FORM 20-F
As filed with the Securities and Exchange Commission on
March 14, 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2006 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Date of event requiring this shell company report |
Commission file number: 1-13546
STMicroelectronics N.V.
(Exact name of registrant as specified in its charter)
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Not Applicable |
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The Netherlands |
(Translation of registrants
name into English) |
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(Jurisdiction of incorporation
or organization) |
39, Chemin du Champ des Filles
1228 Plan-Les-Ouates
Geneva
Switzerland
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
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Title of Each Class: |
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Name of Each Exchange on Which Registered: |
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Common shares, nominal value
1.04 per share
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New York Stock Exchange |
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close
of the period covered by the annual report:
897,395,042 common shares at December 31, 2006
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Exchange Act).
Yes o No þ
TABLE OF CONTENTS
1
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this annual report or
Form 20-F (the
Form 20-F),
references to we, us and
Company are to STMicroelectronics N.V. together with
its consolidated subsidiaries, references to EU are
to the European Union, references to
and
the euro are to the euro currency of the EU,
references to the United States and U.S.
are to the United States of America and references to
$ or to U.S. dollars are to United
States dollars. References to mm are to millimeters
and references to nm are to nanometers.
We have compiled the market share, market size and competitive
ranking data in this annual report using statistics and other
information obtained from several third-party sources. Except as
otherwise disclosed herein, all references to our competitive
positions in this annual report are based on 2006 revenues
according to provisional industry data published by iSuppli and
2005 revenues according to industry data published by iSuppli
and Gartner, Inc., and references to trade association data are
references to World Semiconductor Trade Statistics
(WSTS). Certain terms used in this annual report are
defined in Certain Terms.
We report our financial statements in U.S. dollars and prepare
our consolidated financial statements in accordance with
generally accepted accounting principles in the United States
(U.S. GAAP). We also report certain non-U.S. GAAP
financial measures (net operating cash flow and net financial
position), which are derived from amounts presented in the
financial statements prepared under U.S. GAAP. Furthermore,
since 2005, we have been required by Dutch law to report our
statutory and consolidated financial statements, previously
reported using generally accepted accounting principles in the
Netherlands, in accordance with International Financial
Reporting Standards (IFRS). The financial statements
reported in IFRS can differ materially from the statements
reported in U.S. GAAP.
Various amounts and percentages used in this
Form 20-F have
been rounded and, accordingly, they may not total 100%.
We and our affiliates own or otherwise have rights to the
trademarks and trade names, including those mentioned in this
annual report, used in conjunction with the marketing and sale
of our products.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this
Form 20-F that are
not historical facts, particularly in Item 3. Key
Information Risk Factors, Item 4.
Information on the Company and Item 5.
Operating and Financial Review and Prospects and
Business Outlook, are statements of
future expectations and other forward-looking statements (within
the meaning of Section 27A of the Securities Act of 1933 or
Section 21E of the Securities Exchange Act of 1934, each as
amended) that are based on managements current views and
assumptions, and are conditioned upon and also involve known and
unknown risks and uncertainties that could cause actual results,
performance or events to differ materially from those in such
statements due to, among other factors:
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future developments of the world semiconductor market, in
particular the future demand for semiconductor products in the
key application markets and from key customers served by our
products; |
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pricing pressures, losses or curtailments of purchases from key
customers all of which are highly variable and difficult to
predict; |
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the financial impact of obsolete or excess inventories if actual
demand differs from our anticipations; |
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changes in the exchange rates between the U.S. dollar and the
euro, and between the U.S. dollar and the currencies of the
other major countries in which we have our operating
infrastructure; |
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our ability to manage in an intensely competitive and cyclical
industry where a high percentage of our costs are fixed and
difficult to reduce in the short term, including our ability to
adequately utilize and operate our manufacturing facilities at
sufficient levels to cover fixed operating costs; |
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our ability to perform the announced strategic repositioning of
our Flash memories business in line with the requirements of our
customers and without adverse effect on existing alliances or
other agreements relating to this business; |
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our ability in an intensely competitive environment to secure
customer acceptance and to achieve our pricing expectations for
high volume supplies of new products in whose development we
have or are currently investing; |
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the anticipated benefits of research and development alliances
and cooperative activities, as well as the uncertainties
concerning the modalities, conditions and financial impact
beyond 2007 of the R&D and manufacturing activities in
Crolles, following the termination of our current agreement with
NXP Semiconductors and Freescale Semiconductor; |
2
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the ability of our suppliers to meet our demands for supplies
and materials and to offer competitive pricing; |
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significant variations in our gross margin compared to
expectations could be the result of changes in revenue levels,
product mix and pricing, capacity utilization, variations in
inventory valuation, excess or obsolete inventory, manufacturing
yields, changes in unit costs, impairments of long-lived assets,
including manufacturing, assembly/test and intangible assets,
and the timing and execution of the manufacturing ramp and
associated costs, including start-up costs; |
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changes in the economic, social or political environment,
including military conflict and/or terrorist activities, as well
as natural events such as severe weather, health risks,
epidemics or earthquakes in the countries in which we, our key
customers and our suppliers operate; |
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changes in our overall tax position as a result of changes in
tax laws or the outcome of tax audits, and our ability to
accurately estimate tax credits, benefits, deductions and
provisions and to realize deferred tax assets; |
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our ability to obtain required licenses on third-party
intellectual property on reasonable terms and conditions, the
impact of potential claims by third parties involving
intellectual property rights relating to our business, and the
outcome of litigation; and |
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the results of actions by our competitors, including new product
offerings and our ability to react thereto. |
Such forward-looking statements are subject to various risks and
uncertainties, which may cause actual results and performance of
our business to differ materially and adversely from the
forward-looking statements. Certain forward-looking statements
can be identified by the use of forward-looking terminology,
such as believes, expects,
may, are expected to, will,
will continue, should, would
be, seeks or anticipates or
similar expressions or the negative thereof or other variations
thereof or comparable terminology, or by discussions of
strategy, plans or intentions. Some of these risk factors are
set forth and are discussed in more detail in Item 3.
Key Information Risk Factors. Should one or
more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary
materially from those described in this
Form 20-F as
anticipated, believed or expected. We do not intend, and do not
assume any obligation, to update any industry information or
forward-looking statements set forth in this
Form 20-F to
reflect subsequent events or circumstances.
Unfavorable changes in the above or other factors listed under
Item 3. Key Information Risk
Factors from time to time in our Securities and Exchange
Commission (SEC) filings, could have a material
adverse effect on our business and/or financial condition.
3
PART I
Item 1. Identity of Directors, Senior
Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected
Timetable
Not applicable.
Item 3. Key Information
Selected Financial Data
The table below sets forth our selected consolidated financial
data for each of the years in the five-year period ended
December 31, 2006. Such data have been derived from our
consolidated financial statements. Consolidated audited
financial statements for each of the years in the three-year
periods ended December 31, 2006, including the Notes
thereto (collectively, the Consolidated Financial
Statements), are included elsewhere in this
Form 20-F, while
data for prior periods have been derived from our consolidated
financial statements used in such periods.
The following information should be read in conjunction with
Item 5. Operating and Financial Review and
Prospects, the Consolidated Financial Statements and the
related Notes thereto included in Item 8. Financial
Information Financial Statements in this
Form 20-F.
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Year Ended December 31, | |
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2006 | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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(In millions except per share and ratio data) | |
Consolidated Statement of Income Data:
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Net sales
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$ |
9,838 |
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$ |
8,876 |
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$ |
8,756 |
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$ |
7,234 |
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$ |
6,270 |
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Other revenues
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16 |
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6 |
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4 |
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4 |
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48 |
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Net revenues
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9,854 |
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8,882 |
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8,760 |
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7,238 |
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6,318 |
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Cost of sales
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(6,331 |
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(5,845 |
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(5,532 |
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(4,672 |
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(4,020 |
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Gross profit
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3,523 |
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3,037 |
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3,228 |
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2,566 |
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2,298 |
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Operating expenses:
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Selling, general and administrative
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(1,067 |
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(1,026 |
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(947 |
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(785 |
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(648 |
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Research and development(1)
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(1,667 |
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(1,630 |
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(1,532 |
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(1,238 |
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(1,022 |
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Other income and expenses, net(1)
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(35 |
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(9 |
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10 |
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(4 |
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7 |
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Impairment, restructuring charges and other related closure costs
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(77 |
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(128 |
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(76 |
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(205 |
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(34 |
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Total operating expenses
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(2,846 |
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(2,793 |
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(2,545 |
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(2,232 |
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(1,697 |
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Operating income
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677 |
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244 |
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683 |
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334 |
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601 |
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Interest income (expense), net
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93 |
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34 |
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(3 |
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(52 |
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(68 |
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Loss on equity investments
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(6 |
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(3 |
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(4 |
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(1 |
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(11 |
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Loss on extinguishment of convertible debt
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(4 |
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(39 |
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Income before income taxes and minority interests
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764 |
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275 |
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672 |
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242 |
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522 |
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Income tax benefit (expense)
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20 |
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(8 |
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(68 |
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14 |
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(89 |
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Income before minority interests
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784 |
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267 |
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604 |
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256 |
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433 |
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Minority interests
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(2 |
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(1 |
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(3 |
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(3 |
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(4 |
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Net income
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$ |
782 |
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$ |
266 |
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$ |
601 |
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$ |
253 |
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$ |
429 |
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Earnings per share (basic)
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$ |
0.87 |
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$ |
0.30 |
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$ |
0.67 |
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$ |
0.29 |
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$ |
0.48 |
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Earnings per share (diluted)
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$ |
0.83 |
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$ |
0.29 |
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$ |
0.65 |
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$ |
0.27 |
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$ |
0.48 |
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Number of shares used in calculating earnings per share (basic)
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896.1 |
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892.8 |
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891.2 |
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888.2 |
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887.6 |
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Number of shares used in calculating earnings per share (diluted)
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958.5 |
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935.6 |
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935.1 |
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937.1 |
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893.0 |
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4
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Year Ended December 31, | |
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2006 | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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(In millions except per share and ratio data) | |
Consolidated Balance Sheet Data (end of period):
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Cash and cash equivalents(2)
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$ |
1,963 |
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$ |
2,027 |
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$ |
1,950 |
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$ |
2,998 |
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$ |
2,564 |
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Marketable securities
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460 |
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Short-term deposits
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250 |
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Restricted cash for equity investments
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218 |
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Total assets
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14,198 |
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12,439 |
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13,800 |
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13,477 |
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12,004 |
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Short-term debt (including current portion of long-term debt)
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136 |
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1,533 |
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191 |
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151 |
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165 |
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Long-term debt (excluding current portion)(2)
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1,994 |
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269 |
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1,767 |
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2,944 |
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2,797 |
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Shareholders equity(2)
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9,747 |
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8,480 |
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9,110 |
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8,100 |
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6,994 |
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Capital stock(3)
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3,177 |
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3,120 |
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3,074 |
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3,051 |
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3,008 |
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Other Data:
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Dividends per share
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.08 |
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$ |
0.04 |
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Capital expenditures(4)
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1,533 |
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1,441 |
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2,050 |
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1,221 |
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|
995 |
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Net cash provided by operating activities
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2,491 |
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1,798 |
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2,342 |
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1,920 |
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1,713 |
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Depreciation and amortization(4)
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1,766 |
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1,944 |
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1,837 |
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1,608 |
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1,382 |
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Net debt (cash) to total shareholders equity ratio(5)
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(0.078 |
) |
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(0.026 |
) |
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0.001 |
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|
0.012 |
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|
0.057 |
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(1) |
Other income and expenses, net includes, among other
things, funds received through government agencies for research
and development expenses, the cost of new production facilities
start-ups, foreign currency gains and losses, gains on sales of
marketable securities and non-current assets and the costs of
certain activities relating to intellectual property. Our
reported research and development expenses are mainly in the
areas of product design, technology and development, and do not
include marketing design center costs, which are accounted for
as selling expenses, or process engineering, pre-production and
process-transfer costs, which are accounted for as cost of sales. |
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(2) |
On November 16, 2000, we issued $2,146 million initial
aggregate principal amount of zero-coupon senior convertible
bonds due 2010 (the 2010 Bonds), for net proceeds of
$1,458 million; in 2003, we repurchased on the market
approximately $1,674 million aggregate principal amount at
maturity of 2010 Bonds. During 2004, we completed the repurchase
of our 2010 Bonds and repurchased on the market approximately
$472 million aggregate principal amount at maturity for a
total amount paid of $375 million. In 2001, we redeemed the
remaining $52 million of our outstanding Liquid Yield
Option Notes due 2008 (our 2008 LYONs) and converted
them into common shares in May and June 2001. In 2001, we
repurchased 9,400,000 common shares for $233 million, and
in 2002, we repurchased an additional 4,000,000 shares for
$115 million. We reflected these purchases at cost as a
reduction of shareholders equity. The repurchased shares
have been designated to fund share compensation granted to
employees under our 2001 employee stock plan and may be used for
subsequent grants. In 2006, 637,109 shares were transferred to
employees upon vesting of stock awards. In August 2003, we
issued $1,332 million principal amount at maturity of our
convertible bonds due 2013 (our 2013 Convertible
Bonds) with a negative yield of 0.5% that resulted in a
higher principal amount at issuance of $1,400 million and
net proceeds of $1,386 million. During 2004, we repurchased
all of our outstanding Liquid Yield Option Notes due 2009 (our
2009 LYONs) for a total amount of cash paid of
$813 million. In February 2006, we issued Zero Coupon
Senior Convertible Bonds due 2016 (our 2016 Convertible
Bonds) representing total gross proceeds of
$974 million. In March 2006, we issued
500 million
Floating Rate Senior Bonds due 2013 (our 2013 Senior
Bonds). In August 2006, as a result of almost all of the
holders of our 2013 Convertible Bonds exercising their August 4,
2006 put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds at a
conversion ratio of $985.09 per $1,000 aggregate principal
amount at issuance resulting in a cash disbursement of
$1,377 million. |
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(3) |
Capital stock consists of common stock and capital surplus. |
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(4) |
Capital expenditures are net of certain funds received through
government agencies, the effect of which is to decrease
depreciation. |
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(5) |
Net debt (cash) to total shareholders equity ratio is
a non-U.S. GAAP financial measure. The most directly comparable
U.S. GAAP financial measure is considered to be
Debt-to-Equity Ratio. However, the Debt-to-Equity
Ratio measures gross debt relative to equity, and does not
reflect the current cash position of the Company. We believe
that our net debt (cash) to total shareholders equity
ratio is useful to investors as a measure of our financial
position and leverage. The ratio is computed on the basis of our
net financial position divided by total shareholders
equity. Our net financial position is the difference between our
total cash position (cash and cash equivalents, 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). For more information on our
net financial position, see Item 5. Operating and
Financial Review and Prospects Liquidity and Capital
Resources Capital Resources Net
financial position. Our computation of net debt (cash) to
total shareholders equity ratio may not be consistent with
that of other companies, which could make comparability
difficult. |
5
Risk Factors
Risks Related to the Semiconductor Industry
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The semiconductor industry is cyclical and downturns in
the semiconductor industry can negatively affect our results of
operations and financial condition. |
The semiconductor industry is cyclical and has been subject to
significant economic downturns at various times. Downturns are
typically characterized by diminished demand giving rise to
production overcapacity, accelerated erosion of average selling
prices, high inventory levels and reduced revenues. Downturns
may be the result of industry-specific factors, such as excess
capacity, product obsolescence, price erosion, evolving
standards, changes in end-customer demand, and/or macroeconomic
trends impacting the economies of one or more of the
worlds major regions: Asia, the United States, Europe and
Japan. Such macroeconomic trends relate to the semiconductor
industry as a whole and not necessarily to the individual
semiconductor markets to which we sell our products. The
negative effects on our business from industry downturns may
also be increased to the extent that such downturns are
concurrent with the timing of new increases in production
capacity in our industry.
We have experienced revenue volatility and market downturns in
the past and expect to experience downturns them in the future,
which could have a material adverse impact on our results of
operations and financial condition.
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Increases in production capacity for semiconductor
products may lead to overcapacity, which in turn may lead to
plant closures, asset impairments, restructuring charges and
inventory write-offs. |
Capital investments for semiconductor manufacturing equipment
are made both by integrated semiconductor companies like us and
by specialist semiconductor foundry companies, which are
subcontractors that manufacture semiconductor products designed
by others.
According to data published by industry sources, investments in
worldwide semiconductor fabrication capacity totaled
approximately $37.7 billion in 2001, $26.1 billion in
2002, $29.5 billion in 2003, $45.7 billion in 2004,
$46.1 billion in 2005 and an estimated $55 billion in
2006, or approximately 27%, 19%, 18%, 22%, 20% and 23%,
respectively, of the total available market for these years. The
net increase of manufacturing capacity, defined as the
difference between capacity additions and capacity reductions,
may exceed demand requirements, leading to overcapacity and
price erosion.
Overcapacity and cost optimization have led us, in recent years,
to close manufacturing facilities that used more mature process
technologies and, as a result, to incur significant impairment,
restructuring charges and related closure costs. In 2006, we
recorded impairment, restructuring charges and related closure
costs of $77 million. See Item 5. Operating and
Financial Review and Prospects Impairment, Restructuring
Charges and Other Related Closure Costs.
As of December 31, 2006, the 2005 restructuring plan was
substantially completed and had resulted in total charges of
approximately $73 million for intangible assets and
goodwill mainly related to the CPE product lines and
$86 million for headcount restructuring charges, out of an
estimated $175 million. Through the period ended
December 31, 2006, we have incurred $316 million of
the total expected of approximately $330 million in pre-tax
charges associated with the 150-mm restructuring plan, slightly
down from the original estimate of $350 million that was
defined on October 22, 2003, and which was substantially
completed by the end of 2006.
There can be no assurance that future changes in the market
demand for our products, overcapacity, obsolescence in our
manufacturing facilities and market downturns may not require us
to lower the prices we charge for our products as well as incur
additional impairment and restructuring charges, which may have
a material adverse effect on our business, financial condition
and results of operations.
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Competition in the semiconductor industry is intense, and
we may not be able to compete successfully if our product design
technologies, process technologies and products do not meet
market requirements. |
We compete in different product lines to various degrees on the
following characteristics:
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price; |
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technical performance; |
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product features; |
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product system compatibility; |
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product design and technology; |
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timely introduction of new products; |
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product availability; |
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manufacturing yields; and |
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sales and technical support. |
We face significant competition in each of our product lines.
Like us, many of our competitors also offer a large variety of
products. Some of our competitors may have greater financial
and/or more focused research and development resources than we
do. If these competitors substantially increase the resources
they devote to developing and marketing products that compete
with ours, we may not be able to compete successfully. Any
consolidation among our competitors could also enhance their
product offerings, manufacturing efficiency and financial
resources, further strengthening their competitive position.
Given the intense competition in the semiconductor industry, if
our products are not selected based on any of the above factors,
our business, financial condition and results of operations
could be materially adversely affected.
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In many of the market segments in which we compete for
business, competition for the selection of suppliers to design
products for use in our customers equipment and products
is very intense, and failure to be selected or to execute could
materially adversely affect our business in that market segment.
Even after we win and begin a product design, a customer may
cancel or change its product plans, which could cause us to
generate no sales from a product, resulting in a materially
adverse affect on our results of operations and financial
condition. |
We regularly devote substantial resources to winning competitive
bid selection processes, known as product design
wins, to develop products for use in our customers
equipment and products. These selection processes can be lengthy
and can require us to incur significant design and development
expenditures, with no guarantee of winning or generating
revenue. Delays in developing new products with anticipated
technological advances and failure to win new design projects
for customers or in commencing volume shipments of new products
may have an adverse effect on our business. In addition, there
can be no assurance that new products, if introduced, will gain
market acceptance or will not be adversely affected by new
technological changes or new product announcements by other
competitors that may have greater resources or are more focused
than we are. Because we typically focus on only a few customers
in a product area, the loss of a design win can sometimes result
in our failure to offer a generation of a product. This can
result in lost sales and could hurt our position in future
competitive selection processes because we may be perceived as
not being a technology or industry leader.
Even after obtaining a product design win from one of our
customers, we may still experience delays in generating revenue
from our products as a result of the customers or our
lengthy development and design cycle. In addition, a delay or
cancellation of a customers plans could significantly
adversely affect our financial results, as we may have incurred
significant expense and generated no revenue at the time of such
delay or cancellation. Finally, if our customers fail to
successfully market and sell their own products, it could
materially adversely affect our business, financial condition
and results of operations as the demand for our products falls.
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Semiconductor and other products that we design and
manufacture are characterized by rapidly changing technology and
new product introductions, and our success depends on our
ability to develop and manufacture complex products cost-
effectively and to scale. |
Semiconductor design and process technologies are subject to
constant technological improvements and require large
expenditures for capital investments, advanced research and
technology development. Many of the resulting products that we
market, in turn, have short life cycles, with some being less
than one year.
If we experience substantial delays or are unable to develop new
design or process technologies, our results of operations or
financial condition could be adversely affected.
We also regularly incur costs to acquire technology from third
parties without any guarantee of realizing the anticipated value
of such expenditures due to changes in other available
technologies or market demand. For example, we charged
$52 million as annual amortization expense on our
consolidated statement of income in 2006 related to technologies
and licenses acquired from third parties through the end of
2006. As of December 31, 2006, the residual value, net of
amortization, registered in our consolidated balance sheet for
these technologies and licenses was $95 million. In
addition to amortization expenses, the value of these assets may
be subject to impairment with associated charges being made to
our consolidated financial statements.
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The competitive environment of the semiconductor industry
may lead to further measures to improve our competitive position
and cost structure, which in turn may result in loss of
revenues, asset impairments and/or capital losses. |
We are continuously considering various measures to improve our
competitive position and cost structure in the semiconductor
industry. In February 2005, we decided to stop work on a
reference design chipset for the
7
GSM/ GPRS market and announced plans to reduce our Access
technology programs for CPE products. In May 2005, we announced
additional restructuring efforts to improve profitability. For
the years 2003 through 2005, our sales increased at a slower
pace than the semiconductor industry as a whole and our market
share declined, although we recovered in 2006 with an increase
in our sales of 11% compared to an increase of 9% for the
industry overall. There is no assurance that we will continue to
grow our market share, if we are not able to accelerate product
innovation, extend our customer base, realize manufacturing
improvements and/or otherwise control our costs. In addition, in
recent years the semiconductor industry has continued to
increase manufacturing capacity in Asia in order to access
lower-cost production and to benefit from higher overall
efficiency, which has led to a stronger competitive environment.
We may also in the future, if we consider that market conditions
so require, consider additional measures to improve our cost
structure and competitiveness in the semiconductor market, such
as increasing our production capacity in Asia or a
discontinuation of certain product families or additional
restructurings, which in turn may result in loss of revenues,
asset impairments and/or capital losses.
Risks Related to Our Operations
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Our research and development efforts are increasingly
expensive and dependent on alliances, and our business, results
of operations and prospects could be materially adversely
affected by the failure or termination of such alliances, or
failure to find new partners in such alliances, in developing
new process technologies in line with market
requirements. |
We are dependent on alliances to develop or access new
technologies and there can be no assurance that these alliances
will be successful or that our partners will continue to
participate in the alliances. For example, we are currently
cooperating with Freescale Semiconductor, Inc. (formerly a
division of Motorola Inc.) (Freescale Semiconductor)
and NXP Semiconductors B.V. (formerly Philips Semiconductor
International B.V.) (NXP Semiconductors) for
the joint research and development of CMOS process technology to
provide 90-nm to 32-nm
chip technologies on 300-mm wafers, as well as the operation of
a 300-mm wafer pilot line fab in Crolles, France
(Crolles2). We initially formed the Crolles2
alliance with NXP Semiconductors in 2000 and renewed the
partnership in 2002 when Freescale Semiconductor joined the
alliance. The Crolles2 alliance was also extended in 2002
through a joint development program with TSMC for process
technology alignment, in 2004 by the Nanotec-300 research
program with CEA-LETI for the development of the 45-nm and 32-nm
process technology nodes, and again in 2005 by including 300-mm
wafer testing and packaging, as well as the development and
licensing of core libraries and IP.
In January 2007, NXP Semiconductors announced that it will
withdraw from the alliance at the end of 2007 and therefore our
Crolles2 alliance will expire on December 31, 2007.
Freescale Semiconductor has also notified us that the Crolles2
alliance will terminate as of such date. There can be no
assurance that we will be successful in finding new partners to
pursue joint R&D work and/or joint manufacturing production
at Crolles2 beyond 2007. In addition, the termination of our
R&D alliance in Crolles2 with Freescale Semiconductor and
NXP Semiconductors may significantly increase our future cost
and capital requirements to access advanced CMOS process
technologies and proprietary state-of-the-art derivative CMOS
technologies, and the operation of our Crolles2 manufacturing
facility.
We continue to believe that the shared R&D business model
contributes to the fast acceleration of semiconductor process
technology development while allowing us to lower our
development and manufacturing costs. However, there can be no
assurance that alliances will be successful or that new
alliances will be concluded to allow us to develop and access
new technologies in due time, in a cost-effective manner and/or
to meet customer demands. Furthermore, if these alliances
terminate before our intended goals are accomplished we may lose
our investment, or incur additional unforeseen costs, and our
business, results of operations and prospects could be
materially adversely affected. In addition, if we are unable to
develop or otherwise access new technologies independently, we
may fail to keep pace with the rapid technology advances in the
semiconductor industry, our participation in the overall
semiconductor industry may decrease and we may also lose market
share in the market addressed by our products.
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In difficult market conditions, our high fixed costs
adversely impact our results. |
In less favorable industry environments, we are driven to reduce
prices in response to competitive pressures and we are also
faced with a decline in the utilization rates of our
manufacturing facilities due to decreases in product demand.
Since the semiconductor industry is characterized by high fixed
costs, we are not always able to reduce our total costs in line
with revenue declines. Reduced average selling prices for our
products, therefore adversely affect our results of operations.
Furthermore, in periods of reduced customer demand for our
products, our wafer fabrication plants (fabs) do not
operate at full capacity and the costs associated with the
excess capacity are charged directly to cost of sales. Over the
last five years, our gross profit margin has varied from a high
of 37.9% in the third quarter of 2004 to a low of 32.9% in the
first quarter of 2005. We cannot guarantee that
8
difficult market conditions will not adversely affect the
capacity utilization of our fabs and, consequently our future
gross margins. We cannot guarantee that increased competition in
our core product markets will not lead to further price erosion,
lower revenue growth rates and lower margins in the future.
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The competitive environment of the semiconductor industry
has led to industry consolidation and we may face even more
intense competition from newly merged competitors or we may seek
to acquire a competitor or become an acquisition target. |
The intensely competitive environment of the semiconductor
industry and the high costs associated with developing
marketable products and manufacturing technologies may lead to
further consolidation in the industry. Such consolidation can
allow a company to further benefit from economies of scale,
provide improved or more diverse product portfolios and increase
the size of its serviceable market. Consequently, we may seek to
acquire a competitor to improve our market position and the
applications and products we can market. We also may become a
target for a company looking to improve its competitive
position. Such an occurrence may take place at any time with
consequences that may not be predictable and which can have a
materially adverse effect on our results of operations and
financial condition.
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Future acquisitions or divestitures may adversely affect
our business. |
Our strategies to improve our results of operations and
financial condition may lead us to make significant acquisitions
of businesses that we believe to be complementary to our own, or
to divest ourselves of activities that we believe do not serve
our longer term business plans. In addition, certain regulatory
approvals for potential acquisitions may require the divestiture
of business activities.
Our potential acquisition strategies depend in part on our
ability to identify suitable acquisition targets, finance their
acquisition and obtain required regulatory and other approvals.
Our potential divestiture strategies depend in part on our
ability to define the activities in which we should no longer
engage, and then determine and execute appropriate methods to
divest of them.
Acquisitions and divestitures involve a number of risks that
could adversely affect our operating results, including:
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diversion of managements attention; |
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difficult integration of acquired company operations and
personnel; |
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loss of activities and technologies that may have complemented
our remaining businesses; |
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assumption of potential liabilities, disclosed or undisclosed,
associated with the business acquired, which liabilities may
exceed the amount of indemnification available from the seller; |
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potential inaccuracies in the financial and accounting systems
utilized by the business acquired; |
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that the businesses acquired will not maintain the quality of
products and services that we have historically provided; |
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whether we are able to attract and retain qualified management
for the acquired business; |
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loss of important services provided by key employees that are
assigned to divested activities; |
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whether we are able to retain customers of the acquired entity;
and |
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goodwill and other intangible asset impairment, due to the
inability of the business to meet managements expectations
at the time of the acquisition. |
These and other factors may cause a materially adverse effect on
our results of operations and financial condition.
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The strategic repositioning of our memory business may
fail to produce the operational and strategic benefits which we
envisioned. |
As a result of a strategic review of our product portfolio, we
decided to actively pursue solutions aimed at strengthening the
competitive position of our memory business by deconsolidating
that segment from our financial results, and, if possible,
participate in industry consolidation. Consequently, on
December 13, 2006, we announced plans to create a
stand-alone Flash Memories Group. The Flash Memories Group
incorporates all Flash memory operations, including research and
development and product-related activities, front- and back-end
manufacturing, marketing and sales. Our initiative is intended
to result in a number of strategic benefits, including the
ability to benefit from increased scale and employee incentives
more directly tied to our financial performance. This initiative
may not produce the anticipated benefits, which could adversely
affect the results of our operations and future capital
requirements. It may also lead to disadvantages, including but
not limited to a
9
loss of synergies, economies of scale and one-time or ongoing
losses that are not fully offset by any expected benefits.
Furthermore, we have a joint development agreement with Hynix
Semiconductor Inc. (Hynix Semiconductor) for the
development of NAND Flash memories and a joint venture agreement
with Hynix Semiconductor for the building and operation of a
front-end memory manufacturing facility in Wuxi City, China.
In addition, we are building a new facility in Catania M6, where
facilitization is nearly completed and where we carry
approximately $400 million in assets, but which remains to
be equipped. Realization of the anticipated benefits depend on
the development of future partnerships in the Flash memories
business. Future capital investments for this facility should
benefit from certain public funding, which has been recently
approved by the requisite European Union and Italian
authorities. In case the repositioning of our memory business
results in a change of control, such business would cease to
benefit from those of our agreements which apply only to the
subsidiaries in which we have a minimum 50% controlling
interest, and our assets value and results of operations may
suffer a material adverse effect pursuant to such change of
control.
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Our financial results can be adversely affected by
fluctuations in exchange rates, principally in the value of the
U.S. dollar. |
A significant variation of the value of the U.S. dollar against
the principal currencies which have a material impact on us
(primarily the euro, but also certain other currencies of
countries where we have operations) could result in a favorable
impact on our net income in the case of an appreciation of the
U.S. dollar, or a negative impact on our net income if the U.S.
dollar depreciates relative to these currencies. Currency
exchange rate fluctuations affect our results of operations
because our reporting currency is the U.S. dollar, in which we
receive the major part of our revenues, while, more importantly,
we incur the majority of our costs in currencies other than the
U.S. dollar. 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 incurred in the currencies of the
jurisdictions in which our operations are located.
In order to reduce the exposure of our financial results to the
fluctuations in exchange rates, our principal strategy has been
to balance as much as possible the proportion of sales to our
customers denominated in U.S. dollars with the amount of
purchases from our suppliers denominated in U.S. dollars and to
reduce the weight of the other costs, including labor costs and
depreciation, denominated in euros and in other currencies. In
order to further reduce our exposure to U.S. dollar exchange
rate fluctuations, we have hedged certain line items on our
income statement, in particular with respect to a portion of the
cost of goods sold, most of the research and development
expenses and certain selling and general and administrative
expenses located in the euro zone. No assurance can be given
that the value of the U.S. dollar will not actually appreciate
with the hedging transaction potentially preventing us from
benefiting from lower euro-denominated manufacturing costs when
translated into our U.S. dollar-based accounts. See
Item 5. Operating and Financial Review and
Prospects Impact of Changes in Exchange Rates
and Item 11. Quantitative and Qualitative Disclosures
About Market Risk.
Our Consolidated Financial Statements for 2006 include income
and expense items translated at the average rate for the period.
In 2006, our effective average U.S. dollar exchange rate, which
reflects the current exchange rate levels and the impact of our
hedging contracts, was
1.00 for $1.24,
compared to our effective average exchange rate of
1.00 for $1.28
in 2005.
A decline of the U.S. dollar compared to the other major
currencies that affect our operations negatively impacts our
expenses, margins and profitability, especially if we are unable
to balance or shift our euro-denominated costs to other currency
areas or to U.S. dollars. Any such actions may not be
immediately effective, could prove costly, and their
implementation could prove demanding on our management resources.
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Because we have our own manufacturing facilities, our
capital needs are high compared to competitors who do not
produce their own products. |
As a result of our strategic choice to maintain control of our
advanced proprietary manufacturing technologies to serve our
customer base and develop our strategic alliances, we require
significant amounts of capital to build, expand, modernize and
maintain our facilities. Some of our competitors, however, do
not manufacture their own products and therefore do not require
significant capital expenditures for their facilities. Our
capital expenditures have been significant in recent years and
we spent $1.5 billion in 2006. See Item 5.
Operating and Financial Review and Prospects
Liquidity and Capital Resources. We have evolved our
strategy towards a less capital intensive structure and as such
we expect our capital expenditures to be $1.2 billion in
2007. Our costs may also increase as the complexity of the
individual manufacturing equipment increases. We have the
flexibility to modulate our investments up or down in response
to changes in market conditions, and we are prepared to
accelerate investments in leading-edge technologies if market
conditions require.
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To stay competitive in the semiconductor industry, we must
transition certain products to 300-mm manufacturing technology,
which is much more expensive than 150-mm or 200-mm technologies.
Currently, all of our fabs process wafers with diameters of
150-mm or 200-mm and we are running a 300-mm pilot line at
Crolles2, with our partners NXP Semiconductors and Freescale
Semiconductor. This relationship will expire at
December 31, 2007. There is no assurance that we will be
successful in finding alternative partnership opportunities to
replace the loading currently supported by NXP Semiconductors
and Freescale Semiconductor in Crolles2, which in turn may lead
to increased capital commitments and manufacturing costs. We
have also constructed a building in Catania (Italy), which is
not yet equipped, for the volume production of 300-mm wafers,
which has been allocated to our new Flash Memories Group. In
addition, we have a 33% equity interest in a joint venture
company with Hynix Semiconductor, which has built a new 300-mm
fab for the production of NAND memory products in Wuxi, China.
Since the joint venture is planning to expand its activity, we
may be required to make an additional capital investment to keep
this level of equity interest in the joint venture.
The construction, facilitization or equipment of
state-of-the-art manufacturing facilities may require us to
issue additional debt or equity, or both, and if we are unable
to access such capital on acceptable terms, this may adversely
affect our business and results of operations. The timing and
size of any new share, convertible bond or straight bond
offering would depend upon market conditions as well as a
variety of factors, and any such transaction or any announcement
concerning such a transaction could materially impact the market
price of our common shares.
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We may also need additional funding in the coming years to
finance our investments or to purchase other companies or
technologies developed by third parties. |
In an increasingly complex and competitive environment, we may
need to invest in other companies and/or in technology developed
by third parties to improve our position in the market. We may
also consider acquisitions to complement or expand our existing
business. Furthermore, we may need to rely on public funding as
we transition to 300-mm manufacturing technology. We are
dependent on public funding for equipping the 300-mm wafer
production facility in Catania (Italy) and there can be no
assurance that we will obtain this public funding, as planned,
or that we will be in a position to utilize the funding within
the planned time frame. If such planned funding does not
materialize, we may lack financial resources to continue with
our investment plan for this facility, which in turn could lead
us to discontinue our investment in such facility and
consequently incur significant impairments. Any of the foregoing
may also require us to issue additional debt, equity, or both.
If we are unable to access such capital on acceptable terms,
this may adversely affect our business and results of
operations. Existing loan agreements for local funding of our
Singapore and China legal entities contain financial covenants.
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Our operating results may vary significantly from quarter
to quarter and annually and may differ significantly from our
expectations or guidance. |
Our operating results are affected by a wide variety of factors
that could materially and adversely affect revenues and
profitability or lead to significant variability of operating
results. These factors include, among others, the cyclicality of
the semiconductor and electronic systems industries, capital
requirements, inventory management, availability of funding,
competition, new product developments, technological changes and
manufacturing problems. Furthermore, our effective tax rate
currently takes into consideration certain favorable tax rates
and incentives, which, in the future, may not be available to
us. See Note 22 to our Consolidated Financial Statements.
In addition, a number of other factors could lead to
fluctuations in quarterly and annual operating results,
including:
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performance of our key customers in the markets they serve; |
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order cancellations or reschedulings by customers; |
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excess inventory held by customers leading to reduced bookings
or product returns by key customers; |
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manufacturing capacity and utilization rates; |
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restructuring and impairment charges; |
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fluctuations in currency exchange rates, particularly between
the U.S. dollar and other currencies in jurisdictions where we
have activities; |
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intellectual property developments; |
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changes in distribution and sales arrangements; |
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failure to win new design projects; |
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manufacturing performance and yields; |
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product liability or warranty claims; |
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litigation; |
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acquisitions or divestitures; |
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problems in obtaining adequate raw materials or production
equipment on a timely basis; and |
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property damage or business interruption losses resulting from a
catastrophic event not covered by insurance. |
Unfavorable changes in any of the above factors have in the past
and may in the future adversely affect our operating results.
Furthermore, in periods of industry overcapacity or when our key
customers encounter difficulties in their end markets, orders
are more exposed to cancellations, reductions, price
renegotiation or postponements, which in turn reduce our
managements ability to forecast the next quarter or full
year production levels, revenues and margins. For these reasons
and others that we may not yet have identified, our revenues and
operating results may differ materially from our expectations or
guidance as visibility is reduced. See Item 4.
Information on the Company Backlog.
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Our business is dependent in large part on continued
growth in the industries and segments into which our products
are sold and in our ability to attract and retain new customers.
A market decline in any of these industries or our inability to
attract new customers could have a material adverse effect on
our results of operations. |
We derive and expect to continue to derive significant sales
from the telecommunications equipment and automotive industries,
as well as the home, personal and consumer segments generally.
Growth of demand in the telecommunications equipment and
automotive industries as well as the home, personal and consumer
segments, has in the past fluctuated, and may in the future
fluctuate, significantly based on numerous factors, including:
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spending levels of telecommunications equipment and/or
automotive providers; |
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development of new consumer products or applications requiring
high semiconductor content; |
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evolving industry standards; |
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the rate of adoption of new or alternative technologies; and |
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demand for automobiles, consumer confidence and general economic
conditions. |
We cannot guarantee the rate, or the extent to which, the
telecommunications equipment or automotive industries or the
home, personal or consumer segments will grow, if at all. Any
decline in these industries or segments could result in slower
growth or a decline in demand for our products, which could have
a material adverse effect on our business, financial condition
and results of operations.
In addition, projected industry growth rates may not materialize
as forecasted, resulting in spending on process and product
development well ahead of market requirements, which could have
a material adverse effect on our business, financial condition
and results of operations.
Our business is dependent upon our ability to attract and retain
new customers. The competition for such new customers is
intense. There can be no assurance that we will be successful in
attracting and retaining new customers. Our failure to do so
could materially adversely affect our business, financial
position and results of operations.
