STMicroelectronics N.V. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, dated November 12, 2008, reports on STMicroelectronics N.V.'s third quarter and first nine months ended September 27, 2008. The company is a global independent semiconductor manufacturer. The reporting period is significantly impacted by two major strategic transactions: the deconsolidation of the Flash Memory Group (FMG) into the Numonyx joint venture in Q1 2008, and the consolidation of the ST-NXP Wireless joint venture (80% owned) beginning August 2, 2008. Consequently, operating results are not directly comparable to prior periods.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Revenues ($ millions) | 2,696 | 2,565 | 7,566 | 7,258 |
| Gross Margin (%) | 35.6% | 35.2% | 36.2% | 34.8% |
| Operating Income/Loss ($ millions) | 55 | 181 | (59) | (529) |
| Net Income/Loss ($ millions) | (289) | 187 | (421) | (496) |
| Operating Cash Flow ($ millions) | 414 (Q3) | N/A | 1,332 (9M) | 1,451 (9M) |
| Cash and Equivalents ($ millions) | 868 | 1,650 | 868 | 1,650 |
| Total Debt ($ millions) | 2,550 | 2,173 | 2,550 | 2,173 |
Segment Performance (9M 2008): Automotive, Consumer, Computer and Telecom Infrastructure (ACCI) generated $3,231 million in revenue; Industrial and Multisegment (IMS) generated $2,538 million; and the new Wireless Products Sector (WPS) generated $1,454 million.
Material Changes vs. Prior Period
- Revenue Growth: Q3 2008 revenue increased 5.1% year-over-year. Excluding the NXP wireless business and Flash, organic revenue growth was 10.9%. For the nine months, revenue grew 4.2% year-over-year, with organic growth of 12.4% excluding Flash and NXP.
- Profitability Decline: Despite revenue growth, the company reported a net loss of $289 million in Q3 2008 compared to a net income of $187 million in Q3 2007. The nine-month net loss improved to $421 million from $496 million in the prior year.
- Impairment Charges: A significant $300 million other-than-temporary impairment charge was recorded in Q3 2008 related to the equity investment in Numonyx due to the deterioration of the memory market. Additionally, $13 million in goodwill impairment was recorded.
- Acquisition Accounting: The consolidation of the NXP wireless business resulted in $76 million of In-Process R&D write-offs and a $57 million inventory step-up charge in Q3 2008.
- Currency Impact: The weakening U.S. dollar (effective rate $1.52/€ in 9M 2008 vs $1.33/€ in 9M 2007) negatively impacted reported margins and operating income.
Guidance, Outlook, and Risks
Outlook: Management expects Q4 2008 sequential net revenues to be flat to down 8%. Excluding FMG and NXP, this implies full-year 2008 revenue growth of 6.2% to 8.6%. Q4 gross margin is expected to improve sequentially to approximately 38.8% (+/- 1 percentage point), driven by operational factors and a more favorable currency rate assumption ($1.40/€).
Capital Allocation: The company expects capital expenditures for 2008 to decrease compared to 2007, targeting approximately 10% of sales. As of September 27, 2008, capital spending totaled $735 million.
Risks and Contingencies:
- Financial Assets: The company recorded an $11 million impairment on Lehman Brothers Floating Rate Notes and a $3 million impairment on Auction Rate Securities in Q3 2008. Total impairment on Auction Rate Securities reached $118 million year-to-date.
- Legal Proceedings: Ongoing patent litigation with SanDisk and Tessera. No provision has been recorded as the outcome is not deemed probable for loss, though unfavorable outcomes could be material.
- Market Conditions: Risks include further deterioration in global financial markets, pricing pressures, and the ability to utilize manufacturing capacity efficiently.
Key Facts for Investor Verification
- Numonyx Impairment: Verify the $300 million impairment charge on the Numonyx equity investment and the valuation methodology used (income and market approaches).
- NXP Consolidation Impact: Confirm the specific non-recurring charges ($76M IP R&D, $57M inventory step-up) associated with the ST-NXP Wireless consolidation and their impact on Q3 comparability.
- Currency Hedging: Review the effectiveness of hedging strategies given the significant weakening of the U.S. dollar against the Euro and its impact on gross margins.
- Phoenix Fab Status: Note the reclassification of the Phoenix fab from "held for sale" to "held for use" after a buyer withdrew, resulting in a $38 million credit to impairment charges.
- Liquidity Position: Monitor the net financial position, which shifted to a net cash deficit of $409 million as of September 27, 2008, following the $1.5 billion payment for the NXP stake.