e20vf
As filed with the Securities and Exchange Commission on
March 7, 2011
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 20-F
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this
shell company report
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Commission file
number: 1-13546
STMicroelectronics
N.V.
(Exact name of registrant as
specified in its charter)
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Not Applicable
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The Netherlands
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(Translation of
registrants
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(Jurisdiction of
incorporation
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name into
English)
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or
organization)
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39, Chemin du Champ des
Filles
1228 Plan-Les-Ouates
Geneva
Switzerland
(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:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common shares, nominal value 1.04 per share
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New York Stock Exchange
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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
issuers classes of capital or common stock as of the close
of the period covered by the annual report:
881,686,303 common shares at
December 31, 2010
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
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 o No þ
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 þ No o
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 þ No o
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 definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(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:
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U.S. GAAP þ
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International Financial Reporting Standards as issued o
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Other o
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by the International Accounting Standards Board
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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 o Item 18 o
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 o No
þ
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 have been 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 adopted in 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 managements 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:
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changes in demand in the key application markets and from key
customers served by our products, which make it extremely
difficult to accurately forecast and plan our future business
activities. In particular, following a period of significant
order cancellations in 2009, we have in 2010 experienced a
strong increase in customer demand, which has led to capacity
constraints in certain applications, and we may in the future,
in case of excessive inventory at customers or distribution
channels, experience order cancellations;
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our ability to utilize and operate our manufacturing facilities
at sufficient levels to cover fixed operating costs during
periods of reduced customer demand, as well as our ability to
ramp up production efficiently and rapidly to respond to
increased customer demand, in an intensely cyclical and
competitive industry, and the financial impact of obsolete or
excess inventories if actual demand differs from our
expectations;
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the operations of the ST-Ericsson Wireless joint venture, which
represents a significant investment and risk for our business,
and which may lead to significant impairment and additional
restructuring charges, in the event ST-Ericsson is unable to
successfully compete in a rapidly changing and increasingly
competitive market;
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our ability to compete in the semiconductor industry since a
high percentage of our costs are fixed and are incurred in Euros
and currencies other than U.S. dollars, especially in light
of the increasing 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;
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the outcome of ongoing litigation as well as any new litigation
to which we may become a defendant;
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changes in our overall tax position as a result of changes in
tax laws or the outcome of tax audits, and our ability to
accurately estimate tax credits, benefits, deductions and
provisions and to realize deferred tax assets;
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2
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the impact of intellectual property claims by our competitors or
other third parties, and our ability to obtain required licenses
on reasonable terms and conditions;
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product warranty or liability claims based on epidemic failures
or recalls by our customers for a product containing one of our
parts;
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our ability in an intensively competitive environment to secure
customer acceptance and to achieve our pricing expectations for
high-volume supplies of new products in whose development we
have been, or are currently, investing;
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availability and costs of raw materials, utilities, third-party
manufacturing services, or other supplies required by our
operations; and
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changes in the political, social or economic environment,
including as a result of military conflict, social unrest
and/or
terrorist activities, economic turmoil, as well as natural
events such as severe weather, health risks, epidemics,
earthquakes, volcano eruptions or other acts of nature in, or
affecting, the countries in which we, our key customers or our
suppliers, operate.
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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.
3
PART I
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Item 1.
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Identity
of Directors, Senior Management and Advisers
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Not applicable.
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Item 2.
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Offer
Statistics and Expected Timetable
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Not applicable.
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, 2010. Such data have been derived from our
audited Consolidated Financial Statements. Consolidated audited
financial statements for each of the years in the three-year
period ended December 31, 2010, 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.
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Year Ended December 31,
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2010
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2009
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2008
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2007
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2006
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(In millions except per share and ratio data)
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Consolidated Statements of Income Data:
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Net sales
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$
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10,262
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$
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8,465
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$
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9,792
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$
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9,966
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$
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9,838
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Other revenues
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84
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45
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50
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35
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16
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Net revenues
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10,346
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8,510
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9,842
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10,001
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9,854
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Cost of sales
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(6,331
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)
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(5,884
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)
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(6,282
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)
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(6,465
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)
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(6,331
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)
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Gross profit
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4,015
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2,626
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3,560
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3,536
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3,523
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Operating expenses:
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Selling, general and administrative
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(1,175
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)
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(1,159
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)
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(1,187
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)
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(1,099
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)
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(1,067
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)
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Research and development(1)
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(2,350
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)
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(2,365
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)
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(2,152
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)
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(1,802
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)
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(1,667
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)
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Other income and expenses, net(2)
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90
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166
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62
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|
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48
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(35
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)
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Impairment, restructuring charges and other related closure costs
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(104
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)
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(291
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)
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(481
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)
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(1,228
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)
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(77
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)
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Total operating expenses
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(3,539
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)
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(3,649
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)
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(3,758
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)
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(4,081
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)
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|
(2,846
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)
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|
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|
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Operating income (loss)
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476
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(1,023
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)
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(198
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)
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|
(545
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)
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677
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Other-than-temporary
impairment charge and realized losses on financial assets
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(140
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)
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(138
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)
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(46
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)
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Interest income (expense), net
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(3
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)
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9
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51
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83
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|
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|
93
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Earnings (loss) on equity investments and gain on investment
divestiture
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242
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|
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(337
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)
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(553
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)
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|
14
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|
|
|
(6
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)
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Gain (loss) on financial instruments, net
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(24
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)
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(5
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)
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15
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|
|
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|
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Income (loss) before income taxes and noncontrolling interest
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691
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(1,496
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)
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(823
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)
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|
|
(494
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)
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764
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Income tax benefit (expense)
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|
(149
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)
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|
95
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|
|
43
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|
|
|
23
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|
|
20
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|
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|
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|
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Income (loss) before noncontrolling interest
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542
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|
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(1,401
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)
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|
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(780
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)
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|
|
(471
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)
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|
784
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Net loss (income) attributable to noncontrolling interest
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|
|
288
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|
|
|
270
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|
|
|
(6
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)
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|
(6
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)
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|
|
(2
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)
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|
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Net income (loss) attributable to parent company
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$
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830
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$
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(1,131
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)
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$
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(786
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)
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|
$
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(477
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)
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|
$
|
782
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4
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Year Ended December 31,
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2010
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2009
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2008
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2007
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2006
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(In millions except per share and ratio data)
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Earnings (loss) per share (basic) attributable to parent company
shareholders
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$
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0.94
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$
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(1.29
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)
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$
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(0.88
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)
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$
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(0.53
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)
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$
|
0.87
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Earnings (loss) per share (diluted) attributable to parent
company shareholders
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|
$
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0.92
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|
|
$
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(1.29
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)
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|
$
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(0.88
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)
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|
$
|
(0.53
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)
|
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$
|
0.83
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Number of shares used in calculating earnings per share (basic)
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|
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880.4
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|
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876.9
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|
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892.0
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|
|
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898.7
|
|
|
|
896.1
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Number of shares used in calculating earnings per share (diluted)
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|
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911.1
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|
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876.9
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|
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892.0
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|
|
|
898.7
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|
|
|
958.5
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|
Consolidated Balance Sheet Data (end of period):
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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Cash and cash equivalents
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|
$
|
1,892
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|
|
$
|
1,588
|
|
|
$
|
1,009
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|
|
$
|
1,855
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|
|
$
|
1,659
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Short-term deposits
|
|
|
67
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Marketable securities
|
|
|
1,052
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|
|
|
1,032
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|
|
|
651
|
|
|
|
1,014
|
|
|
|
764
|
|
Restricted cash
|
|
|
7
|
|
|
|
250
|
|
|
|
250
|
|
|
|
250
|
|
|
|
218
|
|
Non-current marketable securities
|
|
|
72
|
|
|
|
42
|
|
|
|
242
|
|
|
|
369
|
|
|
|
|
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Total assets
|
|
|
13,349
|
|
|
|
13,655
|
|
|
|
13,913
|
|
|
|
14,272
|
|
|
|
14,198
|
|
Short-term borrowings and current portion of long-term debt
|
|
|
720
|
|
|
|
176
|
|
|
|
143
|
|
|
|
103
|
|
|
|
136
|
|
Long-term debt (excluding current portion)(3)
|
|
|
1,050
|
|
|
|
2,316
|
|
|
|
2,554
|
|
|
|
2,117
|
|
|
|
1,994
|
|
Total parent company shareholders equity(4)
|
|
|
7,587
|
|
|
|
7,147
|
|
|
|
8,156
|
|
|
|
9,573
|
|
|
|
9,747
|
|
Common stock and capital surplus
|
|
|
3,671
|
|
|
|
3,637
|
|
|
|
3,480
|
|
|
|
3,253
|
|
|
|
3,177
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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Dividends per share(5)
|
|
$
|
0.28
|
|
|
$
|
0.12
|
|
|
$
|
0.36
|
|
|
$
|
0.30
|
|
|
$
|
0.12
|
|
Capital expenditures(6)
|
|
|
1,034
|
|
|
|
451
|
|
|
|
983
|
|
|
|
1,140
|
|
|
|
1,533
|
|
Net cash from operating activities
|
|
|
1,794
|
|
|
|
816
|
|
|
|
1,722
|
|
|
|
2,188
|
|
|
|
2,491
|
|
Depreciation and amortization
|
|
|
1,240
|
|
|
|
1,367
|
|
|
|
1,366
|
|
|
|
1,413
|
|
|
|
1,766
|
|
Debt-to-equity
ratio(7)
|
|
|
0.23
|
|
|
|
0.35
|
|
|
|
0.33
|
|
|
|
0.23
|
|
|
|
0.22
|
|
Net financial position: resources (debt)(7)
|
|
$
|
1,152
|
|
|
$
|
420
|
|
|
$
|
(545
|
)
|
|
$
|
1,268
|
|
|
$
|
761
|
|
Net financial position to total parent company
shareholders equity ratio(7)
|
|
|
0.15
|
|
|
|
0.06
|
|
|
|
(0.07
|
)
|
|
|
0.13
|
|
|
|
0.08
|
|
|
|
|
(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. In 2010, 2009 and 2008, our
R&D expenses were 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 new
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. |
|
(3) |
|
In order to optimize our financial performance, we repurchased a
portion of our 2016 Convertible Bonds during 2009 (98,000 bonds
for a total cash consideration of $103 million) and 2010
(385,830 bonds for a total cash consideration of
$410 million), as well as a portion of our 2013 Senior
Bonds (in 2010, for an amount of $98 million). |
|
(4) |
|
In 2008, we repurchased 29,520,220 of our shares, for a total
cost of $313 million. We reflected this purchase at cost as
a reduction of shareholders 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, 2006, 2007, 2008, 2009 and 2010 annual
general shareholders meetings, and those which may be
attributed in the future. As of December 31, 2010,
14,186,218 shares had been transferred to employees upon
the vesting of such stock awards. As of December 31, 2010,
we owned 28,734,002 treasury shares. |
|
(5) |
|
Dividend per share represents the yearly dividend as approved by
our annual general meeting of shareholders, which relates to the
prior years accounts. |
5
|
|
|
(6) |
|
Capital expenditures are net of certain funds received through
government agencies, the effect of which is to reduce our cash
used in investing activities and to decrease depreciation. |
|
(7) |
|
Net financial position: resources (debt) represents the balance
between our total financial resources and our total financial
debt. Our total financial resources include cash and cash
equivalents, current and non-current marketable securities
(excluding Micron shares held at the end of the period),
short-term deposits and some of restricted cash, and our total
financial debt include bank overdrafts, short-term borrowings,
current portion of long-term debt and long-term debt, as
represented in our consolidated balance sheet. Our net financial
position to total parent company shareholders equity ratio
is a
non-U.S.
GAAP financial measure. The most directly comparable U.S. GAAP
financial measure is considered to be
Debt-to-Equity
Ratio. However, the
Debt-to-Equity
Ratio measures gross debt relative to equity, and does not
reflect our current cash position. We believe that our net
financial position to total shareholders equity ratio is
useful to investors as a measure of our financial position and
leverage. The ratio is computed on the basis of our net
financial position divided by total parent company
shareholders equity. For more information on our net
financial position, see Item 5. Operating and
Financial Review and Prospects Liquidity and Capital
Resources Capital Resources Net
financial position. Our computation of net debt (cash) to
total shareholders equity ratio may not be consistent with
that of other companies, which could make comparability
difficult. |
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 economic downturns at various times. Downturns are
typically characterized by diminished demand giving rise to
production overcapacity, accelerated erosion of average selling
prices, high inventory levels and reduced revenues. Downturns
may be the result of industry-specific factors, such as excess
capacity, product obsolescence, price erosion, evolving
standards, changes in end-customer demand,
and/or
macroeconomic trends impacting global economies. 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 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.
The recent financial market crisis spread into a global economic
recession impacting business and consumer confidence, which
resulted in a precipitous decline in the demand for
semiconductor products. As a result, our business, financial
conditions and results of operations were affected. To the
extent that the current economic environment 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 to our business,
including:
|
|
|
|
|
significant declines in sales;
|
|
|
|
significant reductions in selling prices;
|
|
|
|
significant underutilization of manufacturing capacity;
|
|
|
|
the resulting significant impact on 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 wafer fabrication plants (fabs) and
various restructuring plans;
|
|
|
|
decreased valuations of our equity investments;
|
|
|
|
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.
|
6
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 do not perform
as we have anticipated, we risk under-utilization of our
facilities or having insufficient capacity to meet customer
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 does not grow as we
anticipated when making investments in production capacity, we
risk overcapacity. 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 and cost
optimization have led us to close manufacturing facilities that
used more mature process technologies and, as a result, to incur
significant impairment and restructuring charges and related
closure costs. Furthermore, in the recent period, 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 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 yields; 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, in turn, have short life
cycles, with some being approximately one year. 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. This could significantly impair our ability to
remain a viable competitor in the product areas where our
competitors R&D investments are higher than ours.
We regularly devote substantial resources to winning competitive
bid 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
7
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.
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 customers 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. See
Item 5. Operating and Financial Review and
Prospects. 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 may lead
to erosion of our market share, impacting our capacity to
compete.
We are continuously considering various measures to improve our
competitive position and cost structure in the semiconductor
industry.
In the past, 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.
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, extend
our customer base, realize manufacturing improvements
and/or
otherwise control our costs. In addition, in recent years the
semiconductor industry has continued to increase manufacturing
capacity in Asia in order to access lower-cost production and to
benefit from higher overall efficiency, which has led to a more
competitive environment. We may also in the future, if market
conditions so require, consider additional 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 foreign 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 are driving us to a strategic repositioning, which has
led us to enter into significant joint ventures.
We have recently 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 may lead us to make
8
significant acquisitions of 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. In
addition, certain regulatory approvals for potential
acquisitions may require the divestiture of business activities.
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 define the activities in which we should no longer
engage, and then determine and execute appropriate methods to
divest of them.
In 2009, following the creation in August 2008 of ST-NXP
Wireless, a joint venture combining our wireless business with
that of NXP Semiconductor, we merged ST-NXP with Ericsson Mobile
Platforms (EMP), thereby forming ST-Ericsson. As a
result, the wireless activities of ST-Ericsson represent about
20% of our business. The integration process is 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 triggered a significant
amount of costs. See Note 8 to our Consolidated Financial
Statements. There is no assurance that we will be successful or
that the joint venture will produce the planned operational and
strategic benefits or that the new products developed by
ST-Ericsson will meet or satisfy customer demand.
We also may consider from time to time entering into joint
ventures whose businesses may not be specific to the
semiconductor industry. We established in Catania, Italy, a
joint venture named 3Sun with Enel Green Power
(Enel) and Sharp to manufacture photovoltaic panels,
which will be sold to Enel and Sharp.
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. 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 may negatively impact our
financial condition and could require us to need additional
funding from the capital markets.
Other risks associated with acquisitions and the activities of
our joint ventures include:
|
|
|
|
|
a substantial part of our business is run through a joint
venture whose management acts independently pursuant to joint
venture rule of governance;
|
|
|
|
our ability to plan and anticipate business and financial
results relies, for that portion of our business, on the Joint
Ventures management ability to plan and anticipate
business and financial results and their timely and accurate
reporting to us;
|
|
|
|
diversion of managements attention;
|
|
|
|
insufficient IP rights or potential inaccuracies in the
ownership of key IP;
|
|
|
|
assumption of potential liabilities, disclosed or undisclosed,
associated with the business acquired, which liabilities may
exceed the amount of indemnification available from the seller;
|
|
|
|
potential inaccuracies in the financials of the business
acquired;
|
|
|
|
that the businesses acquired will not maintain the quality of
products and services that we have historically provided;
|
|
|
|
whether we are able to attract and retain qualified management
for the acquired business;
|
|
|
|
whether we are able to retain customers of the acquired
entity; and
|
|
|
|
social issues or costs linked to restructuring plans.
|
Other risks associated with our divestiture activities include:
|
|
|
|
|
diversion of managements attention;
|
9
|
|
|
|
|
loss of activities and technologies that may have complemented
our remaining businesses or operations;
|
|
|
|
loss of important services provided by key employees that are
assigned to divested activities; and
|
|
|
|
social issues or 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.
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
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 have been
significantly affected by the rise over the last few years of
the Euro against the U.S. dollar, our reporting currency.
See Item 5. Operating and Financial Review and
Prospects. While markets improved in 2010, the difficult
conditions experienced in 2008 and 2009 had a significant effect
on the capacity utilization and related manufacturing
efficiencies of our fabs and, consequently, our gross margins.
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.
The
competitive environment of the semiconductor industry has led to
industry consolidation and we may face even more intense
competition from newly merged competitors or we may seek to
acquire a competitor in order to improve our market
share.
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
consolidation in the industry. Such 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. Some of our competitors are
trying to take advantage of such a consolidation process and may
have greater financial resources to do so.
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) 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.
Currency exchange rate fluctuations affect our results of
operations because our reporting currency is the
U.S. dollar, in which we receive the major part 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 manufacturing labor costs, selling, general and
administrative 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 $1.36 to 1.00 in 2010, compared to $1.37 to
1.00 in 2009.
A decline of the U.S. dollar compared to the other major
currencies that affect our operations, negatively impacts our
expenses, margins and profitability.
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 selling, general and
administrative expenses located in the Euro zone and in Sweden.
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
10
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.
Because
we have our 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 and to develop
our strategic alliances, 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 in the last three years our
aggregate capital expenditures decreased, as expressed in terms
of percentage to sales, we are planning in 2011 capital
expenditures of approximately $1.1 billion to
$1.5 billion to upgrade and expand the capacity of our
manufacturing facilities, in order to respond to the increasing
demand from customers and new products in certain segments,
particularly for micro-electro-mechanical systems
(MEMS), Automotive and Smartphone and Tablet
platforms. 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 pursue other business combinations or 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
and/or in
technology developed either by us or by third parties to
maintain or improve our position in the market. We may also
consider acquisitions to complement or expand our existing
business. In addition, a portion of the outstanding cash is
devoted to redeem maturing indebtedness. Although there are no
current plans to issue new debt or equity, the foregoing may
also require us to issue additional 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 increasingly expensive and dependent on
alliances, and our business, results of operations and prospects
could be materially adversely affected by the failure or
termination of such alliances, or failure to find new partners
and/or to develop new process technologies and
products.
We are dependent on alliances to develop or access new
technologies, particularly in light of the increasing levels of
investment required for R&D activities, and there can be no
assurance that these alliances will be successful. We are a
member of the International Semiconductor Development Alliance
(ISDA), a technology alliance led by IBM with
GlobalFoundries, Freescale, Infineon, Renesas, Samsung and
Toshiba to develop complementary metal-on silicon oxide
semiconductor (CMOS) process technology used in
semiconductor development and manufacturing for 32/28-nm and
22/20-nm nodes. This alliance also includes collaboration on IP
development and platforms to speed the design of
System-on-Chip
(SoC) devices in CMOS process technologies. In 2009,
we also entered into an agreement with IBM to develop
value-added derivative SoC technologies in Crolles, France.
We continue to believe that we can maintain proprietary R&D
for derivative technology investments and share R&D
business models, which are based on cooperation and alliances,
for core R&D process technology if we receive adequate
support from state funding, as in the case of the Crolles Nano
2012 frame agreement signed by us with the French government in
2009, which includes certain conditions of employment and
manufacturing capacity to be met by 2012. This, coupled with
manufacturing and foundry partnerships, provides 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, it contributes 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
11
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 market addressed by our products.
In particular, the Nano 2012 agreement will terminate in 2012
and there can be no assurance that a continuation of the program
will be funded by the French administration or that a new
program will be signed and at which terms it will be granted.
Following its creation in 2009, ST-Ericsson has also chosen to
invest significantly in the development of new advanced
technology platforms to address the rapidly evolving needs of
hardware and software solutions for current and future
generations of wireless products. The development of new
products is highly complex and we have in the past, and may in
the future, experience delays in the development, production and
introduction of our new products, which may in turn lead to the
discontinuation of an existing or planned product. As a result,
our relationship with our customers could be impaired which
could trigger additional restructuring plans.
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 23 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 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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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;
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changes in the market value or yield of the financial
instruments in which we invest our liquidity; and
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12
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a substantial part of our business is run through joint ventures
whose management acts independently pursuant to the joint
ventures rule of governance.
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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
managements 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 and
communication infrastructure, automotive and industrial markets.
Growth of demand in these market segments have 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.
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We cannot predict the rate, or the extent to which, the
telecommunications, consumer, computer and communication
infrastructure, automotive and industrial markets will grow. In
2009, the decline in these markets 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, 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. The competition for such new customers is
intense. There can be no assurance that we will be successful in
attracting and retaining new customers. 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 alliances
with us. As of December 31, 2010, our largest customer, the
Nokia group of companies, accounted for 13.9% of our
2010 net revenues, compared to 16.1% in 2009 and 17.5% in
2008. We cannot guarantee that our largest customers will
continue to book the same level of sales with us and our joint
ventures 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. Such consolidations 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
13
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 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 such moment,
which must occur within a defined period of time, when the
customer chooses to take delivery of our products from our
consignment stock.
Our
operating results can also vary significantly due to impairment
of goodwill and other intangible assets incurred in the course
of acquisitions, 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 booked pursuant to acquisitions and to
the purchase of technologies and licenses from third parties,
which has increased significantly since 2008 due to M&A
transactions. Because the market for our products is
characterized by rapidly changing technologies, and because of
significant changes in the semiconductor industry, 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. 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 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
2010 and incurred no charge as the value generated by all of our
product segments exceeded the carrying value of their assets. In
addition, we performed an impairment test of our Wireless assets
on a quarterly basis, as a result of the ongoing losses suffered
in that segment and concluded that no charges are required based
on the current plan of our joint-venture ST-Ericsson. However,
many of the factors used in assessing fair values for such
assets are outside of our control and the estimates used in such
analyses are subject to change. Due to the ongoing uncertainty
of the current market conditions, which may continue to
negatively impact our market value, we will continue to monitor
the carrying value of our assets. If market and economic
conditions further deteriorate, this could result in future
non-cash impairment charges against income. Further impairment
charges could also result from new valuations triggered by
changes in our product portfolio or strategic transactions, such
as ST-Ericsson, especially if ST-Ericsson, is unable to
successfully compete.
