STM

STMicroelectronics N.V. - First Quarter 2004 Financial Summary

Business Context and Reporting Period

This Form 6-K filing covers the unaudited interim results for STMicroelectronics N.V. for the first quarter ended March 27, 2004. The company is a global independent semiconductor manufacturer. The reporting period consisted of 87 days, which is shorter than the 97 days in the fourth quarter of 2003 and 91 days in the second and third quarters of 2003. The semiconductor industry experienced strong growth in Q1 2004, with Total Available Market (TAM) revenues increasing approximately 32.3% year-over-year.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 25.4% year-over-year, driven by significant volume increases and improved product mix, despite a 5% decline in average selling prices. This was the first quarter where revenues exceeded $2 billion.
• Profitability Decline: Operating income decreased 35.5% year-over-year and 47.6% sequentially. This was primarily due to a $33 million pre-tax charge for restructuring and closure costs, higher R&D expenses, and unfavorable foreign exchange impacts from a weaker U.S. dollar.
• Expense Increases: R&D expenses rose 28% to $363 million due to accelerated investment in new product development and the addition of 450 engineers. Selling, general, and administrative (SG&A) expenses increased 32% to $230 million.
• Liquidity Improvement: The company improved its net financial position from negative $97 million at year-end 2003 to positive $131 million, driven by strong operating cash flow.

Guidance, Outlook, and Risks

• Q2 2004 Outlook: Management expects a strong sequential increase in revenues and gross margin. Q2 revenues are projected to range between $2,150 million and $2,270 million (a 6% to 12% sequential increase). Gross margin is expected to reach approximately 37%.
• Capital Expenditures: The company increased its full-year 2004 capital expenditure budget to approximately $2.2 billion (up from $1.6 billion), with two-thirds allocated to leading-edge technologies and R&D.
• Restructuring: The company is executing a 150mm restructuring plan to migrate production to lower-cost areas and upgrade to 200mm technology. Total estimated costs for this plan are approximately $350 million pre-tax.
• Risks: Key risks include the cyclical nature of the semiconductor industry, pricing pressure, the impact of a weakening U.S. dollar on costs, and the successful execution of manufacturing migrations. The company also faces potential litigation regarding intellectual property.

Investor Verification Checklist

• Customer Concentration: Verify the stability of the top customer, the Nokia group, which accounted for 15.2% of Q1 revenues. The top 10 OEMs accounted for 43% of total revenues.
• Restructuring Execution: Monitor the progress and actual costs of the 150mm fab restructuring plan, which aims to reduce costs but involves significant operational changes.
• Currency Exposure: Assess the impact of the U.S. dollar exchange rate against the Euro and other currencies, as the majority of costs are incurred in non-dollar currencies while reporting is in USD.
• Debt Obligations: Review the maturity schedule of convertible bonds, specifically the $804 million 2009 bonds and $370 million 2010 bonds, which have put options exercisable by holders in late 2004 and early 2005.
• Inventory Levels: Monitor inventory turns (currently 4.9) and potential write-downs given the volatility in semiconductor pricing and demand.