Edgar Filing: STMICROELECTRONICS NV

Annual Report on Form 20-F

As filed with the Securities and Exchange Commission on March 4, 2013

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

¨	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

¨	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 1-13546

STMicroelectronics N.V.

(Exact name of registrant as specified in its charter)


Not Applicable		The Netherlands
(Translation of registrant’s		(Jurisdiction of incorporation
name into English)		or organization)

WTC Schiphol Airport

Schiphol Boulevard 265

1118 BH Schiphol Airport

The Netherlands

(Address of principal executive offices)

Carlo Bozotti

39, chemin du Champ des Filles

1228 Plan-Les-Ouates

Geneva

Switzerland

Tel: +41 22 929 29 29

Fax: +41 22 929 29 88

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class:		Name of Each Exchange on Which Registered:
Common shares, nominal value €1.04 per share		New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

887,953,202 common shares at December 31, 2012

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨	(Do not check if a smaller reporting company)

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP x

International Financial Reporting Standards as issued

by the International Accounting Standards Board ¨

Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

TABLE OF CONTENTS


PRESENTATION OF FINANCIAL AND OTHER INFORMATION			2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			2
PART I			4
Item 1. Identity of Directors, Senior Management and Advisers			4
Item 2. Offer Statistics and Expected Timetable			4
Item 3. Key Information			4
Item 4. Information on the Company			22
Item 5. Operating and Financial Review and Prospects			42
Item 6. Directors, Senior Management and Employees			79
Item 7. Major Shareholders and Related Party Transactions			103
Item 8. Financial Information			108
Item 9. Listing			111
Item 10. Additional Information			113
Item 11. Quantitative and Qualitative Disclosures About Market Risk			129
Item 12. Description of Securities Other than Equity Securities			132
PART II			133
Item 13. Defaults, Dividend Arrearages and Delinquencies			133
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			133
Item 15. Controls and Procedures			133
Item 16A. Audit Committee Financial Expert			134
Item 16B. Code of Ethics			134
Item 16C. Principal Accountant Fees and Services			135
Item 16D. Exemptions from the Listing Standards for Audit Committees			136
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			136
Item 16F. Change in Registrant’s Certifying Accountant			136
Item 16G. Corporate Governance			136
PART III			139
Item 17. Financial Statements			139
Item 18. Financial Statements			139
Item 19. Exhibits			139

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report or Form 20-F (the “Form 20-F”), references to “we”, “us” and “Company” are to STMicroelectronics N.V. together with its consolidated subsidiaries, references to “EU” are to the European Union, references to “€” and the “Euro” are to the Euro currency of the EU, references to the “United States” and “U.S.” are to the United States of America and references to “$” or to “U.S. dollars” are to United States dollars. References to “mm” are to millimeters and references to “nm” are to nanometers.

We have compiled market size and ST market share data in this annual report using statistics and other information obtained from several third-party sources. Except as otherwise disclosed herein, all references to trade association data are references to World Semiconductor Trade Statistics (“WSTS”). Certain terms used in this annual report are defined in “Certain Terms”.

We report our financial statements in U.S. dollars and prepare our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). We also report certain non-U.S. GAAP financial measures (free cash flow and net financial position), which are derived from amounts presented in the financial statements prepared under U.S. GAAP. Furthermore, since 2005, we are required by Dutch law to report our Statutory and Consolidated Financial Statements, previously reported using generally accepted accounting principles in The Netherlands, in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union. The IFRS financial statements are reported separately and can differ materially from the statements reported in U.S. GAAP.

Various amounts and percentages used in this Form 20-F have been rounded and, accordingly, they may not total 100%.

We and our affiliates own or otherwise have rights to the trademarks and trade names, including those mentioned in this annual report, used in conjunction with the marketing and sale of our products.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Form 20-F that are not historical facts, particularly in “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” and “— Business Outlook” are statements of future expectations and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended) that are based on management’s current views and assumptions, and are conditioned upon and also involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those in such statements due to, among other factors:

•

future risks to our core business, other potential write-offs of assets, our share of costs and the required cash resources that ensue from our decision to exit ST-Ericsson, and will depend on the chosen exit options;

•

our ability to competitively address market demand for the products which we design, manufacture and sell;

•

changes in the market for our products, including the actual demand for products where we have achieved design wins and/or demand for applications where we are targeting growth;

•

our customers’ ability to successfully compete in the application markets they serve with our products;

•

our ability in periods of reduced market demand or visibility to reduce our expenses as required, as well as our ability to operate our manufacturing facilities at sufficient levels with existing process technologies to cover our fixed operating costs;

•

our ability, in an intensively competitive environment, to identify and allocate necessary design resources to successfully and timely develop and secure customer acceptance for new products meeting their expectations;

•

our ability to achieve our pricing expectations for high-volume supplies of new products in whose development we have been, or are currently, investing;

•

the financial impact of obsolete or excess inventories if actual demand differs from our expectations;

•

our ability to maintain or improve our competitiveness especially in light of volatility in the foreign exchange markets and, more particularly, in the U.S. dollar exchange rate as compared to the Euro and the other major currencies we use for our operations;

•

the impact of intellectual property (“IP”) claims by our competitors or other third parties, and our ability to obtain required licenses on reasonable terms and conditions;

•

restructuring charges and associated cost savings that differ in amount or timing from our estimates;

•

changes in our overall tax position as a result of changes in tax laws, the outcome of tax audits or changes in international tax treaties which may impact our results of operations as well as our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;

•

natural events such as severe weather, earthquakes, tsunami, volcano eruptions or other acts of nature, health risks and epidemics in locations where we, our customers or our suppliers operate;

•

changes in economic, social, political or infrastructure conditions in the locations where we, our customers or our suppliers operate including as a result of macroeconomic or regional events, military conflict, social unrest or terrorist activities;

•

availability and costs of raw materials, utilities, third-party manufacturing services, or other supplies required by our operations; and

•

the outcome of ongoing litigation as well as any new litigation to which we may become a defendant.

Such forward-looking statements are subject to various risks and uncertainties, which may cause actual results and performance of our business to differ materially and adversely from the forward-looking statements. Certain forward-looking statements can be identified by the use of forward-looking terminology, such as “believes”, “expects”, “may”, “are expected to”, “should”, “would be”, “seeks” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Some of these risk factors are set forth and are discussed in more detail in “Item 3. Key Information — Risk Factors”. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Form 20-F as anticipated, believed or expected. We do not intend, and do not assume any obligation, to update any industry information or forward-looking statements set forth in this Form 20-F to reflect subsequent events or circumstances.

Unfavorable changes in the above or other factors listed under “Item 3. Key Information — Risk Factors” from time to time in our Securities and Exchange Commission (“SEC”) filings, could have a material adverse effect on our business and/or financial condition.

PART I

Item 1.

Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

Item 3.

Key Information

Selected Financial Data

The table below sets forth our selected consolidated financial data for each of the years in the five-year period ended December 31, 2012. Such data have been derived from our audited Consolidated Financial Statements. Audited Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2012, including the Notes thereto (collectively, the “Consolidated Financial Statements”), are included elsewhere in this Form 20-F, while data for prior periods have been derived from our audited Consolidated Financial Statements used in such periods.

The following information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the audited Consolidated Financial Statements and the related Notes thereto included in “Item 18. Financial Statements” in this Form 20-F.


	Year Ended December 31,
	2012			2011			2010			2009			2008
	(In millions except per share and ratio data)
Consolidated Statements of Income Data:
Net sales	$	8,380		$	9,630		$	10,262		$	8,465		$	9,792
Other revenues		113			105			84			45			50

Net revenues		8,493			9,735			10,346			8,510			9,842
Cost of sales		(5,710	)		(6,161	)		(6,331	)		(5,884	)		(6,282	)

Gross profit		2,783			3,574			4,015			2,626			3,560
Operating expenses:
Selling, general and administrative		(1,166	)		(1,210	)		(1,175	)		(1,159	)		(1,187	)
Research and development⁽¹⁾		(2,413	)		(2,352	)		(2,350	)		(2,365	)		(2,152	)
Other income and expenses, net⁽²⁾		91			109			90			166			62
Impairment, restructuring charges and other related closure costs		(1,376	)		(75	)		(104	)		(291	)		(481	)

Total operating expenses		(4,864	)		(3,528	)		(3,539	)		(3,649	)		(3,758	)

Operating income (loss)		(2,081	)		46			476			(1,023	)		(198	)
Other-than-temporary impairment charge and realized gains (losses) on financial assets		—			318			—			(140	)		(138	)
Interest income (expense), net		(35	)		(25	)		(3	)		9			51
Income (loss) on equity-method investments and gain on investment divestiture		(24	)		(28	)		242			(337	)		(553	)
Gain (loss) on financial instruments, net		3			25			(24	)		(5	)		15
Income (loss) before income taxes and noncontrolling interest		(2,137	)		336			691			(1,496	)		(823	)
Income tax benefit (expense)		(51	)		(181	)		(149	)		95			43

Net income (loss)		(2,188	)		155			542			(1,401	)		(780	)
Net loss (income) attributable to noncontrolling interest		1,030			495			288			270			(6	)

Net income (loss) attributable to parent company		(1,158	)		650			830			(1,131	)		(786	)

Earnings per share (basic) attributable to parent company stockholders		(1.31	)		0.74			0.94			(1.29	)		(0.88	)
Earnings per share (diluted) attributable to parent company stockholders		(1.31	)		0.72			0.92			(1.29	)		(0.88	)
Number of shares used in calculating earnings per share (basic)		886.7			883.6			880.4			876.9			892.0
Number of shares used in calculating earnings per share (diluted)		886.7			904.5			911.1			876.9			892.0


	Year Ended December 31,
	2012		2011		2010		2009		2008
	(In millions except per share and ratio data)
Consolidated Balance Sheets Data (end of period):
Cash and cash equivalents		2,250		1,912		1,892		1,588		1,009
Short-term deposits		1		—		67		—		—
Marketable securities		238		413		1,052		1,032		651
Restricted cash		4		8		7		250		250
Non-current marketable securities		—		—		72		42		242
Total assets		10,434		12,094		13,349		13,655		13,913
Short-term debt		630		733		720		176		143
Long-term debt (excluding current portion)⁽³⁾		671		826		1,050		2,316		2,554
Total parent company stockholders’ equity⁽⁴⁾		6,225		7,603		7,587		7,147		8,156
Common stock and capital surplus		3,711		3,700		3,671		3,637		3,480
Other Data:
Dividends per share⁽⁵⁾		0.40		0.40		0.28		0.12		0.36
Capital expenditures⁽⁶⁾		476		1,258		1,034		451		983
Net cash from operating activities		612		880		1,794		816		1,722
Depreciation and amortization		1,107		1,279		1,240		1,367		1,366
Debt-to-equity ratio⁽⁷⁾	$	0.21	$	0.21	$	0.23	$	0.35	$	0.33

(1)

Our reported research and development expenses (“R&D”) are mainly in the areas of product design and technology development. They do not include marketing design center costs, which are accounted for as selling expenses, or process engineering, pre-production and process-transfer costs, which are accounted for as cost of sales. Our R&D expenses are net of certain tax credits.

(2)

“Other income and expenses, net” includes, among other things: funds received through government agencies for research and development programs; costs incurred for start-up and phase-out activities not involving saleable production; foreign currency gains and losses; gains on sales of tangible assets and non-current assets; and the costs of certain activities relating to IP protection.

(3)

We repurchased a portion of our 2016 convertible bonds (“2016 Convertible Bonds”) during 2009 (98,000 bonds for a total cash consideration of $103 million), 2010 (385,830 bonds for a total cash consideration of $410 million), 2011 (289,768 bonds for a total cash consideration of $314 million of which 41,123 convertible bonds were redeemed by certain holders on February 23, 2011) and 2012 (200,402 bonds for a total cash consideration of $219 million of which 190,131 convertible bonds were redeemed by certain holders on February 23, 2012). Our 2016 Convertible Bonds were fully redeemed in the second quarter of 2012. We also repurchased a portion of our 2013 senior bonds (“2013 Senior Bonds”) in 2010 and 2011 for an amount of $98 million and $107 million, respectively.

(4)

Following repurchases in earlier periods, we also repurchased 29,520,220 of our shares in 2008, for a total cost of $313 million and we reflected this purchase at cost as a reduction of stockholders’ equity. The repurchased shares have been designated for allocation under our share-based compensation programs as nonvested shares, including the plans as approved by the 2005 through 2012 annual general shareholders’ meetings, and those which may be attributed in the future. As of December 31, 2012, 20,313,617 shares had been transferred to employees upon the vesting of such stock awards. As of December 31, 2012, we owned 22,606,603 treasury shares.

(5)	Dividend per share represents the yearly dividend as approved by our annual general meeting of shareholders, which relates to the prior year’s accounts.

(6)	Capital expenditures are net of proceeds from sale and certain funds received through government agencies, the effect of which is to reduce our cash used in investing activities and to decrease depreciation.

(7)	Debt-to-equity ratio is the ratio between our total financial debt and our total parent company stockholder’s equity.

Risk Factors

Risks Related to the Semiconductor Industry which Impact Us

The semiconductor industry is cyclical and downturns in the semiconductor industry can negatively affect our results of operations and financial condition.

The semiconductor industry is cyclical and has been subject to significant downturns at various times, impacted by global economic conditions. Downturns are typically characterized by reduction in overall demand, accelerated erosion of selling prices, reduced revenues and high inventory levels, which could result in a significant deterioration of our results of operations. Furthermore, downturns may be the result of industry-specific factors, such as built-in excess capacity, product obsolescence, price erosion and changes in

end-customer demand. Such macroeconomic trends relate to the semiconductor industry as a whole and not necessarily to the individual semiconductor markets to which we sell our products. The negative effects on our business from industry downturns may also be increased to the extent that such downturns are concurrent with the timing of new increases in production capacity or the introduction of new advanced technologies in our industry. We have experienced revenue volatility and market downturns in the past and expect to experience them in the future, which could have a material adverse impact on our results of operations and financial condition.

In the event of a global or regional economic slowdown impacting business and consumer confidence, the demand for semiconductor products can decline precipitously. As a result, our business, financial conditions and results of operations have been affected in the past and could also be affected in the future. To the extent that the economic environment in which we conduct our operations worsens, our business, financial condition and results of operations could be significantly and adversely affected.

In particular, economic downturns affecting the semiconductor industry may result in a variety of risks that could significantly affect our business, including:

•

declines in revenues;

•

reductions in selling prices;

•

underutilization of manufacturing capacity;

•

deterioration of our gross margins, profitability and net cash flow;

•

increased volatility and/or declines in our share price;

•

increased volatility or adverse movements in foreign currency exchange rates;

•

delays in, or curtailment of, purchasing decisions by our customers or potential customers either as a result of overall economic uncertainty or as a result of their inability to access the liquidity necessary to engage in purchasing initiatives or new product development;

•

closure of our wafer fabrication plants (“fabs”) and associated restructuring plans;

•

lower valuations of our equity-method investments and lower valuations on our divestitures or our exit from joint ventures;

•

downgrade of our corporate credit ratings / outlook from one or more independent rating agencies, which may negatively impact our ability to access additional liquidity;

•

increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected by the economic downturn; and

•

impairment of goodwill or other assets associated with our product segments.

We may not be able to match our production capacity to demand.

As a result of the cyclicality and volatility of the semiconductor industry, it is difficult to predict future developments in the markets we serve, making it hard to estimate requirements for production capacity. If markets, major customers or certain product designs or technologies do not perform as we have anticipated, we risk underutilization of our facilities or the manufacturing of excess inventories, in the event of overestimated demand or having insufficient capacity to meet customer demand in the event of underestimated demand.

The net increase of manufacturing capacity, defined as the difference between capacity additions and capacity reductions, may exceed demand requirements, leading to overcapacity and price erosion. If the semiconductor market or major customers do not grow as we anticipated when making investments in production capacity, we risk overcapacity and relevant unused capacity charges. In addition, if demand for our products is lower than expected, this may result in write-offs of inventories and losses on products, and could require us to undertake restructuring measures that may involve significant charges to our earnings. In the past, overcapacity for certain products or technologies and cost optimization have led us to close manufacturing facilities and, as a result, to incur significant impairment and restructuring charges and other related closure costs. Furthermore, during certain periods, we have also experienced an increasing demand in certain market segments and product technologies, which has led to a shortage of capacity and an increase in the lead times of our delivery to customers. See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Impairment, restructuring charges and other related closure costs”.

Competition in the semiconductor industry is intense, and we may not be able to compete successfully if our product design technologies, process technologies and products do not meet market requirements or if we are unable to obtain the necessary IP.

We compete in different product lines to various degrees on the following characteristics:

•

price;

•

technical performance;

•

product features;

•

product system compatibility;

•

product design and technology;

•

timely introduction of new products;

•

product availability;

•

process technology;

•

manufacturing capabilities; and

•

sales and technical support.

Given the intense competition in the semiconductor industry, if our products are not selected based on any of the above factors, our business, financial condition and results of operations will be materially adversely affected.

We face significant competition in each of our product lines. Similarly, many of our competitors also offer a large variety of products. Some of our competitors may have greater financial and/or more focused research and development (“R&D”) resources than we do. If these competitors substantially increase the resources they devote to developing and marketing products that compete with ours, we may not be able to compete successfully. Any consolidation among our competitors could also enhance their product offerings, manufacturing efficiency and financial resources, further strengthening their competitive position.

As we are a supplier of a broad range of products, we are required to make significant investments in R&D across our product portfolio in order to remain competitive. Many of the resulting products that we market have short life cycles, with some being one year or less. Economic conditions may impair our ability to maintain our current level of R&D investments and, therefore, we may need to become more focused in our R&D investments across our broad range of product lines. On December 10, 2012, we announced our new strategic plan, centered on leadership in Sense and Power and Automotive Products and in Embedded Processing Solutions, specifically focusing on five product areas: MEMS and sensors, smart power, automotive products, microcontrollers, and application processors including digital consumer. However, there can be no assurance that we will successfully compete in each product area when our competitors’ R&D investments may be higher than ours.

We regularly devote substantial resources to winning competitive selection processes, known as “product design wins”, to develop products for use in our customers’ equipment and products. These selection processes can be lengthy and can require us to incur significant design and development expenditures, with no guarantee of winning or generating revenue. Delays in developing new products with anticipated technological advances or in commencing volume shipments of new products as well as failure to win new design projects for customers may have an adverse effect on our business. In addition, there can be no assurance that new products, if introduced, will gain market acceptance or will not be adversely affected by new technological changes or new product announcements from other competitors that may have greater efficiency, focus or financial resources. Because we typically focus on only a few customers in a product area, the loss of a design win can sometimes result in our failure to offer a generation of a product. This can result in lost sales and could hurt our position in future competitive selection processes because we may be perceived as not being a technology or industry leader. We recently experienced this in our Wireless business, which contributed to our decision to exit from our ST-Ericsson joint venture as part of our new strategic plan, leading to the impairment of our goodwill and intangible assets in ST-Ericsson. For additional information, see “Item 5. Operating and Financial Review and Prospects — Critical Accounting Policies Using Significant Estimates — Impairment of goodwill” and “— Intangible assets subject to amortization”.

Even after obtaining a product design win from one of our customers, we may still experience delays in generating revenue from our products as a result of our customers’ or our lengthy development and design cycle. In

addition, a major change, delay or cancellation of a customer’s plans could significantly adversely affect our financial results, as we may have incurred significant expense and generated no revenue at the time of such change, delay or cancellation. Finally, if our customers fail to successfully market and sell their own products, it could materially adversely affect our business, financial condition and results of operations as the demand for our products falls.

We also regularly incur costs to develop IP internally or acquire it from third parties without any guarantee of realizing the anticipated value of such expenditures if our competitors develop technologies that are more accepted than ours, or if market demand does not materialize as anticipated. In addition to amortization expenses relating to purchased IP, the value of these assets may be subject to impairment with associated charges being made to our Consolidated Financial Statements. There is no assurance that our IP purchases will be successful and will not lead to impairments and associated charges.

The competitive environment of the semiconductor industry as well as the resulting consolidation and vertical integration at the customer level may lead to erosion of our market share, impact our capacity to compete and require us to restructure.

The intensely competitive environment of the semiconductor industry and the high costs associated with developing marketable products and manufacturing technologies as well as investing in production capabilities may lead to further changes, including consolidation and vertical integration, in the industry. Consolidation can allow a company to further benefit from economies of scale, provide improved or more diverse product portfolios and increase the size of its serviceable market. In addition, the Wireless market has recently experienced polarization and vertical integration at leading telephone manufacturers.

Our sales have, at times, increased at a slower pace than the semiconductor industry as a whole and our market share has declined, even in relation to the markets we served and in particular in the Wireless market. There is no assurance that we will be able to maintain or grow our market share if we are unable to accelerate product innovation, identify new applications for our products, further penetrate and extend our customer base and realize manufacturing improvements. In recent years the major growth of the semiconductor industry has been in Asia, supported also by more competitive production costs, resulting in a more competitive environment. We may also incur losses of market share if we are unable to take the required measures to improve our cost structure and competitiveness in the semiconductor market, such as seeking more competitive sources of production, discontinuing certain product families or performing additional restructurings, which in turn may result in loss of revenues, asset impairments and/or capital losses.

The semiconductor industry may also be impacted by changes in the political, social or economic environment, including as a result of military conflict, social unrest and/or terrorist activities, as well as natural events such as severe weather, health risks, epidemics or earthquakes in the countries in which we, our key customers and our suppliers, operate.

We may face greater risks due to the international nature of our business, including in the countries where we, our customers or our suppliers operate, such as:

•

negative economic developments in global economies and instability of foreign governments, including the threat of war, terrorist attacks or civil unrest;

•

epidemics such as disease outbreaks, pandemics and other health related issues;

•

changes in laws and policies affecting trade and investment, including through the imposition of new constraints on investment and trade; and

•

varying practices of the regulatory, tax, judicial and administrative bodies.

Risks Related to Our Operations

Market dynamics have driven, and continue to drive us, to a strategic repositioning.

In recent years, we have undertaken several new initiatives to reposition our business, both through divestitures and new investments. Our strategies to improve our results of operations and financial condition led us, and may in the future lead us, to acquire businesses that we believe to be complementary to our own, or to divest ourselves of activities that we believe do not serve our longer term business plans. Our potential acquisition strategies depend in part on our ability to identify suitable acquisition targets, finance their acquisition and obtain required regulatory and other approvals. Our potential divestiture strategies depend in part on our ability to compete and to identify the activities in which we should no longer engage, and then determine and execute appropriate methods to divest of them.

In 2008, we established the Numonyx joint venture by contributing our Flash memory business. We ultimately sold this business in 2010, and as a result of the negative developments in this sector, incurred significant losses and recognized impairment charges and restructuring charges, partially offset by a gain realized upon the sale of the joint venture.

After having established in August 2008 a wireless joint venture with NXP, in 2009, we contributed this joint venture to the newly established ST-Ericsson wireless joint venture. The integration process was long and complex, compounded by a rapidly changing market moving from chipsets to platforms, combining advanced solutions with both hardware and software features, and has required significant cash funding from Ericsson and us. Furthermore, the joint venture business has faced more challenges than anticipated as a result of major changes in the business of one of its largest customers, the polarization of the smartphone market and the evolution of the top players in the wireless sector towards a more vertically integrated structure. In December 2012, we announced our new strategic plan and took the decision to exit ST-Ericsson after a transition period expected to end during the third quarter of 2013. We are currently finalizing our decision regarding available strategic options, which could have a negative impact on our results in terms of additional provisions for restructuring charges and write-downs of assets. At the end of 2012, we also recognized significant impairments on the goodwill and intangible assets of ST-Ericsson and abandoned significant cash advances made together with Ericsson to support the funding requirements of our joint venture.

We are constantly monitoring our product portfolio and cannot exclude that additional steps in this repositioning process may be required; further, we cannot assure that any strategic repositioning of our business, including executed and possible future acquisitions, dispositions or joint ventures, will be successful and may not result in further impairment and associated charges.

Acquisitions and divestitures involve a number of risks that could adversely affect our operating results, including the risk that we may be unable to successfully integrate businesses or teams we acquire with our culture and strategies on a timely basis or at all, and the risk that we may be required to record charges related to the goodwill or other long-term assets associated with the acquired businesses. As illustrated by the aforementioned examples of Numonyx and ST-Ericsson, changes in our expectations due to changes in market developments that we cannot foresee have in the past resulted in our writing off amounts associated with the goodwill of acquired companies, and future changes may require similar further write-offs in future periods. We cannot be certain that we will be able to achieve the full scope of the benefits we expect from a particular acquisition, divestiture or investment. Our business, financial condition and results of operations may suffer if we fail to coordinate our resources effectively to manage both our existing businesses and any acquired businesses. In addition, the financing of future acquisitions or divestitures may negatively impact our financial position and could require us to raise additional funding.

Other risks associated with acquisitions or joint ventures include:

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in the case of joint ventures, our ability to effectively control the joint venture, when management acts independently pursuant to the joint ventures rules of governance;

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also in the case of joint ventures, our ability to plan and anticipate business and financial results which relies, for that portion of our business, on the joint venture’s management ability to plan and anticipate business and financial results and their timely and accurate reporting to us;

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the diversion of management’s attention;

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insufficient IP rights or issues concerning ownership of key IP;

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assumption of potential liabilities, disclosed or undisclosed, associated with the business acquired, which liabilities may exceed the amount of indemnification available from the seller;

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potential inaccuracies in the financials of the business acquired;

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the ability for businesses acquired or contributed to a joint venture to maintain the quality of products and services that we have historically provided;

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our ability to attract and retain qualified management for the acquired business or business contributed to a joint venture;

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our ability to retain customers of an acquired entity or business;

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employment issues and costs linked to restructuring plans; and

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the ability of the joint venture to succeed in a new business not associated with our core business such as the ability of our 3Sun joint venture, which we hold as an equity interest and which we have set up in Italy together with Enel and Sharp, to successfully compete in the market for photovoltaic products.

Identified risks associated with divestitures, and in particular, our decision to exit the ST-Ericsson joint venture, include:

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diversion of management’s attention;

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loss of activities and technologies that may have complemented our remaining businesses or operations;

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loss of important services provided by key employees that are assigned to divested activities;

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impairment of goodwill and other assets associated with the business to be divested;

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issues that may arise between ST-Ericsson and customers or suppliers of ST-Ericsson; and

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employment issues and restructuring costs linked to divestitures and closures.

These and other factors may cause a materially adverse effect on our results of operations and financial condition.

ST-Ericsson experienced greater than anticipated declining revenues and an increase in operating losses in 2012 leading to our decision to exit the ST-Ericsson joint venture.

During 2012, we continuously monitored ST-Ericsson’s business evolution and evaluated their progress on a regular basis. ST-Ericsson continued to suffer in 2012 from extremely difficult conditions as well as reduced demand. Our Wireless segment revenues decreased in 2012 to $1,345 million or approximately 13% less than the $1,552 million registered in 2011. This significant decline in revenues led to an increase in operating losses, which reached $885 million in 2012 compared to $812 million in 2011, as well as a continuing negative cash flow, which reached approximately $700 million in 2012. This negative trend and the realization that a return to profitability could no longer be anticipated in a reasonable time period without further requirements by the joint venture for financial support from us ultimately led us to decide in December 2012 to exit the ST-Ericsson joint venture. As a result, we have written off the carrying value of our goodwill and other intangible assets, recognizing an impairment charge of $1.2 billion in 2012. We anticipate that we will complete our exit from ST-Ericsson after a transition period expected to end during the third quarter of 2013, and we are finalizing our decision regarding available strategic options, which could have a negative impact on our results in terms of additional provisions for restructuring charges and write-downs of assets. Our current best estimate is that we could have funding requirements, including the ongoing operations of ST-Ericsson during the transition period and restructuring costs, in the range of approximately $300 million to $500 million during 2013.

Our new strategic plan may be unsuccessful if we cannot respond to significant changes in the semiconductor market.

On December 10, 2012, we announced our new strategic plan centered on leadership in Sense and Power and Automotive Products and in Embedded Processing Solutions, which included, as part of this new plan, our decision to exit ST-Ericsson after a transition period and established a targeted operating margin of 10% or more. There can be no assurance that we will successfully implement our new strategic plan and achieve our new financial model, which is dependent upon solid revenue growth and our objective of reducing our operating costs. Our success is contingent upon our ability to respond to the following significant changes currently characterizing the semiconductor market: the long-term structural growth of the overall market for semiconductor products, which has moved from double digit average annual growth rate to a mid-single digit average growth rate over the last several years and which has become more strongly correlated with the global macroeconomic environment; the acceleration of new product innovation and the strong development of new applications in areas such as smart consumer devices, trust and data security, healthcare & wellness, and energy and power management savings; the growing importance of the Asia Pacific region, particularly Greater China and other emerging countries, which represent the fastest growing regional markets; the evolving customer demand to seek new system level, turnkey solutions from semiconductor suppliers; the evolution of the customer base, which also includes polarization and vertical integration at leading manufacturers; the expansion of available manufacturing capacity through third party providers; and the evolution of advanced process development R&D partnerships.

In difficult market conditions, our high fixed costs adversely impact our results.

