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 May 19, 2009
Commission
File Number: 1-13546
STMicroelectronics
N.V.
(Name of
Registrant)
39,
Chemin du Champ-des-Filles
1228
Plan-les-Ouates, Geneva, Switzerland
(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 First Quarter 2009:
· Operating
and Financial Review and Prospects;
· Unaudited
Interim Consolidated Statements of Income, Balance Sheets, Statements of Cash
Flow, and Statements of Changes in Equity and related Notes for the three months
ended March 28, 2009; 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, Balance Sheets, Statements of Cash Flow and
Statements of Changes in Equity for the three months ended March 28, 2009 and
Notes thereto included elsewhere in this Form 6-K and in our annual report on
Form 20-F for the year ended December 31, 2008 as filed with the U.S. Securities
and Exchange Commission (the “Commission” or the “SEC”) on May 13, 2009 (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 “Critical Accounting
Policies Using Significant Estimates”, “Business Outlook” and “Liquidity and
Capital Resources—Financial Outlook”. 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.
Critical
Accounting Policies Using Significant Estimates
The
preparation of our Consolidated Financial Statements, in accordance with
generally accepted accounting principles in the United States (“U.S. GAAP”),
requires us to make estimates and assumptions that have a significant impact on
the results we report in our Consolidated Financial Statements, which we discuss
under the section “Results of Operations.” Some of our accounting policies
require us to make difficult and subjective judgments that can affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during the
reporting period. The primary areas that require significant estimates and
judgments by management include, but are not limited to: sales returns and
allowances; inventory reserves and normal manufacturing capacity thresholds to
determine costs capitalized in inventory; litigation and claims; valuation at
fair value of acquired assets including intangibles and their estimated
amortization periods and assumed liabilities in a business combination;
goodwill, investments and tangible assets as well as the impairment of their
related carrying values; the assessment in each reporting period of events,
which could trigger interim impairment testing; measurement of the fair value of
securities classified as available-for-sale, including debt securities, for
which no observable market price is obtainable; the valuation of equity
investments under the equity method; the assessment of other-than-temporary
impairment charges on financial assets; the valuation of noncontrolling
interests, particularly in case of contribution in kind as part of a business
combination; restructuring charges; assumptions used in calculating pension
obligations and share-based compensation including assessment of the number of
awards expected to vest upon the satisfaction of certain conditions of future
performance; measurement of hedge effectiveness of derivative instruments;
deferred income tax assets including the required valuation allowance and
liabilities as well as provisions for specifically identified income tax
exposures and income tax uncertainties; and the determination of the estimated
amount of taxes to be paid for the full year, including forecasted results of
ordinary taxable income by jurisdiction. We base our estimates and assumptions
on historical experience and on various other factors such as market trends,
market comparables, business plans and levels of materiality that we believe to
be reasonable under the circumstances, the results of which form our basis for
making judgments about the carrying values of assets and liabilities. While we
regularly evaluate our estimates and assumptions, our actual results may differ
materially and adversely from our estimates. To the extent there are material
differences between the actual results and these estimates, our future results
of operations could be significantly affected.
We
believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our Consolidated
Financial Statements:
· Revenue recognition. Our
policy is to recognize revenues from sales of products to our customers when all
of the following conditions have been met: (a) persuasive evidence of an
arrangement exists; (b)
delivery
has occurred; (c) the selling price is fixed or determinable; and (d)
collectibility is reasonably assured. This usually occurs at the time of
shipment.
Consistent
with standard business practice in the semiconductor industry, price protection
is granted to distributor customers on their existing inventory of our products
to compensate them for declines in market prices. The ultimate decision to
authorize a distributor refund remains fully within our control. We accrue a
provision for price protection based on a rolling historical price trend
computed on a monthly basis as a percentage of gross distributor sales. This
historical price trend represents differences in recent months between the
invoiced price and the final price to the distributor, adjusted if required, to
accommodate for a significant move in the current market price. The short
outstanding inventory time period, our ability to foresee changes in standard
inventory product pricing (as opposed to pricing for certain customized
products) and our lengthy distributor pricing history have enabled us to
reliably estimate price protection provisions at period-end. We record the
accrued amounts as a deduction of revenue at the time of the sale. If market
conditions differ from our assumptions, this could have an impact on future
periods. In particular, if market conditions were to deteriorate, net revenues
could be reduced due to higher product returns and price reductions at the time
these adjustments occur.
Our
customers occasionally return our products for technical reasons. Our standard
terms and conditions of sale provide that if we determine that our products are
non-conforming, we will repair or replace them, or issue a credit or rebate of
the purchase price. In certain cases, when the products we have supplied have
been proven to be defective, we have agreed to compensate our customers for
claimed damages in order to maintain and enhance our business relationship.
Quality returns are not related to any technological obsolescence issues and are
identified shortly after sale in customer quality control testing. Quality
returns are always associated with end-user customers, not with distribution
channels. We provide for such returns when they are considered likely and can be
reasonably estimated. We record the accrued amounts as a reduction of
revenue.
Our
insurance policies relating to product liability only cover physical and other
direct damages caused by defective products. We carry only limited insurance
against immaterial, non-consequential damages in the event of a product recall.
We record a provision for warranty costs as a charge against cost of sales based
on historical trends of warranty costs incurred as a percentage of sales which
we have determined to be a reasonable estimate of the probable losses to be
incurred for warranty claims in a period. Any potential warranty claims are
subject to our determination that we are at fault and liable for damages, and
that such claims usually must be submitted within a short period following the
date of sale. This warranty is given in lieu of all other warranties, conditions
or terms expressed or implied by statute or common law. Our contractual terms
and conditions typically limit our liability to the sales value of the products
that gave rise to the claim.
We
maintain an allowance for doubtful accounts for estimated potential losses
resulting from our customers’ inability to make required payments. We base our
estimates on historical collection trends and record a provision accordingly.
Furthermore, we are required to evaluate our customers’ credit ratings from time
to time and take an additional provision for any specific account that we
consider doubtful. In the first quarter of 2009, we did not record any new
material specific provision related to bankrupt customers other than our
standard provision of 1% of total receivables based on estimated historical
collection trends. If we receive information that the financial condition of our
customers has deteriorated, resulting in an impairment of their ability to make
payments, additional allowances could be required. Such deterioration is
increasingly likely given the current crisis in the credit markets. Under the
current financial situation, we are obliged to hold shipment to certain of our
customers on credit watch, which affects our sales and aims at protecting us
from credit risk.
While the
majority of our sales agreements contain standard terms and conditions, we may,
from time to time, enter into agreements that contain multiple elements or
non-standard terms and conditions, which require revenue recognition judgments.
Where multiple elements exist in an agreement, the revenue arrangement is
allocated to the different elements based upon verifiable objective evidence of
the fair value of the elements, as governed under Emerging Issues Task Force
(“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF
00-21”).
· Goodwill and purchased intangible
assets. The purchase method of accounting for acquisitions requires
extensive use of estimates and judgments to allocate the purchase price to the
fair value of the net tangible and intangible assets acquired, including IP
R&D, which is expensed immediately. Goodwill and intangible assets deemed to
have indefinite lives are not amortized but are instead subject to annual
impairment tests. The amounts and useful lives assigned to other intangible
assets impact future amortization. If the assumptions and estimates used to
allocate the purchase price are not correct or if business conditions change,
purchase price adjustments or future asset impairment charges could be required.
At March 28, 2009, the value of goodwill amounted to $1,121 million. Of such
amount, $173 million was recognized during the first quarter of 2009 at the
creation of ST-Ericsson following the purchase price allocation.
· Impairment of goodwill.
Goodwill recognized in business combinations is not amortized and is instead
subject to an impairment test to be performed on an annual basis, or more
frequently if indicators of impairment exist, in order to assess the
recoverability of its carrying value. Goodwill subject to potential impairment
is tested at a reporting unit level, which represents a component of an
operating segment for which discrete financial information is available and is
subject to regular review by segment management. This impairment test determines
whether the fair value of each reporting unit for which goodwill is allocated is
lower than the total carrying amount of relevant net assets allocated to such
reporting unit, including its allocated goodwill. If lower, the implied fair
value of the reporting unit goodwill is then compared to the carrying value of
the goodwill and an impairment charge is recognized for any excess. In
determining the fair value of a reporting unit, we usually estimate the expected
discounted future cash flows associated with the reporting unit. Significant
management judgments and estimates are used in forecasting the future discounted
cash flows including: the applicable industry’s sales volume forecast and
selling price evolution; the reporting unit’s market penetration; the market
acceptance of certain new technologies and relevant cost structure; the discount
rates applied using a weighted average cost of capital; and the perpetuity rates
used in calculating cash flow terminal values. Our evaluations are based on
financial plans updated with the latest available projections of the
semiconductor market evolution, our sales expectations and our costs evaluation,
and are consistent with the plans and estimates that we use to manage our
business. It is possible, however, that the plans and estimates used may be
incorrect, and future adverse changes in market conditions or operating results
of acquired businesses that are not in line with our estimates may require
impairment of certain goodwill. As our market capitalization declined to a level
below our book value, we performed analyses during the fourth quarter of 2008
and the first quarter of 2009 using the most current long term financial plan
available. We recorded specific impairment charges related to the carrying value
of certain marketable securities and equity investments during the period, as
well as $6 million on goodwill. However, many of the factors used in assessing
fair values for such assets are outside of our control and the estimates used in
such analyses are subject to change. Due to the ongoing uncertainty of the
current market conditions, which may continue to negatively impact our market
value, we will continue to monitor the carrying value of our assets. If market
and economic conditions deteriorate further, this could result in future
non-cash impairment charges against income. Further impairment charges could
also result from new valuations triggered by changes in our product portfolio or
strategic transactions, including ST-Ericsson, and possible further impairment
charges relating to our investment in Numonyx, particularly in the event of a
downward shift in expected revenues or operating cash flow in relation to our
current plans.
· Intangible assets subject to
amortization. Intangible assets subject to amortization include the cost
of technologies and licenses purchased from third parties, as well as, as a
result of the purchase method of accounting for acquisitions, purchased software
and internally developed software that is capitalized. In addition, intangible
assets subject to amortization include intangible assets acquired through
business combinations such as core technologies and customer relationships.
Intangible assets subject to amortization are reflected net of any impairment
losses and are amortized over their estimated useful life. The carrying value of
intangible assets subject to amortization is evaluated whenever changes in
circumstances indicate that the carrying amount may not be recoverable. In
determining recoverability, we initially assess whether the carrying value
exceeds the undiscounted cash flows associated with the intangible assets. If
exceeded, we then evaluate whether an impairment charge is required by
determining if the asset’s carrying value also exceeds its fair value. An
impairment loss is recognized for the excess of the
carrying
amount over the fair value. We normally estimate the fair value based on the
projected discounted future cash flows associated with the intangible assets.
Significant management judgments and estimates are required to forecast the
future operating results used in the discounted cash flow method of valuation,
including: the applicable industry’s sales volume forecast and selling price
evolution; our market penetration; the market acceptance of certain new
technologies; and the relevant cost structure. Our evaluations are based on
financial plans updated with the latest available projections of growth in the
semiconductor market and our sales expectations. They are consistent with the
plans and estimates that we use to manage our business. It is possible, however,
that the plans and estimates used may be incorrect and that future adverse
changes in market conditions or operating results of businesses acquired may not
be in line with our estimates and may therefore require us to recognize
impairment of certain intangible assets. We did not record any charges related
to the impairment of intangible assets subject to amortization in 2008. At March
28, 2009, the value of intangible assets subject to amortization amounted to
$894 million, of which $46 million was related to the ST-Ericsson joint venture
consolidated in the first quarter of 2009 and $570 million was related to the
ex-NXP wireless business acquired in August 2008.
· Property, plant and equipment.
Our business requires substantial investments in technologically advanced
manufacturing facilities, which may become significantly underutilized or
obsolete as a result of rapid changes in demand and ongoing technological
evolution. We estimate the useful life for the majority of our manufacturing
equipment, the largest component of our long-lived assets, to be six years,
except for our 300-mm manufacturing equipment, whose useful life was estimated
to be ten years. This estimate is based on our experience using the equipment
over time. Depreciation expense is a major element of our manufacturing cost
structure. We begin to depreciate new equipment when it is placed into
service.
We
perform an impairment review when there is reason to suspect that the carrying
value of tangible assets or groups of assets might not be recoverable. Factors
we consider important which could trigger such a review include: significant
negative industry trends; significant underutilization of the assets or
available evidence of obsolescence of an asset; strategic management decisions
impacting production or an indication that an asset’s economic performance is,
or will be, worse than expected; and a more likely than not expectation that
assets will be sold or disposed of prior to their estimated useful life. In
determining the recoverability of assets to be held and used, we initially
assess whether the carrying value exceeds the undiscounted cash flows associated
with the tangible assets or group of assets. If exceeded, we then evaluate
whether an impairment charge is required by determining if the asset’s carrying
value also exceeds its fair value. We normally estimate this fair value based on
independent market appraisals or the sum of discounted future cash flows, using
market assumptions such as the utilization of our fabrication facilities and the
ability to upgrade such facilities, change in the selling price and the adoption
of new technologies. We also evaluate the continued validity of an asset’s
useful life when impairment indicators are identified. Assets classified as held
for sale are reflected at the lower of their carrying amount and fair value less
selling costs and are not depreciated during the selling period. Selling costs
include incremental direct costs to transact the sale that we would not have
incurred except for the decision to sell.
Our
evaluations are based on financial plans updated with the latest projections of
growth in the semiconductor market and our sales expectations, from which we
derive the future production needs and loading of our manufacturing facilities,
and which are consistent with the plans and estimates that we use to manage our
business. These plans are highly variable due to the high volatility of the
semiconductor business and therefore are subject to continuous modifications. If
future growth differs from the estimates used in our plans, in terms of both
market growth and production allocation to our manufacturing plants, this could
require a further review of the carrying amount of our tangible assets and
result in a potential impairment loss. At March 28, 2009, $7 million of
impairment charges were recorded on long-lived assets of our manufacturing sites
in Carrollton, Texas and in Phoenix, Arizona.
· Inventory. Inventory is
stated at the lower of cost and net realizable value. Cost is based on the
weighted average cost by adjusting the standard cost to approximate actual
manufacturing costs on a quarterly basis; therefore, the cost is dependent upon
our manufacturing performance. In the case of underutilization of our
manufacturing facilities, we estimate the costs associated with the excess
capacity. These costs are not included in the valuation of inventories but are
charged directly to the cost of sales. Net realizable value is the estimated
selling price in the ordinary course of business, less applicable variable
selling
expenses and cost of completion. As required, we evaluate inventory acquired as
part of purchase accounting at fair value, less completion and distribution
costs and related margin.
The
valuation of inventory requires us to estimate obsolete or excess inventory as
well as inventory that is not of saleable quality. Provisions for obsolescence
are estimated for excess uncommitted inventories based on the previous quarter’s
sales, order backlog and production plans. To the extent that future negative
market conditions generate order backlog cancellations and declining sales, or
if future conditions are less favorable than the projected revenue assumptions,
we could be required to record additional inventory provisions, which would have
a negative impact on our gross margin.
· Business combination. The
purchase method of accounting for business combinations requires extensive use
of estimates and judgments to allocate the purchase price to the fair value of
the net tangible and intangible assets acquired. The amounts and useful lives
assigned to other intangible assets impact future amortization. If the
assumptions and estimates used to allocate the purchase price are not correct or
if business conditions change, purchase price adjustments or future asset
impairment charges could be required. On February 3, 2009, we announced the
closing of our agreement to merge ST-NXP Wireless into a 50/50 joint venture
with Ericsson Mobile Platforms (“EMP”). Ericsson contributed $1,145 million to
the joint venture, out of which $700 million was paid to us. We also received
$99 million as an equity investment in ST-Ericsson AT Holding AG (“JVD”), in
which we own 50% less a controlling share held by Ericsson. Our contribution to
the joint venture represented a total amount of $2,210 million, of which $1,105
million was allocated to noncontrolling interests in the wireless business. The
purchase price allocation resulted in the recognition of $48 million in customer
relationships, $8 million in property, plant and equipment, $62 million
liabilities net of other current assets, $173 million on goodwill and $306
million on Ericsson’s noncontrolling interest in the joint
venture.
· Restructuring charges. We
have undertaken, and we may continue to undertake, significant restructuring
initiatives, which have required us, or may require us in the future, to develop
formalized plans for exiting any of our existing activities. We recognize the
fair value of a liability for costs associated with exiting an activity when a
probable liability exists and it can be reasonably estimated. We record
estimated charges for non-voluntary termination benefit arrangements such as
severance and outplacement costs meeting the criteria for a liability as
described above. Given the significance and timing of the execution of such
activities, the process is complex and involves periodic reviews of estimates
made at the time the original decisions were taken. This process can require
more than one year due to requisite governmental and customer approvals and our
capability to transfer technology and know-how to other locations. As we operate
in a highly cyclical industry, we monitor and evaluate business conditions on a
regular basis. If broader or newer initiatives, which could include production
curtailment or closure of other manufacturing facilities, were to be taken, we
may be required to incur additional charges as well as change estimates of the
amounts previously recorded. The potential impact of these changes could be
material and could have a material adverse effect on our results of operations
or financial condition. In the first quarter of 2009, the net amount of
restructuring charges and other related closure costs amounted to $56 million
before taxes, mainly including $43 million to our 2007 restructuring plan, $6
million as impairment of goodwill and $7 million to our other restructuring
initiatives.
