UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
 
Report on Form 6-K dated November 13, 2015
 
Commission File Number:  1-13546
 

 
STMicroelectronics N.V.
(Name of Registrant)
 
WTC Schiphol Airport
Schiphol Boulevard 265
1118 BH Schiphol Airport
The Netherlands
(Address of Principal Executive Offices)
 
 

      
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
 
Form 20-F Q                   Form 40-F £
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
 
Yes £                      No Q
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
 
Yes £                      No Q
 
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
 
Yes £                      No Q
 
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):  82- __________
 
Enclosure:  STMicroelectronics N.V.’s Third Quarter and Nine Months ended September 26, 2015:
 
 
·
Operating and Financial Review and Prospects;
 
 
·
Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flow, and Statements of Equity and related Notes for the three months and nine months ended September 26, 2015; and
 
 
·
Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the Sarbanes-Oxley Act of 2002, submitted to the Commission on a voluntary basis.
 
 


 
 
 
 
 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
Overview
 
The following discussion should be read in conjunction with our Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flows and Statements of Equity for the three months and nine months ended September 26, 2015 and Notes thereto included elsewhere in this Form 6-K, and our annual report on Form 20-F for the year ended December 31, 2014 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on March 3, 2015 (the “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 “Business Overview” and “Liquidity and Capital Resources—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” included in the Form 20-F. We assume no obligation to update the forward-looking statements or such risk factors.
 
Our Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited interim consolidated financial statements (“Consolidated Financial Statements”) and Notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:
 
 
·
Critical Accounting Policies Using Significant Estimates.
 
 
·
Business Overview, a discussion of our business and overall analysis of financial and other relevant highlights of the three months and nine months ended September 26, 2015 designed to provide context for the other sections of the MD&A, including our expectations for selected financial items for the fourth quarter of 2015.
 
 
·
Other Developments in the third quarter of 2015.
 
 
·
Results of Operations, containing a year-over-year and sequential analysis of our financial results for the three months and nine months ended September 26, 2015, as well as segment information.
 
 
·
Legal Proceedings.
 
 
·
Discussion of the impact of changes in exchange rates, interest rates and equity prices on our activity and financial results.
 
 
·
Liquidity and Capital Resources, presenting an analysis of changes in our balance sheets and cash flows, and discussing our financial condition and potential sources of liquidity.
 
 
·
Impact of Recently Issued U.S. Accounting Standards.
 
 
·
Backlog and Customers, discussing the level of backlog and sales to our key customers.
 
 
·
Disclosure Controls and Procedures.
 
 
·
Cautionary Note Regarding Forward-Looking Statements.
 
 
 
2

 
 
STMicroelectronics N.V. (“the Company”) is a global leader in the semiconductor market serving customers across the spectrum of Sense & Power and Automotive products and Embedded Processing Solutions. From energy management and savings to trust and data security, from healthcare and wellness to smart consumer devices, in the home, car and office, at work and at play, ST is found everywhere microelectronics make a positive and innovative contribution to people’s life. By getting more from technology to get more from life, ST stands for life.augmented.
 
Critical Accounting Policies Using Significant Estimates
 
There were no material changes in the first nine months of 2015 to the information provided under the heading “Critical Accounting Policies Using Significant Estimates” included in our annual report on Form 20-F.
 
Fiscal Year
 
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. The first quarter of 2015 ended on March 28, 2015, the second quarter ended on June 27 and the third quarter ended on September 26. The fourth quarter will end on December 31, 2015. 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 2014, 2015 and 2016.
   
      Q1       Q2       Q3       Q4  
   
Days
 
2014
    88       91       91       95  
2015
    87       91       91       96  
2016
    93       91       91       91  
 
Business Overview
 
Our results of operations for each period were as follows:
   
Three Months Ended
   
% Variation
 
   
September 26,
2015
   
June 27,
2015
   
September 27,
2014
   
Sequential
   
Year-Over-Year
 
   
(Unaudited, in millions, except per share amounts)
             
Net revenues
  $ 1,764     $ 1,760     $ 1,886       0.3 %     (6.5 )%
Gross profit
    613       595       646       3.1 %     (5.1 )%
Gross margin as percentage of net revenues
    34.8 %     33.8 %     34.3 %     -       -  
Operating income (loss)
    91       12       37       -       -  
Net income (loss) attributable to parent company
    90       35       72       -       -  
Earnings per share
  $ 0.10     $ 0.04     $ 0.08       -       -  
  
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), DRAMs, optoelectronics devices, Flash Memories and the Wireless Application Specific Products such as Baseband and Application Processor).
 
Based on published industry data by World Semiconductor Trade Statistics (WSTS), semiconductor industry revenues increased in the third quarter of 2015 on a sequential basis by approximately 2% for both the TAM and the SAM, to reach approximately $85 billion and $38 billion, respectively. On a year-over-year basis, both TAM and SAM decreased by approximately 3% and 2%, respectively.
 
Our third quarter 2015 revenues amounted to $1,764 million, a 0.3% sequential increase, within but in the low range of the released guidance for the quarter, mainly due to weaker than expected general market conditions and a manufacturing issue at a subcontractor which affected our sales in AMS. All product lines except AMS and IPD registered a sequential revenues increase, with our Microcontroller Group sales increasing 6.1%, the Automotive Group sales increasing 1.9% and the Digital Product group sales increasing $23 million. By segment, Sense & Power and Automotive Products (SP&A) revenues decreased by approximately 3.6% and Embedded Processing Solutions (EPS) increased by 7.8%.
 
 
3

 
 
On a year-over-year basis, net revenues decreased 6.5%, or 3.8% excluding negative currency effects and ST-Ericsson mobile legacy products that we are phasing out. Both SP&A and EPS revenues declined, by 8.3% and 3.2%, respectively, impacted by weaker market conditions, lower revenues in set-top-box and mobile legacy products and unfavorable currency effects.
 
Compared to the served market, our performance was below the SAM both on a sequential and year-over-year basis.
 
Our effective average exchange rate for the third quarter of 2015 was $1.16 for €1.00 compared to $1.17 for €1.00 in the second quarter of 2015 and $1.34 for €1.00 in the third quarter of 2014. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates” below.
 
Our third quarter 2015 gross margin was 34.8% of revenues, close to the mid-point of our released guidance and improving sequentially by 100 basis points, mostly reflecting higher manufacturing efficiencies, a more favorable product mix and favorable currency effects, net of hedging, partially offset by price pressure, resulting in declines in selling prices. On a year-over-year basis, our third quarter of 2015 gross margin increased by 50 basis points, mainly due to favorable currency effects, net of hedging, improved manufacturing efficiencies and lower unused capacity charges, partially offset by price pressure.
 
Our combined selling, general and administrative (SG&A) and research and development (R&D) costs amounted to $549 million, decreasing by about 8% compared to $599 million in the prior quarter mainly due to seasonality and favorable impact of currency exchange rates, net of hedging. Our operating expenses decreased by about 9% compared to $603 million in the prior-year quarter mainly due to favorable currency effects, net of hedging, and the savings from the EPS restructuring plan, partially offset by a labor cost increase.
 
Other income and expenses, net, amounted to $38 million, which was flat sequentially and increasing from $32 million in the year-ago quarter, mainly due to increased funding and lower start-up and phase-out costs.
 
Impairment, restructuring and other related closure costs for the third quarter of 2015 were $11 million compared to $21 million and $38 million in the prior and year-ago quarters respectively, and related principally to the impairment charges following our yearly impairment test.
 
In the third quarter of 2015, our operating income was $91 million, improving sequentially from $12 million, mainly due to an improved product mix, positive impact of seasonality, favorable currency effects, net of hedging, and improved manufacturing efficiencies, partially balanced by lower volumes and decreasing selling prices. Our operating income increased from the $37 million registered in the year-ago quarter.
 
Free cash flow was a positive $85 million in the third quarter of 2015, compared to a positive $53 million in the prior quarter and a positive $140 million in the year-ago quarter. In first nine months of 2015, we showed significant progress in terms of free cash flow: positive at $179 million and improving by $190 million compared to the first nine months of 2014.
 
