Group VP responsible for the RAM/PSRAM Product Division and the Flash Automotive Business Unit.  In 2005, Mr. Gualandris was appointed CEO of ST Incard, an ST smart-card subsidiary. In 2008-2010, he served as VP and Supply Chain General Manager at ST’s memory joint venture with Intel.  In 2011, Mr. Gualandris was appointed ST’s Executive Vice President in charge of Product Quality Excellence.  Mr. Gualandris has authored several technical and managerial papers and holds some international patents.  He serves as Chairman of STS, ST's manufacturing joint venture in China, and previously sat on boards at Incard, Numonyx, and the Numonyx-Hynix joint venture.  Mr. Gualandris was born in Bergamo, Italy, in 1959.  He graduated in Physics from the University of Milan.

Joël Hartmann is Executive Vice President of STMicroelectronics, Digital & Smart Power Technology and Digital Front-End Manufacturing, and has held this position since February 2012.  He manages ST’s manufacturing operations in Crolles and Rousset, France, Technology and Design Platforms for the Company’s digital products. In December 2018, Mr. Hartmann’s mandate was expanded with ST’s Smart Power Technology R&D operations in Agrate, Italy. From 1979 to 2000, Mr. Hartmann worked at CEA-Leti, France-based applied-research center. In 2000, he joined STMicroelectronics as Director of the Crolles2 Alliance, the semiconductor manufacturing R&D initiative of STMicroelectronics, NXP, and Freescale Semiconductor.  In 2008, Mr. Hartmann was promoted to Group Vice President and Director of Advanced CMOS Logic & Derivative Technologies. From 2010 to 2012, he had additional responsibilities as a co-leader of the Semiconductor Research and Development Center in Fishkill, NY, within the IBM ISDA Technology Alliance for advanced CMOS process development.  Mr. Hartmann is a Member of the IEEE Electron Device Society.  In 2017, he became a member of the French “Académie des Technologies” and received the European SEMI Award in 2019.  Mr. Hartmann has filed 15 patents on semiconductor technology and devices and authored 10 publications in this field to date.  Mr. Hartmann was born in Toulon, France, in 1955.  He graduated from the Ecole Nationale Supérieure de Physique de Grenoble with a degree in Physics.

Michael Hummel is Executive Vice President of STMicroelectronics, Analog and Power Front-End Manufacturing, and has held this position since March 2019. In 1991, Mr. Hummel started his professional career with IBM Microelectronics as a Process Engineer at Europe’s first 200 mm wafer fab in Böblingen, Germany. He held several managerial positions in Manufacturing and Engineering and became Director of Marketing & Supply Chain Management for the Philips-IBM JV in 1996. In the early 2000s, Mr. Hummel served as VP of Philips’ Display Driver business – first in Zürich and later in Taipei. In 2005, he was promoted

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to VP and General Manager of Philips Semiconductors Germany and Head of the Wafer Fab Operation in Böblingen. In 2007, Mr. Hummel joined Texas Instruments as Operations Manager in Dallas and two years later became Fab Manager at the Freising, Germany wafer plant. Upon TI’s acquisition of National Semiconductors in 2011, Mr. Hummel assumed additional responsibility for the Greenock, UK wafer fab and its integration into TI’s Front-End Fab structure. Mr. Hummel sat on SEMI European Advisory Board in 2005-2017. Mr. Hummel was born in Heilbronn, Germany, in 1959. He studied Chemistry at the University of Tübingen and received his PhD degree in Organic & Physical Chemistry in 1991.

Claudia Levo is Executive Vice President at STMicroelectronics with responsibility, since June 2018, for integrated Marketing and Communications strategies and plans.  Her responsibilities encompass corporate communications, including PR, media and industry analyst relations, marketing communications and digital marketing. Mrs. Levo began her career in 1993, with Marconi, a global telecommunications company, where she had responsibility for a number of management roles within the Communication function, including marketing communications and internal and external communications across wide geographies.  In 2005, Mrs. Levo managed the communication activities related to the integration of Marconi with Ericsson, and was subsequently appointed Vice President for Communications at the newly formed Ericsson Multimedia Business Unit.  In 2008, Mrs. Levo was appointed Vice President Communications at Italtel. In early 2009 she joined ST-Ericsson, the wireless joint venture between STMicroelectronics and Ericsson, as Senior Vice President and head of Global Communications.  In this capacity, she has successfully built the Global Communication function covering marketing and portfolio communication, public and media relations, investor relations and internal communication.  Mrs. Levo was born in Genoa, Italy, in 1965, and holds a language school diploma (Liceo Linguistico) in English and Russian.

Matteo Lo Presti is Executive Vice President, General Manager of the Analog sub-group within ST’s Analog, MEMS and Sensors Group, and has held this position since January 2016. Mr. Lo Presti joined the Advanced Research Group of SGS-Thomson Microelectronics (now STMicroelectronics) in 1994 and was appointed Head of Fuzzy Logic R&D four years later.  From 2002 to 2004, Mr. Lo Presti led the marketing and application labs for the Industrial and Automotive market segments in ST’s Emerging Markets.  He gained responsibility for the Company’s Systems Lab in 2004 and the Subsystem Product Group and Technical Marketing for the Industrial & Multisegment Sector were added to his mandate in 2008 and 2009, respectively. In 2012, Mr. Lo Presti was promoted to Group Vice President, General Manager, Industrial and Power Conversion Division.  From 1996 to 2004, Mr. Lo Presti served as a visiting professor at the University of Messina (Italy) and the University of Catania (Italy).  He has authored more than 40 international publications and holds several industrial patents. Mr. Lo Presti was born in Misterbianco, Italy, in 1965, and graduated with a degree in Electronic Engineering from the University of Catania.

Giuseppe Notarnicola is STMicroelectronics’ Executive Vice President responsible for managing Corporate Treasury, a position he has held since January 2006. His responsibilities were expanded in 2013 to include Insurance and in 2018 to include M&A, IP BU, Real Estate and Public Affairs for Italy. Mr. Notarnicola started his career with Banca Nazionale del Lavoro (BNL), one of Italy’s largest banks, in 1987. At BNL, he managed financial operations in Singapore, the Financial Department of the London branch, the global Head Office, financial advisory arm for corporate and institutional customers, and in 2004, was promoted Head of Large Corporate clients. Mr. Notarnicola joined ST in 2006, when he initiated the Company’s relationship with the European Investment Bank and managed the financing aspects of ST’s Flash memory business spin-out, as well as all the Company’s strategic funding in the capital markets. Mr. Notarnicola is President of ST Italy and board member of several other ST affiliates. Mr. Notarnicola was born in Codroipo near Udine, Italy, in 1961. He graduated cum laude in Business Administration from the LUISS Guido Carli University in Rome, Italy.