· Share-based compensation. We
are required to expense our employees’ share-based compensation awards for
financial reporting purposes. We measure our share-based compensation cost based
on its fair value on the grant date of each award. This cost is recognized over
the period during which an employee is required to provide service in exchange
for the award or the requisite service period, usually the vesting period, and
is adjusted for actual forfeitures that occur before vesting. Our share-based
compensation plans may award shares contingent on the achievement of certain
financial objectives, including market performance and financial results. In
order to assess the fair value of this share-based compensation, we are required
to estimate certain items, including the probability of meeting market
performance and financial results targets, forfeitures and employees’ service
period. As a result, in relation to our nonvested Stock Award Plan, we recorded
a total pre-tax expense of $12 million in the first quarter of 2009, out of
which $2 million was related to the 2006 plan; $7 million to the 2007 plan; and
$3 million to the 2008 plan.
· Earnings (loss) on Equity
Investments. We are required to record our proportionate share of the
results of the entities that are consolidated by us under the equity method.
This recognition is based on results reported by these entities, sometimes on a
one-quarter lag, and, for such purpose, we rely on their internal controls. As a
result, in the first quarter of 2009, we recognized approximately $29 million as
our proportional interest in the loss recorded by Numonyx in the fourth quarter
of 2008, based on our 48.6% ownership interest in Numonyx, net of amortization
of basis differences. In case of triggering events, we are required to determine
the fair value of our investment and assess the classification of temporary
versus other-than-temporary impairments of the carrying value. We make this
assessment by evaluating the business on the basis of the most recent plans and
projections or to the best of our estimates. In the first quarter of 2009, due
to deterioration of both the global economic situation and the Memory market
segment, as well as Numonyx’s results, we assessed the fair value of our
investment and recorded an additional other-than temporary impairment charge of
$200 million. The calculation of the impairment was based on both an income
approach, using discounted cash flows, and a market approach, using the metrics
of comparable public companies. In addition, we recognized $4 million related to
the ST-Ericsson entities consolidated under the equity method, which included
the amortization of basis differences.
· Financial assets. We classify
our financial assets in the following categories: held-for-trading financial
assets and available-for-sale financial assets. At March 28, 2009, we did not
hold any investments classified as held-to-maturity financial assets.
Additionally, upon the adoption on January 1, 2008 of Statement of Financial
Accounting Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of the Financial Accounting
Standards Board (“FASB”) Statement No. 115 (“FAS 159”), we did not elect to
apply the fair value option on any financial assets. Such classification depends
on the purpose for which the investments are acquired. Management determines the
classification of its financial assets at initial recognition. Unlisted equity
securities with no readily determinable fair value are carried at cost. They are
neither classified as held-for-trading nor as available-for-sale. Regular
purchases and sales of financial assets are recognized on the trade date – the
date on which we commit to purchase or sell the asset. Financial assets are
initially recognized at fair value, and transaction costs are expensed in the
consolidated statements of income. Available-for-sale financial assets and
held-for-trading financial assets are subsequently carried at fair value.
Financial assets are derecognized when the rights to receive cash flows from the
investments have expired or have been transferred and we have transferred
substantially all risks and rewards of ownership. The gain (loss) on the sale of
the financial assets is reported as a non-operating element on the consolidated
statements of income. The fair values of quoted debt and equity securities are
based on current market prices. If the market for a financial asset is not
active and if no observable market price is obtainable, we measure fair value by
using assumptions and estimates. For unquoted equity securities, these
assumptions and estimates include the use of recent arm’s length transactions;
for debt securities without available observable market price, we establish fair
value by reference to publicly available indexes of securities with same rating
and comparable or similar underlying collaterals or industries’ exposure, which
we believe approximates the orderly exit value in the current market. In
measuring fair value, we make maximum use of market inputs and rely as little as
possible on entity-specific inputs. In the first quarter of 2009, we registered
a loss of $58 million on the value of Auction Rate Securities. Pending the
execution of the favorable arbitration award against Credit Suisse by FINRA, the
Auction Rate Securities are still considered as owned by us and, as such,
required an impairment review. Based on the usual market to model methodology,
this resulted in an additional impairment of $58 million on the value of the
Auction Rate Securities in the first quarter of 2009 that was considered as
other than temporary.
· Income taxes. We are required
to make estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments also occur in the calculation
of certain tax assets and liabilities and provisions. Furthermore, the adoption
of the FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes –
an Interpretation of FASB Statement No. 109 (“FIN 48”) requires an evaluation of
the probability of any tax uncertainties and the recognition of the relevant
charges.
We are
also required to assess the likelihood of recovery of our deferred tax assets.
If recovery is not likely, we are required to record a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable, which would increase our provision for income taxes. As of March
28, 2009, we
believed
that all of the deferred tax assets, net of valuation allowances, as recorded on
our consolidated balance sheet, would ultimately be recovered. However, should
there be a change in our ability to recover our deferred tax assets (in our
estimates of the valuation allowance) or a change in the tax rates applicable in
the various jurisdictions, this could have an impact on our future tax provision
in the periods in which these changes could occur.
· Patent and other intellectual
property litigation or claims. As is the case with many companies in the
semiconductor industry, we have from time to time received, and may in the
future receive, communication alleging possible infringement of patents and
other intellectual property rights of third parties. Furthermore, we may become
involved in costly litigation brought against us regarding patents, mask works,
copyrights, trademarks or trade secrets. In the event the outcome of a
litigation claim is unfavorable to us, we may be required to purchase a license
for the underlying intellectual property right on economically unfavorable terms
and conditions, possibly pay damages for prior use, and/or face an injunction,
all of which singly or in the aggregate could have a material adverse effect on
our results of operations and on our ability to compete. See Item 3. “Key
Information—Risk Factors—Risks Related to Our Operations—We depend on patents to
protect our rights to our technology” included in the Form 20-F, as may be
updated from time to time in our public filings.
We record
a provision when we believe that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. We regularly
evaluate losses and claims with the support of our outside counsel to determine
whether they need to be adjusted based on current information available to us.
Legal costs associated with claims are expensed as incurred. In the event of
litigation that is adversely determined with respect to our interests, or in the
event that we need to change our evaluation of a potential third-party claim
based on new evidence or communications, this could have a material adverse
effect on our results of operations or financial condition at the time it were
to materialize. We are in discussion with several parties with respect to claims
against us relating to possible infringement of other parties’ intellectual
property rights. We are also involved in several legal proceedings concerning
such issues.
As of
March 28, 2009, based on our assessment, we did not record any provisions in our
financial statements relating to third party intellectual property rights since
we had not identified any risk of probable loss that is likely to arise out of
asserted claims or ongoing legal proceedings. There can be no assurance,
however, that we will be successful in resolving these issues. If we are
unsuccessful, or if the outcome of any claim or litigation were to be
unfavorable to us, we could incur monetary damages, and/or face an injunction,
all of which singly or in the aggregate could have an adverse effect on our
results of operation and our ability to compete. Furthermore, our products as
well as the products of our customers that incorporate our goods may be excluded
from entry into U.S. territory pursuant to an exclusion order.
· Pension and Post Retirement
Benefits. Our results of operations and our consolidated balance sheet
include the impact of pension and post retirement benefits that are measured
using actuarial valuations. At March 28, 2009, our pension obligations amounted
to $313 million based on the assumption that our employees will work with us
until they reach the age of retirement. These valuations are based on key
assumptions, including discount rates, expected long-term rates of return on
funds and salary increase rates. These assumptions are updated on an annual
basis at the beginning of each fiscal year or more frequently upon the
occurrence of significant events. Any changes in the pension schemes or in the
above assumptions can have an impact on our valuations. The measurement date we
use for the majority of our plans is December 31.
· Other claims. We are subject
to the possibility of loss contingencies arising in the ordinary course of
business. These include, but are not limited to: warranty costs on our products
not covered by insurance, breach of contract claims, tax claims and provisions
for specifically identified income tax exposure as well as claims for
environmental damages. In determining loss contingencies, we consider the
likelihood of a loss of an asset or the incurrence of a liability, as well as
our ability to reasonably estimate the amount of such loss or liability. An
estimated loss is recorded when we believe that it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. We
regularly reevaluate any losses and claims and determine whether our provisions
need to be adjusted based on the current information
available
to us. In the event we are unable to estimate in a correct and timely manner the
amount of such loss this could have a material adverse effect on our results of
operations or financial condition at the time such loss were to
materialize.
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 2009 ended on March 28, 2009. The second quarter of 2009 will end on
June 27, 2009 and the third quarter of 2009 will end on September 26, 2009. The
fourth quarter of 2009 will end on December 31, 2009. 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.
Business
Overview
The total
available market is defined as the “TAM,” while the serviceable available
market, the “SAM,” is defined as the market for products produced by us (which
consists of the TAM and excludes PC motherboard major devices such as
microprocessors (“MPUs”), dynamic random access memories (“DRAMs”),
optoelectronics devices and Flash Memories).
In the
first quarter of 2009, the semiconductor industry continued to be negatively
impacted by the difficult conditions in the global economy. These deteriorated
conditions caused the TAM and the SAM to register double-digit negative growth
in the first quarter of 2009. Based on recently published estimates, in the
first three months of 2009 semiconductor industry revenues declined on a
year-over-year basis by approximately 30% for the TAM and 29% for the SAM to
reach approximately $44 billion and $27 billion, respectively.
With
reference to our business performance, following the deconsolidation of our FMG
segment during the first quarter of 2008, the consolidation of the NXP wireless
business on August 2, 2008 and the consolidation of the EMP wireless business as
of February 3, 2009, our operating results, as reported, are no longer directly
comparable to previous periods.
Our
revenues as reported in the first quarter of 2009 were $1,660 million, a decline
of 33.0% over the same period in 2008, driven by significant weakness across
most geographic regions. This trend reflected double-digit declines in all main
market applications.
Included
in our first quarter 2009 net revenues as reported was a $238 million
contribution from the NXP and EMP wireless businesses, which was lower than the
$299 million contribution from FMG revenues that had occurred in the first
quarter of 2008.
On a
sequential basis, first quarter 2009 revenues decreased 27.1%, with most market
segments negatively impacted by the adverse conditions originating from the
economic downturn, which resulted in a strong reduction in demand.
In the
first quarter of 2009, our effective exchange rate was $1.33 for €1.00, which
reflects actual exchange rate levels and the impact of cash flow hedging
contracts, compared to an effective exchange rate of $1.47 for €1.00 in the
first quarter of 2008 and $1.40 for €1.00 in the fourth quarter of 2008. 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 gross
margin as reported for the first quarter of 2009 decreased by approximately 10
percentage points to 26.3% on a year-over-year and sequential basis, mainly due
to a lower sales volume negatively impacted by the deteriorating economic
conditions. Furthermore, our gross margin for the first quarter of 2009 was
impacted more than 8 percentage points by $139 million of underutilization
charges associated with the closure of several sites in response to falling
demand. The negative impact of such charges was partially offset by favorable
fluctuations in the dollar exchange rate.
Excluding
the contribution of the acquired EMP wireless business, our profit margin would
have been 25.3%. This is not a U.S. GAAP measure as it does not include gross
margin from EMP for $28 million, but it is presented to provide a more direct
comparison to previous periods.
The
profitable contribution of the improved product mix, the favorable currency
impact and the consolidation of the EMP business as of February 3, 2009 was
offset by the negative impact of substantially lower sales and the
aforementioned unused capacity charges.
Our
operating expenses, comprising selling, general and administrative expenses, as
well as R&D, slightly increased in the first quarter of 2009 compared to the
first quarter of 2008 due to an increase in R&D activities following our
recent acquisitions (Genesis, NXP, EMP), which was partially offset by favorable
currency movements. Our R&D expenses in the first quarter of 2009 were net
of $38 million of tax credits associated with our ongoing programs.
In the
first quarter of 2009, we continued certain ongoing restructuring activities and
also implemented new headcount reduction programs to streamline our structure in
light of the current adverse market conditions. We also impaired goodwill for $6
million. This resulted in impairment and restructuring charges of approximately
$56 million.
Our
“Other income and expenses, net” improved significantly in the first quarter of
2009, supported by higher R&D funding originated by the new contracts signed
with the French Administration to fund certain of our R&D programs covering
the period 2008 through 2012 and by a favorable result in our currency exchange
transactions, resulting in net income of $63 million compared to income of $9
million in the equivalent period in the first quarter of 2008.
Our as
reported operating result in the first quarter of 2009 was a loss of $393
million compared to a loss of $88 million in the first quarter of 2008. Our
operating result was largely negatively impacted by declining demand and unused
capacity charges and partially balanced by the improved dollar exchange
rate.
The
valuation of the fair value of our Auction Rate Securities – purchased for our
account by Credit Suisse Securities LLC contrary to our instruction – required
recording an other-than-temporary impairment charge of $58 million in the first
quarter of 2009. On February 16, 2009 the arbitration panel of the Financial
Industry Regulatory Authority (“FINRA”) awarded us approximately $406 million
comprising compensatory damages as well as interests, attorneys’ fees and
authorized us to retain interest of approximately $25 million that has already
been paid. We have petitioned the United States court for the Southern District
of New York seeking enforcement of the award. Credit Suisse has responded by
seeking to vacate the FINRA award. Upon receipt of the payment we will transfer
ownership of our unauthorized auction rate securities to Credit Suisse. Until
the award is executed, we will continue to own the Auction Rate Securities and,
consequently, we account for them in the same manner as in the prior
periods.
Interest
income decreased significantly from $20 million as at March 30, 2008 to $1
million as at March 28, 2009 as a consequence of less interest income received
on our financial resources as a result of significantly lower U.S. dollar and
Euro denominated interest rates compared to the first quarter of 2008. We expect
our interest income to benefit in the future from a positive cash position
resulting from the $1.1 billion contribution made by Ericsson to the joint
venture.
In the
first quarter of 2009 we registered a $232 million equity loss mainly related to
our proportional stake in Numonyx, which included a $200 million impairment on
our Numonyx equity investment to reflect the worsening conditions in the memory
industry as well as our $29 million share of Numonyx’s fourth quarter 2008
equity loss.
In
summary, our profitability during the first quarter of 2009 was negatively
impacted by the following factors:
· falling
demand as a result of the global economic downturn;
· an
impairment loss recorded on our equity investment in Numonyx;
· manufacturing
inefficiencies arising from under utilization of our fabs;
· a
negative pricing trend;
· an
other-than-temporary loss on financial assets; and
· additional
impairment and other restructuring charges related to our ongoing
programs.
The
factors above were partially offset by the following favorable
elements:
· our
improved product mix, which contributed to our revenues; and
· the
favorable currency impact.
The
market environment during the first quarter was difficult, although our revenues
and gross margin generally tracked to the plans we had at the beginning of the
quarter. Our position in the wireless core business has improved significantly
as a result of the completion of the wireless joint venture with Ericsson in
early February. This action is a key milestone in reshaping our product
portfolio and ST-Ericsson is now moving aggressively towards sustainable
profitability. Our overall operational performance in the first quarter was
focused on mitigating the impact of market conditions on cash flow. We reduced
our inventory levels by $184 million and we will continue to focus on inventory
reduction. Finally, we have returned to a net cash position from a net debt
position. Our actions to improve our financial flexibility continue to support
our business strategy.
We made
solid progress on reducing our costs through the realignment of manufacturing
operations and streamlining of expenses. In the first quarter, we discontinued
manufacturing operations at our Ain Sebaa assembly plant in Morocco and in
mid-April we closed our Carrollton, Texas wafer fab. Overall, in the first
quarter of 2009 we reduced headcount by 3,200, excluding the wireless
transaction. We believe these actions and others demonstrate that we are well
aligned with our goal to reduce costs by over $700 million in 2009 compared to
our 2008 fourth quarter annualized base. Also, ST-Ericsson just announced an
additional restructuring program which is expected to contribute to the joint
venture approximately $230 million in annualized cost savings at completion by
the second quarter of 2010.
Business
Outlook
It is
clear that the global economic environment deteriorated further during the first
quarter of 2009. While we have recently begun to see some indicators of
improvement in booking activity and visibility, we believe it is still too early
to determine how sustainable these signs are across all applications and
geographies. We remain focused on advancing our key priorities for 2009, as we
execute on our ongoing product development, marketing, productivity and cost
savings programs. Current uncertainty in the global financial markets, economic
recession in the world’s major economies, seasonality, and the effect on demand
for semiconductor products in the key application markets and from key customers
served by our products makes it extremely difficult to accurately forecast
product demand and other related matters. Consequently, this quarter we will
only provide approximate revenue and gross margin internal planning targets with
respect to the second quarter of 2009. We are currently planning for revenues in
the second quarter 2009 to be in the range of $1.73 billion to $1.93 billion. As
we continue our efforts to reduce inventory levels during this timeframe, fab
loading will run at levels of about 50%, driving gross margin to an
extraordinary low level which we are planning for internal purposes to be in the
mid 20s, as a percentage of sales. Gross margin is subject to changes in demand
levels and pricing that could impact fab loading, inventory write-offs, mix and
unit costs, and combined with currency fluctuations could potentially create
additional margin variability.