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Disruptions in our relationships with any one of our key
customers could adversely affect our results of
operations. |
A substantial portion of our sales is derived from several large
customers, some of whom have entered into strategic alliances
with us. As of December 31, 2006, our largest customer was
Nokia, which accounted for 21.8% of our 2006 net revenues,
compared to 22.4% in 2005 and 17.1% in 2004. In 2006, our top
ten OEM customers accounted for approximately 51% of our net
revenues, compared to approximately 50% of our 2005 net revenues
and 44% of our 2004 net revenues. We cannot guarantee that our
largest customers will continue to book the same level of sales
with us that they have in the past and will not solicit
alternative suppliers. Many of our key customers operate in
cyclical businesses that are also highly competitive, and their
own demands and market positions may vary considerably. Such
customers have in the past, and may in the future, vary order
levels significantly from period to period, request
postponements to scheduled delivery dates or modify their
bookings. Approximately 19% of our net revenues were made
through distributors in 2006, compared to approximately 18% in
2005 and approximately 21% in 2004. We cannot guarantee that we
will be able to maintain or enhance our market share with our
key customers or distributors. If we were to lose one or more
design wins for our products with our key customers or
distributors, or if any key customer were to reduce or change
its bookings,
12
seek alternate suppliers, increase its product returns or fail
to meet its payment obligations, our business financial
condition and results of operations could be materially
adversely affected. If customers do not purchase products made
specifically for them, we may not be able to resell such
products to other customers or require the customers who have
ordered these products to pay a cancellation fee. Furthermore,
developing industry trends, including customers use of
outsourcing and new and revised supply chain models, may reduce
our ability to forecast the purchase date for our products and
evolving customer demand, thereby affecting our revenues and
working capital requirements. For example, pursuant to industry
developments, some of our products are required to be delivered
on consignment to customer sites with recognition of revenue
delayed until such time, which must occur within a defined
period of time, when the customer chooses to take delivery of
our products from our consignment stock.
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Our operating results can also vary significantly due to
impairment of goodwill and other intangible assets incurred in
the course of acquisitions, as well as to impairment of tangible
assets due to changes in the business environment. |
Our operating results can also vary significantly due to
impairment of goodwill booked pursuant to acquisitions and to
the purchase of technologies and licenses from third parties. As
of December 31, 2006, the value registered on our audited
consolidated balance sheet for goodwill was $223 million
and the value for technologies and licenses acquired from third
parties was $95 million, net of amortization. Because the
market for our products is characterized by rapidly changing
technologies, and because of significant changes in the
semiconductor industry, our future cash flows may not support
the value of goodwill and other intangibles registered in our
balance sheet. Furthermore, the ability to generate revenues for
our fixed assets located in Europe may be impaired by an
increase in the value of the euro with respect to the U.S.
dollar, as the revenues from the use of such assets are
generated in U.S. dollars. We are required to annually test
goodwill and to assess the carrying values of intangible and
tangible assets when impairment indicators exist. As a result of
such tests, we could be required to book impairment in our
statement of income if the carrying value in our balance sheet
is in excess of the fair value. The amount of any potential
impairment is not predictable as it depends on our estimates of
projected market trends, results of operations and cash flows.
Any potential impairment, if required, could have a material
adverse impact on our results of operations.
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Because we depend on a limited number of suppliers for raw
materials and certain equipment, we may experience supply
disruptions if suppliers interrupt supply or increase
prices. |
Our ability to meet our customers demand to manufacture
our products depends upon obtaining adequate supplies of quality
raw materials on a timely basis. A number of materials are
available only from a limited number of suppliers, or only from
a limited number of suppliers in a particular region. In
addition, we purchase raw materials such as silicon wafers, lead
frames, mold compounds, ceramic packages and chemicals and gases
from a number of suppliers on a just-in-time basis, as well as
other materials such as copper and gold whose prices on the
world markets have fluctuated significantly during recent
periods. Although supplies for the raw materials we currently
use are adequate, shortages could occur in various essential
materials due to interruption of supply or increased demand in
the industry. In addition, the costs of certain materials, such
as copper and gold, may increase due to market pressures and we
may not be able to pass on such cost increases to the prices we
charge to our customers. We also purchase semiconductor
manufacturing equipment from a limited number of suppliers and
because such equipment is complex it is difficult to replace one
supplier with another or to substitute one piece of equipment
for another. In addition, suppliers may extend lead times, limit
our supply or increase prices due to capacity constraints or
other factors. Furthermore, suppliers tend to focus their
investments on providing the most technologically advanced
equipment and materials and may not be in a position to address
our requirements for equipment or materials of older
generations. Shortages of supplies have in the past impacted and
may in the future impact the semiconductor industry, in
particular with respect to silicon wafers due to increased
demand and decreased production. Although we work closely with
our suppliers to avoid these types of shortages, there can be no
assurances that we will not encounter these problems in the
future. Our quarterly or annual results of operations would be
adversely affected if we were unable to obtain adequate supplies
of raw materials or equipment in a timely manner or if there
were significant increases in the costs of raw materials or
problems with the quality of these raw materials.
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Our manufacturing processes are highly complex, costly and
potentially vulnerable to impurities, disruptions or inefficient
implementation of production changes that can significantly
increase our costs and delay product shipments to our
customers. |
Our manufacturing processes are highly complex, require advanced
and increasingly costly equipment and are continuously being
modified or maintained in an effort to improve yields and
product performance. Impurities or other difficulties in the
manufacturing process can lower yields, interrupt production or
result in losses of
13
products in process. As system complexity and production changes
have increased and sub-micron technology has become more
advanced, manufacturing tolerances have been reduced and
requirements for precision have become even more demanding.
Although in the past few years we have significantly enhanced
our manufacturing capability in terms of efficiency, precision
and capacity, we have from time to time experienced bottlenecks
and production difficulties that have caused delivery delays and
quality control problems, as is common in the semiconductor
industry. We cannot guarantee that we will not experience
bottlenecks, production or transition difficulties in the
future. In addition, during past periods of high demand for our
products, our manufacturing facilities have operated at high
capacity, which has led to production constraints. Furthermore,
if production at a manufacturing facility is interrupted, we may
not be able to shift production to other facilities on a timely
basis, or customers may purchase products from other suppliers.
In either case, the loss of revenue and damage to the
relationship with our customer could be significant.
Furthermore, we periodically transfer production equipment
between production facilities and must ramp up and test such
equipment once installed in the new facility before it can reach
its optimal production level.
As is common in the semiconductor industry, we have, from time
to time, experienced and may in the future experience
difficulties in transferring equipment between our sites,
ramping up production at new facilities or effecting transitions
to new manufacturing processes. Our operating results may be
adversely affected by an increase in fixed costs and operating
expenses linked to production if revenues do not increase
commensurately with such fixed costs and operating expenses.
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We may be faced with product liability or warranty
claims. |
Despite our corporate quality programs and commitment, our
products may not in each case comply with specifications or
customer requirements. Although our practice, in line with
industry standards, is to contractually limit our liability to
the repair, replacement or refund of defective products,
warranty or product liability claims could result in significant
expenses relating to compensation payments or other
indemnification to maintain good customer relationships.
Furthermore, we could incur significant costs and liabilities if
litigation occurs to defend against such claims and if damages
are awarded against us. In addition, it is possible for one of
our customers to recall a product containing one of our parts.
Costs or payments we may make in connection with warranty claims
or product recalls may adversely affect our results of
operations. There is no guarantee that our insurance policies
will be available or adequate to protect against all such claims.
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If our outside foundry suppliers fail to perform, this
could adversely affect our ability to exploit growth
opportunities. |
We currently use outside suppliers or foundries primarily for
high-speed complementary metal-on silicon oxide semiconductor
(HCMOS) wafers and nonvolatile memory technology. If
our outside suppliers are unable to satisfy our demand, or
experience manufacturing difficulties, delays or reduced yields,
our results of operations and ability to satisfy customer demand
could suffer. In addition, purchasing rather than manufacturing
these products may adversely affect our gross profit margin if
the purchase costs of these products are higher than our own
manufacturing costs. Our internal manufacturing costs include
depreciation and other fixed costs, while costs for products
outsourced are based on market conditions. Prices for foundry
products also vary depending on capacity utilization rates at
our suppliers, quantities demanded, product technology and
geometry. Furthermore, these outsourcing costs can vary
materially from quarter to quarter and, in cases of industry
shortages, they can increase significantly further, negatively
impacting our gross margin.
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We depend on patents to protect our rights to our
technology. |
We depend on our ability to obtain patents and other
intellectual property rights covering our products and their
design and manufacturing processes. We intend to continue to
seek patents on our inventions relating to product designs and
manufacturing processes. However, the process of seeking patent
protection can be long and expensive, and we cannot guarantee
that we will receive patents from currently pending or future
applications. Even if patents are issued, they may not be of
sufficient scope or strength to provide meaningful protection or
any commercial advantage. In addition, effective patent,
copyright and trade secret protection may be unavailable or
limited in some countries. Competitors may also develop
technologies that are protected by patents and other
intellectual property and therefore either be unavailable to us
or be made available to us subject to adverse terms and
conditions. We have in the past used our patent portfolio to
negotiate broad patent cross-licenses with many of our
competitors enabling us to design, manufacture and sell
semiconductor products, without fear of infringing patents held
by such competitors. We may not, however, in the future be able
to obtain licenses or other rights to protect necessary
intellectual property on acceptable terms for the conduct of our
business, and such failure may adversely impact our results of
operations.
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We have from time to time received, and may in the future
receive, communications alleging possible infringement of
patents and other intellectual property rights. Furthermore, we
may become involved in costly litigation brought against us
regarding patents, mask works, copyrights, trademarks or trade
secrets. We are currently involved in patent litigation with
SanDisk Corporation with respect to our Flash memory products
and in litigation with Tessera, Inc. regarding packaging
technologies. See Item 8. Financial
Information Legal Proceedings. In the event
that the outcome of any litigation would be unfavorable to us,
we may be required to obtain a license to the underlying
intellectual property rights upon 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
ability to compete.
Finally, litigation could cost us financial and management
resources necessary to enforce our patents and other
intellectual property rights or to defend against third party
intellectual property claims, when we believe that the amounts
requested for a license are unreasonable.
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Some of our production processes and materials are
environmentally sensitive, which could lead to increased costs
due to environmental regulations or to damage to the
environment. |
We are subject to a variety of laws and regulations relating,
among other things, to the use, storage, discharge and disposal
of chemicals, gases and other hazardous substances used in our
manufacturing processes, air emissions, waste water discharges,
waste disposal, as well as the investigation and remediation of
soil and ground water contamination. European Directive 2002/96/
EC (WEEE Directive) imposes a take back
obligation on manufacturers for the financing of the collection,
recovery and disposal of electrical and electronic equipment.
Additionally, European Directive 2002/95/ EC (ROHS
Directive) banned the use of lead and some flame retardants in
electronic components as of July 2006. Our activities in the EU
are also subject to the European Directive 2003/87/ EC
establishing a scheme for greenhouse gas allowance trading, and
to the applicable national implementing legislation. In
addition, Regulation 1907/2006 of December 18, 2006
will require registration, evaluation, authorization and
restriction of a large number of chemicals (REACH)
starting June 1, 2007. The implementation of any such
legislation could adversely affect our manufacturing costs or
product sales by requiring us to acquire costly equipment,
materials or greenhouse gas allowances, or to incur other
significant expenses in adapting our manufacturing processes or
waste and emission disposal processes. We are not in a position
to quantify specific costs, in part because these costs are part
of our business process. Furthermore, environmental claims or
our failure to comply with present or future regulations could
result in the assessment of damages or imposition of fines
against us, suspension of production or a cessation of
operations. As with other companies engaged in similar
activities, any failure by us to control the use of, or
adequately restrict the discharge of, chemicals or hazardous
substances could subject us to future liabilities. Any specific
liabilities we identify as probable would be reflected in our
balance sheet. To date, we have not identified any such specific
liabilities. We therefore have not booked specific reserves for
any specific environmental risks. See Item 4.
Information on the Company Environmental
Matters.
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Loss of key employees could hurt our competitive
position. |
As is common in the semiconductor industry, success depends to a
significant extent upon our key senior executives and research
and development, engineering, marketing, sales, manufacturing,
support and other personnel. Our success also depends upon our
ability to continue to attract, retain and motivate qualified
personnel. The competition for such employees is intense, and
the loss of the services of any of these key personnel without
adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on us.
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We operate in many jurisdictions with highly complex and
varied tax regimes. Changes in tax rules or the outcome of tax
assessments and audits could cause a material adverse effect on
our results. |
We operate in many jurisdictions with highly complex and varied
tax regimes. Changes in tax rules or the outcome of tax
assessments and audits could have a material adverse effect on
our results in any particular quarter. For example, in 2006, we
had an income tax benefit of $20 million, as compared to an
income tax expense of $8 million in 2005. In 2006, we
benefited from a favorable assessment of our tax assets and
liabilities mainly due to a favorable outcome of a tax
litigation in one of our jurisdictions. Our tax rate is variable
and depends on changes in the level of operating profits 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, and these benefits may
not be available in the future due to changes within the local
jurisdictions. As a result, our effective tax rate could
increase in the coming years.
We are subject to the possibility of loss contingencies arising
out of tax claims and provisions for specifically identified
income tax exposures. There can be no assurance that we will be
successful in resolving
15
such tax claims. Our failure to do so and/or the need to
increase our provisions for such claims could have a material
adverse effect on our financial position.
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We have been required to prepare consolidated financial
statements using both International Financial Reporting
Standards (IFRS) beginning with our 2005 results in
addition to our consolidated financial statements prepared
pursuant to Generally Accepted Accounting Principles in the
United States (U.S. GAAP) and dual reporting
may impair the clarity of our financial reporting. |
We are incorporated in the Netherlands and our shares are listed
on Euronext Paris and on the Borsa Italiana, and, consequently,
we are subject to an EU regulation issued on September 29,
2003 requiring us to report our results of operations and
consolidated financial statements using IFRS (previously known
as International Accounting Standards or IAS). Since
our creation in 1987, we have always prepared our Consolidated
Financial Statements under U.S. GAAP and intend to continue to
do so, while at the same time complying with our reporting
obligations under IFRS by preparing a complementary set of our
2006 accounts or as requested by local stock exchange
authorities. Our decision to continue to apply U.S. GAAP in our
financial reporting is designed to ensure the comparability of
our results to those of our competitors and the continuity of
our reporting, thereby providing our investors a clear
understanding of our financial performance.
The obligation to report our Consolidated Financial Statements
under IFRS requires us to prepare our results of operations
using two different sets of reporting standards, U.S. GAAP and
IFRS, which are currently not consistent. Such dual reporting
could materially increase the complexity of our investor
communications. The main potential areas of discrepancy concern
capitalization and amortization of development expenses required
under IFRS and the accounting for compound financial
instruments. Our financial condition and results of operations
reported in accordance with IFRS will differ from our financial
condition and results of operations reported in accordance with
U.S. GAAP, which could adversely affect the market price of our
common shares.
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Changes in the accounting treatment of stock options and
other share-based compensation could adversely affect our
results of operations. |
We have in the past accounted for share-based compensation to
employees in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,
and as such generally recognize no compensation cost for
employee stock options. In December 2004, the FASB issued
revised FAS 123, Share-Based Payment, or FAS 123R, which
requires companies to expense employee share-based compensation
for financial reporting purposes. We adopted FAS 123R in the
fourth quarter of 2005. See Item 5. Operating and
Financial Review and Prospects and the Notes to the
Consolidated Financial Statements. As a result, in the case of a
distribution of new stock-based compensation, we are now
required to value our employee stock-based compensation pursuant
to a financial valuation model, and then amortize that value
against our reported earnings over the vesting period in effect
for those share-based compensation awards. This change in
accounting treatment of employee stock and other forms of
stock-based compensation could materially and adversely affect
our results of operations, as the share-based compensation
expense, beginning in the fourth quarter of 2005, is now charged
directly against our earnings. This change could have an effect
on our earnings per share, which could negatively impact our
future stock price.
In addition, through the first half of 2005, we used stock
options as a key component of employee compensation in order to
align employees interests with the interests of our
shareholders, encourage employee retention, and provide
competitive compensation packages. To the extent that FAS 123R
or other new regulations make it more difficult or expensive to
grant options or other forms of stock-based compensation to
employees, we may incur increased compensation costs, change our
equity compensation strategy, or find it difficult to attract,
retain, and motivate employees. Any of these results could
materially and adversely affect our business and operating
results.
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If our internal control over financial reporting fail to
meet the requirements of Section 404 of the Sarbanes-Oxley
Act, it may have a materially adverse effect on our stock
price. |
The SEC, as required by Section 404 of the Sarbanes-Oxley
Act of 2002, adopted rules that require us to include a
management report assessing the effectiveness of our internal
control over financial reporting in our annual report on
Form 20-F. In
addition, we must also include an attestation by our independent
registered public accounting firm regarding the adequacy of
managements assessment and the effectiveness of our
internal control over financial reporting. We have successfully
completed our Section 404 assessment and received the
auditors attestation as of December 31, 2006.
However, in the future, if we fail to complete a favorable
assessment from our management or to obtain our auditors
attestation, we may be subject to regulatory sanctions or may
suffer a loss of investor confidence in the reliability of our
financial statements, which could lead to an adverse effect on
our stock price.
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Reduction in the amount of public funding available to us,
changes in existing public funding programs or demands for
repayment may increase our costs and impact our results of
operations. |
Like many other manufacturers operating in Europe, we benefit
from governmental funding for research and development expenses
and industrialization costs (which include some of the costs
incurred to bring prototype products to the production stage),
as well as from incentive programs for the economic development
of underdeveloped regions. Public funding may also be
characterized by grants and/or low-interest financing for
capital investment and/or tax credit investments. See
Item 4. Information on the Company Public
Funding. We have entered into public funding agreements in
France and Italy, which set forth the parameters for state
support to us under selected programs. These funding agreements
may require compliance with EU regulations and approval by EU
authorities.
We rely on receiving funds on a timely basis pursuant to the
terms of the funding agreements. However, funding of programs in
France and Italy is subject to annual appropriation of available
resources and compatibility with the fiscal provisions of their
annual budgets, which we do not control, as well as to our
continuing compliance with all eligibility requirements. If we
are unable to receive anticipated funding on a timely basis, or
if existing government-funded programs were curtailed or
discontinued, or if we were unable to fulfill our eligibility
requirements, this could have a material adverse effect on our
business, operating results and financial condition. There is no
assurance that any alternative funding would be available, or
that, if available, it could be provided in sufficient amounts
or on similar terms.
The application for and implementation of such grants often
involves compliance with extensive regulatory requirements
including, in the case of subsidies to be granted within the EU,
notification to the European Commission by the member state
making the contemplated grant prior to disbursement. In
particular, compliance with project-related ceilings on
aggregate subsidies defined under EU law often involves highly
complex economic evaluations. Furthermore, public funding
arrangements are generally subject to annual and
project-by-project reviews and approvals. If we fail to meet
applicable formal or other requirements, we may not be able to
receive the relevant subsidies or may be obliged to repay them
which could have a material adverse effect on our results of
operations.
On April 9, 2002, the EU approved a grant to us by the
Italian Government of
542.3 million
(Decision N844/2001), representing approximately 26.25% of the
total cost (estimated at
2,066 million)
(the M6 Grant) for the building, facilitization and
equipment of a new 300-mm manufacturing facility in Catania M6
capable of producing approximately 5,000 wafers per week in 2006
for NOR and other nonvolatile memory products (the M6
Plant). The construction of the M6 Plant has not proceeded
as planned. In 2006, the Italian Government informed the EU
Commission about a proposed modification to the conditions for
the M6 Grant, as authorized on April 9, 2002. In a decision
on December 6, 2006 sent to the Italian Foreign Minister,
the EU Commission, according to the proposal made by the Italian
government, accepted to modify the conditions for the M6 Grant.
In particular, the EU Commission accepted the proposal of the
Italian government to provide for an extension of the authorized
time period for the completion of the planned investment and to
allocate, out of the
542.3 million
grants originally authorized,
446 million
for the completion of the M6 Plant if we made a further
investment of
1,700 million
between January 1, 2006 through the end of 2009. The
446 million
M6 Grant is conditional upon the conclusion of a Contratto di
Programma providing, inter alia, for (i) the
creation of a minimum number of new jobs, (ii) the fixed
assets remaining at least five years after the completion of the
M6 Plant, (iii) at least 31.25% of the total of
1,700 million
investment for the M6 Plant being either in the form of equity
or loan, (iv) an annual report on work progress being
submitted to the Italian authorities and the EU Commission, and
(v) a general verification of the consistency of the
project. For the period prior to December 31, 2006, the
Commission, upon the proposal of the Italian government,
considered that we would have been entitled to the remaining
96 million
grant (out of the total
542.3 million
originally granted) in the form of a tax credit if we had made a
total cumulated investment of
366 million
as of such date. As of December 31, 2006, we have invested
a cumulative amount of
298 million
instead of
366 million
and recorded a cumulative amount of tax credit of
78 million
out of the
96 million
to which we could have been entitled.
There is no assurance that the Contratto di Programma
will be concluded at acceptable conditions to both the
Italian authorities and us, and that, if concluded, such
contract will be approved by the EU Commission if the stated
conditions are not consistent with prior decisions by the EU
Commission concerning such grants. Failure to receive the grants
as anticipated may adversely impair our expected results of
operations linked to the equipment and operation of the M6 Plant.
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The interests of our controlling shareholders, which are
in turn controlled respectively by the French and Italian
governments, may conflict with investors interests. |
We have been informed that as of December 31, 2006,
STMicroelectronics Holding II B.V. (ST
Holding II), a wholly-owned subsidiary of
STMicroelectronics Holding N.V. (ST Holding), owned
250,704,754 shares, or approximately 27.5%, of our issued common
shares. ST Holding is therefore effectively in a position to
control actions that require shareholder approval, including
corporate actions, the election of our Supervisory Board and our
Managing Board and the issuance of new shares or other
securities.
We have also been informed that the shareholders agreement
among ST Holdings shareholders (the STH
Shareholders Agreement), to which we are not a
party, governs relations between our current indirect
shareholders Areva Group, Cassa Depositi e Prestiti S.p.A.
(CDP) and Finmeccanica S.p.A.
(Finmeccanica), each of which is ultimately
controlled by the French or Italian government, see
Item 7. Major Shareholders and Related-Party
Transactions Major Shareholders. The STH
Shareholders Agreement includes provisions requiring the
unanimous approval by shareholders of ST Holding before ST
Holding can make any decision with respect to certain actions to
be taken by us. Furthermore, as permitted by our Articles of
Association, the Supervisory Board has specified selected
actions by the Managing Board that require the approval of the
Supervisory Board. See Item 7. Major Shareholders and
Related-Party Transactions Major Shareholders.
These requirements for the prior approval of various actions to
be taken by us and our subsidiaries may give rise to a conflict
of interest between our interests and investors interests,
on the one hand, and the interests of the individual
shareholders approving such actions, on the other, and may
affect the ability of our Managing Board to respond as may be
necessary in the rapidly changing environment of the
semiconductor industry. Furthermore, our ability to issue new
shares or other securities may be limited by the existing
shareholders desire to maintain their proportionate
shareholding at a certain minimum level. Such approval process
is, however, subject to the provisions of Dutch law requiring
members of our Supervisory Board to act independently in
supervising our management and applicable Dutch and non-Dutch
corporate governance standards.
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Our shareholder structure and our preference shares may
deter a change of control. |
On November 27, 2006, our Supervisory Board decided to
authorize us to enter into an option agreement with an
independent foundation, Stichting Continuïteit ST (the
Stichting), and to terminate a substantially similar
option agreement dated May 31, 1999, as amended, between us
and ST Holding II. Our Managing Board and our Supervisory Board,
along with the board of the Stichting, have declared that they
are jointly of the opinion that the Stichting is independent of
our Company and our major shareholders. Our Supervisory Board
approved the new option agreement to reflect changes in Dutch
legal requirements, not in response to any hostile takeover
attempt. On February 7, 2007, the May 31, 1999 option
agreement, as amended, was terminated by mutual consent by ST
Holding II and us and the new option agreement we concluded with
the Stichting became effective on the same date. The new option
agreement provides for the issuance of up to a maximum of
540,000,000 preference shares, the same number as the
May 31, 1999 option agreement, as amended. The Stichting
would have the option, which it shall exercise in its sole
discretion, to take up the preference shares. The preference
shares would be issuable in the event of actions considered
hostile by our Managing Board and Supervisory Board, such as a
creeping acquisition or an unsolicited offer for our common
shares, which are unsupported by our Managing Board and
Supervisory Board and which the board of the Stichting
determines would be contrary to the interests of our Company,
our shareholders and our other stakeholders. If the Stichting
exercises its call option and acquires preference shares, it
must pay at least 25% of the par value of such preference
shares. The preference shares may remain outstanding for no
longer then two years.
No preference shares have been issued to date. The effect of the
preference shares may be to deter potential acquirers from
effecting an unsolicited acquisition resulting in a change of
control or otherwise taking actions considered hostile by our
Managing Board and Supervisory Board. In addition, any issuance
of additional capital within the limits of our authorized share
capital, as approved by our shareholders, is subject to the
requirements of our Articles of Association, see
Item 10. Additional Information
Memorandum and Articles of Association Share Capital as
of December 31, 2006 Issuance of Shares, Preemption
Rights and Preference Shares (Article 4).
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Our direct or indirect shareholders may sell our existing
common shares or issue financial instruments exchangeable into
our common shares at any time while at the same time seeking to
retain their rights regarding our preference shares. In
addition, substantial sales by us of new common shares or
convertible bonds could cause our common share price to drop
significantly. |
The STH Shareholders Agreement, to which we are not a
party, permits our respective French and Italian indirect
shareholders to cause ST Holding to dispose of its stake in us
at its sole discretion at any time from their current level, and
to reduce the current level of their respective indirect
interests in our common shares to 9.5%. The details of the STH
Shareholders Agreement as declared by ST Holding II in its
Schedule 13G/ A filing dated February 13, 2007, are
further explained in Item 7. Major Shareholders and
Related-Party Transactions Major Shareholders.
Disposals of our shares by the parties to the STH
Shareholders Agreement can be made by way of the issuance
of financial instruments exchangeable for our shares, equity
swaps, structured finance transactions or sales of our shares.
An announcement with respect to one or more of such dispositions
could be made at any time without our advance knowledge.
In addition, Finmeccanica Finance S.A. (Finmeccanica
Finance), a subsidiary of Finmeccanica, has issued
501 million
aggregate principal amount of exchangeable notes, exchangeable
into up to 20 million of our existing common shares due
2010 (the Finmeccanica Notes). The Finmeccanica
Notes have been exchangeable at the option of the holder into
our existing common shares since January 2, 2004. In
September 2005, France Telecom caused the sale of approximately
26 million of our common shares pursuant to the terms of a
convertible bond issued by France Telecom. In December 2005,
Finmeccanica caused the sale of approximately 1.5 million
of our common shares.
Further sales of our common shares or issue of bonds
exchangeable into our common shares or any announcements
concerning a potential sale by ST Holding, Areva, CDP or
Finmeccanica, could materially impact the market price of our
common shares. The timing and size of any future share or
exchangeable bond offering by ST Holding, Areva, CDP or
Finmeccanica would depend upon market conditions as well as a
variety of factors.
|
|
|
Because we are a Dutch company subject to the corporate
law of the Netherlands, U.S. investors might have more
difficulty protecting their interests in a court of law or
otherwise than if we were a U.S. company. |
Our corporate affairs are governed by our Articles of
Association and by the laws governing corporations incorporated
in the Netherlands. The corporate affairs of each of our
consolidated subsidiaries are governed by the articles of
association and by the laws governing such corporations in the
jurisdiction in which such consolidated subsidiary is
incorporated. The rights of the investors and the
responsibilities of members of our Supervisory Board and
Managing Board under Dutch law are not as clearly established as
under the rules of some U.S. jurisdictions. Therefore, U.S.
investors may have more difficulty in protecting their interests
in the face of actions by our management, members of our
Supervisory Board or our controlling shareholders than U.S.
investors would have if we were incorporated in the United
States.
Our executive offices and a substantial portion of our assets
are located outside the United States. In addition, ST Holding
II and most members of our Managing and Supervisory Boards are
residents of jurisdictions other than the United States and
Canada. As a result, it may be difficult or impossible for
shareholders to effect service within the United States or
Canada upon us, ST Holding II, or members of our Managing or
Supervisory Boards. It may also be difficult or impossible for
shareholders to enforce outside the United States or Canada
judgments obtained against such persons in U.S. or Canadian
courts, or to enforce in U.S. or Canadian courts judgments
obtained against such persons in courts in jurisdictions outside
the United States or Canada. This could be true in any legal
action, including actions predicated upon the civil liability
provisions of U.S. securities laws. In addition, it may be
difficult or impossible for shareholders to enforce, in original
actions brought in courts in jurisdictions located outside the
United States, rights predicated upon U.S. securities laws.
We have been advised by our Dutch counsel, De Brauw Blackstone
Westbroek N.V., that the United States and the Netherlands do
not currently have a treaty providing for reciprocal recognition
and enforcement of judgments (other than arbitration awards) in
civil and commercial matters. As a consequence, a final judgment
for the payment of money rendered by any federal or state court
in the United States based on civil liability, whether or not
predicated solely upon the federal securities laws of the United
States, will not be enforceable in the Netherlands. However, if
the party in whose favor such final judgment is rendered brings
a new suit in a competent court in the Netherlands, such party
may submit to the Netherlands court the final judgment that has
been rendered in the United States. If the Netherlands court
finds that the jurisdiction of the federal or state court in the
United States has been based on grounds that are internationally
acceptable and that proper legal procedures have been observed,
the court in the Netherlands would, under current practice, give
binding effect to
19
the final judgment that has been rendered in the United States
unless such judgment contravenes the Netherlands public
policy.
|
|
|
Removal of our common shares from the CAC 40 on Euronext
Paris, the S&P/ MIB on the Borsa Italiana or the
Philadelphia Stock Exchange Semiconductor Sector Index could
cause the market price of our common shares to drop
significantly. |
Our common shares have been included in the CAC 40 index on
Euronext Paris since November 12, 1997; the S&P/ MIB on
the Borsa Italiana, or Italian Stock Exchange since
March 18, 2002; and the Philadelphia Stock Exchange
Semiconductor Index (SOX) since June 23, 2003.
However, our common shares could be removed from the CAC 40, the
S&P/ MIB or the SOX at any time, and any such removal or
announcement thereof could cause the market price of our common
shares to drop significantly.
20
Item 4. Information on the Company
History and Development of the Company
STMicroelectronics N.V. was formed and incorporated in 1987 and
resulted from the combination of the semiconductor business of
SGS Microelettronica (then owned by Società Finanziaria
Telefonica (S.T.E.T.), an Italian corporation) and the
non-military business of Thomson Semiconducteurs (then owned by
the former Thomson-CSF, now Thales, a French corporation). Until
1998, we operated as SGS-Thomson Microelectronics N.V. Our
length of life is indefinite. We are organized under the laws of
the Netherlands. We have our corporate legal seat in Amsterdam
and our head offices at WTC Schiphol Airport, Schiphol Boulevard
265, 1118 BH Schiphol Airport, Amsterdam, the Netherlands. Our
telephone number there is +31-20-654-3210. Our headquarters and
operational offices are located at 39 Chemin du Champ des
Filles, 1228 Plan-Les-Ouates, Geneva, Switzerland. Our main
telephone number there is +41-22-929-2929. Our agent for service
of process in the United States related to our registration
under the U.S. Securities Exchange Act of 1934, as amended, is
STMicroelectronics, Inc., 1310 Electronics Drive, Carrollton,
Texas, 75006-5039 and the main telephone number there is
+1-972-466-6000. Our operations are also conducted through our
various subsidiaries, which are organized and operated according
to the laws of their country of incorporation, and consolidated
by STMicroelectronics N.V.
We completed our initial public offering in December 1994 with
simultaneous listings on Euronext Paris and the New York Stock
Exchange. In 1998, we listed our shares on the Borsa Italiana.
Business Overview
We are a global independent semiconductor company that designs,
develops, manufactures and markets a broad range of
semiconductor products used in a wide variety of microelectronic
applications, including automotive products, computer
peripherals, telecommunications systems, consumer products,
industrial automation and control systems. According to
provisional industry data published by iSuppli, we have been
ranked the worlds fifth largest semiconductor company
based on forecasted 2006 total market sales and we held leading
positions in sales of Analog Products, Application Specific
Integrated Circuits (or ASICs) and Application
Specific Standard Products (or ASSPs). Based on
provisional 2006 results published by iSuppli, we believe we
were number one in industrial products, number two in analog
products and number three in wireless, automotive electronics
and NOR Flash. Based on industry results, we also believe we
ranked as a leading supplier of semiconductors in 2006 for
set-top boxes, Smartcards and power management devices.
Furthermore, based on our relationship with Hewlett-Packard,
which has a leading position in the printhead market, we believe
that we are a leading supplier of integrated circuits for
printheads. Our major customers include
Alcatel-Lucent, Bosch,
Cisco, Conti, Delphi, Delta, Denso, Ericsson, Hewlett-Packard,
LG Electronics, Marelli, Maxtor, Motorola, Nokia, Philips,
Pioneer, Samsung, Seagate, Siemens, Thomson, Vestel, Visteon and
Western Digital. We also sell our products through global
distributors and retailers, including Arrow Electronics, Avnet,
BSI Group, Wintech and Yosun.
The semiconductor industry has historically been a cyclical one
and we have responded through emphasizing balance in our product
portfolio, in the applications we serve, and in the regional
markets we address. Consequently, from 1994 through 2006, our
revenues grew at a compounded annual growth rate of 11.6%
compared to 7.7% for the industry as a whole.
We offer a broad and diversified product portfolio and develop
products for a wide range of market applications to reduce our
dependence on any single product, application or end market.
Within our diversified portfolio, we have focused on developing
products that leverage our technological strengths in creating
customized, system-level solutions with high-growth digital and
mixed-signal content. Our product families include
differentiated application-specific products (which we define as
being our dedicated analog, mixed-signal and digital ASIC and
ASSP offerings and semicustom devices), power microcontrollers
and discrete products and nonvolatile memory and Smartcards.
Application Specific Products, which are generally less
vulnerable to market cycles than standard commodity products,
accounted for approximately 55% of our net revenues in 2006.
Memory Product sales accounted for approximately 22% of our net
revenues in 2006, while sales of Micro, Power and Analog
products accounted for approximately 23% of our net revenues in
2006.
Our products are manufactured and designed using a broad range
of manufacturing processes and proprietary design methods. We
use all of the prevalent function-oriented process technologies,
including complementary metal oxide semiconductor
(CMOS), bipolar and nonvolatile memory technologies.
In addition, by combining basic processes, we have developed
advanced systems-oriented technologies that enable us to produce
differentiated and application-specific products, including
bipolar CMOS technologies (BiCMOS) for mixed-signal
applications, and diffused metal oxide semiconductor
(DMOS) technology and Bipolar, CMOS and DMOS
(BCD technologies) for intelligent power
applications and embedded memory
21
technologies. This broad technology portfolio, a cornerstone of
our strategy for many years, enables us to meet the increasing
demand for System-on-Chip (SoC) solutions.
Complementing this depth and diversity of process and design
technology is our broad intellectual property portfolio that we
also use to enter into important patent cross-licensing
agreements with other major semiconductor companies.
Effective January 1, 2005, we realigned our product groups
to increase market focus and realize the full potential of our
products, technologies and sales and marketing channels. Since
this date and until the end of 2006, we report our sales and
operating income in three product group segments:
|
|
|
|
|
the Application Specific Product Group (ASG)
segment, comprised of three product lines our Home,
Personal and Communication Products (HPC), our
Computer Peripherals Products (CPG) and our
Automotive Products (APG). Our HPC Sector is
comprised of the telecommunications, audio and digital consumer
groups. Our CPG products cover computer peripherals products,
specifically disk drives and printers, and our APG products
comprised of all of our major complex products related to
automotive applications; |
|
|
|
the Memory Products Group (MPG) segment, comprised
of our memories and Smartcard businesses; and |
|
|
|
the Micro, Power, Analog Product Group (MPA)
segment, comprised of discrete and standard products plus
standard microcontroller and industrial devices (including the
programmable systems memories (PSM) division); this
segment was previously known as Micro, Linear and Discrete
Product Group, but no change has occurred in the segments
perimeter or organization. |
Effective January 1, 2007, to meet the evolving
requirements of the market together with the pursuit of a
strategic repositioning in Flash memory, we have reorganized our
product segment groups into the Application Specific Product
Groups, the Industrial and Multisegment Sector and the Flash
Memories Group. We will begin reporting sales and segment
financial information using this alignment beginning in the
first quarter of 2007.
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. All our product segments
share common research and development for process technology and
manufacturing capacity for most of their products. However,
beginning January 1, 2007, the stand-alone Flash Memories
Group (FMG), incorporates all the Flash memory operations (both
NOR and NAND), including Technology R&D, all product related
activities, front-end and back-end manufacturing, marketing and
sales worldwide. Keeping the same overall perimeter, our
Application Specific Groups (ASG) will now be comprised of
the newly created Mobile, Multimedia & Communications Group
(MMC) and the Home Entertainment & Displays Group
(HED) as well as the existing Automotive Product Group
(APG) and Computer Peripherals Group (CPG). The former MPA
segment plus non-Flash memory products (formerly under MPG) and
Micro-Electro-Mechanical Systems (MEMS) activity have been
combined to form a new sector, Industrial and Multisegment
Sector (IMS).
In the past two years, we have pursued various initiatives to
reshape our company by (i) reorganizing our management team
and setting up an executive committee, (ii) increasing our
research and development effectiveness through a program
focusing on our key initiatives, improved project control and
redeployment of certain resources with the aim to improve
time-to-market for both technologies and products,
(iii) promoting sales expansion for mass market
applications and new major key accounts with a special focus on
the Chinese and Japanese markets with a view to increased
overall efficiencies, (iv) improving our manufacturing
competitiveness through the restructuring of our 150-mm wafer
production capacity, (v) launching and implementing various
cost-reduction initiatives through procurement savings, improved
asset management, general and administration centralization and
headcount restructuring, and (vi) establishing a less
capital-intensive business model.