While market conditions were mixed entering in the third quarter, we saw progressive deterioration as we moved through the quarter. Lower consumer spending in China is impacting the dynamics of the distribution channel in the region and the industry more globally, particularly in Automotive. As a result we adjusted down our manufacturing plan for the fourth quarter. In the fourth quarter of 2015 we expect revenues to decrease by about 6%  on a sequential basis, plus or minus 3.5 percentage points and gross margin is expected to be about 33.5%, plus or minus 2.0 percentage points. The mid-point of the gross margin outlook incorporates an estimated 2 percentage points from fab under-loading offset, in part, by underlying improvement in our gross margin, including favorable currency effects. With respect to our Digital Product Group, we are making progress in narrowing the options and we have the objective to announce a final decision in early 2016.
 
This outlook is based on an assumed effective currency exchange rate of approximately $1.13= €1.00 for the 2015 fourth quarter and includes the impact of existing hedging contracts. The fourth quarter will close on December 31, 2015.
 
 
4

 
 
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” in our Form 20-F as may be updated from time to time in our SEC filings.
 
Other Developments in the Third Quarter of 2015
 
On July 9, we announced, together with the French Institute of Materials, Microelectronics and Nanosciences in Provence, the official launch of a new joint research laboratory, The Radiation Effects and Electrical Reliability (REER) Joint Laboratory, to develop the next generations of high-reliability, ultra-miniaturized electronic components. The REER Joint Laboratory is a multi-site research establishment that will bring together teams from the IM2NP Institute, based in Marseille and Toulon, and specialist engineers from the ST facility in Crolles, near Grenoble.
 
On August 20, we published our IFRS 2015 Semi Annual Accounts for the six-month period ended June 27, 2015 on our website and filed them with the AFM (Autoriteit Financiële Markten), the Netherlands Authority for the Financial Markets.
 
Results of Operations
 
Segment Information
 
We operate in two business areas: Semiconductors and Subsystems.
 
In the Semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full-custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products, which includes the production and sale of both silicon chips and Smartcards.
 
Our segments are as follows:
 
 
·
Sense & Power and Automotive Products (SP&A), including the following product lines:
 
o
Automotive (APG);
 
o
Industrial & Power Discrete (IPD);
 
o
Analog & MEMS (AMS); and
 
o
Other SP&A;
 
 
·
Embedded Processing Solutions (EPS), comprised of the following product lines:
 
o
Digital Product Group (DPG);
 
o
Microcontrollers, Memory & Secure MCU (MMS); and
 
o
Other EPS.
 
Effective in the first quarter of 2015, the former Digital Convergence Group (DCG) and Imaging, BI-CMOS and Silicon Photonics (IBP) groups, both belonging to EPS, were combined under a single organization, called Digital Product Group (DPG). DPG focuses on three main areas: ASSPs addressing home gateway and set-top box, as well as digital ASICs for consumer applications; mixed process and digital ASICs, including silicon photonics, addressing communication infrastructure; and differentiated imaging products.
 
We believe that the amended 2015 revenues presentation is consistent with that of 2014 and we use these comparatives when managing our company.
 
In the Subsystems business area, we design, develop, manufacture and market subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to our business as a whole, the Subsystems business area does not meet the requirements for a reportable segment as defined in the guidance on disclosures about segments of an enterprise and related information. All the financial values related to Subsystems including net revenues and related costs, are reported in the segment “Others”.
   
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 (“SG&A”) expenses and a part of research and development (“R&D”) expenses. In compliance with our internal policies, certain cost items are not charged to the segments, including impairment, restructuring charges and other related closure costs, phase-out and start-up costs of certain manufacturing facilities, certain one-time corporate items, strategic and special R&D programs or other corporate-sponsored initiatives, including certain corporate-level operating expenses and certain other miscellaneous charges. As of the first quarter of 2015, our internal policy regarding unallocated costs was amended to allocate unused capacity charges to our product lines. Prior periods have been revised accordingly. In addition, depreciation and amortization expense is part of the manufacturing costs allocated to the product segments and is not identified as part of the inventory variation; therefore, it cannot be isolated in the costs of goods sold. Finally, R&D grants are allocated to our product lines proportionally to the incurred R&D expenses on the sponsored projects.
 
Wafer costs are transferred to the product groups’ profit and loss based on actual cost. From time to time, on specific technologies, wafer costs are transferred to product groups based on market price to promote the utilization of the fabs.
 
 
5

 
  
Third Quarter 2015 vs. Second Quarter 2015 and Third Quarter 2014

The following table sets forth certain financial data from our unaudited Consolidated Statements of Income:
   
Three Months Ended (unaudited)
   
September 26, 2015
 
June 27, 2015
 
September 27, 2014
   
$ million
   
% of net revenues
   
$ million
   
% of net revenues
   
$ million
   
% of net revenues
 
Net sales
  $ 1,755       99.5 %   $ 1,754       99.7 %   $ 1,870       99.2 %
Other revenues
    9       0.5       6       0.3       16       0.8  
Net revenues
    1,764       100.0       1,760       100.0       1,886       100.0  
Cost of sales
    (1,151 )     (65.2 )     (1,165 )     (66.2 )     (1,240 )     (65.7 )
Gross profit
    613       34.8       595       33.8       646       34.3  
Selling, general and administrative
    (218 )     (12.4 )     (226 )     (12.9 )     (226 )     (12.0 )
Research and development
    (331 )     (18.8 )     (373 )     (21.2 )     (377 )     (20.0 )
Other income and expenses, net
    38       2.2       37       2.1       32       1.7  
Impairment, restructuring charges and other related closure costs
    (11 )     (0.6 )     (21 )     (1.1 )     (38 )     (2.0 )
Operating income (loss)
    91       5.2       12       0.7       37       1.9  
Interest expense, net
    (5 )     (0.3 )     (6 )     (0.3 )     (7 )     (0.4 )
Income (loss) on equity-method investments
    (1 )     (0.1 )     (1 )     (0.1 )     -       -  
Income (loss) before income taxes and noncontrolling interest
    85       4.8       5       0.3       30       1.6  
Income tax benefit (expense)
    8       0.5       31       1.7       42       2.2  
Net income (loss)
    93       5.3       36       2.0       72       3.8  
Net loss (income) attributable to noncontrolling interest
    (3 )     (0.2 )     (1 )     -       -       -  
Net income (loss) attributable to parent company
  $ 90       5.1 %   $ 35       2.0 %   $ 72       3.8 %
 
Net revenues
 
   
Three Months Ended
 
% Variation
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
   
Sequential
   
Year-Over-Year
 
   
(Unaudited, in millions)
           
Net sales
  $ 1,755     $ 1,754     $ 1,870       0.1 %     (6.2 )%
Other revenues
    9       6       16       54.2       (42.0 )
Net revenues
  $ 1,764     $ 1,760     $ 1,886       0.3 %     (6.5 )%
 
Our third quarter 2015 net revenues increased sequentially by 0.3%, in the low range of the released guidance for the quarter (+2.5% at the mid-point; +/- 350 bps). The sequential increase resulted from an approximate 7% increase in average selling prices, mainly due to an improved product mix, that was almost entirely offset by lower volumes.
 
On a year-over-year basis, our net revenues decreased 6.5% as a result of an approximate 4% decrease in average selling prices and 2% lower volume. The reduction in average selling prices resulted from a purely pricing effect of approximately 7%, partially mitigated by about 3% by a more favorable product mix. All product groups except MMS contributed to the decline. Excluding negative currency effects and mobile legacy products, net revenues decreased 3.8% year-over-year.
 
