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 8, 2012
Commission File Number: 1-13546
STMicroelectronics N.V.
(Name of Registrant)
WTC Schiphol Airport
Schiphol Boulevard 265
1118 BH Schiphol Airport
The Netherlands
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F Q Form 40-F £
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes £ No Q
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes £ No Q
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes £ No Q
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- __________
Enclosure: STMicroelectronics N.V.’s First Quarter 2012:
· Operating and Financial Review and Prospects;
· Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flow, and Statements of Equity and related Notes for the three months ended March 31, 2012; and
· Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the Sarbanes-Oxley Act of 2002, submitted to the Commission on a voluntary basis.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
The following discussion should be read in conjunction with our Unaudited Interim Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Cash Flow and Statements of Equity for the three months ended March 31, 2012 and Notes thereto included elsewhere in this Form 6-K, and our annual report on Form 20-F for the year ended December 31, 2011 as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) on March 5, 2012 (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.
Our Management’s Discussion and Analysis of Financial Position and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:
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Critical Accounting Policies using Significant Estimates, which we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
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Business Overview, a discussion of our business and overall analysis of financial and other relevant highlights of the three months ended March 31, 2012 designed to provide context for the other sections of the MD&A.
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Business Outlook, our expectations for selected financial items for the next quarter.
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Other Developments in 2012.
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Results of Operations, containing a year-over-year and sequential analysis of our financial results for the three months ended March 31, 2012, as well as segment information.
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Legal Proceedings, describing the status of open legal proceedings.
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Related Party Transactions, disclosing transactions with related parties.
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Discussion of the impact of changes in exchange rates, interest rates and equity prices on our activity and financial results.
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Liquidity and Capital Resources, presenting an analysis of changes in our balance sheets and cash flows, and discussing our financial condition and potential sources of liquidity.
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Backlog and Customers, discussing the level of backlog and sales to our key customers.
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Disclosure Controls and Procedures.
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Cautionary Note Regarding Forward-Looking Statements.
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Critical Accounting Policies Using Significant Estimates
The preparation of our Unaudited Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions. The primary areas that require significant estimates and judgments by us include, but are not limited to:
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sales returns and allowances;
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determination of the best estimate of the selling price for deliverables in multiple element sale arrangements;
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inventory obsolescence reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory;
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provisions for litigation and claims and recognition and measurement of loss contingencies;
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valuation at fair value of assets acquired in a business combination, including intangibles, goodwill, investments and tangible assets, as well as the impairment of their related carrying values, and valuation at fair value of assumed liabilities;
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annual and trigger-based impairment review of our goodwill and intangible assets, as well as an assessment, in each reporting period, of events, which could trigger interim impairment testing;
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estimated value of the consideration to be received and used as fair value for asset groups classified as assets to be disposed of by sale and the assessment of probability of realizing the sale;
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assessment of credit losses and other-than-temporary impairment charges on financial assets;
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restructuring charges; and
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determination of the amount of taxes estimated for the full year, including deferred income tax assets, valuation allowances and provisions for uncertain tax positions and claims.
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We base the estimates and assumptions on historical experience and on various other factors such as market trends and the latest available business plans that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While we regularly evaluate our estimates and assumptions, the actual results we experience could differ materially and adversely from our estimates. To the extent there are material differences between our estimates and actual results, future results of operations, cash flows and financial position could be significantly affected. With respect to our Wireless Segment, our accounting relies on estimates based on the recently released business plan of ST-Ericsson and its successful execution, as submitted and reviewed by ST-Ericsson’s CEO to ST-Ericsson’s Board of Directors, which includes an equal number of executives from each partner.
Our Consolidated Financial Statements include the ST-Ericsson joint ventures; in particular, we fully consolidate ST-Ericsson SA and related affiliates (“JVS”), which is owned 50% plus a controlling share by us and is responsible for the full commercial operations of the Wireless business, primarily sales and marketing. The other joint venture is focused on fundamental R&D activities. Its parent company is ST-Ericsson AT SA (“JVD”), which is owned 50% plus a controlling share by Ericsson and is therefore accounted for by us under the equity-method.
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) collectability is reasonably assured. Our revenue recognition 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 inventory of our products to compensate them for declines in market prices. We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor adjusted, if required, to accommodate for a significant change in the current market price. We record the accrued amounts as a deduction of revenue at the time of the sale. The ultimate decision to authorize a distributor refund remains fully within our control. 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. 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, which could severely impact our profitability.
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. We provide for such returns when they are considered probable and can be reasonably estimated. We record the accrued amounts as a reduction of revenue.
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.
Our insurance policy relating to product liability only covers physical and other direct damages caused by defective products. We carry 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.
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’ financial condition periodically and record a provision for any specific account that we consider doubtful. In the first quarter of 2012, we did not record any new material specific provision related to bankrupt customers. If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, additional allowances could be required.
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. In such cases, following the guidance related to revenue recognition, we allocate the revenue to different deliverables qualifying as separate units of accounting based on vendor-specific objective evidence, third party evidence or our best estimates of selling prices of the separable deliverables.
Business combinations and goodwill. The purchase accounting method applied to business combinations requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the identifiable assets acquired and liabilities assumed. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At March 31, 2012, the value of goodwill amounted to $1,064 million.
Impairment of goodwill. Goodwill recognized in business combinations is not amortized but is tested for impairment annually in the third quarter, or more frequently if a triggering event indicating a possible impairment exists. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available. 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 use the lower of a value determined by applying a market approach with financial metrics of comparable public companies compared to an estimate of the expected discounted future cash flows associated with the reporting unit on the basis of the most updated five-year business plan. Significant management judgments and estimates are used in forecasting the future discounted cash flows. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may prove to be incorrect, and future adverse changes in market conditions, changes in strategies, lack of performance of major customers or operating results of acquired businesses that are not in line with our estimates may require impairment of certain goodwill.
The table below presents the results of our most recent impairment tests:
Date of most recent
impairment test
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Reporting Unit
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% estimated fair value exceeds
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Q3 2011
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HED(1)
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275
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Q3 2011
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MMS
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399
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Q1 2012
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Wireless
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99
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(1) In 2012, our HED product line was integrated into our DCG product line, which is part of our Digital Segment.
Our reporting unit “Wireless” includes ST-Ericsson JVS, which is consolidated in our accounts. We monitor, and will continue to monitor, the carrying value of its assets since our Wireless segment registered the lowest ratio of estimated fair value exceeding carrying value in the above table, and experienced a material decline in revenues and operating results in the last several quarters. We performed an impairment test during the first quarter of 2012 in association with the release of ST-Ericsson’s recently announced new strategic plan. The new strategic plan includes the transfer of the development of the application processor platform from ST-Ericsson to us and an additional restructuring plan aimed to significantly reduce its workforce, accelerate time to market and lower the breakeven point by generating significant annual cost savings. The impairment test performed in the first quarter of 2012, based on the successful execution of this plan, resulted in the fair value of the Wireless business exceeding the carrying value by 99% as determined by the lower of market comparables or discounted cash flows. The latest five year plan for the Wireless segment is based on our best estimate about future developments as well as market assumptions. Furthermore, our Wireless business is currently in a shift from legacy to new products. Though its path to success is challenging, ST-Ericsson is continuing to focus on securing the successful execution and delivery of its new products to customers while lowering its breakeven point. In the event of the unsuccessful execution of this plan or in case of a material worsening of business prospects, the value of ST-Ericsson for us could decrease to a value significantly lower than the current carrying amount of ST-Ericsson in our books and we may be required to take an impairment charge, which could be material. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by, or equity transfers to, third parties at a value lower than the one underlying our carrying amount.
Intangible assets subject to amortization. Intangible assets subject to amortization include intangible assets purchased from third parties recorded at cost and intangible assets acquired in business combinations recorded at fair value, comprised of technologies and licenses, trademarks and contractual customer relationships and computer software. Intangible assets with finite useful lives are reflected net of any impairment losses and are amortized over their estimated useful life. We evaluate each period whether there is reason to suspect that intangible assets held for use might not be recoverable. If we identify events or changes in circumstances which are indicative that the carrying amount is not recoverable, we 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. Significant management judgments and estimates are required to forecast undiscounted cash flows associated with the intangible assets. Our evaluations are based on financial plans, including the plan we recently received from ST-Ericsson, updated with the latest available projections of growth in the semiconductor market and our sales expectations. They are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require us to recognize impairment charges on certain intangible assets.
On the basis of the estimates and assumptions set forth in the new strategic plan provided by ST-Ericsson, we did not record any intangible assets impairment charge in the first quarter of 2012. The factors used in assessing fair values for such assets are based on the joint venture’s strategic plan developed by the new ST-Ericsson management, which is approved by its board of directors. We will continue to monitor the carrying value of our assets. If market conditions deteriorate or our Wireless business experiences a lack of or delay in results, in particular with respect to design-wins with customers to generate future revenues, this could result in future non-cash impairment charges against earnings. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or by strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by, or equity transfers to, third parties at a value lower than the one underlying our carrying amount.
At March 31, 2012, the value of intangible assets subject to amortization amounted to $608 million.
Property, plant and equipment. Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, the largest component of our long-lived assets, to be six years, except for our 300-mm manufacturing equipment whose useful life is estimated to be ten years. This estimate is based on our experience using the equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate newly acquired equipment when it is placed into service.
We evaluate each period whether there is reason to suspect impairment on tangible assets or groups of assets held for use and we perform an impairment review when there is reason to suspect that the carrying value of these long-lived assets might not be recoverable, particularly in case of a restructuring plan. If we identify events or changes in circumstances which are indicative that the carrying amount is not recoverable, we 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 assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. We also evaluate and adjust, if appropriate, the assets’ useful lives at each balance sheet date or when impairment indicators are identified. Assets classified as held for sale are reported as current assets at the lower of their carrying amount and fair value less costs to sell and are not depreciated. Costs to sell 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.
Inventory. Inventory is stated at the lower of cost or market value. Cost is based on the weighted average cost by adjusting the standard cost to approximate actual manufacturing costs on a quarterly basis; therefore, the cost is dependent on our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity. These costs are not included in the valuation of inventory but are charged directly to cost of sales. Market 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 in business combinations at fair value, less completion and distribution costs and related margin.
While we perform, on a continuous basis, inventory write-offs of products and semi-finished products, the valuation of inventory requires us to estimate a reserve for 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.
Restructuring charges. We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities. We recognize the fair value of a liability for costs associated with exiting an activity when we have a present obligation and the amount can be reasonably estimated. Given the significance and timing of the execution of the restructuring activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. This process can require 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 2012, the net amount of restructuring charges and other related closure costs amounted to $10 million before taxes. On April 23, 2012, ST-Ericsson announced a new phase of its restructuring plan. The total restructuring costs of the new plan together with the remaining part of the on-going plans are currently estimated to range from approximately $130 million to $150 million, and a significant portion thereof could be recorded in our second quarter 2012 accounts upon finalization of the plan.
Share-based compensation. We measure our share-based compensation expense based on the fair value of the award on the grant date. 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 performance conditions based on financial objectives, including our financial results when compared to certain industry performances. In order to determine share-based compensation to be recorded for the period, we use significant estimates on the number of awards expected to vest, including the probability of achieving certain industry performances compared to our financial results, award forfeitures and employees’ service period. Our assumption related to industry performances is generally taken with a lag of one quarter in line with the availability of the information.