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” herein 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 First Quarter of 2009
On
February 3, 2009, we announced the closing of our agreement to merge ST-NXP
Wireless into a joint venture with EMP. Ericsson contributed $1.1 billion to the
joint venture, out of which $700 million was paid to us. Prior to the closing of
the transaction, we exercised our option to buy out NXP’s 20% ownership stake of
ST-NXP Wireless. Alain Dutheil, presently CEO of ST-NXP Wireless and our Chief
Operating Officer, leads the joint venture as President and Chief Executive
Officer. Governance is balanced. Each parent appoints four directors to the
board with Carl-Henric Svanberg, President and CEO of Ericsson, as the Chairman
of the Board and Carlo Bozotti, our President and CEO, as the Vice Chairman.
Employing about 8,000 people - roughly 3,000 from Ericsson and approximately
5,000 from us - the new global leader in wireless technologies is headquartered
in Geneva, Switzerland.
On
February 16, 2009, we announced that an arbitration panel of FINRA, in a full
and final resolution of the issues submitted for determination, awarded us, in
connection with sales of unauthorized auction rate securities made to us by
Credit Suisse, approximately $406 million, comprising compensatory damages, as
well as interest, attorney’s fees and consequential damages, which were assessed
against Credit Suisse. In addition, we are entitled to retain an interest award
of approximately $25 million that has already been paid. Upon receipt of the
payment, we will transfer ownership of our portfolio of unauthorized auction
rate securities to Credit Suisse. On February 17, 2009, we filed a petition in
the United States District Court for the Southern District of New York seeking
enforcement of the award. Credit Suisse has responded by seeking to vacate the
FINRA award.
On March
31, 2009, we announced the completion of our $500 million medium-term committed
credit-facilities program. The $500 million of credit facilities were provided
on a bilateral basis by Intesa-San Paolo, Société Générale, Citibank,
Centrobanca (UBI Group) and Unicredit. The loan agreements had been executed
between October 2008 and March 2009 with commitments from the banks for up to 3
years. We do not currently envisage any utilization of these credit facilities,
which have been set up for liquidity purposes to strengthen the Company’s
financial flexibility.
At our
annual general meeting of shareholders to be held on May 20, 2009, the following
proposals, inter alia,
will be submitted for our shareholders’ approval:
|
·
|
The
distribution of a cash dividend of $0.12 per common share, to be paid in
four equal installments, on May 25, 2009, August 24, 2009, November 23,
2009 and February 22, 2010. Payment of an installment will be made to
those deriving their rights from our common shares at the aforementioned
dates;
|
|
·
|
The
reappointment for a three-year term, expiring at the 2012 Annual General
Meeting, for the following members of the Supervisory Board: Mr. Doug Dunn
and Dr. Didier Lamouche; and
|
|
·
|
The
maximum number of “restricted” Share Awards under our existing 5-year
Employee Unvested Share Award Plan (2008-2012) of 30,500,000, which
includes any Unvested Stock Awards granted to our President and CEO as
part of his compensation, with the maximum number of “restricted” shares
in 2009 to be 6,100,000.
|
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 through our
divisions, which include the production and sale of both silicon chips and Smart
cards.
As of
March 31, 2008, following the creation with Intel of Numonyx, a new independent
semiconductor company from the key assets of our and Intel’s Flash memory
business (“FMG deconsolidation”), we ceased reporting under the FMG
segment.
Starting
August 2, 2008, we reorganized our product groups. A new segment was created to
report wireless operations. In addition, as of February 3, 2009, we added the
EMP product line to our Wireless segment.
The
current organization is as follows:
|
·
|
Automotive
Consumer Computer and Communication Infrastructure Product Groups
(“ACCI”), comprised of four product
lines:
|
|
o
|
Home
Entertainment & Displays
(“HED”);
|
|
o
|
Automotive
Products Group (“APG”);
|
|
o
|
Computer
and Communication Infrastructure (“CCI”);
and
|
|
o
|
Imaging
(“IMG”), starting January 1, 2009.
|
|
·
|
Industrial
and Multisegment Products Sector (“IMS”), comprised
of:
|
|
o
|
Analog
Power and Micro-Electro-Mechanical Systems (“APM”);
and
|
|
o
|
Microcontrollers,
non-Flash, non-volatile Memory and Smart Card products
(“MMS”).
|
|
·
|
Wireless
Segment, comprised of four product
lines:
|
|
o
|
Wireless
Multi Media (“WMM”);
|
|
o
|
Connectivity
& Peripherals (“C&P”);
|
|
o
|
Cellular
Systems (“CS”); and
|
|
o
|
Ericsson
Mobile Platforms (“EMP”), in which, since February 3, 2009, we report the
portion of sales and operating results of ST-Ericsson as consolidated in
our revenue and operating results.
|
We have
restated our results in prior periods for illustrative comparisons of our
performance by product segment. The preparation of segment information based on
the current segment structure requires management to make significant estimates,
assumptions and judgments in determining the operating income of the segments
for the prior reporting periods. Management believes that the restated 2008
presentation is consistent with 2009’s and uses these comparatives when managing
the Company.
Our
principal investment and resource allocation decisions in the semiconductor
business area are for expenditures on R&D and capital investments in
front-end and back-end manufacturing facilities. These decisions are not made by
product segments, but on the basis of the semiconductor business area. All these
product segments share common R&D for process technology and manufacturing
capacity for most of their products.
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 segment does not meet the requirements
for a reportable segment as defined in Statement of Financial Accounting
Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (“FAS
131”).
The
following tables present our consolidated net revenues and consolidated
operating income by semiconductor product group segment. For the computation of
the segments’ internal financial measurements, we use certain internal rules of
allocation for the costs not directly chargeable to the segments, including cost
of sales, selling, general and administrative expenses and a significant part of
R&D expenses. Additionally, in compliance with our internal policies,
certain cost items are not charged to the segments, including impairment,
restructuring charges and
other
related closure costs, start-up costs of new manufacturing facilities, some
strategic and special R&D programs or other corporate-sponsored initiatives,
including certain corporate level operating expenses, acquired IP R&D, other
non-recurrent purchase accounting items and certain other miscellaneous
charges.
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Net
revenues by product segments:
|
|
|
|
|
|
|
Automotive
Consumer Computer and Communication Infrastructure Product Groups
(ACCI)
|
|
$ |
627 |
|
|
$ |
1,045 |
|
Industrial
and Multi-segment Products Sector (IMS)
|
|
|
499 |
|
|
|
772 |
|
Wireless
|
|
|
518 |
|
|
|
348 |
|
Others(1)
|
|
|
16 |
|
|
|
14 |
|
Flash
Memories Group (FMG)
|
|
|
- |
|
|
|
299 |
|
Total
consolidated net revenues
|
|
$ |
1,660 |
|
|
$ |
2,478 |
|
(1) Includes
revenues from sales of subsystems and other products not allocated to product
segments.
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Net
revenues by product lines:
|
|
|
|
|
|
|
Home
Entertainment & Displays (“HED”)
|
|
$ |
180 |
|
|
$ |
250 |
|
Automotive
Products Group (“APG”)
|
|
|
190 |
|
|
|
383 |
|
Computer
and Communication Infrastructure (“CCI”)
|
|
|
168 |
|
|
|
284 |
|
Imaging
(“IMG”)
|
|
|
89 |
|
|
|
121 |
|
Others
|
|
|
- |
|
|
|
7 |
|
Automotive
Consumer Computer and Communication Infrastructure Product Groups
(“ACCI”)
|
|
|
627 |
|
|
|
1,045 |
|
Analog
Power and Micro-Electro-Mechanical Systems (“APM”)
|
|
|
351 |
|
|
|
562 |
|
Microcontrollers,
non-Flash, non-volatile Memory and Smartcard products
(“MMS”)
|
|
|
148 |
|
|
|
210 |
|
Industrial
and Multisegment Products Sector (“IMS”)
|
|
|
499 |
|
|
|
772 |
|
Wireless
Multi Media (“WMM”)
|
|
|
247 |
|
|
|
296 |
|
Connectivity
& Peripherals (“C&P”)
|
|
|
97 |
|
|
|
52 |
|
Cellular
Systems (“CS”) (1)
|
|
|
130 |
|
|
|
- |
|
Ericsson
Mobile Platforms (“EMP”)
|
|
|
44 |
|
|
|
- |
|
Wireless
|
|
|
518 |
|
|
|
348 |
|
Others
|
|
|
16 |
|
|
|
14 |
|
Flash
Memories Group (“FMG”)
|
|
|
- |
|
|
|
299 |
|
Total
consolidated net revenues
|
|
$ |
1,660 |
|
|
$ |
2,478 |
|
(1)
|
Cellular
Systems includes the largest part of the revenues contributed by NXP
Wireless and, as such, there are no comparable numbers available for the
first quarter of 2008. Connectivity & Peripherals also partly
benefited from the NXP wireless
contribution.
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Operating income (loss) by
product segments (1):
|
|
|
|
|
|
|
Automotive
Consumer Computer and Communication Infrastructure Product Groups
(ACCI)
|
|
$ |
(89 |
) |
|
$ |
17 |
|
Industrial
and Multisegment Products Sector (IMS)
|
|
|
(32 |
) |
|
|
90 |
|
Wireless
|
|
|
(139 |
) |
|
|
(10 |
) |
Others(2)
|
|
|
(133 |
) |
|
|
(201 |
) |
Flash
Memories Group (FMG)
|
|
|
- |
|
|
|
16 |
|
Total
consolidated operating income (loss)
|
|
$ |
(393 |
) |
|
$ |
(88 |
) |
(1) Operating
income (loss) of product segments included $130 million unused capacity charges
as at March 28, 2009.
(2) Operating
income (loss) of “Others” includes items such as impairment, restructuring
charges and other related closure costs, start-up costs, and other unallocated
expenses such as: strategic or special research and development programs,
acquired In-Process R&D and other non-recurrent purchase accounting items,
certain corporate level operating expenses, certain patent claims and
litigation, and other costs that are not allocated to the product segments, as
well as operating earnings or losses of the Subsystems and Other Products Group.
Unused capacity charges not allocated to product segments amounted to $9 million
as at March 28, 2009.
|
(unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
(as
percentages of net revenues)
|
|
Operating
income (loss) by product segments:
|
|
|
|
|
|
|
Automotive
Consumer Computer and Communication Infrastructure Product Groups (ACCI)
(1)
|
|
|
(14.2 |
)% |
|
|
1.6 |
% |
Industrial
and Multi-segment Products Sector (IMS) (1)
|
|
|
(6.4 |
) |
|
|
11.7 |
|
Wireless
(1)
|
|
|
(26.8 |
) |
|
|
(2.9 |
) |
Others(2)
|
|
|
— |
|
|
|
— |
|
Flash
Memories Group (FMG) (1)
|
|
|
— |
|
|
|
5.4 |
% |
Total
consolidated operating income (loss)(3)
|
|
|
(23.7 |
)% |
|
|
(3.6 |
)% |
(1) As
a percentage of net revenues per product group.
(2) As
a percentage of total net revenues. Includes operating income (loss) from sales
of subsystems and other income (costs) not allocated to product
segments.
(3) As
a percentage of total net revenues.
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Reconciliation
to consolidated operating income (loss):
|
|
|
|
|
|
|
Total
operating income (loss) of product segments
|
|
$ |
(260 |
) |
|
$ |
113 |
|
Strategic
and other research and development programs
|
|
|
(5 |
) |
|
|
(1 |
) |
Acquired
In-Process R&D
|
|
|
- |
|
|
|
(21 |
) |
Start-up
costs
|
|
|
(21 |
) |
|
|
(7 |
) |
Impairment,
restructuring charges and other related closure costs
|
|
|
(56 |
) |
|
|
(183 |
) |
Unused
capacity charges
|
|
|
(9 |
) |
|
|
- |
|
Tools
write-off
|
|
|
(16 |
) |
|
|
- |
|
Consulting
fees
|
|
|
(7 |
) |
|
|
- |
|
Other
non-allocated provisions(1)
|
|
|
(19 |
) |
|
|
11 |
|
Total
operating loss Others
|
|
|
(133 |
) |
|
|
(201 |
) |
Total
consolidated operating income (loss)
|
|
$ |
(393 |
) |
|
$ |
(88 |
) |
(1) Includes
unallocated income and expenses such as certain corporate level operating
expenses and other costs that are not allocated to the product
segments.
Net
revenues by location of order shipment and by market segment
The table
below sets forth information on our net revenues by location of order
shipment:
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Net
Revenues by Location of Order Shipment(1)(2)
|
|
|
|
|
|
|
EMEA
|
|
$ |
539 |
|
|
$ |
787 |
|
North
America
|
|
|
197 |
|
|
|
344 |
|
Asia
Pacific
|
|
|
478 |
|
|
|
595 |
|
Greater
China
|
|
|
361 |
|
|
|
628 |
|
Japan
|
|
|
85 |
|
|
|
124 |
|
Total
|
|
$ |
1,660 |
|
|
$ |
2,478 |
|
(1) Net
revenues by location of order shipment are classified by location of customer
invoiced. For example, products ordered by U.S.-based companies to be invoiced
to Asia Pacific affiliates are classified as Asia Pacific revenues.
(2) As
of January 1, 2009, Emerging Markets has been reallocated to the Europe, North
America and Asia Pacific organizations.
The table
below shows our net revenues by location of order shipment and market segment
application and channel as a percentage of net revenues:
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as
percentages of net revenues)
|
|
Net
Revenues by Location of Order Shipment(1)(2)
|
|
|
|
|
|
|
EMEA
|
|
|
32.4 |
% |
|
|
31.8 |
% |
North
America(2)
|
|
|
11.9 |
|
|
|
13.9 |
|
Asia
Pacific
|
|
|
28.8 |
|
|
|
24.0 |
|
Greater
China
|
|
|
21.8 |
|
|
|
25.3 |
|
Japan
|
|
|
5.1 |
|
|
|
5.0 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Net
Revenues by Market Segment Application(3):
|
|
|
|
|
|
|
|
|
Automotive
|
|
|
12 |
% |
|
|
15 |
% |
Consumer
|
|
|
14 |
|
|
|
14 |
|
Computer
|
|
|
11 |
|
|
|
12 |
|
Telecom
|
|
|
43 |
|
|
|
32 |
|
Industrial
and Other
|
|
|
8 |
|
|
|
8 |
|
Distribution
|
|
|
12 |
|
|
|
19 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
(1) Net
revenues by location of order shipment are classified by location of customer
invoiced. For example, products ordered by U.S.-based companies to be invoiced
to Asia Pacific affiliates are classified as Asia Pacific revenues.
(2) As
of January 1, 2009, Emerging Markets has been reallocated to the Europe, North
America and Asia Pacific organizations.
(3) The
above table estimates, within a variance of 5% to 10% in the absolute dollar
amount, the relative weighting of each of our target segments.
The
following table sets forth certain financial data from our Consolidated
Statements of Income, expressed in each case as a percentage of net
revenues:
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as
percentage of net revenues)
|
|
Net
sales
|
|
|
99.8 |
% |
|
|
99.3 |
% |
Other
revenues
|
|
|
0.2 |
|
|
|
0.7 |
|
Net
revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost
of sales
|
|
|
(73.7 |
) |
|
|
(63.7 |
) |
Gross
profit
|
|
|
26.3 |
|
|
|
36.3 |
|
Selling,
general and administrative
|
|
|
(16.9 |
) |
|
|
(12.3 |
) |
Research
and development
|
|
|
(33.6 |
) |
|
|
(20.5 |
) |
Other
income and expenses, net
|
|
|
3.8 |
|
|
|
0.4 |
|
Impairment,
restructuring charges and other related closure costs
|
|
|
(3.3 |
) |
|
|
(7.4 |
) |
Operating
loss
|
|
|
(23.7 |
) |
|
|
(3.6 |
) |
Other-than-temporary
impairment charge on financial assets
|
|
|
(3.5 |
) |
|
|
(1.2 |
) |
Interest
income, net
|
|
|
0.1 |
|
|
|
0.8 |
|
Loss
on sale of financial assets
|
|
|
(0.5 |
) |
|
|
- |
|
Earnings
(loss) on equity investments
|
|
|
(14.0 |
) |
|
|
0.0 |
|
Loss
before income taxes and noncontrolling interests
|
|
|
(41.6 |
) |
|
|
(3.9 |
) |
Income
tax benefit
|
|
|
5.7 |
|
|
|
0.6 |
|
Loss
before noncontrolling interests
|
|
|
(35.9 |
) |
|
|
(3.3 |
) |
Net
loss (income) attributable to noncontrolling interest
|
|
|
3.3 |
|
|
|
(0.1 |
) |
Net
loss attributable to parent company
|
|
|
(32.6 |
)% |
|
|
(3.4 |
)% |
First
Quarter of 2009 vs. First Quarter of 2008 and Fourth Quarter of
2008
Net
Revenues
|
|
|
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,657 |
|
|
$ |
2,264 |
|
|
$ |
2,461 |
|
|
|
(26.8 |
)% |
|
|
(32.7 |
)% |
Other
revenues
|
|
$ |
3 |
|
|
$ |
12 |
|
|
$ |
17 |
|
|
|
— |
|
|
|
— |
|
Net
revenues
|
|
$ |
1,660 |
|
|
$ |
2,276 |
|
|
$ |
2,478 |
|
|
|
(27.1 |
)% |
|
|
(33.0 |
)% |
Year-over-year
comparison
In the
first quarter of 2009, revenues for both the TAM and the SAM registered a
significant decrease due to the difficult economic environment. Based upon most
recently published estimates, semiconductor industry revenues decreased
year-over-year by approximately 30% for the TAM and 29% for the market we serve,
the SAM, to reach approximately $44 billion and $27 billion,
respectively.