22
Results of Operations
The tables below set forth information on our net revenues by
product group segment and by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Net Revenues by Product Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
$ |
5,396 |
|
|
$ |
4,991 |
|
|
$ |
4,902 |
|
Memory Products Group Segment (MPG)
|
|
|
2,137 |
|
|
|
1,948 |
|
|
|
1,887 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
2,243 |
|
|
|
1,882 |
|
|
|
1,902 |
|
Others(1)
|
|
|
78 |
|
|
|
61 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(3)
|
|
$ |
3,073 |
|
|
$ |
2,789 |
|
|
$ |
2,827 |
|
North America(6)
|
|
|
1,232 |
|
|
|
1,281 |
|
|
|
1,360 |
|
Asia Pacific(4)
|
|
|
2,084 |
|
|
|
1,860 |
|
|
|
1,852 |
|
Greater China(4)
|
|
|
2,552 |
|
|
|
2,203 |
|
|
|
1,859 |
|
Japan
|
|
|
400 |
|
|
|
307 |
|
|
|
403 |
|
Emerging Markets(3)(5)(6)
|
|
|
513 |
|
|
|
442 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Product Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
|
54.7 |
% |
|
|
56.2 |
% |
|
|
56.0 |
% |
Memory Products Group Segment (MPG)
|
|
|
21.7 |
|
|
|
21.9 |
|
|
|
21.5 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
22.8 |
|
|
|
21.2 |
|
|
|
21.7 |
|
Others(1)
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(3)
|
|
|
31.2 |
% |
|
|
31.4 |
% |
|
|
32.3 |
% |
North America(6)
|
|
|
12.5 |
|
|
|
14.4 |
|
|
|
15.5 |
|
Asia Pacific(4)
|
|
|
21.1 |
|
|
|
20.9 |
|
|
|
21.2 |
|
Greater China(4)
|
|
|
25.9 |
|
|
|
24.8 |
|
|
|
21.2 |
|
Japan
|
|
|
4.1 |
|
|
|
3.5 |
|
|
|
4.6 |
|
Emerging Markets(3)(5)(6)
|
|
|
5.2 |
|
|
|
5.0 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes revenues from sales of subsystems and other revenues
not allocated to product segments. |
|
(2) |
Net revenues by location of order shipment are classified by
location of customer invoiced. For example, products ordered by
companies to be invoiced to Asia Pacific affiliates are
classified as Asia Pacific revenues. |
|
(3) |
Since January 1, 2005, the region Europe
includes the former East European countries that joined the EU
in 2004. These countries were part of the Emerging Markets
region in the previous periods. Net revenues for Europe and
Emerging Markets for prior periods were restated to include such
countries in the Europe region for such periods. |
|
(4) |
As of January 1, 2006, we created a new region,
Greater China to focus exclusively on our operations
in China, Hong Kong and Taiwan. Net revenues for Asia Pacific
for prior periods were restated according to the new perimeter. |
|
(5) |
Emerging Markets in 2005 and 2006 included markets such as
India, Latin America (excluding Mexico), the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia. |
|
(6) |
As of July 2, 2006, the region North America
includes Mexico which was part of Emerging Markets in prior
periods. Amounts have been reclassified to reflect this change. |
23
Strategy
The semiconductor industry is undergoing several significant
structural changes characterized by:
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|
the changing long-term structural growth of the overall market
for semiconductor products, which has moved from double-digit
growth to single-digit average growth over the last several
years; |
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|
|
the strong development of new emerging applications in areas
such as wireless communications, solid-state storage, digital TV
and video products and games; |
|
|
|
the increasing importance of the Asia Pacific region and
emerging countries, particularly China, which represents the
fastest growing regional market; |
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|
|
the importance of convergence between wireless, consumer and
computer applications, which drives customer demand to seek new
system-level, turnkey solutions from semiconductor suppliers; |
|
|
|
the evolution of the customer base from original equipment
manufacturers (OEM) to a mix of OEM, electronic
manufacturing service providers (EMS) and original
design manufacturers (ODM); |
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|
|
the expansion of available manufacturing capacity through
third-party providers; and |
|
|
|
the increased participation in the semiconductor industry of
private equity firms, exemplified by the takeovers in 2006 of
two of the top ten semiconductor companies, which may lead to
strategic repositionings of those companies and reorganization
amongst industry players. |
Our strategy within this challenging environment is designed to
focus on the following complementary key elements:
Broad, balanced market exposure. We offer a diversified
product portfolio and develop products for a wide range of
market applications using a variety of technologies, thereby
reducing our dependence on any single product, application or
end market. Within our diversified portfolio, we have focused on
developing products that leverage our technological strengths in
creating customized, system-level solutions for high-growth
digital and mixed-signal applications. We target five key
markets comprised of: (i) communications, including
wireless connectivity, mobile phone imaging, portable multimedia
and infrastructure; (ii) computer peripherals, including
data storage, printers, monitors, displays and optical mice;
(iii) digital consumer, including set-top boxes, DVDs,
digital TVs, digital cameras and digital audio;
(iv) automotive, including engine, body and safety, car
radio, car multimedia and telematics; and (v) industrial
and multisegment products, including power supplies, and
motor-control, lighting, metering, banking and Smartcard.
Product strategy and innovation. We aim to be leaders in
multimedia convergence and power applications. In order to serve
these segments, our plan is to maintain and further establish
existing leadership positions for (i) platforms and chipset
solutions for digital consumer, cellular phone and car
navigation; and (ii) power applications, which are driving
system solutions for a wide consumer base in the field of
industrial applications, motor control, factory automation,
lighting, power supply and automotive, in particular, and which
require less research and development effort and manufacturing
capital intensity than more advanced and complex
application-specific devices.
We also dedicate significant resources to product innovation. We
have identified our key product offerings in each of the
targeted market segments and have concentrated our R&D
resources to develop leading-edge products for each. Examples
include: digital-base band and multi-media solutions for
wireless, digital consumer products focused on set-top boxes,
SoC offerings in data storage and system-oriented products for
the multisegment sector. We are also targeting new end markets,
such as medical applications.
Finally, we have decided to strategically reposition our
participation in the Flash memory business in order to limit our
exposure to the capital intensity of the industry as well as to
achieve the appropriate economies of scale which are demanded in
this competitive segment.
Customer-based initiatives. There are three tenets to our
sales strategy. First, we work with our key customers to
identify evolving needs and new applications and to develop
innovative products and product features. We have formal
alliances with certain strategic customers that allow us and our
customers (with whom we jointly share certain product
developments) to exchange information and which give our
customers access to our process technologies and manufacturing
infrastructure. We have formed alliances with customers
including
Alcatel-Lucent, Bosch,
Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate,
Siemens VDO, Thomson and Western Digital. Our strategic
alliances have been historically a major growth driver for us.
In 2004, 2005 and 2006, revenues from strategic customer
alliances accounted for approximately 39%, 44% and 41%
respectively of our net revenues. Secondly, we are targeting new
major key accounts, where we can leverage our position as a
supplier of application-specific products with a broad range
product portfolio to better address the requirements of large
users of semiconductor products with whom our penetration has
historically been quite low. Finally, we
24
have targeted the mass market, or those customers outside of our
traditional top 50 customers, who require system-level solutions
for multiple market segments. In addition, we have focused on
two regions as key ingredients in future sales growth, Greater
China and Japan, where we have reorganized regional management.
Global integrated manufacturing infrastructure. We have a
diversified, leading-edge manufacturing infrastructure,
comprising front-end and back-end facilities, capable of
producing silicon wafers using our broad process technology
portfolio, including our CMOS and BiCMOS technologies as well as
our memories and discretes technologies. Assembling, testing and
packaging of our semiconductor products take place in our large
and modern back-end facilities, which generally are located in
low-cost areas. We have also developed relationships with
outside contractors for foundry and back-end services. In 2006,
while confirming our mission to remain an integrated device
manufacturing company, we decided to reduce our capital
intensity in order to optimize opportunities between internal
and external front-end production, reduce our dependence on
market cycles that impact the loading of our fabs, and decrease
the burden of depreciation on our financial performance.
Research and development partnerships. The semiconductor
industry is increasingly characterized by higher costs and
technological risks involved in the research and development of
state-of-the-art processes. These higher costs and technological
risks have driven us to enter into cooperative partnerships.
From 2000 until now, we have been jointly developing advanced
CMOS technologies in Crolles (France) with Freescale
Semiconductor and NXP Semiconductors. At the end of 2006, one of
our partners notified us of their intention to continue their
participation in the Crolles2 alliance only through the end of
2007. We remain convinced that the shared R&D business model
contributes to the fast acceleration of semiconductor process
technology development, and we therefore remain committed to our
strategy of alliances to reinforce cooperation in the area of
technology development.
Integrated presence in key regional markets. We have
sought to develop a competitive advantage by building an
integrated presence in each of the worlds economic zones
that we target: Europe, Asia, China and America. An integrated
presence means having manufacturing and design, as well as sales
and marketing capabilities in each region, in order to ensure
that we are well positioned to anticipate and respond to our
customers business requirements. We also have design and
marketing capabilities in our Japan and Emerging Markets
regions. We have front-end manufacturing facilities in Europe,
in the United States and in Asia. Our more labor-intensive
back-end facilities are located in Malaysia, Malta, Morocco,
Singapore and China, enabling us to take advantage of more
favorable production cost structures, particularly lower labor
costs. Major design centers and local sales and marketing groups
are within close proximity of key customers in each region,
which we believe enhances our ability to maintain strong
relationships with our customers.
Product quality excellence. We aim to develop the quality
excellence of our products and in the various applications we
serve and we have launched a company-wide Product Quality
Awareness program built around a three-pronged approach:
(i) the improvement of our full product cycle involving
robust design and manufacturing, improved detection of potential
defects, and better anticipation of failures through improved
risk assessment, particularly in the areas of product and
process changes; (ii) improved responsiveness to customer
demands; and (iii) ever increasing focus on quality and
discipline in execution.
Return on capital employed. We remain focused on
providing our shareholders with value creation, measured in
particular in terms of return on net assets compared to the
weighted average cost of capital.
Products and Technology
We design, develop, manufacture and market a broad range of
products used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer
goods, automotive products and industrial automation and control
systems. Our products include discretes, memories and standard
commodity components, ASICs (full custom devices and semicustom
devices) and ASSPs for analog, digital, and mixed-signal
applications. In addition, following the acquisition of Incard,
we manufacture Smartcards. Historically, we have not produced
dynamic random access memory (DRAMs) or x86
microprocessors, despite seeking to develop or acquire the
necessary intellectual property (IP) to use them as
components in SoC.
In 2006, we ran our business along product lines and managed our
revenues and internal operating income performance based on the
following product segments:
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Application Specific Product Group segment; |
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Memory Products Group segment; and |
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Micro, Power and Analog Product Group segment. |
25
We also design, develop, manufacture and market subsystems and
modules for the telecom, automotive and industrial markets
including mobile phone accessories, battery chargers, ISDN power
supplies and in-vehicle equipment for electronic toll payment in
our Subsystems division. Based on its immateriality, we do not
report information separately for Subsystems.
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Application Specific Product Group Segment |
The Application Specific Product Group (ASG) segment
is responsible for the design, development and manufacture of
application-specific products, as well as mixed analog/digital
semicustom-devices, using advanced bipolar, CMOS, BiCMOS
mixed-signal and power technologies. The businesses in the ASG
offer complete system solutions to customers in several
application markets. All products are ASSPs, full-custom or
semicustom devices that may also include digital signal
processor (DSP) and microcontroller cores. The
businesses in the ASG particularly emphasize dedicated ICs for
automotive, computer peripherals, consumer and certain
industrial application segments, as well as for mobile and fixed
communication, computing and networking application segments.
Our businesses in the ASG work closely with customers to develop
application-specific products using our technologies,
intellectual property, and manufacturing capabilities. The
breadth of our customer and application base provides us with a
better source of stability in the cyclical semiconductor market.
The ASG is comprised of three product lines our
Home, Personal and Communication Products (HPC), our
Computer Peripherals Products (CPG) and our
Automotive Products (APG).
Home, Personal and Communication Products
This product line encompasses two of our largest application
segments: wireless and consumer.
(i) Personal and Multimedia Group. Our Personal and
Multimedia Group (PMG) is focused on products
serving the wireless and mobile product application space and is
organized into four divisions.
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(a) Cellular Communications Division. We focus our
product offerings on cellular phones serving several major OEMs,
with differentiated ICs. In this market, we are strategically
positioned in energy management, audio coding and decoding
functions (CODEC) and radio frequency ICs. We
estimate that we ship over 30%, by volume, of the mobile-phone
industrys primary energy-management devices and audio ICs.
We are transitioning from ICs to modular solutions in the field
of radio frequency and energy management for 3G handsets. In
December 2006, we announced a major design win for an ASIC
solution for use in 3G/3.5G digital basebands at Ericsson Mobile
Platforms. This award represents a significant new product
category for us. |
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(b) Application Processor Division. We offer a
family of products, known as the Nomadik family,
addressing the market for multimedia application processor
chips. These products are designed for 2.5/3G mobile phones,
portable wireless products and other applications, and the chips
are being sampled by a wide range of potential customers. We
have several design wins in 2.5/3G mobile smart and feature
phones for three tier-one customers, Nokia, Samsung and LG. |
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(c) Imaging Division. We focus on the wireless
handset image-sensor market. We are in production of CMOS-based
camera modules and processors for low-and-high density pixel
resolutions, which also meet the auto focus, advanced fixed
focus and miniaturization requirements of this market. We have
cumulatively shipped approximately 200 million CMOS
camera-phone solutions since entering this market in 2003.
According to Prismark, we were tied for the number one position
in camera module manufacturing in 2006. |
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(d) Connectivity Division. To respond to the market
need for increased functionality of handsets, we created the
Connectivity Division to address wireless LAN
(WLAN), Bluetooth and connectivity requirements. Our
product offerings include WLAN and Bluetooth and Bluetooth FM
radio combination chips designed for low power consumption and a
small form factor. We have multiple design wins and are in
volume production for several customers in Asia and Europe for
our products. In particular, we are manufacturing in volume our
single-chip WLAN, Bluetooth and combination ICs for several
customers, including a tier-one cellphone manufacturer. Our next
generation of ICs increase combination options, with our
third-generation chips offering single-die multi-function
capability in 65-nm. |
(ii) Home Entertainment Group. Our Home
Entertainment Group (HEG) addresses product
requirements for the digital consumer application market and has
four divisions.
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(a) Home Video Division. This division focuses on
products for digital retail, satellite, cable and IPTV set-top
box products and digital television offerings. We continue to
expand our product offerings and customer base by introducing
solutions for the set-top box market with features such as
web-browsing, digital video recording and time-shifting
capabilities. In 2006, we reinforced the market leadership of our |
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OMEGA family of set-top box back-end decoders with the
introduction of the STi710x series of products, the latest
member of our OMEGA family of set-top box decoder solutions.
This 90-nm family of single-chip SoC device addresses the
high-definition market, performs at an advanced speed and has
enhanced graphics and security features as well as integrated
DVR capability, while retaining compatibility with our earlier
products. We continue to strengthen our product offerings by
addressing software solutions supporting multiple codes,
including DVB-MHP (Java) and Microsoft Windows Media based
systems. |
Our latest product, the STi7109, is our second-generation H.264
high-definition TV (HDTV) AVC and VC-1 decoder.
Building on the success of the STi710x, the worlds first
single-chip AVC and MPEG-2 decoder, the STi7109 adds VC-1
decoding, improved security, connectivity features, and support
for emerging DVD formats and security standards.
The STi7100-based set-top boxes are being rolled out for
satellite, IPTV, and terrestrial broadcast by several operators,
including Canal+, France Telecom and Telecom Italia. The
successor product, the STi7200, a single-chip dual-decode device
in 65-nm technology, is now being sampled by customers.
We address the digital television markets with a wide range of
highly integrated ASSPs and application-specific
microcontrollers. Significant numbers of televisions integrating
digital terrestrial capability using the STi55xx family as
digital plug-in solutions have been sold, primarily in Europe.
We have several design wins in Asia (China, Korea and Japan) for
the STD2000, our single-chip solution in 90-nm for integrated
Digital TV, which supports all display types and both
standard-and high-definition formats and we have also introduced
our STD1000 device which offers both an improved feature set and
competitiveness for this growing market.
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(b) Interactive System Solutions Division. We offer
customers and partners the capability to jointly develop highly
integrated solutions for their consumer products. We utilize a
broad and proven base of expertise, advanced technologies and
hardware/software intellectual property to provide best-in-class
differentiated products for a select base of customers and
markets. |
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(c) Home Display Peripherals Division. This division
offers products aimed at the analog TV market, switches and
sound processors as well as CRT monitors. |
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(d) Audio Division. We design and manufacture a wide
variety of components for use in audio applications. Our audio
products include audio power amplifiers, audio processors and
graphic-equalizer ICs. We recently introduced a family of class
D audio amplifier offerings aimed primarily at home,
desktop and mobile applications with digital-to-digital complete
system solution capability that improve sound quality while
reducing power consumption, size and cost. |
(iii) Communications Infrastructure and Displays Group.
Our Communications Infrastructure and Displays Group
(CID) provides solutions for the wireless and
wireline infrastructure segments as well as displays and is
organized into three divisions.
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(a) Wireless Infrastructure Division. We formed the
Wireless Infrastructure division to develop dedicated
infrastructure chip solutions that will be focused on
third-generation telecom standards, while supporting existing
standards as well. We have already developed all of the
technologies required for the wireless infrastructure ASIC
market due to our many years of experience in the fields of
digital baseband chip, radio frequency and mixed-signal products. |
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Our Greenside family of products combine the markets first
SoC baseband processor for wireless infrastructure applications
with multi-standard software libraries, optimized for GSM, EDGE,
W-CDMA, and WiMAX networks. This family of products is geared
toward addressing the needs of both Macro and Femto basestation
markets. |
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(b) Wireline Infrastructure Division. Our wireline
telecommunications products, both ASIC and ASSP, are used in
telephone sets, modems, subscriber line interface cards
(SLICs) for digital central office switching
equipment and the high-speed electronic and optical
communications networks. |
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(c) Display Division. Our products cover driver
chips for the flat-panel industry and CRT applications. Our
product development is focused mainly on driver chips for
various kinds of flat-panel display technologies such as small
and large LCDs, Plasma, OLED (Organic Light Emitting Diode) and
E-Paper. These products use proprietary technologies fitting the
various electrical parameters required by those market segments,
ranging from low to very high voltages and currents and from
junction to oxide isolation (SOI). |
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Computer Peripherals Products |
(i) Data Storage Division. We produce SoCs and
analog ASICs for several data storage applications, specializing
in disk drives with advanced solutions for read-and
write-channels, disk controllers, host interfaces,
27
digital power processing, motor controllers and micromachinery.
We believe that based on sales, we are, and have been for many
years, one of the largest semiconductor companies supplying the
hard disk drive market.
Complementing our strong position in SoCs, we believe we are the
market leader in motor controllers and we are providing
solutions for all market segments, including enterprise, desktop
and mobile applications. We are currently providing SoC
solutions based on proprietary IP in production at 130-nm for
desktop and server applications, we supply a kit including a SoC
disk controller and a motion-control power combo to a leading
maker of drives for mobile applications. A market leader in the
data storage market selected our latest 90-nm SoC for its next
generation of desktop and mobile drives, which we expect to
begin shipping in volume in the second half of 2007. This SoC
includes a rich variety of our own IP including our proprietary
read/write channel, Serial ATA controller and microcomputer core.
(ii) Printer Division. We are focusing on inkjet and
multifunction printer components and are an important supplier
of pen chips, motor drivers, and head drivers, digital engines,
including those in high-performance photo-quality applications
and digital color copiers. We are also expanding our offerings
to include a reconfigurable ASSP product family, known as SPEAr,
designed for flexibility and ease-of-use by printer
manufacturers. We have successfully validated and released our
SPEAr Head, a new member of our SPEAr (Structured Processor
Enhanced Architecture) family of configurable SoCs that address
various applications, including digital engines for printers,
scanners, and other embedded-control applications. Additionally
in this area, our partnership with one of our major customers
expanded with two new digital engine designs wins in
next-generation printer and MultiFunction platforms.
(iii) Microfluidics Division. This division builds
on the years of our success in microfluidic product design,
developed primarily for the inkjet print-head product line, and
expands our offering into related fields, such as molecular and
health diagnostics. As a result, we announced an agreement with
MobiDiag to create a complete system for genomic-based detection
of infectious diseases based on our silicon MEMS Lab-on-Chip
technology and with Veredus for the detection of Avian Flu.
Our automotive products include alternator regulators, airbag
controls, anti-skid braking systems, vehicle stability control,
ignition circuits, injection circuits, multiplex wiring kits and
products for body and chassis electronics, engine management,
instrumentation systems, car radio and multimedia, as well as
car satellite and navigation systems. We hold a leading position
in the IC market for automotive products. We have developed a
joint initiative with Freescale Semiconductor for the
development of 90-nm embedded Flash technology and common
products based on cost-effective 32-bit microcontrollers for use
in all automotive applications.
(i) Powertrain and Safety Division. From engine and
transmission control to mechanical-electronic solutions,
microelectronics are steadily pervading all sectors of the
automotive industry. Our robust family of automotive products,
including MEMS accelerometers, complete standard solutions for
DC-motor control and automotive grade 16-bit microcontrollers
with embedded Flash memory provide a broad range of features
that enhance performance, safety and comfort while reducing the
environmental impact of the automobile.
(ii) Car Body Division. We manufacture products for
the body and chassis electronics requirements of the car. These
products range from microcontrollers used in lighting, door and
window/wiper applications to junction boxes, power solutions,
dashboards and climate-control needs.
(iii) Car, Radio and Multimedia Division. We provide
auto manufacturers with full solutions for analog and digital
car radio solutions for tolling, navigation and other telematic
applications. The increasingly complex requirements of the
car/driver interface have opened a market for us in the area of
car multimedia. We have the know-how and experience to offer to
the market complete telematics solutions, which include circuits
for GPS navigation, voice recognition, audio amplification and
audio signal processing.
(iv) Digital Broadcast Radio Division. Our products
are used by the fast-growing satellite radio segment. We provide
a number of components to this application, including base-band
products for the reception of signals by the market leaders. Our
penetration in the digital satellite broadcast market is growing
with the success of the two American providers.
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Memory Products Group Segment |
The Memory Products Group segment designs, develops and
manufactures a broad range of semiconductor memory and Smartcard
products.
Flash memory technology, which is one of the enablers of digital
convergence, is the core of our nonvolatile memory activity. The
products developed by the various nonvolatile memory divisions
are complementary and are addressing different functions and/or
market segments.
28
In December 2006, we announced our decision to establish a
stand-alone Flash Memories Group in 2007. This group will
consolidate all the Flash memory operations including NAND and
NOR Flash memories technology R&D, all product related
activities, front-end manufacturing, marketing and sales
worldwide. This strategic repositioning of Flash memories is
designed to facilitate the acquisition of dimension of scale
which we view as a necessity to compete successfully in this
business.
Prior to our December 2006 announcement, our memory business was
comprised as follows:
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(i) Wireless Flash Memories Division. Wireless
applications have very specific requirements in power
consumption, packaging and memory addressing. We offer a very
wide portfolio of wireless NOR Flash memories from single-die
low-density products through high-density 1-Gbit solutions, as
well as multiple chip packages containing several memory
technology components. |
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(ii) Standard Nonvolatile Memories Division. We
produce a broad range of industry-standard, general-purpose
Flash memories from 1 to 64 Mbit and we are in the process of
producing Flash memories that will go up to 128 Mbit. We
also produce the more mature erasable programmable read-only
memory (EPROM), from 64 Kilobit
(Kbit) to 32 Mbit. Efficient manufacturing, together
with our sales and distribution channels, has contributed to the
exploitation of our technological advantage in Flash and EPROM.
The same approach is being applied to industry-standard Flash. |
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(iii) Serial Nonvolatile Memories Division. We offer
serial electronically erasable programmable read-only memory
(EEPROM) up to 512 Kbit, and serial Flash memories
(SNVM). Serial EEPROMs are the most popular type of
EEPROMs and are used in computer, automotive and consumer
applications. Combining the typical interface of serial EEPROM
and Flash technology, we pioneered the concept of serial Flash.
Serial Flash allows integration of up to 64 Mbit and 128 Mbit in
an 8-pin package for a large variety of applications. |
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(iv) NAND Flash and Storage Media Division. In 2004,
we began offering NAND Flash memory products pursuant to a
co-development and manufacturing agreement with Hynix
Semiconductor. Our efforts are targeted at the lower density
memory requirements evolving for embedded wireless applications.
Our most advanced offering, a single die 8 Gigabit
(Gbit) NAND Flash manufactured in
60-nm technology, is
now available in production. NAND Flash is primarily used to
store information such as music, still pictures, video and data
files in a variety of consumer applications, including mobile
phones, MP3 readers, universal serial bus (USB) keys
and digital still cameras. |
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(v) Smartcard IC Division. Smartcards are card
devices containing ICs that store data and provide an array of
security capabilities. They are used in a wide and growing
variety of applications, including public pay-telephone systems,
cellular telephone systems and banks, as well as pay television
systems and ID/passport cards. Other applications include
medical record applications, card-access security systems,
toll-payment and secure transactions over the Internet
applications. We have a long track record of leadership in
Smartcard ICs. Our expertise in security is a key to our
leadership in the finance and
pay-TV segments and
development of IT applications. If addition, our mastering of
the nonvolatile memory technologies is instrumental to offering
the highest memory sizes (up to 128 KBytes and even
1 MByte), particularly important to address the emerging
high-end mobile phone market. |
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(vi) Incard Division. The division develops,
manufactures and sells plastic cards (both memory- and
microprocessors-based) for banking, identification and telecom
applications. Incard operates as a standalone organization and
also directly controls the sales force for this product offering. |
We have made significant progress on improving the cost position
of our Memory Product Group Segment, in particular widely
developing the two-bit-per-cell architecture and transitioning
to more advanced technologies, and will continue to seek to
enhance our competitive position on all fronts of the memory
market we serve both by adding new products and improving
manufacturing costs. The announced creation of our new Flash
Memories Group is designed to facilitate the acquisition of the
dimension of scale, which remains a critical element for future
success and therefore we plan to strategically reposition our
presence in this market.
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Micro, Power and Analog Product Group Segment |
The Micro, Power and Analog Product Group segment (formerly
known as the Micro, Linear and Discrete Product Group Segment)
is responsible for the design, development and manufacture of
discrete power devices, (power transistors and other discrete
power devices), standard linear and logic ICs, and radio
frequency products. In addition, this segment spearheads our
ongoing efforts to maintain and develop high-end analog products
and of consolidating our world leadership position in power
applications, with full solutions centered around
microcontroller applications. Due to the high degree of customer
fragmentation and the need for product diversity to meet these
numerous requirements, MPA designs and releases approximately
four new products each business day.
29
(i) Power MOSFET Division. We design, manufacture
and sell Power MOSFETs (Metal-Oxide-Silicon Field Effect
Transistors) ranging from 20 to 1000 volts for most of the
switching applications on the market today. Our
products are particularly well suited for high voltage
switch-mode power supplies and lighting applications, where we
hold a leadership position from low-power, high-volume consumer
to high-power industrial applications.
(ii) Power Bipolar, IGBT and RF Division. Our
bipolar power transistors are used in a variety of voltage
applications, including television/monitor horizontal deflection
circuits, lighting systems and high power supplies. Our family
of ESBT (Emitter Switch Bipolar Transistor) is suitable for very
high current very high voltage applications, such as
welding machines and PFC (Power Factor Corrector) devices. The
IGBT transistors are well suited for automotive applications,
such as motor control and high-voltage electronic-ignition
actuators. Within this Division we also supply RF transistors
used in television broadcasting transmission systems, radars,
telecommunications systems and avionic equipment.
(iii) ASD and IPAD Division. This division offers a
full range of rectifiers, protection thyristors (silicon
controlled rectifiers or SCRs and three-terminal
semiconductors or Triacs for controlling current in
either direction) and other protection devices. These components
are used in various applications, including telecommunications
systems (telephone sets, modems and line cards), household
appliances and industrial systems (motor-control and
power-control devices). More specifically, rectifiers are used
in voltage converters and regulators and protection devices,
while thyristors vary current flows through a variety of
electrical devices, including lamps and household appliances. We
are leaders in a highly successful range of new products built
with our proprietary Application Specific Discrete
(ASDtm)
technology, which allows a variety of discrete components
(diodes, rectifiers, thyristors) to be merged into a single
device optimized for specific applications such as
electromagnetic interference filtering for cellular phones.
Additionally, we are leaders in electronic devices integrating
both passive and active components on the same chip, also known
as Integrated Passive and Active Devices (IPAD),
which are widely used in the wireless handset market.
(iv) Linear and Interface Division. We offer a broad
product portfolio of linear and switching regulators along with
operational amplifiers, comparators, and serial and parallel
interfaces covering a variety of applications like decoders,
DC-DC converters and mobile phones.
(v) Microcontroller Division. We focus on
high-volume 8-, 16- and 32-bit microcontrollers in this
division. These products have been developed using a wide
technology portfolio and are manufactured in processes capable
of embedding EPROM, EEPROM and Flash non volatile memories as
appropriate. We have improved our product offering in this
division, and now offer a new family of 8-bit microcontrollers
in addition to our line of 32-bit ARM7-based microcontrollers
optimized for multiple industrial applications, including
factory automation, appliances and security systems. We have
also updated our STR7 Software Library supporting our 32-bit
ARM7-based microcontrollers.
(vi) Industrial and Power Conversion Division. We
design and manufacture products for industrial automation
systems, lighting applications (lamp ballast), battery chargers
and Switched Mode Power Supplies (SMPS). Our key
products are power ICs for motor controllers and read/write
amplifiers, intelligent power ICs for spindle motor control and
head positioning in computer disk drives and battery chargers
for portable electronic systems, including mobile telephone sets.
(vii) Advanced Analog and Logic Division. We develop
innovative, differentiated and value-added analog products for a
number of markets and applications including point-of-sales
terminals, power meters and white goods. We recently introduced
our NEATSwitch portfolio of application-specific analog,
digital, and power switches and extended our supervisor and
reset-IC family. We also produce a variety of HCMOS logic device
families, which include clocks, registers, gates, latches and
buffers. Such devices are used in a variety of applications,
including portable computers, computer networks and
telecommunications systems.
Strategic Alliances with Customers and Industry
Partnerships
We believe that strategic alliances with customers and industry
partnerships are critical to success in the semiconductor
industry. We have entered into several strategic customer
alliances, including alliances with
Alcatel-Lucent, Bosch,
Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate,
Siemens VDO, Thomson and Western Digital, among others. Customer
alliances provide us with valuable systems and application
know-how and access to markets for key products, while allowing
our customers to share some of the risks of product development
with us and to gain access to our process technologies and
manufacturing infrastructure. We are actively working to expand
the number of our customer alliances, targeting OEMs in the
United States, Europe and in Asia.
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Partnerships with other semiconductor industry manufacturers
permit costly research and development and manufacturing
resources to be shared to mutual advantage for joint technology
development. We have been collaborating with NXP Semiconductors
(formerly known as Philips Semiconductors) for the joint
development of advanced CMOS process technologies in Crolles,
France, since 1992. In 2003, we signed a new joint technology
cooperation agreement with Freescale Semiconductor and NXP
Semiconductors for the joint research and development of
advanced CMOS process technology on 300-mm wafers, as well as
for the operations of a 300-mm wafer pilot line fab which has
been built in Crolles2 with the stated goal of accelerating the
development of future technologies and their proliferation
throughout the semiconductor industry. This agreement had also
been extended to include research and development related to
wafer testing and packaging and to cover the development and
licensing of core libraries. In January 2007, NXP Semiconductors
announced that it will withdraw from the alliance at the end of
2007. Freescale Semiconductor has also notified us that the
Crolles2 alliance will terminate as of such date. We remain
convinced that the shared R&D business model contributes to
the fast acceleration of semiconductor process technology
development and we will continue to actively pursue an expansion
of our portfolio of alliances to reinforce cooperation in the
area of technology development in Crolles2.
We have also established joint development programs with leading
suppliers such as Air Liquide, Applied Materials, ASM
Lithography, Canon, Gemalto, Hewlett-Packard, KLA-Tencor, LAM
Research, MEMC, Teradyne and Wacker and with electronic design
automation (EDA) tool producers, including Cadence,
Co-Ware and Synopsys. We also participate in joint European
research programs, such as the MEDEA+ and ITEA programs, and
cooperate on a global basis with major research institutions and
universities.
In 2004, we signed and announced a joint venture agreement with
Hynix Semiconductor to build a front-end memory-manufacturing
facility in Wuxi City, China. The joint venture is an extension
of a NAND Flash Process/product joint development relationship.
The facility was inaugurated in October 2006. The fab employs
approximately 2,700 people and features a 200-mm wafer
production line that began production of DRAM in June 2006 and a
300-mm wafer production line, which began NAND production in
October 2006. The total investment in the project is
approximately $2 billion. We contributed 33% of the equity
financing, equivalent to $250 million, while Hynix
Semiconductor contributed 67%. In addition, we have provided
$218 million out of our total $250 million commitment
as debt financing to the joint venture by way of a guarantee.
The financing of the joint venture also includes funding from
local Chinese institutions, including long-term leasehold and
local debt financing.
Customers and Applications
We design, develop, manufacture and market thousands of products
that we sell to approximately 1,300 direct customers. Our major
customers include
Alcatel-Lucent, Bosch,
Cisco, Conti, Delphi, Delta, Denso, Ericsson, Hewlett-Packard,
LG Electronics, Marelli, Maxtor, Motorola, Nokia, Philips,
Pioneer, Samsung, Seagate, Siemens, Thomson, Vestel, Visteon and
Western Digital. To many of our key customers we provide a wide
range of products, including application-specific products,
discrete devices, memory products and programmable products. Our
position as a strategic supplier of application-specific
products to certain customers fosters close relationships that
provide us with opportunities to supply such customers
requirements for other products, including discrete devices,
programmable products and memory products. We also sell our
products through distributors and retailers, including Arrow
Electronics, Avnet, BSI Group, Wintech and Yosun.
The following table sets forth certain of our significant
customers and certain applications for our products:
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Telecommunications |
Customers:
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2Wire |
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Finisar |
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Nokia |
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BG/Tech |
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Alcatel-Lucent |
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Huawei |
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Nortel Networks |
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Siemens |
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BenQ |
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LG Electronics |
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Philips |
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Sony Ericsson |
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Cisco |
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Motorola |
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Samsung |
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TCL Corporation |
Applications:
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Camera modules/ mobile imaging
Central office switching systems
Data transport (routing, switching for electronic and
optical networks)
Digital cellular telephones
Internet access (XDSL) |
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Portable multimedia
Telephone terminals
(wireline and wireless)
Wireless connectivity
(Bluetooth, WLAN,
FM radio)
Wireless infrastructure |
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Computer Peripherals |
Customers:
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Agilent |
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Delta |
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Lexmark |
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Samsung |
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Apple |
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Hewlett-Packard |
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Taiwan-Liton |
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Seagate |
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Xilinx |
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Intel |
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Maxtor |
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Western Digital |
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Dell |
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Lenovo-IBM |
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Microsoft |
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Wintech |
Applications:
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Data storage
Monitors and displays |
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Power management
Printers
Webcams |
Automotive |
Customers:
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Bosch |
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Harman |
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Hitachi |
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TRW |
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Conti |
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Hella |
|
Marelli |
|
Valeo |
|
|
Delphi |
|
Kostal |
|
Pioneer |
|
Visteon |
|
|
Denso |
|
Lear |
|
Siemens VDO |
|
Oasis |
|
|
|
|
|
|
Sirius |
|
XM Satellite |
Applications:
|
|
Airbags
Anti-lock braking systems
Body and chassis electronics
Engine management systems
(ignition and injection) |
|
Global positioning
systems Multimedia
Radio/ satellite radio
Telematics
Vehicle stability
control |
Consumer |
Customers:
|
|
ADB |
|
LG Electronics |
|
Pace |
|
AOC |
|
|
Bose Corporation |
|
Nintendo |
|
Philips |
|
Sony |
|
|
Echostar |
|
Skyworth |
|
Samsung |
|
Thomson |
|
|
Humax |
|
Safran |
|
Scientific Atlanta |
|
TTE WW |
|
|
|
|
|
|
Matsushita |
|
Vestel |
Applications:
|
|
Audio processing (CD, DVD, Hi-Fi) |
|
|
|
DVDs
Imaging |
|
|
|
|
Analog/ digital TVs |
|
|
|
Set-top boxes |
|
|
|
|
Digital cameras |
|
|
|
VCRs |
|
|
|
|
Digital music players |
|
|
|
Displays |
|
|
Industrial/ Other
Applications |
Customers:
|
|
American Power Conversion |
|
Delta |
|
General Electric |
|
Philips |
|
|
Artesyn |
|
Gemalto |
|
Vodafone |
|
Siemens |
|
|
Astec |
|
Universal Lighting |
|
Nagra |
|
TIM |
|
|
Autostrade |
|
|
|
Giesecke & Devrient |
|
Mikron JSC |
Applications:
|
|
Battery chargers
Smartcard ICs
Intelligent power switches
Industrial automation/ control systems
Lighting systems
(lamp ballasts) |
|
MEMS
Motor controllers
Power supplies
Switch mode power
supplies |
In 2006, our largest customer, Nokia, represented 21.8% of our
net revenues, compared to 22.4% in 2005 and 17.1% in 2004. No
other single customer accounted for more than 10% of our net
revenues. Sales to our OEM customers accounted for approximately
81% of our net revenues in 2006, from approximately 82% of our
net revenues in 2005 and 79% in 2004. Sales to our top ten OEM
customers were approximately 51% of total revenues in 2006, 50%
in 2005 and 44% in 2004. We have several large customers,
certain of whom have entered into strategic alliances with us.
Many of our key customers operate in cyclical businesses and
have in the past, and may in the future, vary order levels
significantly from period to period. In addition, approximately
19% of our net revenues in 2006 were sold through distributors,
compared to 18% in 2005 and 21% in 2004. There can be no
assurance that such customers or distributors, or any other
customers, will continue to place orders with us in the future
at the same levels as in prior periods. See Item 3.
Key Information Risk Factors Risks
Related to Our Operations Disruptions in our
relationships with any one of our key customers could adversely
affect our results of operations.
Sales, Marketing and Distribution
We operate regional sales organizations in Europe, North
America, Asia Pacific, Greater China, Japan, and Emerging
Markets, which include Latin America, the Middle East and
Africa, Europe (non-EU and non-EFTA),
32
Russia and India. For a breakdown of net revenues by product
segment and geographic region for each of the three years ended
December 31, 2006, see Item 5. Operating and
Financial Review and Prospects Results of
Operations Segment Information.
The European region is divided into seven business units:
automotive, consumer and computers, Smartcard, telecom, EMS,
industrial, and distribution. Additionally, for all products,
including commodities and dedicated ICs, we actively promote and
support the sales of these products through sales force, field
application engineers, supply-chain management and
customer-service, and a technical competence center for
system-solutions, with support functions provided locally.
In the North America region, the sales and marketing team is
organized into seven business units. They are located near major
centers of activity for either a particular application or
geographic region: automotive (Detroit, Michigan), industrial
(Boston, Massachusetts), consumer (Chicago, Illinois), computer
and peripheral equipment (San Jose, California and
Longmont, Colorado), RFID and Smartcard (Longmont, Colorado),
communications (Dallas, Texas) and distribution (Boston,
Massachusetts). Each regional business unit has a sales force
that specializes in the relevant business sector, providing
local customer service, market development and specialized
application support for differentiated system-oriented products.
This structure allows us to monitor emerging applications, to
provide local design support, and to identify new products for
development in conjunction with the various product divisions as
well as to develop new markets and applications with our current
product portfolio. A central product-marketing operation in
Boston provides product support and training for standard
products for the North American region, while a logistics center
in Phoenix, Arizona supports
just-in-time delivery
throughout North America. In addition, a comprehensive
distribution business unit provides product and sales support
for the regional distribution network.
In the Asia Pacific region during 2006, sales and marketing
segments were managed from our regional sales headquarters in
Singapore and organized into nine segments (computer and
peripheral, automotive, industrial/computer/ MPA, home
entertainment, communications and mobile multimedia, display,
Smartcard and security, distribution and EMS) with three
transversal support organizations (business management, field
quality and communications). We have sales offices in Korea,
Malaysia, Thailand and Australia. The Singapore sales
organization provides central marketing, customer service,
technical support, logistics, an application laboratory and
design services for the entire region. In addition, there is a
design center in Korea.
On January 1, 2006, we created a new sales region,
Greater China, which encompasses China, Taiwan and
Hong Kong. This new sales region is dedicated to sales, design
and support resources and is aimed at expanding on our many
years of successful participation in this quickly growing
market, not only with transnational customers that have
transferred their manufacturing to China, but also with domestic
customers. This market is expected to grow significantly in the
next few years according to industry analysts. In 2006, we grew
our sales in Greater China by 16% and industry analysts
estimated that we were one of the top five semiconductor
suppliers in China.