Jerome Roux is Executive Vice President, Sales and Marketing for the Company’s Asia Pacific Region, and has held this position since July 2017.  Mr. Roux began his career in the Planning department of SGS-THOMSON Microelectronics, a predecessor to STMicroelectronics, in 1988.  He soon moved to the Company’s packaging facility in Casablanca, Morocco as Material Manager.  Afterwards, Mr. Roux moved to Singapore and then Shanghai as the Asia Pacific Marketing Director for ST’s Discrete and Standard Product Group.  He left ST briefly to join an ST supplier company as managing director and member of the board and returned to ST in 2006 as Group Vice President, Assembly & Testing Outsourcing Operations, based in Singapore.  Global Purchasing responsibilities were added to his mandate in 2008. He was promoted to Corporate Vice President in 2012 and has managed Geographic and Distribution Sales in ST’s Greater China & South Asia Region (since 2015) and Asia Pacific Region (since 2016).  Mr. Roux serves as advisor to the French Government (CCEF) on Foreign Trade of the Singapore committee.  Mr. Roux graduated from ISG Business School in Paris with a Master degree in Commerce (Management and Marketing).

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Thierry Tingaud is Executive Vice President of Europe and France Public Affairs since July 2018.  He also holds the position of President of STMicroelectronics France since 2012.  In 1985, Mr. Tingaud joined Thomson Semiconductors, a predecessor company to STMicroelectronics in a telecom marketing role.  Following several promotions, Mr. Tingaud was appointed Corporate Strategic Key Account Director in 1996, Vice President, Sales and Marketing for the European Telecommunications Business Unit in 1999, and then Corporate Vice President for Emerging Markets in 2006.  He joined ST-Ericsson in 2009 as Vice President of Strategic Planning and Public Affairs and then was named Senior Vice President, General Manager of three Product Divisions.  He rejoined ST in 2012 to lead West Europe Sales & Marketing and European Public Affairs.  Mr. Tingaud is Vice-President of ESIA, Chairman of the Joint Steering Committee for the World Semiconductor Council, and the representative of the President and CEO of STMicroelectronics at the European Commission’s High Level Group KET’s, and at the Electronics Leaders Group.  He was appointed President of the “filière électronique” in France in May 2018 and to the High Level Group of Experts on AI by the European Commission in June 2018.  Born in Paris in 1959, Mr. Tingaud graduated with a degree in Electronic Engineering from INSA Lyon (1982) and with a Master of Business Administration from ESSEC (1985).

Nicolas Yackowlew is Executive Vice President, Product Quality & Reliability at STMicroelectronics and has held this position since August 2018.  Mr.Yackowlew began his career in 1996 as Product Quality Engineer at ST.  He has successfully driven Quality and Reliability departments for many years at both the Division and Group levels.  Mr.Yackowlew was promoted Division Quality & Reliability Manager in 2006 leading quality for Serial Non Volatile Memory.  Three years later, he was appointed Quality & Reliability Director in charge of the Quality for Memory, Microcontrollers and Secured MCUs.  In 2016, Mr.Yackowlew took the responsibility of Quality & Reliability for the Microcontroller and Digital ICs Group (MDG).  Mr. Yackowlew was born in Mulhouse (France) in 1969 and graduated with a degree in Chemistry from the University of Nice Sophia Antipolis, France.

Compensation

On December 1, 2019, a Dutch act implementing the revised EU Shareholders’ Rights Directive (2017/828/EU (“SRDII”) took effect in The Netherlands.  As we are incorporated under the laws of The Netherlands and our common shares are admitted to trading on regulated markets in the European Union, we are required, inter alia, to update the remuneration policy with respect to the compensation of the Supervisory Board members and the sole member of our Managing Board, President and Chief Executive Officer and to comply with the respective disclosure requirements introduced to the Dutch Civil Code.  In connection therewith, we present in this section certain comparative information on our performance relative to the compensation of the Supervisory Board members and the sole member of our Managing Board, President and Chief Executive Officer.  In addition, we provide information on the ratio of fixed to variable compensation of the sole member of our Managing Board, President and Chief Executive Officer.

Supervisory Board Compensation

Our Articles of Association provide that the compensation of our Supervisory Board members is determined by our General Meeting of Shareholders.  Currently, we have no remuneration policy in place with respect to the Supervisory Board members.  In 2020, we expect to submit to the AGM a proposal for adoption of a remuneration policy for the Supervisory Board members to ensure compliance with the new requirements under the Dutch Civil Code following the implementation of SRDII.  The aggregate compensation for current and former members of our Supervisory Board with respect to service in 2019 was €937,000 before any applicable withholding taxes, as set forth in the following table.

 

Supervisory Board Members

 

Directors’ Fees(1)

 

Nicolas Dufourcq

0(2)

 

Maurizio Tamagnini

 

166,000

 

Janet Davidson

 

106,000

 

Heleen Kersten

 

117,000

 

Jean-Georges Malcor

 

99,500

 

Lucia Morselli

 

92,500

 

Alessandro Rivera

 

92,000

 

Frédéric Sanchez

 

108,000

 

Martine Verluyten

 

151,500

 

Salvatore Manzi(3)

 

4,500

 

Total

 

937,000

 

 

 

(1)

These amounts include a fixed annual compensation for the directors’ mandate, together with attendance fees from January 1, 2019 until December 31, 2019.

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(2)

Mr. Dufourcq would have been entitled to receive €167,500 in 2019, but he waived his rights to receive any compensation from the Company in relation to his mandate as a member of the Supervisory Board.

 

(3)

Since May 23, 2019 Mr. Manzi has not been a member of the Supervisory Board.

