Stmicroelectronics N.V. annual report, Q4 FY2011

Business Context and Reporting Period

STMicroelectronics N.V. filed its Form 20-F on March 5, 2012, covering the fiscal year ended December 31, 2011. The company designs, manufactures and sells semiconductor products across automotive, industrial, consumer, computer, communications, MEMS, microcontroller, power-discrete and wireless markets. Financial statements are prepared under U.S. GAAP in U.S. dollars; the company also reports separately under IFRS.

The requested fourth quarter ended December 31, 2011. Fourth-quarter figures are unaudited interim amounts included in the audited annual filing.

Financial Highlights

Metric	Q4 2011	Q3 2011	Q4 2010	FY 2011	FY 2010
Net revenues	$2,191 million	$2,442 million	$2,833 million	$9,735 million	$10,346 million
Gross margin	33.4%	35.8%	39.9%	36.7%	38.8%
Operating income (loss)	$(132) million	$(23) million	$213 million	$46 million	$476 million
Net income (loss) attributable to parent	$(11) million	$71 million	$219 million	$650 million	$830 million
Diluted EPS	$(0.01)	$0.08	$0.24	$0.72	$0.92
Net cash from operating activities	Not provided for Q4	Not provided for Q3	Not provided for Q4	$880 million	$1,794 million
Free cash flow	Not provided for Q4	Not provided for Q3	Not provided for Q4	$(288) million	$961 million

Fourth-quarter revenue declined 10.3% sequentially and 22.6% year over year. The decrease reflected approximately 14% lower volume, partly offset by a 4% favorable average-selling-price impact from product mix.
Fourth-quarter gross profit was $732 million. Under-utilization charges were approximately $99 million, reducing gross margin by approximately 450 basis points.
Full-year revenue declined 5.9%, while gross profit fell 11.0%. SG&A was $1,210 million and R&D was $2,352 million, with R&D representing 24.1% of revenue.
Full-year net income included a $318 million net gain from financial assets, principally the $323 million realized gain from the Credit Suisse auction-rate securities settlement, partially offset by a $5 million impairment charge.
At December 31, 2011, cash and cash equivalents were $1,912 million, current marketable securities were $413 million, and total financial resources were $2,333 million.
Total financial debt was $1,566 million, including $740 million of bank overdrafts and short-term debt and $826 million of long-term debt. Parent-company net financial position was $767 million; management also presented an adjusted ST financial position of approximately $1,167 million excluding $400 million of ST-Ericsson debt owed to Ericsson.

Material Changes Versus Comparable Periods

Wireless revenue fell approximately 30% in 2011 to $1,552 million from $2,219 million, and Wireless operating loss increased to $812 million from $483 million. The decline was driven by reduced demand for legacy products and delayed ramp-up of new products at ST-Ericsson.
Wholly owned businesses generated $8,183 million of 2011 revenue, up from $8,127 million, but their operating margin declined to slightly above 11% from slightly above 13%.
Automotive revenue increased 18% and MEMS revenue nearly doubled to more than $600 million. AMM operating income increased to $581 million from $502 million, while ACCI and PDP operating income declined.
Unused-capacity charges increased to $149 million in 2011 from $3 million in 2010, reflecting lower fab utilization during the second half of the year.
Capital expenditures increased to $1,258 million from $1,034 million. Operating cash flow decreased to $880 million from $1,794 million, producing negative free cash flow of $288 million versus positive free cash flow of $961 million.
Restructuring and related closure costs decreased to $75 million from $104 million. The ST-Ericsson cost-savings plan generated $26 million of 2011 charges and is expected to total $70 million to $75 million.
2011 revenue growth was mixed by segment: ACCI declined approximately 1%, AMM increased approximately 8%, PDP declined approximately 6%, and Wireless declined approximately 30%.

Guidance, Outlook, Risks and Unusual Items

Management expected first-quarter 2012 revenue to decline approximately 4% to 10% sequentially, primarily because of a significantly weaker Wireless outlook. Expected gross margin was approximately 33.0%, plus or minus 1.5 percentage points, based on an assumed exchange rate of $1.32 per euro.
Management expected bookings to have bottomed and the semiconductor market to stabilize in 2012, but planned to maintain reduced facility loading and a prudent approach to inventories and capital spending.
ST-Ericsson remained the principal strategic and financial risk. Its carrying value on ST’s books was approximately $1.9 billion, and management warned that a deterioration in its business prospects could result in a significant impairment charge. The fourth-quarter Wireless impairment test showed estimated fair value exceeding carrying value by 54%; a sales decline of 18% in the discounted-cash-flow sensitivity analysis would have resulted in impairment.
ST-Ericsson’s $120 million annualized cost-savings target was expected by the end of 2012. In January 2012, the parent companies extended the ST-Ericsson funding facility to $1.1 billion; $800 million had been utilized at December 31, 2011.
In the fourth quarter, ST recorded a $92 million valuation allowance against part of ST-Ericsson’s deferred tax assets. The charge increased noncontrolling interest and did not reduce net income attributable to ST’s parent company.
Other risks include semiconductor cyclicality, pricing pressure, under-utilized manufacturing capacity, inventory obsolescence, foreign-exchange exposure, European sovereign and financial-market stress, dependence on government funding, customer concentration, supply interruptions, intellectual-property litigation and additional restructuring or impairment charges.
Known legal proceedings included Tessera patent litigation, Rambus litigation and an NXP arbitration claim of approximately $59 million. Estimated possible legal losses were disclosed in a range of $10 million to $50 million, while recorded probable-loss provisions were not material.
The European Commission was reviewing public funding related to the former M6 plant in Catania. An adverse determination could require repayment of all or part of the funding received.
After year-end, holders redeemed approximately $208 million of 2016 convertible bonds, leaving approximately $11 million outstanding. The company stated that it had sufficient resources for the next twelve months, including capital expenditures, working capital, dividends and scheduled debt repayment.

Most Important Facts for Investors to Verify

Whether ST-Ericsson’s new-product roadmap, cost reductions and funding plan can restore sustainable profitability without further parent-company support or impairment charges.
The sustainability of operating cash flow and whether capital expenditures can remain aligned with demand after the 2011 capacity expansion.
The distinction between reported net financial position of $767 million and management’s adjusted ST financial position of approximately $1.167 billion, which excludes $400 million of ST-Ericsson debt to Ericsson.
The effect of continued fab under-utilization, pricing pressure and inventory corrections on gross margin, particularly after the Q4 2011 margin fell to 33.4%.
Potential cash requirements from the ST-Ericsson funding facility, debt maturities, dividends, contractual commitments and restructuring obligations.
The status and potential financial impact of the Rambus, Tessera, NXP and M6 public-funding matters, as well as ongoing tax audits and uncertain tax benefits of $148 million.
The assumptions supporting Wireless goodwill and asset valuations, including the 10.9% discount rate, 1.5% terminal growth rate and sensitivity to revenue declines.
Whether the Q1 2012 guidance of a 4% to 10% sequential revenue decline and approximately 33.0% gross margin was achieved.