STM

STMicroelectronics N.V. 2008 Annual Report Summary

Business Context and Reporting Period

This Form 6-K filing, dated April 28, 2009, submits STMicroelectronics N.V.'s 2008 Dutch Statutory Annual Report. The reporting period covers the fiscal year ended December 31, 2008. STMicroelectronics is a global semiconductor company headquartered in Geneva, Switzerland, with its legal seat in the Netherlands. The 2008 fiscal year was characterized by a severe global economic downturn, a strong Euro, and significant strategic restructuring, including the deconsolidation of the Flash Memory Group (FMG) into the Numonyx joint venture and the consolidation of the NXP Wireless business.

Key Financial Metrics (2008 vs. 2007)

Note: Excluding one-time items (impairments, restructuring, purchase accounting), management estimated 2008 adjusted earnings per share at $0.40.

Material Changes and Drivers

• Revenue Decline: Reported revenue decreased 1.6% due to the deconsolidation of the Flash Memory Group (FMG) in Q1 2008. Excluding FMG and the newly acquired NXP Wireless business, organic revenue grew 4.8%.
• Operating Profit Improvement: Operating profit turned positive ($139 million) from a loss of $406 million in 2007. This was driven by significantly lower impairment charges ($105 million in 2008 vs. $1,167 million in 2007) and improved operating performance, despite currency headwinds.
• Net Loss Drivers: The net loss of $518 million was primarily driven by non-operating items:
  • Numonyx Impairment: A $485 million impairment charge on the equity investment in the Numonyx joint venture.
  • Financial Asset Impairments: $138 million in charges related to marketable securities, including $127 million on auction rate securities and $11 million on Lehman Brothers notes.
  • Acquisition Costs: One-time charges related to the purchase accounting of the NXP Wireless business, including a $110 million inventory step-up.
• Currency Impact: The strong Euro (average rate $1.49/€ in 2008 vs. $1.35/€ in 2007) negatively impacted results by approximately 160 basis points on gross margin.

Guidance, Outlook, and Management Commentary

Management outlined four key priorities for 2009 to address the economic downturn and restructure the company:

• Cost Reduction: A target to reduce costs by over $700 million in 2009 compared to the Q4 2008 cost base. This includes resizing manufacturing operations and streamlining expenses, expected to result in the loss of approximately 4,500 net jobs worldwide.
• Capital Expenditure (Capex): A reduction in the capex budget to approximately $500 million for 2009, representing a 50% decrease from 2008 levels, to maintain an asset-light configuration.
• Strategic Integration: Focus on integrating the ST-Ericsson joint venture (formed with Ericsson Mobile Platforms) to create a world leader in wireless semiconductors.
• Market Share: Continued investment in product portfolios for power applications and multimedia convergence to maintain or increase market share.

Risks and Contingencies:

• Credit Suisse Arbitration: In February 2009, a FINRA arbitration panel awarded STMicroelectronics approximately $406 million in damages regarding unauthorized purchases of auction rate securities by Credit Suisse. STMicroelectronics has petitioned a U.S. court to enforce this award, though Credit Suisse is contesting it.
• Numonyx Exposure: Continued volatility in the memory market poses risks to the valuation of the Numonyx investment. A subsequent $200 million impairment was recorded in Q1 2009.
• Market Conditions: Ongoing global economic recession and semiconductor industry downturns remain significant risks to demand and pricing.

Key Facts for Investor Verification

• Adjusted Earnings: Verify the calculation of the $0.40 adjusted EPS, as the reported loss of $0.58 is heavily skewed by non-recurring impairments and acquisition accounting.
• Credit Suisse Recovery: Monitor the status of the $406 million FINRA award enforcement against Credit Suisse, as collection is not guaranteed pending court rulings.
• Restructuring Execution: Track the progress of the $700 million cost-cutting program and the associated workforce reduction of 4,500 jobs to assess margin improvement potential in 2009.
• Numonyx Valuation: Review subsequent filings for further impairments related to the Numonyx joint venture, given the Q1 2009 charge of $200 million.
• Debt Levels: Note the shift from a net cash position in 2007 to a net debt position of $545 million in 2008 due to acquisitions; monitor debt service capabilities in a low-interest environment.