STM

STMicroelectronics N.V. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K, dated May 8, 2013, reports the unaudited financial results for STMicroelectronics N.V. for the first quarter ended March 30, 2013. The company operates in two primary business areas: Semiconductors (Sense & Power and Automotive Products; Embedded Processing Solutions) and Subsystems. The reporting period is characterized by a strategic restructuring involving the exit from the ST-Ericsson joint venture with Ericsson, agreed upon in March 2013.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net revenues decreased 0.4% year-over-year (YoY) and 7.1% sequentially. The Sense & Power and Automotive Products (SPA) segment grew 1.8% YoY, offset by a 3.8% decline in the Embedded Processing Solutions (EPS) segment, driven by weakness in Wireless and Imaging.
• Profitability: Operating loss improved to $281 million from $352 million in Q1 2012. Gross margin expanded 170 basis points YoY, primarily due to lower unused capacity charges and the absence of a one-time NXP arbitration award charge in the prior year. However, excluding these items, gross margin decreased 320 basis points due to lower selling prices.
• Restructuring: The company recorded $101 million in impairment, restructuring, and closure costs in Q1 2013, compared to $18 million in Q1 2012. This includes $82 million related to the ST-Ericsson exit and $14 million for a new plan to reduce quarterly operating expenses to the $600-$650 million range.
• Debt: The company repaid $455 million of residual 2013 Senior Bonds at maturity in March 2013. Total financial debt decreased to $897 million from $1,301 million at year-end 2012.

Guidance, Outlook, and Risks

• Q2 2013 Outlook: Management expects revenues to grow sequentially by approximately 3% (plus or minus 3.5 percentage points). Gross margin is expected to be approximately 32.7% (plus or minus 2.0 percentage points). This outlook assumes an effective exchange rate of $1.29 = €1.00.
• ST-Ericsson Exit: The company expects total cash costs for the ST-Ericsson exit, including transition and restructuring, to range between $350 million and $450 million. Cash flow is expected to be negative for the next two quarters due to these costs, with a return to positive Free Cash Flow anticipated thereafter.
• Capital Expenditures: Capex for 2013 is projected at approximately $600 million, with half expected in the first half of the year.
• Risks: Key risks include the execution of the ST-Ericsson split, macro-economic volatility, foreign exchange fluctuations (specifically the Euro vs. USD), and ongoing intellectual property litigation (notably with Rambus and Tessera).

Investor Verification Checklist

• ST-Ericsson Transition Costs: Verify the actual cash outflow and timing of the $350-$450 million exit costs against the projected negative cash flow for Q2 and Q3 2013.
• Wireless Segment Performance: Monitor the EPS segment's recovery post-ST-Ericsson split, as Wireless sales declined 11% YoY and remain a significant drag on operating income.
• Operating Expense Reduction: Track progress toward the target of reducing net operating expenses to the $600-$650 million quarterly range by early 2014.
• Legal Proceedings: Review updates on the Rambus and Tessera patent litigations, as adverse outcomes could result in injunctions or significant damages.
• Exchange Rate Sensitivity: Assess the impact of the Euro/USD exchange rate on reported revenues and costs, given the company's significant exposure to currency fluctuations.