 
 
6

 
 
Net revenues by product line and product segment
 
   
Three Months Ended
 
% Variation
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
   
Sequential
   
Year-Over-Year
 
   
(Unaudited, in millions)
           
Automotive (APG)
  $ 447     $ 438     $ 464       1.9 %     (3.6 )%
Industrial & Power Discrete (IPD)
    437       448       486       (2.5 )     (10.2 )
Analog & MEMS (AMS)
    233       273       268       (14.4 )     (12.8 )
Sense & Power and Automotive Products (SP&A)
    1,117       1,159       1,218       (3.6 )     (8.3 )
Digital Product Group (DPG)
    230       207       286       10.9       (19.6 )
Microcontrollers, Memory & Secure MCU (MMS)
    412       388       377       6.1       9.1  
Embedded Processing Solutions (EPS)
    642       595       663       7.8       (3.2 )
Others
    5       6       5       7.4       1.8  
Total consolidated net revenues
  $ 1,764     $ 1,760     $ 1,886       0.3 %     (6.5 )%
 
Sense & Power and Automotive Products (SP&A) third quarter net revenues decreased 3.6% sequentially as growth in APG digital products was more than offset by IPD, reflecting market conditions impacting discrete and power transistor products, and AMS, due to a manufacturing issue at a subcontractor which affected sales of microphones. Embedded Processing Solutions (EPS) third quarter net revenues increased 7.8% on a sequential basis driven by general purpose microcontrollers in MMS and imaging proximity sensors in DPG.
 
On a year-over-year basis, SP&A revenues decreased 8.3% mainly due to weaker market conditions, lower revenues in AMS and IPD and unfavorable currency effects specifically impacting APG. Excluding negative currency effects, SP&A revenues decreased year-over-year by 5.3%. EPS net revenues decreased 3.2% year-over-year, mainly due to DPG decreasing 19.6% reflecting the decline in the former ST-Ericsson and set-top box legacy products as well as commodity camera modules, while MMS posted revenue growth of 9.1%. In addition, MMS was impacted by unfavorable currency effects. Excluding negative currency effects and mobile legacy products, EPS segment revenues decreased by 1.1%.
 
In the third quarter of 2015, “Others” includes revenues from the sales of Subsystems ($3 million) and sales of materials and other products not allocated to product segments.
 
Net Revenues by Market Channel (1)
 
   
Three Months Ended
 
   
September 26,
2015
   
June 27,
2015
   
September 27,
2014
 
   
(Unaudited, in %)
 
OEM
    67 %     67 %     68 %
Distribution
    33       33       32  
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 revenues in Distribution as a percentage of total net revenues amounted to 33%, flat sequentially and increasing year-over-year.
 
7

 
  
Net Revenues by Location of Shipment (1)
 
   
Three Months Ended
   
% Variation
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
   
Sequential
   
Year-Over-Year
 
   
(Unaudited, in millions)
             
EMEA
  $ 452     $ 464     $ 503       (2.4 )%     (10.0 )%
Americas
    300       280       297       7.2       1.1  
Greater China-South Asia
    794       786       842       1.0       (5.7 )
Japan & Korea
    218       230       244       (5.3 )     (10.9 )
Total
  $ 1,764     $ 1,760     $ 1,886       0.3 %     (6.5 )%
____________
(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 Greater China-South Asia affiliates are classified as Greater China-South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.
 
Sequentially, Americas and Greater China-South Asia grew revenues by 7.2% and 1.0%, respectively, while Japan & Korea and EMEA registered a drop in revenues of 5.3% and 2.4%, respectively. On a year-over-year basis, all regions except the Americas registered a decrease in revenues.
 
Gross profit
 
   
Three Months Ended
   
Variation
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
   
Sequential
   
Year-Over-Year
 
   
(Unaudited, in millions)
             
Cost of sales
  $ (1,151 )   $ (1,165 )   $ (1,240 )     1.2 %     7.2 %
Gross profit
    613       595       646       3.1 %     (5.1 )%
Gross margin (as percentage of net revenues)
    34.8 %     33.8 %     34.3 %  
+100bps
 
+50bps
  
In the third quarter of 2015, gross margin was 34.8%, close to the mid-point of our outlook range and improving sequentially by approximately 100 basis points, mostly reflecting manufacturing efficiencies, product mix and favorable currency effects, however still significantly impacted by a $25 million loss on matured hedging contracts, and negatively impacted by price pressure. In the third quarter of 2015, unused capacity charges were $6 million, compared to $9 million in the previous quarter, impacting it by about 30 basis points.
 
On a year-over-year basis, our margin improved 50 basis points, mainly driven by positive currency effects, net of hedging, manufacturing efficiencies and lower unused capacity charges, largely offset by price pressure. Unused capacity charges amounted to $14 million in the year-ago quarter.
 
Operating expenses
 
   
Three Months Ended
   
Variation
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
   
Sequential
   
Year-Over-Year
 
   
(Unaudited, in millions)
             
Selling, general and administrative expenses
  $ (218 )   $ (226 )   $ (226 )     3.7 %     3.7 %
Research and development expenses
  $ (331 )   $ (373 )   $ (377 )     11.2 %     12.1 %
As percentage of net revenues
    (31.1 )%     (34.1 )%     (32.0 )%  
+300bps
 
+90bps
 
Third quarter of 2015 operating expenses decreased sequentially by 8.3%, mainly due to seasonality (holiday season), favorable currency effects, net of a $11 million loss on matured hedging contracts, and savings from the EPS restructuring plan.
 
On a year-over-year basis, our operating expenses decreased $54 million, mainly due to favorable currency effects, net of hedging, and the impact of EPS saving initiatives, partially offset by salary and variable incentive increases. As a percentage of revenues, our operating expenses amounted to 31.1%, decreasing both sequentially and year-over-year.
  
Third quarter of 2015 R&D expenses were net of research tax credits, which amounted to $29 million, similar to the previous quarter and compared to $34 million in the year-ago quarter.
    
 
8

 
  
Other income and expenses, net
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Research and development funding
  $ 31     $ 35     $ 27  
Phase-out and start-up costs
    (1 )     (1 )     (7 )
Exchange gain (loss), net
    1       2       2  
Patent costs
    -       -       1  
Gain on sale of businesses and non-current assets
    7       1       11  
Other, net
    -       -       (2 )
Other income and expenses, net
  $ 38     $ 37     $ 32  
As percentage of net revenues
    2.2 %     2.1 %     1.7 %
  
In the third quarter of 2015, we recognized $38 million of other income, net, which was flat sequentially.
 
On a year-over-year basis, we registered an increase mainly due to higher R&D funding and lower start-up and phase-out costs.
 
Impairment, restructuring charges and other related closure costs
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Impairment, restructuring charges and other related closure costs
  $ (11 )   $ (21 )   $ (38 )
  
In the third quarter of 2015, we recorded $11 million of impairment, restructuring charges and other related closure costs, consisting of: (i) $13 million of a non-monetary impairment of intangibles following our yearly impairment test; (ii) $3 million reversal of unused provision for the EPS restructuring plan and (iii) $1 million lease termination costs. See Note 7 Impairment, Restructuring Charges and Other Related Closure Costs.
 
In the second quarter of 2015, we recorded $21 million of restructuring charges, consisting of: (i) $20 million related to the EPS restructuring plan and (ii) $1 million related to the closure of LongGang following the discontinuation of its manufacturing activities, as part of the manufacturing consolidation plan.
 
In the third quarter of 2014, we recorded $38 million of impairment, restructuring charges and other related closure costs, primarily consisting of: (i) $23 million of impairment charges on DPG dedicated intangible assets following our annual impairment test; and (ii) $13 million of restructuring charges related to the EPS restructuring plan.
 
Operating income (loss)
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Operating income (loss)
  $ 91     $ 12     $ 37  
In percentage of net revenues
    5.2 %     0.7 %     1.9 %
 
The third quarter of 2015 registered operating income of $91 million compared to $12 million in the prior quarter and $37 million in the year-ago quarter. Sequentially, the improvement in our operating results was mainly due to higher gross margin and lower operating expenses. Compared to the year-ago period, notwithstanding the lower level of revenues, we increased our operating results mainly due to lower operating and restructuring expenses.
 
