SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
REPORT
OF FOREIGN PRIVATE ISSUER
PURSUANT
TO RULE 13a-16 or 15d-16 OF
THE
SECURITIES EXCHANGE ACT OF 1934
Report
on Form 6-K dated November 12, 2008
__________________________________________
STMicroelectronics
N.V.
(Name of
Registrant)
39,
Chemin du Champ-des-Filles
1228
Plan-les-Ouates, Geneva, Switzerland
(Address
of Principal Executive Offices)
__________________________________________
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F:
Form 20-F
Q Form
40-F £
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(7):
Yes £ No Q
Indicate
by check mark whether the registrant by furnishing the information contained in
this form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes £ No Q
If “Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- __________
Enclosure:
STMicroelectronics N.V.’s Third Quarter and First Nine Months 2008:
· Operating
and Financial Review and Prospects;
· Unaudited
Interim Consolidated Statements of Income, Balance Sheets, Statements of Cash
Flow, and Statements of Changes in Shareholders’ Equity and related Notes for
the three months and nine months ended September 27, 2008; and
· Certifications
pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1) of the
Sarbanes-Oxley Act of 2002, submitted to the Commission on a voluntary
basis.
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
Overview
The
following discussion should be read in conjunction with our Unaudited Interim
Consolidated Statements of Income, Balance Sheets, Statements of Cash Flow and
Statements of Changes in Shareholders’ Equity for the three months and nine
months ended September 27, 2008 and Notes thereto included elsewhere in this
Form 6-K and in our annual report on Form 20-F for the year ended December 31,
2007 as filed with the U.S. Securities and Exchange Commission (the “Commission”
or the “SEC”) on March 3, 2008 (the “Form 20-F”). The following discussion
contains statements of future expectations and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, or Section 21E
of the Securities Exchange Act of 1934, each as amended, particularly in the
sections “Critical Accounting Policies Using Significant Estimates,” “Business
Outlook” and “Liquidity and Capital Resources—Financial Outlook.” Our actual
results may differ significantly from those projected in the forward-looking
statements. For a discussion of factors that might cause future actual results
to differ materially from our recent results or those projected in the
forward-looking statements in addition to the factors set forth below, see
“Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key
Information—Risk Factors” included in the Form 20-F. We assume no obligation to
update the forward-looking statements or such risk factors.
Critical
Accounting Policies Using Significant Estimates
The
preparation of our Consolidated Financial Statements, in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”), requires us to make estimates and assumptions that have a significant
impact on the results we report in our Consolidated Financial Statements, which
we discuss under the section “Results of Operations.” Some of our accounting
policies require us to make difficult and subjective judgments that can affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during the
reporting period. The primary areas that require significant estimates and
judgments by management include, but are not limited to, sales returns and
allowances; reserves for price protection to certain distributor customers;
allowances for doubtful accounts; inventory reserves and normal manufacturing
loading thresholds to determine costs to be capitalized in inventory; accruals
for warranty costs, litigation and claims; assumptions used to discount monetary
assets expected to be recovered beyond one year; valuation at fair value of
acquired assets, including intangibles and amounts of In-Process research and
development (“IP R&D”), and assumed liabilities in a business combination;
goodwill, investments and tangible assets as well as the impairment of their
related carrying values; estimated value of the consideration to be received and
used as fair value for the asset group classified as assets to be held for sale
and assessments of the probability of realizing such sale; evaluation of the
fair value of debt and equity securities available-for-sale for which no
observable market price is obtainable and assessments of other-than-temporary
charges on financial assets; valuation of equity investments under the equity
method based on results reported by such entities, sometimes on a one-quarter
lag, thus relying on their internal controls; valuation of the results and
financial position of newly integrated subsidiaries when a significant part of
the activity is performed and reported to us by the former controlling entity
for a specified period under a transition services agreement; valuation of
minority interests, particularly when a contribution in kind is part of a
business combination giving rise to a minority interest; restructuring charges;
other non-recurring special charges; assumptions used in calculating pension
obligations and share-based compensation, including assessment of the number of
awards expected to vest upon the achievement of certain conditions based on
future performance; assumptions used to measure and recognize a liability for
the fair value of the obligation we assume at the inception of a guarantee;
assessment of hedge effectiveness of derivative instruments; estimates of taxes
to be paid for the year, based on forecasts of ordinary taxable income by
jurisdiction; deferred income tax assets, including mandatory valuation
allowances and liabilities; and provisions for specifically identified income
tax exposures and income tax uncertainties. We base our estimates and
assumptions on historical experience and on various other factors such as market
trends, market comparables, business plans and levels of materiality that we
believe to be reasonable under the circumstances, the results of which form our
basis for making judgments about the carrying values of assets and liabilities.
While we regularly evaluate our estimates and assumptions, our actual results
may differ materially and
adversely
from our estimates. To the extent there are material differences between the
actual results and these estimates, our future results of operations could be
significantly affected.
We
believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our Consolidated
Financial Statements:
· Revenue recognition. Our
policy is to recognize revenues from sales of products to our customers when all
of the following conditions have been met: (a) persuasive evidence of an
arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or
determinable; and (d) collectibility is reasonably assured. This usually occurs
at the time of shipment.
Consistent
with standard business practice in the semiconductor industry, price protection
is granted to distributor customers on their existing inventory of our products
to compensate them for declines in market prices. The ultimate decision to
authorize a distributor refund remains fully within our control. We accrue a
provision for price protection based on a rolling historical price trend
computed on a monthly basis as a percentage of gross distributor sales. This
historical price trend represents differences in recent months between the
invoiced price and the final price to the distributor, adjusted if required, to
accommodate for a significant move in the current market price. The short
outstanding inventory time period, our ability to foresee changes in standard
inventory product pricing (as opposed to pricing for certain customized
products) and our lengthy distributor pricing history have enabled us to
reliably estimate price protection provisions at period-end. We record the
accrued amounts as a deduction of revenue at the time of the sale. If market
conditions differ from our assumptions, this could have an impact on future
periods. In particular, if market conditions were to deteriorate, net revenues
could be reduced due to higher product returns and price reductions at the time
these adjustments occur.
Our
customers occasionally return our products for technical reasons. Our standard
terms and conditions of sale provide that if we determine that our products are
non-conforming, we will repair or replace them, or issue a credit or rebate of
the purchase price. In certain cases, when the products we have supplied have
been proven to be defective, we have agreed to compensate our customers for
claimed damages in order to maintain and enhance our business relationship.
Quality returns are not related to any technological obsolescence issues and are
identified shortly after sale in customer quality control testing. Quality
returns are always associated with end-user customers, not with distribution
channels. We provide for such returns when they are considered likely and can be
reasonably estimated. We record the accrued amounts as a reduction of
revenue.
Our
insurance policies relating to product liability only cover physical and other
direct damages caused by defective products. We do not carry insurance against
immaterial, non-consequential damages. We record a provision for warranty costs
as a charge against cost of sales based on historical trends of warranty costs
incurred as a percentage of sales which we have determined to be a reasonable
estimate of the probable losses to be incurred for warranty claims in a period.
Any potential warranty claims are subject to our determination that we are at
fault and liable for damages, and that such claims usually must be submitted
within a short period following the date of sale. This warranty is given in lieu
of all other warranties, conditions or terms expressed or implied by statute or
common law. Our contractual terms and conditions typically limit our liability
to the sales value of the products that gave rise to the claim.
We
maintain an allowance for doubtful accounts for estimated potential losses
resulting from our customers’ inability to make required payments. We base our
estimates on historical collection trends and record a provision accordingly.
Furthermore, we are required to evaluate our customers’ credit ratings from time
to time and take an additional provision for any specific account that we
consider doubtful. In the first nine months of 2008, we did not record any new
material specific provision related to bankrupt customers other than our
standard provision of 1% of total receivables based on estimated historical
collection trends. If we receive information that the financial condition of our
customers has deteriorated, resulting in an impairment of their ability to make
payments, additional allowances could be required. Such deterioration is
increasingly likely given the current crisis in the credit markets.
While the
majority of our sales agreements contain standard terms and conditions, we may,
from time to time, enter into agreements that contain multiple elements or
non-standard terms and conditions, which require revenue recognition judgments.
Where multiple elements exist in an agreement, the revenue arrangement is
allocated to the different elements based upon verifiable objective evidence of
the fair value of the elements, as governed under Emerging Issues Task Force
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF
00-21”).
· Goodwill and purchased intangible
assets. The purchase method of accounting for acquisitions requires
extensive use of estimates and judgments to allocate the purchase price to the
fair value of the net tangible and intangible assets acquired, including
In-Process research and development, which is expensed immediately. Goodwill and
intangible assets deemed to have indefinite lives are not amortized but are
instead subject to annual impairment tests. The amounts and useful lives
assigned to other intangible assets impact future amortization. If the
assumptions and estimates used to allocate the purchase price are not correct or
if business conditions change, purchase price adjustments or future asset
impairment charges could be required. At September 27, 2008, the value of
goodwill amounted to $1,030 million, of which $18 million was registered
following the acquisition of Genesis Microchip Inc. (“Genesis”), which occurred
in the first quarter of 2008, and $735 million was registered in the third
quarter of 2008 following the consolidation of the NXP wireless business, which
is 80% owned by us.
· Impairment of goodwill.
Goodwill recognized in business combinations is not amortized and is instead
subject to an impairment test to be performed on an annual basis, or more
frequently if indicators of impairment exist, in order to assess the
recoverability of its carrying value. Goodwill subject to potential impairment
is tested at a reporting unit level, which represents a component of an
operating segment for which discrete financial information is available and is
subject to regular review by segment management. This impairment test determines
whether the fair value of each reporting unit for which goodwill is allocated is
lower than the total carrying amount of relevant net assets allocated to such
reporting unit, including its allocated goodwill. If lower, the implied fair
value of the reporting unit goodwill is then compared to the carrying value of
the goodwill and an impairment charge is recognized for any excess. In
determining the fair value of a reporting unit, we usually estimate the expected
discounted future cash flows associated with the reporting unit. Significant
management judgments and estimates are used in forecasting the future discounted
cash flows including: the applicable industry’s sales volume forecast and
selling price evolution; the reporting unit’s market penetration; the market
acceptance of certain new technologies and relevant cost structure; the discount
rates applied using a weighted average cost of capital; and the perpetuity rates
used in calculating cash flow terminal values. Our evaluations are based on
financial plans updated with the latest available projections of the
semiconductor market evolution, our sales expectations and our costs evaluation,
and are consistent with the plans and estimates that we use to manage our
business. It is possible, however, that the plans and estimates used may be
incorrect, and future adverse changes in market conditions or operating results
of acquired businesses that are not in line with our estimates may require
impairment of certain goodwill. As a result of our yearly impairment testing, we
recorded $13 million of impairment of goodwill charges in the third quarter of
2008.
· Intangible assets subject to
amortization. Intangible assets subject to amortization include the cost
of technologies and licenses purchased from third parties, as well as, as a
result of the purchase method of accounting for acquisitions, purchased software
and internally developed software that is capitalized. In addition, intangible
assets subject to amortization include intangible assets originated by the
purchase method such as core technologies and customer relationships. Intangible
assets subject to amortization are reflected net of any impairment losses and
are amortized over their estimated useful life. The carrying value of intangible
assets subject to amortization is evaluated whenever changes in circumstances
indicate that the carrying amount may not be recoverable. In determining
recoverability, we initially assess whether the carrying value exceeds the
undiscounted cash flows associated with the intangible assets. If exceeded, we
then evaluate whether an impairment charge is required by determining if the
asset’s carrying value also exceeds its fair value. An impairment loss is
recognized for the excess of the carrying amount over the fair value. We
normally estimate the fair value based on the projected discounted future cash
flows associated with the intangible assets. Significant management judgments
and estimates are required to forecast the future operating results used in the
discounted cash flow method of valuation, including: the applicable industry’s
sales volume forecast and selling price evolution; our market penetration; the
market acceptance
of
certain new technologies; and, the relevant cost structure. Our evaluations are
based on financial plans updated with the latest available projections of growth
in the semiconductor market and our sales expectations. They are consistent with
the plans and estimates that we use to manage our business. It is possible,
however, that the plans and estimates used may be incorrect and that future
adverse changes in market conditions or operating results of businesses acquired
may not be in line with our estimates and may therefore require us to recognize
impairment of certain intangible assets. We did not record any charges related
to the impairment of intangible assets subject to amortization in the first nine
months of 2008. At September 27, 2008, the value of intangible assets subject to
amortization amounted to $904 million, of which $615 million was related to core
technologies and customer relationships recognized as part of our purchase
accounting for the NXP wireless business consolidated in the third quarter of
2008.
· Property, plant and
equipment. Our business requires substantial investments in
technologically advanced manufacturing facilities, which may become
significantly underutilized or obsolete as a result of rapid changes in demand
and ongoing technological evolution. We estimate the useful life for the
majority of our manufacturing equipment, the largest component of our long-lived
assets, to be six years, except for our 300-mm manufacturing equipment as stated
below. This estimate is based on our experience using the equipment over time.
Depreciation expense is a major element of our manufacturing cost structure. We
begin to depreciate new equipment when it is placed into service. In the first
quarter of 2008 we launched our first solely-owned 300-mm production facility in
Crolles (France). Consequently, we assessed the useful life of our 300-mm
manufacturing equipment based on relevant economic and technical factors. Our
conclusion was that the appropriate depreciation period for such 300-mm
equipment is 10 years. This policy was applied starting January 1,
2008.
We
perform an impairment review when there is reason to suspect that the carrying
value of tangible assets or groups of assets might not be recoverable. Factors
we consider important which could trigger such a review include: significant
negative industry trends; significant underutilization of the assets or
available evidence of obsolescence of an asset; strategic management decisions
impacting production or an indication that an asset’s economic performance is,
or will be, worse than expected; and, a more likely than not expectation that
assets will be sold or disposed of prior to their estimated useful life. In
determining the recoverability of assets to be held and used, we initially
assess whether the carrying value exceeds the undiscounted cash flows associated
with the tangible assets or group of assets. If exceeded, we then evaluate
whether an impairment charge is required by determining if the asset’s carrying
value also exceeds its fair value. We normally estimate this fair value based on
independent market appraisals or the sum of discounted future cash flows, using
market assumptions such as the utilization of our fabrication facilities and the
ability to upgrade such facilities, change in the selling price and the adoption
of new technologies. We also evaluate the continued validity of an asset’s
useful life when impairment indicators are identified. Assets classified as held
for sale are reflected at the lower of their carrying amount and fair value less
selling costs and are not depreciated during the selling period. Selling costs
include incremental direct costs to transact the sale that we would not have
incurred except for the decision to sell.
Our
evaluations are based on financial plans updated with the latest projections of
growth in the semiconductor market and our sales expectations, from which we
derive the future production needs and loading of our manufacturing facilities,
and which are consistent with the plans and estimates that we use to manage our
business. These plans are highly variable due to the high volatility of the
semiconductor business and therefore are subject to continuous modifications. If
future growth differs from the estimates used in our plans, in terms of both
market growth and production allocation to our manufacturing plants, this could
require a further review of the carrying amount of our tangible assets and
result in a potential impairment loss. As of September 27, 2008, after a
third party withdrew its intent to acquire our Phoenix fab that had previously
been disignated for closure, the net assets of Phoenix were reclassified as held
for use. The net impairment charge recorded for this facility in 2008
amounted to $76 million.
· Inventory. Inventory is
stated at the lower of cost and net realizable value. Cost is based on the
weighted average cost by adjusting the standard cost to approximate actual
manufacturing costs on a quarterly basis; therefore, the cost is dependent upon
our manufacturing performance. In the case of underutilization of our
manufacturing facilities, we estimate the costs associated with the excess
capacity. These costs are not included in the valuation of inventories but are
charged directly to the cost of sales. Net realizable value is the estimated
selling price in the ordinary course of business, less applicable variable
selling expenses. As required, we evaluate inventory acquired as part of
purchase accounting at fair value,
less
completion and distribution costs and related margin. At September 27, 2008,
inventories included $235 million related to
the newly integrated NXP wireless business. This amount includes $31 million of
the $88 million fair value adjustment posted to the opening balance sheet as
part of the purchase accounting that will be charged to cost of goods sold in
future periods as well as a $57 million charge to cost of goods sold in the
third quarter of 2008.
The
valuation of inventory requires us to estimate obsolete or excess inventory as
well as inventory that is not of saleable quality. Provisions for obsolescence
are estimated for excess uncommitted inventories based on the previous quarter’s
sales, order backlog and production plans. To the extent that future negative
market conditions generate order backlog cancellations and declining sales, or
if future conditions are less favorable than the projected revenue assumptions,
we could be required to record additional inventory provisions, which would have
a negative impact on our gross margin.
· Business combination. The
purchase method of accounting for business combinations requires extensive use
of estimates and judgments to allocate the purchase price to the fair value of
the net tangible and intangible assets acquired, including In-Process research
and development, which is expensed immediately. The amounts and useful lives
assigned to other intangible assets impact future amortization. If the
assumptions and estimates used to allocate the purchase price are not correct or
if business conditions change, purchase price adjustments or future asset
impairment charges could be required. On January 17, 2008, we acquired effective
control of Genesis under the terms of a tender offer announced on December 11,
2007. On January 25, 2008, we acquired the remaining common shares of Genesis
that had not been acquired through the original tender by offering the right to
receive the same $8.65 per share price paid in the original tender offer.