In Japan, the large majority of our sales have historically been
made through distributors, as is typical for foreign suppliers
to the Japanese market. However, we are now seeking to work more
directly with our major customers to address their requirements.
We provide marketing and technical support services to customers
through sales offices in Tokyo and Osaka. In addition, we have
established a design center and application laboratory in Tokyo.
The design center designs custom ICs for Japanese clients, while
the application laboratory allows Japanese customers to test our
products in specific applications. In 2006, we implemented
changes in our organization for Japan and are targeting, by
expanding our sales design and support resources, to improve our
coverage of this significant market for the products we serve.
In 2006, our sales grew by more than 30% in Japan, while the
Japanese market grew only 5%.
Our Emerging Markets organization includes Latin America, the
Middle East and Africa, Europe (non-EU and non-EFTA) and Russia
as well as our design and software development centers in India.
The sales and marketing activities carried out by our regional
sales organizations are supported by the product marketing that
is carried out by each product division, which also include
product development functions. This matrix system reinforces our
sales and marketing activities and our broader strategic
objectives. We have initiated a program to expand our customer
base. This programs key elements include adding sales
representatives, adding regional competence centers and new
generations of electronic tools for customer support.
Except for Emerging Markets, each of our regional sales
organizations operates dedicated distribution organizations. To
support the distribution network, we operate logistic centers in
Saint Genis, France; Phoenix, Arizona and Singapore.
We also use distributors and representatives to distribute our
products around the world. Typically, distributors handle a wide
variety of products, including products that compete with our
products, and fill orders
33
for many customers. Most of our sales to distributors are made
under agreements allowing for price protection and/or the
right-of-return on unsold merchandise. We generally recognize
revenues upon transfer of ownership of the goods at shipment.
Sales representatives generally do not offer products that
compete directly with our products, but may carry complementary
items manufactured by others. Representatives do not maintain a
product inventory; instead, their customers place large quantity
orders directly with us and are referred to distributors for
smaller orders.
At the request of certain of our customers, we are also selling
and delivering our products to EMS, which, on a contractual
basis with our customers, incorporate our products into the
application-specific products which they manufacture for our
customers. Certain customers require us to hold inventory on
consignment in their hubs and only purchase inventory when they
require it for their own production. This may lead to delays in
recognizing revenues as such customers may choose within a
specific period of time the moment when they accept delivery of
our products.
Research and Development
We believe that research and development is critical to our
success, and we are committed to increasing research and
development expenditures in the future. The main research and
development (R&D) challenge we face is to
continually increase the functionality, speed and
cost-effectiveness of our semiconductor devices, while ensuring
that technological developments translate into profitable
commercial products as quickly as possible.
We are market driven in our research and development and focused
on leading-edge products and technologies developed in close
collaboration with strategic alliance partners, leading
universities and research institutes, key customers and global
equipment manufacturers working at the cutting edge of their own
markets. On January 1, 2005, we created a new Front-End
Technology and Manufacturing organization (FTM)
encompassing the present front-end manufacturing and central
research and development functions in order to improve our
technology research and development effectiveness and our
manufacturing competitiveness and efficiency. The research and
development activities relating to new products are managed by
the Product Segments and consist mainly of design activities
while the process technologies research and development
activities are managed by our new FTM organization.
In 2005, we reallocated approximately 10% of our research and
development resources in favor of higher priority projects for
both process technology development and product design with the
aim to increase the efficiency of our research and development
activity and accelerate product innovation. In addition, we
focus on our key technology and product programs that set a
clear roadmap with defined milestones and that are reviewed at
least once every quarter by our Executive Committee.
We invest in a variety of research and development projects
ranging from long-term advanced research in line with industry
requirements and roadmaps such as the International Technology
Roadmap for Semiconductors (ITRS), of our broad
range of process technologies including BiCMOS; Bipolar, CMOS
and DMOS (BCD); High Performance Logic; and
stand-alone and embedded Flash and other nonvolatile memories;
to the continued expansion of our system-level design expertise
and IP creation for advanced architecture for SoC integration,
as well as new products for many key applications in digital
consumer, wireless communications and networking, computer
peripherals, Smartcards and car multimedia, among others.
We continue to make significant investments in research and
development, while reducing these investments as a percentage of
revenues. In 2006, we spent $1,667 million on research and
development, which represented approximately a 2% increase from
$1,630 million in 2005, while 2005 spending represented a
6% increase from $1,532 million in 2004. The table below
sets forth information with respect to our research and
development spending since 2004. Our reported research and
development expenses are mainly in product design, technology
and development and do not include marketing and design-center
costs which are accounted for as selling expenses, or process
engineering, pre-production and process-transfer costs, which
are accounted for as cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Expenditures
|
|
$ |
1,667 |
|
|
$ |
1,630 |
|
|
$ |
1,532 |
|
As a percentage of net revenues
|
|
|
16.9 |
% |
|
|
18.3 |
% |
|
|
17.5 |
% |
Approximately 86% of our research and development expenses in
2006 were incurred in Europe, primarily in France and Italy. See
Public Funding below. As of
December 31, 2006, we employed approximately 10,300
employees in research and development activities worldwide.
34
We devote significant effort to R&D because semiconductor
manufacturers face immense pressure to be the first to make
breakthroughs that can be leveraged into competitive advantages;
new developments in semiconductor technology can make end
products significantly cheaper, smaller, faster or more reliable
than their predecessors and enable, through their timely
appearance on the market, significant value creation
opportunities.
To ensure that new technologies can be exploited in commercial
products as quickly as possible an integral part of our R&D
philosophy is concurrent engineering, meaning that new
fabrication processes and the tools needed to exploit them are
developed simultaneously. Typically, these include not only EAD
software, but also cell libraries that allow access to our rich
IP portfolio and a demonstrator product suitable for subsequent
commercialization. In this way, when a new process is delivered
to our product segments or made available to external customers,
they are more able to develop commercial products immediately.
Our R&D activities are conducted on a worldwide scale and
focus on very large scale integration (VLSI)
technology. Our major centers for VLSI technology development
are located in Crolles (France) and Agrate Brianza (Italy).
Other advanced R&D centers are strategically located around
the world: in Italy (Catania), France (Grenoble, Tours and
Rousset), the United States (Phoenix, Carrollton, and
San Diego), Canada (Ottawa), the United Kingdom (Bristol
and Edinburgh), Switzerland (Geneva), India (Noida and
Bangalore), China (Beijing, Shenzhen and Shanghai) and Singapore.
In Crolles we are cooperating through 2007 with NXP
Semiconductors and Freescale Semiconductor as part of the
Crolles2 alliance to jointly develop sub-micron CMOS logic
processes on 300-mm wafers and to build and operate an advanced
300-mm wafer pilot line in Crolles, France. The pilot line was
officially inaugurated on February 27, 2003, and the first
silicon rolled off the line during the first quarter of 2003
with the stated goal of accelerating the development of future
technologies and their proliferation throughout the
semiconductor industry. On January 31, 2005, the Crolles2
alliance extended the scope of the joint semiconductor research
and development activities to include research and development
related to wafer testing and packaging. The agreement reflects
the special needs of wafer testing and packaging for devices
produced on 300-mm wafers in
90-nm and smaller
technologies. In September 2005, we extended this agreement to
cover the development and licensing of core libraries. The
initial five-year term of our Crolles2 agreement had been set
through December 31, 2007 and on January 12, 2007 NXP
Semiconductors informed us that they would cease participation
in the alliance at year end. Freescale Semiconductor has also
notified us that the Crolles2 alliance will terminate as of such
date. For our own core process technology development below
45-nm, we intend to
work with an industry leader, and are currently in negotiations
with potential partners. We intend, however, to continue to
develop state-of-the-art derivative technologies (defined as RF
CMOS, Power CMOS and CMOS Imaging) at Crolles2.
In addition, our manufacturing facility in Crolles, France
houses a research and development center that is operated in the
legal form of a French Groupement dintérêt
économique (GIE) named Centre Commun
de Microelectronique de Crolles. Laboratoire
dElectronique de Technologie dInstrumentation
(LETI), a research laboratory of Commissariat de
lEnergie Atomique (CEA), an affiliate of Areva
Group (one of our indirect shareholders), is our partner.
There can be no assurance that we will be able to develop future
technologies and commercially implement them on satisfactory
terms, or that we will be able to successfully enter into new
alliances for the development of core CMOS technologies on
satisfactory terms beyond 2007, or that we will be able to find
new partners to pursue advanced technology developments in
Crolles2, upon the termination of our Crolles2 Agreement. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
Our research and development efforts are increasingly expensive
and dependent on alliances, and our business, results of
operations and prospects could be materially adversely affected
by the failure or termination of such alliances, or failure to
find new partners in such alliances, in developing new process
technologies in line with market requirements.
Our 200-mm central R&D facility in Agrate (Italy)
(R2) is focused on the development of new generation
Flash memories from which other nonvolatile memory products are
derived: EEPROM, EPROM/ OTP, Smartcards and memory embedded
ASIC. We are currently developing new products for both NOR and
NAND in advanced technologies, with a strong focus on 2-bit per
cell technologies.
The Agrate R2 activity encompasses prototyping, pilot and volume
production of the newly developed technologies with the
objective to accelerate process industrialization and
time-to-market. As part of the recently announced plans to
separate the activities of our Flash Memories Group, the
activities in Agrate will be split between those which will
remain with us and those attributed to the Flash Memories Group.
There is no assurance that we will be successful in implementing
such reorganization or enjoy the expected benefits.
Our center in Phoenix works on technologies for digital
integrated circuits. These are also areas of great strategic
importance and the advances made in recent years have placed us
among the world leaders in logic
35
technology. In addition, our contacts with universities, such as
the University of California at Berkeley and Carnegie Mellon in
the United States, have made innovative product development
possible.
Our intellectual property design center in Noida, India supports
all of our major design activities worldwide and hosts a major
central R&D activity focused on software and core libraries
development, with a strong emphasis on system solutions. Our
corporate technology R&D teams work in a wide variety of
areas that offer opportunities to harness our deep understanding
of microelectronics and our ability to synthesize knowledge from
around the world. These include:
|
|
|
|
|
Soft Computing, in which a variety of problem-solving techniques
such as fuzzy logic, neural networks and genetic algorithms are
applied to situations where the knowledge is inexact or the
computational resources required to obtain a complete solution
would be excessive using traditional computing architectures.
Potential applications include more effective automotive engine
control, emerging fuel-cell technology and future
quantum-computing techniques that will offer much greater
computational speeds than are currently achievable; |
|
|
|
Nano-Organics, which encompasses a variety of emerging
technologies that deal with structures smaller than the deep
sub-micron scale containing as little as a few hundred or
thousand atoms. Examples include carbon nanotubes, which have
potential applications in displays and memories, and all
applications that involve electronic properties of large
molecules such as proteins; and |
|
|
|
Micro-Machining, in which the ability to precisely control the
mechanical attributes of silicon structures is exploited. There
are many potential applications, including highly sensitive
pressure and acceleration sensors, miniature microphones,
microfluidic devices and optical devices. In addition, along
with its optical properties, the mechanical properties of
silicon represent one of the most important links between
conventional SoC technology and all the emerging technologies
such as bioelectronics that can benefit from our semiconductor
expertise. |
The fundamental mission of our Advanced System Technology
(AST) organization is to create system knowledge that
supports our
system-on-chip (SoC)
development. ASTs objective is to develop the advanced
architectures that will drive key strategic applications,
including digital consumer, wireless communications, computer
peripherals and Smartcards, as well as the broad range of
emerging automotive applications such as car multimedia. The
group has played a key role in establishing our pre-eminence in
mobility, connectivity, multimedia, storage and security, the
core competences required to drive todays convergence
markets.
ASTs challenge is to combine the expertise and
expectations of our customers, industrial and academic partners,
our central R&D teams and product segments to create a
cohesive, practical vision that defines the hardware, software
and system integration knowledge that we will need in the next
three to five years and the strategies required to master them.
In addition, AST includes a team dedicated to longer-term system
research, which works in synergy with university research teams,
allowing a continuous flow of ideas from world-class research
centers. AST has eight large laboratories around the world, plus
a number of smaller locations located near universities and
research partners. Its major laboratories are located in: Agrate
Brianza; Catania; Castelletto; Geneva; Grenoble; Lecce; Noida;
Portland, Oregon; Rousset; and San Diego, California.
We also have divisional R&D centers such as those in
Castelletto, Catania and Tours that carry out more specialized
work that benefits from their close relationship to their
markets. For example, Castelletto pioneered the BCD process that
created the world smart-power market and has developed advanced
MEMS (Micro-Electronic-Mechanical Systems) technologies used to
build products such as inkjet printheads, accelerometers and the
worlds first single chip microarray for DNA amplification
and detection.
The Application Specific Discretes
(ASDtm)
technology developed at Tours has allowed ST to bring to the
market numerous products that can handle high bi-directional
currents, sustain high voltages or integrate various discrete
elements in a single chip, like the Integrated Passive and
Active Devices (IPADs). ASD technology has proved increasingly
successful in a variety of telecom, computer and industrial
applications: ESD protection and AC switching are key areas
together with RF filter devices.
The Catania facility hosts a wide range of R&D activities
and its major divisional R&D achievements in recent years
include the development of our revolutionary
PowerMESHTM
and
STripFETTM
MOSFET families.
Our other specialized divisional R&D centers are located in
Grenoble (packaging R&D, IP center), and Rousset (Smartcard
and microcontroller development), in addition to a host of
centers focusing on providing a complete system approach in
digital consumer applications, such as TVs, DVD players, set-top
boxes and cameras. These centers are located in various
locations including: Beijing; Bristol; Carrollton, Texas;
Edinburgh; Grenoble; Noida; Rousset; and Singapore. For
Smartcard SoC, we have centers in Prague and Shanghai.
36
All of these worldwide activities create new ideas and
innovations that enrich our portfolio of intellectual property
and enhance our ability to provide our customers with winning
solutions.
Furthermore, an array of important strategic customer alliances
ensures that our R&D activities closely track the changing
needs of the industry, while a network of partnerships with
universities and research institutes around the world ensures
that we have access to leading-edge knowledge from all corners
of the world. We also play leadership roles in numerous projects
running under the European Unions IST (Information Society
Technologies) programs. We actively participate in these
programs and continue collaborative R&D efforts within the
MEDEA+ research program.
Finally, we believe that platforms are the answer to the growing
need for full system integration, as customers require from
their silicon suppliers not just chips, but an optimized
combination of hardware and software. More than 1,500 engineers
and designers are currently developing the five platforms we
selected to spearhead our future growth in some of the fastest
developing markets of the microelectronics industry. The five
platforms include:
|
|
|
|
|
Two in the area of consumer: set-top boxes, ranging from digital
terrestrial, to cable, and satellite to Internet Protocol based
devices, and Integrated Digital TV, which will include the
expected promising new wave of High-Definition sets; |
|
|
|
One in the area of computer peripherals: the SPEAr family of
reconfigurable SoC ICs for printers and related
applications; and |
|
|
|
Two in the area of wireless: Application Processors, namely our
Nomadik platform that is bringing multimedia to the
next-generation mobile devices and Wireless Infrastructure for
3G base-stations. |
37
Property, Plants and Equipment
We currently operate 15 (as per table below) main manufacturing
sites around the world. The table below sets forth certain
information with respect to our current manufacturing
facilities, products and technologies. Front-end manufacturing
facilities are wafer fabrication plants, known as fabs, and
back-end facilities are assembly, packaging and final testing
plants.
|
|
|
|
|
Location |
|
Products |
|
Technologies |
|
|
|
|
|
Front-end facilities
|
|
|
|
|
Crolles1, France
|
|
Application-specific products |
|
Fab: 200-mm CMOS and BiCMOS, research and development on VLSI
sub-micron technologies |
Crolles2, France(1)
|
|
Application-specific products and leading edge logic products |
|
Fab: 300-mm research and development on deep sub-micron (90-nm
and below) CMOS and system-on-chip (SoC) technology
development |
Phoenix, Arizona
|
|
Application-specific products and microcontrollers |
|
Fab: 200-mm CMOS, BiCMOS, BCD |
Agrate, Italy
|
|
Nonvolatile memories, |
|
Fab 1: 200-mm BCD, nonvolatile |
|
|
microcontrollers and application- |
|
memories, MEMS |
|
|
specific products |
|
Fab 2: 200-mm Flash, embedded Flash, research and development on
nonvolatile memories and BCD technologies |
Rousset, France
|
|
Microcontrollers, nonvolatile |
|
Fab 1: 150-mm CMOS, Smartcard |
|
|
memories and Smartcard ICs and |
|
(phase-out to be completed in early |
|
|
application-specific products |
|
2007) |
|
|
|
|
Fab 2: 200-mm CMOS, Smartcard, embedded Flash |
Catania, Italy
|
|
Power transistors, Smart Power |
|
Fabs 1/2: 150-mm Power metal-on |
|
|
ICs and nonvolatile memories |
|
silicon oxide semiconductor process technology
(MOS),VIPpowertm,
MO-3 and Pilot Line RF |
|
|
|
|
Fab 3: 200-mm Flash, Smartcard, EEPROM 300-mm building
constructed but not fully facilitized and equipped |
Tours, France
|
|
Protection thyristors, diodes and application specific
discrete-power transistors |
|
Fab: 125-mm, 150-mm and 200-mm pilot line discrete |
Ang Mo Kio, Singapore
|
|
Microcontrollers, power transistors, commodity products,
nonvolatile memories, and application-specific products |
|
Fab 1: 125-mm, power MOS, bipolar transistor, bipolar ICs,
standard linear
Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smartcard,
Micros
Fab 3: 200-mm BiCMOS, Flash Memories |
Carrollton, Texas
|
|
Memories and application-specific products |
|
Fab: 150-mm BiCMOS, BCD and CMOS |
Back-end facilities
|
|
|
|
|
Muar, Malaysia
|
|
Application-specific and standard products, microcontrollers |
|
|
Kirkop, Malta
|
|
Application-specific products |
|
|
Toa Payoh, Singapore
|
|
Nonvolatile memories and power ICs |
|
|
Ain Sebaa, Morocco
|
|
Discrete and standard products |
|
|
Bouskoura, Morocco
|
|
Nonvolatile memories, discrete and standard products,
micromodules, RF and subsystems |
|
|
Shenzhen, China(2)
|
|
Nonvolatile memories, discrete and standard products |
|
|
38
|
|
(1) |
Operated jointly with NXP Semiconductors and Freescale
Semiconductor. The agreement will terminate at the end of 2007. |
|
(2) |
Jointly operated with SHIC, a subsidiary of Shenzhen Electronics
Group. |
As of December 31, 2006, we had a total of approximately
610,000 square meters of front-end facilities, comprised of
approximately 370,000 square meters in Europe,
approximately 90,000 square meters in the United States and
approximately 150,000 square meters in Asia (these numbers
exclude Crolles2 and M6). We also had a total of approximately
280,000 square meters of back-end facilities.
At the end of 2006, our front-end facilities had total capacity
of approximately 125,000 200-mm equivalent wafer starts per
week. The number of wafer starts per week varies from facility
to facility and from period to period as a result of changes in
product mix. We have seven 200-mm wafer production facilities
currently in operation. Of these, four (at Crolles, France;
Agrate, Italy; Catania, Italy; and Phoenix, Arizona) have full
design capacity installed as of December 31, 2006; as of
the same date, fabs (in Rousset, France and in Singapore) have
approximately two-thirds of the ultimate capacity installed. Our
latest 200-mm line in Agrate, Italy primarily planned for MEMS
products was still in the
start-up phase on
December 31, 2006.
We, along with our partners NXP Semiconductors and Freescale
Semiconductor, began volume production in our advanced 300-mm
wafer pilot-line fabrication facility in Crolles, France in the
first half of 2004. By the end of 2006, the pilot line produced
approximately 2,500 wafers per week.
At the end of 2006, the building shell for our future 300-mm
wafer volume manufacturing fabrication facility in Catania,
Italy and the first phase of facilitization were completed. In
December 2006, we received confirmation from the Italian
Government that the conditions concerning investment and
employment linked to the grant of subsidies for the
construction, facilitization and equipment of our new M6
facility could be met during the period 2006 to 2009, instead of
the original period expiring in 2006. Because of the location of
this new 300-mm facility as well as other 200-mm and 150-mm
facilities in southern Italy (Catania, Sicily), we face the risk
that an earthquake could damage such facilities. Any disruption
in our product development capability or our manufacturing
capability arising from earthquakes could cause significant
delays in the production or shipment of our products until we
are able to shift development or production to different
facilities or arrange for third parties to manufacture our
products. Such risks, like other risks, may not be fully or
adequately covered under our corporate insurance policies. See
Item 8. Financial Information Risk
Management and Insurance.
We own all of our manufacturing facilities, except Crolles2,
France, which is the subject of a capital lease.
We have historically subcontracted a portion of total
manufacturing volumes to external suppliers. We have recently
announced that our goal is to reduce our capital investment
spending to sales ratio from above 20% in the past several years
to a target of 12%, due to the change in the structural growth
of the semiconductor market which has moved from double to
single digit over the last ten years. The reduction in our
capital investments is also designed to reduce our dependence on
economic cycles which affects the loading of our fabs and to
decrease the burden of depreciation on our financial performance
while optimizing opportunities between internal and external
front-end production.
During the most recent downturns in the industry, we limited our
capital investment, allocating it to strategic projects such as
the evolution of the production capability to finer geometries
in the 200-mm facilities; the development of advanced
manufacturing processes (90-nm and 65-nm); the improvement in
the quality of our operations; the
ramp-up of the new
200-mm production facility in Singapore; the continuation of the
two 300-mm projects (Crolles, France, for pilot-line; Catania,
Italy, for volume manufacturing); the
ramp-up to volume
manufacturing of the new Bouskoura, Morocco back-end facility;
and the completion of the extension of the back-end Shenzhen,
China facility. We have also increased overall installed
front-end capacity.
As of December 31, 2006, we had $467 million in
outstanding commitments for purchases of equipment for delivery
in 2007. The most significant of our 2007 capital expenditure
projects are expected to be: for the front-end facilities,
(i) in Agrate (Italy), related to the upgrading of our
200-mm pilot line, the
ramp-up of the 200-mm
line for MEMS and the expansion of capacity to our 200-mm fab;
(ii) the upgrading to finer geometry technologies for our
200-mm plant in Rousset (France); (iii) the upgrading of
our 200-mm plant in Singapore; and (iv) for the back-end
facilities, the capital expenditures will be mainly dedicated to
the capacity expansion in our plants in Shenzhen (China) and
Muar (Malaysia) and capacity upgrade in Malta and Toa Payoh
(Singapore). We will continue to monitor our level of capital
spending, however, taking into consideration factors such as
trends in the semiconductor industry, capacity utilization and
announced additions. We plan 2007 capital expenditures to be
approximately $1.2 billion, although we have the
flexibility to modulate our investments to changes in market
conditions. The major part of this amount will be allocated to
leading-edge technologies and research and development programs.
39
Although each fabrication plant is dedicated to specific
processes, our strategy is to develop local presence to better
serve customers and mitigate manufacturing risks by having key
processes operated in different manufacturing plants. In certain
countries, we have been granted tax incentives by local
authorities in line with local regulations, being recognized as
an important contributor to the economies where our plants are
located. In periods of industry capacity limitations we have
sought to minimize our capital expenditure needs by purchasing
from subcontractors both wafer foundry and back-end services. In
difficult market conditions, we may face overcapacity issues,
particularly in our older fabrication facilities that use mature
process technologies. Like other semiconductor manufacturers, we
could have mature fabrication facility capacity being only
partially used, which may affect our cost of operations. Such
overcapacity has led us, in recent years, to close manufacturing
facilities using more mature process technologies and
restructure our 150-mm manufacturing. In 2002, we completed the
closure of our 150-mm wafer manufacturing facility in Rancho
Bernardo, California. Pursuant to such closure in 2002, we
recorded impairment, restructuring charges and related closure
costs of $34 million. In 2003, we recorded impairment,
restructuring charges and other related closure costs of
$205 million pursuant to a plan announced in October 2003
to increase our cost competitiveness by restructuring our 150-mm
fab operations and part of our back-end operations. In 2004, our
150-mm wafer manufacturing facility in Rennes, France and our
back-end facility in Tuas, Singapore were closed pursuant to
this restructuring initiative and the total amount of
impairment, restructuring charges and other related closure
pre-tax costs amounted to $76 million. In 2005, the amount
of impairment, restructuring charges and other related closure
pre-tax costs amounted to $128 million. See
Item 5. Operating and Financial Review and
Prospects and Note 19 to the Consolidated Financial
Statements. In 2006, we were still incurring charges for
impairment, restructuring and other closure costs related to the
ongoing plans, which included the closing of the Casteletto,
Italy production facility and concentrating EWS activities in
Singapore. These actions were largely completed at
December 31, 2006; the total amount of these charges in
2006 was $77 million.
Through the period ended December 31, 2006, we have
incurred $316 million of the total expected of
approximately $330 million in pre-tax charges associated
with the 150-mm restructuring plan, slightly down from the
original estimate of $350 million that was defined on
October 22, 2003, and which was substantially completed in
the second half of 2006.
Our manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an
effort to improve yields and product performance. Impurities or
other difficulties in the manufacturing process can lower
yields, interrupt production or result in losses of products in
process. As system complexity has increased and sub-micron
technology has become more advanced, manufacturing tolerances
have been reduced and requirements for precision and excellence
have become even more demanding. Although our increased
manufacturing efficiency has been an important factor in our
improved results of operations, we have from time to time
experienced production difficulties that have caused delivery
delays and quality control problems, as is common in the
semiconductor industry.
No assurance can be given that we will be able to increase
manufacturing efficiency in the future to the same extent as in
the past or that we will not experience production difficulties
in the future.
As is common in the semiconductor industry, we have from time to
time experienced difficulty in ramping up production at new
facilities or effecting transitions to new manufacturing
processes and, consequently, have suffered delays in product
deliveries or reduced yields. There can be no assurance that we
will not experience manufacturing problems in achieving
acceptable yields, product delivery delays or interruptions in
production in the future as a result of, among other things,
capacity constraints, production bottlenecks, construction
delays, equipment failure or maintenance, ramping up production
at new facilities, upgrading or expanding existing facilities,
changing our process technologies, or contamination or fires,
storms, earthquakes or other acts of nature, any of which could
result in a loss of future revenues. In addition, the
development of larger fabrication facilities that require
state-of-the-art
sub-micron technology and larger-sized wafers has increased the
potential for losses associated with production difficulties,
imperfections or other causes of defects. In the event of an
incident leading to an interruption of production at a fab, we
may not be able to shift production to other facilities on a
timely basis, or our customers may decide to purchase products
from other suppliers, and, in either case, the loss of revenues
and the impact on our relationship with our customers could be
significant. Our operating results could also be adversely
affected by the increase in our fixed costs and operating
expenses related to increases in production capacity if revenues
do not increase commensurately. Finally, in periods of high
demand, we increase our reliance on external contractors for
foundry and back-end service. Any failure to perform by such
subcontractors could impact our relationship with our customers
and could materially affect our results of operations.
40
Intellectual Property
Intellectual property rights that apply to our various products
include patents, copyrights, trade secrets, trademarks and mask
work rights. A mask work is the two or three-dimensional layout
of an integrated circuit. We own more than 19,000 patents or
pending patent applications which have been registered in
several countries around the world and correspond to close to
9,000 patent families (each patent family containing all patents
originating from the same invention). We filed 609 new patent
applications around the world in 2006.
Our success depends in part on our ability to obtain patents,
licenses and other intellectual property rights covering our
products and their design and manufacturing processes. To that
end, we intend to continue to seek patents on our circuit
designs, manufacturing processes, packaging technology and other
inventions. The process of seeking patent protection can be long
and expensive, and there can be no assurance that patents will
issue from currently pending or future applications or that, if
patents are issued, they will be of sufficient scope or strength
to provide meaningful protection or any commercial advantage to
us. In addition, effective copyright and trade-secret protection
may be unavailable or limited in certain countries. Competitors
may also develop technologies that are protected by patents and
other intellectual property rights and therefore such
technologies may be unavailable to us or available to us subject
to adverse terms and conditions. Management believes that our
intellectual property represents valuable assets and intends to
protect our investment in technology by enforcing all of our
intellectual property rights. We have used our patent portfolio
to enter into several broad patent cross-licenses with several
major semiconductor companies enabling us to design, manufacture
and sell semiconductor products without fear of infringing
patents held by such companies, and intend to continue to use
our patent portfolio to enter into such patent cross-licensing
agreements with industry participants on favorable terms and
conditions. As our sales increase compared to those of our
competitors, the strength of our patent portfolio may not be
sufficient to guarantee the conclusion or renewal of broad
patent cross-licenses on terms which do not affect our results
of operations. Furthermore, as a result of litigation, or to
address our business needs, we may be required to take a license
to third-party intellectual property rights upon economically
unfavorable terms and conditions, and possibly pay damages for
prior use, and/or face an injunction, all of which could have a
material adverse effect on our results of operations and ability
to compete.
From time to time, we are involved in intellectual property
litigation and infringement claims. See Item 8.
Financial Information Legal Proceedings. In
the event a third-party intellectual property claim were to
prevail, our operations may be interrupted and we may incur
costs and damages, which could have a material adverse effect on
our results of operations, cash flow and financial condition.
Finally, we have received from time to time, and may in the
future receive communications from competitors or other parties
alleging infringement of certain patents and other intellectual
property rights of others, which has been and may in the future
be followed by litigation. Regardless of the validity or the
successful assertion of such claims, we may incur significant
costs with respect to the defense thereof, which could have a
material adverse effect on our results of operations, cash flow
or financial condition. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations We depend on patents to protect
our rights to our technology.
Backlog
Our sales are made primarily pursuant to standard purchase
orders that are generally booked from one to twelve months in
advance of delivery. Quantities actually purchased by customers,
as well as prices, are subject to variations between booking and
delivery and, in some cases, to cancellation due to changes in
customer needs or industry conditions. During periods of
economic slowdown and/or industry overcapacity and/or declining
selling prices, customer orders are not generally made far in
advance of the scheduled shipment date. Such reduced lead time
can reduce managements ability to forecast production
levels and revenues. When the economy rebounds, our customers
may strongly increase their demands, which can result in
capacity constraints due to our inability to match manufacturing
capacity with such demand.
In addition, our sales are affected by seasonality, with the
first quarter generally showing lowest revenue levels in the
year, and the third or fourth quarter generating the highest
amount of revenues due to electronic products purchased from
many of our targeted market segments for the holiday period.
We also sell certain products to key customers pursuant to frame
contracts. Frame contracts are annual contracts with customers
setting forth quantities and prices on specific products that
may be ordered in the future. These contracts allow us to
schedule production capacity in advance and allow customers to
manage their inventory levels consistent with
just-in-time principles
while shortening the cycle times required to produce ordered
products. Orders under frame contracts are also subject to a
high degree of volatility, because they reflect expected market
conditions which may or may not materialize. Thus, they are
subject to risks of price reduction, order cancellation and
modifications as to quantities actually ordered resulting in
inventory build-ups.
41
Furthermore, developing industry trends, including
customers use of outsourcing and their deployment of new
and revised supply chain models, may reduce our ability to
forecast changes in customer demand and may increase our
financial requirements in terms of capital expenditures and
inventory levels.
Our backlog (defined here to include frame orders) decreased
significantly in 2001 from the levels of 2000, reflecting the
most severe downturn in the semiconductor industry. Starting in
2002 we steadily registered an increase in the backlog compared
to 2001, which continued in 2003 compared to 2002. We entered
2004 with a backlog approximately 30% higher than we had
entering 2003. Following the industry-wide over-inventory
situation and the declining level of order booking in the second
half of 2004, we entered 2005 with an order backlog that was
lower than we had entering 2004. During 2005, our backlog
registered a solid increase. We entered 2006, with a backlog
higher than we had entering 2005, while, due to a more difficult
industry environment, we are entering 2007 with an order backlog
that is lower than what we had entering 2006.
Competition
Markets for our products are intensely competitive. While only a
few companies compete with us in all of our product lines, we
face significant competition in each of our product lines. We
compete with major international semiconductor companies, some
of which may have substantially greater financial and other more
focused resources than we do with which to pursue engineering,
manufacturing, marketing and distribution of their products.
Smaller niche companies are also increasing their participation
in the semiconductor market, and semiconductor foundry companies
have expanded significantly, particularly in Asia. Competitors
include manufacturers of standard semiconductors, ASICs and
fully customized ICs, including both chip and board-level
products, as well as customers who develop their own IC products
and foundry operations. Some of our competitors are also our
customers.
The primary international semiconductor companies that compete
with us include Analog Devices, Broadcom, IBM, Infineon
Technologies, Intel, International Rectifier, Fairchild
Semiconductor, Freescale Semiconductor, Linear Technology, LSI
Logic, Marvell Technology Group, Maxim Integrated Products,
Microchip Technology, National Semiconductor, Nippon Electric
Company, ON Semiconductor, NXP Semiconductors, Qualcomm,
Renesas, Samsung, Spansion, Texas Instruments and Toshiba.
We compete in different product lines to various degrees on the
basis of price, technical performance, product features, product
system compatibility, customized design, availability, quality
and sales and technical support. In particular, standard
products may involve greater risk of competitive pricing,
inventory imbalances and severe market fluctuations than
differentiated products. Our ability to compete successfully
depends on elements both within and outside of our control,
including successful and timely development of new products and
manufacturing processes, product performance and quality,
manufacturing yields and product availability, customer service,
pricing, industry trends and general economic trends.
Organizational Structure and History
We are a multinational group of companies that designs,
develops, manufactures and markets a broad range of products
used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer
goods, automotive products and industrial automation and control
systems. We are organized in a matrix structure with
geographical regions interacting with product divisions, both
being supported by central functions, bringing all levels of
management closer to the customer and facilitating communication
among research and development, production, marketing and sales
organizations.
While STMicroelectronics N.V. is the parent company, we also
conduct our operations through our subsidiaries. With the
exception of our subsidiaries in Shenzhen, China, in which we
own 60% of the shares and voting rights; Hynix, ST (China), a
joint venture company, in which we own a 33% equity
participation; Shanghai Blue Media Co. Ltd (China), in which we
own 65%; and Incard do Brazil, in which we own 50% of the shares
and voting rights, STMicroelectronics N.V. owns directly or
indirectly 100% of all of our significant operating
subsidiaries shares and voting rights, which have their
own organization and management bodies, and are operated
independently in compliance with the laws of their country of
incorporation. We provide certain administrative, human
resources, legal, treasury, strategy, manufacturing, marketing
and other overhead services to our consolidated subsidiaries
pursuant to service agreements for which we receive compensation.
42
The following list includes our principal subsidiaries and
equity investments and the percentage of ownership we held as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership | |
Legal Seat |
|
Name |
|
(Direct or Indirect) | |
|
|
|
|
| |
Australia Sydney
|
|
STMicroelectronics PTY Ltd |
|
|
100 |
|
Belgium Zaventem
|
|
STMicroelectronics Belgium N.V. |
|
|
100 |
|
Belgium Zaventem
|
|
Proton World International N.V. |
|
|
100 |
|
Brazil Sao Paolo
|
|
STMicroelectronics Ltda |
|
|
100 |
|
Brazil Sao Paulo
|
|
Incard do Brazil Ltda |
|
|
50 |
|
Canada Ottawa
|
|
STMicroelectronics (Canada), Inc. |
|
|
100 |
|
China Shenzhen
|
|
Shenzhen STS Microelectronics Co. Ltd |
|
|
60 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Co. Ltd |
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Manufacturing Co. Ltd |
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) R&D Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) R&D Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
Shanghai Blue Media Co. Ltd |
|
|
65 |
|
China Shanghai
|
|
STMicroelectronics (China) Investment Co. Ltd |
|
|
100 |
|
China Jiangsu(1)
|
|
Hynix-ST Semiconductor Ltd |
|
|
33 |
|
China Beijing
|
|
STMicroelectronics (Beijing) R&D Co. Ltd |
|
|
100 |
|
Czech Republic Prague
|
|
STMicroelectronics Design and Application s.r.o. |
|
|
100 |
|
Finland Lohja
|
|
STMicroelectronics OY |
|
|
100 |
|
France Crolles
|
|
STMicroelectronics (Crolles 2) SAS |
|
|
100 |
|
France Montrouge
|
|
STMicroelectronics S.A. |
|
|
100 |
|
France Rousset
|
|
STMicroelectronics (Rousset) SAS |
|
|
100 |
|
France Tours
|
|
STMicroelectronics (Tours) SAS |
|
|
100 |
|
France Grenoble
|
|
STMicroelectronics (Grenoble) SAS |
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics GmbH |
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics Design and Application GmbH |
|
|
100 |
|
Holland Amsterdam
|
|
STMicroelectronics Finance B.V. |
|
|
100 |
|
Hong Kong Hong Kong
|
|
STMicroelectronics LTD |
|
|
100 |
|
India Noida
|
|
STMicroelectronics Pvt Ltd |
|
|
100 |
|
Israel Netanya
|
|
STMicroelectronics Ltd |
|
|
100 |
|
Italy Catania
|
|
CO.RI.M.ME. |
|
|
100 |
|
Italy Aosta
|
|
DORA S.p.a. |
|
|
100 |
|
Italy Agrate Brianza
|
|
ST Incard S.r.l. |
|
|
100 |
|
Italy Naples
|
|
STMicroelectronics Services S.r.l. |
|
|
100 |
|
Italy Agrate Brianza
|
|
STMicroelectronics S.r.l. |
|
|
100 |
|
Italy Caivano(1)
|
|
INGAM Srl |
|
|
20 |
|
Japan Tokyo
|
|
STMicroelectronics KK |
|
|
100 |
|
Malaysia Kuala Lumpur
|
|
STMicroelectronics Marketing SDN BHD |
|
|
100 |
|
Malaysia Muar
|
|
STMicroelectronics SDN BHD |
|
|
100 |
|
Malta Kirkop
|
|
STMicroelectronics Ltd |
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Marketing, S. de R.L. de C.V. |
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Design and Applications, S. de R.L. de C.V. |
|
|
100 |
|
Morocco Rabat
|
|
Electronic Holding S.A. |
|
|
100 |
|
Morocco Casablanca
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Singapore Ang Mo Kio
|
|
STMicroelectronics ASIA PACIFIC Pte Ltd |
|
|
100 |
|
Singapore Ang Mo Kio
|
|
STMicroelectronics Pte Ltd |
|
|
100 |
|
Spain Madrid
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Sweden Kista
|
|
STMicroelectronics A.B. |
|
|
100 |
|
Switzerland Geneva
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Switzerland Geneva
|
|
INCARD SA |
|
|
100 |
|
Switzerland Geneva
|
|
INCARD Sales and Marketing SA |
|
|
100 |
|
Turkey Istanbul
|
|
STMicroelectronics Elektronik Arastirma ve Gelistirme Anonim
Sirketi |
|
|
100 |
|
United Kingdom Marlow
|
|
STMicroelecrtonics Limited |
|
|
100 |
|
United Kingdom Marlow
|
|
STMicroelectronics (Research & Development) Limited |
|
|
100 |
|
United Kingdom Bristol
|
|
Inmos Limited |
|
|
100 |
|
United Kingdom Reading
|
|
Synad Technologies Limited |
|
|
100 |
|
United States Carrollton
|
|
STMicroelectronics Inc. |
|
|
100 |
|
United States Wilmington
|
|
STMicroelectronics (North America) Holding, Inc. |
|
|
100 |
|
United States Wilsonville
|
|
The Portland Group, Inc. |
|
|
100 |
|
43
Public Funding
We participate in certain programs established by the EU,
individual countries and local authorities in Europe
(principally France and Italy). Such funding is generally
provided to encourage research and development activities,
industrialization and the economic development of underdeveloped
regions. These programs are characterized by direct partial
support to research and development expenses or capital
investment or by low-interest financing.