Our first
quarter 2009 net revenues experienced a similar trend, driven by the sharp
decrease in demand from our customers. The majority of our market segments were
negatively impacted by these difficult economic conditions and registered
declining rates, with particularly weak results in Distribution, Automotive,
Computer, Industrial and Consumer. Our Telecom sector, however, decreased
less significantly on a year-over-year basis due to the contribution of the
acquired wireless businesses from NXP and Ericsson. Our as reported revenue
variation was slightly below the TAM and the SAM. The first quarter of 2009
included the contribution of the acquired NXP and EMP businesses, while the
first quarter of 2008 included FMG.
ACCI’s
revenues decreased approximately 40%, with the weakest results seen in
Automotive, Computer Peripherals and Consumer products. IMS registered a decline
of 35.5%, although MEMS products registered growth. Wireless
sales
registered growth of approximately 49.1%, thanks to the integration of the NXP
and EMP wireless businesses, which accounted for $238 million during the
first quarter of 2009. The negative trend in volume in all product segments
was partially offset by improvements in our product mix.
By
location of order shipment, all regions were negatively impacted by the drop in
revenues, ranging from the greatest decrease of 42.5% in Greater China to the
lowest of approximately 20% in Asia Pacific. We had several large customers,
with the largest one, the Nokia group of companies, accounting for approximately
19% of our first quarter 2009 net revenues, the same percentage it had accounted
for during the first quarter of 2008, excluding FMG.
Sequential
comparison
On a
sequential basis our revenues also dropped significantly as a result of an
approximate 37.5% decrease in units sold excluding EMP and an estimated
8.5% increase in average selling prices thanks to a more favorable product
mix.
ACCI
revenues decreased by 30.2%, reflecting difficult market conditions in all
product groups, especially in Consumer, Automotive and Computer. The decrease
was mainly driven by a decline in units sold, which was partially offset by a
favorable product mix. IMS revenues declined 37.0%, due to lower sales volume
and flat selling prices. Wireless revenues decreased 9.9%, despite the
additional revenue contributed by EMP, due to lower sales
volume.
All market
segment applications decreased, with the most significant decrease registered in
Distribution.
All
regions registered a negative sequential performance in terms of revenues
ranging from a 40% decrease in Japan to a 20% decrease in EMEA. In the first
quarter of 2009, we had several large customers, with the largest one, the Nokia
group of companies, accounting for approximately 19% of our net
revenues, increasing from the 15% it had accounted for during the fourth
quarter of 2008.
Gross
profit
|
|
|
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
(1,223 |
) |
|
$ |
(1,454 |
) |
|
$ |
(1,579 |
) |
|
|
15.9 |
% |
|
|
22.6 |
% |
Gross
profit
|
|
$ |
437 |
|
|
$ |
822 |
|
|
$ |
899 |
|
|
|
(46.8 |
)% |
|
|
(51.4 |
)% |
Gross
margin (as a percentage of net revenues)
|
|
|
26.3 |
% |
|
|
36.1 |
% |
|
|
36.3 |
% |
|
|
— |
|
|
|
— |
|
The first
quarter of 2009 was largely penalized by unused capacity charges which resulted
from significant underloading of our wafer fabs that we had planned in order to
cut the level of our inventories. Gross margin was largely below the previous
quarters, reaching a level of 26.3%; however, the unused capacity charges were
estimated to account for over 8 percentage points. On a year-over-year
comparable basis, the significant decline was also due to the lower volume of
our revenues. First quarter of 2008 gross margin was 36.3%.
In the
fourth quarter of 2008, gross margin was 36.1% as reported or, on an adjusted
basis, 37.5% excluding inventory step-up purchase accounting adjustments related
to the former NXP wireless business, which accounted for $31 million. The
adjusted number is not a U.S. GAAP measure, but it is presented to provide a
more direct comparison to the first quarter of 2009.
The
impact of the U.S. dollar exchange rate was favorable on both a sequential and
year-over-year basis.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$ |
(280 |
) |
|
$ |
(304 |
) |
|
$ |
(304 |
) |
|
|
8.0 |
% |
|
|
8.0 |
% |
As
percentage of net revenues
|
|
|
(16.9 |
)% |
|
|
(13.4 |
)% |
|
|
(12.3 |
)% |
|
|
— |
|
|
|
— |
|
The
amount of our selling, general and administrative expenses decreased on a
year-over-year basis, as a result of our cost reduction plans, the
deconsolidation of FMG and the favorable dollar exchange rate. Our
share-based compensation charges were $6 million in the first quarter of 2009,
compared to $16 million in the first quarter of 2008.
As a
percentage of revenues, selling, general and administrative expenses increased
to 16.9% compared to the prior year’s first quarter, due primarily to the sharp
drop of our sales.
Sequentially,
our selling, general and administrative expenses also decreased, thanks to the
more favorable dollar exchange rate. Share-based compensation charges amounted
to $5 million in the fourth quarter of 2008.
As a
percentage of revenues, we registered an increase from 13.4% to 16.9% due to the
decline in sales.
Research
and development expenses
|
|
|
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
$ |
(557 |
) |
|
$ |
(572 |
) |
|
$ |
(509 |
) |
|
|
2.5 |
% |
|
|
(9.7 |
)% |
As
percentage of net revenues
|
|
|
(33.6 |
)% |
|
|
(25.1 |
)% |
|
|
(20.5 |
)% |
|
|
— |
|
|
|
— |
|
On a
year-over-year basis, our R&D expenses increased in line with the expansion
of our activities, including the integration of the acquired businesses from
NXP, Ericsson and Genesis. The first quarter of 2009 amount included $4 million
of share-based compensation charges compared to $10 million in the first quarter
of 2008. In addition, the first quarter of 2009 included $13 million related to
amortization charges generated by recent acquisitions. However, these expenses
benefited from $38 million recognized as research tax credits, compared to
$36 million in the year-ago quarter.
As a
percentage of revenues, first quarter 2009 R&D was equivalent to 33.6%, with
a substantial increase compared to the year ago period due to declining
revenues.
On a
sequential basis, R&D expenses decreased, despite the consolidation of
EMP, due to seasonal factors.
Other
income and expenses, net
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Research
and development funding
|
|
$ |
72 |
|
|
$ |
19 |
|
|
$ |
19 |
|
Start-up/phase-out
costs
|
|
|
(21 |
) |
|
|
(7 |
) |
|
|
(7 |
) |
Exchange
gain (loss) net
|
|
|
19 |
|
|
|
- |
|
|
|
4 |
|
Patent
litigation costs
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
Patent
pre-litigation costs
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
Gain
on sale of other non-current assets
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Other,
net
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Other
income and expenses, net
|
|
|
63 |
|
|
|
6 |
|
|
|
9 |
|
As a
percentage of net revenues
|
|
|
3.8 |
% |
|
|
0.3 |
% |
|
|
0.4 |
% |
Other
income and expenses, net, mainly included, as income, items such as R&D
funding and, as expenses, start-up costs and patent claim costs. R&D funding
income was associated with our R&D projects, which, upon project
approval, qualifies as funding on the basis of contracts with local
government agencies in locations where we pursue our activities. In the first
quarter of 2009, the balance of these factors resulted in net income of $63
million, originated by $72 million in R&D funding, which was significantly
higher than in comparable previous periods as a result of a new program in
France which, while entered into during the first quarter of 2009, covers a time
period beginning retroactively in 2008. The first quarter of 2009 also included
a high amount of phase-out costs associated with the closure of our facilities
in Carrollton, Texas and Ain Sebaa, Morocco.
Impairment,
restructuring charges and other related closure costs
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Impairment,
restructuring charges and other related closure costs
|
|
$ |
(56 |
) |
|
$ |
(91 |
) |
|
$ |
(183 |
) |
As a
percentage of net revenues
|
|
|
(3.3 |
)% |
|
|
(4.0 |
)% |
|
|
(7.4 |
)% |
In the
first quarter of 2009, we recorded impairment, restructuring charges and other
related closure costs of $56 million related to:
· $43
million of one-time termination benefits to be paid in relation to the closure
of our Ain Sebaa, Morocco, Carrollton, Texas and Phoenix, Arizona sites, as well
as other relevant charges;
· $7
million related to other ongoing and newly committed restructuring plans,
consisting primarily of voluntary termination benefits and early retirement
arrangements in some of our European locations, as well as workforce reduction
in Asia Pacific; and
· $6
million as impairment on certain of our goodwill.
In the
first quarter of 2008, we recorded impairment, restructuring charges and other
related closure costs of $183 million, mainly comprised of: the FMG assets
disposal which required the recognition of $164 million as an additional loss
and $2 million as restructuring and other related disposal costs; 2007
restructuring plan, which required the recognition of $13 million as
restructuring charges and $1 million as other related closure costs; and
previously announced programs which accounted for a charge of $3
million.
In the
fourth quarter of 2008, we recorded impairment, restructuring charges and other
related closure costs pertaining to: $29 million related to one-time termination
benefits to be paid at the closure of our Carrollton, Texas and Phoenix, Arizona
sites, as well as other charges; $2 million impairment costs associated with an
investment in a minority participation; $9 million charges related to the FMG
deconsolidation; and $51 million related to other restructuring plans,
consisting primarily of voluntary termination benefits and early retirement
arrangements in some of our European locations.
Operating
income (loss)
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
Operating
loss
|
|
$ |
(393 |
) |
|
$ |
(139 |
) |
|
$ |
(88 |
) |
In
percentage of net revenues
|
|
|
(23.7 |
)% |
|
|
(6.1 |
)% |
|
|
(3.6 |
)% |
Our
operating results were largely impacted by the strong decline in demand,
which also triggered the recognition of significant underutilization charges. As
a result, we registered an operating loss of $393 million, significantly greater
than our operating losses in previous periods.
All of
our product segments registered a decline in their operating results on a
year-over-year basis. ACCI’s operating result moved from a profit of $17 million
to a loss of $89 million, driven by the significant drop in revenues. IMS
registered a loss of $32 million, compared to a profit of $90 million in the
year-ago quarter; its profitability was largely impacted by a strong decline in
sales volume, while operating expenses remained at a high level. Wireless
registered an operating loss of $139 million, deteriorating compared to the
operating loss of $10 million in the year ago period, as a result of higher
operating expenses.
We also
present our pro forma operating results, calculated by adding back to operating
income (loss), as reported, our impairment and restructuring charges and other
one-time items. We believe pro forma operating results provide useful
information for investors and management because they measure our capacity to
generate profitability from our business operations, excluding the one-time
effects of acquisitions and the expenses related to the rationalizing of our
activities and sites. In addition, our pro forma operating results are used on a
comparable basis as one of the performance criteria that determines the vesting
of our shares allocated under our nonvested stock award plans for key employees.
Pro forma operating results are not a U.S. GAAP measure and do not fully present
our total operating results since they do not include impairment and
restructuring charges and other items related to purchase
accounting.
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Operating
loss, as reported
|
|
$ |
(393 |
) |
|
$ |
(139 |
) |
|
$ |
(88 |
) |
Adding
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales: NXP inventory step-up
|
|
|
— |
|
|
|
31 |
|
|
|
— |
|
Research
and development: IP R&D
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
Impairment
and restructuring charges
|
|
|
56 |
|
|
|
91 |
|
|
|
183 |
|
Operating
result, pro forma
|
|
$ |
(337 |
) |
|
$ |
(17 |
) |
|
$ |
116 |
|
On a
comparative basis with previous periods, our pro forma operating result had also
significantly deteriorated due to the drop in revenues.
Interest
income, net
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Interest
income,
net
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
20 |
|
We
recorded net interest income of $1 million, which decreased compared to previous
periods due to less interest income received as a result of significantly lower
U.S. dollar and Euro denominated interest rates.
Other-than-temporary
impairment charges on financial assets
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Other-than-temporary
impairment charges on financial assets
|
|
$ |
(58 |
) |
|
$ |
(55 |
) |
|
$ |
(29 |
) |
In the
first quarter of 2009, we registered an additional $58 million as an
other-than-temporary impairment charge relating to our Auction Rate Securities
investments.
As of
March 28, 2009, we had Auction Rate Securities, representing interests in
collateralized obligations and credit linked notes, that were carried on our
balance sheet as available-for-sale financial assets at an amount of $184
million with a par value of $415 million. On February 16, 2009, we announced
that FINRA had awarded us, in connection with sales of unauthorized Auction Rate
Securities made to us by Credit Suisse, approximately $406 million and on
February 17, 2009, we filed a petition in the United States District Court for
the Southern District of New York seeking enforcement of the award. Credit
Suisse has responded by seeking to vacate the FINRA award. See “Other
Developments” for more information.
For more
details, see the paragraph “Liquidity and Capital Resources.”
Earnings
(loss) on equity investments
|
|
Three
Months Ended
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Earnings
(loss) on equity investments
|
|
$ |
(232 |
) |
|
$ |
(204 |
) |
|
|
— |
|
In the
first quarter of 2009, we recorded a charge of $69 million that represents our
proportional share of the loss reported by Numonyx in the fourth quarter of 2008
and a benefit of $40 million related to amortization of basis differences
arising principally from impairment charges recorded by us in prior periods,
which resulted in net impact of $29 million. We recorded an additional
impairment loss of $200 million on our Numonyx equity investment, which
reflected the joint venture’s deteriorating performance in the metrics used to
assess the value of the company.
In the
fourth quarter of 2008, we recorded an impairment loss of $180
million on our Numonyx equity investment.
Loss
on sale of financial assets / Unrealized gain on financial assets
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Loss
on sale of financial assets
|
|
$ |
(8 |
) |
|
|
- |
|
|
|
- |
|
Unrealized
gain on financial assets
|
|
|
- |
|
|
$ |
15 |
|
|
|
- |
|
In 2006,
we entered into cancellable swaps with a combined notional value of $200 million
to hedge the fair value of a portion of the convertible bonds due 2016 carrying
a fixed interest rate. The cancellable swaps convert the fixed rate interest
expense recorded on the convertible bonds due 2016 to a variable interest rate
based upon adjusted LIBOR. Until November 1, 2008, the cancellable swaps met the
criteria for designation as a fair value hedge. Due to the exceptionally low
U.S. dollar interest rate as a consequence of the financial crisis, we assessed
in 2008 that the swaps were no longer effective as of November 1, 2008 and the
fair value hedge relationship was discontinued. Consequently, the swaps were
classified as held-for-trading financial assets. An unrealized gain was
recognized in earnings from discontinuance date totaling $15 million and was
reported on the line “Unrealized gain on financial assets” of the consolidated
statement of income for the three months ended December 31, 2008.
This
instrument was sold during the first quarter of 2009 with a loss of $8 million
due to variation in the underlying interest rates compared to December 31,
2008.
Income
tax benefit (expense)
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Income
tax benefit
|
|
$ |
95 |
|
|
$ |
9 |
|
|
$ |
14 |
|
During
the first quarter of 2009, we registered an income tax benefit of $95 million,
reflecting an effective tax rate of 13.8%.
Our tax
rate is variable and depends on changes in the level of operating income within
various local jurisdictions and on changes in the applicable taxation rates of
these jurisdictions, as well as changes in estimated tax provisions due to new
events. We currently enjoy certain tax benefits in some countries; as such
benefits may not be available in the future due to changes in the local
jurisdictions, our effective tax rate could be different in future quarters
and may increase in the coming years. In addition, our yearly income tax charges
include the estimated impact of some provisions related to potential and certain
positions.
Net
loss (income) attributable to noncontrolling interest
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Net
loss (income) attributable to noncontrolling interest
|
|
$ |
54 |
|
|
$ |
5 |
|
|
$ |
(1 |
) |
In the
first quarter of 2009, we booked a net loss of $54 million attributable to
noncontrolling interest, which included noncontrolling interest of 20%
owned by NXP in the ST-NXP joint venture for the month of January and of 50%
owned by Ericsson in ST-Ericsson Holding AG, which is the parent of the
ST-Ericsson joint venture companies that we consolidated for the months of
February and March. This amount reflected their share in the joint ventures’
loss.
In the
fourth quarter of 2008, the net loss was attributable to NXP’s 20% ownership in
the ST-NXP joint venture.
All
periods included the recognition of noncontrolling interest related to our joint
venture in Shenzhen, China for assembly operating activities, which however does
not report material amounts.