Earnings (loss) on Equity-method Investments. We are required to record our proportionate share of the results of the entities that we account for under the equity-method. This recognition is based on results reported by these entities, relying on their internal reporting systems to measure financial results. The main equity-method investments as of March 31, 2012 are represented by ST-Ericsson JVD and 3Sun. In the first quarter of 2012, we recognized a loss of approximately $4 million related to the ST-Ericsson JVD, net of amortization of basis differences, and a $3 million loss related to 3Sun. In case of triggering events, we are required to determine whether our investment is temporarily or other-than-temporarily impaired. If impairment is considered to be other-than-temporary, we need to assess the fair value of our investment and record an impairment charge directly in earnings when fair value is lower than the carrying value of the investment. 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.
Financial assets. We classify our financial assets in the following categories: held-for-trading and available-for-sale. Such classification depends on the purpose for which the investments are acquired and held. We determine the classification of our 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.
Held-for-trading and available-for-sale-financial assets are valued at fair value. The fair value of quoted debt and equity securities is based on current market prices. If the market for a financial asset is not active, if no observable market price is obtainable, or if the security is not quoted, 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 the 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.
Income taxes. We are required to make estimates and judgments in determining income tax for the period, comprising current and deferred income tax. We need to assess the income tax expected to be paid or the benefit expected to be received related to the current year income (loss) in each individual tax jurisdiction and recognize deferred income tax for all temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the consolidated financial statements. Furthermore, we are required to assess all material open income tax positions in all tax jurisdictions to determine any uncertain tax positions, and to record a provision for those that are not more likely than not to be sustained upon examination by the taxing authorities, which could trigger potential tax claims by them. In such an event, we could be required to record additional charges in our accounts, which could significantly exceed our best estimates and our provisions.
We are also required to assess the likelihood of recovery of our deferred tax assets originated by our net operating loss carry-forwards. The ultimate realization of deferred tax assets is dependent upon, among other things, our ability to generate future taxable income that is sufficient to utilize loss carry-forwards or tax credits before their expiration or our ability to implement prudent and feasible tax planning strategies. 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 31, 2012, we had current deferred tax assets of $170 million and non-current deferred tax assets of $371 million, net of valuation allowances. Our deferred tax assets have increased in the past few years. In particular, a significant portion of the increase in the deferred tax assets was recorded in relation to net operating losses incurred in the ST-Ericsson joint-venture. These net operating losses may not be realizable before their expiration in seven years, unless ST-Ericsson is capable of identifying favorable tax strategies. In connection with the continuing losses of ST-Ericsson, in the first quarter of 2012, we performed an assessment of the future recoverability of the deferred tax assets resulting from past net operating losses. On the basis of ST-Ericsson’s tax planning strategies and its most updated business plans, a valuation allowance of $14 million with respect to the ST-Ericsson deferred tax assets was recorded in the first quarter 2012. As this allowance does not relate to our investment in ST-Ericsson, noncontrolling interest increases by the same amount of $14 million, with no impact to our net income attributable to us. The future recoverability of these net operating losses is partly dependent on the successful market penetration of new product releases and additional tax planning strategies; however, negative developments in the new product roll-out or in the ongoing evaluation of the tax planning strategies could require adjustments to our evaluation of the deferred tax asset valuation.
We could be required to record further valuation allowances thereby reducing the amount of total deferred tax assets, resulting in a decrease in our total assets and, consequently, in our equity, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in our assessment or due to other factors, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize net operating losses and tax credit carry-forwards in the future. Likewise, a change in the tax rates applicable in the various jurisdictions or unfavorable outcomes of any ongoing tax audits could have a material impact on our future tax provisions in the periods in which these changes could occur.
Patent and other Intellectual Property (“IP”) 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, communications alleging possible infringement of patents and other IP 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 IP 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 and may face claims of infringing the IP rights of others” included in our Form 20-F, which 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. We currently estimate that the possible losses for known claims are in the range of $10 million to $45 million. From time to time we face cases where loss contingencies cannot readily be reasonably estimated. 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’ IP rights. We are also involved in certain legal proceedings concerning such issues. See “Legal Proceedings”.
As of March 31, 2012, based on our assessment, we recorded an immaterial provision in our financial statements relating to third-party claims, and in particular third party claims that relate to patent rights, since we had not identified any significant risk of probable loss that could arise out of such asserted claims or ongoing legal proceedings. There can be no assurance, however, that all such claims will be resolved in our favor. 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 operations and our ability to compete.
Other claims. We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims beyond assessed uncertain tax positions as well as claims for environmental damages. 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 re-evaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us. As of March 31, 2012, the majority of these claims were assessed as remote. In the event we are unable to estimate the amount of such loss in a correct and timely manner, this could have a material adverse effect on our results of operations or financial condition at the time such loss were to materialize. On April 5, 2012, an arbitration tribunal set up according to the rules of the International Chamber of Commerce (“ICC”), ordered us to pay approximately $59 million to NXP Semiconductors B.V. (“NXP”) concerning a dispute related to a claim from NXP for underloading charges to be included in the price of wafers which NXP supplied to our Wireless joint venture. For further details, see “Legal Proceedings” and our note 22 to our Consolidated Financial Statements.
Pension and Post-Retirement Benefits. Our results of operations and our consolidated balance sheet include amounts for pension obligations and post-retirement benefits that are measured using actuarial valuations. At March 31, 2012, our pension and post-retirement benefit obligations net of plan assets amounted to $425 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 our plans is December 31.
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 2012 ended on March 31, 2012. The second quarter and third quarter of 2012 will end on June 30 and September 29, respectively. The fourth quarter of 2012 will end on December 31, 2012. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year and can also differ from equivalent prior years’ periods.
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 major devices such as Microprocessors (“MPUs”), DRAMs, optoelectronics devices and Flash Memories).
In the first quarter of 2012, the semiconductor industry continued to be negatively impacted by the difficult conditions in the global economy. Based on the most recently published estimates by WSTS, semiconductor industry revenues decreased in the first quarter of 2012 on a year-over-year basis by approximately 8% for the TAM and by approximately 9% for the SAM to reach approximately $70 billion and $40 billion, respectively. Sequentially, in the first quarter of 2012, the TAM and the SAM both decreased approximately by 2%.
With reference to our revenues performance, we registered a decrease on both a year-over-year and sequential basis. Our first quarter 2012 revenues amounted to $2,017 million, a 20.4% decrease on a year-over-year basis and an 8.0% decrease sequentially, in line with our guidance. While the year-over-year revenues decrease was driven by all of our product segments, the sequential decline was driven by all of our product segments but APG and AMM. Compared to the served market, our performance was below the SAM both on a year-over-year and sequential basis.
Our effective average exchange rate for the first quarter of 2012 was $1.33 for €1.00 compared to $1.33 for €1.00 for the first quarter of 2011 and $1.36 for €1.00 in the fourth quarter of 2011. 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 first quarter 2012 gross margin declined to 29.6% of revenues, or 32.2% excluding a one time 260 basis point impact due to the charge on our cost of sales following the arbitration award, which ordered us to pay approximately $59 million to NXP. Additionally, the first quarter 2012 gross margin was negatively impacted by an unsaturation charge of $71 million, driven by inventory reduction plans, and a deterioration of our manufacturing performances due to a low level of loading. Our gross margin of 32.2% (excluding the unexpected arbitration award charge) was within our mid-point guidance of 33.0% plus or minus 150 basis points, however slightly below the mid-point due to a less favorable than expected product mix. On a year-over-year comparison, our first quarter 2012 gross margin deteriorated 950 basis points; the main factors contributing to the year-over-year deterioration were: (i) the significant drop in revenues and the decline in selling prices, (ii) the significant amounts of unused capacity charges due to the underloading of our fabs, which accounted for approximately 350 basis points, and (iii) the unexpected arbitration award, which accounted for approximately 260 basis points. On a sequential basis our gross margin decreased by 380 basis points, penalized by the arbitration award and the deterioration in manufacturing performances.
In summary, the low level of revenues, the unsaturation charges, the unexpected arbitration award charge and the increased level of operating losses of our Wireless segment, were the major factors contributing to penalize our operating results in the first quarter of 2012, which resulted in significant operating losses. Our operating losses reached $352 million compared to an income of $118 million in the first quarter of 2011 and a loss of $132 million in the fourth quarter of 2011.
Our wholly owned businesses, which exclude the Wireless segment, in the first quarter of 2012 posted a sequential decrease of 3%, better than historical seasonality, benefiting from growth in the Automotive and AMM segments. Our Wireless segment losses weighed heavily on our quarterly results. However, ST-Ericsson has announced its new strategic direction and renewed business model with a key objective to significantly reduce its operating losses throughout 2012 as it moves towards leadership and improved financial returns.
In total, first quarter 2012 activity levels across our product portfolio tracked closely to our expectations, with net revenues near the mid-point of our business outlook. Similarly, gross margin evolution was consistent with our continued focus on inventory management and in the first quarter 2012, gross margin absorbed approximately 600 basis points of unsaturation charges and a one-time unexpected charge resulting from an arbitration award. The effort on inventory reduction and prudent capital management led to a quarter on quarter increase in free cash flow and a further improvement in our financial position which stood at $1.27 billion, as adjusted, excluding the $489 million loan provided by our partner to fund ST-Ericsson SA.
Business Outlook
While there are still macro-economic uncertainties, we believe billings have bottomed in the first quarter. Bookings have improved across the board during the course of the first quarter.
Based on current visibility, we expect broad-based growth in all product segments during the second quarter leading to revenue growth. Looking further ahead, we also anticipate broad-based revenue growth with a strong acceleration in MEMS and Analog in the second half of 2012, thanks to our new and innovative products and our expanding customer base.
We expect second quarter 2012 revenues to grow sequentially in the range of about 7.5%, plus or minus 3 percentage points. As a result, gross margin in the second quarter is expected to be about 34.4%, plus or minus 1.5 percentage points, and assumes an improvement from the first quarter amount from fab loading and manufacturing performance.
This Outlook is based on an assumed effective currency exchange rate of approximately $1.33 = €1.00 for the 2012 second quarter and includes the impact of existing hedging contracts. The second quarter will close on June 30, 2012.
These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key Information — Risk Factors” in our Form 20-F as may be updated from time to time in our SEC filings.
Other Developments in 2012
On January 27, 2012, we announced that we were reorganizing our Sales & Marketing organization with the primary objectives to accelerate sales growth and gain market share. The changes have been designed along three key drivers:
·
|
Strengthening the effectiveness of the development of global accounts;
|
·
|
Boosting demand creation through an enhanced focus on the geographical coverage; and
|
·
|
Establishing marketing organizations in the Regions fully aligned with the Product Groups.
|
Our Sales and Marketing organization is structured in six units:
·
|
Four Regional Sales Organizations, all with a very similar structure to enhance coordination in the go-to-market activities and all strongly focused on accelerated growth:
|
|
1.
|
Europe, Middle East and Africa Region led by Paul Grimme;
|
|
2.
|
Americas Region led by Bob Krysiak;
|
|
3.
|
Greater China-South Asia Region led by François Guibert; and
|
|
4.
|
Japan-Korea Region led by Marco Cassis.
|
·
|
Two Major Accounts units for our established global customers aimed at the further development of the business relationship between us and those clients:
|
|
1.
|
Europe Major Accounts led by Paul Grimme; and
|
|
2.
|
Americas Major Accounts led by Bob Krysiak.
|
In each of the four regions, the existing sales organization by market segment is replaced by a new sales organization based on a combination of country/area coverage and key accounts coverage.