Public funding in France, Italy and Europe generally is open to
all companies, regardless of their ownership or country of
incorporation, for research and development and for capital
investment and low-interest-financing related to incentive
programs for the economic development of under-developed
regions. The EU has developed model contracts for research and
development funding that require beneficiaries to disclose the
results to third parties on reasonable terms. As disclosed, the
conditions for receipt of government funding may include
eligibility restrictions, approval by EU authorities, annual
budget appropriations, compliance with European Commission
regulations, as well as specifications regarding objectives and
results.
Some of our government funding contracts for research and
development involve advance payments that requires us to justify
our expenses after receipt of funds. Certain specific contracts
(Crolles2, Rousset, France and Catania, Italy) contain
obligations to maintain a minimum level of employment and
investment during a certain amount of time. There could be
penalties (partial refund) if these objectives are not
fulfilled. Other contracts contain penalties for late deliveries
or for breach of contract, which may result in repayment
obligations. However, the obligation to repay such funding is
never automatic.
The main programs for research and development in which we are
involved include: (i) the Micro-Electronics Development for
European Application (MEDEA+) cooperative research
and development program; (ii) EU research and development
projects with FP6 (Sixth Frame Program) for Information
Technology; and (iii) national or regional programs for
research and development and for industrialization in the
electronics industries involving many companies and
laboratories. The pan-European programs cover a period of
several years, while national programs in France and Italy are
subject mostly to annual budget appropriation.
The MEDEA+ cooperative research and development program was
launched in June 2000 by the Eureka Conference and is designed
to bring together many of Europes top researchers in a
12,000 man-year program that covers the period 2000-2008. The
MEDEA+ program replaced the joint European research program
called MEDEA, which was a European cooperative project in
microelectronics among several countries that covered the period
1996 through 2000 and involved more than 80 companies. In
Italy, there are some national funding programs established to
support the FIRB (Fondo per gli Investimenti della Ricerca di
Base, aimed to fund fundamental research), the FAR (Fondo
per le Agevolazioni alla Ricerca, to fund industrial
research), and the FIT (Fondo per lInnovazione
Tecnologica, to fund precompetitive development). These
programs are not limited to microelectronics. Italian programs
often cover several years, but funding from each of FIRB, FAR
and FIT is subject to annual budget appropriations. During 2004,
the FAR and FIT suspended funding of new projects, including the
MEDEA+ projects whose Italian activities are subject to FAR
rules and availability. In September 2005, however, the Italian
Government began considering funding new projects, and in doing
so called for limited Strategic programmes on areas
selected by the Government. One of these areas was
semiconductors where we have submitted several proposals, which
are presently under review. Furthermore, there are some regional
funding tools that can be addressed by local initiatives,
primarily the regions Puglia and Val DAosta, provided that
a reasonable regional socio-economic impact could be recognized
in terms of industrial exploitation, new professional hiring
and/or cooperation with local academia and public laboratories.
On April 9, 2002, the EU approved a grant to us by the
Italian Government of
542.3 million
(Decision N844/2001), representing approximately 26.25% of the
total cost (estimated at
2,066 million)
(the M6 Grant) for the building, facilitization and
equipment of a new 300-mm manufacturing facility in Catania M6
capable of producing approximately 5,000 wafers per week in 2006
for NOR and other nonvolatile memory products (the M6
Plant). The construction of the M6 Plant has not proceeded
as planned. In 2006, the Italian Government informed the EU
Commission about a proposed modification to the conditions for
the M6 Grant, as authorized on April 9, 2002. In a decision
on December 6, 2006 sent to the Italian Foreign Minister,
the EU Commission, according to the proposal made by the Italian
government, accepted to modify the conditions for the M6 Grant.
In particular, the EU Commission accepted the proposal of the
Italian government to provide for an extension of the authorized
time period for the completion of the planned investment and to
allocate, out of the
542.3 million
grants originally authorized,
446 million
for the completion of the M6 Plant if we made a further
investment of
1,700 million
between January 1, 2006 through the end of 2009. The
446 million
M6 Grant is conditional upon the conclusion of a Contratto
di Programma providing, inter alia, for (i) the
creation of a minimum number of new jobs, (ii) the fixed
assets remaining at least five years after the completion of the
44
M6 Plant, (iii) at least 31.25% of the total of
1,700 million
investment for the M6 Plant being either in the form of
equity or loan, (iv) an annual report on work progress
being submitted to the Italian authorities and the
EU Commission, and (v) a general verification of the
consistency of the project. For the period prior to
December 31, 2006, the Commission, upon the proposal of the
Italian government, considered that we would have been entitled
to the remaining
96 million
grant (out of the total
542.3 million
originally granted) in the form of a tax credit if we had made a
total cumulated investment of
366 million
as of such date. As of December 31, 2006, we have invested
a cumulative amount of
298 million
instead of
366 million
and recorded a cumulative amount of tax credit of
78 million
out of the
96 million
to which we could have been entitled.
There is no assurance that the Contratto di Programma
will be concluded at acceptable conditions to both the
Italian authorities and us, and that, if concluded, such
contract will be approved by the EU Commission if the
stated conditions are not consistent with prior decisions by the
EU Commission concerning such grants. Failure to receive
the grants as anticipated may adversely impair our expected
results of operations linked to the equipment and operation of
the M6 Plant.
In France, support for microelectronics is provided to over
30 companies with activities in the semiconductor industry.
The amount of support under French programs is decided annually
and subject to budget appropriation.
In accordance with SEC Statement Accounting
Bulletin No. 104 Revenue Recognition
(SAB 104) and our revenue recognition policy, funding
related to these contracts is booked when the conditions
required by the contracts are met. Our funding programs are
classified in three general categories for accounting purposes:
funding for research and development activities, funding for
research and development capital investments, and loans.
Funding for research and development activities is the most
common form of funding that we receive. Public funding for
research and development is recorded as Other Income and
Expenses, net in our consolidated statements of income.
Public funding for research and development is booked pro rata
in relation to the relevant cost once the agreement with the
applicable government agency has been signed and as any
applicable conditions are met. See Note 18 to our
Consolidated Financial Statements. Such funding has totaled
$54 million, $76 million and $84 million in the
years 2006, 2005 and 2004, respectively.
Government support for capital expenditures funding has totaled
$15 million, $38 million and $46 million in the
years 2006, 2005 and 2004, respectively. Such funding has been
used to support our capital investment. Although receipt of
these funds is not directly reflected in our results of
operations, the resulting lower amounts recorded in property,
plant and equipment costs reduce the level of depreciation
recognized by us. Public funding reduced depreciation charges by
$54 million, $66 million and $74 million in 2006,
2005 and 2004, respectively.
As a third category of government funding, the Company receives
some loans, mainly related to large capital investment projects,
at preferential interest rates. The Company recognizes these
loans as debt on its balance sheet in accordance with
paragraph 35 of Statements of Financial Accounting Concepts
No. 6, Elements of Financial Statements (CON 6). Low
interest financing has been made available (principally in
Italy) under programs such as the Italian Republics Fund
for Applied Research, established in 1988 for the purpose of
supporting Italian research projects meeting specified program
criteria. At year-end 2006, 2005 and 2004, we had approximately
$125 million, $120 million and $156 million,
respectively, of indebtedness outstanding under state-assisted
financing programs at an average interest cost of 0.9%, 1.0% and
1.0%, respectively.
Funding of programs in France and Italy is subject to annual
appropriation, and if such governments or local authorities were
unable to provide anticipated funding on a timely basis or if
existing government- or local authority-funded programs were
curtailed or discontinued, or if we were unable to fulfill our
eligibility requirements, such an occurrence could have a
material adverse effect on our business, operating results and
financial condition. Furthermore, we may need to rely on public
funding as we transition to 300-mm manufacturing technology. We
are dependent on public funding for equipping the 300-mm wafers
production facility in Catania (Italy). If such planned funding
does not materialize, we may lack financial resources to
continue with our investment plan for this facility, which in
turn could lead us to discontinue our investment in such
facility and consequentially incur significant impairments. From
time to time, we have experienced delays in the receipt of
funding under these programs. As the availability and timing of
such funding are substantially outside our control, there can be
no assurance that we will continue to benefit from such
government support, that funding will not be delayed from time
to time, that sufficient alternative funding would be available
if necessary or that any such alternative funding would be
provided on terms as favorable to us as those previously
committed.
Due to changes in legislation and/or review by the competent
administrative or judicial bodies, there can be no assurance
that government funding granted to us may not be revoked or
challenged or discontinued in whole or in part, by any competent
state or European authority, until the legal time period for
challenging or revoking
45
such funding has fully lapsed. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations Reduction in the amount of state
funding available to us or demands for repayment may increase
our costs and impact our results of operations.
Suppliers
We use three main critical types of suppliers in our business:
equipment suppliers, raw material suppliers and external
subcontractors.
In the front-end process, we use steppers, scanners, tracking
equipment, strippers, chemo-mechanical polishing equipment,
cleaners, inspection equipment, etchers, physical and chemical
vapor-deposition equipment, implanters, furnaces, testers,
probers and other specialized equipment. The manufacturing tools
that we use in the back-end process include bonders, burn-in
ovens, testers and other specialized equipment. The quality and
technology of equipment used in the IC manufacturing process
defines the limits of our technology. Demand for increasingly
smaller chip structures means that semiconductor producers must
quickly incorporate the latest advances in process technology to
remain competitive. Advances in process technology cannot be
brought about without commensurate advances in equipment
technology, and equipment costs tend to increase as the
equipment becomes more sophisticated.
Our manufacturing processes use many raw materials, including
silicon wafers, lead frames, mold compound, ceramic packages and
chemicals and gases. The prices of many of these raw materials
are volatile. We obtain our raw materials and supplies from
diverse sources on a
just-in-time basis.
Although supplies for the raw materials used by us are currently
adequate, shortages could occur in various essential materials
due to interruption of supply or increased demand in the
industry. See Item 3. Key Information
Risk Factors Risks Related to Our
Operations Because we depend on a limited number of
suppliers for raw materials and certain equipment, we may
experience supply disruptions if suppliers interrupt supply or
increase prices.
Finally, we also use external subcontractors to outsource wafer
manufacturing and assembly and testing of finished products. See
Property, Plants and Equipment above. We
also have an agreement with Hynix Semiconductor for the
co-development and manufacturing of NAND products pursuant to
which Hynix Semiconductor from Korea is supplying the
co-developed NAND products to us. We have also set up a joint
venture in China which has built and operates a memory
manufacturing facility in Wuxi City, China and expect to receive
an amount of wafers produced at this facility at competitive
conditions and commensurate with our 33% equity interest in the
joint venture.
Environmental Matters
Our manufacturing operations use many chemicals, gases and other
hazardous substances, and we are subject to a variety of
evolving environmental and health and safety regulations
related, among other things, to the use, storage, discharge and
disposal of such chemicals and gases and other hazardous
substances, emissions and wastes, as well as the investigation
and remediation of soil and ground water contamination. In most
jurisdictions in which we operate, our manufacturing activities
are subject to obtaining permits, licences or other
authorizations, or to prior notification. Because a large
portion of our manufacturing activities are located in the EU,
we are subject to European Commission regulation on
environmental protection, as well as regulations of the other
jurisdictions where we have operations.
Consistent with our Total Quality Environmental Management
(TQEM) principles, we have established proactive
environmental policies with respect to the handling of
chemicals, gases, emissions and waste disposals from our
manufacturing operations, and we have not suffered material
environmental claims in the past. We believe that our activities
comply with presently applicable environmental regulations in
all material respects. We have engaged outside consultants to
audit all of our environmental activities and created
environmental management teams, information systems and
training. We have also instituted environmental control
procedures for new processes used by us as well as our
suppliers. As a company, we have been certified to be in
compliance with the quality standard ISO9001:2000 and with the
technical specification ISO/TS16949:2002. In addition, all 15 of
our manufacturing facilities have been certified to conform to
the environmental standard ISO14001, to the Eco Management and
Audit Scheme (EMAS) and to the Health and Safety standard
OHSAS18001.
We have participated in various working groups set up by the
European Commission for the adoption of two directives on
January 27, 2003: Directive 2002/95/EC on the restriction
of the use of certain hazardous substances in electrical and
electronic equipment (ROHS Directive, as amended by
Commission Decision 2005/618/EC of August 18, 2005) and
Directive 2002/96/EC on waste electrical and electronic
equipment (WEEE Directive, as modified by Directive
2003/108/EC of December 8, 2003). Directive 2002/95/EC aims
at banning the use of lead and other flame-retardant substances
in manufacturing electronic components by July 1, 2006.
Directive 2002/96/EC promotes the recovery and recycling of
electrical and electronic waste. Both directives had to be
46
transposed by the EU Member States into national legislation by
August 13, 2004. In France, Directives 2002/95/EC and
2002/96/ EC have been implemented by a decree dated
July 20, 2005 and five ministerial orders published in
November 2005, December 2005 and March 2006. The French scheme
for the recovery and recycling of WEEE was officially launched
on November 15, 2006.
Our activities in the EU are also subject to the European
Directive 2003/87/ EC establishing a scheme for greenhouse gas
allowance trading (as modified by Directive 2004/101/ EC), and
the applicable national legislation. In particular, in France,
one of our manufacturing sites has been allocated a quota of
greenhouse gas for the period 2005-2007. Failure to comply with
this quota would force us to acquire potentially expensive
additional emission allowance from third parties and to pay a
fee for each extra ton of gas emitted. We do not know what our
obligations with regard to greenhouse gas reductions will be in
the future, in particular for the period 2008-2012 for which the
quotes are still being discussed between the French government
and the European Commission, but we intend to proactively comply
with these regulations. In the United States, we participated in
the first phase of the Chicago Climate Exchange program, a
voluntary greenhouse gas trading program whose members commit to
reduce emissions, for the period 2003-2006 and we intend to
continue our participation in the second phase for the period
2007-2010. We have also implemented voluntary reforestation
projects in several countries in order to sequester additional
carbon dioxide (CO(2)) emissions.
Furthermore, Regulation 1907/2006 of December 18, 2006
concerning the registration, evaluation, authorization and
restriction of chemicals (REACH) has been adopted
and will enter into force on June 1, 2007. We intend to
proactively implement such new legislation, in line with our
commitment toward environmental protection.
The implementation of any such legislation could adversely
affect our manufacturing costs or product sales by requiring us
to acquire costly equipment or materials, or to incur other
significant expenses in adapting our manufacturing processes or
waste and emission disposal processes. However, we are currently
unable to evaluate such specific expenses and therefore have no
specific reserves for environmental risks. Furthermore,
environmental claims or our failure to comply with present or
future regulations could result in the assessment of damages or
imposition of fines against us, suspension of production or a
cessation of operations and, as with other companies engaged in
similar activities, any failure by us to control the use of, or
adequately restrict the discharge of hazardous substances could
subject us to future liabilities. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations Some of our production processes
and materials are environmentally sensitive, which could lead to
increased costs due to environmental regulations or to damage to
the environment. Any specific liabilities that we identify
will be reflected on our balance sheet. To date we have not
identified any such specific liabilities.
Industry Background
Semiconductors are the basic building blocks used to create an
increasing variety of electronic products and systems. Since the
invention of the transistor in 1948, continuous improvements in
semiconductor process and design technologies have led to
smaller, more complex and more reliable devices at a lower cost
per function. As performance has increased and size and cost
have decreased, semiconductors have expanded beyond their
original primary applications (military applications and
computer systems) to applications such as telecommunications
systems, consumer goods, automotive products and industrial
automation and control systems. In addition, system users and
designers have demanded systems with more functionality, higher
levels of performance, greater reliability and shorter design
cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a
percentage of system cost. Calculated on the basis of the total
available market (the TAM), which includes all
semiconductor products, as a percentage of worldwide revenues
from production of electronic equipment according to published
industry data, semiconductor content has increased from
approximately 12% in 1992 to approximately 22% in 2006.
Semiconductor sales have increased significantly over the long
term but have experienced significant cyclical variations in
growth rates. According to trade association data, the TAM
increased from $45 billion in 1988 to $247.7 billion
in 2006 (growing at a compound annual growth rate of
approximately 9.9%). In 2005, the TAM increased by approximately
7% and in 2006 by approximately 9%. On a sequential,
quarter-by-quarter basis in 2006 (including actuators), the TAM
decreased by 1.3% in the first quarter over the fourth quarter
2005, while in the second quarter it increased by 0.4% over the
first quarter, it increased by 7.9% in the third quarter over
the second quarter, and increased by 1.9% in the fourth quarter
over the third quarter. To better reflect our corporate strategy
and our current product offering, we measure our performance
against our serviceable available market (SAM),
redefined as the TAM without DRAMs, microprocessors and
optoelectronic products. The SAM increased from approximately
$35 billion in 1988 to $164.5 billion in 2006, growing
at a
47
compound annual rate of approximately 9%. The SAM increased by
approximately 8% in 2006 compared to 2005. In 2006,
approximately 18% of all semiconductors were shipped to the
Americas, 16% to Europe, 19% to Japan, and 47% to the Asia
Pacific region.
The following table sets forth information with respect to
worldwide semiconductor sales by type of semiconductor and
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Semiconductor Sales(1) | |
|
Compound Annual Growth Rates(2) | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
1998 | |
|
1988 | |
|
05-06 | |
|
04-05 | |
|
03-04 | |
|
88-06 | |
|
88-98 | |
|
98-03 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In billions) | |
|
(Expressed as percentages) | |
Integrated Circuits and Sensors
|
|
$ |
214.8 |
|
|
$ |
197.3 |
|
|
$ |
183.5 |
|
|
$ |
143.5 |
|
|
$ |
109.1 |
|
|
$ |
35.9 |
|
|
|
8.9 |
% |
|
|
7.5 |
% |
|
|
27.9 |
% |
|
|
10.5 |
% |
|
|
11.8 |
% |
|
|
5.6 |
% |
Analog, Sensors and Actuators
|
|
|
42.3 |
|
|
|
36.5 |
|
|
|
36.1 |
|
|
|
30.4 |
|
|
|
19.1 |
|
|
|
7.2 |
|
|
|
16.0 |
|
|
|
0.9 |
|
|
|
19.0 |
|
|
|
10.3 |
|
|
|
10.2 |
|
|
|
9.7 |
|
Digital Logic
|
|
|
114.1 |
|
|
|
112.4 |
|
|
|
100.3 |
|
|
|
80.7 |
|
|
|
67.0 |
|
|
|
17.8 |
|
|
|
1.5 |
|
|
|
12.1 |
|
|
|
24.3 |
|
|
|
10.9 |
|
|
|
14.2 |
|
|
|
3.8 |
|
Memory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DRAM
|
|
|
33.8 |
|
|
|
25.6 |
|
|
|
26.8 |
|
|
|
16.7 |
|
|
|
14.0 |
|
|
|
6.3 |
|
|
|
32.0 |
|
|
|
(4.7 |
) |
|
|
60.9 |
|
|
|
9.8 |
|
|
|
8.3 |
|
|
|
3.6 |
|
|
Others
|
|
|
24.7 |
|
|
|
22.9 |
|
|
|
20.3 |
|
|
|
15.8 |
|
|
|
9.0 |
|
|
|
4.6 |
|
|
|
7.7 |
|
|
|
13.0 |
|
|
|
28.3 |
|
|
|
9.8 |
|
|
|
6.9 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Memory
|
|
|
58.5 |
|
|
|
48.5 |
|
|
|
47.1 |
|
|
|
32.5 |
|
|
|
23.0 |
|
|
|
10.9 |
|
|
|
20.5 |
|
|
|
2.9 |
|
|
|
45.0 |
|
|
|
9.8 |
|
|
|
7.7 |
|
|
|
7.2 |
|
Total Digital
|
|
|
172.6 |
|
|
|
160.9 |
|
|
|
147.4 |
|
|
|
113.2 |
|
|
|
90.0 |
|
|
|
28.7 |
|
|
|
7.3 |
|
|
|
9.1 |
|
|
|
30.3 |
|
|
|
10.5 |
|
|
|
12.1 |
|
|
|
4.7 |
|
Discrete
|
|
|
16.6 |
|
|
|
15.2 |
|
|
|
15.8 |
|
|
|
13.3 |
|
|
|
11.9 |
|
|
|
7.0 |
|
|
|
8.8 |
|
|
|
(3.3 |
) |
|
|
18.1 |
|
|
|
4.9 |
|
|
|
5.5 |
|
|
|
2.3 |
|
Optoelectronics
|
|
|
16.3 |
|
|
|
14.9 |
|
|
|
13.7 |
|
|
|
9.5 |
|
|
|
4.6 |
|
|
|
2.1 |
|
|
|
9.3 |
|
|
|
8.6 |
|
|
|
43.8 |
|
|
|
12.0 |
|
|
|
8.1 |
|
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAM
|
|
$ |
247.7 |
|
|
$ |
227.5 |
|
|
$ |
213.0 |
|
|
$ |
166.4 |
|
|
$ |
125.6 |
|
|
$ |
45.0 |
|
|
|
8.9 |
% |
|
|
6.8 |
% |
|
|
28.0 |
% |
|
|
9.9 |
%(3) |
|
|
10.8 |
% |
|
|
5.8 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
39.9 |
|
|
|
39.3 |
|
|
|
39.4 |
|
|
|
32.3 |
|
|
|
29.4 |
|
|
|
8.1 |
|
|
|
1.6 |
|
|
|
(0.4 |
) |
|
|
22.0 |
|
|
|
9.3 |
|
|
|
13.8 |
|
|
|
1.9 |
|
Americas
|
|
|
44.9 |
|
|
|
40.7 |
|
|
|
39.1 |
|
|
|
32.3 |
|
|
|
41.4 |
|
|
|
13.4 |
|
|
|
10.3 |
|
|
|
4.3 |
|
|
|
20.8 |
|
|
|
6.9 |
|
|
|
11.9 |
|
|
|
(4.8 |
) |
Asia Pacific
|
|
|
116.5 |
|
|
|
103.4 |
|
|
|
88.8 |
|
|
|
62.8 |
|
|
|
28.9 |
|
|
|
5.4 |
|
|
|
12.7 |
|
|
|
16.5 |
|
|
|
41.3 |
|
|
|
18.6 |
|
|
|
18.3 |
|
|
|
16.8 |
|
Japan
|
|
|
46.4 |
|
|
|
44.1 |
|
|
|
45.8 |
|
|
|
38.9 |
|
|
|
25.9 |
|
|
|
18.1 |
|
|
|
5.3 |
|
|
|
(3.7 |
) |
|
|
17.5 |
|
|
|
5.4 |
|
|
|
3.7 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAM
|
|
$ |
247.7 |
|
|
$ |
227.5 |
|
|
$ |
213.0 |
|
|
$ |
166.4 |
|
|
$ |
125.6 |
|
|
$ |
45.0 |
|
|
|
8.9 |
% |
|
|
6.8 |
% |
|
|
28.0 |
% |
|
|
9.9 |
%(3) |
|
|
10.8 |
% |
|
|
5.8 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Source: WSTS. |
|
(2) |
Calculated using end points of the periods specified. |
|
(3) |
Calculated on a comparable basis, without information with
respect to actuators as they were not included in the indicator
before 2003. |
Although cyclical changes in production capacity in the
semiconductor industry and demand for electronic systems have
resulted in pronounced cyclical changes in the level of
semiconductor sales and fluctuations in prices and margins for
semiconductor products from time to time, the semiconductor
industry has experienced substantial growth over the long term.
Factors that are contributing to long-term growth include the
development of new semiconductor applications, increased
semiconductor content as a percentage of total system cost,
emerging strategic partnerships and growth in the electronic
systems industry in the Asia Pacific region.
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Semiconductor Classifications |
The process technologies, levels of integration, design
specificity, functional technologies and applications for
different semiconductor products vary significantly. As
differences in these characteristics have increased, the
semiconductor market has become highly diversified as well as
subject to constant and rapid change. Semiconductor product
markets may be classified according to each of these
characteristics.
Semiconductors can be manufactured using different process
technologies, each of which is particularly suited to different
applications. Since the mid-1970s, the two dominant processes
have been bipolar (the original technology used to produce ICs)
and CMOS. Bipolar devices typically operate at higher speeds
than CMOS devices, but CMOS devices consume less power and
permit more transistors to be integrated on a single IC. CMOS
has become the prevalent technology, particularly for devices
used in personal computers and consumer applications. Advanced
technologies have been developed during the last decade that are
particularly suited to more systems-oriented semiconductor
applications. BiCMOS technologies have been developed to combine
the high-speed and high-voltage characteristics of bipolar
technologies with the low power consumption and high integration
of CMOS technologies. BCD technologies have been developed that
combine bipolar, CMOS and DMOS technologies. Such
systems-oriented technologies require more process steps and
mask levels, and are more complex than the basic
function-oriented technologies.
Semiconductors are often classified as either discrete devices
(such as individual diodes, thyristors and transistors, as well
as optoelectronic products) or ICs (in which thousands of
functions are combined on a single
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chip of silicon to form a more complex circuit).
Compared to the market for ICs, there is typically less
differentiation among discrete products supplied by different
semiconductor manufacturers. Also, discrete markets have
generally grown at slower, but more stable, rates than IC
markets.
Semiconductors may also be classified as either standard
components, ASSPs or ASICs. Standard components are used for a
broad range of applications, while ASSPs and ASICs are designed
to perform specific functions in specific applications.
The two basic functional technologies for semiconductor products
are analog and digital. Mixed-signal products combine both
analog and digital functionality. Analog devices monitor,
condition, amplify or transform analog signals, which are
signals that vary continuously over a wide range of values.
Analog/digital (or mixed-signal) ICs combine analog
and digital devices on a single chip to process both analog
signals and digital data. System designers are increasingly
demanding system-level integration in which complete electronic
systems containing both analog and digital functions are
integrated on a single IC.
Digital devices are divided into two major types: memory
products and logic devices. Memory products, which are used in
electronic systems to store data and program instructions, are
classified as either volatile memories (which lose their data
content when power to the device is switched off) or nonvolatile
memories (which retain their data content without the need for
continuous power).
The primary volatile memory devices are DRAMs, which accounted
for approximately 58% of semiconductor memory sales in 2006, and
static RAMs (SRAMs), which accounted for
approximately 5% of semiconductor memory sales in 2006. SRAMs
are roughly four times as complex as DRAMs. DRAMs are used in a
computers main memory. SRAMs are principally used as
caches and buffers between a computers microprocessor and
its DRAM-based main memory and in other applications such as
mobile handsets.
Nonvolatile memories are used to store program instructions.
Among such nonvolatile memories, read-only memories
(ROMs) are permanently programmed when they are
manufactured while programmable ROMs (PROMs) can be
programmed by system designers or end-users after they are
manufactured. Erasable PROMs (EPROMs) may be erased
after programming by exposure to ultraviolet light and can be
reprogrammed several times using an external power supply.
Electrically erasable PROMs (EEPROMs) can be erased
byte by byte and reprogrammed in-system without the
need for removal.
Flash memories are products that represent an
intermediate solution between EPROMs and EEPROMs based on their
cost and functionality. Because Flash memories can be erased and
reprogrammed electrically and in-system, they are more flexible
than EPROMs and are therefore progressively replacing EPROMs in
many current applications. Flash memories are typically used in
high volume in digital mobile phones and digital consumer
applications (set-top boxes, DVDs, digital cameras, MP3 digital
music players) and, because of their ability to store large
amounts of information, are also suitable for solid-state mass
storage of data and emerging high-volume applications.
Logic devices process digital data to control the operation of
electronic systems. The largest segment of the logic market
includes microprocessors, microcontrollers and DSPs.
Microprocessors are the central processing units of computer
systems. Microcontrollers are complete computer systems
contained on single ICs that are programmed to specific customer
requirements. Microcontrollers control the operation of
electronic and electromechanical systems by processing input
data from electronic sensors and generating electronic control
signals. They are used in a wide variety of consumer,
communications, automotive, industrial and computer products.
DSPs are parallel processors used for high complexity,
high-speed real-time computations in a wide variety of
applications.
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Item 5. |
Operating and Financial Review and Prospects |
Overview
The following discussion should be read in conjunction with
our Consolidated Financial Statements and Notes thereto included
elsewhere in this
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. We assume no obligation to update the
forward-looking statements or such risk factors.
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Critical Accounting Policies Using Significant
Estimates |
The preparation of our Consolidated Financial Statements in
accordance with 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 below. 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; valuation of acquired intangibles,
goodwill, investments and tangible assets as well as the
impairment of their related carrying values; restructuring
charges; other non-recurring special charges and stock-based
compensation charges; assumptions used in calculating pension
obligations and share-based compensation; assessment of hedge
effectiveness of derivative instruments; deferred income tax
assets, including required valuation allowances and liabilities;
provisions for specifically identified income tax exposures; and
evaluation of tax provisions. We base our estimates and
assumptions on historical experience and on various other
factors such as market trends and business plans that we believe
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities. While we regularly evaluate our
estimates and assumptions, 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.
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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. |
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Consistent with standard business practice in the semiconductor
industry, price protection is granted to distribution 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 a significant move in the current
market price. The short outstanding inventory time period,
visibility into the standard inventory product pricing (as
opposed to certain customized products) and long 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. |
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Our customers occasionally return our products from time to time
for technical reasons. Our standard terms and conditions of sale
provide that if we determine that products are non-conforming,
we will repair or replace the non-conforming products, or issue
a credit or rebate of the purchase price. Quality returns are
not related to any technological obsolescence issues and are
identified shortly after sale in customer |
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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 as probable
and can be reasonably estimated. We record the accrued amounts
as a reduction of revenue. |
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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 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 which gave rise to the claims. |
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We maintain an allowance for doubtful accounts for potential
estimated 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 estimate as doubtful.
In 2006, we recorded specific provisions amounting to
$4 million related to the expected inability to fully
collect a certain customers receivables, in addition to
our standard provision of 1% of total receivables based on the
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. |
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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 arrangement, the 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).
In 2006, we signed a $17 million licensing agreement which
included $10 million of upfront revenue recognition related
to the perpetual license granted and separate training and
consulting units that will be recognized as revenue as services
are provided. |
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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 December 31, 2006, the value of goodwill in
our Consolidated Financial Statements amounted to
$223 million. |
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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 industrys sales volume forecast and selling
price evolution; the reporting units 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 |
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future adverse changes in market conditions or operating results
of acquired businesses not in line with our estimates may
require impairment of certain goodwill. In 2006, we recorded a
goodwill impairment charge of $6 million due to our
decision to discontinue developing products from our Tioga
Technologies Ltd. (Tioga) business acquisition. See
Note 7 to our Consolidated Financial Statements. |
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Intangible assets subject to amortization. Intangible
assets subject to amortization include the cost of technologies
and licenses purchased from third parties, internally developed
software which is capitalized and purchased software. Intangible
assets subject to amortization are reflected net of any
impairment losses. These are amortized over a period ranging
from three to seven years. 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 assets 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 and used in the forecasts of future
operating results that are used in the discounted cash flow
method of valuation, including: the applicable industrys
sales volume forecast and selling price evolution; our market
penetration; the market acceptance of certain new technologies;
and costs evaluation. Our evaluations are based on financial
plans updated with the latest available projections of the
semiconductor market evolution and our sales expectations 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 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
impairment of certain intangible assets. In 2006, we recorded an
impairment charge of $4 million due to the discontinuance
of product development related to our Tioga business
acquisition, which was determined to be without any alternative
use. See Note 8 to our Consolidated Financial Statements.
At December 31, 2006, the value of intangible assets in our
Consolidated Financial Statements subject to amortization
amounted to $211 million. |
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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, which is the
largest component of our long-lived assets, to be six years.
This estimate is based on our experience with using equipment
over time. Depreciation expense is a major element of our
manufacturing cost structure. We begin to depreciate new
equipment when it is put into use. |
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We evaluate each period whether 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 an impairment review include: significant negative
industry trends, significant underutilization of the assets or
available evidence of obsolescence of an asset and strategic
management decisions impacting production or an indication that
its economic performance is, or will be, worse than expected. 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 assets
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 assets useful life when
impairment indicators are identified. Assets classified as held
for disposal are reflected at the lower of their carrying amount
or 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. |
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Our evaluations are based on financial plans updated with the
latest projections of the semiconductor market and of 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 the future evolution
differs from the basis of our plans, both in terms of market
evolution and production allocation to our manufacturing plants,
this could require a further review of the carrying amount of
our tangible assets resulting in a potential impairment |
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loss. In 2006, we recorded an impairment charge of
$7 million related to optimizing our Electrical Wafer
Sorting (EWS) activities (wafer test). |
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Inventory. Inventory is stated at the lower of cost or
net realizable value. Cost is based on the weighted average cost
by adjusting standard cost to approximate actual manufacturing
costs on a quarterly basis; the cost is therefore dependent on
our manufacturing performance. In the case of underutilization
of our manufacturing facilities, we estimate the costs
associated with the excess capacity; these costs are not
included in the valuation of inventories but are charged
directly to cost of sales. Net realizable value is the estimated
selling price in the ordinary course of business less applicable
variable selling expenses. |
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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 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. |
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Asset disposal. At December 31, 2006, we were
required to evaluate the likelihood of the announced
deconsolidation of our Flash memory business under Statement of
Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets
(FAS 144). Given the status of the project
at the closure date, we determined that the deconsolidation was
more likely than not to occur for accounting purposes, thus
triggering an impairment review for Flash memory activity. The
outcome of this test determined that no impairment was required
at December 31, 2006. |
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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 of and the
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 new 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 to change estimates of
amounts previously recorded. The potential impact of these
changes could be material and have a material adverse effect on
our results of operations or financial condition. In 2006, the
amount of restructuring charges and other related closure costs
amounted to $65 million before taxes. See Note 19 to
our Consolidated Financial Statements. |
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Share-based compensation. In December 2004, the FASB
issued revised Statement of Financial Accounting Standards
No. 123, Share-Based Payment
(FAS 123R), which requires companies to
expense employee share-based compensation for financial
reporting purposes. We adopted FAS 123R early, in the
fourth quarter of 2005, to account for charges related to
non-vested stock awards distributed to our employees. As a
result, we were required to value our current and anticipated
future employee share-based compensation pursuant to a pricing
model, and then amortize that value against our reported
earnings over the vesting period in effect for those awards. Due
to this accounting treatment, the share-based compensation
expense is charged directly against our earnings. In order to
assess the fair value of this share-based compensation through a
financial evaluation model, we were required to make significant
estimates since, pursuant to our plan, awarding shares is
contingent on the achievement of certain financial objectives,
including market performance and financial results. We are
required to estimate certain items, including the probability of
meeting the market performance objective, the forfeitures and
the service period of our employees. As a result, we recorded in
2006 a total pre-tax charge of $13 million related to the
2005 stock-based compensation plan and are expecting a pre-tax
charge of approximately $2 million in each of the first two
quarters of 2007 and $1 million in each of the last two
quarters of 2007. The impact is further detailed in
Note 16.6 to our Consolidated Financial Statements.
Furthermore, on September 29, 2006 our Compensation
Committee gave its final approval of the 2006 stock-based
compensation plan which is contingent on Company performance
criteria. All performance criteria have been met; therefore, we
recorded for the 2006 stock-based compensation plan a pre-tax
charge of $15 million in 2006, of which $3 million was
capitalized in inventory, and are expecting a pre-tax charge of
approximately $15 million in the first quarter of 2007,
$9 million in the second quarter of 2007 and
$6 million in each of the last two quarters of 2007. |
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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. |
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We are 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. On the basis of this
assessment, at the end of 2006 we recorded a provision of
approximately $15 million in one of our tax jurisdictions.
As of December 31, 2006, we believed that all of the
deferred tax assets, net of valuation allowances, as recorded on
our 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. |
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In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. We record provisions for anticipated tax audit
issues based on our estimate that probable additional taxes will
be due. We reverse provisions and recognize a tax benefit during
the period if we ultimately determine that the liability is no
longer necessary. We received in the past a tax assessment from
the United States tax authorities, and accordingly we took a
provision at the moment the assessment was received. In the
second quarter of 2006, we received a favorable recommendation
from the United States tax authorities Appeals Team Case
Leader in relation to this tax assessment. This recommendation
was sent to the Joint Committee for Taxation for final ruling.
In December 2006, the Joint Committee for Taxation decided that
there was no tax liability for us and as a result we reversed
the entire $90 million provision we established to cover
these claims. See Note 24 to our Consolidated Financial
Statements. |
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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, communications alleging possible
infringement of patents and other intellectual property rights
of others. Furthermore, we may become involved in costly
litigation brought against us regarding patents, mask works,
copyrights, trademarks or trade secrets. In the event that the
outcome of any litigation would be unfavorable to us, we may be
required to take a license to the underlying intellectual
property right upon economically unfavorable terms and
conditions, and possibly pay damages for prior use, and/or face
an injunction, all of which singly or in the aggregate could
have a material adverse effect on our results of operations and
ability to compete. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations We depend on patents to protect
our rights to our technology. |
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We record a provision when we believe that it is probable that a
liability has been incurred and when the amount of the loss can
be reasonably estimated. We regularly evaluate losses and claims
with the support of our outside attorneys to determine whether
they need to be adjusted based on the current information
available to us. Legal costs associated with claims are expensed
as incurred. We are in discussion with several parties with
respect to claims against us relating to possible infringements
of patents and similar intellectual property rights of others. |
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We are currently a party to several legal proceedings, including
legal proceedings with SanDisk Corporation (SanDisk)
and Tessera, Inc. See Item 8. Financial
Information Legal Proceedings. As of
December 31, 2006, based on our assessment, we did not
record any provisions in our Consolidated Financial Statements
relating to those legal proceedings, because we had not
identified any risk of probable loss that is likely to arise out
of the proceedings. There can be no assurance, however, that we
will be successful in resolving these proceedings. If we are
unsuccessful, or if the outcome of any other litigation or claim
were to be unfavorable to us, we may incur monetary damages, or
an injunction or exclusion order. |
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Pension and Post Retirement Benefits. Our results of
operations and our balance sheet include the impact of pension
and post retirement benefits that are measured using actuarial
valuations. 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. As of December 31, 2006,
the Company adopted Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment
of FASB Statements No. 87, 88, 106 and 132(R)
(FAS 158), which requires the Company to
account for the overfunded and underfunded status of defined
benefit and other post retirement plans in its consolidated
financial statements. As of |
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December 31, 2006, we had a total benefit obligation
estimated at $575 million, and total plan assets estimated
at $241 million resulting in an underfunded status of
$334 million, recorded in our balance sheet at
December 31, 2006. |
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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 exposures
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 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. |
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. Our fiscal year starts at
January 1 and the first quarter of 2006 ended on April 1,
2006. The second quarter of 2006 ended on July 1, 2006, and
the third quarter of 2006 ended on September 30, 2006. The
fourth quarter ended on December 31, 2006. 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.
In 2006, the semiconductor market experienced a higher increase
in total sales compared to 2005, supported by a solid economic
environment in the major world economies.
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 (DRAMs), and optoelectronics devices).
Based upon recently published data by the World Semiconductor
Trade Statistics (WSTS), semiconductor industry
revenues increased year-over-year by approximately 9% for the
TAM and 8% for the SAM in 2006 to reach approximately
$248 billion and approximately $165 billion,
respectively. This increase was driven by unit demand while
average selling prices declined compared to 2005. In the fourth
quarter of 2006, the TAM and the SAM increased approximately 9%
and 4% year-over-year, respectively, while the TAM increased by
approximately 2% and the SAM decreased 1% sequentially.