Payment of approximately $340 million for the acquired shares was made through a
wholly-owned subsidiary that was merged with and into Genesis promptly
thereafter and received $170 million of cash and cash equivalents from Genesis
Microchip. Additional direct costs associated with the acquisition totaled
approximately $8 million. On closing, Genesis became part of our Home
Entertainment & Displays business activity which is part of the new
Automotive, Consumer, Computer and Telecom Infrastructure Product Groups
segment. The purchase price allocation resulted in the recognition of: $11
million in marketable securities; $14 million in property, plant and equipment;
$44 million on deferred tax assets and intangible assets including $44 million
of core technologies; $27 million related to customer relationships, $2 million
in trademarks, $18 million of goodwill and $2 million of liabilities net of
other current assets. We also recorded in the first quarter of 2008 $21 million
of In-Process research and development that we immediately wrote-off. Such
In-Process research and development charge was recorded on the line “Research
and development expenses” in our consolidated statements of income for the first
quarter of 2008.
On April
10, 2008, we announced our agreement with NXP, an independent semiconductor
company founded by Philips, to combine our respective key wireless operations to
form a joint venture company with strong relationships with all major handset
manufacturers. The new company will have the scale to better meet customer needs
in 2G, 2.5G, 3G, multimedia, connectivity and all future wireless technologies.
The transaction closed on July 28, 2008 and the joint venture company, which is
named ST-NXP Wireless, started operations on August 2, 2008. At closing, we
received an 80% stake in the joint venture and paid NXP $1,517 million net of
cash received, including a control premium, that was funded from outstanding
cash. The consideration also included a contribution in kind, measured at fair
value, corresponding to a 20% interest in our wireless business. NXP will
continue to own a 20% interest in the venture; however, we and NXP have agreed
on a future exit mechanism for NXP’s interest, which involves put and call
options based on the financial results of the business that are exercisable
starting three years from the formation of the joint venture, or earlier under
certain conditions. We began to consolidate the joint venture on August 2, 2008.
The transaction has been accounted for on the basis of a business combination as
prescribed by FAS 141. Assets going into the venture from NXP have been valued
on our consolidated books at 100% of book value, plus 80% of the excess of fair
value over book since, per U.S. GAAP, the transaction structure allows for
step-up only to the extent of our ownership. Our assets going into the venture
are not fair valued, but remain at our former book value. The purchase price was
allocated as follows: $735 million on goodwill; $405 million on customer
relationships; $223 million on core technologies; $76 million on IP R&D,
charged against income on the line “Research and development expenses” in the
third quarter of 2008; $285 million on inventory; $301 million on PP&E; $65
million on tax receivables; $47 million on
other
liabilities, net; $44 million on the restructuring reserve; $76 million on
deferred tax liabilities; and $106 million on minority interests in NXP
contributions.
· Asset disposal. On March 30,
2008, we closed the deal for the creation of the Numonyx venture in partnership
with Intel and Francisco Partners. We contributed our flash memory business
(“FMG”) to the newly created entity on such date. FMG deconsolidation was
reported as a first quarter 2008 event. Thus, our consolidated statements of
income for the first nine months of 2008 contain only one quarter of FMG
activity. As a result of changes to the terms of the transaction from those
expected at December 31, 2007 and an updated market value of comparable
companies, we incurred in the first nine months of 2008 an additional impairment
loss of $191 million and $16 million of restructuring and other related closure
charges. The total loss recognized from the FMG business disposal amounted to
$1,297 million plus $22 million of other costs.
In April
2008, we adopted a plan to pursue the sale of our fab in Phoenix as a business
concern instead of continuing its progressive phase out. At that time, all
conditions for treating the assets to be sold as “Assets held for sale” in our
consolidated financial statements were satisfied. On July 21, 2008, we entered
into a memorandum of understanding with a third party for the sale of the
Phoenix fab and proceeded with the negotiation of definitive agreements with the
third party to finalize the sale. As required, a CFIUS (“Committee on Foreign
Investment in the United States”) filing seeking government approval for the
purchase was made. On September 15, 2008, we were informed by the third party
that it would not be able to complete the Phoenix transaction on a timely basis.
On September 26, 2008, the CFIUS filing was withdrawn. While we continue to
pursue the sale of the Phoenix fab as a business concern, it is no longer deemed
probable under the current industry and debt market conditions. Accordingly, we
reclassified the assets as held for use and recorded them at the lower of their
current fair value on a held for use basis and the book value they would have
had if they had never been classified as held for sale. Based on the current
situation, under which Phoenix is required to operate a mini-line beyond its
originally anticipated closure date in order to satisfy the requirements of its
automotive customers, the fair value calculated using the expected discounted
cash flows is $98 million, which is lower than the $146 million that would have
been the book value had the assets never been classified as held for sale. The
$38 million difference between the new fair value ($98 million) and the value of
the assets that had been recorded on a held-for-sale basis ($60 million), has
been recognized as a credit to impairment expense pursuant to FAS 144 which
states that the adjustment must be reported in the same income statement caption
used to report the loss.
· Restructuring charges. We
have undertaken, and we may continue to undertake, significant restructuring
initiatives, which have required us, or may require us in the future, to develop
formalized plans for exiting any of our existing activities. We recognize the
fair value of a liability for costs associated with exiting an activity when a
probable liability exists and it can be reasonably estimated. We record
estimated charges for non-voluntary termination benefit arrangements such as
severance and outplacement costs meeting the criteria for a liability as
described above. Given the significance and timing of the execution of such
activities, the process is complex and involves periodic reviews of estimates
made at the time the original decisions were taken. 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 nine months of 2008, the net amount of
restructuring charges and other related closure costs amounted to $104 million
before taxes, including $16 million related to FMG and $59 million to our 2007
restructuring plan. See Note 7 to our Unaudited Interim Consolidated Financial
Statements.
· Share-based compensation. We
are required to expense our employees’ share-based compensation awards for
financial reporting purposes. We measure our share-based compensation cost based
on its fair value on the grant date of each award. This cost is recognized over
the period during which an employee is required to provide service in exchange
for the award or the requisite service period, usually the vesting period, and
is adjusted for actual forfeitures that occur before vesting. Our share-based
compensation plans
may award
shares contingent on the achievement of certain financial objectives, including
market performance and financial results. In order to assess the fair value of
this share-based compensation, we are required to estimate certain items,
including the probability of meeting market performance and financial results
targets, forfeitures and employees’ service period. As a result, in relation to
our Unvested Stock Award Plan, we recorded a total pre-tax expense of $66
million in the first nine months of 2008, out of which $1 million was related to
the 2005 plan; $17 million to the 2006 plan; $41 million to the 2007 plan; and
$7 million to the 2008 plan. In the third quarter of 2008, we recorded $16
million in charges.
· Earnings (loss) on Equity
Investments. We are required to record the pick-up of the results of the
entities that are consolidated by us under the equity method. This recognition
is based on results reported by these entities, sometimes on a one-quarter lag,
and, for such purpose, we rely on their internal controls. As a result, in the
third quarter of 2008, we recognized $44 million as our proportional interest in
the loss recorded by Numonyx in the second quarter of 2008, based on our 48.6%
ownership interest in Numonyx. For more information, please see “Other
Developments.” In case of triggering events, we are required to determine the
fair value of our investment and assess the classification of temporary versus
other-than-temporary impairments of the carrying value. We make this assessment
by evaluating the business on the basis of the most recent plans and projections
or to the best of our estimates. In the third quarter of 2008, due to
deterioration of both the global economic situation and the Memory market
segment, as well as Numonyx’s results, we assessed the fair value of our
investment and recorded a $300 million other-than temporary impairment
charge. The calculation of the impairment was based on both an income
approach, using discounted cash flows, and a market approach, using the metrics
of comparable public companies.
· Income taxes. We are required
to make estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments also occur in the calculation
of certain tax assets and liabilities and provisions. Furthermore, the adoption
of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes – an Interpretation of FASB Statement No.
109 (“FIN 48”) requires an evaluation of the probability of any tax
uncertainties and the recognition of the relevant charges.
We are
also required to assess the likelihood of recovery of our deferred tax assets.
If recovery is not likely, we are required to record a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable, which would increase our provision for income taxes. As of
September 27, 2008, we believed that all of the deferred tax assets, net of
valuation allowances, as recorded on our consolidated balance sheet, would
ultimately be recovered. However, should there be a change in our ability to
recover our deferred tax assets (in our estimates of the valuation allowance) or
a change in the tax rates applicable in the various jurisdictions, this could
have an impact on our future tax provision in the periods in which these changes
could occur.
· Patent and other intellectual
property litigation or claims. As is the case with many companies in the
semiconductor industry, we have from time to time received, and may in the
future receive, communication alleging possible infringement of patents and
other intellectual property rights of third parties. Furthermore, we may become
involved in costly litigation brought against us regarding patents, mask works,
copyrights, trademarks or trade secrets. In the event the outcome of a
litigation claim is unfavorable to us, we may be required to purchase a license
for the underlying intellectual property right on economically unfavorable terms
and conditions, possibly pay damages for prior use, and/or face an injunction,
all of which singly or in the aggregate could have a material adverse effect on
our results of operations and on our ability to compete. See Item 3. “Key
Information—Risk Factors—Risks Related to Our Operations—We depend on patents to
protect our rights to our technology” included in the Form 20-F, as may be
updated from time to time in our public filings.
We record
a provision when we believe that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. We regularly
evaluate losses and claims with the support of our outside counsel to determine
whether they need to be adjusted based on current information available to us.
Legal costs associated with claims are expensed as incurred. In the event of
litigation that is adversely determined with respect to our interests, or in the
event that we need to change our evaluation of a potential third-party claim
based on new evidence or communications, this could have a material adverse
effect on
our
results of operations or financial condition at the time it were to materialize.
We are in discussion with several parties with respect to claims against us
relating to possible infringement of other parties’ intellectual property
rights. We are also involved in several legal proceedings concerning such
issues.
As of
September 27, 2008, based on our assessment, we did not record any provisions in
our financial statements relating to third party intellectual property rights
since we had not identified any risk of probable loss that is likely to arise
out of asserted claims or ongoing legal proceedings. There can be no assurance,
however, that we will be successful in resolving these issues. If we are
unsuccessful, or if the outcome of any claim or litigation were to be
unfavorable to us, we could incur monetary damages, and/or face an injunction,
all of which singly or in the aggregate could have an adverse effect on our
results of operation and our ability to compete. Furthermore, our products as
well as the products of our customers that incorporate our goods may be excluded
from entry into U.S. territory pursuant to an exclusion order.
· Pension and Post Retirement
Benefits. Our results of operations and our consolidated balance sheet
include the impact of pension and post retirement benefits that are measured
using actuarial valuations. At September 27, 2008, our pension obligations
amounted to $301 million based on the assumption that our employees will work
with us until they reach the age of retirement. These valuations are based on
key assumptions, including discount rates, expected long-term rates of return on
funds and salary increase rates. These assumptions are updated on an annual
basis at the beginning of each fiscal year or more frequently upon the
occurrence of significant events. Any changes in the pension schemes or in the
above assumptions can have an impact on our valuations. The measurement date we
use for the majority of our plans is December 31.
· Other claims. We are subject
to the possibility of loss contingencies arising in the ordinary course of
business. These include, but are not limited to: warranty costs on our products
not covered by insurance, breach of contract claims, tax claims and provisions
for specifically identified income tax exposure as well as claims for
environmental damages. In determining loss contingencies, we consider the
likelihood of a loss of an asset or the incurrence of a liability, as well as
our ability to reasonably estimate the amount of such loss or liability. An
estimated loss is recorded when we believe that it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. We
regularly reevaluate any losses and claims and determine whether our provisions
need to be adjusted based on the current information available to us. In the
event we are unable to estimate in a correct and timely manner the amount of
such loss, this could have a material adverse effect on our results of
operations or financial condition at the time such loss were to
materialize.
Fiscal
Year
Under
Article 35 of our Articles of Association, our financial year extends from
January 1 to December 31, which is the period end of each fiscal year. The first
quarter of 2008 ended on March 30, 2008. The second quarter of 2008 ended on
June 28, 2008 and the third quarter of 2008 ended on September 27, 2008.
The fourth quarter of 2008 will end on December 31, 2008. Based on our
fiscal calendar, the distribution of our revenues and expenses by quarter may be
unbalanced due to a different number of days in the various quarters of the
fiscal year.
Business
Overview
The total
available market is defined as the “TAM,” while the serviceable available
market, the “SAM,” is defined as the market for products produced by us (which
consists of the TAM and excludes PC motherboard major devices such as
microprocessors (“MPU”), dynamic random access memories (“DRAM”),
optoelectronics devices and Flash Memories).
Despite
the recent slowdown due to the difficult conditions in the global economy, the
semiconductor industry experienced growth in the first nine months of 2008.
Based on most recently published estimates, semiconductor industry revenues in
the first nine months of 2008 increased by 4.0% for the TAM and 9.6% for the SAM
to reach approximately $196 billion and $122 billion, respectively, on a
year-to-date basis compared to the same period in 2007.
With
reference to our business performance, following the deconsolidation of our FMG
segment during the first quarter of 2008 and, on August 2, 2008, the
consolidation of the NXP wireless business, which is 80% owned by us, our
operating results, as reported, are no longer directly comparable to previous
periods.
Our
revenues as reported in the first nine months of 2008 increased to $7,566
million, a growth of 4.2% over the equivalent period in 2007. Excluding the
Flash segments and revenues from the recently consolidated NXP wireless
business, which is 80% owned by us, our growth in revenues was 12.4%, which was
significantly above the growth of the TAM and the comparable SAM. This
performance reflected double digit or high single digit growth rates in all main
market applications except for Automotive, which experienced more moderate
growth.
Our third
quarter 2008 net revenues increased 5.1% compared to the same period in 2007 to
reach $2,696 million, which included $241 million gained from the recently
consolidated NXP wireless business. Excluding the NXP wireless business and
Flash, our revenues increased 10.9%, driven by all market applications, notably
Industrial and Telecom, and again outperforming the SAM growth rate, which
increased by 8.5%.
On a
sequential basis, our revenues increased 12.8%. Excluding the NXP wireless
business and the Flash segments, our revenues increased 2.7%, driven by our
Computer and Telecom sectors and despite the Automotive sector’s decline, which
reflected the significant downturn in the automotive industry as a
whole.
In the
first nine months of 2008, our effective exchange rate was $1.52 for €1.00,
which reflects current exchange rate levels and the impact of certain hedging
contracts, compared to an effective exchange rate of $1.33 for €1.00 in the
first nine months of 2007. In the third quarter of 2008 our effective exchange
rate was $1.54, while in the second quarter of 2008 and in the third quarter of
2007 our effective exchange rate was $1.55 and $1.36, respectively, for €1.00.
For a more detailed discussion of our hedging arrangements and the impact of
fluctuations in exchange rates, see “Impact of Changes in Exchange Rates”
below.
Our gross
margin for the first nine months of 2008 increased to 36.2%, compared to 34.8%
in the first nine months of 2007 largely due to the repositioning of our product
portfolio. Excluding the impact of the consolidation of the NXP wireless
business and the deconsolidation of Flash, our gross margin would have been
37.2% in the first nine months of 2008 compared to 38% in the first nine months
of 2007 primarily due to the negative impact of the weakening U.S. dollar and
declining selling prices, even though such factors were partially offset by
enhanced manufacturing efficiencies, a higher sales volume and an improved
product mix.
On a
year-over-year basis, our third quarter gross margin experienced a similar
trend, increasing from 35.2% to 35.6% despite the impact of a $57 million charge
to cost of goods sold related to the inventory step-up to fair value required by
the purchase accounting method used for the NXP wireless business.
Excluding
the effect of the consolidation of the NXP wireless business, our third quarter
2008 gross margin would have been 37.2%, slightly above the guidance that
indicated a gross margin of approximately 36.8% plus or minus 1 percentage
point.
Our
operating expenses, comprising selling, general and administrative expenses and
research and development, increased in the first nine months of 2008 compared to
the comparable period in 2007 due to the significantly unfavorable U.S. dollar
exchange rate and an overall increase in our activities which included several
acquisitions such as those relating to the NXP wireless business, Genesis and a
3G wireless design team. As the result of such recent acquisitions, we booked
additional charges of $97 million as In-Process R&D during the first nine
months of 2008. Our R&D expenses in the first nine months of 2008 were net
of $123 million of tax credits associated with our ongoing programs following
the amendment of a law in one of our jurisdictions. In 2007, similar credits
were registered as an income tax benefit.
In the
first nine months of 2008, we reported significant losses related to impairment
and restructuring charges, as well as certain ongoing programs. We also reported
an additional cost of $207 million in connection with the FMG deal closure and
changes in certain terms of the transaction.
In the
third quarter of 2008, our yearly impairment testing triggered the recognition
of a $13 million charge for goodwill impairment.
After a
third party withdrew its intent to acquire our Phoenix fab, we revalued the
assets for an amount of $98 million, which was higher than the consideration to
be received upon the sale. An adjustment of $38 million was therefore recorded
in the third quarter of 2008 as a credit to impairment charge.
Our other
income and expenses improved significantly in the first nine months of 2008,
supported by an increase in R&D funding, a favorable result in our currency
exchange transactions and lower start-up costs, resulting in income of $56
million compared to income of $20 million in the equivalent period in
2007.
Our as
reported operating result in the first nine months of 2008 was a loss of $59
million largely due to $390 million in impairment, restructuring and other
related closure costs, $154 million in one-time charges associated with purchase
accounting for our acquisitions and the material negative impact of the
weakening U.S. dollar exchange rate. Excluding such factors, our operating
performance significantly improved compared to the previous year due to our
solid revenue growth, more favorable product mix and manufacturing performance
improvements.
The
valuation of the fair value of our Auction Rate Securities – purchased for our
account by Credit Suisse Securities LLC contrary to our instruction – required
recording an other-than-temporary impairment charge of $71 million in the first
nine months of 2008, of which $3 million was recorded in the third quarter of
2008. In addition, we recorded a $11 million impairment on a Floating Rate Note
issued by Lehman Brothers following its Chapter 11 filing on September 15,
2008.
