STMicroelectronics N.V. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, dated August 5, 2011, reports the unaudited financial results for STMicroelectronics N.V. for the second quarter and first half of 2011, ended July 2, 2011. The company is a global independent semiconductor manufacturer. The reporting period includes a significant one-time gain from the settlement of litigation regarding Auction Rate Securities (ARS) with Credit Suisse.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Net Revenues ($ millions) | $2,567 | $2,531 | $5,101 | $4,856 |
| Gross Margin (%) | 38.1% | 38.3% | 38.6% | 38.0% |
| Operating Income ($ millions) | $83 | $91 | $201 | $71 |
| Net Income Attributable to Parent ($ millions) | $420 | $356 | $590 | $413 |
| Diluted EPS ($) | $0.46 | $0.39 | $0.65 | $0.46 |
| Net Financial Position ($ millions) | $1,070 | $702 | $1,070 | $702 |
| Free Cash Flow ($ millions) | $(250) (Q2) | $(199) (H1) | $388 (H1 2010) | N/A |
Debt and Liquidity: Total financial debt was $1,870 million as of July 2, 2011, comprising $1,045 million in long-term debt and $825 million in short-term borrowings/current portion of long-term debt. The company maintained a net cash position of $1,070 million.
Material Changes vs. Prior Period
- Revenue Growth: Q2 2011 revenues increased 1.4% year-over-year (YoY) and 1.3% sequentially. Excluding the Wireless segment, wholly owned businesses grew 10.6% YoY.
- Wireless Segment Decline: The Wireless segment (primarily ST-Ericsson) revenues dropped 33.9% YoY to $347 million, with an operating loss of $207 million, compared to a loss of $137 million in Q2 2010.
- Wholly Owned Performance: ACCI (Automotive, Consumer, Computer, Communication Infrastructure) and AMM (Analog, MEMS, Microcontrollers) segments showed strong growth, driven by Automotive and Imaging products.
- One-Time Gain: Net income was significantly boosted by a $323 million pre-tax realized gain on financial assets resulting from the settlement of the Credit Suisse ARS litigation.
- Restructuring Costs: The company recorded $31 million in impairment, restructuring, and closure costs in Q2 2011, primarily related to manufacturing facility closures (Carrollton and Phoenix) and ST-Ericsson cost-saving plans.
Guidance, Outlook, and Risks
- Q3 2011 Outlook: Management anticipates net revenues to evolve sequentially in the range of -5% to +2%. Gross margin is expected to be approximately 35.5% (+/- 1 percentage point) due to temporary high levels of unsaturation at selected facilities.
- Capital Expenditures: Total 2011 capex is expected to be between $1.1 billion and $1.5 billion. Capex in the second half is expected to decline significantly as major capacity additions are completed.
- ST-Ericsson Risks: The Wireless joint venture faces significant risks due to a dramatic change in its major customer's business and a transition from legacy to new products. Management noted that if market conditions deteriorate or results lag, further non-cash impairment charges against the investment in ST-Ericsson could be required.
- Legal Proceedings: Ongoing litigation includes patent disputes with Rambus Inc. (ITC investigation and District Court lawsuit) and Tessera Technologies (appeals pending). The company also faces an arbitration claim from NXP Semiconductors regarding underloading costs.
- Currency Impact: The company remains exposed to exchange rate fluctuations, particularly the Euro/U.S. dollar rate, which negatively impacted results in Q2 2011 due to a weakening dollar.
Key Facts for Investor Verification
- Quality of Earnings: Verify the sustainability of Q2 net income ($420 million) by excluding the $305 million after-tax gain from the Credit Suisse settlement to assess core operating profitability.
- Wireless Segment Viability: Monitor the ST-Ericsson joint venture's ability to secure new design wins and reduce its operating losses, which widened to $207 million in Q2 2011.
- Restructuring Execution: Track the completion of manufacturing closures (Carrollton, Phoenix) and the execution of ST-Ericsson's cost-saving plan, with total charges expected to reach $70-$75 million for the latter.
- Inventory Levels: Review inventory build-up, which consumed $199 million in cash during H1 2011, and assess potential obsolescence risks given the softening demand in some consumer and wireless markets.
- Legal Exposure: Assess the potential financial impact of the Rambus patent litigation, which could result in injunctions or damages affecting memory controller products.