Our 2006 revenues were characterized by significant high volume
demand and improved product mix, which did not translate into an
equivalent revenue performance due to persisting negative impact
of price pressure in the market we serve. As a result, our
revenues increased by approximately 11% to $9,854 million
compared to $8,882 million in 2005. Strong growth in
revenues was driven by double-digit increases in Wireless and
Industrial applications with mid-single digit contributions from
the Automotive, Consumer and Computer segments. Our 2006 sales
performance was above the TAM and the SAM growth rates.
With reference to the quarterly results, our fourth quarter 2006
revenues performance was below the TAM and flat with the SAM,
both on a year-over-year basis and on a sequential basis.
On a year-over-year basis, our fourth quarter 2006 revenues
increased by approximately 4% to $2,483 million compared to
$2,389 million in the fourth quarter of 2005, driven
primarily by Digital Consumer and Automotive segment
applications while we registered declines in Telecom and
Memories. On a year-over-year basis, the TAM and the SAM
registered increases of approximately 9% and 4%, respectively.
On a sequential basis, in the fourth quarter 2006, revenues
decreased approximately 1% mainly due to the overall weakness in
the Telecom sector. Our net revenues performance was at the low
end of our guidance, which indicated a sequential growth of
between -1% and +5%. Sequentially, the TAM registered an
increase of approximately 2% while the SAM registered a decrease
of 1%.
In 2006, our effective average U.S. dollar exchange rate
was 1.00 for
$1.24, which reflects the actual exchange rate levels and the
impact of certain hedging contracts, compared to our 2005
effective average
55
exchange rate of
1.00 for $1.28.
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.
On a total year basis, our gross margin increased from 34.2% in
2005 to 35.8% in 2006 due to overall improvements in volume,
manufacturing performances and product mix, which were partially
offset by the declining selling prices.
On a sequential basis, our gross margin increased from 36.0% to
36.3% in the fourth quarter 2006, due to improved manufacturing
efficiency and product mix, partially offset by the pricing
pressures and the unfavorable U.S. dollar exchange rate
impact. Our fourth quarter gross margin was within our guidance
that indicated a gross margin of approximately 37% plus or minus
one percentage point.
Our operating expenses combining selling, general and
administrative expenses and research and development were higher
in 2006 compared to 2005 due to higher spending in research and
development and the 2006 share-based compensation for our
employees and members and professionals of the Supervisory Board.
Our total impairment and restructuring charges for 2006 were
significantly lower compared to 2005 as our previously announced
restructuring plan costs were largely recognized in prior time
periods. Our manufacturing initiatives are now substantially
completed and were drivers of margin improvements in 2006.
The combined effect of the above mentioned factors and the other
operating items resulted in a quite favorable impact on our
operating income, that increased significantly from
$244 million in 2005 to $677 million in 2006. The
operating margin for 2006 improved over 400 basis points to
6.9%. This improvement was driven by higher sales volume, an
improved gross margin and a more favorable effective
U.S. dollar exchange rate. In the fourth quarter of 2006,
however, our operating income decreased both sequentially and on
a year-over-year basis as the result of an unfavorable industry
environment.
Our interest income significantly improved in 2006 mainly as the
result of rising interest rates on our available cash, which
significantly increased after the refinancing transactions in
the first quarter of 2006 and due to the continued generation of
positive net operating cash flow. Due to some favorable
adjustments in our tax position, our income tax for 2006
resulted in a benefit of $20 million.
In summary, our financial results for 2006 compared to the
results of 2005 were favorably impacted by the following factors:
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higher sales volume and a more favorable product mix in our
revenues, which contributed to a solid increase in our net
revenues over 2005; |
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continuous strong improvement of our manufacturing performance; |
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a more favorable effective exchange rate for the
U.S. dollar; |
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net interest income; |
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lower impairment, restructuring charges and other related
closure costs; and |
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income tax benefit. |
Our financial results in 2006 were negatively affected by the
following factors:
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negative pricing trends due to a persisting overcapacity in the
industry, which translated into our average selling prices
declining by approximately 8%, as a pure pricing effect; |
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stock-based compensation charges related to 2005 and 2006
grants; and |
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higher amount of other expenses. |
In 2006, we continued to invest in upgrading and expanding our
manufacturing capacity. Total capital expenditures in 2006 were
$1,533 million, which were financed entirely by net cash
generated from operating activities. In fact, we generated
$666 million of net operating cash flow during the year.
Net operating cash flow is not a U.S. GAAP measure, as
further discussed in section Liquidity and
Capital Resources Liquidity Net
operating cash flow. At December 31, 2006, we had
cash, cash equivalents, marketable securities and short-term
deposits of $2,673 million. Total debt and bank overdrafts
were $2,130 million, of which $1,994 million were
long-term debt.
Looking at the fourth quarter and the near term environment, the
current market correction underway in some of the key
applications that we serve is more pronounced than forecasted.
Our wireless results, in particular, came in well below
historical seasonal patterns and were also negatively impacted
by product mix shift towards the low end, which put additional
pressure on our margins and operating performance in the
quarter. However, for the full year, we achieved double digit
year-over-year sales growth in a market that appears to be
growing in the high single digits. This is a clear signal that
the evolution of our product portfolio is delivering results
with higher
56
revenues, improved profitability, better leverage of our
research and development and capital investments, and expansion
of our market share.
During 2006, we made significant headway in delivering on our
most important business and strategic imperatives. Our product
portfolio continues to strengthen. We are driving a significant
reduction in our capital intensity. This is visible in our 2006
results, with our capital investments to sales ratio down to
15.6% from over 20% on average for 2004 and 2005. Further, we
have initiated a new mid-term target of 12% through a
combination of a less capital-intensive product portfolio,
increased usage of foundries for non-proprietary technologies
and optimization of our manufacturing facilities. As of
January 1, 2007, we have organized our NOR and NAND Flash
business into a stand-alone segment and are moving ahead on
creating a separate legal entity in connection with our
strategic repositioning of this business. In summary, we
achieved our primary objectives for 2006: gaining market share
while simultaneously improving financial performance in terms of
return on assets and cash flow.
Notwithstanding the current tougher environment as the market
works through inventory in selected applications in the first
half of 2007, we believe we are poised to make further important
progress on our ongoing key initiatives for sales expansion, new
product introduction and asset leverage, which will strengthen
our market opportunities and financial position.
As it is typical for the first quarter seasonality, we expect
our revenues for the first quarter of 2007 to decline from 2006
fourth quarter levels. Specifically, we expect sales to decrease
between 3% and 11% sequentially. This sales range, coupled with
our intention to control the absolute level of inventory, will
result in adverse fab loading conditions in the quarter, leading
to a gross margin of about 35%, plus or minus 1 percentage
point.
Our capital expenditures are currently budgeted to be
$1.2 billion for 2007, which is expected to further reduce
our capital expenditure to sales ratio from the previous
years level.
This guidance is based on an effective average U.S. dollar
exchange rate of approximately
1.00 for $1.29,
which reflects current exchange rate levels combined with the
impact of 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 and Item 3. Key
Information Risk Factors in this
Form 20-F.
As of January 1, 2006, we created our new Greater
China region to focus exclusively on our operations in
China, Hong Kong and Taiwan and appointed Mr. Robert
Krysiak as Corporate Vice-President and General Manager of
Greater China.
As of January 1, 2006, we renamed the Micro, Linear and
Discrete Product Group (MLD) segment Micro, Power,
Analog Product Group (MPA) segment to better reflect
our efforts of developing high-end analog products and of
consolidating our world leadership position in power
applications, with full solutions centered around micro
applications.
On January 26, 2006, we announced the appointment of
Mr. Jeffrey See as Corporate Vice President and General
Manager of our worldwide back-end operations. Effective
April 3, 2006, Mr. See took over his responsibilities.
Mr. See will continue to be based in Singapore, close to
where the largest part of our assembly and test production is
located.
On February 20, 2006, we inaugurated our new design and
development facility in Greater Noida (India) and we announced
our plans to invest $30 million in local operations over
the next two years and to recruit 300 new engineers by the end
of 2006.
On February 23, 2006, we issued Zero Coupon Senior
Convertible Bonds due 2016 (2016 Convertible Bonds)
representing total gross proceeds of $974 million. The
amount due to bondholders upon redemption or at maturity based
on the accreted value of the bonds will produce a yield
equivalent to 1.5% per annum on a semi-annual bond
equivalent basis. The bonds are convertible into a maximum of
approximately 42 million of our underlying ordinary shares.
The conversion price at issuing date is $23.19, based on the
closing price of ordinary shares on the NYSE on
February 14, 2006, plus a 30% premium.
On March 13, 2006, we issued
500 million
Floating Rate Senior Bonds due 2013 in the Euro Debt Capital
Market (2013 Senior Bonds). These bonds will pay
interest quarterly at a rate equal to three-month Euribor plus
40 basis points.
57
On March 29, 2006, we announced our intention to further
expand our presence and support for the China market. In
addition to our joint venture with Hynix Semiconductor in Wuxi
and to supplement our existing plant in Shenzhen, we plan to
invest approximately $500 million to build our second
back-end plant in China, which is expected to start production
in the third quarter of 2008.
Following the decision by the Compensation Committee of our
Supervisory Board in April 2006, the number of shares granted
under our 2005 stock-based compensation plan will be a maximum
of approximately 2.7 million shares out of the maximum of
4.1 million non-vested shares granted to our employees and
CEO in 2005. In April 2006, the Compensation Committee of our
Supervisory Board determined that two out of the three
predetermined criteria linked to company performance had been
met.
At our annual general meeting of shareholders held in Amsterdam
on April 27, 2006, our shareholders approved the
following proposals of our Managing Board upon the
recommendation of our Supervisory Board:
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the Companys accounts, which were for the first time
reported in accordance with International Financial Reporting
Standards (IFRS); |
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a cash dividend of $0.12 per share, equal to last
years cash dividend distribution. The cash dividend was
distributed in May 2006. On May 22, 2006, our common shares
traded ex-dividend on the three stock exchanges on which they
are listed; |
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the reappointment of Mr. Doug Dunn for a new three-year
term until the 2009 annual general meeting of shareholders and
of Mr. Robert White for an additional one-year-term until
the 2007 annual general meeting of shareholders, as well as the
three-year term appointment of Mr. Didier Lamouche as a new
Supervisory Board member in replacement of Mr. Francis
Gavois whose mandate was up at this years annual
shareholders meeting; |
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the approval of the main principles of the 2006 stock-based
compensation plan for our employees and CEO. As part of such
plan and specifically as approved by the general meeting of
shareholders, our President and CEO will be entitled to receive
a maximum of 100,000 common shares; |
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the adoption of the compensation, including stock-based
compensation, for members of our Supervisory Board; and |
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the delegation of authority to our Supervisory Board for five
years to issue new shares, to grant rights, to subscribe for new
shares and to limit and/or exclude existing shareholders
pre-emptive rights. |
On June 20, 2006, we announced the appointment of two new
Corporate Vice Presidents. Mr. François Guibert,
Corporate Vice President, and formerly General Manager of our
Emerging Markets Region, was appointed to the position of
General Manager of our Asia Pacific region, effective
October 1, 2006. Mr. Guibert replaces Mr. Jean-Claude
Marquet, who retired in October. Succeeding
Mr. Guiberts position, Mr. Thierry Tingaud,
formerly Vice President Sales and Marketing Europe for
Telecommunications, was promoted to the position of Corporate
Vice President and General Manager of our Emerging Markets
Region, effective July 1, 2006.
On June 29, 2006, we sold to Sofinnova Capital V our 51%
interest in Accent, one of our subsidiaries based in Italy
specialized in hardware and software design and consulting
services for integrated circuit design and fabrication. We
recorded a net pre tax gain of $6 million relating to this
sale. We simultaneously entered into a license agreement with
Accent in which we granted them, for a total agreed lump sum
amount of $3 million, the right to use certain of our
specifically identified intellectual property currently used in
its business activities. In connection with this agreement, we
were granted warrants for 6,675 new shares of Accent. Such
warrants expire after 15 years and can only be exercised in
the event of a change of control or an initial public offering
of Accent above a predetermined value.
On August 7, 2006, as a result of almost all of the holders
of our 2013 Convertible Bonds exercising their August 4,
2006 put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds at a
conversion ratio of $985.09 per $1,000 aggregate principal
amount at issuance resulting in a cash disbursement of
$1,377 million.
On October 10, 2006, we, along with Hynix Semiconductor
officially inaugurated the new joint front-end
memory-manufacturing facility in Wuxi City, China. The facility
is currently producing DRAM memories and will begin production
of NAND Flash by the middle of 2007.
On November 27, 2006, our Supervisory Board approved
entering into an option agreement with an independent
foundation, Stichting Continuïteit ST, to replace a
substantially similar option agreement dated May 31, 1999,
as amended, between us and one of our shareholders, STH II
B.V. The new option agreement has
58
been entered into to reflect changes in Netherlands legal
requirements. It was not adopted in response to any hostile
takeover attempt.
Following the discovery in 2006 by our internal audit of a fraud
perpetrated by our former head of treasury operations, who
retired at the end of 2005, we filed a criminal complaint in
September 2006 with the prosecutor in Lugano, Switzerland, that
led to the arrest of our former treasurer. The criminal
proceeding is ongoing. Our Audit Committee appointed a U.S. law
firm last fall to conduct an independent investigation to
determine the nature of the fraud and whether the wrongdoing was
limited to our former treasurer. To date, based on this
investigation, which is substantially complete, and based on our
understanding of the available evidence from the criminal
proceeding, nothing has been brought to the attention of the
Audit Committee or the Company indicating that the fraud was
committed with the knowledge or involvement of any of our
current or former senior management team, or that such
transactions materially affected our financial statements for
the current or prior periods.
In an effort to better align our Company to meet the
requirements of the market, together with the pursuit of
strategic repositioning in Flash Memory, on December 13,
2006, we announced a reorganization of our product segment
groups effective as of January 1, 2007: the Application
Specific Groups, the Industrial and Multisegment Sector and the
Flash Memories Group. The Application Specific Groups include
the existing Automotive Products Group and Computer Peripherals
Group and the newly created Mobile, Multimedia &
Communications Group and Home Entertainment & Displays
Group. The Industrial and Multisegment Sector contain the
Microcontrollers, Memories & Smartcards Group and the
Analog, Power & MEMS Group. The Flash Memories Group
incorporates all Flash memory operations, including research and
development and product-related activities, front- and back-end
manufacturing, marketing and sales. In conjunction with this
realignment, we announced a number of new executive and
corporate vice presidents. These include Mr. Mario
Licciardello as the Corporate Vice President and General Manager
of the stand-alone Flash Memories Group; Mr. Carmelo Papa
was promoted to Executive Vice President leading the Industrial
and Multisegment Sector; Mr. Claude Dardanne as the new
Corporate Vice President leading the Microcontrollers,
Memories & Smartcards Group; Mr. Tommi Uhari was
promoted to Executive Vice President over Mobile,
Multimedia & Communications Group; and
Mr. Christos Lagomichos promoted to Corporate Vice
President for the Home Entertainment & Displays Group.
On January 16, 2007, we confirmed that the technology
development at Crolles will continue beyond 2007 despite the
announcement that NXP Semiconductors will withdraw from the
Crolles2 alliance at the end of 2007 and the joint technology
cooperation agreements with NXP Semiconductors and Freescale
Semiconductor will expire on December 31, 2007. The
Crolles2 alliance, in which we have partnered with NXP
Semiconductors and Freescale Semiconductor, will work together
to complete the program on 45-nm CMOS and manage the transition
throughout 2007.
Results of Operations
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, memories 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.
In the Semiconductors business area, effective January 1,
2005, we realigned our product groups to increase market focus
and realize the full potential of our products, technologies and
sales and marketing channels. Since such date we report our
semiconductor sales and operating income in three product group
segments:
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the Application Specific Product Group (ASG)
segment, comprised of three product lines our Home,
Personal and Communication Products (HPC), our
Computer Peripherals Products (CPG) and our
Automotive Products (APG). Our HPC Sector is
comprised of the telecommunications, audio and digital consumer
groups. Our CPG products cover computer peripherals products,
specifically disk drives and printers, and our APG products are
comprised of all of our major complex products related to
automotive applications; |
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the Memory Products Group (MPG) segment, comprised
of our memories and Smart Card businesses; and |
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the Micro, Power, Analog Product Group (MPA)
segment, comprised of discrete and standard products plus
standard microcontroller and industrial devices (including the
programmable systems memories |
59
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(PSM) division); this segment was previously known
as Micro, Linear and Discrete Product Group (MLD),
but no change has occurred in the segments perimeter or
organization. |
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 group segments, but on the basis of the semiconductor
business area. All these product group segments share common
research and development for process technology and
manufacturing capacity for most of their products.
We have restated our results in prior periods for illustrative
comparisons of our performance by product segment and by period.
The segment information of 2004 has been restated using the same
principles applied to the 2005 and 2006 years. The
preparation of segment information according to the new segment
structure requires management to make significant estimates,
assumptions and judgments in determining the operating income of
the new segments for the prior years. However, we believe that
the presentation for the 2004 year is representative of
2005 and 2006 years and we are using these comparatives
when managing our business.
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 and certain other miscellaneous charges. Starting in
the first quarter of 2005, we allocated the
start-up costs to
expand our marketing and design presence in new developing areas
to each segment, and we restated prior years results
accordingly.
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Year Ended December 31, | |
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| |
|
|
2006 | |
|
2005 | |
|
2004 | |
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| |
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| |
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| |
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(In millions) | |
Net revenues by product group segment:
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|
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|
|
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|
Application Specific Product Group Segment (ASG)
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|
$ |
5,396 |
|
|
$ |
4,991 |
|
|
$ |
4,902 |
|
Memory Products Group Segment (MPG)
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|
|
2,137 |
|
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|
1,948 |
|
|
|
1,887 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
2,243 |
|
|
|
1,882 |
|
|
|
1,902 |
|
Others(1)
|
|
|
78 |
|
|
|
61 |
|
|
|
69 |
|
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|
|
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|
Total consolidated net revenues
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|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
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|
|
|
|
|
|
|
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|
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|
(1) |
Net revenues of Others include revenues from sales
of subsystems mainly and other products not allocated to product
group segments. |
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|
Year Ended December 31, | |
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| |
|
|
2006 | |
|
2005 | |
|
2004 | |
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| |
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| |
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| |
|
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(In millions) | |
Operating income (loss) by product group segment:
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|
|
|
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|
|
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|
Application Specific Product Group Segment (ASG)
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|
$ |
439 |
|
|
$ |
355 |
|
|
$ |
530 |
|
Memory Products Group Segment (MPG)
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|
34 |
|
|
|
(118 |
) |
|
|
42 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
362 |
|
|
|
271 |
|
|
|
413 |
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|
|
|
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Total operating income of product group segments
|
|
|
835 |
|
|
|
508 |
|
|
|
985 |
|
Others(1)
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|
|
(158 |
) |
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|
(264 |
) |
|
|
(302 |
) |
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|
Total consolidated operating income
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|
$ |
677 |
|
|
$ |
244 |
|
|
$ |
683 |
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|
|
|
|
|
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|
|
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(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, certain
corporate-level operating expenses, certain patent claims and
litigations, and |
60
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other costs that are not allocated to the product group
segments, as well as operating earnings or losses of the
Subsystems and Other Products Group. Certain costs, mainly
R&D, formerly in the Others category, have been
allocated to the product group segments; comparable amounts
reported in this category have been reclassified accordingly in
the above table. |
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Year Ended | |
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|
December 31, | |
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| |
|
|
2006 | |
|
2005 | |
|
2004 | |
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|
| |
|
| |
|
| |
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|
(As a percentage of | |
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|
total net revenues) | |
Operating income (loss) by product group segment:
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Application Specific Product Group Segment (ASG)(1)
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8.1 |
% |
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7.1 |
% |
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10.8 |
% |
Memory Products Group Segment (MPG)(1)
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1.6 |
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(6.1 |
) |
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2.2 |
|
Micro, Power, Analog Product Group Segment (MPA)(1)
|
|
|
16.1 |
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|
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14.4 |
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|
|
21.7 |
|
Others(2)
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(1.6 |
) |
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|
(3.0 |
) |
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|
(3.5 |
) |
Total consolidated operating income(3)
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|
6.9 |
% |
|
|
2.7 |
% |
|
|
7.8 |
% |
|
|
(1) |
As a percentage of net revenues per product segment. |
|
(2) |
As a percentage of total net revenues. Operating income (loss)
of Others includes items or parts of them, which are
not allocated to product group segments 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, certain corporate-level
operating expenses, certain patent claims and litigations, and
other costs that are not allocated to the product group
segments, as well as operating earnings or losses of the
Subsystems and Other Products segment. Certain costs, mainly
R&D, formerly in the Others category, have been
allocated to the product group segments; comparable amounts
reported in this category have been reclassified accordingly in
the above table. |
|
(3) |
As a percentage of total net revenues. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Reconciliation to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product group segments
|
|
$ |
835 |
|
|
$ |
508 |
|
|
$ |
985 |
|
Operating Income of others(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic and other research and development programs
|
|
|
(17 |
) |
|
|
(49 |
) |
|
|
(91 |
) |
|
Start-up costs
|
|
|
(57 |
) |
|
|
(56 |
) |
|
|
(63 |
) |
|
Impairment, restructuring charges and other related closure costs
|
|
|
(77 |
) |
|
|
(128 |
) |
|
|
(76 |
) |
|
Subsystems
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
One-time compensation and special contributions(2)
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
Patent claim costs
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
Other non-allocated provisions(3)
|
|
|
(6 |
) |
|
|
(10 |
) |
|
|
(67 |
) |
Total operating income (loss) of others
|
|
|
(158 |
) |
|
|
(264 |
) |
|
|
(302 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income
|
|
$ |
677 |
|
|
$ |
244 |
|
|
$ |
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Operating income (loss) of Others includes items or
parts of them, which are not allocated to product group segments
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, certain
corporate-level operating expenses, certain patent claims and
litigations, and other costs that are not allocated to the
product group segments, as well as operating earnings or losses
of the Subsystems and Other Products segment. Certain costs,
mainly R&D, formerly in the Others category,
have been allocated to the product group segments; comparable
amounts reported in this category have been reclassified
accordingly in the above table. |
|
(2) |
One-time compensation and special contributions to our former
CEO and other executives not allocated to product group segments. |
|
(3) |
Includes unallocated expenses such as certain corporate level
operating expenses and other costs. |
61
|
|
|
Net Revenues by Location of Order Shipment |
The table below sets forth information on our net revenues by
location of order shipment and as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(2)
|
|
$ |
3,073 |
|
|
$ |
2,789 |
|
|
$ |
2,827 |
|
North America(5)
|
|
|
1,232 |
|
|
|
1,281 |
|
|
|
1,360 |
|
Asia Pacific(3)
|
|
|
2,084 |
|
|
|
1,860 |
|
|
|
1,852 |
|
Greater China(3)
|
|
|
2,552 |
|
|
|
2,203 |
|
|
|
1,859 |
|
Japan
|
|
|
400 |
|
|
|
307 |
|
|
|
403 |
|
Emerging Markets(2)(4)(5)
|
|
|
513 |
|
|
|
442 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(2)
|
|
|
31.2 |
% |
|
|
31.4 |
% |
|
|
32.3 |
% |
North America(5)
|
|
|
12.5 |
|
|
|
14.4 |
|
|
|
15.5 |
|
Asia Pacific(3)
|
|
|
21.1 |
|
|
|
20.9 |
|
|
|
21.2 |
|
Greater China(3)
|
|
|
25.9 |
|
|
|
24.8 |
|
|
|
21.2 |
|
Japan
|
|
|
4.1 |
|
|
|
3.5 |
|
|
|
4.6 |
|
Emerging Markets(2)(4)(5)
|
|
|
5.2 |
|
|
|
5.0 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net revenues by location of order shipment region are classified
by location of customer invoiced. For example, products ordered
by U.S.-based companies
to be invoiced to Asia Pacific affiliates are classified as Asia
Pacific revenues. |
|
(2) |
Since January 1, 2005, the region Europe
includes the former East European countries that joined the
European Union in 2004. These countries were part of the
Emerging Markets region in the previous periods. Net revenues
for Europe and Emerging Markets for prior periods were restated
to include such countries in the Europe region for such periods. |
|
(3) |
As of January 1, 2006, we created a new region
Greater China to focus exclusively on our operations
in China, Hong Kong and Taiwan. Net revenues for Asia Pacific
for prior periods were restated according to the new perimeter. |
|
(4) |
Emerging Markets in 2005 and 2006 included markets such as
India, Latin America (excluding Mexico), the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia. |
|
(5) |
As of July 2, 2006, the region North America
includes Mexico which was part of Emerging Markets in prior
periods. Amounts have been reclassified to reflect this change. |
|
|
|
Net Revenues by Market Segment |
The table below estimates, within a variance of 5% to 10% in the
absolute dollar amount, the relative weight of each of our
target segments in percentages of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(As a percentage of | |
|
|
net revenues) | |
Net Revenues by Market Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
|
15 |
% |
|
|
16 |
% |
|
|
15 |
% |
Consumer
|
|
|
16 |
|
|
|
18 |
|
|
|
21 |
|
Computer
|
|
|
17 |
|
|
|
17 |
|
|
|
16 |
|
Telecom
|
|
|
38 |
|
|
|
35 |
|
|
|
32 |
|
Industrial and Other
|
|
|
14 |
|
|
|
14 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
62
The following table sets forth certain financial data from our
consolidated statements of income since 2004, expressed in each
case as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(As a percentage of | |
|
|
net revenues) | |
Net sales
|
|
|
99.8 |
% |
|
|
99.9 |
% |
|
|
100.0 |
% |
Other revenues
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales
|
|
|
(64.2 |
) |
|
|
(65.8 |
) |
|
|
(63.2 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
35.8 |
|
|
|
34.2 |
|
|
|
36.8 |
|
|
Selling, general and administrative
|
|
|
(10.8 |
) |
|
|
(11.6 |
) |
|
|
(10.8 |
) |
|
Research and development
|
|
|
(16.9 |
) |
|
|
(18.3 |
) |
|
|
(17.5 |
) |
|
Other income and expenses, net
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Impairment, restructuring charges and other related closure costs
|
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
Total operating expenses
|
|
|
(28.9 |
) |
|
|
(31.5 |
) |
|
|
(29.0 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6.9 |
|
|
|
2.7 |
|
|
|
7.8 |
|
Interest income (expense), net
|
|
|
0.9 |
|
|
|
0.4 |
|
|
|
|
|
Loss on equity investment
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
Loss on extinguishment of convertible debt
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
7.7 |
|
|
|
3.1 |
|
|
|
7.7 |
|
Income tax benefit (expense)
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
7.9 |
|
|
|
3.0 |
|
|
|
6.9 |
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7.9 |
% |
|
|
3.0 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
In 2006, based upon recent industry data, the semiconductor
industry experienced a year-over-year revenue increase of
approximately 9% for the total available market
(TAM) and an increase of approximately 8% for the
serviceable available market (SAM), respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net sales
|
|
$ |
9,838 |
|
|
$ |
8,876 |
|
|
|
10.8 |
% |
Other revenues
|
|
|
16 |
|
|
|
6 |
|
|
|
192.9 |
% |
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
The increase in our net revenues in 2006 was primarily due to
our higher sales volumes and improved product mix, which
exceeded the negative impact of the declining selling prices due
to the continuing pricing pressure in the markets we serve. Our
average selling prices decreased overall by approximately 8%,
which is the result of a tougher pure pricing effect mitigated
by a higher selling price from improved product mix.
All product group segments registered a positive revenue
performance with a particularly strong result by MPA. ASG net
revenues increased 8.1% over 2005, mainly driven by Imaging,
Computer Peripherals, Connectivity, Digital Consumer and
Automotive products. Cellular Communication slightly increased,
while Data Storage product registered a decline. Net revenues
for MPA significantly increased by 19.2% compared to 2005, with
all of the products lines generating strong revenue growth. MPG
net revenues increased 9.7% compared to 2005, supported by NOR
Flash for wireless applications and other memory products, while
Smartcard sales decreased.
By market segment application, the most important contribution
to net revenue growth came from Telecom and Industrial, while
Automotive, Consumer and Computer registered approximately
mid-single digit growth. Net revenues by market segment
increased in Telecom by approximately 19% and Industrial by
approximately 10%, while Automotive, Consumer and Computer each
increased by approximately 6%. As a significant portion of our
sales are made through distributors, the foregoing are
necessarily estimates within a variance of 5% to 10% in absolute
dollar amounts of the relative weighting of each of our targeted
market segments.
63
By location of order shipment, Japan revenues strongly increased
by approximately 31%, all of the other regions registered a
solid double-digit growth, with the exception of North America
which slightly declined compared to last year.
In 2006, we had several large customers, with the largest one,
the Nokia Group of companies, accounting for approximately 22%
of our net revenues, which remained flat compared to 2005. Our
top ten OEM customers accounted for approximately 51% of our net
revenues in 2006, compared to approximately 50% of our net
revenues in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cost of sales
|
|
$ |
(6,331 |
) |
|
$ |
(5,845 |
) |
|
|
(8.3 |
)% |
Gross profit
|
|
$ |
3,523 |
|
|
$ |
3,037 |
|
|
|
16.0 |
|
Gross margin (as a percentage of net revenues)
|
|
|
35.8 |
% |
|
|
34.2 |
% |
|
|
|
|
The cost of sales increased at a lower pace than the net
revenues, therefore leveraging a 16% improvement of our gross
profit. The increase in gross profit was driven by sales volume,
more favorable product mix and improved manufacturing
efficiencies, which are the result of lower depreciation
charges, the cost savings realized from the 150-mm restructuring
plan that has been almost totally completed, and the benefit of
solid level of loading in our facilities over the first three
quarters of 2006. As a result of these improvements, which were
partially offset by the negative impact of severe price
pressures, our gross margin increased 160 basis points to
35.8%.
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Selling, general and administrative expenses
|
|
$ |
(1,067 |
) |
|
$ |
(1,026 |
) |
|
|
(4.0 |
)% |
As a percentage of net revenues
|
|
|
(10.8 |
)% |
|
|
(11.6 |
)% |
|
|
|
|
The increase in selling, general and administrative expenses was
largely due to the higher expenses associated with increased
activities and to the charges related to the share-based
compensation which amounted to $14 million. However, as a
percentage to sales ratio, the selling, general and
administrative expenses decreased to 10.8%.
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Research and development expenses
|
|
$ |
(1,667 |
) |
|
$ |
(1,630 |
) |
|
|
(2.3 |
)% |
As a percentage of net revenues
|
|
|
(16.9 |
)% |
|
|
(18.3 |
)% |
|
|
|
|
Research and development expenses increased 2.3% in 2006
resulting from a combination of higher spending in relation to
our activities and $8 million in share-based compensation
charges. As a percentage of net revenues, research and
development expenses decreased significantly by 140 basis
points to 16.9%. Our reported research and development expenses
are mainly in the areas of product design, technology and
development and do not include marketing design center costs,
which are accounted for as selling expenses, or process
engineering, pre-production or process-transfer costs, which are
accounted for as cost of sales.
|
|
|
Other income and expenses, net |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Research and development funding
|
|
$ |
54 |
|
|
$ |
76 |
|
Start-up costs
|
|
|
(57 |
) |
|
|
(56 |
) |
Exchange gain (loss), net
|
|
|
(9 |
) |
|
|
(16 |
) |
Patent litigation costs
|
|
|
(22 |
) |
|
|
(14 |
) |
Patent pre-litigation costs
|
|
|
(7 |
) |
|
|
(8 |
) |
Gain on sale of Accent subsidiary
|
|
|
6 |
|
|
|
|
|
Gain on sale of non-current assets, net
|
|
|
2 |
|
|
|
12 |
|
Other, net
|
|
|
(2 |
) |
|
|
(3 |
) |
Other income and expenses, net
|
|
$ |
(35 |
) |
|
$ |
(9 |
) |
As a percentage of net revenues
|
|
|
(0.4 |
)% |
|
|
(0.1 |
)% |
64
Other income and expenses, net results include
miscellaneous items, such as research and development funding,
gains on sale of non-current assets,
start-up and phase-out
costs, net exchange gain or loss and patent claim costs.
Research and development funding includes 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 major amounts of
research and development funding were received in Italy and
France; however, the funding significantly decreased in 2006 due
to restricted support in certain jurisdictions. The net gain on
sale of non-current assets is mainly related to the sale of a
minor investment.
Start-up and phase-out
costs in 2006 were related to our 150-mm fab expansion in
Singapore, the conversion to 200-mm fab in Agrate (Italy) and
the build-up of the
300-mm fab in Catania (Italy). The net exchange loss related to
transactions not designated as a cash flow hedge denominated in
foreign currencies.
|
|
|
Impairment, restructuring charges and other related
closure costs |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Impairment, restructuring charges and other related closure costs
|
|
$ |
(77 |
) |
|
$ |
(128 |
) |
As a percentage of net revenues
|
|
|
(0.8 |
)% |
|
|
(1.5 |
)% |
In 2006, we recorded impairment, restructuring charges and other
related closure costs of $77 million. This expense was
mainly composed of:
|
|
|
|
|
Our headcount restructuring plan announced in May 2005, which
resulted in total charges of $45 million mainly for
employee termination benefits; the total cost of this
restructuring plan was estimated to be approximately
$100 million and was substantially complete at the end of
2006, with total charges of $86 million incurred through
December 31, 2006; |
|
|
|
An impairment charge of approximately $10 million was
recorded pursuant to subsequent decisions to discontinue
adoption of Tioga related technologies in certain products, of
which $6 million corresponded to the write-off of Tioga
goodwill and $4 million to impairment charges on
technologies purchased as part of the Tioga business acquisition
which were determined to be without any alternative use; |
|
|
|
Our ongoing 150-mm restructuring plan and related manufacturing
initiatives generated restructuring charges of approximately
$22 million. As of December 31, 2006, we have incurred
$316 million of the total expected of approximately
$330 million in pre-tax charges in connection with this
restructuring plan, slightly down from the original estimate of
$350 million, which was announced in October 2003. |
In 2005, we incurred $128 million of impairment,
restructuring charges and other related closure costs mainly
related to our 2005 headcount restructuring plan and our 150-mm
restructuring plan. See Note 19 to our Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income
|
|
$ |
677 |
|
|
$ |
244 |
|
|
|
178.0 |
% |
As a percentage of net revenues
|
|
|
6.9 |
% |
|
|
2.7 |
% |
|
|
|
|
Operating income increased significantly in 2006 as the combined
effect of all of the factors presented above.
In 2006, all of our product group segments were profitable. ASG
registered an increase in its operating income from
$355 million in 2005 to $439 million in 2006, mainly
resulting from the contribution of an increase in sales volume.
MPA operating income increased significantly from
$271 million in 2005 to $362 million in 2006 driven by
the strong revenue leverage. MPG moved from an operating loss of
$118 million in 2005 to an operating income of
$34 million in 2006, in spite of significant negative price
impact on sales. All the product group segments were negatively
impacted by declines in pricing.
|
|
|
Interest income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Interest income (expense), net
|
|
$ |
93 |
|
|
$ |
34 |
|
The interest income, net significantly increased to
$93 million in 2006 from $34 million in 2005,
reflecting more effective placement of liquidity investments and
rising interest rates in the U.S. dollar and the euro on
our available cash, and the strong net operating cash flow which
further contributed additional cash during the year.
65
|
|
|
Loss on equity investments |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Loss on equity investments
|
|
$ |
(6 |
) |
|
$ |
(3 |
) |
During 2006, we recorded a loss of $6 million and in 2005
we recorded a loss of $3 million, mainly related to
start-up costs due to
our investment as a minority shareholder in our joint venture in
China with Hynix Semiconductor.
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Income tax benefit (expense)
|
|
$ |
20 |
|
|
$ |
(8 |
) |
In 2006, we had an income tax benefit of $20 million. This
is the result of our effective tax rate for the full year 2006
which was approximately 8% and the benefit of certain favorable
adjustments in our tax position that occurred during the year.
In particular, in 2006, we recorded a reversal of a
$90 million provision due to a favorable outcome of a tax
litigation in one of our jurisdictions and approximately a
$23 million benefit pursuant to the application of certain
favorable tax regimes. Our tax rate is variable and depends on
changes in the level of operating profits 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 within the local
jurisdictions, our effective tax rate could increase in the
coming years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income
|
|
|
$782 |
|
|
|
$266 |
|
|
|
193.9 |
% |
As a percentage of net revenues
|
|
|
7.9 |
% |
|
|
3.0 |
% |
|
|
|
|
For 2006, we reported a net income of $782 million, a
strong increase compared to 2005. Basic and diluted earnings per
share for 2006 were $0.87 and $0.83, respectively, compared to
basic and diluted earnings of $0.30 and $0.29 per share for
2005.
2005 vs. 2004
In 2005, based upon published industry data by WSTS, the
semiconductor industry experienced a year-over-year revenue
increase of approximately 7% both for the total available market
(TAM) and the serviceable available market
(SAM).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net sales
|
|
$ |
8,876 |
|
|
$ |
8,756 |
|
|
|
1.4 |
% |
Other revenues
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
The increase in our net revenues in 2005 was primarily due to
our higher sales volumes and improved product mix, as our
average selling prices declined by approximately 8% due to the
continuing broad-based pressure in the markets we serve.
With respect to our product group segments, ASG net revenues
increased 2% over 2004, mainly due to a more favorable product
mix, which was, however, largely offset by continuous pricing
pressure. This revenue increase was generated by higher sales in
Imaging, Cellular Communication, Automotive and Data Storage
products, while Consumer registered a decline. MPA net revenues
slightly decreased 1% compared to 2004, mainly due to the
negative price impact that more than offset the sales volume
increase registered by all product group segments. In 2005, MPG
net revenues increased by 3% compared to 2004; this increase was
driven by a large volume demand, particularly in Flash products
and mainly within NAND, despite a decline in our average selling
prices.
Net revenues by market segment increased in Computer by
approximately 11%, Telecom by approximately 10% and Automotive
by approximately 7%, while Consumer and Industrial and Other
decreased by approximately 15% and 9%, respectively. As a
significant portion of our sales are made through distributors,
the
66
foregoing are necessarily estimates within a variance of 5% to
10% in absolute dollar amounts of the relative weighting of each
of our targeted market segments.
By location of order shipment, net revenues increased strongly
in Greater China by approximately 18%, while net revenues were
flat in the Asia Pacific and declining in Japan, North America,
Emerging Markets and Europe by approximately 24%, 6%, 4% and 1%,
respectively.
In 2005, we had several large customers, with the largest one,
the Nokia Group of companies, accounting for approximately 22%
of our net revenues, increasing from the 17% it accounted for in
2004. Our top ten OEM customers accounted for approximately 50%
of our net revenues in 2005, compared to approximately 44% of
our net revenues in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cost of sales
|
|
$ |
(5,845 |
) |
|
$ |
(5,532 |
) |
|
|
(5.7 |
)% |
Gross profit
|
|
$ |
3,037 |
|
|
$ |
3,228 |
|
|
|
(5.9 |
)% |
Gross margin (as a percentage of net revenues)
|
|
|
34.2 |
% |
|
|
36.8 |
% |
|
|
|
|
The increase in our cost of sales is due to the strong sales
volume increase and the negative impact of the effective
U.S. dollar exchange rate because a large part of our
manufacturing activities is located in the euro zone. The
combined effect of price impact on our revenues and of the
increase in cost of sales generated a decrease in our gross
profit; as a result, our gross margin decreased 260 basis
points to 34.2% because the profitable contribution of higher
sales volume, improved product mix and manufacturing
efficiencies was offset by the negative impacts of the decline
in selling prices and of the effective U.S. dollar exchange
rate.
