FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
Report on Form 6-K dated February 22, 2006
STMicroelectronics N.V.
(Name of Registrant)
39, Chemin du Champ-des-Filles
1228 Plan-les-Ouates, Geneva, Switzerland
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form
20-F or Form 40-F:
Form 20-F þ Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7):
Yes o No þ
Indicate by check mark whether the registrant by furnishing the information contained in this form
is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934:
Yes o No þ
If Yes is marked, indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82- ___
Enclosure: STMicroelectronics N.V.s Fourth Quarter and Full Year 2005:
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Operating and Financial Review and Prospects; |
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Audited Consolidated Statements of Income, Statements of Cash Flow and Statements of
Changes in Shareholders Equity for the years ended December 31, 2005, 2004 and 2003;
Balance Sheets for the years ended December 31, 2005 and 2004 and related Notes; and |
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Certifications pursuant to Sections 302 (Exhibits 12.1 and 12.2) and 906 (Exhibit 13.1)
of the Sarbanes-Oxley Act of 2002, submitted to the Commission on a voluntary basis. |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
The following discussion should be read in conjunction with our Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 6-K. 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 ResourcesFinancial
Outlook. Our actual results may differ significantly from those projected in the forward-looking
statements. For a discussion of factors that might cause future actual results to differ
materially from our recent results or those projected in the forward-looking statements in addition
to the factors set forth below, see Cautionary Note Regarding Forward-Looking Statements and
Item 3. Key InformationRisk Factors included
in our Form 20-F as they may be updated in our SEC submissions
from time to time. 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 that have a significant impact on the results we report in our
Consolidated Financial Statements, which we discuss under the section Results of Operations
below. Some of our accounting policies require us to make difficult and subjective judgments that
can affect the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of net revenue and expenses during the reporting period. The primary areas
that require significant estimates and judgments by management
include, but are not limited to:
sales returns and allowances; reserves for price protection to certain distributor customers;
allowances for doubtful accounts; inventory reserves and normal manufacturing capacity thresholds
to determine costs to be capitalized in inventory; accruals for warranty costs; litigation and
claims; valuation of acquired intangibles; goodwill; investments and tangible assets as well as the
impairment of their related carrying values; restructuring charges; assumptions used in calculating
pension obligations and share-based compensation; assessment of hedge effectiveness of derivative
instruments; deferred income tax assets, including required valuation allowances and liabilities;
and provisions for specifically identified income tax exposures. We base our estimates and
assumptions on historical experience and on various other factors such as market trends and
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, our actual results may differ materially and
adversely from our estimates. To the extent there are material differences between the actual
results and these estimates, our future results of operations could be significantly affected.
We believe the following critical accounting policies require us to make significant judgments
and estimates in the preparation of our Consolidated Financial Statements.
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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) collectibility is reasonably assured. This usually occurs at the time of shipment. |
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Consistent with standard business practice in the semiconductor industry, price protection is
granted to distribution customers on their existing inventory of our products to compensate
them for declines in market prices. The ultimate decision to authorize a distributor refund
remains fully within our control. 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 a significant move in the current market price. The short outstanding inventory
time period, visibility into the standard inventory product pricing (as opposed to certain
customized products) and long distributor pricing history have enabled us to reliably estimate
price protection provisions at period-end. We record the accrued amounts as a deduction of
revenue at the time of the sale. If market conditions differ from our assumptions, this could
have an impact on future periods; in particular, if market conditions were to deteriorate, net
revenues could be reduced due to higher product returns and price reductions at the time these
adjustments occur. |
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Our customers occasionally return our products from time to time for technical reasons. Our
standard terms and conditions of sale provide that if we determine that products are
non-conforming, we will repair or |
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replace the non-conforming products, or issue a credit or rebate of the purchase price.
Quality returns are not related to any technological obsolescence issues and are identified
shortly after sale in customer quality control testing. Quality returns are always associated
with end-user customers, not with distribution channels. We provide for such returns when they
are considered as probable and can be reasonably estimated. We record the accrued amounts as a
reduction of revenue. |
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Our insurance policies relating to product liability only cover physical and other direct
damages caused by defective products. We do not carry insurance against immaterial, non
consequential damages. We record a provision for warranty costs as a charge against cost of
sales based on historical trends of warranty costs incurred as a percentage of sales which we
have determined to be a reasonable estimate of the probable losses to be incurred for warranty
claims in a period. Any potential warranty claims are subject to our determination that we are
at fault and liable for damages, and 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 limit our liability to the sales value of the products, which gave rise to the
claims. |
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We maintain an allowance for doubtful accounts for potential estimated losses resulting from
our customers inability to make required payments. We base our estimates on historical
collection trends and record a provision accordingly. Furthermore, we are required to evaluate
our customers credit ratings from time to time and take an additional provision for any
specific account that we estimate as doubtful. In 2005, we recorded specific provisions of $7
million related to bankrupt customers, in addition to our standard provision of 1% of total
receivables based on the estimated historical collection trends. Although we have determined
that our most significant customers are creditworthy, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances could be required. |
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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, including
in-process research and development, which is expensed
immediately. 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, 2005, the value of goodwill amounted to $221
million. |
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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 and is subject to regular
review by segment management. 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
usually 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 including: the applicable industrys sales
volume forecast and selling price evolution; the reporting units
market penetration; the market acceptance of certain new
technologies; and relevant cost structure, the discount rates
applied using a weighted average cost of capital and the
perpetuity rates used in calculating cash flow terminal values.
Our evaluations are based on financial plans updated with the
latest available projections of the semiconductor market
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 not in line
with our estimates may require impairment of certain goodwill. In
2005, we had an impairment of goodwill of $39 million related to
the elimination of the Customer Premises Equipment (CPE) product
lines. |
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Intangible assets subject to amortization. Intangible assets
subject to amortization include the cost of technologies and
licenses purchased from third parties, internally developed
software which is capitalized and purchased software. Intangible
assets subject to amortization are reflected net of any impairment
losses. These are amortized over a period ranging from three to
seven years. The carrying value of intangible assets subject to
amortization is evaluated whenever changes in circumstances
indicate that the carrying amount |
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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 based on the
projected discounted future cash flows associated with the intangible assets.
Significant management judgments and estimates are required and used in the
forecasts of future operating results that are used in the discounted cash flow
method of valuation, including: the applicable industrys sales volume forecast
and selling price evolution; our market penetration; the market acceptance of
certain new technologies; and costs evaluation. Our evaluations are based on
financial plans updated with the latest available projections of the
semiconductor market evolution and our sales expectations 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 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
impairment of certain intangible assets. In 2005, we registered an impairment
charge of $25 million. At December 31, 2005, the value of intangible assets
subject to amortization amounted to $224 million. |
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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, which is the
largest component of our long-lived assets, to be six
years. This estimate is based on our experience with
using equipment over time. Depreciation expense is a
major element of our manufacturing cost structure. We
begin to depreciate new equipment when it is put into
use. |
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We evaluate each period whether there is reason to suspect that tangible assets or groups of
assets might not be recoverable. Factors we consider important which could trigger an
impairment review include: significant negative industry trends, significant underutilization
of the assets or available evidence of obsolescence of an asset and strategic management
decisions impacting production or an indication that its economic performance is, or will be,
worse than expected. Since a significant portion of our tangible assets are carried by our
European affiliates and their cost of operations are mainly denominated in euros, while
revenues primarily are denominated in U.S. dollars, the exchange rate dynamic may trigger
impairment charges. 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 independent market appraisals or the
sum of discounted future cash flows, using market assumptions such as the utilization of our
fabrication facilities and the ability to upgrade such facilities, change in the selling price
and the adoption of new technologies. We also evaluate the continued validity of an assets
useful life when impairment indicators are identified. Assets classified as held for disposal
are reflected at the lower of their carrying amount or 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. |
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Our evaluations are based on financial plans updated with the latest projections of the
semiconductor market and of our sales expectations, from which we derive the future production
needs and loading of our manufacturing facilities, and which are consistent with the plans and
estimates that we use to manage our business. These plans are highly variable due to the high
volatility of the semiconductor business and therefore are subject to continuous
modifications. If the future evolution differs from the basis of our plans, both in terms of
market evolution and production allocation to our manufacturing plants, this could require a
further review of the carrying amount of our tangible assets resulting in a potential
impairment loss. In 2005, we registered an impairment charge of $3 million related to the
optimization of our Electrical Wafer Sorting (EWS) activities (wafer test). |
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Inventory. Inventory is stated at the lower of cost or net realizable value. Cost is based
on the weighted average cost by adjusting standard cost to approximate actual manufacturing
costs on a quarterly basis; the cost is therefore dependent on our manufacturing performance.
In the case of underutilization of our manufacturing facilities, we estimate the costs
associated with the excess capacity; these costs are not included in the valuation of
inventories but are charged directly to cost of sales. Net realizable value is the estimated
selling price in the ordinary course of business less applicable variable selling expenses. |
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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 quarter 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. |
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Share-based compensation. We have in the past accounted for
share-based compensation to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and as such generally recognized no
compensation cost for employee stock options. In December 2004,
the FASB issued revised FAS No. 123, Share-Based Payment, or FAS
123R, which requires companies to expense employee share-based
compensation for financial reporting purposes. Pro forma
disclosure of the income statement effects of share-based
compensation is no longer an alternative. We early adopted FAS
123R in the fourth quarter of 2005 to account for charges related
to non-vested stock awards distributed to our employees. As a
result, we are now required to value the current and any future
employee share-based compensation pursuant to an option pricing
model, and then amortize that value against our reported earnings
over the vesting period in effect for those awards. Due to this
change in accounting treatment of employee stock and other forms
of share-based compensation, the share-based compensation expense
is charged directly against our earnings. In order to assess the
fair value of this share-based compensation through a financial
evaluation model, we are required to make significant estimates
since, pursuant to our plan, awarding shares is contingent to the
achievement of certain financial objectives including market
performance and financial results. We are required to estimate
certain items including the probability of meeting the market
performance, the forfeitures and the service period of our
employees. As a result, we recorded in the fourth quarter of 2005
a total charge of $9 million and we are expecting to incur
additional charges related to this plan during 2006. The impact is
further detailed in Note 15.6 to our Consolidated Financial
Statements Non-vested share awards. |
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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 our exiting activities or to dispose of our
activities. We recognize the fair value of a liability for costs
associated with an exit or disposal 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 of and the 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.
As we operate in a highly cyclical industry, we continue to
evaluate business conditions. If broader or new 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 to change estimates of amounts
previously recorded. The potential impact of these changes could
be material and have a material adverse effect on our results of
operations or financial condition. In 2005, the amount of
restructuring charges and other related closure costs amounted to
$61 million before taxes. See Note 18 to our Consolidated
Financial Statements. |
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Income taxes. We are required to make estimates and judgments in
determining income tax expense for financial statement purposes.
These estimates and judgments also occur in the calculation of
certain tax assets and liabilities and provisions. |
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We are required to assess the likelihood of recovery of our deferred tax assets. 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. As of December 31, 2005, we believed that all of the deferred tax assets, net of
valuation allowances, as recorded on our balance sheet, would ultimately be recovered.
However, should there be a change in our ability to recover our deferred tax assets or in our
estimates of the valuation allowance, or in the tax rates applicable in the various
jurisdictions, this could have an impact on our future tax provision in the periods in which
these changes could occur. |
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In addition, the calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations. We record provisions for anticipated tax audit issues
based on our estimate that probable additional taxes will be due. We reverse provisions and
recognize a tax benefit during the period if we ultimately determine that the liability is no
longer necessary. We record an additional charge in our provision for taxes in the period in
which we determine that the recorded provision is less than we expect the ultimate assessment
to be. |
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Patent and other intellectual property litigation or claims. As is the case with many
companies in the semiconductor industry, we have from time to time received, and may in the
future receive, communications alleging possible infringement of patents and other
intellectual property rights of others. Furthermore, we may become involved in costly
litigation brought against us regarding patents, mask works, copyrights, trademarks or trade
secrets. In the event that the outcome of any litigation would be unfavorable to us, we may be
required to take a license to the underlying intellectual property right upon economically
unfavorable terms and conditions, and 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 ability to compete. See Item 3. Key InformationRisk
FactorsRisks Related to Our OperationsWe depend on patents to protect our rights to our
technology included in our Form 20-F, as may be updated
from time to time in our public filings. |
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We record a provision when it is probable that a liability has been incurred and when the
amount of the loss can be reasonably estimated. We regularly evaluate losses and claims with
the support of our outside attorneys to determine whether they need to be adjusted based on
the current information available to us. Legal costs associated with claims are expensed as
incurred. We are in discussion with several parties with respect to claims against us relating
to possible infringements of patents and similar intellectual property rights of others. |
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We are currently a party to several legal proceedings including legal proceedings with SanDisk
Corporation (SanDisk) and Tessera, Inc. |
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On October 15, 2004, SanDisk filed a complaint against us with the United States International
Trade Commission (the ITC) with respect to certain NAND memory products, alleging patent
infringement and seeking an order excluding our NAND products from importation into the United
States. On November 15, 2004, the ITC instituted an investigation against us in response to the
complaint. On October 19, 2005, Administrative Law Judge Paul J. Luckern, in his Initial
Determination, ruled that our NAND products do not infringe the asserted SanDisk patent, and that
there was no violation of Section 337 of the U.S. Tariff Act of 1930. On December 5, 2005, the ITC
confirmed its initial decision. No impact to our financial statements resulted from this recent
decision. |
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On October 15, 2004, SanDisk also filed a complaint for patent infringement, and declaratory
judgment of non-infringement and patent invalidity against us with the United States District Court
for the Northern District of California. The complaint alleges that our products infringe a SanDisk
U.S. patent and seeks a declaratory judgment that SanDisk does not infringe several of our U.S.
patents. By order dated January 4, 2005, the court stayed SanDisks patent infringement claim
pending a final determination in the ITC action discussed above. On January 20, 2005, the court
issued an order granting our motion to dismiss the declaratory judgment causes of action. SanDisk
has appealed the order to the United States Court of Appeals for the Federal Circuit. |
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On February 4, 2005, we filed two complaints for patent infringement against SanDisk with the
United States District Court for the Eastern District of Texas. The complaints allege that SanDisk
products infringe seven of our U.S. patents. On April 22, 2005, SanDisk filed a counterclaim
against us alleging that our products infringed two SanDisk patents. We anticipate that the first
trial will be held during the second quarter of 2006 and that the second trial will be held during
the third quarter of 2006. |
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On March 28, 2005, SanDisk filed a complaint for declaratory judgment of non-infringement and
patent invalidity against us with the United States District Court for the Northern District of
California. The complaint seeks a declaratory judgment that SanDisk does not infringe several of
our U.S. patents. On April 11, 2005, SanDisk voluntarily dismissed the case. |
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On October 14, 2005, we filed a complaint against SanDisk and its current CEO Dr. Eli Harari before
the Superior Court of California, County of Alameda. The complaint seeks, among other relief,
assignment of certain SanDisk patents that resulted from inventive activity on the part of Dr.
Harari that took place while he was an employee, officer and/or director of Waferscale Integration,
Inc. We are the successor to Waferscale Integration, Inc. by merger. |
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On December 6, 2005 SanDisk filed a complaint against us in the California (San Jose) Federal
Court. The complaint alleges that our NAND and NOR flash products infringe a SanDisk patent. We
are investigating the allegation and have not filed any papers with the California court. |
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On January 10, 2006 SanDisk filed a complaint against us with the ITC with respect to certain NAND
and NOR memory products, alleging patent infringement and seeking an order excluding our NAND and
NOR products from importation into the United States. On February 10, 2006, the ITC announced that
it has instituted an investigation against us in response to the complaint. |
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In addition, on January 31, 2006, we were informed that Tessera, Inc. (Tessera) has decided to
add us, along with several other semiconductor companies, as a co-defendant to a lawsuit filed by
Tessera on October 7, 2005 against Advanced Micro Devices, Inc. and Spansion LLC in the United
States District Court for the Northern District of California. Tessera is claiming that our ball
grid array format semiconductor and multi-chip semiconductor packages infringe several patents
owned by Tessera. We intend to defend the lawsuit vigorously; however, it is difficult to predict
the outcome of such litigation, and an adverse outcome could result in significant financial costs
that may materially affect our results of operations. |
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As of the end of 2005, based on our assessment there was no impact on our
financial statements relating to the SanDisk litigation. However, if we are unsuccessful in
resolving these proceedings, or if the outcome of any other litigation or claim were to be
unfavorable to us, we may incur monetary damages, or an injunction or exclusion order. |
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Pension and Post Retirement Benefits. Our results of operations
and our balance sheet include the impact of pension and post
retirement benefits that are measured using actuarial valuations.
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 above
assumptions can have an impact on our valuations. As of December
31, 2005, we have a total benefit obligation estimated at $323
million, and total plan assets estimated at $194 million resulting
in an unfunded status of $129 million, of which $56 million was
registered in our balance sheet at December 31, 2005. |
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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 exposures 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 it is probable that a liability
has been incurred and the amount of the loss can be reasonably
estimated. We regularly reevaluate any losses and claims and
determine whether they need to be readjusted based on the current
information available to us. In the event of litigation that is
adversely determined with respect to our interests, or in the
event 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. |
Fiscal Year 2005
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. Our fiscal year starts at January 1 and
the first quarter of 2005 ended on April 2, 2005. The second quarter of 2005 ended on July 2, 2005,
and the third quarter of 2005 ended on October 1, 2005. The fourth quarter ended on December 31,
2005. 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.
2005 Business Overview
In 2005, the semiconductor market experienced a moderate increase in total sales after the
strong growth recorded in 2004. Semiconductor industry data for 2005 indicates that revenues
improved supported by a solid economic environment in the major world economies.
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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 (MPU), dynamic random access
memories (DRAMs), and optoelectronics devices).
Based upon recently published data, semiconductor industry revenues increased year-over-year
by approximately 7% both for the TAM and the SAM in 2005, to reach $227.5 billion and approximately
$152 billion, respectively. This increase was driven by unit demand while average selling prices
remained basically flat. In the fourth quarter of 2005, the TAM and the SAM increased approximately
9% and 13% year-over-year, respectively and increased by approximately 2% and 3% sequentially,
respectively.
Effective January 1, 2005, we realigned our product groups to increase market focus and
realize the full potential of our products, technologies and sales and marketing channels. Since
such date we report our sales and operating income in three segments:
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the Application Product Specific Groups (ASG) segment, comprised of three product
lines our Home, Personal and Communication (HPC), our Computer Peripherals (CPG) and our Automotive Product (APG). Our new HPC Sector is comprised
of the telecommunications, audio and digital consumer groups. Our CPG Group covers
computer peripherals products, specifically disk drives and printers, and our APG Group
now comprises all of our major complex products related to automotive applications. |
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the Memory Product Group (MPG) segment, comprised of our memories and Smart card
businesses; and |
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the Micro, Linear and Discrete Group (MLD) segment, comprised of discrete and
standard products plus standard microcontroller and industrial devices (including the
programmable systems memories (PSM) division).(1) |
Our principal investment and resource allocation decisions in the semiconductor business area
are for expenditures on research and development and capital investments in front-end and back-end
manufacturing facilities. These decisions are not made by product groups, but on the basis of the
semiconductor business area. All these product groups share common research and development for
process technology and manufacturing capacity for most of their products.
Our 2005 revenues were characterized by significant high volume demand and improved product
mix, which did not translate into an equivalent revenue performance due to persisting negative
impact of price pressure in the market we serve. As a result, our revenues increased by
approximately 1% to $8,882 million compared to $8,760 million in 2004. Our sales growth was driven
primarily by Computer Peripherals, Telecom and Automotive market segments while both Consumer and
Industrial and Other declined. Our sales trend, however, was below the TAM and the SAM growth
rates.
With reference to the quarterly results, our fourth quarter 2005 revenues performance was
below the TAM and the SAM on a year-over-year basis but stronger on a sequential basis.
On a year-over-year basis, our fourth quarter 2005 revenues increased by approximately 3% to
$2,389 million compared to $2,328 million in the fourth quarter of 2004. Our sales growth was
driven primarily by Telecom and Computer Peripherals while we registered declines in Consumer
applications and Industrial and Other. On a year-over-year basis, the TAM and the SAM registered
increases of approximately 9% and 13% respectively.
On a sequential basis, in the fourth quarter 2005, revenues increased approximately 6% driven
by stronger demand in Telecom, Consumer and Industrial and Other and Automotive. In particular,
sequential revenues were driven by the strong growth in wireless. Our net revenues performance was
firmly within our guidance, which indicated a sequential growth of between 3% and 9%. Finally, our
sales trend was above both the TAM and the SAM, which registered an increase of approximately 2%
and 3%, respectively.
|
|
|
(1) |
|
Our principal investment and resource allocation
decisions in the semiconductor business area are for expenditures on research
and development and capital investments in front-end and back-end manufacturing
facilities. These decisions are not made by product groups. All these product
groups share common research and development for process technology and
capacity for most of their products. |
6
In 2005, the effective average U.S. dollar exchange rate was $1.28 for 1.00, which reflects
current exchange rate levels and the impact of certain hedging contracts, compared to a 2004
effective exchange rate of $1.23 for 1.00. 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 gross margin dropped from 36.8% in 2004 to 34.2% in 2005 due to the negative impact of the
declining sales price and of the effective U.S. dollar exchange rate, which was partially balanced
by manufacturing and product mix improvements as well as by the increased sales volume. Our fourth
quarter revenues were well within our guidance that indicated a gross margin of approximately 36%
plus or minus one percentage point.
On a sequential basis, our gross margin increased from 34.1% to 36.5% in the fourth quarter
2005. Volume, enhanced product mix, manufacturing performance and currency drove the improvements
in gross profit and gross margin.
Our operating expenses including selling, general and administrative expenses and research and
development were higher in 2005 compared to 2004 due to higher spending in research and
development, the negative impact of the effective U.S. dollar exchange rate, the one-time
compensation charges related to our former CEO and other retired senior executives, the new pension
scheme for executive management and the 2005 share-based compensation for our employees and members
and professionals of the Supervisory Board.
Our total impairment and restructuring charges for 2005 were significantly higher compared to
2004, given that in addition to the ongoing 150-mm restructuring plan launched in 2003, we have
incurred charges related to the new 2005 restructuring and reorganization plans. Our manufacturing
initiatives are moving forward and are becoming drivers of margin improvements as we complete these
programs and realize the associated benefits during the fourth quarter of 2005 and through 2006.
The combined effect of the above mentioned factors and the other operating items resulted in a
net negative impact on our operating income for 2005 compared to 2004; our operating income
decreased significantly from $683 million in 2004 to $244 million in 2005. In the fourth quarter
2005, however, our operating income significantly improved compared to the third quarter of 2005.
This improvement was driven by higher sales volume, an improved gross margin and lower expenses to
sales ratio due to a combination of higher sales and expense control, combined with a more
favorable effective average U.S. dollar exchange rate.
Our interest income significantly improved in 2005 mainly as the result of rising interest
rates on our available cash. In 2005, our income tax resulted in an expense of $8 million, also positively affected by restructuring charges
occurring under higher tax rate jurisdictions and the reversal of some tax provisions.
In summary, our financial results for 2005 compared to the results of 2004 were favorably
impacted by the following factors:
|
|
|
higher sales volume and a more favorable product mix in our revenues, which
contributed to an increase in our net revenues over 2004; |
|
|
|
|
continuous improvement of our manufacturing performances; |
|
|
|
|
net interest income; and |
|
|
|
|
lower income tax expense. |
Our financial results in 2005 were negatively affected by the following factors:
|
|
|
negative pricing trends due to a persisting overcapacity in the industry, which
translated into our average selling prices declining by approximately 8%, as a pure
pricing effect; |
|
|
|
|
the impact of the effective U.S. dollar exchange rate against the euro and other
currencies, which translated into an increase of our cost of sales and in our
operating expenses significantly higher than the favorable impact on our revenues; |
|
|
|
|
higher impairment, restructuring charges and other related closure costs due to
the new restructuring and reorganization activities initiated in 2005; and |
7
|
|
|
the one-time compensation packages and special bonuses to our former CEO and to
a limited number of retired senior executives, the new pension scheme charges for
executive management and the share-based compensation charges for non-vested shares
granted to employees and members and professionals of Supervisory Board for a total
of $37 million. |
In 2005, we continued to invest in upgrading and expanding our manufacturing capacity. Total
capital expenditures in 2005 were approximately $1,441 million, which were financed entirely by net
cash generated from operating activities. At December 31, 2005, we had cash and cash equivalents
of $2,027 million. Total debt and bank overdrafts were $1,802 million, of which $269 million were
long-term debt.
In the fourth quarter 2005, we continued to make steady progress in improving our financial
performance, with both revenue and gross margin results in line with our objectives. Sequential
revenue growth was driven by strong performance in wireless, where our product offerings provide
important functionality to a wide range of handset requirements. Sequential improvement in our
gross margin reflected, in addition to currency, the impact of previously announced actions and
programs. Through a sharper focus in both research and development and marketing and sales,
operating expenses met our targeted objectives. Additionally, cash generation in the quarter was
strong and at the year end our financial position improved to a net cash balance of over $200
million. In summary, in the fourth quarter of 2005, we saw progress across our most important financial metrics.
The year 2005 has been devoted to strengthening and reshaping our company into a stronger and
more competitive leader. Key competitive changes have been implemented. The cost savings actions
we announced at the beginning of the year delivered the expected benefits of 2005, and we are on
track to deliver additional results in the coming years. New product designs have accelerated.
Customer base expansion efforts have been developed and are being carried out. Therefore, as we
move into 2006, we are confident that we will continue to strengthen our financial performance and
product leadership based upon the execution of our corporate performance roadmap.
Business Outlook
We believe that moderate industry growth will continue into 2006. Within these dynamics, we
expect to continue to make solid progress in improving our performance thanks to our ongoing plans
and initiatives. As it is typical for the first quarter seasonality, we expect our revenues for
the first quarter of 2006 to decline from 2005 fourth quarter levels, but to be significantly
higher than our first quarter 2005 results. Specifically, we expect sales to decrease between 1%
and 7% sequentially. Given the seasonal mix and volume impacts we expect the gross margin to be
about 35%, plus or minus 1 percentage point.
Our capital expenditures are targeted to be $1.8 billion for 2006, with flexibility to
modulate to market conditions.
This guidance is based on an effective currency exchange rate of approximately $1.205 for
1.00, which reflects current exchange rate levels combined with the impact of existing hedging
contracts.
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 InformationRisk Factors in our
Form 20-F, as may be updated from time to time in our SEC filings.
Other Developments in 2005
In January 2005, we decided to reduce our Access technology products for CPE modem products.
This decision was intended to eliminate certain low-volume, non-strategic product families whose
return in the current environment did not meet internal targets. This decision resulted in a total
impairment charge of approximately $67 million in 2005, out of which $61 million related to
impairment of intangible assets and goodwill related to the CPE product lines.
On February 28, 2005, we signed an advanced pricing agreement for the period 2001 through 2007
with the United States Internal Revenue Service resulting in a net one-time tax benefit of
approximately $10 million in 2005. In the second quarter of 2005, we benefited from a tax credit
of $18 million in relation to the application of the ETI (Extraterritorial Income Exclusion) rules
in the United States after notification in writing by the local authorities.
At our annual general meeting of shareholders held on March 18, 2005, our shareholders
approved the appointment of Mr. Carlo Bozotti as our President and Chief Executive Officer
replacing Mr. Pasquale Pistorio
8
who retired. Our shareholders also approved the distribution of a cash dividend of $0.12 per
common share in respect to the 2004 financial year, equivalent to the prior years cash dividend
payment, for a total of approximately $107 million that was paid in the second quarter of 2005. In
addition, the shareholders appointed our Supervisory Board and Managing Board members, approved
amendments to our Articles of Association and to our 2001 Employee Stock Option Plan, as well as
approving a new 2005 share-based compensation for Supervisory Board members and professionals,
among other resolutions. Our Supervisory Board is composed of Messrs. Gérald Arbola, Matteo del
Fante, Tom de Waard, Didier Lombard, Bruno Steve and Antonino Turicchi, who were each appointed for
a three-year term (to expire at our 2008 AGM), as well as Messrs. Doug Dunn, Francis Gavois and
Robert White, who were each appointed for a one-year term (to expire at our 2006 AGM). Our
Managing Board is composed of Mr. Carlo Bozotti, our President and Chief Executive Officer, who was
appointed for a three-year term (to expire at our 2008 AGM).
On May 16, 2005, we announced a head count restructuring plan that, combined with other
already announced initiatives, will aim to reduce our workforce by 3,000 outside Asia by the second
half of 2006. From these new measures estimated to cost between $100 to $130 million, we
anticipate additional savings of $90 million per year, at completion of the plan. On June 8, 2005,
we specified our restructuring efforts by announcing the following: our workforce gross reduction
in Europe will represent about 2,300 jobs of the 3,000 already announced; we will pursue the
conversion of 150-mm and 200-mm production tools; we will optimize on a global scale our Electrical
Wafer Sorting (EWS) activities; we will harmonize and rationalize our support functions and we will
disengage from certain activities.