In particular, in addition to the above major accounts, about forty accounts will be managed globally by key account managers who will be responsible for the total sales generated worldwide, regardless of the channel and the geography. The main criteria for the selection of these accounts are their growth potential, the size of their transnational business and the geographical dispersion of their R&D activities.
On February 20, 2012, we announced that Carlo Ferro, Chief Financial Officer, has accepted to focus on the turnaround of ST-Ericsson as chief operating officer of the company. Mario Arlati, ST’s chief accounting officer and head of corporate external reporting, has been appointed Chief Financial Officer while Carlo Ferro is assigned to ST-Ericsson. Corporate External Communications and Investor Relations, led by Claudia Levo and Tait Sorensen, respectively, now report to Philippe Lambinet, head of the Strategy Office and newly created Digital Sector. With the increased responsibilities of Philippe Lambinet, we announced that we were re-organizing the Digital Sector as follows: the newly-formed Digital Convergence Group (DCG), encompassing all CMOS-based products, both ASIC and Application Processor Platforms and the Imaging, Bi-CMOS ASIC and Silicon Photonics Group (IBP). Effective January 1, 2012, the Products Groups are divided as follows:
·
|
The Automotive Product Group, led by the newly appointed Corporate Vice President Marco Monti;
|
·
|
The Digital Sector, led by Philippe Lambinet which consists of two Product Groups: the Digital Convergence Group, led by Gian Luca Bertino and the Imaging, Bi-CMOS ASIC and Silicon Photonics Group, led by Eric Aussedat; and
|
·
|
The Industrial & Multisegment Sector, led by Carmelo Papa which consists of three Product Groups: Industrial & Power Discretes, led by Carmelo Papa, Microcontrollers, Memories & Secure MCUs, led by Claude Dardanne and Analog, MEMS & Sensors, led by Benedetto Vigna.
|
Giuseppe Notarnicola will maintain his role as head of Corporate Treasury and Otto Kosgalwies will lead Corporate Infrastructures and Services, both directly reporting to Carlo Bozotti.
On February 23, 2012, certain holders redeemed 190,131 of our 2016 convertible bonds at a price of $1,093.81, out of the total of 200,402 outstanding bonds, representing approximately 95% of the then outstanding convertible bonds. In addition, on March 12, 2012, we accepted the further put of 4,980 bonds for a cash consideration of $5 million. As of March 31, 2012, there were 5,291 bonds remaining outstanding. On March 28, 2012, we published a notice of sweep-up redemption for the remaining 5,291 bonds outstanding, which will be redeemed on May 10, 2012.
On April 5, 2012, an arbitration tribunal set up according to the rules of the International Chamber of Commerce, ordered us to pay approximately $59 million to NXP concerning a dispute related to a claim from NXP for underloading charges to be included in the price of wafers which NXP supplied to our Wireless joint venture. The tribunal chose not to address certain issues raised by us that will be part of a second arbitration between the same ICC tribunal scheduled for June 2012, with a final decision coming within twelve months. Though the award has been recognized in these first quarter results, we intend to vigorously pursue our claims in the second arbitration aiming to convince the tribunal to reverse the economic effect of its first arbitration award.
On April 23, 2012, ST-Ericsson announced its new strategic plan, which includes the transfer of the development of the application processor platform from ST-Ericsson to us and an additional restructuring plan aimed to significantly reduce its workforce, accelerate time to market and lower the breakeven point by generating significant annual cost savings.
Results of Operations
Segment Information
We operate in two business areas: Semiconductors and Subsystems.
In the Semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full-custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products, which include the production and sale of both silicon chips and Smartcards.
As of January 1, 2012, we changed the segment organization structure. The current organization is as follows:
|
·
|
Automotive Segment (APG);
|
|
·
|
Digital Segment, consisting of two product lines:
|
|
-
|
Digital Convergence Group (DCG); and
|
|
-
|
Imaging, Bi-CMOS ASIC and Silicon Photonics Group (IBP).
|
|
·
|
Analog, MEMS and Microcontrollers Sector (AMM), comprised of three product lines:
|
|
-
|
Analog, MEMS & Sensors (AMS);
|
|
-
|
Industrial & Power Conversion (IPC); and
|
|
-
|
Microcontrollers, Memories & Secure MCUs (MMS).
|
|
·
|
Power Discrete Product Segment (PDP);
|
|
·
|
Wireless Segment comprised of the following product lines:
|
|
-
|
Entry Solutions and Connectivity (ESC);
|
|
-
|
Smartphone and Tablet Solutions (STS);
|
|
-
|
Other Wireless, in which we report other revenues, gross margin and other items related to the Wireless business but outside the ST-Ericsson JVS.
|
In 2012, we restated our results from prior periods for illustrative comparisons of our performance by product segment due to the former Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”) now being split into three segments (“APG”, “Digital” and “AMM”). The preparation of segment information based on the current segment structure requires us to make significant estimates, assumptions and judgments in determining the operating income of the segments for the prior reporting periods. We believe that the restated 2011 presentation is consistent with that of 2012 and we use these comparatives when managing our 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 business area does not meet the requirements for a reportable segment as defined in the guidance on disclosures about segments of an enterprise and related information. All the financial values related to Subsystems including net revenues and related costs, are reported in the segment “Others”.
The following tables present our consolidated net revenues and consolidated operating income (loss) by product 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 research and development expenses. Additionally, in compliance with our internal policies, certain cost items are not charged to the segments, including unused capacity charges, impairment, restructuring charges and other related closure costs including ST-Ericsson plans, phase-out and start-up costs of certain manufacturing facilities, the NXP arbitration award, strategic and special R&D programs or other corporate-sponsored initiatives, including certain corporate-level operating expenses and certain other miscellaneous charges.
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net revenues by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive (“APG”)
|
|
$ |
391 |
|
|
$ |
433 |
|
Digital
|
|
|
336 |
|
|
|
488 |
|
Analog, MEMS and Microcontrollers (“AMM”)
|
|
|
758 |
|
|
|
886 |
|
Power Discrete Products (“PDP”)
|
|
|
233 |
|
|
|
333 |
|
Wireless
|
|
|
290 |
|
|
|
384 |
|
Others(1)
|
|
|
9 |
|
|
|
11 |
|
Total consolidated net revenues
|
|
$ |
2,017 |
|
|
$ |
2,535 |
|
____________
(1)
|
In the first quarter of 2012, “Others” includes revenues from the sales of Subsystems ($3 million), sales of materials and other products not allocated to product segments ($4 million) and miscellaneous ($2 million).
|
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net revenues by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive (“APG”)
|
|
$ |
391 |
|
|
$ |
433 |
|
Digital Convergence Group (“DCG”)
|
|
|
208 |
|
|
|
316 |
|
Imaging, Bi-CMOS ASIC and Silicon Photonics Group (“IBP”)
|
|
|
128 |
|
|
|
172 |
|
Digital
|
|
|
336 |
|
|
|
488 |
|
Analog, MEMS & Sensors (“AMS”)
|
|
|
301 |
|
|
|
347 |
|
Industrial & Power Conversion (“IPC”)
|
|
|
182 |
|
|
|
220 |
|
Microcontrollers, Memories & Secure MCUs (“MMS”)
|
|
|
275 |
|
|
|
319 |
|
Analog, MEMS and Microcontrollers (“AMM”)
|
|
|
758 |
|
|
|
886 |
|
Power Discrete Products (“PDP”)
|
|
|
233 |
|
|
|
333 |
|
Entry Solutions and Connectivity (“ESC”)
|
|
|
26 |
|
|
|
190 |
|
Smartphone and Tablet Solutions (“STS”)
|
|
|
245 |
|
|
|
171 |
|
Modems (“MOD”)
|
|
|
19 |
|
|
|
23 |
|
Wireless
|
|
|
290 |
|
|
|
384 |
|
Others
|
|
|
9 |
|
|
|
11 |
|
Total consolidated net revenues
|
|
$ |
2,017 |
|
|
$ |
2,535 |
|
____________
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating income (loss) by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive (“APG”)
|
|
$ |
37 |
|
|
$ |
60 |
|
Digital
|
|
|
(38 |
) |
|
|
45 |
|
Analog, MEMS and Microcontrollers (“AMM”)
|
|
|
99 |
|
|
|
177 |
|
Power Discrete Products (“PDP”)
|
|
|
(6 |
) |
|
|
50 |
|
Wireless (1)
|
|
|
(293 |
) |
|
|
(180 |
) |
Others(2)
|
|
|
(151 |
) |
|
|
(34 |
) |
Total consolidated operating income (loss)
|
|
$ |
(352 |
) |
|
$ |
118 |
|
____________
(1)
|
The majority of Wireless’ activities are run through ST-Ericsson JVS. In addition, Wireless includes other items affecting operating results related to the Wireless business. The noncontrolling interest of Ericsson in ST-Ericsson JVS’ operating results (which are 100% included in Wireless) is credited on the line “Net loss (income) attributable to noncontrolling interest” of our Consolidated Statements of Income, which represented $159 million for the quarter ended March 31, 2012.
|
(2)
|
Operating loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs including ST-Ericsson plans, phase-out and start-up costs, the NXP arbitration award and other unallocated expenses such as: strategic or special R&D programs, certain corporate-level operating expenses and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products Group.
|
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(As percentage of net revenues)
|
|
Operating income (loss) by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive (“APG”) (1)
|
|
|
9.4 |
% |
|
|
13.9 |
% |
Digital (1)
|
|
|
(11.2 |
) |
|
|
9.1 |
|
Analog, MEMS and Microcontrollers (“AMM”) (1)
|
|
|
13.1 |
|
|
|
20.0 |
|
Power Discrete Products (“PDP”) (1)
|
|
|
(2.6 |
) |
|
|
15.1 |
|
Wireless (1)
|
|
|
(101.0 |
) |
|
|
(46.7 |
) |
Others
|
|
|
- |
|
|
|
- |
|
Total consolidated operating income (loss)(2)
|
|
|
(17.5 |
)% |
|
|
4.7 |
% |
____________
(1)
|
As a percentage of net revenues per product segment.
|
(2)
|
As a percentage of total net revenues.
|
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Reconciliation to consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) of product segments
|
|
$ |
(201 |
) |
|
$ |
152 |
|
Unused capacity charges
|
|
|
(71 |
) |
|
|
(2 |
) |
Impairment, restructuring charges and other related closure costs
|
|
|
(18 |
) |
|
|
(24 |
) |
Phase-out and start-up costs
|
|
|
- |
|
|
|
(7 |
) |
Strategic and other research and development programs
|
|
|
(2 |
) |
|
|
(4 |
) |
NXP arbitration award
|
|
|
(54 |
) |
|
|
- |
|
Other non-allocated provisions(1)
|
|
|
(6 |
) |
|
|
3 |
|
Total operating loss Others
|
|
|
(151 |
) |
|
|
(34 |
) |
Total consolidated operating income (loss)
|
|
$ |
(352 |
) |
|
$ |
118 |
|
____________
(1)
|
Includes unallocated income and expenses such as certain corporate-level operating expenses and other costs/income that are not allocated to the product segments.