Interest
income decreased significantly from $57 million as at September 29, 2007 to $48
million as at September 27, 2008 as a consequence of the payment of $1,517
million, net of cash received, related to the transaction with NXP in early
August and lower U.S. dollar interest rates compared to 2007.
In the
third quarter of 2008, due to the deterioration of both the gloal economic
situation and the Memory market segment, as well as Numonyx’s results, we
assessed the fair value of our investment and recorded a $300 million
other-than-temporary impairment charge on the line Earnings (loss) on equity
investment in the consolidated statements of income. The calculation of
the impairment was basd on both an income approach, using discounted cash flows,
and a market approach, using the metrics of comparable public companies.
In addition, we registered a $44 million equity loss related to our proportional
stake in Numonyx during the second quarter of 2008 that we recognized in the
third quarter pursuant to one-quarter lag reporting.
In
summary, our profitability during the first nine months of 2008 was negatively
impacted by the following factors:
· Negative
pricing trends;
· The
weakening of the U.S. dollar exchange rate;
· The
impairment loss recorded on our equity investment in Numonyx;
· The
additional impairment loss booked in relation to the deconsolidation of the FMG
business;
· The
one-time items related to the purchase accounting for the NXP wireless business;
and
· The
other-than-temporary loss on financial assets.
The
factors above were partially offset by the following favorable
elements:
· A
solid performance in sales that outperformed the market, which was driven by an
improved product mix and higher volume; and
· Improvements
in our manufacturing performance.
The third
quarter reflected continued focus on both our operating and strategic
initiatives. From a financial perspective, our third quarter performance
demonstrated further progress in strengthening our market position, building on
the results of the first half of this year. Before including the revenue from
the recently closed ST-NXP Wireless joint venture, net revenues increased 12.4%
year-to-date.
We
estimate that we are gaining market share overall and in particular in our areas
of focus, including multimedia convergence applications and power solutions.
Additionally, we continued to harvest the benefits of our sales expansion
initiatives and we increased our sales to new target key accounts by 16.0% on a
sequential basis.
We
continue to build scale in the critical area of wireless applications with our
joint announcement in August with Ericsson to form a joint venture composed of
Ericsson Mobile Platforms and ST-NXP Wireless. We believe this new leader will
have the industry’s strongest product offering in semiconductors and platforms
for mobile applications and will be well positioned to continue and extend
customer relationships with the most innovative players in the wireless
industry.
We have
been able to advance our strategic initiatives independent of the uncertainties
in the financial markets due to our systematic ability to generate operating
cash flow and our solid capital structure. During the first nine months of 2008
these strengths have enabled us to complete the deconsolidation of Numonyx, fund
$1.7 billion of acquisitions, maintain a solid credit rating, pay increased cash
dividends and initiate a share buyback program, all while increasing our return
on invested capital.
Business
Outlook
We expect
our sequential net revenues to be in the range of flat to minus 8%, which,
excluding FMG and the recently consolidated NXP wireless business, would
represent net revenues growth of between 6.2% and 8.6% for fiscal year 2008.
Fourth quarter 2008 gross margin is expected to improve sequentially to
approximately 38.8%, plus or minus one percentage point, despite the estimated
sequential decline in sales and the negative impact of reduced fab loading,
reflecting improved operational factors and a more favorable currency rate. Such
an outlook is based on an assumed effective currency exchange rate of
approximately $1.40 to €1.00 for the
fourth quarter of 2008, which reflects exchange rate levels current at the time
of our issuing our outlook and existing hedging contracts.
These
are forward-looking statements that are subject to known and unknown risks and
uncertainties that could cause actual results to differ materially; in
particular, refer to those known risks and uncertainties described in
“Cautionary Note Regarding Forward-Looking Statements” herein and Item 3. “Key
Information—Risk Factors” in our Form 20-F as may be updated from time to time
in our SEC filings.
Other
Developments in the First Nine Months of 2008
On
January 15, 2008, we announced that the following individuals had been appointed
as new executive officers, all reporting to President and Chief Executive
Officer Carlo Bozotti: Orio Bellezza, as Executive Vice President and General
Manager, Front-End Manufacturing; Jean-Marc Chery, as Executive Vice President
and Chief Technology Officer; Executive Vice President Andrea Cuomo, as
Executive Vice President and General Manager of our Europe Region, who will also
maintain his responsibility for the Advanced System Technology organization;
Loïc Lietar, as Corporate Vice President, Corporate Business Development; and
Pierre Ollivier, as Corporate Vice President and General Counsel. In addition,
we announced the hiring and appointment of Alisia Grenville as Corporate Vice
President, Chief Compliance Officer, and the retirement of both Laurent Bosson,
as Executive Vice President for Front-End Technology and Manufacturing, and
Enrico Villa, as Executive Vice President and General Manager of our Europe
Region.
On
January 17, 2008, we acquired effective control of Genesis under the terms of a
tender offer announced on December 11, 2007. On January 25, 2008, we acquired
the remaining common shares of Genesis that had not been acquired through the
original tender by offering the right to receive the same $8.65 per share price
paid in the original tender offer. Payment of approximately $340 million for the
acquired shares was made through a wholly-owned subsidiary that was merged with
and into Genesis promptly thereafter. On closing, Genesis became part
of
our Home
Entertainment & Displays business activity which is part of the new
Automotive, Consumer, Computer and Telecom Infrastructure Product Groups
segment.
On March
30, 2008, we, together with Intel and Francisco Partners announced the closing
of our previously announced Numonyx joint venture. At the closing, we
contributed our flash memory assets and businesses in NOR and NAND, including
our Phase Change Memory (“PCM”) resources and NAND joint venture interest, to
Numonyx in exchange for a 48.6% equity ownership stake in common stock and
$155.6 million in long-term subordinated notes. These long-term notes yield
interest at appropriate market rates at inception. Intel contributed its NOR
assets and certain assets related to PCM resources, while Francisco Partners
L.P., a private equity firm, invested $150 million in cash. Intel and Francisco
Partners’ equity ownership interests in Numonyx are 45.1% in common shares and
6.3% in convertible preferred stock, respectively. The convertible stock of
Francisco Partners includes preferential payout rights. In addition, Intel and
Francisco Partners received long-term subordinated notes of $144.4 million and
$20.2 million, respectively. In liquidation events in which proceeds are
insufficient to pay off the term loan, revolving credit facility and the
Francisco Partners’ preferential payout rights, the subordinated notes will be
deemed to have been retired. Also at the closing, Numonyx entered into financing
arrangements for a $450 million term loan and a $100 million committed revolving
credit facility from Intesa Sanpaolo S.p.A. and Unicredit Banca d’Impresa S.p.A.
The loans have a four-year term and we and Intel have each granted in favor of
Numonyx a 50% guarantee not joint and several, for indebtedness. At close,
Numonyx had a cash position of about $585 million. The closing of the
transaction also includes certain supply agreements and transition service
agreements for administrative functions between Numonyx and us. The transition
service agreements have terms up to one year with fixed monthly or usage based
payments.
On April
10, 2008, we announced our agreement with NXP, an independent semiconductor
company founded by Philips, to combine our respective key wireless operations to
form a joint venture company with strong relationships with all major handset
manufacturers. The new company will have the scale to better meet customer needs
in 2G, 2.5G, 3G, multimedia, connectivity and all future wireless technologies.
The transaction closed on July 28, 2008 and the joint venture company, which is
named ST-NXP Wireless, started operations on August 2, 2008. At closing, we
received an 80% stake in the joint venture and paid NXP $1,517 million net of
cash received, including a control premium that was funded from outstanding
cash. The consideration also included a contribution in kind, measured at fair
value, corresponding to a 20% interest in our wireless business. NXP will
continue to own a 20% interest in the venture; however, we and NXP have agreed
on a future exit mechanism for NXP’s interest, which involves put and call
options based on the financial results of the business that are exercisable
starting three years from the formation of the joint venture, or earlier under
certain conditions. For example, in light of the recently announced business
combination with Ericsson Mobile Platforms (“EMP”), we have the right to an
accelerated call.
At our
annual general meeting of shareholders held on May 14, 2008, our shareholders
approved the following proposals of our Managing Board upon the recommendation
of our Supervisory Board:
|
·
|
The
reappointment for a three-year term, expiring at the 2011 Annual General
Meeting, of Carlo Bozotti as the sole member of the Managing Board and the
Company’s President and Chief Executive
Officer;
|
|
·
|
The
reappointment for a three-year term, expiring at the 2011 Annual General
Meeting, for the following members of the Supervisory Board: Mr. Gérald
Arbola, Mr. Tom de Waard, Mr. Didier Lombard and Mr. Bruno
Steve;
|
|
·
|
The
appointment for a three-year term, expiring at the 2011 Annual General
Meeting, as a member of the Supervisory Board of Mr. Antonino
Turicchi;
|
|
·
|
The
distribution of a cash dividend of $0.36 per share, to be paid in four
equal quarterly installments to shareholders of record in the month of
each quarterly payment (our shares traded ex-dividend on May 19, 2008, and
will trade ex-dividend on August 18, 2008, November 24, 2008 and February
23, 2009; and
|
|
·
|
Authorization
to repurchase up to 30 million shares of common stock under certain
limitations and in accordance with applicable
law.
|
On August
20, 2008, we announced our agreement to merge ST-NXP Wireless into a 50/50 joint
venture with EMP. The joint venture will be fabless and will employ almost 8,000
people with pro-forma 2007 sales of $3,600 million. It will rely on its complete
platform offering, which will include modems, multimedia and connectivity
solutions for 2G/EDGE, 3G, HSPA and LTE technologies, as well as all appropriate
hardware, software and support to enable handset manufacturers to develop
mass-market products. The business in the joint venture will be led by a
development and marketing company with approximately 7,000 people
employed. A separate platform design company, with approximately 1,000
people employed, will provide platform designs to the development and marketing
company. The joint venture will acquire relevant assets from the parent
companies. Ericsson will contribute $1,100 million net to the joint venture, out
of which $700 million will be paid to us by the joint venture. After these
transactions the joint venture will have a cash position of approximately $400
million. The joint venture plans to be headquartered in Geneva, Switzerland and
governance will be balanced. As ST-NXP Wireless was launched as an 80-20 venture
between us and NXP, we will acquire the remaining shares under the terms already
agreed with NXP. The value of the 20 percent stake will be a function of the
last twelve months (LTM) performance of the ST-NXP Wireless joint venture at the
exercise of the call, which is expected to take place before the closing of the
transaction between us and Ericsson.
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 Smart card products through our
divisions, which include the production and sale of both silicon chips and Smart
cards.
Beginning
on January 1, 2007, and until August 2, 2008, we reported our semiconductor
sales and operating income in the following product segments:
|
·
|
Application
Specific Groups (“ASG”), comprised of four product lines: Home
Entertainment & Displays Group (“HED”), Mobile, Multimedia &
Communications Group (“MMC”), Automotive Products (“APG”) and Computer
Peripherals (“CPG”);
|
|
·
|
Industrial
and Multisegment Sector (“IMS”), comprised of the former Micro, Power,
Analog (“MPA”) segment, non-Flash memory and Smart Card products and
Micro-Electro-Mechanical Systems (“MEMS”);
and
|
|
·
|
Flash
Memories Group (“FMG”). As of March 31, 2008, following the creation with
Intel of Numonyx, a new independent semiconductor company from the key
assets of our and Intel’s Flash memory business (“FMG deconsolidation”),
we ceased reporting under the FMG
segment.
|
Starting
August 2, 2008, following the creation of the joint venture
company with NXP, we reorganized our product groups. A new segment called
Wireless Product Sector (“WPS”) was created to report wireless operations. The
product line Mobile, Multimedia & Communications Group (“MMC”), which was a
part of the segment Application Specific Groups (“ASG”) was abandoned and its
divisions were reallocated to different product lines. The remainder of ASG is
now comprised of Automotive, Consumer, Computer and Telecom Infrastructure
Product Groups (“ACCI”).
The new
organization is as follows:
|
·
|
Automotive,
Consumer, Computer and Telecom Infrastructure Product Groups (“ACCI”),
comprised of three product
lines:
|
|
|
Home
Entertainment & Displays (“HED”), which now includes the Imaging
division;
|
|
|
Automotive
Products Group (“APG”); and,
|
|
|
Computer
and Communication Infrastructure (“CCI”), which now includes the
Communication Infrastructure
division.
|
|
·
|
Industrial
and Multisegment Products Sector (“IMS”), comprised
of:
|
|
|
Analog
Power and Micro-Electro-Mechanical Systems (“APM”);
and
|
|
|
Micro,
non-Flash, non-volatile Memory and Smartcard products
(“MMS”).
|
|
·
|
Wireless
Products Sector (“WPS”), comprised of three product
lines:
|
|
|
Wireless
Multi Media (“WMM”);
|
|
|
Connectivity
& Peripherals (“C&P”); and
|
We have
restated our results in prior periods for illustrative comparisons of our
performance by product segment. The preparation of segment information based on
the new segment structure requires management to make significant estimates,
assumptions and judgments in determining the operating income of the segments
for the prior reporting periods. Management believes that the restated 2007
presentation is consistent with 2008 and is using these comparatives when
managing the Company.
Our
principal investment and resource allocation decisions in the semiconductor
business area are for expenditures on research and development 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 research and development for
process technology and manufacturing capacity for most of their
products.
In the
subsystems business area, we design, develop, manufacture and market subsystems
and modules for the telecommunications, automotive and industrial markets
including mobile phone accessories, battery chargers, ISDN power supplies and
in-vehicle equipment for electronic toll payment. Based on its immateriality to
our business as a whole, the Subsystems segment does not meet the requirements
for a reportable segment as defined in Statement of Financial Accounting
Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (“FAS
131”).
The
following tables present our consolidated net revenues and consolidated
operating income by semiconductor product group segment. For the computation of
the segments’ internal financial measurements, we use certain internal rules of
allocation for the costs not directly chargeable to the segments, including cost
of sales, selling, general and administrative expenses and a significant part of
research and development expenses. Additionally, in compliance with our internal
policies, certain cost items are not charged to the segments, including
impairment, restructuring charges and other related closure costs, start-up
costs of new manufacturing facilities, some strategic and special research and
development programs or other corporate-sponsored initiatives, including certain
corporate level operating expenses, acquired In-Process R&D, other
non-recurrent purchase accounting items and certain other miscellaneous
charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Net
revenues by product segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
Consumer Computer and Telecom Infrastructure Product Groups
(ACCI)
|
|
$ |
1,085 |
|
|
$ |
990 |
|
|
$ |
3,231 |
|
|
$ |
2,866 |
|
Industrial
and Multisegment Products Sector (IMS)
|
|
|
901 |
|
|
|
804 |
|
|
|
2,538 |
|
|
|
2,292 |
|
Wireless
Products Sector (WPS)(1)
|
|
|
696 |
|
|
|
404 |
|
|
|
1,454 |
|
|
|
1,052 |
|
Others(2)
|
|
|
14 |
|
|
|
15 |
|
|
|
44 |
|
|
|
42 |
|
Net
revenues excluding Flash Memories Group (FMG)
|
|
|
2,696 |
|
|
|
2,213 |
|
|
|
7,267 |
|
|
|
6,252 |
|
Flash
Memories Group
(FMG)
|
|
|
- |
|
|
|
352 |
|
|
|
299 |
|
|
|
1,006 |
|
Total
consolidated net
revenues
|
|
$ |
2,696 |
|
|
$ |
2,565 |
|
|
$ |
7,566 |
|
|
$ |
7,258 |
|
___________________
(1) WPS
revenues in the third quarter of 2008 and the first nine months of 2008 included
a $241 million contribution from the NXP wireless business.
(2) Includes
revenues from the sale of subsystems and other products not allocated to product
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Operating
income (loss) by product segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
Consumer Computer and Telecom Infrastructure Product Groups
(ACCI)
|
|
$ |
58 |
|
|
$ |
83 |
|
|
$ |
110 |
|
|
$ |
135 |
|
Industrial
and Multisegment Products Sector (IMS)
|
|
|
152 |
|
|
|
129 |
|
|
|
374 |
|
|
|
338 |
|
Wireless
Products Sector
(WPS)
|
|
|
22 |
|
|
|
59 |
|
|
|
12 |
|
|
|
60 |
|
Operating
income of product segments excluding FMG
|
|
|
232 |
|
|
|
271 |
|
|
|
496 |
|
|
|
533 |
|
Others(1)
|
|
|
(177 |
) |
|
|
(55 |
) |
|
|
(571 |
) |
|
|
(985 |
) |
Operating
income (loss) excluding
FMG
|
|
|
55 |
|
|
|
216 |
|
|
|
(75 |
) |
|
|
(452 |
) |
Flash
Memories Group
(FMG)
|
|
|
- |
|
|
|
(35 |
) |
|
|
16 |
|
|
|
(77 |
) |
Total
consolidated operating income
(loss)
|
|
$ |
55 |
|
|
$ |
181 |
|
|
$ |
(59 |
) |
|
$ |
(529 |
) |
(1) Operating
income (loss) of “Others” includes items such as impairment, restructuring
charges and other related closure costs, start-up costs, and other unallocated
expenses such as: strategic or special research and development programs,
acquired In-Process R&D and other non-recurrent purchase accounting items,
certain corporate level operating expenses, certain patent claims and
litigation, and other costs that are not allocated to the product segments, as
well as operating earnings or losses of the Subsystems and Other Products Group,
including, beginning in the second quarter of 2008, the remaining FMG costs. The
third quarter 2008 “Others” included non-recurring purchase accounting
items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
as percentage of net revenues)
|
|
Operating
income (loss) by product segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
Consumer Computer and Telecom Infrastructure Product Groups
(ACCI)
|
|
|
5.3 |
% |
|
|
8.4 |
% |
|
|
3.4 |
% |
|
|
4.7 |
% |
Industrial
and Multisegment Products Sector (IMS)
|
|
|
16.9 |
|
|
|
16.0 |
|
|
|
14.7 |
|
|
|
14.7 |
|
Wireless
Products Sector
(WPS)
|
|
|
3.2 |
|
|
|
14.6 |
|
|
|
0.8 |
|
|
|
5.7 |
|
Others(2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Flash
Memories Group (FMG)
(1)
|
|
|
- |
|
|
|
(9.9 |
) |
|
|
5.4 |
|
|
|
(7.7 |
) |
Total consolidated operating
income (loss)(3)
|
|
|
2.1 |
% |
|
|
7.0 |
% |
|
|
(0.8 |
)% |
|
|
(7.3 |
)% |
(1) As
a percentage of net revenues per product group.