Net
income (loss) attributable to parent company
|
|
|
|
|
|
March
28, 2009
(unaudited)
|
|
|
|
|
|
March
30, 2008
(unaudited)
|
|
|
|
(In
millions)
|
|
Net
loss attributable to parent company
|
|
$ |
(541 |
) |
|
$ |
(366 |
) |
|
$ |
(84 |
) |
As
percentage of net revenues
|
|
|
(32.6 |
)% |
|
|
(16.1 |
)% |
|
|
(3.4 |
)% |
For the
first quarter of 2009, we reported a loss of $541 million as a result of adverse
economic conditions, which negatively impacted our operations, and certain
unusual charges. In the first quarter of 2008, we had a net loss of $84 million
and in the fourth quarter of 2008 we had a net loss of $366
million.
Loss per
share for the first quarter of 2009 was $(0.62), compared to $(0.42) in the
fourth quarter of 2008 and $(0.09) in the year-ago quarter.
We also
present our pro forma earnings (loss) per share, calculated by adding back to
net income (loss) attributable to parent company, as reported, our impairment
and restructuring charges and, when applicable, other one-time items. We believe
pro forma earnings (loss) per share provide useful information for
investors and management because they measure our capacity to generate earnings
from our business operations, excluding the expenses related to the
rationalizing of our activities and sites and the one-time effects of
acquisitions. Pro forma earnings (loss) per share are not a U.S. GAAP measure
and do not fully present our earnings (loss) per share attributable to parent
company since they do not include impairment and restructuring charges and other
items related to purchase accounting, when applicable.
In the
first quarter of 2009, the impact of restructuring and impairment charges,
other-than-temporary impairment charges and the loss on our Numonyx equity
investment was estimated to be approximately $(0.31) per share. In the
fourth quarter of 2008, loss per share was impacted for approximately $(0.36)
per share by restructuring and impairment charges, other-than-temporary
impairment charges, the loss on our Numonyx equity investment and non-recurring
items. In the year-ago quarter, the impact of impairment, restructuring and
other-than temporary impairment charges was estimated to be equivalent to
approximately $(0.22) per share.
Legal
Proceedings
As is the
case with many companies in the semiconductor industry, we have from time to
time received, and may in the future receive, communications from other
semiconductor companies or third parties alleging possible infringement of
patents. Furthermore, we may become involved in costly litigation brought
against us regarding patents, copyrights, trademarks, trade secrets or mask
works. In the event the outcome of any litigation is unfavorable to us, we may
be required to take a license to the underlying intellectual property right upon
economically unfavorable terms and conditions, and possibly pay damages for
prior use, and/or face an injunction, all of which individually or in the
aggregate could have a material adverse effect on our results of operations and
ability to compete. See “Item 3. Key Information — Risk Factors — Risks Related
to Our Operations — We depend on patents to protect our rights to our
technology.”
We record
a provision when it is probable that a liability has been incurred and when the
amount of the loss can be reasonably estimated. We regularly evaluate losses and
claims to determine whether they need to be adjusted based on the current
information available to us. Legal costs associated with claims are expensed as
incurred. We are in discussion with several parties with respect to claims
against us relating to possible infringements of patents and similar
intellectual property rights of others.
We are
currently a party to legal proceedings with SanDisk Corporation.
On
October 15, 2004, SanDisk filed a complaint for patent infringement and a
declaratory judgment of non-infringement and patent invalidity against us with
the United States District Court for the Northern District of California. The
complaint alleged that our products infringed on a single SanDisk U.S. patent
(Civil Case No. C 04-04379JF). By an order dated January 4, 2005, the court
stayed SanDisk’s patent infringement claim, pending final determination in an
action filed contemporaneously by SanDisk with the U.S. International Trade
Commission (“ITC”), which covered the same patent claim asserted in Civil Case
No. C 04-04379JF. The ITC action was subsequently resolved in our favor. On
August 2, 2007, SanDisk filed an amended complaint in the United States District
Court for the Northern District of California adding allegations of infringement
with respect to a second SanDisk U.S. patent which had been the subject of a
second ITC action and which was also resolved in our favor. On September 6,
2007, we filed an answer and a counterclaim alleging various federal and state
antitrust and unfair competition claims. SanDisk filed a motion to dismiss our
antitrust counterclaim, which was denied on January 25, 2008. On October 17,
2008, the Court issued an order granting in part and denying in part a summary
judgment motion filed by SanDisk with respect to our antitrust counterclaims.
Discovery is ongoing. SanDisk recently moved to add two additional related
patents to the case. Such motion is currently pending. The trial date has not
yet been set.
On
October 14, 2005, we filed a complaint against SanDisk and its current CEO, Dr.
Eli Harari, before the Superior Court of California, County of Alameda. The
complaint seeks, among other relief, the assignment or co-ownership of certain
SanDisk patents that resulted from inventive activity on the part of Dr. Harari
that took place while he was an employee, officer and/or director of Waferscale
Integration, Inc. and actual, incidental, consequential, exemplary
and
punitive damages in an amount to be proven at trial. We are the successor to
Waferscale Integration, Inc. by merger. SanDisk removed the matter to the United
States District Court for the Northern District of California, which remanded
the matter to the Superior Court of California, County of Alameda in July 2006.
SanDisk moved to transfer the case to the Superior Court of California, County
of Santa Clara and to strike our claim for unfair competition, which were both
denied by the trial court. SanDisk appealed these rulings and also moved to stay
the case pending resolution of the appeal. On January 12, 2007, the California
Court of Appeals ordered that the case be transferred to the Superior Court of
California, County of Santa Clara. On August 7, 2007, the California Court of
Appeals affirmed the Superior Court’s decision denying SanDisk’s motion to
strike our claim for unfair competition. SanDisk appealed this ruling to the
California Supreme Court, which refused to hear it. On August 26, 2008, the
federal court granted our motion to remand the case back to Santa Clara County
and, subsequently, on September 9, 2008 SanDisk’s motion for reconsideration.
The case has now been re-certified in the state court and a trial date of
September 8, 2009 has been set. Discovery is ongoing. In April 2009, the Court
denied Sandisk’s motion for summary judgement on SanDisk’s affirmative defense
of statute of limitations.
With
respect to the lawsuits with SanDisk as described above, and following two prior
decisions in our favor taken by the ITC, we have not identified any risk of
probable loss that is likely to arise out of the outstanding
proceedings.
We are
also a party to legal proceedings with Tessera, Inc.
On
January 31, 2006, Tessera added our Company as a co-defendant, along with
several other semiconductor and packaging companies, to a lawsuit filed by
Tessera on October 7, 2005 against Advanced Micro Devices Inc. and Spansion in
the United States District Court for the Northern District of California.
Tessera is claiming that certain of our small format BGA packages infringe
certain patents owned by Tessera, and that we are liable for damages. Tessera is
also claiming that various ST entities breached a 1997 License Agreement and
that we are liable for unpaid royalties as a result. In April and May 2007, the
United States Patent and Trademark Office (“PTO”) initiated reexaminations in
response to the reexamination requests. A final decision regarding the
reexamination requests is pending.
On April
17, 2007, Tessera filed a complaint against us, Spansion, ATI Technologies,
Inc., Qualcomm, Motorola and Freescale with the ITC with respect to certain
small format ball grid array packages and products containing the same, alleging
patent infringement claims of two of the Tessera patents previously asserted in
the District Court action described above and seeking an order excluding
importation of such products into the United States. On May 15, 2007, the ITC
instituted an investigation pursuant to 19 U.S.C. § 1337, entitled “In the
Matter of Certain Semiconductor Chips with Minimized Chip Package Size and
Products Containing Same”, Inv. No. 337-TA-605. The PTO’s Central Reexamination
Unit has issued office actions rejecting all of the asserted patent claims on
the grounds that they are invalid in view of certain prior art. Tessera is
contesting these rejections, and the PTO has not made a final decision. On
February 25, 2008, the administrative law judge issued an initial determination
staying the ITC proceeding pending completion of these reexamination
proceedings. On March 28, 2008, the ITC reversed the administrative law judge
and ordered him to reinstate the ITC proceeding. Trial proceedings took place
from July 14, 2008 to July 18, 2008. On December 1, 2008, the ITC Administration
Law Judge issued this initial determination finding the “326” and “419” patents
valid but not infringed. Tessera has appealed this ruling to the ITC which, on
March 26, 2009 decided to extend the deadline for completing its review and
rendering its final determination until May 20, 2009. Pursuant to its review,
the ITC can affirm, modify or reverse the initial determination, in whole or in
part. The two Tessera patents asserted in the proceedings will expire in
2010.
In
addition, in April 2008, we, along with several other companies such as
Freescale, NXP Semiconductor, Grace Semiconductor, National Semiconductor,
Spansion and Elpida, were sued by LSI Corp. and its wholly-owned subsidiary
Agere Systems, Inc. (collectively “LSI”) before the ITC in Washington, D.C. The
lawsuit follows LSI Corp.’s purchase of Agere Systems Inc. and alleges
infringement of a single Agere U.S. process patent (US 5,227,335). LSI is
seeking an exclusion order preventing the importation into the United States of
semiconductor integrated devices and products made by the methods alleged to
infringe the asserted patent. The Administrative Law Judge assigned to the case
set a July 2009 trial date with an initial determination on the merits due
September 21, 2009. The ITC’s final determination is currently scheduled for
January 21, 2010. The LSI patent in suit expires July 13, 2010. A claim for
patent infringement was also made by LSI in the United States District Court for
the Eastern District of Texas regarding the same patent. The action in the
United States District Court for the Eastern
District
of Texas has been stayed pending completion of the ITC case. Fact discovery is
closed in this case and the plaintiff’s expert report contains no mention of ST.
We have filed a motion for summary determination with the ITC based upon our
affirmative defense of license and LSI’s failure to offer expert testimony
regarding infringement of the asserted patent by any ST product.
Other
Matters
In
February 2008, we instituted arbitration proceedings against Credit Suisse
Securities LLC (“Credit Suisse”) in connection with the unauthorized purchase by
Credit Suisse of collateralized debt obligations and credit-linked notes (the
“Unauthorized Securities”) instead of the federally guaranteed student loan
securities that we had instructed Credit Suisse to purchase. On February 12,
2009 an arbitration panel of the Financial Industry Regulatory Authority
(“FINRA”) awarded us approximately $401.5 million in compensatory and
consequential damages, in addition to approximately $27 million in interest and
$3 million in attorney's fees, in exchange for the transfer of all of the
Unauthorized Securities back to Credit Suisse. On February 17, 2009, we filed a
petition in the United States District Court for the Southern District of New
York (the “Court”) seeking confirmation and enforcement of the FINRA award.
Credit Suisse has responded by seeking to vacate the FINRA award. All required
written submissions have to date been filed with the court by us and Credit
Suisse, and the court may rule at any time.
In
October 2008, we learned that the European Commission had commenced an
investigation involving the Smartcard business for alleged violations of
antitrust laws. This investigation is in the very early stages. We are
monitoring the investigation carefully and have expressed our willingness to the
European Commission to cooperate to the full extent possible in the management
of the case and our availability to provide any additional information or
documentation as may be requested.
Related-Party
Transactions
One of
the members of our Supervisory Board is a managing director of Areva SA, which
is a controlled subsidiary of CEA, one of the members of our Supervisory Board
is the Chairman and CEO of France Telecom and a member of the Board of Directors
of Thomson, another is the non-executive Chairman of the Board of Directors of
ARM Holdings PLC (“ARM”), two of our Supervisory Board members are non-executive
directors of Soitec, one of our Supervisory Board members is the CEO of Groupe
Bull, one of the members of the Supervisory Board is also a member of the
Supervisory Board of BESI and one of the members of our Supervisory Board is a
director of Oracle Corporation (“Oracle”) and Flextronics International. France
Telecom and its subsidiaries Equant and Orange, as well as Oracle’s subsidiary
PeopleSoft supply certain services to our Company. We have a long-term joint
R&D partnership agreement with LETI, a wholly-owned subsidiary of CEA. We
have certain licensing agreements with ARM, and have conducted transactions with
Soitec and BESI as well as with Thomson, Flextronics and a subsidiary of Groupe
Bull. Each of the aforementioned arrangements and transactions are negotiated
without the personal involvement of our Supervisory Board members and we believe
that they are made on an arms-length basis in line with market practices and
conditions.
Impact
of Changes in Exchange Rates
Our
results of operations and financial condition can be significantly affected by
material changes in exchange rates between the U.S. dollar and other currencies,
particularly the Euro.
As a
market rule, the reference currency for the semiconductor industry is the U.S.
dollar and product prices are mainly denominated in U.S. dollars. However,
revenues for some of our products (primarily our dedicated products sold in
Europe and Japan) 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 changes in currency rates and adjustments in
the local currency equivalent price paid for such products. Furthermore, certain
significant costs incurred by us, such as manufacturing, labor costs and
depreciation charges, selling, general and administrative 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 or
other
non-U.S. dollar currency areas, our costs tend to increase when translated into
U.S. dollars in case of dollar weakening or to decrease when the U.S. dollar is
strengthening.
In
summary, as our reporting currency is the U.S. dollar, currency exchange rate
fluctuations affect our results of operations: if the U.S. dollar weakens, we
receive a limited part of our revenues, and more importantly, we increase a
significant part of our costs, in currencies other than the U.S. dollar. As
described below, our effective average U.S. dollar exchange rate strengthened
during the first quarter of 2009, particularly against the Euro, causing us to
report lower expenses and favorably impacting both our gross margin and
operating income. Our consolidated statements of income for the three months
ended March 28, 2009 included income and expense items translated at the average
U.S. dollar exchange rate for the period.
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 raw 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 selling and general and
administrative expenses, located in the Euro zone. Our effective average rate of
the Euro to the U.S. dollar was $1.33 for €1.00 for the first quarter of 2009
and $1.40 for €1.00 for the fourth quarter of 2008 while it was $1.47 for €1.00
for the first quarter of 2008. These effective exchange rates are not a U.S.
GAAP measure, but they reflect the actual exchange rates combined with the
impact of hedging contracts matured in the period.
As of
March 28, 2009, the outstanding hedged amounts were €335 million to cover
manufacturing costs and €395 million to cover operating expenses, at an average
rate of about $1.31 for €1.00 for both (including the premium paid to purchase
foreign exchange options), maturing over the period from March 31, 2009 to
February 5, 2010. In the fourth quarter of 2008 we decided to extend the time
horizon of our cash flow hedging contracts for manufacturing costs and operating
expenses for up to 12 months. As of March 28, 2009, these outstanding hedging
contracts and certain expired contracts covering manufacturing expenses
capitalized in inventory represented a deferred gain of approximately $10
million after tax, recorded in “Other comprehensive income” in equity, compared
to a deferred gain of approximately $12 million after tax as at December 31,
2008.
Our
hedging policy is not intended to cover the full exposure and is based on
hedging a declining percentage of exposure quarter after quarter. In addition,
in order to mitigate potential exchange rate risks on our commercial
transactions, we purchased and entered into forward foreign currency exchange
contracts and currency options to cover foreign currency exposure in payables or
receivables at our affiliates. 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 as may be updated from time to time in our
public filings for full details of outstanding contracts and their fair values.
Furthermore, we may not predict in a timely fashion the amount of future
transactions in the volatile industry environment. Consequently, our results of
operations have been and may continue to be impacted by fluctuations in exchange
rates.
Our
treasury strategies to reduce exchange rate risks are intended to mitigate the
impact of exchange rate fluctuations. No assurance may be given that our hedging
activities will sufficiently protect us against declines in the value of the
U.S. dollar. Furthermore, if the value of the U.S. dollar increases, we may
record losses in connection with the loss in value of the remaining hedging
instruments at the time. In the first quarter of 2009, as a result of cash flow
hedging, we recorded a net loss of $13 million, consisting of a loss of $5
million to R&D expenses, a loss of $7 million to costs of goods sold and a
loss of $1 million to selling, general and administrative expenses, while in the
first quarter of 2008, we recorded a net gain of $6 million.
The net
effect of the consolidated foreign exchange exposure resulted in a net gain of
$19 million in “Other income and expenses, net” in the first quarter of
2009.
Assets
and liabilities of subsidiaries are, for consolidation purposes, translated into
U.S. dollars at the period-end exchange rate. Income and expenses are translated
at the average exchange rate for the period. The balance sheet impact of such
translation adjustments has been, and may be expected to be, significant from
period to period since a large part of our assets and liabilities are accounted
for in Euros as their 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 changes in
equity. At March 28, 2009, 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 as 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 from operations and financial condition, since
these changes can impact the total interest income received on our cash and cash
equivalents and the total interest expense paid on our financial
debt.