|
Net revenues by location of shipment and by market segment
The table below sets forth information on our net revenues by location of shipment:
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net Revenues by Location of Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$ |
513 |
|
|
$ |
625 |
|
Americas
|
|
|
303 |
|
|
|
333 |
|
Greater China-South Asia
|
|
|
830 |
|
|
|
1,130 |
|
Japan-Korea
|
|
|
371 |
|
|
|
447 |
|
Total
|
|
$ |
2,017 |
|
|
$ |
2,535 |
|
____________
(1)
|
Net revenues by location of shipment are classified by location of customer invoiced. For example, products ordered by U.S.-based companies to be invoiced to Greater China-South Asia affiliates are classified as Greater China-South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.
|
The tables below show our net revenues by location of shipment and market segment application in percentage of net revenues:
|
|
(unaudited)
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
(As percentage of net revenues)
|
|
Net Revenues by Location of Shipment(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
25.4 |
% |
|
|
24.6 |
% |
Americas
|
|
|
15.0 |
|
|
|
13.1 |
|
Greater China-South Asia
|
|
|
41.2 |
|
|
|
44.7 |
|
Japan-Korea
|
|
|
18.4 |
|
|
|
17.6 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
(1)
|
Net revenues by location of shipment are classified by location of customer invoiced. For example, products ordered by U.S. based companies to be invoiced to Greater China-South Asia affiliates are classified as Greater China-South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.
|
Net Revenues by Market Segment/Channel(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
|
20 |
% |
|
|
17 |
% |
Computer
|
|
|
14 |
|
|
|
14 |
|
Consumer
|
|
|
11 |
|
|
|
11 |
|
Telecom
|
|
|
24 |
|
|
|
26 |
|
Industrial and Other
|
|
|
10 |
|
|
|
8 |
|
Distribution
|
|
|
21 |
|
|
|
24 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
____________
(1)
|
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. Net revenues by market segment/channel are classified according to the status of the final customer. For example, products ordered by a computer company, even including sales of other applications such as Telecom, are classified as Computer revenues.
|
The following table sets forth certain financial data from our unaudited Consolidated Statements of Income:
|
|
Three Months Ended (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
2,010 |
|
|
|
99.7 |
% |
|
|
2,523 |
|
|
|
99.5 |
% |
Other revenues
|
|
|
7 |
|
|
|
0.3 |
|
|
|
12 |
|
|
|
0.5 |
|
Net revenues
|
|
|
2,017 |
|
|
|
100.0 |
|
|
|
2,535 |
|
|
|
100.0 |
|
Cost of sales
|
|
|
(1,421 |
) |
|
|
(70.4 |
) |
|
|
(1,544 |
) |
|
|
(60.9 |
) |
Gross profit
|
|
|
596 |
|
|
|
29.6 |
|
|
|
991 |
|
|
|
39.1 |
|
Selling, general and administrative
|
|
|
(310 |
) |
|
|
(15.4 |
) |
|
|
(312 |
) |
|
|
(12.3 |
) |
Research and development
|
|
|
(633 |
) |
|
|
(31.4 |
) |
|
|
(562 |
) |
|
|
(22.1 |
) |
Other income and expenses, net
|
|
|
13 |
|
|
|
0.6 |
|
|
|
25 |
|
|
|
1.0 |
|
Impairment, restructuring charges and other related closure costs
|
|
|
(18 |
) |
|
|
(0.9 |
) |
|
|
(24 |
) |
|
|
(1.0 |
) |
Operating income (loss)
|
|
|
(352 |
) |
|
|
(17.5 |
) |
|
|
118 |
|
|
|
4.7 |
|
Other-than-temporary impairment charge on financial assets
|
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
|
|
(0.2 |
) |
Interest expense, net
|
|
|
(13 |
) |
|
|
(0.6 |
) |
|
|
(15 |
) |
|
|
(0.6 |
) |
Loss on equity-method investments
|
|
|
(7 |
) |
|
|
(0.3 |
) |
|
|
(6 |
) |
|
|
(0.3 |
) |
Gain on financial instruments, net
|
|
|
3 |
|
|
|
0.1 |
|
|
|
22 |
|
|
|
0.9 |
|
Income (loss) before income taxes and noncontrolling interest
|
|
|
(369 |
) |
|
|
(18.3 |
) |
|
|
114 |
|
|
|
4.5 |
|
Income tax benefit (expense)
|
|
|
34 |
|
|
|
1.7 |
|
|
|
(31 |
) |
|
|
(1.2 |
) |
Net income (loss)
|
|
|
(335 |
) |
|
|
(16.6 |
) |
|
|
83 |
|
|
|
3.3 |
|
Net loss (income) attributable to noncontrolling interest
|
|
|
159 |
|
|
|
7.9 |
|
|
|
87 |
|
|
|
3.4 |
|
Net income (loss) attributable to parent company
|
|
|
(176 |
) |
|
|
(8.7 |
)% |
|
|
170 |
|
|
|
6.7 |
% |
First Quarter 2012 vs. First Quarter 2011 and Fourth Quarter 2011
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,010 |
|
|
$ |
2,170 |
|
|
$ |
2,523 |
|
|
|
(7.4 |
)% |
|
|
(20.3 |
)% |
Other revenues
|
|
|
7 |
|
|
|
21 |
|
|
|
12 |
|
|
|
(67.1 |
) |
|
|
(39.1 |
) |
Net revenues
|
|
$ |
2,017 |
|
|
$ |
2,191 |
|
|
$ |
2,535 |
|
|
|
(8.0 |
)% |
|
|
(20.4 |
)% |
Year-over-year comparison
Our first quarter 2012 net revenues decreased in all product segments and in all regions, reflecting a more difficult industry environment, which negatively impacted the demand for our products. As a result, our revenues declined 20.4%, which originated from an approximate 16% decrease in volume and a 4% reduction in average selling prices with a pure pricing effect down by 7% partially offset by a more favorable product mix.
By product segment, our revenues were down by approximately 10% in APG, 31% in Digital, 14% in AMM and 30% in PDP. Wireless sales registered a decline of approximately 24%, reflecting its portfolio transition and a drop in sales at one of ST-Ericsson’s largest customers.
By market segment/channel, our revenues registered a similar downward trend, with a major decline in Distribution, which was down approximately 31%.
By location of shipment, all regions were negatively impacted in terms of revenues by the difficult market conditions.
In the first quarter of 2012, no customer exceeded 10% of our total net revenues, while in the first quarter of 2011, the Nokia group represented about 11% of our net revenues.
Sequential comparison
On a sequential basis our revenues decreased by 8.0%, in line with our targeted range of 4% to 10% sequential decrease. This sequential decrease of 8.0% resulted from an approximate 7% decrease in average selling prices, mainly due to a less favorable than expected product mix, and an approximate 1% decrease in units sold.
By product segment, APG and AMM benefited from an improved demand and both increased their revenues sequentially by approximately 2%. Digital revenues were down by approximately 13% and PDP by approximately 8%, while Wireless registered a more significant drop of approximately 29%.
By market segment/channel, Automotive and Computer improved their revenues, while the other market segments registered a decline.
By region, revenues were down except EMEA, which was supported by a solid performance in Automotive.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
|
|
|
|
|
|
Cost of sales
|
|
$ |
(1,421 |
) |
|
$ |
(1,459 |
) |
|
$ |
(1,544 |
) |
|
|
2.6 |
% |
|
|
8.0 |
% |
Gross profit
|
|
|
596 |
|
|
|
732 |
|
|
|
991 |
|
|
|
(18.6 |
) |
|
|
(39.8 |
) |
Gross margin (as percentage of net revenues)
|
|
|
29.6 |
% |
|
|
33.4 |
% |
|
|
39.1 |
% |
|
|
- |
|
|
|
- |
|
In the first quarter, gross margin was 29.6%, decreasing on a year-over-year basis by approximately 950 basis points, due to a strong decline in the volume of revenues, the negative impact of selling prices, higher unused capacity charges, which accounted for approximately 350 basis points, and the unexpected arbitration award to be paid to NXP, which accounted for approximately 260 basis points.
On a sequential basis, gross margin in the first quarter decreased by 380 basis points, mainly due to the unexpected arbitration award to be paid to NXP, a deterioration of manufacturing performance due to the low level of loading and a less favorable product mix.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$ |
(310 |
) |
|
$ |
(280 |
) |
|
$ |
(312 |
) |
|
|
(10.7 |
)% |
|
|
0.6 |
% |
As percentage of net revenues
|
|
|
(15.4 |
)% |
|
|
(12.8 |
)% |
|
|
(12.3 |
)% |
|
|
- |
|
|
|
- |
|
The amount of our selling, general and administrative expenses was basically flat on a year-over-year basis, while on a sequential basis, SG&A expenses increased, due to seasonal factors and reduced activity in the prior quarter.
As a percentage of revenues, our selling, general and administrative expenses amounted to 15.4% increasing both in comparison to 12.3% in the prior year’s first quarter and 12.8% in the prior quarter.
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$ |
(633 |
) |
|
$ |
(614 |
) |
|
$ |
(562 |
) |
|
|
(3.0 |
)% |
|
|
(12.7 |
)% |
As percentage of net revenues
|
|
|
(31.4 |
)% |
|
|
(28.0 |
)% |
|
|
(22.1 |
)% |
|
|
- |
|
|
|
- |
|
The first quarter 2012 R&D expenses increased year-over-year, mainly because the first quarter 2011 benefited from a $60 million billing of R&D services by ST-Ericsson to a third party. On a sequential basis, R&D expenses increased, due to seasonal factors.
The first quarter 2012 R&D expenses were net of research tax credits, which amounted to $37 million, basically equivalent to prior periods.
As a percentage of revenues, the first quarter 2012 ratio increased to 31.4%, mainly due to the drop in revenues.
Other income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Research and development funding
|
|
$ |
18 |
|
|
$ |
46 |
|
|
$ |
34 |
|
Phase-out and start-up costs
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
Exchange gain (loss) net
|
|
|
(1 |
) |
|
|
2 |
|
|
|
3 |
|
Patent costs
|
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(4 |
) |
Gain on sale of non-current assets
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Other, net
|
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Other income and expenses, net
|
|
|
13 |
|
|
|
39 |
|
|
$ |
25 |
|
As percentage of net revenues
|
|
|
0.6 |
% |
|
|
1.8 |
% |
|
|
1.0 |
% |
Other income and expenses, net, mainly included, as income, items such as R&D funding and a gain on sale of non-current assets and, as expenses, patent costs. Income from R&D funding 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 2012, the balance of these factors resulted in an income, net of $13 million, decreasing compared to previous periods mainly due to the lower level of funding.