 
9

 
 
Operating income (loss) by product segment
 
   
Three Months Ended (unaudited)
 
   
September 26, 2015
 
June 27, 2015
  September 27, 2014
   
$ million
   
% of net revenues
   
$ million
   
% of net revenues
   
$ million
   
% of net revenues
 
Sense & Power and Automotive Products (SP&A)
  $ 102       9.2 %   $ 76       6.6 %   $ 111       9.1 %
Embedded Processing Solutions (EPS)
    -       -       (42 )     (7.0 )     (38 )     (5.8 )
Total operating income (loss) of product segments (2)
    102       9.2       34       2.0       73       3.9  
Others(1) (2)
    (11 )     -       (22 )     -       (36 )     -  
Total consolidated operating income (loss)
  $ 91       5.2 %   $ 12       0.7 %   $ 37       1.9 %
____________
 
(1)
Operating loss of “Others” includes items such as impairment, restructuring charges and other related closure costs, phase-out and start-up costs of certain manufacturing facilities, certain one-time corporate items and other unallocated expenses such as: strategic or special R&D programs, certain corporate-level operating expenses and other costs that are not allocated to the product segments, as well as operating earnings of the Subsystems and Other Products Group.
 
 
(2)
The segment operating results of the prior periods have been restated following our internal policy on unallocated costs being amended as of Q1 2015 to allocate unused capacity charges to our product lines instead of allocating it to “Others”. In 2015, for certain technologies, wafer costs are charged to product groups based on market price.
 
Sequentially, our SP&A segment reported a significant increase in operating income despite lower revenues, mainly due to lower operating expenses due to seasonality, favorable currency effects, net of hedging, and manufacturing efficiencies, partially offset by price pressure. Our EPS segment operating margin improved to break-even from a negative 7% in the previous quarter, driven by product mix, significantly lower operating expenses due to seasonality and favorable currency effects, net of hedging.
 
On a year-over-year basis, SP&A operating margin was flat, with a lower level of expenses, mainly driven by positive currency effects almost offsetting lower revenues and gross profit. Compared to the year ago period, EPS reduced its operating loss by $38 million, mainly due to an improved product mix, positive currency effects, net of hedging, and significantly lower net expenses.
 
Reconciliation to consolidated operating income (loss)
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Total operating income of product segments
  $ 102     $ 34     $ 73  
Impairment, restructuring charges and other related closure costs
    (11 )     (21 )     (38 )
Strategic and other research and development programs
    (1 )     (2 )     (2 )
Phase-out and start-up costs
    (1 )     (1 )     (7 )
Other non-allocated provisions(1)
    2       2       11  
Total operating loss Others
    (11 )     (22 )     (36 )
Total consolidated operating income (loss)
  $ 91     $ 12     $ 37  
____________
(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 expense, net
 
   
Three Months Ended
 
 
 
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Interest expense, net
  $ (5 )   $ (6 )   $ (7 )
 
In the third quarter of 2015, we recorded a net interest expense of $5 million, slightly decreasing both sequentially and on a year-over-year basis. The majority of this amount is due to the non-cash interest expense of the $1,000 million dual-tranche offering of convertible bonds issued on July 3, 2014 (“Senior Bonds”).
 
 
10

 
  
Income (loss) on equity-method investments
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Income (loss) on equity-method investments
  $ (1 )   $ (1 )     -  
 

In each of the third and second quarter of 2015, we recorded a $1 million loss on our equity investment in Incard do Brazil (IdB).
 
Income tax benefit (expense)
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Income tax benefit (expense)
  $ 8     $ 31     $ 42  
 
During the third quarter of 2015, we registered an income tax benefit of $8 million, including an anticipated one-time income tax benefit of $14 million related to the positive settlement of a local tax assessment. Income tax was estimated adopting a discrete effective tax method as opposed to an estimated effective tax rate due to significant uncertainty in estimating the effective tax rate. In addition, our income tax included the estimated impact of provisions related to potential tax positions which have been considered uncertain.
 
Our income tax amounts and rates also depend on our loss carry-forwards and their relevant valuation allowances, which are based on estimated projected plans and available tax planning strategies. In the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges.
 
Net loss (income) attributable to noncontrolling interest
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Net loss (income) attributable to noncontrolling interest
  $ (3 )   $ (1 )     -  
   
We recorded income of $3 million in the third quarter of 2015 and of $1 million in the prior quarter, representing the result attributable to noncontrolling interest mainly related to our joint venture in Shenzhen, China for assembly operating activities.
 
Net income (loss) attributable to parent company
 
   
Three Months Ended
 
   
September 26, 2015
   
June 27, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Net income (loss) attributable to parent company
  $ 90     $ 35     $ 72  
As percentage of net revenues
    5.1 %     2.0 %     3.8 %
  
For the third quarter of 2015, we reported net income attributable to parent company of $90 million compared to $35 million income in the prior quarter and a $72 million income in the year-ago quarter.
 
Earnings per share for the third quarter of 2015 was $0.10 compared to $0.04 in the prior quarter and $0.08 in the year-ago quarter.
 
In the third quarter of 2015, the impact per share after tax of impairment, restructuring charges and one-time charges, a non U.S. GAAP measure, was estimated to be approximately $(0.02) per share, compared to approximately $(0.02) per share in the prior quarter and approximately $(0.05) per share in the year-ago quarter.
 
 
11

 
  
First Nine Months of 2015 vs. First Nine Months of 2014
 
The following table sets forth consolidated statements of operations data for the periods indicated:
 
   
Nine Months Ended
(Unaudited)
   
Nine Months Ended
(Unaudited)
 
   
September 26, 2015
   
September 27, 2014
 
   
$ million
   
% of net revenues
   
$ million
   
% of net revenues
 
Net sales
  $ 5,202       99.5 %   $ 5,529       99.2 %
Other revenues
    27       0.5       46       0.8  
Net revenues
    5,229       100.0       5,575       100  
Cost of sales
    (3,455 )     (66.1 )     (3,696 )     (66.3 )
Gross profit
    1,774       33.9       1,879       33.7  
Selling, general and administrative
    (666 )     (12.7 )     (691 )     (12.4 )
Research and development
    (1,073 )     (20.5 )     (1,144 )     (20.5 )
Other income and expenses, net
    110       2.1       157       2.8  
Impairment, restructuring charges and other related closure costs
    (61 )     (1.2 )     (71 )     (1.3 )
Operating income (loss)
    84       1.6       130       2.3  
Interest expense, net
    (16 )     (0.3 )     (11 )     (0.2 )
Income (loss) on equity-method investments
    1       -       (60 )     (1.1 )
Gain on financial instruments, net
    -       -       1       0.0  
Income (loss) before income taxes and noncontrolling interest
    69       1.3       60       1.1  
Income tax benefit (expense)
    38       0.8       26       0.5  
Net income
    107       2.1       86       1.5  
Net loss (income) attributable to noncontrolling interest
    (5 )     (0.1 )     (1 )     -  
Net income attributable to parent company
  $ 102       2.0 %   $ 85       1.5 %
 
Net revenues
 
   
Nine Months Ended
       
   
September 26, 2015
   
September 27, 2014
   
% Variation
 
   
(Unaudited, in millions)
       
Net sales
  $ 5,202     $ 5,529       (5.9 )%
Other revenues
    27       46       (40.7 )
Net revenues
  $ 5,229     $ 5,575       (6.2 )%

Our first nine months 2015 net revenues decreased compared to the year-ago period by about 6% as a result of an approximate 12% decline in average selling prices, partially offset by an approximate 6% increase in volume. MMS grew revenues 4.9% while all other product groups experienced a decrease. Excluding negative currency effects and mobile legacy products, net revenues decreased by approximately 2.6%.
 
Net revenues by product line and product segment
 
   
Nine Months Ended
       
   
September 26, 2015
   
September 27, 2014
   
% Variation
 
   
(Unaudited, in millions)
       
Automotive (APG)
  $ 1,319     $ 1,371       (3.8 )%
Industrial & Power Discrete (IPD)
    1,315       1,404       (6.3 )
Analog & MEMS (AMS)
    761       835       (8.9 )
Sense & Power and Automotive Products (SP&A)
    3,395       3,610       (6.0 )
Digital Products Group (DPG)
    645       827       (22.1 )
Microcontrollers, Memory & Secure MCU (MMS)
    1,173       1,119       4.9  
Other EPS
    -       1       -  
Embedded Processing Solutions (EPS)
    1,818       1,947       (6.6 )
Others
    16       18       (7.9 )
Total consolidated net revenues
  $ 5,229     $ 5,575       (6.2 )%
 
By product segment, our revenues were down by approximately 7% for EPS due to a decrease in DPG of approximately 22%, mainly in mobile and set-top-box legacy products and commodity camera modules, partially offset by increased revenues of MMS. SP&A registered a decrease of approximately 6%, mainly driven by IPD and AMS.
 