Pursuant to the joint venture agreement that we signed in 2004 with Hynix Semiconductor Inc.,
to build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China, we made
during 2005 capital contributions to the joint venture totaling $38 million, of which $13 million
were paid in the fourth quarter of 2005. Under the agreement, Hynix Semiconductor Inc., will
contribute $500 million for a 67% equity interest and we will contribute $250 million for a 33%
equity interest. In addition, we have committed to grant $250 million in long-term financing for
the joint venture guaranteed by the subordinated collateral of the joint ventures assets.
On June 30, 2005, we sold our interest in UPEK Inc. (a spin-off of our former TouchChip
business) for $13 million and recorded in the second quarter of 2005 a gain amounting to $6
million. Additionally, on June 30, 2005, we were granted warrants for 2 million shares of UPEK
Inc., at an exercise price of $0.01 per share. The warrants are not limited in time but can only
be exercised in the event of a change of control or an initial public offering of UPEK Inc., above
a predetermined value.
On August 6, 2005, the 442 million aggregate principal amount of 63/4% mandatory exchangeable
notes, initially issued by France Telecom in 2002 and exchangeable into our common shares, reached
maturity. We were informed that the exchange ratio was 1.25 of our common shares per each 20.92
principal amount of notes, which resulted in the disposal by France Telecom of approximately 26.4
million of our currently existing common shares, representing the totality of the shares entirely
held by France Telecom in our company.
On September 6, 2005, we announced the appointment of two new Corporate Vice Presidents: Mr.
Reza Kazerounian was promoted to the position of Corporate Vice President for the North America
region and Mr. Marco Luciano Cassis was appointed to the position of Corporate Vice President of
STMicroelectronics Japan.
On October 17, 2005, we announced the creation of our new Greater China region to focus
exclusively on our operations in China, Hong Kong and Taiwan and appointed Mr. Robert Krysiak as
Corporate Vice President and General Manager of Greater China.
On October 25, 2005, upon the recommendation of its Compensation Committee, our Supervisory
Board approved the conditions for the Executive-Vice Presidents and Corporate Vice Presidents to
become eligible for the Companys Executive Pension Plan Scheme, as follows: eight years of
seniority as Executive Vice President or Corporate Vice President, Managing Board decision to be
elected into the plan and variable pension amount according to the years of services with the
maximum pension after 13 years of service in these positions. The total 2005 charge has been
estimated at the level of $11 million.
In December 2005, Mr. Piero Mosconi retired, leaving his role of Corporate Vice President and
Treasurer, a position he occupied since 1987. Treasury moved under the responsibility of our Chief
Financial Officer, Mr. Carlo Ferro. Mr. Giuseppe Notarnicola joined our Company and was appointed
Group Vice President, Corporate Treasurer.
9
Mr. Giordano Seragnoli, Corporate Vice President and General Manager of our worldwide back-end
manufacturing operations, is also retiring at the end of the second quarter of 2006. Effective
April 3, 2006, Jeffrey See, who is currently General Manager of our manufacturing complex in Ang Mo
Kio (Singapore) will take over his responsibilities. Mr. See will continue to be based in
Singapore, close to where the largest part of our assembly and test production is located.
Recent Developments
Upon the proposal of our Managing Board, our Supervisory Board decided in January 2006 to
recommend for the 2006 AGM, scheduled in Amsterdam on April 27, 2006, the distribution of a cash
dividend of $0.12 per share, maintaining the same cash dividend level as in the prior year.
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, memories 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 Smart card products through our Incard
division, which includes the production and sale of both silicon chips and Smart cards.
In the Semiconductors business area, effective January 1, 2005, we realigned our product
groups to increase market focus and realize the full potential of our products, technologies and
sales and marketing channels. Since such date we report our semiconductor sales and operating
income in three segments:
|
|
|
Application Specific Product Groups (ASG) segment, comprised of three product
lines Home, Personal and Communication (HPC), Computer Peripherals (CPG) and new Automotive Product Group (APG); |
|
|
|
|
Memory Product Group (MPG) segment; and |
|
|
|
|
Micro, Linear and Discrete Group (MLD) segment. |
Our principal investment and resource allocation decisions in the Semiconductor business area
are for expenditures on research and development and capital investments in front-end and back-end
manufacturing facilities. These decisions are not made by product groups, but on the basis of the
semiconductor business area. All these product groups share common research and development for
process technology and manufacturing capacity for most of their products. Please see Item 4.
Information on the CompanyBusiness Overview included in
our Form 20-F, as may be updated from time to time in our public
filings.
We have restated our results in prior periods for illustrative comparisons of our performance
by product group and by period. The segment information of 2003 and 2004 has been restated using
the same principles applied to the current 2005 year. The preparation of segment information
according to the new group structure requires management to make significant estimates, assumptions
and judgments in determining the operating income of the new groups for the prior years. However,
we believe that the prior years presentation is representative of 2005 and we are using these
comparatives when managing our business.
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 Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131).
The following tables present our consolidated net revenues and consolidated operating income
by semiconductor product segment. For the computation of the Groups internal financial
measurements, we use certain internal rules of allocation for the costs not directly chargeable to
the Groups, 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 Groups,
10
including impairment, restructuring charges and other related closure costs, start-up costs of
new manufacturing facilities, some strategic and special research and development programs or other
corporate-sponsored initiatives, including certain corporate level operating expenses and certain
other miscellaneous charges. Starting in the first quarter of 2005, we allocated the start-up costs
to expand our marketing and design presence in new developing areas to each Group, and we restated
prior years results accordingly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Net revenues by product group: |
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group |
|
$ |
4,991 |
|
|
$ |
4,902 |
|
|
$ |
4,405 |
|
Memory Product Group |
|
|
1,948 |
|
|
|
1,887 |
|
|
|
1,294 |
|
Micro, Linear and Discrete Group |
|
|
1,882 |
|
|
|
1,902 |
|
|
|
1,469 |
|
Others(1) |
|
|
61 |
|
|
|
69 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net revenues |
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
$ |
7,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenues from sales of subsystems mainly and other products not allocated to
product groups. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Operating income (loss) by product group: |
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group |
|
$ |
355 |
|
|
$ |
530 |
|
|
$ |
582 |
|
Memory Product Group |
|
|
(118 |
) |
|
|
42 |
|
|
|
(65 |
) |
Micro, Linear and Discrete Group |
|
|
271 |
|
|
|
413 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product groups |
|
|
508 |
|
|
|
985 |
|
|
|
709 |
|
Others(1) |
|
|
(264 |
) |
|
|
(302 |
) |
|
|
(375 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income |
|
$ |
244 |
|
|
$ |
683 |
|
|
$ |
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating income (loss) of Others includes
items or parts of them, which are not allocated to product groups such as impairment, restructuring
charges and other related closure costs, start-up costs, and other unallocated expenses, such
as: strategic or special research and development programs, certain corporate-level operating
expenses, certain patent claims and litigations, and other costs that are not allocated to the
product groups, as well as operating earnings or losses of the Subsystems and Other Products
Group. Certain costs, mainly R&D, formerly in the Others category, are now being allocated
to the groups; comparable amounts reported in this category have been reclassified accordingly
in the above table. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(as a percentage of total net revenues) |
|
Operating income (loss) by product group: |
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group(1) |
|
|
7.1 |
% |
|
|
10.8 |
% |
|
|
13.2 |
% |
Memory Product Group(1) |
|
|
(6.1 |
) |
|
|
2.2 |
|
|
|
(5.0 |
) |
Micro, Linear and Discrete Group(1) |
|
|
14.4 |
|
|
|
21.7 |
|
|
|
13.1 |
|
Others(2) |
|
|
(3.0 |
) |
|
|
(3.5 |
) |
|
|
(5.2 |
) |
Total consolidated operating income(3) |
|
|
2.7 |
% |
|
|
7.8 |
% |
|
|
4.6 |
% |
|
|
|
(1) |
|
As a percentage of net revenues per product group. |
|
(2) |
|
As a percentage of total net revenues. Operating income
(loss) of Others includes items or parts of them,
which are not allocated to product groups such as impairment, restructuring charges and other related closure costs, start-up costs, and
other unallocated expenses, such as: strategic or special research and development programs,
certain corporate-level operating expenses, certain patent claims and litigations, and other
costs that are not allocated to the product groups, as well as operating earnings or losses of
the Subsystems and Other Products Group. Certain costs, mainly R&D, formerly in the Others
category, are now being allocated to the groups; comparable amounts reported in this category
have been reclassified accordingly in the above table. |
|
(3) |
|
As a percentage of total net revenues. |
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Reconciliation to consolidated operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product groups |
|
$ |
508 |
|
|
$ |
985 |
|
|
$ |
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income of others(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Strategic and other research and development programs |
|
|
(49 |
) |
|
|
(91 |
) |
|
|
(52 |
) |
Start-up costs |
|
|
(56 |
) |
|
|
(63 |
) |
|
|
(54 |
) |
Impairment, restructuring charges and other related closure costs |
|
|
(128 |
) |
|
|
(76 |
) |
|
|
(205 |
) |
Subsystems |
|
|
1 |
|
|
|
(1 |
) |
|
|
2 |
|
One-time compensation and special contributions(2) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
Patent claim costs |
|
|
|
|
|
|
(4 |
) |
|
|
(10 |
) |
Other non-allocated provisions(3) |
|
|
(10 |
) |
|
|
(67 |
) |
|
|
(56 |
) |
Total operating income (loss) of others |
|
|
(264 |
) |
|
|
(302 |
) |
|
|
(375 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income |
|
$ |
244 |
|
|
$ |
683 |
|
|
$ |
334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating income (loss) of Others includes
items or parts of them, which are not allocated to product groups such as impairment, restructuring
charges and other related closure costs, start-up costs, and other unallocated expenses, such
as: strategic or special research and development programs, certain corporate-level operating
expenses, certain patent claims and litigations, and other costs that are not allocated to the
product groups, as well as operating earnings or losses of the Subsystems and Other Products
Group. Certain costs, mainly R&D, formerly in the Others category, are now being allocated
to the groups; comparable amounts reported in this category have been reclassified accordingly
in the above table. |
|
(2) |
|
One-time compensation and special contributions to our former CEO and other executives not
allocated to product groups. |
|
(3) |
|
Includes unallocated expenses such as certain corporate level operating expenses and other
costs. |
Net Revenues by Location of Order Shipment and by Market Segment
The table below sets forth information on our consolidated net revenues by location of order
shipment and as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Net Revenues by Location of Order Shipment:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(2) |
|
$ |
2,789 |
|
|
$ |
2,827 |
|
|
$ |
2,306 |
|
North America |
|
|
1,141 |
|
|
|
1,211 |
|
|
|
985 |
|
Asia/Pacific |
|
|
4,063 |
|
|
|
3,711 |
|
|
|
3,190 |
|
Japan |
|
|
307 |
|
|
|
403 |
|
|
|
337 |
|
Emerging Markets(2)(3) |
|
|
582 |
|
|
|
608 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
$ |
7,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Europe(2) |
|
|
31.4 |
% |
|
|
32.3 |
% |
|
|
31.9 |
% |
North America |
|
|
12.8 |
|
|
|
13.8 |
|
|
|
13.6 |
|
Asia/Pacific |
|
|
45.7 |
|
|
|
42.4 |
|
|
|
44.1 |
|
Japan |
|
|
3.5 |
|
|
|
4.6 |
|
|
|
4.6 |
|
Emerging Markets(2)(3) |
|
|
6.6 |
|
|
|
6.9 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net revenues by location of order shipment region are classified by location of customer
invoiced. For example, products ordered by U.S.-based companies to be invoiced to Asia/Pacific
affiliates are classified as Asia/Pacific revenues. |
|
(2) |
|
Since January 1, 2005, the region Europe includes the former East European countries that
joined the EU in 2004. These countries were part of the Emerging Markets region in the
previous periods. Net revenues for Europe and Emerging Markets for prior periods were
restated to include such countries in the Europe region for such periods. |
12
|
|
|
(3) |
|
Emerging Markets in 2005 included markets such as India, Latin America, the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia. |
The table below estimates, within a variance of 5% to 10% in absolute dollar amounts, the
relative weighting of each of the target market segments in percentages of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(as a percentage of net revenues) |
|
Net Revenues by Market Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Automotive |
|
|
16 |
% |
|
|
15 |
% |
|
|
14 |
% |
Consumer |
|
|
18 |
|
|
|
21 |
|
|
|
20 |
|
Computer |
|
|
17 |
|
|
|
16 |
|
|
|
18 |
|
Telecom |
|
|
35 |
|
|
|
32 |
|
|
|
33 |
|
Industrial and Other |
|
|
14 |
|
|
|
16 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain financial data from our consolidated statements of
income since 2003, expressed in each case as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(as a percentage of net revenues) |
|
Net sales |
|
|
99.9 |
% |
|
|
100.0 |
% |
|
|
99.9 |
% |
Other revenues |
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales |
|
|
(65.8 |
) |
|
|
(63.2 |
) |
|
|
(64.5 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
34.2 |
|
|
|
36.8 |
|
|
|
35.5 |
|
Selling, general and administrative |
|
|
(11.6 |
) |
|
|
(10.8 |
) |
|
|
(10.9 |
) |
Research and development |
|
|
(18.3 |
) |
|
|
(17.5 |
) |
|
|
(17.1 |
) |
Other income and expenses, net |
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
(0.1 |
) |
Impairment, restructuring charges and other related closure costs |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
|
(2.8 |
) |
Total operating expenses |
|
|
(31.5 |
) |
|
|
(29.0 |
) |
|
|
(30.9 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2.7 |
|
|
|
7.8 |
|
|
|
4.6 |
|
Interest income (expense), net |
|
|
0.4 |
|
|
|
|
|
|
|
(0.7 |
) |
Loss on equity investment |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of convertible debt |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
|
3.1 |
|
|
|
7.7 |
|
|
|
3.3 |
|
Income tax benefit (expense) |
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
3.0 |
|
|
|
6.9 |
|
|
|
3.5 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3.0 |
% |
|
|
6.9 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
In 2005, based upon recently published industry data, the semiconductor industry experienced a
year-over-year revenue increase of approximately 7% both for the total available market (TAM) and
the serviceable available market (SAM).
13
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Variation |
|
|
|
(in millions) |
|
Net sales |
|
$ |
8,876 |
|
|
$ |
8,756 |
|
|
|
1.4 |
% |
Other revenues |
|
$ |
6 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
The increase in our net revenues in 2005 was primarily due to our higher sales volumes and
improved product mix, as our average selling prices declined by approximately 8% due to the
continuing broad based pressure in the markets we serve.
With respect to our product segments, ASG net revenues increased 2% over 2004, mainly due to a
more favorable product mix, which was however largely offset by continuous pricing pressure. This
revenue increase was generated by higher sales in Imaging, Cellular Communication, Automotive and
Data Storage products, while Consumer registered a decline. MLD net revenues slightly decreased 1%
compared to 2004, mainly due to the negative price impact that more than offset the sales volume
increase registered by all product groups. In 2005, MPG net revenues increased by 3% compared to
2004; this increase was driven by a large volume demand, particularly in Flash products and mainly
within NAND, despite a decline in our average selling prices.
Net revenues by segment market increased in Computer by approximately 11%, Telecom by
approximately 10% and Automotive by approximately 7%, while Consumer and Industrial and Other
decreased by approximately 15% and 9%, respectively. As a significant portion of our sales are
made through distributors, the foregoing are necessarily estimates within a variance of 5% to 10%
in absolute dollar amounts of the relative weighting of each of our targeted market segments.
By location of order shipment, net revenues were increasing in the Asia/Pacific region by
approximately 10%, while Japan North America, Emerging Markets and Europe net revenues were
decreasing by approximately 24%, 6%, 4% and 1% respectively.
In 2005, we had several large customers, with the largest one, the Nokia Group of companies,
accounting for approximately 22% of our net revenues, increasing from the 17% it accounted for in
2004. Our top ten OEM customers accounted for approximately 50% of our net revenues in 2005
compared to approximately 44% of our net revenues in 2004.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Variation |
|
|
|
(in millions) |
|
Cost of sales |
|
$ |
(5,845 |
) |
|
$ |
(5,532 |
) |
|
|
(5.7 |
%) |
Gross profit |
|
$ |
3,037 |
|
|
$ |
3,228 |
|
|
|
(5.9 |
%) |
Gross margin (as a percentage of net revenues) |
|
|
34.2 |
% |
|
|
36.8 |
% |
|
|
|
|
The increase in our cost of sales is due to the strong sales volume increase and the negative
impact of the effective U.S. dollar exchange rate because a large part of our manufacturing
activities is located in the euro zone. The combined effect of price impact on our revenues and of
the increase in cost of sales generated a decrease in our gross profit; as a result, our gross
margin decreased 260 basis points to 34.2% because the profitable contribution of higher sales
volume, improved product mix and manufacturing efficiencies was offset by the negative impacts of
the decline in selling prices and of the effective U.S. dollar exchange rate.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Variation |
|
|
|
(in millions) |
|
Selling, general and administrative expenses |
|
$ |
(1,026 |
) |
|
$ |
(947 |
) |
|
|
(8.4 |
%) |
As a percentage of net revenues |
|
|
(11.6 |
%) |
|
|
(10.8 |
%) |
|
|
|
|
14
The increase in selling, general and administrative expenses was largely due to the negative
impact of the effective U.S. dollar exchange rate, the one-time compensation charges related to our
former CEO and other retired senior executives for $7 million, the new pension scheme for executive
management for $11 million, the share-based compensation amounting to $5 million and the overall
increase in our expenditures.
Research and development expenses
We
believe that research and development is critical to our success, and
we are committed to increasing research and development expenditures
in the future. Our policy in the field of research and development is
market driven and is focused on leading-edge products and
technologies in close collaboration with strategic alliance partners,
leading universities and research institutions, key customers and
global equipment manufacturers working at the cutting edge of their
own markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Variation |
|
|
|
(in millions) |
|
Research and development expenses |
|
$ |
(1,630 |
) |
|
$ |
(1,532 |
) |
|
|
(6.3 |
%) |
As a percentage of net revenues |
|
|
(18.3 |
%) |
|
|
(17.5 |
%) |
|
|
|
|
The combined result of the negative impact of the effective U.S. dollar exchange rate, higher
spending in our research and development activities, a $6 million one-time termination charge for
two former executives and a $3 million share-based compensation charge resulted in an increase of
our research and development expenses in 2005. As a percentage of net revenues, research and
development expenses grew at a higher rate than our net revenues, thus increasing from 17.5% in
2004 up to 18.3% in 2005. Our reported research and development expenses are mainly in the areas of
product design, technology and development and do not include marketing design center costs, which
are accounted for as selling expenses, or process engineering, pre-production or process-transfer
costs, which are accounted for as cost of sales.
Other income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Research and development funding |
|
$ |
76 |
|
|
$ |
84 |
|
Start-up costs |
|
|
(56 |
) |
|
|
(63 |
) |
Exchange gain (loss), net |
|
|
(16 |
) |
|
|
33 |
|
Patent claim costs |
|
|
(22 |
) |
|
|
(37 |
) |
Gain on sale of non-current assets, net |
|
|
12 |
|
|
|
6 |
|
Other, net |
|
|
(3 |
) |
|
|
(13 |
) |
Other income and expenses, net |
|
$ |
(9 |
) |
|
$ |
10 |
|
As a percentage of net revenues |
|
|
(0.1 |
%) |
|
|
0.2 |
% |
Other income and expenses, net results include miscellaneous items such as research and
development funding, gains on sale of non-current assets, start-up costs, net exchange gain or loss
and patent claim costs. In 2005, research and development funding included income of some of our
research and development projects, which qualify as funding on the basis of contracts with local
government agencies in locations where we pursue our activities. The major amounts of research and
development funding were received in Italy and France. In 2005, research and development funding
slightly decreased compared to 2004. The net gain on sale of non-current assets of $12 million is
the result of the gain of $6 million on the sale of our share in UPEK Inc., the gains on sales of
buildings and lands for a total of $8 million and losses of $2 million on the sale of equipment.
Start-up costs in 2005 were related to our 150-mm fab expansion in Singapore and the conversion to
200-mm fab in Agrate (Italy) and the build-up of the 300-mm fab in Catania (Italy). The net
exchange loss related to transactions not designated as a cash flow hedge denominated in foreign
currencies. Patent claim costs included costs associated with several ongoing litigations and
claims. These costs are categorized either as patent litigation costs or
pre-litigation costs, amounting to $14 million and $8 million, respectively.
Impairment, restructuring charges and other related closure costs
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Impairment, restructuring charges and other related closure costs |
|
$ |
(128 |
) |
|
$ |
(76 |
) |
As a percentage of net revenues |
|
|
(1.5 |
%) |
|
|
(0.9 |
%) |
In 2005, we recorded impairment, restructuring charges and other related closure costs of $128
million. This expense was mainly composed of:
|
|
|
Our new head count restructuring plan announced in May 2005, which resulted in total
charges of $41 million mainly for employee termination benefits; the total cost of this
restructuring plan is |
15
|
|
estimated to be in a range of between $100 and $130 million and its completion is
expected by the second half of 2006; |
|
|
Our restructuring and reorganization activities initiated in the first quarter of
2005, which generated a total charge of impairment on goodwill and other intangible
assets of $63 million and $10 million for restructuring and other related closure
costs; this restructuring plan was fully completed in 2005; |
|
|
Our ongoing 2003 restructuring plan and related manufacturing initiatives generated
restructuring charges of approximately $13 million. As of December 31, 2005, we have
incurred $294 million of the total expected approximate $350 million in pre-tax charges
in connection with this restructuring plan, which was announced in October 2003. We
expect to incur the balance in the coming quarters, which is later than anticipated to
accommodate unforeseen qualification requirements of our customers, and to complete the
plan in the second half of 2006; and |
|
|
Our annual impairment review of goodwill and intangible assets that resulted in a
charge of $1 million. |
In 2004, we incurred $76 million of impairment, restructuring charges and other related
closure costs mainly related to our 2003 restructuring plan. See Note 18 to our Consolidated
Financial Statements.
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Variation |
|
|
|
(in millions) |
|
Operating income |
|
$ |
244 |
|
|
$ |
683 |
|
|
|
(64.3 |
%) |
As a percentage of net revenues |
|
|
2.7 |
% |
|
|
7.8 |
% |
|
|
|
|
The decrease in operating income was mainly caused by the negative impact of the ongoing
pricing pressure on our net revenues, the negative impact of the effective U.S. dollar exchange
rate, the increase in our total operating expenses as well as the increase of our impairment,
restructuring charges and other related closure costs. These negative factors were partially
compensated by overall improved efficiencies in our manufacturing activities and higher volume of
sales.
In 2005, our product segments were profitable with the exception of MPG. ASG registered a
decrease of its operating income from $530 million in 2004 to $355 million in 2005, as improved
product mix was insufficient to compensate for strong declines in selling prices and a decrease in
consumer segment sales. MLD operating income decreased from $413 million in 2004 to $271 million
in 2005 mainly due to continuing price pressure. In 2005, MPG registered an operating loss of $118
million, compared to an operating income of $42 million in 2004, mainly due to the significant
negative price impact on sales. All the groups were negatively impacted by the effective U.S.
dollar exchange rate and increased operating expenses.
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Interest income (expense), net |
|
$ |
34 |
|
|
$ |
(3 |
) |
The interest expense, net of $3 million for 2004 compared to interest income, net of $34
million in 2005, reflects a decrease in interest expense due to the repurchases of our 2010 Bonds
and an increase in interest receivable on our available cash due to rising interest rates on our
cash positions mainly denominated in U.S. dollars.
Loss on equity investments
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Loss on equity investments |
|
$ |
(3 |
) |
|
$ |
(4 |
) |
During 2005, we registered a loss, related to start-up costs, of $3 million mainly due to our
investment as a minority shareholder in our joint venture in China with Hynix Semiconductor Inc.
In 2004, we registered a loss of $2 million with respect to SuperH, Inc., the joint venture we
formed with Renesas Ltd., which has subsequently been terminated and a $2 million loss with respect
to UPEK Inc., created with Sofinnova Capital IV FCRP as a venture capital-funded purchase of our
TouchChip business.
16
Loss on extinguishment of convertible debt
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Loss on extinguishment of convertible debt |
|
|
|
|
|
$ |
(4 |
) |
We did not incur any loss on extinguishment of convertible debt in 2005. In 2004, a loss of
$4 million was recorded in relation to the repurchase of our 2010 Bonds.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Income tax expense |
|
$ |
(8 |
) |
|
$ |
(68 |
) |
In 2005, we had an income tax expense of $8 million, which included, in addition to the
current tax provision, the reversal of certain tax provisions in the first and second quarters of
2005 for about $10 million following the conclusion of an advanced pricing agreement for the period
2001 through 2007 with the United States Internal Revenue Service and an income tax benefit of $18
million in the United States pursuant to the application of the ETI rules. Excluding these items,
our effective tax rate for the full year 2005 was approximately 13%, which is the result of actual
tax charges in each jurisdiction for the total year, including tax benefit from restructuring
charges that occurred under jurisdictions whose tax rate is higher than our average tax rate and
that overall resulted in reducing our effective tax rate in 2005. In 2004, we had an income tax
charge of $68 million. Excluding extraordinary items, the effective tax rate in 2004 was
approximately 15%. 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
enjoy certain tax benefits in some countries; as such benefits may not be available in the future
due to changes within the local jurisdictions, our effective tax rate could increase in the coming
years.
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Variation |
|
|
|
(in millions) |
|
Net income |
|
$ |
266 |
|
|
$ |
601 |
|
|
|
(55.7 |
%) |
As a percentage of net revenues |
|
|
3.0 |
% |
|
|
6.9 |
% |
|
|
|
|
For 2005, we reported a net income of $266 million compared to a net income of $601 million
for 2004. Basic and diluted earnings per share for 2005 were $0.30 and $0.29, respectively,
compared to basic and diluted earnings of $0.67 and $0.65 per share for 2004. Net income in 2005
included $101 million in charges net of income taxes, or $0.11 per diluted share, related to
impairment, restructuring charges and other related closure costs while net income in 2004 included
$51 million in charges net of income taxes related to impairment restructuring charges and other
related closure costs, or $0.05 per diluted share.
2004 vs. 2003
In 2004, according to the most recently published industry data, the semiconductor industry
experienced a year-over-year revenue increase of approximately 28% for the TAM and of approximately
26% for our SAM.
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
% Variation |
|
|
|
(in millions) |
|
Net sales |
|
$ |
8,756 |
|
|
$ |
7,234 |
|
|
|
21.0 |
% |
Other revenues |
|
$ |
4 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
8,760 |
|
|
$ |
7,238 |
|
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
On a year-over-year basis, the increase in our 2004 net sales was primarily due to our higher
sales volumes and improved product mix, as our average selling prices declined by approximately 5%
due to the continuing broad based pricing pressure in the markets we serve. The increase in our
2004 net revenues was mainly driven by higher demand registered in all product groups and in
particular in MPG and MLD.
17
ASG net revenues increased by approximately 11% compared to 2003, primarily as a result of
improved product mix and higher volume of sales, while average selling prices declined. Revenues
increased mainly in Digital Consumer, Automotive and Computer Peripherals, while Telecom sales were
flat compared to 2003. MLD net revenues increased by approximately 29% on a year-over-year basis
due mainly to an increase in volumes and an improved product mix in almost all the product
families. MPG net revenues increased by approximately 46% compared to 2003 as a result of an
increase in volume and a more favorable product mix in all memory products, particularly in Flash.
All product groups experienced declining average sale prices during 2004, especially ASG. See
"Results of Operations above.
In 2004, by location of order shipment, approximately 42% of our revenues came from orders
shipped to Asia/Pacific; 32% to Europe; 14% to North America; 7% to Emerging Markets; and 5% to
Japan. The major increase was registered in the Emerging Markets driven by the strong economic
development in this area.