Our
interest income, net, as reported on our consolidated statements of income, is
the balance between interest income received from our cash and cash equivalent
and marketable securities investments and interest expense paid on our long-term
debt. Our interest income is dependent on the fluctuations in the interest
rates, mainly in the U.S. dollar and the Euro, since we invest primarily on a
short-term basis; any increase or decrease in the short-term market interest
rates would mean an equivalent increase or decrease in our interest income. Our
interest expenses are associated with our long-term Zero Coupon 2013 Convertible
Bonds (with a fixed rate of 1.5%), our Floating Rate Note, which is fixed
quarterly at a rate of LIBOR + 40bps, and EIB Floating Rate Loans for a total of
$701 million. To manage the interest rate mismatch, in the second quarter of
2006, we entered into cancelable swaps to hedge a portion of the fixed rate
obligations on our outstanding long-term debt with Floating Rate derivative
instruments. Of the $974 million in 2016 Convertible Bonds issued in the first
quarter of 2006, we entered into cancelable swaps for $200 million of the
principal amount of the bonds, swapping the 1.5% yield equivalent on the bonds
for 6 Month USD LIBOR minus 3.375%, partially offsetting the interest rate
mismatch of the 2016 Convertible Bond. Our hedging policy was not intended to
cover the full exposure and all risks associated with these instruments. Due to
the exceptionally low U.S. dollar interest rate as a consequence of the
financial crisis, in 2008 we determined that the swaps had not been effective
since November 1, 2008 and the fair value hedge relationship was discontinued.
Consequently, the swaps were designated as held-for-trading financial assets and
reported at fair value as a component of “Other receivables and current assets”
in the consolidated balance sheet as at December 31, 2008 for $34 million, since
we intended to hold the derivative instruments for a short period of time that
would not exceed twelve months. An unrealized gain was recognized in earnings
from discontinuance date totaling $15 million and was reported on the line
“Unrealized gain on financial assets” of the consolidated statement of income
for the three months ended December 31, 2008. This instrument was sold during
the first quarter of 2009 with a positive cash flow impact of $26 million and a
loss of $8 million.
We also
have $250 million of restricted cash formally associated with Hynix
Semiconductor.
As of
March 28, 2009, our cash and cash equivalents and marketable securities
generated an average interest income rate of 1.49%.
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 “A”
or better. Part of our liquidity is also held in Euros to naturally hedge
intercompany payables and financial debt in the same currency and is placed with
financial institutions rated at least single A long-term rating, meaning at
least A3 from Moody’s Investor Service and A- from Standard & Poor’s and
Fitch Ratings. Marginal amounts are held in other currencies. See Item 11,
“Quantitative and Qualitative Disclosures About Market Risk” included in the
Form 20-F, as may be updated from time to time in our public
filings.
In the
third quarter of 2007, we determined that since unauthorized investments in
Auction Rate Securities other than in the U.S. federally-guaranteed student loan
program experienced auction failure since August such investments were to be
more properly classified on our consolidated balance sheet as “Marketable
securities” instead
of “Cash
and cash equivalents” as done in previous periods. Because the investments made
for our account in Auction Rate Securities other than U.S. federally-guaranteed
student loans were made without our authorization, in 2008, we initiated
arbitration proceedings against Credit Suisse Securities LLC, and an action in
district court against Credit Suisse Group, to reverse the unauthorized
purchases and to recover all losses in our account, including, but not limited
to, the $231 million impairment posted to date.
As of
March 28, 2009, we had $1,480 million in cash and cash equivalents, $988 million
in marketable securities as current assets composed of $606 million of senior
debt Floating Rate Notes (“FRN”) issued by primary financial institutions and
$382 million of Aaa Discounted Government Bonds, $250 million as restricted cash
and $184 million as non-current assets invested in Auction Rate Securities. At
March 30, 2008, cash and cash equivalents were $2,060 million and at December
31, 2008 they were $1,009 million.
As of
March 28, 2009, we had $988 million in marketable securities as current assets,
composed of $382 million invested in Aaa Discounted Government Bonds from French
and U.S. governments, $606 million invested in senior debt floating rate notes
issued by primary financial institutions with an average rating, excluding
impaired debt securities, of Aa2/A+. The FRN are classified as
available-for-sale and reported at fair value, with changes in fair value
recognized as a separate component of “Accumulated other comprehensive income”
in the consolidated statement of changes in equity, except if deemed to be
other-than temporary. Out of the total $382 million invested in Aaa Discounted
Government Bonds in 2009, $249 million is classified as available-for-sale
financial assets, with changes in fair value recognized as a separate component
of “Accumulated other comprehensive income” in the consolidated statement of
changes in equity and $133 million is classified as held-for-trading debt
securities, with changes in fair value immediately recorded in the consolidated
statement of income in the first quarter of 2009.
We
reported as of March 28, 2009 an after-tax decline in fair value on our floating
rate note portfolio totaling $1 million due to the general widening of credit
spreads associated with the financial market turmoil. The change in fair value
was recognized as a separate component of “Accumulated other comprehensive
income” in the consolidated statement of changes in equity since we assessed
that this decline in fair value was temporary and that we were in a position to
recover the total carrying amount of these investments in subsequent periods.
Since the duration of the floating-rate note portfolio is only 2.3 years on
average and the securities have a minimum Moody’s rating of “A2”, we expect the
value of the securities to return to par as the final maturity approaches (with
the only exception of a Senior FRN of €15 million issued by Lehman Brothers, the
value of which was impaired through an “other than temporary” charge in 2008).
The fair value for these securities is based on market prices publicly available
through major financial information providers. The market price of the Floating
Rate Notes is influenced by changes in the credit standing of the issuer but is
not significantly impacted by movement in interest rates. The approaching
maturity of the Floating Rate Notes has a positive effect on the market
price.
In 2009,
we invested $503 million in French and U.S. government bonds, of which $127
million was sold in the first quarter of 2009. The change in fair value of the
$249 million debt securities classified as available-for-sale was not material
as at March 28, 2009. The change in fair value on the Euro-denominated Aaa
Discounted Government Bonds classified as held-for-trading corresponded to a $6
million gain and primarily resulted from changes in the Euro/U.S. dollar
exchange rate. The duration of the government bonds portfolio is 3.5 months and
the securities are rated Aaa by Moody’s.
As of
March 28, 2009, we had Auction Rate Securities, representing interests in
collateralized debt obligations and credit linked notes with a par value of $415
million, that were carried on our balance sheet as available-for-sale financial
assets for $184 million. Following the continued failure of auctions for these
securities which began in August 2007, during the fourth quarter of 2007, we
first registered a decline in the value of these Auction Rate Securities as an
“Other-than-temporary” impairment charge against net income for $46 million.
Since the initial failure of the auctions in August 2007, the market for these
securities has completely frozen without any observable secondary market trades,
and consequently, during 2008 and 2009, the portfolio experienced a further
estimated decline in fair value of $185 million, of which $58 million was
recorded during the first quarter of 2009. The reduction in estimated fair value
was recorded as an “Other-than-temporary” impairment charge against net
income.
Since the
fourth quarter of 2007, as there was no information available regarding ‘mark to
market’ bids and ‘mark to model’ valuations from the structuring financial
institutions for these securities, we based our estimation of fair value on a
theoretical model using yields obtainable for comparable assets. The value
inputs for the evaluation of
these
securities were publicly available indices of securities with the same rating,
similar duration and comparable/similar underlying collaterals or industries
exposure (such as ABX for the collateralized debt obligation and ITraxx and
IBoxx for the credit linked notes). The higher impairment charges during 2008
and 2009 reflect downgrading events on the collateral debt obligations comparing
the relevant ABX indices of a lower rating category and a general negative trend
of the corporate debt market. The estimated value of the collateralized debt
obligations could further decrease in the future as a result of credit market
deterioration and/or other downgrading. The estimated value of the corporate
debt securities could also further decrease in the future due to a deterioration
of the corporate industry indices used for the evaluation.
The
investments made in the aforementioned Auction Rate Securities were made without
our authorization and, in 2008, we launched a legal action against Credit Suisse
Securities LLC (Credit Suisse). On February 16, 2009, the arbitration panel of
the Financial Industry Regulatory Authority (“FINRA”) awarded us approximately
$406 million comprising compensatory damages as well as interest, attorneys’
fees and authorized us to retain interest of approximately $25 million that has
already been paid. We have petitioned the United States court for the Southern
District of New York seeking enforcement of the award. Credit Suisse has
responded by seeking to vacate the FINRA award. Upon receipt of the payment we
will transfer ownership of our unauthorized auction rate securities to Credit
Suisse. See “Other Developments” for more information.
Liquidity
We
maintain a significant cash position and a low debt to equity ratio, which
provide us with adequate financial flexibility. As in the past, our cash
management policy is to finance our investment needs with net cash generated
from operating activities.
During
the first quarter of 2009, the evolution of our cash flow produced an increase
in our cash and cash equivalents of $471 million, resulting in a level of cash
and cash equivalent of $1,480 million.
The
evolution of our cash flow for each of the respective periods is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Net
cash from (used in) operating activities
|
|
$ |
(14 |
) |
|
$ |
502 |
|
Net
cash from (used in) investing activities
|
|
|
671 |
|
|
|
(453 |
) |
Net
cash from (used in) financing activities
|
|
|
(162 |
) |
|
|
129 |
|
Effect
of change in exchange rates
|
|
|
(24 |
) |
|
|
27 |
|
Net
cash increase (decrease)
|
|
$ |
471 |
|
|
$ |
205 |
|
Net cash from (used in) operating
activities. Our operating activities did not provide cash in the first
quarter of 2009 due to the negative impact of our operating loss. See “Results
of Operations” for more information.
As a
result, our net cash from operating activities decreased from $502 million in
the first quarter of 2008 to a negative amount of $14 million in the first
quarter of 2009. Depreciation and amortization was $335 million in the first
quarter of 2009 compared to $341 million in the equivalent prior year period.
Furthermore, our cash flow benefited from a net inventory decrease of $123
million, while in the equivalent prior year period it had increased by $142
million.
Net cash from (used in) investing
activities. Investing activities generated cash in the first quarter of
2009 due to the proceeds from the $1,145 million received from Ericsson in
relation to the creation of ST-Ericsson. Payments for the purchase of tangible
assets were $89 million, a significant reduction from the $258 million
registered in the equivalent prior year period. Furthermore, in the first
quarter of 2009, there was a payment of $503 million for the purchase of
marketable securities while we sold $154 million of such
securities.
Net cash from (used in) financing
activities. Net cash used in financing activities was $162 million in the
first quarter of 2009, decreasing compared to the favorable position of $129
million generated in the first quarter of 2008.
The first
quarter of 2009 included a $92 million purchase of equity from noncontrolling
interests related to the acquisition of NXP’s 20% stake in ST-NXP Wireless. In
addition, the first quarter of 2009 included $71 million as quarterly dividends
paid to shareholders, corresponding to the last installment of dividends payable
on the 2007 results.
Net operating cash flow. We
also present net operating cash flow defined as net cash from (used in)
operating activities minus net cash from (used in) investing activities,
excluding payment for purchases of and proceeds from the sale of marketable
securities (both current and non-current), short-term deposits and restricted
cash. We believe net operating cash flow provides useful information for
investors and management because it measures our capacity to generate cash from
our operating and investing activities to sustain our operating activities. Net
operating 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. In addition, our definition of net operating cash flow may differ
from definitions used by other companies. Net operating cash flow is determined
as follows from our Unaudited Interim Consolidated Statements of Cash
Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Net
cash from (used in) operating activities
|
|
$ |
(14 |
) |
|
$ |
502 |
|
Net
cash from (used in) investing activities
|
|
|
671 |
|
|
|
(453 |
) |
Payment
for purchase and proceeds from sale of marketable securities (current and
non-current), short-term deposits and restricted cash, net
|
|
|
349 |
|
|
|
— |
|
Net
operating cash flow
|
|
$ |
1,006 |
|
|
$ |
49 |
|
We had
favorable net operating cash flow of $1,006 million in the first quarter of
2009, significantly increasing compared to net operating cash flow of $49
million in the first quarter of 2008, as a result of our receiving cash from EMP
as part of the creation of the ST-Ericsson joint venture. Excluding the effects
of business combinations, net operating cash flow was unfavorable by $139
million, decreasing compared to favorable net operating cash flow of $219
million, because of the deterioration in our operating result.
Capital
Resources
Net
financial position
Our net
financial position: resources (debt), represents the balance between our total
financial resources and our total financial debt. Our total financial resources
include cash and cash equivalents, current and non-current marketable
securities, short-term deposits and restricted cash, and our total financial
debt include bank overdrafts, current portion of long-term debt and long-term
debt, as represented in our consolidated balance sheet. 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, cash equivalents and marketable securities and the total level of our
financial indebtedness.
The net
financial position has been determined as follows from our Unaudited Interim
Consolidated Balance Sheets as at March 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Cash
and cash equivalents, net of bank overdrafts
|
|
$ |
1,477 |
|
|
$ |
989 |
|
|
$ |
2,060 |
|
Marketable
securities, current
|
|
|
988 |
|
|
|
651 |
|
|
|
1,060 |
|
Restricted
cash
|
|
|
250 |
|
|
|
250 |
|
|
|
250 |
|
Marketable
securities, non-current
|
|
|
184 |
|
|
|
242 |
|
|
|
339 |
|
Total
financial resources
|
|
|
2,899 |
|
|
|
2,132 |
|
|
|
3,709 |
|
Current
portion of long-term debt
|
|
|
(159 |
) |
|
|
(123 |
) |
|
|
(300 |
) |
Long-term
debt
|
|
|
(2,486 |
) |
|
|
(2,554 |
) |
|
|
(2,324 |
) |
Total
financial debt
|
|
|
(2,645 |
) |
|
|
(2,677 |
) |
|
|
(2,624 |
) |
Net
financial position
|
|
$ |
254 |
|
|
$ |
(545 |
) |
|
$ |
1,085 |
|
Our net
financial position as of March 28, 2009 resulted in a net cash position of $254
million, representing a significant improvement from the net debt position of
$545 million as of December 31, 2008 due to the payment of $1,145 million
received from Ericsson relating to the creation of ST-Ericsson. We paid $92
million in February 2009 for the call option to purchase NXP’s 20% interest in
our wireless joint venture company. In the same period, both our cash position
and our current marketable securities portfolio increased significantly to
$1,477 million and $988 million, respectively, while total financial debt
decreased to $2,645 million.
Our net
financial position decreased as compared to March 30, 2008, as a result of the
payments of $1.6 billion made for our business acquisitions, which exceeded the
cash received from Ericsson to create ST-Ericsson.
At March
28, 2009, the aggregate amount of our long-term debt, including the current
portion, was $2,645 million, including $1,039 million of our 2016 Convertible
Bonds and $665 million of our 2013 Senior Bonds (corresponding to the €500
million at issuance), while we nearly entirely redeemed our 2013 Convertible
Bonds. Additionally, we had unutilized committed medium term credit facilities
with core relationship banks totaling $500 million. Furthermore, the aggregate
amount of our and our subsidiaries’ total available short-term credit
facilities, excluding foreign exchange credit facilities, was approximately $729
million as at March 28, 2009. We also had two committed credit facilities with
the European Investment Bank as part of a R&D funding program. The first
one, for a total of €245 million for R&D in France was fully drawn in U.S.
dollars for a total amount of $341 million, of which $20 million was paid back
in 2008. The second one, signed on July 21, 2008, for a total amount of €250
million for R&D projects in Italy, was fully drawn in U.S. dollars for $380
million as at March 28, 2009. We also maintain uncommitted foreign exchange
facilities totaling $700 million at March 28, 2009. At March 28, 2009, available
short-term lines of credit were reduced by $3 million bank overdrafts. At March
30, 2008, amounts available under the short-term lines of credit were not
reduced by any borrowing.
Our
long-term capital market financing instruments contain standard covenants, but
do not impose minimum financial ratios or similar obligations on us. Upon a
change of control, the holders of our 2016 Convertible Bonds and 2013 Senior
Bonds may require us to repurchase all or a portion of such holder’s bonds. See
Note 16 to our Consolidated Financial Statements.
As of
March 28, 2009, debt payments due by period and based on the assumption that
convertible debt redemptions are at the holder’s first redemption option were as
follows:
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Long-term
debt (including current portion)
|
|
$ |
2,645 |
|
|
$ |
159 |
|
|
$ |
1,211 |
|
|
$ |
115 |
|
|
$ |
780 |
|
|
$ |
113 |
|
|
$ |
112 |
|
|
$ |
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to
regulatory and withholding tax issues, we could not directly provide the
Hynix joint venture with the $250 million long-term financing as originally
planned. As a result, in 2006, we entered into a ten-year term debt guarantee
agreement with an external financial institution through which we guaranteed the
repayment of the loan by the joint venture to the bank. The guarantee agreement
includes our placing up to $250 million in cash in a deposit account. The
guarantee deposit will be used by the bank in case of repayment failure from the
joint venture, with $250 million as the maximum potential amount of future
payments we, as the guarantor, could be required to make. In the event of
default and failure to repay the loan from the joint venture, the bank will
exercise our rights,
subordinated
to the repayment to senior lenders, to recover the amounts paid under the
guarantee through the sale of the joint venture’s assets. The $250 million,
which has been on deposit since 2007, has been reported as “Restricted cash” on
the consolidated balance sheet at March 28, 2009. The debt guarantee was
evaluated under FIN 45, and resulted in the recognition of a $17 million
liability, corresponding to the fair value of the guarantee at inception of the
transaction. The debt guarantee obligation continues to be reported on the line
“Other non-current liabilities” in the consolidated balance sheet as at March
28, 2009, since the terms of the FMG deconsolidation did not include the
transfer of the guarantee. As at March 28, 2009, the guarantee was not
exercised. To the best of management’s knowledge as at March 28, 2009, the joint
venture was current on its debt obligations, not in default of any debt
covenants and did not expect to be in default on these obligations in the
foreseeable future. Our current maximum exposure to loss as a result of our
involvement with the joint venture is limited to our indirect investment through
Numonyx and the debt guarantee commitments.