Set forth in the following table is the annual change over the last three years of (i) the average remuneration of our Supervisory Board Members, (ii) the performance of the Company and (iii) the average remuneration of our employees:

 

 

 

2019

 

 

2018

 

 

2017

 

Directors' remuneration

 

 

 

 

 

 

 

 

 

 

 

 

Average remuneration of Supervisory Board Members(1)

$

105,066(2)

 

$

 

115,618

 

$

 

123,281

 

Company's performance

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues (amounts in millions)

$

 

9,556

 

$

 

9,664

 

$

 

8,347

 

Operating income (amounts in millions)

$

 

1,203

 

$

 

1,400

 

$

 

1,005

 

Average remuneration of all global indirect employees

   (FTE basis)(3)

 

 

 

 

 

 

 

 

 

 

 

 

Employees

$

 

97,300

 

$

 

100,600

 

$

 

93,500

 

 

 

(1)

Using the euro per US dollar exchange rate on December 31, 2019 of €1 = $1.1213.

 

(2)

Since May 23, 2019 Mr. Manzi has not been a member of the Supervisory Board.

 

(3)

Global indirect employees are all employees other than those directly manufacturing our products.

We do not have any service agreements with members of our Supervisory Board.  We did not extend any loans or overdrafts to any of our Supervisory Board members.  Furthermore, we have not guaranteed any debts or concluded any leases with any of our Supervisory Board members or their families.

Senior Management Compensation

Our Senior Management, including the sole member of our Managing Board and our President and Chief Executive Officer, received a combination of short term and long term compensation.  The following table sets forth the total cash amount paid as compensation in 2019, 2018 and 2017 to the 22, 22 and 20 members, respectively, of our Senior Management (including the sole member of our Managing Board, our President and Chief Executive Officer) on duty on December 31st of each year, before applicable withholding taxes and social contributions (amounts in millions):

 

 

 

2019(1)

 

 

2018(3)

 

 

2017(3)

 

Total cash amount paid as compensation(2)

 

$

21.3

 

 

$

22.2

 

 

$

19.0

 

 

 

(1)

Including amounts paid in 2019 to our former President, Human Resources and Corporate Social Responsibility, Mr. Brun.

 

(2)

Total cash amount paid as compensation comprises fixed salary, annual cash bonus incentive and other cash benefits. In addition, non-cash amounts paid as compensation, including vested stock awards and other non-cash benefits, as well as all applicable withholding taxes, pension contributions and social contributions, were approximately $22.3 million in 2019, $25.3 million in 2018 and $12.5 million in 2017. Total cash amount paid as compensation includes the fixed salary, annual cash bonus incentive and other cash benefits paid to our former President, Human Resources and Corporate Social Responsibility, Mr. Brun.

 

 

(3)

In 2019, we changed the classification of pension contributions and we determined that pension contributions are attributable to non-cash amounts paid as compensation.  In addition, in 2019, we classified housing and meal allowances (as applicable) as other cash benefits.  The reclassification of pension contributions and housing and meal allowances resulted in restatement of the total cash amount paid as compensation and non-cash amounts paid as compensation in 2018 and 2017.  

 

The annual cash bonus incentive, which we call Corporate Executive Incentive Program (the “EIP”), entitles selected executives to a yearly bonus based upon the assessment of the achievement of individual, organizational and company objectives that are set on an annual basis and focused, inter alia, on return on net assets, customer service, profit, cash flow and market share.  The maximum bonus awarded under the EIP is based upon a percentage of the executive’s salary and the overall achievement of the above objectives on an annual basis.

 

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The amounts paid in 2019 to our Senior Management (including the sole member of our Managing Board, our President and Chief Executive Officer) pursuant to the EIP represented approximately 41% of the total compensation paid to our Senior Management.

 

 

 

 

Bonus paid

in 2019 (2018

performance)

 

 

Bonus paid

in 2018 (2017

performance)

 

 

Bonus paid

in 2017 (2016

performance)

 

Bonus (cash) amount(1)

 

$

8,239,417

 

 

$

10,181,945

 

 

$

6,095,335

 

Ratio bonus / base salary + EIP(1)

 

 

41.12

%

 

 

48.84

%

 

 

35.22

%

 

(1)

Including amounts paid in 2019 to our former President, Human Resources and Corporate Social Responsibility, Mr. Brun.

Our Supervisory Board has approved the establishment of a complementary pension plan for certain members of our Senior Management, comprising the sole member of our Managing Board, President and Chief Executive Officer, and certain other key executives as selected by the sole member of our Managing Board, President and Chief Executive Officer, according to the general criteria of eligibility and service set up by the Supervisory Board upon the proposal of its Compensation Committee.  With respect to such plan, we have set up an independent foundation under Swiss law which manages the plan and to which we make contributions.  Pursuant to this plan, in 2019, we made a contribution of approximately $0.5 million to the plan of the sole member of our Managing Board, President and Chief Executive Officer, and $0.5 million to the plan for all other beneficiaries.  The amount of pension plan payments made for other beneficiaries, such as former employees retired in 2019 and/or no longer salaried in 2019, was $1.1 million.

We did not extend any loans or overdrafts to the sole member of our Managing Board, President and Chief Executive Officer, nor to any other member of our Senior Management.  Furthermore, we have not guaranteed any debts or concluded any leases with the sole member of our Managing Board, President and Chief Executive Officer, nor with any other member of our Senior Management or their families.

The members of our Senior Management, including the sole member of our Managing Board, President and Chief Executive Officer, were covered in 2019 under certain group life and medical insurance programs provided by us.  The aggregate additional amount set aside by us in 2019 to provide pension, retirement or similar benefits for our Senior Management, including the sole member of our Managing Board, President and Chief Executive Officer, as a group is, including the amounts allocated to the complementary pension plan described above and is estimated to have been approximately $5.1 million, which includes statutory employer contributions for state run retirement, similar benefit programs and other miscellaneous allowances.  

For the year 2019, the Senior Management pay ratio is 19.9 (2018: 19.6).  This ratio is based on:

(i) the average remuneration of our Senior Management (including the compensation of Philippe Brun);

compared to

(ii) the average remuneration of our global indirect employees (i.e., all employees other than those directly manufacturing our products), excluding the compensation of our Senior Management and Managing Board and President and Chief Executive Officer.  See “—Managing Board Compensation” below.