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Selling, general and administrative expenses
|
|
$ |
(1,026 |
) |
|
$ |
(947 |
) |
|
|
(8.4 |
)% |
As a percentage of net revenues
|
|
|
(11.6 |
)% |
|
|
(10.8 |
)% |
|
|
|
|
The increase in selling, general and administrative expenses was
largely due to the negative impact of the effective
U.S. dollar exchange rate, the one-time compensation
charges related to our former CEO and other retired senior
executives for $7 million, the new pension scheme for
executive management for $11 million, the share-based
compensation amounting to $5 million and the overall
increase in our expenditures.
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Research and development expenses
|
|
$ |
(1,630 |
) |
|
$ |
(1,532 |
) |
|
|
(6.3 |
)% |
As a percentage of net revenues
|
|
|
(18.3 |
)% |
|
|
(17.5 |
)% |
|
|
|
|
The combined result of the negative impact of the effective
U.S. dollar exchange rate, higher spending in our research
and development activities, a $6 million one-time
termination charge for two former executives and a
$3 million share-based compensation charge resulted in an
increase of our research and development expenses in 2005. As a
percentage of net revenues, research and development expenses
grew at a higher rate than our net revenues, thus increasing
from 17.5% in 2004 up to 18.3% in 2005. Our reported research
and development expenses are mainly in the areas of product
design, technology and development and do not include marketing
design center costs, which are accounted for as selling
expenses, or process engineering, pre-production or
process-transfer costs, which are accounted for as cost of sales.
67
|
|
|
Other income and expenses, net |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Research and development funding
|
|
$ |
76 |
|
|
$ |
84 |
|
Start-up costs
|
|
|
(56 |
) |
|
|
(63 |
) |
Exchange gain (loss), net
|
|
|
(16 |
) |
|
|
33 |
|
Patent claim costs
|
|
|
(22 |
) |
|
|
(37 |
) |
Gain on sale of non-current assets, net
|
|
|
12 |
|
|
|
6 |
|
Other, net
|
|
|
(3 |
) |
|
|
(13 |
) |
Other income and expenses, net
|
|
$ |
(9 |
) |
|
$ |
10 |
|
As a percentage of net revenues
|
|
|
(0.1 |
)% |
|
|
0.2 |
% |
Other income and expenses, net results include
miscellaneous items, such as research and development funding,
gains on sale of non-current assets,
start-up costs, net
exchange gain or loss and patent claim costs. In 2005, research
and development funding included 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 major amounts of research and
development funding were received in Italy and France. In 2005,
research and development funding slightly decreased, compared to
2004. The net gain on sale of non-current assets of
$12 million is the result of the gain of $6 million on
the sale of our share in UPEK Inc., the gains on sales of
buildings and lands for a total of $8 million and losses of
$2 million on the sale of equipment.
Start-up costs in 2005
were related to our 150-mm fab expansion in Singapore and the
conversion to 200-mm fab in Agrate (Italy) and the
build-up of the 300-mm
fab in Catania (Italy). The net exchange loss related to
transactions not designated as a cash flow hedge denominated in
foreign currencies. Patent claim costs included costs associated
with several ongoing litigations and claims. These costs are
categorized either as patent litigation costs or pre-litigation
costs, amounting to $14 million and $8 million,
respectively.
|
|
|
Impairment, restructuring charges and other related
closure costs |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Impairment, restructuring charges and other related closure costs
|
|
$ |
(128 |
) |
|
$ |
(76 |
) |
As a percentage of net revenues
|
|
|
(1.5 |
)% |
|
|
(0.9 |
)% |
In 2005, we recorded impairment, restructuring charges and other
related closure costs of $128 million. This expense was
mainly composed of:
|
|
|
|
|
Our new headcount restructuring plan announced in May 2005,
which resulted in total charges of $41 million mainly for
employee termination benefits; the total cost of this
restructuring plan is estimated to be in a range of between $100
and $130 million and its completion is expected by the
second half of 2006; |
|
|
|
Our restructuring and reorganization activities initiated in the
first quarter of 2005, which generated a total charge of
impairment on goodwill and other intangible assets of
$63 million and $10 million for restructuring and
other related closure costs; this restructuring plan was fully
completed in 2005; |
|
|
|
Our ongoing 150-mm restructuring plan and related manufacturing
initiatives generated restructuring charges of approximately
$13 million. As of December 31, 2005, we have incurred
$294 million of the total expected of approximately
$330 million in pre-tax charges in connection with this
restructuring plan, slightly down from the original estimate of
$350 million, which was announced in October 2003. We
expect to incur the balance in the coming quarters, which is
later than anticipated to accommodate unforeseen qualification
requirements of our customers, and to complete the plan in the
second half of 2006; and |
|
|
|
Our impairment review of goodwill and intangible assets that
resulted in a charge of $1 million. |
In 2004, we incurred $76 million of impairment,
restructuring charges and other related closure costs mainly
related to our 150-mm restructuring plan. See Note 18 to
our 2005 Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income
|
|
$ |
244 |
|
|
$ |
683 |
|
|
|
(64.3 |
%) |
As a percentage of net revenues
|
|
|
2.7 |
% |
|
|
7.8 |
% |
|
|
|
|
68
The decrease in operating income was mainly caused by the
negative impact of the ongoing pricing pressure on our net
revenues, the negative impact of the effective U.S. dollar
exchange rate, an increase in our total operating expenses as
well as an increase of our impairment, restructuring charges and
other related closure costs. These negative factors were
partially compensated by overall improved efficiencies in our
manufacturing activities and higher volume of sales.
In 2005, our product group segments were profitable with the
exception of MPG. ASG registered a decrease of its operating
income from $530 million in 2004 to $355 million in
2005, as improved product mix was insufficient to compensate for
strong declines in selling prices and a decrease in consumer
segment sales. MPA operating income decreased from
$413 million in 2004 to $271 million in 2005 mainly
due to continuing price pressure. In 2005, MPG registered an
operating loss of $118 million, compared to an operating
income of $42 million in 2004, mainly due to the
significant negative price impact on sales. All the product
group segments were negatively impacted by the effective
U.S. dollar exchange rate and increased operating expenses.
|
|
|
Interest income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Interest income (expense), net
|
|
$ |
34 |
|
|
$ |
(3 |
) |
The interest expense, net of $3 million for 2004, compared
to interest income, net of $34 million in 2005, reflects a
decrease in interest expense due to the repurchases of our 2010
Bonds and an increase in interest receivable on our available
cash due to rising interest rates on our cash positions mainly
denominated in U.S. dollars.
|
|
|
Loss on equity investments |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Loss on equity investments
|
|
$ |
(3 |
) |
|
$ |
(4 |
) |
During 2005, we registered a loss, related to
start-up costs, of
$3 million mainly due to our investment as a minority
shareholder in our joint venture in China with Hynix
Semiconductor. In 2004, we registered a loss of $4 million
with respect to SuperH, Inc., the joint venture we formed with
Renesas Ltd., which has subsequently been terminated, and a
$2 million loss with respect to UPEK Inc., created with
Sofinnova Capital IV FCRP as a venture capital-funded
purchase of our TouchChip business.
|
|
|
Loss on extinguishment of convertible debt |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Loss on extinguishment of convertible debt
|
|
|
|
|
|
$ |
(4 |
) |
We did not incur any loss on extinguishment of convertible debt
in 2005. In 2004, a loss of $4 million was recorded in
relation to the repurchase of our 2010 Bonds.
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 |
|
|
| |
|
|
|
|
(In millions) |
Income tax expense
|
|
$ |
(8 |
) |
|
$(68) |
In 2005, we had an income tax expense of $8 million, which
included, in addition to the current tax provision, the reversal
of certain tax provisions in the first and second quarters of
2005 for about $10 million following the conclusion of an
advanced pricing agreement for the period 2001 through 2007 with
the United States Internal Revenue Service and an income
tax benefit of $18 million in the United States pursuant to
the application of the ETI rules. Excluding these items, our
effective tax rate for the full year 2005 was approximately 13%,
which is the result of actual tax charges in each jurisdiction
for the total year, including tax benefit from restructuring
charges that occurred under jurisdictions whose tax rate is
higher than our average tax rate and that overall resulted in
reducing our effective tax rate in 2005. In 2004, we had an
income tax charge of $68 million. Excluding extraordinary
items, the effective tax rate in 2004 was approximately 15%. Our
tax rate is variable and depends on changes in the level of
operating profits 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 within the local jurisdictions, our effective tax
rate could increase in the coming years.
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income
|
|
$ |
266 |
|
|
$ |
601 |
|
|
|
(55.7 |
%) |
As a percentage of net revenues
|
|
|
3.0 |
% |
|
|
6.9 |
% |
|
|
|
|
For 2005, we reported a net income of $266 million compared
to a net income of $601 million for 2004. Basic and diluted
earnings per share for 2005 were $0.30 and $0.29, respectively,
compared to basic and diluted earnings of $0.67 and
$0.65 per share for 2004. Net income in 2005 included
$101 million in charges net of income taxes, or
$0.11 per diluted share, related to impairment,
restructuring charges and other related closure costs, while net
income in 2004 included $51 million in charges net of
income taxes related to impairment restructuring charges and
other related closure costs, or $0.05 per diluted share.
Quarterly Results of Operations
Certain quarterly financial information for the years 2006 and
2005 are set forth below. Such information is derived from
unaudited interim consolidated financial statements, prepared on
a basis consistent with the Consolidated Financial Statements,
that include, in the opinion of management, all normal
adjustments necessary for a fair presentation of the interim
information set forth therein. Operating results for any quarter
are not necessarily indicative of results for any future period.
In addition, in view of the significant growth we have
experienced in recent years, the increasingly competitive nature
of the markets in which we operate, the changes in product mix
and the currency effects of changes in the composition of sales
and production among different geographic regions, we believe
that period-to-period
comparisons of our operating results should not be relied upon
as an indication of future performance.
Our quarterly and annual operating results are also affected by
a wide variety of other factors that could materially and
adversely affect revenues and profitability or lead to
significant variability of operating results, including, among
others, capital requirements and the availability of funding,
competition, new product development and technological change
and manufacturing. In addition, a number of other factors could
lead to fluctuations in operating results, including order
cancellations or reduced bookings by key customers or
distributors, intellectual property developments, international
events, currency fluctuations, problems in obtaining adequate
raw materials on a timely basis, impairment, restructuring
charges and other related closure costs, as well as the loss of
key personnel. As only a portion of our expenses varies with our
revenues, there can be no assurance that we will be able to
reduce costs promptly or adequately in relation to revenue
declines to compensate for the effect of any such factors. As a
result, unfavorable changes in the above or other factors have
in the past and may in the future adversely affect our operating
results. Quarterly results have also been and may be expected to
continue to be substantially affected by the cyclical nature of
the semiconductor and electronic systems industries, the speed
of some process and manufacturing technology developments,
market demand for existing products, the timing and success of
new product introductions and the levels of provisions and other
unusual charges incurred. Certain additions of quarterly results
will not total to annual results due to rounding.
In the fourth quarter of 2006, based upon recently published
data by WSTS, the TAM and the SAM increased approximately 9% and
4% year-over-year, respectively, while the TAM increased
approximately 2% and the SAM decreased approximately 1%
sequentially.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Net sales
|
|
$ |
2,482 |
|
|
$ |
2,502 |
|
|
$ |
2,388 |
|
|
|
(0.8 |
)% |
|
|
3.9 |
% |
Other revenues
|
|
|
1 |
|
|
|
11 |
|
|
|
1 |
|
|
|
(89.0 |
) |
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
2,483 |
|
|
$ |
2,513 |
|
|
$ |
2,389 |
|
|
|
(1.2 |
)% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-year comparison |
The increase of our fourth quarter 2006 net revenues was
mainly driven by significantly higher volume that was largely
offset by the decline of our average selling prices. As a result
of ongoing pricing pressure in the semiconductor market, our
average selling prices decreased by approximately 6% during the
fourth quarter of 2006, compared to the fourth quarter of 2005
due totally to pure pricing effect.
The trend in net revenues was different for each of our main
product group segments, with a strong increase in MPA revenues,
a moderate increase in ASG revenues and a decline in MPG
revenues. ASG net revenues increased by approximately 3% due to
volume and improved product mix, while prices declined; the
revenue
70
increase was mainly driven by Digital Consumer which registered
double-digit growth, with Automotive products registering
single-digit growth, while revenues declined in Telecom. MPA net
revenues strongly increased by 21% driven by higher volumes and
improved product mix, while selling prices marginally decreased;
the revenue increase was generated by all the product families.
MPG net revenues decreased approximately 8% as the impact of the
price decline exceeded the higher volume; by product family, the
decrease was most significant in Flash.
Net revenues by market segment application increased in
Industrial and Consumer by approximately 14% and 10%,
respectively, in Automotive and Computer by approximately 4% and
3%, respectively, while Telecom registered a 2% decline. The
foregoing are estimates within a variance of 5% to 10% in
absolute dollar amounts of the relative weighting of each of our
targeted market segments.
By location of order shipment, our sales performance was
particularly strong in Japan registering a 40% increase,
Emerging Markets, Europe and Greater China registered an
increase of 17%, 7% and 3%, respectively, while there was a
decrease in North America by 6% and Asia Pacific by 2%.
The sequential variation of our revenues was the result of the
combined effect of a favorable improvement in product mix and of
a solid volume increase, partially negatively balanced by a
decrease of our selling prices, which registered a further
decline of approximately 3%.
While MPA revenues were flat, both ASG and MPG revenues slightly
declined on a sequential basis. Net revenues for ASG decreased
2% mainly due to continuously strong price pressure; by product
families, revenues increased in Digital Consumer, while
decreasing in the other families, particularly in Telecom
products, while Automotive products remained basically flat. MPA
revenues were basically flat, with improvements in product mix
offset by a decline in volume; by product families,
Microcontrollers and Power increased while Advanced Analog
decreased. MPG revenues decreased approximately 1% due to the
impact of a tougher pricing environment while the number of
units shipped was higher; Flash memory decreased by 2% and
Smartcard by 7%, while Other Memories increased.
Net revenues by segment market application increased in Consumer
by approximately 5%, in Industrial and Computer by 2%, while
they strongly decreased in Telecom by 6%. As a significant
portion of our sales are made through distributors, the
foregoing are necessarily estimates within a variance of 5% to
10% in absolute dollar amounts of the relative weighting of each
of our targeted market segments.
By location of order shipment, our net revenues registered an
increase in North America, Japan and Greater China by
approximately 4%, 1%, and 1%, respectively, while they declined
in Asia Pacific by 6%, in Europe by 2% and Emerging Markets by
1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Cost of sales
|
|
$ |
(1,582 |
) |
|
$ |
(1,609 |
) |
|
$ |
(1,517 |
) |
|
|
1.7 |
% |
|
|
(4.3 |
)% |
Gross profit
|
|
$ |
901 |
|
|
$ |
904 |
|
|
$ |
872 |
|
|
|
(0.3 |
)% |
|
|
3.3 |
% |
Gross margin
|
|
|
36.3 |
% |
|
|
36.0 |
% |
|
|
36.5 |
% |
|
|
|
|
|
|
|
|
On a year-over-year basis, our gross profit increased due to the
combined effect of factors having a favorable impact including
manufacturing efficiencies, sales volume and improved product
mix and other factors having a negative impact including price
decline, underloading charges for some of our fabs and our
effective average U.S. dollar exchange rate, which was
equivalent to
1.00 for $1.28
for the fourth quarter 2006 and to
1.00 for $1.20
for the fourth quarter of 2005. As a result, our gross margin
slightly decreased 20 basis points to 36.3%.
On a sequential basis, our gross profit was basically unchanged
in absolute value in spite of declining revenues, since the
favorable contributions by manufacturing performances and
improved product mix exceeded the negative impact of price
decline and the effective U.S. dollar exchange rate. In
addition, in the fourth quarter of 2006, our gross profit was
also negatively impacted by charges associated with unused
capacity in some of our fabs. As a result of these factors, our
gross margin slightly improved 30 basis points to 36.3%.
71
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Selling, general and administrative expenses
|
|
$ |
(281 |
) |
|
$ |
(264 |
) |
|
$ |
(259 |
) |
|
|
(6.5 |
)% |
|
|
(8.2 |
)% |
As percentage of net revenues
|
|
|
(11.3 |
)% |
|
|
(10.5 |
)% |
|
|
(10.9 |
)% |
|
|
|
|
|
|
|
|
On a year-over-year basis, our selling, general and
administrative expenses increased mainly in relation to the
expansion of our activities, the negative impact of the
effective U.S. dollar exchange rate and the charges related
to the share-based compensation plan which amounted to
$9 million in the fourth quarter of 2006. This resulted in
an increase in the percentage of net revenues ratio from 10.9%
in the fourth quarter of 2005 to 11.3% in the fourth quarter of
2006.
On a sequential basis, the increase in our selling, general and
administrative expenses was also mainly due to the negative
impact of the effective U.S. dollar exchange rate and the
charges related to the share-based compensation plan. The
expenses to sales ratio for the fourth quarter 2006 increased
80 basis points to 11.3%, compared to the third quarter of
2006 due to the above factors and the decrease in our net
revenues.
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Research and development expenses
|
|
$ |
(430 |
) |
|
$ |
(421 |
) |
|
$ |
(402 |
) |
|
|
(2.1 |
)% |
|
|
(7.0 |
)% |
As percentage of net revenues
|
|
|
(17.3 |
)% |
|
|
(16.8 |
)% |
|
|
(16.8 |
)% |
|
|
|
|
|
|
|
|
Our research and development expenses increased both on a
year-over-year basis, as well as on a sequential basis mainly
due to the negative impact of the effective U.S. dollar
exchange rate and the share-based compensation plan which
amounted to $5 million in the fourth quarter of 2006. As a
percentage of net revenues, the fourth quarter ratio was 17.3%,
due to the decline in revenues.
|
|
|
Other income and expenses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Research and development funding
|
|
$ |
21 |
|
|
$ |
19 |
|
|
$ |
29 |
|
Start-up costs
|
|
|
(16 |
) |
|
|
(15 |
) |
|
|
(10 |
) |
Exchange gain (loss) net
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(20 |
) |
Patent litigation costs
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
Patent pre-litigation costs
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
Gain on sale of other non-current assets
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Other, net
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
1 |
|
Other income and expenses, net
|
|
|
(7 |
) |
|
|
(5 |
) |
|
|
2 |
|
As a percentage of net revenues
|
|
|
(0.3 |
)% |
|
|
(0.2 |
)% |
|
|
0.1 |
% |
Other income and expenses, net results include miscellaneous
items such as research and development funding, gains on sale of
non-current assets and net exchange rate results, and as
expenses it mainly includes
start-up costs and
patent claim costs. In the fourth quarter 2006, research and
development funding income was associated with 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. In the fourth quarter of 2006, these
factors resulted in a net expense of $7 million, which was
mainly the result of expenses associated with patent litigation
and with the
start-up/phase-out
costs related to our conversion to 200-mm fab in Agrate (Italy),
to the build-up of the
300-mm fab in Catania (Italy) and to the 150-mm fab expansion in
Singapore and of other income related to research and
development funding.
72
|
|
|
Impairment, restructuring charges and other related
closure costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Impairment, restructuring charges and other related closure costs
|
|
$ |
(10 |
) |
|
$ |
(20 |
) |
|
$ |
(16 |
) |
As a percentage of net revenues
|
|
|
(0.4 |
)% |
|
|
(0.8 |
)% |
|
|
(0.7 |
)% |
Our impairment, restructuring charges and other related closure
costs of $10 million for the fourth quarter of 2006 were
composed of:
|
|
|
|
|
Our headcount restructuring plan announced in May 2005, which
resulted in charges of $4 million mainly for employee
termination benefits; |
|
|
|
Our ongoing 150-mm restructuring plan and related manufacturing
initiatives, which resulted in a charge of $6 million. |
See Note 19 to our Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income
|
|
$ |
173 |
|
|
$ |
195 |
|
|
$ |
197 |
|
In percentage of net revenues
|
|
|
7.0 |
% |
|
|
7.7 |
% |
|
|
8.2 |
% |
On a year-over-year basis, our operating income slightly
decreased due the negative impact of selling prices and the
effective exchange rate of the U.S. dollar which were
partially compensated by overall improved efficiencies in our
manufacturing activities, higher volume of sales and an improved
product mix.
With respect to our product group segments, on a year-over-year
basis, MPA improved its operating income while the profitability
of both ASG and MPG declined. ASG registered a decrease in its
operating income from $137 million in the fourth quarter of
2005 to $111 million in the fourth quarter of 2006, due to
the negative impact of ongoing pricing pressure, increased
operating expenses and the negative impact of the effective
U.S. dollar exchange rate. MPA operating income increased
from $67 million in the fourth quarter of 2005 to
$103 million in the fourth quarter of 2006 mainly driven by
the strong volume increase. MPG profitability decreased from
$27 million in the fourth quarter of 2005 to break-even in
the fourth quarter of 2006 as a result of declining revenues and
the tough pricing environment.
On a sequential basis, our operating income also slightly
decreased, due again to the negative impact of the declining
selling prices and the effective U.S. dollar exchange rate.
On a sequential basis, the operating income of all of our
product group segments decreased. ASGs operating income
decreased in the fourth quarter to $111 million compared to
$125 million in the third quarter 2006 due to declining
revenues, product mix and difficult selling price environment.
MPAs operating income decreased slightly on flat revenues;
however, its profitability remained at a high ratio
corresponding to 17.3% of sales. MPG registered a break-even
after an operating income of $10 million in the third
quarter of 2006, which benefited from a one-time income
associated with a licensing deal.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Interest income, net
|
|
$ |
25 |
|
|
$ |
17 |
|
|
$ |
11 |
|
On a year-over-year basis, our interest income increased
significantly, due to the favorable impact of rising interest
rates on our available cash and cash equivalents, more effective
placement of liquidity investments and the additional favorable
operating cash flow generated during 2006. Furthermore, the
fourth quarter of 2006 benefited from a one-time interest
payment received by us in connection with the favorable outcome
of a tax litigation.
73
|
|
|
Loss on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Loss on equity investments
|
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
|
|
|
We did not record any major variation in the fourth quarter of
2006 in relation to our investments. Our current major
investment is as a minority shareholder in our joint venture in
China with Hynix Semiconductor, which is in a
start-up phase.
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Income tax benefit (expense)
|
|
$ |
80 |
|
|
$ |
(2 |
) |
|
$ |
(25 |
) |
During the fourth quarter of 2006, we recorded an income tax
benefit of $80 million, which is the result of certain
provision reversals and certain benefits, net of the actual tax
charges accrued in each jurisdiction for the total year. The
fourth quarter benefited from a provision reversal of
approximately $90 million due to the favorable outcome of a
tax litigation; these benefits were partially offset by some new
provisions of approximately $33 million related to certain
tax assessments.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income
|
|
$ |
276 |
|
|
$ |
207 |
|
|
$ |
183 |
|
As percentage of net revenues
|
|
|
11.1 |
% |
|
|
8.2 |
% |
|
|
7.7 |
% |
For the fourth quarter of 2006, we reported net income of
$276 million, a significant improvement compared to both
the fourth quarter of 2005 and the third quarter of 2006, which
is largely due to one-time income tax benefits. Basic and
diluted earnings per share for the fourth quarter of 2006 were
$0.31 and $0.30, respectively, improved compared to the basic
and diluted earnings of $0.20 per share for the fourth
quarter of 2005, and $0.23 and $0.22, respectively, per share
for the third quarter of 2006. The favorable impact of the
one-time income tax benefit on both our basic and diluted
earnings for the fourth quarter of 2006 has been estimated to be
approximately $0.10.
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 where we
maintain our operations, particularly the euro, the Singapore
dollar and the Japanese yen.
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 certain
of our products (primarily 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.
74
In summary, as our reporting currency is the U.S. dollar,
currency exchange rate fluctuations affect our results of
operations: if the U.S. dollar weakens, we receive a
limited part of our revenues, and more importantly, we increase
a significant part of our costs, in currencies other than the
U.S. dollar. As described below, our effective average
U.S. dollar exchange rate strengthened during 2006,
particularly against the euro, causing us to report lower
expenses and positively impacting both our gross margin and
operating income. Our Consolidated Statement of Income for the
year ended December 31, 2006 includes income and expense
items translated at the average 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
income statement, in particular with respect to a portion of
cost 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 rate
of the euro to the U.S. dollar was $1.24 for
1.00 in 2006 and
it was $1.28 for
1.00 in 2005.
These effective exchange rates reflect the actual exchange rates
combined with the impact of hedging contracts matured in the
period.
As of December 31, 2006, the outstanding hedged amounts to
cover manufacturing costs were
190 million
and to cover operating expenses were
260 million,
at an average rate of about $1.30 and $1.29 per euro
respectively, maturing over the period from January 2007 to June
2007. As of December 31, 2006, these hedging contracts
represented a deferred gain of $13 million after tax,
recorded in other comprehensive income in shareholders
equity, compared to a deferred loss of $13 million as of
December 31, 2005. 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 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, therefore 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 2006,
as the result of cash flow hedging, we recorded a net profit of
$19 million, consisting of a profit of $5 million to
cost of sales, a profit of $11 million to research and
development expenses, and a profit of $3 million to
selling, general and administrative expenses, while in 2005, we
recorded total charges of $81 million. We recorded a net
loss of $9 million in Other income and expenses,
net due to the utilization in 2006 of foreign exchange
forward contracts on a rolling basis to hedge intercompany
payables and receivables in euros, the negative interest
differential between euro and dollars has been entirely
reflected in the $9 million loss. In the second half of
2006, the impact of the negative interest differential was
drastically reduced, and starting from the fourth quarter of
2006 no forward contracts are reported to hedge intercompany
payables and receivables; as such, no exchange losses have been
recorded for this hedging activity in the fourth quarter of
2006. In addition, no foreign exchange trading activities have
been conducted.
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 euro 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 December 31, 2006, our
outstanding indebtedness was denominated mainly in
U.S. dollars and, to a limited extent, in euros and in
Singapore dollars.
Effective January 2006, our Corporate Treasury was reorganized
under the lead of a newly appointed Corporate Treasurer and now
reports to our Chief Financial Officer. Simultaneously, we
created a Treasury Committee to steer treasury activities and to
ensure compliance with corporate policies.
For a more detailed discussion, see Item 3. Key
Information Risk Factors
Risks Related to Our Operations Our financial
results can be adversely affected by fluctuations in exchange
rates, principally in the value of the U.S. dollar.
75
Impact of Changes in Interest Rates
Our results of operations and financial condition can be
affected by material changes in interest rates, which can impact
the total interest income received on our cash and cash
equivalents and on our interest expense on our financial debt.
Our interest income, net is the balance between interest income
received mainly from our cash and interest expense paid on our
long-term debt. Our interest income is almost entirely dependent
on the fluctuations in the interest rates, mainly in the
U.S. dollar and the euro. Any increase or decrease in the
short-term market interest rates would mean an increase or
decrease in our interest income. Since we benefited from the
increases in the U.S. dollar-and euro-denominated interest
rates, our interest income (expense), net increased from
$(3) million in 2004, to $34 million in 2005 and to
$93 million in 2006. The interest expenses are mainly
related to long-term convertible debt, which are mainly issued
at fixed rates in U.S. dollars and to a euro-denominated
FRN issued at a floating rate in euros.
In response to the possible risk of interest rate mismatch, in
the second quarter of 2006, we entered into cancellable 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 cancellable 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%. Our hedging policy is not intended to cover the
full exposure and all risks associated with these instruments.
As of December 31, 2006, the 10-year U.S. swap
interest rate was 5.12% as compared to 5.64% at the inception of
the transaction, on June 14, 2006. The fair value of the
swaps as of December 31, 2006 was $4 million since
they were executed at higher market rates. In compliance with
FAS 133 provisions on fair value hedges, the net impact of
the hedging transaction on our income statement was the
ineffective part of the hedge, which resulted in a net loss of
less than $1 million for 2006 and was recorded in
Other income and expenses, net. These cancellable
swaps were designed and are expected to effectively replicate
the bonds 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.
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 a single A long-term rating, meaning at least A3 from
Moodys Investor Service and A- from Standard &
Poors and Fitch Ratings. Marginal amounts are held in
other currencies. See Item 11. Quantitative and
Qualitative Disclosures About Market Risk.
At December 31, 2006, cash and cash equivalents totaled
$1,963 million, compared to $2,027 million as of
December 31, 2005 and $1,950 million as of
December 31, 2004. Overall, our available cash decreased in
2006 as a result of the early redemption of substantially all of
our 2013 Convertible Bonds in the third quarter of 2006. At
December 31, 2006, we also had investments of
$250 million in short-term deposits with a maturity between
three months and one year. These deposits are almost exclusively
held at various banks with a single A minimum rating in order to
diversify our credit concentration. Interest on these deposits
is paid at maturity with interest rates fixed at inception for
the duration of the deposits. The principal will be repaid at
final maturity. As of December 31, 2006 we had
$460 million in marketable securities, with primary
financial institutions with minimum rating of A1/ A+ (with
approximately 80% of the portfolio rated Aa3/ Aa- and
approximately 20% rated A1/ A+). As of December 31, 2005,
we did not have marketable securities or short-term deposits.
Changes in the instruments adopted to invest our liquidity in
future periods may occur and may significantly affect our
interest income/(expense), net.
76
We maintain a significant cash position and a low debt to equity
ratio, which provide us with adequate financial flexibility. As
in the past, our cash management policy is to finance our
investment needs mainly with net cash generated from operating
activities.
Net cash from operating activities. As in prior periods,
the major source of cash during 2006 was cash provided by
operating activities. Our net cash from operating activities
totaled $2,491 million in 2006, increasing significantly
compared to $1,798 million in 2005 and $2,342 million
in 2004.
Changes in our operating assets and liabilities resulted in net
cash used of $60 million in 2006, compared to net cash used
of $472 million in 2005. The main variations were due to
the net cash used for inventory, balanced by trade payables and
by other assets and liabilities.
Net cash used in investing activities. Net cash used in
investing activities was $2,753 million in 2006, compared
to $1,528 million in 2005 and $2,134 million in 2004.
Payments for purchases of tangible assets were the main
utilization of cash, amounting to $1,533 million for 2006,
an increase over the $1,441 million in 2005. The 2006
payments are net of $660 million proceeds from matured
short-term deposits and from the sale of our Accent subsidiary.
In 2006, cash used for investments in intangible assets and
financial assets was $86 million and capital contributions
to equity investments was $213 million.
Capital expenditures for 2006 were principally allocated to:
|
|
|
|
|
the expansion of the 300-mm front-end joint project with NXP
Semiconductors and Freescale Semiconductor in Crolles2 (France); |
|
|
|
the capacity expansion and the upgrading to finer geometry
technologies for our 200-mm plant in Rousset (France); |
|
|
|
the capacity expansion and the upgrading of our 150-mm and
200-mm plant in Singapore; |
|
|
|
the upgrading of our 200-mm fab and pilot line in Agrate
(Italy); and |
|
|
|
the capacity expansion for our back-end facilities in Malta,
Shenzhen (China), Bouskoura (Morocco) and Muar (Malaysia). |
Capital expenditures for 2005 were principally allocated to:
|
|
|
|
|
the capacity expansion of our 200-mm and 150-mm front-end
facilities in Singapore; |
|
|
|
the conversion to 200-mm of our front-end facility in Agrate
(Italy); |
|
|
|
the capacity expansion of our back-end plants in Muar
(Malaysia), Shenzhen (China), Toa Payoh (Singapore) and Malta; |
|
|
|
the expansion of our 200-mm front-end facility in Phoenix
(Arizona); |
|
|
|
the capacity expansion of our 200-mm front-end facility in
Rousset (France); |
|
|
|
the completion of building and continuation of facilities for
our 300-mm front-end plant in Catania (Italy); |
|
|
|
the expansion of a 150-mm front-end and a 200-mm pilot line in
Tours (France); and |
|
|
|
the expansion of the 300-mm front-end joint project with NXP
Semiconductors and Freescale Semiconductor in Crolles2 (France). |
Capital expenditures for 2004 were principally allocated to:
|
|
|
|
|
the expansion of our 200-mm and 150-mm front-end facilities in
Singapore; |
|
|
|
the expansion of our 200-mm front-end facility in Rousset
(France); |
|
|
|
the facilitization of our 300-mm facility in Catania (Italy); |
|
|
|
the upgrading of our front-end and research and development
pilot line in Agrate (Italy); |
|
|
|
the upgrading of our 200-mm front-end facility in Catania
(Italy); |
|
|
|
the expansion and upgrading of our front-end facilities 200-mm
in Phoenix and 150-mm in Carrollton (United States); and |
|
|
|
the capacity expansion in our back-end plants of Muar
(Malaysia), Toa Payoh (Singapore), Shenzhen (China) and Malta. |
Net operating cash flow. We define net operating cash
flow 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, short-term
deposits and restricted cash. We believe net operating cash flow
provides useful information
77
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 Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net cash from operating activities
|
|
$ |
2,491 |
|
|
$ |
1,798 |
|
|
$ |
2,342 |
|
Net cash used in investing activities
|
|
|
(2,753 |
) |
|
|
(1,528 |
) |
|
|
(2,134 |
) |
Payment for purchase and proceeds from sale of marketable
securities, short-term deposits and restricted cash, net
|
|
|
928 |
|
|
|
|
|
|
|
|
|
Net operating cash flow
|
|
$ |
666 |
|
|
$ |
270 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
|
In the last three years, our operating activities were capable
of generating cash in excess of our investing activities. As a
result, net operating cash flow consistently increased to reach
$666 million in 2006, compared to net operating cash flow
of $270 million in 2005 and of $208 million in 2004.
This cash flow was mainly generated by the strong increase in
cash from operating activities, while at the same time we were
able to reduce the level of our capital investments as a
percentage of sales.
Net cash used in financing activities. Net cash from
financing activities was $132 million in 2006 compared to
$178 million in 2005. The net cash used in financing
activities in 2006 is mainly due to the balance of the proceeds
from the issuance of our 2013 Senior Bonds and 2016 Convertible
Bonds, which amounted to $1,554 million net of issuance
costs, and the repayment of long-term debts, primarily the
redemption of the 2013 Convertible Bonds, of
$1,377 million. In 2004, 2005 and 2006, we paid dividends
in the amount of $107 million in each year. The major item
of the cash used for financing activities in 2004 was the
repayment of long-term debt for a total amount of
$1,288 million, mainly consisting of the redemption of all
outstanding 2009 LYONs for an amount paid of $813 million
and of the repurchase of all outstanding 2010 Bonds for an
amount paid of $375 million. These bonds were cancelled.
We define our net financial position as the difference between
our total cash position (cash, cash equivalents, 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 Consolidated Balance
Sheets as at December 31, 2006, December 31, 2005 and
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cash and cash equivalents
|
|
$ |
1,963 |
|
|
$ |
2,027 |
|
|
$ |
1,950 |
|
Marketable securities
|
|
|
460 |
|
|
|
|
|
|
|
|
|
Short-term deposits
|
|
|
250 |
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash position
|
|
|
2,891 |
|
|
|
2,027 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
|
|
|
|
|
(11 |
) |
|
|
(58 |
) |
Current portion of long-term debt
|
|
|
(136 |
) |
|
|
(1,522 |
) |
|
|
(133 |
) |
Long-term debt
|
|
|
(1,994 |
) |
|
|
(269 |
) |
|
|
(1,767 |
) |
|
|
|
|
|
|
|
|
|
|
Total financial debt
|
|
|
(2,130 |
) |
|
|
(1,802 |
) |
|
|
(1,958 |
) |
|
|
|
|
|
|
|
|
|
|
Net financial position
|
|
$ |
761 |
|
|
$ |
225 |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
The net financial position (cash, cash equivalents, marketable
securities, short-term deposits and restricted cash net of total
financial debt) as of December 31, 2006 moved to a positive
net financial cash position of $761 million, representing
an improvement from the net financial position of
$225 million as of December 31, 2005. The improvement
of the net financial position mainly results from favorable net
operating cash flow
78
generated during 2006. The restricted cash for 2006 is a
long-term deposit with a bank to guarantee a loan from the bank
to our joint venture in China with Hynix Semiconductor. In 2006,
the restricted cash amounted to $218 million.
At December 31, 2006, the aggregate amount of our long-term
debt was approximately $2,130 million, including
$2 million of our 2013 Convertible Bonds, $991 million
of our 2016 Convertible Bonds and $659 million of our 2013
Senior Bonds (corresponding to the
500 million
issuance). Additionally, the aggregate amount of our total
available short-term credit facilities, excluding foreign
exchange credit facilities, was approximately
$1,107 million, which were not used at December 31,
2006. 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 holders
bonds. See Note 15 to our Consolidated Financial Statements.
As of December 31, 2006, debt payments due by period and
based on the assumption that convertible debt redemptions are at
the holders first redemption option were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
Total |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 |
|
Thereafter | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(In millions) | |
Long-term debt (including current portion)
|
|
$2,130 |
|
$ |
136 |
|
|
$ |
89 |
|
|
$ |
83 |
|
|
$ |
45 |
|
|
$1,020 |
|
$ |
757 |
|
On August 7, 2006, as a result of almost all of the holders
of our 2013 Convertible Bonds exercising the August 4, 2006
put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds. The
outstanding 2013 Convertible Bonds, corresponding to
approximately $2 million and approximately 2,505 bonds, may
be redeemed, at the holders option, for cash on
August 5, 2008 at a conversion ratio of $975.28, or on
August 5, 2010 at a conversion ratio of $965.56, subject to
adjustments in certain circumstances.
During 2004, we redeemed all the outstanding 2009 LYONs for a
total amount of $813 million in cash.
As of the end of 2006, we have the following credit ratings on
our 2013 and 2016 Bonds:
|
|
|
|
|
|
|
|
|
|
|
Moodys Investors | |
|
Standard & | |
|
|
Service | |
|
Poors | |
|
|
| |
|
| |
Zero Coupon Senior Convertible Bonds due 2013
|
|
|
A3 |
|
|
|
A- |
|
Zero Coupon Senior Convertible Bonds due 2016
|
|
|
A3 |
|
|
|
A- |
|
Floating Rate Senior Bonds due 2013
|
|
|
A3 |
|
|
|
A- |
|
On September 30, 2006, Moodys issued a credit report
confirming the above ratings and a previously issued
negative outlook. On January 25, 2007,
Moodys issued a credit report with the outlook changed
from negative to under review for possible
downgrade. On January 9, 2007, Standard &
Poors confirmed the A- ratings and issued a
stable outlook.
In the event of a downgrade of these ratings, we believe we
would continue to have access to sufficient capital resources.