Impairment, restructuring charges and other related closure costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Impairment, restructuring charges and other related closure costs
|
|
$ |
(18 |
) |
|
$ |
(9 |
) |
|
$ |
(24 |
) |
In the first quarter of 2012, we recorded $18 million of impairment, restructuring charges and other related closure costs, mainly due to the following:
·
|
$9 million was recorded in relation to the manufacturing restructuring plan contemplating the closure of our Carrollton (Texas) and Phoenix (Arizona) sites, of which $8 million was recorded as an impairment on the Carrollton building and facilities; and
|
·
|
$9 million related to the cost savings plan announced in June 2011 by ST-Ericsson, primarily consisting of employee termination benefits.
|
In the fourth quarter of 2011, we recorded $9 million of impairment, restructuring charges and other related closure costs in relation to the cost savings plan announced in June 2011 by ST-Ericsson, primarily consisting of employee termination benefits.
In the first quarter of 2011, we recorded $24 million of impairment, restructuring charges and other related closure costs, of which: (i) $19 million was recorded in relation to the manufacturing restructuring plan contemplating the closure of our Carrollton and Phoenix sites, and was composed of one-time termination benefits, as well as other relevant closure charges, mainly associated with Carrollton and Phoenix fabs; (ii) $4 million related to the workforce reductions plans announced in April and December 2009 by ST-Ericsson, primarily consisting of lease contract termination costs, pursuant to the closure of certain locations; and (iii) $1 million related to other restructuring initiatives.
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Operating income (loss)
|
|
$ |
(352 |
) |
|
$ |
(132 |
) |
|
$ |
118 |
|
In percentage of net revenues
|
|
|
(17.5 |
)% |
|
|
(6.0 |
)% |
|
|
4.7 |
% |
The first quarter 2012 registered an operating loss of $352 million compared to an operating income of $118 million in the year-ago quarter and an operating loss of $132 million in the prior quarter. Compared to the year-ago period, the deterioration in our operating results was mainly due to the negative impact of revenues, both in terms of a volume decrease and average selling price impact. Additionally, the first quarter 2012 operating results were negatively impacted by some one-time charges, including unused capacity charges of approximately $71 million and a net impact of the arbitration award of $54 million. Furthermore, the first quarter of 2011 benefited from a $60 million billing of R&D services to a third party.
All of our product segments reported a decline in their profitability levels compared to the year-ago period mainly due to lower revenues; however, APG and AMM were able to keep a solid profitability level in spite of the very difficult market environment. APG registered an operating income of $37 million or about 9% of revenues, down from the year-ago income of $60 million or approximately 14% of revenues. AMM registered an operating income of $99 million or 13% of revenues down from $177 million or 20% of revenues. Digital registered an operating loss of $38 million or negative 11% of revenues in the current quarter compared to an operating income of $45 million or approximately 9% of the last year first quarter revenues. PDP registered an operating loss of $6 million or negative 3% of revenues versus $50 million operating income, equivalent to about 15% of the prior year first quarter revenues. Due to a strong decline in revenues, the Wireless segment registered a significant deterioration in its operating result, registering a loss of $293 million, compared to a loss of $180 million in the prior year first quarter; since substantially all of this loss was generated by ST-Ericsson JVS, 50% was attributed to Ericsson as noncontrolling interest below operating income (loss). The segment “Others” increased its losses to $151 million, from $34 million in the year-ago period, mainly due to higher unused capacity charges and the NXP arbitration award.
Other-than-temporary impairment charge on financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Other-than-temporary impairment charge on financial assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(5 |
) |
In the first quarter of 2012, we did not record any other-than-temporary impairment charge (OTTI). In the first quarter of 2011, an OTTI charge of $5 million was recorded as an adjustment of the fair value of certain marketable securities.
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Interest expense, net
|
|
$ |
(13 |
) |
|
$ |
(5 |
) |
|
$ |
(15 |
) |
We recorded a net interest expense of $13 million, which remained at the same level on a year-over-year basis. The first quarter of 2012 registered a significant expense increase with the previous quarter, mainly due to the sale, with no recourse, of certain R&D tax credits in ST-Ericsson (see “Liquidity and Capital Resources”).
Loss on equity-method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Loss on equity-method investments
|
|
$ |
(7 |
) |
|
$ |
(6 |
) |
|
$ |
(6 |
) |
In the first quarter of 2012, we recorded a charge of $7 million, of which $4 million related to our proportionate share in ST-Ericsson JVD as a loss pick-up including amortization of basis difference and $3 million related to 3Sun. The loss of ST-Ericsson JVD equity was the most important item in the comparable periods.
Gain on financial instruments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Gain on financial instruments, net
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
22 |
|
The $3 million gain on financial assets in the first quarter of 2012 was mainly associated with the gain of $2 million related to the repurchase of our 2016 Convertible Bonds and $1 million related to the sale of some marketable securities. The fourth quarter 2011 $3 million gain on financial instruments was related to an additional unsolicited repurchase of part of our 2016 Convertible Bonds with an accreted value of $201 million, inclusive of the swap, for a cash consideration of $198 million. In the prior year first quarter the $22 million gain on financial assets was mainly associated with the gain of $20 million related to the sale of the remaining shares of our equity participation in Micron received upon the Numonyx disposal.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Income tax benefit (expense)
|
|
$ |
34 |
|
|
$ |
(70 |
) |
|
$ |
(31 |
) |
During the first quarter of 2012, we registered an income tax benefit of $34 million, reflecting the yearly effective tax rate estimated in each of our jurisdictions and applied to the first quarter consolidated result before taxes. This income tax benefit resulted from the combination of (i) income tax expense estimated at a rate of about 20% on the ST entities income and (ii) an income tax benefit computed with a much lower tax rate applicable to the losses of the ST-Ericsson entities. Furthermore, in the first quarter 2012, income tax includes a $14 million charge for a valuation allowance related to part of ST-Ericsson’s accumulated net operating losses. Income tax also included the impact of certain discrete items.
Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimations of our tax provisions. Our income tax amounts and rates depend also on our loss carry-forwards and their relevant valuation allowances, which are based on estimated projected plans and available tax planning strategies; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries. Such benefits may not be available in the future due to changes in the local jurisdictions; our 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 provisions related to potential tax positions which have been considered uncertain.
Net loss (income) attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Net loss (income) attributable to noncontrolling interest
|
|
$ |
159 |
|
|
$ |
199 |
|
|
$ |
87 |
|
In the first quarter of 2012, we recorded $159 million, representing the loss attributable to noncontrolling interest, which mainly included the 50% less one share owned by Ericsson in the consolidated ST-Ericsson JVS. In the fourth quarter of 2011, the corresponding amount was $199 million.
All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities and Incard do Brazil for distribution. Those amounts were not material.
Net income (loss) attributable to parent company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited, in millions)
|
|
Net income (loss) attributable to parent company
|
|
$ |
(176 |
) |
|
$ |
(11 |
) |
|
$ |
170 |
|
As percentage of net revenues
|
|
|
(8.7 |
)% |
|
|
(0.5 |
)% |
|
|
6.7 |
% |
For the first quarter of 2012, we reported a net loss of $176 million, a significant decline compared to the year-ago quarter due to the aforementioned factors.
Earnings (loss) per share for the first quarter of 2012 was $(0.20) compared to $(0.01) in the fourth quarter of 2011 and $0.19 per diluted share in the year-ago quarter.
In the first quarter of 2012, the impact per share after tax of impairment, restructuring charges and other related closure costs and other one-time items, was estimated to be approximately $(0.06) per share, while in the fourth quarter of 2011, it was estimated to be basically nil. In the year-ago quarter, the impact of impairment, restructuring charges and other related closure costs, other-than-temporary impairment charge and other one-time items was estimated to be approximately $(0.01) 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 that the outcome of such IP litigation would be unfavorable to us, we may be required to take a license for patents or other IP rights upon economically unfavorable terms and conditions, and 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 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 and may face claims of infringing the IP rights of others” included in our Form 20-F, which may be updated from time to time in our public filings. We are also party to certain disputes which are not related to patents or other IP rights.
We record a provision when, based on our best estimate, we consider it probable that a liability has been incurred and when the amount of the probable loss can be reasonably estimated. As of March 31, 2012, provisions for estimated probable losses with respect to legal proceedings were not considered material. In addition, the amount we estimated for possible losses was between $10 million and $45 million. We regularly evaluate losses and claims to determine whether they need to be adjusted based on the most current information available to us and using our best judgment. There can be no assurance that our recorded reserves will be sufficient to cover the extent of our potential liabilities. Legal costs associated with claims are expensed as incurred.
We are a party to arbitration proceedings following a complaint filed by NXP Semiconductors.
We announced that, on April 5, 2012, we had been ordered to pay approximately $59 million to NXP Semiconductors Netherlands B.V. (“NXP”), following an award from an arbitration tribunal set up according to the rules of the International Chamber of Commerce (“ICC”), which, as of March 31, 2012, was booked as current liability. The award concerns a dispute between us and NXP and relates to a claim brought by NXP against us for underloading charges to be included in the price of wafers which NXP supplied to our Wireless joint venture from October 1, 2008 until December 31, 2009.
We are also involved in a second arbitration against NXP where we are a claimant before the same ICC Tribunal for compensation relating to the detriment caused by NXP’s failure to timely disclose certain information as well as for inventory which we consider has not effectively been contributed by NXP to the joint venture in accordance with contractual requirements. A hearing for this second arbitration is scheduled in June 2012 with a final decision expected during the following twelve months.
We are a party to legal proceedings with Tessera, Inc.
In 2006, Tessera initiated a patent infringement lawsuit against us and numerous other semiconductor manufacturers in the U.S. District Court for the Northern District of California. Tessera also filed a complaint in 2007 with the International Trade Commission in Washington, D.C. (“ITC”) against us and numerous other parties. During the ITC proceedings, the District Court action was stayed. On May 20, 2009, the ITC issued a limited exclusion order as well as a cease and desist order, both of which were terminated when the Tessera patents expired. The patents asserted by Tessera which related to ball grid array packaging technology expired in September 2010. The Court of Appeal affirmed the ITC’s orders and on November 28, 2011, the U.S. Supreme Court denied the defendants’ petition for review, and the ITC decision became final.
The District Court proceedings have recently been revived in California and a trial has been tentatively scheduled for April 2014. Pursuant to these proceedings, Tessera may continue to seek an unspecified amount of monetary damages as compensation for alleged infringement of its two packaging patents now expired.
We are a party to legal proceedings with Rambus Inc.
On December 1, 2010, Rambus Inc. filed a complaint with the ITC against us and numerous other parties, asserting that we engaged in unfair trade practices by importing certain memory controllers and devices using certain interface technologies that allegedly infringe certain patents owned by Rambus. The complaint seeks an exclusion order to bar importation into the United States of all semiconductor chips that include memory controllers and/or peripheral interfaces that are manufactured, imported, or sold for importation and that infringe any claim of the asserted patents, and all products incorporating the same. The complaint further seeks a cease and desist order directing us and other parties to cease and desist from importing, marketing, advertising, demonstrating, sampling, warehousing inventory for distribution, offering for sale, selling, distributing, licensing, or using any semiconductor chips that include memory controllers and/or peripheral interfaces, and products containing such semiconductor chips, that infringe any claim of the asserted patents. On December 29, 2010, the ITC voted to institute an investigation based on Rambus’ complaint. We filed our response to the complaint on February 1, 2011. A trial was held before the ITC from October 11, 2011 until October 20, 2011. On March 2, 2012, the ITC issued an Initial Determination ruling that we, along with our other co-defendants, did not violate the five patents asserted by Rambus. The ITC’s Final Determination is expected on or before July 5, 2012.
