Business Context and Reporting Period
STMicroelectronics N.V. filed its Form 20-F on March 7, 2011, covering the fiscal year ended December 31, 2010. The company is a global semiconductor manufacturer reporting in U.S. dollars under U.S. GAAP, with businesses spanning automotive, consumer, computer and communications infrastructure, industrial, MEMS, microcontrollers, power products and wireless platforms. The filing also provides unaudited fourth-quarter 2010 results.
Key Financial Metrics
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Net revenues | $10,346 million | $8,510 million | +21.6% |
| Gross profit | $4,015 million | $2,626 million | +52.9% |
| Gross margin | 38.8% | 30.9% | +7.9 percentage points |
| Operating income (loss) | $476 million | $(1,023) million | Turnaround |
| Net income (loss) attributable to parent | $830 million | $(1,131) million | Turnaround |
| Diluted EPS | $0.92 | $(1.29) | Turnaround |
| Net cash from operating activities | $1,794 million | $816 million | +120% |
| Free cash flow | $961 million | $1,364 million | Down; 2009 included $1,137 million from a business combination |
| Capital expenditures | $1,034 million | $451 million | +129% |
| Net financial position | $1,152 million net cash | $420 million net cash | Improved by $732 million |
At December 31, 2010, cash and cash equivalents were $1,892 million, total financial resources were $2,922 million and total financial debt was $1,770 million. Parent-company shareholders’ equity was $7,587 million and total assets were $13,349 million. The debt-to-equity ratio was 0.23.
Fourth Quarter 2010
| Metric | Q4 2010 | Q3 2010 | Q4 2009 |
|---|---|---|---|
| Net revenues | $2,833 million | $2,657 million | $2,583 million |
| Gross margin | 39.9% | 39.2% | 37.0% |
| Operating income (loss) | $213 million | $193 million | $(6) million |
| Net income (loss) attributable to parent | $219 million | $198 million | $(70) million |
| Diluted EPS | $0.24 | $0.22 | $(0.08) |
Fourth-quarter revenue increased 6.6% sequentially and 9.7% year over year. ACCI revenue grew approximately 15% year over year and IMS revenue grew 30% to a record $1,131 million. Wireless revenue declined approximately 21% because of the transition away from legacy products.
Material Changes Versus the Prior Comparable Period
- The 2010 semiconductor-market recovery drove record annual revenue and substantially higher factory utilization.
- Gross margin improved primarily because of higher volumes, improved manufacturing efficiency, product mix and the near elimination of unused-capacity charges. Unused-capacity charges fell to approximately $3 million in 2010 from $322 million in 2009.
- ACCI moved from a $69 million operating loss in 2009 to $410 million of operating income in 2010; IMS improved from $91 million to $681 million.
- Wireless operating loss increased from $356 million to $483 million, reflecting continued ST-Ericsson losses and portfolio transition. Approximately $296 million of the Wireless loss was attributable to Ericsson’s noncontrolling interest.
- Impairment, restructuring and closure costs declined to $104 million from $291 million. The 2010 charge primarily related to ST-Ericsson and manufacturing-site closures.
- STMicroelectronics completed the sale of its Numonyx investment to Micron, recognizing an after-tax gain of approximately $265 million. Remaining Micron shares were sold in January 2011 for $196 million, generating an additional $20 million gain.
- Debt declined following $508 million of bond repurchases and $218 million of long-term debt repayments. The company also paid $212 million of dividends in 2010.
Guidance, Outlook, Risks and Unusual Items
- Management expected the semiconductor market to grow in 2011 at a more moderate rate than in 2010 and targeted above-market revenue growth with further year-over-year improvement in quarterly operating profitability.
- Planned 2011 capital expenditures were approximately $1.1 billion to $1.5 billion, focused on MEMS, automotive, microcontrollers, advanced processes, manufacturing capacity and ST-Ericsson-related products.
- First-quarter 2011 revenue was expected to decline approximately 7% to 12% sequentially because of normal seasonality; gross margin guidance was approximately 39.0%, plus or minus 1 percentage point, based on an assumed exchange rate of $1.32 per euro.
- Growth initiatives included gyroscopes, accelerometers, 32-bit microcontrollers, automotive products, connected-TV system-on-chips, MEMS microphones, pressure sensors, advanced analog products and ST-Ericsson’s thin modem and U8500 smartphone platform.
- Key risks include semiconductor cyclicality, customer order cancellations, inventory corrections, pricing pressure, capacity constraints, manufacturing interruptions, supply shortages, foreign-exchange volatility, high fixed costs and dependence on large customers. Nokia represented 13.9% of 2010 net revenues.
- ST-Ericsson remained a significant risk because of continuing operating losses, reliance on new product launches and potential future restructuring or impairment charges.
- The company retained $72 million of auction-rate securities carried at fair value, while pursuing approximately $357 million from Credit Suisse under a confirmed FINRA arbitration award; the award remained subject to appeal.
- Pending legal matters included Rambus intellectual-property litigation and an NXP arbitration claim currently estimated at approximately $59 million. The company stated that recorded legal reserves were not material.
- Contractual obligations totaled $4,181 million, including $1,695 million of long-term debt obligations, $1,116 million of purchase obligations and $378 million of operating leases. No material off-balance-sheet arrangements were reported.
- Management concluded that the company had adequate resources for the next twelve months. Internal control over financial reporting was assessed as effective and received an unqualified auditor attestation.
Facts Investors Should Verify
- Whether ST-Ericsson’s product transition and restructuring produce sustained improvement or require further funding, impairment or restructuring charges.
- Whether 2011 capital spending of $1.1 billion to $1.5 billion generates the expected revenue growth and capacity returns.
- The sustainability of the 2010 gross-margin improvement after accounting for pricing pressure, foreign-exchange movements and semiconductor-cycle normalization.
- The collectability and timing of the approximately $357 million Credit Suisse arbitration award.
- The outcomes and potential financial exposure from Rambus litigation, the NXP arbitration and other intellectual-property claims.
- The recoverability of deferred tax assets, including $1,396 million of valuation allowances and ST-Ericsson-related tax-loss carryforwards.
- Near-term debt maturities, including $645 million due in 2011 and $676 million due in 2013.
- The effect of customer concentration, particularly Nokia’s 13.9% share of 2010 revenue, and any changes in customer demand or inventory levels.