In less favorable industry environments, we are driven to reduce prices in response to competitive pressures and we are also faced with a decline in the utilization rates of our manufacturing facilities due to decreases in product demand. Reduced average selling prices and demand for our products both adversely affect our results of operations. Since the semiconductor industry is characterized by high fixed costs, we are not always able to cut our total costs in line with revenue declines. Furthermore, in periods of lower customer demand for our products, our fabs do not operate at full capacity and the costs associated with the excess capacity are charged directly to cost of sales as unused capacity charges. Additionally, a significant number of our manufacturing facilities are located in France and Italy and their cost of operation could be significantly affected by the rise of the Euro against the U.S. dollar, our reporting currency. See “Item 5. Operating and Financial Review and Prospects — Impact of Changes in Exchange Rates”. The difficult conditions experienced in 2011 and 2012 had a significant effect on the capacity utilization and related manufacturing efficiencies of our fabs, generating significant unused capacity charges in the second half of 2011 and in 2012, which led to a significant decline in our gross margin. We cannot guarantee that such market conditions, and increased competition in our core product markets, will not lead to further price erosion, lower revenue growth rates and lower margins.

Our financial results can be adversely affected by fluctuations in exchange rates, principally in the value of the U.S. dollar.

A significant variation of the value of the U.S. dollar against the principal currencies that have a material impact on us (primarily the Euro, but also certain other currencies of countries where we have operations, such as the Swedish Krona and the Singapore dollar) could result in a favorable impact on our net income in the case of an appreciation of the U.S. dollar, or a negative impact on our net income if the U.S. dollar depreciates relative to these currencies, in particular with respect to the Euro. Currency exchange rate fluctuations affect our results of operations because our reporting currency is the U.S. dollar, in which we receive the major portion of our revenues, while, more importantly, we incur a significant portion of our costs in currencies other than the U.S. dollar. Certain significant costs incurred by us, such as a significant part of our manufacturing costs, selling, general and administrative (“SG&A”) expenses, and R&D expenses, and — in certain jurisdictions — depreciation charges are incurred in the currencies of the jurisdictions in which our operations are located, which mainly includes the Euro zone. Our effective average exchange rate, which reflects actual exchange rate levels combined with the impact of cash flow hedging programs, was $1.31 to €1.00 in 2012, compared to $1.37 to €1.00 in 2011.

In order to reduce the exposure of our financial results to the fluctuations in exchange rates, our principal strategy has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of purchases from our suppliers denominated in U.S. dollars and to reduce the weight of the other costs, including labor costs and depreciation, denominated in Euros and in other currencies. In order to further reduce our exposure to U.S. dollar exchange rate fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of the cost of goods sold, most of the R&D expenses and certain SG&A expenses located in the Euro zone and in Sweden. During the second quarter of 2012, we started to hedge certain manufacturing costs denominated in Singapore dollars. No assurance can be given that our hedging transactions will prevent us from incurring higher Euro-denominated manufacturing costs when translated into our U.S. dollar-based accounts in the event of a weakening of the U.S. dollar. See “Item 5. Operating and Financial Review and Prospects — Impact of Changes in Exchange Rates” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Our results of operations and financial condition could be adversely impacted by a negative resolution of the economic and sovereign debt crisis in Europe.

The financial markets and global economic conditions have been negatively impacted by the European sovereign debt crisis that began in 2010 and has spread to several Euro zone countries, in particular Greece, Ireland, Italy, Portugal and Spain. This resulted in a sovereign liquidity crisis, with a significant increase in the interest rates on the national debt of several Euro zone countries and the downgrading of several sovereign debt ratings, which has contributed to a general slowdown of economic growth and higher debt levels. While it appears that the financial crisis in the Euro zone may be beginning to ease, we cannot exclude a potential further deterioration of economic conditions, in particular in the event of a default by certain countries. It cannot be ruled out that the default of a Euro zone member could eventually even lead to its exit from the Euro and the readoption of a national currency.

We have significant operations in Europe, in particular our manufacturing activities in France, Italy and Malta, where our total net assets, equivalent to total assets less total liabilities, were approximately $4 billion as of December 31, 2012. In the event of the re-denomination of currencies of these countries, the most significant potential impact could be a material devaluation of their values against the U.S. dollar, which could lead to a significant reduction of the value of our assets when expressed in U.S. dollars.

We generate significant cash flows in the ordinary course of our business and, as a result, maintain significant cash and cash equivalents with European financial institutions. As of December 31, 2012, our cash and cash equivalents held by financial institutions in the Euro zone totaled $829 million. While we follow internal treasury guidelines to minimize concentration and the resulting risk, in the event of a major default of European sovereign debt, particularly in France or Italy, we could suffer a negative impact on our liquidity and/or be required to recognize significant losses.

Furthermore, we have a significant amount of receivables relating to tax credits, refunds and funding from the governments of certain countries in the Euro zone. As of December 31, 2012, we had $470 million of long-term government receivables almost entirely from France and Italy. See Note 12 to our Consolidated Financial Statements. In the event of budgetary constraints imposed to meet deficit reduction targets in these countries, governments may not meet their prior commitments, which could require us to recognize a significant loss.

Finally, in the event of a further deterioration of the sovereign financial situation, we may face difficulties obtaining sufficient financing or we may experience higher borrowing costs than those which we currently pay on our borrowings from the European Investment Bank, which is currently our major lender.

Because we own manufacturing facilities, our capital needs are high compared to those competitors who do not produce their own products.

As a result of our choice to maintain control of a certain portion of our advanced and proprietary manufacturing technologies to better serve our customer base, significant amounts of capital to maintain or upgrade our facilities could be required in the future. We monitor our capital expenditures taking into consideration factors such as trends in the semiconductor market and capacity utilization. While our capital expenditures decreased in 2012 to $476 million, net of proceeds from sales, compared to $1.26 billion in 2011, these expenditures may increase in the future and if we are required to upgrade or expand the capacity of our manufacturing facilities in order to respond to customer demand for increased quantities or for new more advanced products in certain segments we serve. There is no assurance that future market demand and products required by our customers will meet our expectations. Failure to invest appropriately or in a timely manner could have a material adverse effect on our business, and results of operations. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources”.

We may also need additional funding in the coming years to finance our investments, to purchase other companies or technologies developed by third parties or to refinance our maturing indebtedness.

In an increasingly complex and competitive environment, we may need to invest in other companies, in IP and/or in technology developed either by us or by third parties to maintain or improve our position in the market or to complement or expand our existing business. In addition, a portion of the outstanding cash is devoted to redeem maturing indebtedness and will also be required to support restructuring costs linked to our decision to exit ST-Ericsson. Although there are no current plans to issue new debt or equity, the foregoing may also require us to secure additional financing, including through the issuance of debt, equity, or both; the timing and the size of any new share or bond offering would depend upon market conditions as well as a variety of factors, and any such transaction or any announcement concerning such a transaction could materially impact the market price of our common shares. If we are unable to access such capital on acceptable terms, this may adversely affect our business and results of operations.

Our R&D efforts are expensive and dependent on technology alliances, and our business, results of operations and prospects could be materially adversely affected by the failure or termination of such alliances.

We are dependent on alliances to develop or access new technologies, particularly in light of the high levels of investment required for R&D activities, and there can be no assurance that these alliances will be successful.

Since 2009, we have been a member of the International Semiconductor Development Alliance (“ISDA”), a technology alliance led by IBM and in which Samsung and Global Foundries are our main co-development partners, to develop complementary metal on silicon oxide semiconductor (“CMOS”) process technology used in semiconductor development and manufacturing up to 20nm node. This alliance also includes collaboration with IBM on IP development and platforms to speed the design of System on Chip (“SoC”) devices in CMOS process technologies. We recently extended and amended our participation in this alliance to cover further developments up to 7nm node. See “Item 4. Information on the Company — Research and Development”.

To support our proprietary R&D investments for derivative technology investments and investments in cooperative R&D ventures such as the ISDA alliance, we have benefited from state funding, such as Crolles Nano-2012 frame agreement (the “Nano-2012 agreement”) signed by us with the French government in 2009, covering the period from 2009 to 2012. We are currently negotiating with the French government to establish a new Crolles Nano frame agreement for the period 2013 to 2017. There can be no assurance that our discussions for a new frame agreement will provide for a continuation of a program funded by the French government or that any such funding will ultimately be received. If no agreement is reached, we could experience a material adverse effect on our business and financial results and may not be able to continue our participation in certain technology alliances.

Our R&D alliances provide us with a number of important benefits, including the sharing of risks and costs, reductions in our own capital requirements, acquisitions of technical know-how and access to additional production capacities. In addition, they contribute to the fast acceleration of semiconductor process technology development while allowing us to lower our development and manufacturing costs. However, there can be no assurance that alliances will be successful and allow us to develop and access new technologies in due time, in a cost-effective manner and/or to meet customer demands. Certain companies develop their own process technologies, which may be more advanced than the technologies we develop through our cooperative alliances. Furthermore, if these alliances terminate before our intended goals are accomplished we may lose our investment, or incur additional unforeseen costs, and our business, results of operations and prospects could be materially adversely affected. In addition, if we are unable to develop or otherwise access new technologies independently, we may fail to keep pace with the rapid technology advances in the semiconductor industry, our participation in the overall semiconductor industry may decrease and we may also lose market share in the markets addressed by our products.

We also receive a material amount of R&D tax credits in France, which are directly linked to the amount spent for our R&D activities. In 2012, we booked $152 million, which reflected amounts relating to our R&D activities in France during 2012. In 2011 and 2010, the amounts were $159 and $146 million, respectively. In the event of a change in the French R&D tax credit regime, this could affect our continued ability to invest in R&D as we currently do and we could experience a material adverse effect on our business and financial results.

If we fail to meet the condition and approval requirements applicable to public funding we have received in the past, we may face demands for repayment, which may increase our costs and impact our results of operations.

Like many other manufacturers operating in Europe, we have benefited from governmental funding for R&D expenses and certain industrialization costs. We have entered into public funding agreements in France and Italy, which set forth the parameters for state support to us under selected programs. These funding agreements require compliance with EU regulations and approval by EU authorities. These agreements also set forth certain conditions relating to the nature and amount of the investments, as well as employment. See “Item 4. Information on the Company — Public Funding”.

The application for and implementation of such grants often involves compliance with extensive regulatory requirements including, in the case of subsidies to be granted within the EU, notification to the European Commission by the member state making the contemplated grant prior to disbursement and receipt of required EU approval. In addition, compliance with project-related ceilings on aggregate subsidies defined under EU law often involves highly complex economic evaluations. Furthermore, public funding arrangements are generally subject to annual and project-by-project reviews and approvals. If we fail to meet applicable formal or other requirements, we may under certain circumstances be required to refund previously received amounts, which could have a material adverse effect on our results of operations. In addition, if we do not complete projects for which public funding has been approved, or meet certain objectives set forth in funding programs, which may include certain conditions of employment and manufacturing capacity to be met, we may be required to repay any advances received for ongoing milestones, which may lead to a material adverse effect on our results of operations and our financial position. See “Item 4. Information on the Company — Public Funding”.

Our operating results may vary significantly from quarter to quarter and annually and may differ significantly from our expectations or guidance.

Our operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability or lead to significant variability of operating results. These factors include, among others, the cyclicality of the semiconductor and electronic systems industries, capital requirements, inventory management, availability of funding, competition, new product developments, technological changes and manufacturing problems. For example, if anticipated sales or shipments do not occur when expected, expenses and inventory levels in a given quarter can be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, may be adversely affected. In addition, our effective tax rate currently takes into consideration certain favorable tax rates and incentives, which, in the future, may not be available to us. See Note 21 to our Consolidated Financial Statements.

A number of other factors could lead to fluctuations in quarterly and annual operating results, including:

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performance of our key customers in the markets they serve;

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order cancellations or reschedulings by customers;

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excess inventory held by customers leading to reduced bookings or product returns by key customers;

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manufacturing capacity and utilization rates;

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restructuring and impairment charges;

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losses on equity-method investments;

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fluctuations in currency exchange rates, particularly between the U.S. dollar and other currencies in jurisdictions where we have activities;

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IP developments;

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receipt of governmental funding;

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changes in distribution and sales arrangements;

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failure to win new design projects;

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manufacturing performance and yields;

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product liability or warranty claims;

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litigation;

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taxation;

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acquisitions or divestitures;

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problems in obtaining adequate raw materials or production equipment on a timely basis;

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property loss or damage or interruptions to our business, including as a result of fire, natural disasters or other disturbances at our facilities or those of our customers and suppliers that may exceed the amounts recoverable under our insurance policies; and

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changes in the market value or yield of the financial instruments in which we invest our liquidity.

Unfavorable changes in any of the above factors have in the past and may in the future adversely affect our operating results. Furthermore, in periods of industry overcapacity or when our key customers encounter difficulties in their end markets, orders are more exposed to cancellations, reductions, price renegotiation or postponements, which in turn reduce our management’s ability to forecast the next quarter or full year production levels, revenues and margins. For these reasons and others that we may not yet have identified, our revenues and operating results may differ materially from our expectations or guidance as visibility is reduced. See “Item 4. Information on the Company — Backlog”.

Our business is dependent in large part on continued growth in the industries and segments into which our products are sold and on our ability to attract and retain new customers. A market decline in any of these industries or our inability to attract new customers could have a material adverse effect on our results of operations.

We derive and expect to continue to derive significant sales from the telecommunications, consumer, computer peripherals, automotive and industrial markets. Growth of demand in these market segments has fluctuated significantly in the past, and may in the future, based on numerous factors, including:

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spending levels of the market segment participants;

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reduced demand resulting from a drop in consumer confidence and/or a deterioration of general economic conditions;

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development of new consumer products or applications requiring high semiconductor content;

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evolving industry standards; and

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the rate of adoption of new or alternative technologies.

We cannot predict the rate, or the extent to which, the telecommunications, consumer, computer peripherals, automotive and industrial markets will grow. Changes in these markets, coupled with a lower penetration of certain of our customers, in particular in Wireless, resulted in slower growth and a decline in demand for our products, which had a material adverse effect on our business, financial condition and results of operations.

In addition, our spending on process and product development well ahead of market acceptance could have a material adverse effect on our business, financial condition and results of operations if projected industry growth rates do not materialize as forecasted.

Our business is dependent upon our ability to attract and retain new customers who are successful in identifying and serving new potential, fast-growing markets. The competition for such new customers or new markets is intense. There can be no assurance that we will be successful in attracting and retaining new customers or be able to identify early on any new market prospects. Our failure to do so could materially adversely affect our business, financial position and results of operations.

Our business is also dependent upon continuing to supply existing large customers, their business success and the fit of our product offering with their products road-map. Our customers’ products strategy may change from time to time and we have no certainty that our business, financial position and results of operations will not be affected.

Disruptions in our relationships with any one of our key customers, and/or material changes in their strategy or financial condition, could adversely affect our results of operations.

A substantial portion of our sales is derived from several large customers, some of whom have entered into strategic agreements with us. However, in 2012, none of our customers represented 10% or more of our revenues. We cannot guarantee that our largest customers will continue to book the same level of sales with us that they have in the past, or will not solicit alternative suppliers or will continue to succeed in the markets they serve. Many of our key customers operate in cyclical businesses that are also highly competitive, and their own demands and market positions may vary considerably. In recent years, certain customers of the semiconductor industry have experienced consolidation and have vertically integrated their businesses. Such consolidations and vertical integrations may impact our business in the sense that our relationships with the new entities could be either reinforced or jeopardized pursuant thereto. Our customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates or modify their bookings. We cannot guarantee that we will be able to maintain or enhance our market share with our key customers or distributors. If we were to lose important design wins for our products with our key customers, or if any key customer or distributor were to reduce or change its bookings, seek alternate suppliers, increase its product returns or become unable or fail to meet its payment obligations, our business, financial condition and results of operations could be materially adversely affected. If customers do not purchase products made specifically for them, we may not be able to resell such products to other customers or require the customers who have ordered these products to pay a cancellation fee. Furthermore, developing industry trends, including customers’ use of outsourcing and new and revised supply chain models, may reduce our ability to forecast the purchase date for our products and understand evolving customer demand, thereby affecting our revenues and working capital requirements. For example, pursuant to industry developments, some of our products are required to be delivered on consignment to customer sites with recognition of revenue delayed until the earlier of such moment when the customer chooses to take delivery of our products from our consignment stock and the expiry of a defined period of time.

Our operating results can also vary significantly due to impairment of goodwill and other intangible assets incurred in the course of acquisitions and equity investments, as well as to impairment of tangible assets due to changes in the business environment.

Our operating results can also vary significantly due to impairment of goodwill, other intangible assets and equity investments booked pursuant to acquisitions, joint venture agreements and the purchase of technologies and licenses from third parties. Because the market for our products is characterized by rapidly changing technologies, significant changes in the semiconductor industry, and the potential failure of our business initiatives, our future cash flows may not support the value of goodwill and other intangibles registered in our consolidated balance sheet. We are required to perform an impairment test of our goodwill on an annual basis, which is done in the third quarter. In addition, we are also required to assess the carrying values of intangible and tangible assets when impairment indicators exist. As a result of such tests, we could be required to book an impairment charge in our consolidated statement of income if the carrying value in our consolidated balance sheet is in excess of the fair value. The amount of any potential impairment is not predictable as it depends on our estimates of projected market trends, results of operations and cash flows. Any potential impairment, if required, could have a material adverse impact on our results of operations.

We performed our annual impairment test in the third quarter of 2012 and, with the exception of our Wireless business discussed below, incurred no charge as the value generated by those reporting units exceeded the carrying value of their assets. We also performed an impairment test of our Wireless assets on a quarterly basis as a result of the ongoing losses suffered in that segment, and booked an impairment charge in the third quarter of $690 million. As part of our new strategic plan announced on December 10, 2012, we decided to exit the ST-Ericsson joint venture. Following this decision, we performed an additional impairment test and booked an additional impairment charge of $544 million, leading to a total impairment charge in 2012 in the amount of $1,234 million relating to our goodwill and other intangible assets in the Wireless business. See “— ST-Ericsson experienced declining revenues and an increase in operating losses in 2012 leading to our decision to exit the ST-Ericsson joint venture” and “Item 5. Operating and Financial Review and Prospects — Overview — Critical Accounting Policies Using Significant Estimates — Impairment of goodwill”, “— Intangible assets subject to amortization” and “— Income (loss) on Equity–method Investments”.

Because we depend on a limited number of suppliers for raw materials and certain equipment, we may experience supply disruptions if suppliers interrupt supply, increase prices or experience material adverse changes in their financial condition.

Our ability to meet our customers’ demand to manufacture our products depends upon obtaining adequate supplies of quality raw materials on a timely basis. A number of materials are available only from a limited number of suppliers, or only from a limited number of suppliers in a particular region. In addition, we purchase raw materials such as silicon wafers, lead frames, mold compounds, ceramic packages and chemicals and gases from a number of suppliers on a just-in-time basis, as well as other materials such as copper and gold whose prices on the world markets have fluctuated significantly during recent periods. Although supplies for the raw materials we currently use are adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. In addition, the costs of certain materials, such as copper and gold, have increased due to market pressures and we may not be able to pass on such cost increases to the prices we charge to our customers. We also purchase semiconductor manufacturing equipment from a limited number of suppliers and, because such equipment is complex, it is difficult to replace one supplier with another or to substitute one piece of equipment for another. In addition, suppliers may extend lead times, limit our supply or increase prices due to capacity constraints or other factors. Furthermore, suppliers tend to focus their investments on providing the most technologically advanced equipment and materials and may not be in a position to address our requirements for equipment or materials of older generations. Shortages of supplies have in the past impacted and may in the future impact the semiconductor industry, in particular with respect to silicon wafers due to increased demand and decreased production, which we experienced as a result of certain natural disasters that have occurred in recent years. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurance that we will not encounter these problems in the future. Our quarterly or annual results of operations would be adversely affected if we were unable to obtain adequate supplies of raw materials or equipment in a timely manner or if there were significant increases in the costs of raw materials or problems with the quality of these raw materials.

If our outside contractors fail to perform, this could adversely affect our ability to exploit growth opportunities.

We currently use outside contractors, both for front and back-end activities, and we will increasingly rely on foundries for a portion of our needs. The foundries we contract with are primarily manufacturers of high-speed

complementary metal-on silicon oxide semiconductor (“HCMOS”) wafers, while our back-end subcontractors engage in the assembly and testing of a wide variety of packaged devices. If our outside suppliers are unable to satisfy our demand, or experience manufacturing difficulties, delays or reduced yields, our results of operations and ability to satisfy customer demand could suffer. Our internal manufacturing costs include depreciation and other fixed costs, while costs for products outsourced are based on market conditions. Prices for these services also vary depending on capacity utilization rates at our suppliers, quantities demanded, product technology and geometry. Furthermore, these outsourcing costs can vary materially from quarter to quarter and, in cases of industry shortages, they can increase significantly further, negatively impacting our gross margin and our results of operations.

Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities, disruptions or inefficient implementation of production changes that can significantly increase our costs and delay product shipments to our customers.

Our manufacturing processes are highly complex, require advanced and increasingly costly equipment and are continuously being modified or maintained in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields, interrupt production or result in losses of products in process. As system complexity and production changes have increased and sub-micron technology has become more advanced using ever finer geometries, manufacturing tolerances have been reduced and requirements for precision have become even more demanding. Although in the past few years we have significantly enhanced our manufacturing capability in terms of efficiency, precision and capacity, we have from time to time experienced bottlenecks and production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry. We cannot guarantee that we will not experience bottlenecks, production or transition difficulties in the future. In addition, during past periods of high demand for our products, our manufacturing facilities have operated at high capacity, which has led to production constraints. Furthermore, if production at a manufacturing facility is interrupted, we may not be able to shift production to other facilities on a timely basis, or customers may purchase products from other suppliers. In either case, the loss of revenue and damage to the relationship with our customer could be significant.

We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others.

We depend on our ability to obtain patents and other IP rights covering our products and their design and manufacturing processes. We intend to continue to seek patents on our inventions relating to product designs and manufacturing processes. However, the process of seeking patent protection can be long and expensive, and we cannot guarantee that we will receive patents from currently pending or future applications. Even if patents are issued, they may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in some countries. Competitors may also develop technologies that are protected by patents and other IP and therefore either be unavailable to us or be made available to us subject to adverse terms and conditions. We have in the past used our patent portfolio to negotiate broad patent cross-licenses with many of our competitors enabling us to design, manufacture and sell semiconductor products, without fear of infringing patents held by such competitors. We may not, however, in the future be able to obtain such licenses or other rights to protect necessary IP on favorable terms for the conduct of our business, and such failure may adversely impact our results of operations.

We have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other IP rights. Some of those claims are made by so called non-practicing entities against which we are unable to assert our own broad patent portfolio to lever licensing terms and conditions. Competitors with whom we do not have patent cross-license agreements may also develop technologies that are protected by patents and other IP rights and which may be unavailable to us or only made available on unfavorable terms and conditions. We may therefore become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. We are currently involved in several lawsuits. See “Item 8. Financial Information — Legal Proceedings”. IP litigation and specifically litigation in the U.S. International Trade Commission (“ITC”) may also involve our customers who in turn may seek indemnification from us should we not prevail and/or who may decide to curtail their orders for those of our products over which claims have been asserted before the ITC. Such lawsuits may therefore have a material adverse effect on our business. We may be forced to stop producing substantially all or some of our products or to license the underlying technology upon economically unfavorable terms and conditions or we may be required to pay damages for the prior use of third party IP and/or face an injunction.

The outcome of IP litigation, given the complex technical issues it involves, is inherently uncertain and may divert the efforts and attention of our management and other specialized technical personnel. Furthermore, litigation can result in significant costs and, if not resolved in our favor, could materially and adversely affect our business, financial condition and results of operations.

We may be faced with product liability or warranty claims.

Despite our corporate quality programs and commitment, our products may not in each case comply with specifications or customer requirements. We may face product liability or warranty claims based on epidemic, security or delivery failures. Although our general practice, in line with industry standards, is to contractually limit our liability to the repair, replacement or refund of defective products, warranty or product liability claims could result in significant expenses relating to compensation payments or other indemnification to maintain good customer relationships if a customer threatens to terminate or suspend our relationship pursuant to a defective product supplied by us. No assurance can be made that we will be successful in maintaining our relationships with customers with whom we incur quality problems, which could have a material adverse effect on our business. Furthermore, we could incur significant costs and liabilities if litigation occurs to defend against such claims and if damages are awarded against us. In addition, it is possible for one of our customers to recall a product containing one of our parts. Costs or payments we may make in connection with warranty claims or product recalls may adversely affect our results of operations. There is no guarantee that our insurance policies will be available or adequate to protect us against such claims.

Our information technology systems are subject to security breaches and other cybersecurity incidents.

We may face attempts by others to penetrate our information technology systems and networks to misappropriate our proprietary information and technology or interrupt our business. To the extent that any disruptions or security breaches, which are not addressed by the preventative measures we consistently seek to implement, result in a loss or damage to our data, or inappropriate disclosure of proprietary information, this could ultimately harm our business.

Some of our production processes and materials are environmentally sensitive, which could expose us to liability and increase our costs due to environmental regulations and laws or because of damage to the environment.

We are subject to many environmental laws and regulations wherever we operate that govern, among other things, the use, storage, discharge and disposal of chemicals, gases and other hazardous substances used in our manufacturing processes, air emissions, waste water discharges, waste disposal, as well as the investigation and remediation of soil and ground water contamination.

A number of environmental requirements in the European Union, including some that have only recently come into force, affect our business. See “Item 4. Information on the Company — Environmental Matters”. These requirements are partly under revision by the European Union and their potential impacts cannot currently be determined in detail. Such regulations, however, could adversely affect our manufacturing costs or product sales by requiring us to acquire costly equipment, materials or greenhouse gas allowances, or to incur other significant expenses in adapting our manufacturing processes or waste and emission disposal processes. We are not in a position to quantify specific costs, in part because these costs are part of our business process. Furthermore, environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of operations. As with other companies engaged in similar activities, any failure by us to control the use of, or adequately restrict the discharge of, chemicals or hazardous substances could subject us to future liabilities. Any specific liabilities we identify as probable would be reflected in our consolidated balance sheet. To date, we have not identified any such probable liabilities and have therefore not booked reserves for any environmental risks.

Loss of key employees could hurt our competitive position.

As is common in the semiconductor industry, success depends to a significant extent upon our key senior executives and R&D, engineering, marketing, sales, manufacturing, support and other personnel. Our success also depends upon our ability to continue to attract, retain and motivate qualified personnel. The competition for such employees is intense, and the loss of the services of any of these key personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on us.

We operate in many jurisdictions with highly complex and varied tax regimes. Changes in tax rules or the outcome of tax assessments and audits could cause a material adverse effect on our results.

We operate in many jurisdictions with highly complex and varied tax regimes. Changes in tax rules or the outcome of tax assessments and audits could have a material adverse effect on our results in any particular quarter. Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimated tax provisions due to new events. We currently receive certain tax benefits in some countries, and these benefits may not be available in the future due to changes in the local jurisdictions. As a result, our effective tax rate could increase in the coming years.

In line with our strategic repositioning of our product portfolio, the acquisition or divestiture of businesses in different jurisdictions could materially affect our effective tax rate.

We evaluate our deferred tax asset position and the need for a valuation allowance on a regular basis. This assessment requires the exercise of judgment on the part of our management with respect to, among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax assets is dependent upon, among other things, our ability to generate future taxable income that is sufficient to utilize loss carry-forwards or tax credits before their expiration or our ability to implement prudent and feasible tax planning strategies. The recorded amount of total deferred tax assets could be reduced, resulting in a loss in our consolidated income statement, a decrease in our total assets and, consequently, in our stockholders’ equity, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in management’s assessment or due to other factors, such as divestitures, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize tax loss and credit carry-forwards in the future. For example, our decision to exit the ST-Ericsson joint venture led to additional valuation allowances recorded on certain deferred tax assets related to ST-Ericsson, which are no longer supported by tax planning strategies. See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Income tax expense”. A change in the estimated amounts and the character of the future result may require additional valuation allowances, resulting in a negative impact on our consolidated income statement.

We are subject to the possibility of loss contingencies arising out of tax claims, assessment of uncertain tax positions and provisions for specifically identified income tax exposures. There are currently tax audits ongoing in certain of our jurisdictions, which could result in material adjustments in our tax position. There can be no assurance that we will be successful in resolving potential tax claims that arose or can arise from these audits. We have booked provisions on the basis of the best current understanding; however, we could be required to book additional provisions in future periods for amounts that cannot be assessed at this stage. Our failure to do so and/or the need to increase our provisions for such claims could have a material adverse effect on our consolidated income statement and our financial position.

We are required to prepare financial statements under IFRS in addition to Consolidated Financial Statements under U.S. GAAP, and such dual reporting may impair the clarity of our financial reporting.

We use U.S. GAAP as our primary set of reporting standards. Applying U.S. GAAP in our financial reporting is designed to ensure the comparability of our results to those of our competitors, as well as the continuity of our reporting, thereby providing our stakeholders and potential investors with a clear understanding of our financial performance. As we are incorporated in The Netherlands and our shares are listed on Euronext Paris and on the Borsa Italiana, we are subject to EU regulations requiring us to also report our results of operations and financial statements using IFRS.