Managing Board Compensation

The remuneration of the sole member of our Managing Board, President and Chief Executive Officer, is determined by our Supervisory Board on the advice of the Compensation Committee and within the scope of the remuneration policy as adopted by our 2005 AGM. In 2020, we expect to submit to the AGM a proposal for revision of the remuneration policy to align it with the new requirements under the Dutch Civil Code following the implementation of SRDII.

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The sole member of our Managing Board, President and Chief Executive Officer, received compensation in the form of: a fixed salary, annual bonus, stock awards, employer social contributions, company car allowance, pension contributions and miscellaneous allowances. Set forth in the following table is the total compensation of the sole member of our Managing Board, President and Chief Executive Officer, in 2019, 2018 and 2017.  The total compensation of the sole member of our Managing Board, President and Chief Executive Officer, comprises (i) with relation to 2019 (y) the total compensation of Mr. Jean-Marc Chery and (z) contractually obligated deferred compensation relating to Mr. Carlo Bozotti’s departure in 2018; and (ii) with relation to 2018 (x) the total compensation of Mr. Bozotti until May 31, 2018 (excluding any accelerated compensation), (y) the total compensation of Mr. Chery from June 1, 2018 and (z) accelerated compensation relating to Carlo Bozotti’s departure:

 

 

 

2019

 

 

2018

 

 

2017

 

Salary

 

$

896,297

 

 

$

927,820

 

 

$

903,186

 

Bonus(1)

 

$

1,280,173

 

 

$

3,214,578

 

 

$

1,044,514

 

Charges and Non-cash Benefits(2)

 

$

5,618,382

 

 

$

6,971,946

 

 

$

1,828,814

 

Total(3)

 

$

7,794,852

 

 

$

11,114,344

 

 

$

3,776,514

 

 

(1)

The bonus paid in 2019, 2018 and 2017 was approved by the Compensation Committee and Supervisory Board with respect to the 2018, 2017 and 2016 financial year, respectively, based on the evaluation and assessment of the actual fulfillment of a number of pre-defined objectives for such year.

(2)

Including stock awards, employer social contributions, company car allowance, pension contributions, complementary pension contributions, miscellaneous allowances as well as one-off contractually obligated deferred compensation paid to Mr. Bozotti in 2019.  In accordance with the resolutions adopted at our AGM held on May 30, 2012, the bonus of our former President and Chief Executive Officer, Mr. Bozotti, in 2018 and 2017 included a portion of a bonus payable in stock awards and corresponding to 86,782 and 59,435 vested shares, respectively, based on fulfillment of a number of pre-defined objectives.  In addition, our sole member of our Managing Board, President and Chief Executive Officer, Mr. Chery, was granted, in accordance with the compensation policy adopted by our General Meeting of Shareholders and subsequent shareholder authorizations, up to 100,000 unvested Stock Awards.  The vesting of such stock awards is conditional upon the sole member of our Managing Board, President and Chief Executive Officer’s, continued service with us.

(3)

In 2019, the total compensation of the sole member of our Managing Board, President and Chief Executive Officer was 46% fixed to 54% variable, compared to 12% fixed to 88% variable in 2018 and 44% fixed to 56% variable in 2017.

Set forth in the following table is the total compensation of the sole member of our Managing Board, President and Chief Executive Officer, Mr. Jean-Marc Chery, in 2019:

 

Salary

 

$

      896,297

 

Bonus

 

$

        1,280,173

 

Charges and Non-cash Benefits(1)

 

$

    2,286,463

 

Total

 

$

    4,462,933

 

 

(1)

Including stock awards, employer social contributions, company car allowance, pension contributions, complementary pension contributions and miscellaneous allowances.  Our sole member of our Managing Board, President and Chief Executive Officer, Mr. Chery, was granted, in accordance with the compensation policy adopted by our General Meeting of Shareholders and subsequent shareholder authorizations, up to 100,000 unvested Stock Awards.  The vesting of such stock awards is conditional upon the sole member of our Managing Board, President and Chief Executive Officer’s, continued service with us.

The sole member of our Managing Board, President and Chief Executive Officer, was appointed on May 31, 2018 for a three-year term expiring at the 2021 AGM.  He has employment agreements with us, the first with our Dutch parent company, which relates to his activities as sole member of our Managing Board and representative of the Dutch legal entity, and the second with one of our entities in Switzerland, which relates to his activities as President and Chief Executive Officer, the EIP, Pension and other items covered by the compensation policy adopted by our General Meeting of Shareholders.  While the relationship between a member of the managing board and a listed Dutch company will be treated as a mandate agreement, not an employment agreement, existing employment agreements, including the employment agreement between us and our sole member of the Managing Board, will remain in effect.

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(i) CEO Bonus

In accordance with the resolutions adopted at our AGM held on May 30, 2012, the annual bonus of the sole member of our Managing Board and President and Chief Executive Officer is composed of a portion payable in cash (up to a maximum of 150% of the base salary for the relevant year) and a portion payable in shares (up to a maximum of 60% of the base salary for the relevant year), all subject to the assessment and fulfillment of a number of pre-defined conditions which are set annually by the Compensation Committee of our Supervisory Board.

Consistent with the remuneration policy adopted by our General Meeting of Shareholders, the Supervisory Board, upon the recommendation of its Compensation Committee, set the conditions and performance criteria that must be met by Mr. Chery for the attribution of his 2019 bonus.  Those conditions are based, inter alia, on revenues growth, certain financial targets, the share price evolution versus the SOXSM, as well as certain special programs. The evaluation and assessment of the fulfillment of those conditions and performance criteria, will be done by the Compensation Committee of our Supervisory Board within the first months of the following year (i.e. in 2020 for the 2019 CEO bonus), in order to determine the actual amount of the CEO bonus for 2019.

(ii) CEO Stock Awards

The Supervisory Board, upon recommendation of the Compensation Committee, determines whether the performance criteria, as described below, have been met and conclude whether and to which extent all eligible employees, including the sole member of our Managing Board, President and Chief Executive Officer, are entitled to any stock awards under the stock award plan. The stock awards vest 32% after one year, a further 32% after two years and the remaining 36% after three years, respectively, after the date of the grant as defined by the plan, provided that the eligible employee is still an employee at such time (subject to the acceleration provisions in the event of a change in control).

