STMicroelectronics N.V. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, dated August 4, 2009, reports the unaudited financial results for STMicroelectronics N.V. for the second quarter and first half of 2009, ended June 27, 2009. The company operates in the semiconductor industry, facing a global economic downturn that caused a significant decline in total available market (TAM) and serviceable available market (SAM) revenues. The reporting period includes the consolidation of the ST-Ericsson joint venture (formed with Ericsson) starting February 3, 2009, and the deconsolidation of the Flash Memory Group (FMG) which occurred in 2008.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | Y/Y Change | H1 2009 | H1 2008 | Y/Y Change |
|---|---|---|---|---|---|---|
| Net Revenues ($ millions) | 1,993 | 2,391 | -16.6% | 3,653 | 4,869 | -25.0% |
| Gross Margin (%) | 26.1% | 36.8% | -10.7 pts | 26.2% | 36.5% | -10.3 pts |
| Operating Loss ($ millions) | (428) | (26) | Worsened | (821) | (114) | Worsened |
| Net Loss Attributable to Parent ($ millions) | (318) | (47) | Worsened | (860) | (131) | Worsened |
| Loss Per Share (Diluted) | (0.36) | (0.05) | Worsened | (0.98) | (0.15) | Worsened |
| Cash and Cash Equivalents ($ millions) | 1,685 | 2,136 (Q2 2008) | - | 1,685 | 2,136 | - |
| Total Financial Debt ($ millions) | 2,659 | 2,466 (Q2 2008) | + | 2,659 | 2,466 | + |
Liquidity: As of June 27, 2009, the company held a net cash position of $205 million, a significant improvement from a net debt position of $545 million at year-end 2008. This was driven by proceeds from the ST-Ericsson joint venture ($1.116 billion received from Ericsson) and inventory reduction efforts.
Material Changes vs. Prior Period
- Revenue Decline: Revenues dropped 25% year-over-year in H1 2009, tracking the semiconductor industry decline. However, Q2 2009 showed a sequential increase of 20.1% compared to Q1 2009, driven by recovery in Greater China and Asia Pacific.
- Gross Margin Compression: Gross margins fell significantly due to lower sales volumes, pricing pressure, and substantial "unused capacity charges" (approximately $260 million in H1 2009) resulting from fab underutilization to reduce inventory levels.
- Restructuring and Impairment: The company recorded $142 million in impairment and restructuring charges in H1 2009, compared to $369 million in H1 2008 (which included a large FMG disposal loss). Q2 2009 charges were $86 million, related to site closures in Texas, Arizona, and Morocco, and the ST-Ericsson restructuring plan.
- Equity Investment Losses: A $200 million other-than-temporary impairment charge was recorded in Q1 2009 on the Numonyx equity investment due to the memory market downturn. Additionally, a $72 million impairment was recorded on unauthorized Auction Rate Securities purchased by Credit Suisse.
- Other Income: "Other income and expenses, net" improved to $98 million in H1 2009 (from $39 million in H1 2008), largely due to $131 million in R&D funding from the French government.
Guidance, Outlook, and Risks
Q3 2009 Outlook: Management expects revenues in the range of $2.07 billion to $2.27 billion, representing a sequential growth of 4% to 14%. Gross margin is expected to reach 31% +/- 2 percentage points, driven by improved fab utilization (targeting ~75%) and product mix.
Cost Reduction: The company is executing a $1 billion savings and productivity plan, with $750 million expected to be realized in 2009, primarily in the second half.
Key Risks and Contingencies:
- Legal Proceedings: Ongoing litigation with SanDisk (patent infringement and antitrust counterclaims) and Tessera (patent infringement regarding BGA packages). A FINRA arbitration award of $406 million against Credit Suisse regarding unauthorized Auction Rate Securities is pending enforcement; Credit Suisse is seeking to vacate the award.
- Market Conditions: Continued volatility in the global economy and semiconductor demand could impact revenue forecasts and necessitate further inventory provisions or capacity adjustments.
- Equity Investments: Significant exposure to Numonyx (48.6% stake) and ST-Ericsson (50% stake). Further impairments could occur if market conditions deteriorate.
Investor Verification Checklist
- Inventory Levels: Verify the success of inventory reduction strategies and the risk of future obsolescence charges given the $1.449 billion inventory balance.
- ST-Ericsson Integration: Monitor the financial performance and integration progress of the ST-Ericsson joint venture, which is currently loss-making but expected to drive future wireless growth.
- Credit Suisse Arbitration: Track the status of the $406 million FINRA award enforcement and the potential reversal of the $72 million impairment charge upon resolution.
- Numonyx Exposure: Assess the stability of the memory market and the potential for further impairment charges on the Numonyx investment.
- Restructuring Execution: Confirm the realization of the $750 million cost savings target for 2009 and the completion of planned facility closures.