(2) As
a percentage of total net revenues. Includes operating income (loss) from sales
of subsystems and other income (costs) not allocated to product
segments.
(3) As
a percentage of total net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Reconciliation
to consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income of product segments excluding FMG
|
|
$ |
232 |
|
|
$ |
271 |
|
|
$ |
496 |
|
|
$ |
533 |
|
Operating
income (loss) of
FMG
|
|
|
- |
|
|
|
(35 |
) |
|
|
16 |
|
|
|
(77 |
) |
Strategic
and other research and development programs
|
|
|
(7 |
) |
|
|
(6 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
Acquired
In-Process R&D and other non-recurring purchase accounting
items
|
|
|
(133 |
) |
|
|
- |
|
|
|
(154 |
) |
|
|
- |
|
Start-up
costs
|
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(12 |
) |
|
|
(19 |
) |
Impairment,
restructuring charges and other related closure costs
|
|
|
(22 |
) |
|
|
(31 |
) |
|
|
(390 |
) |
|
|
(949 |
) |
Other
non-allocated provisions(1)
|
|
|
(10 |
) |
|
|
6 |
|
|
|
(1 |
) |
|
|
17 |
|
Total
operating loss Others(2)
|
|
|
(177 |
) |
|
|
(55 |
) |
|
|
(571 |
) |
|
|
(985 |
) |
Total
consolidated operating income
(loss)
|
|
$ |
55 |
|
|
$ |
181 |
|
|
$ |
(59 |
) |
|
$ |
(529 |
) |
(1) Includes
unallocated income and expenses such as certain corporate level operating
expenses and other costs that are not allocated to the product
segments.
(2) Operating
income (loss) of “Others” includes items such as impairment, restructuring
charges and other related closure costs, start-up costs, and other unallocated
expenses such as: strategic or special research and development programs,
acquired In-Process R&D and other non-recurrent purchase accounting items,
certain corporate level operating expenses, certain patent claims and
litigation, and other costs that are not allocated to the product segments, as
well as operating earnings or losses of the Subsystems and Other Products Group,
including, beginning in the second quarter of 2008, the remaining FMG costs. The
third quarter 2008 “Others” included non-recurring purchase accounting
items.
Net
revenues by location of order shipment and by market segment
The table
below sets forth information on our net revenues by location of order
shipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Net
Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
764 |
|
|
$ |
773 |
|
|
$ |
2,196 |
|
|
$ |
2,355 |
|
North
America(2)
|
|
|
296 |
|
|
|
304 |
|
|
|
903 |
|
|
|
871 |
|
Asia
Pacific
|
|
|
630 |
|
|
|
491 |
|
|
|
1,652 |
|
|
|
1,334 |
|
Greater
China
|
|
|
691 |
|
|
|
747 |
|
|
|
1,935 |
|
|
|
1,949 |
|
Japan
|
|
|
135 |
|
|
|
115 |
|
|
|
372 |
|
|
|
357 |
|
Emerging
Markets(1)(2)
|
|
|
181 |
|
|
|
135 |
|
|
|
508 |
|
|
|
392 |
|
Total
|
|
$ |
2,696 |
|
|
$ |
2,565 |
|
|
$ |
7,566 |
|
|
$ |
7,258 |
|
(1) Net
revenues by location of order shipment are classified by location of customer
invoiced. For example, products ordered by U.S.-based companies to be invoiced
to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore,
the comparison among the different periods may be affected by shifts in order
shipment from one location to another, as requested by our
customers.
(2) Emerging
Markets include markets such as India, Latin America, the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia.
The table
below shows our net revenues by location of order shipment and market segment
application in percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
as percentage of net revenues)
|
|
Net
Revenues by Location of Order
Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
28.3 |
% |
|
|
30.1 |
% |
|
|
29.0 |
% |
|
|
32.4 |
% |
North
America
|
|
|
11.0 |
|
|
|
11.8 |
|
|
|
11.9 |
|
|
|
12.0 |
|
Asia
Pacific
|
|
|
23.4 |
|
|
|
19.2 |
|
|
|
21.8 |
|
|
|
18.4 |
|
Greater
China
|
|
|
25.6 |
|
|
|
29.1 |
|
|
|
25.6 |
|
|
|
26.9 |
|
Japan
|
|
|
5.0 |
|
|
|
4.5 |
|
|
|
5.0 |
|
|
|
4.9 |
|
Emerging
Markets(2)(3)
|
|
|
6.7 |
|
|
|
5.3 |
|
|
|
6.7 |
|
|
|
5.4 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Net
Revenues by Market Segment Application:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
|
13.5 |
% |
|
|
14.5 |
% |
|
|
15.3 |
% |
|
|
15.5 |
% |
Consumer
|
|
|
15.6 |
|
|
|
17.4 |
|
|
|
16.5 |
|
|
|
17.2 |
|
Computer
|
|
|
15.1 |
|
|
|
16.2 |
|
|
|
15.7 |
|
|
|
16.0 |
|
Telecom
|
|
|
40.1 |
|
|
|
37.1 |
|
|
|
35.9 |
|
|
|
35.9 |
|
Industrial
and
Other
|
|
|
15.7 |
|
|
|
14.8 |
|
|
|
16.6 |
|
|
|
15.4 |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
(1) Net
revenues by location of order shipment are classified by location of customer
invoiced. For example, products ordered by U.S.-based companies to be invoiced
to Asia Pacific affiliates are classified as Asia Pacific revenues. Furthermore,
the comparison among the different periods may be affected by shifts in order
shipment from one location to another, as requested by our
customers.
(2) Emerging
Markets include markets such as India, Latin America, the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia.
(3) The
above table estimates, within a variance of 5% to 10% in the absolute dollar
amount, the relative weighting of each of our target segments.
The
following table sets forth certain financial data from our Consolidated
Statements of Income, expressed in each case as a percentage of net
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
as percentage of net revenues)
|
|
Net
sales
|
|
|
99.6 |
% |
|
|
99.6 |
% |
|
|
99.5 |
% |
|
|
99.7 |
% |
Other
revenues
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
0.3 |
|
Net
revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost
of
sales
|
|
|
(64.4 |
) |
|
|
(64.8 |
) |
|
|
(63.8 |
) |
|
|
(65.2 |
) |
Gross
profit
|
|
|
35.6 |
|
|
|
35.2 |
|
|
|
36.2 |
|
|
|
34.8 |
|
Selling,
general and
administrative
|
|
|
(11 |
) |
|
|
(10.6 |
) |
|
|
(11.7 |
) |
|
|
(11.1 |
) |
Research
and
development
|
|
|
(22.3 |
) |
|
|
(17.2 |
) |
|
|
(20.9 |
) |
|
|
(18.2 |
) |
Other
income and expenses,
net
|
|
|
0.6 |
|
|
|
0.9 |
|
|
|
0.7 |
|
|
|
0.3 |
|
Impairment,
restructuring charges and other related closure costs
|
|
|
(0.8 |
) |
|
|
(1.2 |
) |
|
|
(5.2 |
) |
|
|
(13.1 |
) |
Operating
income
(loss)
|
|
|
2.1 |
|
|
|
7.0 |
|
|
|
(0.8 |
) |
|
|
(7.3 |
) |
Other-than-temporary
impairment charge on financial assets
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
(1.1 |
) |
|
|
- |
|
Interest
income,
net
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
0.8 |
|
Earnings
(loss) on equity
investments
|
|
|
(12.8 |
) |
|
|
0.1 |
|
|
|
(4.6 |
) |
|
|
0.2 |
|
Income
(loss) before income taxes and minority interests
|
|
|
(10.9 |
) |
|
|
8.0 |
|
|
|
(5.9 |
) |
|
|
(6.3 |
) |
Income
tax (expense)
benefit
|
|
|
0.6 |
|
|
|
(0.7 |
) |
|
|
0.4 |
|
|
|
(0.4 |
) |
Income
(loss) before minority
interests
|
|
|
(10.4 |
) |
|
|
7.3 |
|
|
|
(5.4 |
) |
|
|
(6.7 |
) |
Minority
interests
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Net
income
(loss)
|
|
|
(10.7 |
)% |
|
|
7.3 |
% |
|
|
(5.6 |
)% |
|
|
(6.8 |
)% |
Third
Quarter of 2008 vs. Third Quarter of 2007 and Second Quarter of
2008
Net
Revenues
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,687 |
|
|
$ |
2,379 |
|
|
$ |
2,555 |
|
|
|
12.9 |
% |
|
|
5.1 |
% |
Other
revenues
|
|
|
9 |
|
|
|
12 |
|
|
|
10 |
|
|
|
(17.9 |
)% |
|
|
(2.0 |
)% |
Net
revenues
|
|
$ |
2,696 |
|
|
$ |
2,391 |
|
|
$ |
2,565 |
|
|
|
12.8 |
% |
|
|
5.1 |
% |
Year-over-year
comparison
Our third
quarter 2008 net revenues increased despite the deconsolidation of the FMG
segment, which had revenues of $352 million in the third quarter of 2007, due to
organic growth and the consolidation of the NXP wireless business, which
contributed approximately $241 million. On a comparable basis, excluding the
effect of FMG and NXP, our revenues experienced growth of 10.9%, of which, based
on estimates, approximately 7% was from selling prices and approximately 4% was
from units sold.
All of
our product segments registered double-digit revenue growth: ACCI registered
growth of approximately 10%, mainly in the Automotive Product Group, which
includes portable navigation devices, and Digital Consumer products; IMS
registered growth of approximately 12%, mainly associated with MEMS, IPAD,
SmartCard and Microcontrollers products; and, WPS sales, excluding those from
the NXP wireless business, registered growth of approximately 13%, reflecting
improvements in our product mix and our expanded customer base.
By market
segment application, the greatest contribution to our improved revenue
performance came from Telecom and Industrial & Others, which achieved growth
of approximately 13% (16% excluding the NXP wireless business) and 11% (19%
excluding the NXP wireless business), respectively.
By
location of order shipment, Greater China, Europe and America, registered a
decline, while Emerging Markets, Asia Pacific and Japan increased respectively
by approximately 34%, 28% and 18%. Excluding FMG and the NXP wireless business,
only Greater China experienced a decrease, while Europe and America had a
moderate increase and Japan, Emerging Markets and Asia Pacific registered strong
double-digit growth. We had several large customers, with the largest one, the
Nokia group of companies, accounting for approximately 19% of our third quarter
2008 net revenues excluding the NXP wireless business, which was lower than the
approximate 21% it accounted for during the third quarter of 2007.
Sequential
comparison
Our third
quarter 2008 revenues increased sequentially due to the contribution of the NXP
wireless business, which we began consolidating on August 2, 2008. Excluding
such contribution, our net revenues increased by 2.7% as a result of improving
average selling prices, which were driven by an improved product mix. We
estimate a revenue increase of 2.2% from our average selling prices and an
increase of approximately 0.5% in units sold.
ACCI
revenues decreased by 1.4%, reflecting difficult market conditions in
Automotive, while Consumer and Computer both increased sequentially. IMS
revenues grew by 4.2%, led by MEMS, IPAD, Smartcards and Microcontrollers as a
result of our higher sales volume and improved product mix. The product group
with the best revenues performance was WPS, excluding the NXP wireless business,
which registered a 10.8% increase driven by both sales volume and an improved
product mix.
By market
segment application, Telecom registered a strong increase, while the revenue
growth of Computer and Consumer was more moderate. Automotive declined
significantly and Industrial & Others was basically flat.
By
location of order shipment, revenues increased in all regions except America,
which declined by approximately 4%. Asia Pacific, Japan, Emerging Markets and
Greater China increased by approximately 27%, 21%, 12% and 12%, respectively. In
the third quarter of 2008, we had several large customers, with the largest one,
the Nokia group of companies, accounting for approximately 19% of our net
revenues (excluding the NXP wireless business), increasing from the 18% it
accounted for during the second quarter of 2008.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
(1,737 |
) |
|
$ |
(1,511 |
) |
|
$ |
(1,663 |
) |
|
|
(15.0 |
)% |
|
|
(4.4 |
)% |
Gross
profit
|
|
|
959 |
|
|
$ |
880 |
|
|
$ |
902 |
|
|
|
9.0 |
% |
|
|
6.4 |
% |
Gross
margin (as a percentage of net revenues)
|
|
|
35.6 |
% |
|
|
36.8 |
% |
|
|
35.2 |
% |
|
|
— |
|
|
|
— |
|
On a
year-over-year basis, our results in terms of cost of sales, gross profit and
gross margin were impacted by a variety of factors, including the
deconsolidation of FMG in the first quarter of 2008, the consolidation of the
NXP wireless business as of August 2, 2008, an increase of $57 million in cost
of sales in the third quarter of 2008 related to the purchase accounting for the
NXP wireless business and the negative impact of the U.S. dollar exchange rate.
Excluding the above factors, cost of sales decreased despite higher sales volume
due to significant improvements in our manufacturing performance.
As
reported, our overall result compared to the prior year’s third quarter was an
improvement of 40 basis points to our gross margin. On a sequential basis, our
reported gross margin decreased 120 basis points, due primarily to the $57
million charge related to inventory valuation at fair value for the NXP wireless
business.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$ |
(297 |
) |
|
$ |
(281 |
) |
|
$ |
(272 |
) |
|
|
(5.6 |
)% |
|
|
(9.0 |
)% |
As
percentage of net revenue
|
|
|
(11.0 |
)% |
|
|
(11.8 |
)% |
|
|
(10.6 |
)% |
|
|
|
|
|
|
|
|
The
amount of our selling, general and administrative (“SG&A”) expenses
increased on a year-over-year basis, mainly as a result of the integration of
the NXP wireless business and the Genesis acquisition, while the third quarter
of 2008 benefited from the deconsolidation of Flash. Excluding this impact, our
SG&A expenses were $274 million, compared to $245 million in the third
quarter of 2007 excluding Flash. This increase is due to the negative impact of
the U.S. dollar exchange rate.
Our
share-based compensation charges were $7 million, compared to $8 million in the
third quarter of 2007. As a percentage of revenues, SG&A expenses increased
to 11% compared to the prior year’s third quarter due primarily to currency
effects.
Sequentially,
our SG&A expenses increased primarily due to the consolidation of the NXP
wireless business. Share-based compensation charges amounted to $8 million in
the second quarter of 2008. As a percentage of revenues, we registered an
improvement from 11.8% to 11.0%.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
$ |
(602 |
) |
|
$ |
(470 |
) |
|
$ |
(442 |
) |
|
|
(28.3 |
)% |
|
|
(36.5 |
)% |
As
percentage of net revenues
|
|
|
(22.3 |
)% |
|
|
(19.6 |
)% |
|
|
(17.2 |
)% |
|
|
|
|
|
|
|
|
On a
year-over-year basis, our research and development expenses increased in line
with the expansion of our activities, including the integration of the NXP
wireless business, the recognition of $76 million as In-Process R&D and $9
million amortization on acquired intangibles. In addition, fluctuations in the
U.S. dollar exchange rate adversely affected these third quarter 2008 expenses.
The third quarter of 2008 amount included $5 million of share-based compensation
charges compared to $4 million in the third quarter of 2007. However, these
third quarter 2008 expenses benefited from $50 million recognized as research
tax credits following the amendment of a law in France. The research tax credits
were also available in previous periods, but under different terms and
conditions. As such, in the past they were not shown as a reduction in research
and development expenses but rather included in the calculation of the effective
income tax rate of the period.
On a
sequential basis, research and development expenses increased compared to the
second quarter of 2008. As a percentage of revenues, there was a significant
sequential increase in our research and development expenses from 19.6% to 22.3%
for the preceding reasons. Excluding Flash and the NXP wireless business, they
decreased due to seasonal factors, such as the summer vacation
period.
Other
income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Research
and development funding
|
|
$ |
21 |
|
|
$ |
24 |
|
|
$ |
35 |
|
Start-up
costs
|
|
|
(3 |
) |
|
|
- |
|
|
|
(4 |
) |
Exchange
gain (loss) net
|
|
|
9 |
|
|
|
7 |
|
|
|
- |
|
Patent
litigation costs
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
Patent
pre-litigation costs
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Gain
on sale of non-current assets
|
|
|
- |
|
|
|
2 |
|
|
|
1 |
|
Other,
net
|
|
|
(3 |
) |
|
|
2 |
|
|
|
(2 |
) |
Other
income and expenses, net
|
|
|
17 |
|
|
|
30 |
|
|
|
24 |
|
As a
percentage of net revenues
|
|
|
0.6 |
% |
|
|
1.3 |
% |
|
|
0.9 |
% |
Other
income and expenses, net, mainly included, as income, items such as research and
development funding and exchange gain and, as expenses, start-up costs and
patent claim costs. Research and development funding income was associated with
our research and development projects, which qualifies upon project approval as
funding on the basis of contracts with local government agencies in locations
where we pursue our activities. The balance of these factors resulted in net
income of $17 million, originated by $21 million in research and development
funding.