Also on December 1, 2010, Rambus filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging infringement of nineteen Rambus patents. On June 13, 2011, the District Court issued an order granting in part and denying in part defendants’ motion to stay the action concerning Rambus’ patent infringement claims pending completion of the aforementioned ITC proceedings. The case is stayed as to nine of the asserted patents, and moving forward as to the remaining patents. No trial date has yet been set. We intend to vigorously defend our rights and position in these matters.
Following a request made in March 2011, we have been informed that on February 1, 2012, the President of the Second Chamber of the European Court of Justice issued an order allowing us to intervene in a case between Hynix, on the one hand, and the European Commission and Qualcomm on the other hand, seeking annulment of the European Commission decision of December 9, 2009, which made binding certain commitments by Rambus on maximum royalty rates that would be applicable to a license of the patents asserted by Rambus against us, should we decide to enter into such a license.
We are a party to legal proceedings with Caltech.
On May 1, 2012, the California Institute of Technology (“Caltech”) filed a complaint with the ITC against us and certain of our customers seeking the opening by the ITC of an investigation into the importation into the U.S. of certain CMOS image sensor products which allegedly infringe three Caltech patents. These proceedings follow a lawsuit filed in Federal Court (Los Angeles and Orange County) by Caltech against us claiming infringement of various patents, including the three patents now put forward by Caltech before the ITC by our image sensor products. We intend to vigorously defend our rights and position in these matters.
We and our subsidiaries are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.
All pending claims and litigation proceedings involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. The resolution of intellectual property litigation may require us to pay damages for past infringement or to obtain a license under the other party’s intellectual property rights that could require one-time license fees or ongoing royalties, which could adversely impact our product gross margins in future periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees involved in such litigation may perform for us. From time to time we may enter into confidential discussions regarding the potential settlement of pending litigation or other proceedings; however, there can be no assurance that any such discussions will occur or will result in a settlement. The settlement of any pending litigation or other proceeding could require us to incur substantial settlement payments and costs. Furthermore, the settlement of any intellectual property proceeding may require us to grant a license to certain of our intellectual property rights to the other party under a cross-license agreement. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. In addition, from time to time we are approached by holders of intellectual property to engage in discussions about our obtaining licenses to their intellectual property. We will disclose the nature of any such discussion if we believe that (i) it is probable an intellectual property holder will assert a claim of infringement, (ii) there is a reasonable possibility the outcome (assuming assertion) will be unfavorable, and (iii) the resulting liability would be material to our financial condition. We also constantly review the merits of litigation and claims which we are facing and decide to make an accrual when we are able to reasonably determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. To date, we have not determined on such basis that any of the litigation or claims which we are facing gives rise to a material liability, singly or in the aggregate.
Related Party Transactions
One of the members of our Supervisory Board is a member of the Board of Directors of Technicolor (formerly known as Thomson), another is the non-executive Chairman of the Board of Directors of ARM Holdings PLC (“ARM”), one of our Supervisory Board members is a member of the Supervisory Board of Soitec, two of the members of the Supervisory Board are also members 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. One of our executive officers is a member of the Board of Directors of Soitec and Adecco. Adecco, as well as Oracle’s new subsidiary PeopleSoft, supply certain services to our Company. We have certain licensing agreements with ARM, and have conducted transactions with Soitec and BESI as well as with Technicolor and Flextronics. Each of the aforementioned arrangements and transactions is negotiated without the personal involvement of our Supervisory Board members and we believe that they are made on an arm’s length basis in line with market practices and conditions.
In the first quarters ended March 31, 2012 and April 2, 2011, our related party transactions were primarily with our significant shareholders, or their subsidiaries and companies in which our management performs similar policymaking functions. These include, but are not limited to: Adecco, Areva, BESI, France Telecom, Equant, Orange, Flextronics, Oracle and Technicolor.
Impact of Changes in Exchange Rates
Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.
As a market rule, the reference currency for the semiconductor industry is the U.S. dollar and the market prices of semiconductor products are mainly denominated in U.S. dollars. However, revenues for some of our products (primarily our 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 the changes in currency rates and the adjustments in the local currency equivalent of the price paid for such products. Furthermore, certain significant costs incurred by us, such as manufacturing costs, 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 and other non-U.S. dollar currency areas, including Sweden, our costs tend to increase when translated into U.S. dollars when the dollar weakens or to decrease when the U.S. dollar strengthens.
In summary, as our reporting currency is the U.S. dollar, currency exchange rate fluctuations affect our results of operations: in particular, if the U.S. dollar weakens, our results are negatively impacted since we receive a limited part of our revenues, and more importantly, we incur a significant part of our costs, in currencies other than the U.S. dollar. On the other hand, our results are favorably impacted when the dollar strengthens. The impact on our accounts could therefore be material, in the case of a material variation of the U.S. dollar exchange rate.
Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues. Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of the costs of goods sold, most of the R&D expenses and certain selling, general and administrative expenses, located in the Euro zone, which we account for as cash flow hedging contracts. We use three different types of hedging contracts, consisting of forward contracts, collars and options.
Our consolidated statements of income for the three months ended March 31, 2012 included income and expense items translated at the average U.S. dollar exchange rate for the period, plus the impact of the hedging contracts expiring during the period. Our effective average exchange rate was $1.33 for €1.00 for the first quarter of 2012 and $1.33 for €1.00 in the first quarter of 2011 while it was $1.36 for €1.00 for the fourth quarter of 2011. These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.
In 2010, we extended the time horizon of our cash flow hedging through collar contracts for manufacturing costs and operating expenses for up to 24 months, for a limited percentage of our exposure to the Euro and under certain currency market circumstances. As of March 31, 2012, the outstanding hedged amounts were €766 million to cover manufacturing costs and €488 million to cover operating expenses, at an average exchange rate of about $1.3632 and $1.3684 to €1.00, respectively (considering the options and the collars at strike and including the premiums paid to purchase foreign exchange options), maturing over the period from April 3, 2012 to April 4, 2013. As of March 31, 2012, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory represented a deferred loss of approximately $5 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statements of equity, compared to a deferred loss of approximately $67 million before tax at December 31, 2011.
With respect to the portion of our R&D expenses incurred in ST-Ericsson Sweden, as of March 31, 2012, the outstanding hedged amounts were Swedish krona 908 million at an average exchange rate of about SEK 6.7532 to $1.00, maturing over the period from April 5, 2012 to March 7, 2013. As of March 31, 2012, these outstanding hedging contracts represented a deferred gain of approximately $3 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statements of equity, compared to a deferred loss of approximately $4 million before tax at December 31, 2011.
Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a portion of our exposure in the next quarters and a declining percentage of our exposure in each quarter thereafter. In the first quarter of 2012, as a result of Euro U.S. dollar and U.S. dollar Swedish krona cash flow hedging, we recorded a net loss of $19 million, consisting of a loss of about $9 million to R&D expenses, a loss of about $9 million to costs of goods sold and a loss of $1 million to selling, general and administrative expenses, while in the first quarter of 2011, we recorded a net gain of $25 million.
In addition to our cash flow hedging, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates, which we account for as fair value instruments. We may in the future purchase or sell similar types of instruments. See Item 11. “Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F, which may be updated from time to time in our public filings. Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment. No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar. Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates. The net effect of the consolidated foreign exchange exposure resulted in a net loss of $1 million recorded in “Other income and expenses, net” in our first quarter of 2012 Statement of Income.
The assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate. Income and expenses, as well as cash flows, are translated at the average exchange rate for the period. The balance sheet impact, as well as the income statement and cash flow impact, of such translations have been, and may be expected to be, significant from period to period since a large part of our assets and liabilities and activities are accounted for in Euros as they are located in jurisdictions where the Euro is the functional currency. Adjustments resulting from the translation are recorded directly in equity, and are shown as “Accumulated other comprehensive income (loss)” in the consolidated statements of equity. At March 31, 2012, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.
For a more detailed discussion, see Item 3. “Key Information — Risk Factors — Risks Related to Our Operations” in our Form 20-F, which may be updated from time to time in our public filings.
Impact of Changes in Interest Rates
Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results of operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and marketable securities, as well as the total interest expense paid on our financial debt.
Our interest income (expense), net, as reported in our consolidated statements of income, is the balance between interest income received from our cash and cash equivalents and marketable securities investments and interest expense paid on our financial liabilities and bank fees (including fees on committed credit lines). Our interest income is dependent upon fluctuations in interest rates, mainly in U.S. dollars and Euros, since we invest primarily on a short-term basis; any increase or decrease in the market interest rates would mean an equivalent increase or decrease in our interest income. Our interest expense is mainly associated with long- and short-term debt, which mainly consists of 2013 floating rate Senior Bonds, which is fixed quarterly at a rate of Euribor plus 40bps, and European Investment Bank Floating Rate Loans at Libor plus variable spreads. Our 2016 Convertible Bond was almost fully repaid to the bondholders in the first quarter of 2012.
At March 31, 2012, our total financial resources, including cash and cash equivalents and marketable securities, generated an average interest income rate of 0.57%. In the same period, the average interest rate on our outstanding debt was 1.65%, including the external portion of the short-term debt of ST-Ericsson.
During the first quarter of 2012, our interest expense registered an increase mainly originated by the charges paid by ST-Ericsson on the factoring of its research tax credit (see “Liquidity and Capital Resources”).
Impact of Changes in Equity Prices
The impact of changes in equity prices was applicable in previous years to us mainly in relation to our participation in Micron, following the Numonyx divestiture. As consideration for the divestiture of our share in Numonyx in May 2010, we received 66.88 million Micron shares and we owed $78 million to one of our partners. In the fourth quarter of 2010 we sold 46.8 million shares at an average price of $8.48 per share, including the unwinding of the applicable hedging contracts. We received proceeds of $319 million (net of the $78 million payment to one of our partners) and realized a $13 million loss in the fourth quarter 2010. The remaining 20.1 million shares were sold in January 2011, together with the unwinding of their hedging contracts, for the total proceeds of $195 million, realizing a gain of $20 million, recorded as a gain on financial instruments in the first quarter 2011.
As of March 31, 2012, we did not hold any significant participations, which could be subject to a material impact in changes in equity prices.
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 “A3/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 a single A long-term rating, meaning at least A3 from Moody’s Investor Service (“Moody’s”) and A- from Standard & Poor’s (“S&P’s”) or Fitch Ratings (“Fitch”). Marginal amounts are held in other currencies. See Item 11. “Quantitative and Qualitative Disclosures About Market Risk” in our Form 20-F, which may be updated from time to time in our public filings.
Cash flow
We maintain a significant cash position and a low debt-to-equity ratio, which provide us with adequate financial flexibility. As in the past, our cash management policy is to finance our investment needs mainly with net cash generated from operating activities.
During the first quarter of 2012, the evolution of our cash flow produced an increase in our cash and cash equivalents of $147 million, generated by net cash from operating activities and from investing activities, which exceeded the net cash used in financing activities.