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. Although we work closely with
our suppliers to avoid these types of shortages, there can be no
assurances 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
14
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 it is likely that we will increasingly
rely on foundries for a growing portion of our needs. The
foundries we contract with are primarily manufacturers of
high-speed complementary metal-on silicon oxide semiconductor
(HCMOS) wafers and nonvolatile memory technology,
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.
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.
Furthermore, we periodically transfer production equipment
between production facilities and must ramp up and test such
equipment once installed in the new facility before it can reach
its optimal production level.
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, including
15
litigation before the U.S. International Trade Commission
(ITC). See Item 8. Financial
Information Legal Proceedings. IP litigation
and specifically litigation in the ITC may also involve our
customers who in turn may seek indemnification from us should we
not prevail. 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 operation.
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. 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 affect 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.
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 specific liabilities and have therefore not booked reserves
for any specific 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.
16
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 profits 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 in future periods.
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. The recorded amount of total deferred tax assets
could be reduced, resulting in a decrease in our total assets
and, consequently, in our shareholders equity, if our
estimates of projected future taxable income and benefits from
available tax strategies are reduced as a result of a change in
managements 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
tax loss and credit carry-forwards in the future. 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 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. 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 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 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 investor 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. We are continuing to consider
whether to shift our primary accounting standards to IFRS at
some point in the future.
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, 2010. 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.
17
The
lack of public funding available to us, changes in existing
public funding programs or demands for repayment may increase
our costs and impact our results of operations.
Like many other manufacturers operating in Europe, we benefit
from governmental funding for R&D expenses and
industrialization costs (which include some of the costs
incurred to bring prototype products to the production stage),
as well as from incentive programs for the economic development
of underdeveloped regions. Public funding may also be
characterized by grants
and/or
low-interest financing for capital investment
and/or tax
credit investments. 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. We have also entered into the Crolles Nano
2012 funding program. See Item 4. Information on the
Company Public Funding.
Furthermore, we receive a material amount of R&D tax
credits in France, which is directly linked to the amount spent
for our R&D activities. In 2010, we booked
$146 million, which reflected amounts relating to yearly
activities.
We rely on receiving funds on a timely basis pursuant to the
terms of the funding agreements. However, the funding of
programs in France and Italy is subject to the annual
appropriation of available resources and compatibility with the
fiscal provisions of their annual budgets, which we do not
control, as well as to our continuing compliance with all
eligibility requirements. If we are unable to receive
anticipated funding on a timely basis, or if existing
government-funded programs were curtailed or discontinued, or if
we were unable to fulfill our eligibility requirements, this
could have a material adverse effect on our business, operating
results and financial condition. There is no assurance that any
alternative funding would be available, or that, if available,
it could be provided in sufficient amounts or on similar terms.
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 not be able to receive the relevant
subsidies, which could have a material adverse effect on our
results of operations. If we do not receive anticipated funding,
this may lead us to curtail or discontinue existing projects,
which may lead to further impairments. In addition, if we do not
complete projects for which public funding has been approved, or
meet certain objectives set forth in funding programs such as in
the case of the Crolles Nano 2012 frame agreement signed by us
with the French government in 2009, which includes certain
conditions of employment and manufacturing capacity to be met by
2012, we may be required to repay any advances received for
completed milestones, which may lead to a material adverse
effect on our results of operations.
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, 2010,
STMicroelectronics Holding II B.V. (ST Holding
II), a wholly-owned subsidiary of 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.
We have also been informed that the shareholders agreement
among ST Holdings shareholders (the STH
Shareholders Agreement), to which we are not a
party, governs relations between our current indirect
shareholders Areva Group (Areva), Commissariat
à lEnergie Atomique et aux Energies Alternatives
(CEA) and the Italian Ministero
dellEconomia e delle Finanze (the Ministry of
the Economy and Finance), which is in the process of
signing a deed of adherence to the STH Shareholders
Agreement. 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 7. Major Shareholders and Related Party
Transactions Major Shareholders. 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, and may affect the ability
of our Managing Board to respond as may be necessary in the
rapidly changing environment
18
of the semiconductor industry. 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 Continuiteit 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 Agreements 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
our authorized share capital, subject to the requirements of our
Articles of Association, without the need to seek a specific
shareholder resolution for each capital increase. See
Item 10. Additional Information
Memorandum and Articles of Association Share
Capital Issuance of Shares, Preemptive Preference
Shares and Capital Reduction (Articles 4 and 5).
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 sales 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 FT1CI, our French Shareholder
controlled by Areva and CEA, and the Ministry of the Economy and
Finance, our Italian shareholder, which is in the process of
signing a deed of adherence to the STH Shareholders
Agreement, permits our respective French and Italian indirect
shareholders to cause ST Holding to dispose of its stake in us
at its sole discretion at any time from their current level, and
to reduce the current level of their respective indirect
interests in our common shares. The details of the STH
Shareholders Agreement, as reported by ST Holding II, are
further explained in Item 7. Major Shareholders and
Related Party Transactions Major Shareholders.
Disposals of our shares by the parties to the STH
Shareholders Agreement can be made by way of the issuance
of financial instruments exchangeable for our shares, equity
swaps, structured finance transactions or sales of our shares.
An announcement with respect to one or more of such dispositions
could be made at any time without our advance knowledge.
Further sales of our common shares or issue of bonds
exchangeable into our common shares or any announcements
concerning a potential sale by ST Holding, FT1CI, Areva, CEA or
the Ministry of the Economy and Finance, could materially impact
the market price of our common shares. The timing and size of
any future share or exchangeable bond offering by ST Holding,
FT1CI, Areva, CEA or the Ministry of the Economy and Finance
would depend upon market conditions as well as a variety of
factors.
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 Supervisory Board and
Managing Board 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 II 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
19
the United States or Canada upon us, ST Holding II, 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, the FTSE MIB
on the Borsa Italiana or the PHLX Semiconductor Sector Index
(SOX) could cause the market price of our common
shares to drop significantly.
Our common shares have been included in the CAC 40 index on
Euronext since November 12, 1997; the FTSE MIB index (which
replaced the S&P/MIB on June 1, 2009), or 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 were to fall
below the required thresholds for the respective indices or our
shares were to trade below a certain price, or in the case 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 significantly.
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Item 4.
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Information
on the Company
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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 Euronext and the New York Stock
Exchange (NYSE). In 1998, we listed our shares on
the Borsa Italiana. Until 1998, we operated as SGS-Thomson
Microelectronics N.V. Our length of life is indefinite. 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
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 microelectronic
applications, including automotive products, computer
peripherals, telecommunications systems, consumer products,
industrial automation and control systems. Our major customers
include Apple, Bosch, Cisco, Continental, Delta, Gemalto,
Hewlett-Packard,
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LG Electronics, Motorola, Nokia, Pace, Panasonic, Philips,
Research in Motion, Samsung, Seagate, Sharp, Siemens, Sony
Ericsson and Western Digital. We also sell our products through
distributors and retailers, including Arrow Electronics, Avnet,
Tomen, Wintech and Yosun.
The semiconductor industry has historically been a cyclical one
and we have responded through emphasizing balance in our product
portfolio, in the applications we serve, and in the regional
markets we address.
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 standard products (ASICs) and
application-specific standard products (ASSP)
offerings and semi-custom devices) that are organized under our
Automotive, Consumer, Computer and Communication Infrastructure
(ACCI) and Wireless (Wireless) segments
and our Industrial and Multisegment Sector (IMS),
consisting mainly of power discrete devices, analog,
microcontrollers and MEMS.
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 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 2010 Results of Operations, see Item 5.
Operating and Financial Review and Prospects Results
of Operations Segment Information.
Strategy
We aim to become the undisputed leader in multimedia
convergence, power and sensor applications, dedicating
significant resources to product innovation and increasingly
becoming a solution provider in order to drive higher value and
increase our market share in the markets we serve. As a
worldwide semiconductor leader, we are well positioned to
implement our strategy after having accomplished two major
strategic transformations, namely a refocus of our product
portfolio and our move towards being an asset lighter company.
In addition, our strategy to enhance market share by developing
innovative products and targeting new key customers is gaining
momentum. Our strong capital structure enables us to operate as
a long-term, viable supplier of semiconductor products and to
possibly participate as a consolidator into the industry
consolidation in high margin segments like advanced analog,
MEMS, microcontrollers and automotive.
The semiconductor industry, after having experienced a strong
recovery from the difficult market conditions of the second half
of 2008 and the whole of 2009 continues to undergo several
significant structural changes characterized by:
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the changing long-term structural growth of the overall market
for semiconductor products, which has moved from double-digit
average growth rate to single-digit average growth rate over the
last several years;
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the strong development of new emerging applications in areas
such as wireless communications, mobile Internet access and
smart consumer devices, home digital consumer as well as for
energy saving and healthcare & wellness;
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the importance of the Asia Pacific region, particularly China,
Taiwan and other emerging countries, which represent the fastest
growing regional markets;
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the importance of convergence between wireless, consumer and
computer applications, which drives customer demand to seek new
system-level, turnkey solutions from semiconductor suppliers;
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the evolution of the customer base from original equipment
manufacturers (OEM) to a mix of OEM, electronic
manufacturing service providers (EMS) and original
design manufacturers (ODM);
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the expansion of available manufacturing capacity through
third-party providers;
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the evolution of advanced process development R&D
partnerships; and
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the recent consolidation process, which may lead to further
strategic repositioning and reorganization amongst industry
players.
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Our strategy within this challenging environment is designed to
focus on the following complementary key elements:
Broad, balanced market exposure. We offer a
diversified product portfolio and develop products for a wide
range of market applications using a variety of technologies,
thereby reducing 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 for high-growth digital, advanced analog, MEMS and
mixed-signal applications. We target five key markets comprised
of: (i) industrial and multisegment products, including
high performance analog solutions, MEMS, microcontrollers,
digital audio, power supply, motor-control, metering, banking
and Smartcard; (ii) digital consumer, including set-top
boxes and digital TVs; (iii) automotive, including engine,
body, safety and infotainment; (iv) ASICs for communication
infrastructure and computer peripherals, such as printers;
(v) wireless communications and portable multi-media;
mostly through a
50-50% Joint
Venture.
Product innovation. We aim to be leaders in
multi-media convergence and power applications. In order to
serve these segments, our plan is to maintain and further
establish existing leadership positions for (i) platforms
and chipset solutions for multimedia applications; and
(ii) power applications, which are driving system solutions
for customer specific applications. We have the knowledge,
partners and financial resources to develop new, leading edge
products, such as cellular modems and application processor
solutions for wireless, MEMS, digital consumer products focused
on set-top boxes and digital TVs and system-oriented products
for the multisegment sector. We are also targeting new end
markets, such as medical and energy saving applications.
Customer-based initiatives. We have a strategy
based on four tenets, which we believe will help us gain market
share. First, we work with our key customers to identify
evolving needs and new applications in order to develop
innovative products and product features. We have formal
alliances with certain strategic customers that allow us and our
customers to exchange information and which give our customers
access to our process technologies and manufacturing
infrastructure. Secondly, we are targeting new major key
accounts, where we can leverage our position as a supplier of
application-specific products with a broad range product
portfolio to better address the requirements of large users of
semiconductor products with whom our market share has been
historically quite low. Thirdly, we have targeted the mass
market, or those customers outside of our traditional top 50
customers, who require system-level solutions for multiple
market segments. Finally, we have focused on two regions as key
ingredients in our future sales growth. The first is Greater
China-South Asia and the second is Japan-Korea. We have launched
important marketing initiatives in both regions.
Global integrated manufacturing
infrastructure. We have a diversified,
leading-edge manufacturing infrastructure, comprising front-end
and back-end facilities, capable of producing silicon wafers
using our broad process technology portfolio, including our
CMOS, BiCMOS, BCD and MEMS technologies as well as our discrete
technologies. Assembling, testing and packaging of our
semiconductor products takes place in our large and modern
back-end facilities, which generally are located in low-cost
areas. In order to ensure adequate flexibility, we continue to
utilize outside contractors for certain foundry and back-end
services.
Reduced asset intensity. While confirming our
mission to remain an integrated device manufacturing company,
and in conjunction with our decision to pursue the strategic
repositioning of our product portfolio, we have decided to
reduce our capital intensity in order to optimize opportunities
between internal and external front-end production, reduce our
dependence on market cycles that impact the loading of our fabs,
and decrease the impact of depreciation on our financial
performance. We have been able to reduce the
capex-to-sales
ratio from a historic average of 26% of sales during the period
of 1995 through 2004, to approximately 8.6% of sales in the last
three years aggregated.
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Process research and development (R&D)
leadership. The semiconductor industry is
increasingly characterized by higher costs and technological
risks involved in the R&D of leading edge CMOS process
development. These higher costs and technological risks have
driven us to enter into cooperative partnerships, in particular
for the development of basic CMOS technology. We are a member of
ISDA, a technology alliance led by IBM with GlobalFoundries,
Freescale, Infineon, Renesas, Samsung and Toshiba to develop the
CMOS process technology for 32/28-nm and 22/20-nm nodes.
Furthermore, in order to maintain our differentiation
capabilities through process technology leadership, we are
continuing our development of proprietary derivatives of CMOS
process technologies and of Smart Power, analog, discretes, MEMS
and mixed signal processes, for which R&D costs are
significantly lower than for CMOS.
Integrated presence in key regional
markets. We have sought to develop a competitive
advantage by building an integrated presence in each of the
worlds economic zones that we target: Europe, Asia, China
and America. An integrated presence means having product
development, sales and marketing capabilities in each region, in
order to ensure that we are well positioned to anticipate and
respond to our customers business requirements. We have
major front-end manufacturing facilities in Europe and Asia. Our
more labor-intensive back-end facilities are located in
Malaysia, China, Philippines, Singapore, Morocco and Malta,
enabling us to take advantage of more favorable production cost
structures, particularly lower labor costs. Major design centers
and local sales and marketing groups are within close proximity
of key customers in each region, which we believe enhances our
ability to maintain strong relationships with our customers.
Product quality excellence. We aim to develop
the quality excellence of our products and in the various
applications we serve and our quality strategy is built around a
three-pronged approach: (i) the improvement of our full
product cycle involving robust design and manufacturing,
improved detection of potential defects, and better anticipation
of failures through improved risk assessment, particularly in
the areas of product and process changes; (ii) improved
responsiveness to customer demands; and (iii) ever
increasing focus on quality and discipline in execution.
Sustainable Excellence and Compliance. We are
committed to sustainable excellence and compliance. We conduct
our business based on our Principles for Sustainable
Excellence (PSE) and are focused on following
the highest ethical standards, empowering our people and
striving for quality and customer satisfaction, while creating
value for all of our partners.
Creating Shareholder Value. We remain focused
on creating value for our shareholders, which we measure in
terms of return on net assets attributable to our shareholders
(i.e., including 50% of ST-Ericssons results) in excess of
our weighted average cost of capital.
Products
and Technology
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 2010, we ran our business along product lines and managed our
revenues and internal operating income performance based on the
following product segments:
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Automotive, Consumer, Computer and Communication Infrastructure
(ACCI);
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Industrial and Multisegment Sector (IMS); and
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Wireless.
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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 29 to our Consolidated Financial Statements.
ACCI
ACCI is responsible for the design, development and manufacture
of application-specific products using advanced bipolar, CMOS,
BiCMOS Smart Power technologies. The businesses in the ACCI
offer complete system solutions to customers in several
application markets. All products are ASSPs, full-custom or
semi-custom devices
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that may also include digital signal processor (DSP)
and microcontroller cores. The businesses in the ACCI
particularly emphasize dedicated Integrated Circuits
(ICs) for automotive, consumer, computer
peripherals, telecommunications infrastructure and certain
industrial application segments.
Our businesses in ACCI work closely with customers to develop
application-specific products using our technologies, IP, and
manufacturing capabilities. The breadth of our customer and
application base provides us with a better source of stability
in the cyclical semiconductor market.
ACCI is comprised of three major product lines
Automotive Products Group (APG); Computer and
Communication Infrastructure (CCI); and Home
Entertainment & Displays (HED).
Furthermore, we also operate an imaging business with a product
line called Imaging (IMG).
Automotive
Products Group
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) Automotive Electronics Division. We
design and manufacture products to enhance performance, safety
and comfort while reducing the environmental impact of the
automobile. For body and chassis electronics requirements, our
products range from microcontrollers used in lighting, door and
window/wiper applications to mixed signal control in junction
boxes, power solutions, dashboards and climate control needs.
For powertrain and safety, our products are used for engine
emissions and fuel economy improvements, passive and active
safety systems and powertrain electrification with
microcontrollers, mixed signal power management and, in some
cases, RF sensing.
(ii) Automotive Infotainment Division. We
produce products comprising full solutions for analog and
digital car radio for tolling, navigation and telematics
applications. The increasingly complex requirements of the
car/driver interface continue to create market opportunities for
re-use of the companys media processing and multi-format
global positioning (GPS) capabilities into car
multimedia applications. We have the skills and competence to
provide the total solution, which includes 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 segment.
Computer
and Communications Infrastructure
(i) BCD Power Division. This organization
serves the markets of hard disk drive (HDD) and
Printers with products developed on our BCD technology. Main
applications are motor controllers for HDD and motor drivers and
head drivers for printers.
(ii) Networking and Storage
Division. This division provides solutions for
the wireless and wireline infrastructure segments and digital
SoC for the HDD market. Our wireline telecommunications
products, mainly digital and mixed signal ASICs, are used for
various application in the high-speed electronic and optical
communications market. In the wireless field, we focus on the
ASIC market due to our many years of experience in the fields of
digital baseband, radio frequency and mixed-signal products. Our
activity in digital SoC for the HDD market is focused on
selected customer/product and is no longer part of our
development for future business.
(iii) Computer System Division. We are
focusing mainly on inkjet and laser printer components and are
an important supplier of digital engines including those in
high-performance photo-quality applications and multifunction
printers. We are also expanding our offerings to include a
reconfigurable ASSP product family, known as
SPEArtm
(Structured Processor Enhanced Architecture), designed for
flexibility and
ease-of-use
by customers on printers and other computing, industrial and
networking applications.
(iv) Microfluidics Division. This
division builds on the years of our success in microfluidic
product design, developed primarily for the inkjet print-head
product line, and expands our offering into related fields, such
as molecular and health diagnostics. In the field of medical
diagnostic, we have developed specific Lab On Chip technology
and products.
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Home
Entertainment and Displays Group
Our HED addresses product requirements for the digital consumer
application market and has three divisions.
(i) Audio Division. We design and
manufacture a wide variety of components for use in audio
applications. Our audio products include audio power amplifiers,
audio processors and graphic-equalizer ICs.
(ii) Set Top Box Division. This division
focuses on products for digital terrestrial, satellite, cable
and IPTV set-top box products. We continue to expand our product
offerings and customer base by introducing innovative platform
solutions offering advanced technologies and a wide range of
consumer services.
We also offer customers and partners the capability to jointly
develop highly integrated solutions for their digital consumer
products. We utilize our expertise and knowledge of the digital
consumer ecosystem, advanced technologies and hardware/software
IP to provide
best-in-class
differentiated ASIC products for a select base of customers and
markets.
(iii) TV & Monitor Division. We
address the digital television markets with a range of highly
integrated ASSPs and application-specific microcontrollers.
Following the acquisition of Genesis in 2008, we have worked to
develop our integrated digital television product portfolio. The
first generation DTV platform was introduced in 2010 to the
market.
Imaging
Division
We have been focusing on the wireless handset image-sensor
market. We are in production of CMOS-based camera modules and
processors for
low-and-high
density pixel resolutions, which also meet the autofocus,
advanced fixed focus and miniaturization requirements of this
market. We also sell standalone sensors. We plan to focus our
presence in the imaging business by concentrating on selling
CMOS sensors as opposed to modules, focusing our technology and
products offering towards higher margin and pursuing new
opportunities beyond wireless applications.
IMS
IMS is comprised of two Product Lines: Analog, Power and
Micro-Electro-Mechanical Systems (APM) and
Microcontroller, non-Flash, non-volatile Memory and Smart Cards
(MMS).
We are positioning IMS in the High End Analog world that
comprises MEMS, many kind of Sensors, Interfaces, low power RF
Transceivers and Analog front-end. It comprises also High
Voltage Smart Power Controllers for main Industrial and Power
Conversion applications such as Metering and Lighting,
exploiting our leadership in MEMS and our system expertise built
around ARM based microcontrollers representing the core of many
applications today.
APM
(i) Industrial and Power Conversion
Division. We design and manufacture products for
industrial applications including 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.
(ii) MEMS, Sensors and High Performance Analog
Division. We manufacture MEMS for a wide variety
of applications where real-world input is required. Our prior
product line of three-axis accelerometers was expanded in 2010
to include a complete family of very successful high-performance
multi-axis gyroscopes. The combination of accelerometers and
gyroscopes enables accurate motion tracking into a 3D space,
which is the primary component of enhanced motion controlled
user interfaces in gaming, mobile phones, Portable Navigation
Devices and multimedia players. The same devices are also
employed in laptops, automotive, HDDs and digital cameras. Other
important developments include MEMS based Pressure Sensors and
Active Microphones. The Division develops also innovative,
differentiated and value-added analog products such as Audio
Amplifiers ICs from portable to professional Audio Systems
equipment, Touch Sensors, Op Amps and Application Specific ICs
(i.e., glucose meters, ECG, flow sensors), supported by ultra
low power technologies necessary for healthcare and consumer
applications.
25
(iii) 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, very important in mobile
phones and thin film flexible rechargeable batteries.
(iv) Transistor Division. We design,
manufacture and sell Power MOSFET, IGBT and Bipolar Transistor
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 a particular effort in 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.
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 filed 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.
Wireless
The wireless segment resulted from the combination of our
wireless business with NXPs to create ST-NXP Wireless as
of August 2, 2008. Subsequently, we combined that business
with the EMP business to form a joint venture, ST-Ericsson,
which began operations on February 1, 2009.
Wireless is responsible for the design, development and
manufacture of semiconductors and platforms for mobile
applications. In addition, this segment spearheads our ongoing
efforts to maintain and develop innovative solutions for our
mobile customers while consolidating our world leadership
position in wireless. Wireless is comprised of four product
lines: 2G, EDGE, TD-SCDMA & Connectivity; 3G
Multimedia & Platforms; LTE & 3G Modem
Solutions; 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, cost of sales
and other items related to the wireless business but outside of
the ST-Ericsson JVS.
ST-Ericsson offers integrated and discrete solutions for
wireless applications and serves several major OEMs. In this
market, ST-Ericsson is strategically positioned in platform
solutions serving the smartphone and tablet markets combining
modem and application processor, thin modems, stand alone
application processors, energy management, audio coding and
decoding functions (CODEC) and radio frequency ICs
and connectivity.
Strategic
Alliances with Customers and Industry Partnerships
We believe that strategic alliances with customers and industry
partnerships are critical to success in the semiconductor
industry. We have entered into several strategic customer
alliances, including alliances with Bosch, Continental,
Hewlett-Packard, Marelli, Nokia, Pioneer, Samsung, Seagate,
Sharp, SonyEricsson and Western Digital. 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.