During 2004, we had several large customers, with the largest one, the Nokia Group of
companies, accounting for approximately 17.1% of our net revenues. Our top ten OEM customers
accounted for approximately 44% of our net revenues for the year.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
% Variation |
|
|
|
(in millions) |
|
Cost of sales |
|
$ |
(5,532 |
) |
|
$ |
(4,672 |
) |
|
|
(18.4 |
%) |
Gross profit. |
|
$ |
3,228 |
|
|
$ |
2,566 |
|
|
|
25.8 |
% |
Gross margin. |
|
|
36.8 |
% |
|
|
35.5 |
% |
|
|
|
|
Our gross margin increased from 35.5% in 2003 to 36.8% in 2004, lower than our initial
expectation on the year-end gross margin. This gross margin improvement is attributable to a
variety of factors, including higher sales volume and higher capacity utilization in most of our
factories, an overall improvement in our manufacturing efficiency, and a more favorable product
mix. These improving factors were partially offset by the negative impact of price decline and the
sharp year-over-year decline in the value of the U.S. dollar versus the major currencies in which
our manufacturing operations are located. The impact of changes in foreign exchange rates on gross
profit in 2004 compared to 2003 was estimated to be negative since the negative currency impact on
cost of sales generated by the weaker U.S. dollar versus the euro and other currencies was greater
than the favorable impact on net revenues. See Impact of Changes in Exchange Rates below.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
% Variation |
|
|
|
(in millions) |
|
Selling, general and administrative expenses |
|
$ |
(947 |
) |
|
$ |
(785 |
) |
|
|
(20.6 |
%) |
As a percentage of net revenues |
|
|
(10.8 |
)% |
|
|
(10.9 |
)% |
|
|
|
|
Selling expenses have increased in relation to our increased volume of sales and our enhanced
spending in marketing activities to broaden our customer base. Also, general and administrative
expenses increased mainly due to higher expenditures in information technology and to the expansion
of our activities. Selling, general and administrative expenses were also negatively impacted by
the decline of the U.S. dollar since large parts of these expenses are located in the euro zone.
Selling, general and administrative expenses have increased at the same pace as our net revenues;
as a percentage of net revenues, selling, general and administrative expenses were 10.8%, slightly
improving compared to 2003.
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
% Variation |
|
|
|
(in millions) |
|
Research and development expenses |
|
$ |
(1,532 |
) |
|
$ |
(1,238 |
) |
|
|
(23.8 |
%) |
As a percentage of net revenues |
|
|
(17.5 |
)% |
|
|
(17.1 |
)% |
|
|
|
|
The 2004 increase in research and development expenses resulted primarily from greater
spending on product design and technology for our core activities and from the impact of the
decline in value of the U.S. dollar since a large part of our research and development expenses is
incurred in the euro zone. We continued to invest heavily in research and development during 2004,
and we increased our research and development staff by approximately 1,000 people between December
2003 and December 2004. We continued to allocate
18
significant resources to strengthen our market position in key applications, reflecting our
commitment to customer service and continuing innovation. Our reported research and development
expenses are mainly in the areas of product design, technology and development and do not include
marketing design center costs, which are accounted for as selling expenses, or process engineering,
pre-production or process-transfer costs, which are accounted for as cost of sales.
Other income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Research and development funding |
|
$ |
84 |
|
|
$ |
76 |
|
Start-up costs |
|
|
(63 |
) |
|
|
(55 |
) |
Exchange gain, net |
|
|
33 |
|
|
|
5 |
|
Patent claim costs |
|
|
(37 |
) |
|
|
(29 |
) |
Gain on sale of non-current assets |
|
|
6 |
|
|
|
17 |
|
Other, net |
|
|
(13 |
) |
|
|
(18 |
) |
Other income and expenses, net |
|
$ |
10 |
|
|
$ |
(4 |
) |
As a percentage of net revenues |
|
|
0.2 |
% |
|
|
(0.1 |
%) |
Total Other income and expenses, net resulted in income of $10 million in 2004, compared to
an expense of $4 million in 2003. The detail of the various items is set forth above. Research
and development funding included income of some of our research and development projects, which
qualify as funding on the basis of contracts with local government agencies in locations where we
pursue our activities. The major amounts of funding were received in Italy and France. In 2004,
these fundings increased compared to 2003 in line with the increased number of funded projects and
expenditures. Start-up costs represent costs incurred in the start-up and testing of our new
manufacturing facilities. In 2004, start-up costs included the upgrading of our 200-mm fab in
Agrate (Italy), the start of our 300-mm pilot line in Crolles (France), the launch of our 150-mm
fab in Singapore and the build-up of our 300-mm fab in Catania (Italy). Exchange gain, net,
included the gain on foreign exchange transactions. Patent claim costs are composed of patent
pre-litigation costs and patent litigation costs. Patent litigation costs include legal and
attorney fees and payment of claims, and patent pre-litigation costs are composed of consultancy
fees and legal fees. Patent litigation costs are costs incurred in respect of pending litigation.
Patent pre-litigation costs are costs incurred to prepare for licensing discussions with third
parties with a view to concluding an agreement. Patent claim costs increased in 2004 in relation
to the costs associated with increased activity in connection with patent litigation. In 2004, we
settled our outstanding patent litigation with both Motorola, Inc. and Freescale Semiconductor,
Inc. See Item 8. Financial InformationLegal
Proceedings included in our Form 20-F, as may be updated
from time to time in our public filings, and Note 24 to our Consolidated
Financial Statements.
Impairment, restructuring charges and other related closure costs
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Impairment, restructuring charges and other related closure costs |
|
$ |
(76 |
) |
|
$ |
(205 |
) |
As a percentage of net revenues |
|
|
(0.9 |
)% |
|
|
(2.8 |
)% |
In 2004, we recorded a $76 million charge for impairment, restructuring charges and other
related closure costs, of which $8 million related to impairment of intangible assets and
investments, $33 million of restructuring charges related mainly to workforce termination benefits
and $35 million related to other closure costs. In 2004, the $76 million charge for impairment,
restructuring charges and other related closure costs included $60 million related to our 150-mm
restructuring plan, $4 million for our back-end restructuring, $8 million of impairment of
intangible assets and investments and $4 million for other miscellaneous costs. In 2003, we
recorded a charge of $205 million, mainly associated with the initial impairment charges recorded
for our 150-mm restructuring plan. Through the period ended December 31, 2004, we incurred $281
million of the expected $350 million in pre-tax charges associated with the restructuring plan that
was defined on October 22, 2003, and we expect to incur the remaining $69 million in the coming
quarters. We expect our manufacturing restructuring plan to be completed by the second half of
2006, later than previously anticipated. See Impairment, Restructuring Charges and Other
Related Closure Costs below.
19
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
% Variation |
|
|
|
(in millions) |
|
Operating income |
|
$ |
683 |
|
|
$ |
334 |
|
|
|
104.3 |
% |
As a percentage of net revenues |
|
|
7.8 |
% |
|
|
4.6 |
% |
|
|
|
|
The increase in operating income was mainly driven by the higher level of sales, improved
manufacturing performances and the decrease in impairment, restructuring charges and other related
closure costs incurred in 2004. The impact of changes in foreign exchange rates on operating
income in 2004 compared to 2003 was estimated to be substantially unfavorable because the decline
of the U.S. dollar versus the euro and other currencies negatively impacted cost of sales and
operating expenses, and these currency impacts on costs were significantly higher than the
favorable impact on net sales. See Impact of Changes in Exchange Rates below.
All major groups were profitable in 2004 despite the negative effect of the effective U.S.
dollar exchange rate, which impacted the profitability of all groups. The increase in operating
income was particularly significant in MLD and MPG, which in addition to the strong increase in
volume benefited from a more favorable pricing environment, while operating income decreased in ASG
mainly due to price pressure. The operating income for our ASG group decreased to $530 million
from $582 million in 2003. This deterioration of operating income was due to a variety of factors,
including a significant price decline due to the effect of strong competition in the markets we
serve, the negative impact of the effective U.S. dollar exchange rate and a significant increase in
research and development expenditures. Operating income for MLD increased to $413 million in 2004
from $192 million in 2003. As a result of a revenue increase generated by a higher volume of sales
and a more favorable product mix, as well as improved productivity in manufacturing, MPG registered
an operating income of $42 million compared to an operating loss of $65 million in 2003. See
Results of Operations above.
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Interest expense, net |
|
$ |
(3 |
) |
|
$ |
(52 |
) |
The decrease in interest expense in 2004 was mainly due to the repurchases of the 2010 Bonds
and the early redemption of the 2009 LYONs that occurred in 2004, which allowed us to save
approximately $50 million in interest charges. See Note 20 to our Consolidated Financial
Statements.
Loss on equity investments
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Loss on equity investments |
|
$ |
(4 |
) |
|
$ |
(1 |
) |
In 2004, the shareholders agreed to restructure SuperH, Inc., the joint venture we formed with
Hitachi, Ltd. (now Renesas), by transferring SuperHs intellectual property to each shareholder and
continuing any further development individually. Based upon estimates of forecasted cash
requirements of the joint venture, we paid and expensed an additional $2 million in 2004. The
increase in losses in 2004 also relates to a new company, UPEK Inc., created with Sofinnova Capital
IV FCPR as a venture capital-funded purchase of our TouchChip business for which we recorded losses
of approximately $2 million.
Loss on extinguishment of convertible debt
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Loss on extinguishment of convertible debt |
|
$ |
(4 |
) |
|
$ |
(39 |
) |
In 2004, we recorded a non-operating pre-tax charge of $4 million related to the repurchase of
approximately $472 million of the aggregate principal amount at maturity of our 2010 Bonds. This
charge included the price paid in excess of the bonds accreted value for an amount of
approximately $3 million and the write-off of approximately $1 million for the related bond
issuance costs. The decrease compared to 2003 was
20
because we paid a premium in repurchases of and wrote-off underwriter discounts related to our
2010 Bonds, most of which were done in 2003.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Income tax benefit (expense) |
|
$ |
(68 |
) |
|
$ |
14 |
|
In 2004, we had an income tax charge of $68 million, compared to an income tax benefit of $14
million in 2003 which benefited from the favorable impact of significant impairment, restructuring
charges and other related closure costs incurred during 2003 in higher tax rate jurisdictions.
Excluding impairment, restructuring charges and other related closure costs, our effective tax rate
in 2004 was 12.4% compared to 11.5% in 2003. Both 2004 and 2003 registered an income tax benefit
related to effects of change in enacted tax rate on deferred taxes and impact of final tax
assessments relating to prior years. Excluding impairment, restructuring charges and other related
closure costs and the one-time benefits of 2004, our effective tax rate would have been
approximately 15%. 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
enjoy certain tax benefits in some countries. These benefits may not be available in the future
due to changes within the local jurisdictions, and our effective tax rate could increase in the
coming years.
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
% Variation |
|
|
|
(in millions) |
|
Net income |
|
$ |
601 |
|
|
$ |
253 |
|
|
|
137.3 |
% |
As a percentage of net revenues |
|
|
6.9 |
% |
|
|
3.5 |
% |
|
|
|
|
For 2004, we reported net income of $601 million compared to net income of $253 million for
2003. Basic and diluted earnings per share for 2004 were $0.67 and $0.65, respectively, compared to
basic and diluted earnings per share of $0.29 and $0.27 for 2003. Net income in 2004 included $51
million in charges net of income taxes, or $0.05 per diluted share, related to impairment,
restructuring charges and other related closure costs, while net income in 2003 included $140
million in charges net of income taxes related to impairment, restructuring charges and other
related closure costs, or $0.15 per diluted share.
Quarterly Results of Operations
Certain quarterly financial information for the years 2005 and 2004 are set forth below. Such
information is derived from unaudited interim consolidated financial statements, prepared on a
basis consistent with the Consolidated Financial Statements, that include, in the opinion of
management, all normal adjustments necessary for a fair presentation 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 product 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 and technological change and
manufacturing. 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,
intellectual property 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 quarterly results
will not total to annual results due to rounding.
In the fourth quarter of 2005, based upon recently published data, the TAM and the SAM
increased approximately 9% and 13% year-over-year respectively and by approximately 2% and 3%
sequentially.
21
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
% Variation |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
Sequential |
|
|
Year-over-year |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,388 |
|
|
$ |
2,246 |
|
|
$ |
2,326 |
|
|
|
6.3 |
% |
|
|
2.6 |
% |
Other revenues |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
2,389 |
|
|
$ |
2,247 |
|
|
$ |
2,328 |
|
|
|
6.3 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-year comparison
The increase of our fourth quarter 2005 net revenues was mainly driven by significantly higher
sales volume that was largely offset by the negative impact of the decline in our average selling
prices. Due to ongoing pricing pressure in the semiconductor market, our average selling prices
decreased by approximately 8% during the fourth quarter of 2005 compared to the fourth quarter of
2004.
The trend in net revenues was different for each of our main product segments, since MPG
revenues increased, ASG net revenues decreased and MLD net revenues remained flat. MPG net
revenues increased by approximately 18% as a result of a significant increase in sales volume that
more than compensated for the average selling price decline; this increase is mainly due to Flash
products revenues that increased by 39%, and in particular NAND products. ASG net revenues
decreased by approximately 2% due to a significant price decline and to a lower sales volume that
more than offset the improved product mix. Net revenues for MLD remained flat mainly due to the
continuous pressure on prices that exceeded the benefits of higher sales volumes.
Net revenues by segment market increased in Telecom and Computer by approximately 14% and 7%,
respectively, and decreased in Consumer, Industrial and Other and Automotive by approximately 14%,
5% and 1%, respectively. The foregoing are estimates within a variance of 5% to 10% in absolute
dollar amounts of the relative weighting of each of our targeted market segments.
By location of order shipment, net revenues in Asia/Pacific and North America increased by
approximately 15% and 2% respectively while Emerging Markets net revenues remained basically flat.
In Japan as well as in Europe, net revenues decreased by approximately 27% and 8%, respectively.
Sequential comparison
The combined effect of the significant increase in sales volume and a more favorable product
mix resulted in an increase in our net revenues over third quarter 2005 despite the continuous
pricing pressure in the semiconductor market. During the fourth quarter of 2005, we registered a
further decline in our selling prices of approximately 3%.
All product segments registered an increase in their net revenues. Net revenues for ASG
increased by approximately 3% as a result of higher sales volumes partially offset by the average
selling price decline; the principal increases in net revenue were registered in Imaging and
Cellular Communication while Data Storage revenues slightly decreased. MLD net revenues increased
5% due to higher sales volumes in all of its product groups. MPG registered the most significant
increase in net revenues with 14% growth due to improved product mix and higher volumes; total
sales of Flash products increased by approximately 23% out of which sales of NAND products
registered the most significant increase.
Net revenues by segment market application increased by approximately 14% in Telecom, 4% both
in Consumer and Industrial and Other, and 2% in Automotive, while Computer remained approximately
flat. As a significant portion of our sales are made through distributors, the foregoing are
necessarily estimates within a variance of 5% to 10% in absolute dollar amounts of the relative
weighting of each of our targeted market segments.
By location of order shipment, net revenues increased in all regions; Asia/Pacific and Europe
each registered approximately 7% in revenue growth, America registered net revenues growth of 6%,
Emerging Markets registered net revenue growth of 3% and Japan registered net revenue growth of 1%
due to seasonal factors.
22
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
% Variation |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
Sequential |
|
|
Year-over-year |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
(1,517 |
) |
|
$ |
(1,481 |
) |
|
$ |
(1,476 |
) |
|
|
(2.4 |
%) |
|
|
(2.8 |
%) |
Gross profit. |
|
$ |
872 |
|
|
$ |
766 |
|
|
$ |
852 |
|
|
|
13.8 |
% |
|
|
2.3 |
% |
Gross margin. |
|
|
36.5 |
% |
|
|
34.1 |
% |
|
|
36.6 |
% |
|
|
|
|
|
|
|
|
On a year-over-year basis, our cost of sales increased due the combined effect of the increase
in sales volume, which was partially balanced by improved manufacturing efficiencies and the
positive impact of the effective U.S. dollar exchange rate, which was equivalent to 1.00 for
$1.230 in the fourth quarter of 2004 and $1.203 in the fourth quarter of 2005. Additionally, our
gross profit increased due to the combined effect of the increase in sales volume, improved
efficiencies and the positive impact of the effective U.S. dollar exchange rate which was partially
balanced by the decline in average selling prices. Our gross margin slightly decreased from 36.6%
to 36.5% due to the strong decline in our average selling prices, which was almost offset by the
improved manufacturing efficiencies and the positive impact of the effective U.S. dollar exchange
rate.
On a sequential basis, our gross profit increase was driven by higher sales volumes, improved
product mix and manufacturing performance as well as the positive impact of our U.S. dollar
effective exchange rate that were partially offset by the continuing downward pressure on our
selling prices. Due to these factors, our gross margin improved to 36.5%.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
% Variation |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
Sequential |
|
|
Year-over-year |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
$ |
(259 |
) |
|
$ |
(248 |
) |
|
$ |
(245 |
) |
|
|
(4.6 |
%) |
|
|
(6.0 |
%) |
As percentage of net revenues |
|
|
(10.9 |
%) |
|
|
(11.0 |
%) |
|
|
(10.5 |
%) |
|
|
|
|
|
|
|
|
On a year-over-year basis, our selling, general and administrative expenses increased mainly
due a one time charge of $4 million related to our new pension scheme for executives and to the
share-based compensation expense of $5 million as well as higher expenditures in our
infrastructures. This resulted in an increase of the ratio of 10.9% as percentage of net revenues
compared to 10.5% in the fourth quarter of 2004.
Our selling, general and administrative expenses increased sequentially mainly due a one time
charge of $4 million related to our new pension scheme for executives and to the share-based
compensation expense of $5 million. However, a faster growth of our net revenues compared to our
expenses and a more favorable effective U.S. dollar exchange rate led to an improvement of the
fourth quarter 2005 ratio of 10.9% as a percentage of net revenues compared to 11.0% for the third
quarter of 2005.
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
% Variation |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
Sequential |
|
|
Year-over-year |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
$ |
(402 |
) |
|
$ |
(401 |
) |
|
$ |
(402 |
) |
|
|
(0.1 |
%) |
|
|
0.1 |
% |
As percentage of net revenues |
|
|
(16.8 |
%) |
|
|
(17.9 |
%) |
|
|
(17.3 |
%) |
|
|
|
|
|
|
|
|
On a year-over-year basis as well as on a sequential basis, our research and development
expenses remained flat. Our research and development expenses of the fourth quarter 2005 included
$3 million in share-based compensation costs for our employees. Excluding these items, our research
and development expenses decreased sequentially mainly due to the seasonal effect and the positive
impact of the U.S. dollar exchange rate. The foregoing impacts translated into a sequential
decrease in research and development expenses as a percentage of net revenues.
23
Other income and expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct. 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Research and development funding |
|
$ |
29 |
|
|
$ |
20 |
|
|
$ |
47 |
|
Start-up costs |
|
|
(10 |
) |
|
|
(12 |
) |
|
|
(18 |
) |
Exchange gain (loss) net |
|
|
(20 |
) |
|
|
(5 |
) |
|
|
14 |
|
Patent claim costs |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(16 |
) |
Gain on sale of non-current assets |
|
|
8 |
|
|
|
(2 |
) |
|
|
|
|
Other, net |
|
|
1 |
|
|
|
2 |
|
|
|
(4 |
) |
Other income and expenses, net |
|
|
2 |
|
|
|
(3 |
) |
|
|
23 |
|
As a percentage of net revenues |
|
|
0.1 |
% |
|
|
(0.1 |
%) |
|
|
1.0 |
% |
Other income and expenses, net results include miscellaneous items such as research and
development funding, gains on sale of non-current assets and as expenses it mainly includes
start-up costs, net exchange losses and patent claim costs. In the fourth quarter 2005, research
and development funding income was associated to our research and development projects, which
qualify as funding on the basis of contracts with local government agencies in locations where we
pursue our activities. The net gain on sale of non-current assets of $8 million is the result of
the gains on sales of real estate properties in India and of certain equipment in other countries.
Start-up costs were related to our conversion to 200-mm fab in Agrate (Italy), to the build-up of
the 300-mm fab in Catania (Italy) and to the 150-mm fab expansion in Singapore. The net exchange
loss related to transactions not designated as a cash flow hedge denominated in foreign currencies.
Patent claim costs included costs associated with several ongoing litigations and claims; these
costs are categorized either as patent litigation costs or pre-litigation costs, amounting to $3
million and $3 million, respectively.
Impairment, restructuring charges and other related closure costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Impairment, restructuring
charges and other related
closure costs |
|
$ |
(16 |
) |
|
$ |
(12 |
) |
|
$ |
(18 |
) |
As a percentage of net revenues |
|
|
(0.7 |
%) |
|
|
(0.5 |
)% |
|
|
(0.8 |
%) |
Our impairment, restructuring charges and other related closure costs of $16 million for the
fourth quarter of 2005 were composed of:
|
|
|
Our new headcount restructuring plan announced in May 2005, which resulted in
charges of $17 million mainly for employee termination benefits; |
|
|
|
|
Our restructuring and reorganization activities initiated in the first quarter of
2005, which generated an additional charge of $1 million; and |
|
|
|
|
Our ongoing 2003 restructuring plan and related manufacturing initiatives generated
a positive impact of approximately $2 million as a result of a reversal of a provision
pursuant to our decision made in the fourth quarter 2005 to keep a back-end production
line in France. |
See Note 18 to our Consolidated Financial Statements.
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Operating income |
|
$ |
197 |
|
|
$ |
102 |
|
|
$ |
210 |
|
In percentage of net revenues |
|
|
8.2 |
% |
|
|
4.5 |
% |
|
|
9.0 |
% |
Our operating income decreased on a year-over-year basis mainly due the negative impact of the
ongoing pricing pressure on our net revenues and the increase in our total operating expenses
mainly related to higher selling, general and administrative expenses and lower other incomes.
These negative factors were
24
partially compensated by overall improved efficiencies in our
manufacturing activities and higher volume of sales.
With respect to our product segments, on a year-over-year basis, only MPG registered an
improvement in its operating income. ASG registered a decrease from $157 million compared to its
operating income of $137 million in the fourth quarter of 2004, due to the negative impact of
ongoing pricing pressure, lower sales and the negative impact of the effective U.S. dollar exchange
rate. MLD operating income decreased from $105 million in the fourth quarter of 2004 to $67
million in the fourth quarter of 2005 due to continuing price pressure and increased operating
expenses, while sales remained flat. In the fourth quarter of 2005, MPG registered an operating
income of $27 million, compared to an operating income of $4 million in the fourth quarter of 2004,
mainly due to significant increases in revenues and improved product mix.
On a sequential basis, the main contributors to the increase of our operating income, in
addition to currency benefits, were higher sales volumes, improved product mix and manufacturing
efficiencies that more than compensated for the further decline in our selling prices.
On a sequential basis, with respect to our three product segments, ASG reached a double-digit
operating margin, MLD maintained a nearly 14% margin level sequentially notwithstanding tougher
market conditions and as expected MPG generated an operating profit. ASG improved its operating
income in the fourth quarter of 2005 to $137 million compared to $81 million in the third quarter
2005; ASG profitability benefited from higher sales and better product mix. MPG was able to move
from its operating loss of $17 million in the third quarter of 2005 to an operating income of $27
million mainly due to higher sales, better product mix and improved manufacturing performances.
MLD operating income in the fourth quarter 2005 was $67 million compared to $68 million in the
third quarter of 2005; despite tougher pricing conditions, MLD maintained its profitability by
achieving higher sales.
Interest income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Interest income, net |
|
$ |
11 |
|
|
$ |
8 |
|
|
$ |
5 |
|
Our interest income increased both year-over-year and sequentially. The year-over-year
improvement reflects the decrease in interest expense due to our repurchases of our 2010 Bonds. In
addition, the interest rate on our cash and cash equivalents has improved from approximately 2.3%
at the end of the fourth quarter of 2004 to 4.1% at the end of the fourth quarter 2005.
Loss on equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Loss on equity investments |
|
|
|
|
|
$ |
(2 |
) |
|
$ |
(2 |
) |
We did not record any major variation in the fourth quarter of 2005 in relation to our
investments. Our current major investment is as a minority shareholder in our joint venture in
China with Hynix Semiconductor Inc., which is in a start-up phase. In the fourth quarter of 2004,
we recorded a $2 million charge corresponding to the loss in the equity value of our shareholding
in UPEK Inc.
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Income tax expense |
|
$ |
(25 |
) |
|
$ |
(18 |
) |
|
$ |
(26 |
) |
During the fourth quarter of 2005, we incurred an income tax expense of $25 million as the
result of actual tax charges in each jurisdiction for the total year.
Our effective tax rate was 12.1% in the fourth quarter of 2005, compared to 17.0% in the third
quarter of 2005 and compared to 12.3% in the fourth quarter of 2004. The effective tax rate for
the fourth quarter of
25
2005 was prorated on the basis of actual tax charges in each jurisdiction.
Our tax rate is variable and depends on changes in the level of operating income 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 enjoy certain tax benefits in some countries; as 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.
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Dec 31, 2005 |
|
|
Oct 1, 2005 |
|
|
Dec 31, 2004 |
|
|
|
(in millions) |
|
Net income |
|
$ |
183 |
|
|
$ |
89 |
|
|
$ |
187 |
|
As percentage of net revenues |
|
|
7.7 |
% |
|
|
3.9 |
% |
|
|
8.0 |
% |
For the fourth quarter of 2005, we reported net income of $183 million, significantly
improving compared to $89 million in the third quarter of 2005, and basically flat compared to net
income of $187 million in the fourth quarter of 2004, however declining to 7.7% of the net revenues
on a year-over-year basis. Basic and diluted earnings per share for the fourth quarter of 2005
were both $0.20, comparable to the fourth quarter of 2004 with $0.21 and $0.20 respectively, and
improved compared to the basic and diluted earnings of $0.10 per share for the third quarter of
2005.
Impact of Changes in Exchange Rates
Our results of operations and financial condition can be significantly affected by material
changes in exchange rates between the U.S. dollar and other currencies where we maintain our
operations, particularly the euro, the Japanese yen and other Asian currencies.
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 certain of our
products (primarily dedicated products sold in Europe and Japan) that are quoted in currencies
other than the U.S. dollar are directly affected by fluctuations in the value of the U.S. dollar.
As a result of the 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 changes in currency rates and adjustments in the
local currency equivalent 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 research and development expenses, are largely incurred in the
currency of the jurisdictions in which our operations are located, given that most of our
operations are located in the euro zone or other currency areas: as such they tend to increase when
translated in U.S. dollars in case of dollar rate weakening or to reduce when the dollar rate is
strengthening.
Because our reporting currency is the U.S. dollar, currency exchange rate fluctuations affect
our results of operations because we receive a limited part of our revenues, and more importantly,
incur the majority of our costs, in currencies other than the U.S. dollar. In 2005, the U.S.
dollar declined in value, particularly against the euro, causing us to report higher expenses and
negatively impacting both our gross margin and operating income. Our Consolidated Statement of
Income for the year ended December 31, 2005 includes income and expense items translated at the
average 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 raw 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 income statement, in particular with respect to a portion
of cost of goods sold, most of the research and development expenses and certain selling and
general and administrative expenses, located in the euro zone. Our effective average rate of the
euro to the U.S. dollar was $1.28 for 1.00 in 2005 and it was $1.23 for 1.00 in 2004. These
effective exchange rates reflect the actual exchange rates combined with the impact of hedging
contracts matured in the period.
As of December 31, 2005, the outstanding hedged amounts to cover manufacturing costs were 380
million and to cover operating expenses were 310 million, at an average rate of about $1.205 and
$1.20 per euro respectively, maturing over the period from January 2006 to June 2006. As of
December 31, 2005, these hedging contracts represented a deferred loss of $13 million after tax,
registered in other comprehensive income
in shareholders equity, compared to a deferred gain of $59 million as of December 31, 2004.
Our hedging policy is not intended to cover the full exposure. In addition, in order to mitigate
potential exchange rate risks on our commercial transactions, we purchased and sold 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.
For full details of
outstanding contracts and their fair values, see Item 11.
Quantitative and Qualitative Disclosures About Market Risk
included in our Form 20-F, as may be updated from time to time
in our public filings. 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.
26
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 the value of the U.S. dollar, therefore if the value of
the U.S. dollar increases, we may record losses in connection with the loss in value of the
remaining hedging instruments at the time. As a result of losses incurred in respect of hedging
contracts in 2005, we recorded total charges of $81 million, consisting of charges of $51 million
to cost of sales, $23 million to research and development expenses, and $7 million to selling,
general and administrative expenses, while in 2004, we registered a total income of $16 million.
As the result of the gains or losses on exchange on all the other transactions, in 2005, we
registered a net loss of $16 million compared to a net gain of $33 million in 2004.
Assets and liabilities of subsidiaries are, for consolidation purposes, translated into U.S.
dollars at the period-end exchange rate. Income and expenses are translated at the average exchange
rate for the period. The balance sheet impact of such translation adjustments has been, and may be
expected to be, significant from period to period since a large part of our assets and liabilities
are accounted for in euro as their 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 shareholders equity. At December 31,
2005, our outstanding indebtedness was denominated principally in U.S. dollars and, to a limited
extent, in euros and in Singapore dollars.
Effective January 1, 2006, we have changed the organization of our Corporate Treasury and,
simultaneously, we have created a Treasury Committee to oversee our investment and foreign exchange
operations.
For a more detailed discussion, see Item 3. Key InformationRisk FactorsRisks Related to
Our OperationsOur financial results can be adversely affected by fluctuations in exchange rates,
principally in the value of the U.S. dollar as set forth in our
Form 20-F.
