Fourth Quarter Review
Fourth quarter net revenues increased 3.5% sequentially to $1.86 billion, 30 basis points above the midpoint of the Company's guidance. Analog and MEMS Group (AMG) revenues increased 8.2% sequentially driven by MEMS and analog products. Microcontrollers and Digital ICs Group (MDG) revenues increased 3.8% on a sequential basis driven by microcontrollers, memories and digital products. Automotive and Discrete Group (ADG) revenues increased 1.7% on a sequential basis driven by automotive microcontrollers and power discrete products.
On a year-over-year basis, fourth quarter net revenues increased 11.5% on strong growth across most product families. Analog and MEMS Group (AMG) revenues increased 17.8% compared to the year-ago period driven by both strong growth in MEMS and recovery in Analog. Automotive and Discrete Group (ADG) revenues increased 12.5% compared to the year-ago period driven by double-digit growth for both automotive and power discrete products. Microcontrollers and Digital ICs Group (MDG) revenues decreased 0.8% mainly due to lower sales of secure microcontrollers and discontinued businesses.
By region of shipment, Asia Pacific and EMEA grew revenues sequentially 5.5% and 1.4%, respectively, while the Americas was lower by 1.1%. On a year-over-year basis, Asia Pacific and EMEA grew 18.2% and 5.7%, respectively, while the Americas decreased by 2.8%.
Fourth quarter gross profit was $698 million. The gross margin was 37.5%, 50 basis points above the midpoint of the Company's guidance, and included about 20 basis points of unused capacity charges. On a sequential basis, gross margin increased 170 basis points on improved manufacturing efficiencies, lower unused capacity charges and improved product mix partially offset principally by normal price pressure.
Combined R&D and SG&A expenses were $570 million, increasing by $28 million on a sequential basis, mainly due to seasonality and increased level of R&D activity.
Fourth quarter other income and expenses, net, registered income of $25 million compared to $18 million in the prior quarter mainly due to higher R&D funding.
Impairment and restructuring charges in the fourth quarter were $24 million compared to $29 million in the prior quarter, both mostly related to the set-top box restructuring plan announced in January 2016. The Company continued to make progress on its restructuring of the set-top box business. Exiting 2016, the restructuring plan was on track and achieved about $110 million of the total $170 million of targeted annualized savings expected upon completion.
Fourth quarter operating income was $129 million compared to $90 million and $25 million in the prior quarter and year-ago quarter.
Fourth quarter operating income and operating margin before impairment and restructuring charges(1) improved sequentially to $153 million and 8.2% of revenues, respectively, from $119 million and 6.6%, respectively, mainly due to higher revenues and gross profit partially offset by higher operating expenses. On a year-over-year basis, operating income before impairment and restructuring charges improved by $124 million mainly due to higher revenues, improved product mix, manufacturing efficiencies and fab loading.
Fourth quarter net income was $112 million, equivalent to $0.13 per share, compared to net income of $71 million in the prior quarter and net income of $2 million in the year-ago quarter.
Full Year 2016 Review
Net revenues for the full year 2016 increased 1.1% to $6.97 billion from $6.90 billion in 2015. Net revenues, excluding businesses undergoing a phase-out (mobile legacy products, camera modules and set-top box), increased 2.4% with strong growth in specialized image sensors and solid growth in automotive and microcontrollers partially offset by market softness earlier in the year in both analog and power discrete sales for the computer peripheral market, and in MEMS sales for the smartphone market.
Full year 2016 gross margin improved 140 basis points to 35.2% from 33.8% in 2015 mainly benefiting from manufacturing efficiencies, favorable currency effects, net of hedging, lower unused capacity charges and improved product mix partially offset by normal price pressure.
Operating income increased substantially in 2016 to $214 million from $109 million in 2015. Similarly, operating income before impairment and restructuring charges(1) also increased sharply to $307 million, compared to $174 million in 2015 reflecting favorable currency effects, net of hedging, manufacturing efficiencies, improved product mix, and lower operating expenses partially offset mainly by price pressure and lower R&D grants. By product group, in 2016 both ADG and MDG operating performance improved in comparison to 2015 while AMG operating result decreased mainly due to lower sales.
Combined R&D and SG&A expenses decreased 3.2% to $2.25 billion compared to $2.32 billion in 2015 mainly reflecting lower R&D costs due to favorable currency effects, net of hedging, the benefits of the set-top box restructuring plan, and the savings plan completed in 2015.
Other income and expenses, net, registered income of $99 million compared to $164 million in 2015 mainly due to a lower level of R&D grants.
Impairment and restructuring charges were $93 million in 2016 compared to $65 million in 2015 and principally related to the set-top box restructuring plan.
Full Year 2016 net income increased 58% to $165 million, equivalent to $0.19 per share, compared to net income of $104 million, or $0.12 per share for the full year 2015.
(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.
Cash Flow and Balance Sheet Highlights
Net cash from operating activities was $378 million and $1.04 billion for the fourth quarter and full year 2016, respectively. Full Year 2015 net cash from operating activities was $842 million.
Capital expenditure payments, net of proceeds from sales, were $228 million and $607 million during the fourth quarter and full year of 2016, respectively. Full year 2015 capital expenditures were $467 million. Combined capital expenditures for the years 2015-2016 were 7.7% as a percentage of combined net revenues.
Free cash flow(1) was $135 million and $312 million (or $390 million before the NFC and RFID reader assets acquisition of $78 million) during the fourth quarter and full year of 2016, respectively. Full year 2015 free cash flow was $327 million.
Inventory was $1.17 billion at quarter end, down 5.3% from the prior quarter. Inventory in the fourth quarter of 2016 was at 4.0 turns or 90 days compared to 3.7 turns or 97 days in the third quarter.
The Company paid cash dividends to shareholders of $53 million and $251 million for the fourth quarter and full year 2016, respectively.
ST's total financial resources equaled $1.96 billion and total financial debt was $1.45 billion at December 31, 2016. ST's net financial position(1) was $513 million at December 31, 2016 compared to $464 million at October 1, 2016.
Total equity, including non-controlling interest, was $4.60 billion at December 31, 2016.
(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.
First Quarter 2017 Business Outlook
Mr. Bozotti commented, "Based on market forecasts, a positive booking trend, and a strong point-of-sales performance at our distributors, we see the momentum of the second half of 2016 to continue entering 2017.
"Based on these factors, we expect our first quarter to reflect better than normal seasonality, with a sequential net revenues decline of about 2.4% at the midpoint. On a year-over year basis, this would translate into a net revenues growth of about 12.5% at the mid-point. We expect a gross margin of about 37.0% at the midpoint.