As of
March 28, 2009, we have the following credit ratings on our 2013 and 2016
Bonds:
|
Moody’s
Investors Service
|
|
|
Zero
Coupon Senior Convertible Bonds due 2013
|
WR
(1)
|
|
BBB+
|
Zero
Coupon Senior Convertible Bonds due 2016
|
Baa1
|
|
BBB+
|
Floating
Rate Senior Bonds due 2013
|
Baa1
|
|
BBB+
|
(1) Rating
withdrawn since the redemption in August 2006 of $1.4 billion of our 2013
Convertible Bonds.
On April
11, 2008, Moody's Investors Service and Standard & Poor's Ratings Services
put our ratings “on review for possible downgrade” and “on CreditWatch with
negative implications,” respectively. On June 24, 2008, Standard and Poor’s
Rating Services affirmed the “A-” rating. On June 25, 2008 Moody’s Investors
Service downgraded our senior debt rating from “A3” to “Baa1.”
On
February 6, 2009 Standard & Poor’s Rating Services lowered our senior debt
rating from “A-” to “BBB+” and Moody’s Investors Service affirmed the Baa1
senior debt ratings and changed the outlook on the ratings to negative from
stable.
Contractual
Obligations, Commercial Commitments and Contingencies
Our
contractual obligations, commercial commitments and contingencies as of March
28, 2009, and for each of the five years to come and thereafter, were as follows
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases(2)
|
|
$ |
372 |
|
|
|
71 |
|
|
|
67 |
|
|
|
59 |
|
|
|
47 |
|
|
|
30 |
|
|
|
27 |
|
|
|
71 |
|
Purchase
obligations(2)
|
|
$ |
541 |
|
|
|
427 |
|
|
|
74 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and other asset purchase
|
|
$ |
112 |
|
|
|
109 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry
purchase
|
|
$ |
154 |
|
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software,
technology licenses and design
|
|
$ |
275 |
|
|
|
164 |
|
|
|
71 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
obligations(2)
|
|
$ |
353 |
|
|
|
146 |
|
|
|
105 |
|
|
|
53 |
|
|
|
43 |
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
Long-term
debt obligations (including current portion)(3)(4)(5)
of
which:
|
|
$ |
2,645 |
|
|
|
159 |
|
|
|
1,211 |
|
|
|
115 |
|
|
|
780 |
|
|
|
113 |
|
|
|
112 |
|
|
|
155 |
|
Capital
leases(3)
|
|
$ |
13 |
|
|
|
4 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Pension
obligations(3)
|
|
$ |
313 |
|
|
|
26 |
|
|
|
36 |
|
|
|
26 |
|
|
|
31 |
|
|
|
32 |
|
|
|
42 |
|
|
|
120 |
|
Other
non-current liabilities(3)
|
|
$ |
355 |
|
|
|
8 |
|
|
|
59 |
|
|
|
16 |
|
|
|
85 |
|
|
|
8 |
|
|
|
7 |
|
|
|
172 |
|
Total
|
|
$ |
4,579 |
|
|
$ |
837 |
|
|
$ |
1,552 |
|
|
$ |
309 |
|
|
$ |
986 |
|
|
$ |
187 |
|
|
$ |
190 |
|
|
$ |
518 |
|
(1) Contingent
liabilities which cannot be quantified are excluded from the table
above.
(2) Items
not reflected on the Unaudited Consolidated Balance Sheet at March 28,
2009.
(3) Items
reflected on the Unaudited Consolidated Balance Sheet at March 28,
2009.
(4) See
Note 16 to our Unaudited Consolidated Financial Statements at March 28, 2009 for
additional information related to long-term debt and redeemable convertible
securities.
(5) Year
of payment is based on maturity before taking into account any potential
acceleration that could result from a triggering of the change of control
provisions of the 2016 Convertible Bonds and the 2013 Senior Bonds.
As a
consequence of our July 10, 2007 announcement concerning the planned closures of
certain of our manufacturing facilities, the future shutdown of our plants in
the United States will lead to negotiations with some of our suppliers. As no
final date has been set, none of the contracts as reported above have been
terminated nor do the reported amounts take into account any termination
fees.
Operating
leases are mainly related to building leases and to equipment leases as part of
the Crolles2 equipment repurchase which was finalized in the third quarter of
2008. The amount disclosed is composed of minimum payments for future leases
from 2009 to 2014 and thereafter. We lease land, buildings, plants and equipment
under operating leases that expire at various dates under non-cancelable lease
agreements.
Purchase
obligations are primarily comprised of purchase commitments for equipment, for
outsourced foundry wafers and for software licenses.
Other
obligations primarily relate to firm contractual commitments with respect to a
cooperation agreement. In addition, on January 17, 2008 we acquired effective
control of Genesis. There remains a commitment of $5 million related to a
retention program expected to be paid in 2009, which is also included in Other
obligations.
Long-term
debt obligations mainly consist of bank loans, convertible and non-convertible
debt issued by us that is totally or partially redeemable for cash at the option
of the holder. They include maximum future amounts that may be redeemable for
cash at the option of the holder, at fixed prices. On August 7, 2006, as a
result of almost all of the holders of our 2013 Convertible Bonds exercising the
August 4, 2006 put option, we repurchased $1,397 million aggregate principal
amount of the outstanding convertible bonds. The outstanding long-term debt
corresponding to the 2013 convertible debt was not material as at March 28,
2009.
In
February 2006, we issued $1,131 million principal amount at maturity of Zero
Coupon Senior Convertible Bonds due in February 2016. The bonds were convertible
by the holder at any time prior to maturity at a conversion rate of 43.118317
shares per one thousand dollars face value of the bonds corresponding to
41,997,240 equivalent shares. The holders can also redeem the convertible bonds
on February 23, 2011 at a price of $1,077.58, on February 23, 2012 at a price of
$1,093.81 and on February 24, 2014 at a price of $1,126.99 per one thousand
dollars face value of the bonds. We can call the bonds at any time after March
10, 2011 subject to our share price exceeding 130% of the accreted value divided
by the conversion rate for 20 out of 30 consecutive trading days.
At our
annual general meeting of shareholders held on April 26, 2007, our shareholders
approved a cash dividend distribution of $0.30 per share. Pursuant to the terms
of our 2016 Convertible Bonds, the payment of this dividend gave rise to a
slight change in the conversion rate thereof. The new conversion rate was
43.363087 corresponding to 42,235,646 equivalent shares. At our annual general
meeting of shareholders held on May 14, 2008, our shareholders approved a cash
dividend distribution of $0.36 per share. The payment of this dividend gave rise
to a change in the conversion rate thereof. The new conversion rate is
43.833898, corresponding to 42,694,216 equivalent shares.
In March
2006, STMicroelectronics Finance B.V. (“ST BV”), one of our wholly-owned
subsidiaries, issued Floating Rate Senior Bonds with a principal amount of €500
million at an issue price of 99.873%. The notes, which mature on March 17, 2013,
pay a coupon rate of the three-month Euribor plus 0.40% on the 17th of June,
September, December and March of each year through maturity. The notes have a
put for early repayment in case of a change of control. The Floating Rate Senior
Bonds issued by ST BV are collateralized with guarantee issued by
us.
Pension
obligations and termination indemnities amounting to $313 million consist of our
best estimates of the amounts projected to be payable by us for the retirement
plans based on the assumption that our employees will work for us until they
reach the age of retirement. The final actual amount to be paid and related
timing of such
payments
may vary significantly due to early retirements, terminations and changes in
assumptions rates. See Note 18 to our Consolidated Financial Statements. As part
of the FMG deconsolidation, we retained the obligation to fund the
severance payment (“trattamento di fine rapporto”) due to certain transferred
employees by the defined amount of about $33 million which qualifies as a
defined benefit plan and was classified as an other non-current liability as at
March 28, 2009.
Other
non-current liabilities include, in addition to the above-mentioned pension
obligation, future obligations related to our restructuring plans and
miscellaneous contractual obligations. They also include as at March 28, 2009,
following the FMG deconsolidation in 2008, a long-term liability for capacity
rights amounting to $55 million. In addition, we and Intel have each granted in
favor of Numonyx B.V., in which we hold a 48.6% equity investment through
Numonyx, a 50% guarantee not joint and several, for indebtedness related to the
financing arrangements entered into by Numonyx for a $450 million term loan and
a $100 million committed revolving credit facility. Non-current liabilities
include the $69 million guarantee liability based on the fair value of the term
loan over 4 years with effect of the savings provided by the
guarantee.
Off-Balance
Sheet Arrangements
At March
28, 2009, we had convertible debt instruments outstanding. Our convertible debt
instruments contain certain conversion and redemption options that are not
required to be accounted for separately in our financial statements. See Note 16
to our Unaudited Interim Consolidated Financial Statements for more information
about our convertible debt instruments and related conversion and redemption
options.
We have
no other material off-balance sheet arrangements at March 28, 2009.
Financial
Outlook
We are
reconfirming our target to have capital expenditures to decrease approximately
by 50% as compared to the $983 million spent in 2008 to approximate $500
million. The most significant of our 2009 capital expenditure projects are
expected to be: (a) for the front-end facilities: (i) the tool set to transfer
the 32nm process from our participation in the IBM Alliance to our 300-mm fab in
Crolles; (ii) the completion of the restructuring program for FE fabs; (iii)
focused investment both in manufacturing and R&D in France sites to secure
and develop our system oriented proprietary technologies portfolio; (iv)
quality, safety, security, maintenance both in 6” and 8” front end fabs; and (b)
for the back-end facilities, the capital expenditures will mainly be dedicated
to the technology evolution to support the ICs path to package size reduction in
Shenzhen (China) and Muar (Malaysia) and to prepare the room for future years
capacity growth by completing the new production area in Muar and the new plant
in Longgang (China).
We will
continue to monitor our level of capital spending by taking into consideration
factors such as trends in the semiconductor industry, capacity utilization and
announced additions. We expect to have capital requirements in the coming years
and, in addition, we intend to continue to devote a substantial portion of our
net revenues to R&D. We plan to fund our capital requirements from cash
provided by operating activities, available funds and available 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 issuing 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 the previous years to
fund our capital expenditures plans for expending/upgrading our production
facilities, our working capital requirements, our R&D and industrialization
costs.
Impact
of Recently Issued U.S. Accounting Standards
In
September 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards
No. 157, Fair Value Measurements (“FAS 157”). This statement defines fair
value as “the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date.” In addition, the statement defines a fair value hierarchy
which should be used when determining
fair
values, except as specifically excluded. FAS 157 is effective for fiscal years
beginning after November 15, 2007. However, in February 2008, the Financial
Accounting Standards Board issued an FASB Staff Position (“FSP”) that partially
deferred the effective date of FAS 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized at fair value in the financial
statements on a nonrecurring basis. We adopted FAS 157 on January 1, 2008 for
fair value measurement on financial assets and liabilities and on January 1,
2009 for nonfinancial assets and liabilities recognized at fair value on a
nonrecurring basis. We assessed the impact of FAS 157 adoption on nonfinancial
assets and liabilities, such as impaired long-lived assets or goodwill. For
goodwill impairment testing and the use of fair value of tested reporting units,
we reviewed our goodwill impairment model to measure fair value relying on
external inputs and market participant’s assumptions rather than exclusively
using discounted cash flows generated by each reporting entity. Such fair value
measurement corresponds to a FAS 157 level 3 fair value hierarchy, as described
in Note 23. This new fair value measurement basis, when applied in a comparable
market environment as in the last impairment campaigns, had no significant
material impact on the results of the goodwill impairment test as performed in
the first quarter of 2009. However, as a result of the continuing downturn in
market conditions and the general business environment, this new measurement of
the fair value of the reporting units, when used in future goodwill and
impairment testing, could generate higher impairment charges as the fair value
will be estimated on business indicators that could reflect a distressed
market.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (Revised 2007), Business Combinations
(“FAS 141R”) and No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51 (“FAS 160”). FAS 141R significantly
changes how business acquisitions are accounted for. FAS 160 changes the
accounting and reporting for minority interests, which are recharacterized as
noncontrolling interests and classified as a component of equity. The
significant changes from past practice resulting from FAS 141R are as follows:
the new standard expands the definitions of a business and business combination;
it requires the recognition of contingent consideration at fair value on the
acquisition date; acquisition-related transaction costs and restructuring costs
are expensed as incurred; FAS 141R changes the way certain assets are valued and
requires retrospective application of measurement period adjustments.
Additionally, for all business combinations (whether partial, full, or step
acquisitions), the entity that acquires the business records 100% of all assets
and liabilities of the acquired business, including goodwill, generally at their
fair values. The significant change from past practice resulting from FAS 160
adoption is that since the noncontrolling interests are now considered as
equity, transactions between the parent company and the noncontrolling interests
are treated as equity transactions as far as these transactions do not create a
change in control. Additionally, FAS 160 also requires the recognition of
noncontrolling interests at fair value rather than at book value as in past
practice in case of partial acquisitions. FAS 141R and FAS 160 are effective for
fiscal years beginning on or after December 15, 2008 and were adopted by us
on January 1, 2009. FAS 141R was applied prospectively, with the exception of
accounting for changes in a valuation allowance for acquired deferred tax assets
and the resolution of uncertain tax positions accounted for under FIN 48. FAS
160 required retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of FAS 160
were applied prospectively. Acquisition-related costs, which amounted to $7
million and were capitalized as at December 31, 2008, were immediately recorded
in earnings in the first quarter of 2009. Additionally, the adoption of FAS 160
for the presentation and disclosures of noncontrolling interests generated a
reclassification in all reporting periods as at January 1, 2009 from the
mezzanine line “Minority interests” in the previously filed consolidated balance
sheet as at December 31, 2008 to equity for a total amount of $276 million. No
significant changes were recorded in valuation allowance for acquired deferred
tax assets and the resolution of assumed uncertain tax positions on past
business combinations.
In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 161, Disclosures about Derivative Instruments and
Hedging Activities (“FAS 161”). The new standard is intended to improve
financial reporting about derivative instruments and hedging activities and to
enable investors to better understand how these instruments and activities
affect an entity’s financial position, financial performance and cash flows
through enhanced disclosure requirements. FAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application permitted. We adopted FAS 161 in the first
quarter of 2009 and included the new disclosure requirements in Note
23.
In May
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting
Principles (“FAS 162”). The new standard identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial
statements
of nongovernmental entities that are presented in conformity with U.S. GAAP. FAS
162 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application permitted. We
adopted FAS 162 in the first quarter of 2009, which did not have a material
effect on our financial position and results of operations.
In
November 2008, the Emerging Issues Task Force reached final consensus on Issue
No. 08-6, Equity Method Investment Accounting Considerations (“EITF 08-6”). This
issue addresses a certain number of matters associated with the impact that FAS
141R and FAS 160 might have on the accounting for equity method investments.
EITF 08-6 is effective for financial statements issued for fiscal years and
interim periods within those fiscal years beginning on or after December 15,
2008, with no early application permitted. EITF 08-6 must be applied
prospectively to new investments acquired after the effective date. We adopted
EITF 08-6 in the first quarter of 2009 and such adoption did not represent a
significant change to past practice.
In
November 2008, the Emerging Issues Task Force reached final consensus on Issue
No. 08-7, Accounting for Defensive Intangible Assets (“EITF 08-7”). This issue
applies to all defensive assets, either acquired from a third party or through a
business combination. However, EITF 08-7 excludes from its scope in-process
research and development acquired in a business combination. EITF 08-7 states
that a defensive asset should be considered a separate unit of accounting and
should not be combined with the existing asset whose value it may enhance. A
useful life should be assigned that reflects the acquiring entity’s consumption
of the defensive asset’s expected benefits. EITF 08-7 is effective prospectively
to intangible assets acquired on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, with no early
application permitted. We adopted EITF 08-6 in the first quarter of 2009. We did
not acquire significant defensive intangible assets and even if future business
combinations involve the acquisition of defensive assets, the application of
EITF 08-7 would not represent a significant change to past
practice.
Equity
investments
Numonyx
In 2007,
we entered into an agreement with Intel Corporation and Francisco Partners L.P.
to create a new independent semiconductor company from the key assets of our
Flash Memory Group and Intel’s flash memory business (“FMG deconsolidation”).
Under the terms of the agreement, we would sell our flash memory assets,
including our NAND joint venture interest with Hynix as described below and
other NOR resources, to the new company, which was called Numonyx Holdings B.V.
(“Numonyx”), while Intel would sell its NOR assets and resources. In connection
with this announcement, we reported in 2007 an impairment charge of
$1,106 million to adjust the value of these assets to fair value less costs
to sell.