As a result of the obligation to report our financial statements under IFRS, we prepare our results of operations using both U.S. GAAP and IFRS, which are currently not consistent. Such dual reporting can materially increase the complexity of our financial communications. Our financial condition and results of operations reported in accordance with IFRS will differ from our financial condition and results of operations reported in accordance with U.S. GAAP, which could give rise to confusion in the marketplace.

If our internal control over financial reporting fails to meet the requirements of Section 404 of the Sarbanes-Oxley Act, it may have a materially adverse effect on our stock price.

The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules that require us to include a management report assessing the effectiveness of our internal control over financial reporting in our annual report on Form 20-F. In addition, we must also include an attestation by our independent registered public

accounting firm regarding the effectiveness of our internal control over financial reporting. We have successfully completed our Section 404 assessment and received the auditors’ attestation as of December 31, 2012. However, in the future, if we fail to complete a favorable assessment from our management or to obtain an “unqualified” auditors’ attestation, we may be subject to regulatory sanctions or may suffer a loss of investor confidence in the reliability of our financial statements, which could lead to an adverse effect on our stock price.

The interests of our controlling shareholders, which are in turn controlled respectively by the French and Italian governments, may conflict with investors’ interests.

We have been informed that as of December 31, 2012, STMicroelectronics Holding N.V. (“ST Holding”), owned 250,704,754 shares, or approximately 27.5%, of our issued common shares. ST Holding is therefore effectively in a position to control actions that require shareholder approval, including corporate actions, the election of our Supervisory Board and our Managing Board and the issuance of new shares or other securities. On June 1, 2012, STMicroelectronics Holding II B.V. (“ST Holding II”) merged with ST Holding, as a result of which, ST Holding acquired all of the assets and liabilities of ST Holding II, including our common shares held by ST Holding II, by universal transfer of title, and ST Holding II ceased to exist.

We have also been informed that the shareholders’ agreement among ST Holding’s shareholders (the “STH Shareholders’ Agreement”), to which we are not a party, governs relations between our current indirect shareholders, Commissariat à l’Energie Atomique et aux Energies Alternatives (“CEA”), Fonds Stratégique d’Investissement (“FSI”), FT1CI, a company jointly controlled by CEA and FSI, and the Italian Ministero dell’Economia e delle Finanze (the “Ministry of the Economy and Finance”). Each of these shareholders is ultimately controlled by the French or Italian government. See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders”. The STH Shareholders’ Agreement includes provisions requiring the unanimous approval by shareholders of ST Holding before ST Holding can make any decision with respect to certain actions to be taken by us. Furthermore, as permitted by our Articles of Association, the Supervisory Board has specified selected actions by the Managing Board that require the approval of the Supervisory Board. See “Item 6. Directors, Senior Management and Employees”. These requirements for the prior approval of various actions to be taken by us and our subsidiaries may give rise to a conflict of interest between our interests and investors’ interests, on the one hand, and the interests of the individual shareholders approving such actions, on the other. Our ability to issue new shares or other securities may be limited by the existing shareholders’ desire to maintain their proportionate shareholding at a certain minimum level and our ability to buy back shares may be limited by our existing shareholders due to a Dutch law that may require shareholders that own 30% or more of our voting rights to launch a tender offer for our outstanding shares. Dutch law, however, requires members of our Supervisory Board to act independently in supervising our management and to comply with applicable corporate governance standards.

Our shareholder structure and our preference shares may deter a change of control.

We have an option agreement (the “Option Agreement”) with an independent foundation, Stichting Continuiteït ST (the “Stichting”), whereby we could issue a maximum of 540,000,000 preference shares in the event of actions considered hostile by our Managing Board and Supervisory Board, such as a creeping acquisition or an unsolicited offer for our common shares, which are unsupported by our Managing Board and Supervisory Board and which the board of the Stichting determines would be contrary to the interests of our Company, our shareholders and our other stakeholders. See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders — Shareholders’ Agreement — Preference Shares”.

No preference shares have been issued to date. The effect of the issuance of preference shares pursuant to the Option Agreement may be to deter potential acquirers from effecting an unsolicited acquisition resulting in a change of control or otherwise taking actions considered hostile by our Managing Board and Supervisory Board. In addition, our shareholders have authorized us to issue additional capital within the limits of the authorization by our shareholders’ meeting, subject to the requirements of our Articles of Association, without the need to seek a specific shareholder resolution for each capital increase. See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders — Shareholders’ Agreement — Preference Shares”.

Our direct or indirect shareholders may sell our existing common shares or issue financial instruments exchangeable into our common shares at any time. In addition, substantial issuances by us of new common shares or convertible bonds could cause our common share price to drop significantly.

The STH Shareholders’ Agreement, to which we are not a party, between respectively CEA, FSI, FT1CI, our French Shareholder controlled by FSI and CEA, and the Ministry of the Economy and Finance, our Italian

Shareholder, permits our respective French and Italian indirect shareholders to cause ST Holding to dispose of its stake in us at any time from their current level, thereby reducing the current level of their respective indirect interests in our common shares. Such disposals could be made by way of sales of our shares or through issuance of financial instruments exchangeable for our shares, equity swaps or structured finance transactions. The details of the STH Shareholders’ Agreement, as reported by its parties, are further explained in “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders”. An announcement with respect to one or more of such dispositions could be made at any time without our advance knowledge.

Sales of our common shares or the issuance of financial instruments exchangeable into our common shares or any announcements concerning a potential sale by ST Holding, FT1CI, FSI, CEA or the Ministry of the Economy and Finance, could materially impact the market price of our common shares depending on the timing and size of such sale, market conditions as well as a variety of factors.

In addition, substantial issuances by us of new common shares or convertible bonds could cause our common share price to drop significantly as a result of substantial dilution in the percentage of our shares held by our then existing shareholders. The issuance of common stock for acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our shareholders, and might have an adverse effect on any trading market for our common stock.

Because we are subject to the corporate law of The Netherlands, U.S. investors might have more difficulty protecting their interests in a court of law or otherwise than if we were a U.S. company.

Our corporate affairs are governed by our Articles of Association and by the laws governing corporations incorporated in The Netherlands. The corporate affairs of each of our consolidated subsidiaries are governed by the Articles of Association and by the laws governing such corporations in the jurisdiction in which such consolidated subsidiary is incorporated. The rights of the investors and the responsibilities of members of our Managing and Supervisory Boards under Dutch law are not as clearly established as under the rules of some U.S. jurisdictions. Therefore, U.S. investors may have more difficulty in protecting their interests in the face of actions by our management, members of our Supervisory Board or our controlling shareholders than U.S. investors would have if we were incorporated in the United States.

Our executive offices and a substantial portion of our assets are located outside the United States. In addition, ST Holding and most members of our Managing and Supervisory Boards are residents of jurisdictions other than the United States and Canada. As a result, it may be difficult or impossible for shareholders to effect service within the United States or Canada upon us, ST Holding, or members of our Managing or Supervisory Boards. It may also be difficult or impossible for shareholders to enforce outside the United States or Canada judgments obtained against such persons in U.S. or Canadian courts, or to enforce in U.S. or Canadian courts judgments obtained against such persons in courts in jurisdictions outside the United States or Canada. This could be true in any legal action, including actions predicated upon the civil liability provisions of U.S. securities laws. In addition, it may be difficult or impossible for shareholders to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon U.S. securities laws.

We have been advised by Dutch counsel that the United States and The Netherlands do not currently have a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. As a consequence, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws of the United States, will not be enforceable in The Netherlands. However, if the party in whose favor such final judgment is rendered brings a new suit in a competent court in The Netherlands, such party may submit to The Netherlands court the final judgment that has been rendered in the United States. If The Netherlands court finds that the jurisdiction of the federal or state court in the United States has been based on grounds that are internationally acceptable and that proper legal procedures have been observed, the court in The Netherlands would, under current practice, give binding effect to the final judgment that has been rendered in the United States unless such judgment contradicts The Netherlands’ public policy.

Removal of our common shares from the CAC 40 on Euronext Paris, the FTSE MIB on the Borsa Italiana or the PHLX Semiconductor Sector Index (“SOX”) with respect to the U.S. markets could cause the market price of our common shares to drop.

Our common shares have been included in the CAC 40 index on Euronext Paris since November 12, 1997; the FTSE MIB index (which replaced the S&P/MIB on June 1, 2009), on the Italian Stock Exchange, since March 18, 2002; and the SOX since June 23, 2003. However, our common shares could be removed from the

CAC 40, the FTSE MIB or the SOX at any time if, for a sustained period of time, our market capitalization, liquidity or trading volume were to fall below the required thresholds for the respective indices or our shares were to trade below a certain price. In addition, we could be removed from one or more of these indices in the event of a delisting of our shares from one or more of the stock exchanges where we are currently listed or if we were to decide to pursue a delisting on one of the three stock exchanges on which we maintain a listing as part of the measures we may from time to time consider to simplify our administrative and overhead expenses. Certain investors will only invest funds in companies that are included in one of these indexes. Any such removal or the announcement thereof could cause the market price of our common shares to drop.

Item 4.

Information on the Company

History and Development of the Company

STMicroelectronics N.V. was formed and incorporated in 1987 and resulted from the combination of the semiconductor business of SGS Microelettronica (then owned by Società Finanziaria Telefonica (S.T.E.T.), an Italian corporation) and the non-military business of Thomson Semiconducteurs (then owned by the former Thomson-CSF, now Thales, a French corporation). We completed our initial public offering in December 1994 with simultaneous listings on the Bourse de Paris (now known as “Euronext Paris”) and the New York Stock Exchange (“NYSE”). In 1998, we listed our shares on the Borsa Italiana S.p.A. (“Borsa Italiana”). Until 1998, we operated as SGS-Thomson Microelectronics N.V. We are organized under the laws of The Netherlands. We have our corporate legal seat in Amsterdam, The Netherlands, and our head offices at WTC Schiphol Airport, Schiphol Boulevard 265, 1118 BH Schiphol Airport, The Netherlands. Our telephone number there is +31-20-654-3210. Our headquarters and operational offices are managed through our wholly owned subsidiary, STMicroelectronics International N.V., and are located at 39 Chemin du Champ des Filles, 1228 Plan-Les-Ouates, Geneva, Switzerland. Our main telephone number there is +41-22-929-2929. Our agent for service of process in the United States related to our registration under the U.S. Securities Exchange Act of 1934, as amended, is Corporation Service Company (CSC), 80 State Street, Albany, New York, 12207. Our operations are also conducted through our various subsidiaries, which are organized and operated according to the laws of their country of incorporation, and consolidated by STMicroelectronics N.V.

Business Overview

We are a global independent semiconductor company that designs, develops, manufactures and markets a broad range of semiconductor products used in a wide variety of applications, including automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation and control systems. Semiconductors are the basic building blocks used to create an increasing variety of electronic products and systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor process and design technologies have led to smaller, more complex and more reliable devices at a lower cost per function. As performance has increased and size and unitary cost have decreased, semiconductors have expanded beyond their original primary applications (i.e. computer systems) to applications such as telecommunication systems, consumer goods, automotive products and industrial automation and control systems. In addition, system users and designers have demanded systems with more functionality, higher levels of performance, greater reliability and shorter design cycle times, all in smaller packages at lower costs.

Our major customers include Apple, Blackberry, Bosch, Cisco, Continental, Delphi, Delta, Denso, Ericsson, Hewlett Packard, Hitachi, HTC, Marelli, Motorola Mobility, Nokia, Philips, Samsung, Seagate, Sony and Western Digital. We also sell our products through distributors and retailers, including Arrow Electronics, Avnet, Tomen and Yosun. The semiconductor industry has historically been cyclical and we have responded by emphasizing balance in our product portfolio, in the applications we serve and in the regional markets we address.

Although cyclical changes in production capacity in the semiconductor industry and demand for electronic systems have resulted in pronounced cyclical changes in the level of semiconductor sales and fluctuations in prices and margins for semiconductor products from time to time, the semiconductor industry has experienced substantial growth over the long-term. Factors that contribute to long-term growth include the development of new semiconductor applications, increased semiconductor content as a percentage of total system cost, emerging strategic partnerships and growth in the electronic systems industry.

We offer a broad and diversified product portfolio and develop products for a wide range of market applications to reduce our dependence on any single product, application or end market. Within our diversified portfolio, we have focused on developing products that leverage our technological strengths in creating

customized, system-level solutions with high-growth digital and mixed-signal content. Our product families are comprised of differentiated application-specific products (we define as being our dedicated analog, mixed-signal and digital application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSP”) offerings and semi-custom devices) that were organized under our Automotive (“APG”), Analog, MEMS and Microcontrollers (“AMM”), Digital (“Digital”), Power Discrete Products (“PDP”) and Wireless (“Wireless”) segments.

Our products are manufactured and designed using a broad range of manufacturing processes and proprietary design methods. We use all of the prevalent function-oriented process technologies, including CMOS, bipolar and nonvolatile memory technologies. In addition, by combining basic processes, we have developed advanced systems-oriented technologies that enable us to produce differentiated and application-specific products, including bipolar CMOS technologies (“BiCMOS”) for mixed-signal applications, and diffused metal-on silicon oxide semiconductor (“DMOS”) technology and bipolar, CMOS and DMOS (“BCD technologies”) for intelligent power applications, MEMS and embedded memory technologies. This broad technology portfolio, a cornerstone of our strategy for many years, enables us to meet the increasing demand for System-on-Chip (“SoC”) and System-in-Package (“SiP”) solutions. Complementing this depth and diversity of process and design technology is our broad IP portfolio that we also use to enter into broad patent cross-licensing agreements with other major semiconductor companies.

Our principal investment and resource allocation decisions in the semiconductor business area are for expenditures on technology R&D as well as capital investments in front-end and back-end manufacturing facilities, which are planned at the corporate level; therefore, our product segments share common R&D for process technology and manufacturing capacity for most of their products.

For information on our segments and product lines, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information”.

Results of Operations

For our 2012 Results of Operations, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information”.

Strategy

We finalized our new strategic plan and announced it on December 10, 2012, setting forth our new vision and strategy, focusing on five growth drivers where ST leads or intends to lead.

Our new strategy takes into account the evolution of the markets we are in and the environment we see in the years ahead. Our new strategy is based on leadership in our two product segments, which were effective January 1, 2013: (i) Sense & Power and Automotive Products (“SPA”) comprised of MEMS and Sensors, Power Discrete and Modules, Advanced Analog, Power Management and Standard ICs, and Automotive products; and (ii) Embedded Processing Solutions (“EPS”) comprised of General Purpose and Secure MCUs, EEPROMs, Imaging ICs and Modules, Digital ASICs and Application Processors and Digital Consumer products. Each segment will be supported by a new Sales & Marketing organization with a particular focus on our major accounts, as well as expanding our penetration of the mass market.

Going forward we will focus on five growth drivers: (i) Automotive Products, (ii) Application Processors, including Digital Consumer Products, (iii) MEMS and Sensors, (iv) Microcontrollers and (v) Smart Power. These product families are expected to experience solid growth rates driven by secular trends and are aligned with our market-leading positions and competitive advantages. Our innovative products in these areas, combined with our competitive technology and flexible and independent manufacturing capabilities, bring us even more opportunities to significantly grow and gain market share.

We intend to be more focused, leaner and better positioned to achieve our new financial model. We are targeting an operating margin of 10% or more. Our ability to meet this financial model is based upon our objective of achieving solid revenue growth and reducing our quarterly net operating expenses to the range of $600 million to $650 million by the beginning of 2014, assuming an exchange rate of $1.30 per Euro. Our decision to exit the ST-Ericsson joint venture is part of our new strategy. We believe that our strong capital structure enables us to operate as a long-term, viable supplier of semiconductor products and participate as a global leader in the industry.

Product Segments

We design, develop, manufacture and market a broad range of products used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer goods, automotive products and industrial automation and control systems. Our products include discretes, microcontrollers, Smartcard products, standard commodity components, MEMS and advanced analog products, ASICs (full-custom devices and semi-custom devices) and ASSPs for analog, digital, and mixed-signal applications.

In 2012, we ran our business along product lines and managed our revenues and internal operating performance based on the following product segments:

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Automotive Segment (“APG”);

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Digital Segment, consisting of two product lines:

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Digital Convergence Group (“DCG”); and

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Imaging, Bi-CMOS ASIC and Silicon Photonics (“IBP”).

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Analog, MEMS and Microcontrollers Sector (“AMM”), comprised of three product lines:

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Analog, MEMS & Sensors (“AMS”);

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Industrial & Power Conversion (“IPC”); and

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Microcontrollers, Memories & Secure MCUs (“MMS”).

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Power Discrete Product Segment (“PDP”);

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Wireless Segment comprised of the following product lines:

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Connectivity (“COS”);

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Smartphone and Tablet Solutions (“STS”);

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Modems (“MOD”); and

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Other Wireless, in which we report other revenues, gross margin and other items related to the Wireless business but outside the ST-Ericsson JVS.

We also design, develop, manufacture and market subsystems and modules for a wide variety of products in the telecommunications, automotive and industrial markets in our Subsystems division. Based on its immateriality, we do not report information separately for Subsystems. For a description of the main categories of products sold and/or services performed for each of the last three fiscal years, see Note 26 to our Consolidated Financial Statements.

Please refer to “Item 5. Operating and Financial Review and Prospects — Overview — Other Developments” and “Item 5. Operating and Financial Review and Prospects — Results of Operations — Segment Information” for a description of the changes effective January 1, 2013.

Automotive Segment (APG)

Our automotive products include digital and mixed signal devices that enable features like airbag controls, anti skid braking systems, vehicle stability control, ignition and injection circuits, multiplex wiring, RF and power management for body and chassis electronics, engine management, advanced safety, instrumentation, car radio and infotainment. We hold a leading position in the global IC market for automotive semiconductor products. In addition to our own products and technologies, we also work with Freescale Semiconductor on 90nm and 55nm embedded Flash Technology and other common products based on cost effective 32-bit microcontrollers for use in many automotive applications.

(i) Power Train and Safety Division. We design and manufacture smart power products to enhance performance, safety and comfort while reducing the environmental impact of the automobile. For powertrain and safety, our products are used for engine emissions and fuel economy improvements, passive and active safety systems and powertrain electrification with mixed signal power management power driver and analog signal processing. In this area, we are clearly a market leader thanks to continuous process innovation, such as the recently introduced 110nm.

(ii) Body and Audio Division. We design and manufacture power and smart power products addressing applications like air conditioning, lighting (including Xenon), car connectivity, dashboard, body and comfort. In addition, in 2012, we introduced the new generation class D power audio amplifier in both the analog and digital domains.

(iii) Micro and RF Division. We design and produce products to provide a full solution in the digital area of automotive applications. We provide a full range of 32-bit microcontrollers to cover all the different applications of the Automotive industry, from power train to passive and active safety, to body and convenience. All these products are based on Power Architecture^TM and foster our leadership in manufacturing embedded flash processes. The 55nm was introduced in production and the 40nm is currently used for new products. We also create full solutions for automotive infotainment analog including tolling, navigation and telematics applications. The increasingly complex requirements of the car/driver interface continue to create market opportunities for us to use the company’s media processing and global positioning (“GPS”) capabilities in car multimedia applications. We have the skills and competence to provide a total solution, including GPS navigation, media processing, audio amplification and signal processing. We also supply components to satellite radio applications, including base band products to market leaders in this area.

Digital Segment

The Digital Segment is comprised of two product lines: Digital Convergence Group (“DCG”) and Imaging, Bi-CMOS ASIC and Silicon Photonics Group (“IBP”).

DCG

We provide a complete and flexible solution across a broad range of applications for delivering high-definition content and rich services to end users, from complex ASICs for network infrastructure and gaming to ASSPs for digital set-top boxes, monitors, and digital TV. We plan to focus our efforts on application processors including digital consumer products. A key objective is to offer application processors to serve many markets through a unified processing platform. During 2012, we saw fast adoption of our 40nm Set-Top box families for cable, terrestrial & IPTV; we earned significant design wins for Orly, a powerful set-top box system-on-chip, in both 32nm and 28nm; and we introduced our DOCSIS 3.0 products for new high-speed cable networks. We also increased traction for high-resolution multimedia-monitor controllers in premium monitors and public displays with major manufacturers. In addition, we were awarded a 32nm ASIC with a major networking company and have started to work on innovative ASICs for various applications using our FD-SOI technology.

IBP

The IBP Group’s activities focus on developing innovative, competitive and low power solutions and systems for Bi-CMOS ASIC & Silicon Photonics as well as Imaging products.

(i) Bi-CMOS ASIC & Silicon Photonics. We are focused on developing products for RF, Optical ICs and Silicon Photonics. In 2012, our Bi-CMOS process family for communications infrastructure included RF ICs for base stations and ICs for optical interconnect. In 2012, following our partnership agreement signed in December 2011 with Luxtera, a world leader in Silicon Photonics, we began setting up the process to design, manufacture and sell Silicon Photonics products based on our CMOS 65nm produced on our 12” Crolles line.

(ii) Imaging. We address image capture and processing product requirements for various segments of the industry, thanks to four product families, CMOS image sensors, CMOS photonic sensors, Imaging modules and Imaging processors. In the mobile imaging segment, wireless handset and tablets, we produce CMOS-based camera modules, CMOS image sensors and processors for low and high density pixel resolutions, which also meet the autofocus, advanced fixed focus and miniaturization requirements of this market. In 2012, we began the expansion and rebalance of our business portfolio, both by enlarging our customer base in mobile imaging, and by pursuing new opportunities beyond wireless such as automotive, consumer and health applications. We also offer customers and partners the capability to jointly develop innovative and system optimized solutions for their image capture and processing needs. We utilize our expertise and knowledge of the imaging ecosystem, advanced technologies and IP, to provide best in class differentiated products for a select base of customers who are leaders in their markets. Technology wise, customers have adopted new image sensors based on our proprietary BSI (Back Side Illumination) process. In addition, the innovative ToF (Time of Flight) technologies we have developed are being deployed in unique CMOS photonic sensors and highly integrated modules.

Analog, MEMS and Microcontrollers Sector (AMM)

AMM is comprised of three product lines: Analog, MEMS and Sensors (“AMS”), Industrial & Power Conversion (“IPC”) and Microcontrollers, Memories & Secure MCUs (“MMS”).

We are positioning AMM in the High End Analog world that comprises MEMS, many kinds of Sensors, Interfaces, low power RF Transceivers and Analog front-end. AMM also comprises High Voltage Smart Power Controllers for main Industrial and Power Conversion applications such as Metering and Lighting, which leverages our leadership in MEMS and our system expertise built around ARM based microcontrollers, representing the core of many applications today.

AMS

We design and manufacture a wide variety of MEMS products for many different applications and all market segments. We are a leader of the overall MEMS Market with the ability to produce and sell micro-actuators, like the thermal ones utilized in the Thermal Ink Jet and micromachined sensors, such as accelerometers, gyroscopes, altimeters, compasses and microphones, in billions of pieces per year. Our original product line of three axis accelerometers designed to be used for user interfaces was expanded in 2010 to include a complete family of very successful high performance multi axis gyroscopes. In 2012, the sales of gyroscopes exceeded the sales of accelerometers. We have a family of products under the trademark of iNEMO^TM, which results from the combination of accelerometers, gyroscopes, compasses, pressure sensors and microcontrollers. Sales of iNEMO^TM and standalone pressure sensors grew substantially in 2012. Standalone sensors and iNEMO^TM enable accurate motion tracking in 3D to enhance motion controlled user interfaces in gaming, smartphones, tablets, remote controllers, portable navigation devices and multimedia players. Motion sensors are also widely employed in laptops, automobiles, PCs, hard disk drives and digital still cameras. In 2012, we also began volume production of high performance bottom-port and top-port microphones for better audio quality in portable devices. The current most important developments in the MEMS field include:

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miniaturized high accuracy pressure sensors;

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fast response-time miniaturized low cost humidity sensors;

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lower power consumption magnetic sensors;

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lower noise, higher stability motion sensors for optical image stabilization, indoor navigation and wearable devices;

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new generation microphones;

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micro mirrors, Analog and digital ICs for complete portable projectors (in 2012 we acquired a startup in Israel called bTendo, specialized in portable projectors);

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piezoelectric actuators faster than thermal actuators for inkjet print-head in the commercial drive; and

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miniaturized Lab-On-Chips for the Molecular Diagnostics market segment.

The Group also develops innovative, differentiated and value added analog products such as:

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Audio Amplifiers ICs, used in a variety of end-products from portable to professional audio systems;

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Touch Screen controllers, named FingerTip Chips, for in-cell and on-cell LCD and AMOLED panel technology for smartphones and tablets applications;

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Low power InfraRed sensors;

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Battery-less low power wireless sensor nodes for applications in healthcare, industrial and consumer applications;

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Gas Flow sensors for next generation fully electronic gas-meters;

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High-resolution ICs for 3D and 4D ultrasound imaging; and

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High Performance Standard Products like Operational Amplifiers and comparators, current sensors, real time clock chips, smart resets, supervisors and new generation Interface chips.

IPC

We design and manufacture products for industrial applications, such as those relating to lighting and power-line communication; power supply and power management ICs for computer, industrial, consumer, and telecom applications along with power over Ethernet powered devices. In the industrial market segment, our key products are power ICs for motor control, including monolithic DMOS solutions and high-voltage gate drivers, for a broad range of systems; intelligent power switches for factory automation and process control. We offer also a broad product portfolio of linear and switching voltage regulators, addressing various applications, from general purpose “point of load”, for most of the market segments (consumer, computer and data storage, mobile phones, industrial, medical, automotive, aerospace), to specific functions such as camera flash LED, LCD backlighting and organic LED power supply, for the mobile handset and other portable device markets; Low Noise Block supply and control for set top box; and multiple channels DC-DC for motherboards are also featured.

MMS

(i) Memory Division. Memories (EEPROM, EPROM) are used for parameter storage in various electronic devices used in all market segments.

(ii) Microcontroller Division. We offer a wide range of 8-bit and 32-bit microcontrollers suitable for a wide variety of applications from those where a minimum cost is a primary requirement to those that need powerful real-time performance and high-level language support. These products are manufactured in processes capable of embedding nonvolatile memories as appropriate.

(iii) Secure Microcontoller Division. Secure Microcontrollers are 8-bit and 32-bit microcontrollers that securely store data and provide an array of security capabilities including advanced data encryption. Our expertise in security is a key to our leadership in the banking, pay-TV, mobile communication, identity, and transport fields. We also actively contribute to the emergence of new applications such as secure mobile transactions on near field communication (“NFC”) mobile phones, trusted computing, brand protection, etc. In addition under the “Incard” brand, the division develops, manufactures and sells smartcards for banking, identification and telecom applications.

Power Discrete Product Segment (PDP)

(i) ASD and IPAD Division. This division offers a full range of rectifiers, protection devices, thyristors and Integrated Passive and Active Devices (“IPAD”). These components are used in various applications, including telecommunications systems (telephone sets, modems and line cards), household appliances and industrial systems (motor-control and power-control devices). More specifically, rectifiers (both Silicon and Silicon carbide) are used in voltage converters and regulators, while thyristors control current flows through a variety of electrical devices, including lamps and household appliances. New areas of development are Tunable capacitors, which are very important in mobile phones, and thin film flexible rechargeable batteries.

(ii) Transistor Division. We design, manufacture and sell Power MOSFET, IGBT and Bipolar Transistors ranging from 20 to 2200 volts for most of the “switching” and “linear” applications on the market today. Our products are particularly well suited for high voltage switch-mode power supplies, lighting, motor control and consumer applications. The Division also produces RF power transistors for specific markets such as factory automation, medical and avionics with particular attention paid to developing new composite materials like SiC and GaN, which look to be the new promising areas of growth for automotive and alternative energies, where high switching performance, low conduction losses and high operating temperature are required.

During 2012 we announced a new family of products, the Advanced Power MOSFET Family, that enables customers to satisfy stricter power and efficiency targets set by eco-design standards and green-energy applications such as solar micro-inverters, photovoltaic string inverters and electric vehicles. The new family includes the industry’s first super-junction transistors (SuperMESH 5 technology) capable of withstanding peak voltages up to 950V, as well as 900V devices offering best-in-class energy efficiency and the world’s only 850V devices to be offered in the ultra-thin and space-saving PowerFLAT 8x8 HV package.

For IGBT, we received various design wins in Solar & Welding applications in Europe and Greater China with our new IGBT series in Trench Gate Field Stop technology, beginning with a 650V 60A device.

In Power-Supply Chips for Advanced Smartphone Displays, we extended our leadership with the new chip, STOD13AS. This chip is produced using our innovative Silicon On Insulator (SOI) process technology, which ensures remarkable energy efficiency and results in longer battery life. In addition, high immunity to cellphone-communication noise produces a consistent, flicker-free display.

We also developed the cSPIN series, the first controller family with the ability to provide full digital control of motion with speed profile generation and positioning, integrating a dual full bridge gate driver for external MOSFETs with embedded non-dissipative over-current protection.