79
|
|
|
Contractual Obligations, Commercial Commitments and
Contingencies |
Our contractual obligations, commercial commitments and
contingencies as of December 31, 2006, and for each of the
five years to come and thereafter, were as follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Capital leases(3)
|
|
$ |
29 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
2 |
|
|
$ |
4 |
|
Operating leases(2)
|
|
|
304 |
|
|
|
54 |
|
|
|
44 |
|
|
|
40 |
|
|
|
31 |
|
|
|
28 |
|
|
|
107 |
|
Purchase obligations(2)
|
|
|
1,052 |
|
|
|
959 |
|
|
|
68 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchase
|
|
|
467 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry purchase
|
|
|
373 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, technology licenses and design
|
|
|
212 |
|
|
|
119 |
|
|
|
68 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hynix ST Joint Venture Debt Financing
|
|
|
32 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations(2)
|
|
|
110 |
|
|
|
67 |
|
|
|
23 |
|
|
|
11 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
Long-term debt obligations (including current portion)(3)(4)(5)
|
|
|
2,130 |
|
|
|
136 |
|
|
|
89 |
|
|
|
83 |
|
|
|
45 |
|
|
|
1,020 |
|
|
|
757 |
|
Pension obligations(3)
|
|
|
342 |
|
|
|
16 |
|
|
|
22 |
|
|
|
27 |
|
|
|
23 |
|
|
|
22 |
|
|
|
232 |
|
Other non-current liabilities(3)
|
|
|
43 |
|
|
|
8 |
|
|
|
9 |
|
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
20 |
|
Total
|
|
$ |
4,042 |
|
|
$ |
1,278 |
|
|
$ |
261 |
|
|
$ |
194 |
|
|
$ |
112 |
|
|
$ |
1,074 |
|
|
$ |
1,123 |
|
|
|
(1) |
Contingent liabilities which cannot be quantified are excluded
from the table above. |
|
(2) |
Items not reflected on the Consolidated Balance Sheet at
December 31, 2006. |
|
(3) |
Items reflected on the Consolidated Balance Sheet at
December 31, 2006. |
|
(4) |
See Note 15 to our Consolidated Financial Statements at
December 31, 2006 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. |
Operating leases are mainly related to building leases. The
amount disclosed is composed of minimum payments for future
leases from 2007 to 2011 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.
We signed a joint venture agreement with Hynix Semiconductor on
November 16, 2004 to build a front-end
memory-manufacturing facility in Wuxi City, Jiangsu Province,
China. We paid $250 million of capital contributions up to
December 31, 2006, of which $212 million was paid in
2006; we have completed our capital contribution in the joint
venture. We have also entered into a debt guarantee agreement
with a third party financial institution which is loaning up to
$250 million to the joint venture. Furthermore, we have
contingent future loading obligations to purchase products from
the joint venture, which have not been included in the table
above because, at this stage, the amounts remain contingent and
non-quantifiable.
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. At the holders option, any outstanding 2013
Convertible Bonds were redeemable on August 4, 2006 at a
conversion ratio of $985.09.
On August 7, 2006, as a result of almost all of the holders
of our 2013 Convertible Bonds exercising the August 4, 2006
put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds. The
outstanding 2013 Convertible Bonds, corresponding to
approximately $2 million and approximately 2,505 bonds, may
be redeemed, at the holders option, for cash on
August 5, 2008 at a conversion ratio of $975.28, or on
August 5, 2010 at a conversion ratio of $965.56, subject to
adjustments in certain circumstances.
In February 2006, we issued $974 million principal amount
at maturity of Zero Coupon Senior Convertible Bonds due in
February 2016. The bonds are convertible by the holder at any
time prior to maturity at a conversion rate of
43.118317 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
80
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.
Subsequently, 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
$342 million consist of our best estimates of the amounts
that will 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 or terminations. Upon adoption of a new
accounting pronouncement regarding defined benefit pension
plans, we recorded an additional $72 million to our pension
obligations. See Notes 2.25 and 14 to our Consolidated
Financial Statements. This amount does not include the
additional pension plan granted in the first quarter of 2005 by
our Supervisory Board to our former CEO and to a limited number
of retired senior executives and to our executive management in
the fourth quarter of 2005. This plan resulted in a liability of
$9 million and a payment of $10 million, which offset
the full liability.
Other non-current liabilities include future obligations related
to our restructuring plans and miscellaneous contractual
obligations.
Other obligations primarily relate to contractual firm
commitments with respect to cooperation agreements.
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|
Off-Balance Sheet Arrangements |
As described above, we signed a joint venture agreement in 2004
with Hynix Semiconductor to build a $2 billion front-end
memory-manufacturing facility in China. In the fourth quarter of
2006, we provided $218 million out of our total
$250 million commitment as debt financing to the joint
venture by way of a guarantee by depositing such amount with a
bank, which then loaned an equivalent amount to the joint
venture.
At December 31, 2006, 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 15 to our 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
December 31, 2006.
We currently expect that capital spending for 2007 will be
approximately $1.2 billion, a decrease compared to the
$1.5 billion spent in 2006. The major part of our capital
spending will be dedicated to the leading edge technology fabs
by aligning the capacity with the expected demand mix both in
the 300-mm and 200-mm fabs. We have the flexibility to modulate
our investments up or down in response to changes in market
conditions. At December 31, 2006, we had $467 million
in outstanding commitments for equipment purchases for 2007.
The most significant of our 2007 capital expenditure projects
are expected to be: for the front-end facilities, (i) in
Agrate (Italy), related to the upgrading of our 200-mm pilot
line, the ramp-up of
the 200-mm line for MEMS and the expansion of capacity to our
200-mm fab; (ii) the upgrading to finer geometry
technologies for our 200-mm plant in Rousset (France);
(iii) the upgrading of our 200-mm plant in Singapore;
(iv) for the back-end facilities, the capital expenditures
will be mainly dedicated to the capacity expansion in our plants
in Shenzhen (China) and Muar (Malaysia) and capacity upgrade in
Malta and Toa Payoh (Singapore). 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 (including state support), 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.
As part of our refinancing strategy, we issued Zero Coupon
Senior Convertible Bonds due 2016 representing total proceeds of
$974 million in the first quarter of 2006. Furthermore, in
the first quarter of 2006, we issued
81
500 million
Floating Rate Senior Bonds due 2013. We used the proceeds of
these offerings primarily for the repurchase of our 2013
Convertible Bonds on August 7, 2006 and for general
corporate purposes.
Impact of Recently Issued U.S. Accounting Standards
In February 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140 (FAS 155). The
statement amended Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133) and Statement
of Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 140).
The primary purposes of this statement were (1) to allow
companies to select between bifurcation of hybrid financial
instruments or fair valuing the hybrid as a single instrument,
(2) to clarify certain exclusions of FAS 133 related
to interest and principal-only strips, (3) to define the
difference between freestanding and hybrid securitized financial
assets, and (4) to eliminate the FAS 140 prohibition
of Special Purpose Entities holding certain types of
derivatives. The statement is effective for annual periods
beginning after September 15, 2006, with early adoption
permitted prior to a company issuing first quarter financial
statements. We chose not to early adopt FAS 155 during our
first quarter 2006. However, we do not expect FAS 155 to
have a material effect on our financial position and results of
operations upon final adoption.
In March 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
(FAS 156). This statement requires initial
fair value recognition of all servicing assets and liabilities
for servicing contracts entered in the first fiscal year
beginning after September 15, 2006. After initial
recognition, the servicing assets and liabilities are either
amortized over the period of expected servicing income or loss
or fair value is reassessed each period with changes recorded in
earnings for the period. We do not expect FAS 156 will have
a material effect on our financial position and results of
operations upon final adoption.
In June 2006, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). The interpretation seeks to
clarify the accounting for tax positions taken, or expected to
be taken, in a companys tax return and the uncertainty as
to the amount and timing of recognition in the companys
financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes (FAS 109). The interpretation sets a
two step process for the evaluation of uncertain tax positions.
The recognition threshold in step one permits the benefit from
an uncertain position to be recognized only if it is more likely
than not, or 50 percent assured that the tax position will
be sustained upon examination by the taxing authorities. The
measurement methodology in step two is based on cumulative
probability, resulting in the recognition of the largest
amount that is greater than 50 percent likely of being
realized upon settlement with the taxing authority. The
interpretation also addresses derecognizing previously
recognized tax positions, classification of related tax assets
and liabilities, accrual of interest and penalties, interim
period accounting, and disclosure and transition provisions. The
interpretation is effective for fiscal years beginning after
December 15, 2006. We continue to evaluate the potential
impact of adopting FIN 48, but we have currently estimated
an incremental FIN 48 liability in the range of
approximately $15 to $40 million, primarily related to
uncertain tax positions that are under audit in one tax
jurisdiction. This range is the result of analysis done based on
current assumptions that are true today, but upon certain
changes in events or circumstances may no longer be consistent
with the assumptions upon the date of adoption. As a result, the
amount to be recorded upon adoption is subject to revision as
the evaluations are concluded.
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 (i.e. stock awards,
measurements requiring vendor specific objective evidence, and
inventory pricing). The hierarchy places the greatest relevance
on Level 1 inputs which include quoted prices in active
markets for identical assets or liabilities. Level 2
inputs, which are observable either directly or indirectly, and
include quoted prices for similar assets or liabilities, quoted
prices in non-active markets, and inputs that could vary based
on either the condition of the assets or liabilities or volumes
sold. The lowest level of the hierarchy, Level 3, is
unobservable inputs and should only be used when observable
inputs are not available. This would include company level
assumptions and should be based on the best available
information under the circumstances. FAS 157 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 will adopt FAS 157 when
effective and do not expect FAS 157 will have a material
effect on our financial position and results of operations.
82
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R)
(FAS 158). This statement requires
companies to account for the overfunded and underfunded status
of defined benefit and other post retirement plans in their
financial statements, with offsetting entries made to
accumulated other comprehensive income. The statement will also
require additional disclosures for such plans. The overfunded or
underfunded status of the defined benefit plans are calculated
as the difference between plan assets and the projected benefit
obligations. Overfunded plans may not be netted against
underfunded plans and must be shown separately in the financial
statements. The recording of the funded status removes the prior
requirements for recording additional minimum liabilities and
intangible assets on unfunded plans due to the requirement to
record the full unfunded amount as a liability. In addition to
the funding requirements, FAS 158 requires companies to
obtain actuarial valuations for the plans as of the year end,
and does not allow estimates based on dates up to three months
prior to year end as previously allowed under FAS 132(R).
The requirements to record the overfunded and underfunded
positions are effective for years ending after December 15,
2006. The requirements for performance of valuations at the end
of the year are effective for years ending after
December 15, 2007, with early adoption encouraged. We have
adopted both the funding requirements and the valuation date
requirements on a prospective basis for the year ended
December 31, 2006. The impact of such adoption is further
described in Note 16 of our Consolidated Financial
Statements.
In September 2006, the U.S. Securities and Exchange
Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). This
statement addresses the diversity in practice of quantifying
financial statement misstatements that result in the potential
build up of improper amounts on the balance sheet. SAB 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC
staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and
evaluate whether either approach results in a misstatement that
is material either quantitatively or qualitatively. SAB 108
is effective for fiscal years ending after November 15,
2006. SAB 108 allows a one-time transitional cumulative
effect adjustment to beginning retained earnings as of
January 1, 2006 for errors that were not previously deemed
material, but are material under the guidance in SAB 108.
We adopted SAB 108 in 2006 and it did not have any material
effect on our financial position and results of operations.
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. The
objective of this statement is to improve financial reporting by
providing companies with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. A company may decide whether to elect the
fair value option for each eligible item on its election date,
subject to certain requirements described in the statement.
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
are currently evaluating the effect that adoption of this
statement will have on our financial position and results of
operations.
Impairment, Restructuring Charges and Other Related Closure
Costs
In 2006, we have incurred charges related to the main following
items: (i) the 150-mm restructuring plan started in 2003;
(ii) the headcount reduction plan announced in second
quarter of 2005; and (iii) the yearly impairment review.
During the third quarter of 2003, we commenced a plan to
restructure our 150-mm fab operations and part of our back-end
operations in order to improve cost competitiveness. The 150-mm
restructuring plan focuses on cost reduction by migrating a
large part of European and U.S. 150-mm production to
Singapore and by upgrading production to a finer geometry 200-mm
wafer fab. The plan includes the discontinuation of production
of Rennes, France; the closure as soon as operationally feasible
of the 150-mm wafer pilot line in Castelletto, Italy; and the
downsizing by approximately one-half of the 150-mm wafer fab in
Carrollton, Texas. Furthermore, the 150-mm wafer fab productions
in Agrate, Italy and Rousset, France will be gradually
phased-out in favor of 200-mm wafer
ramp-ups at existing
facilities in these locations, which will be expanded or
upgraded to accommodate additional finer geometry wafer
capacity. This manufacturing restructuring plan designed to
enhance our cost structure and competitiveness is moving ahead
and was substantially completed by the end of 2006. The total
plan of impairment and restructuring costs for the front-end and
back-end reorganization is estimated to be
83
$330 million in pre-tax charges, slightly down from the
original estimate of $350 million, of which
$316 million has been incurred as of December 31, 2006
($22 million in 2006, $13 million in 2005,
$76 million in 2004 and $205 million in 2003).
In the second quarter of 2005, we announced a restructuring plan
that, combined with other initiatives, aimed at exiting 3,000
members of our workforce outside Asia by the second half of
2006, of which 2,300 are planned for Europe. The total cost of
these measures was estimated to be approximately
$100 million pre-tax at the completion of the plan, of
which $86 million has been incurred as of December 31,
2006. We also upgraded the 150-mm production fabs to 200-mm,
optimized on a global scale our Electrical Wafer Sorting
(EWS) activities, and harmonized and streamlined our
support functions and disengaged from certain activities. This
plan was substantially completed by the end of 2006.
In the third quarter of 2006, we performed our annual impairment
tests in order to assess the recoverability of goodwill carrying
value. In addition, we decided to cease product development from
technologies inherited from Tioga business acquisitions, which
resulted in a $10 million charge in our 2006 accounts.
Impairment, restructuring charges and other related closure
costs incurred in 2006 are summarized as follows:
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Year Ended December 31, 2006 | |
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| |
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|
Total Impairment, | |
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|
Restructuring | |
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|
Charges and | |
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|
|
Restructuring | |
|
Other Related | |
|
Other Related | |
|
|
Impairment | |
|
Charges | |
|
Closure Costs | |
|
Closure Costs | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
150-mm fab plan
|
|
$ |
(1 |
) |
|
$ |
(7 |
) |
|
$ |
(14 |
) |
|
$ |
(22 |
) |
Restructuring plan decided in the second quarter 2005
|
|
|
(1 |
) |
|
|
(36 |
) |
|
|
(8 |
) |
|
|
(45 |
) |
Other
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(12 |
) |
|
$ |
(43 |
) |
|
$ |
(22 |
) |
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, total cash outlays for the restructuring plan amounted
to $76 million, corresponding mainly to the payment of
expenses consisting of $21 million related to our 150-mm
restructuring plan, $54 million related to our second
quarter 2005 restructuring plan and $1 million related to
other obligations accrued in 2005.
See Note 19 to our Consolidated Financial Statements.
Equity Method Investments
In 2001, we formed with Renesas Technology Corp. (previously
known as Hitachi, Ltd.) a joint venture to develop and license
reduced instruction set computing (RISC)
microprocessors. The joint venture, SuperH, Inc., was initially
capitalized with our contribution of $15 million in cash
plus internally developed technologies with an agreed intrinsic
value of $14 million for a 44% interest. Renesas Technology
Corp. contributed $37 million in cash for a 56% interest.
We accounted for our share in the SuperH, Inc. joint venture
under the equity method based on the actual results of the joint
venture. During 2002 and 2003, we made additional capital
contributions on which accumulated losses exceeded our total
investment, which was shown at zero carrying value in the
consolidated balance sheet.
In 2003, the shareholders agreement was amended to require
from us an additional $3 million cash contribution. This
amount was fully accrued, based on the inability of the joint
venture to meet its projected business plan objectives, and the
charge was reflected in the 2003 consolidated statement of
income line Impairment, restructuring charges and other
related closure costs. In 2004, the shareholders agreed to
restructure the joint venture by transferring the intellectual
properties to each shareholder and continuing any further
development individually. Based upon estimates of forecasted
cash requirements of the joint venture, we paid an additional
$2 million, which was reflected in the 2004 consolidated
statement of income as Loss on equity investments.
In 2005, the joint venture was liquidated with no further losses
incurred.
In 2004, we formed with Sofinnova Capital IV FCPR a new
company, UPEK Inc., as a venture capital-funded purchase of our
TouchChip business. UPEK Inc. was initially capitalized with our
transfer of the business, personnel and technology assets
related to the fingerprint biometrics business, formerly known
as the TouchChip Business Unit, for a 48% interest. Sofinnova
Capital IV FCPR contributed $11 million in cash for a
52% interest. During the first quarter of 2005, an additional
$9 million was contributed by Sofinnova Capital IV
FCPR,
84
reducing our ownership to 33%. We accounted for our share in
UPEK Inc. under the equity method and recorded in 2004 losses of
approximately $2 million, which were reflected in the 2004
consolidated statement of income as Loss on equity
investments.
On June 30, 2005, we sold our interest in UPEK Inc, for
$13 million and recorded in the second quarter of 2005 a
gain amounting to $6 million in Other Income and
Expenses, net of our consolidated statement of income.
Additionally, on June 30, 2005, we were granted warrants
for 2,000,000 shares of UPEK Inc. at an exercise price of
$0.01 per share. The warrants are not limited in time but
can only be exercised in the event of a change of control or an
Initial Public Offering of UPEK Inc. above a predetermined value.
In 2004, we signed and announced the joint venture agreement
with Hynix Semiconductor to build a front-end
memory-manufacturing facility in Wuxi City, Jiangsu Province,
China. The joint venture is an extension of the NAND Flash
Process/product joint development relationship. Construction of
the facility began in 2005. The fab employs approximately 2,700
people and features a 200-mm wafer production line that began
production in June 2006 and a 300-mm wafer production line,
which began production in October 2006. The total investment in
the project is $2 billion. We contributed 33% of the equity
financing, equivalent to $250 million, of which
$38 million was contributed in 2005 and $212 million
in 2006, while Hynix Semiconductor contributed 67%. We also
contributed $218 million out of $250 million as
long-term debt to the new joint venture, guaranteed by
subordinated collateral on the joint ventures assets. Our
current maximum exposure to loss as a result of our involvement
with the joint venture is limited to our equity and debt
investment commitments. The financing will also include credit
from local Chinese institutions, involving debt and a long
leasehold.
We have identified the joint venture as a Variable Interest
Entity (VIE) at December 31, 2006, and have determined
that we are not the primary beneficiary of the VIE. We are
accounting for our share in the Hynix ST joint venture under the
equity method based on the actual results of the joint venture
and recorded losses of approximately $6 million as
Loss on equity investments in our 2006 Consolidated
Statement of Income compared to $4 million in 2005.
Backlog and Customers
We entered 2007 with a backlog (including frame orders) that was
lower than we had entering 2006. This decrease is due to the
correction in the semiconductor market that we registered in the
fourth quarter of 2006 that resulted in a reduced level of
bookings. In 2006, we had several large customers, with the
Nokia Group of companies being the largest and accounting for
approximately 22% of our revenues, flat compared to 2005. Total
original equipment manufacturers (OEMs) accounted
for approximately 81% of our net revenues, declining slightly
from approximately 82% in 2005. In 2006, our top ten OEM
customers accounted for approximately 51%, increasing slightly
from approximately 50% in 2005. Distributors accounted for
approximately 19% of our net revenues compared to approximately
18% in 2005. We have no assurance that the Nokia Group of
companies, or any other customer, will continue to generate
revenues for us at the same levels. If we were to lose one or
more of our key customers, or if they were to significantly
reduce their bookings, or fail to meet their payment
obligations, our operating results and financial condition could
be adversely affected.
85
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Item 6. |
Directors, Senior Management and Employees |
Directors and Senior Management
The management of our company is entrusted to the Managing Board
under the supervision of the Supervisory Board.
Our Supervisory Board advises our Managing Board and is
responsible for supervising the policies pursued by our Managing
Board and the general course of our affairs and business. Our
Supervisory Board consists of such number of members as is
resolved by our annual shareholders meeting upon a
non-binding proposal of our Supervisory Board, with a minimum of
six members. Decisions by our annual shareholders meeting
concerning the number and the identity of our Supervisory Board
members are taken by a simple majority of the votes cast at a
meeting, provided quorum conditions are met (15% of our issued
and outstanding share capital present or represented).
Our Supervisory Board had the following nine members since our
annual shareholders meeting on April 27, 2006:
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Name(1) |
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Position | |
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Year Appointed(2) | |
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Term Expires | |
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Age | |
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Gérald Arbola
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Chairman |
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2004 |
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2008 |
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58 |
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Bruno Steve
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Vice Chairman |
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1989 |
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2008 |
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65 |
|
Matteo del Fante
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Member |
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2005 |
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2008 |
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40 |
|
Tom de Waard
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Member |
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1998 |
|
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2008 |
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|
60 |
|
Douglas Dunn
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Member |
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|
2001 |
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2009 |
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62 |
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Didier Lamouche
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Member |
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2006 |
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|
2009 |
|
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47 |
|
Didier Lombard
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Member |
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2004 |
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2008 |
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65 |
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Antonino Turicchi
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Member |
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2005 |
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2008 |
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41 |
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Robert M. White
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Member |
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1996 |
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2007 |
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|
68 |
|
|
|
(1) |
Mr. Francis Gavois was a Supervisory Board member until our
2006 annual shareholders meeting, at which time he was
succeeded by Mr. Didier Lamouche. |
|
(2) |
As a member of the Supervisory Board. |
After our 2005 annual shareholders meeting, our
Supervisory Board appointed Mr. Gérald Arbola as
Chairman of our Supervisory Board and Mr. Bruno Steve as
Vice Chairman, each for a three-year term. On April 27,
2006, our Supervisory Board appointed Chairmen and members to
the Strategic Committee, the Audit Committee and the
Compensation Committee. Mr. Gérald Arbola was
appointed President of the Strategic Committee, and
Messrs. Bruno Steve, Antonino Turicchi, Didier Lombard and
Robert White were appointed as members. Mr. Tom de Waard
was appointed President of the Audit Committee,
Messrs. Robert White and Doug Dunn were appointed members
and Messrs. Matteo del Fante and Didier Lamouche were
appointed as observers. Mr. Gérald Arbola was
appointed President of the Compensation Committee, and
Messrs. Bruno Steve, Antonino Turicchi, Didier Lombard and
Tom de Waard were appointed as members. Mr. Tom de Waard
was appointed President of the Nomination and Corporate
Governance Committee and Messrs. Gérald Arbola, Bruno
Steve and Robert White were appointed as members.
During our annual shareholders meeting in 2007, the
mandate of Mr. White will expire. The mandates of
Messrs. Steve, Arbola, del Fante, de Waard, Lombard and
Turicchi will expire during our annual shareholders
meeting in 2008 and the mandates of Messrs. Dunn and
Lamouche will expire at our annual shareholders meeting in
2009.
Resolutions of the Supervisory Board require the approval of at
least three-quarters of its members in office. The Supervisory
Board must meet upon request by two or more of its members or by
the Managing Board. The Supervisory Board has established
procedures for the preparation of Supervisory Board resolutions
and the calendar for Supervisory Board meetings. The Supervisory
Board meets at least five times a year, including once a quarter
to approve our quarterly and annual accounts and their release.
Our Supervisory Board has adopted a Supervisory Board Charter
setting forth its duties, responsibilities and operations, as
mentioned below. This charter is available on our website at
http://www.st.com/stonline/company/governance/index.htm. In
2006, the Supervisory Board approved an updated version of its
charter.
There is no mandatory retirement age for members of our
Supervisory Board pursuant to Dutch law. Members of the
Supervisory Board may be suspended or dismissed by the
shareholders meeting. The Supervisory Board may make a
proposal to the shareholders meeting for the suspension or
dismissal of one or
86
more of its members. The members of the Supervisory Board
receive compensation as authorized by the shareholders
meeting. Each member of the Supervisory Board must resign no
later than three years after appointment, as described in our
Articles of Association, but may be reappointed following the
expiry of such members term of office.
Gérald Arbola was appointed to our Supervisory Board at the
2004 annual shareholders meeting and was reelected at the
2005 annual shareholders meeting. Mr. Arbola was
appointed the Chairman of our Supervisory Board on
March 18, 2005. Mr. Arbola previously served as Vice
Chairman of our Supervisory Board from April 23, 2004 until
March 18, 2005. Mr. Arbola is also Chairman of our
Supervisory Boards Compensation Committee and Strategic
Committee, and serves on its Nominating and Corporate Governance
Committee. Mr. Arbola is now Managing Director of
Areva S.A., where he had also served as Chief Financial
Officer, and is a member of the Executive Board of Areva since
his appointment on July 3, 2001. Mr. Arbola joined the
Cogema group in 1982 as Director of Planning and Strategy for
SGN, then served as Chief Financial Officer at SGN from 1985 to
1989, becoming Executive Vice President of SGN in 1988 and Chief
Financial Officer of Cogema in 1992. He was appointed as a
member of the executive committee in 1999, and also served as
Chairman of the Board of SGN in 1997 and 1998. Mr. Arbola
is currently a member of the boards of directors of Cogema,
Framatome ANP, Areva T&D Holdings and Chairman of Areva
Finance Gestion S.A. and Cogerap. Mr. Arbola is a graduate
of the Institut dEtudes Politiques de Paris and holds an
advanced degree in economics. Mr. Arbola is the Chairman of
the Board of Directors of FT1CI and was the Chairman until his
resignation on November 15, 2006 of the Supervisory Board
of ST Holding, our largest shareholder.
Bruno Steve has been a member of our Supervisory Board since
1989 and was appointed Vice Chairman of our Supervisory Board on
March 18, 2005, and previously served as Chairman of our
Supervisory Board from March 27, 2002 through
March 18, 2005, from July 1990 through March 1993, and from
June 1996 until May 1999. He also served as Vice Chairman of the
Supervisory Board from 1989 to July 1990 and from May 1999
through March 2002. Mr. Steve serves on our Supervisory
Boards Compensation Committee as well as on its Nominating
and Corporate Governance and Strategic Committees. He was with
Istituto per la Ricostruzione Industriale-IRI S.p.A.
(IRI), a former shareholder of Finmeccanica,
Finmeccanica and other affiliates of I.R.I. in various senior
positions for over 17 years. Mr. Steve is currently
Chairman of Statutory Auditors of Selex
S. & A. S. S.p.A., Chairman of Surveillance
Body of Selex S. & A. S. S.p.A and member of Statutory
Auditors of Pirelli Tyres S.p.A. Until December 1999, he served
as Chairman of MEI. He served as the Chief Operating Officer of
Finmeccanica from 1988 to July 1997 and Chief Executive Officer
from May 1995 to July 1997. He was Senior Vice President of
Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior
to 1984, Mr. Steve served in several key executive
positions at Telecom Italia. He is also a professor at LUISS
Guido Carli University in Rome. Mr. Steve was Vice Chairman
from May 1999 to March 2002, Chairman from March 2002 to May
2003 and member until his resignation on April 21, 2004 of
the Supervisory Board of ST Holding, our largest shareholder.
Matteo del Fante was appointed to our Supervisory Board at our
2005 annual shareholders meeting. Mr. del Fante
is also a non-voting observer on its Audit Committee.
Mr. del Fante has served as the Chief Financial Officer of
CDP in Rome since the end of 2003. Prior to joining CDP,
Mr. del Fante held several positions at JPMorgan Chase in
London, England, where he became Managing Director in 1999.
During his 13 years with JPMorgan Chase, Mr. del Fante
worked with large European clients on strategic and financial
operations. Mr. del Fante obtained his degree in
Economics and Finance from Università Bocconi in Milan in
1992, and followed graduate specialization courses at New York
Universitys Stern Business School. Mr. del Fante was
the Vice Chairman until his resignation on November 15,
2006 of the Supervisory Board of ST Holding, our largest
shareholder.
Tom de Waard has been a member of our Supervisory Board since
1998. Mr. de Waard was appointed Chairman of the Audit
Committee by the Supervisory Board in 1999 and Chairman of the
Nominating and Corporate Governance Committee in 2004 and 2005,
respectively. He also serves on our Supervisory Boards
Compensation Committee. Mr. de Waard has been a partner of
Clifford Chance, a leading international law firm, since March
2000 and was the Managing Partner of Clifford Chance Amsterdam
office from May 1, 2002 until May 1, 2005. From
January 1, 2005 to January 1, 2007 he was a member of
the Management Committee of Clifford Chance. Prior to joining
Clifford Chance, he was a partner at Stibbe, where he held
several positions since 1971 and gained extensive experience
working with major international companies, particularly with
respect to corporate finance. He is a member of the Amsterdam
bar and was President of the Netherlands Bar Association from
1993 through 1995. He received his law degree from Leiden
University in 1971. Mr. de Waard is a member of the
Supervisory Board of BE Semiconductor Industries N.V.
(BESI) and of its audit and
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nominating committees. He is also chairman of BESIs
compensation committee. Mr. de Waard is a member of the
board of the foundation Stichting Sport en Zaken.
Douglas Dunn has been a member of our Supervisory Board since
2001. He is a member of its Audit Committee since such date. He
was formerly President and Chief Executive Officer of ASML
Holding N.V. (ASML), an equipment supplier in the
semiconductor industry, a position from which he retired
effective October 1, 2004. Mr. Dunn was appointed
Chairman of the Board of Directors of ARM Holdings plc (United
Kingdom) in October 2006. In 2005, Mr. Dunn was appointed
to the board of Philips-LG LCD (Korea), TomTom N.V.
(Netherlands) and OMI, a privately-held company (Ireland), and
also serves as a non-executive director on the board of SOITEC
(France). He is also a member of the audit committees of ARM
Holdings plc, SOITEC and TomTom N.V. In 2005, Mr. Dunn
resigned from his position as a non-executive director on the
board of Sendo plc (United Kingdom). Mr. Dunn was a member
of the Managing Board of Royal Philips Electronics in 1998. From
1996 to 1998 he was Chairman and Chief Executive Officer of
Philips Consumer Electronics and from 1993 to 1996 Chairman and
Chief Executive Officer of Philips Semiconductors (now NXP
Semiconductors). From 1980 to 1993 he held various positions at
Plessey Semiconductors.
Didier Lamouche has been a member of our Supervisory Board since
2006. Mr. Lamouche is currently a non-voting observer on
the Audit Committee of our Supervisory Board. Dr. Lamouche
is a graduate of Ecole Centrale de Lyon and holds a PhD in
semiconductor technology. He has 25 years experience in the
semiconductor industry. Dr. Lamouche started his career in
1984 in the R&D department of Philips before joining IBM
Microelectronics where he held several positions in France and
the United States. In 1995, he became Director of Operations of
Motorolas Advanced Power IC unit in Toulouse (France).
Three years later, in 1998, he joined IBM as General Manager of
the largest European semiconductor site in Corbeil (France) to
lead its turnaround and transformation into a joint venture
between IBM and Infineon: Altis Semiconductor. He managed Altis
Semiconductor as CEO for four years. In 2003, Dr. Lamouche
rejoined IBM and was the Vice President for Worldwide
Semiconductor Operations based in New York
(United States) until the end of 2004. Since December 2004,
Dr. Lamouche has been the Chairman and CEO of Groupe Bull, a
France-based global company operating in the IT sector. He is
also a member of the Board of Directors of CAMECA and SOITEC.
Didier Lombard was first appointed to our Supervisory Board at
the 2004 annual shareholders meeting and was reelected at
our 2005 annual shareholders meeting. He serves on the
Compensation and Strategic Committees of our Supervisory Board.
Mr. Lombard was appointed Chairman and Chief Executive
Officer of France Telecom in March 2005. Mr. Lombard began
his career in the Research and Development division of France
Telecom in 1967. From 1989 to 1990, he served as scientific and
technological director at the Ministry of Research and
Technology. From 1991 to 1998, he served as General Director for
industrial strategies at the French Ministry of Economy,
Finances and Industry, and from 1999 to 2003 he served as
Ambassador at large for foreign investments in France and as
President of the French Agency for International Investments.
From 2003 through February 2005, he served as France
Telecoms Senior Executive Vice President in charge of
technologies, strategic partnerships and new usages and as a
member of France Telecoms Executive Committee.
Mr. Lombard also spent several years as Ambassador in
charge of foreign investment in France. Mr. Lombard is also
Chairman of the Board of Directors of Orange and a member of the
Board of Directors of Thales and Thomson, one of our important
customers, as well as a member of the Supervisory Board of
Radiall. Mr. Lombard was also a member until his
resignation on November 15, 2006 of the Supervisory Board
of ST Holding, our largest shareholder. Mr. Lombard is
a graduate of the Ecole Polytechnique and the Ecole Nationale
Supérieure des Télécommunications.
Antonino Turicchi was appointed as a member of our Supervisory
Board at our 2005 annual shareholders meeting. He serves
on its Compensation and Strategic Committees. Mr. Turicchi
earned a degree cum laude in Economics and Business from the
University of Rome and, after receiving a scholarship from
Istituto San Paolo di Torino, he attended the masters
program in Economics at the University of Turin in 1991 and
1992. In 1993, he was awarded a grant from the European Social
Fund to attend the masters program in International
Finance and Foreign Trade. Mr. Turicchi has been Managing
Director of CDP in Rome since June 2002. From 1994,
Mr. Turicchi held positions with the Italian Ministry of
the Treasury (now known as the Ministry of the Economy and
Finance). In 1999, he was promoted to director responsible for
conducting securitization operations and managing financial
operations as part of the treasurys debt management
functions. Between 1999 and June 2002, Mr. Turicchi was
also a member of the board of Mediocredito del Friuli; from 1998
until 2000, he served on the board of Mediocredito di Roma, and
from 2000 until 2003, he served on the board of EUR S.p.A.
Robert M. White has been a member of our Supervisory Board since
1996. He serves on its Strategic and Audit Committees.
Mr. White is a University Professor Emeritus at Carnegie
Mellon University and serves as a member of several corporate
boards, including SGI Federal. He is a former director of
Read-Rite Corporation, which filed for bankruptcy in July 2003.
Mr. White is a member of the U.S. National Academy of
Engineering
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and the recipient of the American Physical Societys Pake
Prize for research and technology management in 2004. From 1990
to 1993, Mr. White served as Under Secretary of Commerce
for Technology in the United States government. Prior to 1990,
Mr. White served in several key executive positions,
including Principal Scientist for Xerox Corporation and Vice
President and Chief Technology Officer for Control Data
Corporation. He received a doctoral degree in Physics from
Stanford University and graduated with a degree in physics from
Massachusetts Institute of Technology.
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Corporate Governance at ST |
Our consistent commitment to the principles of good corporate
governance is evidenced by:
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Our corporate organization under Dutch law that entrusts our
management to a Managing Board acting under the supervision and
control of a Supervisory Board totally independent from the
Managing Board. Members of our Managing Board and of our
Supervisory Board are appointed and dismissed by our
shareholders. |
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Our early adoption of policies on important issues such as
business ethics and conflicts of
interest and strict policies to comply with applicable
regulatory requirements concerning financial reporting, insider
trading and public disclosures. |
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Our compliance with Dutch securities laws, because we are a
company incorporated under the laws of the Netherlands, as well
as our compliance with United States, French and Italian
securities laws, because our shares are listed in these
jurisdictions, in addition to our compliance with the corporate,
social and financial laws applicable to our subsidiaries in the
countries in which we do business. |
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Our broad-based activities in the field of corporate social
responsibility, encompassing environmental, social, health,
safety, educational and other related issues. |
As a Dutch company, we became subject to the Dutch Corporate
Governance Code (the Code) effective January 1,
2004. As we are listed on the NYSE, Euronext Paris, the Borsa
Italiana in Milan, but not in the Netherlands, our policies and
practices cannot be in every respect consistent with all Dutch
Best Practice recommendations contained in the Code.
We have summarized our policies and practices in the field of
corporate governance in the ST Corporate Governance Charter,
including our corporate organization, the remuneration
principles which apply to our Managing and Supervisory Boards,
our information policy and our corporate policies relating to
business ethics and conflicts of interests. Our Charter was
discussed with and approved by our shareholders at our 2004
annual shareholders meeting. The ST Corporate Governance
Charter was updated in 2005 and will be further updated and
expanded whenever necessary or advisable. We are committed to
inform our shareholders of any significant changes in our
corporate governance policies and practices at our annual
shareholders meeting. Along with our Supervisory Board
Charter (which includes the charters of our Supervisory Board
Committees) and our Code of Business Conduct and Ethics, the
current version of our ST Corporate Governance Charter is posted
on our website, at
http:/www.st.com/stonline/company/governance/index.htm, and
these documents are available in print to any shareholder who
may request them.
Our Supervisory Board is carefully selected based upon the
combined experience and expertise of its members. Certain of our
Supervisory Board members, as disclosed in their biographies set
forth above, have existing relationships or past relationships
with Areva, CDP, and/or Finmeccanicca, who are currently parties
to the STH Shareholders Agreement as well as with ST
Holding or ST Holding II, our major shareholder. See
Item 7. Major Shareholders and Related-Party
Transactions Shareholders
Agreements STH Shareholders Agreement.
Such relationships may give rise to potential conflicts of
interest. However, in fulfilling their duties under Dutch law,
Supervisory Board members serve the best interests of all of our
stakeholders and of our business and must act independently in
their supervision of our management. Our Supervisory Board has
adopted criteria to assess the independence of its members in
accordance with corporate governance listing standards of the
NYSE.
We have been informed in 2004 that our then principal direct and
indirect shareholders, Areva, Finmeccanica, and France Telecom,
FT1CI S.A. (FT1CI), and ST Holding and ST
Holding II, signed a new shareholders agreement in
March 2004, to which we are not a party (the STH
Shareholders Agreement). We have been informed that
CDP joined this agreement at the end of 2004 and that since
September 2005 France Telecom is no longer a shareholder of
FT1CI or an indirect shareholder (through ST Holding and ST
Holding II) of our company, pursuant to the disposition by
France Telecom of approximately 26.4 million of our common
shares, representing the totality of the shares held by France
Telecom in our company. Under the STH Shareholders
Agreement, Finmeccanica, CDP and FT1CI have provided for their
right, subject to certain conditions, to insert on a list,
prepared for proposal by ST Holding II to our
shareholders meeting, certain members for appointment to
our Supervisory Board. This agreement also contains other
corporate governance provisions, including
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decisions to be taken by our Supervisory Board which are subject
to certain prior approvals, and which are described in
Item 7. Major Shareholders and Related-Party
Transactions. See also Item 3. Key
Information Risk Factors Risks Related
to Our Operations The interests of our controlling
shareholders, which are in turn controlled respectively by the
French and Italian governments, may conflict with
investors interests.
Our Supervisory Board has on various occasions discussed the
Dutch corporate governance code, the implementing rules and
corporate governance standards of the SEC and of the NYSE, as
well as other corporate governance standards.
In 2005, the Supervisory Board, based on the evaluations by an
ad hoc committee, established the following independence
criteria for its members: Supervisory Board members must not
have any material relationship with STMicroelectronics N.V., or
any of our consolidated subsidiaries, or our management. A
material relationship can include commercial,
industrial, banking, consulting, legal, accounting, charitable
and familial relationships, among others, but does not include a
relationship with direct or indirect shareholders.
We believe we are fully compliant with all material NYSE
corporate governance standards, to the extent possible for a
Dutch company listed on Euronext Paris, Borsa Italiana, as well
as the NYSE. Two of our Supervisory Board members with
affiliations to our largest shareholder, ST Holding, and its
French and Italian state-controlled shareholders, are non-voting
observers on our Audit Committee. Because we are a Dutch
company, the Audit Committee is an advisory committee to the
Supervisory Board, which reports to the Supervisory Board, and
our shareholders must approve the selection of our statutory
auditors. Our Audit Committee has established a charter
outlining its duties and responsibilities with respect to the
monitoring of our accounting, auditing, financial reporting and
the appointment, retention and oversight of our external
auditors. In 2005, in compliance with NYSE requirements, our
Audit Committee established procedures for the receipt,
retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters, and the
confidential anonymous submission by employees of the Company
regarding questionable accounting or auditing m