(iii) Unvested Stock Awards Allocation

 

Year(1)

 

Performance

Achieved

 

 

 

Result

 

Weighted Performance Criteria

2018

 

 

100

%

(2)

 

3 criteria out of 3 met

 

Evolution of Sales - Criteria met (33.3%)

Evolution of Operating Income - Criteria met

(33.3%)

Return on Net Assets (RONA) – Criteria met

(33.3%)

2017

 

 

100

%

(2)

 

3 criteria out of 3 met

 

Evolution of Sales - Criteria met (33.3%)

Evolution of Operating Income - Criteria met

(33.3%)

Return on Net Assets (RONA) – Criteria met

(33.3%)

2016

 

 

45

%

(2)

 

2 criteria out of 4 met

 

Evolution of Sales criteria met (30%)

Evolution of Operating Income criteria not met

(50%)

Days of Sale Outstanding (DSO) met (15%)

Return on Net Assets (RONA) not met (5%)

 

(1)

For 2019, the assessment of the fulfillment of the conditions and performance criteria, will be done by the Compensation Committee of our Supervisory Board in March/April, 2020 in order to determine the actual number of stock awards to be allocated for 2019.

(2)

In accordance with the resolution adopted by our General Meeting of Shareholders, the maximum grant allowed in relation to the CEO stock award for each of 2015, 2016, 2017, 2018 and 2019 was 100,000 unvested stocks awards.

During 2019, our sole member of our Managing Board, President and Chief Executive Officer, Mr. Chery, did not have any stock options, and did not purchase or sell any of our shares.

For further information regarding stock options and other stock based compensation granted to members of our Supervisory Board, the Managing Board and our Senior Management, please refer to Note 17 to our Consolidated Financial Statements.

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Comparative information on the change of remuneration and Company's performance

Set forth in the following table is the annual change over the last three years of (i) the remuneration of the sole member of our Managing Board and President and Chief Executive Officer, (ii) the performance of the Company and (iii) the average remuneration of our employees (i.e., all employees other than the sole member of our Managing Board and President and Chief Executive Officer):

 

 

 

 

2019

 

 

2018

 

 

2017

Managing Board remuneration

 

 

 

 

 

 

 

 

Total remuneration of the sole member of our Managing Board and President and Chief Executive Officer

$

7,794,852(1)

 

$

11,114,344(2)

 

$

3,776,514

Company's performance

 

 

 

 

 

 

 

 

Net revenues (amounts in millions)

$

9,556

 

$

9,664

 

$

8,347

Operating income (amounts in millions)

$

1,203

 

$

1,400

 

$

1,005

Average remuneration of all global indirect employees (FTE basis)(3)

 

 

 

 

 

 

 

 

Employees

$

97,300

 

$

100,600

 

$

93,500

 

 

(1)

Total Managing Board remuneration for 2019 includes one-off contractually obligated deferred compensation paid to Mr. Bozotti.

 

(2)

Total Managing Board remuneration for 2018 includes the accelerated remuneration to Mr. Bozotti.

 

(3)

Global indirect employees are all employees other than those directly manufacturing our products.

Share Ownership

None of the members of our Supervisory Board, Managing Board or Senior Management holds shares or options to acquire shares representing more than 1% of our issued share capital.

Stock Awards and Options

Our stock-based compensation plans are designed to incentivize, attract and retain our executives and key employees by aligning compensation with our performance and the evolution of our share price. We have adopted stock based compensation plans comprising either stock options or unvested stock awards for our Senior Management as well as key employees.  Furthermore, until 2012, the Compensation Committee (on behalf of the Supervisory Board and with its approval) granted stock-based awards (the options to acquire common shares in the share capital of the Company) to the members and professionals of the Supervisory Board.  For a description of our stock option plans and unvested share award plans, please see Note 17 to our Consolidated Financial Statements, which is incorporated herein by reference.

Pursuant to the shareholders’ resolutions adopted by our general meetings of shareholders, our Supervisory Board, upon the proposal of the Managing Board and the recommendation of the Compensation Committee, took the following actions:

 

approved conditions relating to our 2016 unvested stock award allocation under the 2013 Unvested Stock Award Plan, including restriction criteria linked to our performance (for selected employees);

 

approved, for a four-year period, our 2017 Unvested Stock Award Plan for Executives and Key Employees, under which directors, managers and selected employees may be granted stock awards upon the fulfillment of restricted criteria, such as those linked to our performance (for selected employees) and continued service with us; and

 

approved conditions relating to our 2018 unvested stock award allocation under the 2017 Unvested Stock Award Plan, including restriction criteria linked to our performance (for selected employees).

 

approved conditions relating to our 2019 unvested stock award allocation under the 2017 Unvested Stock Award Plan, including restriction criteria linked to our performance (for selected employees).

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The exercise of stock options and the sale or purchase of shares of our stock by the members or professionals of our Supervisory Board, the sole member of our Managing Board and President and Chief Executive Officer, and all our employees are subject to an internal policy which involves, inter alia, certain blackout periods.

Employees

The tables below set forth the breakdown of employees by geographic area and main category of activity for the past three years.

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

France

 

 

10,131

 

 

 

10,314

 

 

 

10,296

 

Italy

 

 

10,551

 

 

 

10,266

 

 

 

10,108

 

Rest of Europe

 

 

970

 

 

 

904

 

 

 

884

 

United States

 

 

761

 

 

 

744

 

 

 

744

 

Mediterranean (Malta, Morocco, Tunisia)

 

 

4,743

 

 

 

4,897

 

 

 

4,616

 

Asia

 

 

18,398

 

 

 

18,828

 

 

 

18,820

 

Total

 

 

45,554

 

 

 

45,953

 

 

 

45,468

 

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Research and Development

 

 

7,796

 

 

 

7,387

 

 

 

7,370

 

Marketing and Sales

 

 

2,261

 

 

 

2,211

 

 

 

2,170

 

Manufacturing

 

 

30,351

 

 

 

31,317

 

 

 

31,016

 

Administration and General Services

 

 

2,290

 

 

 

2,190

 

 

 

2,135

 

Divisional Functions

 

 

2,856

 

 

 

2,848

 

 

 

2,777

 

Total

 

 

45,554

 

 

 

45,953

 

 

 

45,468

 

 

Our future success will partly depend on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel, as well as on our ability to timely adapt the size and/or profile of our personnel to changing industry needs.  Unions are represented at almost all of our manufacturing facilities and at several of our R&D sites.  We use temporarily employees if required during production spikes and, in Europe, during summer vacation.  We have not experienced any significant strikes or work stoppages in recent years.