In addition, we expanded our portfolio addressing LED lamp applications with the new members of the High Voltage LED family (HVLED807PF and HVLED815PF) and added two miniaturized motor drivers to our range of SLLIMM (Small Low-Loss intelligent Molded Modules) to enable domestic appliances to have better energy ratings. SLLIMM™-nano modules integrate complete motor-control power stage plus optional sensing and safety features, saving over 30 components to cut design time, cost and size.

Wireless Segment

The Wireless Segment resulted from the combination of our wireless business with NXP’s to create ST-NXP Wireless as of August 2, 2008. Subsequently, we combined that business with Ericsson’s mobile platform business to form a joint venture, ST-Ericsson, which began operations on February 1, 2009.

The Wireless Segment is responsible for the design, development and manufacture of semiconductors and platforms for mobile applications. The Wireless Segment is comprised of four product lines: Connectivity (“COS”), Smartphone and Tablet Solutions (“STS”), Modems (“MOD”), in which since February 3, 2009, we report the portion of sales and operating results of ST-Ericsson JVS as consolidated in our revenue and operating results, and Other Wireless, in which we report other revenues, gross margin and other items related to our Wireless business outside the ST-Ericsson JVS. For the definition of ST-Ericsson JVS, see “Item 5. Operating and Financial Review and Prospects — Overview — Critical Accounting Policies Using Significant Estimates”.

ST-Ericsson focuses on developing and delivering a complete portfolio of innovative mobile platforms and cutting-edge wireless semiconductor solutions across the broad spectrum of mobile technologies.

Alliances with Customers and Industry Partnerships

We believe that alliances with customers and industry partnerships are critical to success in the semiconductor industry. Customer alliances provide us with valuable systems and application know-how and access to markets for key products, while allowing our customers to share some of the risks of product development with us and to gain access to our process technologies and manufacturing infrastructure. We are actively working to expand the number of our customer alliances, targeting OEMs in the United States, in Europe and in Asia.

Partnerships with other semiconductor industry manufacturers permit costly R&D and manufacturing resources to be shared to mutual advantage for joint technology development. For example, we belong to the International Semiconductor Development Alliance to co-develop 32/28nm and below process technologies. In addition, we have joint development programs with leading suppliers such as Air Liquide, ASM Lithography, Hewlett-Packard, PACKTEC, JSR, SOITEC, Statchip, Teradyne and with electronic design automation (“EDA”) tool producers, including Apache, Atrenta, Cadence, Mentor and Synopsys. We also participate in joint European research programs, such as the ITEA, the Cluster for Application and Technology Research in Europe on NanoElectronics (“CATRENE”), ARTEMIS and the European Nanoelectronics Initiative Advisory (“ENIAC”) programs.

Customers and Applications

We design, develop, manufacture and market thousands of products that we sell to thousands of customers. Our top 20 customers include Apple, Blackberry, Bosch, Cisco, Continental, Delphi, Delta, Denso, Ericsson, Hewlett-Packard, Hitachi, HTC, Marelli, Motorola Mobility, Nokia, Philips, Samsung, Seagate, Sony and Western Digital. To many of our key customers we provide a wide range of products, including application-specific products, discrete devices, memory products and programmable products. Our broad range portfolio helps foster close relationships with customers, which provides opportunities to supply such customers’ requirements for multiple products, including discrete devices, programmable products and memory products. We also sell our products through distributors and retailers, including Arrow Electronics, Avnet, Tomen, Wintech and Yosun.

As of December 31, 2012, no single customer accounted for 10% or more of our 2012 net revenues. The Nokia group of companies accounted for 10.4% of net revenues in 2011 and 13.9% in 2010. There can be no assurance that our customers or distributors will continue to place orders with us in the future at the same levels as in prior periods. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Disruptions in our relationships with any one of our key customers, and/or material changes in their strategy or financial condition, could adversely affect our results of operations”.

Sales, Marketing and Distribution

In 2012, we reorganized our Sales & Marketing organization with the primary objectives of accelerating sales growth and gaining market share. The changes were designed along three key drivers: strengthening the effectiveness of the development of our global accounts; boosting demand creation through an enhanced focus on geographical coverage; and establishing marketing organizations in our regional sales organizations that are fully aligned with the Product Groups.

Following this reorganization, the previous sales organization structured by market segment was replaced by a new sales organization organized by a combination of country/area coverage and key accounts coverage. Our Sales & Marketing organization is now structured into six units: four regional sales organizations and two major accounts units.

Regional Sales Organizations

Our four regional sales organizations, a description of which follows below, have a similar structure to enhance coordination in the go-to-market activities. They are also strongly focused on accelerated growth.

(i) EMEA — The EMEA region is divided into four business units: automotive, convergence EMS, industrial and multimarket and also integrates the global business unit covering Nokia and the wireless platform accounts. Each business unit is dedicated to customers operating mainly in its market segment, actively promoting a broad range of products, including commodities and dedicated ICs, as well as proposing solutions through its sales force, field application engineers, supply-chain management, customer service and technical competence center for system solutions, with support functions provided locally or centrally (through central labs).

(ii) Americas — In the Americas region, the sales and marketing team is organized into seven major accounts: Global Key Accounts, Four New Major Accounts, Sales by Geography consisting of the West Coast, Central South, North Central and East Coast Sales. We also have a sales team supporting Latin America based in two centers in Mexico and Brazil. Our Marketing teams that support and promote specific products are organized in line with our product segments for which there are six: APG, AMS, DCG, IBP, Industrial and Power Discrete (“IPD”), MMS. We also have an organization that manages our distribution network and supports EMS customers mostly for manufacturing on behalf of our OEM customers.

(iii) Greater China-South Asia — Since January 2012, the Greater China & South Asia region now comprises six geographical sales units with offices covering North China (Beijing), Central China (Shanghai), South China (Hong Kong), Taiwan (Taipei), India (New Delhi) and ASEAN/Australia & New Zealand (Singapore). It is further supported by a centralized Channel coordination function, as well as four key Marketing and Application functions, namely, DCG/IBP, APG, IPD/AMS and MMS, and four new major accounts. Certain major highlights from 2012 include: the establishment of a joint R&D laboratory to drive innovation in automotive with the FAW Group, the longest and largest automobile group operating in China; the opening of a joint laboratory with the Harbin Institute of Technology, one of China’s most renowned universities, to nurture the next generation of engineering talent in China; and the launch of VereMTB using ST’s Lab-on-Chip technology, a new molecular diagnostic kit, to test for Multi-Drug Resistant Tuberculosis.

(iv) Japan-Korea — The Japan-Korea region sales and marketing team is divided into four business units (automotive, consumer, industrial, communications) in each country, plus a comprehensive distribution business unit that provides products and sales support for the regional distribution network. Each business unit sells each product from our portfolio that fits the applications covered by the unit. A central product-marketing organization provides product support and training for standard products for the region. In addition, five central support functions (business management, field quality, human resources, finance and corporate communications) allow the region to run all of the necessary tasks smoothly. Our sales and marketing activities are performed through sales offices in Tokyo, Osaka, Nagoya and Seoul.

The sales and marketing activities performed by our regional sales organizations are supported by product marketing that is carried out by each product division, which also includes product development functions. This matrix system reinforces our sales and marketing activities and our broader strategic objectives. An important component of our regional sales and marketing efforts is to expand our customer base, which we seek to do by adding sales representatives, regional competence centers and new generations of electronic tools for customer support.

Most of our regional sales organizations operate dedicated distribution organizations. To support the distribution network, we operate logistic centers in Saint Genis, France and Singapore. We also engage distributors and representatives to distribute our products around the world. Typically, distributors handle a wide variety of products, including products that compete with our products, and fill orders for many customers. Most of our sales to distributors are made under agreements allowing for price protection and/or the right of return on unsold merchandise. We generally recognize revenues upon the transfer of ownership of the goods at the contractual point of delivery. Sales representatives generally do not offer products that compete directly with our products, but may carry complementary items manufactured by others. Representatives do not maintain a product inventory. Their customers place large quantity orders directly with us and are referred to distributors for smaller orders.

At the request of certain of our customers, we also sell and deliver our products to EMS, which, on a contractual basis with our customers, incorporate our products into the application specific products they manufacture for our customers. Certain customers require us to hold inventory on consignment in their hubs and only purchase inventory when they require it for their own production. This may lead to delays in recognizing revenues, as revenue recognition will occur, within a specific period of time, at the actual withdrawal of the products from the consignment inventory, at the customer’s option.

Major Accounts Units

Our Sales & Marketing organization includes two major accounts units, Europe Major Accounts and Americas Major Accounts, for our established global customers, aimed at enhancing the development of our business relationships with such clients.

In addition to the aforementioned major accounts, approximately forty accounts are managed globally by key account managers who are responsible for total sales generated worldwide, irrespective of the channel and the geography. The main criteria for the selection of these accounts are their growth potential, the size of their transnational business and the geographical dispersion of their R&D activities.

For a breakdown of net revenues by product segment and geographic region for the last three fiscal years, see “Item 5. Operating and Financial Review and Prospects”.

Research and Development

We believe that market driven R&D founded on leading edge products and technologies is critical to our success. The main R&D challenge we face is continually increasing the functionality, speed and cost-effectiveness of our semiconductor devices, while ensuring that technological developments translate into profitable commercial products as quickly as possible.

We combine front-end manufacturing and technology R&D under the same organization to ensure a smooth flow of information between the R&D and manufacturing organizations. We manage our R&D projects by technology and by product segment. The relevant technology R&D expenses are allocated to the product segments on the basis of the estimated efforts. The total amount of R&D expenses in the past three fiscal years was $2,413 million, $2,352 million and $2,350 million in 2012, 2011 and 2010, respectively.

We devote significant effort to R&D because we believe such investment can be leveraged into competitive advantages. New developments in semiconductor technology can make end products significantly cheaper, smaller, faster, more reliable and embedded with more functionalities than their predecessors. They also enable, through their timely appearance on the market, significant value creation opportunities. For a description of our R&D expenses, see “Item 5. Operating and Financial Review and Prospects — Results of Operations — Research and Development Expenses”.

With the core CMOS and analog technologies in our portfolio, we are aggressively proceeding to miniaturization in line with industry requirements. To differentiate our offering for higher value systems, we also seek to combine our core technologies with our specific knowhow and expertise, in particular in the area of System-in-Package.

Our R&D design centers offer a significant advantage for us in quickly and cost effectively introducing products. In addition, we have advanced R&D centers strategically located around the world, including in France, Italy, Belgium, Canada, China, India, Singapore, Sweden, the United Kingdom and the United States. We have a technology council comprised of fifteen leading experts to review, evaluate and advise us on the competitive landscape. Our R&D center in Greater Noida, India provides necessary support to the Group’s design activities worldwide and hosts R&D activities focused on software development and core libraries development, with a strong emphasis on system solutions.

In 2008, we entered into an R&D alliance with the International Semiconductor Development Alliance (“ISDA”) led by IBM, whose other core members are Samsung and Global Foundries, to develop leading edge core CMOS technologies at 32/28nm and 22/20nm nodes. In 2013, we extended our participation in ISDA to cover the next nodes. We are also working with the CEA Leti and IBM to develop in Crolles our FD-SOI derivative technology, which is now ready for production.

In 2009, we also entered into a framework agreement with the French Ministry of Economy, Industry and Employment for the “Nano-2012” Research and Development program. This alliance expired at the end of 2012 and we are currently in discussions concerning a new program, “Nano-2017”, for an additional five-year period, with the goal of reaching an agreement on content and budget before the end of 2013. For more information, see “— Public Funding”.

Furthermore, our manufacturing facility in Crolles, France houses a R&D center, “Centre Commun de Microelectronique de Crolles”. Laboratoire d’Electronique de Technologie d’Instrumentation, a research laboratory of CEA (one of our indirect shareholders), is our partner in this center. In 2012, a new structure, Institut de Recherche Technologique (“IRT”), was set up by CEA in the frame of the French initiative “Investissements d’Avenir”. We participate in this program, which takes place on CEA’s premises, through investment and by contributing the expertise of some of our researchers.

There can be no assurance that we will be able to generate the necessary funding to support the ongoing costs of our R&D programs, or that we will be able to develop future technologies and commercially implement them on satisfactory terms, or that our alliances will allow the successful development of state-of-the-art core CMOS or FD-SOI technologies on satisfactory terms and in line with market requirements. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Our R&D efforts are increasingly expensive and dependent on technology alliances, and our business, results of operations and prospects could be materially adversely affected by the failure or termination of such alliances”.

In Italy, our technology R&D development activities occur principally in Agrate and Catania. In Agrate, such activities encompass prototyping, pilot and volume production of newly developed technologies with the objective of accelerating process industrialization and time to market for Smart Power affiliation (BCD), including on SOI, High Voltage CMOS and MEMS. We also run a joint operation under a consortium agreement with Micron Technologies (“Micron”) in which we and Micron each manage our respective technology R&D programs. In Catania, we develop new technologies for power discretes, SICs and gallium arsenide.

Our Advanced Systems Technology (“AST”) organization, primarily located in Agrate, creates system knowledge that supports our SoC development. AST’s objective is to develop the advanced architectures that will drive key strategic applications, including health care, wireless and data security. AST’s challenge is to combine the expertise and expectations of our customers, industrial and academic partners, our central R&D teams and product segments to create a cohesive, practical vision that defines the hardware, software and system integration knowledge that we will need in the next three to five years and the strategies required to master them.

We play leadership roles in numerous projects running under the European Union’s IST (Information Society Technologies) programs. We also participate in joint European research programs, such as the ITEA, the Cluster for Application and Technology Research in Europe on NanoElectronics (“CATRENE”), ARTEMIS and the European Nanoelectronics Initiative Advisory (“ENIAC”) programs.

Property, Plants and Equipment

We currently operate 14 main manufacturing sites around the world. The table below sets forth certain information with respect to our current manufacturing facilities, products and technologies. Front-end manufacturing facilities are fabs and back-end facilities are assembly, packaging and final testing plants.


Location	Products	Technologies
Front-end facilities
Crolles1, France	Application-specific products	Fab: 200mm CMOS and BiCMOS, Analog/RF

Crolles2, France	Application-specific products and leading edge logic products	Fab: 300mm research and development on deep sub micron (20nm bulk and FD-SOI 14nm) CMOS and differentiated SoC technology and manufacturing on advanced CMOS and imaging technologies

Agrate, Italy	Nonvolatile memories, microcontrollers and application-specific products MEMS	Fab 1: 200mm BCD, MEMS, Microfluidics Fab 2: 200mm, embedded Flash, research and development on nonvolatile memories and BCD technologies and Flash (operating in consortium with Micron)

Rousset, France	Microcontrollers, nonvolatile memories and Smartcard ICs, application-specific products	Fab 1: 200mm CMOS, Smartcard, embedded Flash, Analog/RF

Catania, Italy	Power transistors, Smart Power and analog ICs and application-specific products, MEMS	Fab 1: 150mm Power metal-on silicon oxide semiconductor process technology (“MOS”), VIPpower^tm, MO-3, MO-5 and Pilot Line RF Fab 2: 200mm, Microcontrollers, BCD, power MOS

Tours, France	Protection thyristors, diodes and ASD power transistors, IPAD	Fab: 125mm, 150mm and 200mm pilot line discrete

Ang Mo Kio, Singapore	Analog, microcontrollers, power transistors, commodity products, nonvolatile memories, and application-specific products	Fab 1: 125mm, (150mm conversion ongoing) power MOS, bipolar, power Fab 2: 150mm-bipolar, power MOS and BCD, EEPROM, Smartcard, Micros, CMOS logic Fab 3: 150mm Microfluidics, MEMS, power MOS, BiCMOS, CMOS

Back-end facilities

Muar, Malaysia	Application-specific and standard products, microcontrollers	Ball Grid Array, Power Automotive, SOIC, QFP

Kirkop, Malta	Application-specific products, MEMS, Embedded Flash for Automotive	Ball Grid Array, QFP, Land Grid Array


Location	Products	Technologies
Toa Payoh, Singapore	Optical packages research and development, EWS and Testing Center

Bouskoura, Morocco	Nonvolatile memories, discrete and standard products, micromodules, RF and subsystems	Power, SOIC, Micromodules

Shenzhen, China⁽¹⁾	Nonvolatile memories, optical packages, discrete, application-specific and standard products	Ball Grid Array, Camera Module, SOIC, Power

Longgang, China	Discrete and standard products	Power, PDIP

Calamba, Philippines⁽²⁾	Application specific products and standard products, MEMS	Ball Grid Array, QFN, Micromodules, Land Grid Array

(1)	Jointly operated with SHIC, a subsidiary of Shenzhen Electronics Group.

(2)	Operated by ST but owned by ST-Ericsson.

At the end of 2012, our front-end facilities had a total maximum capacity of approximately 135,000 200mm equivalent wafer starts per week. The number of wafer starts per week varies from facility to facility and from period to period as a result of changes in product mix. Our advanced 300mm wafer pilot-line fabrication facility in Crolles, France had an installed capacity of 3,600 wafers per week at the end of 2012, and we plan to increase production to up to approximately 6,000 wafers per week as required by market conditions and within the framework of our R&D Nano 2017 program.

We own all of our manufacturing facilities, except Crolles2 in France and Shenzhen and Longgang in China, which are the subject of long-term leases that represent overall a small percentage of total assets.

We have historically subcontracted a portion of total manufacturing volumes to external suppliers. In 2012 we purchased approximately 11% from external foundries of our total silicon production. Our plan is to extend sourcing of silicon from external foundries up to above 20% of our total needs.

At December 31, 2012, we had approximately $175 million in outstanding commitments for purchases of equipment and other assets for delivery in 2013. In 2012, our capital spending, net of proceeds, decreased to $476 million from $1,258 million registered in 2011. In the 2010-2012 period the ratio of capital investment spending to revenues was about 9.5%. The high level of capital spending in 2011 was designed to respond to market demand growth in the first half of the year while optimizing in parallel opportunities between internal and external front-end production. For more information, see “Item 5. Operating and Financial Review and Prospects — Financial Outlook”.

Our manufacturing processes are highly complex, require technologically advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields, interrupt production or result in losses of products in process. As system complexity has increased and sub-micron technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision and excellence have become even more demanding. Although our increased manufacturing efficiency has been an important factor in our improved results of operations, we have from time to time experienced production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry.

In the second part of 2012, we experienced a slowing down of demand driven by inventory correction dynamics common to all market segments. As a consequence, our fabs and plants underwent an important reduction of their loading with respect to the capacity, and capital expenditures were reduced to match the new profile of the business in the second half of 2012. No assurance can be given that we will be able to increase manufacturing efficiencies in the future to the same extent as in the past, or that we will not experience production difficulties and/or unsaturation in the future.

In addition, as is common in the semiconductor industry, we have from time to time experienced difficulty in ramping up production at new facilities or effecting transitions to new manufacturing processes and, consequently, have suffered delays in product deliveries or reduced yields. There can be no assurance that we

will not experience manufacturing problems in achieving acceptable yields, product delivery delays or interruptions in production in the future as a result of, among other things, capacity constraints, production bottlenecks, construction delays, equipment failure or maintenance, ramping up production at new facilities, upgrading or expanding existing facilities, changing our process technologies, or contamination or fires, storms, earthquakes or other acts of nature, any of which could result in a loss of future revenues. In addition, the development of larger fabrication facilities that require state-of-the-art sub-micron technology and larger-sized wafers has increased the potential for losses associated with production difficulties, imperfections or other causes of defects. In the event of an incident leading to an interruption of production at a fab, we may not be able to shift production to other facilities on a timely basis, or our customers may decide to purchase products from other suppliers, and, in either case, the loss of revenues and the impact on our relationship with our customers could be significant. Our operating results could also be adversely affected by the increase in our fixed costs and operating expenses related to increases in production capacity if revenues do not increase commensurately. Finally, in periods of high demand, we increase our reliance on external contractors for foundry and back-end service. Any failure to perform by such subcontractors could impact our relationship with our customers and could materially affect our results of operations.

Intellectual Property (IP)

IP rights that apply to our various products include patents, copyrights, trade secrets, trademarks and mask work rights. A mask work is the two- or three-dimensional layout of an integrated circuit. We currently own approximately 16,000 patents and pending patent applications, corresponding to approximately 9,000 patent families (each patent family containing all patents originating from the same invention), including 515 original new patent applications filed in 2012.

Our success depends in part on our ability to obtain patents, licenses and other IP rights covering our products and their design and manufacturing processes. To that end, we intend to continue to seek patents on our innovations in our circuit designs, manufacturing processes, packaging technology and system applications as well as on industry standards and other inventions. The process of seeking patent protection can be long and expensive, and there can be no assurance that patents will issue from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. In addition, effective copyright and trade secret protection may be unavailable or limited in certain countries. Competitors may also develop technologies that are protected by patents and other IP rights and therefore such technologies may be unavailable to us or available to us subject to adverse terms and conditions. Management believes that our IP represents valuable assets and intends to protect our investment in technology by enforcing all of our IP rights. We have also set up a dedicated team actively seeking to optimize the value from our IP portfolio by the licensing of our design technology and other IP, including patents. We have used our patent portfolio to enter into several broad patent cross-licenses with several major semiconductor companies enabling us to design, manufacture and sell semiconductor products without fear of infringing patents held by such companies, and intend to continue to use our patent portfolio to enter into such patent cross-licensing agreements with industry participants on favorable terms and conditions. As our sales increase compared to those of our competitors, the strength of our patent portfolio may not be sufficient to guarantee the conclusion or renewal of broad patent cross-licenses on terms that do not affect our results of operations. Furthermore, as a result of litigation, or to address our business needs, we may be required to take a license to third party IP rights upon economically unfavorable terms and conditions, and possibly pay damages for prior use, and/or face an injunction or exclusion order, all of which could have a material adverse effect on our results of operations and ability to compete.

From time to time, we are involved in IP litigation and infringement claims. See “Item 8. Financial Information — Legal Proceedings”. In the event a third party IP claim were to prevail, our operations may be interrupted and we may incur costs and damages, which could have a material adverse effect on our results of operations, cash flow and financial condition.

Finally, we have received from time to time, and may in the future receive communications from competitors or other third parties alleging infringement of certain patents and other IP rights of others, which have been and may in the future be followed by litigation. Regardless of the validity or the successful assertion of such claims, we may incur significant costs with respect to the defense thereof, which could have a material adverse effect on our results of operations, cash flow or financial condition. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others”.

Backlog

Our sales are made primarily pursuant to standard purchase orders that are generally booked from one to twelve months in advance of delivery. Quantities actually purchased by customers, as well as prices, are subject to variations between booking and delivery and, in some cases, to cancellation due to changes in customer needs or industry conditions. During periods of economic slowdown and/or industry overcapacity and/or declining selling prices, customer orders are not generally made far in advance of the scheduled shipment date. Such reduced lead time can reduce management’s ability to forecast production levels and revenues. When the economy rebounds, our customers may strongly increase their demands, which can result in capacity constraints due to our inability to match manufacturing capacity with such demand.

In addition, our sales are affected by seasonality, with the first quarter generally showing lowest revenue levels in the year, and the third or fourth quarter historically generating higher amounts of revenues.

We also sell certain products to key customers pursuant to frame contracts. Frame contracts are annual contracts with customers setting forth quantities and prices on specific products that may be ordered in the future. These contracts allow us to schedule production capacity in advance and allow customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required to produce ordered products. Orders under frame contracts are also subject to a high degree of volatility, because they reflect expected market conditions which may or may not materialize. Thus, they are subject to risks of price reduction, order cancellation and modifications as to quantities actually ordered resulting in inventory build-ups.

Furthermore, developing industry trends, including customers’ use of outsourcing and their deployment of new and revised supply chain models, may reduce our ability to forecast changes in customer demand and may increase our financial requirements in terms of capital expenditures and inventory levels.

We entered 2012 with a backlog significantly lower than we had compared to 2011, as a result of a difficult industry environment. During 2012, our backlog declined, in particular in the second half, reflecting the continuing difficult industry environment, which resulted in a significant decline in our order inflows. As a result of these challenging conditions, we entered 2013 with a backlog significantly lower than we had entering 2012.

Competition

Markets for our products are intensely competitive. While only a few companies compete with us in all of our product lines, we face significant competition in each of them. We compete with major international semiconductor companies. Smaller niche companies are also increasing their participation in the semiconductor market, and semiconductor foundry companies have expanded significantly, particularly in Asia. Competitors include manufacturers of standard semiconductors, ASICs and fully customized ICs, including both chip and board-level products, as well as customers who develop their own IC products and foundry operations. Some of our competitors are also our customers.

The primary international semiconductor companies that compete with us include Analog Devices, Atmel, Avago, Broadcom, Fairchild Semiconductor, Freescale Semiconductor, Infineon, Intel, International Rectifier, Invensense, Linear Technology, LSI Logic, Marvell, Maxim, MediaTek, Microchip Technology, Mstar, NXP Semiconductors, ON Semiconductor, Qualcomm, Renesas, ROHM Semiconductor, Samsung, Texas Instruments, Toshiba, TSMC and Vishay.

We compete in different product lines to various degrees on the basis of price, technical performance, product features, product system compatibility, customized design, availability, quality and sales and technical support. In particular, standard products may involve greater risk of competitive pricing, inventory imbalances and severe market fluctuations than differentiated products. Our ability to compete successfully depends on elements both within and outside our control, including successful and timely development of new products and manufacturing processes, product performance and quality, manufacturing yields and product availability, customer service, pricing, industry trends and general economic trends.

Organizational Structure and History

We are organized in a matrix structure with geographic regions interacting with product divisions, both supported by shared technology and manufacturing operations and by central functions, designed to enable us to be closer to our customers and to facilitate communication among the R&D, production, marketing and sales organizations.

While STMicroelectronics N.V. is the parent company, we also conduct our operations through service activities from our subsidiaries. We provide certain administrative, human resources, legal, treasury, strategy, manufacturing, marketing and other overhead services to our consolidated subsidiaries pursuant to service agreements for which we recover the cost. We have two joint ventures with Ericsson, which operate as independent JV companies and are governed by a fully balanced Board and an independent management team. Our Consolidated Financial Statements include “JVS and related affiliates”, responsible for the full commercial operation of the combined businesses, namely sales and marketing. Its parent company is ST-Ericsson SA (“JVS”), which is owned 50% plus a controlling share by us. The other JV is focused on fundamental R&D activities. Its parent company is ST-Ericsson AT SA (“JVD”), which is owned 50% plus a controlling share by Ericsson and is therefore accounted for by us under the equity-method.