26
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 32/28-nm 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 or/and Electronics
(CATRENE) 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, Bosch, Cisco, Continental, Delta, Gemalto,
Hewlett-Packard, LG Electronics, Motorola, Nokia, Pace,
Panasonic, Philips, Research in Motion, Samsung, Seagate, Sharp,
Siemens, Sony Ericsson 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 position as a strategic supplier
of application-specific products to certain customers fosters
close relationships that provide us with opportunities to supply
such customers requirements for other 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.
The following table sets forth the top 10 customers by market
segment for our
products1:
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Automotive
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Customers:
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Bosch, Continental, Delphi, Denso, Harman, Hella, Lear, Marelli,
Sirius Satellite Radio, Valeo
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Communication
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Customers:
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Cisco, Ericsson Finisar, Huawei, LG Electronics, Nokia, Research
in Motion, Samsung, Sharp, Sony Ericsson
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Computer & Peripherals
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Customers:
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Agilent, Apple, Dell, Delta, Eastman Kodak, Hewlett-Packard,
Hitachi, Microsoft, Seagate, Western Digital
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Consumer
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Customers:
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ADB, Garmin, LG Electronics, Pace, Panasonic, Sagem
Communications, Samsung, Cisco/SA, Technicolor, Videocon
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Industrial/ Other Applications
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Customers:
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Autostrade, Delta, Emerson, Gemalto, Liteon, Nagra, Nintendo,
Philips, Safran, Siemens
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In 2010, our largest customer, the Nokia group of companies,
represented approximately 13.9% of our net revenues, compared to
approximately 16.1% in 2009 and 17.5% in 2008. No other single
customer accounted for more than 10% of our net revenues. There
can be no assurance that such customers or distributors, or any
other customers, 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 2010, we operated regional sales organizations in EMEA (which
includes all of Europe, the Middle East and Africa), the
Americas, Greater China-South Asia and Japan-Korea. A
description of our regional sales organizations activities
and structure during 2010 is below.
(i) EMEA The EMEA region is divided into
four business units: automotive, convergence EMS, industrial and
multimarket. 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).
1 Net
revenues by market segment application are classified according
to the status of the final customer. For example, products
ordered by a computer company, even including sales of other
applications such as Telecom, are classified as Computer
revenues.
27
(ii) Americas In the Americas region,
the sales and marketing team is organized into six business
units: automotive (Detroit, Michigan); industrial (Boston,
Massachusetts); consumer, industrial and medical (Chicago,
Illinois); communications, consumer and computer Peripherals
(San Jose, California and Longmont, Colorado); RFID and
communications (Dallas, Texas); and distribution (Boston,
Massachusetts). A central product-marketing operation in Boston
provides product support and training for standard products for
the Americas region. In addition, a comprehensive distribution
business unit provides product and sales support for the
regional distribution network.
(iii) Greater China-South Asia In the
Greater China-South Asia region, which encompasses China,
Taiwan, Hong Kong, India, Singapore and other countries in the
Asia Pacific region, with the exception of Japan and Korea. Our
sales and marketing activities are organized into seven business
units (automotive, computer peripherals, consumer, distribution,
EMS, industrial and telecom) with seven central support
functions (service and business management, field quality, human
resources, strategic planning, finance, corporate communication
and design center). Our design center in Singapore carries out
full custom designs in several applications.
(iv) Japan-Korea In Japan, the large
majority of our sales have historically been made through
distributors, as is typical for foreign suppliers to the
Japanese market. However, we are now seeking to work more
directly with our major customers to address their requirements.
We provide marketing and technical support services to customers
through sales offices in Tokyo and Osaka. In addition, we have
established a quality laboratory and an application laboratory
in Tokyo. The quality laboratory allows us to respond quickly to
the local requirement, while the application laboratory allows
Japanese customers to test our products in specific
applications. In Korea, we have a strong local presence serving
the local Korean companies in telecom, consumer, automotive and
industrial applications.
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 use 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 customers
option.
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 research and development (R&D)
is critical to our success. The main R&D challenge we face
is to continually increase 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 are market driven in our R&D and focused on leading-edge
products and technologies developed in close collaboration with
strategic alliance partners, leading universities and research
institutions, key customers, leading EDA vendors and global
equipment manufacturers working at the cutting edge of their own
markets. In addition, we have a technology council comprised of
15 leading experts to review, evaluate and advise us on the
competitive landscape. Front-end manufacturing and technology
R&D, while being separate organizations, are under the
responsibility of our Chief Operating Officer, thereby ensuring
a smooth flow of information between the R&D and
28
manufacturing organizations. The R&D activities relating to
new products are managed by the Product Segments and consist
mainly of design activities.
We devote significant effort to R&D because semiconductor
manufacturers face immense pressure to be the first to make
breakthroughs that 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
and 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 Research and
Development Expenses.
To ensure that new technologies can be exploited in commercial
products as quickly as possible, an integral part of our
R&D philosophy is concurrent engineering, meaning that new
fabrication processes and the tools needed to exploit them are
developed simultaneously. Typically, these include not only EDA
software, but also cell libraries that allow access to our rich
IP portfolio and a demonstrator product suitable for subsequent
commercialization. In this way, when a new process is delivered
to our product segments or made available to external customers,
they are more able to develop commercial products immediately.
In the same spirit, we develop, in a concurrent engineering
mode, a complete portfolio of Analog and RF IP. The new
generation of products now mix Analog and Digital IP Blocks, and
even complex RF solutions, high performance data converters and
high-speed data transmission ports. Our R&D design centers
located in France and India have been specialized in the
development of these functions, offering a significant advantage
for us in quickly and cost effectively introducing products in
the consumer and wireless market.
Our advanced R&D centers are strategically located around
the world, including in France, Italy, Belgium, Canada, China,
India, Singapore, Sweden, the United Kingdom and the United
States.
In 2008, we entered into an R&D alliance with the ISDA to
develop leading edge core CMOS technologies at 32/28 nm and
22/20 nm nodes. We are also working with the CEA Leti to develop
derivative technologies from our technology portfolio. In this
context, five strategic objectives have been established.
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Accelerate the development and the number of differentiated
technologies for SoC so as to be able to supply amongst the
worlds leading prototypes ICs, thereby develop a strategy
of advanced differentiated products.
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Develop libraries and perform transversal R&D on the
methods and tools necessary to develop complex ICs using these
technologies.
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Provide Crolles 300mm operation with competitive leading edge
technologies.
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Perform advanced technology research linked to the conception of
CMOS nano electric functionalities advanced devices on 300mm
wafers.
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Pervade local, national and European territories, taking
advantage of nano-electronic diffusion technologies to further
promote innovation in various application sectors.
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In 2009, we entered into a framework agreement with the French
Ministry of Economy, Industry and Employment for the
Nano2012 Research and Development program. For more
information, see Item 4. Information on the
Company Public Funding. In addition, our
manufacturing facility in Crolles, France houses a R&D
center that is operated in the legal form of a French Groupement
dintérêt économique named Centre
Commun de Microelectronique de Crolles. Laboratoire
dElectronique de Technologie dInstrumentation
(LETI), a research laboratory of CEA (one of our
indirect shareholders), is our partner.
There can be no assurance 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 or derivative CMOS technologies on satisfactory terms. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
Our R&D efforts are increasingly expensive and dependent on
alliances, and our business, results of operations and prospects
could be materially adversely affected by the failure or
termination of such alliances, or failure to find new partners
and/or to
develop new process technologies and products.
The R2 activity in Agrate encompasses prototyping, pilot and
volume production of the 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. It is the result of an ongoing
cooperation under a consortium agreement with Micron
Technologies. Please refer to Item 5
Other developments. Our IP design center in Greater Noida,
India supports all of our major design activities worldwide and
hosts a major central R&D activity focused on software and
core libraries development, with a strong emphasis on system
solutions. The fundamental mission of our Advanced System
Technology (AST) organization is to create system
knowledge that
29
supports our SoC development. ASTs objective is to develop
the advanced architectures that will drive key strategic
applications, including digital consumer, wireless
communications, computer peripherals and Smartcards, as well as
the broad range of emerging automotive applications such as car
multi-media. ASTs 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.
All of these worldwide activities create new ideas and
innovations that enrich our portfolio of IP and enhance our
ability to provide our customers with winning solutions.
Furthermore, an array of important strategic customer alliances
ensures that our R&D activities closely track the changing
needs of the industry, while a network of partnerships with
universities and research institutes around the world ensures
that we have access to leading-edge knowledge from all corners
of the world. We also play leadership roles in numerous projects
running under the European Unions IST (Information Society
Technologies) programs. We actively participate in these
programs and continue collaborative R&D efforts such as the
CATRENE, ARTEMIS and ENIAC programs.
Finally, we believe that platforms are the answer to the growing
need for full system integration, as customers require from
their silicon suppliers not just chips, but an optimized
combination of hardware and software. Our world-class engineers
and designers are currently developing platforms we selected to
spearhead our future growth in some of the fastest developing
markets of the microelectronics industry. The platforms include
the application processors and integrated modem, set-top
boxes/integrated digital TV, which include high definition and
3-D
capability, and in the area of computer peripherals, the
SPEArtm
family of reconfigurable SoC ICs for printers and related
applications.
Property,
Plants and Equipment
We currently operate 15 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.
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Location
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Products
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Technologies
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Front-end facilities
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Crolles1, France
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Application-specific products, image sensors
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Fab: 200-mm CMOS and BiCMOS, Analog/RF, imaging
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Crolles2, France
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Application-specific products and leading edge logic products
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Fab: 300-mm research and development on deep sub-micron
(45-nm and
below) CMOS and differentiated SoC technology and manufacturing
on advanced CMOS and imaging, technologies
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Phoenix, Arizona
(sold in 2010, production to be closed in Q1 2011)
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Application-specific products and microcontrollers
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Fab: 200-mm BCD, BiCMOS, microcontrollers, CMOS
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Agrate, Italy
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Nonvolatile memories, microcontrollers and application-specific
products MEMS
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Fab 1: 200-mm BCD, MEMS, Microfluidics Fab 2: 200-mm, embedded
Flash, research and development on nonvolatile memories and BCD
technologies and Flash (operating in consortium with Micron)
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Rousset, France
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Microcontrollers, nonvolatile memories and Smartcard ICs,
application-specific products and image sensors
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Fab 1: 200-mm CMOS, Smartcard, embedded Flash, Analog/RF
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Catania, Italy
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Power transistors, Smart Power and analog ICs and
application-specific products, MEMS
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Fab 1: 150-mm Power metal-on silicon oxide semiconductor process
technology (MOS),
VIPpowertm,
MO-3, MO-5 and Pilot Line RF Fab 2: 200-mm,
Microcontrollers, BCD, power MOS
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Tours, France
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Protection thyristors, diodes and ASD power transistors, IPAD
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Fab: 125-mm, 150-mm and 200-mm pilot line discrete
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30
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Location
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Products
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Technologies
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Ang Mo Kio, Singapore
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Analog, microcontrollers, power transistors, commodity products,
nonvolatile memories, and application-specific products
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Fab 1: 125-mm, (150-mm conversion ongoing) power MOS, bipolar,
power Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM,
Smartcard, Micros, CMOS logic Fab 3: 150 mm Microfluidics, MEMS,
power MOS, BiCMOS, CMOS, 200mm BCD
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Back-end facilities
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Muar, Malaysia
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Application-specific and standard products, microcontrollers
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A building (block P) inside the plant has been contributed to STE
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Kirkop, Malta
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Application-specific products, MEMS, Embedded Flash for
Automotive
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Toa Payoh, Singapore
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Optical packages research and development, EWS and Testing Center
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Bouskoura, Morocco
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Nonvolatile memories, discrete and standard products,
micromodules, RF and subsystems
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Shenzhen, China(1)
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Nonvolatile memories, optical packages, discrete,
application-specific and standard products
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Longgang, China
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Discrete and standard products
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Calamba, Philippines(2)
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Application Specific Products and standard products
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(1) |
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Jointly operated with SHIC, a subsidiary of Shenzhen Electronics
Group. |
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(2) |
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Operated by ST but owned by ST-Ericsson. |
At the end of 2010, our front-end facilities had a total
capacity of approximately 125,000
200-mm
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. Among the
200-mm
wafers production facilities, the fabs based in Europe (Crolles
and Rousset, France; Agrate and Catania, Italy) had full
installed capacity as of December 31, 2010. Among the
150-mm
wafers production facilities, two (at Catania, Italy and Tours,
France) had full design capacity installed as of
December 31, 2010. As of the same date, the fab in
Singapore had approximately two-thirds of the full design
capacity installed.
Our advanced
300-mm wafer
pilot-line fabrication facility in Crolles, France had an
installed capacity of 3,200 wafers per week at the end of 2010,
and we plan to increase production to up to approximately 4,500
wafers per week as required by market conditions and within the
framework of our R&D Nano 2012 program.
We own all of our manufacturing facilities, except Crolles2,
France, which is the subject of leases for the building shell
and some equipment that represents overall a small percentage of
total assets.
We have historically subcontracted a portion of total
manufacturing volumes to external suppliers. In 2010 we
purchased approximately 15% of our total silicon from external
foundries. Our plan is to extend sourcing of silicon from
external foundries up to above 20% of our total needs.
At December 31, 2010, we had approximately
$630 million in outstanding commitments for purchases of
equipment and other assets for delivery in 2011. In 2010, we
increased our capital spending to approximately
$1,040 million, from $451 million registered in 2009. In
the 2009-2010 period the ratio of capital investment spending to
revenues was approximately 7.9%. Such a level of capital
spending in 2010 was designed to respond to the revamping market
demand, 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.
31
The present environment is affected by demand growth and supply
availability remains constrained throughout a portion of the
semiconductor market. Recently, our existing capacity has been
outstripped by the increase in business demand as a result of
the upturn in the semiconductor industry. This situation is
completely different from the one seen in the first six months
of 2009, where we had experienced a severe under-loading that
resulted in significant unused capacity charges and cost
inefficiencies despite our ongoing measures to reduce the
activity of our fabs. 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. Including patents and pending patent
applications owned by us and our affiliate ST-Ericsson, we
currently own over 20,000 patents and pending patent
applications which have been registered in multiple countries
around the world and correspond to more than 10,000 patent
families (each patent family containing all patents originating
from the same invention). Together we also increased to 839 our
filings of new patent applications around the world in 2010.
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 are also
endeavouring to optimize the value from our IP portfolio by
creating a new business unit in 2010. 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 which 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.
32
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 managements 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 generating the highest
amount of revenues due to electronic products purchased from
many of our targeted market segments.
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 2010 with a backlog significantly higher compared to
2009 due to the strong improvement in the semiconductor industry
registered in the second half of 2009. During 2010, our backlog
grew as a result of a strong increase in order flow, reflecting
a more favorable industry environment and new products. As a
result of this improvement, we entered 2011 with a backlog
significantly higher than we had entering 2010.
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 our product lines. 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, Linear Technology, LSI Logic,
Marvell, Maxim, MediaTek, Microchip Technology, Mstar, National
Semiconductor, NXP Semiconductors, ON Semiconductor, Qualcomm,
Renesas, ROHM Semiconductor, Samsung, Texas Instruments,
Trident, 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 of 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.
33
Organizational
Structure and History
We are a multinational group of companies that designs,
develops, manufactures and markets 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. We are organized in a matrix structure with geographic
regions interacting with product divisions, both being 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 and the
principal player of our business, ST NV also conducts its
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 currently 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 Holding AG (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, 2010:
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership
|
Legal Seat
|
|
Name
|
|
(Direct or Indirect)
|
|
Australia Sydney
|
|
STMicroelectronics PTY Ltd
|
|
|
100
|
|
Belgium Zaventem
|
|
ST-Ericsson Belgium N.V.
|
|
|
50
|
|
Belgium Zaventem
|
|
Proton World International N.V.
|
|
|
100
|
|
Brazil Sao Paolo
|
|
STMicroelectronics Ltda
|
|
|
100
|
|
Brazil Sao Paulo
|
|
Incard do Brazil Ltda
|
|
|
50
|
|
Canada Ottawa
|
|
STMicroelectronics (Canada), Inc.
|
|
|
100
|
|
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
|
|
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
|
|
Shanghai NF Trading Ltd
|
|
|
50
|
|
China Shanghai
|
|
Shanghai NF Semiconductors Technology Ltd
|
|
|
50
|
|
China Beijing
|
|
STMicroelectronics (Beijing) R&D Co. Ltd
|
|
|
100
|
|
China Beijing
|
|
ST-Ericsson Semiconductor (Beijing) Co. Ltd
|
|
|
50
|
|
Czech Republic Prague
|
|
STMicroelectronics Design and Application s.r.o.
|
|
|
100
|
|
Czech Republic Prague
|
|
ST-Ericsson s.r.o.
|
|
|
50
|
|
Finland Lohja
|
|
ST-Ericsson OY
|
|
|
50
|
|
France Crolles
|
|
STMicroelectronics (Crolles 2) SAS
|
|
|
100
|
|
France Montrouge
|
|
STMicroelectronics S.A.
|
|
|
100
|
|
France Paris
|
|
ST-Ericsson (France) SAS
|
|
|
50
|
|
France Rousset
|
|
STMicroelectronics (Rousset) SAS
|
|
|
100
|
|
France Tours
|
|
STMicroelectronics (Tours) SAS
|
|
|
100
|
|
France Grenoble
|
|
STMicroelectronics (Grenoble 2) SAS
|
|
|
100
|
|
France Grenoble
|
|
ST-Ericsson (Grenoble) SAS
|
|
|
50
|
|
Germany Grasbrunn
|
|
STMicroelectronics GmbH
|
|
|
100
|
|
Germany Grasbrunn
|
|
STMicroelectronics Design and Application GmbH
|
|
|
100
|
|
Germany Grasbrunn
|
|
ST-NXP Wireless GmbH i.L.
|
|
|
50
|
|
Holland Amsterdam
|
|
STMicroelectronics Finance B.V.
|
|
|
100
|
|
Holland Amsterdam
|
|
ST-Ericsson Wireless N.V.
|
|
|
50
|
|
Holland Eindhoven
|
|
ST-Ericsson B.V.
|
|
|
50
|
|
Holland Eindhoven
|
|
ST-Ericsson Holding B.V.
|
|
|
50
|
|
Hong Kong Hong Kong
|
|
STMicroelectronics LTD
|
|
|
100
|
|
India Noida
|
|
STMicroelectronics Pvt Ltd
|
|
|
100
|
|
India Noida
|
|
ST-Ericsson India Pvt Ltd
|
|
|
50
|
|
India New Delhi
|
|
STMicroelectronics Marketing Pvt Ltd
|
|
|
100
|
|
India Bangalore
|
|
NF Wireless India Pvt Ltd
|
|
|
50
|
|
Ireland Dublin
|
|
NXP Falcon Ireland Ltd
|
|
|
50
|
|
Israel Netanya
|
|
STMicroelectronics Ltd
|
|
|
100
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership
|
Legal Seat
|
|
Name
|
|
(Direct or Indirect)
|
|
Italy Catania
|
|
CO.RI.M.ME.
|
|
|
100
|
|
Italy Aosta
|
|
DORA S.p.a.
|
|
|
100
|
|
Italy Agrate Brianza
|
|
ST Incard S.r.l.
|
|
|
100
|
|
Italy Naples
|
|
STMicroelectronics Services S.r.l.
|
|
|
100
|
|
Italy Agrate Brianza
|
|
STMicroelectronics S.r.l.
|
|
|
100
|
|
Italy Agrate Brianza
|
|
ST-Ericsson Srl
|
|
|
50
|
|
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) SAS
|
|
|
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
|
|
Spain Madrid
|
|
STMicroelectronics Iberia S.A.
|
|
|
100
|
|
Sweden Kista
|
|
STMicroelectronics A.B.
|
|
|
100
|
|
Sweden Stockholm
|
|
ST-Ericsson A.B.
|
|
|
50
|
|
Sweden Kista
|
|
STMicroelectronics Wireless A.B.
|
|
|
50
|
|
Switzerland Geneva
|
|
STMicroelectronics S.A.
|
|
|
100
|
|
Switzerland Geneva
|
|
INCARD SA
|
|
|
100
|
|
Switzerland Geneva
|
|
INCARD Sales and Marketing SA
|
|
|
100
|
|
Switzerland Geneva
|
|
ST-Ericsson SA
|
|
|
50
|
|
Taiwan Taipei
|
|
ST-Ericsson (Taiwan) Ltd
|
|
|
50
|
|
Thailand Bangkok
|
|
STMicroelectronics (Thailand) Ltd
|
|
|
100
|
|
United Kingdom Marlow
|
|
STMicroelectronics Limited
|
|
|
100
|
|
United Kingdom Marlow
|
|
STMicroelectronics (Research & Development) Limited
|
|
|
100
|
|
United Kingdom Bristol
|
|
Inmos Limited
|
|
|
100
|
|
United Kingdom Bristol
|
|
ST-Ericsson (UK) Ltd
|
|
|
50
|
|
United Kingdom Reading
|
|
Synad Technologies Limited
|
|
|
100
|
|
United Kingdom Southampton
|
|
NF UK, Ltd
|
|
|
50
|
|
United States Carrollton
|
|
STMicroelectronics Inc.
|
|
|
100
|
|
United States Carrollton
|
|
ST-Ericsson Inc.
|
|
|
50
|
|
United States Carrollton
|
|
Genesis Microchip Inc.
|
|
|
100
|
|
United States Carrollton
|
|
Genesis Microchip (Del) Inc.
|
|
|
100
|
|
United States Carrollton
|
|
Genesis Microchip LLC
|
|
|
100
|
|
United States Carrollton
|
|
Genesis Microchip Limited Partnership
|
|
|
100
|
|
United States Carrollton
|
|
Sage Inc.
|
|
|
100
|
|
United States Carrollton
|
|
Faroudja Inc.
|
|
|
100
|
|
United States Carrollton
|
|
Faroudja Laboratories Inc.
|
|
|
100
|
|
United States Wilmington
|
|
STMicroelectronics (North America) Holding, Inc.
|
|
|
100
|
|
United States Wilsonville
|
|
The Portland Group, Inc.
|
|
|
100
|
|
The following table lists our principal equity investments and
our percentage ownership as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership
|
Legal Seat
|
|
Name
|
|
(Direct or Indirect)
|
|
Italy Roma
|
|
3 Sun S.r.l.
|
|
|
33.3
|
|
South Korea Yongin-si
|
|
ATLab Inc.
|
|
|
8
|
|
Singapore The Curie
|
|
Veredus Laboratories Pte Ltd
|
|
|
41.2
|
|
Switzerland Zurich
|
|
ST-Ericsson AT SA
|
|
|
49
|
|
On May 7, 2010, Micron Technology Inc. acquired all of the
outstanding shares of capital stock of Numonyx.
35
Public
Funding
We participate in certain programs established by the EU,
individual countries and local authorities in Europe
(principally 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, France and Catania, Italy) contain obligations to
maintain a minimum level of employment and 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), which is the successor of MEDEA+ (which ended
in 2008); (ii) EU R&D projects with FP6 and FP7 (Sixth
and Seventh Frame Program) for Information Technology;
(iii) European industry initiatives such as ENIAC (European
Nanoelectronics Initiative) and ARTEMIS (Embedded Computing
Systems Initiative); 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.