 

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Item 7.

Major Shareholders

The following table sets forth certain information with respect to the ownership of our issued common shares as of December 31, 2019 based on information available to us:

 

 

 

Common Shares Owned

 

Shareholders

 

Number

 

 

%

 

STMicroelectronics Holding N.V. (“ST Holding”)

 

 

250,704,754

 

 

 

27.5

 

Public

 

 

640,729,735

 

 

 

70.3

 

Treasury shares

 

 

19,752,431

 

 

 

2.2

 

Total

 

 

911,186,920

 

 

 

100.0

 

 

We are not aware of any significant change over the past three years in the percentage ownership of our shares by ST Holding, our major shareholder.  ST Holding does not have any different voting rights from those of our other shareholders.

Shareholders Agreement

According to the report on Schedule 13G (“ST Holding 13G”) jointly filed with the SEC on February 11, 2020 by ST Holding, the Italian Ministry of the Economy and Finance (the “MEF”), Bpifrance Participations S.A., a successor to its former wholly-owned subsidiary FT1CI, (“Bpifrance” and together with the MEF, the “STH Shareholders”) and the Italian Government and the French Government, each indirectly through the MEF and Bpifrance, respectively, hold 14.1% of our share capital as of December 31, 2019.  The ownership percentages of each the MEF and Bpifrance are based on 891,434,489 shares outstanding as of December 31, 2019.  On November 17, 2016, Commissariat à l’Energie Atomique et aux Énergies Alternatives (“CEA”) and Bpifrance, which were, at the time, the shareholders of FT1CI, entered into a share purchase agreement pursuant to which CEA transferred 721,513 shares of FT1CI to Bpifrance. As a result of the transaction, Bpifrance increased its shareholding in FT1CI from 79.2% to 95.1%, with CEA retaining the remaining 4.9% in FT1CI. On November 16, 2018, CEA and Bpifrance entered into a second purchase agreement, pursuant to which CEA transferred 222,265 shares, representing its remaining ownership interest in FT1CI, to Bpifrance. As a result of this transaction, Bpifrance became the sole shareholder of FT1CI. On June 21, 2019, FT1CI merged with and into Bpifrance and ceased to exist. The filers of the ST Holding 13G have entered into a shareholders agreement which governs relations between them, including for certain matters relating to the ownership of our shares and the actions of our management to the extent shareholder approval is required (the “STH Shareholders Agreement”).  Below is a brief summary of certain details from the ST Holding 13G.

Corporate Governance

Managing Board and Supervisory Board members can only be appointed by the General Meeting of Shareholders upon a proposal by the Supervisory Board.  The Supervisory Board passes resolutions, including on such a proposal, by at least three quarters of the votes of the members in office.  The STH Shareholders Agreement, to which STM is not a party, furthermore provides that:  (i) each of the STH Shareholders, Bpifrance, on the one hand, and the MEF, on the other hand, may propose the same number of members for election to the Supervisory Board by our shareholders, and ST Holding shall vote in favor of such members; and (ii) any decision relating to the voting rights of ST Holding shall require the unanimous approval of the STH Shareholders.  ST Holding may therefore be in a position to effectively control actions that require shareholder approval, including, as discussed above, the proposal of six out of nine members for election to our Supervisory Board (three members by each STH Shareholder) and the appointment of our Managing Board, as well as corporate actions, and the issuance of new shares or other securities.  As a result of the STH Shareholders Agreement, the Chairman of our Supervisory Board is proposed by an STH Shareholder for a three-year term, and the Vice-Chairman of our Supervisory Board is proposed by the other STH Shareholder for the same period, and vice-versa for the following three-year term.  The STH Shareholder proposing the appointment of the Chairman may furthermore propose the appointment of the Assistant Secretary of our Supervisory Board, and the STH Shareholder proposing the appointment of Vice-Chairman proposes the appointment of the Secretary of our Supervisory Board.  Finally, each STH Shareholder also proposes the appointment of a Financial Controller to the Supervisory Board.

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Ownership of ST Shares

The STH Shareholders Agreement provides that each STH Shareholder retains the right to cause ST Holding to dispose of its stake in us at its sole discretion pursuant to the issuance of financial instruments, an equity swap, a structured finance deal or a straight sale; however, except in the case of a public offer, no sales by any party to the STH Shareholders Agreement may be made of any of our shares or any shares of Bpifrance or ST Holding to any of our top ten competitors or any company controlling such a competitor.  The STH Shareholders Agreement also requires all of the parties to the STH Shareholders Agreement to hold their stakes in us at all time through the current holding structure of ST Holding, subject to certain limited exceptions, and precludes all such parties and their affiliates from acquiring any of our common shares other than through ST Holding.

Change of Control Provision

The STH Shareholders Agreement provides for tag-along rights, pre-emptive rights, and provisions with respect to a change of control of any of the STH Shareholders or any controlling shareholder of Bpifrance, on the one hand, and the Italian Ministry of the Economy and Finance, on the other hand.  The STH Shareholders may transfer shares of ST Holding and/or Bpifrance, as applicable, to any of their respective affiliates, which could include entities ultimately controlled by the Italian Government or the French Government.

Preference Shares

We have an option agreement with an independent foundation, Stichting Continuiteït ST (the “Stichting”), whereby the Stichting can acquire a maximum of 540,000,000 preference shares in the event of actions which the board of the Stichting determines would be contrary to our interests, our shareholders and our other stakeholders and which in the event of a creeping acquisition or an unsolicited offer for our common shares are not supported by our Managing Board and Supervisory Board. If the Stichting exercises its call option and acquires preference shares, it must pay at least 25% of the par value of such preference shares. The preference shares may remain outstanding for no longer than two years.

No preference shares have been issued to date.  The effect of the preference shares may be to deter potential acquirers from effecting an unsolicited acquisition resulting in a change of control as well as to create a level-playing field in the event actions which are considered hostile by our Managing Board and Supervisory Board, as described above, occur and which the board of the Stichting determines to be contrary to our interests and our shareholders and other stakeholders.  In addition, any issuance of additional capital within the limits of our authorized share capital, as approved by our shareholders, is subject to approval by our Supervisory Board, other than pursuant to an exercise of the call option granted to the Stichting.