 
12

 
 
 
Net Revenues by Market Channel (1)
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in %)
 
OEM
    68 %     69 %
Distribution
    32       31  
Total
    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, in the first nine months of 2015, Distribution reached 32% share of total revenues compared to approximately 31% in the first nine months of 2014.
 
Net Revenues by Location of Shipment (1)
 
   
Nine Months Ended
       
   
September 26, 2015
   
September 27, 2014
   
% Variation
 
   
(Unaudited, in millions)
       
EMEA
  $ 1,367     $ 1,479       (7.6 )%
Americas
    847       851       (0.5 )
Greater China-South Asia
    2,353       2,465       (4.5 )
Japan & Korea
    662       780       (15.2 )
Total
  $ 5,229     $ 5,575       (6.2 )%
____________
(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 Greater China-South Asia affiliates are classified as Greater China-South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.
 
By location of shipment, revenues declined in all regions, with the largest declines in the Japan & Korea region, mainly due to the phasing out of mobile legacy products, and in EMEA, principally driven by the currency impact.
 
Gross profit
 
   
Nine Months Ended
       
 
 
September 26, 2015
   
September 27, 2014
   
% Variation
 
   
(Unaudited, in millions)
       
Cost of sales
  $ (3,455 )   $ (3,696 )     6.5 %
Gross profit
    1,774       1,879       (5.6 )
Gross margin (as percentage of net revenues)
    33.9 %     33.7 %  
+20bps
 
Gross margin was 33.9% for the first nine months of 2015, increasing by 20 basis points compared to the year-ago period due to favorable currency effects, however still significantly impacted by a $93 million loss on our matured hedging contracts, and improved manufacturing efficiencies, partially offset by decreasing selling prices, a less favorable product mix and higher unused capacity charges. Unused capacity charges amounted to $34 million in the first nine months of 2015 compared to $24 million in the year-ago period.
 
 
13

 
 
Operating expenses
 
   
Nine Months Ended
       
   
September 26, 2015
   
September 27, 2014
   
% Variation
 
   
(Unaudited, in millions)
       
Selling, general and administrative expenses
  $ (666 )   $ (691 )     3.6 %
Research and development expenses
    (1,073 )     (1,144 )     6.2  
As percentage of net revenues
    (33.3 )%     (32.9 )%  
-40bps
 
Our operating expenses decreased mainly driven by the favorable impact of exchange rates, net of a $57 million loss on our matured hedging contracts, and the EPS saving initiatives, partially offset by salary and variable incentive increases and one-time R&D expenses.
 
Total R&D expenses were net of research tax credits, which amounted to $85 million in the first nine months of 2015 and $103 million in the year-ago period.
 
Other income and expenses, net
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Research and development funding
  $ 102     $ 178  
Phase-out and start-up costs
    (3 )     (13 )
Exchange gain (loss), net
    -       3  
Patent costs
    -       (28 )
Gain on sale of businesses and non current assets
    8       25  
Other, net
    3       (8 )
Other income and expenses, net
  $ 110     $ 157  
As percentage of net revenues
    2.1 %     2.8 %
 
In the first nine months of 2015, we recognized other income, net, of $110 million, decreasing compared to $157 million in the first nine months of 2014. The decrease is mainly due to $97 million catch-up of grants related to prior periods registered in the first nine months of 2014.
 
Impairment, restructuring charges and other related closure costs
 
   
Nine Months Ended
 
 
 
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Impairment, restructuring charges and other related closure costs
  $ (61 )   $ (71 )
   
In the first nine months of 2015, we recorded $61 million of impairment, restructuring charges and other related closure costs, primarily consisting of: (i) $35 million of restructuring charges related to the EPS restructuring plan; (ii) $13 million of a non-monetary impairment of intangibles following our yearly impairment test and (iii) $11 million of restructuring charges related to the manufacturing consolidation plan. See Note 7 Impairment, Restructuring Charges and Other Related Closure Costs.
 
In the first nine months of 2014, we recorded $71 million of impairment, restructuring charges and other related closure costs, primarily consisting of: (i) $23 million of impairment charges on the DPG dedicated intangible assets following our annual impairment test; (ii) $24 million of restructuring charges related to our net opex 600 plan (iii) $13 million of restructuring charges related to the EPS restructuring plan; and (iv) $10 million of restructuring charges related to the manufacturing consolidation plan.
  
 
14

 
  
Operating income (loss)
 
   
Nine Months Ended
 
 
 
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Operating income (loss)
  $ 84     $ 130  
As percentage of net revenues
    1.6 %     2.3 %

Our operating results deteriorated compared to the first nine months of 2014 mainly due to the grants catch-up from previous periods of $97 million recognized in 2014. Excluding the impact of this catch-up, our operating results improved by $51 million.
 
Operating income (loss) by product segment
     
   
Nine Months Ended (unaudited)
 
 
September 26, 2015
   
September 27, 2014
 
   
$ million
   
% of net revenues
   
$ million
   
% of net revenues
 
Sense & Power and Automotive Products (SP&A)
  $ 250       7.4 %   $ 337       9.3 %
Embedded Processing Solutions (EPS)
    (106 )     (5.8 )     (110 )     (5.6 )
Total operating income (loss) of product segments(1)
    144       2.8       227       4.1  
Others(1) (2)
    (60 )     -       (97 )     -  
Total consolidated operating income (loss)
  $ 84       1.6 %   $ 130       2.3 %
____________
 
(1)
The segment operating results of the prior periods have been restated following our internal policy on unallocated costs being amended as of Q1 2015 to allocate unused capacity charges to our product lines instead of allocating it to “Others”.
 
(2)
Operating loss of “Others” includes items such as impairment, restructuring charges and other related closure costs, phase-out and start-up costs of certain manufacturing facilities, certain one-time corporate items and other unallocated expenses such as:  strategic or special R&D programs, certain corporate-level operating expenses and other costs that are not allocated to the product segments, as well as operating earnings of the Subsystems and Other Products Group.
 
SP&A operating margin decreased to 7.4% in the first nine months of 2015 from 8.9%, excluding the grants catch-up in the first nine months of 2014, mainly reflecting a lower level of revenues and unfavorable product mix partially offset by favorable currency effects, net of hedging. EPS operating margin in the first nine months of 2015 was a negative 5.8% compared to a negative 9.8%, excluding the grants catch-up in the first nine months of 2014, mainly reflecting an improved product mix, favorable currency effects, net of hedging, and lower net operating expenses.
 
Reconciliation to consolidated operating income (loss)
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Total operating income (loss) of product segments
  $ 144     $ 227  
Impairment, restructuring charges and other related closure costs
    (61 )     (71 )
Strategic and other research and development programs
    (4 )     (5 )
Phase-out and start-up costs
    (3 )     (13 )
Other non-allocated provisions(1) 
    8       (8 )
Total operating loss Others
    (60 )     (97 )
Total consolidated operating income (loss)
  $ 84     $ 130  
____________
(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.
 
 
 
15

 
  
Interest expense, net
 
   
Nine Months Ended
 
 
 
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Interest expense, net
  $ (16 )   $ (11 )

In the first nine months of 2015, net interest expense on our borrowings was $16 million, composed of $29 million interest expense, including $18 million (mainly non-cash) related to the Senior Bonds issued on July 3, 2014, partially offset by $13 million interest income. In the first nine months of 2014, interest expense on our borrowings was $19 million, of which $5 million of non-cash interest expense related to our Senior Bonds, partially offset by an $8 million interest income.
 