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 lInnovazione Tecnologica) is designed to fund
precompetitive development in manufacturing. These programs are
not limited to microelectronics and are suitable 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 2010, the strategic program industria
2015 (involving a two-step evaluation procedure) at the
end of the second evaluation stage, three projects of the
company have been 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 has approved public grants for seven projects
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 dAosta,
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, facilitization
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. The M6 plant and the Contratto di
programma have been transferred to Numonyx, which will benefit
from future M6 grants linked to the completion of the M6 plant
and assume related responsibilities. Under a Memorandum of
Understanding dated July 30, 2009 the Italian Authorities
declared their willingness to release public grants in
connection with a revision of the current M6 Program Agreement
so that original project (consisting in 1,700 million
of investments to complete the M6 plant so as to make it able to
produce memories with corresponding public funds for
446 million) is replaced by 2 separate projects, one
related to Numonyx R&D activities in its Italian sites and
the second to the finalization of the announced joint venture in
the photovoltaic field with Enel and Sharp, and the conversion
of the industrial destination of the new M6 facility in Catania
from production of memories to production of photovoltaic
panels. In particular, as part of the joint venture in the
photovoltaic field with Enel and Sharp, we have contributed the
M6 plant, reacquired from Numonyx, to the new joint venture,
which will make the necessary investments to convert industrial
destination of M6 from production of memories to production of
photovoltaic panels up to a
36
capacity of 240 MW/year (approved phase 1) and plans, subject to
future business and financial conditions, up to a maximum of
1GW/year production capability for a corresponding maximum
investment of 1,150 million. Recently CIPE
(Comitato Interministeriale Programmazione Economica )
has resolved to issue a first step of 49 million in
funding.
In France, support for R&D is given by ANR (Agence
Nationale de la Recherche), by OSEO (the agency taking over
the missions and budgets of the AII Agency for Industrial
Innovation), by the Ministry of Industry (FCE) and
local public authorities. Specific support for microelectronics
is provided through FCE to over 30 companies with
activities in the semiconductor industry. The amount of support
under French programs is decided annually and subject to budget
appropriation. In 2010, we continued the execution of the
framework agreement with the French Ministry of Economy,
Industry and Employment, the Nano2012 Research and
Development program. Under this agreement, we are the
Coordinator and Project Leader and have been allocated up to
340 million (about $450 million) in grants for
the period
2008-2012 if
all technical parameters and objectives are met. Nano2012 is
designed to promote 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 (International Semiconductor
Development Alliance) led by IBM and grouping seven leading
world-wide semiconductor partners.
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 a open and
non-discriminatory base for their research &
development activities. See Item 5. Operating and
Financial Review and Prospects 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 new Tremonti-ter
allows 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 11 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 15 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 are 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 The lack of public funding available to
us, changes in existing public funding programs or demands for
repayment 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
37
advances in process technology to remain competitive. Advances
in process technology cannot be brought about 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. We obtain our raw materials and supplies from
diverse sources on a
just-in-time
basis. Although supplies for the raw materials used by us are
currently adequate, shortages could occur in various essential
materials due to interruption of supply or increased demand in
the industry. 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.
Finally, we also use external subcontractors to outsource wafer
manufacturing and 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
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 PSE (Principles of Sustainable Excellence),
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 in particular by
Commission Decision 2005/618/EC of August 18, 2005); and
Directive 2002/96/EC on waste electrical and electronic
equipment (WEEE Directive, as modified by Directive
2003/108/EC, Directive 2008/34/EC and Directive 2008/12/EC).
Both Directives are in the process of being replaced by new
directives that are expected to be adopted in 2011. The ROHS
Directive aims at banning the use of lead and other
flame-retardant substances in manufacturing electronic
components. The WEEE Directive promotes the recovery and
recycling of electrical and electronic waste. Due to unclear
statutory definitions and interpretations, we are unable at this
time to determine in detail the ramifications of our activities
under the WEEE Directive. The WEEE Directive to be adopted in
2011 may or may not clarify such definitions with respect
to our activities. 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 establishing a scheme for greenhouse gas
allowance trading (as modified by Directive 2004/101/EC and
Directive 2008/101/EC), and applicable national legislation. The
2003 Directive was also amended by Directive 2009/29/EC, which
must be transposed into national law by the European Member
States on or before December 31, 2012. Two of our
manufacturing sites (Crolles, France, and Agrate, Italy) have
been allocated a quota of greenhouse gas for the period
2008-2012.
Failure to comply would force us to acquire potentially
expensive additional emission allowances from third parties, or
to pay a fee for each extra ton of gas emitted. Our on-going
programs to reduce
CO2
emissions should allow us to comply with the greenhouse gas
quota allocations that have been defined for Crolles and Agrate
for the period
2008-2012.
At this stage, the emission permits are allocated for free to
the industry. However, pursuant to provisions created by the
2009 Directive, a growing percentage of the permits will be
auctioned by Member States beginning in 2013. Moreover, the
French authorities will be implementing a scheme in the course
of 2011 where part of the permits (up to 10%) will be auctioned,
pursuant to Law n°
2010-1657 of
December 2010. We
38
are not yet in a position to know whether our Crolles site will
be impacted by such measures. However, part of the permits will
be allocated for free until 2027, when all of the permits will
be subject to auction.
In the United States, we participate in the Chicago Climate
Exchange program, a voluntary greenhouse gas trading program
whose members commit to reduce emissions. 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
Sustainable Report as well as through the Carbon Disclosure
Project.
Regulations implementing the registration, evaluation,
authorization and restriction of chemicals (REACH)
were adopted in 2008. 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 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.
Industry
Background
The
Semiconductor Market
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 (military applications and
computer systems) to applications such as telecommunications
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.
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, in particular, the Asia Pacific region.
Semiconductor
Classifications
Process technologies, levels of integration, design specificity,
functional technologies and applications for different
semiconductor products vary significantly. As differences in
these characteristics have increased, the semiconductor market
has become highly diversified as well as subject to constant and
rapid change. Semiconductor product markets may be classified
according to each of these characteristics.
Semiconductors can be manufactured using different process
technologies, each of which is particularly suited to different
applications. Since the mid-1970s, the two dominant processes
have been bipolar (the original technology used to produce ICs)
and CMOS. Bipolar devices typically operate at higher speeds
than CMOS devices, but CMOS devices consume less power and
permit more transistors to be integrated on a single IC. CMOS
has become the prevalent technology, across all major mass
markets such as personal computers, consumer application and
cellular phones. Advanced technologies have been developed
during the last decade that are particularly suited to more
systems-oriented semiconductor applications. BiCMOS technologies
have been developed to combine the high-speed and high-voltage
characteristics of bipolar technologies with the low power
consumption and high integration of CMOS technologies. BCD
technologies have been developed that combine bipolar, CMOS and
DMOS technologies to target intelligent power control and
conversion applications. Such systems-oriented technologies
require more process steps and mask levels, and are more complex
than the basic function-oriented technologies.
39
Process technologies, referred to as MEMS, has significantly
developed in the last decade and has allowed to expand the scope
of traditional semiconductor devices from signal processing,
storage and power conversion, up to sensing and converting a
wide variety of physical dimensions such as pressure,
temperature and acceleration.
Semiconductors are often classified as either discrete devices
(such as individual diodes, thyristors and single high voltage
and power transistors, as well as optoelectronic products) or
ICs (in which thousands of functions are combined on a single
chip of silicon to form a more complex circuit).
Compared to the market for ICs, there is typically less
differentiation among discrete products supplied by different
semiconductor manufacturers. Also, discrete markets have
generally grown at slower, but more stable, rates than IC
markets.
Semiconductors may also be classified as either standard
components, ASSPs or ASICs. Standard components are used for a
broad range of applications, while ASSPs and ASICs are designed
to perform specific functions in specific applications.
The two basic functional technologies for semiconductor products
are analog and digital. Mixed-signal products combine both
analog and digital functionality. Analog devices monitor,
condition, amplify or transform analog signals, which are
signals that vary continuously over a wide range of values.
Analog/digital (or mixed-signal) ICs combine analog
and digital devices on a single chip to process both analog
signals and digital data. System designers are increasingly
demanding system-level integration in which complete electronic
systems containing both analog and digital functions are
integrated on a single IC.
Digital devices are divided into two major types: memory
products and logic devices. Memory products, which are used in
electronic systems to store data and program instructions, are
classified as either volatile memories (which lose their data
content when power to the device is switched off) or nonvolatile
memories (which retain their data content without the need for
continuous power).
The primary volatile memory devices are dynamic random access
memories (DRAMs). DRAMs are used in a
computers main memory. SRAMs are principally used as
caches and buffers between a computers microprocessor and
its DRAM-based main memory and in other applications such as
mobile handsets.
Nonvolatile memories are used to store program instructions.
Among such nonvolatile memories, read-only memories
(ROMs) are permanently programmed when they are
manufactured while programmable ROMs (PROMs) can be
programmed by system designers or end-users after they are
manufactured. Erasable PROMs (EPROMs) may be erased
after programming by exposure to ultraviolet. Electrically
erasable PROMs (EEPROMs) can be erased byte by byte
and reprogrammed in-system without the need for
removal. Flash Memory is a type of EEPROM in which the memory
data is electrically erased by large arrays of bits rather than
by fractions such as bit by bit.
Logic devices process digital data to control the operation of
electronic systems. The largest segment of the logic market
includes microprocessors, microcontrollers and DSPs.
Microprocessors are the central processing units of computer
systems. Microcontrollers are complete computer systems
contained on single ICs that are programmed to specific customer
requirements. Microcontrollers control the operation of
electronic and electromechanical systems by processing input
data from electronic sensors and generating electronic control
signals. They are used in a wide variety of consumer,
communications, automotive, industrial and computer products.
DSPs are parallel processors used for high complexity,
high-speed real-time computations in a wide variety of
applications.
A significant number of our logic devices is constituted by ASSP
SoC, which gathers the functions of system control, multi-media
signal processing and communication protocols in a wide variety
of systems, such as smart-phones, set-top-boxes and
communication infrastructure platforms.
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Item 5.
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Operating
and Financial Review and Prospects
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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 and
Liquidity and Capital Resources
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
40
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:
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sales returns and allowances;
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determination of the best estimate of selling price for
deliverables in multiple element sale arrangements;
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inventory reserves and normal manufacturing capacity thresholds
to determine costs capitalized in inventory;
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provisions for litigation and claims;
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valuation at fair value of acquired assets including
intangibles, goodwill, investments and tangible assets, and
assumed liabilities in a business combination, as well as the
impairment of their related carrying values;
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assessment, in each reporting period, of events, which could
trigger interim impairment testing;
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estimated value of the consideration to be received and used as
fair value for asset groups classified as assets to be disposed
of by sale and the assessment of the probability of realizing
the sale;
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measurement of the fair value of debt and equity securities, for
which no observable market price is obtainable;
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assessment of credit losses and
other-than-temporary
impairment charge on financial assets;
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valuation of noncontrolling interests, particularly in case of a
contribution in kind as part of a business combination;
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restructuring charges;
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assumptions used in calculating pension obligations; and
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determination of the amount of taxes estimated for the full
year, including deferred income tax assets and valuation
allowances, and provisions for uncertain positions and claims.
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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. With respect to the
Wireless segment, our accounting relies on estimates based on
the business plan of ST-Ericsson, as submitted by
ST-Ericssons CEO to ST-Ericssons Board of Directors.
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. This usually occurs at the time of shipment.
Consistent with standard business practice in the semiconductor
industry, price protection is granted to distributor customers
on their 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 move 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 ability to foresee changes in
standard inventory product pricing (as opposed to pricing for
certain customized products) and our lengthy 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
41
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.
Our customers occasionally return our products for technical
reasons. Our standard terms and conditions of sale provide that
if we determine that our 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 book a provision 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 policies relating to product liability only cover
physical and other direct damages caused by defective products.
We carry only limited insurance against immaterial,
non-consequential damages in the event of a product recall. 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 and liable 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 claim.
We maintain an allowance for doubtful accounts for estimated
potential 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 are required to evaluate our customers
credit ratings from time to time and take an additional
provision for any specific account that we consider doubtful. In
2010, 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. Such deterioration is
increasingly likely in the case of a crisis in the credit
markets. 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, we allocate the revenue to different
deliverables based on best estimates of selling prices of each
deliverable.
Goodwill and purchased intangible assets. The
purchase method of accounting for acquisitions requires
extensive use of estimates and judgments to allocate the
purchase price to the fair value of the net tangible and
intangible assets acquired. Goodwill and intangible assets
deemed to have indefinite lives are not amortized but are
instead subject to annual impairment tests. The amounts and
useful lives assigned to other intangible assets impact future
amortization. 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, 2010, the value
of goodwill amounted to $1,054 million.
Impairment of goodwill. Goodwill recognized in
business combinations is not amortized and is instead subject to
an impairment test to be performed on an annual basis, or more
frequently if indicators of impairment exist, in order to assess
the recoverability of its carrying value. 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. Our reporting unit
Wireless includes ST-Ericsson. 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 a market approach with financial metrics
of comparable public companies and estimate 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. Our evaluations
are based on financial plans updated with the latest available
projections of the semiconductor market evolution, 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 be
incorrect, and future adverse changes in market conditions or
operating results of acquired businesses that are not in line
with our estimates may require impairment of certain goodwill.
In the third quarter, we conducted the yearly impairment test,
which did not result in a need to recognize an additional
impairment. In the fourth quarter, we tested the fair value of
the Wireless business and concluded that no additional
impairment was required. The fair values comfortably exceeded
our carrying values for each reporting
42
unit. We did not record any goodwill impairment charge in 2010.
However, many of the factors used in assessing fair values for
such assets are outside of our control and the estimates used in
such analyses are subject to change. We will continue to monitor
the carrying value of our assets. If market conditions
deteriorate or our Wireless business experiences a further
decline in revenues, 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 strategic transactions, particularly in
the event of a downward shift in future revenues or operating
cash flow in relation to our current plans.
Intangible assets subject to
amortization. Intangible assets subject to
amortization include the cost of technologies and licenses
purchased from third parties, as well as from the purchase
method of accounting for acquisitions, purchased software and
internally developed software that is capitalized. In addition,
intangible assets subject to amortization include intangible
assets acquired through business combinations such as core
technologies and customer relationships. Intangible assets
subject to amortization are reflected net of any impairment
losses and are amortized over their estimated useful life. The
carrying value of intangible assets subject to amortization is
evaluated whenever changes in circumstances indicate that the
carrying amount may not be recoverable. In determining
recoverability, we initially 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 assets
carrying value also exceeds its fair value. An impairment loss
is recognized for the excess of the carrying amount over the
fair value. We normally estimate the fair value using a market
approach with financial metrics of comparable public companies
and estimate the expected discounted future cash flows
associated with the intangible assets. Significant management
judgments and estimates are required to forecast the future
operating results used in the discounted cash flow method of
valuation. Our evaluations are based on financial plans,
including the plan we receive from ST-Ericsson, 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 of certain intangible assets.
During the third quarter, we conducted the yearly impairment
test, which did not result in a need to recognize an additional
impairment. In the fourth quarter, we tested the fair value of
the Wireless business and no additional impairment was required.
The fair values comfortably exceeded the carrying values of our
intangible assets for each reporting unit. However, many of the
factors used in assessing fair values for such assets are
outside of our control and the estimates used in such analyses
are subject to change. We will continue to monitor the carrying
values of our intangible assets. If market conditions
deteriorate or our Wireless business experiences a further
decline in revenues, this could result in future non-cash
impairment charges against income. Further impairment charges
could also result from new valuations triggered by changes in
our product portfolio or strategic transactions, particularly in
the event of a downward shift in future revenues or operating
cash flow in relation to our current plans. At December 31,
2010, the value of intangible assets subject to amortization
amounted to $731 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 300-mm
manufacturing equipment whose useful life was 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 new
equipment when it is placed into service.
We perform an impairment review when there is reason to suspect
that the carrying value of tangible assets or groups of assets
might not be recoverable. In determining the recoverability of
assets to be held and used, we initially 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 assets carrying value also exceeds its
fair value. We normally estimate this fair value based on 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 the continued validity of an assets useful life
when impairment indicators are identified. Assets classified as
held for sale are reflected at the lower of their carrying
amount and fair value less selling costs and are not depreciated
during the selling period. Selling costs include incremental
direct costs to transact the sale that we would not have
incurred except for the decision to sell.
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
43
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 and net realizable 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 upon 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 inventories but are
charged directly to the cost of sales. Net realizable 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 as part
of purchase accounting at fair value, less completion and
distribution costs and related margin.
The valuation of inventory requires us to estimate 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 quarters
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, we could
be required to record additional inventory provisions, which
would have a negative impact on our gross margin.
Business combination. The purchase method of
accounting for business combinations requires extensive use of
estimates and judgments to allocate the purchase price to the
fair value of the net tangible and intangible assets acquired.
The amounts and useful lives assigned to other intangible assets
impact future amortization. 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.
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 a probable
liability exists and it can be reasonably estimated. We record
estimated charges for non-voluntary termination benefit
arrangements such as severance and outplacement costs meeting
the criteria for a liability as described above. Given the
significance and timing of the execution of such 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 be required to 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. For 2010, the net
amount of restructuring charges and other related closure costs
amounted to $93 million before taxes.
Share-based compensation. We measure our
share-based compensation cost based on its fair value on the
grant date of each award. 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 financial objectives, including our
financial results. In order to assess the fair value of this
share-based compensation, we are required to estimate certain
items, including the probability of meeting certain industry
performances compared to our financial results, forfeitures and
employees service period. As a result, in relation to our
nonvested Stock Award Plan, we recorded a total pre-tax expense
of $34 million in 2010, out of which $6 million was
related to the 2007 plan, $4 million was related to the
2008 plan; $12 million to the 2009 plan and
$12 million to the 2010 plan.
Earnings (loss) on Equity Investments. We are
required to record our proportionate share of the results of the
entities that we account for under the equity method. This
recognition is based on results reported by these entities,
sometimes on a one-quarter lag, and, for such purpose, we rely
on their internal controls. In 2010, we recognized a loss of
approximately $28 million related to the ST-Ericsson JVD
entities we account for under the equity method, net of the
amortization of basis differences, a gain of approximately
$8 million on our investment in Numonyx and $3 million
loss related to other investments. Moreover, we recognized a
$265 million gain on the sale of the
44
Numonyx shares in the second quarter of 2010. In case of
triggering events, we are required to determine the fair value
of our investment and assess the classification of temporary
versus
other-than-temporary
impairments of the carrying value. 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.
Financial assets. We classify our financial
assets in the following categories:
held-for-trading
and
available-for-sale.
Such classification depends on the purpose for which the
investments are acquired. We determine the classification of our
financial assets at initial recognition. We have not elected to
apply the fair value option on any financial assets. Unlisted
equity securities with no readily determinable fair value are
carried at cost. Regular purchases and sales of financial assets
are recognized on the trade date the date on which
we commit to purchase or sell the asset. Financial assets are
initially recognized at fair value;
available-for-sale
and
held-for-trading
financial assets are subsequently carried at fair value. The
gain (loss) on the sale of the financial assets is reported as a
non-operating element on the consolidated statements of income.
The fair values of quoted debt and equity securities are based
on current market prices. If the market for a financial asset is
not active and if no observable market price is obtainable, we
measure fair value by using assumptions and estimates. For
unquoted equity securities, these assumptions and estimates
include the use of recent arms-length transactions; for
debt securities without available observable market price, we
establish fair value by reference to publicly available indexes
of securities with same rating and comparable or similar
underlying collaterals or industries exposure, which we
believe approximates the orderly exit value in the current
market. In measuring fair value, we make maximum use of market
inputs and rely as little as possible on entity-specific inputs.
Based on the previously adopted mark to model methodology, in
2010 we had no additional impairment on the value of the Auction
Rate Securities (ARS) that Credit Suisse purchased
on our account contrary to our mandate. For more information
about the ARS purchased by Credit Suisse contrary to our
instruction, which are still accounted for and owned by us
pending the execution of the favorable arbitration award against
Credit Suisse Securities LLC (Credit Suisse) by the
Financial Industry Regulatory Authority (FINRA) and
confirmed on March 19, 2010 and on August 24, 2010 by
the ruling of the federal district court in New York, see
Item 8. Financial Information Legal
Proceedings.
Income taxes. We are required to make
estimates and judgments in determining income tax expense or
benefit for financial statement purposes. These estimates and
judgments also occur in the calculation of certain tax assets
and liabilities and provisions. Furthermore, the adoption of the
FASB guidance on accounting for uncertainty in income taxes
requires an evaluation of the probability of any tax
uncertainties and the recognition of the relevant charges.
We are also required to assess the likelihood of recovery of our
deferred tax assets and partially depend on
ST-Ericsson
management as deferred tax assets at ST-Ericsson are concerned.
This assessment requires the exercise of judgement 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. If recovery is not likely, we
are required to record a valuation allowance against the
deferred tax assets that we estimate will not ultimately be
recoverable, which would increase our provision for income
taxes. Our deferred tax assets have increased substantially in
the period
2007-2009 in
light of our negative net earnings, particularly at
ST-Ericsson,
while decreased in 2010 due to improved performances resulting
in net income. As of December 31, 2010, we recorded in our
accounts certain valuation allowances based on our current
operating assumptions. However, the recorded amount of total
deferred tax assets could be reduced, resulting in a decrease in
our total assets and, consequently, in our shareholders
equity, if our estimates of projected future taxable income and
benefits from available tax strategies are reduced as a result
of a change in managements 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 tax loss and 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. In particular, a
significant part of the increase in the deferred tax assets was
recorded in relation to net operating losses incurred in
ST-Ericsson joint-venture. These net operating losses will
expire in seven years; currently, no valuation allowance was
recorded at December 31, 2010 on the basis of the most
updated business plans including its tax considerations. The
future recoverability of these net operating losses is partly
dependent on the successful market penetration of new product
releases. We have received several design wins to support our
forecasted recoverability of the deferred tax assets; however,
negative developments in the new product roll-out could require
adjustments to our evaluation of the deferred tax asset
valuation.
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, communication
alleging possible infringement of patents and other IP rights of
third parties. Furthermore, we may become involved in costly
45
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. From time to time we face cases where contingent
liability cannot readily be reasonably estimated. 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, 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 other parties IP rights. We are also involved in
several legal proceedings concerning such issues. See
Item 8. Financial Information Legal
Proceedings.
As of December 31, 2010, based on our assessment, we did
not record any material provisions in our financial statements
relating to third-party IP right claims since we had not
identified any risk of probable loss that is likely to arise out
of asserted claims or ongoing legal proceedings. There can be no
assurance, however, that these will be resolved in our favor. 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 operation and our
ability to compete.
Pension and Post-Retirement Benefits. Our
results of operations and our consolidated balance sheet include
an amount of pension and post-retirement benefits that are
measured using actuarial valuations. At December 31, 2010,
our pension and long-term benefit obligations net of plan assets
amounted to $326 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 the majority of our plans is December 31.
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 and provisions for specifically
identified income tax exposure as well as claims for
environmental damages. In determining loss contingencies, we
consider the likelihood of a loss of an asset or the incurrence
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. 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 more information, see Note 2 to our Consolidated
Financial Statements.