Related Party Transactions

See Note 28 to our Consolidated Financial Statements, incorporated herein by reference, for transactions with significant shareholders, their affiliates and other related parties, which also include transactions between us and our equity method investments.

Item 8.

Financial Information

Consolidated Statements and Other Financial Information

Please see “Item 18. Financial Statements” for a list of the financial statements filed with this Form 20-F.

Legal Proceedings

For a description of our material pending legal proceedings, please see Note 26 “Contingencies, Claims and Legal Proceedings” to our Consolidated Financial Statements, which is incorporated herein by reference.

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Dividend Policy

Our dividend policy reads as follows: “STMicroelectronics seeks to use its available cash in order to develop and enhance its position in a competitive semiconductor market while at the same time managing its cash resources to reward its shareholders for their investment and trust in STMicroelectronics.  Based on its results, projected capital requirements as well as business conditions and prospects, the Managing Board proposes on an annual basis to the Supervisory Board, whenever deemed possible and desirable in line with STMicroelectronics’ objectives and financial situation, the distribution of a quarterly cash dividend, if any.  The Supervisory Board, upon the proposal of the Managing Board, decides or proposes on an annual basis, in accordance with this policy, which portion of the profits or distributable reserves shall not be retained in reserves to fund future growth or for other purposes and makes a proposal concerning the amount, if any, of the quarterly cash dividend”.

On May 23, 2019, our shareholders approved a cash dividend of US$0.24 per outstanding share of our common stock, which was distributed in quarterly installments of US$0.06 in each of the second, third and fourth quarters of 2019 and will also be distributed in the first quarter of 2020. Future dividends, if any, and their timing and amounts may be affected by our accumulated profits, our capacity to generate cash flow, our financial situation, the general economic situation and prospects and any other factors that the Supervisory Board, upon the recommendation of our Managing Board, shall deem important. For a history of dividends paid by us to our shareholders in the past three years, see Note 17 to our Consolidated Financial Statements “Shareholders’ Equity – Dividends”.

Item 9.

Listing

Market Information

Our common shares are traded on the NYSE under the symbol “STM” and CUSIP #861012102, are listed on the compartment A (large capitalizations) of Euronext Paris under the ISIN Code NL0000226223 and are traded on the Borsa Italiana.  In 2017, ST issued a $1.5 billion dual-tranche offering of new Convertible Bonds due 2022 and 2024 that trade on the Frankfurt Stock Exchange.

Effective September 18, 2017 our common shares were re-admitted by the independent Conseil Scientifique to the CAC 40, a free float market capitalization weighted index that reflects the performance of the 40 most capitalized and traded shares listed on Euronext Paris, and is the most widely used indicator of the Paris stock market.  Our common shares are included in the FTSE MIB Index, which measures the performance of the 40 most liquid and capitalized shares listed on the Borsa Italiana and seeks to replicate the broad sector weights of the Italian stock market, and the FTSE MIB Dividend Index, the index which represents the cumulative value of ordinary gross dividends paid by the individual constituents of the underlying FTSE MIB Index, expressed in terms of index points.

Of the 891,434,489 common shares outstanding as of December 31, 2019, 62,416,409, or 7.0%, were registered in the common share registry maintained on our behalf in New York and 829,018,080 or 93.0%, of our common shares outstanding were listed on Euroclear France and traded on Euronext Paris and on the Borsa Italiana in Milan.

 

Item 10.

Additional Information

 

A.

Share Capital

Not applicable.

 

B.

Memorandum and Articles of Association

We were incorporated under the laws of The Netherlands by deed of May 21, 1987 and are registered with the trade register (handelsregister) of the Dutch Chamber of Commerce (Kamer van Koophandel) under no. 33194537.  Set forth below is a summary of certain provisions of our Articles of Association and relevant Dutch law.  The summary below does not purport to be complete and is qualified in its entirety by reference to our Articles of Association, most recently amended on June 20, 2017, and relevant Dutch law.

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Object and Purposes (Article 2)

The purpose of our company is to participate in or take, in any manner, any interests in other business enterprises; to manage such enterprises; to carry on business in semiconductors and electronic devices; to take and grant licenses and other industrial property interests; to assume commitments in the name of any enterprises with which we may be associated within a group of companies; and to take any other action, such as but not limited to the granting of securities or the undertaking of obligations on behalf of third parties, which in the broadest sense of the term, may be related or contribute to the aforementioned objects.

Supervisory Board Members

Our Articles of Association do not include any provisions related to a Supervisory Board member’s:

 

power to vote on proposals, arrangements or contracts in which such member is materially interested;

 

power, in the absence of an independent quorum, to vote on compensation to themselves or any members of the Supervisory Board;

 

borrowing powers exercisable by the directors and how such borrowing powers can be varied;

 

mandatory retirement age; or

 

number of owned shares in our company required to qualify as a Supervisory Board member.

Our Supervisory Board Charter and Dutch law, however, explicitly prohibits members of our Supervisory Board from participating in discussions and voting on matters where they have a conflict of interest.  If our entire Supervisory Board has a conflict of interest, our shareholders’ meeting is the competent corporate body to adopt the relevant resolution.  Our Articles of Association provide that our shareholders’ meeting must adopt the compensation of our Supervisory Board members.  Neither our Articles of Association nor our Supervisory Board Charter has a requirement or policy that Supervisory Board members hold a minimum number of our common shares.

We have balanced participation by men and women on our Supervisory Board and currently, our Supervisory Board comprises nine members of which 4 are female and 5 are male.

Distribution of Profits (Articles 37, 38, 39 and 40)

Subject to certain exceptions, dividends may only be paid out of the profits as shown in our adopted annual accounts.  Our profits must first be used to set up and maintain reserves required by Dutch law and our Articles of Association.  Subsequently, if any of our preference shares are issued and outstanding, preference shareholders shall be paid a dividend, which will be a percentage of the paid up part of the par value of their preference shares.  Our Supervisory Board may then, upon proposal of our Managing Board, also establish reserves out of our annual profits.  The portion of our annual profits that remains after the establishment or maintenance of reserves and the payment of a dividend to our preference shareholders is at the disposal of our shareholders’ meeting.  No distribution may be made to our shareholders when the equity after such distribution is or becomes inferior to the fully-paid share capital, increased by the legal reserves.  Our preference shares are cumulative by nature, which means that if in a financial year the dividend or the preference shares cannot be (fully) paid, the deficit must first be paid in the following financial year(s).