The following table lists our consolidated subsidiaries and our percentage ownership as of December 31, 2012:


Legal Seat	Name	Percentage Ownership (Direct or Indirect)
Australia, Sydney	STMicroelectronics PTY Ltd		100
Belgium, Diegem	ST-Ericsson Belgium N.V.		50
Belgium, Diegem	Proton World International N.V.		100
Brazil, Sao Paulo	STMicroelectronics Ltda		100
Brazil, Sao Paulo	Incard do Brazil Ltda		50
Canada, Ottawa	STMicroelectronics (Canada), Inc.		100
China, Beijing	STMicroelectronics (Beijing) R&D Co. Ltd		100
China, Beijing	ST-Ericsson Semiconductor (Beijing) Co. Ltd		50
China, Shanghai	STMicroelectronics (Shanghai) Co. Ltd		100
China, Shanghai	STMicroelectronics (Shanghai) R&D Co. Ltd		100
China, Shanghai	STMicroelectronics (China) Investment Co. Ltd		100
China, Shanghai	ST-Ericsson Semiconductor (Shanghai) Co. Ltd		50
China, Shanghai	Shanghai NF Semiconductors Technology Ltd		50
China, Shenzhen	Shenzhen STS Microelectronics Co. Ltd		60
China, Shenzhen	STMicroelectronics (Shenzhen) Co. Ltd		100
China, Shenzhen	STMicroelectronics (Shenzhen) Manufacturing Co. Ltd		100
China, Shenzhen	STMicroelectronics (Shenzhen) R&D Co. Ltd		100
Czech Republic, Prague	STMicroelectronics Design and Application s.r.o.		100
Czech Republic, Prague	ST-Ericsson s.r.o.		50
Finland, Nummela	STMicroelectronics Finland OY		100
Finland, Turku	ST-Ericsson OY		50
France, Crolles	STMicroelectronics (Crolles 2) SAS		100
France, Grenoble	STMicroelectronics (Grenoble 2) SAS		100
France, Grenoble	ST-Ericsson (France) SAS		50
France, Grenoble	ST-Ericsson (Grenoble) SAS		50
France, Montrouge	STMicroelectronics S.A.		100
France, Rousset	STMicroelectronics (Rousset) SAS		100
France, Tours	STMicroelectronics (Tours) SAS		100
Germany, Aschheim-Dornach	STMicroelectronics GmbH		100
Germany, Aschheim-Dornach	STMicroelectronics Application GmbH		100
Germany, Aschheim-Dornach	ST-NXP Wireless GmbH i.L.		50
Holland, Amsterdam	STMicroelectronics Finance B.V.		100
Holland, Amsterdam	STMicroelectronics Finance II N.V.		100
Holland, Amsterdam	STMicroelectronics International N.V.		100
Holland, Eindhoven	ST-Ericsson B.V.		50
Holland, Eindhoven	ST-Ericsson Holding B.V.		50
Hong Kong, Hong Kong	STMicroelectronics LTD		100
India, Bangalore	NF Wireless India Pvt Ltd i.L.		50
India, New Delhi	STMicroelectronics Marketing Pvt Ltd		100
India, Noida	STMicroelectronics Pvt Ltd		100
India, Noida	ST-Ericsson India Pvt Ltd		50
Israel, Netanya	STMicroelectronics Ltd		100
Italy, Agrate Brianza	STMicroelectronics S.r.l.		100


Legal Seat	Name	Percentage Ownership (Direct or Indirect)
Italy, Agrate Brianza	ST-Ericsson Srl		50
Italy, Aosta	DORA S.p.a.		100
Italy, Catania	CO.RI.M.ME.		100
Italy, Naples	STMicroelectronics Services S.r.l.		100
Italy, Torino	ST-POLITO Scarl		75
Japan, Tokyo	STMicroelectronics KK		100
Japan, Tokyo	ST-Ericsson KK		50
Korea, Seoul	ST-Ericsson Korea Ltd		50
Malaysia, Kuala Lumpur	STMicroelectronics Marketing SDN BHD		100
Malaysia, Muar	STMicroelectronics SDN BHD		100
Malaysia, Muar	ST-Ericsson SDN BHD		50
Malta, Kirkop	STMicroelectronics (Malta) Ltd		100
Mexico, Guadalajara	STMicroelectronics Marketing, S. de R.L. de C.V.		100
Morocco, Rabat	Electronic Holding S.A.		100
Morocco, Casablanca	STMicroelectronics S.A.S. (Maroc)		100
Morocco, Rabat	ST-Ericsson (Maroc) SARLAU		50
Norway, Grimstad	ST-Ericsson A.S.		50
Philippines, Calamba	STMicroelectronics, Inc.		100
Philippines, Calamba	ST-Ericsson (Philippines) Inc.		50
Philippines, Calamba	Mountain Drive Property, Inc.		20
Singapore, Ang Mo Kio	STMicroelectronics Asia Pacific Pte Ltd		100
Singapore, Ang Mo Kio	STMicroelectronics Pte Ltd		100
Singapore, Ang Mo Kio	ST-Ericsson Asia Pacific Pte Ltd		50
Singapore, The Curie	Veredus Laboratories Pte Ltd		67
Spain, Barcelona	STMicroelectronics Iberia S.A.		100
Sweden, Kista	STMicroelectronics A.B.		100
Sweden, Lund	ST-Ericsson A.B.		50
Switzerland, Geneva	STMicroelectronics S.A.		100
Switzerland, Geneva	INCARD S.A.		100
Switzerland, Geneva	ST-Ericsson S.A.		50
Switzerland, Geneva	ST New Ventures S.A.		100
Taiwan, Taipei	ST-Ericsson (Taiwan) Ltd		50
Thailand, Bangkok	STMicroelectronics (Thailand) Ltd		100
United Kingdom, Bristol	Inmos Limited		100
United Kingdom, Bristol	ST-Ericsson (UK) Ltd		50
United Kingdom, Marlow	STMicroelectronics Limited		100
United Kingdom, Marlow	STMicroelectronics (Research & Development) Limited		100
United Kingdom, Reading	Synad Technologies Limited		100
United States, Coppell	STMicroelectronics Inc.		100
United States, Coppell	ST-Ericsson Inc.		50
United States, Coppell	Genesis Microchip Inc.		100
United States, Coppell	Genesis Microchip (Delaware) Inc.		100
United States, Coppell	Genesis Microchip LLC		100
United States, Coppell	Genesis Microchip Limited Partnership		100
United States, Coppell	Sage Inc.		100
United States, Coppell	Faroudja Inc.		100
United States, Coppell	Faroudja Laboratories Inc.		100
United States, Coppell	STMicroelectronics (North America) Holding, Inc.		100
United States, Wilsonville	The Portland Group, Inc.		100

The following table lists our principal equity-method investments and our percentage ownership as of December 31, 2012:


Legal Seat	Name	Percentage Ownership (Direct or Indirect)
France, Grenoble	MicroOLED S.A.S		39.6
Italy, Catania	3Sun S.r.l.		33.3
South Korea, Yongin-si	ATLab Inc.		8.0
Switzerland, Geneva	ST-Ericsson AT SA		49.0

Public Funding

We participate in certain programs established by the EU, individual countries and local authorities in Europe (primarily in France and Italy). Such funding is generally provided to encourage R&D activities and capital investment, industrialization and the economic development of underdeveloped regions. These programs are partially supported by direct funding, tax credits and specific loans (low-interest financing).

Public funding in France, Italy and Europe generally is open to all companies, regardless of their ownership or country of incorporation. The EU has developed model contracts for R&D funding that require beneficiaries to disclose the results to third parties on reasonable terms. As disclosed, the conditions for receipt of government funding may include eligibility restrictions, approval by EU authorities, annual budget appropriations, compliance with European Commission regulations, as well as specifications regarding objectives and results.

Some of our R&D government funding contracts involve advance payments that require us to justify our expenses after receipt of funds. Certain specific contracts (Crolles, Grenoble, Rousset and Tours, France and Catania, Italy) contain commitments to maintain a minimum level of employment and/or investment during a certain amount of time. There could be penalties (i.e., a partial refund due to the government) if these objectives are not fulfilled. Other contracts contain penalties for late deliveries or for breach of contract, which may result in repayment obligations.

The main programs for R&D in which we are involved include: (i) the Eureka CATRENE cooperative R&D program (Cluster for Application and Technology Research in Europe on NanoElectronics); (ii) EU R&D projects with FP7 (Seventh Frame Program) for Information and Communication Technology; (iii) European Joint Technology Initiatives such as ENIA (European Nanoelectronics Initiative Advisory Committee) and ARTEMIS (Embedded Computing Systems Initiative) operated by Joint Undertakings formed by the European Union, some member states and industry; and (iv) national or regional programs for R&D and for industrialization in the electronics industries involving many companies and laboratories. The pan-European programs cover a period of several years, while national or regional programs in France and Italy are subject mostly to annual budget appropriation. We were recently awarded two of the first of five projects under the ENIAC “KET (Key Enabling Technologies) Pilot Lines” frame, recently launched in Europe. They are devoted respectively to specific MEMS technologies (based in Italy) and FD-SOI technologies (based in France).

In Italy, there are some national funding programs established to support the new FIRST (Fondo per gli Investimenti nella Ricerca Scientifica e Tecnologica) that will group previous funding regulations FIRB (Fondo per gli Investimenti della Ricerca di Base, aimed to fund fundamental research), FAR (Fondo per le Agevolazioni alla Ricerca, to fund industrial research), and the FCS (Fondo per la Competitività e lo Sviluppo). The FRI (Fondo rotativo per il sostegno alle imprese e agli investimenti in ricerca) funds research and innovation activities and the FIT (Fondo speciale rotativo per l’Innovazione Tecnologica) is designed to fund precompetitive development in manufacturing. These programs are not limited to microelectronics and are intended to support industry R&D in any segment. Italian programs often cover several years and the approval phase is quite long, up to two or three years. In 2012, within the PON (Programma Operativo Nazionale “Ricerca e competitività 2007 2013”), the Italian Research Ministry finalized the complete ranking of the approved proposals, and one of our proposals was selected for funding.

In Italy, according to the ARTEMIS and ENIAC Joint Undertaking procedures related to calls for proposals, in 2010 the Italian Research Ministry approved public grants for an additional four ENIAC projects (of which one was under the ENIAC’s call for Key Enabling Technologies) and one for ARTEMIS project (under the ARTEMIS Innovation Pilot Program call) involving the company.

Furthermore, there are some regional funding tools for research that can be addressed by local initiatives, primarily in the regions of Puglia, Sicily, Campania and Val d’Aosta, provided that a reasonable regional socio-economic impact could be recognized in terms of industrial exploitation, new professional hiring and/or cooperation with local academia and public laboratories.

In 2006, the EU Commission allowed the modification of the conditions of a grant pertaining to the building, facilitation and equipment of our facility in Catania, Italy (the “M6 Plant”). Following this decision, the authorized timeframe for completion of the project was extended and the Italian government was authorized to allocate €446 million, out of the €542 million grants originally authorized, for the completion of the M6 Plant if we made a further investment of €1,700 million between January 1, 2006 through the end of 2009. On the basis of the investments actually realized during the period, we recorded an amount of approximately €78 million as funding for capital investment of which approximately €44 million has been received to date. On September 13, 2011, the European Commission initiated a review of the M6 investment and related benefits, requesting information from the Italian government about the status and the ownership of the benefits of the M6 investment during the period 2001-2006. The Italian authorities responded to all such requests for information in 2011 and 2012 concerning primarily the history of the investment made, the motivation of the state aid granted, the formal interpretation related to the definition of “investment activation”, and its application to the M6 case. To our knowledge, no proceedings are ongoing.

In France, support for R&D is given by public agencies such as ANR (Agence Nationale de la Recherche), or OSEO (the agency taking over the missions and budgets of the AII Agency for Industrial Innovation), generally for consortia of partners grouping universities, public laboratories and private actors (large and small). The agencies operate via calls for project proposals, most often related to the identified ‘clusters of competitiveness’ (Pôles de Compétitivité) throughout the French territory. The most relevant for us are ‘Minalogic’ around Grenoble, ‘SCS’ in the south-east area covering Rousset and ‘S2E2’ in the Tours area. The selected projects receive a support limited to 25% or 35% of the actual R&D expenses, depending on the type of project. The funding is given when technical reports have been accepted by the agencies; all expenses must be documented and financial audits are organized by the agencies to check their eligibility.

Another important contribution is given by the Ministry of Industry (“FCE”) and by local public authorities. Specific support for microelectronics is provided through FCE to all the companies with activities in France in the semiconductor industry. The amount of support under French programs is decided annually and subject to budget appropriation. In 2012, we terminated the execution of the framework agreement for the “Nano-2012” Research and Development program in which STMicroelectronics (Crolles and Grenoble sites) is the leading contributor, with over 30 other partners (universities, public research laboratories, large groups and small companies (SMEs)). Under this frame agreement, an overall funding budget of €340 million (about $450 million) in grants was put in place for us for the period 2008-2012, subject to the conclusion of agreements every year with the public authorities (the French State being represented by the Ministry of Industry, and local authorities), and provided that all technical parameters and objectives are met. Nano-2012 is designed to promote the development of advanced CMOS (32nm and below) technologies for system on chip semiconductor products in the Grenoble-Crolles region of France, in cooperation with the ISDA.

Due to a major change in the taxation regime in France, the local authorities have received lower tax receipts than before. During the “Nano-2012” program, some of the local authorities involved have, as a result of such tax receipts, decided to suspend their funding obligations related to the “Nano-2012” program. Therefore, the benefit for us and the other partners ended up being lower than expected as the French government did not agree to compensate us for the shortfall in support from the local authorities. The technical part of the program was completed successfully at the end of 2012 and a final review of our participation in the “Nano-2012” program is planned in April 2013. We are currently in discussions concerning a new program, “Nano-2017”, for an additional five-year period, with the goal of reaching an agreement on content and budget before the end of 2013.

A new type of R&D support program was set up in France in 2011, as part of a global rejuvenation effort aimed at research and industry (“Investissements d’Avenir” or IA). This program is coordinated by the CGI (Commissariat Général aux Investissements d’Avenir) and targets industrial sectors of high relevance. We have been granted three projects under this frame, all due to start in 2013: one for “Tours 2015” covering three types of technologies developed in cooperation with public laboratories, one for Rousset “MAGE” targeting the development of ultra-low power secure microcontrollers and one in the area of electricity metering.

We also benefit from tax credits for R&D activities in several countries (notably in France). R&D tax credits consist of tax benefits granted to companies on an open and non-discriminatory base for their research & development activities. See “Item 5. Operating and Financial Review and Prospects — Results of Operations — Research and Development Expenses”.

Funding for R&D activities is the most common form of funding that we receive. Public funding for R&D is recorded as “Other Income and Expenses, net” in our consolidated statements of income and booked pro rata in relation to the relevant cost once the agreement with the respective government agency has been signed and all applicable conditions are met. See Note 2 to our Consolidated Financial Statements.

Government support for capital expenditures funding has been used to support our capital investment. Although receipt of these funds is not directly reflected in our results of operations, the resulting lower amounts recorded in property, plant and equipment costs reduce the level of depreciation recognized by us. In Italy, the “Tremonti-ter” laws allowed business income tax reduction excluding from taxation of business income an amount equal to 50 percent of the value of investments in a detailed list of new machinery and new equipment, made from July 1, 2009 through June 30, 2010. See Note 10 to our Consolidated Financial Statements.

As a third category of government funding, we receive some loans, mainly related to large capital investment projects, at preferential interest rates. See Note 14 to our Consolidated Financial Statements.

Funding of programs in France and Italy is subject to annual appropriation, and if such governments or local authorities were unable to provide anticipated funding on a timely basis or if existing government or local-authority-funded programs were curtailed or discontinued, or if we were unable to fulfill our eligibility requirements, such an occurrence could have a material adverse effect on our business, operating results and financial condition. From time to time, we have experienced delays in the receipt of funding under these programs. As the availability of such funding is substantially outside our control, there can be no assurance that we will continue to benefit from such government support, that sufficient alternative funding would be available if necessary, or that any such alternative funding would be provided on terms as favorable to us as those previously committed. Due to changes in legislation and/or review by the competent administrative or judicial bodies, there can be no assurance that government funding granted to us may not be revoked or challenged or discontinued, in whole or in part, by any competent state or European authority, until the legal time period for challenging or revoking such funding has fully lapsed. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — If we fail to meet the condition and approval requirements applicable to public funding we have received in the past, we may face demands for repayment, which may increase our costs and impact our results of operations.”.

Suppliers

We use three main critical types of suppliers in our business: equipment suppliers, raw material suppliers and external subcontractors.

In the front-end process, we use steppers, scanners, tracking equipment, strippers, chemo-mechanical polishing equipment, cleaners, inspection equipment, etchers, physical and chemical vapor-deposition equipment, implanters, furnaces, testers, probers and other specialized equipment. The manufacturing tools that we use in the back-end process include bonders, burn-in ovens, testers and other specialized equipment. The quality and technology of equipment used in the IC manufacturing process defines the limits of our technology. Demand for increasingly smaller chip structures means that semiconductor producers must quickly incorporate the latest advances in process technology to remain competitive. Advances in process technology cannot occur without commensurate advances in equipment technology, and equipment costs tend to increase as the equipment becomes more sophisticated.

Our manufacturing processes use many raw materials, including silicon wafers, lead frames, mold compound, ceramic packages and chemicals and gases. The prices of many of these raw materials are volatile due to the specificity of the market. We have therefore adopted a “multiple sourcing strategy” designed to protect us from the risk of price disruption. The same strategy applies to supplies for the raw materials used by us to avoid potential material disruption of essential material when industry demand is ramping up. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Because we depend on a limited number of suppliers for raw materials and certain equipment, we may experience supply disruptions if suppliers interrupt supply, increase prices or experience material adverse changes in their financial condition”. Our “multiple sourcing strategy”, our Financial Risk Monitoring (FRISK) as well as the robustness of our supply chain and strong partnership with suppliers are intended to mitigate these risks.

Finally, we also use external subcontractors to outsource wafer manufacturing, as well as assembly and testing of finished products. See “— Property, Plants and Equipment” above.

Environmental Matters

Our manufacturing operations use many chemicals, gases and other hazardous substances, and we are subject to a variety of evolving environmental and health and safety regulations related, among other things, to the use, storage, discharge and disposal of such chemicals and gases and other hazardous substances, emissions and wastes, as well as the investigation and remediation of soil and ground water contamination. In most of the jurisdictions in which we operate, we must obtain permits, licenses and other forms of authorization, or give prior notification, in order to operate. Because a large portion of our manufacturing activities are located in the EU, we are subject to European Commission regulation on environmental protection, as well as regulations of the other jurisdictions where we have operations.

Consistent with our Principles of Sustainable Excellence (“PSE”) and Sustainability Strategy, we have established proactive environmental policies with respect to the handling of chemicals, gases, emissions and waste disposals from our manufacturing operations, and we have not suffered material environmental claims in the past. We believe that our activities comply with presently applicable environmental regulations in all material respects. We have engaged outside consultants to audit all of our environmental activities and created environmental management teams, information systems and training. We have also instituted environmental control procedures for processes used by us as well as our suppliers. As a company, we have been certified to be in compliance with the quality standard ISO9001:2008 and with the technical specification ISO/TS16949:2009, and with the environmental standards ISO14001 and the European EMAS (Eco Management and Audit Scheme).

Our activities are subject to two directives: Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic equipment (“ROHS” Directive, as amended), which will be replaced, with effect from January 3, 2013, by Directive 2011/65/EU of June 8, 2011, entitled “ROHS 2” Directive; and Directive 2002/96/EC on waste electrical and electronic equipment (“WEEE” Directive, as amended), which will be replaced, with effect from February 15, 2014 by Directive 2012/19/EU of July 4, 2012. Moreover our products, due to their final applications, may be subject to the end of life vehicles Directive 2000/53/EC (“ELV” Directive, as amended) and Directive 2007/47/EC (Medical Devices as amended). The ROHS Directive aims at banning the use of lead and other metals and of other flame retardant substances in electric and electronic equipments placed on the market, while the new text is also introducing new requirements within the design and manufacturing phases of the products manufacturing electronic components. The WEEE Directive promotes the recovery and recycling of electrical and electronic waste, while not imposing any “take back” activities to our operations. At this stage, we do not participate in a “take back” organization in France.

Our activities in the EU are also subject to the European Directive 2003/87/EC (as amended) establishing a scheme for greenhouse gas allowance trading and applicable national legislation. Two of our manufacturing sites (Crolles, France, and Agrate, Italy) have been allocated a quota of greenhouse gas for the period 2008-2012. The Crolles site in France was removed from the allocation scheme in 2010 by the French authorities and our site in Agrate, Italy, was removed from the scheme by the Italian authorities in 2012. We were able to complete the allocation period of 2008-2012 without purchasing any allocation.

We have also implemented voluntary reforestation projects in several countries in order to sequester additional CO2 emissions and report our emissions in our annual Corporate Sustainability Report as well as through the Carbon Disclosure Project.

Regulations implementing the registration, evaluation, authorization and restriction of chemicals (“REACH”) came into force in 2008, and are required to be fully implemented by 2018. We intend to proactively implement such legislation, in line with our commitment toward environmental protection. The implementation of any such legislation could adversely affect our manufacturing costs or product sales by requiring us to develop new processes, acquire costly equipment or materials, or to incur other significant expenses in adapting our manufacturing processes or waste and emission disposal processes. However, we are currently unable to evaluate such specific expenses and therefore have no specific reserves for environmental risks. Furthermore, environmental claims or our failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or a cessation of operations and, as with other companies engaged in similar activities, any failure by us to control the use of, or adequately restrict the discharge of hazardous substances could subject us to future liabilities. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — Some of our production processes and materials are environmentally sensitive, which could expose us to liability and increase our costs due to environmental regulations and laws or because of damage to the environment”.

Item 5.

Operating and Financial Review and Prospects

Overview

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included elsewhere in this Form 20-F. The following discussion contains statements of future expectations and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Section 21E of the Securities Exchange Act of 1934, each as amended, particularly in the sections “— Critical Accounting Policies Using Significant Estimates”, “— Business Outlook”, “— Liquidity and Capital Resources” and “— Financial Outlook”. Our actual results may differ significantly from those projected in the forward-looking statements. For a discussion of factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements in addition to the factors set forth below, see “Cautionary Note Regarding Forward-Looking Statements” and Item 3. “Key Information — Risk Factors”. We assume no obligation to update the forward-looking statements or such risk factors.

Critical Accounting Policies Using Significant Estimates

The preparation of our Consolidated Financial Statements in accordance with U.S. GAAP requires us to make estimates and assumptions. The primary areas that require significant estimates and judgments by us include, but are not limited to:

•

sales returns and allowances;

•

determination of the best estimate of the selling price for deliverables in multiple element sale arrangements;

•

inventory obsolescence reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory;

•

provisions for litigation and claims and recognition and measurement of loss contingencies;

•

valuation at fair value of assets acquired in a business combination, including intangibles, goodwill, investments and tangible assets, as well as the impairment of their related carrying values, and valuation at fair value of assumed liabilities;

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annual and trigger-based impairment review of our goodwill and intangible assets, as well as an assessment, in each reporting period, of events, which could trigger interim impairment testing;

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assessment of credit losses and other-than-temporary impairment charges on financial assets and equity investments;

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restructuring charges;

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assumptions used in assessing the number of awards expected to vest on stock-based compensation plans;

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assumptions used in calculating pension obligations; and

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determination of the amount of taxes expected to be paid and tax benefit expected to be received, including deferred income tax assets and valuation allowances, and provisions for uncertain tax positions and claims.

We base the estimates and assumptions on historical experience and on various other factors such as market trends and the latest available business plans that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. While we regularly evaluate our estimates and assumptions, the actual results we experience could differ materially and adversely from our estimates. To the extent there are material differences between our estimates and actual results, future results of operations, cash flows and financial position could be significantly affected.

Our Consolidated Financial Statements include the ST-Ericsson joint ventures; in particular, we fully consolidate ST-Ericsson SA and related affiliates (“JVS”), which is owned 50% plus a controlling share by us and is responsible for the full commercial operations of the Wireless business, primarily sales and marketing. The other joint venture is focused on fundamental R&D activities. Its parent company is ST-Ericsson AT SA (“JVD”), which is owned 50% plus a controlling share by Ericsson and is therefore accounted for by us under the equity-method.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our Consolidated Financial Statements:

Revenue recognition. Our policy is to recognize revenues from sales of products to our customers when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or determinable; and (d) collectability is reasonably assured. Our revenue recognition usually occurs at the time of shipment.

Consistent with standard business practice in the semiconductor industry, price protection is granted to distribution customers on their existing inventory of our products to compensate them for declines in market prices. We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor adjusted, if required, to accommodate for a significant change in the current market price. We record the accrued amounts as a deduction of revenue at the time of the sale. The ultimate decision to authorize a distributor refund remains fully within our control. The short outstanding inventory time period, our visibility into the standard inventory product pricing and our long distributor pricing history, have enabled us to reliably estimate price protection provisions at period-end. If market conditions differ from our assumptions, this could have an impact on future periods. In particular, if market conditions were to deteriorate, net revenues could be reduced due to higher product returns and price reductions at the time these adjustments occur, which could severely impact our profitability.

Our customers occasionally return our products for technical reasons. Our standard terms and conditions of sale provide that if we determine that products are non-conforming, we will repair or replace them, or issue a credit or rebate of the purchase price. In certain cases, when the products we have supplied have been proven to be defective, we have agreed to compensate our customers for claimed damages in order to maintain and enhance our business relationship. Quality returns are not related to any technological obsolescence issues and are identified shortly after sale in customer quality control testing. We provide for such returns when they are considered probable and can be reasonably estimated. We record the accrued amounts as a reduction of revenue.

Our insurance policy relating to product liability only covers physical and other direct damages caused by defective products. We carry limited insurance against immaterial non consequential damages. We record a provision for warranty costs as a charge against cost of sales based on historical trends of warranty costs incurred as a percentage of sales which we have determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period.

Any potential warranty claims are subject to our determination that we are at fault for damages, and that such claims usually must be submitted within a short period following the date of sale. This warranty is given in lieu of all other warranties, conditions or terms expressed or implied by statute or common law. Our contractual terms and conditions typically limit our liability to the sales value of the products that gave rise to the claims.

We maintain an allowance for doubtful accounts for potential estimated losses resulting from our customers’ inability to make required payments. We base our estimates on historical collection trends and record a provision accordingly. Furthermore, we evaluate our customers’ financial condition periodically and record a provision for any specific account we consider as doubtful. In 2012, we did not record any new material specific provision related to bankrupt customers. If we receive information that the financial condition of our customers has deteriorated, resulting in an impairment of their ability to make payments, additional allowances could be required.

While the majority of our sales agreements contain standard terms and conditions, we may, from time to time, enter into agreements that contain multiple elements or non-standard terms and conditions, which require revenue recognition judgments. In such cases, following the guidance related to revenue recognition, the arrangement is allocated to the different elements based on vendor-specific objective evidence, third party evidence or our best estimates of the selling price of the separable deliverables.

Business combinations and goodwill. The purchase accounting method applied to business combinations requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the identifiable assets acquired and liabilities assumed. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At December 31, 2012, the value of goodwill amounted to $141 million, after having recorded in 2012 a non-cash impairment charge of $922 million relating to our Wireless business.

Impairment of goodwill. Goodwill recognized in business combinations is not amortized but is tested for impairment annually in the third quarter, or more frequently if a triggering event indicating a possible impairment exists. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available after performing a qualitative assessment to determine whether an impairment test is necessary, in cases when we have chosen such option. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, we use the lower of a value determined by applying a market approach with financial metrics of comparable public companies compared to an estimate of the expected discounted future cash flows associated with the reporting unit. Significant management judgments and estimates are used in forecasting the future discounted cash flows, including: the applicable industry’s sales volume forecast and selling price evolution, the reporting unit’s market penetration and its revenues evolution, the market acceptance of certain new technologies and products, the relevant cost structure, the discount rates applied using a weighted average cost of capital and the perpetuity rates used in calculating cash flow terminal values. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market, our sales expectations and our costs evaluation, and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may prove to be incorrect, and future adverse changes in market conditions, changes in strategies, lack of performance of major customers or operating results of acquired businesses that are not in line with our estimates may require impairments.

We performed our annual impairment test of goodwill on each of our reporting units during the third quarter of 2012. Based upon the first step of the goodwill impairment test, no impairment was recorded for the DCG, AMS and MMS reporting units since the fair value of the reporting units exceeded their carrying values. However, we were required, based upon step one, to conduct the second step of the impairment test for the Wireless reporting unit whose estimated fair value was lower than its carrying value. The second step consists in allocating a reporting unit’s fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets. Based on our analysis, which calculated the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination, we estimated that the implied fair value of Wireless goodwill was lower than its carrying value. Due to the complexity required to estimate the fair value of the Wireless reporting unit in the first step of the impairment test and to estimate the fair value of all assets and liabilities of the Wireless reporting unit in the second step of the test, we recorded a preliminary non-cash impairment charge of $690 million for Wireless goodwill in the third quarter of 2012. During the fourth quarter, as part of our new strategic plan, we decided to exit the ST-Ericsson joint venture and consequently undertook a further impairment test to estimate the fair value of all assets and liabilities of the Wireless reporting unit in light of this decision. As a result, we recorded an additional non-cash impairment charge of $232 million in the fourth quarter, effectively writing off the total amount of goodwill of the Wireless reporting unit.

Further impairment charges could also result from new valuations triggered by changes in our product portfolio or strategic alternatives, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by, or equity transfers to, third parties at a value lower than the current carrying value.

Intangible assets subject to amortization. Intangible assets subject to amortization include intangible assets purchased from third parties recorded at cost and intangible assets acquired in business combinations recorded at fair value, comprised of technologies and licenses, trademarks and contractual customer relationships and computer software. Intangible assets with finite useful lives are reflected net of any impairment losses and are amortized over their estimated useful life. We evaluate each period whether there is reason to suspect that intangible assets held for use might not be recoverable. If we identify events or changes in circumstances which are indicative that the carrying amount is not recoverable, we assess whether the carrying value exceeds the undiscounted cash flows associated with the intangible assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. An impairment charge is recognized for the excess of the carrying amount over the fair value. Significant management judgments and estimates are required to forecast undiscounted cash flows associated with the intangible assets. Our evaluations are based on financial plans updated with the latest available projections of growth in the semiconductor market and our sales expectations. They are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require us to recognize impairment charges on certain intangible assets.

We recorded an impairment charge on intangible assets of $323 million in 2012, relating primarily to our decision to exit the ST-Ericsson joint venture. We will continue to monitor the carrying value of our assets. If market conditions deteriorate, this could result in future non-cash impairment charges against earnings. Further impairment charges could also result from new valuations triggered by changes in our product portfolio or by strategic transactions, particularly in the event of a downward shift in future revenues or operating cash flows in relation to our current plans or in case of capital injections by, or equity transfers to, third parties at a value lower than the one underlying the carrying amount.

At December 31, 2012, the value of intangible assets subject to amortization amounted to $213 million.

Property, plant and equipment. Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, the largest component of our long-lived assets, to be six years, except for our 300mm manufacturing equipment whose useful life is estimated to be ten years. This estimate is based on our experience using the equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate newly acquired equipment when it is placed into service.

We evaluate each period if there is reason to suspect impairment on tangible assets or groups of assets held for use and we perform an impairment review when there is reason to suspect that the carrying value of these long-lived assets might not be recoverable, particularly in case of a restructuring plan. If we identify events or changes in circumstances which are indicative that the carrying amount is not recoverable, we assess whether the carrying value exceeds the undiscounted cash flows associated with the tangible assets or group of assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. We normally estimate this fair value based on independent market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. We also evaluate and adjust, if appropriate, the assets’ useful lives at each balance sheet date or when impairment indicators are identified. Assets classified as held for sale are reported as current assets at the lower of their carrying amount and fair value less costs to sell and are not depreciated. Costs to sell include incremental direct costs to transact the sale that we would not have incurred except for the decision to sell. During 2012, we recorded an impairment charge of $21 million on our Carrollton building and facilities in Texas, which we no longer occupy, and which have remained unsold. As a result, the remaining carrying value was reclassified into assets held for use.