Fiscal
Year 2010
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 2010
ended on March 27, 2010. The second quarter of 2010 ended
on June 26, 2010 and the third quarter of 2010 ended on
September 25, 2010. The fourth quarter of 2010 ended on
December 31, 2010. 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 2011 the first quarter will end on April 2, the second
quarter will end on July 2, the third quarter will end on
October 1 and the fourth quarter will end on
December 31.
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2010
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 PC motherboard major devices
such as Microprocessors (MPUs), DRAMs,
optoelectronics devices and Flash Memory).
In 2010, the semiconductor industry significantly rebound after
the previous year decline, with the total revenues reaching new
historically high levels.
Based on published industry data by WSTS, semiconductor industry
revenues increased in 2010 on a
year-over-year
basis by approximately 32% for the TAM and 26% for the SAM to
reach approximately $298 billion and $171 billion,
respectively. In the fourth quarter the TAM and the SAM
decreased approximately 4% and 2% sequentially, while increasing
on a
year-over-year
basis by 12% and 14%, respectively.
With reference to our business performance, in 2010 we
registered a solid progression in terms of revenues, with
particularly strong results noted by the ACCI and IMS product
segments. Our yearly revenues increased to $10,346 million,
our highest ever net revenues, resulting in a 21.6% increase
over 2009; this performance was below the SAM, as a combination
of IMS and ACCI growing faster than their served market and
Wireless declining in a growing market due to product portfolio
transition.
Our fourth quarter 2010 revenues reached $2,833 million,
increasing both on a
year-over-year
and sequential basis by 9.7% and 6.6%, respectively, as they
continued to benefit from strong demand from our customers,
mainly in Automotive and Industrial and Multi segment sectors.
Compared to the SAM, our sequential performance was
significantly better, although it was lower on a
year-over-year
basis.
Our effective average exchange rate for 2010 was $1.36 for
1.00 compared to $1.37 for 1.00 for 2009. Our
effective average exchange rate for the fourth quarter of 2010
was $1.34 for 1.00, same as for the third quarter of 2010
and compared to $1.43 for 1.00 in the fourth quarter of
2009. 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 2010 gross margin reached 38.8% of revenues, increasing
by 7.9 percentage points compared to the prior year. The
main factors contributing to the improvement during 2010 were:
(i) higher sales volume and, consequently, the improved
loading of our fabs, while the 2009 gross margin was
penalized by approximately 4 percentage points by the
unused capacity charges; (ii) overall improvement in our
manufacturing efficiencies resulting from our cost optimization
initiatives and restructuring plans; and (iii) new product
introductions in several of our product lines.
Our fourth quarter 2010 gross margin further increased to
39.9%, up sequentially and on a
year-over-year
basis, by 70 and 290 basis points, respectively.
Our total operating expenses, combining the selling, general and
administrative (SG&A) and research and
development (R&D) expenses, were basically flat
compared to 2009, despite higher revenues, taking advantage of
the cost saving initiatives, while we maintained our commitment
to support significant investments in the research and
development activities.
The 2010 overall improvement of our performances, particularly
in terms of higher revenues and manufacturing efficiencies,
coupled with a strong decrease in the amount of impairment and
restructuring charges and led to a significant turnaround of our
operating results, moving from a loss of $1,023 million in
2009 to an income of $476 million in 2010. Our continued
effort to develop new and exciting products has started to
translate into increased profitability as operating results
improved in 2010 by approximately $1.5 billion on
$1.84 billion of higher revenues.
Our fourth quarter 2010 operating income amounted to
$213 million, improving sequentially from
$193 million, driven by higher revenues.
In summary, our profitability in 2010 was generated by the
following factors:
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strong progression of our revenues; and
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overall improvement of our manufacturing performances.
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These factors were partially offset by the following elements:
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negative pricing trend; and
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the losses of ST-Ericsson JVS, half of which were attributed to
noncontrolling interest.
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We had a very strong finish to the year. Our fourth quarter
revenues came in near the top end of our range anticipated when
entering the quarter, increasing 6.6% sequentially on
broad-based strength in Analog, MEMS, Microcontrollers and
Automotive applications. Our gross margin further increased to
39.9%, up 70 basis points sequentially, coming in above the
mid-point of our guidance.
ACCI and IMS again achieved record sales this quarter,
accompanied by further improvements at the operating profit
level, with ACCI operating margin increasing to 11.9% and IMS
rising to 22.5%. In Wireless, while operating losses remain very
significant, ST-Ericsson has completed its restructuring and is
now well on its way to complete the transition to its new
product portfolio. Our strong sales result, driven by our
innovative product portfolio combined with our restructuring
efforts, enabled us to generate net earnings of
$830 million for the year.
In 2010, we were well prepared to take advantage of
significantly better industry conditions with the right
portfolio and we have started to turn our vision of leadership
in Sense and Power applications and in multimedia
convergence into reality. In the last eight quarters, we went
through the most severe economic recession in 2009 and
successfully capitalized on the 2010 market recovery. Throughout
this time frame, we remained focused on our growth and
profitability objectives. Today, our innovative products, which
have leadership positions in highly successful applications,
customer base and solid capital structure, make us a much
stronger company.
Business
Outlook
As we enter 2011, key new products continuing to ramp will
include gyroscopes, accelerometers, 32-bit microcontrollers and
automotive products among others. New products that will
contribute to our growth in the coming quarters include
System-on-Chips
for 3-D and
connected TVs, MEMS microphones and pressure sensors and
advanced analog products for medical and smart grid
applications. Also, ST-Ericsson will ramp new products, such as
their thin modem and, in the second half of the year, U8500
smartphone platforms.
While the semi-conductor industry is expected to grow in 2011,
although at a much more moderate rate compared to the strong
growth in 2010, based on current market conditions, we believe
we are positioned to deliver above market revenue growth
accompanied by further
year-over-year
improvements in quarterly operating profitability. We are
well-positioned for success in our traditional and new growth
markets including energy savings, data security, healthcare and
wellness, as well as smart consumer devices.
In order to support our innovative product portfolio and to fuel
revenue growth faster than the served market dynamic,
particularly for MEMS, Automotive and U8500 smartphone platform,
we expect to invest approximately $1.1 billion to
$1.5 billion in 2011 based on revenue growth.
In line with normal seasonality, the high exposure to New Year
holidays in Asia and the accounting calendar, we expect the
first quarter 2011 revenues to be lower sequentially by about 7
to 12%, which at the mid-point equates to a 10% increase when
compared to the
year-over-year
period. As a result, and based on prices entering the new year
contracts, gross margin in the first quarter is expected to be
around 39.0%, plus or minus 1 percentage point.
This outlook is based on an assumed effective currency exchange
rate of approximately $1.32 equal to 1.00 for 2011 first
quarter. The first quarter will close on April 2, 2011.
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
3Sun
S.r.l. (3Sun)
On January 4, 2010, we signed a joint agreement with Enel
and Sharp for the manufacture of triple-junction thin-film
photovoltaic panels in Italy. On August 2, 2010, we
announced, together with Enel and Sharp, the signature of a
binding commitment letter for a project financing of around
150 million by a group of banks and our equal share
joint venture, named 3Sun, began operations at the Catania,
Italy factory. The Catania factorys initial photovoltaic
panel production capacity, equivalent to 160 MW per year,
is to be financed through a combination of equity from sponsors,
grants from the Italian Joint Ministerial Committee for Economic
planning, which recently committed 49 million to this
project, and project financing provided by leading banks. In
December 2010, 3Sun signed the project finance agreement. We,
Enel and Sharp have each underwritten one-third of the joint
ventures equity, equal to 60 million. Our
equity commitment was mainly satisfied by the contribution of
the M6 facility in Catania (see below) for a value of
60 million. We, Enel and Sharp are committed to
further equity contributions up
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to 30 million should certain conditions be met. Panel
production at the Catania plant is scheduled to begin in the
second half of 2011.
Numonyx
On February 10, 2010, we, together with our partners Intel
Corporation and Francisco Partners, entered into a definitive
agreement with Micron Technology Inc., in which Micron acquired
Numonyx Holdings B.V. in an all-stock transaction, closed on
May 7, 2010. In exchange for our 48.6% stake in Numonyx, we
received approximately 66.88 million shares of Micron
common stock, recorded as a financial investment. At the
May 6, 2010 Micron closing share price of $8.75 per share,
the value of the shares was $585.2 million. Due to the high
volatility in the share price, the value of these shares could
be subject to material variations and, therefore, in order to
partially protect the value of the transaction, we had hedged,
with certain derivative instruments, a significant portion of
the 66.88 million shares. Through December 31, 2010,
we sold 46.8 million shares at an average price of $8.48
per share, including the unwinding of the applicable hedging
contracts. For the details of these hedging operations, see
Note 27 to our Consolidated Financial Statements.
Furthermore, we had a payable of $78 million due to
Francisco Partners at the end of the shares six month
lock-up
period which was paid during the fourth quarter 2010. Also, at
the closing of this transaction, the senior credit facility that
was supported by our guarantee of $225 million was repaid
in full by Numonyx. The overall transaction resulted in a gain
after tax of approximately $265 million, higher than the
amount previously announced, which was reported in our fiscal
second quarter Consolidated Statement of Income. In connection
with the divestiture of Numonyx we also received full ownership
of the Numonyx M6 facility in Catania, Italy, which, as noted
above, we have contributed to 3Sun, the new photovoltaic joint
venture among Enel, Sharp and us. Subsequently, in
January 2011, we sold all the remaining Micron shares
together with their relevant collar option for the total
proceeds of $196 million, realizing a gain of
$20 million.
Under the terms of the agreement to sell Numonyx to Micron, we
retained the $250 million deposit with DBS Bank Ltd. in
Singapore, which was intended to guarantee the Hynix-Numonyx
Joint Ventures debt financing for such amount. Concurrent
with our divestiture of Numonyx, we entered into an agreement
with Micron and Numonyx that provided that, in the event Hynix
exercised its right to purchase Numonyxs interest in the
Hynix joint venture following the closing of the Numonyx
transaction, Numonyx would take over all or part of our
obligations under the guarantee. On May 31, 2010, Numonyx
notified us that on May 28, 2010, Hynix had delivered a
call option exercise notice to them. Following these events, our
$250 million deposit in favor of the Numonyx-Hynix joint
venture was released to us on August 31, 2010, upon the
completion of Hynixs purchase of Numonyxs equity
interest in the Hynix-Numonyx Joint Venture.
Credit
Suisse
On March 19, 2010, in connection with our legal action to
recover from Credit Suisse the amount invested in unauthorized
auction rate securities against our instructions, the federal
district court in New York issued a ruling affirming the
unanimous arbitration award in our favor for more than
$432 million, including collected interest, entered in
February 2009 by FINRA. The ruling of the federal district court
in New York denied Credit Suisses motion to vacate the
award, also granting our petition to affirm the award and
directing Credit Suisse to pay us the unpaid balance. Based on
the ruling we should receive approximately $357 million,
which includes approximately $27 million of interest to
date, in addition to the approximately $75 million
previously received in December upon selling a portion of these
securities. On March 31, 2010, the New York Court for the
Southern District issued a judgment confirming the
March 19, 2010 order and closing the case. On
August 24, 2010, the New York Court for the Southern
District issued a judgment confirming the ruling of March 2010,
which was subsequently appealed by Credit Suisse. After filing
the required supersedeas bond, Credit Suisse filed on
September 21, 2010 a motion of appeal to the US Court of
Appeal of the Second Circuit, and three days later we filed a
motion for an expedited appeal. On February 24, 2011, we
received notice that the US Court of Appeals for the Second
Circuit has fixed March 28, 2011 as the trial date.
Shareholders
Meeting
At our annual general meeting of shareholders held on
May 25, 2010, the following proposals, inter alia, were
approved by our shareholders:
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Approval of our 2009 accounts reported in accordance with
International Financial Reporting Standards (IFRS);
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The reappointment for a three-year term, expiring at the 2013
Annual General Meeting, of the following members of the
Supervisory Board: Mr. Raymond Bingham and
Mr. Alessandro Ovi; and
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The distribution of an annual cash dividend of $0.28 per share,
to be paid in four equal quarterly installments.
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Organizational
changes
On February 3, 2010, we announced that Tjerk Hooghiemstra
joined us as Executive Vice President, Chief Administrative
Officer (CAO), reporting to our President and CEO,
Carlo Bozotti. This new position was created with the aim of
generating synergies among several staff organizations by
optimizing the functions of Human Resources, Health &
Safety, Education, Legal, Internal Communication, Security and
Corporate Responsibility.
As of October 8, 2010, our Chief Compliance Officer reports
to our CAO; and our Internal Audit organization reports
functionally to the Chairman of our Audit Committee and
administratively to our CEO.
Our Supervisory Board met on October 26, 2010, and
announced its decision to propose for shareholder approval at
our next Annual General Meeting in 2011, the reappointment for a
three-year term of Carlo Bozotti as the sole member of the
Managing Board and our President and Chief Executive Officer. In
addition, Didier Lamouche resigned as a member of our
Supervisory Board effective October 26, 2010, in view of
his joining us on November 1, 2010. Alain Dutheil has
announced his decision to retire in 2011 after 27 years
with us. Following a transition period, Didier Lamouche
succeeded Alain Dutheil as Chief Operating Officer on
January 26, 2011. Alessandro Ovi was appointed to replace
Didier Lamouche on our Audit Committee.
We have decided to start some venture capital investments in
areas of strategic interest for our company. With this
initiative, managed by a dedicated organization, we will invest
in startup companies that develop emergent technologies,
products and services connected to our business, allowing us to
assess new markets and to position ourselves early. As a
consequence, Loïc Lietar, formerly Chief Strategic Officer,
will manage this new activity and Philippe Lambinet, on top of
his current assignment, will take on the responsibility of the
strategic functions currently managed by Loïc Lietar.
Moreover, the Corporate Communication Group has become part of
our CFOs organization, with the purpose of driving a
comprehensive and thorough business, market, product and
financial integrated communication platform, aimed at a broader
audience of stakeholders and shareholders.
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 through our
divisions, which include the production and sale of both silicon
chips and Smart cards.
The organization during 2010 was as follows:
|
|
|
|
|
Automotive Consumer Computer and Communication Infrastructure
(ACCI), comprised of four product lines:
|
|
|
|
|
|
Automotive Products Group (APG);
|
|
|
|
Computer and Communication Infrastructure (CCI);
|
|
|
|
Home Entertainment & Displays
(HED); and
|
|
|
|
Imaging (IMG).
|
|
|
|
|
|
Industrial and Multisegment Sector (IMS), comprised
of:
|
|
|
|
|
|
Analog, Power and Micro-Electro-Mechanical Systems
(APM); and
|
|
|
|
Microcontrollers, non-Flash, non-volatile Memory and Smart Card
products (MMS).
|
|
|
|
|
|
Wireless Segment (Wireless), comprised of:
|
|
|
|
|
|
2G, EDGE, TD-SCDMA & Connectivity;
|
|
|
|
3G Multimedia & Platforms;
|
|
|
|
LTE & 3G Modem Solutions;
|
50
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 the wireless business but outside of
the ST-Ericsson JVS.
|
In 2010, we restated our results from prior periods for
illustrative comparisons of our performance by product segment.
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 of
the segments for the prior reporting periods. The tables set
forth below reflect the transfer of a small business unit from
ACCI to IMS; accordingly, we have reclassified the prior
periods revenues and operating income results of ACCI and
IMS. We believe that the restated 2009 presentation is
consistent with that of 2010 and we use these comparatives when
managing our company.
As of January 1, 2011, the Audio division moved from ACCI
to the IMS perimeter.
Additionally starting in 2011, we are now tracking the
Industrial and Multisegment Sector (IMS) in the two
following sub-segments:
|
|
|
|
|
Analog, MEMS, MCU (AMM), including
|
|
|
|
|
|
all Analog Products and MEMS from former product line Analog
Power and Micro-Electro-Mechanical Systems
(APM); and
|
|
|
|
former product line Microcontrollers, non-Flash, non-volatile
Memory and Smart Card products (MMS).
|
|
|
|
|
|
Power Discrete Products (PDP), including:
|
|
|
|
|
|
Tyristors & Triacs, IPAD and Transistors from former
product line Analog Power and Micro-Electro-Mechanical Systems
(APM).
|
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 these
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 segment
does not meet the requirements for a reportable segment as
defined in the guidance on disclosures about segments of an
enterprise and related information.
The following tables present our consolidated net revenues and
consolidated operating income 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, selling, general and administrative expenses and
a significant part of research and development expenses.
Additionally, in compliance with our internal policies, certain
cost items are not charged to the segments, including unused
capacity charges, impairment, restructuring charges and other
related closure costs,
start-up and
phase out costs of certain manufacturing facilities, strategic
and special R&D programs or other corporate-sponsored
initiatives, including certain corporate level operating
expenses, acquired IP R&D, other non-recurrent purchase
accounting items and certain other miscellaneous charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net revenues by product segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive Consumer Computer and Communication Infrastructure
(ACCI)(1)
|
|
$
|
4,169
|
|
|
$
|
3,152
|
|
|
$
|
4,055
|
|
Industrial and Multi segment Sector (IMS)
|
|
|
3,899
|
|
|
|
2,687
|
|
|
|
3,403
|
|
Wireless
|
|
|
2,219
|
|
|
|
2,585
|
|
|
|
2,030
|
|
Others(2)
|
|
|
59
|
|
|
|
86
|
|
|
|
55
|
|
Flash Memory Group (FMG)
|
|
|
|
|
|
|
|
|
|
|
299
|
|
Total consolidated net revenues
|
|
$
|
10,346
|
|
|
$
|
8,510
|
|
|
$
|
9,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
(1) |
|
Following the transfer of a small business unit from ACCI to
IMS, we have reclassified prior periods revenues
accordingly. |
|
(2) |
|
In 2010, Others includes revenues from the sales of
Subsystems ($19 million), assembly services
($14 million), sales of materials and other products not
allocated to product segments ($21 million) and
miscellaneous ($5 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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net revenues by product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive Products Group (APG)(1)
|
|
$
|
1,420
|
|
|
$
|
1,005
|
|
|
$
|
1,386
|
|
Computer and Communication Infrastructure (CCI)
|
|
|
1,125
|
|
|
|
932
|
|
|
|
1,077
|
|
Home Entertainment & Displays (HED)
|
|
|
1,006
|
|
|
|
787
|
|
|
|
1,086
|
|
Imaging (IMG)
|
|
|
569
|
|
|
|
417
|
|
|
|
499
|
|
Others
|
|
|
49
|
|
|
|
11
|
|
|
|
7
|
|
Automotive Consumer Computer and Communication Infrastructure
(ACCI)
|
|
|
4,169
|
|
|
|
3,152
|
|
|
|
4,055
|
|
Analog, Power and Micro-Electro-Mechanical Systems
(APM)
|
|
|
2,714
|
|
|
|
1,887
|
|
|
|
2,393
|
|
Microcontrollers, non-Flash, non-volatile Memory and Smartcard
products (MMS)(1)
|
|
|
1,181
|
|
|
|
798
|
|
|
|
1,010
|
|
Others
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
Industrial and Multisegment Sector (IMS)
|
|
|
3,899
|
|
|
|
2,687
|
|
|
|
3,403
|
|
2G, EDGE TD-SCDMA & Connectivity
|
|
|
956
|
|
|
|
1,027
|
|
|
|
737
|
|
3G Multimedia & Platforms
|
|
|
1,223
|
|
|
|
1,529
|
|
|
|
1,293
|
|
LTE & 3G Modem Solutions
|
|
|
35
|
|
|
|
18
|
|
|
|
|
|
Others
|
|
|
5
|
|
|
|
11
|
|
|
|
|
|
Wireless
|
|
|
2,219
|
|
|
|
2,585
|
|
|
|
2,030
|
|
Others
|
|
|
59
|
|
|
|
86
|
|
|
|
55
|
|
Flash Memory Group (FMG)
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net revenues
|
|
$
|
10,346
|
|
|
$
|
8,510
|
|
|
$
|
9,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Following the transfer of a small business unit from ACCI to
IMS, we have reclassified prior periods revenues
accordingly. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Operating income (loss) by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive Consumer Computer and Communication Infrastructure
(ACCI)
|
|
$
|
410
|
|
|
$
|
(69
|
)
|
|
$
|
142
|
|
Industrial and Multisegment Sector (IMS)
|
|
|
681
|
|
|
|
91
|
|
|
|
476
|
|
Wireless(1)
|
|
|
(483
|
)
|
|
|
(356
|
)
|
|
|
(65
|
)
|
Others(2)
|
|
|
(132
|
)
|
|
|
(689
|
)
|
|
|
(767
|
)
|
Operating income (loss) excluding FMG
|
|
|
476
|
|
|
|
(1,023
|
)
|
|
|
(214
|
)
|
Flash Memory Group (FMG)
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Operating income (loss)
|
|
$
|
476
|
|
|
$
|
(1,023
|
)
|
|
$
|
(198
|
)
|
|
|
|
(1) |
|
The majority of Wireless activities are run through
ST-Ericsson JVS, a joint venture between us and Ericsson. In
addition, the Wireless segment 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 the Wireless
segment) is credited on the line Net loss (income)
attributable to noncontrolling interest of our
Consolidated Statements of Income, which represented
$288 million for the year ended December 31, 2010. |
|
(2) |
|
Operating loss of Others includes items such as
unused capacity charges, impairment, restructuring charges and
other related closure costs,
start-up and
phase-out costs, and other unallocated expenses such as:
strategic or |
52
|
|
|
|
|
special R&D programs, acquired IP R&D and other
non-recurrent purchase accounting items, certain corporate level
operating expenses, certain patent claims and litigation, and
other costs that are not allocated to the product segments, as
well as operating earnings or losses of the Subsystems and Other
Products Group. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(As percentage of net revenues)
|
|
|
Operating income (loss) by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive Consumer Computer and Communication Infrastructure
(ACCI)(1)
|
|
|
9.8
|
%
|
|
|
(2.2
|
)%
|
|
|
3.5
|
%
|
Industrial and Multisegment Sector (IMS)(1)
|
|
|
17.5
|
|
|
|
3.4
|
|
|
|
14.0
|
|
Wireless(1)
|
|
|
(21.8
|
)
|
|
|
(13.8
|
)
|
|
|
(3.2
|
)
|
Others(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Flash Memory Group (FMG)
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income (loss)(3)
|
|
|
4.6
|
%
|
|
|
(12.0
|
)%
|
|
|
(2.0
|
)%
|
|
|
|
(1) |
|
As a percentage of net revenues per product segment. |
|
(2) |
|
Includes operating income (loss) from sales of subsystems and
other income (expenses) not allocated to product segments. |
|
(3) |
|
As a percentage of total net revenues. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Reconciliation to consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) of product segments
|
|
$
|
608
|
|
|
$
|
(334
|
)
|
|
$
|
553
|
|
Total operating income FMG
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Unused capacity charges
|
|
|
(3
|
)
|
|
|
(322
|
)
|
|
|
(57
|
)
|
Impairment, restructuring charges and other related closure costs
|
|
|
(104
|
)
|
|
|
(291
|
)
|
|
|
(481
|
)
|
Start-up/phase-out
costs
|
|
|
(15
|
)
|
|
|
(39
|
)
|
|
|
(17
|
)
|
Strategic and other research and development programs
|
|
|
(18
|
)
|
|
|
(22
|
)
|
|
|
(24
|
)
|
Acquired In-Process R&D and other non recurring purchase
accounting items
|
|
|
|
|
|
|
|
|
|
|
(185
|
)
|
Other non-allocated provisions(1)
|
|
|
8
|
|
|
|
(15
|
)
|
|
|
(3
|
)
|
Total operating loss Others
|
|
|
(132
|
)
|
|
|
(689
|
)
|
|
|
(767
|
)
|
Total consolidated operating income (loss)
|
|
$
|
476
|
|
|
$
|
(1,023
|
)
|
|
$
|
(198
|
)
|
|
|
|
(1) |
|
Includes unallocated income and expenses such as certain
corporate level operating expenses and other costs that are not
allocated to the product segments. |
Net
revenues by location of order shipment and by market
segment
The table below sets forth information on our net revenues by
location of order shipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
2,592
|
|
|
$
|
2,413
|
|
|
$
|
3,024
|
|
Americas
|
|
|
1,331
|
|
|
|
1,015
|
|
|
|
1,334
|
|
Greater China South Asia
|
|
|
4,558
|
|
|
|
3,457
|
|
|
|
3,928
|
|
Japan-Korea
|
|
|
1,865
|
|
|
|
1,625
|
|
|
|
1,556
|
|
Total
|
|
$
|
10,346
|
|
|
$
|
8,510
|
|
|
$
|
9,842
|
|
|
|
|
(1) |
|
Net revenues by location of order shipment are classified by
location of customer invoiced. For example, products ordered by
U.S.-based
companies to be invoiced to Greater China South Asia
affiliates are |
53
|
|
|
|
|
classified as Greater China South Asia revenues.