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 are placed with financial institutions rated A
or higher. Marginal amounts are held in other currencies. See Item 11. Quantitative and
Qualitative Disclosures About Market Risk included in our
Form 20-F, as may be updated from time to time in our public
filings.
At December 31, 2005, cash and cash equivalents totaled $2,027 million, compared to $1,950
million as of December 31, 2004 and $2,998 million as of December 31, 2003. During 2005, we
invested in credit-linked deposits issued by several primary banks in order to maximize the return
on available cash. The principal was fully repaid to us in December 2005. We did not have
marketable securities at December 31, 2005 as well as at December 31, 2004. Changes in the
instruments adopted to invest our liquidity in future periods may occur and may significantly
affect our interest income/(expense), net.
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.
Net
cash from operating activities. As in prior periods, the major source of cash during 2005
was cash provided by operating activities. Our net cash from operating activities totaled $1,798
million in 2005, decreasing compared to $2,342 million in 2004 and $1,920 million in 2003.
27
Changes in our operating assets and liabilities resulted in net cash used of $472 million in
2005, compared to net cash used of $142 million in 2004. The main variations were due to the net
cash used for inventory, and more cash was used for trade payables and for other assets and
liabilities.
Net
cash used in investing activities. Net cash used in investing activities was $1,528
million in 2005, compared to $2,134 million in 2004 and $1,439 million in 2003. Payments for
purchases of tangible assets were the main utilization of cash, amounting to $1,441 million for
2005, a significant decrease over the $2,050 million in 2004. The 2005 payments are net of $82
million proceeds from equipment resale. In 2005, cash used for investments in intangible assets
and financial assets was $49 million and capital contributions to equity investments was $38
million. There were no payments for acquisitions in 2005 compared to $3 million paid in 2004
relating to the portion of Synad Ltd. cash consideration.
Capital expenditures for 2005 were principally allocated to:
|
|
|
the capacity expansion of our 200-mm and 150-mm front-end facilities in Singapore; |
|
|
|
|
the conversion to 200-mm of our front-end facility in Agrate (Italy); |
|
|
|
|
the capacity expansion of our back-end plants in Muar (Malaysia), Shenzhen (China),
Toa Payoh (Singapore) and Malta; |
|
|
|
|
the expansion of our 200-mm front-end facility in Phoenix (Arizona); |
|
|
|
|
the capacity expansion of our 200-mm front-end facility in Rousset (France); |
|
|
|
|
the completion of building and continuation of facilities for our 300-mm front-end
plant in Catania (Italy); |
|
|
|
|
the expansion of an 150-mm front-end and a 200-mm pilot line in Tours (France); and |
|
|
|
|
the expansion of the 300-mm front-end joint project with Philips Semiconductor
International B.V. and Freescale Semiconductor Inc., in Crolles2 (France). |
Capital expenditures for 2004 were principally allocated to:
|
|
|
the expansion of our 200-mm and 150-mm front-end facilities in Singapore; |
|
|
|
|
the expansion of our 200-mm front-end facility in Rousset (France); |
|
|
|
|
the facilitization of our 300-mm facility in Catania (Italy); |
|
|
|
|
the upgrading of our front-end and research and development pilot line in Agrate (Italy); |
|
|
|
|
the upgrading of our 200-mm front-end facility in Catania (Italy); |
|
|
|
|
the expansion and upgrading of our front-end facilities 200-mm in Phoenix and 150-mm
in Carrollton (United States); and |
|
|
|
|
the capacity expansion in our back-end plants of Muar (Malaysia), Toa Payoh
(Singapore), Shenzen (China) and Malta. |
Capital expenditures for 2003 were principally allocated to:
|
|
|
the expansion of our 200-mm and 150-mm front-end facilities in Singapore; |
|
|
|
|
the upgrading of our 200-mm front-end plant in Agrate (Italy); |
|
|
|
|
the expansion of our 200-mm front-end facility in Rousset (France); |
|
|
|
|
the expansion of our 300-mm facility in Crolles2 (France); |
|
|
|
|
the facilitization of our 300-mm facility in Catania (Italy); and |
|
|
|
|
the expansion of our back-end facilities in Muar (Malaysia). |
Net
operating cash flow. We define net operating cash flow as net cash from operating
activities minus net cash used in investing activities, excluding payment for purchases of and
proceeds from the sale of marketable securities. We believe net operating cash flow provides useful information for
investors because it measures our capacity to generate cash from our operating activities to
sustain our investments for our operating activities. Net operating 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 net operating cash flow may
differ from definitions used by other companies. Net operating cash flow is determined as follows
from our Consolidated Statements of Cash Flow:
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Net cash from operating activities |
|
|
1,798 |
|
|
$ |
2,342 |
|
|
$ |
1,920 |
|
Net cash used in investing activities. |
|
|
(1,528 |
) |
|
|
(2,134 |
) |
|
|
(1,439 |
) |
Payment for purchase and proceeds
from sale of marketable securities,
net |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Net operating cash flow |
|
$ |
270 |
|
|
$ |
208 |
|
|
$ |
477 |
|
|
|
|
|
|
|
|
|
|
|
Due to the capacity of our operating activities to generate cash in excess of our investing
activities, we generated net operating cash flow of $270 million in 2005, compared to net operating
cash flow of $208 million in 2004. This resulted mainly from the decrease in net cash used in
investing activities. In 2003, we generated a net operating cash flow of $477 million.
Net cash used in financing activities.?Net cash used in financing activities was $178 million
in 2005 compared to $1,271 million in 2004. The major item of the cash used in 2005 was the
payment of the dividends amounting to $107 million, equivalent to the amount paid in 2004 while the
amount paid in 2003 was $71 million. The major item of the cash used for financing activities in
2004 was the repayment of long-term debt for a total amount of $1,288 million, mainly consisting of
the redemption of all outstanding 2009 LYONs for an amount paid of $813 million and of the
repurchase of all outstanding 2010 Bonds for an amount paid of $375 million. These bonds were
cancelled. During 2003, we received proceeds from issuance of long-term debt of $1,398 million,
mainly related to the offering of our 2013 Bonds, and we repaid $1,432 million mainly related to
repurchases of our 2010 Bonds.
Capital Resources
Net financial position
We define our net financial position as the difference between our total cash position (cash
and cash equivalents) net of total financial debt (bank overdrafts, current portion of long-term
debt and long-term debt). Net financial position is not a U.S. GAAP measure. We believe our net
financial position 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 and cash equivalents and the total level of our financial indebtedness. The net
financial position is determined as follows from our Consolidated Balance Sheets as at December 31,
2005, December 31, 2004 and December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions) |
|
Cash and cash equivalents |
|
$ |
2,027 |
|
|
$ |
1,950 |
|
|
$ |
2,998 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash position |
|
|
2,027 |
|
|
|
1,950 |
|
|
|
2,998 |
|
Bank overdrafts |
|
|
(11 |
) |
|
|
(58 |
) |
|
|
(45 |
) |
Current portion of long-term debt |
|
|
(1,522 |
) |
|
|
(133 |
) |
|
|
(106 |
) |
Long-term debt |
|
|
(269 |
) |
|
|
(1,767 |
) |
|
|
(2,944 |
) |
|
|
|
|
|
|
|
|
|
|
Total financial debt |
|
|
(1,802 |
) |
|
|
(1,958 |
) |
|
|
(3,095 |
) |
|
|
|
|
|
|
|
|
|
|
Net financial position |
|
$ |
225 |
|
|
$ |
(8 |
) |
|
$ |
(97 |
) |
|
|
|
|
|
|
|
|
|
|
The net financial position (cash and cash equivalents net of total financial debt) as of
December 31, 2005 moved to a positive net financial cash position of $225 million, representing an
improvement from the net financial debt position of $8 million as of December 31, 2004. The improvement of the net
financial position mainly results from favorable net operating cash flow generated during 2005.
29
At December 31, 2005, the aggregate amount of our long-term debt was approximately $1,791
million, including $1,379 million of 2013 Bonds. At the holders option, any outstanding 2013 Bond
may be redeemed for cash on August 5, 2006, 2008 or 2010 for a total aggregate amount payable by us
of $1,379 million on August 5, 2006 or $1,365 million on August 5, 2008 or $1,352 million on August
5, 2010. As a result of this holders redemption option on August 5, 2006, the outstanding amount
of 2013 Bonds was classified in the consolidated balance sheet as current portion of long-term
debt. Additionally, the aggregate amount of our short-term credit facilities was approximately
$1,957 million, under which approximately $11 million of indebtedness was outstanding. Our
long-term financing instruments contain standard covenants, but do not impose minimum financial
ratios or similar obligations on us. See Note 14 to our Consolidated Financial Statements.
As of December 31, 2005, 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 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
|
(in millions) |
|
Long-term debt
(including current
portion) |
|
|
1,791 |
|
|
|
1,522 |
|
|
|
119 |
|
|
|
58 |
|
|
|
30 |
|
|
|
22 |
|
|
|
40 |
|
Average interest rate |
|
|
0.25 |
% |
|
|
(0.19 |
)% |
|
|
3.14 |
% |
|
|
3.58 |
% |
|
|
2.49 |
% |
|
|
2.09 |
% |
|
|
1.16 |
% |
During 2004, we redeemed all the outstanding 2009 LYONs for a total amount of $813 million in
cash.
In 2003, we repurchased approximately $1,674 million aggregate principal amount at maturity of
our 2010 Bonds, for a total cash amount of approximately $1,304 million, representing approximately
78% of the total amount initially issued. In 2004, we repurchased all of our remaining outstanding
2010 Bonds for a total cash amount paid of $375 million. The repurchased 2010 Bonds were
cancelled.
As of the end of 2005, we have the following credit ratings on our remaining convertible debt:
|
|
|
|
|
|
|
Moodys Investors |
|
Standard & |
|
|
Service |
|
Poors |
Zero Coupon Senior Convertible Bonds due 2013
|
|
A3
|
|
A |
On October 11, 2005, Moodys issued a credit report confirming the above rating and updating
the outlook from stable to negative.
In the event of a downgrade of these ratings, we believe we would continue to have access to
sufficient capital resources.
Zero Coupon Senior Convertible Bonds due 2016
On February 15, 2006, we launched an offering of senior zero-coupon
convertible bonds totalling gross proceeds of $928 million bearing an interest rate of 1.5%. We have granted an option to increase the
issue size by up to 5% for a period of 30 days from settlement. Assuming full exercise of this option, gross proceeds from the offering
will be up to $974 million. The notes are convertible into a maximum of 42 million of our underlying common shares, including the increase option. The
conversion price is $23.19, based on the closing price of common shares on New York Stock Exchange on February 14, 2006, plus a 30% premium.
30
Contractual Obligations, Commercial Commitments and Contingencies
Our contractual obligations, commercial commitments and contingencies as of December 31, 2005,
and for each of the five years to come and thereafter, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
|
(in millions) |
|
Capital leases(2) |
|
$ |
26 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
1 |
|
Operating leases(1) |
|
|
271 |
|
|
|
50 |
|
|
|
37 |
|
|
|
32 |
|
|
|
28 |
|
|
|
22 |
|
|
|
102 |
|
Purchase obligations(1) |
|
|
1,053 |
|
|
|
940 |
|
|
|
79 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
of which: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchase |
|
|
576 |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry purchase |
|
|
260 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, technology licenses
and design |
|
|
217 |
|
|
|
104 |
|
|
|
79 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Venture Agreement with
Hynix Semiconductor
Inc.(1)(4) |
|
|
212 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations(1) |
|
|
112 |
|
|
|
59 |
|
|
|
44 |
|
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
Long-term debt obligations
(including current
portion)(2)(3) |
|
|
1,791 |
|
|
|
1,522 |
|
|
|
119 |
|
|
|
58 |
|
|
|
30 |
|
|
|
22 |
|
|
|
40 |
|
Pension obligations(2). |
|
|
270 |
|
|
|
29 |
|
|
|
20 |
|
|
|
22 |
|
|
|
26 |
|
|
|
28 |
|
|
|
145 |
|
Other non-current
liabilities(2) |
|
|
16 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Total |
|
$ |
3,751 |
|
|
$ |
2,820 |
|
|
$ |
306 |
|
|
$ |
157 |
|
|
$ |
93 |
|
|
$ |
81 |
|
|
$ |
294 |
|
|
|
|
(1) |
|
Items not reflected on the Consolidated Balance Sheet at December 31, 2005. |
|
(2) |
|
Items reflected on Consolidated Balance Sheet at December 31, 2005. |
|
(3) |
|
See Note 14 to our Consolidated Financial Statements at December 31, 2005 for additional
information related to
long-term debt and redeemable convertible securities, in particular, in respect to the
noteholders option to put our convertible bonds for earlier redemption in August 2006. |
|
(4) |
|
These amounts correspond to our capital commitments to the joint venture, but not the
additional $250 million in loans that we have committed to provide. |
Operating leases are mainly related to building leases. The amount disclosed is composed
of minimum payments for future leases from 2006 to 2010 and thereafter. We lease land, buildings,
plants and equipment under operating leases that expire at various dates under non-cancelable lease
agreements.
Purchase obligations are primarily comprised of purchase commitments for equipment, for
outsourced foundry wafers and for software licenses.
We signed a joint venture agreement with Hynix Semiconductor Inc., on November 16, 2004 to
build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. As the
business license for the joint venture was obtained in April 2005, we paid $38 million of capital
contributions up to December 31, 2005. We expect to fulfill our remaining financial obligations up
to our total contribution of $250 million in 2006. In addition, we are committed to grant
long-term financing for $250 million to the new joint venture guaranteed by subordinated collateral
on the joint ventures assets. Furthermore, we have contingent future loading obligations to
purchase products from the joint venture, which have not been included in the table above because,
at this stage, the amounts remain contingent and non-quantifiable.
Long-term debt obligations mainly consist of bank loans and convertible debt issued by us that
is totally or partially redeemable for cash at the option of the holder. They include maximum
future amounts that may be redeemable for cash at the option of the holder, at fixed prices. At
the holders option, any outstanding 2013 Bond may be redeemed for cash on August 5, 2006, 2008 or
2010 for a total aggregate amount payable by us of $1,379 million on August 5, 2006 or $1,365
million on August 5, 2008 or $1,352 million on August 5, 2010. The conversion ratio is $985.09 per
$1,000 principal amount of 2013 Bonds at August 5, 2006, $975.28 at August 5, 2008 and $965.56 at
August 5, 2010, subject to adjustments in certain circumstances. As a result of this holders
redemption option in August 2006, the outstanding amount of 2013 Bonds was classified in the
consolidated balance sheet as current portion of long-term debt at December 31, 2005.
Pension obligations amounting to $270 million consist of our best estimates of the amounts
that will be payable by us for the retirement plans based on the assumption that our employees will
work for us until they reach the age of retirement. The final actual amount to be paid and related timings of such
payments may vary significantly due to early retirements or terminations. This amount does not
include the additional pension plan for a total of $11 million granted by our Supervisory Board to
our former CEO, to a limited number of retired senior executives in the first quarter of 2005 and
to our executive management in the fourth quarter of 2005, which was recorded as current
liabilities as we are intending to transfer this obligation to an insurance company. We accrued
the estimated premiums to expenses during 2005.
31
Other non-current liabilities include future obligations related to our restructuring plans
and miscellaneous contractual obligations.
Other obligations primarily relate to contractual firm commitments with respect to cooperation
agreements.
Other than those described above, there are no material off-balance sheet obligations,
contractual obligations or other commitments.
Financial Outlook
We currently expect that capital spending for 2006 will be approximately $1.8 billion, an
increase compared to the $1.4 billion spent in 2005. The major part of our capital spending will
be dedicated to the leading edge technology fabs by increasing capacity in the 300-mm and for
saturation of the existing 200-mm. We have the flexibility to modulate our investments up or down
in response to changes in market conditions. At December 31, 2005, we had $576 million in
outstanding commitments for equipment purchases for 2006.
The most significant of our 2006 capital expenditure projects are expected to be: for the
front-end facilities, (i) the expansion of the 300-mm front-end joint project with Philips
Semiconductor International B.V. and Freescale Semiconductor Inc., in Crolles 2 (France); (ii) the
preliminary equipment installation in our 300-mm plant in Catania (Italy); (iii) the upgrading to
finer geometry technologies for our 200-mm plant in Rousset (France); (iv) the upgrading of our
200-mm plant in Singapore; (v) the upgrading of our 200-mm fab and pilot line in Agrate (Italy);
and (vi) for the back-end facilities, the capital expenditures will be mainly dedicated to the
capacity expansion in our plants in Shenzhen (China), Bouskoura (Morocco) and Muar (Malaysia). We
will continue to monitor our level of capital spending by taking into consideration factors such as
trends in the semiconductor industry, capacity utilization and announced additions. We expect to
have significant capital requirements in the coming years and in addition we intend to continue to
devote a substantial portion of our net revenues to research and development. We plan to fund our
capital requirements from cash provided by operating activities, available funds and available
support from third parties (including state support), and may have recourse to borrowings under
available credit lines and, to the extent necessary or attractive based on market conditions
prevailing at the time, the issuing of debt, convertible bonds or additional equity securities. A
substantial deterioration of our economic results and consequently of our profitability could
generate a deterioration of the cash generated by our operating activities. Therefore, there can
be no assurance that, in future periods, we will generate the same level of cash as in the previous
years to fund our capital expenditures for expansion plans, our working capital requirements,
research and development and industrialization costs.
The holders of our 2013 Bonds may require us to redeem them on August 5, 2006 at a price of
$985.09 per one thousand dollar face value. The conversion ratio is $985.09 per $1,000 principal
amount of 2013 Bonds at August 5, 2006, $975.28 at August 5, 2008 and $965.56 at August 5, 2010,
subject to adjustments in certain circumstances. The total redeemable amount will be equivalent to
$1,379 million on August 5, 2006. There can be no assurance that additional financing will be
available as necessary, or that any such financing, if available, will be on terms acceptable to
us. However, we believe that our ability to meet debt obligations is fully backed by our existing
liquidity and may be complemented by our cash flow plan and/or by accessing equity and/or debt
capital markets.
Impact of Recently Issued U.S. Accounting Standards
In November 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (FAS 151).
The Statement requires abnormal amounts of idle capacity and spoilage costs to be excluded from the
cost of inventory and expensed when incurred. The provisions of FAS 151 are applicable
prospectively to inventory costs incurred during fiscal years beginning after June 15, 2005. We
adopted early FAS 151 in 2005. As costs associated with underutilization of manufacturing
facilities have historically been charged directly to cost of sales, FAS 151 has not had a material
effect on our financial position or results of operations.
32
In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29
(FAS 153). This Statement amends Opinion No. 29 to eliminate the exception to the basic fair
value measurement principle for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of transactions that do not have commercial substance, that
is, transactions that are not expected to result in significant changes in the cash flows of the
reporting entity. The Statement is effective prospectively for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005, with early application permitted. We
early adopted FAS 153 in 2005 but have not had any material nonmonetary exchanges of assets since
FAS 153 was published. Therefore, FAS 153 has not had a material effect on our financial position
or results of operations.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment and the related FASB Staff
Positions (collectively FAS 123R). This Statement revises FASB Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. FAS 123R requires a public entity to measure
the cost of share-based service awards based on the grant-date fair value of the award. That cost
will be 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. The grant-date
fair value of employee share options and similar instruments will be estimated using option-pricing
models adjusted for the unique characteristics of those instruments. FAS 123R also requires more
extensive disclosures than the previous standards relating to the nature of share-based payment
transactions, compensation cost and cash flow effects. On April 14, 2005, the Securities and
Exchange Commission amended the effective date of FAS 123R; the Statement now applies to all awards
granted and to all unvested awards modified, repurchased, or cancelled during the first annual
reporting period beginning after June 15, 2005. We are required to adopt FAS 123R in the first
quarter of 2006 or earlier, and we elected an early adoption in the fourth quarter of 2005 using
the modified prospective application method. In 2005, we redefined our equity-based compensation
strategy in order to maintain a more effective policy in motivating and retaining key employees, by
no longer granting options but rather issuing non-vested stock. As part of this revised stock
compensation policy, we decided in July 2005 to accelerate the vesting period of outstanding
unvested stock options, following authorization from our shareholders at the annual general meeting
held on March 18, 2005. As a result, options equivalent to approximately 32 million shares became
exercisable immediately. Based on the market value of our shares, all these options had no
intrinsic economic value at the date of acceleration. Furthermore, following the authorization of
our Shareholders meetings of March 2005, we have decided a new plan in the fourth quarter 2005 by
granting non-vested stock awards to senior executives, selected employees and members of the
Supervisory Board equivalent to approximately 4.1 million of shares. Part of our treasury shares
was designated to be used for these new share-based remuneration programs. According to FAS 123R,
we registered a total charge of $9 million in our income statement. The full impact on our
financial position and results of operations is illustrated in the information presented in Note
15.6 to our Consolidated Financial Statements Non-vested share awards.
In 2005, we adopted Financial Accounting Standards Board Interpretation No. 47 Accounting for
Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies certain terms of Financial
Accounting Standards Board No. 143 Accounting for Asset Retirement Obligations (FAS 143) and
related FASB Staff Positions, and deals with obligations to perform asset retirement activities in
which the timing and (or) method of settlement are conditional on a future event, such as legal
requirements surrounding asbestos handling and disposal that are triggered by demolishing or
renovating a facility. The new guidance requires entities to recognize liabilities for these
obligations if the fair value of a conditional asset retirement obligation can be reasonably
estimated. Upon adoption of FIN 47, we identified our conditional asset retirement obligations and
determined that none had a material effect on our financial position or results of operations for
the year ended December 31, 2005.
Impairment, Restructuring Charges and Other Related Closure Costs
In 2005, we have incurred charges related to the main following items: (i) the 150-mm
restructuring plan started in 2003; (ii) the streamlining of certain activities decided in the
first quarter 2005; (iii) the headcount reduction plan announced in second quarter of 2005; and
(iv) the yearly impairment review.
During the third quarter of 2003, we commenced a plan to restructure our 150-mm fab operations
and part of our back-end operations in order to improve cost competitiveness. The 150-mm
restructuring plan focuses on cost reduction by migrating a large part of European and U.S. 150-mm
production to Singapore and by upgrading production to a finer geometry 200-mm wafer fab. The plan
includes the discontinuation of production of Rennes, France; the closure as soon as operationally
feasible of the 150-mm wafer pilot line in
33
Castelletto, Italy; and the downsizing by approximately one-half of the 150-mm wafer fab in
Carrollton, Texas. Furthermore, the 150-mm wafer fab productions in Agrate, Italy and Rousset,
France will be gradually phased-out in favor of 200-mm wafer ramp-ups at existing facilities in
these locations, which will be expanded or upgraded to accommodate additional finer geometry wafer
capacity. This manufacturing restructuring plan designed to enhance our cost structure and
competitiveness is moving ahead and we expect it to be completed in the second half of 2006 later
than previously anticipated to accommodate unforeseen qualification requirements of our customers.
The total plan of impairment and restructuring costs for the front-end and back-end reorganization
is estimated to be approximately $350 million pre-tax of which $294 million has been incurred as of
December 31, 2005 ($13 million in 2005, $76 million in 2004 and $205 million in 2003). The total
actual costs that we will incur may differ from these estimates based on the timing required to
complete the restructuring plan, the number of people involved, the final agreed termination
benefits and the costs associated with the transfer of equipment, products and processes.
In the first quarter of 2005, we announced our decision to reduce Access technology products
for CPE modem products in order to eliminate certain low volume, non-strategic product families
whose returns in the current environment did not meet internal targets. This decision resulted in a
total charge of $73 million for impairment of intangible assets and goodwill related to the CPE
product lines and certain additional restructuring charges. This plan was completed in 2005.
In the second quarter of 2005, we announced a restructuring plan that, combined with other
initiatives, that will aim to reduce our workforce by 3,000 outside Asia by the second half of
2006, of which 2,300 are planned for Europe. We will also pursue the upgrading of the 150-mm
production fabs to 200-mm, we will optimize on a global scale our Electrical Wafer Sorting (EWS)
activities and we will harmonize and streamline our support functions and disengage from certain
activities. The total cost of these new measures has been estimated in the range of $100 to $130
million pre-tax at the completion of the plan, of which $41 million has been incurred as of
December 31, 2005. The total actual costs that we will incur may differ from these estimates based
on the timing required to complete the restructuring plan, the number of people involved, the final
agreed termination benefits and the costs associated with the transfer of equipment, products and
processes. This plan is expected to be completed in the second half of 2006.
In the third quarter of 2005, we performed the impairment test on an annual basis in order to
assess the recoverability of the goodwill carrying value. As a result of this review, we have
registered a $1 million charge in our 2005 accounts.
Impairment, restructuring charges and other related closure costs incurred in 2005 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
|
|
|
|
|
|
Restructuring |
|
|
Other related |
|
|
charges and other |
|
|
|
Impairment |
|
|
|
charges |
|
|
closure costs |
|
|
related closure costs |
|
|
|
(in millions of U.S. dollars) |
|
150-mm fab plan |
|
|
|
|
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(13 |
) |
Restructuring
initiatives decided
in the first
quarter 2005 |
|
|
(63 |
) |
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(73 |
) |
Restructuring plan
decided in the
second quarter 2005. |
|
|
(3 |
) |
|
|
(37 |
) |
|
|
(1 |
) |
|
|
(41 |
) |
Other |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(67 |
) |
|
|
(50 |
) |
|
|
(11 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, total cash outlays for the restructuring plan amounted to $56 million, corresponding
mainly to the payment of expenses consisting of $33 million related to our 150-mm restructuring
plan, $8 million related to our first quarter restructuring initiatives, $13 million related to our
second quarter 2005 restructuring plan and $2 million related to other obligations accrued for in
2004.
See Note 18 to our Consolidated Financial Statements.
34
Equity Method Investments
SuperH, Inc.
In 2001, we formed with Renesas Technology Corp. (previously known as Hitachi, Ltd.) a joint
venture to develop and license reduced instruction set computing (RISC) microprocessors. The
joint venture, SuperH Inc., was initially capitalized with our contribution of $15 million of cash
plus internally developed technologies with an agreed intrinsic value of $14 million for a 44%
interest. Renesas Technology Corp. contributed $37 million of cash for a 56% interest. We
accounted for our share in the SuperH, Inc. joint venture under the equity method based on the
actual results of the joint venture. During 2002 and 2003, we made additional capital
contributions on which accumulated losses exceeded our total investment, which was shown at zero
carrying value in the consolidated balance sheet.
In 2003, the shareholders agreement was amended to require from us an additional $3 million
cash contribution. This amount was fully accrued, based on the inability of the joint venture to
meet its projected business plan objectives, and the charge was reflected in the 2003 consolidated
statement of income line Impairment, restructuring charges and other related closure costs. In
2004, the shareholders agreed to restructure the joint venture by transferring the intellectual
properties to each shareholder and continuing any further development individually. Based upon
estimates of forecasted cash requirements of the joint venture, we paid an additional $2 million,
which was reflected in the 2004 consolidated statement of income as Loss on equity investments.
In 2005, the joint venture was liquidated with no further losses incurred.
UPEK Inc.
In 2004, we formed with Sofinnova Capital IV FCPR a new company, UPEK Inc., as a venture
capital-funded purchase of our TouchChip business. UPEK Inc. was initially capitalized with our
transfer of the business, personnel and technology assets related to the fingerprint biometrics
business, formerly known as the TouchChip Business Unit, for a 48% interest. Sofinnova Capital IV
FCPR contributed $11 million of cash for a 52% interest. During the first quarter of 2005, an
additional $9 million was contributed by Sofinnova Capital IV FCPR, reducing our ownership to 33%.
We accounted for our share in UPEK Inc. under the equity method and recorded in 2004 losses of
approximately $2 million, which were reflected in the 2004 consolidated statement of income as
Loss on equity investments.
On June 30, 2005, we sold our interest in UPEK Inc, for $13 million and recorded in the second
quarter of 2005 a gain amounting to $6 million in Other Income and Expenses, net of our
consolidated statement of income. Additionally, on June 30, 2005, we were granted warrants for
2,000,000 shares of UPEK Inc. at an exercise price of $0.01 per share. The warrants are not limited
in time but can only be exercised in the event of a change of control or an Initial Public Offering
of UPEK Inc. above a predetermined value.
Hynix ST Joint Venture
In 2004, we signed and announced the joint venture agreement with Hynix Semiconductor to build
a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. The joint venture
is an extension of the NAND Flash Process/product joint development relationship. Construction of
the facility began in 2005. When complete, the fab will employ approximately 1,500 people and will
feature a 200-mm wafer production line planned to begin production at the end of 2006 and a 300-mm
wafer production line planned to begin production in 2007. The total investment planned for the
project is $2 billion. We will be contributing 33% of the equity financing, equivalent to $250
million, while Hynix will contribute 67%. We will also contribute $250 million as long-term debt
to the new joint venture, guaranteed by subordinated collateral on the joint ventures assets. As
of December 31, 2005, we have not provided any debt financing to the joint venture under this
commitment. Our current maximum exposure to loss as a result of our involvement with the joint
venture is limited to our equity and debt investment commitments. The financing will also include
credit from local Chinese institutions, involving debt and a long leasehold. In 2005, our
contributions to the equity investment reached approximately $38 million. We plan to subscribe the
additional capital of $212 million in 2006 concurrently with Hynix and once the financing from
local financing institutions is in place.