Our evaluations are based on financial plans updated with the latest projections of growth in the semiconductor market and our sales expectations, from which we derive the future production needs and loading of our manufacturing facilities, and which are consistent with the plans and estimates that we use to manage our business. These plans are highly variable due to the high volatility of the semiconductor business and therefore are subject to continuous modifications. If future growth differs from the estimates used in our plans, in terms of both market growth and production allocation to our manufacturing plants, this could require a further review of the carrying amount of our tangible assets and result in a potential impairment loss.

Inventory. Inventory is stated at the lower of cost or market value. Cost is based on the weighted average cost by adjusting the standard cost to approximate actual manufacturing costs on a quarterly basis; therefore, the cost is dependent on our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity. These costs are not included in the valuation of inventory but are charged directly to cost of sales. Market value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses and cost of completion. As required, we evaluate inventory acquired in business combinations at fair value, less completion and distribution costs and related margin.

While we perform, on a continuous basis, inventory write-offs of products and semi-finished products, the valuation of inventory requires us to estimate a reserve for obsolete or excess inventory as well as inventory that is not of saleable quality. Provisions for obsolescence are estimated for excess uncommitted inventories based on the previous quarter’s sales, order backlog and production plans. To the extent that future negative market conditions generate order backlog cancellations and declining sales, or if future conditions are less favorable than the projected revenue assumptions or if issues arise following our exit from ST-Ericsson, we could record additional inventory provisions, which would have a negative impact on our gross margin.

Restructuring charges. We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for exiting any of our existing activities. We recognize the fair value of a liability for costs associated with exiting an activity when we have a present obligation and the amount can be reasonably estimated. Given the significance and timing of the execution of our restructuring activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. This process can require more than one year due to requisite governmental and customer approvals and our capability to transfer technology and know-how to other locations. As we operate in a highly cyclical industry, we monitor and evaluate business conditions on a regular basis. If broader or newer initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may incur additional charges as well as change estimates of the amounts previously recorded. The potential impact of these changes could be material and could have a material adverse effect on our results of operations or financial condition. In 2012, the amount of restructuring charges and other related closure costs amounted to $108 million before taxes, which does not include additional restructuring charges, which will be incurred in 2013, as a result of our decision to exit the ST-Ericsson joint venture. The amount of such restructuring charges will depend upon which strategic options are adopted with regard to our ST-Ericsson joint venture.

Share-based compensation. We measure the cost of share-based service awards based on the fair value of the award on the grant date. This cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, usually the vesting period, and is adjusted for actual forfeitures that occur before vesting. Our share-based compensation plans may award shares contingent on the achievement of certain performance conditions based on financial objectives, including our financial results when compared to certain industry performances. In order to determine share-based compensation to be recorded for the period, we use significant estimates on the number of awards expected to vest, including the probability of achieving certain industry performances compared to our financial results, award forfeitures and employees’ service period. Our assumption related to industry performances is generally taken with a lag of one quarter in line with the availability of the information. In 2012, we recorded a total charge of approximately $11 million relating to our outstanding stock award plans.

Income (loss) on Equity-method Investments. We record our proportionate share in the results of entities that we account for under the equity-method. This recognition is based on results reported by these entities, relying on their internal reporting systems to measure financial results. Our main equity-method investments as of December 31, 2012 were represented by 3Sun with a carrying value of approximately $91 million, out of total equity investments of $106 million. In 2012, we recognized a loss of approximately $16 million related to our minority equity investment in 3Sun and an $8 million loss related to other investments, principally ST-Ericsson JVD. In case of triggering events, such as continuing difficult market conditions, which could lead to continued operation losses and negative cash flow, or in the case of a strategic repositioning by one or more of our partners, we determine whether our investment is temporarily or other-than-temporarily impaired. If impairment is considered to be other-than-temporary, we need to assess the fair value of our investment and record an impairment charge directly in earnings when fair value is lower than the carrying value of the investment. We make this assessment by evaluating the business on the basis of the most recent plans and projections or to the best of our estimates. We are continuing to monitor our equity investments and if required, additional other-than-temporary impairment charges could negatively impact our future results.

Financial assets. We classify our financial assets in the following two categories, held-for-trading and available-for-sale. Such classification depends on the purpose for which the investments are acquired and held. We determine the classification of our financial assets at initial recognition. Unlisted equity securities with no readily determinable fair value are carried at cost; they are neither classified as trading nor as available-for-sale financial assets.

Trading and available-for-sale financial assets are valued at fair value. The fair value of quoted debt and equity securities is based on current market prices. If the market for a financial asset is not active, if no observable market price is obtainable, or if the security is not quoted, we measure fair value by using assumptions and estimates. For unquoted equity securities, these assumptions and estimates include the use of recent arm’s-length transactions; for debt securities without available observable market price, we establish fair value by reference to publicly available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, which we believe approximates the amount that would be received from the sale of the asset in an orderly transaction between market participants. In measuring fair value, we make maximum use of market inputs and rely as little as possible on entity-specific inputs.

Income taxes. We make estimates and judgments in determining income tax for the period, comprising current and deferred income tax. We need to assess the income tax expected to be paid or the benefit expected to be received related to the current year income (loss) in each individual tax jurisdiction and recognize deferred income tax for all temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the consolidated financial statements. Furthermore, we assess all material open income tax positions in all tax jurisdictions to determine any uncertain tax positions, and to record a provision for those that are not more likely than not to be sustained upon examination by the taxing authorities, which could trigger potential tax claims by them. In such an event, we could be required to record additional charges in our accounts, which could significantly exceed our best estimates and our provisions.

We also assess the likelihood of realization of our deferred tax assets originated by our net operating loss carry-forwards. The ultimate realization of deferred tax assets is dependent upon, among other things, our ability to generate future taxable profit available against loss carry-forwards or tax credits before their expiration or our ability to implement prudent and feasible tax planning strategies. We record a valuation allowance against the deferred tax assets that we consider it is more likely than not that the deferred tax assets will not be realized, which would increase our provision for income taxes.

As of December 31, 2012, we had current deferred tax assets of $137 million and non-current deferred tax assets of $414 million, net of valuation allowances. Our deferred tax assets have increased in the past few years. In 2012, we continued to assess the future recoverability of the deferred tax assets resulting from past net operating losses.

We could be required to record further valuation allowances thereby reducing the amount of total deferred tax assets, resulting in a decrease in our total assets and, consequently, in our equity, if our estimates of projected future taxable income and benefits from available tax strategies are reduced as a result of a change in our assessment or due to other factors, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize net operating losses and tax credit carry-forwards in the future. Likewise, a change in the tax rates applicable in the various jurisdictions or unfavorable outcomes of any ongoing tax audits could have a material impact on our future tax provisions in the periods in which these changes could occur.

Patent and other Intellectual Property (“IP”) litigation or claims. As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other IP rights of third parties. Furthermore, we may become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. In the event the outcome of a litigation claim is unfavorable to us, we may be required to purchase a license for the underlying IP right on economically unfavorable terms and conditions, possibly pay damages for prior use, and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and on our ability to compete. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology and may face claims of infringing the IP rights of others”.

We record a provision when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate losses and claims with the support of our outside counsel to determine whether they need to be adjusted based on current information available to us. Such estimates are difficult to the extent that they are largely dependent on the status of ongoing litigation that may vary based on positions taken by the Court with respect to issues submitted, demands of opposing parties, changing laws, discovery of new facts or other matters of fact or law. As of December 31, 2012, based on our current evaluation of ongoing litigation and claims we face, we have not estimated any amounts that could have a material impact on our results of operations and financial condition with respect to either probable or possible risks. In the event of litigation that is adversely determined with respect to our interests, or in the event that we need to change our evaluation of a potential third-party claim based on new evidence or communications, unexpected legal rulings or changes in the law, this could have a material adverse effect on our results of operations or financial condition at the time it were to materialize. We are in discussion with several parties with respect to claims against us relating to possible infringement of IP rights. We are also involved in certain legal proceedings concerning such issues. See “Item 8. Financial Information — Legal Proceedings”.

Other claims. We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims beyond assessed uncertain tax positions as well as claims for environmental damages. We are also exposed to numerous legal risks which until now have not resulted in legal disputes and proceedings. These include risks related to product recalls, environment, anti-trust, anti-corruption, competition as well as other compliance regulations. We may also face claims in the event of breaches of law committed by individual employees or third parties. In determining loss contingencies, we consider the likelihood of a loss of an asset or the occurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when we believe that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly re-evaluate any losses and claims and determine whether our provisions need to be adjusted based on the current information available to us. As of December 31, 2012, based on our current evaluation of ongoing litigation and claims we face, we have not estimated any amounts that could have a material impact on our results of operations and financial condition with respect to either probable or possible risks. The disclosure of accruals for possible risks relating to the claims we are facing may compromise our legal and negotiating position with respect to such claims. In the event we are unable to estimate the amount of such loss in a correct and timely manner, this could have a material adverse effect on our results of operations or financial condition at the time such loss were to materialize. For further details of our legal proceedings refer to “Item 8. Financial Information — Legal Proceedings” and Note 23 to our Consolidated Financial Statements.

There can be no assurance, however, that all IP litigation or claims and other claims to which we are currently subject will be resolved in our favor or as currently anticipated. If the outcome of any claim or litigation were to be unfavorable to us, we could incur monetary damages, and/or face an injunction, all of which singly or in the aggregate could have an adverse effect on our results of operations and our ability to compete.

Pension and Post-Retirement Benefits. Our results of operations and our consolidated balance sheet include amounts for pension obligations and post-retirement benefits that are measured using actuarial valuations. At December 31, 2012, our pension and post-retirement benefit obligations net of plan assets amounted to $477 million based on the assumption that our employees will work with us until they reach the age of retirement. These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds and salary increase rates. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events. Any changes in the pension schemes or in the above assumptions can have an impact on our valuations. The measurement date we use for our plans is December 31.

Fiscal Year 2012

Under Article 35 of our Articles of Association, our financial year extends from January 1 to December 31, which is the period end of each fiscal year. The first quarter of 2012 ended on March 31, 2012. The second quarter of 2012 ended on June 30, 2012 and the third quarter of 2012 ended on September 29, 2012. The fourth quarter of 2012 ended on December 31, 2012. Based on our fiscal calendar, the distribution of our revenues and expenses by quarter may be unbalanced due to a different number of days in the various quarters of the fiscal year.

In 2013 the first quarter will end on March 30, the second quarter will end on June 29, the third quarter will end on September 28 and the fourth quarter will end on December 31.

2012 Business Overview

The total available market is defined as the “TAM”, while the serviceable available market, the “SAM”, is defined as the market for products produced by us (which consists of the TAM and excludes major devices such as Microprocessors (“MPUs”), DRAMs, optoelectronics devices and Flash Memories).

The semiconductor market experienced a demand reduction and inventory correction, which started in the second half of 2011, which led to a decrease in 2012 of both the TAM and the SAM, while registering recovery towards the end of the year.

Based on published industry data by WSTS, semiconductor industry revenues decreased in 2012 on a year-over-year basis by approximately 3% for both the TAM and the SAM to reach approximately $292 billion and $169 billion, respectively. In the fourth quarter, the TAM and the SAM increased on a year-over-year basis by approximately 4% and 3%, respectively. Sequentially, in the fourth quarter of 2012, the TAM was basically flat while the SAM decreased by approximately 4%.

With reference to our business performance, in 2012 we continued to experience difficult market conditions, which led to a decline in terms of revenues, mainly due to lower unit volumes, also driven by a significant drop in sales at our former largest customer. As a result, our 2012 revenues decreased 12.8% to $8,493 million; this performance was below the SAM.

Our fourth quarter 2012 revenues were down to $2,162 million, declining by 1.4% on a year-over-year basis and by 0.2% on a sequential basis. The year-over-year decrease was mainly originated by a 14.2% decline in Wireless revenues, while our wholly owned businesses revenues increased by 1.6%. The sequential variation was characterized by a 0.2% increase in our wholly owned businesses revenues, while Wireless revenues decreased by 2.2%. Both on a year-over-year basis and sequential basis, our fourth quarter 2012 revenues decreased in all product segments except AMM, whose revenues increased by 15.8% and 7.4%, respectively. Compared to the SAM, our performance was above the SAM on a sequential basis and lower on a year-over-year basis. Our fourth quarter 2012 sequential performance was slightly better than the mid-point of the guidance range released to the market, which indicated a quarter-over-quarter evolution in revenues in the range of about -5% to +2%.

Our effective average exchange rate for 2012 was $1.31 for €1.00 compared to $1.37 for €1.00 for 2011. Our effective average exchange rate for the fourth quarter of 2012 was $1.30 for €1.00, compared to $1.29 for €1.00 for the third quarter of 2012 and compared to $1.36 for €1.00 in the fourth quarter of 2011. For a more detailed discussion of our hedging arrangements and the impact of fluctuations in exchange rates, see “Impact of Changes in Exchange Rates” below.

Our 2012 gross margin was 32.8% of revenues, decreasing by 390 basis points compared to the prior year, principally due to the negative impact of selling prices, lower sales volume and higher unused capacity charges, originated by the actions taken to keep strong control on our inventory levels. Furthermore, 2012 included a $53 million charge related to the arbitration award paid to NXP. Our fourth quarter 2012 gross margin was down by 250 basis points sequentially to 32.3%, slightly improving compared to our guidance range, which indicated a gross margin of 32.0%, plus or minus 2 percentage points.

Combined 2012 SG&A and R&D expenses were basically flat compared to 2011, with the increase in R&D balanced by a decline in SG&A.

Restructuring and impairment charges significantly increased to $1,376 million from $75 million in 2011, which included a $1,234 million non-cash impairment charge on our Wireless goodwill and other intangible assets and $87 million of charges and other related closure costs, related to restructuring initiatives due to our Wireless business.

Our operating results were therefore negatively impacted by the non-cash impairment charge on Wireless goodwill and other intangible assets, lower revenues, higher restructuring charges, the NXP arbitration award charge and higher unused capacity charges, resulting in a loss of $2,081 million, compared to an income of $46 million in 2011.

Our fourth quarter 2012 operating result was a loss of $730 million, mainly due to $544 million non-cash impairment charges on our Wireless goodwill and intangible assets and $44 million of other impairment and restructuring charges.

In the fourth quarter, both revenue and gross margin results came in above the mid-point of our guidance despite the ongoing softness in the semiconductor market. We extended our leadership in key areas. Thanks to new product momentum, revenues from our wholly owned businesses increased 0.2% and 1.6% on a sequential and year-ago basis driven by a very strong ramp of our MEMS products in the fourth quarter.

Looking at 2012 overall, we improved our net financial position, as defined in “— Capital Resources”, compared to 2011 despite the significant cash used by ST-Ericsson as well as the impact of weak business conditions. We were able to end the year with significant financial flexibility and strong cash balances while providing shareholders with the same level of dividend compared to 2011.

Important decisions were made in 2012 that are shaping a new, more focused, higher-performing ST. In December, we announced our new strategic plan targeting leadership in two product segments effective January 1, 2013: Sense & Power and Automotive Products and Embedded Processing Solutions. This new strategy includes a sharper focus on five growth drivers: MEMS and sensors, smart power, automotive products, microcontrollers, and application processors including digital consumer products. Importantly, from a financial model perspective, we are targeting an operating margin of 10% or more. A key component to achieving this objective is bringing our net operating expenses, defined as SG&A expenses and R&D expenses net of related grants, to an average quarterly rate in the range of $600 million to $650 million by the beginning of 2014.

In connection with our new strategic plan, we decided to exit ST-Ericsson after a transition period and our actions this past quarter, including the further impairment charge, are aligned with moving this decision forward.

Business Outlook

In the first quarter, we expect our wholly owned businesses to deliver a better than seasonal revenue performance, with a sequential decrease of about 3% at the mid-point, despite weak macro-economic conditions. Including Wireless, we expect an overall revenue decrease of about 7% at the mid-point of our guidance, plus or minus 3.5 percentage points, as ST-Ericsson anticipates a very significant sequential decrease in net sales. Reflecting lower unsaturation charges and no licensing revenues compared to the fourth quarter, we expect gross margin in the first quarter to be about 31.4%, plus or minus 2.0 percentage points. This does not take into consideration potential write-off charges, if any, which may be incurred depending on the exit options adopted for ST-Ericsson.

More broadly, semiconductor market conditions are expected to improve in 2013, driven by a more favorable economic environment. During the first part of the year, there have been initial signs of a mild recovery. At ST, we expect to outperform the market with our Sense & Power and Automotive Products and Embedded Processing Solutions segments. In particular, we expect Imaging, Microcontrollers, Analog and MEMS to be the highest contributors to our revenue performance.

With respect to ST-Ericsson, we are finalizing our decision regarding available strategic options. While we do not underestimate the challenges related to the transition, we are committed to ensure a smooth and timely exit. This could have a negative impact on our results in terms of additional provisions for restructuring charges and write-downs of assets. Our current best estimate is that we could have funding requirements, including the ongoing operations of ST-Ericsson during the transition period and restructuring costs, in the range of approximately $300 million to $500 million during 2013.

Overall, we will be a much stronger company with a re-sized cost base, sharpened product focus and stronger market position.

This outlook is based on an assumed effective currency exchange rate of approximately $1.31 = €1.00 for the 2013 first quarter and includes the impact of existing hedging contracts. The first quarter will close on March 30, 2013.

These are forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially; in particular, refer to those known risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements” and “Item 3. Key Information — Risk Factors” herein.

Other Developments

On February 23, 2012, certain holders redeemed 190,131 of our 2016 Convertible Bonds at a price of $1,093.81, out of the total of 200,402 outstanding bonds, representing approximately 95% of the then outstanding convertible bonds. In addition, on March 12, 2012, we accepted the further put of 4,980 bonds for a cash consideration of $5 million. On March 28, 2012, we published a notice of sweep up redemption for the remaining 5,291 bonds outstanding, which were redeemed on May 10, 2012. As of December 31, 2012, there were no bonds remaining outstanding.

On April 5, 2012, an arbitration tribunal set up according to the rules of the International Chamber of Commerce, ordered us to pay approximately $59 million to NXP concerning a dispute related to a claim from NXP for underloading charges to be included in the price of wafers which NXP supplied to our Wireless joint venture. The tribunal chose not to address certain issues raised by us that formed part of a second arbitration before the same ICC tribunal. Hearings occurred in June 2012 and a final decision is expected in the first half of 2013.

Our Annual General Meeting of Shareholders was held on May 30, 2012 in Amsterdam and, among other, the following decisions were adopted by our shareholders:

•

The appointment of Ms. Martine Verluyten as a new member of the Supervisory Board for a three-year term, expiring at the 2015 Annual General Meeting, in replacement of Mr. Doug Dunn whose mandate expired;

•

The adoption of our 2011 accounts reported in accordance with International Financial Reporting Standards, as issued by the IASB and adopted by the European Union (IFRS);

•

The distribution of a cash dividend of $0.40 per share, to be paid in four equal quarterly installments in June, August and December 2012 and February 2013 to shareholders of record in the month of each quarterly payment.

After our Annual General Meeting of Shareholders on May 30, 2012, Philippe Dereeper was named Executive Secretary of our Supervisory Board.

On July 2, 2012, we announced the publication of our 2011 Sustainability Report. Containing comprehensive details of our sustainability strategy, policies and performance during 2011, the Report also illustrates how we embed sustainability into every level of our operations to create value for all our stakeholders.

Effective July 31, 2012, Alisia Grenville-Mangold, Corporate Vice President and Chief Compliance Officer, was succeeded by Philippe Dereeper as Corporate Compliance Officer, reporting to Tjerk Hooghiemstra, Chief Administrative Officer.

Effective July 31, 2012, Franck Freymond, Chief Audit and Risk Executive, took on responsibility for the Ethics Committee, the whistle-blowing hotline and the process and reporting on related investigations and Enterprise Risk Management, in addition to his current assignment.

Effective July 31, 2012, Patrice Chastagner, Corporate Vice President, Human Resources, was succeeded by Philippe Brun, reporting to Tjerk Hooghiemstra.

On August 6, 2012, we announced the completion of an IP and talent acquisition from bTendo, an Israeli projection-technology innovator.

On August 30, 2012, we announced a strategic agreement with MicroOLED, a France-based company dedicated to the development and commercialization of state-of-the-art organic light emitting diodes, as well as an equity investment of approximately €6 million in the company.

On September 13, 2012, we announced that Georges Penalver was appointed Executive Vice President, Member of the Corporate Strategic Committee, Corporate Strategy Officer, effective immediately. Jean-Marc Chery, Executive Vice President, took the additional responsibility of General Manager, Digital Sector, while maintaining his current role of Executive Vice President, Chief Technology and Manufacturing Officer. As a result of Mr. Chery’s expanded responsibilities, Eric Aussedat, General Manager, Imaging and Bi-CMOS ASICs Group, Joel Hartmann, Corporate Vice President, Front-end Manufacturing & Process R&D, Digital Sector, and Philippe Magarshack, Corporate Vice President, Design Enablement & Services, are promoted to Executive Vice Presidents while maintaining their previous roles. Stephane Delivre, Corporate Vice President, Global Chief Information Officer, now reports to Carlo Bozotti. Philippe Lambinet, Executive Vice President, Corporate Strategy Officer and General Manager, Digital Sector, left the company to pursue other interests, effective September 13, 2012.

On October 23, 2012, in a move to enhance performance and optimize asset utilization, we announced a new savings plan designed to achieve $150 million in annual savings at the ST level upon completion anticipated to occur by the end of 2013. A portion of the savings coming from the identified initiatives will leverage the synergies of our previously disclosed Unified Processing Platform approach by integrating the development of System-on-Chip for digital TV. The plan also involves other new initiatives, such as efficiencies in our process-technology development model and expenses related to design outsourcing. Total restructuring costs are expected to be about $25 million to $30 million through completion and might affect up to 500 jobs, including contractors and attritions.

On December 10, 2012, we announced our new strategic plan. The plan is the outcome of a strategic review, as we saw major changes in the market dynamics, in particular, with reference to the wireless market. Our new strategy is aligned with the new market environment and is centered on leadership in Sense and Power and Automotive Products, and in Embedded Processing Solutions. Our specific focus is on five product areas: MEMS and sensors, smart power, automotive products, microcontrollers, and application processors including digital consumer. As part of new strategy, we decided to exit the ST-Ericsson joint venture after a transition period, which is expected to end during the third quarter of 2013.

Results of Operations

Segment Information

We operate in two business areas: Semiconductors and Subsystems.

In the Semiconductors business area, we design, develop, manufacture and market a broad range of products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full-custom devices and semi-custom devices and application-specific standard products (“ASSPs”) for analog, digital and mixed-signal applications. In addition, we further participate in the manufacturing value chain of Smartcard products, which include the production and sale of both silicon chips and Smartcards.

In 2012, the organization was as follows:

•

Automotive Segment (“APG”);

•

Digital Segment, consisting of two product lines:

•

Digital Convergence Group (“DCG”); and

•

Imaging, Bi-CMOS ASIC and Silicon Photonics Group (“IBP”).

•

Analog, MEMS and Microcontrollers Sector (“AMM”), comprised of three product lines:

•

Analog, MEMS & Sensors (“AMS”);

•

Industrial & Power Conversion (“IPC”); and

•

Microcontrollers, Memories and Secure MCUs (“MMS”).

•

Power Discrete Product Segment (“PDP”);

•

Wireless Segment comprised of the following product lines:

•

Connectivity (“COS”);

•

Smartphone and Tablet Solutions (“STS”);

•

Modems (“MOD”); and

•

Other Wireless, in which we report other revenues, gross margin and other items related to the Wireless business but outside the ST-Ericsson JVS.

In 2012, we revised our results from prior periods in accordance with the new segment structure due to the former Automotive, Consumer, Computer and Communication Infrastructure (“ACCI”) now being split into three segments (“APG”, “Digital” and “AMM”). In addition, we revised the product lines of the Wireless segment due to Entry Solutions being reclassified into Smartphone and Tablet Solutions (“STS”). The preparation of segment information based on the current segment structure requires us to make significant estimates, assumptions and judgments in determining the operating income (loss) of the segments for the prior reporting periods. We believe that the revised 2011 and 2010 presentation is consistent with that of 2012 and we use these comparatives when managing our company.

Effective January 1, 2013, based on our new strategy, the reporting of our results reflects the new organization announced on December 10, 2012, as follows:

•

Sense & Power and Automotive Products (“SPA”), including Analog and MEMS, Automotive and Industrial and Power Discrete; and

•

Embedded Processing Solutions (“EPS”), comprised of Digital Consumer, Microcontrollers, Memory and Security, Imaging and Wireless.

Our principal investment and resource allocation decisions in the semiconductor business area are for expenditures on R&D and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the semiconductor business area. All product segments share common R&D for process technology and manufacturing capacity for most of their products.

In the Subsystems business area, we design, develop, manufacture and market subsystems and modules for the telecommunications, automotive and industrial markets including mobile phone accessories, battery chargers, ISDN power supplies and in-vehicle equipment for electronic toll payment. Based on its immateriality to our business as a whole, the Subsystems business area does not meet the requirements for a reportable segment as defined in the guidance on disclosures about segments of an enterprise and related information. All the financial values related to Subsystems including net revenues and related costs, are reported in the segment “Others”.

The following tables present our consolidated net revenues and consolidated operating income (loss) by product segment. For the computation of the segments’ internal financial measurements, we use certain internal rules of allocation for the costs not directly chargeable to the segments, including cost of sales, SG&A expenses and a significant part of R&D expenses. In compliance with our internal policies, certain cost items are not charged to the segments, including impairment, restructuring charges and other related closure costs, including ST-Ericsson plans, unused capacity charges, phase-out and start-up costs of certain manufacturing facilities, the NXP arbitration award charge, strategic and special R&D programs or other corporate-sponsored initiatives, including certain corporate-level operating expenses and certain other miscellaneous charges. In addition, depreciation and amortization expense is part of the manufacturing costs allocated to the product segments and is neither identified as part of the inventory variation nor as part of the unused capacity charges; therefore, it cannot be isolated in the costs of goods sold.


	Year Ended December 31,
	2012		2011		2010
	(In millions)
Net revenues by product segment:
Automotive (“APG”)	$	1,554	$	1,678	$	1,420
Digital		1,334		1,839		2,174
Analog, MEMS and Microcontrollers (“AMM”)		3,200		3,377		3,154
Power Discrete Products (“PDP”)		1,015		1,240		1,319
Wireless		1,345		1,552		2,219
Others⁽¹⁾		45		49		60
Total consolidated net revenues	$	8,493	$	9,735	$	10,346

(1)	In 2012, “Others” includes revenues from the sales of Subsystems ($25 million), sales of materials and other products not allocated to product segments ($16 million) and miscellaneous ($4 million).

For each product segment, the following table discloses the revenues of their relevant product lines for the periods under review:


	Year Ended December 31,
	2012			2011		2010
	(In millions)
Net revenues by product line:
Automotive (“APG”)	$	1,554		$	1,678	$	1,420
Digital Convergence Group (“DCG”)		888			1,084		1,413
Imaging, Bi-CMOS ASIC and Silicon Photonics Group (“IBP”)		437			722		712
Others		9			33		49
Digital		1,334			1,839		2,174
Analog, MEMS & Sensors (“AMS”)		1,320			1,335		1,106
Industrial & Power Conversion (“IPC”)		733			864		863
Microcontrollers, Memories & Secure MCUs (“MMS”)		1,147			1,175		1,181
Others		—			3		4
Analog, MEMS and Microcontrollers (“AMM”)		3,200			3,377		3,154
Power Discrete Products (“PDP”)		1,015			1,240		1,319
Connectivity (“COS”)		120			233		286
Smartphone and Tablet Solutions (“STS”)		1,102			1,202		1,893
Modems (“MOD”)		129			115		35
Others		(6	)		2		5
Wireless		1,345			1,552		2,219
Others		45			49		60
Total consolidated net revenues	$	8,493		$	9,735	$	10,346


	Year Ended December 31,
	2012			2011			2010
	(In millions)
Operating income (loss) by product segment:
Automotive (“APG”)	$	129		$	227		$	121
Digital		(154	)		108			245
Analog, MEMS and Microcontrollers (“AMM”)		418			606			546
Power Discrete Products (“PDP”)		18			139			179
Wireless⁽¹⁾		(885	)		(812	)		(483	)
Others⁽²⁾		(1,607	)		(222	)		(132	)
Operating income (loss)	$	(2,081	)	$	46		$	476

(1)

The majority of Wireless’ activities are run through ST-Ericsson JVS. In addition, Wireless includes other items affecting operating results related to the Wireless business. The noncontrolling interest of Ericsson in ST-Ericsson JVS’ operating results (which are 100% included in Wireless) is credited on the line “Net loss (income) attributable to noncontrolling interest” of our Consolidated Statements of Income, which represented $1,030 million for the year ended December 31, 2012.