Furthermore, the comparison among the different periods may be
affected by shifts in order shipment from one location to
another, as requested by our customers. |
The table below shows our net revenues by location of order
shipment and market segment application in percentage of net
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(As percentage of net revenues)
|
|
|
Net Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
|
25.0
|
%
|
|
|
28.4
|
%
|
|
|
30.7
|
%
|
Americas
|
|
|
12.9
|
|
|
|
11.9
|
|
|
|
13.6
|
|
Greater China South Asia
|
|
|
44.1
|
|
|
|
40.6
|
|
|
|
39.9
|
|
Japan-Korea
|
|
|
18.0
|
|
|
|
19.1
|
|
|
|
15.8
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Net Revenues by Market Segment Application:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
|
14.0
|
|
|
|
12.2
|
|
|
|
13.8
|
|
Computer
|
|
|
13.0
|
|
|
|
12.9
|
|
|
|
12.0
|
|
Consumer
|
|
|
12.2
|
|
|
|
11.5
|
|
|
|
13.6
|
|
Telecom
|
|
|
31.8
|
|
|
|
39.9
|
|
|
|
33.3
|
|
Industrial and Other
|
|
|
8.1
|
|
|
|
7.7
|
|
|
|
9.0
|
|
Distribution
|
|
|
20.9
|
|
|
|
15.8
|
|
|
|
18.3
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
(1) |
|
Net revenues by location of order shipment are classified by
location of customer invoiced. 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 order shipment from one
location to another, as requested by our customers. |
|
(2) |
|
The above table estimates, within a variance of 5% to 10% in the
absolute dollar amount, the relative weighting of each of our
target segments. Net revenues by market segment application are
classified according to the status of the final customer. For
example, products ordered by a computer company, even including
sales of other applications such as Telecom, are classified as
Computer revenues. |
54
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(As percentage of net revenues)
|
|
|
Net sales
|
|
|
99.2
|
%
|
|
|
99.5
|
%
|
|
|
99.5
|
%
|
Other revenues
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Net revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of sales
|
|
|
(61.2
|
)
|
|
|
(69.1
|
)
|
|
|
(63.8
|
)
|
Gross profit
|
|
|
38.8
|
|
|
|
30.9
|
|
|
|
36.2
|
|
Selling, general and administrative
|
|
|
(11.4
|
)
|
|
|
(13.6
|
)
|
|
|
(12.0
|
)
|
Research and development
|
|
|
(22.7
|
)
|
|
|
(27.8
|
)
|
|
|
(21.9
|
)
|
Other income and expenses, net
|
|
|
0.9
|
|
|
|
1.9
|
|
|
|
0.6
|
|
Impairment, restructuring charges and other related closure costs
|
|
|
(1.0
|
)
|
|
|
(3.4
|
)
|
|
|
(4.9
|
)
|
Operating income (loss)
|
|
|
4.6
|
|
|
|
(12.0
|
)
|
|
|
(2.0
|
)
|
Other-than-temporary
impairment charge and realized losses on financial assets
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(1.4
|
)
|
Interest income (expense), net
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.5
|
|
Earnings (loss) on equity investments and gain on investment
divestiture
|
|
|
2.3
|
|
|
|
(4.0
|
)
|
|
|
(5.6
|
)
|
Gain (loss) on financial instruments, net
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
Income (loss) before income taxes and noncontrolling
interest
|
|
|
6.7
|
|
|
|
(17.6
|
)
|
|
|
(8.3
|
)
|
Income tax benefit expense
|
|
|
(1.5
|
)
|
|
|
1.1
|
|
|
|
0.4
|
|
Income (loss) before noncontrolling interest
|
|
|
5.2
|
|
|
|
(16.5
|
)
|
|
|
(7.9
|
)
|
Net loss (income) attributable to noncontrolling interest
|
|
|
2.8
|
|
|
|
3.2
|
|
|
|
(0.1
|
)
|
Net income (loss) attributable to parent company
|
|
|
8.0
|
%
|
|
|
(13.3
|
)%
|
|
|
(8.0
|
)%
|
2010 vs.
2009
Based on published industry data by WSTS, semiconductor industry
revenue increased by approximately 32% for the TAM and 26% for
the SAM.
Net
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Variation
|
|
|
|
(Audited, in millions)
|
|
|
Net sales
|
|
$
|
10,262
|
|
|
$
|
8,465
|
|
|
|
21.2
|
|
Other revenues
|
|
|
84
|
|
|
|
45
|
|
|
|
87.1
|
|
Net revenues
|
|
$
|
10,346
|
|
|
$
|
8,510
|
|
|
|
21.6
|
|
In 2010, we registered a strong performance, posting growth in
all regions and in all product segments, with the exception of
Wireless. Our revenues reached a record $10,346 million,
increasing 21.6% compared to prior year, as a result of a broad
product portfolio and significantly better industry conditions.
In 2010, we recognized $84 million in other revenues,
mainly consisting of the proceeds from the licensing of CMOS
technologies which accounted for $57 million. The revenue
increase was entirely driven by volume, which accounted for an
approximate 31% increase, partially balanced by an approximate
9% decline in average selling prices. The selling price decrease
resulted from a negative pricing impact of approximately 6% and
a less favorable product mix impact of 3% due to a strong volume
increase in IMS and ACCI coupled with a volume decrease in
Wireless.
By product segment, our revenues performance was supported by
the strong results within both IMS and ACCI, registering an
increase of approximately 45% and 32%, respectively, while
Wireless sales registered a decline of approximately 14%. Within
ACCI, strong results were driven by all key product lines, in
particular Automotive, Digital Consumer, Computer Peripherals
and Printers. IMS revenue growth benefited from two main
factors: (1) first advanced Analog and MEMS products, which
are becoming an increasing proportion of its overall portfolio;
(2) success of its general purpose and secure
microcontroller families. The decline in volume and selling
prices was the main reason for Wireless sales decrease,
due to the expected ongoing decline in sales of our legacy
product portfolio.
55
By location of order shipment, Greater China-South Asia and
Americas were the top performers, with approximately 32% and 31%
growth, respectively, largely exceeding the results registered
by Japan-Korea at approximately 15% and EMEA at approximately
7%. Our largest customer, the Nokia group of companies,
accounted for approximately 14% of our net revenues in 2010
compared to about 16% during 2009.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Variation
|
|
|
|
(Audited, in millions)
|
|
|
Cost of sales
|
|
$
|
(6,331
|
)
|
|
$
|
(5,884
|
)
|
|
|
(7.6
|
)
|
Gross profit
|
|
|
4,015
|
|
|
|
2,626
|
|
|
|
52.9
|
|
Gross margin (as a percentage of net revenues)
|
|
|
38.8
|
%
|
|
|
30.9
|
%
|
|
|
|
|
Our gross margin in 2010 reached a level of 38.8%, increasing on
a
year-over-year
basis by nearly 8 percentage points. The increase in gross
profit and gross margin reflected higher revenues, improved
manufacturing efficiencies and a more favorable product mix in
ACCI and IMS, as well as the absence of unused capacity charges
following the return to normal fab loading. The unused capacity
charges were immaterial in 2010, compared to $322 million
in 2009. The gross profit also benefited slightly from a
positive fluctuation in the U.S. dollar exchange rate.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Variation
|
|
|
|
(Audited, in millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
(1,175
|
)
|
|
$
|
(1,159
|
)
|
|
|
(1.4
|
)
|
As a percentage of net revenues
|
|
|
(11.4
|
)%
|
|
|
(13.6
|
)%
|
|
|
|
|
While our selling, general and administrative expenses
registered a slight increase in 2010 in dollar terms, they
decreased as a percentage of revenues from 13.6% in 2009 to
11.4% in 2010, as leveraged by the higher revenues.
Our share-based compensation charges were $18 million in
2010, compared to $19 million registered in 2009.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Variation
|
|
|
|
(Audited, in millions)
|
|
|
Research and development expenses
|
|
$
|
(2,350
|
)
|
|
$
|
(2,365
|
)
|
|
|
0.6
|
|
As a percentage of net revenues
|
|
|
(22.7
|
)%
|
|
|
(27.8
|
)%
|
|
|
|
|
Our
year-over-year
R&D expenses remained basically flat due to our ongoing
cost saving measures and restructuring initiatives, mainly in
the ST-Ericsson perimeter, while maintaining our commitment to
invest in R&D activities. The R&D expense to sales
ratio was at about 23% of revenues in 2010, also reflecting the
current effort in product transition in Wireless.
The 2010 amount included $10 million of share-based
compensation charges compared to $11 million in 2009.
R&D expenses in 2010 were net of research tax credits,
which amounted to $146 million, same as in the prior year.
56
Other
income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Audited, in millions)
|
|
|
Research and development funding
|
|
$
|
106
|
|
|
$
|
202
|
|
Start-up/phase-out
costs
|
|
|
(15
|
)
|
|
|
(39
|
)
|
Exchange gain, net
|
|
|
11
|
|
|
|
11
|
|
Patent costs, net of gain from settlement
|
|
|
(12
|
)
|
|
|
(5
|
)
|
Gain on sale of long-lived assets, net
|
|
|
4
|
|
|
|
3
|
|
Other, net
|
|
|
(4
|
)
|
|
|
(6
|
)
|
Other income and expenses, net
|
|
$
|
90
|
|
|
$
|
166
|
|
As a percentage of net revenues
|
|
|
0.9
|
%
|
|
|
2.0
|
%
|
Other income and expenses, net, mainly included, as income,
R&D funding and exchange gain and, as expenses,
start-up and
phase-out costs and patent claim costs net of settlement
agreements. Income from R&D funding was associated with our
R&D projects, which, upon approval, qualify as funding on
the basis of contracts with local government agencies in
locations where we pursue our activities. In 2010, the balance
of these factors resulted in net income of $90 million,
significantly lower than in the previous year, which benefited
from the
catch-up of
funding related also to prior years. The 2010 amount also
included a significant decline in
start-up and
phase-out costs, benefiting from a more stabilized structure of
our manufacturing activities.
Impairment,
restructuring charges and other related closure
costs
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Impairment, restructuring charges and other related closure costs
|
|
$
|
(104
|
)
|
|
$
|
(291
|
)
|
In 2010, we recorded $104 million of impairment and
restructuring charges and other related closure costs, which
were basically related to two plans: the manufacturing
restructuring plan, which is expected to be completed in the
second half of 2011, and the ST-Ericsson restructuring plan. The
breakdown was as follows:
|
|
|
|
|
$27 million related to our manufacturing restructuring plan
which contemplated the closure of our Ain Sebaa (Morocco),
Carrollton (Texas) and Phoenix (Arizona) sites, and was composed
of one-time termination benefits, as well as other relevant
charges, mainly related to the Carrollton and Phoenix fabs;
|
|
|
|
$74 million related to the plans announced in April and
December 2009 by ST-Ericsson, largely completed during 2010,
primarily consisting of on-going termination benefits pursuant
to the workforce reduction plan and the closure of certain
locations in Europe; and
|
|
|
|
$3 million related to other restructuring initiatives.
|
In 2009, we recorded $291 million in impairment,
restructuring charges and other related closure costs, of which:
$126 million related to the closure of our Ain Sebaa
(Morocco), Carrollton (Texas) and Phoenix (Arizona) sites,
including $101 million of one-time termination benefits, as
well as other relevant charges and $25 million as
impairment charges on the fair value of Carrollton and Phoenix
assets; $100 million related to the new plans announced in
April and December 2009 by ST-Ericsson, primarily consisting of
on-going termination benefits pursuant to the closure of certain
locations in Europe and the United States; $59 million
related to other ongoing and newly committed restructuring
plans, consisting primarily of voluntary termination benefits
and early retirement arrangements in some of our European
locations; and $6 million as impairment on certain goodwill.
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Operating income (loss)
|
|
$
|
476
|
|
|
$
|
(1,023
|
)
|
As a percentage of net revenues
|
|
|
4.6
|
%
|
|
|
(12.0
|
)%
|
57
Our operating results significantly improved in 2010 compared to
the year-ago period due to the rebound in our revenues, the
success of new product offering, in particular in ACCI and IMS
and the benefits of our cost optimization initiatives. As a
result, our operating income reached $476 million,
significantly better than our operating loss of
$1,023 million in 2009. In 2009, the high level of
operating losses was mainly due to the sharp drop in revenues
originated by the market downturn, the high amount of unused
capacity charges associated with the low level of fab loading
and the higher amount of impairment and restructuring charges.
Both ACCI and IMS reported a significant improvement in their
profitability compared to the year ago period, supported by
their higher levels of revenues, while Wireless incurred higher
losses due to declining sales. ACCI increased its operating
result from a loss of $69 million to an operating profit of
$410 million, equivalent to 9.8% of revenues. IMS improved
its profit from $91 million to $681 million,
equivalent to 17.5% of revenues. Wireless operating loss
increased from $356 million to $483 million, partially
off-set by noncontrolling interest in our earnings of
respectively $276 million and $296 million, and was
originated by ST-Ericsson, which is completing its cost
restructuring while seeking to enhance its product and
customers portfolio. The segment Others
significantly reduced its losses to $132 million, from
$689 million in the year ago period, mainly due to
significantly lower amounts of restructuring and unused capacity
charges.
Other-than-temporary
impairment charge and realized losses on financial
assets
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Other-than-temporary
impairment charge and realized losses on financial assets
|
|
$
|
0
|
|
|
$
|
(140
|
)
|
No amounts were recorded as
other-than-temporary
impairment charge or realized losses on financial assets as of
December 31, 2010. The 2009 amount was related to an
other-than-temporary
impairment of $72 million and a realized loss of
$68 million, both linked to the portfolio of ARS purchased
on our account by Credit Suisse contrary to our instruction. See
Liquidity and Capital Resources.
Interest
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Interest income (expense), net
|
|
$
|
(3
|
)
|
|
$
|
9
|
|
We recorded net interest expense of $3 million in 2010,
compared to income of $9 million registered in the previous
period. This amount consisted of (i) $31 million in
interest income, decreasing compared to 2009, in spite of the
more favorable cash position, due to lower U.S. dollar
denominated interest rates on liquidity investments and the
extinguishment of long-term subordinated notes received upon the
creation of Numonyx, as well as the redemption of the
$250 million restricted cash in favor of the Numonyx-Hynix
joint venture; and (ii) $34 million of interest
expense and banking fees, which also decreased due to the lower
cost of debt following our repurchase of about 50% of our 2016
convertible bonds (2016 Convertible Bonds) and about
15% of our 2013 senior bonds (2013 Senior Bonds).
Loss
on equity investments and gain on investment
divestiture
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Loss on equity investments and gain on investment divestiture
|
|
$
|
242
|
|
|
$
|
(337
|
)
|
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 Numonyxs 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. In
2009, we recorded an impairment loss of $200 million booked
on our Numonyx equity investment, $103 million as our net
proportional share of the loss reported by Numonyx, a
$32 million loss related to
58
our proportionate share in ST-Ericsson JVD as a loss
pick-up
including an amortization of basis difference and
$2 million related to other investments.
Loss
on financial instruments, net
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Loss on financial instruments, net
|
|
$
|
(24
|
)
|
|
$
|
(5
|
)
|
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 a senior Floating
Rate Notes (FRN); (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. In
2009, we registered a loss of $8 million related to the
sale of a cancellable swap purchased to hedge the fair value of
a portion of the convertible bonds due 2016 carrying a fixed
interest rate, partially balanced by a $3 million gain
related to a partial repurchase of our 2016 Convertible Bonds.
Income
tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Income tax benefit (expense)
|
|
$
|
(149
|
)
|
|
$
|
95
|
|
In 2010, we registered an income tax expense of
$149 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 and our best estimate on
tax charges related to potential uncertain tax positions. The
2009 benefit was reflecting the loss before taxes.
Net
loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Net loss attributable to noncontrolling interest
|
|
$
|
288
|
|
|
$
|
270
|
|
As a percentage of net revenues
|
|
|
2.8
|
%
|
|
|
3.2
|
%
|
In 2010, we booked $288 million as a result 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, while the corresponding 2009
amount was $276 million.
All periods included the recognition of noncontrolling interest
related to our joint venture in Shenzhen, China for assembly
operating activities and Incard do Brasil for the distribution
of the smart cards. Those amounts were not material.
Net
income (loss) attributable to parent company
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
|
(Audited, in millions)
|
|
Net income (loss) attributable to parent company
|
|
$
|
830
|
|
|
$
|
(1,131
|
)
|
As a percentage of net revenues
|
|
|
8.0
|
%
|
|
|
(13.3
|
)%
|
In 2010, we reported a net income of $830 million. In 2009,
we had a net loss of $1,131 million as a result of adverse
economic conditions, which negatively impacted our operations
and certain non-operating charges.
Earnings per diluted share was $0.92 in 2010, whereas in 2009 we
reported a loss per share of $(1.29).
59
2009 vs.
2008
Based on published industry data by WSTS, semiconductor industry
revenue decreased by approximately 9% for the TAM and 13% for
the SAM.
Net
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
% Variation
|
|
|
(Audited, in millions)
|
|
Net sales
|
|
$
|
8,465
|
|
|
$
|
9,792
|
|
|
|
(13.5
|
)
|
Other revenues
|
|
|
45
|
|
|
|
50
|
|
|
|
(10.2
|
)
|
Net revenues
|
|
$
|
8,510
|
|
|
$
|
9,842
|
|
|
|
(13.5
|
)
|
In 2009, our net revenues decreased significantly due to the
difficult market environment experienced overall by the
semiconductor industry. Our revenues performance was basically
in line with the SAMs decline. The majority of our market
segments was negatively impacted by these difficult conditions
and registered declining rates, except for Telecom, which
benefited from the additional contribution of the NXP and EMP
wireless businesses integrated in August 2008 and February 2009,
respectively. Such a negative trend in our revenues was driven
by the large drop in units sold since average selling prices
basically remained flat as a result of an improved product mix.
By product segment, both ACCI and IMS registered double digit
declines, driven by a sharp drop in sales volume. Wireless,
however, increased approximately 27%, benefiting from the
additional contribution of the integrated wireless business.
By location of order shipment, all regions but Japan-Korea
registered a drop in revenues, ranging from declines of
approximately 24% in the Americas to approximately 20% in EMEA
and 12% in Greater China-South Asia. Our largest customer, the
Nokia group of companies, accounted for approximately 16.1% of
our net revenues, compared to 17.5% during 2008, excluding FMG.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
% Variation
|
|
|
(Audited, in millions)
|
|
Cost of sales
|
|
$
|
(5,884
|
)
|
|
$
|
(6,282
|
)
|
|
|
6.3
|
|
Gross profit
|
|
|
2,626
|
|
|
|
3,560
|
|
|
|
(26.2
|
)
|
Gross margin (as a percentage of net revenues)
|
|
|
30.9
|
%
|
|
|
36.2
|
%
|
|
|
|
|
Our gross profit in 2009 was largely penalized by unused
capacity charges of $322 million due to the significant
underloading of our wafer fabs planned in response to dropping
demand, coupled with our substantial reduction in inventory and
manufacturing inefficiencies. Consequently, our gross margin was
largely below the previous years result, totaling 30.9%,
or a drop of 5.3 percentage points, with unused capacity
charges estimated to account for approximately 4 percentage
points.
Gross profit and gross margin in 2009, however, benefited from
the positive impact of the strengthening U.S. dollar.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
% Variation
|
|
|
(Audited, in millions)
|
|
Selling, general and administrative expenses
|
|
$
|
(1,159
|
)
|
|
$
|
(1,187
|
)
|
|
|
2.3
|
|
As a percentage of net revenues
|
|
|
(13.6
|
)%
|
|
|
(12.1
|
)%
|
|
|
|
|
Our selling, general and administrative expenses decreased by
approximately 2.3% despite the additional activities related to
the integration of the NXP and EMP businesses, mainly due to the
favorable impact of the strengthening U.S. dollar exchange
rate and savings from the progression of cost restructuring
plans. As a percentage of revenues, they increased to 13.6%
compared to the prior year, due primarily to the sharp decline
in our sales. The 2009 amount included $19 million of
share-based compensation charges compared to $37 million in
2008.
60
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
% Variation
|
|
|
(Audited, in millions)
|
|
Research and development expenses
|
|
$
|
(2,365
|
)
|
|
$
|
(2,152
|
)
|
|
|
(9.9
|
)
|
As a percentage of net revenues
|
|
|
(27.8
|
)%
|
|
|
(21.9
|
)%
|
|
|
|
|
On a
year-over-year
basis, our R&D expenses increased in line with the
expansion of our activities, including, primarily, the
integration of the businesses from NXP and Ericsson. Our 2009
R&D expenses also benefited from a stronger
U.S. dollar exchange rate and savings from the progression
of cost restructuring plans for both us and ST-Ericsson. The
2009 amount included $11 million of share-based
compensation charges compared to $24 million in 2008.
R&D expenses in 2009 were net of research tax credits,
which amounted to $146 million, decreasing $15 million
compared to the year-ago period.
