STM

STMicroelectronics N.V. Q1 2009 Financial Summary

Business Context and Reporting Period

This Form 6-K filing, dated April 30, 2009, reports the unaudited financial results for STMicroelectronics N.V. for the first quarter ended March 28, 2009. The period reflects the consolidation of the ST-Ericsson joint venture (formed with Ericsson) starting February 2, 2009, and the deconsolidation of the Flash Memory Group (FMG) into an equity investment in Numonyx. The company operates in a severe global economic downturn, impacting demand across all semiconductor market segments.

Key Financial Metrics

Note: Net operating cash flow for Q1 2009 is estimated at -$136 million, excluding M&A cash flows.

Material Changes vs. Prior Periods

• Revenue Decline: Net revenues decreased 33.0% year-over-year and 27.1% sequentially, driven by weakness in Automotive (-47% YoY), Computer (-42% YoY), and Industrial (-41% YoY) segments. Distribution sales fell 56% YoY due to channel destocking.
• Margin Compression: Gross margin dropped to 26.3% from 36.1% in Q4 2008. This was primarily due to unused capacity charges (over 8 percentage points) and lower manufacturing volumes, partially offset by product mix improvements.
• Segment Performance:
  • ACCI (Automotive/Consumer/Computer/Telecom Infra): Revenues fell 40% YoY to $627 million; operating loss of $35 million.
  • IMS (Industrial/Multisegment): Revenues fell 35.5% YoY to $499 million; operating profit of $12 million.
  • Wireless: Revenues increased 49.1% YoY to $518 million (due to ST-Ericsson consolidation) but decreased 9.9% sequentially. Operating loss widened to $107 million.
• Liquidity Improvement: The company moved from a net debt position of $545 million in Q4 2008 to a net cash position of $254 million in Q1 2009, aided by inventory reduction of $184 million and M&A cash inflows.

Guidance, Outlook, and Risks

• Q2 2009 Outlook: Management forecasts revenues between $1.73 billion and $1.93 billion. Gross margin is expected to be in the "mid 20s" due to fab loadings running at approximately 50% to reduce inventory.
• Restructuring: ST-Ericsson announced a new restructuring plan with estimated costs of $70-$90 million (majority in Q2 2009) targeting $230 million in annualized savings. STMicroelectronics reduced headcount by 3,200 in Q1 (excluding wireless) and closed facilities in Texas and Morocco.
• Legal Contingency: The company secured a FINRA arbitration award of approximately $406 million plus interest against Credit Suisse regarding asset-backed securities. ST is seeking enforcement in U.S. District Court; collection could reverse prior impairment losses.
• Investment Impairments: Significant non-cash charges included $200 million impairment on Numonyx equity investment and $58 million other-than-temporary impairment (OTTI) on financial assets.
• Risks: Key risks include the severity of the global recession, inability to forecast demand, fixed cost structures, and integration challenges with ST-Ericsson.

Investor Verification Checklist

• Verify the status of the Credit Suisse arbitration enforcement and the likelihood of collecting the $406 million award.
• Monitor the execution of the ST-Ericsson restructuring plan and the timeline for achieving the $230 million in annualized savings.
• Track inventory levels and fab loading rates in Q2 to assess if the "mid 20s" gross margin guidance is sustainable or if further write-downs are needed.
• Review the financial health of Numonyx, given the $200 million impairment charge and ST's exposure as a guarantor for certain Numonyx debts.
• Confirm the impact of currency fluctuations (USD/EUR) on future margins, given the company's global cost structure.