Income (loss) on equity-method investments
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Income (loss) on equity-method investments
  $ 1     $ (60 )

In the first nine months of 2015, we recorded income of $1 million due to the sale of our participation in 3Sun to Enel Green Power, which was realized on more favorable conditions than originally expected, partially offset by a loss in Incard do Brazil (IdB). In the first nine months 2014, we recorded a charge of $60 million, out of which $9 million related to our share in ST-Ericsson JVS as a loss pick-up and $51 million related to 3Sun, including impairment and other charges associated with our decision to exit the joint venture.
 
Income tax benefit (expense)
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Income tax benefit (expense)
  $ 38     $ 26  

During the first nine months of 2015, we registered an income tax benefit of $38 million, adopting a discrete effective tax method as opposed to an estimated effective tax rate due to significant uncertainty in estimating the effective tax rate. Income tax benefit includes one-time income of $46 million related to a local tax settlement. Our income tax also included the estimated impact of provisions related to potential tax positions which have been considered uncertain.
 
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 also depend on our loss carry-forwards and their relevant valuation allowances, which are based on estimated projected plans and available tax planning 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 estimated tax rate could be different in future quarters and may increase in the coming years.
 
Net loss (income) attributable to noncontrolling interest
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Net loss (income) attributable to noncontrolling interest
  $ (5 )   $ (1 )

In the first nine months of 2015, we recorded $5 million in income attributable to noncontrolling interest, mainly related to our joint venture in Shenzhen, China for assembly operating activities. In the first nine months of 2014, the income attributable to noncontrolling interest was $1 million.
  
 
16

 
  
Net income attributable to parent company
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Net income attributable to parent company
  $ 102     $ 85  
As percentage of net revenues
    2.0 %     1.5 %

For the first nine months of 2015, we reported net income of $102 million, representing earnings per share of $0.12, compared to income of $85 million in the year-ago period, representing earnings per share of $0.10.
 
Legal Proceedings
 
For a discussion of legal proceedings, see Note 24 Contingencies, Claims and Legal Proceedings to our Consolidated Financial Statements.
 
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.
 
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 (primarily our products sold in Europe) 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, in the short-term, our level of revenues when reported in U.S. dollars. Revenues for all other products, which are either quoted in U.S. dollars and billed in U.S. dollars or in local currencies for payment, tend not to be affected significantly by fluctuations in exchange rates, except to the extent that there is a lag between the changes in currency rates and the adjustments in the local currency equivalent of the price paid for such products. 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 dollar weakens or to decrease when the U.S. dollar strengthens.
 
In summary, as our reporting currency is the U.S. dollar, exchange rate fluctuations affect our results of operations: in particular, if the U.S. dollar weakens, our results are negatively impacted since we receive a part of our revenues, and more importantly, we incur a significant part of our costs, in currencies other than the U.S. dollar. On the other hand, our results are favorably impacted when the dollar strengthens. The impact on our accounts could therefore be material, in the case of a material variation of the U.S. dollar exchange rate.
 
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 goods sold, 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 three different types of hedging contracts, consisting of forward contracts, collars and options.
 
Our Consolidated Statements of Income for the nine months ended September 26, 2015 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 exchange rate was $1.16 for €1.00 in the third quarter of 2015 compared to $1.17 for €1.00 in the second quarter of 2015 and $1.34 for €1.00 in the third quarter of 2014. 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 and under certain currency market circumstances. As of September 26, 2015, the outstanding hedged amounts were €779 million to cover manufacturing costs and €477 million to cover operating expenses, both at an average exchange rate of about $1.16 for €1.00 (considering the collars at upper strike), maturing over the period from September 29, 2015 to November 30, 2016. As of September 26, 2015, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory resulted in a deferred loss of approximately $15 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the Consolidated Statements of Equity, compared to a deferred loss of approximately $73 million before tax at December 31, 2014.
 
 
 
17

 
 
We also hedge certain manufacturing costs denominated in Singapore dollars (SGD). As of September 26, 2015, the outstanding hedged amounts were SGD 131 million at an average exchange rate of about SGD 1.36 to $1.00 maturing over the period from September 29, 2015 to June 9, 2016. As of September 26, 2015, 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 $3 million before tax at December 31, 2014.
 
Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a portion of our exposure in the next four quarters and a declining percentage of our exposure in each quarter thereafter. In the third quarter of 2015, as a result of our cash flow hedging, we recorded a net loss of $36 million, consisting of a loss of about $9 million to R&D expenses, a loss of about $2 million to SG&A and a loss of about $25 million to costs of goods sold, while in the third quarter of 2014, we recorded a net profit of $2 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 11. “Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F, which may be updated from time to time in our public filings. 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 nil net result recorded in “Other income and expenses, net” in our Consolidated Statements of Income for the third quarter of 2015.
 
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 September 26, 2015, 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” in our Form 20-F, which may be updated from time to time in our public filings.
 
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 $1,000 million dual-tranche offering of convertible bonds issued on July 3, 2014 (“Senior 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, since we invest primarily on a short-term basis; any increase or decrease in the market interest rates would mean an equivalent 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 September 26, 2015, our total financial resources, including cash and cash equivalents and marketable securities, generated an average interest income rate of 0.72%. At the same date, the average interest rate on our outstanding debt was 1.91%, while the average rate of the cash interests on our total debt at redemption value was 0.70%.
 
Impact of Changes in Equity Prices
 
As of September 26, 2015, we did not hold any significant equity participations, which could be subject to a material impact in changes in equity prices. However, we hold equity participations whose carrying value could be reduced due to further losses or impairment charges of our equity-method investments. See Note 18 to our Consolidated Financial Statements.
 
18

 
Liquidity and Capital Resources
 
Treasury activities are regulated by our policies, which define procedures, objectives and controls. The 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 11. “Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F, which may be updated from time to time in our public filings.
 
Cash flow
 
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 the first nine months of 2015, our net cash decreased by $148 million, due to the net cash used in financing and investing activities exceeding the net cash from operating activities.
 
The components of our cash flow for the comparable periods are set forth below:
 
   
Nine Months Ended
 
   
September 26, 2015
   
September 27, 2014
 
   
(Unaudited, in millions)
 
Net cash from operating activities
  $ 597     $ 404  
Net cash used in investing activities
    (418 )     (681 )
Net cash from (used in) financing activities
    (317 )     579  
Effect of changes in exchange rates
    (10 )     (8 )
Net cash increase (decrease)
  $ (148 )   $ 294  

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 for the first nine months of 2015 was $597 million, increasing compared to $404 million in the prior year period. Net cash from operating activities for the first nine months of 2015 compared to the year-ago period benefited from the more favorable changes in net working capital.
 
Net cash used in investing activities. Investing activities used $418 million of cash in the first nine months of 2015, due to payments for the purchase of tangible and intangible assets and the payment for disposal of equity investment. The decrease in net cash used in investing activities compared to the $681 million in prior-year period was primarily due to the absence of payment for purchase of marketable securities. Payments for purchase of tangible assets, net of proceeds, totaled $378 million, slightly decreasing compared to the prior year period.
 
Net cash used in financing activities. Net cash used in financing activities was $317 million for the first nine months of 2015 and consisted of a $59 million repayment of long-term debt and $258 million of dividends paid to stockholders. For the nine months of 2014, net cash from financing activities was $579 million, primarily attributable to the Senior Bonds issuance.
 
19

 
 
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, 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 and proceeds received in the sale of businesses. 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 as follows from our Consolidated Statements of Cash Flows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26, 2015
   
September 26, 2015
   
September 27, 2014
 
   
(In millions)
   
(In millions)
 
Net cash from operating activities
  $ 225     $ 597     $ 404  
Net cash used in investing activities
    (120 )     (418 )     (681 )
Excluding:
                       
Proceeds from sale of marketable securities, change in short term deposits, restricted cash, net and net variation for JV deconsolidation
    (20 )     -       266  
Payment for purchase and proceeds from sale of tangible and intangible assets (1)
    (140 )     (418 )     (415 )
Free Cash Flow (non U.S. GAAP measure)
  $ 85     $ 179     $ (11 )
_____________
(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, Payment for disposal of equity investment, Proceeds from sale of financial assets, Proceeds received in sale of businesses.
 