We have identified the joint venture as a Variable Interest Entity (VIE) at December 31, 2005,
but have determined that we are not the primary beneficiary of the VIE. We are accounting for our
share in the Hynix ST joint venture under the equity method based on the actual results of the
joint venture and recorded losses of approximately $4 million as Loss on equity investments in
our 2005 Consolidated Statement of Income.
Backlog and Customers
We entered 2006 with a backlog (including frame orders) that was significantly higher than we
had entering 2005. This increase is due to high level of bookings and frames registered in the
fourth quarter of 2005.
35
However, the level of frames included in our backlog are high and are subject to significant
adjustments on the basis of future customer demand. In 2005, we had several large customers, with
the Nokia Group of companies being the largest and accounting for approximately 22% of our
revenues. Total original equipment manufacturers (OEMs) accounted for approximately 82% of our
net revenues, of which the top ten OEM customers accounted for approximately 50%. Distributors
accounted for approximately 18% of our net revenues. We have no assurance that the Nokia Group of
companies, or any other customer, will continue to generate revenues for us at the same levels. If
we were to lose one or more of our key customers, or if they were to significantly reduce their
bookings, or fail to meet their payment obligations, our operating results and financial condition
could be adversely affected.
36
Changes to Our Share Capital, Stock Option Grants and Other Matters
The following table sets forth changes to our share capital as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal |
|
|
Cumulative |
|
|
Cumulative |
|
|
increase/ |
|
|
Amount of |
|
|
Cumulative- |
|
|
|
|
|
Number of |
|
|
value |
|
|
amount of |
|
|
number of |
|
|
reduction |
|
|
issue premium |
|
|
issue premium |
|
Year |
|
Transaction |
|
shares |
|
|
(euro) |
|
|
capital (euro) |
|
|
shares |
|
|
in capital |
|
|
(euro) |
|
|
(euro) |
|
December 31,
2004 |
|
LYONs conversion |
|
|
1,761 |
|
|
|
1.04 |
|
|
|
941,521,357 |
|
|
|
905,308,997 |
|
|
|
1,831 |
|
|
|
46,225 |
|
|
|
1,708,949,494 |
|
December 31, 2005 |
|
Conversion of bonds |
|
|
59 |
|
|
|
1.04 |
|
|
|
941,521,418 |
|
|
|
905,309,056 |
|
|
|
61 |
|
|
|
1,448 |
|
|
|
1,708,950,942 |
|
December 31, 2005 |
|
Exercise of options |
|
|
2,515,223 |
|
|
|
1.04 |
|
|
|
944,137,250 |
|
|
|
907,824,279 |
|
|
|
2,615,832 |
|
|
|
25,762,612 |
|
|
|
1,734,713,554 |
|
The following table summarizes the amount of stock options authorized to be granted,
exercised, cancelled and outstanding as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
|
Supervisory Board |
|
|
|
1995 Plan |
|
|
2001 Plan |
|
|
1996 |
|
|
1999 |
|
|
2002 |
|
|
Total |
|
Remaining amount
authorized to be
granted |
|
|
|
|
|
|
12,265,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,265,817 |
|
Amount exercised |
|
|
12,255,102 |
|
|
|
9,650 |
|
|
|
293,500 |
|
|
|
18,000 |
|
|
|
|
|
|
|
12,576,252 |
|
Amount cancelled |
|
|
2,782,808 |
|
|
|
4,438,997 |
|
|
|
72,000 |
|
|
|
63,000 |
|
|
|
24,000 |
|
|
|
7,380,805 |
|
Amount outstanding |
|
|
16,524,031 |
|
|
|
43,285,536 |
|
|
|
35,000 |
|
|
|
342,000 |
|
|
|
372,000 |
|
|
|
60,558,567 |
|
We granted 29,200 options at an exercise price of $16.73 on January 31, 2005 and 13,000
options at an exercise price of $17.31 on March 17, 2005.
In line with our 2005 AGM shareholders resolutions, we are transitioning our stock-based
compensation plans from stock-option grants to non-vested stock awards. Pursuant to shareholders
resolutions adopted by the 2005 AGM, our Supervisory Board, upon the recommendation of the
Compensation Committee, approved the terms and conditions of the 2005 Supervisory Board Stock-Based
Compensation Plan for members and professionals, which resulted in a $1 million charge in 2005.
Pursuant to shareholders resolutions adopted by the 2005 AGM, our Supervisory Board, upon the
proposal of the Managing Board and the recommendation of the Compensation Committee, took the
following actions:
|
|
|
amended our 2001 Employee Stock Option Plan with the aim of enhancing our
ability to retain key employees and motivate them to shareholder value creation; |
|
|
|
|
approved the vesting conditions, linked to our future performance and their
continued service with us, to apply to non-vested stock awards granted to employees
in 2005, the maximum number of which will be 4.1 million; and |
|
|
|
|
accelerated the vesting of all of our outstanding stock options in July 2005
with no charge to our interim consolidated statements of income. |
We intend to use 4.1 million of our shares held by us in treasury (out of the 13.4 million
currently available) to cover the four million non-vested stock award granted to our employees in
the fourth quarter of 2005 as well as the granting of up to 100,000 non-vested shares to the sole
member of our Managing Board that was also approved by shareholders at the 2005 AGM.
Following these decisions, the share-based compensation plans generated a total additional charge
in our income statement of the fourth quarter of 2005 of $9 million pre-tax. This charge
corresponded to the compensation expense to be recognized for the non-vested stock awards from the
grant date over the vesting period, by adopting FAS 123R and took into consideration the
probability of the performance achievement by early adoption FAS123R. The vesting of the awards
depends on the following performance achievement: (i) the total amount of shares will vest if the
evolution of our stock price is equal or better to the evolution of the
37
Philadelphia SOX Index over the period from May 2, 2005 to April 1, 2006. If the awards do not vest
pursuant to the market performance, the employees can still receive a maximum of 66% of the awards:
(a) 33% if the evolution of our sales between May 2, 2005 and April 1, 2006 is equal to or greater
than the evolution of the sales of top ten semiconductor companies publishing quarterly results for
the quarter ending on or before April 1st, 2006 over the same corresponding quarter in 2005 and (b)
33% if our actual return on net assets achieved in 2005 is equal to or higher than our target as
per 2005 budget. We will register a total charge of $31 million to which social charges should be
added for a total cost of approximately $40 million (before tax) to be accounted for over the
vesting period in the years 2006, 2007 and 2008.
Disclosure Controls and Procedures
Our chief executive officer and chief financial officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(f)) as of the end of the
period covered by this report, have concluded that, as of such date, our disclosure controls and
procedures were effective to ensure that material information relating to our company was made
known to them by others within our company, particularly during the period in which this Form 6-K
was being prepared.
There were no significant changes in our internal controls over financial reporting or in other
factors that could significantly affect these controls during the period covered by the annual
report, nor were there any material weaknesses in our internal controls
requiring corrective actions.
Other Reviews
We have sent this report to our Audit Committee, which had an opportunity to raise questions with
our management and independent auditors before we filed it with the Securities and Exchange
Commission.
Cautionary Note Regarding Forward-Looking Statements
Some of
the statements contained in this Form 6-K that are not historical
facts, 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:
|
|
|
future developments of the world semiconductor market, in particular the future
demand for semiconductor products in the key application markets and from key customers
served by our products; |
|
|
|
|
pricing pressures, losses or curtailments of purchases from key customers; |
|
|
|
|
the financial impact of inadequate or excess inventories if actual demand differs
from our anticipations; |
|
|
|
|
changes in the exchange rates between the U.S. dollar and the euro and between the
U.S. dollar and the currencies of the other major countries in which we have our
operating infrastructure; |
|
|
|
|
our ability to be successful in our strategic research and development initiatives
to develop new products to meet anticipated market demand, as well as our ability to
achieve our corporate performance roadmap by completing successfully and in a timely
manner our other various announced initiatives to improve our overall efficiency and
our financial performance; |
|
|
|
|
the anticipated benefits of research and development alliances and cooperative
activities and the continued pursuit of our various alliances, in the field of
development of new advanced technologies or products; |
|
|
|
|
the ability of our suppliers to meet our demands for products and to offer
competitive pricing; |
38
|
|
|
changes in the economic, social or political environment, as well as natural events
such as severe weather, health risks, epidemics or earthquakes in the countries in
which we and our key customers operate; |
|
|
|
|
changes in our overall tax position as a result of changes in tax laws or the
outcome of tax audits; |
|
|
|
|
product liability or warranty claims for a product containing one of our parts; and |
|
|
|
|
our ability to obtain required licenses on third-party intellectual property, the
outcome of litigation and the results of actions by our competitors. |
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 such forward-looking statements can be identified by the use
of forward-looking terminology such as believes, expects, may, are expected to, will,
will continue, 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 in our Form 20-F as may be updated from time to
time. 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
6-K 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 6-K to reflect
subsequent events or circumstances.
Unfavorable changes in the above or other factors listed under Item 3. Key Information Risk
Factors from our Form 20-F, as may be updated from time to time, could have a material adverse
effect on our business and/or financial condition.
39
STMICROELECTRONICS N.V.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
Report of
Independent Registered Public Accounting Firm for the years ended
December 31, 2005 and December 31, 2004 |
|
|
F-2 |
|
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003 |
|
|
F-3 |
|
Consolidated Balance Sheets as of December 31, 2005 and 2004 |
|
|
F-4 |
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 |
|
|
F-5 |
|
Consolidated Statements of Changes in Shareholders Equity for the Years Ended December
31, 2005, 2004 and 2003 |
|
|
F-6 |
|
Notes to Consolidated Financial Statements |
|
|
F-7 |
|
F-1
Report of Independent Registered Public Accounting Firm
To the Supervisory Board and Shareholders of
STMicroelectronics N.V.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of changes in shareholders equity and of cash flows present fairly, in all
material respects, the financial position of STMicroelectronics N.V. and its subsidiaries at
December 31, 2005 and December 31, 2004, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States).Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers SA
M Foley H-J Hofer
Geneva, February 15, 2006
PricewaterhouseCoopers is represented in about 140 countries worldwide and in Switzerland in
Aarau, Basle, Berne, Chur, Geneva, Lausanne, Lucerne, Lugano, Neuchâtel, Sion, St. Gall, Thun,
Winterthur, Zug and Zurich and offers Assurance, Tax & Legal and Advisory services.
F-2
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF INCOME
In millions of U.S. dollars except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(audited) | |
|
(audited) | |
|
(audited) | |
Net sales
|
|
|
8,876 |
|
|
|
8,756 |
|
|
|
7,234 |
|
Other revenues
|
|
|
6 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
8,882 |
|
|
|
8,760 |
|
|
|
7,238 |
|
Cost of sales
|
|
|
(5,845 |
) |
|
|
(5,532 |
) |
|
|
(4,672 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,037 |
|
|
|
3,228 |
|
|
|
2,566 |
|
Selling, general and administrative
|
|
|
(1,026 |
) |
|
|
(947 |
) |
|
|
(785 |
) |
Research and development
|
|
|
(1,630 |
) |
|
|
(1,532 |
) |
|
|
(1,238 |
) |
Other income and expenses, net
|
|
|
(9 |
) |
|
|
10 |
|
|
|
(4 |
) |
Impairment, restructuring charges and other related closure costs
|
|
|
(128 |
) |
|
|
(76 |
) |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
244 |
|
|
|
683 |
|
|
|
334 |
|
Interest income (expense), net
|
|
|
34 |
|
|
|
(3 |
) |
|
|
(52 |
) |
Loss on equity investments
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Loss on extinguishment of convertible debt
|
|
|
0 |
|
|
|
(4 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
275 |
|
|
|
672 |
|
|
|
242 |
|
Income tax benefit (expense)
|
|
|
(8 |
) |
|
|
(68 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
267 |
|
|
|
604 |
|
|
|
256 |
|
Minority interests
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
266 |
|
|
|
601 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Basic)
|
|
|
0.30 |
|
|
|
0.67 |
|
|
|
0.29 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Diluted)
|
|
|
0.29 |
|
|
|
0.65 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
STMicroelectronics N.V.
CONSOLIDATED BALANCE SHEETS
In millions of U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
As at | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(audited) | |
|
(audited) | |
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,027 |
|
|
|
1,950 |
|
Marketable securities
|
|
|
0 |
|
|
|
0 |
|
Trade accounts receivable, net
|
|
|
1,490 |
|
|
|
1,408 |
|
Inventories, net
|
|
|
1,411 |
|
|
|
1,344 |
|
Deferred tax assets
|
|
|
152 |
|
|
|
140 |
|
Other receivables and assets
|
|
|
531 |
|
|
|
785 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,611 |
|
|
|
5,627 |
|
|
|
|
|
|
|
|
Goodwill
|
|
|
221 |
|
|
|
264 |
|
Other intangible assets, net
|
|
|
224 |
|
|
|
291 |
|
Property, plant and equipment, net
|
|
|
6,175 |
|
|
|
7,442 |
|
Long-term deferred tax assets
|
|
|
55 |
|
|
|
59 |
|
Investments and other non-current assets
|
|
|
153 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
6,828 |
|
|
|
8,173 |
|
|
|
|
|
|
|
|
Total assets
|
|
|
12,439 |
|
|
|
13,800 |
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
|
11 |
|
|
|
58 |
|
Current portion of long-term debt
|
|
|
1,522 |
|
|
|
133 |
|
Trade accounts payable
|
|
|
965 |
|
|
|
1,352 |
|
Other payables and accrued liabilities
|
|
|
642 |
|
|
|
776 |
|
Deferred tax liabilities
|
|
|
7 |
|
|
|
17 |
|
Accrued income tax
|
|
|
152 |
|
|
|
176 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,299 |
|
|
|
2,512 |
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
269 |
|
|
|
1,767 |
|
Reserve for pension and termination indemnities
|
|
|
270 |
|
|
|
285 |
|
Long-term deferred tax liabilities
|
|
|
55 |
|
|
|
63 |
|
Other non-current liabilities
|
|
|
16 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
610 |
|
|
|
2,130 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,909 |
|
|
|
4,642 |
|
|
|
|
|
|
|
|
Commitment and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
50 |
|
|
|
48 |
|
|
|
|
|
|
|
|
Common stock (preferred stock: 540,000,000 shares authorized,
not issued; common stock: Euro 1.04 nominal value,
1,200,000,000 shares authorized, 907,824,279 shares issued,
894,424,279 shares outstanding)
|
|
|
1,153 |
|
|
|
1,150 |
|
Capital surplus
|
|
|
1,967 |
|
|
|
1,924 |
|
Accumulated result
|
|
|
5,427 |
|
|
|
5,268 |
|
Accumulated other comprehensive income
|
|
|
281 |
|
|
|
1,116 |
|
Treasury stock
|
|
|
(348 |
) |
|
|
(348 |
) |
|
|
|
|
|
|
|
Shareholders equity
|
|
|
8,480 |
|
|
|
9,110 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
12,439 |
|
|
|
13,800 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions of U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(audited) | |
|
(audited) | |
|
(audited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
266 |
|
|
|
601 |
|
|
|
253 |
|
|
Items to reconcile net income and cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,944 |
|
|
|
1,837 |
|
|
|
1,608 |
|
|
|
Amortization of discount on convertible debt
|
|
|
5 |
|
|
|
28 |
|
|
|
68 |
|
|
|
Loss on extinguishment of convertible debt
|
|
|
|
|
|
|
4 |
|
|
|
39 |
|
|
|
Gain on the sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
Other non-cash items
|
|
|
10 |
|
|
|
5 |
|
|
|
(53 |
) |
|
|
Minority interest in net income of subsidiaries
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
Deferred income tax
|
|
|
(31 |
) |
|
|
(6 |
) |
|
|
(131 |
) |
|
|
Loss on equity investments
|
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
|
|
Impairment, restructuring charges and other related closure
costs, net of cash payments
|
|
|
72 |
|
|
|
8 |
|
|
|
197 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
|
(117 |
) |
|
|
(119 |
) |
|
|
(109 |
) |
|
|
Inventories, net
|
|
|
(174 |
) |
|
|
(144 |
) |
|
|
(75 |
) |
|
|
Trade payables
|
|
|
(71 |
) |
|
|
128 |
|
|
|
(8 |
) |
|
|
Other assets and liabilities, net
|
|
|
(110 |
) |
|
|
(7 |
) |
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
1,798 |
|
|
|
2,342 |
|
|
|
1,920 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for purchases of tangible assets
|
|
|
(1,441 |
) |
|
|
(2,050 |
) |
|
|
(1,221 |
) |
|
Proceeds from sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
Investment in intangible and financial assets
|
|
|
(49 |
) |
|
|
(79 |
) |
|
|
(31 |
) |
|
Capital contributions to equity investments
|
|
|
(38 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
Payment for acquisitions, net of cash received
|
|
|
|
|
|
|
(3 |
) |
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,528 |
) |
|
|
(2,134 |
) |
|
|
(1,439 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
50 |
|
|
|
91 |
|
|
|
1,398 |
|
|
Repayment of long-term debt
|
|
|
(110 |
) |
|
|
(1,288 |
) |
|
|
(1,432 |
) |
|
Increase (decrease) in short-term facilities
|
|
|
(47 |
) |
|
|
10 |
|
|
|
25 |
|
|
Capital increase
|
|
|
35 |
|
|
|
23 |
|
|
|
22 |
|
|
Dividends paid
|
|
|
(107 |
) |
|
|
(107 |
) |
|
|
(71 |
) |
|
Other financing activities
|
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(178 |
) |
|
|
(1,271 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates
|
|
|
(15 |
) |
|
|
15 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Net cash increase (decrease)
|
|
|
77 |
|
|
|
(1,048 |
) |
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
1,950 |
|
|
|
2,998 |
|
|
|
2,562 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
|
2,027 |
|
|
|
1,950 |
|
|
|
2,998 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
17 |
|
|
|
16 |
|
|
|
19 |
|
Income tax paid
|
|
|
90 |
|
|
|
84 |
|
|
|
102 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
In millions of U.S. dollars, except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
Common | |
|
Capital | |
|
Treasury | |
|
Accumulated | |
|
Comprehensive | |
|
Shareholders | |
|
|
Stock | |
|
Surplus | |
|
Stock | |
|
Result | |
|
income (loss) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2002 (audited)
|
|
|
1,144 |
|
|
|
1,864 |
|
|
|
(348 |
) |
|
|
4,592 |
|
|
|
(258 |
) |
|
|
6,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital increase
|
|
|
2 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
253 |
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881 |
|
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,134 |
|
Dividends, $0.08 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003 (audited)
|
|
|
1,146 |
|
|
|
1,905 |
|
|
|
(348 |
) |
|
|
4,774 |
|
|
|
623 |
|
|
|
8,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital increase
|
|
|
4 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601 |
|
|
|
|
|
|
|
601 |
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094 |
|
Dividends, $0.12 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 (audited)
|
|
|
1,150 |
|
|
|
1,924 |
|
|
|
(348 |
) |
|
|
5,268 |
|
|
|
1,116 |
|
|
|
9,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital increase
|
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Stock-based compensation expense
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
266 |
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(835 |
) |
|
|
(835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(569 |
) |
Dividends, $0.12 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 (audited)
|
|
|
1,153 |
|
|
|
1,967 |
|
|
|
(348 |
) |
|
|
5,427 |
|
|
|
281 |
|
|
|
8,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
1 THE COMPANY
STMicroelectronics N.V. (the Company) is registered
in The Netherlands with its statutory domicile in Amsterdam. The
Company was formed in 1987 with the original name of SGS-THOMSON
Microelectronics by 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 Thomson-CSF, a French corporation) whereby each company
contributed their respective semiconductor businesses in
exchange for a 50% interest in the Company.
The Company is a global independent semiconductor company that
designs, develops, manufactures and markets a broad range of
semiconductor integrated circuits (ICs) and discrete
devices. The Company offers a diversified product portfolio and
develops products for a wide range of market applications,
including automotive products, computer peripherals,
telecommunications systems, consumer products, industrial
automation and control systems. Within its diversified
portfolio, the Company has focused on developing products that
leverage its technological strengths in creating customized,
system-level solutions with high-growth digital and mixed-signal
content.
2 ACCOUNTING POLICIES
The accounting policies of the Company conform with accounting
principles generally accepted in the United States of America
(U.S. GAAP). All balances and values in the current
and prior periods are in millions of dollars, except share and
per-share amounts. Under Article 35 of the Companys
Articles of Association, the financial year extends from January
1 to December 31, which is the period-end of each fiscal
year.
2.1 Principles of consolidation
The consolidated financial statements of the Company have been
prepared in conformity with U.S. GAAP. The Companys
consolidated financial statements include the assets,
liabilities, results of operations and cash flows of its
majority-owned subsidiaries. The ownership of other interest
holders is reflected as minority interests. Intercompany
balances and transactions have been eliminated in consolidation.
Since the adoption in 2003 of Financial Accounting Standards
Board Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(revised 2003), and the related FASB Staff Positions
(collectively FIN 46R), the Company assesses
for consolidation any entity identified as a Variable Interest
Entity (VIE) and consolidates VIEs, if any, for
which the Company is determined to be the primary beneficiary,
as described in note 2.19.
2.2 Use of estimates
The preparation of financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of net
revenue and expenses during the reporting period. The primary
areas that require significant estimates and judgments by
management include, but are not limited to, sales returns and
allowances, allowances for doubtful accounts, inventory reserves
and normal manufacturing capacity thresholds to determine costs
capitalized in inventory, accruals for warranty costs,
litigation and claims, valuation of acquired intangibles,
goodwill, investments and tangible assets as well as the
impairment of their related carrying values, restructuring
charges, assumptions used in calculating pension obligations and
share-based compensation, assessment of hedge effectiveness of
derivative instruments, deferred income tax assets including
required valuation allowances and liabilities as well as
provisions for specifically identified income tax exposures. The
Company bases the estimates and assumptions on historical
experience and on various other factors such as market trends
and business plans that it believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
The actual results experienced by the Company could differ
materially and adversely from managements estimates. To
the extent there are material differences between the estimates
and the actual results, future results of operations, cash flows
and financial position could be significantly affected.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.3 Foreign currency
The U.S. dollar is the reporting currency for the Company,
which is the currency of the primary economic environment in
which the Company operates. The worldwide semiconductor industry
uses the U.S. dollar as a currency of reference for actual
pricing in the market. Furthermore, the majority of the
Companys transactions are denominated in
U.S. dollars, and revenues from external sales in
U.S. dollars largely exceed revenues in any other currency.
However, labor costs are concentrated primarily in the countries
that have adopted the Euro currency.
The functional currency of each subsidiary throughout the group
is generally the local currency. For consolidation purposes,
assets and liabilities of these subsidiaries are translated at
current rates of exchange at the balance sheet date. Income and
expense items are translated at the monthly average exchange
rate of the period. The effects of translating the financial
position and results of operations from local functional
currencies are reported as a component of accumulated
other comprehensive income in the consolidated statements
of changes in shareholders equity.
Assets, liabilities, revenues, expenses, gains or losses arising
from foreign currency transactions are recorded in the
functional currency of the recording entity at the exchange rate
in effect during the month of the transaction. At each balance
sheet date, recorded balances denominated in a currency other
than the recording entitys functional currency are
remeasured into the functional currency at the exchange rate
prevailing at the balance sheet date. The related exchange gains
and losses are recorded in the consolidated statements of income.
2.4 Derivative instruments
Foreign
Currency Forward Contracts Not Designated as a Hedge
The Company conducts its business on a global basis in various
major international currencies. As a result, the Company is
exposed to adverse movements in foreign currency exchange rates.
The Company enters into foreign currency forward contracts and
currency options to reduce its exposure to changes in exchange
rates and the associated risk arising from the denomination of
certain assets and liabilities in foreign currencies at the
Companys subsidiaries. These instruments do not qualify as
hedging instruments under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), and are
marked-to-market at each period-end with the associated changes
in fair value recognized in other income and expenses,
net in the consolidated statements of income.
Cash
Flow Hedges
To further reduce its exposure to U.S. dollar exchange rate
fluctuations, the Company also hedged in 2005 and 2004 certain
euro-denominated forecasted transactions that cover at year-end
a large part of its research and development, selling general
and administrative expenses as well as a portion of its
front-end manufacturing production costs of semi-finished goods.
The foreign currency forward contracts used to hedge exposures
are reflected at their fair value in the consolidated balance
sheet and meet the criteria for designation as cash flow hedges.
The criteria for designating a derivative as a hedge include the
instruments effectiveness in risk reduction and, in most
cases, a one-to-one matching of the derivative instrument to its
underlying transaction. Foreign currency forward contracts used
as hedges are effective at reducing the euro/ U.S. dollar
currency fluctuation risk and are designated as a hedge at the
inception of the contract. For these derivatives, the gain or
loss from the effective portion of the hedge is reported as a
component of accumulated other comprehensive income
in the consolidated statements of changes in shareholders
equity and is reclassified into earnings in the same period in
which the hedged transaction affects earnings, and within the
same income statement line item as the impact of the hedged
transaction. The gain or loss is recognized immediately in
other income and expenses, net in the consolidated
statements of income when a designated hedging instrument is
either terminated early or an improbable or ineffective portion
of the hedge is identified.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.5 Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year presentation.
2.6 Revenue Recognition
Revenue is recognized as follows:
Net
sales
Revenue from products sold to customers is recognized, pursuant
to SEC Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104), when all 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) collectibility 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 distribution customers
on their existing inventory of the Companys products to
compensate them for declines in market prices. The ultimate
decision to authorize a distributor refund remains fully within
the control of the Company. The Company accrues 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 a
significant move in the current market price. The short
outstanding inventory time period, visibility into the standard
inventory product pricing (as opposed to certain customized
products) and long distributor pricing history have enabled the
Company to reliably estimate price protection provisions at
period-end. The Company records the accrued amounts as a
deduction of revenue at the time of the sale.
The Companys customers occasionally return the
Companys products for technical reasons. The
Companys standard terms and conditions of sale provide
that if the Company determines that products are non-conforming,
the Company will repair or replace the non-conforming products,
or issue a credit or rebate of the purchase price. Quality
returns are not related to any technological obsolescence issues
and are identified shortly after sale in customer quality
control testing. Quality returns are always associated with
end-user customers, not with distribution channels. The Company
provides for such returns when they are considered as probable
and can be reasonably estimated. The Company records the accrued
amounts as a reduction of revenue.
The Companys insurance policy relating to product
liability only covers physical damage and other direct damages
caused by defective products. The Company does not carry
insurance against immaterial non consequential damages. The
Company records 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 management has
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 the Companys determination
that the Company is at fault for damages, and 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 express or implied by statute or
common law. The Companys contractual terms and conditions
limit its liability to the sales value of the products which
gave rise to the claims.
Other
revenues
Other revenues primarily consist of license revenue and patent
royalty income, which are recognized ratably over the term of
the agreements.
Fundings
Fundings received by the Company are mainly from governmental
agencies and income is recorded as recognized when all
contractually required conditions are fulfilled. The
Companys primary sources for government funding are
French, Italian, other European Union (EU)
governmental entities and Singapore agencies. Such funding is
generally provided to encourage research and development
activities, industrialization and local economic development.
The EU has developed model contracts for research and
development funding that require beneficiaries to disclose the
results to third parties on reasonable terms. 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.
Certain specific contracts contain obligations to maintain a
minimum level of employment and
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
investment during a certain period of time. There could be
penalties if these objectives are not fulfilled. Other contracts
contain penalties for late deliveries or for breach of contract,
which may result in repayment obligations. In accordance with
SAB 104 and the Companys revenue recognition policy,
funding related to these contracts is recorded when the
conditions required by the contracts are met. The Companys
funding programs are classified under three general categories:
funding for research and development activities, capital
investment, and loans.
Funding for research and development activities is the most
common form of funding that the Company receives. Public funding
for research and development is recorded as other income
and expenses, net in the Companys consolidated
statements of income. Public funding for research and
development is recognized ratably as the related costs are
incurred once the agreement with the respective governmental
agency has been signed and all applicable conditions are met.
Capital investment funding is recorded as a reduction of
property, plant and equipment, net and is recognized
in the Companys consolidated statements of income
according to the depreciation charges of the funded assets
during their useful lives. The Company also receives capital
funding in Italy, which is recovered through the reduction of
various governmental liabilities, including income taxes,
value-added tax and employee-related social charges. The funding
has been classified as long-term receivable and is reflected in
the balance sheet at its discounted net present value. The
subsequent accretion of the discount is recorded as
non-operating income in interest income (expense),
net.