Impairment,
restructuring charges and other related closure costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Impairment,
restructuring charges and other related closure costs
|
|
$ |
(22 |
) |
|
$ |
(185 |
) |
|
$ |
(31 |
) |
As a
percentage of net revenues
|
|
|
(0.8 |
)% |
|
|
(7.8 |
)% |
|
|
(1.2 |
)% |
In the
third quarter of 2008, we recorded impairment, restructuring charges and other
related closure costs of $22 million related to:
|
·
|
One-time
termination benefits to be paid at the closure of our Carrollton, Texas
and Phoenix, Arizona sites, as well as other charges, which were
approximately $19 million;
|
|
·
|
Goodwill
impairment charges of $13 million as a result of our annual impairment
testing;
|
|
·
|
$5
million associated with an investment in a minority
participation;
|
|
·
|
FMG
deconsolidation which required the recognition of $6 million as
restructuring, impairment and other related disposal costs;
and
|
|
·
|
Other
ongoing and newly committed restructuring plans, for which we incurred $17
million restructuring and other related closure costs consisting primarily
of voluntary termination benefits and early retirement arrangements in
some of our European locations.
|
The above
charges were partially offset by the reverse of $38 million in impairment
charges on the Phoenix fab, for which the accounting has been moved from assets
held for sale to assets held for use.
In the
third quarter of 2007, we recorded $31 million in impairment, restructuring
charges and other related closure costs, of which $16 million was related to the
severance costs and impairment charge booked in relation to the 2007
restructuring plan of our manufacturing activities, $3 million of other related
closure costs was for the deconsolidation of FMG assets and $12 million was
related to other previously committed restructuring plans and other
activities.
In the
second quarter of 2008, we recorded $185 million in impairment, restructuring
charges and other related closure costs, mainly comprised of: $114 million
impairment loss related to the potential sale of our Phoenix fab, $35 million
related to the FMG deconsolidation, $27 million incurred by our 2007
restructuring program and $9 million related to ongoing and newly committed
restructuring plans.
See Note
7 to our Unaudited Interim Consolidated Financial Statements.
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
Operating
income (loss)
|
|
$ |
55 |
|
|
$ |
(26 |
) |
|
$ |
181 |
|
As a
percentage of net revenues
|
|
|
2.1 |
% |
|
|
(1.1 |
)% |
|
|
7.0 |
% |
Year-over-year
basis
Our
operating income decreased from $181 million to $55 million due primarily to
non-recurrent charges originated by purchase accounting for the NXP wireless
business and the negative impact of the U.S. dollar exchange rate. In
particular, our third quarter 2008 operating income included specific
non-recurring charges of $57 million for the NXP inventory step up
charge and $76 million for IP R&D.
All of
our product segments registered operating income in the third quarter of 2008.
ACCI operating profit declined on a year-over-year basis driven by a combination
of factors including negative currency effects and increased R&D efforts.
IMS improved its profitability by taking advantage of improvements in sales
volume, product mix and efficiency. WPS’ operating income declined due to
currency impacts and negative pricing trends. In addition, WPS’ results included
charges of $12 million related to the amortization of intangibles assets due to
the purchase accounting for the NXP Wireless business.
Sequentially
On a sequential basis, we registered a significant
improvement in our operating results, driven by our sales performance, an
improved product mix and manufacturing efficiencies, while the U.S. dollar
exchange rate had no material impact.
All
of our product segments registered an improvement in operating
income.
Interest
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Interest
income, net
|
|
$ |
8 |
|
|
$ |
19 |
|
|
$ |
22 |
|
We
recorded net interest income of $8 million, which greatly decreased compared to
previous periods due to the decline in cash and cash equivalents that we
registered following the $1,517 million payment, net of cash received, for our
80% interest in the NXP wireless business, and also due to U.S. dollar interest
rates that were lower compared to 2007.
Other-than-temporary
impairment charges on financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Other-than-temporary
impairment charges on financial assets
|
|
$ |
(14 |
) |
|
$ |
(39 |
) |
|
|
- |
|
Beginning
in May 2006, we gave a specific mandate to Credit Suisse Securities LLC to
invest a portion of our cash in a U.S. federally-guaranteed student loan
program. In August 2007, we became aware Credit Suisse Securities LLC had
deviated from our instructions and that our account had been credited with
investments in unauthorized Auction Rate Securities. In the fourth quarter of
2007, we registered a $46 million charge due to a decline in the fair value of
these Auction Rate Securities and considered this decline as
“Other-than-temporary.” Credit market developments have further negatively
affected the valuation of the Auction Rate Securities that we classify as
available for sale securities on our consolidated balance sheet. The entire
portfolio has experienced an estimated $118 million decline in fair value as at
September 27, 2008, of which $71 million was generated in the first nine months
of 2008, with $3 million generated in the third quarter alone. This amount has
been recorded as an additional other-than-temporary impairment charge during the
period. In addition, we recorded a charge of $11 million on a Floating Rate Note
investment. See more details in paragraph “Liquidity and Capital
resources.”
Earnings
(loss) on equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Earnings
(loss) on equity investments
|
|
$ |
(344 |
) |
|
$ |
(5 |
) |
|
$ |
3 |
|
In the
third quarter of 2008 we recorded a $44 million loss on our equity investment in
Numonyx, for the second quarter of 2008, which is equivalent to our proportion
of the Numonyx loss based on our ownership stake and which was recorded by us on
a one-quarter lag.
Furthermore,
due to the deterioration of both the global economic situation and the Memory
market segment, as well as Numonyx’s results, we assessed the fair value of our
investment and recorded a $300 million other-than-temporary impairment
charge.
Income
tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Income
tax benefit (expense)
|
|
$ |
15 |
|
|
$ |
5 |
|
|
$ |
(18 |
) |
During
the third quarter of 2008, we registered an income tax benefit of $15 million.
The income tax included a non-recurring benefit of $7 million as a one-time
favorable outcome in a certain jurisdiction. The Numonyx investment impairment
is considered a discrete item and has no tax impact due to a participation
exemption in the relevant jurisdiction. In addition, following the amendment of
a law in France, research tax credits that were included in the calculation of
the effective tax rate in 2007 and prior years, were recognized as a reduction
of research and development expenses in the third quarter of 2008. During the
third quarter of 2007, we had an income tax expense of $18 million. During the
second quarter of 2008, we recorded an income tax benefit of $5
million.
Our tax
rate is variable and depends on changes in the level of operating income within
various local jurisdictions and on changes in the applicable taxation rates of
these jurisdictions, as well as changes in estimated tax provisions due to new
events. We currently enjoy certain tax benefits in some countries; as such
benefits may not be available in the future due to changes in the local
jurisdictions, our effective tax rate could be different in future quarters and
may increase in the coming years.
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Net
income (loss)
|
|
$ |
(289 |
) |
|
$ |
(47 |
) |
|
$ |
187 |
|
As
percentage of net revenues
|
|
|
(10.7 |
)% |
|
|
(2.0 |
)% |
|
|
7.3 |
% |
We
reported a net loss mainly due to an impairment on our Numonyx equity investment
and non-recurrent charges related to the consolidation of the NXP wireless
business.
For the
third quarter of 2008, we reported a loss of $289 million, compared to net
income of $187 million in the third quarter of 2007 and net loss of $47 million
in the second quarter of 2008. Compared to the third quarter of 2007, our third
quarter of 2008 was also penalized by the adverse impact of the U.S. dollar
exchange rate.
Basic and
diluted loss per share for the third quarter of 2008 was $(0.32). The impact of
restructuring and impairment charges, other-than-temporary impairment charges,
the loss on our Numonyx equity investment and non-recurrent items was estimated
to be approximately $(0.51) per share. In the second quarter of 2008, loss per
share was $(0.05) and in the year-ago quarter, basic and diluted earnings per
share were $0.21 and $0.20, respectively.
First
Nine Months of 2008 vs. First Nine Months of 2007
Based
upon most recently published estimates, semiconductor industry revenue increased
by approximately 4% for the TAM and by approximately 10% for the
SAM.
Net
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
Net
sales
|
|
$ |
7,528 |
|
|
$ |
7,233 |
|
|
|
4.1 |
% |
Other
revenues
|
|
|
38 |
|
|
|
25 |
|
|
|
- |
|
Net
revenues
|
|
|
7,566 |
|
|
$ |
7,258 |
|
|
|
4.2 |
% |
Despite
the deconsolidation of FMG in the first quarter of 2008, which had revenues of
$1,006 million in the first nine months of 2007, our net revenues increased on a
year-over-year basis due to the integration of the NXP wireless business.
Excluding FMG, which had revenues of $299 million for the first quarter of 2008,
and the NXP wireless business, which contributed $241 million in revenues after
August 2, 2008, our net revenues increased 12.4% in the first nine months of
2008. Such strong growth is due to both an increase in units sold and an
improved product mix. During the first nine months of 2008, our sales
performance without Flash and the NXP Wireless contribution exceeded both the
TAM and the SAM.
All of
our product group segments registered growth, which was supported by higher
sales volume. ACCI increased by 12.7%, IMS by 10.7% and WPS excluding the NXP
wireless business, by 15.4%.
By market
segment application, Industrial & Others and Telecom were the main
contributors to positive year-over-year variation with growth of approximately
12% (18% excluding Flash and the NXP wireless business) and 4% (17% excluding
Flash and the NXP wireless business), respectively.
By
location of order shipment, an increase was experienced in all regions, except
for Europe, which decreased by 6.8%. Excluding FMG and the NXP wireless
business, all regions increased, with the main contributors being Japan,
Emerging Markets and Asia Pacific, which increased by 37.8%, 33.8% and 31.3%,
respectively.
In the
first nine months of 2008, we had several large customers, with the largest one,
the Nokia Group of companies, accounting for approximately 19% of our net
revenues excluding FMG and the NXP wireless business, slightly decreasing from
the 20% it accounted for during the first nine months of 2007.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
Cost
of
sales
|
|
$ |
(4,828 |
) |
|
$ |
(4,733 |
) |
|
|
(2.0 |
)% |
Gross
profit
|
|
$ |
2,738 |
|
|
$ |
2,525 |
|
|
|
8.5 |
% |
Gross
margin (as a percentage of net revenues)
|
|
|
36.2 |
% |
|
|
34.8 |
% |
|
|
|
|
Despite
charges of $57 million registered in the third quarter of 2008 related to the
inventory valuation at fair value for the recently consolidated NXP wireless
business, our gross margin improved 140 basis points compared to 34.8% in the
year-ago period, and our gross profit increased 8.5%, primarily driven by our
portfolio repositioning which included the deconsolidation of Flash and the NXP
Wireless business consolidation. Excluding the NXP wireless business and Flash,
our gross margin decreased from 38.0% to 37.2%, despite our improved
manufacturing capabilities, due to continuous price pressure and the
deterioration of U.S. dollar exchange rate.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$ |
(882 |
) |
|
$ |
(803 |
) |
|
|
(9.8 |
)% |
As a
percentage of net
revenues
|
|
|
(11.7 |
)% |
|
|
(11.1 |
)% |
|
|
- |
|
Our
selling, general and administrative expenses increased by 9.8% due to the
weakening U.S. dollar exchange rate. They included $7 million of amortization of
intangible assets as part of the purchase accounting used for Genesis and the
NXP wireless business. In the first nine months of 2008, such expenses also
included $31 million for share-based compensation compared to $26 million in the
first nine months of 2007.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
|
|
|
Research
and development
expenses
|
|
$ |
(1,581 |
) |
|
$ |
(1,322 |
) |
|
|
(19.5 |
)% |
As a
percentage of net
revenues
|
|
|
(20.9 |
)% |
|
|
(18.2 |
)% |
|
|
- |
|
Our
research and development expenses increased for several reasons, including: $97
million of one-time charges that were booked as a write-off of In-Process
R&D related to the purchase accounting for the NXP wireless business and
Genesis; $17 million of amortization of acquired intangible assets; additional
charges originated by the expansion of our activities following the acquisition
of Genesis and a 3G wireless design team, as well as those associated with the
integration of the NXP wireless business; and, the negative impact of the U.S.
dollar exchange rate. Such expenses, however, were offset by the benefits of the
FMG deconsolidation.
Research
and development expenses for the first nine months of 2008 also included $20
million of share-based compensation charges, which were $13 million in the first
nine months of 2007. The first nine months of 2008, however, benefited from $123
million recognized as research tax credits following the amendment of a law in
France. The research tax credits were also available in previous periods,
however under different terms and conditions. As such, in the past they were not
shown as a reduction in research and development expenses but rather included in
the calculation of the effective income tax rate of the period.
Other
income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Research
and development
funding
|
|
$ |
64 |
|
|
$ |
61 |
|
Start-up
costs
|
|
|
(10 |
) |
|
|
(19 |
) |
Exchange
gain (loss)
net
|
|
|
19 |
|
|
|
(3 |
) |
Patent
litigation
costs
|
|
|
(11 |
) |
|
|
(15 |
) |
Patent
pre-litigation
costs
|
|
|
(7 |
) |
|
|
(8 |
) |
Gain
on sale of non-current
assets
|
|
|
4 |
|
|
|
- |
|
Other,
net
|
|
|
(3 |
) |
|
|
4 |
|
Other
income and expenses,
net
|
|
$ |
56 |
|
|
$ |
20 |
|
As a
percentage of net
revenues
|
|
|
0.7 |
% |
|
|
0.3 |
% |
“Other
income and expenses, net” resulted in net income of $56 million in the first
nine months of 2008, compared to net income of $20 million in the first nine
months of 2007 primarily as a result of a higher exchange gain and lower
start-up costs. Research and development funding included the income of some of
our research and development projects, which qualify as funding on the basis of
contracts with local government agencies in locations where we pursue our
activities. The majority of our research and development funding was received in
Italy and France and, compared to the first nine months of 2007, it increased
slightly.
Impairment,
restructuring charges and other related closure costs
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Impairment,
restructuring charges and
other related closure
costs
|
|
$ |
(390 |
) |
|
$ |
(949 |
) |
Impairment,
restructuring charges and other related closure costs continued to materially
impact our results, although they decreased significantly compared to the
previous year. In the first nine months this expense was mainly comprised
of:
· FMG
assets disposal which required the recognition of $191 million as an additional
loss and $16 million as restructuring and other related disposal costs; this
additional loss was the result of revised terms of the transaction from those
expected at December 31, 2007 and an updated market value of comparable
companies;
· $135
million incurred as part of our 2007 restructuring initiatives which include the
closure of our fabs in Phoenix and Carrollton (USA) and of our back-end
facilities in Ain Sebaa (Morocco);
· $13
million as impairment charges on goodwill; and
· Other
previously and newly announced restructuring plans for $35 million, consisting
primarily of voluntary termination benefits and early retirement arrangements in
some of our European locations.
In the
first nine months of 2007, we incurred $949 million of impairment, restructuring
charges and other related closure costs, including $857 million booked upon
signing the agreement for the disposal of our FMG assets and $3 million in other
related closure costs, $56 million related to the severance costs booked in
relation to the 2007 restructuring plan of our manufacturing activities and $33
million relating to previously announced programs.
See Note
7 to our Unaudited Interim Consolidated Financial Statements.
Operating
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Operating
loss
|
|
$ |
(59 |
) |
|
$ |
(529 |
) |
As a
percentage of net revenues
|
|
|
(0.8 |
)% |
|
|
(7.3 |
)% |
Our
operating loss significantly decreased from the $529 million recorded in the
first nine months of 2007 primarily due to lower impairment charges and an
improvement in our business operations, despite the significant negative impact
of fluctuations in the U.S. dollar exchange rate. See “Business
Overview.”
We
registered operating income in all of our product groups. ACCI’s operating
income decreased to $110 million from $135 million registered in the first nine
months of 2007, despite higher sales, due to higher operating expenses and the
significant impact of the weakening U.S. dollar exchange rate. IMS registered
operating income of $374 million, significantly increasing compared to the $338
million registered in the first nine months of 2007, due to higher sales and an
improved product mix. WPS decreased from income of $60 million to income of $12
million. In the first quarter of 2008, FMG had registered a significant benefit
from the suspended depreciation associated with assets held for
sale.
Interest
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Interest
income,
net
|
|
$ |
48 |
|
|
$ |
57 |
|
In the
first nine months of 2008, interest income, net contributed $48 million compared
to the $57 million recorded in the same period in 2007. The lower amount is due
to the decrease of our cash position after payment for the NXP wireless business
and also because of lower U.S. dollar interest rates compared to the same period
in 2007.
Other-than-temporary
impairment charges on financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Other-than-temporary
impairment charges on financial assets
|
|
$ |
(82 |
) |
|
|
- |
|
Beginning
in May 2006, we gave a specific mandate to Credit Suisse Securities LLC to
invest a portion of our cash in a U.S. federally-guaranteed student loan
program. In August 2007, we became aware that Credit Suisse Securities LLC had
deviated from our instructions and that our account had been credited with
investments in unauthorized Auction Rate Securities. In the fourth quarter of
2007, we registered a $46 million charge due to a decline in the fair value of
these Auction Rate Securities and considered this decline as
“Other-than-temporary.” Credit market developments have further negatively
affected the valuation of Auction Rate Securities that we classify as available
for sale securities on our consolidated balance sheet. The entire portfolio has
experienced an estimated $118 million decline in fair value as at September 27,
2008, of which $71 million was generated in the first nine months of 2008, with
$3 million generated in the third quarter alone. This amount has been recorded
as an additional other-than-temporary impairment charge during the period. In
addition, we recorded a charge of $11 million on one Floating Rate Note
investment. See more details in paragraph “Liquidity and Capital
resources.”
Earnings
(loss) on equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Earnings
(loss) on equity investments
|
|
$ |
(350 |
) |
|
$ |
12 |
|
Our loss
on equity investments was impacted by the loss recorded on our Numonyx
investment, which was primarily composed of a $300 million
other-than-temporary impairment resulting from the deterioration of both the
global economic situation and the Memory market segment, as well as Numonyx’s
results, and a $44 million equity loss related to our share of the second
quarter 2008 Numonyx loss recognized in our third quarter pursuant to
one-quarter lag reporting.
