(b) Net revenues of "Others" includes revenues from sales of Subsystems, assembly services, and other revenue.
Fourth Quarter Review
Fourth quarter net revenues increased 15.5% sequentially, a better than seasonal performance, and 200 basis points above the high-end of the Company's guidance range mainly due to higher than expected revenues in Imaging products and Microcontrollers. On a sequential basis, Analog, MEMS and Sensors Group (AMS) revenues increased 37.4% led by the Imaging Product Division which registered, as expected, triple-digit sequential growth. Automotive and Discrete Group (ADG) revenues were up 5.9% and Microcontrollers and Digital ICs Group (MDG) revenues increased 5.6%.
On a year-over-year basis, fourth quarter net revenues increased by 32.6% on double-digit growth across all product groups with strong traction of new products. Analog, MEMS and Sensors Group (AMS) fourth quarter revenues grew 70.1% year-over-year due to triple-digit growth in Imaging, a sharp recovery in Analog and solid growth in MEMS. Microcontrollers and Digital ICs Group (MDG) fourth quarter revenues grew 21.4% year-over-year on very strong growth for general purpose microcontrollers, in part offset by lower sales of businesses undergoing phase-out. Automotive and Discrete Group (ADG) fourth quarter revenues increased 14.6% compared to the year-ago quarter on strong results for both Automotive and Power Discrete.
By region of shipment, revenues grew on a sequential basis across all regions. Specifically, Asia Pacific revenues grew by 24.5%, EMEA increased by 2.2% and the Americas was up by 0.4%. On a year-over-year basis, Asia Pacific revenues were up by 43.1%, EMEA increased by 21.5% and the Americas grew by 8.0%.
Fourth quarter gross profit was $1.00 billion and gross margin was 40.6%. On a sequential basis, gross margin increased 110 basis points due to improved product mix and increased manufacturing efficiency, partially offset mainly by normal price pressure and negative currency effects, net of hedging. Gross margin increased 310 basis points year-over-year largely driven by improved manufacturing efficiency and better product mix partially offset mainly by normal price pressure as well as negative currency effects, net of hedging.
Combined R&D and SG&A expenses were $592 million compared to $558 million and $570 million in the prior and year-ago quarter, respectively, increasing mainly due to seasonality and inflationary dynamics.
Fourth quarter other income and expenses, net, registered income of $18 million compared to $5 million in the prior quarter due to higher than anticipated R&D funding.
Impairment and restructuring charges in the fourth quarter were $20 million compared to $14 million and $24 million in the prior and year-ago quarter, respectively, mainly related to the set-top box restructuring plan announced in January 2016.
Operating income in the fourth quarter rose sharply on a sequential and year-over-year basis to $408 million compared to $278 million and $129 million in the prior quarter and year-ago quarter, respectively. By product group, MDG operating margin increased to 19.6% from 17.9% in the prior quarter. ADG operating margin improved to 12.3% compared to 10.9% in the prior quarter. AMS operating margin expanded to 20.9% from 13.2% in the prior quarter, benefiting from an improved product mix, as well as leveraging higher revenues and improved manufacturing performance.
Fourth quarter operating income before impairment and restructuring charges(1) increased sequentially by $136 million to $428 million, equivalent to 17.3% of net revenues, driven by a higher level of revenues and improved gross margin and resulted in a return on invested capital of 35.7%. On a year-over-year basis, operating income before impairment and restructuring charges(1) increased by $275 million reflecting higher revenues, manufacturing efficiencies and improved product mix.
In the fourth quarter of 2017, the Company recorded a one-time, non-cash charge of $46 million as a result of the recently enacted Tax Cuts and Jobs Act (TCJA) in the United States. This charge results from the revaluation of the Company's deferred tax assets as of December 31, 2017.
Fourth quarter net income increased significantly both on a sequential and year-over-year basis to $308 million, or $0.34 diluted earnings per share, compared to net income of $236 million, or $0.26 diluted earnings per share, in the prior quarter and net income of $112 million, or $0.13 diluted earnings per share, in the year-ago quarter.
(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.
Full Year 2017 Review
Net revenues for the full year 2017 increased 19.7% to $8.35 billion from $6.97 billion in 2016. By product group, full year 2017 Analog, MEMS and Sensors Group (AMS) revenues were up 41.4%, on triple-digit growth in Imaging and strong growth in both Analog and MEMS. Microcontrollers and Digital ICs Group (MDG) revenues increased 15.8% compared to 2016 on strong growth in general purpose microcontrollers partially offset by lower revenues for products undergoing phase-out. Automotive and Discrete Group (ADG) revenues increased 8.8% for the full year of 2017 compared to the full year of 2016 on growth in both Automotive and Discrete.
Full year 2017 gross profit was $3.27 billion. Gross margin improved by 400 basis points to 39.2% from 35.2% in full year 2016. Specifically, the 2017 gross margin benefited from manufacturing efficiencies, better product mix, and improved fab loading partially offset by normal price pressure.
Combined R&D and SG&A expenses increased 1.7% to $2.29 billion in 2017 compared to $2.25 billion in 2016.
Other income and expenses, net, registered income of $55 million in 2017 compared to $99 million in 2016 mainly due to a lower level of R&D grants.
In 2017, impairment and restructuring charges were $45 million compared to $93 million in 2016, mostly related to the set-top box restructuring plan.
Operating income in 2017 improved by $779 million to $993 million compared to 2016.
Full year 2017 operating income and operating margin before impairment and restructuring charges(1) increased sharply to $1.04 billion, equivalent to 12.4% of net revenues, compared to $307 million, equivalent to 4.4% of net revenues in 2016, on higher revenues, gross margin expansion and strong operating leverage.
Income tax expense in 2017 was $143 million, including the one-time impact related to tax reform in the United States, reflecting an effective tax rate of 15.0%.
Full year 2017 net income was $802 million, or $0.89 fully diluted earnings per share, compared to net income of $165 million, or $0.19 fully diluted earnings per share for the full year 2016.
(1)Non-U.S. GAAP measure. See Appendix for additional information and reconciliation to U.S. GAAP.
Cash Flow and Balance Sheet Highlights
Reflecting the strong growth in revenues and improvement in operating profitability, net cash from operating activities was $587 million and $1.71 billion for the fourth quarter and full year 2017, respectively. Full Year 2016 net cash from operating activities was $1.04 billion.
Capital expenditure payments, net of proceeds from sales, were $407 million and $1.30 billion during the fourth quarter and full year of 2017, respectively. Full year 2016 capital expenditures, net of proceeds from sales, were $607 million.
Free cash flow(1) was $145 million and $338 million during the fourth quarter and full year of 2017, respectively, favorably impacted by improved operating results and higher than expected revenues in the fourth quarter. Full year 2016 free cash flow was $316 million.