The Company receives certain loans, mainly related to large
capital investment projects, at preferential interest rates. The
Company records these loans as debt in its consolidated balance
sheet.
2.7 Advertising costs
Advertising costs are expensed as incurred and are recorded as
selling, general and administrative expenses. Advertising
expenses for 2005, 2004 and 2003 were $14 million,
$17 million and $9 million, respectively.
2.8 Research and development
Research and development expenses include costs incurred by the
Company, the Companys share of costs incurred by other
research and development interest groups, and costs associated
with co-development contracts. Research and development expenses
do not include marketing design center costs, which are
accounted for as selling expenses and process engineering,
pre-production or process transfer costs which are recorded as
cost of sales. Research and development costs are charged to
expense as incurred. The amortization expense recognized on
technologies and licenses purchased by the Company from third
parties to facilitate the Companys research is recorded as
research and development expenses.
2.9 Start-up costs
Start-up costs represent costs incurred in the start-up and
testing of the Companys new manufacturing facilities,
before reaching the earlier of a minimum level of production or
6-months after the fabrication lines quality
qualification. Start-up costs are included in other income
and expenses, net in the consolidated statements of income.
2.10 Income taxes
The provision for current taxes represents the income taxes
expected to be paid or the benefit expected to be received
related to the current year income or loss in each individual
tax jurisdiction. Provisions for specific tax exposures are also
estimated and recorded when an additional tax payment is
determined probable. Deferred tax assets and liabilities are
recorded for all temporary differences arising between the tax
and book bases of assets and liabilities and for the benefits of
tax credits and operating loss carry-forwards. Deferred income
tax is determined using tax rates and laws that are enacted by
the balance sheet date and are expected to apply when the
related deferred income tax asset is realized or the deferred
income tax liability is settled. The effect on deferred tax
assets and liabilities from changes in tax law is recognized in
the period of enactment. Deferred income tax assets are
recognized in full but the Company assesses whether it is
probable that future taxable profit will be available against
which the temporary differences can be utilized. A valuation
allowance is provided where
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
necessary to reduce deferred tax assets to the amount for which
management considers the possibility of recovery to be more
likely than not. The Company utilizes the flow-through method to
account for its investment credits, reflecting the credits as a
reduction of tax expense in the year they are recognized.
Similarly, research and development tax credits are classified
as a reduction of tax expense in the year they are recognized.
2.11 Earnings per share
Basic earnings per share are computed by dividing net income by
the weighted average number of common shares outstanding during
the period. Diluted earnings per share are computed using the
treasury stock method by dividing net income (adding-back
interest expense, net of tax effects, related to convertible
debt if determined to be dilutive) by the weighted average
number of common shares and common share equivalents outstanding
during the period. The weighted average shares used to compute
diluted earnings per share include the incremental shares of
common stock relating to stock-options granted, nonvested shares
and convertible debt to the extent such incremental shares are
dilutive. Nonvested shares with performance or market conditions
are included in the computation of diluted earnings per share if
their conditions have been satisfied at the balance sheet date
and if the awards are dilutive.
2.12 Cash and cash equivalents
Cash and cash equivalents represents cash, deposits and highly
liquid investments with insignificant interest rate risk
purchased with an original maturity of ninety days or less.
2.13 Marketable securities
Management determines the appropriate classification of
investments in debt and equity securities at the time of
purchase and reassesses the classification at each reporting
date. For those marketable securities with a readily
determinable fair value and that are classified as
available-for-sale, the securities are reported at fair value
with changes in fair value recognized as a separate component of
accumulated other comprehensive income (loss) in the
consolidated statements of changes in shareholders equity.
Other-than-temporary losses are recorded in net income based on
the Companys assessment of any significant, sustained
reductions in the investments market value and of the
market indicators affecting the securities. Gains and losses on
securities sold are determined based on the specific
identification method and are recorded as other income and
expenses, net.
2.14 Trade accounts receivable
Trade accounts receivable are recognized at their sales value,
net of allowances for doubtful accounts. The Company maintains
an allowance for doubtful accounts for potential estimated
losses resulting from its customers inability to make
required payments. The Company bases its estimates on historical
collection trends and records a provision accordingly. In
addition, the Company is required to evaluate its
customers financial condition periodically and records an
additional provision for any specific account the Company
estimates as doubtful.
2.15 Inventories
Inventories are stated at the lower of cost or net realizable
value. Cost is based on the weighted average cost by adjusting
standard cost to approximate actual manufacturing costs on a
quarterly basis; the cost is therefore dependent on the
Companys manufacturing performance. In the case of
underutilization of manufacturing facilities, the costs
associated with the excess capacity are not included in the
valuation of inventories but charged directly to cost of sales.
Net realizable value is the estimated selling price in the
ordinary course of business, less applicable variable selling
expenses.
Additionally, the Company evaluates its product inventory to
identify obsolete or slow-selling stock and records a specific
provision if the Company estimates the inventory will eventually
become obsolete. Provisions for obsolescence are estimated for
excess uncommitted inventory based on the previous quarter
sales, orders backlog and production plans.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.16 Intangible assets subject to amortization
Intangible assets subject to amortization include the cost of
technologies and licenses purchased from third parties,
purchased software and internally developed software which is
capitalized. Intangible assets subject to amortization are
reflected net of any impairment losses. 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, the Company
usually estimates the fair value based on the projected
discounted future cash flows associated with the intangible
assets and compares this to their carrying value. An impairment
loss is recognized in the income statement for the amount by
which the assets carrying amount exceeds its fair value.
Amortization is computed using the straight-line method over the
following estimated useful lives:
|
|
|
|
|
Technologies & licenses
|
|
|
3-7 years |
|
Purchased software
|
|
|
3-4 years |
|
Internally developed software
|
|
|
4 years |
|
The Company evaluates the remaining useful life of an intangible
asset at each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization.
The capitalization of costs for internally generated software
developed by the Company for its internal use begins when
preliminary project stage is completed and when the Company,
implicitly or explicitly, authorizes and commits to funding a
computer software project. It must be probable that the project
will be completed and will be used to perform the function
intended.
2.17 Goodwill
Goodwill recognized in business combinations is not amortized
but rather is 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 and is subject to regular review by segment
management. 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, the Company
usually estimates the expected discounted future cash flows
associated with the reporting unit. Significant management
judgments and estimates are used in forecasting the future
discounted cash flows, including: the applicable industrys
sales volume forecast and selling price evolution, the reporting
units market penetration, the market acceptance of certain
new technologies, relevant cost structure, the discount rates
applied using a weighted average cost of capital and the
perpetuity rates used in calculating cash flow terminal values.
2.18 Property, plant and equipment
Property, plant and equipment are stated at historical cost, net
of government fundings and any impairment losses. Major
additions and improvements are capitalized, minor replacements
and repairs are charged to current operations.
Land is not depreciated. Depreciation on fixed assets is
computed using the straight-line method over the following
estimated useful lives:
|
|
|
|
|
Buildings
|
|
|
33 years |
|
Facilities & leasehold improvements
|
|
|
5-10 years |
|
Machinery and equipment
|
|
|
3-6 years |
|
Computer and R&D equipment
|
|
|
3-6 years |
|
Other
|
|
|
2-5 years |
|
The Company evaluates each period whether there is reason to
suspect that tangible assets or groups of assets might not be
recoverable. Several impairment indicators exist for making this
assessment, such as: significant changes in the technological,
market, economic or legal environment in which the Company
operates or in the market to which the asset is dedicated, or
available evidence of obsolescence of the asset, or indication
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
that its economic performance is, or will be, worse than
expected. In determining the recoverability of assets to be held
and used, the Company initially assesses whether the carrying
value of the tangible assets or group of assets exceeds the
undiscounted cash flows associated with these assets. If
exceeded, the Company then evaluates whether an impairment
charge is required by determining if the assets carrying
value also exceeds its fair value. This fair value is normally
estimated by the Company based on independent market appraisals
or the sum of discounted future cash flows, using market
assumptions such as the utilization of the Companys
fabrication facilities and the ability to upgrade such
facilities, change in the selling price and the adoption of new
technologies. The Company also evaluates, and adjusts if
appropriate, the assets useful lives, at each balance
sheet date or when impairment indicators exist. Assets
classified as held for disposal are reflected at the lower of
their carrying amount or fair value less selling costs and are
not depreciated during the selling period. Costs to sell include
incremental direct costs to transact the sale that would not
have been incurred except for the decision to sell.
When property, plant and equipment are retired or otherwise
disposed of, the net book value of the assets is removed from
the Companys books and the net gain or loss is included in
other income and expenses, net in the consolidated
statements of income.
Capital leases are included in property, plant and
equipment, net and depreciated over the shorter of the
estimated useful life or the lease term. Payments made under
operating leases are charged to the income statement on a
straight-line basis over the period of the lease.
Borrowing costs incurred for the construction of any qualifying
asset are capitalized during the period of time that is required
to complete and prepare the asset for its intended use. Other
borrowing costs are expensed.
2.19 Investments
Equity investments are all entities over which the Company has
the ability to exercise significant influence but not control,
generally representing a shareholding of between 20% and 50% of
the voting rights. These investments are accounted for by the
equity method of accounting and are initially recognized at
cost. The Companys share in its equity investments
results is recognized in the consolidated income statement as
Income (loss) on equity investments and in the
consolidated balance sheet as an adjustment against the carrying
amount of the investments. When the Companys share of
losses in an equity investment equals or exceeds its interest in
the investee, the Company does not recognize further losses,
unless it has incurred obligations or made payments on behalf of
the investee.
Investments without readily determinable fair values and for
which the Company does not have the ability to exercise
significant influence are accounted for under the cost method.
Under the cost method of accounting, investments are carried at
historical cost and are adjusted only for declines in fair
value. For investments in public companies that have readily
determinable fair values and for which the Company does not
exercise significant influence, the Company classifies these
investments as available-for-sale and, accordingly, recognizes
changes in their fair values as a separate component of
accumulated other comprehensive income (loss) in the
consolidated statements of changes in shareholders equity.
Other-than-temporary losses are recorded in net income and are
based on the Companys assessment of any significant,
sustained reductions in the investments market value and
of the market indicators affecting the securities. Gains and
losses on investments sold are determined on the specific
identification method and are recorded as other income or
expenses, net in the consolidated statements of income.
Since the adoption in 2003 of Financial Accounting Standards
Board Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(revised 2003), and the related FASB Staff Positions
(collectively FIN 46R), the Company assesses
for consolidation entities identified as a Variable Interest
Entity (VIE) and consolidates the VIEs, if any, for
which the Company is determined to be the primary beneficiary.
The primary beneficiary of a VIE is the party that absorbs the
majority of the entitys expected losses, receives the
majority of its expected residual returns, or both as a result
of holding variable interests. Assets, liabilities, and the
non-controlling interest of newly consolidated VIEs are
initially measured at fair value in the same manner as if the
consolidation resulted from a business combination.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.20 Employee benefits
(a) Pension
obligations
The Company sponsors various pension schemes for its employees.
These schemes conform to local regulations and practices in the
countries in which the Company operates. They are generally
funded through payments to insurance companies or
trustee-administered funds, determined by periodic actuarial
calculations. Such plans include both defined benefit and
defined contribution plans. A defined benefit plan is a pension
plan that defines the amount of pension benefit that an employee
will receive on retirement, usually dependent on one or more
factors such as age, years of service and compensation. A
defined contribution plan is a pension plan under which the
Company pays fixed contributions into a separate entity. The
Company has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay
all employees the benefits relating to employee service in the
current and prior periods.
The liability recognized in the consolidated balance sheets in
respect of defined benefit pension plans is the present value of
the defined benefit obligation at the balance sheet date less
the fair value of plan assets, together with adjustments for
unrecognized actuarial gains and losses and past service costs.
Significant estimates are used in determining the assumptions
incorporated in the calculation of the pension obligations,
which is supported by input from independent actuaries.
Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are charged or credited to
income over the employees expected average remaining
working lives. Past-service costs are recognized immediately in
income, unless the changes to the pension scheme are conditional
on the employees remaining in service for a specified period of
time (the vesting period). In this case, the past-service costs
are amortized on a straight-line basis over the vesting period.
Additional minimum liability is required when the accumulated
benefit obligation exceeds the fair value of the plan assets and
the amount of the accrued liability. Such minimum liability is
recognized as a component of accumulated other
comprehensive income (loss) in the consolidated statements
of changes in shareholders equity. The net periodic
benefit cost of the year is determined based on the assumptions
used at the end of the previous year.
For defined contribution plans, the Company pays contributions
to publicly or privately administered pension insurance plans on
a mandatory, contractual or voluntary basis. The Company has no
further payment obligations once the contributions have been
paid. The contributions are recognized as employee benefit
expense when they are due. Prepaid contributions are recognized
as an asset to the extent that a cash refund or a reduction in
the future payments is available.
(b) Other
post-employment obligations
The Company provides post-retirement benefits to some of its
retirees. The entitlement to these benefits is usually
conditional on the employee remaining in service up to
retirement age and to the completion of a minimum service
period. The expected costs of these benefits are accrued over
the period of employment using an accounting methodology similar
to that for defined benefit pension plans. Actuarial gains and
losses arising from experience adjustments, and changes in
actuarial assumptions, are charged or credited to income over
the expected average remaining working lives of the related
employees. These obligations are valued annually by independent
qualified actuaries.
(c) Termination
benefits
Termination benefits are payable when employment is
involuntarily terminated, or whenever an employee accepts
voluntary termination in exchange for these benefits. For the
accounting treatment and timing recognition of the involuntarily
termination benefits, the Company distinguishes between one-time
benefit arrangements and ongoing termination arrangements. A
one-time benefit arrangement is one that is established by a
termination plan that applies to a specified termination event
or for a specified future period. These one-time involuntary
termination benefits are recognized as a liability when the
termination plan meets certain criteria and has been
communicated to employees. If employees are required to render
future service in order to receive these one-time termination
benefits, the liability is recognized ratably over the future
service period. Termination benefits other than one-time
termination benefits are termination benefits for which criteria
for communication are not met but that are committed to by
management, or termination obligations that are not specifically
determined in a new and single plan. These termination benefits
are all legal, contractual and past practice termination
obligations to be paid to employees in case of involuntary
termination. These termination benefits are accrued for at
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
commitment date when it is probable that employees will be
entitled to the benefits and the amount can be reasonably
estimated.
In the case of special termination benefits proposed to
encourage voluntary termination, the Company recognizes a
provision for voluntary termination benefits at the date on
which the employee irrevocably accepts the offer and the amount
can be reasonably estimated.
(d) Profit-sharing
and bonus plans
The Company recognizes a liability and an expense for bonuses
and profit-sharing plans when it is contractually obliged or
where there is a past practice that has created a constructive
obligation.
(e) Share-based
compensation
Stock
options
At December 31, 2005, the Company had five employee and
Supervisory Board stock-option plans, which are described in
detail in Note 15. Until the fourth quarter of 2005, the
Company applied the intrinsic-value-based method prescribed by
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and
its related implementation guidance, in accounting for
stock-based awards to employees. For all option grants prior to
the fourth quarter of 2005, no stock-based employee compensation
cost was reflected in net income as all options under those
plans were granted at an exercise price equal to the market
value of the underlying common stock on the date of grant.
The following tabular presentation provides pro forma
information on net income and earnings per share required to be
disclosed as if the Company had applied the fair value
recognition provisions prescribed by Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123), for the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income, as reported
|
|
|
266 |
|
|
|
601 |
|
|
|
253 |
|
of which compensation expense on nonvested shares, net of
tax effect
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
Deduct: Total stock-option employee compensation expense
determined under FAS 123, net of related tax effects
|
|
|
(244 |
) |
|
|
(166 |
) |
|
|
(186 |
) |
Net income, pro forma
|
|
|
22 |
|
|
|
435 |
|
|
|
67 |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
|
0.30 |
|
|
|
0.67 |
|
|
|
0.29 |
|
|
Basic, pro forma
|
|
|
0.02 |
|
|
|
0.49 |
|
|
|
0.08 |
|
|
Diluted, as reported
|
|
|
0.29 |
|
|
|
0.65 |
|
|
|
0.27 |
|
|
Diluted, pro forma
|
|
|
0.02 |
|
|
|
0.47 |
|
|
|
0.07 |
|
The Company has amortized the pro forma compensation expense
over the nominal vesting period for employees. The pro forma
information presented above for the year ended December 31,
2005 includes an approximate $182 million charge relating
to the effect of accelerating the vesting period of all
outstanding unvested stock options during the third quarter of
2005, which has been recognized immediately in the pro forma
result for the amount that otherwise would have been recognized
ratably over the remaining vesting period.
The fair value of the Companys stock options was estimated
under FAS 123 using a Black-Scholes option pricing model since
the simple characteristics of the stock options did not require
complex pricing assumptions. Forfeitures of options are
reflected in the pro forma charge as they occur. For those stock
option plans with graded vesting periods, the Company has
determined that the historical exercise activity actually
reflects that employees exercise the option after the close of
the graded vesting period. Therefore, the Company recognizes the
estimated pro forma charge for stock option plans with graded
vesting period on a straight-line basis.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The fair value of stock options under FAS 123 provisions was
estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Expected life (years)
|
|
|
6.1 |
|
|
|
6.1 |
|
|
|
5.9 |
|
Historical Company share price volatility
|
|
|
52.9% |
|
|
|
56.4% |
|
|
|
59.6% |
|
Risk-free interest rate
|
|
|
3.84% |
|
|
|
3.6% |
|
|
|
2.7% |
|
Dividend yield
|
|
|
0.69% |
|
|
|
0.56% |
|
|
|
0.35% |
|
The Company has determined the historical share price volatility
to be the most appropriate estimate of future price activity.
The weighted average fair value of stock options granted during
2005 was $8.60 ($12.14 in 2004 and $10.66 in 2003).
Nonvested
shares
In 2005, the Company redefined its equity-based compensation
strategy by no longer granting options but rather issuing
nonvested shares. In July 2005, the Company amended its latest
Stock Option Plans for employees, Supervisory Board and
Professionals of the Supervisory Board accordingly. As part of
this revised stock-based compensation policy, the Company
decided in July 2005 to accelerate the vesting period of all
outstanding unvested stock options, following authorization from
the Companys shareholders at the annual general meeting
held on March 18, 2005. As a result, underwater options
equivalent to approximately 32 million shares became
exercisable immediately in July 2005 with no earnings impact. In
addition, on October 25, 2005, the Company granted
nonvested shares to senior executives, selected employees and
members of the Supervisory Board to be issued upon vesting from
treasury stock. The shares were granted for free to employees
and at their nominal value for the members of the Supervisory
Board. The awards granted to employees will contingently vest
upon achieving certain market or performance conditions and upon
completion of a three-year service period.
Shares granted to the Supervisory Board vest unconditionally
along the same vesting period as employees. Since nonvested
shares granted to Supervisory Board members are not forfeited,
even if the service period is not completed, their associated
compensation cost has been recorded immediately at grant.
Nonvested share grants are further explained in Note 15.
In the fourth quarter of 2005 the Company decided to early adopt
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, and the related FASB
Staff Positions (collectively FAS 123R), which
requires a public entity to measure the cost of share-based
service awards based on the grant-date fair value of the award.
That cost will be 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. The early adoption of FAS 123R is described in
Note 2.24.
2.21 Convertible debt
Zero-coupon convertible bonds are recorded at the principal
amount on maturity in long-term debt and are presented net of
the debt discount on issuance. This discount is amortized over
the term of the debt as interest expense using the interest rate
method.
Zero-coupon convertible bonds issued with a negative yield are
initially recorded at their accreted value as of the first
redemption right of the holder. The negative yield is recorded
as capital surplus and represents the difference between the
principal amount at issuance and the lower accreted value at the
first redemption right of the holder.
Debt issuance costs are included in long-term investments and
are amortized in interest income (expense), net
until the first redemption right of the holder. Outstanding
bonds amounts are classified in the consolidated balance sheet
as current portion of long term debt in the year of
the redemption right of the holder.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.22 Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares or options are
shown in equity as a deduction, net of tax, from the proceeds.
Where any subsidiary purchases the Companys equity share
capital (treasury shares), the consideration paid, including any
directly attributable incremental costs (net of income taxes),
is deducted from equity attributable to the Companys
equity holders until the shares are cancelled, reissued or
disposed of. Where such shares are subsequently sold or
reissued, any consideration received net of directly
attributable incremental transaction costs and the related
income tax effect is included in equity.
2.23 Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity
of a business during a period except those resulting from
investment by shareholders and distributions to shareholders. In
the accompanying consolidated financial statements,
accumulated other comprehensive income (loss)
consists of, unrealized gains or losses on marketable securities
classified as available-for-sale, the change in the excess of
the minimum pension liability over the unrecognized prior
service cost of certain pension plans and the unrealized gain
(loss) on derivatives, all net of tax as well as foreign
currency translation adjustments.
2.24 Recent accounting pronouncements
In November 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (FAS 151). The Standard
requires abnormal amounts of idle capacity and spoilage costs to
be excluded from the cost of inventory and expensed when
incurred. The provisions of FAS 151 are applicable
prospectively to inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company early adopted
FAS 151 in 2005. As costs associated with underutilization
of manufacturing facilities have historically been charged
directly to cost of sales, FAS 151 has not had a material
effect on the Companys financial position or results of
operations.
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29 (FAS 153). This Statement
amends Opinion 29 to eliminate the exception to the basic
fair value measurement principle for nonmonetary exchanges of
similar productive assets and replaces it with a general
exception for exchanges of transactions that do not have
commercial substance, that is, transactions that are not
expected to result in significant changes in the cash flows of
the reporting entity. The Statement is effective prospectively
for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005, with early application
permitted. The Company early adopted FAS 153 in 2005 but
has not had any material nonmonetary exchanges of assets since
FAS 153 was published. Therefore, FAS 153 has not had
a material effect on the Companys financial position or
results of operations.
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, and the related FASB
Staff Positions (collectively FAS 123R). This
Statement revises FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. FAS 123R requires
a public entity to measure the cost of share-based service
awards based on the grant-date fair value of the award. That
cost will be 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. The
grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments.
FAS 123R also requires more extensive disclosures than the
previous standards relating to the nature of share-based payment
transactions, compensation cost and cash flow effects. On
April 14, 2005, the U.S. Securities and Exchange Commission
amended the effective date of FAS 123R; the Statement now
applies to all awards granted and to all unvested awards
modified, repurchased, or cancelled during the first annual
reporting period beginning after June 15, 2005.
FAS 123R provides a choice of transition methods including
the modified prospective application method, which allows
discretionary restatement of interim periods during the calendar
year of adoption, or the modified retrospective application
method, which allows the restatement of the prior years
presented. Each method requires the cumulative effect of
initially applying FAS 123R to be recognized in the period
of adoption. The Company early adopted FAS 123R in the
fourth quarter of 2005 using the modified prospective application
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
method. As such, the Company has not restated prior periods to
reflect the recognition of stock-based compensation cost. The
Company redefined in the second quarter of 2005 its equity-based
compensation strategy, since it had become minimally effective
in motivating and retaining key-employees. The Company will no
longer grant options but rather issue nonvested shares. As part
of this revised equity-based compensation policy, the Company
decided in July 2005 to accelerate the vesting period of all
outstanding unvested stock options. These options totaling
approximately 32 million had no intrinsic economic value
based on the market price of the shares at the date of
acceleration. The acceleration of the vesting period will avoid
any future compensation expense associated with FAS 123R;
accordingly, the Company did not recognize any cumulative effect
of initially adopting FAS 123R since no outstanding
unvested stock awards existed as of the adoption date of
FAS 123R. The impact of FAS 123R on the Companys
grant of nonvested shares in the fourth quarter of 2005 is
further illustrated in Note 15.
In 2005, the Company adopted Financial Accounting Standards
Board Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47).
FIN 47 clarifies certain terms of Financial Accounting
Standards Board No. 143, Accounting for Asset Retirement
Obligations (FAS 143), and related FASB Staff
Positions, and deals with obligations to perform asset
retirement activities in which the timing and (or) method of
settlement are conditional on a future event, such as legal
requirements surrounding asbestos handling and disposal that are
triggered by demolishing or renovating a facility. The new
guidance requires entities to recognize liabilities for these
obligations if the fair value of a conditional asset retirement
obligation can be reasonably estimated. Upon adoption of
FIN 47, the Company identified its conditional asset
retirement obligations and determined that none had a material
effect on its financial position or results of operations for
the year ended December 31, 2005.
3 EQUITY-METHOD INVESTMENTS
SuperH
Joint Venture
In 2001, the Company and Renesas Technology Corp. (previously
known as Hitachi, Ltd.) formed a joint venture to develop and
license RISC microprocessors. The joint venture, SuperH Inc.,
was initially capitalized with the Companys contribution
of $15 million of cash plus internally developed
technologies with an agreed intrinsic value of $14 million
for a 44% interest. Renesas Technology Corp. contributed
$37 million of cash for a 56% interest. The Company
accounted for its share in the SuperH, Inc. joint venture under
the equity method based on the actual results of the joint
venture. During 2002 and 2003, the Company made additional
capital contributions on which accumulated losses exceeded the
Companys total investment, which was shown at a zero
carrying value in the consolidated balance sheet.
In 2003, the shareholders agreement was amended to require
an additional $3 million cash contribution from the
Company. This amount was fully accrued, based on the inability
of the joint venture to meet its projected business plan
objectives, and the charge was reflected in the 2003
consolidated statement of income line Impairment,
restructuring charges and other related closure costs. In
2004, the shareholders agreed to restructure the joint venture
by transferring the intellectual properties to each shareholder
and continuing any further development individually. Based upon
estimates of forecasted cash requirements of the joint venture,
the Company paid an additional $2 million, which was
reflected in the 2004 consolidated statement of income as
loss on equity investments. In 2005, the joint
venture was liquidated with no further losses incurred by the
Company.
UPEK
Inc.
In 2004, the Company and Sofinnova Capital IV FCPR formed a new
company, UPEK Inc., as a venture capitalist-funded purchase of
the Companys TouchChip business. UPEK, Inc. was initially
capitalized with the Companys transfer of the business,
personnel and technology assets related to the fingerprint
biometrics business, formerly known as the TouchChip Business
Unit, for a 48% interest. Sofinnova Capital IV FCPR contributed
$11 million of cash for a 52% interest. During the first
quarter of 2005, an additional $9 million was contributed
by Sofinnova Capital IV FCPR, reducing the Companys
ownership to 33%. The Company accounted for its share in UPEK,
Inc. under the equity method and in 2004 recorded losses of
approximately $2 million, which were reflected in the 2004
consolidated statement of income as Loss on equity
investments.
On June 30, 2005, the Company sold its interest in UPEK
Inc. for $13 million and recorded a gain amounting to
$6 million in Other income and expenses, net on
its consolidated statement of income.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Additionally, on June 30, 2005, the Company was granted
warrants for 2,000,000 shares of UPEK, Inc. at an exercise price
of $0.01 per share. The warrants are not limited in time but can
only be exercised in the event of a change of control or an
Initial Public Offering of UPEK Inc. above a predetermined value.
Hynix
ST Joint Venture
Pursuant to the joint-venture agreement signed in 2004 by the
Company with Hynix Semiconductor Inc. to build a $2 billion
front-end memory-manufacturing facility in Wuxi City, Jiangsu
Province, China, the Company made capital contributions to the
joint venture totaling $38 million in 2005. Under the
agreement, Hynix Semiconductor Inc. will contribute
$500 million for a 67% equity interest and the Company will
contribute $250 million for a 33% equity interest. In
addition, the Company committed to grant $250 million in
long-term financing to the new joint venture guaranteed by the
subordinated collateral of the joint-ventures assets. As
of December 31, 2005 the Company has not provided any debt
financing to the joint venture under this commitment. The
Companys current maximum exposure to loss as a result of
its involvement with the joint venture is limited to its equity
and debt investment commitments.
The Company has identified the joint venture as a Variable
Interest Entity (VIE) at December 31, 2005, but has
determined that it is not the primary beneficiary of the VIE.
The Company accounts for its share in the Hynix ST joint venture
under the equity method based on the actual results of the joint
venture and recorded losses totaling $4 million in 2005 as
loss on equity investments.
4 TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Trade accounts receivable
|
|
|
1,517 |
|
|
|
1,429 |
|
Less valuation allowance
|
|
|
(27 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
Total
|
|
|
1,490 |
|
|
|
1,408 |
|
|
|
|
|
|
|
|
Bad debt expense in 2005 and 2004 was $7 and $5 million,
respectively. In 2003, the Company decreased its valuation
allowance and recorded income of $10 million. In 2005, 2004
and 2003, one customer, the Nokia group of companies,
represented 22.4%, 17.1% and 17.9% of consolidated net revenues,
respectively.