The evolution of our cash flow for the comparable periods is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net cash from operating activities
|
|
$ |
250 |
|
|
$ |
350 |
|
Net cash from (used in) investing activities
|
|
|
113 |
|
|
|
(206 |
) |
Net cash used in financing activities
|
|
|
(225 |
) |
|
|
(116 |
) |
Effect of change in exchange rates
|
|
|
9 |
|
|
|
8 |
|
Net cash increase
|
|
$ |
147 |
|
|
$ |
36 |
|
Net cash from operating activities. The net cash from operating activities in the first quarter of 2012 was $250 million, decreasing compared to the prior year period mainly due to the overall deterioration of our financial results (see “Results of Operations” for more information). Net cash from operating activities is the sum of (i) net income (loss) adjusted for non-cash items and (ii) changes in assets and liabilities. The deterioration in net cash from operating activities in the first quarter 2012 was due to the net income adjusted for non-cash items and the change in assets and liabilities, as follows:
|
·
|
Net income (loss) adjusted for non-cash items significantly decreased to $121 million of cash used in the first quarter of 2012 compared to $336 million of cash generated in the prior year period, mainly due to the deteriorated operating results;
|
|
·
|
Changes in assets and liabilities generated cash for a total amount of $371 million in the first quarter 2012, compared to $14 million in the prior year period. The first quarter 2012 changes were represented by a positive trend in all the components of assets and liabilities, which also included a favorable net cash impact of $33 million, deriving from the sales, with no recourse, of trade and other receivables, done by ST-Ericsson, compared to $50 million in the first quarter 2011. In the first quarter 2011, the changes were mainly represented by a positive trend in other assets and liabilities and trade payables, balanced by an unfavorable change in inventories, associated to the increase of their levels.
|
Net cash from (used in) investing activities. Investing activities generated $113 million of cash in the first quarter of 2012, mainly due to the net cash from proceeds of the sale of our marketable securities, partially balanced by payments for tangible assets. Payments for the purchase of tangible assets totaled $125 million, a significant decrease compared to $466 million registered in the prior year period. Investing activity in the first quarter of 2011 used net cash of $206 million, after having benefited from $195 million cash proceeds from the divestiture of Micron shares.
Net cash used in financing activities. Net cash used in financing activities was $225 million in the first quarter of 2012 with an increase compared to the $116 million used in the first quarter of 2011 mainly due to the cash used for repayment of our 2016 Convertible Bonds upon the exercise by the bondholders of their put options. Moreover, the first quarter 2012 amount included $20 million as a repayment of long-term debt at maturity and $88 million as dividends paid to stockholders.
Free Cash Flow (non U.S. GAAP measure).
We also present Free Cash Flow, which is a non U.S. GAAP measure, defined as (i) net cash from operating activities plus (minus) (ii) net cash from (used in) investing activities, excluding payment for purchases (and proceeds from the sale) of marketable securities and restricted cash, which are considered as temporary financial investments. The result of this definition is ultimately net cash from operating activities plus (minus) payment for purchase of tangible and intangible assets and net proceeds from sales of stock received on investment divestitures. We believe Free Cash Flow, a non U.S. GAAP measure, provides useful information for investors and management because it measures our capacity to generate cash from our operating activities to sustain our operating investing activities.
Free Cash Flow is not a U.S. GAAP measure and does not represent total cash flow since it does not include the cash flows generated by or used in financing activities. Free Cash Flow reconciles with the total cash flow and the net cash increase (decrease) by including the payment for purchases (and proceeds from the sale) of marketable securities and restricted cash, the net cash used in financing activities and the effect of change in exchange rates. In addition, our definition of Free Cash Flow may differ from definitions used by other companies. Free Cash Flow is determined as follows from our Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net cash from operating activities
|
|
$ |
250 |
|
|
$ |
350 |
|
Net cash from (used in) investing activities
|
|
|
113 |
|
|
|
(206 |
) |
Payment for purchase and proceeds from sale of marketable securities and restricted cash, net(1)
|
|
|
(265 |
) |
|
|
(93 |
) |
Payment for purchase of tangible and intangible assets and net proceeds from sales of stock received on investment divestitures (2)
|
|
|
(152 |
) |
|
|
(299 |
) |
Free Cash Flow (non U.S. GAAP measure)
|
|
$ |
98 |
|
|
$ |
51 |
|
_____________
(1) Reflects the total of the following line items reconciled with our Consolidated Statements of Cash Flows relating to temporary financial investments of our liquidity: Payment for purchase of marketable securities, Proceeds from sale of marketable securities and Restricted cash.
(2) Reflects the total of the following line items reconciled with our Consolidated Statements of Cash Flows relating to the operating investing activities: Net payment for purchase of tangible assets, Investment in intangible and financial assets net of proceeds from sale and Net proceeds from sale of stock received on investment divestiture.
We generated Free Cash Flow of $98 million in the first quarter of 2012, compared to $51 million in the first quarter of 2011, which benefited from the $195 million cash proceeds from the sale of Micron shares. The improvement in our first quarter 2012 Free Cash Flow was generated by the significantly lower amount of tangible asset payments, which amounted to $125 million comparable to $466 million in the equivalent year-ago period. Furthermore, the improvement was also supported by inventories management, which recorded $46 million as cash generation in the first quarter 2012, which compares to $135 million cash used in the prior year period.
Net financial position (non U.S. GAAP measure).
Our net financial position represents the balance between our total financial resources and our total financial debt. Our total financial resources include cash and cash equivalents, current and non-current marketable securities, short-term deposits and restricted cash, and our total financial debt includes bank overdrafts, short-term debt and long-term debt, as represented in our Consolidated Balance Sheets. Net financial position is not a U.S. GAAP measure but we believe it provides useful information for investors because it gives evidence of our global position either in terms of net indebtedness or net cash by measuring our capital resources based on cash and cash equivalents and marketable securities and the total level of our financial indebtedness, which includes the 50% of ST-Ericsson indebtedness. Moreover, we also present the ST financial position, which does not include the ST-Ericsson indebtedness towards our partner in the joint venture JVS. Our net financial position has been determined as follows from our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cash and cash equivalents
|
|
$ |
2,059 |
|
|
$ |
1,912 |
|
|
$ |
1,928 |
|
Marketable securities, current
|
|
|
154 |
|
|
|
413 |
|
|
|
719 |
|
Restricted cash
|
|
|
7 |
|
|
|
8 |
|
|
|
92 |
|
Short-term deposits
|
|
|
- |
|
|
|
- |
|
|
|
71 |
|
Marketable securities, non-current
|
|
|
- |
|
|
|
- |
|
|
|
77 |
|
Total financial resources
|
|
|
2,220 |
|
|
|
2,333 |
|
|
|
2,887 |
|
Bank overdrafts and short-term debt
|
|
|
(1,076 |
) |
|
|
(740 |
) |
|
|
(717 |
) |
Long-term debt
|
|
|
(366 |
) |
|
|
(826 |
) |
|
|
(1,032 |
) |
Total financial debt
|
|
|
(1,442 |
) |
|
|
(1,566 |
) |
|
|
(1,749 |
) |
Net financial position
|
|
$ |
778 |
|
|
$ |
767 |
|
|
$ |
1,138 |
|
ST-Ericsson net debt to Ericsson
|
|
$ |
489 |
|
|
$ |
400 |
|
|
$ |
117 |
|
ST financial position
|
|
$ |
1,267 |
|
|
$ |
1,167 |
|
|
$ |
1,255 |
|
Our net financial position (ST financial position) as of March 31, 2012 resulted in a net cash position of $1,267 million, meaning a $100 million increase compared to the net cash of $1,167 million at December 31, 2011. Total financial resources declined mainly following the repayment of $213 million of our 2016 Convertible Bonds in cash, while at the same time, there was an almost equivalent reduction of total financial debt.
Cash and cash equivalents amounted to $2,059 million as at March 31, 2012, as a result of our cash flow evolution as presented above.
Restricted cash of $7 million is cash in an escrow account out of which $4 million is related to the disposal of the Numonyx investment and $3 million is related to the sale of our Phoenix plant.
Marketable securities, current was composed of $154 million invested in senior debt securities (out of which $127 million at a floating rate and $27 million at a fixed rate) issued by primary financial institutions with an average rating of A2/A- from Moody’s and S&P’s. The Floating Rate Notes are classified as available-for-sale and reported at fair value. See Note 11 to our Unaudited Interim Consolidated Financial Statements.
Marketable securities, non-current included in prior periods Auction Rate Securities purchased by Credit Suisse, which were fully recovered through a cash settlement with Credit Suisse in 2011.
Financial debt was $1,442 million as at March 31, 2012, composed of (i) $489 million short-term borrowings, (ii) $587 million of current portion of long-term debt and (iii) $366 million long-term debt. The breakdown of our total financial debt included: (i) $6 million of our 2016 Convertible Bonds, (ii) $467 million of our 2013 Senior Bonds, which during the first quarter 2012 was reclassified to current portion of long-term debt from long-term debt since its maturity is within twelve months, scheduled in March 2013, (iii) $447 million in European Investment Bank loans (the “EIB Loans”), (iv) $24 million in loans from other funding programs, (v) $9 million of capital leases, and (vi) $489 million of short-term borrowings related to ST-Ericsson owed by the joint venture to our partner, Ericsson. The EIB Loans represent two committed credit facilities as part of R&D funding programs. The first, for R&D in France, was drawn in U.S. dollars, between December 2006 and February 2008, for a total amount of $341 million, of which $166 million had been paid back as at March 31, 2012. The second for R&D projects in Italy, was drawn in U.S. dollars, between August and October 2008, for a total amount of $380 million, out of which $108 million had been paid back as of March 31, 2012. Additionally, we had unutilized committed medium-term credit facilities with core relationship banks of about $492 million. At March 31, 2012, the amounts available under the short-term lines of credit were unutilized. In 2010, we signed with the European Investment Bank a €350 million multi-currency loan to support our industrial and R&D programs, which is currently undrawn.
In 2010, we granted, together with Ericsson, a $200 million committed facility to ST-Ericsson SA, extended to $800 million in 2011. In January 2012, we and Ericsson extended the committed facility to fund ST-Ericsson SA to the level of $1.1 billion. During the second quarter, it is expected that the committed facility will be increased up to $1.4 billion. As of March 31, 2012, $978 million ($489 million for each parent) was utilized. Withdrawals on the facility are subject to approval by the parent companies at ST-Ericsson’s Board of Directors.
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.
