STMicroelectronics N.V. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, dated May 7, 2007, reports on STMicroelectronics N.V.'s financial results for the first quarter ended March 31, 2007. The company is a global semiconductor manufacturer. Effective January 1, 2007, the company reorganized its reporting segments into three groups: Application Specific Groups (ASG), Flash Memories Group (FMG), and Industrial and Multisegment Sector (IMS). The semiconductor industry experienced a sequential decline in revenue, with the Total Available Market (TAM) down approximately 6% and the Serviceable Available Market (SAM) down 5% compared to the fourth quarter of 2006.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 | Q4 2006 |
|---|---|---|---|
| Net Revenues | $2,276 million | $2,364 million | $2,483 million |
| Gross Profit | $785 million | $837 million | $901 million |
| Gross Margin | 34.5% | 35.4% | 36.3% |
| Operating Income | $62 million | $140 million | $173 million |
| Net Income | $74 million | $132 million | $276 million |
| Earnings Per Share (Diluted) | $0.08 | $0.14 | $0.30 |
| Cash and Cash Equivalents | $2,040 million | $2,831 million | $1,963 million |
| Net Financial Position | $917 million | $400 million | $761 million |
| Capital Expenditures | $285 million | $297 million | $383 million (implied) |
Debt and Liquidity: Total long-term debt was $2,113 million as of March 31, 2007. The company maintained a positive net financial position of $917 million. Net cash provided by operating activities was $476 million, while net cash used in investing activities was $366 million.
Material Changes vs. Prior Periods
- Revenue Decline: Net revenues decreased 3.7% year-over-year and 8.4% sequentially. The decline was driven by a 21.6% drop in Flash memory revenues and a 7.3% decrease in ASG revenues due to lower selling prices and unfavorable product mix. The IMS segment was the only growth area, up 16.1% year-over-year.
- Margin Compression: Gross margin fell to 34.5% from 35.4% in Q1 2006 and 36.3% in Q4 2006. This was caused by declining selling prices, a weaker U.S. dollar against the euro, and reduced factory loadings.
- Operating Expenses: Operating expenses increased 5% year-over-year, primarily due to higher share-based compensation ($18 million in Q1 2007 vs. $3 million in Q1 2006) and restructuring charges of $12 million.
- Profitability: Operating income dropped significantly to $62 million from $140 million in Q1 2006. Net income fell to $74 million from $132 million in the prior year period.
Guidance, Outlook, and Risks
- Q2 2007 Outlook: Management expects sequential sales growth between 4% and 10%. Gross margin is projected to be approximately 35% (+/- 1 percentage point), limited by a weaker U.S. dollar and a 40 basis point impact from unloading logic products at the Singapore fab.
- Capital Strategy: The company aims to reduce capital intensity, targeting a capital expenditure to sales ratio of approximately 12% for the full year. Full-year 2007 capital spending is expected to be around $1.2 billion.
- Dividend: Shareholders approved a cash dividend of $0.30 per share, a 150% increase from the previous year.
- Legal Proceedings: The company is involved in ongoing patent litigation with SanDisk Corporation and Tessera, Inc. Management currently believes no provision is required as no probable loss has been identified, but unfavorable outcomes could have a material adverse effect.
- Flash Memory Deconsolidation: The company continues to progress toward the deconsolidation of its Flash memory business. As of March 31, 2007, this was deemed "more likely than not" to occur, requiring no impairment charge.
- Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulting in an $8 million incremental tax liability recorded as an adjustment to retained earnings.
Key Facts for Investor Verification
- Customer Concentration: The Nokia Group accounted for approximately 19% of Q1 2007 revenues. The top ten OEM customers represented 50% of total revenues.
- Restructuring Progress: The 150mm fab restructuring plan and the 2005 headcount reduction plan are nearly fully completed, with $325 million and $89 million of expected charges incurred, respectively.
- Joint Venture Exposure: The company has a $250 million restricted cash deposit guaranteeing a loan for its joint venture with Hynix Semiconductor in China.
- Convertible Debt: The company holds $996 million in 2016 Convertible Bonds and $666 million in 2013 Floating Rate Senior Bonds. Credit ratings are currently A3/A- (Moody's/S&P) with a "stable" outlook from S&P and "under review for possible downgrade" from Moody's.
- Inventory Levels: Net inventories increased to $1,676 million from $1,639 million at year-end 2006, requiring monitoring for potential obsolescence provisions if market conditions deteriorate.