5 INVENTORIES, NET
Inventories, net of reserve consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw materials
|
|
|
60 |
|
|
|
70 |
|
Work-in-process
|
|
|
880 |
|
|
|
874 |
|
Finished products
|
|
|
471 |
|
|
|
400 |
|
|
|
|
|
|
|
|
Total
|
|
|
1,411 |
|
|
|
1,344 |
|
|
|
|
|
|
|
|
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
6 OTHER RECEIVABLES AND ASSETS
Other receivables and assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Receivables from government agencies
|
|
|
168 |
|
|
|
212 |
|
Taxes and other government receivables
|
|
|
189 |
|
|
|
143 |
|
Advances to suppliers
|
|
|
2 |
|
|
|
3 |
|
Advances to employees
|
|
|
10 |
|
|
|
16 |
|
Prepaid expenses
|
|
|
48 |
|
|
|
88 |
|
Sundry debtors within cooperation agreements
|
|
|
67 |
|
|
|
85 |
|
Foreign exchange forward contracts
|
|
|
3 |
|
|
|
200 |
|
Other
|
|
|
44 |
|
|
|
38 |
|
|
|
|
|
|
|
|
Total
|
|
|
531 |
|
|
|
785 |
|
|
|
|
|
|
|
|
Receivables from government agencies relate to research and
development contracts, industrialization contracts and capital
investment projects.
7 GOODWILL
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application | |
|
|
|
|
|
|
|
|
Specific | |
|
Memory | |
|
|
|
|
|
|
Products | |
|
Products | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
December 31, 2003
|
|
|
176 |
|
|
|
85 |
|
|
|
6 |
|
|
|
267 |
|
|
TouchChip sale
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
Foreign currency translation
|
|
|
(3 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
173 |
|
|
|
88 |
|
|
|
3 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE goodwill impairment
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
(39 |
) |
Foreign currency translation
|
|
|
|
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
134 |
|
|
|
85 |
|
|
|
2 |
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, the Company decided to reduce its Access technology
products for Customer Premises Equipment (CPE) modem
products. The Company reports CPE business as part of the Access
reporting unit, included in the Application Specific Product
Groups (ASG). Following the decision to discontinue
a portion of this reporting unit, the Company, in compliance
with FAS 142, Goodwill and Other Intangible Assets,
reassessed the allocation of goodwill between the continuing
Access reporting unit and the business to be disposed of
according to their relative fair values using market
comparables. The reassessment resulted in a $39 million
goodwill impairment in 2005.
8 INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
December 31, 2005 |
|
Gross Cost | |
|
Amortization | |
|
Net Cost | |
|
|
| |
|
| |
|
| |
Technologies & licenses
|
|
|
309 |
|
|
|
(199 |
) |
|
|
110 |
|
Purchased software
|
|
|
162 |
|
|
|
(114 |
) |
|
|
48 |
|
Internally developed software
|
|
|
114 |
|
|
|
(48 |
) |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
585 |
|
|
|
(361 |
) |
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Accumulated | |
|
Net | |
December 31, 2004 |
|
Cost | |
|
Amortization | |
|
Cost | |
|
|
| |
|
| |
|
| |
Technologies & licenses
|
|
|
409 |
|
|
|
(233 |
) |
|
|
176 |
|
Purchased software
|
|
|
148 |
|
|
|
(100 |
) |
|
|
48 |
|
Internally developed software
|
|
|
104 |
|
|
|
(37 |
) |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
661 |
|
|
|
(370 |
) |
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense in 2005, 2004 and 2003 was
$98 million, $112 million and $103 million,
respectively.
The estimated amortization expense of the existing intangible
assets for the following years is:
|
|
|
|
|
Year |
|
|
|
|
|
2006
|
|
|
107 |
|
2007
|
|
|
68 |
|
2008
|
|
|
33 |
|
2009
|
|
|
11 |
|
2010
|
|
|
4 |
|
Thereafter
|
|
|
1 |
|
|
|
|
|
Total
|
|
|
224 |
|
|
|
|
|
9 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Accumulated | |
|
Net | |
December 31, 2005 |
|
Cost | |
|
Depreciation | |
|
Cost | |
|
|
| |
|
| |
|
| |
Land
|
|
|
84 |
|
|
|
|
|
|
|
84 |
|
Buildings
|
|
|
1,071 |
|
|
|
(267 |
) |
|
|
804 |
|
Capital leases
|
|
|
55 |
|
|
|
(29 |
) |
|
|
26 |
|
Facilities & leasehold improvements
|
|
|
2,715 |
|
|
|
(1,294 |
) |
|
|
1,421 |
|
Machinery and equipment
|
|
|
12,473 |
|
|
|
(9,063 |
) |
|
|
3,410 |
|
Computer and R&D equipment
|
|
|
492 |
|
|
|
(381 |
) |
|
|
111 |
|
Other tangible assets
|
|
|
131 |
|
|
|
(103 |
) |
|
|
28 |
|
Construction in progress
|
|
|
291 |
|
|
|
|
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,312 |
|
|
|
(11,137 |
) |
|
|
6,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Accumulated | |
|
Net | |
December 31, 2004 |
|
Cost | |
|
Depreciation | |
|
Cost | |
|
|
| |
|
| |
|
| |
Land
|
|
|
93 |
|
|
|
|
|
|
|
93 |
|
Buildings
|
|
|
1,021 |
|
|
|
(250 |
) |
|
|
771 |
|
Capital leases
|
|
|
66 |
|
|
|
(31 |
) |
|
|
35 |
|
Facilities & leasehold improvements
|
|
|
2,763 |
|
|
|
(1,187 |
) |
|
|
1,576 |
|
Machinery and equipment
|
|
|
12,898 |
|
|
|
(8,581 |
) |
|
|
4,317 |
|
Computer and R&D equipment
|
|
|
516 |
|
|
|
(382 |
) |
|
|
134 |
|
Other tangible assets
|
|
|
125 |
|
|
|
(108 |
) |
|
|
17 |
|
Construction in progress
|
|
|
499 |
|
|
|
|
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,981 |
|
|
|
(10,539 |
) |
|
|
7,442 |
|
|
|
|
|
|
|
|
|
|
|
The depreciation charge in 2005, 2004 and 2003 was
$1,846 million, $1,725 million and
$1,505 million, respectively.
Capital investment funding has totaled $38 million,
$46 million and $62 million in the years ended
December 31, 2005, 2004 and 2003, respectively. Public
funding reduced the depreciation charge by $66 million,
$74 million and $80 million in 2005, 2004 and 2003,
respectively.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
For the years ended December 31, 2005, 2004 and 2003 the
Company made equipment sales for cash proceeds of
$82 million, $10 million and $8 million,
respectively.
10 AVAILABLE-FOR-SALE MARKETABLE SECURITIES
In 2003 the Company has classified certain marketable securities
as available-for-sale, which related to equity securities held
as strategic investments in various companies. During 2004, all
available-for-sale securities were sold. For fiscal years 2005,
2004 and 2003, gross realized gains associated with the sale of
the marketable securities were $0 million, $5 million
and $16 million, respectively.
11 INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Equity-method investments (see note 3)
|
|
|
35 |
|
|
|
6 |
|
Cost investments
|
|
|
36 |
|
|
|
34 |
|
Long-term receivables related to funding
|
|
|
33 |
|
|
|
33 |
|
Debt issuance costs, net
|
|
|
3 |
|
|
|
8 |
|
Deposits and other long-term receivables
|
|
|
46 |
|
|
|
36 |
|
|
|
|
|
|
|
|
Total
|
|
|
153 |
|
|
|
117 |
|
|
|
|
|
|
|
|
The Company entered into a joint venture agreement in 2002 with
Dai Nippon Printing Co, Ltd for the development and production
of photomask in which the Company holds a 19% equity interest.
The joint venture, DNP Photomask Europe S.p.A, was initially
capitalized with the Companys contribution of
2 million
of cash. Dai Nippon Printing Co, Ltd contributed
8 million
of cash for an 81% equity interest. In the event of the
liquidation of the joint-venture, the Company is required to
repurchase the land at cost, and the facility at 10% of its net
book value, if no suitable buyer is identified. No provision for
this obligation has been registered to date. At
December 31, 2005, the Companys total contribution to
the joint venture is $10 million. The Company continues to
maintain its 19% ownership of the joint venture, and therefore
continues to account for this investment under the cost method.
The Company has identified the joint venture as a Variable
Interest Entity (VIE), but has determined that it is not the
primary beneficiary of the VIE.
12 OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Taxes other than income taxes
|
|
|
77 |
|
|
|
68 |
|
Salaries and wages
|
|
|
248 |
|
|
|
261 |
|
Social charges
|
|
|
110 |
|
|
|
120 |
|
Advances received on government fundings
|
|
|
24 |
|
|
|
25 |
|
Foreign exchange forward contracts
|
|
|
31 |
|
|
|
109 |
|
Current portion of provision for restructuring
|
|
|
40 |
|
|
|
39 |
|
Pension and termination benefits
|
|
|
21 |
|
|
|
11 |
|
Other
|
|
|
91 |
|
|
|
143 |
|
|
|
|
|
|
|
|
Total
|
|
|
642 |
|
|
|
776 |
|
|
|
|
|
|
|
|
Other payables and accrued liabilities also include individually
insignificant amounts as of December 31, 2005 and
December 31, 2004.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
13 RETIREMENT PLANS
The Company and its subsidiaries have a number of defined
benefit pension plans covering employees in various countries.
The plans provide for pension benefits, the amounts of which are
calculated based on factors such as years of service and
employee compensation levels. The Company uses a
December 31 measurement date for the majority of its plans.
Eligibility is generally determined in accordance with local
statutory requirements.
The changes in benefit obligation and plan assets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
286 |
|
|
|
249 |
|
Service cost
|
|
|
18 |
|
|
|
18 |
|
Interest cost
|
|
|
14 |
|
|
|
13 |
|
Benefits paid
|
|
|
(10 |
) |
|
|
(6 |
) |
Actuarial losses
|
|
|
34 |
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(24 |
) |
|
|
15 |
|
Other
|
|
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
323 |
|
|
|
286 |
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Plan assets at fair value at beginning of year
|
|
|
181 |
|
|
|
150 |
|
Actual return on plan assets
|
|
|
11 |
|
|
|
11 |
|
Employer and participant contributions
|
|
|
16 |
|
|
|
19 |
|
Benefits paid
|
|
|
(10 |
) |
|
|
(6 |
) |
Actuarial gain (losses)
|
|
|
10 |
|
|
|
(2 |
) |
Foreign currency translation adjustments
|
|
|
(14 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
Plan assets at fair value at end of year
|
|
|
194 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Funded status
|
|
|
(129 |
) |
|
|
(105 |
) |
Unrecognized prior service cost
|
|
|
(3 |
) |
|
|
(3 |
) |
Unrecognized transition obligation
|
|
|
(1 |
) |
|
|
(1 |
) |
Unrecognized actuarial loss
|
|
|
77 |
|
|
|
60 |
|
|
|
|
|
|
|
|
Net amount recognized
|
|
|
(56 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
Net amount recognized in the balance sheet consisted of the
following:
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
|
2 |
|
|
|
2 |
|
Accrued benefit liability
|
|
|
(93 |
) |
|
|
(93 |
) |
Intangible asset
|
|
|
1 |
|
|
|
1 |
|
Accumulated other comprehensive income
|
|
|
34 |
|
|
|
41 |
|
|
|
|
|
|
|
|
Net amount recognized
|
|
|
(56 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plans
with accumulated benefit obligations in excess of plan assets
were $313 million, $270 million and $184 million,
respectively, as of December 31, 2005 and
$251 million, $216 million and $147 million,
respectively, as of December 31, 2004.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The components of the net periodic benefit cost included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Service cost
|
|
|
18 |
|
|
|
18 |
|
|
|
14 |
|
Interest cost
|
|
|
14 |
|
|
|
13 |
|
|
|
10 |
|
Expected return on plan assets
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
(7 |
) |
Amortization of unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
3 |
|
|
|
8 |
|
|
|
2 |
|
Amortization of prior service cost
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
24 |
|
|
|
29 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used in the determination of
the benefit obligation for the pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
Assumptions |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
4.54% |
|
|
|
5.02% |
|
|
|
5.25% |
|
Salary increase rate
|
|
|
3.75% |
|
|
|
3.34% |
|
|
|
3.34% |
|
Expected long-term rate of return on funds for the pension
expense of the year
|
|
|
6.34% |
|
|
|
6.44% |
|
|
|
6.75% |
|
The discount rate was determined by comparison against long-term
corporate bond rates applicable to the respective country of
each plan. In developing the expected long-term rate of return
on assets, the Company modelled the expected long-term rates of
return for broad categories of investments held by the plan
against a number of various potential economic scenarios.
The Company pension plan asset allocation at December 31,
2005 and 2004 and target allocation for 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
|
Plan Assets at | |
|
|
|
|
December | |
|
|
Target allocation | |
|
| |
Asset Category |
|
2005 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Equity securities
|
|
|
57% |
|
|
|
61% |
|
|
|
57% |
|
Fixed income securities
|
|
|
39% |
|
|
|
37% |
|
|
|
39% |
|
Real estate
|
|
|
2% |
|
|
|
2% |
|
|
|
2% |
|
Other
|
|
|
2% |
|
|
|
|
|
|
|
2% |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
The Companys investment strategy for its pension plans is
to maximize the long-term rate of return on plan assets with an
acceptable level of risk in order to minimize the cost of
providing pension benefits while maintaining adequate funding
levels. The Companys practice is to periodically conduct a
strategic review of its asset allocation strategy. A portion of
the fixed income allocation is reserved in short-term cash to
provide for expected benefits to be paid. The Companys
equity portfolios are managed in such a way as to achieve
optimal diversity. The Company does not manage any assets
internally and does not utilize hedging, future or derivative
instruments.
After considering the funded status of the Companys
defined benefit plans, movements in the discount rate,
investment performance and related tax consequences, the Company
may choose to make contributions to its pension plans in any
given year in excess of required amounts. The Company
contributions to plan assets were $12 million and
$17 million in 2005 and 2004, respectively. The Company
expects to contribute cash of $8 million in 2006.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The Companys estimated future benefit payments as of
December 2005 are as follows:
|
|
|
|
|
|
|
Estimated future | |
Years |
|
benefit payments | |
|
|
| |
2006
|
|
|
9 |
|
2007
|
|
|
8 |
|
2008
|
|
|
10 |
|
2009
|
|
|
10 |
|
2010
|
|
|
7 |
|
From 2011 to 2015
|
|
|
66 |
|
The Company also has other plans not calculated based on the
employees expected date of separation or retirement:
|
|
|
|
|
For Italian termination indemnity plan (TFR), the
Company calculates the vested benefits to which Italian
employees are entitled if they separate immediately as of
December 2005, in compliance with the Emerging Issues Task Force
Issue No. 88-1,
Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan
(EITF 88-1).
The benefits accrued on a
pro-rata basis during
the employees employment period are based on the
individuals salaries, adjusted for inflation. Movements in
the reserve were as follows: |
|
|
|
|
|
Balance as of December 31, 2002
|
|
|
129 |
|
Provision for the year
|
|
|
29 |
|
Indemnities paid during the year
|
|
|
(19 |
) |
Foreign currency translation adjustments
|
|
|
31 |
|
Balance as of December 31, 2003
|
|
|
170 |
|
Provision for the year
|
|
|
33 |
|
Indemnities paid during the year
|
|
|
(25 |
) |
Foreign currency translation adjustments
|
|
|
14 |
|
Balance as of December 31, 2004
|
|
|
192 |
|
Provision for the year
|
|
|
34 |
|
Indemnities paid during the year
|
|
|
(18 |
) |
Foreign currency translation adjustments
|
|
|
(26 |
) |
Balance as of December 31, 2005
|
|
|
182 |
|
|
|
|
|
|
The Company has certain defined contribution plans, which
accrued benefits for employees on a pro-rata basis during their
employment period based on their individual salaries. The
Company accrued benefits related to defined contribution pension
plans of $21 million and $11 million, as of
December 31, 2005 and 2004, respectively. The annual cost
of these plans amounted to approximately $42 million,
$29 million and $25 million in 2005, 2004 and 2003,
respectively. The benefits accrued to the employees on a
pro-rata basis, during their employment period are based on the
individuals salaries. |
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
14 LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Bank loans:
|
|
|
|
|
|
|
|
|
2.62% (weighted average), due 2006, floating interest rate at
Libor + 0.30
|
|
|
45 |
|
|
|
105 |
|
2.53% (weighted average), due 2007, fixed interest rate
|
|
|
120 |
|
|
|
153 |
|
4.77% (weighted average rate), due 2007, variable interest rate
|
|
|
36 |
|
|
|
44 |
|
5.08% due 2008, floating interest rate at Libor + 0.40
|
|
|
25 |
|
|
|
|
|
5.11% due 2010, floating interest rate at Libor + 0.40
|
|
|
25 |
|
|
|
|
|
Funding program loans:
|
|
|
|
|
|
|
|
|
5.35% (weighted average), due 2006, fixed interest rate
|
|
|
4 |
|
|
|
13 |
|
1.07% (weighted average), due 2009, fixed interest rate
|
|
|
72 |
|
|
|
102 |
|
3.10% (weighted average), due 2012, fixed interest rate
|
|
|
12 |
|
|
|
14 |
|
0.83% (weighted average), due 2017, fixed interest rate
|
|
|
47 |
|
|
|
55 |
|
Capital leases:
|
|
|
|
|
|
|
|
|
4.78%, due 2011, fixed interest rate
|
|
|
26 |
|
|
|
35 |
|
Convertible debt:
|
|
|
|
|
|
|
|
|
-0.50% convertible bonds due 2013
|
|
|
1,379 |
|
|
|
1,379 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,791 |
|
|
|
1,900 |
|
Less current portion
|
|
|
1,522 |
|
|
|
133 |
|
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
|
269 |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
Long-term debt is denominated in the following currencies:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
U.S. dollar
|
|
|
1,454 |
|
|
|
1,404 |
|
Euro
|
|
|
206 |
|
|
|
324 |
|
Singapore dollar
|
|
|
120 |
|
|
|
153 |
|
Other
|
|
|
11 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Total
|
|
|
1,791 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
Aggregate future maturities of total long-term debt outstanding
are as follows:
|
|
|
|
|
|
|
December 31, | |
|
|
2005 | |
|
|
| |
2006
|
|
|
1,522 |
|
2007
|
|
|
119 |
|
2008
|
|
|
58 |
|
2009
|
|
|
30 |
|
2010
|
|
|
22 |
|
Thereafter
|
|
|
40 |
|
|
|
|
|
Total
|
|
|
1,791 |
|
|
|
|
|
In August 2003, the Company issued $1,332 million principal
amount at maturity of zero coupon unsubordinated convertible
bonds due 2013. The bonds were issued with a negative yield of
0.5% that resulted in a higher principal amount at issuance of
$1,400 million and net proceeds of $1,386 million. The
negative yield through the first redemption right of the holder
totals $21 million and has been recorded in capital
surplus. The bonds are convertible at any time by the holders at
the rate of 29.9144 shares of the Companys common stock
for each one thousand dollar face value of the bonds. The
holders may redeem their convertible bonds on August 5,
2006 at a price of $985.09, on August 5, 2008 at $975.28
and on August 5, 2010 at $965.56 per one thousand dollar
face value of the notes. As a result of this holders
redemption option in August 2006, the
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
outstanding amount of 2013 Bonds was classified in the
consolidated balance sheet as current portion of long-term
debt as of December 31, 2005. At any time from
August 20, 2006 the Company may redeem for cash at their
negative accreted value all or a portion of the convertible
bonds subject to the level of the Companys share price.
Credit facilities
The Company has revolving line of credit agreements with several
financial institutions totalling $1,957 million at
December 31, 2005. At December 31, 2005, amounts
available under the lines of credit were reduced by borrowings
of $11 million at a weighted average interest rate of 4.40%.
15 SHAREHOLDERS EQUITY
15.1 Outstanding shares
The authorized share capital of the Company is EUR
1,810 million consisting of 1,200,000,000 common shares and
540,000,000 preference shares, each with a nominal value of
EUR 1.04. As of December 31, 2005 the number of shares
of common stock issued was 907,824,279 shares (905,308,997 at
December 31, 2004).
As of December 31, 2005 the number of shares of common
stock outstanding was 894,424,279 (891,908,997 at
December 31, 2004).
15.2 Preference shares
The 540,000,000 preference shares entitle a holder to full
voting rights and to a preferential right to dividends and
distributions upon liquidation. The Company holds an option
agreement with STMicroelectronics Holding II B.V. in
order to protect the Company from a hostile takeover or other
similar action. The option agreement provides for 540,000,000
preference shares to be issued to STMicroelectronics
Holding II B.V. upon their request based on approval
by the Companys Supervisory Board. STMicroelectronics
Holding II B.V. would be required to pay at least 25%
of the par value of the preference shares to be issued, and to
retain ownership of at least 30% of the Companys issued
share capital. An amendment was signed in November 2004 which
reduced the threshold required for STMicroelectronics
Holding II B.V. to exercise its preference shares of
the Company down to 19% issued share capital from the previous
requirement of at least 30%. There were no preference shares
issued as of December 31, 2005.
15.3 Treasury shares
In 2002 and 2001, the Company repurchased 13,400,000 of its own
shares, for a total amount of $348 million, which were
reflected at cost as a reduction of the shareholders
equity. No treasury shares were acquired in 2003, 2004 and 2005.
Treasury shares of 4,100,000 have been designated to be used for
the Companys share-based remuneration programs on
nonvested shares as decided in 2005. As of December 31,
2005, none of the common shares repurchased had been transferred
to employees under the Companys share-based remuneration
programs.
15.4 Stock option plans
In 1995, the Shareholders voted to adopt the 1995 Employee Stock
Option Plan (the 1995 Plan) whereby options for up
to 33,000,000 shares may be granted in installments over a
five-year period. Under the 1995 Plan, the options may be
granted to purchase shares of common stock at a price not lower
than the market price of the shares on the date of grant. At
December 31, 2005, under the 1995 plan, 10,106,151 of the
granted options outstanding originally vest 50% after three
years and 50% after four years following the date of the grant;
6,417,880 of the granted options vest 32% after two years, 32%
after three years and 36% after four years following the date of
the grant. The options expire 10 years after the date of
grant. During 2005, the vesting periods for all options under
the plan were accelerated with no impact on the income statement.
In 1996, the Shareholders voted to adopt the Supervisory Board
Option Plan whereby each member of the Supervisory Board was
eligible to receive, during the three-year period 1996-1998,
18,000 options for 1996 and 9,000 options for both 1997 and 1998
to purchase shares of common stock at the closing market price
of the shares on the date of the grant. In the same three-year
period, the professional advisors to the Supervisory Board
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
were eligible to receive 9,000 options for 1996 and 4,500
options for both 1997 and 1998. Under the Plan, the options vest
over one year and are exercisable for a period expiring eight
years from the date of grant.
In 1999, the Shareholders voted to renew the Supervisory Board
Option Plan whereby each member of the Supervisory Board may
receive, during the three-year period 1999-2001, 18,000 options
for 1999 and 9,000 options for both 2000 and 2001 to purchase
shares of capital stock at the closing market price of the
shares on the date of the grant. In the same three-year period,
the professional advisors to the Supervisory Board may receive
9,000 options for 1999 and 4,500 options for both 2000 and 2001.
Under the Plan, the options vest over one year and are
exercisable for a period expiring eight years from the date of
grant.
In 2001, the Shareholders voted to adopt the 2001 Employee Stock
Option Plan (the 2001 Plan) whereby options for up
to 60,000,000 shares may be granted in installments over a
five-year period. The options may be granted to purchase shares
of common stock at a price not lower than the market price of
the shares on the date of grant. In connection with a revision
of its equity-based compensation policy, the Company decided in
2005 to accelerate the vesting period of all outstanding
unvested stock options. The options expire ten years after the
date of grant.
In 2002, the Shareholders voted to adopt a Stock Option Plan for
Supervisory Board Members and Professionals of the Supervisory
Board. Under this plan, 12,000 options can be granted per year
to each member of the Supervisory Board and 6,000 options per
year to each professional advisor to the Supervisory Board.
Options will vest 30 days after the date of grant. The
options expire ten years after the date of grant.
A summary of stock option activity for the plans for the three
years ended December 31, 2005, 2004 and 2003 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Per Share | |
|
|
|
|
| |
|
|
|
|
|
|
Weighted | |
|
|
Number of Shares | |
|
Range | |
|
Average | |
|
|
| |
|
| |
|
| |
Outstanding at December 31, 2002
|
|
|
46,817,761 |
|
|
$ |
6.04-$62.01 |
|
|
$ |
32.01 |
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan
|
|
|
11,976,310 |
|
|
$ |
19.18-$25.90 |
|
|
$ |
19.35 |
|
|
Supervisory Board Plan
|
|
|
132,000 |
|
|
$ |
19.18 |
|
|
$ |
19.18 |
|
Options forfeited
|
|
|
(898,456 |
) |
|
$ |
6.04-$62.01 |
|
|
$ |
37.09 |
|
Options exercised
|
|
|
(1,258,318 |
) |
|
$ |
6.04-$24.88 |
|
|
$ |
10.04 |
|
Outstanding at December 31, 2003
|
|
|
56,769,297 |
|
|
$ |
6.04-$62.01 |
|
|
$ |
29.71 |
|
|
|
|
|
|
|
|
|
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan
|
|
|
12,365,280 |
|
|
$ |
17.08-$27.21 |
|
|
$ |
22.66 |
|
|
Supervisory Board Plan
|
|
|
132,000 |
|
|
$ |
22.71 |
|
|
$ |
22.71 |
|
Options forfeited
|
|
|
(1,304,969 |
) |
|
$ |
6.04-$62.01 |
|
|
$ |
29.20 |
|
Options exercised
|
|
|
(2,537,401 |
) |
|
$ |
6.04-$24.88 |
|
|
$ |
8.93 |
|
Outstanding at December 31, 2004
|
|
|
65,424,207 |
|
|
$ |
12.03-$62.01 |
|
|
$ |
29.18 |
|
|
|
|
|
|
|
|
|
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan
|
|
|
42,200 |
|
|
$ |
16.73-$17.31 |
|
|
$ |
16.91 |
|
|
Supervisory Board Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(2,364,862 |
) |
|
$ |
12.03-$62.01 |
|
|
$ |
29.65 |
|
Options exercised
|
|
|
(2,542,978 |
) |
|
$ |
12.03-$14.23 |
|
|
$ |
13.88 |
|
Outstanding at December 31, 2005
|
|
|
60,558,567 |
|
|
$ |
12.03-$62.01 |
|
|
$ |
29.80 |
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable following acceleration of vesting for
all outstanding unvested stock options were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Options exercisable
|
|
|
60,558,567 |
|
|
|
32,212,680 |
|
|
|
23,338,811 |
|
Weighted average exercise price
|
|
$ |
29.80 |
|
|
$ |
33.84 |
|
|
$ |
28.87 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options
outstanding as of December 31, 2005, 2004 and 2003 was 5.5,
6.3 and 6.4 years, respectively.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The range of exercise prices, the weighted average exercise
price and the weighted average remaining contractual life of
options exercisable as of December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Weighted | |
|
average | |
|
|
Option price | |
|
average | |
|
remaining | |
Number of shares |
|
range | |
|
exercise price | |
|
contractual life | |
|
|
| |
|
| |
|
| |
|
|
2,523,511
|
|
$ |
12.03-$17.31 |
|
|
$ |
12.43 |
|
|
|
1.2 |
|
|
30,682,918
|
|
$ |
19.18-$24.88 |
|
|
$ |
22.03 |
|
|
|
6.2 |
|
236,990
|
|
$ |
25.90-$29.70 |
|
|
$ |
27.18 |
|
|
|
7.3 |
|
|
20,679,858
|
|
$ |
31.09-$44.00 |
|
|
$ |
34.37 |
|
|
|
5.9 |
|
|
|
6,435,290
|
|
$ |
50.69-$62.01 |
|
|
$ |
59.08 |
|
|
|
2.6 |
|
15.5 Employee share purchase plans
In 2003, the Company offered to certain of its employees
worldwide the right to acquire shares of capital stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares | |
|
Price per share | |
|
Discount from | |
|
|
|
|
offered per | |
|
| |
|
the market | |
|
Number of | |
|
|
employee | |
|
In U.S. Dollars | |
|
In Euro | |
|
price | |
|
shares issued | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
June 2003
|
|
|
309 |
|
|
|
17.91 |
|
|
|
15.51 |
|
|
|
15% |
|
|
|
587,862 |
|
No employee share purchase plan was offered in 2005 and 2004.
15.6 Nonvested share awards
Additionally, on October 25, 2005 the Company granted
3,940,065 nonvested shares to senior executives, selected
employees and members of the Supervisory Board, to be issued
upon vesting from treasury stock. The shares were granted for
free to employees. The shares granted to the employees will vest
upon completion of market or internal performance conditions.