In February 2006, we issued $1,131 million principal amount at maturity of zero coupon senior convertible bonds due in February 2016. The bonds are convertible by the holder at any time prior to maturity at a conversion rate of 43.833898 shares per one thousand dollar face value of the bonds corresponding to 42,694,216 equivalent shares. In order to optimize our liability management and yield, we repurchased a portion of our 2016 Convertible Bonds during 2009 (98,000 bonds for a total cash consideration of $103 million and corresponding to 4,295,722 shares) and in 2010 (385,830 bonds for a total cash consideration of $410 million and corresponding to 16,912,433 shares). On February 23, 2011, certain holders redeemed 41,123 convertible bonds at a price of $1,077.58, out of the total of 490,170 outstanding bonds, or about 8%. In the third and fourth quarters of 2011, we repurchased 248,645 bonds for a total cash consideration of $270 million, corresponding to 10,899,080 shares. On February 23, 2012, certain holders redeemed 190,131 convertible bonds at a price of $1,093.81, out of the total of 200,402 outstanding bonds, representing approximately 95% of the then outstanding convertible bonds. In addition, on March 12, 2012, we accepted the further put of 4,980 bonds for a cash consideration of $5 million. As of March 31, 2012, there were 5,291 bonds remaining outstanding. On March 28, 2012, we published a notice of sweep-up redemption for the remaining 5,291 bonds outstanding, which will be redeemed on May 10, 2012.
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% (“2013 Senior Bonds”). The notes, which mature on March 17, 2013, pay a coupon rate of the three-month Euribor plus 0.40% on June 17, September 17, December 17 and March 17 of each year through maturity. The notes have a put for early repayment in case of a change of control. The 2013 Senior Bonds issued by ST BV are guaranteed by ST NV. We repurchased a portion of our 2013 Senior Bonds: (i) for the amount of $98 million in 2010 and (ii) for the amount of $107 million in 2011.
As of March 31, 2012 we had the following credit ratings on our 2013 Senior Bonds and 2016 Convertible Bonds:
|
Moody’s Investors Service
|
|
Standard & Poor’s
|
Zero Coupon Senior Convertible Bonds due 2016
|
Baa1
|
|
BBB+
|
Floating Rate Senior Bonds due 2013
|
Baa1
|
|
BBB+
|
On April 30, 2012, Moody’s affirmed our Baa1 rating and changed the outlook to negative from stable.
We are also rated “BBB+” from Fitch on an unsolicited basis. On February 2, 2012, Fitch changed the outlook on the ratings to negative from stable.
On February 6, 2009 S&P’s lowered our senior debt rating from “A-” to “BBB+”.
As of March 31, 2012, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Long-term debt (including current portion)
|
|
$ |
953 |
|
|
$ |
99 |
|
|
$ |
579 |
|
|
$ |
109 |
|
|
$ |
87 |
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Financial Outlook
The increase in demand that we have broadly faced across all end markets in 2010 required the acceleration of our 2011 capex spending in order to adapt our supply capability to this increasing level of demand. In the second part of 2011, the semiconductor market experienced a demand reduction and inventory correction, which have driven a slowdown of our capital spending in line with our policy of modulating the capital spending according to the semiconductor market evolution. Based on current visibility on demand, we anticipate our capex to remain at a low level in the first half 2012 and to be adjusted based on demand thereafter. The total year is expected to be aligned with our overall target of capital expenditures below 10% of revenues in a cycle. The most significant of our 2012 capital expenditure projects are expected to be: (a) for the front-end facilities: (i) in our 300-mm fab in Crolles, technology evolution to introduce the capability for 20-nm processes, and mix evolution to support the production ramp up of the most advanced technologies, reaching a capacity of 3,700 wafers per week by the end of the year; (ii) the first step of the conversion program to 200-mm of our 150-mm fab in Ang-Mo-Kio (Singapore); (iii) selective programs of mix evolution in our 200-mm fabs; and (iv) quality, safety, security and maintenance in both 150-mm and 200-mm front-end fabs; (b) for the back-end facilities, capital expenditures will mainly be dedicated to: (i) capacity growth on strategic package families, mainly in the area of MEMS to sustain market demand; (ii) further consolidation of our presence in China (Longgang and Shenzhen), in Muar (Malaysia) and in Calamba (Philippines); (iii) modernization of package lines targeting cost-saving benefits (copper bonding vs. gold bonding and increase in lead frame density); and (iv) specific investments in the areas of quality, environment and energy saving; and (c) an overall capacity adjustment in final testing and wafers probing (EWS) for all product lines.
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 significant 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 and to continue to support ST-Ericsson towards its newly announced strategic plan. We plan to fund our capital requirements from cash provided by operating activities, available funds and support from third parties, and may have recourse to borrowings under available credit lines and, to the extent necessary or attractive based on market conditions prevailing at the time, the 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.
On February 23, 2012, holders were able to put for the redemption of our outstanding 2016 Convertible Bonds, which occurred for 190,131 bonds, for an amount of $208 million, realizing a gain of $2 million. The residual amount outstanding after the exercise was $11 million; in addition, on March 12, 2012, we accepted the further put of 4,980 bonds for a cash consideration of $5 million. On March 28, 2012, we published a notice of sweep-up redemption for the remaining 5,291 bonds outstanding, which will be redeemed on May 10, 2012.
Furthermore, there may be a need to provide additional financing by the parent companies of the ST-Ericsson joint venture.
We are expecting to participate in a 3Sun share capital increase under certain conditions together with our partners for an amount of €30 million (for each partner) to be completed in line with activity expansion.
We believe that we have the financial resources needed to meet our business requirements for the next twelve months, including capital expenditures for our manufacturing activities, working capital requirements, dividend payments and the repayment of our debts in line with their maturity dates. We may use some of our available cash to repurchase a portion of our outstanding debt securities, including the remaining 2016 Convertible Bonds and 2013 Senior Bonds, should market conditions permit.
Contractual Obligations, Commercial Commitments and Contingencies
Our contractual obligations, commercial commitments and contingencies are mainly comprised of: operating leases for land, buildings, plants and equipment; purchase commitments for equipment, outsourced foundry wafers and for software licenses; long-term debt obligations; pension obligations and other long-term liabilities.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at March 31, 2012.
Backlog and Customers
During the first quarter of 2012, our bookings plus frames orders increased compared to the third and fourth quarters 2011, reflecting an improved demand after the weak market conditions registered in the second half of 2011. As a result of the solid demand, we entered the second quarter 2012 with a backlog higher than the level we had when entering the first quarter 2012. Backlog (including frame orders) is subject to possible cancellation, push back and a lower ratio of frame orders being translated into firm orders and, thus, it is not necessarily indicative of the amount of billings or growth to be registered in subsequent periods.
In the first quarter of 2012, no customer accounted for more than 10% of our revenues, while the Nokia Group of companies, accounted for approximately 11% of our revenues in the first quarter of 2011. There is no guarantee that any customer will continue to generate revenues for us at the same levels as in prior periods. If we were to lose one or more of our key customers, or if they were to significantly reduce their bookings, not confirm planned delivery dates on frame orders in a significant manner or fail to meet their payment obligations, our operating results and financial condition could be adversely affected.
Disclosure Controls and Procedures
Evaluation
As in prior periods, our management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this periodic report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis.
The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and their effect on the information generated for use in this periodic report. In the course of the controls evaluation, we reviewed identified data errors, control problems or acts of fraud and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed at least on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 6-K and Form 20-F. The components of our Disclosure Controls are also evaluated on an ongoing basis by our Internal Audit Department, which, as of December 2010, reports directly to the Audit Committee. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.
In connection with our Disclosure Controls evaluation, we have received a certification from ST-Ericsson’s management with respect to their internal controls at ST-Ericsson and their affiliates, which are consolidated in our financial statements but which act as independent companies under the 50-50% governance structure of their two parents.
Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this periodic report, our Disclosure Controls (including those at ST-Ericsson) were effective.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
No system of internal control over financial reporting, including one determined to be effective, may prevent or detect all misstatements. It can provide only reasonable assurance regarding financial statement preparation and presentation. Also, projections of the results of any evaluation of the effectiveness of internal control over financial reporting into future periods are subject to the inherent risk that the relevant controls may become inadequate due to changes in circumstances or that the degree of compliance with the underlying policies or procedures may deteriorate.
Other Reviews
We have sent this report to our Audit Committee, which had an opportunity to raise questions with our management and independent auditors before we submitted it to the Securities and Exchange Commission.
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:
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the possible impact of an impairment charge on the carrying value of the ST-Ericsson investment in our books of approximately $1.7 billion, as well as the impact of possible restructuring charges on our consolidated results resulting from the execution of ST-Ericsson's new strategic direction plan and its related savings announced on April 23, 2012;
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the possibility that part of certain grants and funding received from state agencies could be claimed back by them under certain circumstances, which could result in a negative impact on our consolidated accounts;
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changes in demand in the key application markets and/or from key customers served by our products, including demand for products where we have achieved design wins and/or demand for applications where we are targeting growth, all of which make it extremely difficult to accurately forecast and plan our future business activities;
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our ability in periods of reduced demand or visibility on orders to reduce our expenses as required, as well as our ability to operate our manufacturing facilities at sufficient levels with existing process technologies to cover our fixed operating costs;
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our ability, in an intensively competitive environment, to identify and allocate necessary design resources to successfully develop and secure customer acceptance for new products meeting their expectations as well as our ability to achieve our pricing expectations for high-volume supplies of new products in whose development we have been, or are currently, investing;
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the financial impact of obsolete or excess inventories if actual demand differs from our expectations as well as the ability of our customers to successfully compete in the markets they serve using our products;
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our ability to maintain or improve our competitiveness when a high percentage of our costs are fixed and are incurred in Euros and currencies other than U.S. dollars, especially in light of the increasing volatility in the foreign exchange markets and, more particularly, in the U.S. dollar exchange rate as compared to the Euro and the other major currencies we use for our operations;
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the outcome of ongoing litigation as well as any new litigation to which we may become a defendant;
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changes in our overall tax position as a result of changes in tax laws, estimated income or the outcome of tax audits, changes in international tax treaties which may impact our results of operations as well as our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;
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the impact of intellectual property (“IP”) claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions;
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product warranty or liability claims based on epidemic or delivery failures or recalls by our customers for a product containing one of our parts;
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availability and costs of raw materials, utilities, third-party manufacturing services, or other supplies required by our operations; and
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current economic uncertainties involving the possibility during 2012 of limited growth or recession in global or important regions of the world economy, sovereign default, changes in the political, social, economic or infrastructure 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, earthquakes, tsunami, volcano eruptions or other acts of nature in, or affecting, the countries in which we, our key customers or our suppliers, operate and causing unplanned disruptions in our supply chain and reduced or delayed demand from our customers.
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Such forward-looking statements are subject to various risks and uncertainties, which may cause actual results and performance of our business to differ materially and adversely from the forward-looking statements. Certain forward-looking statements can be identified by the use of forward-looking terminology, such as “believes”, “expects”, “may”, “are expected to”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Some of these risk factors are set forth and are discussed in more detail in “Item 3. Key Information — Risk Factors” in our Form 20-F. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in our Form 20-F as anticipated, believed or expected. We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set forth in this Form 6-K to reflect subsequent events or circumstances.
Unfavorable changes in the above or other factors listed under “Item 3. Key Information — Risk Factors” from time to time in our Securities and Exchange Commission (“SEC”) filings, could have a material adverse effect on our business and/or financial condition.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Statements of Income for the Three Months Ended March 31, 2012 and April 2, 2011 (unaudited)
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F-1
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Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and April 2, 2011 (unaudited)
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F-2
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Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 (audited)
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F-3
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and April 2, 2011 (unaudited)
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F-4
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Consolidated Statements of Equity (unaudited)
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F-5
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Notes to Interim Consolidated Financial Statements (unaudited)
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F-6
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