(2)

Operating loss of “Others” includes items such as impairment, restructuring charges and other related closure costs including ST-Ericsson plans, unused capacity charges, phase-out and start-up costs, the NXP arbitration award charge and other unallocated expenses such as: strategic or special R&D programs, certain corporate-level operating expenses and other costs that are not allocated to the product segments, as well as operating earnings of the Subsystems and Other Products Group. The $1,234 million non-cash Wireless impairment charge has been attributed to the segment “Others”.


	Year Ended December 31,
	2012			2011			2010
	(As percentage of net revenues)
Operating income (loss) by product segment:
Automotive (“APG”)⁽¹⁾		8.3	%		13.5	%		8.5	%
Digital⁽¹⁾		(11.5	)		5.8			11.3
Analog, MEMS and Microcontrollers (“AMM”)⁽¹⁾		13.1			17.9			17.3
Power Discrete Products (“PDP”)⁽¹⁾		1.8			11.2			13.6
Wireless⁽¹⁾		(65.8	)		(52.3	)		(21.8	)
Others		—			—			—
Total consolidated operating income (loss)⁽²⁾		(24.5	)%		0.5	%		4.6	%

(1)	As a percentage of net revenues per product segment.

(2)	As a percentage of total net revenues.


	Year Ended December 31,
	2012			2011			2010
	(In millions)
Reconciliation to consolidated operating income (loss):
Total operating income (loss) of product segments	$	(474	)	$	268		$	608
Unused capacity charges		(172	)		(149	)		(3	)
Impairment, restructuring charges and other related closure costs		(1,376	)		(75	)		(104	)
Phase-out and start up costs		—			(8	)		(15	)
Strategic and other research and development programs		(12	)		(13	)		(18	)
NXP arbitration award		(54	)		—			—
Other non-allocated provisions⁽¹⁾		7			23			8
Total operating loss Others		(1,607	)		(222	)		(132	)
Total consolidated operating income (loss)	$	(2,081	)	$	46		$	476

(1)	Includes unallocated income and expenses such as certain corporate-level operating expenses and other costs/income that are not allocated to the product segments.

Net revenues by location of shipment and by market channel

The table below sets forth information on our net revenues by location of shipment:


	Year Ended December 31,
	2012		2011		2010
	(In millions)
Net Revenues by Location of Shipment:⁽¹⁾
EMEA	$	2,100	$	2,328	$	2,592
Americas		1,253		1,342		1,331
Greater China-South Asia		3,555		4,359		4,558
Japan-Korea		1,585		1,706		1,865
Total	$	8,493	$	9,735	$	10,346

(1)

Net revenues by location of shipment are classified by location of customer invoiced or reclassified by shipment destination in line with customer demand. For example, products ordered by U.S.-based companies to be invoiced to Greater China-South Asia affiliates are classified as Greater China-South Asia revenues. Furthermore, the comparison among the different periods may be affected by shifts in shipment from one location to another, as requested by our customers.

The table below shows our net revenues by location of shipment and market channel in percentage of net revenues:


	Year Ended December 31,
	2012			2011			2010
	(As percentage of net revenues)
Net Revenues by Location of Shipment:⁽¹⁾
EMEA		24.7	%		23.9	%		25.0	%
Americas		14.7			13.8			12.9
Greater China-South Asia		41.9			44.8			44.1
Japan-Korea		18.7			17.5			18.0
Total		100.0			100.0			100.0
Net Revenues by Market Channel:⁽²⁾
OEM		77.6			77.3			79.1
Distribution		22.4			22.7			20.9
Total		100.0	%		100.0	%		100.0	%

(1)

(2)	Original Equipment Manufacturers (“OEM”) are the end-customers which are directly followed by us in terms of marketing application engineering support, while Distribution customers refers to the distributors and representatives that we engage to distribute our products around the world.

The following table sets forth certain financial data from our Consolidated Statements of Income, expressed in each case as a percentage of net revenues:


	Year Ended December 31,
	2012			2011			2010
	(As percentage of net revenues)
Net sales		98.7	%		98.9	%		99.2	%
Other revenues		1.3			1.1			0.8
Net revenues		100.0			100.0			100.0
Cost of sales		(67.2	)		(63.3	)		(61.2	)
Gross profit		32.8			36.7			38.8
Selling, general and administrative		(13.8	)		(12.4	)		(11.4	)
Research and development		(28.4	)		(24.1	)		(22.7	)
Other income and expenses, net		1.1			1.1			0.9
Impairment, restructuring charges and other related closure costs		(16.2	)		(0.8	)		(1.0	)
Operating income (loss)		(24.5	)		0.5			4.6
Other-than-temporary impairment charge and realized gains on financial assets		—			3.3			—
Interest expense, net		(0.4	)		(0.3	)		(0.0	)
Income (loss) on equity-method investments and gain on investment divestiture		(0.3	)		(0.3	)		2.3
Gain (loss) on financial instruments, net		0.0			0.3			(0.2	)
Income (loss) before income taxes and noncontrolling interest		(25.2	)		3.5			6.7
Income tax expense		(0.6	)		(1.9	)		(1.5	)
Net income (loss)		(25.8	)		1.6			5.2
Net loss (income) attributable to noncontrolling interest		12.2			5.1			2.8
Net income (loss) attributable to parent company		(13.6	)%		6.7	%		8.0	%

2012 vs. 2011

Net revenues


	Year Ended December 31,				% Variation
	2012		2011		Year-Over- Year
	(In millions)
Net sales	$	8,380	$	9,630		(13.0	)%
Other revenues		113		105		7.3
Net revenues	$	8,493	$	9,735		(12.8	)%

Our 2012 net revenues decreased compared to the year-ago period, which benefited from more favorable market conditions. Net revenues decreased by 12.8% driven by a decrease of approximately 7% in volume and a decline in average selling prices by approximately 6%.

Net revenues decreased by approximately 27% for Digital, 18% for PDP, 7% for APG and 5% for AMM, all driven by a significant decline in volume except APG. Wireless revenues registered a decline of approximately 13%.

By market channel, the relative breakdown between OEM and Distribution remained comparable from one period to the next.

By location of shipment, all regions were negatively impacted in terms of revenues by the difficult market conditions. In 2012, no customer exceeded 10% of our total net revenues while the Nokia group of companies accounted for slightly more than 10% of our total net revenues in 2011.

Gross profit


	Year Ended December 31,						% Variation
	2012			2011			Year-Over- Year
	(In millions)
Cost of sales	$	(5,710	)	$	(6,161	)		7.3	%
Gross profit		2,783			3,574			(22.1	)
Gross margin (as percentage of net revenues)		32.8	%		36.7	%		—

In 2012, gross margin was 32.8%, decreasing by 390 basis points compared to the prior year, principally due to the negative impact of declining selling prices, lower sales volume, higher unused capacity charges and the $53 million NXP arbitration award charge, partially offset by a favorable currency effect and a more favorable product mix.

Selling, general and administrative expenses


	Year Ended December 31,						% Variation
	2012			2011			Year-Over- Year
	(In millions)
Selling, general and administrative expenses	$	(1,166	)	$	(1,210	)		3.6	%
As percentage of net revenues		(13.8	)%		(12.4	)%		—

Our SG&A expenses decreased in 2012 mainly due to the favorable impact of the U.S. dollar exchange rate and cost saving initiatives. Our share-based compensation charges were $6 million in 2012, compared to $16 million in 2011.

As a percentage of revenues, our SG&A expenses amounted to 13.8%, slightly increasing in comparison to 12.4% in 2011 due to lower volumes of sales.

Research and development expenses


	Year Ended December 31,						% Variation
	2012			2011			Year-Over- Year
	(In millions)
Research and development expenses	$	(2,413	)		$(2,352	)		(2.6	)%
As percentage of net revenues		(28.4	)%		(24.1	)%		—

Our R&D expenses increased compared to 2011, mainly because 2011 benefited from a $100 million billing of R&D services. Furthermore, the 2012 R&D expenses benefited from ongoing cost saving measures and restructuring initiatives and a more favorable exchange rate. Our 2012 R&D expenses included $3 million of share-based compensation charges, compared to $8 million in 2011. Total R&D expenses were net of research tax credits, which amounted to $152 million in 2012; the amount was $159 million in 2011.

As a percentage of revenues, 2012 R&D equaled 28.4%, increasing compared to 24.1% in the prior year.

Other income and expenses, net


	Year Ended December 31,
	2012			2011
	(In millions)
Research and development funding	$	102		$	128
Phase-out and start-up costs		—			(8	)
Exchange gain, net		5			8
Patent costs		(20	)		(28	)
Gain on sale of non-current assets		9			15
Other, net		(5	)		(6	)
Other income and expenses, net	$	91		$	109
As percentage of net revenues		1.1	%		1.1	%

Other income and expenses, net, mainly included, as income, items such as R&D funding, gain on sale of non-current assets and exchange gain and, as expenses, patent costs. Income from R&D funding was associated with our R&D projects, which, upon project approval, qualifies as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In 2012, the balance of these factors resulted in an income, net of $91 million, decreasing compared to 2011 mainly due to the lower level of funding.

Impairment, restructuring charges and other related closure costs


	Year Ended December 31,
	2012			2011
	(In millions)
Impairment, restructuring charges and other related closure costs	$	(1,376	)	$	(75	)

In 2012, we recorded $1,376 million of impairment, restructuring charges and other related closure costs, of which:

•

$1,234 million as a non-cash impairment on our Wireless goodwill and other intangible assets;

•

$66 million related to the ST-Ericsson restructuring plan announced in April 2012, primarily consisting of employee termination benefits, as well as $2 million impairment charges on long-lived assets with no future use;

•

$23 million related to the manufacturing restructuring plan as part of the closure of our Carrollton (Texas) and Phoenix (Arizona) sites of which $21 million was recorded as an impairment on the Carrollton building and facilities;

•

$21 million related to the ST-Ericsson restructuring plans previously announced in 2011 and 2009;

•

$20 million was recorded in relation to our Digital restructuring plan announced in October 2012 and was composed of employee termination benefits, as well as $7 million impairment charges on intangible assets with no future use;

•

$8 million related to other restructuring initiatives; and

•

a $4 million impairment charge on certain intangibles.

In 2011, we recorded $75 million of impairment, restructuring charges and other related closure costs, of which:

•

$37 million was recorded in relation to the manufacturing restructuring plan as part of the closure of our Carrollton and Phoenix sites, and was composed of one-time termination benefits, as well as other related closure charges, mainly associated with the Phoenix fab, where production was terminated in the first quarter of 2011;

•

$26 million related to the cost savings plan announced in June 2011 by ST-Ericsson, primarily consisting of employee termination benefits;

•

$7 million related to the workforce reduction plans announced in April and December 2009 by ST-Ericsson, pursuant to the closure of certain locations; and

•

$5 million related to other restructuring initiatives.

Operating income (loss)


	Year Ended December 31,
	2012			2011
	(In millions)
Operating income (loss)	$	(2,081	)	$	46
As percentage of net revenues		(24.5	)%		0.5	%

Our operating results deteriorated compared to the prior year mainly due to the non-cash impairment charge on Wireless goodwill and other intangible assets, the impact of lower revenues due both to a volume and average selling price decline, higher restructuring charges, the NXP arbitration award charge and higher unused capacity charges. Furthermore, 2011 benefited from a $100 million billing of R&D services. This resulted in an operating loss of $2,081 million in 2012 compared to an operating income of $46 million in 2011.

Our wholly owned businesses (APG, Digital, AMM, PDP and others) reported a decline in their profitability levels compared to the year-ago period, mainly due to lower levels of revenues. APG operating income was $129 million or approximately 8% of revenues in 2012, down from $227 million, or about 14% of 2011 revenues. AMM profit declined from $606 million or about 18% of revenues to $418 million or about 13% of revenues in 2012. PDP operating income decreased from $139 million or about 11% of revenues to $18 million or about 2% of revenues in 2012. In 2012, Digital registered an operating loss of $154 million or about negative 12% of revenues, down from a $108 million operating income or approximately 6% of 2011 revenues. Wireless operating loss increased from $812 million in 2011 to $885 million in 2012, of which the largest part was generated from ST-Ericsson JVS, partially originated by an approximate 13% decline in revenues; 50% of this loss was attributed to Ericsson as noncontrolling interest below operating income (loss). The segment “Others” increased its losses to $1,607 million from $222 million in 2011, mainly due to higher impairment and restructuring charges (which accounted for $1,376 million in 2012 compared to $75 million in 2011), the higher amount of unused capacity charges (which accounted for $172 million in 2012 compared to $149 million in 2011) and the NXP arbitration award charge of $54 million in 2012.

Other-than-temporary impairment charge and realized gains on financial assets


	Year Ended December 31,
	2012		2011
	(In millions)
Other-than-temporary impairment charge and realized gains on financial assets	$	—	$	318

In 2011, the income of $318 million represented a balance of (i) a realized gain on financial assets of $323 million as a result of the cash settlement from Credit Suisse against the transfer of ownership of the whole portfolio of Auction Rate Securities and (ii) an other-than-temporary impairment charge of $5 million as an adjustment of the fair value of certain marketable securities.

Interest expense, net


	Year Ended December 31,
	2012			2011
	(In millions)
Interest expense, net	$	(35	)	$	(25	)

In 2012, we registered an expense increase compared with the year-ago period, mainly due to ST-Ericsson increased utilization of the parent’s loan facility. As in 2011, ST-Ericsson had a one-off sale of certain R&D tax credits anticipating their collection by three years and also interest expenses related to the sale without recourse of its trade receivables.

Loss on equity-method investments


	Year Ended December 31,
	2012			2011
	(In millions)
Loss on equity-method investments	$	(24	)	$	(28	)

In 2012, we recorded a charge of $24 million, out of which $16 million related to 3Sun and $7 million to our proportionate share in the loss of ST-Ericsson JVD primarily reflecting our share of the impairment charge recorded by ST-Ericsson JVD as a result of their impairment test. The remaining $1 million loss related to other investments. The 2011 amount represented a charge of $28 million, out of which $23 million related to our proportionate share in ST-Ericsson JVD’s net results, including amortization of basis difference. The remaining $5 million loss related to other investments.

Gain on financial instruments, net


	Year Ended December 31,
	2012		2011
	(In millions)
Gain on financial instruments, net	$	3	$	25

The $3 million gain on financial assets in 2012 was mainly associated with the gain of $2 million related to the repurchase of our 2016 Convertible Bonds and $1 million related to the sale of some marketable securities. The $25 million gain on financial assets in 2011 was mainly associated with (i) the gain of $20 million related to the sale of the remaining Micron shares and the unwinding of the related hedging of our equity participation in

Micron received upon the Numonyx disposal and (ii) a gain of $4 million recorded following unsolicited repurchases of a portion of our 2016 Convertible Bonds with an accreted value of $318 million, inclusive of the swap, for a cash consideration of $314 million.

Income tax expense


	Year Ended December 31,
	2012			2011
	(In millions)
Income tax expense	$	(51	)	$	(181	)

During 2012, we registered an income tax expense of $51 million, reflecting the actual tax charge calculated on our income before income taxes in each of our jurisdictions. This expense included the recognition of deferred tax assets, net of valuation allowances, associated with our estimates of the net operating loss recoverability in certain jurisdictions and our best estimate on additional tax charges related to potential uncertain tax positions and claims. The 2012 income tax expense was also impacted by the additional valuation allowances recorded on certain deferred tax assets related to ST-Ericsson, which are no longer supported by tax planning strategies, partially due to our decision to exit the joint venture.

Net loss (income) attributable to noncontrolling interest


	Year Ended December 31,
	2012			2011
	(In millions)
Net loss (income) attributable to noncontrolling interest	$	1,030		$	495
As percentage of net revenues		12.2	%		5.1	%

In 2012, we recorded $1,030 million loss attributable to noncontrolling interest, which mainly included Ericsson’s ownership in ST-Ericsson JVS. In 2011, we recorded $495 million loss attributable to noncontrolling interest, which mainly included $413 million of the ST-Ericsson JVS losses and $92 million charge for a valuation allowance related to part of ST-Ericsson’s accumulated net operating losses.

All periods also included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities and Incard do Brazil for distribution.

Net income (loss) attributable to parent company


	Year Ended December 31,
	2012			2011
	(In millions)
Net income (loss) attributable to parent company	$	(1,158	)	$	650
As percentage of net revenues		(13.6	)%		6.7	%

In 2012, we reported a net loss of $1,158 million, a significant decline compared to 2011 due to the aforementioned factors. In 2011, we reported a net income of $650 million.

The 2012 net loss attributable to the parent company was $(1.31) per share compared to diluted earnings of $0.72 per share in 2011.

In 2012, the impact after tax of impairment, restructuring charges and other related closure costs and other one-time items, net of tax, was estimated to be approximately $(0.98) per share.

2011 vs. 2010

Net revenues


	Year Ended December 31,				% Variation
	2011		2010		Year-Over- Year
	(In millions)
Net sales	$	9,630	$	10,262		(6.2	)%
Other revenues		105		84		24.3
Net revenues	$	9,735	$	10,346		(5.9	)%

Our 2011 net revenues decreased by approximately 6%, driven by the significant decline in Wireless and the overall weakness in the semiconductor industry registered in the second half of 2011. Such decline originated from an approximate 4% decrease in volume and 2% reduction in average selling prices. Our 2011 net revenues benefited from $105 million of other revenues, consisting mainly of technology licensing of $77 million.

Our wholly owned businesses revenues registered an increase by about 1% in 2011.

APG revenues increased by approximately 18% compared to the prior year. AMM registered a revenue growth of approximately 7%, led by the strong success of our MEMS products, while Digital revenues decreased by approximately 15%. PDP revenues declined by approximately 6%. Wireless sales registered a decline of approximately 30%, led by the strong reduction of its legacy products.

By market channel, Distribution revenues accounted for approximately 23% of our total revenues, compared to 21% in 2010.

By location of shipment, all regions except the Americas performed negatively in terms of revenues. In 2011, our largest customer, the Nokia group of companies, accounted for slightly more than 10% of our total net revenues, compared to about 14% in 2010.

Gross profit


	Year Ended December 31,						% Variation
	2011			2010			Year-Over- Year
	(In millions)
Cost of sales	$	(6,161	)	$	(6,331	)		2.7	%
Gross profit		3,574			4,015			(11.0	)
Gross margin (as percentage of net revenues)		36.7	%		38.8	%		—

In 2011, gross margin was 36.7%, down by 210 basis points compared to the prior year, mainly due to the negative impact of selling prices, lower sales volume which generated a significant amount of unused capacity charges, which penalized the 2011 gross margin by 150 basis points. Furthermore, 2011 benefited from the contribution of improved overall manufacturing performances and of the contribution of other revenues.

Selling, general and administrative expenses


	Year Ended December 31,						% Variation
	2011			2010			Year-Over- Year
	(In millions)
Selling, general and administrative expenses	$	(1,210	)	$	(1,175	)		(3.0	)%
As percentage of net revenues		(12.4	)%		(11.4	)%		—

Our SG&A expenses increased in 2011 mainly due to the negative impact of the U.S. dollar exchange rate. Our share-based compensation charges were $16 million in 2011, slightly lower compared to the previous period.

As a percentage of revenues, our SG&A expenses amounted to 12.4%, slightly increasing in comparison to 11.4% in 2010.

Research and development expenses


	Year Ended December 31,						% Variation
	2011			2010			Year-Over- Year
	(In millions)
Research and development expenses	$	(2,352	)	$	(2,350	)		(0.1	)%
As percentage of net revenues		(24.1	)%		(22.7	)%		—

The 2011 R&D expenses benefited from higher billing of R&D services in the amount of $100 million, whereas they amounted to $80 million in 2010, while they were penalized by the unfavorable impact of the exchange rates. In addition, the 2011 R&D expenses benefited from our ongoing cost saving measures and restructuring initiatives, mainly in the ST-Ericsson perimeter. As a result, our R&D expenses were flat on a year-over-year basis.

The 2011 amount included $8 million of share-based compensation charges, slightly less compared to 2010. Total R&D expenses were net of research tax credits, which amounted to $159 million in 2011; the amount was $146 million in 2010.

As a percentage of revenues, 2011 R&D equaled 24.1%, increasing compared to 22.7% in the prior year.

Other income and expenses, net


	Year Ended December 31,
	2011			2010
	(In millions)
Research and development funding	$	128		$	106
Phase-out and start-up costs		(8	)		(15	)
Exchange gain, net		8			11
Patent costs		(28	)		(12	)
Gain on sale of non-current assets		15			4
Other, net		(6	)		(4	)
Other income and expenses, net	$	109		$	90
As percentage of net revenues		1.1	%		0.9	%

Other income and expenses, net, mainly included, as income, items such as R&D funding, gain on sale of non-current assets and exchange gain and, as expenses, patent costs and phase-out and start-up costs. Income from R&D funding was associated with our R&D projects, which, upon project approval, qualifies as funding on the basis of contracts with local government agencies in locations where we pursue our activities. Patent costs increased mainly due to higher provisions for loss contingencies and higher legal fees. The gain on the sale of non-current assets mainly consisted of the gain on the sale of our Phoenix plant. In 2011, the balance of these factors resulted in an income, net of $109 million, increasing compared to 2010 mainly due to the higher level of funding.

Impairment, restructuring charges and other related closure costs


	Year Ended December 31,
	2011			2010
	(In millions)
Impairment, restructuring charges and other related closure costs	$	(75	)	$	(104	)

In 2011, we recorded $75 million of impairment, restructuring charges and other related closure costs, of which:

•

$37 million was recorded in relation to the manufacturing restructuring plan as part of the closure of our Carrollton (Texas) and Phoenix (Arizona) sites, and was composed of one-time termination benefits, as well as other related closure charges, mainly associated with the Phoenix fab, where production was terminated in the first quarter of 2011;

•

$26 million related to the cost savings plan announced in June 2011 by ST-Ericsson, primarily consisting of employee termination benefits;

•

$7 million related to the workforce reduction plans announced in April and December 2009 by ST-Ericsson, pursuant to the closure of certain locations; and

•

$5 million related to other restructuring initiatives.

In 2010, we recorded $104 million of impairment, restructuring charges and other related closure costs, which were basically related to two plans: the manufacturing plan and the ST-Ericsson restructuring plan. The breakdown was as follows:

•

$74 million related to the plans announced in April and December 2009 by ST-Ericsson, largely completed during 2010, primarily consisting of ongoing termination benefits pursuant to the workforce reduction plan and the closure of certain locations in Europe;

•

$27 million related to our manufacturing restructuring plan, which contemplated the closure of our Ain Sebaa (Morocco), Carrollton and Phoenix sites, and was composed of one-time termination benefits, as well as other relevant charges, mainly related to the Carrollton and Phoenix fabs; and

•

$3 million related to other restructuring initiatives.

Operating income


	Year Ended December 31,
	2011			2010
	(In millions)
Operating income	$	46		$	476
As percentage of net revenues		0.5	%		4.6	%

Our operating income was down to $46 million from $476 million in 2010, as a result of the lower volume of our revenues and the other aforementioned factors.

Our wholly owned businesses (APG, Digital, AMM, PDP and others), were in a position to maintain a solid operating income of slightly above 11% of revenues, while they reported a decline in their profitability compared to 2010 because of lower revenues. APG operating income increased to $227 million or about 14% of revenues from $121 million operating income or approximately 9% of 2010 revenues, mainly driven by the revenue growth. Digital operating income decreased to $108 million or about 6% of revenues from $245 million or approximately 11% of 2010 revenues. AMM improved its profit level, driven by revenue growth, registering $606 million operating income or 18% of revenues compared to $546 million operating income or about 17% of revenues in 2010, mainly supported by the strong MEMS operating performances. PDP operating income was down to $139 million, equivalent to about 11% of revenues from $179 million operating income or about 14% of 2010 revenues. Due to a strong decline in revenues, Wireless segment registered a significant deterioration in its operating result, registering a loss of $812 million, compared to a loss of $483 million in the previous year; since, substantially all of this loss was generated by ST-Ericsson JVS, 50% was attributed to Ericsson as noncontrolling interest below operating income. The segment “Others” increased its losses to $222 million from $132 million in 2010, mainly due to higher unused capacity charges, which are not allocated to the product segments.

Other-than-temporary impairment charge and realized gains on financial assets


	Year Ended December 31,
	2011		2010
	(In millions)
Other-than-temporary impairment charge and realized gains on financial assets	$	318	$	—

The income of $318 million represents a balance of (i) a realized gain on financial assets of $323 million as a result of the cash settlement from Credit Suisse against the transfer of ownership of the whole portfolio of ARS and (ii) an other-than-temporary impairment charge of $5 million as an adjustment of the fair value of certain marketable securities.

Interest expense, net


	Year Ended December 31,
	2011			2010
	(In millions)
Interest expense, net	$	(25	)	$	(3	)

In 2011, we registered a significant expense increase compared with the year-ago period, mainly due to ST-Ericsson because of the one-off sale of certain R&D tax credits at ST-Ericsson, anticipating their collection by three years and the increased utilization of the parents’ loan facility.

Income (loss) on equity-method investments and gain on investment divestiture


	Year Ended December 31,
	2011			2010
	(In millions)
Income (loss) on equity-method investments and gain on investment divestiture	$	(28	)	$	242

In 2011, we recorded a charge of $28 million, out of which $23 million related to our proportionate share in ST-Ericsson JVD’s net results, including amortization of basis difference. The remaining $5 million loss related to other investments. The 2010 amount represented an income of $242 million, which included (i) $265 million gain realized on the divestiture of our proportionate share in Numonyx; (ii) $8 million of income representing our net proportional share of Numonyx’s result; (iii) $28 million of loss related to our proportionate share in the ST-Ericsson JVD (both results included amortization of basis difference following the business combinations); and (iv) $3 million loss relating to other investments.

Gain (loss) on financial instruments, net


	Year Ended December 31,
	2011		2010
	(In millions)
Gain (loss) on financial instruments, net	$	25	$	(24	)

The $25 million gain on financial assets in 2011 was mainly associated with (i) the gain of $20 million related to the sale of the remaining Micron shares and the unwinding of the related hedging of our equity participation in Micron received upon the Numonyx disposal and (ii) a gain of $4 million recorded following unsolicited repurchases of a portion of our 2016 Convertible Bonds with an accreted value of $318 million, inclusive of the swap, for a cash consideration of $314 million. The $24 million loss on financial instruments in 2010 was the balance between (i) a loss of $15 million related to the net premium paid on financial contracts designated to hedge part of the disposal of our share in Numonyx; (ii) a loss of $3 million related to the sale of senior Floating Rate Notes; (iii) a loss of $13 million related to the sale of shares of our equity participation in Micron; and (iv) a gain of $7 million related to the repurchase of our 2016 Convertible Bonds.

Income tax expense


	Year Ended December 31,
	2011			2010
	(In millions)
Income tax expense	$	(181	)	$	(149	)

During 2011, we registered an income tax expense of $181 million, reflecting the actual tax charge calculated on our income before income taxes in each of our jurisdictions. This expense included the recognition of deferred tax assets, potential valuation allowances on our deferred tax assets associated with our estimates of the net operating loss recoverability in certain jurisdictions of which a $92 million charge was for a valuation allowance related to part of ST-Ericsson’s accumulated net operating losses and our best estimate on tax charges related to potential uncertain tax positions.

Net loss (income) attributable to noncontrolling interest


	Year Ended December 31,
	2011			2010
	(In millions)
Net loss (income) attributable to noncontrolling interest	$	495		$	288
As percentage of net revenues		5.1	%		2.8	%

In 2011, we recorded $495 million loss attributable to noncontrolling interest, which mainly included $413 million of the ST-Ericsson JVS losses and $92 million charge for a valuation allowance related to part of ST-Ericsson’s accumulated net operating losses. In 2010, we booked $288 million loss attributable to noncontrolling interest, of which $296 million was attributable to the share owned by Ericsson in the losses of the consolidated ST-Ericsson JVS.

All periods included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities and Incard do Brazil for distribution. Those amounts were not material.

Net income attributable to parent company


	Year Ended December 31,
	2011			2010
	(In millions)
Net income attributable to parent company	$	650		$	830
As percentage of net revenues		6.7	%		8.0	%

In 2011, we reported a net income of $650 million, a significant decline compared to 2010 due to the aforementioned factors and in spite of the significant amount of realized gain on financial assets. In 2010, we reported a net income of $830 million.

Diluted earnings per share for 2011 was $0.72 compared to $0.92 per share in 2010.

In 2011, the impact after tax of impairment, restructuring charges and other related closure costs, other-than-temporary impairment charge and other one-time items, net of tax, was estimated to be approximately $0.31 per share.

Quarterly Results of Operations

Certain quarterly financial information for the years 2012 and 2011 are set forth below. Such information is derived from our unaudited Consolidated Financial Statements, prepared on a basis consistent with the Consolidated Financial Statements that include, in our opinion, all normal adjustments necessary for a fair statement of the interim information set forth therein. Operating results for any quarter are not necessarily indicative of results for any future period. In addition, in view of the significant volatility we have experienced in recent years, the increasingly competitive nature of the markets in which we operate, the changes in products mix and the currency effects of changes in the composition of sales and production among different geographic regions, we believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance.