The
Numonyx transaction closed on March 30, 2008. At closing, through a series of
steps, we contributed our flash memory assets and businesses as previously
announced, for 109,254,191 common shares of Numonyx, representing a 48.6% equity
ownership stake valued at $966 million, and $156 million in long-term
subordinated notes, as described in Note 15. As a consequence of the final terms
and balance sheet at the closing date and additional agreements on assets to be
contributed, coupled with changes in valuation for comparable Flash memory
companies, we incurred an additional pre-tax loss of $190 million for the year
ended December 31, 2008, of which $164 million was recorded in the first quarter
of 2008. The additional losses were reported on the line “Impairment,
restructuring charges and other related closure costs” of the consolidated
statement of income, as described in Note 7.
Upon
creation, Numonyx entered into financing arrangements for a $450 million term
loan and a $100 million committed revolving credit facility from two primary
financial institutions. The loans have a four-year term. We and Intel have each
granted in favor of Numonyx a 50% debt guarantee not joint and several. In the
event of default and failure to repay the loans from Numonyx, the banks will
exercise our rights, subordinated to the repayment to senior lenders, to recover
the amounts paid under the guarantee through the sale of the assets. The debt
guarantee was evaluated under FIN 45. It resulted in the recognition of a $69
million liability, corresponding to the fair value of the guarantee at inception
of the transaction. The same amount was also added to the value of the equity
investment. The debt guarantee obligation was reported on the line “Other
non-current liabilities” in the consolidated balance sheet as at March 28, 2009.
As at March 28, 2009 the guarantee was not exercised. To the best of
management’s knowledge, as at March 28, 2009, Numonyx was current on its debt
obligations, not in default of any debt covenants and did not expect to be in
default on these obligations in the foreseeable future.
We
account for our share in Numonyx under the equity method based on the results of
the venture. In the valuation of our Numonyx investment under the equity method,
we apply a one-quarter lag reporting. For the first quarter of 2009, the line
“Earnings (loss) on equity investments” in our consolidated statement of income
included the following amounts related to the investment in Numonyx: a charge of
$69 million that represents our proportional share of the loss reported by
Numonyx in the fourth quarter of 2008, a benefit of $40 million related to
amortization of basis differences arising principally from impairment charges
recorded by us in prior periods and a $200 million other-than-temporary
impairment charge, for a net total of $229 million. The impairment charge
recorded in the first quarter resulted from a re-assessment by us of the fair
value of our investment in Numonyx following the deterioration of both the
global economic situation and the memory market segment, as well as a revision
by Numonyx of its 2009 projected results. The calculation of the impairment was
based upon a combination of an income approach, using discounted cash flows, and
a market approach, using metrics of comparable public companies. At March 28,
2009 our investment in Numonyx, including the amount of the debt guarantee,
amounted to $266 million.
Our
current maximum exposure to loss as a result of our involvement with Numonyx is
limited to our equity investment, our investment in subordinated notes and our
debt guarantee obligation.
ST-Ericsson
AT Holding
As
discussed in Note 9, on February 3, 2009, we announced the closing of a
transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and
ST-NXP Wireless into a new venture, to be named ST-Ericsson. As part of the
transaction, we received an interest in ST-Ericsson AT Holding AG (“JVD”). JVD,
in which we own 50% less a
controlling
share held by Ericsson, is the parent company of a group of entities that
perform fundamental R&D activities for the ST-Ericsson venture. We have
determined that JVD is a Variable Interest Entity as defined in FIN 46(R), but
have determined that we are not the primary beneficiary of the entity.
Accordingly, we account for our noncontrolling interest in JVD under the equity
method of accounting. Our investment in JVD at the date of the transaction was
valued at $99 million. In the first quarter of 2009, the line “Earnings (loss)
on equity investments” in our consolidated statement of income included a charge
of $4 million related to JVD, which includes the amortization of basis
differences. Our current maximum exposure to loss as a result of our involvement
with JVD is limited to our equity investment, which was shown as $95 million on
the consolidated balance sheet at March 28, 2009.
Veredus
In 2008,
we acquired 41.2% of ownership interest in Veredus Laboratories Pte. Ltd
(“Veredus”), a company located in Singapore which sells diagnostic solutions to
the medical market. The acquisition amounted to $11 million and was fully paid
in 2008. The investment is aimed at joining forces with established and growing
players in the medical diagnostic market, accelerating thus market adoption of
LabOnCHip technology and products. We account for our interest in Veredus under
the equity method. In the valuation of the Veredus investment under the equity
method, we apply a one-quarter lag reporting. Our share of the results of
Veredus, as reported on the line “Earnings (loss) on equity investments” of the
consolidated statement of income for the three months ended March 28, 2009, was
not material.
ATLab
In 2008,
we acquired 8.1% of the ownership interest in ATLab Inc. (“ATLab”), a Korean
company that sells semiconductor devices to the optical mouse, touch screen and
touch pad markets. With this investment, we intend to secure partnership in
product development for the growing touch screen market. The acquisition, which
totaled $4 million, was fully paid in 2008, and included the purchase of a
technology.
We have
identified ATLab as a Variable Interest Entity as defined in FIN 46(R), but have
determined that we are not the primary beneficiary of the entity. We have the
ability to exercise significant influence on certain decisions of the entity.
Consequently, we account for our interest in ATLab under the equity method. Our
share of the results of ATLab, as reported on the line “Earnings (loss) on
equity investments” of the consolidated statement of income for the three months
ended March 28, 2009, was not material.
Backlog
and Customers
During
the first quarter of 2009, we registered a decrease in the level of bookings
(including frame orders) compared to the comparable period in 2008, due to the
negative impact of the current downturn in the industry. We entered the second
quarter of 2009, however, with a backlog higher than what we had entering the
first quarter of 2009. Backlog (including frame orders) is subject to possible
cancellation, push back, lower than expected hit of frame orders, etc., and thus
is not necessarily indicative of billings amount or growth for the
year.
In the
first quarter of 2009, we had several large customers, with the Nokia Group of
companies being the largest, accounting for approximately 19% of our revenues
compared to 19% in the first quarter of 2008 (excluding FMG). There is no
guarantee that the Nokia Group of companies, or any other customer, will
continue to generate revenues for us at the same levels. 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.
Changes
to Our Share Capital, Stock Option Grants and Other Matters
The
following table sets forth changes to our share capital as of March 28,
2009:
Year
|
Transaction
|
|
Number of
shares
|
|
|
Nominal
value (Euro)
|
|
|
Cumulative
amount of capital (Euro)
|
|
|
Cumulative
number of shares
|
|
|
Nominal
value of increase/ reduction in capital
(Euro)
|
|
|
Amount
of issue premium (Euro)
|
|
|
Cumulative—issue
premium (Euro)
|
|
|
|
|
March
30, 2008
|
Exercise
of options
|
|
|
4,885 |
|
|
|
1.04 |
|
|
|
946,710,237 |
|
|
|
910,298,305 |
|
|
|
5,080 |
|
|
|
— |
|
|
|
1,756,254,982 |
|
December
31, 2008
|
Exercise
of options
|
|
|
13,885 |
|
|
|
1.04 |
|
|
|
946,719,597 |
|
|
|
910,307,305 |
|
|
|
14,440 |
|
|
|
— |
|
|
|
1,756,254,982 |
|
March
28, 2009
|
Exercise
of options
|
|
|
— |
|
|
|
1.04 |
|
|
|
946,719,597 |
|
|
|
910,307,305 |
|
|
|
— |
|
|
|
— |
|
|
|
1,756,254,982 |
|
As of
March 28, 2009, we had 910,307,305 shares, of which 35,979,531 shares were owned
as treasury stock. We also had outstanding stock options exercisable into the
equivalent of 39,032,772 common shares and 10,865,963 unvested stock awards to
be vested on treasury stock. Upon fulfillment of the respective predetermined
criteria, the second tranche of stock awards granted under our 2007 stock-based
plan vested on April 26, 2009, and the last tranche of stock awards granted
under our 2006 stock-based plan vested on April 27, 2009. For full details of
quantitative and qualitative information, see “Item 6. Directors, Senior
Management and Employees” as set forth in our Form 20-F, as may be updated from
time to time in our public filings, and see Notes 17 and 20 to our Unaudited
Interim Consolidated Financial Statements.
In the
first quarter of 2009, our share-based compensation plans generated a total
charge of $12 million pre-tax in our income statement ($3 million for the 2008
Unvested Stock Award Plan, $7 million for the 2007 Unvested Stock Award Plan and
$2 million for the 2006 Unvested Stock Award Plan).
Disclosure
Controls and Procedures
We
conducted 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. The controls evaluation was conducted under the
supervision and with the participation of management, including our CEO and CFO.
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 Form 6-K, 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
for purposes of providing the management report which is set forth
below.
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 Form 6-K. 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, as of January 2008,
reports to our Chief Compliance Officer. 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 report, our Disclosure Controls were effective to
provide reasonable assurance that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified by the SEC, and that material information related to
STMicroelectronics and its consolidated subsidiaries is made known to
management, including the CEO and CFO, particularly during the period when our
periodic reports are being prepared.
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.
Cautionary
Note Regarding Forward-Looking Statements
Some of
the statements contained in this Form 6-K that are not historical facts,
particularly in “Overview Business Outlook” and in “Liquidity and Capital
Resources – Financial Outlook”, are statements of future expectations and other
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as
amended) that are based on management’s current views and assumptions, and are
conditioned upon and also involve known and unknown risks and uncertainties that
could cause actual results, performance or events to differ materially from
those in such statements due to, among other factors:
|
·
|
volatility
in demand in the key application markets and from key customers served by
our products, and changes in customer order patterns, including order
cancellations, all of which generate uncertainties and make it extremely
difficult to accurately forecast and plan our future business
activities;
|
|
·
|
our
ability to adequately utilize and operate our manufacturing facilities at
sufficient levels to cover fixed operating costs particularly at a time of
decreasing demand for our products as well as the financial impact of
obsolete or excess inventories if actual demand differs from our
anticipations;
|
|
·
|
the
impact of intellectual property claims by our competitors or other third
parties, and our ability to obtain required licenses on reasonable terms
and conditions;
|
|
·
|
the
outcome of ongoing litigation as well as any new litigation to which we
may become a defendant;
|
|
·
|
our
ability to successfully integrate the acquisitions we pursue, in
particular the merger of ST-NXP Wireless with Ericsson Mobile Platforms
(“EMP”) to form ST-Ericsson in the current difficult economic
environment;
|
|
·
|
we
hold significant non-marketable equity investments in Numonyx, our joint
venture in the flash memory market segment, and in ST-Ericsson, our joint
venture in the wireless segment. Additionally, we are a guarantor for
certain Numonyx debts. Therefore, declines in these market segments could
result in significant impairment charges, restructuring charges and
gains/losses on equity investments;
|
|
·
|
our
ability to manage in an intensely competitive and cyclical industry, where
a high percentage of our costs are fixed and are incurred in currencies
other than U.S. dollars as well as our ability to execute our
restructuring initiatives in accordance with our plans if unforeseen
events require adjustments or delays in
implementation;
|
|
·
|
our
ability in an intensively competitive environment to secure customer
acceptance and to achieve our pricing expectations for high-volume
supplies of new products in whose development we have been, or are
currently, investing;
|
|
·
|
the
ability to maintain solid, viable relationships with our suppliers and
customers in the event they are unable to maintain a competitive market
presence due, in particular, to the effects of the current economic
environment;
|
|
·
|
changes
in the political, social or economic environment, including as a result of
military conflict, social unrest and/or terrorist activities, economic
turmoil as well as natural events such as severe weather, health risks,
epidemics or earthquakes in the countries in which we, our key customers
or our suppliers, operate; and
|
|
·
|
changes
in our overall tax position as a result of changes in tax laws or the
outcome of tax audits, and our ability to accurately estimate tax credits,
benefits, deductions and provisions and to realize deferred tax
assets.
|
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”, “will”, “will continue”,
“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 this Form 6-K 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 “Risk Factors” from time to
time in our Securities and Exchange Commission (“SEC”) filings, could have a
material adverse effect on our business and/or financial condition.
|
|
|
|
UNAUDITED
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Pages
|
|
Consolidated
Statements of Income for the Three Months Ended March 28, 2009 and March
30, 2008 (unaudited)
|
|
|
F-1 |
|
Consolidated
Balance Sheets as of March 28, 2009 (unaudited) and December 31, 2008
(audited)
|
|
|
F-2 |
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 28, 2009 and
March 30, 2008 (unaudited)
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F-3 |
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Consolidated
Statements of Changes in Equity (unaudited)
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F-4 |
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Notes
to Interim Consolidated Financial Statements (unaudited)
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F-5 |
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STMicroelectronics
N.V.
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CONSOLIDATED
STATEMENTS OF INCOME
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Three
months ended
|
|
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(Unaudited)
|
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March
28,
|
March
30,
|
|
|
In
million of U.S. dollars except per share amounts
|
2009
|
2008
|
|
|
|
|
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Net
sales
|
1,657
|
2,461
|
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|
Other
revenues
|
3
|
17
|
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Net
revenues
|
1,660
|
2,478
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Cost
of sales
|
(1,223)
|
(1,579)
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Gross
profit
|
437
|
899
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Selling,
general and administrative
|
(280)
|
(304)
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Research
and development
|
(557)
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(509)
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Other
income and expenses, net
|
63
|
9
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Impairment,
restructuring charges and other related closure costs
|
(56)
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(183)
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Operating
loss
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(393)
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(88)
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Other
-than-temporary impairment charge on financial assets
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(58)
|
(29)
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Interest
income, net
|
1
|
20
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Earnings
(loss) on equity investments
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(232)
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-
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Unrealized
gain on financial assets
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-
|
-
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Loss
on sale of financial assets
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(8)
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-
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Loss
before income taxes and noncontrolling interest
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(690)
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(97)
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Income
tax benefit (expense)
|
95
|
14
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Loss
before noncontrolling interest
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(595)
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(83)
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Net
loss (income) attributable to noncontrolling interest
|
54
|
(1)
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Net
loss attributable to parent company
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(541)
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(84)
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Loss
per share (Basic) attributable to parent company
shareholders
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(0.62)
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(0.09)
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Loss
per share (Diluted) attributable to parent company
shareholders
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(0.62)
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(0.09)
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The
accompanying notes are an integral part of these interim consolidated
financial statements |
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STMicroelectronics
N.V.
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DRAFT
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CONSOLIDATED
BALANCE SHEETS
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March
28,
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December
31,
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In
million of U.S. dollars
|
2009
|
2008
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|
(Unaudited)
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(Audited)
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Assets
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Current
assets:
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Cash
and cash equivalents
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1,480
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1,009
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Marketable
securities
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988
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651
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Trade
accounts receivable, net
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1,101
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1,064
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Inventories,
net
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1,656
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1,840
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Deferred
tax assets
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248
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252
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Receivables
for transactions performed on behalf, net
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11
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-
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Other
receivables and assets
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885
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685
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Total
current assets
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6,369
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5,501
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Goodwill
|
1,121
|
958
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Other
intangible assets, net
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894
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863
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Property,
plant and equipment, net
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4,341
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4,739
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Long-term
deferred tax assets
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319
|
373
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Equity
investments
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376
|
510
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Restricted
cash
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250
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250
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Non-current
marketable securities
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184
|
242
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Other
investments and other non-current assets
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337
|
477
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7,822
|
8,412
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Total
assets
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14,191
|
13,913
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Liabilities
and shareholders’
equity
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Current
liabilities:
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Bank
overdrafts
|
3
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20
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Current
portion of long-term debt
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159
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123
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Trade
accounts payable
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707
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847
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Dividends
payable to shareholders
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-
|
79
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Other
payables and accrued liabilities
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1,037
|
996
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Deferred
tax liabilities
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30
|
28
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Accrued
income tax
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121
|
125
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Total
current liabilities
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2,057
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2,218
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Long-term
debt
|
2,486
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2,554
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Reserve
for pension and termination indemnities
|
313
|
332
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Long-term
deferred tax liabilities
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26
|
27
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Other
non-current liabilities
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355
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350
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3,180
|
3,263
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Total
liabilities
|
5,237
|
5,481
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Commitment
and contingencies
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Equity
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Parent
company shareholders’
equity
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Common
stock (preferred stock: 540,000,000 shares authorized, not issued; common
stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized,
910,307,305 shares issued, 874,327,774 shares outstanding)
|
1,156
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1,156
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Capital
surplus
|
2,455
|
2,324
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Accumulated
result
|
3,521
|
4,064
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Accumulated
other comprehensive income
|
890
|
1,094
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Treasury
stock
|
(480)
|
(482)
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Total
parent company shareholders’
equity
|
7,542
|
8,156
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Noncontrolling
interest
|
1,412
|
276
|
Total
equity
|
8,954
|
8,432
|
|
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|
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Total
liabilities and equity
|
14,191
|
13,913
|
|
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The accompanying notes are an integral part of these interim
consolidated financial statements |
|
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STMicroelectronics
N.V.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Three
Months Ended
|
|
March
28,
|
March
30,
|
In
million of U.S. dollars
|
2009
|
2008
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
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Net
loss attributable to parent company
|
|