Income
tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Income
tax benefit (expense)
|
|
$ |
34 |
|
|
$ |
(32 |
) |
During
the first nine months of 2008, we registered an income tax benefit of $34
million, reflecting an estimated annual effective tax rate for recurring
operations of approximately 15.2% before one-time elements. After one-time
elements, this annual effective tax rate was estimated at approximately 14%. In
the first nine months of 2007, we incurred a tax expense of $32
million.
Our tax
rate is variable and depends on changes in the level of operating income within
various local jurisdictions and on changes in the applicable taxation rates of
these jurisdictions, as well as changes in estimated tax provisions due to new
events. We currently enjoy certain tax benefits in some countries. As such
benefits may not be available in the future due to changes in the laws of the
local jurisdictions, our effective tax rate could be different in future
quarters and may increase in the coming years.
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited,
in millions)
|
|
Net
loss
|
|
$ |
(421 |
) |
|
$ |
(496 |
) |
As a
percentage of net revenues
|
|
|
(5.6 |
)% |
|
|
(6.8 |
)% |
For the
first nine months of 2008, we reported a net loss of $421 million, compared to a
net loss of $496 million in the first nine months of 2007. The first nine months
of 2008 was negatively impacted by the impairment charge associated with our
equity investment in Numonyx, the additional loss recorded for the FMG
deconsolidation, the one-time elements of the purchase accounting used for the
NXP wireless business and the adverse impact of fluctuations in the U.S. dollar
exchange rate. During the same period in 2007, there was a significant amount of
impairment on the FMG deconsolidation since those assets were reclassified for
sale, significant restructuring charges and a significant negative effect due to
the weakening U.S. dollar exchange rate. Loss per share for the first nine
months of 2008 was $(0.47). Impairment charges, restructuring charges and other
specific items accounted for a $(0.97) loss per diluted share in the first nine
months of 2008, while they accounted for $(1.03) per diluted share in the same
period in the prior year.
Legal
Proceedings
We are
currently a party to legal proceedings with SanDisk Corporation.
On
October 15, 2004, SanDisk filed a complaint for patent infringement and a
declaratory judgment of non-infringement and patent invalidity against us with
the United States District Court for the Northern District of California. The
complaint alleged that our products infringed on a single SanDisk U.S. patent
(Civil Case No. C 04-04379JF). By an order dated January 4, 2005, the court
stayed SanDisk’s patent infringement claim, pending final determination in an
action filed contemporaneously by SanDisk with the United States International
Trade Commission (“ITC”), which covered the same patent claim asserted in Civil
Case No. C 04-04379JF. The ITC action was subsequently resolved in our favor. On
August 2, 2007, SanDisk filed an amended complaint in the United States District
Court for the Northern District of California adding allegations of infringement
with respect to a second SanDisk U.S. patent which had been the subject of a
second ITC action and which was also resolved in our favor. On September 6,
2007, we filed an answer and a counterclaim alleging various federal and state
antitrust and unfair competition claims. SanDisk filed a motion to dismiss our
antitrust counterclaim, which was denied on January 25, 2008. Following an
additional appeal by SanDisk on October 17, 2008, the Court issued an order
confirming our antitrust cause of action, but also granting SanDisk’s summary
judgment motion with respect to our claim for sham litigation and unfair
competition. The decision regarding the trial schedule remains to be
set.
On
October 14, 2005, we filed a complaint against SanDisk and its current CEO, Dr.
Eli Harari, before the Superior Court of California, County of Alameda. The
complaint seeks, among other relief, the assignment or co-ownership of certain
SanDisk patents that resulted from inventive activity on the part of Dr. Harari
that took place while he was an employee, officer and/or director of Waferscale
Integration, Inc. and actual, incidental, consequential, exemplary and punitive
damages in an amount to be proven at trial. We are the successor to Waferscale
Integration, Inc. by merger. SanDisk removed the matter to the United States
District Court for the Northern District of California which remanded the matter
to the Superior Court of California, County of Alameda in July 2006. SanDisk
moved to transfer the case to the Superior Court of California, County of Santa
Clara and to strike our claim for unfair competition, which were both denied by
the trial court. SanDisk appealed these rulings and also moved to stay the case
pending resolution of the appeal. On January 12, 2007, the California Court of
Appeals ordered that the case be transferred to the Superior Court of
California, County of Santa Clara. On August 7, 2007, the California Court of
Appeals affirmed the Superior Court’s decision denying SanDisk’s motion to
strike our claim for unfair competition. SanDisk appealed this ruling to the
California Supreme Court, which refused to hear it. The trial date has recently
been set for September 8, 2009.
With
respect to the lawsuits with SanDisk as described above, and following two prior
decisions in our favor taken by the ITC, we have not identified any risk of
probable loss that is likely to arise out of the outstanding
proceedings.
We are
also a party to legal proceedings with Tessera, Inc.
On
January 31, 2006, Tessera added our Company as a co-defendant, along with
several other semiconductor and packaging companies, to a lawsuit filed by
Tessera on October 7, 2005 against Advanced Micro Devices Inc. and Spansion in
the United States District Court for the Northern District of California.
Tessera is claiming that certain of our small format BGA packages infringe
certain patents owned by Tessera, and that we are liable for damages. Tessera is
also claiming that various ST entities breached a 1997 License Agreement and
that we are liable for unpaid royalties as a result. In April and May 2007, the
United States Patent and Trademark Office (“PTO”) initiated reexaminations in
response to the reexamination requests. A final decision regarding the
reexamination requests is pending.
On April
17, 2007, Tessera filed a complaint against us, Spansion, ATI Technologies,
Inc., Qualcomm, Motorola and Freescale with the ITC with respect to certain
small format ball grid array packages and products containing the same, alleging
patent infringement claims of two of the Tessera patents previously asserted in
the District Court action described above and seeking an order excluding
importation of such products into the United States. On May 15, 2007, the ITC
instituted an investigation pursuant to 19 U.S.C. § 1337, entitled In the Matter
of Certain Semiconductor Chips with Minimized Chip Package Size and Products
Containing Same, Inv. No. 337-TA-605. The PTO’s Central Reexamination Unit has
issued office actions rejecting all of the asserted patent claims on the grounds
that they are invalid in view of certain prior art. Tessera is contesting these
rejections, and the PTO has not made a final decision. On February 25, 2008, the
administrative law judge issued an initial determination staying the ITC
proceeding pending completion of these reexamination proceedings. On March 28,
2008, the ITC reversed the administrative law judge and ordered him to reinstate
the ITC proceeding. Trial proceedings took place from July 14, 2008 to July 18,
2008. The Initial Determination was due no later than October 20, 2008, but has
now been postponed until December 1, 2008.
Furthermore,
recently we have, along with several other companies such as Freescale, NXP
Semiconductor, Grace Semiconductor, National Semiconductor, Spansion and Elpida,
been sued by LSI Corp. before the International Trade Commission in Washington.
The lawsuit follows LSI Corp.’s purchase of Agere Systems Inc. and alleges
infringement of a single Agere US process patent (US 5,227,335). The
International Trade Commission initiated an investigation in May 2008 and has
set a March 2009 trial date. A claim for patent infringement before the Eastern
District of Texas relating to the same LSI patents has been stayed pending
outcome of the ITC case. We have requested that the LSI/Agere case be dismissed
based on the argument that the patent is licensed to us.
Other
Litigation
In
September 2006, after our internal audit department uncovered fraudulent foreign
exchange transactions not known to us performed by our former Treasurer and
resulting in payments by a financial institution of over 28 million Swiss Francs
in commissions for the personal benefit of our former Treasurer, we filed a
criminal complaint before the Public Prosecutor in Lugano, Switzerland.
Following such complaint, our former Treasurer was arrested in November 2006 and
on February 12, 2008 sentenced to three and one-half years imprisonment.
Following the evidence uncovered during the trial which led to the decision of
February 12, 2008 which is currently under appeal on legal grounds, we have
declared ourselves a plaintiff in a new action launched in April 2008 by the
Public Prosecutor in Lugano, against directors of Credit Suisse for
falsification of documentation. This action could help us in recovering from
Credit Suisse amounts not refunded by our former Treasurer by further
highlighting responsibility of the bank in the fraud. To date, we have recovered
over half of the illegally paid commissions.
In
February 2008, following unauthorized purchases for our account of certain
Auction Rate Securities, we initiated arbitration proceedings against Credit
Suisse Securities LLC seeking to reverse the unauthorized purchases and recover
all losses in our account, including, but not limited to, the $118 million
impairment posted to date. These proceedings are set to commence on December 1,
2008. We have also filed an action in district court against Credit Suisse
Group, which is currently being contested.
Related-Party
Transactions
One of
the members of our Supervisory Board is managing director of Areva SA, which is
a controlled subsidiary of Commissariat de l’Energie Atomique (“CEA”), one of
the members of our Supervisory Board is the Chairman and
CEO of
France Telecom, one is a member of the Board of Directors of Thomson, another is
the non-executive Chairman of the Board of Directors of ARM Holdings PLC
(“ARM”), two of our Supervisory Board members are non-executive directors
of Soitec, one of our Supervisory Board members is the CEO of Groupe Bull,
one of the members of the Supervisory Board is also a member of the
supervisory board of BESI and one of the members of the Supervisory Board is a
director of Oracle Corporation (“Oracle”) and Flextronics International. France
Telecom and its subsidiaries as well as Oracle’s new subsidiary PeopleSoft
supply certain services to our Company. We have a long-term joint research and
development partnership agreement with Leti, a wholly-owned subsidiary of CEA.
We have certain licensing agreements with ARM, and have conducted transactions
with Soitec and BESI as well as with Thomson, Flextronics and a subsidiary of
Groupe Bull. We believe that each of these arrangements and transactions are
made on an arms-length basis in line with market practices and
conditions.
Impact
of Changes in Exchange Rates
Our
results of operations and financial condition can be significantly affected by
material changes in exchange rates between the U.S. dollar and other currencies,
particularly the Euro.
As a
market rule, the reference currency for the semiconductor industry is the U.S.
dollar and product prices are mainly denominated in U.S. dollars. However,
revenues for some of our products (primarily our dedicated products sold in
Europe and Japan) are quoted in currencies other than the U.S. dollar and as
such are directly affected by fluctuations in the value of the U.S. dollar. As a
result of currency variations, the appreciation of the Euro compared to the U.S.
dollar could increase, in the short term, our level of revenues when reported in
U.S. dollars. Revenues for all other products, which are either quoted in U.S.
dollars and billed in U.S. dollars or in local currencies for payment, tend not
to be affected significantly by fluctuations in exchange rates, except to the
extent that there is a lag between changes in currency rates and adjustments in
the local currency equivalent price paid for such products. Furthermore, certain
significant costs incurred by us, such as manufacturing, labor costs and
depreciation charges, selling, general and administrative expenses, and research
and development expenses, are largely incurred in the currency of the
jurisdictions in which our operations are located. Given that most of our
operations are located in the Euro zone or other non-U.S. dollar currency areas,
our costs tend to increase when translated into U.S. dollars in case of dollar
weakening or to decrease when the U.S. dollar is strengthening.
In
summary, as our reporting currency is the U.S. dollar, currency exchange rate
fluctuations affect our results of operations: if the U.S. dollar weakens, we
receive a limited part of our revenues, and more importantly, we increase a
significant part of our costs, in currencies other than the U.S. dollar. As
described below, our effective average U.S. dollar exchange rate weakened during
the first nine months of 2008, particularly against the Euro, causing us to
report higher expenses and negatively impacting both our gross margin and
operating income. Our consolidated statements of income for the first nine
months of 2008 included income and expense items translated at the average U.S.
dollar exchange rate for the period.
Our
principal strategy to reduce the risks associated with exchange rate
fluctuations has been to balance as much as possible the proportion of sales to
our customers denominated in U.S. dollars with the amount of raw materials,
purchases and services from our suppliers denominated in U.S. dollars, thereby
reducing the potential exchange rate impact of certain variable costs relative
to revenues. Moreover, in order to further reduce the exposure to U.S. dollar
exchange fluctuations, we have hedged certain line items on our consolidated
statements of income, in particular with respect to a portion of the costs of
goods sold, most of the research and development expenses and certain selling
and general and administrative expenses, located in the Euro zone. Our effective
average exchange rate of the Euro to the U.S. dollar was $1.52 for €1.00 in the
first nine months of 2008 compared to $1.33 for €1.00 in the first nine months
of 2007. Our effective average rate of the Euro to the U.S. dollar was $1.54 for
€1.00 for the third quarter of 2008 and $1.55 for €1.00 in the second quarter of
2008 while it was $1.36 for €1.00 for the third quarter of 2007. These effective
exchange rates reflect the actual exchange rates combined with the impact of
hedging contracts matured in the period.
As of
September 27, 2008, the outstanding hedged amounts were €272.5 million to cover
manufacturing costs and €262.5 million to cover operating expenses, at an
average rate of about $1.50 and $1.51 for €1.00, respectively (including the
premium paid to purchase foreign exchange options), maturing over the period
from October 2, 2008 to February 9, 2009. As of September 27, 2008, these
outstanding hedging contracts and certain expired contracts covering
manufacturing expenses capitalized in inventory represented a deferred loss of
approximately $7 million
after
tax, recorded in “Other comprehensive income” in shareholders’ equity, compared
to a deferred gain of approximately $3 million after tax as at June 28, 2008 and
to a deferred gain of approximately $8 million after tax as at December 31,
2007.
Our
hedging policy is not intended to cover the full exposure. In addition, in order
to mitigate potential exchange rate risks on our commercial transactions, we
purchased and entered into forward foreign currency exchange contracts and
currency options to cover foreign currency exposure in payables or receivables
at our affiliates. We may in the future purchase or sell similar types of
instruments. See Item 11, “Quantitative and Qualitative Disclosures about Market
Risk,” in the Form 20-F as may be updated from time to time in our public
filings for full details of outstanding contracts and their fair values.
Furthermore, we may not predict in a timely fashion the amount of future
transactions in the volatile industry environment. Consequently, our results of
operations have been and may continue to be impacted by fluctuations in exchange
rates.
Our
treasury strategies to reduce exchange rate risks are intended to mitigate the
impact of exchange rate fluctuations. No assurance may be given that our hedging
activities will sufficiently protect us against declines in the value of the
U.S. dollar. Furthermore, if the value of the U.S. dollar increases, we may
record losses in connection with the loss in value of the remaining hedging
instruments at the time. In the first nine months of 2008, as a result of cash
flow hedging, we recorded a net gain of $30 million, consisting of a gain of $10
million to research and development expenses, a gain of $17 million to costs of
goods sold and a gain of $3 million to selling, general and administrative
expenses, while in the first nine months of 2007, we recorded a net gain of $20
million. In the third quarter of 2008, the impact was not material to the
P&L, since it was the result of a net gain of $2 million to costs of goods
sold and a net loss of $1 million to research & development expenses,
compared to a net gain of $1 million in the third quarter of 2007, and a gain of
$18 million in the second quarter of 2008.
The net
effect of the consolidated foreign exchange exposure resulted in a net gain of
$19 million in “Other income and expenses, net” in the first nine months of
2008.
Assets
and liabilities of subsidiaries are, for consolidation purposes, translated into
U.S. dollars at the period-end exchange rate. Income and expenses are translated
at the average exchange rate for the period. The balance sheet impact of such
translation adjustments has been, and may be expected to be, significant from
period to period since a large part of our assets and liabilities are accounted
for in Euros as their functional currency. Adjustments resulting from the
translation are recorded directly in shareholders’ equity, and are shown as
“Accumulated other comprehensive income (loss)” in the consolidated statements
of changes in shareholders’ equity. At September 27, 2008, 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 the Form 20-F as may be updated from time to time
in our public filings.
Impact
of Changes in Interest Rates
Interest
rates may fluctuate upon changes in financial market conditions and material
changes can affect our results from operations and financial condition, since
these changes can impact the total interest income received on our cash and cash
equivalents and the total interest expense paid on our financial
debt.
Our
interest income, net, as reported on our consolidated statements of income, is
the balance between interest income received from our cash and cash equivalent
and marketable securities investments and interest expense paid on our long-term
debt. Our interest income is dependent on the fluctuations in the interest
rates, mainly in the U.S. dollar and the Euro, since we are investing on a
short-term basis; any increase or decrease in the short-term market interest
rates would mean an equivalent increase or decrease in our interest income. Our
interest expenses are associated with our long-term Zero coupon convertible
bonds (with a fixed rate of 1.5%), our Floating Rate Note, which is fixed
quarterly at a rate of LIBOR + 40bps, and EIB Floating Rate Loans for a total of
$540 million. To manage the interest rate mismatch, in the second quarter of
2006, we entered into cancelable swaps to hedge a portion of the fixed rate
obligations on our outstanding long-term debt with Floating Rate derivative
instruments. Of the $974 million in 2016 Convertible Bonds issued in the first
quarter of 2006, we entered into cancelable swaps for $200 million of the
principal amount of the bonds, swapping the 1.5% yield equivalent on the bonds
for 6 Month USD LIBOR minus 3.375%, partially offsetting the interest rate
mismatch of the 2016 Convertible Bond. We also
have $250
million of restricted cash at a fixed rate formally associated with Hynix
Semiconductor. Our hedging policy is not intended to cover the full exposure and
all risks associated with these instruments.
