Business Context and Reporting Period
This Form 6-K, dated April 26, 2012, reports the 2011 Dutch Statutory Annual Report for STMicroelectronics N.V. (ST), a global semiconductor leader. The reporting period covers the fiscal year ended December 31, 2011. ST operates in a highly cyclical industry and faced significant headwinds in 2011, including natural disasters in Japan and Thailand, the European sovereign debt crisis, and a severe downturn in the semiconductor market. The company's performance was heavily impacted by its 50% joint venture, ST-Ericsson, which struggled with a shift from legacy to new product roadmaps.
Key Financial Metrics
| Metric | 2011 (USD Millions) | 2010 (USD Millions) |
|---|---|---|
| Total Revenues | 9,735 | 10,346 |
| Gross Profit | 3,010 | 3,676 |
| Gross Margin | 30.9% | 35.5% |
| Operating Profit (Loss) | (9) | 687 |
| Net Result | 53 | 619 |
| Net Result Attributable to Parent | 581 | 867 |
| Net Cash from Operating Activities | 1,451 | 2,322 |
| Cash and Cash Equivalents (Year End) | 1,912 | 1,892 |
| Total Financial Resources | 2,333 | 2,696 (Est.) |
| Gross Financial Debt | 1,577 | 1,746 |
Note: Gross financial debt of $1.577 billion includes $400 million in short-term borrowings related to ST-Ericsson. Excluding this specific loan, gross debt was approximately $1.2 billion.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 5.9% to $9.735 billion, driven primarily by a ~30% decline in Wireless segment revenues due to ST-Ericsson's challenges. Wholly-owned businesses performed slightly better than their served markets, with revenues of $8.183 billion.
- Operating Loss: Operating results deteriorated significantly from a profit of $687 million in 2010 to a loss of $9 million in 2011. This was caused by lower revenues, a 460 basis point drop in gross margin, and significant unused capacity charges (approx. 150 basis points impact) due to fab underloading in the second half of the year.
- Segment Performance:
- Wireless: Recorded an operating loss of $812 million (2010: loss of $483 million).
- Wholly-Owned Businesses: Delivered an operating margin of slightly above 11% (2010: 13%).
- Growth Areas: MEMS sales nearly doubled to over $600 million; Automotive sales grew 18% to record levels.
- One-Time Gain: The company recorded a pre-tax gain of approximately $329 million in Q2 2011 from the settlement of litigation regarding auction rate securities (ARS) with Credit Suisse.
Guidance, Outlook, and Risks
Outlook for 2012: Management believes bookings have bottomed and billings are expected to bottom in Q1 2012. The company anticipates a stabilization of the overall semiconductor market but remains concerned about macro-economic uncertainty. Capital expenditures are expected to remain at low levels in the first half of 2012. Primary goals include supporting ST-Ericsson's path to lowering its break-even point, improving free cash flow, and growing faster than the markets served through innovation.
Key Risks and Contingencies:
- ST-Ericsson Impairment: There is a risk of a significant impairment charge (carrying value approx. $2.45 billion) if the strategic review of ST-Ericsson's financial prospects results in a decrease in the value of the investment.
- Market Volatility: Exposure to cyclical demand, pricing pressure, and the ability to reduce expenses during downturns.
- Legal Proceedings: Ongoing patent litigation with Rambus (ITC and District Court) and Tessera. The company estimates possible losses between $10 million and $50 million for legal proceedings but believes aggregate contingencies are not material.
- Government Funding: Potential requirement to refund public funding related to the M6 Plant in Catania, Italy, if the European Commission makes an adverse determination.
Investor Verification Checklist
- ST-Ericsson Turnaround: Verify the progress of ST-Ericsson's cost-cutting measures and the timeline for achieving sustainable profitability, as this is the primary driver of the operating loss.
- Unused Capacity Charges: Monitor the utilization rates of ST's fabs in 2012 to assess the persistence of unused capacity charges impacting gross margins.
- Convertible Bond Redemption: Confirm the status of the 2016 Convertible Bonds, noting that 95% were redeemed in February 2012, leaving a residual amount of approximately $11 million.
- Dividend Policy: Verify the proposed 2011 dividend of $0.40 per share (to be paid in installments) and the company's ability to maintain this payout given the reduced operating income.
- Legal Exposure: Track the outcome of the Rambus ITC investigation and District Court proceedings, as an adverse ruling could impact future operations.