Our Supervisory Board independently as well as our shareholders’ meeting, upon the proposal of our Supervisory Board, may each declare distributions out of our share premium reserve and other reserves available for shareholder distributions under Dutch law.  Pursuant to a resolution of our Supervisory Board, distributions adopted by the shareholders’ meeting may be fully or partially made in the form of our new shares to be issued.  Our Supervisory Board may, subject to certain statutory provisions, make one or more interim distributions in respect of any year before the accounts for such year have been adopted at a shareholders’ meeting.  Rights to cash dividends and distributions that have not been collected within five years after the date on which they became due and payable shall revert to us.

For the history of dividends paid by us to our shareholders in the past five years, see Note 17 to our Consolidated Financial Statements.

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Notice Convening the Shareholders’ Meeting (Articles 25, 26, 27, 28 and 29)

Our ordinary shareholders’ meetings are held at least annually, within six months after the close of each financial year, in The Netherlands.  Extraordinary shareholders’ meetings may be held as often as our Supervisory Board deems necessary, and must be held upon the written request of registered shareholders or other persons entitled to attend shareholders’ meetings of at least 10% of the total issued share capital to our Managing Board or our Supervisory Board specifying in detail the business to be dealt with.  Such written requests may not be submitted electronically.

The notice convening the shareholders’ meeting shall be given in such manner as shall be authorized or required by law with due observance of the statutory notice period, which is currently 42 days prior to the meeting.

One or more shareholders or other persons entitled to attend shareholders’ meetings representing at least one-tenth of our issued share capital may, provided that the request was made at least five days prior to the date of convocation of the meeting, request proposals to be included on the agenda.  Furthermore, a request that a proposal be included on the agenda can be made in writing to our Managing Board within sixty days of a meeting by persons who are entitled to attend our shareholders’ meetings who, solely or jointly, represent at least 1% of our issued share capital or a market value of at least €50 million.  The aforementioned requests may not be submitted electronically and must comply with conditions stipulated by our Managing Board, subject to the approval of our Supervisory Board, which shall be posted on our website.  Pursuant to Dutch law a shareholder requesting discussion of an agenda item must disclose to us its entire beneficial interest (long and short position) and we are required to disclose this information on our website.

We are exempt from the proxy solicitation rules under the United States Securities Exchange Act of 1934.  Euroclear France will provide notice of shareholders’ meetings to, and compile voting instructions from, holders of shares held directly or indirectly through Euroclear France.  The Depository Trust Company (“DTC”) will provide notice of shareholders’ meetings to holders of shares held directly or indirectly through DTC and the New York Transfer Agent and Registrar will compile voting instructions.  In order for holders of shares held directly or indirectly through Euroclear France to attend shareholders’ meetings in person, such holders must withdraw their shares from Euroclear France and have such shares registered directly in their name or in the name of their nominee.  In order for holders of shares held directly or indirectly through DTC to attend shareholders’ meetings of shareholders in person, such holders need not withdraw such shares from DTC but must follow rules and procedures established by the New York Transfer Agent and Registrar.

Attendance at Shareholders’ Meetings and Voting Rights (Articles 30, 31, 32, 33 and 34)

Each share is entitled to one vote.

All shareholders and other persons entitled to attend shareholders’ meetings may attend in person or be represented by a person holding a written proxy.  Shareholders and other persons entitled to vote, may do so pursuant to our Articles of Association.  Subject to the approval of our Supervisory Board, our Managing Board may resolve to facilitate the use of electronic means of communication in relation to the participation and voting in shareholders’ meetings.  Dutch law prescribes a fixed registration date of 28 days prior to the shareholders’ meeting, which means that shareholders and other persons entitled to attend shareholders’ meetings are those persons who have such rights at the 28th day prior to the shareholders’ meeting and, as such, are registered in a register designated by our Managing Board, regardless of who is a shareholder or otherwise a person entitled to attend shareholders’ meetings at the time of the meeting if a registration date would not be applicable. In the notice convening the shareholders’ meeting, the time of registration must be mentioned as well as the manner in which shareholders and other persons entitled to attend shareholders’ meetings can register themselves and the manner in which they can exercise their rights.

All matters regarding admittance to the shareholders’ meeting, the exercise of voting rights and the result of voting, as well as any other matters regarding the business of the shareholders’ meeting, shall be decided upon by the chairman of that meeting, in accordance with the requirements of Section 2:13 of the Dutch Civil Code.

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Our Articles of Association allow for separate meetings for holders of common shares and for holders of preference shares.  At a meeting of holders of preference shares at which the entire issued capital of shares of such class is represented, valid resolutions may be adopted even if the requirements in respect of the place of the meeting and the giving of notice have not been observed, provided that such resolutions are adopted by unanimous vote.  Also, valid resolutions of preference shareholder meetings may be adopted outside a meeting if all persons entitled to vote on our preference shares indicate in writing that they vote in favor of the proposed resolution, provided that no depositary receipts for preference shares have been issued with our cooperation.

Authority of our Shareholders’ Meeting (Articles 12, 16, 19, 25, 28, 32 and 41)

Our AGM may decide upon (i) the discharge of the members of our Managing Board for their management during the past financial year and the discharge of the members of our Supervisory Board for their supervision during the past financial year; (ii) the adoption of our statutory annual accounts and the distribution of dividends; (iii) the appointment of the members of our Supervisory Board and our Managing Board; and (iv) any other resolutions listed on the agenda.

Furthermore, our shareholders’ meeting has to approve resolutions of our Managing Board regarding a significant change in the identity or nature of us or our enterprise, including in any event (i) transferring our enterprise or practically our entire enterprise to a third party, (ii) entering into or canceling any long-term cooperation between us or a subsidiary of us and any other legal person or company or as a fully liable general partner of a limited partnership or a general partnership, provided that such cooperation or the cancellation thereof is of essential importance to us, and (iii) us or a subsidiary of us acquiring or disposing of a participating interest in the capital of a company with a value of at least one-third of our total assets according to our Consolidated Balance Sheets and notes thereto in our most recently adopted annual accounts.

Our Articles of Association may only be amended (and our liquidation can only be decided on) if ame