As of
September 27, 2008, our cash and cash equivalents generated an average interest
income rate of 3.93%. The fair value of the swaps as of September 27, 2008 was
positive for $15 million since they were executed at higher than current market
rates (the 8-year U.S. swap interest rate was 4.44%). In compliance with FAS 133
provisions on fair value hedges, the net impact of the hedging transaction on
our consolidated statements of income was a gain of $1 million in the first nine
months of 2008, which represents the ineffective part of the hedge. This amount
was recorded in “Other income and expenses, net.” These cancelable swaps were
designed and are expected to effectively replicate the bond’s behavior through a
wide range of changes in financial market conditions and decisions made by both
the holders of the bonds and us, thus being classified as highly effective
hedges; however no assurance can be given that our hedging activities will
sufficiently protect us against future significant movements in interest
rates.
We may in
the future enter into further cancellable swap transactions related to the 2016
Convertible Bonds or other fixed rate instruments. For full details of
quantitative and qualitative information, see Item 11, “Quantitative and
Qualitative Disclosures about Market Risk” included in the Form 20-F, as may be
updated from time to time in our public filings.
Liquidity
and Capital Resources
Treasury
activities are regulated by our policies, which define procedures, objectives
and controls. The policies focus on the management of our financial risk in
terms of exposure to currency rates and interest rates. Most treasury activities
are centralized, with any local treasury activities subject to oversight from
our head treasury office. The majority of our cash and cash equivalents are held
in U.S. dollars and Euros and are placed with financial institutions rated “A”
or better. Part of our liquidity is also held in Euros to naturally hedge
intercompany payables in the same currency and is placed with financial
institutions rated at least single A long-term rating, meaning at least A3 from
Moody’s Investor Service and A- from Standard & Poor’s and Fitch Ratings.
Marginal amounts are held in other currencies. See Item 11, “Quantitative and
Qualitative Disclosures About Market Risk” included in the Form 20-F, as may be
updated from time to time in our public filings.”
In the
third quarter of 2007, we determined that since unauthorized investments in
Auction Rate Securities other than in the U.S. federally-guaranteed student loan
program experienced auction failure since August such investments were to be
more properly classified on our consolidated balance sheet as “Marketable
securities” instead of “Cash and cash equivalents” as done in previous periods.
The revision of the consolidated statement of cash flows for the nine months
ended September 29, 2007 affects ”Cash and cash equivalents at the beginning of
the period” which was restated from $1,963 million to $1,659 million following
the restatement performed on the December 31, 2006 financial statements, as
described in the Form 20-F. The revision of consolidated statements of cash
flows for the three months ended September 29, 2007 affects the “Cash and cash
equivalents at the beginning of the period”, which was restated from $1,849
million to $1,374 million following the restatement performed on June 30, 2007
financial statements. We believe that investments made for our account in
Auction Rate Securities other than U.S. federally-guaranteed student loans have
been made without our due authorization and in 2008, we initiated arbitration
proceedings against Credit Suisse Securities LLC seeking to reverse the
unauthorized purchases and to recover all losses in our account, including, but
not limited to, the $118 million impairment posted to date.
As of
September 27, 2008, we had $868 million in cash and cash equivalents, $726
million in marketable securities as current assets, composed of senior debt
Floating Rate Notes issued by primary financial institutions, $250 million as
restricted cash and $297 million as non-current assets invested in Auction Rate
Securities. At June 28, 2008, cash and cash equivalents were $2,136 million and
at December 31, 2007 they were $1,855 million.
As of
September 27, 2008, we had $726 million in marketable securities as current
assets, with primary financial institutions with a minimum rating of A1/A. They
are reported at fair value, with changes in fair value recognized as a separate
component of “Accumulated other comprehensive income” in the consolidated
statement of changes in shareholders’ equity, except if deemed to be other-than
temporary. For that reason, as at September 27, 2008, after recent economic
events and given our exposure to Lehman Brothers’ senior unsecured bonds for a
maximum amount of €15 million, we recorded an other-than-temporary charge of $11
million, which represents 50% of the
face
value of these Floating Rate Notes, according to recovery rate calculated from a
major credit rating company. The change in fair value of all other current
marketable securities amounted to approximately $15 million after tax as of
September 27, 2008. We sold $127 million of these instruments in the third
quarter of 2008. Marketable securities as current assets amounted to $898
million as of June 28, 2008, while we had $1,014 million as of December 31,
2007. Changes in the instruments adopted to invest our liquidity in future
periods may occur and may significantly affect our interest income (expense),
net.
As of
September 27, 2008, we had Auction Rate Securities in an amount of $297 million
with a par value of $415 million. These securities represent interest in
collateralized obligations and other commercial obligations. In the fourth
quarter of 2007, we registered a decline in the fair value of these Auction Rate
Securities and considered such decline as “Other-than-temporary.”
Recent credit concerns arising in the capital markets have reduced the ability
to liquidate Auction Rate Securities that we classify as available for sale
securities on our consolidated balance sheet. As the entire portfolio has
experienced an estimated $118 million decline in fair value as at September 27,
2008, we recorded an additional other-than-temporary impairment charge of $3
million in the third quarter of 2008 on top of the charge registered in the
first half of 2008. The fair value measure of these securities was based on
publicly available indices of securities with the same rating and
comparable/similar underlying collaterals or industries exposure (such as ABX,
ITraxx and IBoxx. Until December 31, 2007, the fair value was measured: (i)
based on the weighted average of available information in public indices as
described above and (ii) using ‘mark to market’ bids and ‘mark to model’
valuations received from the structuring financial institutions of the
outstanding auction rate securities, weighting the different valuations at 80%
and 20%, respectively. In the third quarter of 2008, no prices for these
securities were available from the financial institutions. The estimated value
of these securities could further decrease in the future as a result of credit
market deterioration and/or other downgrading. After the $3 million impairment
charge recorded in quarter ended September 27, 2008, our Auction Rate Securities
have, therefore, an estimated fair value of approximately $297
million.
Liquidity
We
maintain a significant cash position and a low debt to equity ratio, which
provide us with adequate financial flexibility. As in the past, our cash
management policy is to finance our investment needs with net cash generated
from operating activities.
During
the first nine months of 2008, as a result of the payments made for the wireless
business from NXP and for Genesis, we registered a decrease in our cash and cash
equivalents of $987 million. In addition, we have distributed $161 million of
dividends and repurchased $231 million of treasury shares.
The
evolution of our cash flow for each of the respective periods is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Net
cash from operating activities
|
|
$ |
1,332 |
|
|
$ |
1,451 |
|
Net
cash used in investing activities
|
|
|
(2,245 |
) |
|
|
(1,189 |
) |
Net
cash used in financing activities
|
|
|
(69 |
) |
|
|
(303 |
) |
Effect
of change in exchange rates
|
|
|
(5 |
) |
|
|
32 |
|
Net
cash increase (decrease)
|
|
$ |
(987 |
) |
|
$ |
(9 |
) |
Net cash from operating
activities. As in prior periods, the major source of liquidity during the
first nine months of 2008 was cash provided by operating activities. Our net
cash from operating activities totaled $1,332 million in the first nine months
of 2008, decreasing compared to $1,451 million in the first nine months of 2007
due to a lower level of profitability from operations resulting from the
negative impact of the U.S. dollar exchange rate. Changes in our operating
assets and liabilities resulted in a use of cash in the amount of $78 million in
the first nine months of 2008, compared to $107 million of net cash used in the
first nine months of 2007.
Net cash used in investing
activities. Net cash used in investing activities was $2,245 million in
the first nine months of 2008, compared to the $1,189 million used in the first
nine months of 2007. Payments for business acquisitions,
net of
cash received, were the main utilization of cash in the first nine months of
2008, including the NXP wireless business for $1,517 million and Genesis for
$170 million. Payments for purchases of tangible assets were $777 million for
the first nine months of 2008, an increase of over $735 million in the first
nine months of 2007 primarily as a result of the repurchase of the Crolles2
equipment from our partners, which was completed in the third quarter of 2008.
The first nine months of 2007 payments included $708 million purchase of
marketable securities and were net of $250 million proceeds from matured
short-term deposits and $100 million proceeds from marketable securities. We did
not purchase any marketable securities in the first nine months of 2008,
although we sold $287 million of Floating Rate Notes.
Net cash used in financing
activities. Net cash used in financing activities was $69 million in the
first nine months of 2008 decreasing compared to $303 million used in the first
nine months of 2007. The variance is due to the following factors: as at
September 27, 2008, we had paid only one half of the dividends to shareholders,
equivalent to $161 million, while the total amount of the prior year’s dividend
($269 million) had already been paid as at September 29, 2007; during 2008, we
started our shares repurchase program, spending an aggregate amount of $231
million; and we contracted some new long-term loans, primarily with the European
Investment Bank for $336 million.
Net operating cash flow. We
also present net operating cash flow defined as net cash from operating
activities minus net cash used in investing activities, excluding payment for
purchases of and proceeds from the sale of marketable securities (both current
and non-current), short-term deposits and restricted cash. We believe net
operating cash flow provides useful information for investors and management
because it measures our capacity to generate cash from our operating and
investing activities to sustain our operating activities. Net operating cash
flow is not a U.S. GAAP measure and does not represent total cash flow since it
does not include the cash flows generated by or used in financing activities. In
addition, our definition of net operating cash flow may differ from definitions
used by other companies. Net operating cash flow is determined as follows from
our Unaudited Interim Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Net
cash from operating activities
|
|
$ |
414 |
|
|
$ |
1,332 |
|
|
$ |
1,451 |
|
Net
cash used in investing activities
|
|
|
(1,664 |
) |
|
|
(2,245 |
) |
|
|
(1,189 |
) |
Payment
for purchase and proceeds from sale of marketable securities (current and
non-current), short-term deposits and restricted cash, net
|
|
|
(127 |
) |
|
|
(287 |
) |
|
|
390 |
|
Net
operating cash flow
|
|
$ |
(1,377 |
) |
|
$ |
(1,200 |
) |
|
$ |
652 |
|
We had
unfavorable net operating cash flow of $(1,200) million in the first nine months
of 2008, decreasing compared to net operating cash flow of $652 million in the
first nine months of 2007. This decrease is primarily due to the payments for
the NXP wireless business (in the third quarter of 2008) and Genesis (in the
first quarter of 2008) which totaled $1,687 million – net of available cash.
Excluding these payments, our net operating cash flow would have been $487
million in the first nine months of 2008 and $140 million in the third quarter
of 2008.
Capital
Resources
Net
financial position
We define
our net financial position as the difference between our total cash position
(cash, cash equivalents, current and non-current marketable securities,
short-term deposits and restricted cash) net of total financial debt (bank
overdrafts, current portion of long-term debt and long-term debt). Net financial
position is not a U.S. GAAP measure. We believe our net financial position
provides useful information for investors because it gives evidence of our
global position either in terms of net indebtedness or net cash by measuring our
capital resources based on cash, cash equivalents and marketable securities and
the total level of our financial indebtedness. The net financial position is
determined as follows from our Unaudited Interim Consolidated Balance Sheets as
at September 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Cash
and cash equivalents, net of bank overdrafts
|
|
$ |
868 |
|
|
$ |
2,136 |
|
|
$ |
1,855 |
|
|
$ |
1,650 |
|
Marketable
securities, current
|
|
|
726 |
|
|
|
898 |
|
|
|
1,014 |
|
|
|
1,389 |
|
Restricted
cash
|
|
|
250 |
|
|
|
250 |
|
|
|
250 |
|
|
|
250 |
|
Marketable
securities, non-current
|
|
|
297 |
|
|
|
300 |
|
|
|
369 |
|
|
|
- |
|
Total
cash position
|
|
|
2,141 |
|
|
|
3,584 |
|
|
|
3,488 |
|
|
|
3,289 |
|
Current
portion of long-term debt
|
|
|
(63 |
) |
|
|
(153 |
) |
|
|
(103 |
) |
|
|
(74 |
) |
Long-term
debt
|
|
|
(2,487 |
) |
|
|
(2,313 |
) |
|
|
(2,117 |
) |
|
|
(2,099 |
) |
Total
financial debt
|
|
|
(2,550 |
) |
|
|
(2,466 |
) |
|
|
(2,220 |
) |
|
|
(2,173 |
) |
Net
financial position
|
|
$ |
(409 |
) |
|
$ |
1,118 |
|
|
$ |
1,268 |
|
|
$ |
1,116 |
|
The net
financial position as of September 27, 2008 resulted in a net cash deficit of
$409 million, representing a significant decrease from the positive cash
position of $1,118 as of June 28, 2008 due to the payment made for the NXP
wireless deal. In the same period, our total cash position decreased
significantly to $2,141 million while total financial debt increased to $2,550
million.
On July
28, 2008 we closed our previously announced deal to create a joint venture
company with NXP from our wireless operations, which resulted in our providing a
cash payment, net of cash received, of $1,517 million to NXP. Following the
announcement of the transaction with EMP, we anticipate the acceleration of the
call option to purchase NXP’s 20% interest in our wireless joint-venture
company, however, in such event, we would expect to receive cash proceeds from
EMP. We also expect additional use of cash in the coming quarter due to our
common share repurchase program and our upcoming payment of the remaining half
of cash dividend.
At
September 27, 2008, the aggregate amount of our long-term debt was $2,550
million, including $1,029 million of our 2016 Convertible Bonds and $729 million
of our 2013 Senior Bonds (corresponding to the €500 million at issuance), while
we nearly entirely redeemed our 2013 Convertible Bonds. Additionally, the
aggregate amount of our total available short-term credit facilities, excluding
foreign exchange credit facilities, was approximately $800 million, which was
not used at September 27, 2008. We also had two committed credit facilities with
the European Investment Bank as part of a R&D funding program. The first
one, for a total of €245 million for R&D in France was fully drawn in U.S.
dollars for a total amount of $341 million as at September 27, 2008. The second
one, signed on July 21, 2008, for a total amount of €250 million for R&D
Italy, was drawn for $200 million as at September 27, 2008, with €121 million
($180 million equivalent) of available commitment left. We also maintain
uncommitted foreign exchange facilities totaling $800 million as at September
27, 2008. Our long-term capital market financing instruments contain standard
covenants, but do not impose minimum financial ratios or similar obligations on
us. Upon a change of control, the holders of our 2016 Convertible Bonds and 2013
Senior Bonds may require us to repurchase all or a portion of such holder’s
bonds. See Note 14 to our Consolidated Financial Statements.
As of
September 27, 2008, 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)
|
|
$ |
2,550 |
|
|
$ |
63 |
|
|
$ |
203 |
|
|
$ |
1,127 |
|
|
$ |
90 |
|
|
$ |
819 |
|
|
$ |
86 |
|
|
$ |
162 |
|
As of
September 27, 2008, we have the following credit ratings on our 2013 and 2016
Bonds:
|
Moody’s
Investors Service
|
|
Zero
Coupon Senior Convertible Bonds due
2013
|
WR(1)
|
A-
|
Zero
Coupon Senior Convertible Bonds due
2016
|
Baa1
|
A-
|
Floating
Rate Senior Bonds due
2013
|
Baa1
|
A-
|
(1)
|
Rating
withdrawn since the redemption in August 2006 of $1.4 billion of our 2013
Convertible Bonds.
|
On April
11, 2008, Moody’s Investors Service and Standard & Poor’s Ratings Services
put our ratings “on review for
possible downgrade” and “on CreditWatch
with negative implications,” respectively. On
June 24, 2008 Standard and Poor’s Rating Services affirmed the “A-” rating. On
June 25, 2008 Moody’s Investors Service downgraded our senior debt rating from
“A3” to “Baa1.”
In the
event of a downgrade of these ratings, we believe we would continue to have
access to sufficient capital resources.
Contractual
Obligations, Commercial Commitments and Contingencies
Our
contractual obligations, commercial commitments and contingencies as of
September 27, 2008, and for each of the five years to come and thereafter, were
as follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases(2)
|
|
$ |
487 |
|
|
$ |
38 |
|
|
$ |
93 |
|
|
$ |
71 |
|
|
$ |
64 |
|
|
$ |
56 |
|
|
$ |
64 |
|
|
$ |
101 |
|
Purchase
obligations(2)
|
|
$ |
554 |
|
|
|
452 |
|
|
|
79 |
|
|
|
17 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
of
which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and other asset purchase
|
|
$ |
170 |
|
|
|
133 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry
purchase
|
|
$ |
168 |
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software,
technology licenses and design
|
|
$ |
216 |
|
|
|
151 |
|
|
|
42 |
|
|
|
17 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
obligations(2)(6)
|
|
$ |
192 |
|
|
|
43 |
|
|
|
74 |
|
|
|
43 |
|
|
|
13 |
|
|
|
10 |
|
|
|
7 |
|
|
|
2 |
|
Long-term
debt obligations (including current portion)(3)(4)(5)
of
which:
|
|
$ |
2,550 |
|
|
|
63 |
|
|
|
203 |
|
|
|
1,127 |
|
|
|
90 |
|
|
|
819 |
|
|
|
86 |
|
|
|
162 |
|
Capital leases(3)
|
|
$ |
17 |
|
|
|
2 |
|
|
|
6 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
obligations(3)
|
|
$ |
301 |
|
|
|
8 |
|
|
|
38 |
|
|
|
29 |
|
|
|
28 |
|
|
|
23 |
|
|
|
25 |
|
|
|
150 |
|
Other
non-current liabilities(3)
|
|
$ |
323 |
|
|
|
6 |
|
|
|
29 |
|
|
|
31 |
|
|
|
17 |
|
|
|
87 |
|
|
|
8 |
|
|
|
145 |
|
Total
|
|
$ |
4,407 |
|
|
$ |
610 |
|
|
$ |
516 |
|
|
$ |
1,318 |
|
|
$ |
218 |
|
|
$ |
995 |
|
|
$ |
190 |
|
|
$ |
560 |
|
__________
(1)
|
Contingent
liabilities which cannot be quantified are excluded from the table
above.
|
(2)
|
Items
not reflected on the Unaudited Consolidated Balance Sheet at September 27,
2008.
|
(3)
|
Items
reflected on the Unaudited Consolidated Balance Sheet at September 27,
2008.
|
(4)
|
See
Note 14 to our Unaudited Consolidated Financial Statements at September
27, 2008 for additional information related to long-term debt and
redeemable convertible securities.
|
(5)
|
Year
of payment is based on maturity before taking into account any potential
acceleration that could result from a triggering of the change of control
provisions of the 2016 Convertible Bonds and the 2013 Senior
Bonds.
|
(6)
|
As
not yet firmly determinable, no amount was input regarding the put option
to repurchase 20% from NXP of ST-NXP Wireless
joint-venture.
|
As a
consequence of our July 10, 2007 announcement concerning the planned closures of
certain of our manufacturing facilities, the future shutdown of our plants in
the United States will lead to negotiations with some of our suppliers. As no
final date has been set, none of the contracts as reported above have been
terminated nor do the reported amounts take into account any termination
fees.