Free Cash Flow for the third quarter of 2015 included, as expected, the collection of a significant portion of R&D Grants in France ($66 million), mainly related to Nano2017, as well as $12 million related to the sale of non-strategic assets. Free Cash Flow was positive $179 million for the first nine months of 2015, compared to negative $11 million for the first nine months of 2014.
 
Net Financial Position (non U.S. GAAP measure).
 
Our Net Financial Position represents the balance between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents, marketable securities, short-term deposits and restricted cash, and our total financial debt includes bank overdrafts, short-term debt 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 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. Our Net Financial Position for each period has been determined as follows from our Consolidated Balance Sheets:
        
   
As at
 
 
 
September 26, 2015
   
December 31, 2014(1)
   
September 27, 2014(1)
 
   
(Unaudited, in millions)
 
Cash and cash equivalents
  $ 1,869     $ 2,017     $ 2,130  
Marketable securities
    338       334       330  
Total financial resources
    2,207       2,351       2,460  
Short-term debt
    (191 )     (202 )     (223 )
Long term debt
    (1,557 )     (1,599 )     (1,739 )
Total financial debt
    (1,748 )     (1,801 )     (1,962 )
Net Financial Position
  $ 459     $ 550     $ 498  
_____________
(1) 
The September 27, 2014 and December 31, 2014 net financial positions were restated following the early adoption of ASU 2015-03, consisting in a balance sheet reclassification of debt issuance costs (now reported as deduction of issued debt and not as non-current assets).
 
 
20

 
Our Net Financial Position as of September 26, 2015 was a net cash position of $459 million, decreasing compared to the net financial position of $550 million at December 31, 2014.
 
Total financial resources amounted to $2,207 million as at September 26, 2015 and were composed of: (i) $1,869 million of cash and cash equivalents as a result of our cash flow evolution as presented above and (ii) $338 million of marketable securities.
 
Financial debt was $1,748 million as at September 26, 2015, composed of (i) $191 million of current portion of long-term debt and (ii) $1,557 million long-term debt. The breakdown of our total financial debt included: (i) $835 million in European Investment Bank loans (the “EIB Loans”), (ii) $899 million in the Senior Bonds, (iii) $13 million in loans from other funding programs and other long-term loans, and (iv) $1 million of capital leases.
 
The EIB Loans are comprised of four long-term amortizing credit facilities as part of our R&D funding programs. The first for R&D in France was drawn in U.S. dollars from 2006 to 2008 for a total amount of $341 million, of which $19 million remained outstanding as of September 26, 2015. The second for R&D projects in Italy, was drawn in U.S. dollars in 2008 for a total amount of $380 million, of which $80 million remained outstanding as of September 26, 2015. The third, 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 the equivalent of $324 million remained outstanding as of September 26, 2015. The fourth, signed in the first quarter of 2013, is a €350 million multicurrency loan which also supports our R&D programs. It was drawn in U.S. dollars for an amount of $471 million, of which $412 million is outstanding as of September 26, 2015. At September 26, 2015, the amounts available under our back-up and uncommitted credit facilities were unutilized.
 
The Senior Bonds were issued on July 3, 2014, for a principal amount of $1,000 million (Tranche A for $600 million and Tranche B for $400 million), due 2019 and 2021, respectively, for net proceeds of approximately $994 million. Tranche A bonds were issued as zero-coupon bonds while Tranche B bonds bear a 1% per annum nominal interest, payable semi-annually. The conversion price at issuance was approximately $12 on each tranche. The Senior Bonds are convertible by the bondholders if certain conditions are satisfied on a net-share settlement basis, except if an alternative settlement is elected by us. We can also redeem the Senior Bonds prior to their maturity in certain circumstances. Upon initial recognition, the proceeds were allocated between debt and equity by determining the fair value of the liability component using an income approach. The liability component will accrete to par value until maturity based on the effective interest rate (Tranche A: 2.40% and Tranche B: 3.22%, including 1% p.a. nominal interest). In the computation of diluted EPS, the Senior Bonds will be dilutive only for the portion of net-share settlement underlying the conversion premium when the conversion option is in the money.

Our long-term debt contains standard conditions, but does not impose minimum financial ratios.
 
Our current rating with rating agencies are as follow: Moody’s: “Baa3” with negative outlook; S&P: “BBB-” with stable outlook; Fitch (on an unsolicited basis): “BBB-” with stable outlook.
 
As of September 26, 2015, debt payments at redemption value by period were as follows:
   
Payments Due by Period
 
   
Total
   
2015
   
2016
   
2017
   
2018
   
2019
   
Thereafter
 
   
(Unaudited, in millions)
 
Long-term debt (including current portion)
  $ 1,850       141       191       116       115       714       573  
    
 
21

 
Financial Outlook: Capital Investment
 
Our policy is to modulate our capital spending according to the evolution of the semiconductor market. Based on current macro and semiconductor demand softness, we now anticipate our capital expenditure to be down to approximately $500 million in 2015, from our original estimate of $600 million. The most important of our 2015 capital expenditure projects are expected to be: (a) for our front end facilities: (i) in our 300 mm fab in Crolles, R&D and technology evolution to support the production ramp up of new technologies; (ii) mix evolution, and a few selective programs capacity growth, mainly in the area of analog processes; (iii) qualification and ramp-up of technologies in 200 mm in Singapore and Catania; and (iv) quality, safety, maintenance, and productivity and cost savings investments in both 150 mm and 200 mm front end fabs; (b) for our back end facilities, capital expenditures will mainly be dedicated to: (i) capacity growth on certain package families, to sustain market demand and secure service to strategic customers; (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; and (c) an overall capacity adjustment in final testing and wafers probing (EWS) to meet increased demand and changed product mix.

We will continue to monitor our level of capital spending by 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.
 
In support of our R&D activities, we signed the Nano2017 program with the French government, which was approved by the European Union in the second quarter of 2014 and, in our role as Coordinator and Project Leader of Nano2017, we have been allocated an overall funding budget of about €400 million for the period 2013-2017, subject to the conclusion of agreements every year with the public authorities and linked to the achievement of technical parameters and objectives. The Nano2017 contract contains certain covenants which, in the event they are not fulfilled, may affect our ability to access such funding.
 
As a result of our exit from the ST-Ericsson joint venture, our exposure is limited to covering 50% of ST-Ericsson’s needs to complete the wind-down, which are estimated to be negligible, based on our current visibility of the ST-Ericsson liquidation balance.
 
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.
 
Contractual Obligations, Commercial Commitments and Contingencies
 
Our contractual obligations, commercial commitments and contingencies are mainly comprised of: operating leases for land, buildings, plants and equipment; purchase commitments for equipment, outsourced foundry wafers and for software licenses; long-term debt obligations; pension obligations and other long-term liabilities.
 
Off-Balance Sheet Arrangements
 
We had no material off-balance sheet arrangements at September 26, 2015.
 
 
22

 
 
Impact of Recently Issued U.S. Accounting Standards
 
See Note 5 Recent Accounting Announcements to our Consolidated Financial Statements.
 
Backlog and Customers
 
During the third quarter of 2015, our booking plus net frame orders decreased compared to the second quarter of 2015, mainly impacted by a progressive deterioration of market conditions and unfavorable seasonality. We entered the fourth quarter of 2015 with a lower backlog than the level we had when entering in the third quarter of 2015. Backlog (including frame orders) is subject to possible cancellation, push back and lower ratio of frame orders being translated into firm orders and, thus, it is not necessarily indicative of the amount of billings or growth to be registered in subsequent periods.
 
Both in the third quarter and in the first nine months of 2015, no customer accounted for more than 10% of our total net revenues. There is no guarantee that any customer will continue to generate revenues for us at the same levels as in prior periods. If we were to lose one or more of our key customers, or if they were to significantly reduce their bookings, not confirm planned delivery dates on frame orders in a significant manner or fail to meet their payment obligations, our operating results and financial condition could be adversely affected.
 