Other
income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Research and development funding
|
|
$
|
202
|
|
|
$
|
83
|
|
Start-up/phase-out
costs
|
|
|
(39
|
)
|
|
|
(17
|
)
|
Exchange gain (loss) net
|
|
|
11
|
|
|
|
20
|
|
Patent costs, net of gain from settlement
|
|
|
(5
|
)
|
|
|
(24
|
)
|
Gain on sale of other non-current assets
|
|
|
3
|
|
|
|
4
|
|
Other, net
|
|
|
(6
|
)
|
|
|
(4
|
)
|
Other income and expenses, net
|
|
$
|
166
|
|
|
$
|
62
|
|
As a percentage of net revenues
|
|
|
2.0
|
%
|
|
|
0.6
|
%
|
Other income and expenses, net, mainly included, as income,
items such as R&D funding and exchange gain and, as
expenses,
start-up and
phase-out costs. R&D funding income was associated with our
R&D projects, which, upon project approval, qualifies as
funding pursuant to contracts with local government agencies in
locations where we pursue our activities. In 2009, the balance
of these factors resulted in net income of $166 million, a
significant improvement compared to the equivalent period in
2008, resulting from the booking of new funding for an R&D
program in France. As a result, total funding reached in 2009
was $202 million, which included the
catch-up of
2008 projects, and resulted in an amount significantly higher
compared to 2008. The 2009 amount also included a higher level
of phase-out costs associated with the closure of our facilities
in Carrollton, Texas and Ain Sebaa, Morocco.
Impairment,
restructuring charges and other related closure
costs
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Impairment, restructuring charges and other related closure costs
|
|
$
|
(291
|
)
|
|
$
|
(481
|
)
|
In 2009, we recorded $291 million in impairment,
restructuring charges and other related closure costs, of which:
|
|
|
|
|
$126 million related to the closure of our Ain Sebaa
(Morocco), Carrollton (Texas) and Phoenix (Arizona) sites,
including $101 million of one-time termination benefits, as
well as other relevant charges and $25 million as
impairment charges on the fair value of Carrollton and Phoenix
assets;
|
|
|
|
$100 million related to the new plans announced in April
and December 2009 by ST-Ericsson, to be completed in 2010,
primarily consisting of on-going termination benefits pursuant
to the closure of certain locations in Europe and the United
States;
|
|
|
|
$59 million related to other ongoing and newly committed
restructuring plans, consisting primarily of voluntary
termination benefits and early retirement arrangements in some
of our European locations; and
|
|
|
|
$6 million as impairment on certain goodwill.
|
61
In 2008, this expense was mainly comprised of the following:
$216 million originated by the disposal of the FMG assets,
which required the recognition of $190 million as an
additional loss as a result of a revision in the terms of the
transaction from those expected at December 31, 2007 and
$26 million as restructuring and other related disposal
costs; $164 million incurred as part of our ongoing 2007
restructuring initiatives which included the closure of our fabs
in Phoenix and Carrollton (USA) and of our back-end facilities
in Ain Sebaa (Morocco); $13 million as impairment charges
on goodwill and certain financial investments; and
$88 million for other previously and newly announced
restructuring plans, consisting primarily of voluntary
termination benefits and early retirement arrangements in some
of our European locations.
Operating
loss
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Operating loss
|
|
$
|
(1,023
|
)
|
|
$
|
(198
|
)
|
As a percentage of net revenues
|
|
|
(12.0
|
)%
|
|
|
(2.0
|
)%
|
Our operating results were largely impacted by the strong
decline in revenues, which also triggered the recognition of
significant underutilization charges. As a result, we registered
an operating loss of $1,023 million, significantly larger
than our operating loss of $198 million in 2008.
All of our product segments registered a decline in their
operating results on a
year-over-year
basis, driven by the drop in revenues. ACCI moved from a profit
of $142 million to a loss of $69 million. IMS
registered a profit of $91 million, compared to a profit of
$476 million in 2008. Wireless registered an operating loss
of $356 million compared to an operating loss of
$65 million in the year ago period, due to deteriorated
market conditions and additional charges associated with recent
acquisitions. The majority of Wireless activities are run
through ST-Ericsson JVS. The minority interest of Ericsson in
ST-Ericssons operating losses (which are 100% included in
the wireless segment) is credited in the line Non
controlling interest of our Income Statement, which
reported income of $265 million for the year ended
December 31, 2009. The Segment Others reported
a significant loss since it included the allocation of
$322 million of unused capacity charges, $291 million
impairment and restructuring charges and $39 million
phase-out costs related to the closure of certain manufacturing
facilities.
Other-than-temporary
impairment charge and realized losses on financial
assets
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Other-than-temporary
impairment charge and realized losses on financial assets
|
|
$
|
(140
|
)
|
|
$
|
(138
|
)
|
The 2009 amount is related to an
other-than-temporary
impairment of $72 million and a realized loss of
$68 million, both linked to the portfolio of ARS purchased
on our account by Credit Suisse contrary to our instruction. See
Liquidity and Capital Resources.
Interest
income, net
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Interest income, net
|
|
$
|
9
|
|
|
$
|
51
|
|
We recorded net interest income of $9 million, which
decreased compared to previous periods as a result of
significantly lower U.S. dollar and Euro denominated
interest rates, despite a higher amount of cash and cash
equivalents. The favorable impact of lower interest rates on our
financial liabilities at floating rate resulted in a lower
average cost of debt of 1.18%.
62
Loss
on equity investments
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Loss on equity investments
|
|
$
|
(337
|
)
|
|
$
|
(553
|
)
|
The 2009 amount represented a loss of $337 million, which
includes $103 million as our net proportional share of the
loss reported by Numonyx, an additional impairment loss of
$200 million booked in the first quarter of 2009 on our
Numonyx equity investment, a $32 million loss related to
our proportionate share in ST-Ericsson JVD as a loss
pick-up
including an amortization of basis difference and
$2 million related to other investments.
In 2008, our income on equity investments included our minority
interest in the joint venture with Hynix Semiconductor in China,
which was transferred to Numonyx on March 30, 2008.
Gain
(loss) on financial instruments, net
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Gain (loss) on financial instruments, net
|
|
$
|
(5
|
)
|
|
$
|
15
|
|
In 2006, we entered into cancellable swaps with a combined
notional value of $200 million to hedge the fair value of a
portion of the convertible bonds due 2016 carrying a fixed
interest rate. The cancellable swaps convert the fixed rate
interest expense recorded on the convertible bonds due 2016 to a
variable interest rate based upon adjusted LIBOR. Until
November 1, 2008, the cancellable swaps met the criteria
for designation as a fair value hedge. Due to the exceptionally
low U.S. dollar interest rate as a consequence of the
financial crisis, we assessed in 2008 that the swaps were no
longer effective as of November 1, 2008 and the fair value
hedge relationship was discontinued. Consequently, the swaps
were classified as
held-for-trading
financial assets. An unrealized gain of $15 million was
recognized in earnings from the discontinuance date and was
reported on the line Unrealized gain on financial
assets in the consolidated statement of income for the
year ended December 31, 2008.
This instrument was sold in 2009 with a loss of $8 million
due to variation in the underlying interest rates compared to
December 31, 2008. This loss was partially offset by
$3 million gain on convertible debt buyback is related to
the repurchase of bonds with a principal value of
$106 million for total cash consideration of
$103 million.
Income
tax benefit
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Income tax benefit
|
|
$
|
95
|
|
|
$
|
43
|
|
In 2009, we registered an income tax benefit of
$95 million, reflecting the actual tax benefit estimated on
our loss before income taxes in each of our jurisdictions. This
benefit was net of about $56 million booked as a tax
expense related to the valuation allowances on our deferred tax
asset associated with our estimates of the net operating loss
recoverability in certain jurisdictions.
Net
loss (income) attributable to noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Net loss (income) attributable to noncontrolling interest
|
|
$
|
270
|
|
|
$
|
(6
|
)
|
As a percentage of net revenues
|
|
|
3.2
|
%
|
|
|
(0.1
|
)%
|
In 2009, we booked $270 million as a result attributable to
noncontrolling interest, which primarily represented the share
of the loss attributable to noncontrolling interest that
included the 20% owned by NXP in the ST-NXP joint venture for
the month of January 2009 and the 50% owned by Ericsson in the
consolidated ST-Ericsson JVS as of February 2009. This amount
reflected their share in the joint ventures losses.
63
All periods included the recognition of noncontrolling interest
related to our joint venture in Shenzhen, China for assembly
operating activities. Such amounts were not material.
Net
income (loss) attributable to parent company
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Audited, in millions)
|
|
Net income (loss) attributable to parent company
|
|
$
|
(1,131
|
)
|
|
$
|
(786
|
)
|
As a percentage of net revenues
|
|
|
(13.3
|
)%
|
|
|
(8.0
|
)%
|
In 2009, we reported a loss of $1,131 million as a result
of adverse economic conditions, which negatively impacted our
operations and certain non-operating charges. In 2008, we had a
net loss of $786 million.
Loss per share was $(1.29) in 2009.
Quarterly
Results of Operations
Certain quarterly financial information for the years 2010 and
2009 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 growth 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 2010, based upon published industry
data by WSTS, the TAM and the SAM increased
year-over-year
approximately 12% and 14%, reaching approximately
$75 billion and $44 billion, while sequentially, they
decreased approximately 4% and 2%, respectively.
In the fourth quarter of 2010, our average effective exchange
rate was approximately $1.34 to 1.00, the same as in the
third quarter of 2010 and compared to $1.43 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.
Due to the 2010 accounting calendar schedule, the fourth quarter
period had six more days than the third quarter, which was
approximately 6% higher on a sequential basis.
64
Net
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% Variation
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
Sequential
|
|
Year-Over-Year
|
|
|
(Unaudited, in millions)
|
|
Net sales
|
|
$
|
2,810
|
|
|
$
|
2,634
|
|
|
$
|
2,570
|
|
|
|
6.7
|
|
|
|
9.4
|
|
Other revenues
|
|
|
23
|
|
|
|
23
|
|
|
|
13
|
|
|
|
(1.3
|
)
|
|
|
72.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
2,833
|
|
|
$
|
2,657
|
|
|
$
|
2,583
|
|
|
|
6.6
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-year
comparison
Our fourth quarter 2010 net revenues increased in all
product segments compared to the year ago quarter, except in
Wireless, and in all regions, except EMEA, reflecting the broad
based recovery in the semiconductor market. Such performance was
driven by an increase of approximately 15% in volume, while
average selling prices declined approximately 5%.
ACCIs revenues increased by approximately 15%, driven by
the strong results observed in all its served markets, led by
robust demand in automotive and imaging products. IMSs
fourth quarter net revenues reached a record of
$1,131 million, with a 30%
year-over-year
increase, with an almost equal contribution by its product
lines. Revenue growth was strong in all segments, except
Telecom, and in distribution and was led by MEMS,
Microcontrollers, Power and Industrial products. Wireless sales
registered a decline of approximately 21%, reflecting its
product portfolio transition.
By location of order shipment, almost all regions were
positively impacted by strong local demand from their customers,
registering revenue growth of 15%, 14% and 12% in Greater
China-South Asia, the Americas and Japan-Korea, respectively.
EMEA experienced a decrease of about 2%. Our largest customer,
the Nokia group of companies, accounted for approximately 14% of
our fourth quarter 2010 net revenues, compared to about 15%
in the fourth quarter of 2009.
Sequential
comparison
On a sequential basis our revenues increased by 6.6%, near the
top of our targeted range of 2% to 7% sequential growth. The
quarter experienced a continued solid demand for our products;
all market segments increased on a sequential basis, except
Consumer, also benefiting from a higher number of days in the
quarter. This favorable trend was supported by an approximate 4%
increase in units sold, and about 3% increase from average
selling prices, the latter due to a more favorable product mix.
ACCI revenues increased by approximately 4%, reflecting a solid
contribution from Automotive and Imaging product lines, while
Home Entertainment and Displays as well as Computer and
Communication Infrastructure were slightly decreasing, mainly
due to seasonal factors. IMSs revenues increased by about
12% mainly as a result of higher sales volume, led by the strong
performance of MEMS, Microcontrollers, Industrial and others.
Wireless revenues also increased by 3%, driven by a stronger
demand.
All market segments, except Consumer, increased, with Automotive
higher by 16%, Industrial and other by 13%, Computer by 10% and
Telecom by 7%; Consumer decreased by 6% on weakening demand;
Distribution increased sequentially by 4%.
Sequentially, revenues grew in all regions, led by Japan-Korea,
Greater China-South Asia and Americas, with 10%, 8% and 7%
increases, respectively. In the fourth quarter of 2010, our
largest customer, the Nokia group of companies, accounted for
approximately 14% of our net revenues, remaining stable compared
to the third quarter of 2010.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% Variation
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
Sequential
|
|
Year-Over-Year
|
|
|
(Unaudited, in millions)
|
|
Cost of sales
|
|
|
(1,704
|
)
|
|
$
|
(1,616
|
)
|
|
$
|
(1,626
|
)
|
|
|
(5.4
|
)
|
|
|
(4.8
|
)
|
Gross profit
|
|
|
1,129
|
|
|
|
1,041
|
|
|
|
957
|
|
|
|
8.4
|
|
|
|
18.1
|
|
Gross margin (as a percentage of net revenues)
|
|
|
39.9
|
%
|
|
|
39.2
|
%
|
|
|
37.0
|
%
|
|
|
|
|
|
|
|
|
65
Fourth quarter gross margin reached a level of 39.9%, increasing
on a
year-over-year
basis by nearly 3 percentage points, benefiting from a
higher volume of revenues, improved manufacturing efficiencies
and an improved product mix as well as a favorable impact of
exchange rates partially offset by the negative impact of the
decline in selling prices.
On a sequential basis, gross margin in the fourth quarter
increased by 70 basis points, as a result of the higher
volumes, improved product mix and efficiencies.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% Variation
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
Sequential
|
|
Year-Over-Year
|
|
|
(Unaudited, in millions)
|
|
Selling, general and administrative expenses
|
|
$
|
(310
|
)
|
|
$
|
(281
|
)
|
|
$
|
(303
|
)
|
|
|
(10.5
|
)
|
|
|
(2.4
|
)
|
As percentage of net revenue
|
|
|
(11.0
|
)%
|
|
|
(10.6
|
)%
|
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
The amount of our selling, general and administrative expenses
did not register a material variation on the
year-over-year
basis. On a sequential basis, SG&A expenses increased,
reflecting a longer quarter, as well as less favorable seasonal
impact. Our share-based compensation charges were
$4 million in the fourth quarter of 2010, compared to
$5 million in the fourth quarter of 2009 and
$5 million in the third quarter of 2010.
The ratio to sales of our selling, general and administrative
expenses was mainly driven by the volume of our revenues. As a
percentage of revenues, they decreased to 11.0% compared to
11.7% in the prior years fourth quarter, while there was a
slight increase sequentially from 10.6%.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% Variation
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
Sequential
|
|
Year-Over-Year
|
|
|
(Unaudited, in millions)
|
|
Research and development expenses
|
|
$
|
(604
|
)
|
|
$
|
(558
|
)
|
|
$
|
(603
|
)
|
|
|
(8.2
|
)
|
|
|
(0.2
|
)
|
As percentage of net revenues
|
|
|
(21.3
|
)%
|
|
|
(21.0
|
)%
|
|
|
(23.3
|
)%
|
|
|
|
|
|
|
|
|
R&D expenses remained basically flat
year-over-year.
On a sequential basis, R&D expenses increased, reflecting a
longer quarter and unfavorable seasonal effect, which were
partially offset by cost re-alignment initiatives.
The fourth quarter of 2010 included $3 million of
share-based compensation charges, basically flat compared to the
fourth quarter of 2009 and increasing compared to
$2 million in the third quarter of 2010. Total R&D
expenses were net of research tax credits, which amounted to
$40 million, basically equivalent to prior periods.
As a percentage of revenues, fourth quarter 2010 R&D
equaled 21.3%, a 2 percentage points decrease compared to
the year-ago period due to increasing revenues.
Other
income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31, 2010
|
|
|
September 25, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited, in millions)
|
|
|
Research and development funding
|
|
$
|
32
|
|
|
$
|
25
|
|
|
$
|
44
|
|
Start-up/phase-out
costs
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
Exchange gain (loss) net
|
|
|
4
|
|
|
|
4
|
|
|
|
2
|
|
Patent costs, net of gain from settlement
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Gain on sale of long-lived assets, net
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Other, net
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Other income and expenses, net
|
|
$
|
30
|
|
|
$
|
18
|
|
|
$
|
39
|
|
As a percentage of net revenues
|
|
|
1.1
|
%
|
|
|
0.7
|
%
|
|
|
1.5
|
%
|
66
Other income and expenses, net, mainly included, as income,
items such as R&D funding and exchange gain and, as
expenses,
start-up/phase-out
costs and patent claim costs net of settlement agreements.
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 2010, the balance of these factors resulted in net income of
$30 million, entirely due to funding of approximately
$32 million.
Impairment,
restructuring charges and other related closure
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Impairment, restructuring charges and other related closure costs
|
|
$
|
(32
|
)
|
|
$
|
(27
|
)
|
|
$
|
(96
|
)
|
In the fourth quarter of 2010, we recorded $32 million of
impairment, restructuring charges and other related closure
costs, of which:
|
|
|
|
|
$8 million was recorded in relation to the manufacturing
restructuring plan contemplating the closure of our Ain Sebaa
(Morocco), Carrollton (Texas) and Phoenix (Arizona) sites, and
was composed of one-time termination benefits, as well as other
relevant closure charges, mainly associated with Carrollton and
Phoenix fabs;
|
|
|
|
$24 million related to the workforce reductions plans
announced in April and December 2009 by ST-Ericsson, primarily
consisting of on-going termination benefits pursuant to the
workforce reduction plan and the closure of certain locations in
Europe.
|
In the third quarter of 2010, we recorded $27 million of
impairment, restructuring charges and other related closure
costs, of which: $7 million related to our manufacturing
restructuring plan which contemplated the closure of our Ain
Sebaa (Morocco), Carrollton (Texas) and Phoenix (Arizona) sites,
and was composed of one-time termination benefits, as well as
other relevant charges, mainly related to the Carrollton and
Phoenix fabs; $18 million related to the plans announced in
April and December 2009 by ST-Ericsson, primarily consisting of
on-going termination benefits pursuant to the workforce
reduction plan and the closure of certain locations in Europe;
and $2 million related to other restructuring initiatives.
In the fourth quarter of 2009, we recorded $96 million of
impairment and restructuring charges and other related closure
costs, of which: $16 million was recorded in preparation of
the closure of our Ain Sebaa (Morocco), Carrollton (Texas) and
Phoenix (Arizona) sites, and was composed of one-time
termination benefits, as well as other relevant charges;
$17 million related to the plan announced in April 2009 by
ST-Ericsson, primarily consisting of on-going termination
benefits pursuant to the closure of certain locations in Europe
and the United States and $45 million related to a plan
announced in December 2009 by ST-Ericsson, primarily consisting
of on-going termination benefits pursuant to workforce
reduction; and $18 million related to other ongoing and
newly committed restructuring plans, consisting primarily of
voluntary termination benefits and early retirement arrangements
in some of our European locations.
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Operating income (loss)
|
|
$
|
213
|
|
|
$
|
193
|
|
|
$
|
(6
|
)
|
In percentage of net revenues
|
|
|
7.5
|
%
|
|
|
7.3
|
%
|
|
|
(0.2
|
)%
|
Our operating results improved compared to both the third
quarter of 2010 and the year-ago period as a result of a higher
level of revenues and cost optimization initiatives,
particularly in manufacturing. The fourth quarter 2010
registered an operating income of $213 million compared to
a loss of $6 million in the year ago quarter and an income
of $193 million in the prior quarter. The recovery in our
revenues led to a strong increase in loading, thereby reducing
underutilization charges from $13 million in the fourth
quarter of 2009 and to an immaterial amount in the fourth
quarter of 2010.
The fourth quarter registered an improved operating result
despite the fact that our operating income was impacted by
$32 million in impairment, restructuring and other related
closure costs, while in the third quarter of 2010 those charges
amounted to $27 million. In the year-ago quarter, the
negative impact of impairment, restructuring and other related
closure costs was $96 million.
67
Both ACCI and IMS reported a significant improvement in their
profitability levels compared to the year ago period, supported
by their higher levels of revenues, while Wireless incurred
higher losses due to declining sales. ACCI increased its
operating income from $62 million to $135 million,
equivalent to 11.9% of revenues. IMS improved its profit from
$85 million to $254 million, equivalent to 22.5% of
revenues. Wireless operating loss increased from
$48 million to $136 million, partially attributable to
noncontrolling interest of our 50% partner, and was originated
by ST-Ericsson, which is completing its cost restructuring while
seeking to enhance its product and customers portfolio.
The segment Others significantly reduced its losses
to $40 million, from $105 million in the year ago
period, mainly due to significantly lower amounts of
restructuring and unused capacity charges.
Other-than-temporary
impairment charge and realized losses on financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Other-than-temporary
impairment charge and realized losses on financial assets
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(68
|
)
|
No amounts were recorded as
other-than-temporary
impairment charge or realized losses on financial assets as of
December 31, 2010 and September 25, 2010. The fourth
quarter of 2009 income statement included a pre-tax non-cash
loss of $68 million related to the sale of a part of the
portfolio of ARS purchased on our account by Credit Suisse
contrary to our instruction. See Liquidity and Capital
Resources.
Interest
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Interest income (expense), net
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
We recorded net interest expense of $5 million, compared to
an income of $3 million in the prior year quarter, due to
the declining U.S. dollar and Euro denominated interest
rates received on our cash resources. On a sequential basis the
net interest expense increased by $3 million.
Loss
on equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Loss on equity investments
|
|
$
|
(10
|
)
|
|
$
|
(8
|
)
|
|
$
|
(13
|
)
|
In the fourth quarter of 2010, we recorded a charge of
$10 million, of which $9 million related to our
proportionate share in ST-Ericsson JVD as a loss
pick-up
including amortization of basis difference and $1 million
related to other investments.
Gain
(loss) on financial instruments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Gain (loss) on financial instruments, net
|
|
$
|
(12
|
)
|
|
$
|
(1
|
)
|
|
$
|
3
|
|
The $12 million loss on financial assets in the fourth
quarter of 2010 was the balance between (i) a loss of
$13 million related to the sale of shares of our equity
participation in Micron and (ii) a gain of $1 million
related to the additional repurchase of part of our 2016
Convertible Bonds. The $1 million loss on financial assets
in the third quarter of 2010 was the balance between (i) a
loss of $3 million related to the sale of senior FRN and
(ii) a gain of $2 million related to the additional
repurchase of part of our 2016 Convertible Bonds. In the prior
year quarter the gain related to the repurchase of part of our
2016 Convertible Bonds. Please see Capital Resources.
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Income tax expense
|
|
$
|
(50
|
)
|
|
$
|
(44
|
)
|
|
$
|
(48
|
)
|
68
During the fourth quarter of 2010, we registered an income tax
expense of $50 million, reflecting actual tax provisions in
each jurisdiction.
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. Our income tax amounts and rates depend also on our loss
carryforwards and their relevant valuation allowances, which are
based on estimated projected plans; 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 that are uncertain.
Net
loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Net loss attributable to noncontrolling interest
|
|
$
|
83
|
|
|
$
|
60
|
|
|
$
|
59
|
|
In the fourth quarter of 2010, we booked $83 million as a
result attributable to noncontrolling interest, representing the
loss attributable to noncontrolling interest, which mainly
included the 50% owned by Ericsson in the consolidated
ST-Ericsson JVS. In the third quarter of 2010, the corresponding
amount was $60 million. These amounts reflected
Ericssons share in the joint ventures loss.
All periods included the recognition of noncontrolling interest
related to our joint venture in Shenzhen, China for assembly
operating activities. Those amounts were not material.