Operating
leases are mainly related to building leases and to equipment leases as part of
the Crolles2 equipment repurchase which has been finalized in the third quarter
of 2008. The amount disclosed is composed of minimum payments for future leases
from 2008 to 2013 and thereafter. We lease land, buildings, plants and equipment
under operating leases that expire at various dates under non-cancelable lease
agreements.
Purchase
obligations are primarily comprised of purchase commitments for equipment, for
outsourced foundry wafers and for software licenses.
Other
obligations primarily relate to firm contractual commitments with respect to a
cooperation agreement. On January 17, 2008 we acquired effective control of
Genesis. There remains a commitment of $5 million related to a retention
program.
As part
of the agreement with NXP, beginning three years following the establishment of
the venture, we have the right to purchase NXP's 20% interest for cash and NXP
has the right to put its 20% interest to us for cash. The pricing of the put and
call are based upon certain multiples of trailing twelve-month revenues and
EBITDA through the end of the month preceding the exercise. While there is a
significant spread between the multiples, it was intended that such multiples
represent the high and low end of a range of fair market values. Under both the
put and the call, 25% of the exercise price is determined based upon revenues
and 75% is based upon EBITDA. We also had the right of an accelerated call in
the event that we agreed to a further venture between the ST-NXP Wireless joint
venture and EMP. Following the agreement with Ericsson to set up a new joint
venture combing ST-NXP Wireless and EMP, and Ericsson’s desire to limit the
ownership of the new venture to us and EMP, it was agreed that we would have a
call on the NXP interest at multiples of revenue and EBITDA that represent the
average of the multiples specified in the normal put and call provisions
described above. In August, we announced that we had reached agreement with
Ericsson for the creation of the new venture and have advised NXP that, given
Ericsson’s preference to limit ownership of the new venture to only us and EMP,
we intend to exercise the accelerated call provision. As the amount of the
payment for the call provision cannot be determined firmly as at September 27,
2008 given the underlying conditions, we did not report any figure for this
matter in the above table.
Long-term
debt obligations mainly consist of bank loans, convertible and non-convertible
debt issued by us that is totally or partially redeemable for cash at the option
of the holder. They include maximum future amounts that may be redeemable for
cash at the option of the holder, at fixed prices. On August 7, 2006, as a
result of almost all of the holders of our 2013 Convertible Bonds exercising the
August 4, 2006 put option, we repurchased $1,397 million aggregate principal
amount of the outstanding convertible bonds. On August 5, 2008, we were required
to repurchase 2,317 convertible bonds, at a price of $975.28 each. This resulted
in a cash payment of $2 million. The outstanding long-term debt corresponding to
the 2013 convertible debt was not material as at September 27, 2008
corresponding to the remaining 188 bonds valued at August 5, 2010 redemption
price.
In
February 2006, we issued $1,131 million principal amount at maturity of Zero
Coupon Senior Convertible Bonds due in February 2016. The bonds were convertible
by the holder at any time prior to maturity at a conversion rate of 43.118317
shares per one thousand dollars face value of the bonds corresponding to
41,997,240 equivalent shares. The holders can also redeem the convertible bonds
on February 23, 2011 at a price of $1,077.58, on February 23, 2012 at a price of
$1,093.81 and on February 24, 2014 at a price of $1,126.99 per one thousand
dollars face value of the bonds. We can call the bonds at any time after March
10, 2011 subject to our share price exceeding 130% of the accreted value divided
by the conversion rate for 20 out of 30 consecutive trading days.
At our
annual general meeting of shareholders held on April 26, 2007, our shareholders
approved a cash dividend distribution of $0.30 per share. Pursuant to the terms
of our 2016 Convertible Bonds, the payment of this dividend gave rise to a
slight change in the conversion rate thereof. The new conversion rate was
43.363087 corresponding to 42,235,646 equivalent shares. At our annual general
meeting of shareholders held on May 14, 2008, our shareholders approved a cash
dividend distribution of $0.36 per share. The payment of this dividend gave rise
to a change in the conversion rate thereof. The new conversion rate is
43.833898, corresponding to 42,694,216 equivalent shares.
In March
2006, STMicroelectronics Finance B.V. (“ST BV”), one of our wholly-owned
subsidiaries, issued Floating Rate Senior Bonds with a principal amount of €500
million at an issue price of 99.873%. The notes, which mature on March 17, 2013,
pay a coupon rate of the three-month Euribor plus 0.40% on the 17th of June,
September, December and March of each year through maturity. The notes have a
put for early repayment in case of a change of control.
Pension
obligations and termination indemnities amounting to $301 million consist of our
best estimates of the amounts projected to be payable by us for the retirement
plans based on the assumption that our employees will work for us until they
reach the age of retirement. The final actual amount to be paid and related
timings of such payments may vary significantly due to early retirements,
terminations and changes in assumptions rates. See Note 16 to our Consolidated
Financial Statements. In addition, following the FMG deconsolidation, we
contractually agreed to maintain in our books the existing defined benefit plan
obligation of one of the deconsolidated entities, which was classified as a
non-current liability for $37 million (see below) as at September 27, 2008. The
FMG deconsolidation did not trigger any significant curtailment gain. As part of
the integration of the NXP wireless business, we assumed liabilities related to
pension for an amount of approximately $19 million.
Other
non-current liabilities include, in addition to the above-mentioned pension
obligation, future obligations related to our restructuring plans and
miscellaneous contractual obligations. They also include, following the FMG
deconsolidation as at September 27, 2008, a long-term liability for capacity
rights amounting to $78 million and a $69 million guarantee liability based on
the fair value of the term loan over 4 years with effect of the savings provided
by the guarantee.
Off-Balance
Sheet Arrangements
At
September 27, 2008, we had convertible debt instruments outstanding. Our
convertible debt instruments contain certain conversion and redemption options
that are not required to be accounted for separately in our financial
statements. See Note 14 to our Unaudited Interim Consolidated Financial
Statements for more information about our convertible debt instruments and
related conversion and redemption options.
We have
no other material off-balance sheet arrangements at September 27,
2008.
Financial
Outlook
We are
reconfirming our target to have capital expenditures represent approximately 10%
of sales in 2008; we, therefore, currently expect that capital spending for 2008
will decrease compared to the $1.14 billion spent in 2007. As of September 27,
2008, the amount of capital expenditures amounted to $735 million. The most
significant of our 2008 capital expenditure projects are expected to be: (a) for
the front-end facilities: (i) a specific program of capacity growth devoted to
MEMS in Agrate (Italy) and mixed technologies in Agrate and Catania (Italy) to
support the significant growth opportunity in these technologies; (ii) focused
investment both in manufacturing and R&D in France sites to secure and
develop our system oriented proprietary technologies portfolio (HCMOS
derivatives and mixed signal) required by our strategic customers; and (b) for
the back-end facilities, the capital expenditures will mainly be dedicated to
increasing our assembly and testing capacity, to the technology evolution to
support the IC’s path to package size reduction in Shenzhen (China) and Muar
(Malaysia) and to preparing the room for future years capacity growth by
completing the new production area in Muar and the new plant in Longgang
(China).
As part
of the agreement with NXP, beginning three years following the establishment of
the venture, we have the right to purchase NXP's 20% interest for cash and NXP
has the right to put its 20% interest to us for cash. The pricing of the put and
call are based upon certain multiples of trailing twelve-month revenues and
EBITDA through the end of the month preceding the exercise. While there is a
significant spread between the multiples, it was intended that such multiples
represent the high and low end of a range of fair market values. Under both the
put and the call, 25% of the exercise price is determined based upon revenues
and 75% is based upon EBITDA. We also had the right of an accelerated call in
the event that we agreed to a further venture between the ST-NXP Wireless joint
venture and EMP. Following the agreement with EMP to set up a new JV, and EMP’s
desire to limit the ownership of the new venture to us and EMP it was agreed
that we would have a call on the NXP interest at multiples of revenue and EBITDA
that represent the average of the multiples specified in the normal put and call
provisions described above. In August, we announced that we had reached
agreement with EMP for the creation of the new venture and have advised NXP
that, given EMP's preference to limit ownership of the new venture to only us
and EMP, we intend to exercise the accelerated call provision.
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 research and development. We plan to fund our
capital requirements from cash provided by operating activities, available funds
and available support from third parties, and may have recourse to borrowings
under available credit lines and, to the extent necessary or attractive based on
market conditions prevailing at the time, the issuing of debt, convertible bonds
or additional equity securities. A substantial deterioration of our economic
results and consequently of our profitability could generate a deterioration of
the cash generated by our operating activities. Therefore, there can be no
assurance that, in future periods, we will generate the same level of cash as in
the previous years to fund our capital expenditures for expansion plans, our
working capital requirements, research and development and industrialization
costs.
Impact
of Recently Issued U.S. Accounting Standards
(a)
Accounting pronouncements effective in 2008
In
September 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS
157”). This statement defines fair value as “the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.” In addition, the statement defines
a fair value hierarchy which should be used when determining fair values, except
as specifically excluded. FAS 157 is effective for fiscal years beginning after
November 15, 2007. However, in February 2008, the Financial Accounting
Standards Board issued an FASB Staff Position (“FSP”) that partially deferred
the effective date of FAS 157 for one year for nonfinancial assets and
nonfinancial liabilities that are recognized at fair value in the financial
statements on a nonrecurring basis. However, the FSP did not defer recognition
and disclosure requirements for financial assets and financial liabilities or
for nonfinancial assets and nonfinancial liabilities that are measured at least
annually, which do not include goodwill. We adopted FAS 157 on January 1, 2008.
FAS 157 adoption is prospective, with no cumulative effect of the change in the
accounting guidance for fair value measurement to be recorded as an adjustment
to retained earnings, except for specified categories of instruments. We did not
record, upon adoption, any adjustment to retained earnings since we do not hold
any of these categories of instruments. In the first quarter of 2008, we
reassessed fair value on financial assets and liabilities in compliance with FAS
157, including the valuation of available-for-sale securities for which no
observable market price is obtainable. Management estimates that the measure of
fair value of these instruments, even if using certain entity-specific
assumptions, is in line with an FAS 157 fair value hierarchy. We are also
assessing the future impact of FAS 157 when adopted for nonfinancial assets and
liabilities that are recognized at fair value in the financial statements on a
nonrecurring basis, such as impaired long-lived assets or goodwill. For goodwill
impairment testing and the use of fair value of tested reporting units, we are
currently reviewing our goodwill impairment model to measure fair value on
marketable comparables, instead of discounted cash flows generated by each
reporting entity. Based on our preliminary assessment, management estimates that
FAS 157 adoption could have an effect on certain future goodwill impairment
tests, in the event our strategic plan could necessitate changes in the product
portfolios, upon the final date of adoption of FAS 157.
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities- Including an amendment of FASB Statement No.
115 (“FAS 159”). This statement permits companies to choose to measure
eligible items at fair value at specified election dates and report unrealized
gains and losses in earnings at each subsequent reporting date on items for
which the fair value option has been elected. FAS 159 is effective for fiscal
years beginning after November 15, 2007 with early adoption permitted for
fiscal year 2007 if first quarter statements have not been issued. We adopted
FAS 159 on January 1, 2008 and have not elected to apply the fair value option
on any of our assets and liabilities as permitted by FAS 159.
In June
2007, the Emerging Issues Task Force reached final consensus on Issue No. 06-11,
Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). This
issue states that a realized tax benefit from dividends or dividend equivalents
that are charged to retained earnings and paid to employees for
equity-classified nonvested shares, nonvested equity share units, and
outstanding share options should be recognized as an increase to additional
paid-in-capital. Those tax benefits are considered excess tax benefits
(“windfall”) under FAS 123R. EITF 06-11 must be applied prospectively to
dividends declared in fiscal years beginning after December 15, 2007 and
interim periods within those fiscal years, with early adoption permitted for the
income tax benefits of dividends on equity-based awards that are declared in
periods for which financial statements have not yet been issued. We adopted EITF
06-11 in the first quarter of 2008 and EITF 06-11 did not have any impact on our
financial position and results of operations.
In June
2007, the Emerging Issues Task Force reached final consensus on Issue No. 07-3,
Accounting for Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities (“EITF 07-3”). The issue addresses whether non-refundable
advance payments for goods or services that will be used or rendered for
research and development activities should be expensed when the advance payments
are made or when the research and development activities have been performed.
EITF 07-3 is effective for fiscal years beginning after December 15, 2007
and interim periods within those fiscal years. We adopted EITF 07-3 in the first
quarter of 2008 and EITF 07-3 did not have a material effect on our financial
position and results of operations.
In
November 2007, the Emerging Issues Task Force reached final consensus on Issue
No. 07-6, Accounting for the
Sale of Real Estate When the Agreement Includes a Buy-Sell Clause (“EITF
07-6”). The issue addresses whether the existence of a buy-sell arrangement
would preclude partial sales treatment when real estate is sold to a jointly
owned entity. EITF 07-6 is effective for fiscal years beginning after
December 15, 2007 and would be applied prospectively to transactions
entered into after the effective date. We adopted EITF 07-6 in the first quarter
of 2008 and EITF 07-6 did not have a material effect on our financial position
and results of operations.
In
November 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 109, Written Loan Commitments Recorded at
Fair Value Through Earnings (“SAB 109”). SAB 109 provides the Staff’s
views regarding written loan commitments that are accounted for at fair value
through earnings under U.S. GAAP. SAB 109 is effective for all written loan
commitments recorded at fair value that are entered into, or substantially
modified, in fiscal quarters beginning after December 15, 2007. We adopted SAB
109 in the first quarter of 2008 and have no written loan commitments to which
the standard applies.
In
January 2008, the U.S. Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 110, Year-End Help for Expensing Employee
Stock Options (“SAB 110”). SAB 110 expresses the views of the Staff
regarding the use of a “simplified” method, in
developing an estimate of expected term of “plain vanilla” share options in
accordance with FAS 123R and amended its previous guidance under SAB 107 which
prohibited entities from using the simplified method for stock option grants
after December 31, 2007. SAB 110 is not relevant to our operations since we
redefined in 2005 our compensation policy by no longer granting stock options
but rather issuing nonvested shares.
(b)
Accounting pronouncements expected to impact our operations that are not yet
effective and that we did not adopt early
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (“FAS
141R”) and No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“FAS
160”). These new standards will initiate substantive and pervasive changes that
will impact both the accounting for future acquisition deals and the measurement
and presentation of previous acquisitions in consolidated financial statements.
The standards continue the movement toward the greater use of fair values in
financial reporting. FAS 141R will significantly change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. FAS 160 will change the accounting
and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. The
significant changes from current practice resulting from FAS 141R are: the
definitions of a business and a business combination have been expanded,
resulting in an increased number of transactions or other events that will
qualify as business combinations; for all business combinations (whether
partial, full, or step acquisitions), the entity that acquires the business (the
“acquirer”) will record 100%
of all assets and liabilities of the acquired business, including goodwill,
generally at their fair values; certain contingent assets and liabilities
acquired will be recognized at their fair values on the acquisition date;
contingent consideration will be recognized at its fair value on the acquisition
date and, for certain arrangements, changes in fair value will be recognized in
earnings until settled; acquisition-related transaction and restructuring costs
will be expensed rather than treated as part of the cost of the acquisition and
included in the amount recorded for assets acquired; in step acquisitions,
previous equity interests in an acquiree held prior to obtaining control will be
remeasured to their acquisition-date fair values, with any gain or loss
recognized in earnings; when making adjustments to finalize initial accounting,
companies will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
had been recorded on the acquisition date; reversals of valuation allowances
related to acquired deferred tax assets and changes to acquired income tax
uncertainties will be recognized in earnings, except for qualified measurement
period adjustments (the measurement period is a period of up to one year during
which the initial amounts recognized for an acquisition can be adjusted; this
treatment is similar to how changes in other assets and liabilities in a
business combination will be treated, and different from current accounting
under which such changes are treated as an adjustment of the cost of the
acquisition); and asset values will no longer be reduced when acquisitions
result in a “bargain
purchase,”
instead the bargain purchase will result in the recognition of a gain in
earnings. The significant change from current practice resulting from FAS 160 is
that since the noncontrolling interests are now considered as equity,
transactions between the parent company and the noncontrolling interests will be
treated as equity transactions as far as these transactions do not create a
change in control. FAS 141R and
FAS 160
are effective for fiscal years beginning on or after December 15, 2008. FAS
141R will be applied prospectively, with the exception of accounting for changes
in a valuation allowance for acquired deferred tax assets and the resolution of
uncertain tax positions accounted for under FIN 48. FAS 160 requires retroactive
adoption of the presentation and disclosure requirements for existing minority
interests. All other requirements of FAS 160 shall be applied prospectively.
Early adoption is prohibited for both standards. We are currently evaluating the
effect the adoption of these statements will have on our financial position and
results of operations.
In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“FAS 161”). The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities and to enable investors to better understand how these instruments
and activities affect an entity’s financial position, financial performance and
cas