Our quarterly and annual operating results are also affected by a wide variety of other factors that could materially and adversely affect revenues and profitability or lead to significant variability of operating results, including, among others, capital requirements and the availability of funding, competition, new product development, changes in technology, manufacturing problems, litigation and possible IP claims. In addition, a number of other factors could lead to fluctuations in operating results, including order cancellations or reduced bookings by key customers or distributors, IP developments, international events, currency fluctuations, problems in obtaining adequate raw materials on a timely basis, impairment, restructuring charges and other related closure costs, as well as the loss of key personnel. As only a portion of our expenses varies with our revenues, there can be no assurance that we will be able to reduce costs promptly or adequately in relation to revenue declines to compensate for the effect of any such factors. As a result, unfavorable changes in the above or other factors have in the past and may in the future adversely affect our operating results. Quarterly results have also been and may be expected to continue to be substantially affected by the cyclical nature of the semiconductor and electronic systems industries, the speed of some process and manufacturing technology developments, market demand for existing products, the timing and success of new product introductions and the levels of provisions and other unusual charges incurred. Certain additions of our quarterly results will not total our annual results due to rounding.

In the fourth quarter of 2012, based upon published industry data by WSTS, the TAM and the SAM increased year-over-year approximately 4% and 3%, reaching approximately $74 billion and $42 billion, while sequentially, the TAM was basically flat and the SAM decreased by approximately 4%.

In the fourth quarter of 2012, our average effective exchange rate was approximately $1.30 to €1.00, compared to $1.29 to €1.00 in the third quarter of 2012 and $1.36 to €1.00 in the year-ago quarter. Our effective exchange rate reflects actual exchange rate levels combined with the impact of cash flow hedging programs.

Net revenues


	Three Months Ended						% Variation
	December 31, 2012		September 29, 2012		December 31, 2011		Sequential			Year-Over- Year
	(Unaudited, in millions)
Net sales	$	2,111	$	2,119	$	2,170		(0.4	)%		(2.7	)%
Other revenues		51		47		21		7.6			139.0

Net revenues	$	2,162	$	2,166	$	2,191		(0.2	)%		(1.4	)%

Year-over-year comparison

Our fourth quarter 2012 net revenues were $2,162 million, or 1.4% below the equivalent year-ago quarter, reflecting a more difficult industry environment, which negatively impacted our average selling prices for our products. As such, our revenue performance was primarily originated from an approximate 7% reduction in average selling prices almost entirely due to the impact of negative pricing pressure, with no benefit from an improved product mix, partially balanced by an approximate 6% increase in volume.

By product segment, all product segments registered a decrease, except AMM, which registered an approximate increase by 16% driven by a strong performance in MEMS and Microcontrollers. AMM’s increase in fourth quarter revenues was mainly due to volume despite negative pricing pressure. Digital revenues were down by approximately 17% due to declining prices and volume. APG revenues decreased by about 4%, mainly due to negative pricing pressure since volume was increasing. PDP revenues were down by approximately 3% compared to the equivalent year-ago quarter. In total, our wholly owned businesses increased 1.6% on a year-ago basis, again driven by a strong ramp of our MEMS products. Wireless sales registered a decline of approximately 14%.

By market channel, Distribution revenues accounted for approximately 23% of our total revenues, compared to 20% in the fourth quarter of 2011.

By location of shipment, our fourth quarter 2012 revenues increased in Japan-Korea and EMEA by approximately 9% and 4%, respectively, while they decreased in Greater China-South Asia and in Americas by about 8% and 1% respectively.

In the fourth quarter 2012, our largest customer, the Samsung group of companies, accounted for approximately 11% of our net revenues. In the fourth quarter of 2011, Nokia accounted for about 13% of our net revenues.

Sequential comparison

On a sequential basis our revenues decreased by 0.2%, slightly better than the mid-point of the anticipated range of about -5% to +2%. This result is consistent with our expectation of a relatively flat quarter-to-quarter pattern in revenue. This sequential variation was due to an approximate 5% decrease in volume, almost entirely compensated by an approximate 5% increase in average selling prices, due to a more favorable product mix. The fourth quarter also benefited from $51 million of other revenues compared to $47 million in the third quarter, which both consisted mainly of technology licensing.

By product segment, with reference to our wholly owned businesses, our revenues increased by 0.2%, led by an approximate 7% increase in AMM, while they decreased by about 11% in PDP, 6% in APG and 2% in Digital. Wireless revenues decreased by approximately 2%.

By region, our revenues in Japan-Korea and Greater China-South Asia registered an approximate increase by 16% and 1% respectively while revenues in EMEA decreased by about 13%. Americas revenues were almost flat compared to the third quarter.

In the fourth quarter of 2012, our largest customer, the Samsung group of companies, accounted for approximately 11% of our net revenues while no customer exceeded 10% of our total net revenues in the third quarter of 2012.

Gross profit


	Three Months Ended									% Variation
	December 31, 2012			September 29, 2012			December 31, 2011			Sequential			Year-Over- Year
	(Unaudited, in millions)
Cost of sales	$	(1,465	)	$	(1,413	)	$	(1,459	)		(3.6	)%		(0.4	)%
Gross profit		697			753			732			(7.4	)		(4.8	)
Gross margin (as percentage of net revenues)		32.3	%		34.8	%		33.4	%		—			—

Fourth quarter gross margin was 32.3%, decreasing on a year-over-year basis by approximately 110 basis points, mainly due to the impact of negative pricing pressure and a less favorable product mix, partially balanced by a higher volume of revenues and lower unused capacity charges.

On a sequential basis, gross margin in the fourth quarter decreased by 250 basis points, mainly due to lower volume, lower selling prices and higher unused capacity charges, partially balanced by a more favorable product mix.

Selling, general and administrative expenses


	Three Months Ended									% Variation
	December 31, 2012			September 29, 2012			December 31, 2011			Sequential			Year- Over- Year
	(Unaudited, in millions)
Selling, general and administrative expenses	$	(291	)	$	(274	)	$	(280	)		(6.1	)%		(3.8	)%
As percentage of net revenues		(13.5	)%		(12.7	)%		(12.8	)%		—			—

Our SG&A expenses increased on a year-over-year basis mainly because of a higher number of days. On a sequential basis, SG&A expenses increased mainly due to seasonal factors. Our share-based compensation charges were $3 million in the fourth quarter of 2012, compared to $3 million in the fourth quarter of 2011 and $1 million in the third quarter of 2012.

As a percentage of revenues, our SG&A expenses amounted to 13.5%, slightly increasing in comparison to 12.8% in the prior year’s fourth quarter and 12.7% in the prior quarter.

Research and development expenses


	Three Months Ended									% Variation
	December 31, 2012			September 29, 2012			December 31, 2011			Sequential			Year-Over- Year
	(Unaudited, in millions)
Research and development expenses		$(585	)		$(578	)		$(614	)		(1.1	)%		4.8	%
As percentage of net revenues		(27.1	)%		(26.7	)%		(28.0	)%		—			—

R&D expenses decreased year-over-year, mainly due to the positive impact of the U.S. dollar exchange rate, which strengthened against the Euro and the benefit of our cost saving programs primarily at ST-Ericsson. On a sequential basis, R&D expenses increased, due to seasonal factors.

The fourth quarter of 2012 included $1 million of share-based compensation charges compared to $2 million in the fourth quarter of 2011 and was basically flat compared to the third quarter of 2012. The fourth quarter 2012 R&D expenses were net of research tax credits, which amounted to $42 million, compared to $36 million in both the fourth quarter 2011 and the third quarter 2012.

As a percentage of revenues, fourth quarter 2012 R&D equaled 27.1%, a decrease of approximately 90 basis points compared to the year-ago period due to the reduction in our operating expenses and a 40 basis points increase on a sequential basis, due to increasing operating expenses.

Other income and expenses, net


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Research and development funding	$	41		$	19		$	46
Phase-out costs and start-up costs		—			—			—
Exchange gain, net		1			3			2
Patent costs, net of reversals for unused provisions		(5	)		1			(7	)
Gain on sale of non-current assets		2			—			—
Other, net		(2	)		(3	)		(2	)
Other income and expenses, net	$	37		$	20		$	39
As percentage of net revenues		1.7	%		0.9	%		1.8	%

Other income and expenses, net, mainly included, as income, items such as R&D funding and gain on sale of non-current assets and, as expenses, patent costs, net of reversals for unused provisions. Income from R&D funding was associated with our R&D projects, which, upon project approval, qualifies as funding on the basis of contracts with local government agencies in locations where we pursue our activities. In the fourth quarter of 2012, the balance of these factors resulted in net income of $37 million, mainly due to funding of approximately $41 million.

Impairment, restructuring charges and other related closure costs


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Impairment, restructuring charges and other related closure costs	$	(588	)	$	(713	)	$	(9	)

In the fourth quarter of 2012, we recorded $588 million of impairment, restructuring charges and other related closure costs, of which:

•

$544 million as a non-cash impairment on our Wireless goodwill and other intangible assets;

•

$16 million related to the ST-Ericsson restructuring plan announced in April 2012, primarily consisting of employee termination benefits; and

•

$8 million related to other restructuring initiatives.

In the third quarter of 2012, we recorded $713 million of impairment, restructuring charges and other related closure costs, mainly due to the following:

•

$690 million as a non-cash impairment on our Wireless goodwill;

•

$13 million as an additional impairment on the Carrollton (Texas) building and facilities, reflecting the persistent difficulty in disposing of this asset;

•

$5 million in relation to the ST-Ericsson restructuring plan announced in April 2012, primarily consisting of employee termination benefits;

•

$4 million as an impairment on certain intangibles; and

•

$1 million related to the ST-Ericsson cost savings plan previously announced in 2011.

In the fourth quarter of 2011, we recorded $9 million of impairment, restructuring charges and other related closure costs in relation to the cost savings plan announced in June 2011 by ST-Ericsson, primarily consisting of employee termination benefits.

Operating loss


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Operating loss	$	(730	)	$	(792	)	$	(132	)
As percentage of net revenues		(33.8	)%		(36.6	)%		(6.0	)%

Our fourth quarter 2012 operating results deteriorated compared to the year-ago period mainly as a result of higher impairment and restructuring charges and a lower amount of revenues. On a sequential basis, our operating loss decreased mainly because of lower impairment and restructuring charges. Excluding impairment and restructuring charges, the operating loss deteriorated sequentially primarily due to higher unused capacity charges and higher operating expenses due to seasonal factors. The fourth quarter 2012 registered an operating loss of $730 million compared to a loss of $132 million in the year-ago quarter and a loss of $792 million in the prior quarter.

While all our segments except AMM reported a decline in their profitability levels compared to the year-ago period mainly driven by lower revenues, AMM, APG and PDP were able to maintain a solid profitability level in spite of the difficult market environment. AMM operating income increased from $116 million or about 16% of revenues to $120 million or an approximate 14% of revenues driven by higher revenue. APG decreased its operating income from $41 million or about 11% of revenues to $20 million, equivalent to about 6% of revenues. PDP decreased its operating income from $16 million or about 6% of revenues to $3 million, equivalent to about 1% of revenues. Digital registered an operating loss of $51 million or about negative 16% of revenues compared to an operating income of $9 million equivalent to about 2% of revenues in the prior year fourth quarter. Wireless registered an improvement in its operating result, registering a loss of $168 million, compared to a loss of $211 million in the prior year fourth quarter; since substantially all of this loss was generated by ST-Ericsson JVS, 50% was attributed to Ericsson as noncontrolling interest below operating loss. The segment “Others” significantly increased its losses from $103 million in the year-ago period to $654 million, mainly due to higher impairment and restructuring charges. Excluding impairment and restructuring charges, the segment “Others” decreased its losses mainly due to lower unused capacity charges.

On a sequential basis, all product segments registered a deterioration in their operating results except AMM and Wireless.

Interest expense, net


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Interest expense, net	$	(9	)	$	(8	)	$	(5	)

We recorded net interest expense of $9 million in the fourth quarter of 2012. On a year-over-year basis and on a sequential basis the net interest expense increased by $4 million and $1 million, respectively, mainly due to the increased utilization of the parent loan facility in ST-Ericsson.

Income (loss) on equity-method investments


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Income (loss) on equity-method investments	$	(11	)	$	(4	)	$	(6	)

In the fourth quarter of 2012, we recorded a charge of $11 million, of which $5 million related to our minority equity investment in 3Sun, $5 million related to our proportionate share in ST-Ericsson JVD, primarily reflecting our share of the impairment charge recorded by ST-Ericsson JVD as a result of its impairment test, and $1 million related to other investments.

Gain on financial instruments, net


	Three Months Ended
	December 31, 2012		September 29, 2012		December 31, 2011
	(Unaudited, in millions)
Gain on financial instruments, net	$	—	$	—	$	3

In the fourth quarter of 2011 the $3 million gain on financial instruments was related to an additional unsolicited repurchase of part of our 2016 Convertible Bonds with an accreted value of $201 million, inclusive of the swap, for a cash consideration of $198 million.

Income tax expense


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Income tax expense	$	(39	)	$	(25	)	$	(70	)

During the fourth quarter of 2012, we registered an income tax expense of $39 million, in spite of a loss before income taxes, reflecting actual tax charges and benefits in each jurisdiction. The income tax expense of the fourth quarter was impacted by the additional valuation allowances recorded on certain deferred tax assets related to ST-Ericsson, which are no longer supported by tax planning strategies, partially due to our decision to exit the joint venture.

Our tax rate is variable and depends on changes in the level of operating results within various local jurisdictions and on changes in the applicable taxation rates of these jurisdictions, as well as changes in estimations of our tax provisions. Our income tax amounts and rates depend also on our loss carry-forwards and their relevant valuation allowances, which are based on estimated projected plans and available tax planning strategies; in the case of material changes in these plans, the valuation allowances could be adjusted accordingly with an impact on our tax charges. We currently enjoy certain tax benefits in some countries. Such benefits may not be available in the future due to changes in the local jurisdictions; our effective tax rate could be different in future quarters and may increase in the coming years. In addition, our yearly income tax charges include the estimated impact of provisions related to potential tax positions which have been considered uncertain.

Net loss (income) attributable to noncontrolling interest


	Three Months Ended
	December 31, 2012		September 29, 2012		December 31, 2011
	(Unaudited, in millions)
Net loss (income) attributable to noncontrolling interest	$	361	$	351	$	199

In the fourth quarter of 2012, we recorded $361 million loss attributable to noncontrolling interest, which mainly included the 50% owned by Ericsson in the consolidated ST-Ericsson JVS. In the third quarter of 2012 and in the fourth quarter of 2011, the corresponding amounts were $351 million and $199 million, respectively. These amounts mainly reflected Ericsson’s share in the joint venture’s loss. The year-over-year increase was mainly associated with the non-cash impairment charge on Wireless goodwill and other intangible assets which was allocated to ST-Ericsson JVS.

All periods also included the recognition of noncontrolling interest related to our joint venture in Shenzhen, China for assembly operating activities and Incard do Brazil for distribution.

Net loss attributable to parent company


	Three Months Ended
	December 31, 2012			September 29, 2012			December 31, 2011
	(Unaudited, in millions)
Net loss attributable to parent company	$	(428	)	$	(478	)	$	(11	)
As percentage of net revenues		(19.8	)%		(22.1	)%		(0.5	)%

For the fourth quarter of 2012, we reported a net loss of $428 million, slightly improving sequentially but a significant deterioration compared to the year-ago quarterly loss due to the aforementioned factors and the significant non-cash impairment charge on Wireless goodwill and other intangible assets.

Earnings per share for the fourth quarter of 2012 was $(0.48) compared to $(0.54) in the third quarter of 2012 and $(0.01) in the year-ago quarter.

In the fourth quarter of 2012, the impact per share after tax of impairment, restructuring charges and other related closure costs and other one-time items was estimated to be approximately $(0.37) per share, while in the third quarter of 2012, it was approximately $(0.51) per share. In the year-ago quarter, the impact per share after tax of impairment, restructuring charges and other related closure costs and other one-time items was estimated to be basically nil.

Impact of Changes in Exchange Rates

Our results of operations and financial condition can be significantly affected by material changes in the exchange rates between the U.S. dollar and other currencies, particularly the Euro.

As a market rule, the reference currency for the semiconductor industry is the U.S. dollar and the market prices of semiconductor products are mainly denominated in U.S. dollars. However, revenues for some of our products (primarily our dedicated products sold in Europe and Japan) are quoted in currencies other than the U.S. dollar and as such are directly affected by fluctuations in the value of the U.S. dollar. As a result of currency variations, the appreciation of the Euro compared to the U.S. dollar could increase, in the short term, our level of revenues when reported in U.S. dollars. Revenues for all other products, which are either quoted in U.S. dollars and billed in U.S. dollars or in local currencies for payment, tend not to be affected significantly by fluctuations in exchange rates, except to the extent that there is a lag between the changes in currency rates and the adjustments in the local currency equivalent of the price paid for such products. Furthermore, certain significant costs incurred by us, such as manufacturing costs, SG&A expenses, and R&D expenses, are largely incurred in the currency of the jurisdictions in which our operations are located. Given that most of our operations are located in the Euro zone and other non U.S. dollar currency areas, including Sweden and Singapore, our costs tend to increase when translated into U.S. dollars when the dollar weakens or to decrease when the U.S. dollar strengthens.

In summary, as our reporting currency is the U.S. dollar, currency exchange rate fluctuations affect our results of operations: in particular, if the U.S. dollar weakens, our results are negatively impacted since we receive a limited part of our revenues, and more importantly, we incur a significant part of our costs, in currencies other than the U.S. dollar. On the other hand, our results are favorably impacted when the dollar strengthens. The impact on our accounts could therefore be material, in the case of a material variation of the U.S. dollar exchange rate.

Our principal strategy to reduce the risks associated with exchange rate fluctuations has been to balance as much as possible the proportion of sales to our customers denominated in U.S. dollars with the amount of materials, purchases and services from our suppliers denominated in U.S. dollars, thereby reducing the potential exchange rate impact of certain variable costs relative to revenues. Moreover, in order to further reduce the exposure to U.S. dollar exchange fluctuations, we have hedged certain line items on our consolidated statements of income, in particular with respect to a portion of the costs of goods sold, most of the R&D expenses and certain SG&A expenses, located in the Euro zone, which we account for as cash flow hedging contracts. We use three different types of hedging contracts, consisting of forward contracts, collars and options.

Our consolidated statements of income for 2012 included income and expense items translated at the average U.S. dollar exchange rate for the period, plus the impact of the hedging contracts expiring during the period. Our effective average exchange rate was $1.31 for €1.00 for 2012 compared to $1.37 for €1.00 for 2011.

Our effective exchange rate was $1.30 for €1.00 for the fourth quarter of 2012 and $1.29 for €1.00 for the third quarter of 2012, while it was $1.36 for €1.00 for the fourth quarter of 2011. These effective exchange rates reflect the actual exchange rates combined with the impact of cash flow hedging contracts that matured in the period.

In 2010, we extended the time horizon of our cash flow hedging through zero cost collars contracts for manufacturing costs and operating expenses for up to 24 months, for a limited percentage of our exposure to the Euro and under certain currency market circumstances. As of December 31, 2012, the outstanding hedged amounts were €601 million to cover manufacturing costs and €370 million to cover operating expenses, at an average exchange rate of about $1.3162 to €1.00 and $1.3133 to €1.00, respectively (considering the options and the risk reversals at strike and including the premiums paid to purchase foreign exchange options), maturing over the period from January 3, 2013 to November 7, 2013. As of December 31, 2012, these outstanding hedging contracts and certain expiring contracts covering manufacturing expenses capitalized in inventory represented a deferred profit of approximately $24 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statements of equity, compared to a deferred loss of approximately $67 million before tax at December 31, 2011.

With respect to the portion of our R&D expenses incurred in ST-Ericsson Sweden, as of December 31, 2012, the outstanding hedged amounts were Swedish krona (SEK) 821 million at an average exchange rate of about SEK 6.7766 to $1.00, maturing over the period from January 4, 2013 to November 7, 2013. As of December 31, 2012, these outstanding hedging contracts represented a deferred profit of approximately $4 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statements of equity, compared to a deferred loss of approximately $4 million before tax at December 31, 2011.

During the second quarter of 2012, we started to hedge certain manufacturing costs denominated in Singapore dollars (SGD); as of December 31, 2012, the outstanding hedged amounts were SGD 178 million at an average exchange rate of about SGD 1.2282 to $1.00 maturing over the period from January 3, 2013 to November 7, 2013. As of December 31, 2012, these outstanding hedging contracts represented a deferred gain of approximately $1 million before tax, recorded in “Accumulated other comprehensive income (loss)” in the consolidated statement of equity.

Our cash flow hedging policy is not intended to cover our full exposure and is based on hedging a portion of our exposure in the next quarter and a declining percentage of our exposure in each quarter thereafter. In 2012, as a result of Euro / U.S. dollar, U.S. dollar / SEK and U.S. dollar / Singapore dollar cash flow hedging, we recorded a net loss of $71 million, consisting of a loss of $27 million to R&D expenses, a loss of $39 million to cost of goods sold and a loss of $5 million to SG&A expenses, while in 2011, we recorded a net gain of $117 million.

In addition to our cash flow hedging, in order to mitigate potential exchange rate risks on our commercial transactions, we purchase and enter into forward foreign currency exchange contracts and currency options to cover foreign currency exposure in payables or receivables at our affiliates, which we account for as fair value instruments. We may in the future purchase or sell similar types of instruments. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. Furthermore, we may not predict in a timely fashion the amount of future transactions in the volatile industry environment. No assurance may be given that our hedging activities will sufficiently protect us against declines in the value of the U.S. dollar. Consequently, our results of operations have been and may continue to be impacted by fluctuations in exchange rates. The net effect of the consolidated foreign exchange exposure resulted in a net gain of $5 million recorded in “Other income and expenses, net” in our 2012 consolidated statement of income.

The assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S. dollars at the period-end exchange rate. Income and expenses, as well as cash flows, are translated at the average exchange rate for the period. The balance sheet impact, as well as the income statement and cash flow impact, of such translations have been, and may be expected to be, significant from period to period since a large part of our assets and liabilities and activities are accounted for in Euros as they are located in jurisdictions where the Euro is the functional currency. Adjustments resulting from the translation are recorded directly in equity, and are shown as “Accumulated other comprehensive income (loss)” in the consolidated statements of equity. At December 31, 2012, our outstanding indebtedness was denominated mainly in U.S. dollars and in Euros.

For a more detailed discussion, see “Item 3. Key Information — Risk Factors — Risks Related to Our Operations”.

Impact of Changes in Interest Rates

Interest rates may fluctuate upon changes in financial market conditions and material changes can affect our results of operations and financial condition, since these changes can impact the total interest income received on our cash and cash equivalents and marketable securities, as well as the total interest expense paid on our financial debt.

Our interest income (expense), net, as reported in our consolidated statements of income, is the balance between interest income received from our cash and cash equivalents and marketable securities investments and interest expense paid on our financial liabilities and bank fees (including fees on committed credit lines). Our interest income is dependent upon fluctuations in interest rates, mainly in U.S. dollars and Euros, since we invest primarily on a short-term basis; any increase or decrease in the market interest rates would mean an equivalent increase or decrease in our interest income. Our interest expense is mainly associated with long- and short-term debt, which mainly consists of our 2013 Senior Bonds, which is reset quarterly at a rate of three-month Euribor plus 40bps, and European Investment Bank Floating Rate Loans at three-month Libor and Euribor plus variable spreads. Our 2016 Convertible Bond was almost entirely repaid to the bondholders in the first quarter of 2012 upon the exercise of the put option and fully redeemed in the second quarter of 2012.

At December 31, 2012, our total financial resources, including cash and cash equivalents and marketable securities, generated an average interest income rate of 0.19%. At the same date, the average interest rate on our outstanding debt was 0.81%.

Impact of Changes in Equity Prices

As of December 31, 2012, we did not hold any significant equity participations, which could be subject to a material impact in changes in equity prices. However, we hold equity participations whose carrying value could be lower due to further losses or impairment charges of our equity-method investments.

Liquidity and Capital Resources

Treasury activities are regulated by our policies, which define procedures, objectives and controls. The policies focus on the management of our financial risk in terms of exposure to currency rates and interest rates. Most treasury activities are centralized, with any local treasury activities subject to oversight from our head treasury office. The majority of our cash and cash equivalents are held in U.S. dollars and Euros and are placed with financial institutions rated at least a single A long-term rating, meaning at least A3 from Moody’s Investor Service (“Moody’s”) and A- from Standard & Poor’s (“S&P’s”) or Fitch Ratings (“Fitch”), or better. Marginal amounts are held in other currencies. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Our total liquidity and capital resources were $2,493 million as of December 31, 2012, increasing compared to $2,333 million at December 31, 2011. As of December 31, 2012, our total liquidity and capital resources were comprised of $2,250 million in cash and cash equivalents, of which $37 million was held at the ST-Ericsson level, $1 million in short-term deposits and $238 million in marketable securities, all considered as current assets. Additionally, in order to reconcile with our consolidated balance sheet as of December 31, 2012, we had $4 million as restricted cash in an escrow account related to the disposal of the Numonyx investment.

As of December 31, 2012, marketable securities were $238 million held by us as current assets of which $150 million invested in treasury bills from the U.S. government and $88 million invested in senior debt issued by primary financial institutions with an average rating of A-/Baa1/A from Moody’s, S&P’s and Fitch, respectively. Both the treasury bills and the marketable securities are classified as available-for-sale and reported at fair value, with changes in fair value recognized as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of equity, except if deemed to be other-than-temporary. We reported as of December 31, 2012, a before tax increase of $6 million compared to December 31, 2011, in the fair value of our marketable securities portfolio. Since the duration of the marketable securities portfolio is only an average of one year, we expect the value of the securities to return to par as the final maturity approaches. The fair value of these securities is based on market prices publicly available through major financial information providers. The market price of the marketable securities is influenced by changes in the credit standing of the issuer but is not significantly impacted by movement in interest rates. In 2012, we invested $450 million in U.S. treasury bills. In addition, we reported proceeds of $481 million during the year 2012 pursuant to sold or matured treasury bills. The change in fair value of the $150 million government debt securities classified as available-for-sale was not material at December 31, 2012. The average duration of the treasury bills portfolio is less than five months and the securities are rated Aaa by Moody’s.

In 2007, we had $415 million of Auction Rate Securities (“ARS”), representing interests in collateralized debt obligations and credit linked notes invested by Credit Suisse without our authorization. In 2008, we launched a legal action against Credit Suisse. In December 2009, Credit Suisse, because of its contingent interest in certain securities held by us and issued by Deutsche Bank, requested that we tender the securities. Pursuant to legal advice, and while reserving our legal rights, we participated in the tender offer. As a result, we sold ARS with a face value of $154 million, collected $75 million and registered $68 million as realized losses on financial assets. On June 9, 2011, we received cash proceeds of $356.8 million from Credit Suisse as the full and final payment for the settlement of all outstanding litigation concerning ARS. Upon receipt of the funds, the ownership of the whole portfolio was transferred to Credit Suisse. We booked a pre-tax gain of approximately $329 million in the second quarter of 2011 as a result of the settlement, out of which $6 million was reported on the line “selling, general and administrative” and $323 million as a realized gain on financial assets. This $356.8 million plus the $75 million already cashed in makes a total amount of $431.8 million that exceeds all losses and costs associated with the litigation.

Liquidity

We maintain a significant cash position and a low debt-to-equity ratio, which provide us with adequate financial flexibility. As in the past, our cash management policy is to finance our investment needs mainly with net cash generated from operating activities.

During 2012, our cash and cash equivalents increased by $338 million, due to the net cash from operating activities and financing activities exceeding the net cash used in investing activities.

The components of our cash flow for the last three years are set forth below:


	Year Ended December 31,
	2012			2011			2010
	(In millions)
Net cash from operating activities	$	612		$	880		$	1,794
Net cash used in investing activities		(396	)		(287	)		(526	)
Net cash from (used in) financing activities		135			(529	)		(876	)
Effect of changes in exchange rates		(13	)		(44	)		(88	)
Net cash increase	$	338		$	20		$	304

Net cash from operating activities. The net cash from operating activities in 2012 was $612 million, decreasing compared to the prior year period mainly due to the overall deterioration of our financial results (see “— Results of Operations” above for more information). Net cash from operating activities is the sum of (i) net income (loss) adjusted for non-cash items and (ii) changes in assets and liabilities. The decrease in net cash from operating activities in 2012 compared to 2011 resulted from:

•

Net income (loss) adjusted for non-cash items significantly reduced to $109 million of cash generated in 2012 compared to $965 million in the prior year period, due to the deteriorated operating results mainly at ST-Ericsson;

•

Changes in assets and liabilities generated cash for a total amount of $503 million in 2012, compared to $85 million of cash used in the prior year period. The changes in 2012 were represented by a positive trend in all the components of assets and liabilities, mainly associated with a favorable variation in inventories ($191 million) and trade payables ($148 million). In 2011, changes were negative, mainly due to trade payables with a negative change by $384 million. Furthermore, 2012 also included a favorable net cash impact of $26 million, deriving from the non-recourse factoring of trade and other receivables, mainly done by ST-Ericsson, while the same impact in 2011 was $43 million.