Net
income (loss) attributable to parent company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
December 31, 2010
|
|
September 25, 2010
|
|
December 31, 2009
|
|
|
(Unaudited, in millions)
|
|
Net income (loss) attributable to parent company
|
|
$
|
219
|
|
|
$
|
198
|
|
|
$
|
(70
|
)
|
As percentage of net revenues
|
|
|
7.7
|
%
|
|
|
7.4
|
%
|
|
|
(2.7
|
)%
|
For the fourth quarter of 2010, we reported a net income of
$219 million, a significant improvement compared to
previous periods due to the aforementioned factors.
Earnings per diluted share for the fourth quarter of 2010 was
$0.24 compared to $0.22 in the third quarter of 2010 and $(0.08)
loss in the year-ago quarter.
In the fourth quarter of 2010, the impact after tax of
impairment, restructuring charges and other related closure
costs and other one-time items, was estimated to be
approximately $(0.03) per share, while in the third quarter of
2010, it was approximately $(0.01) per share. In the year ago
quarter, the impact of restructuring and impairment charges,
other-than-temporary
impairment charge, the loss on our Numonyx equity investment and
non-recurrent items was estimated to be approximately $(0.12)
per share.
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 product prices 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, labor costs and
depreciation charges, selling, general and administrative
expenses, and R&D expenses, are largely incurred in the
69
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, 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. Our consolidated
statements of income for the year ended December 31, 2010
included income and expense items translated at the average
U.S. dollar exchange rate for the period.
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 selling and general and administrative
expenses, located in the Euro zone. Our effective average
exchange rate was $1.36 for 1.00 for 2010 compared to
$1.37 for 1.00 for 2009. Our effective average exchange
rate was $1.34 for 1.00 for the fourth quarter of 2010 and
$1.34 for 1.00 for the third quarter of 2010 while it was
$1.43 for 1.00 in the fourth quarter of 2009. These
effective exchange rates reflect the actual exchange rates
combined with the impact of cash flow hedging contracts that
matured in the period.
In the fourth quarter of 2008 we decided to extend the time
horizon of our cash flow hedging contracts for manufacturing
costs and operating expenses for up to 12 months and in the
third quarter of 2010 we decided to extend the time horizon of
our cash flow hedging 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, 2010, the
outstanding hedged amounts were 797 million to cover
manufacturing costs and 498 million to cover
operating expenses, at an average exchange rate of about $1.33
and $1.32 to 1.00, respectively (including the premium
paid to purchase foreign exchange options), maturing over the
period from January 4, 2011 to September 5, 2012. As
of December 31, 2010, these outstanding hedging contracts
and certain expired contracts covering manufacturing expenses
capitalized in inventory represented a deferred profit of
approximately $31 million after tax, recorded in
Other comprehensive income in Net Equity, compared
to a deferred gain of approximately $6 million after tax at
December 31, 2009.
In addition, in order to further reduce our exposure to
fluctuations in the U.S. dollar exchange rate, we have
begun hedging certain line items on our consolidated statements
of income, particularly with respect to the portion of our
R&D expenses incurred in Sweden. As of December 31,
2010, the outstanding hedged amounts were SEK 805 million
at an average exchange rate of about SEK 7.13 to $1.00, maturing
over the period from January 7, 2011 to December 8,
2011. As of December 31, 2010, these outstanding hedging
contracts represented a deferred profit of approximately
$7 million after tax, recorded in Other comprehensive
income in Net Equity.
Our cash flow hedging policy is not intended to cover the 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 2010, as a result of EUR USD cash
flow hedging, we recorded a net loss of $81 million,
consisting of a loss of $37 million to R&D expenses, a
loss of $37 million to costs of goods sold and a loss of
$7 million to selling, general and administrative expenses,
while in 2009, we recorded a net gain of $71 million,
consisting of a gain of $36 million to R&D expenses, a
gain of $29 million to cost of goods sold and a gain of
$6 million to selling, general and administrative expenses.
In addition, in 2010, as a result of USD SEK cash flow hedging,
we recorded a gain of $2 million related to SEK-denominated
R&D expenses.
In addition, 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. 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. 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 $11 million in Other income and expenses,
net in 2010.
Our treasury strategies to reduce exchange rate risks are
intended to mitigate the impact of exchange rate fluctuations.
No assurance may be given that our hedging activities will
sufficiently protect us against declines in
70
the value of the U.S. dollar. In each reporting period we
may record a loss or gain as a result of the variation between
the hedged and the actual exchange rate.
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 shareholders
equity, and are shown as Accumulated other comprehensive
income (loss) in the consolidated statements of changes in
equity. At December 31, 2010, 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 from
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 on our
consolidated statements of income, is the balance between
interest income received from our cash and cash equivalent and
marketable securities investments and interest expense paid on
our long-term debt 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 expenses are mainly associated with our long-term debt,
comprised of 2016 Convertible Bonds (with a fixed rate of 1.5%),
our 2013 Senior Bonds, which is fixed quarterly at a rate of
EURIBOR plus 40bps, and European Investment Bank Floating Rate
Loans at LIBOR plus variable spreads; a part of these interest
expenses are at fixed rates. See Note 22 to our
Consolidated Financial Statements.
At December 31, 2010, our total financial resources,
including cash, cash equivalents and marketable securities
current and non-current, generated an average interest income
rate of 0.4%. In the same period, our average cost of debt rate
was 1.1%.
Impact of
Changes in Equity Prices
As consideration for the divestiture of our share in Numonyx, we
received 66.88 million Micron shares and we owed
$78 million to one of our partners. These shares were
subject to a
lock-up
period through November 7, 2010; through December 31,
2010, we sold 46.8 million shares at an average price of
$8.48 per share, including the unwinding of the applicable
hedging contracts. We received proceeds of $319 million net
of the $78 million payment to one of our partners referred
to above and realized a $13 million loss in the fourth
quarter income statement as a result of having not fully hedged
16 million shares.
The remaining 20.1 million shares were fully hedged at
December 31, 2010, and have been recorded as
available-for-sale
financial assets and considered as current assets on the basis
of the maturity of hedging contracts. At the December 31,
2010 closing, these remaining shares were accounted at their
fair market value (trading place of $8.02) for a value of
$161 million with the loss compared to the closing price of
the deal of $15 million deferred in Net Equity as Other
comprehensive income. Furthermore, the derivative hedging
instruments were evaluated at their fair market value with the
relevant gain ($27 million) deferred in Net Equity as Other
comprehensive income.
Subsequently, in January 2011, we sold all the remaining
Micron shares together with their relevant collar option for the
total proceeds of $196 million, realizing a gain of $20 million.
For the details of the hedging operations, see Note 27 to
our Consolidated Financial Statements.
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
A or better. Part of our liquidity is also held in
Euros to naturally hedge intercompany payables and financial
71
debt in the same currency and is placed with financial
institutions rated at least a single A long-term rating, meaning
at least A3 from Moodys Investor Service and A- from
Standard & Poors or Fitch Ratings. Marginal
amounts are held in other currencies. See Item 11,
Quantitative and Qualitative Disclosures About Market
Risk.
Our total liquidity and capital resources were
$2,922 million as of December 31, 2010, slightly
increasing compared to $2,912 million at December 31,
2009, after having done certain transactions, including, among
others, a repurchase for a total amount of $508 million of
our 2016 Convertible Bonds and 2013 Senior Bonds and paid
$212 million of dividends to shareholders. As of
December 31, 2010, our total liquidity and capital
resources were comprised of $1,892 million in cash and cash
equivalents, of which $66 million is held at the
ST-Ericsson level, $67 million as short-term deposits and
$891 million in marketable securities, all considered as
current assets, and $72 million in ARS, considered as
non-current assets. Additionally, in order to reconcile with our
consolidated balance sheet as of December 31, 2010, we had
$7 million as restricted cash, related to certain margin
calls and we held $161 million fair value of the remaining
Micron shares considered in our balance sheet as current
marketable securities.
As of December 31, 2010, the $891 million held by us
in marketable securities as current assets was composed of
$563 million invested in Aaa treasury bills from the
French, German and U.S. governments and $328 million
invested in senior debt floating rate notes issued by primary
financial institutions with an average rating, excluding one
impaired debt security for a notional value of
15 million, of Aa3/A+ from Moodys and S&P,
respectively. Both the treasury bills and the Floating Rate
Notes 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 in the consolidated statement of
changes in equity, except if deemed to be
other-than-temporary.
We reported as of December 31, 2010 a before tax increase
of $4 million compared to December 31, 2009 in the
fair value of our FRN portfolio. Since the duration of the FRN
portfolio is only an average of 1.5 years and the
securities have a minimum Moodys rating of A2, we expect
the value of the securities to return to par as the final
maturity approaches (with the only exception being the
15 million of Senior Floating Rate Notes issued by
Lehman Brothers, the value of which was impaired through an
other-than-temporary
charge in 2008). The fair value of these securities is based on
market prices publicly available through major financial
information providers. The market price of the FRN is influenced
by changes in the credit standing of the issuer but is not
significantly impacted by movement in interest rates. In 2010,
we invested $1,100 million in French, German and
U.S. treasury bills, of which $1,011 million was sold
or matured during the year. The change in fair value of the
$563 million debt securities classified as
available-for-sale
was not material at December 31, 2010. The average duration
of the treasury bills portfolio is less than three months and
the securities are rated Aaa by Moodys.
As of December 31, 2010, we had Auction Rate Securities,
purchased by Credit Suisse contrary to our instruction,
representing interests in collateralized debt obligations with a
par value of $261 million, that were carried on our balance
sheet as
available-for-sale
financial assets for $72 million, including the positive
revaluation of $45 million in Other comprehensive income in
equity. Following the continued failure of auctions for these
securities which began in August 2007, we first registered a
decline in the value of these Auction Rate Securities as an
Other-than-temporary
impairment charge against net income for $46 million during
the fourth quarter of 2007. Since the initial failure of the
auctions in August 2007, the market for these securities has
completely frozen without any observable secondary market
trades, and consequently, during 2008 and 2009, the portfolio
experienced a further estimated decline in fair value charged to
our Income Statement pursuant to applicable U.S. GAAP of
$127 million and $72 million, respectively. The
reduction in estimated fair value was recorded as an
Other-than-temporary
impairment charge against net income.
The investments made in the aforementioned Auction Rate
Securities were made without our authorization and, in 2008, we
launched a legal action against Credit Suisse. For the details
of the legal proceedings against Credit Suisse, see Note 3
to our Consolidated Financial Statements.
Since the fourth quarter of 2007, as there was no information
available regarding mark to market bids and mark to
model valuations from the structuring financial institutions for
these securities, we based our estimation of fair value on a
theoretical model using yields obtainable for comparable assets.
The value inputs for the evaluation of these securities were
publicly available indices of securities with the same rating,
similar duration and comparable/similar underlying collaterals
or industries exposure (such as ABX for the collateralized debt
obligation and ITraxx and IBoxx for the credit linked notes).
The higher impairment charges during 2008 and 2009 reflected
downgrading events on the collateral debt obligations comparing
the relevant ABX indices of a lower rating category and a
general negative trend of the corporate debt market. The
estimated value of the collateralized debt obligations could
further decrease in the future as a result of credit market
deterioration
and/or other
downgrading.
72
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 2010, the evolution of our cash flow produced an increase
in our cash and cash equivalents of $304 million, generated
by net cash from operating activities.
The evolution of our cash flow for each period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net cash from operating activities
|
|
$
|
1,794
|
|
|
$
|
816
|
|
|
$
|
1,722
|
|
Net cash from (used in) investing activities
|
|
|
(526
|
)
|
|
|
290
|
|
|
|
(2,417
|
)
|
Net cash used in financing activities
|
|
|
(876
|
)
|
|
|
(513
|
)
|
|
|
(67
|
)
|
Effect of changes in exchange rates
|
|
|
(88
|
)
|
|
|
(14
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash increase (decrease)
|
|
$
|
304
|
|
|
$
|
579
|
|
|
$
|
(846
|
)
|
Net cash from operating activities. Net cash
from operating activities is (i) net income (loss) adjusted
for certain non-cash items and (ii) changes in assets and
liabilities. The net cash from operating activities in 2010 was
$1,794 million, largely improving compared to the prior
year period following the overall improvement in our financial
results (see Results of Operations for more
information).
|
|
|
|
|
Net income adjusted for non-cash items generated
$1,565 million of cash in 2010 compared to
$369 million in the prior year period.
|
|
|
|
Changes in assets and liabilities generated cash for a total
amount of $229 million, compared to $447 million in
the prior year, with the main 2010 item being represented by a
favorable change in trade payables, partially balanced by a
negative trend in inventory, while in 2009 the favorable change
was mainly related to the reduction in inventories. Furthermore,
2010 also included the net cash impact of $166 million,
originated by the sales, with no recourse, of receivables done
by ST-Ericsson.
|
Net cash from (used in) investing
activities. Investing activities used
$526 million of cash in 2010, mainly for payments for
tangible assets, and net cash from proceeds of the sale of
Micron shares. Additionally, such amount included some
investments in intangible and financial assets. Payments for the
purchase of tangible assets totaled $1,034 million, a
significant increase from the $451 million registered in
the prior year period, as we upgraded our production capacity in
line with the strong increase in demand for our products.
Moreover, the net cash from investing activities included
$319 million as net proceeds from the sale of Micron stock
received on our Numonyx investment divestiture and the release
of the $250 million of restricted cash associated with the
Hynix-Numonyx JV, following the disposal of our shares in
Numonyx. Investing activity in 2009 generated net cash of
$290 million, entirely due to $1,137 million net
proceeds received from Ericsson as part of a business
combination.
Net cash used in financing activities. Net
cash used in financing activities was $876 million in 2010
with an increase compared to the $513 million used in 2009
mainly due to the partial buyback of our issued debt: our 2016
Convertible Bonds for a total cash consideration of
$410 million and our 2013 Senior Bonds for the amount of
EUR 74 million. Moreover, the 2010 amount included
$218 million as a repayment of long term debt at maturity
and $212 million as dividends paid to shareholders.
Free cash flow (non U.S. GAAP
measure). We also present free cash flow, defined
as net cash from (used in) operating activities plus (minus) net
cash from (used in) investing activities, excluding payment for
purchases of and proceeds from the sale of marketable securities
(both current and non-current), short-term deposits and
restricted cash. We believe free cash flow provides useful
information for investors and management because it measures our
capacity to generate cash from our operating and investing
activities to sustain our operating activities. Free cash flow
is not a U.S. GAAP measure and does not represent total
cash flow since it does not include the cash flows generated by
or used in financing activities. In addition, our definition of
free cash flow may differ from
73
definitions used by other companies. Free cash flow is
determined as follows from our Consolidated Statements of Cash
Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Audited, in millions)
|
|
|
Net cash from operating activities
|
|
$
|
1,794
|
|
|
$
|
816
|
|
|
$
|
1,722
|
|
Net cash from (used in) investing activities
|
|
|
(526
|
)
|
|
|
290
|
|
|
|
(2,417
|
)
|
Payment for purchase and proceeds from sale of marketable
securities (current and non-current), short-term deposits and
restricted cash, net
|
|
|
(307
|
)
|
|
|
258
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
961
|
|
|
$
|
1,364
|
|
|
$
|
(1,046
|
)
|
We generated free cash flow of $961 million in 2010, of
which $349 million in the fourth quarter of 2010, supported
by a significant improvement in the cash generated from
operating activities. In 2009, free cash flow was
$1,364 million, mainly as a result of the
$1,137 million net proceeds received from Ericsson as part
of a business combination. Excluding the effects of business
combinations in both periods, our free cash flow in 2010 was
$972 million, including $319 million proceeds from the sale
of Micron shares, largely improving by $745 million
compared to 2009, in line with the overall improvement in our
financial results.
Capital
Resources
Net financial position (non U.S. GAAP
measure). Our net financial position represents
the balance between our total financial resources and our total
financial debt. Our total financial resources include cash and
cash equivalents, current and non-current marketable securities,
short-term deposits and restricted cash, and our total financial
debt includes bank overdrafts, short term borrowings and current
portion of long-term debt and long-term debt, as represented in
our consolidated Balance Sheet. Net financial position is not a
U.S. GAAP measure but we believe it provides useful
information for investors because it gives evidence of our
global position either in terms of net indebtedness or net cash
by measuring our capital resources based on cash, cash
equivalents and marketable securities and the total level of our
financial indebtedness. Our net financial position has been
determined as follows from our Consolidated Balance Sheets at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents, net of bank overdrafts
|
|
$
|
1,892
|
|
|
$
|
1,588
|
|
|
$
|
989
|
|
Marketable securities, current(1)
|
|
|
891
|
|
|
|
1,032
|
|
|
|
651
|
|
Restricted cash
|
|
|
|
|
|
|
250
|
|
|
|
250
|
|
Short-term deposits
|
|
|
67
|
|
|
|
|
|
|
|
|
|
Marketable securities, non-current
|
|
|
72
|
|
|
|
42
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial resources
|
|
|
2,922
|
|
|
|
2,912
|
|
|
|
2,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
|
(720
|
)
|
|
|
(176
|
)
|
|
|
(123
|
)
|
Long-term debt
|
|
|
(1,050
|
)
|
|
|
(2,316
|
)
|
|
|
(2,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial debt
|
|
|
(1,770
|
)
|
|
|
(2,492
|
)
|
|
|
(2,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financial position
|
|
$
|
1,152
|
|
|
$
|
420
|
|
|
$
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount of $1,052 million of marketable securities,
current reported in our Balance Sheet as of December 31,
2010 was composed of: (i) marketable securities
($891 million); and (ii) Micron shares
($161 million). |
Our net financial position as of December 31, 2010 resulted
in a net cash position of $1,152 million, representing a
solid improvement compared to the net cash of $420 million
at December 31, 2009, mainly due to favorable free cash
flow. In the same period, our cash and cash equivalents
increased significantly to $1,892 million, while total
financial debt decreased by $722 million.
At December 31, 2010, our financial debt was
$1,770 million, comprised of $720 million short-term,
of which $645 million as the current portion of our
long-term debt mainly related to our 2016 Convertible Bonds and
$1,050 million long-term. The breakdown of our total
financial debt included: (i) $534 million of our 2016
Convertible Bonds; (ii) $569 million of our 2013
Senior Bonds (corresponding to 500 million at
issuance); (iii) $569 million in European Investment
Bank loans (the EIB Loans);
(iv) $12 million in loans from other
74
funding programs; (v) $11 million of capital leases;
and (vi) $75 million of short-term borrowings related to
ST-Ericsson. The EIB Loans represent two committed credit
facilities as part of R&D funding programs; the first,
related to R&D in France, was fully drawn in
U.S. dollars, between December 2006 and February 2008, for
a total amount of $341 million, of which $98 million
had been paid back as at December 31, 2010; the second,
related to R&D projects in Italy, was fully drawn in
U.S. dollars, between August and October 2008, for a total
amount of $380 million, out of which $54 million had
been paid back as of December 31, 2010.
Additionally, we had unutilized committed medium term credit
facilities with core relationship banks totaling
$492 million. Furthermore, the aggregate amount of our
total available short-term credit facilities, excluding foreign
exchange credit facilities, was approximately $664 million
at December 31, 2010. At December 31, 2010, the
amounts available under the short-term lines of credit were not
reduced by any borrowing. On September 27, 2010 we signed
with the European Investment Bank a new 350 million
loan to support our industrial and R&D programs, which is
currently undrawn.
In 2010 we granted, together with Ericsson, a $200 million
committed facility to ST-Ericsson, of which $150 million ($75
million for each parent) was withdrawn as of December 31,
2010. The withdrawal of that line is subject to approval of the
parent companies at ST-Ericssons Board of Directors. In
January 2011, we and Ericsson extended the overall amount of the
credit facility to $300 million.
Our long-term capital market financing instruments contain
standard covenants, but do not impose minimum financial ratios
or similar obligations on us. Upon a change of control, the
holders of our 2016 Convertible Bonds and 2013 Senior Bonds may
require us to repurchase all or a portion of such holders
bonds.
As of December 31, 2010, debt payments due by period and
based on the assumption that convertible debt redemptions are at
the holders first redemption option were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Long-term debt (including current portion)
|
|
$
|
1,695
|
|
|
$
|
645
|
|
|
$
|
109
|
|
|
$
|
676
|
|
|
$
|
106
|
|
|
$
|
84
|
|
|
$
|
75
|
|
In February 2006, we issued $1,131 million principal amount
at maturity zero coupon senior convertible bonds due in February
2016. The bonds are convertible by the holder at any time prior
to maturity at a conversion rate of 43.833898 shares per
one thousand dollar face value of the bonds corresponding to
42,694,216 equivalent shares. The holders can redeem the
convertible bonds upon a change of control or on
February 23, 2012 at a price of $1,093.81 and on
February 24, 2014 at a price of $1,126.99 per one thousand
dollar face value of the bonds. On February 23, 2011, the
holders redeemed 41,123 convertible bonds at a price of
$1,077.58, out of the total of 490,170 outstanding bonds, or
about 8%. We can call the bonds at any time after March 10,
2011 subject to our share price exceeding 130% of the accreted
value divided by the conversion rate for 20 out of 30
consecutive trading days. In order to optimize our liquidity
management and yield, we repurchased a portion of our 2016
Convertible Bonds during 2009 (98,000 bonds for a total cash
consideration of $103 million and corresponding to
4,295,722 shares) and in 2010 (385,830 bonds for a total cash
consideration of $410 million and corresponding to
16,912,433 shares).
As of December 31, 2010, we had the following credit
ratings on our 2013 Senior Bonds and 2016 Convertible Bonds:
|
|
|
|
|
|
|
Moodys Investors Service
|
|
Standard & Poors
|
|
Zero Coupon Senior Convertible Bonds due 2016
|
|
Baa1
|
|
BBB+
|
Floating Rate Senior Bonds due 2013
|
|
Baa1
|
|
BBB+
|
We are also rated A− from Fitch on an
unsolicited basis.
On February 6, 2009 Standard & Poors Rating
Services lowered our senior debt rating from
A− to BBB+. On January 27,
2011, Moodys Investors Service affirmed the Baa1 senior
debt ratings and changed the outlook on the ratings to stable
from negative.
In March 2006, STMicroelectronics Finance B.V. (ST
BV), one of our wholly-owned subsidiaries, issued Floating
Rate Senior Bonds with a principal amount of
500 million at an issue price of 99.873%. The notes,
which mature on March 17, 2013, pay a coupon rate of the
three-month EURIBOR plus 0.40% on June 17,
September 17, December 17 and March 17 of each year through
maturity. The notes have a put for early repayment in case of a
change of control. The Floating Rate Senior Bonds issued by ST
BV are guaranteed by ST NV. We repurchased a portion of our 2013
Senior Bonds: (i) during the third quarter 2010, for the
amount of $17 million and (ii) during the fourth
quarter 2010 for the amount of $81 million.
75
Contractual
Obligations, Commercial Commitments and Contingencies
Our contractual obligations, commercial commitments and
contingencies as of December 31, 2010, and for each of the
five years to come and thereafter, were as follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Operating leases(2)
|
|
$
|
378
|
|
|
$
|
103
|
|
|
$
|
77
|
|
|
$
|
49
|
|
|
$
|
29
|
|
|
$
|
26
|
|
|
$ |