Disclosure Controls and Procedures
 
Evaluation
 
Our management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this periodic report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis.
 
The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and their effect on the information generated for use in this periodic report. In the course of the controls evaluation, we reviewed identified data errors, control problems or acts of fraud and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed at least on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 6-K and Form 20-F. The components of our Disclosure Controls are also evaluated on an ongoing basis by our Internal Audit Department, which reports directly to our Audit Committee. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.
 
Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this periodic report, our Disclosure Controls were effective.
 
Changes in Internal Control over Financial Reporting
 
There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Limitations on Effectiveness of Controls
 
No system of internal control over financial reporting, including one determined to be effective, may prevent or detect all misstatements. It can provide only reasonable assurance regarding financial statement preparation and presentation. Also, projections of the results of any evaluation of the effectiveness of internal control over financial reporting into future periods are subject to inherent risk that the relevant controls may become inadequate due to changes in circumstances or that the degree of compliance with the underlying policies or procedures may deteriorate.
 
Other Reviews
We have sent this report to our Audit Committee, which had an opportunity to raise questions with our management and independent auditors before we submitted it to the Securities and Exchange Commission.
   
 
23

 
Cautionary Note Regarding Forward-Looking Statements
 
Some of the statements contained in this Form 6-K that are not historical facts, particularly in “Business Overview” and in “Liquidity and Capital Resources—Financial Outlook: Capital Investment”, 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:
 
 
·
uncertain macro-economic and industry trends;
 
 
·
customer demand and acceptance for the products which we design, manufacture and sell;
 
 
·
unanticipated events or circumstances, which may either impact our ability to execute the planned reductions in our net operating expenses and / or meet the objectives of our R&D programs, which benefit from public funding;
 
 
·
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;
 
 
·
the functionalities and performance of our IT systems, 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;
 
 
·
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 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;
 
 
·
the ability to successfully restructure underperforming business lines and associated restructuring charges and cost savings that differ in amount or timing from our estimates;
 
 
·
changes in our overall tax position as a result of changes in tax laws, 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;
 
 
·
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 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, health risks and epidemics in locations where we, our customers or our suppliers operate;
     
 
·
changes in economic, social, 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 conflict, social unrest, labor actions or terrorist activities; and
 
 
·
availability and costs of raw materials, utilities, third-party manufacturing services, or other supplies required by our operations.
 
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” in our Form 20-F. 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 our 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 6-K 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 SEC filings, could have a material adverse effect on our business and/or financial condition.
 
 

 
 
 
 
 
 
24

 
  
STMICROELECTRONICS N.V.
 
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
 
Pages
Consolidated Statements of Income for the Three and Nine Months Ended September 26, 2015 and September 27, 2014 (unaudited)
F-1
Consolidated Statements of Comprehensive Income for Three and Nine Months Ended September 26, 2015 and September 27, 2014 (unaudited)
F-3
Consolidated Balance Sheets as of September 26, 2015 (unaudited) and December 31, 2014 (audited)
F-5
Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2015 and September 27, 2014 (unaudited)
F-6
Consolidated Statements of Equity (unaudited)
F-7
Notes to Interim Consolidated Financial Statements (unaudited)
F-8
   
 
 
 
 
 
 
 
 
 
 
 
 
 
25

 
  
STMicroelectronics N.V.
           
CONSOLIDATED STATEMENTS OF INCOME
             
   
Three months ended
   
(Unaudited)
   
September 26,
 
September 27,
In million of U.S. dollars except per share amounts
 
2015
 
2014
             
Net sales
    1,755       1,870  
Other revenues
    9       16  
Net revenues
    1,764       1,886  
Cost of sales
    (1,151 )     (1,240 )
Gross profit
    613       646  
Selling, general and administrative
    (218 )     (226 )
Research and development
    (331 )     (377 )
Other income and expenses, net
    38       32  
Impairment, restructuring charges and other related closure costs
    (11 )     (38 )
Operating income
    91       37  
Interest expense, net
    (5 )     (7 )
Loss on equity-method investments
    (1 )     -  
Income before income taxes and noncontrolling interest
    85       30  
Income tax benefit
    8       42  
Net income
    93       72  
Net loss (income) attributable to noncontrolling interest
    (3 )     -  
Net income attributable to parent company
    90       72  
                 
Earnings per share (Basic) attributable to parent company stockholders
    0.10       0.08  
Earnings per share (Diluted) attributable to parent company stockholders
    0.10       0.08  
                 
                 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
 
 
 
 
F-1

 
 
STMicroelectronics N.V.
           
CONSOLIDATED STATEMENTS OF INCOME
             
   
Nine months ended
   
(Unaudited)
   
September 26,
 
September 27,
In million of U.S. dollars except per share amounts
 
2015
 
2014
             
Net sales
    5,202       5,529  
Other revenues
    27       46  
Net revenues
    5,229       5,575  
Cost of sales
    (3,455 )     (3,696 )
Gross profit
    1,774       1,879  
Selling, general and administrative
    (666 )     (691 )
Research and development
    (1,073 )     (1,144 )
Other income and expenses, net
    110       157  
Impairment, restructuring charges and other related closure costs
    (61 )     (71 )
Operating income
    84       130  
Interest expense, net
    (16 )     (11 )
Income (loss) on equity-method investments
    1       (60 )
Gain on financial instruments, net
    -       1  
Income before income taxes and noncontrolling interest
    69       60  
Income tax benefit
    38       26  
Net income
    107       86  
Net loss (income) attributable to noncontrolling interest
    (5 )     (1 )
Net income attributable to parent company
    102       85  
                 
Earnings per share (Basic) attributable to parent company stockholders
    0.12       0.10  
Earnings per share (Diluted) attributable to parent company stockholders
    0.12       0.10  
                 
                 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
 
 
 
 
F-2

 
   
STMicroelectronics N.V.
           
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
             
   
Three months ended
   
(Unaudited)
   
September 26,
 
September 27,
In million of U.S. dollars
 
2015
 
2014
             
             
Net income
    93       72  
Other comprehensive income (loss), net of tax :
               
  Currency translation adjustments arising during the period
    (10 )     (145 )
    Foreign currency translation adjustments
    (10 )     (145 )
  Unrealized gains (losses) arising during the period
    4       (2 )
    Unrealized gains (losses) on securities
    4       (2 )
  Unrealized gains (losses) arising during the period
    (10 )     (48 )
  Less : reclassification adjustment for (income) losses included in net income
    36       (2 )
    Unrealized gains (losses) on derivatives
    26       (50 )
  Net gains (losses) arising during the period
    1       -  
    Defined benefit pension plans
    1       -  
Other comprehensive income (loss), net of tax
    21       (197 )
Comprehensive income (loss)
    114       (125 )
  Less : comprehensive income (loss) attributable to noncontrolling interest
    3       -  
Comprehensive income (loss) attributable to the company's stockholders
    111       (125 )
                 
                 
                 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements
         
 
 
 
F-3

 
   
STMicroelectronics N.V.
           
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
             
  Nine months ended
  (Unaudited)
  September 26, September 27,
In million of U.S. dollars
2015 2014
             
             
Net income
    107       86  
Other comprehensive income (loss), net of tax :
               
  Currency translation adjustments arising during the period
    (159 )     (181 )
  Less: reclassification adjustment for gains on disposal of equity investment
    (10 )     -  
    Foreign currency translation adjustments
    (169 )     (181 )
  Unrealized gains (losses) arising during the period
    3       (2 )
    Unrealized gains (losses) on securities
    3       (2 )
  Unrealized gains (losses) arising during the period
    (93 )     (56 )
  Less : reclassification adjustment for (income) losses included in net income
    150       (23 )
    Unrealized gains (losses) on derivatives
    57       (79 )
  Net gains (losses) arising during the period
    4       1  
    Defined benefit pension plans
    4       1  
Other comprehensive income (loss), net of tax
    (105 )     (261 )
Comprehensive income (loss)
    2       (175 )
  Less : comprehensive income (loss) attributable to noncontrolling interest
    5       1  
Comprehensive income (loss) attributable to the company's stockholders
    (3 )     (176 )