Under the program, if the defined market condition is met in the
first quarter of 2006, each employee will receive 100% of the
nonvested shares granted. If the market condition is not
achieved, the employee can earn one-third of the grant for each
of the two performance conditions. If neither the market or
performance conditions are met, the employee will receive none
of the grant. In addition to the market and performance
conditions, the nonvested shares will vest over a requisite
service period: 32% after 6 months, 32% after
18 months and 36% after 30 months following the date
of the grant. At December 31, 2005, 3,914,220 nonvested
shares were outstanding.
On October 25, 2005, the Compensation Committee granted
66,000 stock-based awards to the members of the Supervisory
Board and professionals of the Supervisory Board. These awards
are granted at the nominal value of the share of
1.04 and are not
subject to any vesting conditions. Their associated compensation
cost was recorded immediately at grant. As of December 31,
2005, 51,000 awards were outstanding.
A summary of the nonvested share activity for the year ended
December 31, 2005 is presented below:
|
|
|
|
|
|
|
|
|
|
Nonvested Shares |
|
Number of Shares | |
|
Price | |
|
|
| |
|
| |
Outstanding at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards granted:
|
|
|
|
|
|
|
|
|
|
Amended 2001 Plan
|
|
|
3,940,065 |
|
|
$ |
0 |
|
|
Supervisory Board Plan
|
|
|
66,000 |
|
|
|
1.04 |
|
Awards cancelled:
|
|
|
|
|
|
|
|
|
|
Amended 2001 Plan
|
|
|
(25,845 |
) |
|
$ |
0 |
|
|
Supervisory Board Plan
|
|
|
(15,000 |
) |
|
|
1.04 |
|
Awards exercised
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
3,965,220 |
|
|
$ |
0-1.04 |
|
|
|
|
|
|
|
|
The Company recorded compensation expense for the nonvested
share awards based on the fair value of the awards at the grant
date, which represents the $16.61 share price at the date of the
grant. The fair value of the
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
nonvested shares affected by a market condition, reflects a
discount of 49.50%, using a Monte Carlo path-dependent pricing
model to measure the probability of achieving the market
condition.
The following assumptions were incorporated into the Monte Carlo
pricing model to estimate the 49.50% discount:
|
|
|
|
|
|
|
2005 grant | |
|
|
| |
Historical share price volatility
|
|
|
27.74% |
|
Historical volatility of reference index
|
|
|
25.5% |
|
Three-year average dividend yield
|
|
|
0.55% |
|
Risk-free interest rates used
|
|
|
4.21%-4.33% |
|
Consistent with fair value calculations of stock option grants
in prior years, the Company has determined the historical share
price volatility to be the most appropriate estimate of future
price activity. The weighted average grant-date fair value of
nonvested shares granted in 2005 was $8.50.
The following table illustrates the classification of
stock-based compensation included in the statement of income for
the year ended at December 31, 2005:
|
|
|
|
|
Selling, general and administrative
|
|
$ |
6 million |
|
Research and development
|
|
$ |
3 million |
|
|
|
|
|
Total stock-based compensation expense
|
|
$ |
9 million |
|
|
|
|
|
The compensation expense recorded for nonvested shares in 2005
included a reduction for estimated forfeitures of 6%, reflecting
the historical trend of forfeitures on past stock award plans.
This estimate will be adjusted for actual forfeitures. For
employees eligible for retirement during the three-year
requisite service period, the Company records compensation
expense over the applicable shortened period.
The total deferred income tax benefit recognized in the income
statement related to share-based compensation expense amounted
to $2 million for the year ended December 31, 2005.
Compensation cost capitalized as part of inventory was
$2 million at December 31, 2005. As of
December 31, 2005 there was $23 million of total
unrecognized compensation cost related to the grant of nonvested
shares, which is expected to be recognized over a weighted
average period of ten months.
If the Company had continued to apply the intrinsic-value based
method as prescribed by APB 25 instead of adopting FAS 123R,
compensation expense would have been recognized on all granted
nonvested shares for the intrinsic value, difference between the
exercise price and the market price at the date of grant.
The following table illustrates for the year ended
December 31, 2005 the differences between granting
nonvested shares under the intrinsic-value based method as
prescribed by APB 25 and the fair-value method after adoption of
FAS 123R:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended | |
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Pro forma | |
|
|
As reported | |
|
(applying APB 25) | |
|
|
| |
|
| |
Operating income
|
|
|
244 |
|
|
|
242 |
|
of which compensation expense before tax effect
|
|
|
(9 |
) |
|
|
(11 |
) |
Income before income taxes and minority interests
|
|
|
275 |
|
|
|
273 |
|
Net income
|
|
|
266 |
|
|
|
265 |
|
of which tax benefit related to compensation expense
|
|
|
2 |
|
|
|
3 |
|
|
Earnings per share (Basic)
|
|
|
0.30 |
|
|
|
0.30 |
|
|
Earnings per share (Diluted)
|
|
|
0.29 |
|
|
|
0.29 |
|
Net cash from operating activities
|
|
|
1,798 |
|
|
|
1,798 |
|
Net cash used in financing activities
|
|
|
(178 |
) |
|
|
(178 |
) |
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
15.7 Accumulated other comprehensive income
(loss)
The accumulated balances related to each component of other
comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
|
|
|
|
|
|
|
Foreign | |
|
gain (loss) on | |
|
Unrealized | |
|
Minimum | |
|
Accumulated other | |
|
|
currency | |
|
available-for-sale | |
|
gain (loss) on | |
|
pension liability | |
|
comprehensive | |
|
|
translation | |
|
securities, | |
|
derivatives, | |
|
adjustment, | |
|
income (loss), | |
|
|
income (loss) | |
|
net of tax | |
|
net of tax | |
|
net of tax | |
|
net of tax | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2002
|
|
|
(226 |
) |
|
|
1 |
|
|
|
|
|
|
|
(33 |
) |
|
|
(258 |
) |
Other comprehensive income (loss)
|
|
|
883 |
|
|
|
2 |
|
|
|
|
|
|
|
(4 |
) |
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
657 |
|
|
|
3 |
|
|
|
|
|
|
|
(37 |
) |
|
|
623 |
|
Other comprehensive income (loss)
|
|
|
441 |
|
|
|
(3 |
) |
|
|
59 |
|
|
|
(4 |
) |
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
1,098 |
|
|
|
0 |
|
|
|
59 |
|
|
|
(41 |
) |
|
|
1,116 |
|
Other comprehensive income (loss)
|
|
|
(770 |
) |
|
|
|
|
|
|
(72 |
) |
|
|
7 |
|
|
|
(835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
328 |
|
|
|
0 |
|
|
|
(13 |
) |
|
|
(34 |
) |
|
|
281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.8 Dividends
In 2005 and 2004, the Company paid a cash dividend of $0.12 per
share for a total amount of $107 million each year. In
2003, the Company paid cash dividends of $0.08 per share,
totalling $71 million. Upon the proposal of the
Companys Management Board, the Supervisory Board decided
in January 2006 to recommend for the 2006 Annual General Meeting
of shareholders (AGM) the distribution of a cash
dividend of $0.12 per share.
16 EARNINGS PER SHARE
For the years ended December 31, 2005, 2004 and 2003,
earnings per share (EPS) was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
266 |
|
|
|
601 |
|
|
|
253 |
|
Weighted average shares outstanding
|
|
|
892,760,520 |
|
|
|
891,192,542 |
|
|
|
888,152,244 |
|
Basic EPS
|
|
|
0.30 |
|
|
|
0.67 |
|
|
|
0.29 |
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
266 |
|
|
|
601 |
|
|
|
253 |
|
Convertible debt interest, net of tax
|
|
|
5 |
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Net income adjusted
|
|
|
271 |
|
|
|
605 |
|
|
|
255 |
|
Weighted average shares outstanding
|
|
|
892,760,520 |
|
|
|
891,192,542 |
|
|
|
888,152,244 |
|
Dilutive effect of stock options
|
|
|
854,523 |
|
|
|
2,038,369 |
|
|
|
7,059,127 |
|
Dilutive effect of nonvested shares
|
|
|
116,233 |
|
|
|
|
|
|
|
|
|
Dilutive effect of convertible debt
|
|
|
41,880,104 |
|
|
|
41,880,160 |
|
|
|
41,880,160 |
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in calculating diluted EPS
|
|
|
935,611,380 |
|
|
|
935,111,071 |
|
|
|
937,091,531 |
|
Diluted EPS
|
|
|
0.29 |
|
|
|
0.65 |
|
|
|
0.27 |
|
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
At December 31, 2005, 2004 and 2003, outstanding stock
options included anti-dilutive shares totalling approximately
59,704,044 shares, 63,385,838 shares and
49,710,170 shares, respectively.
17 OTHER INCOME AND EXPENSES, NET
Other income and expenses, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Research and development funding
|
|
|
76 |
|
|
|
84 |
|
|
|
76 |
|
Start-up costs
|
|
|
(56 |
) |
|
|
(63 |
) |
|
|
(55 |
) |
Exchange gain (loss), net
|
|
|
(16 |
) |
|
|
33 |
|
|
|
5 |
|
Patent litigation costs
|
|
|
(14 |
) |
|
|
(31 |
) |
|
|
(24 |
) |
Patent pre-litigation costs
|
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
Gain on sale of non-current assets
|
|
|
12 |
|
|
|
6 |
|
|
|
17 |
|
Other, net
|
|
|
(3 |
) |
|
|
(13 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income and expenses, net
|
|
|
(9 |
) |
|
|
10 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Patent litigation costs include legal and attorney fees and
payment of claims, and patent pre-litigation costs are composed
of consultancy fees and legal fees. Patent litigation costs are
costs incurred in respect of pending litigation. Patent
pre-litigation costs are costs incurred to prepare for licensing
discussions with third parties with a view to concluding an
agreement. In 2003, patent litigation costs included a
$10 million provision for probable losses in connection
with a dispute with a competitor, which was settled in 2004.
18 IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER
RELATED CLOSURE COSTS
In 2005, the Company has incurred charges related to the main
following items: (i) the 150mm restructuring plan started
in 2003; (ii) the streamlining of certain activities
decided in the first quarter of 2005; (iii) the headcount
reduction plan announced in the second quarter of 2005; and
(iv) the yearly impairment review.
During the third quarter of 2003, the Company commenced a plan
to restructure its 150mm fab operations and part of its back-end
operations in order to improve cost competitiveness. The 150mm
restructuring plan focuses on cost reduction by migrating a
large part of European and U.S. 150mm production to
Singapore and by upgrading production to finer geometry 200mm
wafer fabs. The plan includes the discontinuation of the 150mm
production of Rennes (France), the closure as soon as
operationally feasible of the 150mm wafer pilot line in
Castelletto (Italy) and the downsizing by approximately one-half
of the 150mm wafer fab in Carrollton, Texas. Furthermore, the
150mm wafer fab productions in Agrate (Italy) and Rousset
(France) will be gradually phased-out in favor of 200mm wafer
ramp-ups at existing facilities in these locations, which will
be expanded or upgraded to accommodate additional finer geometry
wafer capacity. The Company is expecting to incur the balance of
the restructuring charges related to this manufacturing
restructuring plan in the second half of 2006, later than
previously anticipated to accommodate unforeseen qualification
requirements of the Companys customers.
In the first quarter of 2005, the Company decided to reduce its
Access technology products for Customer Premises Equipment
(CPE) modem products. This decision was intended to
eliminate certain low volume, non-strategic product families
whose returns in the current environment did not meet internal
targets. Additional restructuring initiatives were also
implemented in the first quarter of 2005 such as the closure of
a research and development design center in Karlsruhe (Germany)
and in Malvern (USA), and the discontinuation of a development
project in Singapore.
In May 2005, the Company announced additional restructuring
efforts to improve profitability. These initiatives will aim to
reduce the Companys workforce by 3,000 outside Asia by
the second half of 2006, of which 2,300 are planned for Europe. The Company
plans to reorganize its European activities by optimizing on a
global scale its EWS activities (wafer testing); harmonizing its
support functions; streamlining its activities outside its
manufacturing areas; and by disengaging from certain activities.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In the third quarter of 2005, the Company performed the
impairment test on an annual basis in order to assess the
recoverability of the goodwill carrying value.
Impairment, restructuring charges and other related closure
costs incurred in 2005, 2004 and 2003 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, | |
|
|
|
|
|
|
|
|
restructuring charges | |
|
|
|
|
Restructuring | |
|
Other related | |
|
and other related | |
Year ended December 31, 2005 |
|
Impairment | |
|
charges | |
|
closure costs | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
150mm fab plan
|
|
|
|
|
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(13 |
) |
2005 restructuring initiatives
|
|
|
(66 |
) |
|
|
(46 |
) |
|
|
(2 |
) |
|
|
(114 |
) |
Other
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(67 |
) |
|
|
(50 |
) |
|
|
(11 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, | |
|
|
|
|
|
|
|
|
restructuring charges | |
|
|
|
|
Restructuring | |
|
Other related | |
|
and other related | |
Year ended December 31, 2004 |
|
Impairment | |
|
charges | |
|
closure costs | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
150mm fab plan
|
|
|
|
|
|
|
(29 |
) |
|
|
(35 |
) |
|
|
(64 |
) |
Intangible assets and investments
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Other
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(8 |
) |
|
|
(33 |
) |
|
|
(35 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, | |
|
|
|
|
|
|
|
|
restructuring charges | |
|
|
|
|
Restructuring | |
|
Other related | |
|
and other related | |
Year ended December 31, 2003 |
|
Impairment | |
|
charges | |
|
closure costs | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
150mm fab plan
|
|
|
(155 |
) |
|
|
(34 |
) |
|
|
(1 |
) |
|
|
(190 |
) |
Intangible assets and investments
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Other
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(161 |
) |
|
|
(43 |
) |
|
|
(1 |
) |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charges
In 2005, the Company recorded impairment charges as follows:
|
|
|
|
|
$39 million impairment of goodwill pursuant to the decision
of the Company to reduce its Access technology products for
Customer Premises Equipment (CPE) modem products.
The Company reports CPE business as part of the Access reporting
unit, included in the Application Specific Products Group
(ASG). Following the decision to discontinue a
portion of this reporting unit, the Company, in compliance with
FAS 142, Goodwill and Other Intangible Assets, reassessed
the allocation of goodwill between the Access reporting unit and
the business to be disposed of according to their relative fair
values using market comparables; |
|
|
|
$22 million of purchased technologies were identified
without an alternative use following the discontinuation of CPE
product lines; |
|
|
|
$6 million for technologies and other intangible assets
pursuant to the decision of the Company to close its research
and development design center in Karlsruhe (Germany), the
discontinuation of a development project in Singapore, the
optimization of its EWS (wafer testing) in the United States and
other intangibles determined to be obsolete. |
During the year 2004, impairment charges were incurred relating
to $5 million for purchased technologies primarily
associated with ASG product group that were determined to be
obsolete and $3 million for financial assets with
other-than-temporary losses based on a valuation used for
additional third party financing in the underlying investment.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In 2003, the Company incurred impairment charges as follows:
|
|
|
|
|
$133 million on certain property and equipment used in its
150mm fab operations, based on the discounted expected future
cash flows of the assets and market quotations for the
facilities in Castelletto (Italy); |
|
|
|
$7 million fair market adjustment on the Rancho Bernardo,
California facility, based on market quotations under the
held-for-sale model. This impairment charge was unrelated to the
Companys plan to restructure its 150mm fab facilities, but
was the consequence of a deterioration in real estate market
conditions for this type of facility. The facility was sold in
2004 for approximately its carrying value; |
|
|
|
$15 million on the planned closure of a back-end building
facility based on a market quotation; |
|
|
|
$3 million related to certain purchased technologies
identified to be obsolete; and |
|
|
|
$3 million for contractually committed future capital
contributions to SuperH Inc., the joint venture formed with
Renesas Technology Corp. |
All fabrication sites affected by the restructuring plan are
owned by the Company and, with the exception of the Rancho
Bernardo, California facility, were assessed for impairment
using the held-for-use model defined in Statement of Financial
Accounting Standards No. 144, Accounting for the
impairment or disposal of long-term assets (FAS
144), since these facilities did not satisfy all of the
criteria required for held-for-sale status, as set forth in FAS
144.
Restructuring
charges and other related closure costs
Restructuring
charges and other related closure costs in 2005 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150mm fab plan | |
|
|
|
|
|
Total | |
|
|
| |
|
2005 | |
|
|
|
restructuring & | |
|
|
|
|
Other related | |
|
|
|
restructuring | |
|
|
|
other related | |
|
|
Restructuring | |
|
closure costs | |
|
Total | |
|
initiatives | |
|
Other | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Provision as at December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2003
|
|
|
34 |
|
|
|
1 |
|
|
|
35 |
|
|
|
|
|
|
|
9 |
|
|
|
44 |
|
Amounts paid
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
(8 |
) |
Currency translation effect
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2003
|
|
|
34 |
|
|
|
1 |
|
|
|
35 |
|
|
|
|
|
|
|
3 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2004
|
|
|
32 |
|
|
|
32 |
|
|
|
64 |
|
|
|
|
|
|
|
4 |
|
|
|
68 |
|
Amounts paid
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(68 |
) |
Currency translation effect
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2004
|
|
|
36 |
|
|
|
1 |
|
|
|
37 |
|
|
|
|
|
|
|
3 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2005
|
|
|
10 |
|
|
|
9 |
|
|
|
19 |
|
|
|
48 |
|
|
|
|
|
|
|
67 |
|
Reversal of provision
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Amounts paid
|
|
|
(23 |
) |
|
|
(10 |
) |
|
|
(33 |
) |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(56 |
) |
Currency translation effect
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2005
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
27 |
|
|
|
1 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150mm
fab plan:
Restructuring charges incurred in 2005 amounted to
$10 million, mainly related to termination benefits, and
$9 million of other closure costs for transfers of
production. In 2005, management decided to continue a specific
back-end fabrication line in Rennes (France), which had
originally been designated for full closure. This decision
resulted in a $6 million reversal of the provision relating
to the 2003 restructuring plan.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Restructuring charges in 2004 primarily related to
$32 million in estimated one-time involuntary termination
benefits and $32 million of other charges associated with
the closure and transfers of production.
In 2003, the Company accrued for restructuring charges and other
related costs of $35 million, mainly related to termination
benefits for the fab plant in Rennes (France).
2005
restructuring initiatives:
The Company commenced several restructuring initiatives during
2005, including:
|
|
|
|
|
Pursuant to the decision of reducing its Access technology
products for Customer Premises Equipment (CPE) modem
products, the Company committed to an exit plan in Zaventem
(Belgium) and recorded $4 million of workforce termination
benefits. |
|
|
|
In order to streamline its research and development sites, the
Company decided to cease its activities in two locations,
Karlsruhe (Germany) and Malvern (USA). The Company incurred, in
2005, $1 million restructuring charges corresponding to
employee termination costs and $1 million of unused lease
charges relating to the closure of these two sites. |
|
|
|
In addition, charges totaling $2 million were paid in 2005
by the Company for voluntary termination benefits for certain
employees. The Company also incurred a $2 million charge in
2005 related to additional restructuring initiatives, mainly in
the United States and Mexico. |
|
|
|
The Company defined a plan of reorganization and optimization of
its activities. This plan focuses on workforce reduction, mainly
in Europe, but will, whenever possible, encourage voluntary
redundancy such as early retirement measures and other special
termination arrangements with the employees. The plan also
includes the non-renewal of some temporary positions. For the
year ended December 31, 2005, the Company recorded a total
restructuring charge for its new restructuring plan amounting to
$38 million, mainly related to termination incentives for
two of the Companys subsidiaries in Europe, who accepted
special termination arrangements. |
Other:
During the year 2004, charges totalling $4 million were
paid by the Company, mainly for a voluntary termination benefit
program. In 2003, certain payments were made for voluntary
termination benefits in France totalling $6 million and
amounts accrued for lease contract terminations in the United
States totalling $3 million.
Total impairment, restructuring charges and other related
closure costs:
The 2003 restructuring plan and related manufacturing
initiatives are expected to be largely completed by the second half of 2006. Of
the total $350 million expected pre-tax charges to be
incurred under the plan, $294 million have been incurred as
of December 31, 2005 ($13 million in 2005,
$76 million in 2004 and $205 million in 2003).
The 2005 restructuring plan is expected to result in pre-tax
charges between $175 million and $205 million, out of
which $114 million have been already incurred as of
December 31, 2005. The 2005 restructuring plan is expected
to be completed during 2006.
In 2005, total amounts paid for restructuring and related
closure costs amounted to $56 million.
The total actual costs that the Company will incur may differ
from these estimates based on the timing required to complete
the restructuring plan, the number of people involved, the final
agreed termination benefits and the costs associated with the
transfer of equipment, products and processes.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
19 INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income
|
|
|
53 |
|
|
|
41 |
|
|
|
37 |
|
Expense
|
|
|
(19 |
) |
|
|
(44 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34 |
|
|
|
(3 |
) |
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Capitalized interest was $2 million, $3 million and
$2 million, in 2005, 2004 and 2003, respectively.
20 LOSS ON EXTINGUISHMENT OF CONVERTIBLE DEBT
In 2004, the Company repurchased on the market all of the
remaining 3.75% zero coupon convertible bonds due in 2010 for a
cash amount totalling $375 million. The repurchased
convertible bonds were equivalent to 4,403,075 shares and were
cancelled. In relation to this repurchase, the Company recorded
a non-operating pre-tax charge in 2004 of $4 million, of
which $3 million related to the price paid in excess of the
repurchased convertible bonds accreted value and $1 million
related to the write-off of the related bond issuance costs.
In 2003, the Company repurchased on the market approximately
$1,674 million aggregate principal amount at maturity of
the 3.75% zero coupon convertible bonds due in 2010. The total
cash paid was approximately $1,304 million. The repurchased
convertible bonds were equivalent to 15,596,824 shares and were
cancelled. In relation to these repurchases, the Company
recorded a one-time non-operating pre-tax charge in 2003 of
$39 million, of which $30 million related to the price
paid in excess of the repurchased convertible bonds
accreted value and $9 million related to the write-off of
bond issuance costs.
21 INCOME TAX
Income before income tax expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income (loss) recorded in The Netherlands
|
|
|
(60 |
) |
|
|
12 |
|
|
|
15 |
|
Income from foreign operations
|
|
|
335 |
|
|
|
660 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
275 |
|
|
|
672 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
STMicroelectronics N.V. and its subsidiaries are individually
liable for income taxes in their jurisdictions. Tax losses can
only offset profits generated by the taxable entity incurring
such loss.
Income tax benefit (expense) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
The Netherlands taxes current
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
Foreign taxes current
|
|
|
(33 |
) |
|
|
(52 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
|
(39 |
) |
|
|
(58 |
) |
|
|
(85 |
) |
Foreign deferred taxes
|
|
|
31 |
|
|
|
(10 |
) |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(8 |
) |
|
|
(68 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The principal items comprising the differences in income taxes
computed at The Netherlands statutory rate (34.5%) and the
effective income tax rate are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income tax expense computed at statutory rate
|
|
|
(95 |
) |
|
|
(232 |
) |
|
|
(83 |
) |
Permanent and other differences
|
|
|
(26 |
) |
|
|
(11 |
) |
|
|
(3 |
) |
Change in valuation allowances
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Impact of final tax assessments relating to prior years
|
|
|
28 |
|
|
|
3 |
|
|
|
6 |
|
Effects of change in enacted tax on deferred taxes
|
|
|
|
|
|
|
18 |
|
|
|
|
|
Current year credits
|
|
|
20 |
|
|
|
28 |
|
|
|
12 |
|
Other tax and credits
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
Benefits from tax holidays
|
|
|
48 |
|
|
|
77 |
|
|
|
67 |
|
Earnings of subsidiaries taxed at different rates
|
|
|
19 |
|
|
|
52 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(8 |
) |
|
|
(68 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
The tax holidays represent a tax exemption period aimed to
attract foreign technological investment in certain tax
jurisdictions. The effect of the tax benefits on basic earnings
per share was $0.05, $0.09 and $0.07 for the years ended
December 31, 2005, 2004 and 2003, respectively. These
agreements are present in various countries and include programs
that reduce up to and including 100% of taxes in years affected
by the agreements. The Companys tax holidays expire at
various dates through the year ending December 31, 2013.
Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Tax loss carryforwards and investment credits
|
|
|
150 |
|
|
|
162 |
|
Inventory valuation
|
|
|
28 |
|
|
|
16 |
|
Impairment and restructuring charges
|
|
|
24 |
|
|
|
35 |
|
Fixed asset depreciation in arrears
|
|
|
73 |
|
|
|
72 |
|
Receivables for government funding
|
|
|
66 |
|
|
|
69 |
|
Tax allowances granted on past capital investments
|
|
|
761 |
|
|
|
765 |
|
Pension service costs
|
|
|
13 |
|
|
|
13 |
|
Commercial accruals
|
|
|
11 |
|
|
|
15 |
|
Other temporary differences
|
|
|
44 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,170 |
|
|
|
1,192 |
|
Valuation allowances
|
|
|
(854 |
) |
|
|
(855 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
317 |
|
|
|
337 |
|
|
|
|
|
|
|
|
Accelerated fixed asset depreciation
|
|
|
(116 |
) |
|
|
(147 |
) |
Acquired intangible assets
|
|
|
(7 |
) |
|
|
(6 |
) |
Advances of government funding
|
|
|
(31 |
) |
|
|
(37 |
) |
Other temporary differences
|
|
|
(18 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(172 |
) |
|
|
(218 |
) |
Net deferred income tax asset
|
|
|
145 |
|
|
|
119 |
|
|
|
|
|
|
|
|
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
As of December 31, 2005, the Company and its subsidiaries
have tax loss carryforwards and investment credits that expire
starting 2006, as follows:
|
|
|
|
|
Year |
|
|
|
|
|
2006
|
|
|
21 |
|
2007
|
|
|
1 |
|
2008
|
|
|
1 |
|
2009
|
|
|
1 |
|
Thereafter
|
|
|
126 |
|
|
|
|
|
Total
|
|
|
150 |
|
|
|
|
|
The Tax allowances granted on past capital
investments mainly related to a 2003 agreement granting
the Company certain tax credits for capital investments
purchased through the year ending December 31, 2006. Any
unused tax credits granted under the agreement will continue to
increase yearly by a legal inflationary index (currently 7% per
annum). The credits may be utilized through 2020 or later
depending on the Company meeting certain program criteria. In
addition to this agreement, the Company will continue to receive
tax credits on future years capital investments, which may
be used to offset that years tax liabilities. However,
pursuant to the inability to utilize these credits currently and
in future years, the Company did not recognize any deferred tax
asset on such tax allowance. As a result, there is no financial
impact to the net deferred tax assets of the Company.
Tax loss carryforwards include $35 million in net operating
losses acquired in business combinations, which continue to be
fully provided for at December 31, 2005. Any eventual use
of these tax loss carryforwards would result in a reduction of
the goodwill recorded in the original business combination.
The amount of deferred tax expense (benefit) recorded as a
component of other comprehensive income (loss) was
$6 million benefit, $5 million expense, and
$0 million in 2005, 2004, and 2003, respectively. This
related primarily to the tax effects of unrealized gains
(losses) on derivatives as well as minimum pension liability
adjustments.
22 COMMITMENTS
The Companys commitments as of December 31, 2005 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions) | |
Operating leases
|
|
$ |
271 |
|
|
$ |
50 |
|
|
$ |
37 |
|
|
$ |
32 |
|
|
$ |
28 |
|
|
$ |
22 |
|
|
$ |
102 |
|
Purchase obligations
|
|
|
1,053 |
|
|
|
940 |
|
|
|
79 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchase
|
|
|
576 |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry purchase
|
|
|
260 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, technology licenses and design
|
|
|
217 |
|
|
|
104 |
|
|
|
79 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hynix ST Joint Venture
|
|
|
212 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other obligations
|
|
$ |
112 |
|
|
$ |
59 |
|
|
$ |
44 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,648 |
|
|
|
1,261 |
|
|
|
160 |
|
|
|
69 |
|
|
|
30 |
|
|
|
23 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases land, buildings, plants, and equipment under
operating leases that expire at various dates under
non-cancellable lease agreements. Operating lease expense was
$61 million, $45 million and $54 million in 2005,
2004 and 2003, respectively.
As described in Note 3, the Company and Hynix Semiconductor
signed on November 16, 2004 a joint-venture agreement to
build a front-end memory-manufacturing facility in Wuxi City,
Jiangsu Province, China. The business license was obtained in
April 2005 and the Company paid $38 million of capital
contributions through December 31, 2005. The Company
expects to fulfill its remaining financial obligations up to the
total agreed contribution of $250 million in 2006. In
addition, the Company is committed to grant long-term financing
of $250 million to the new joint venture guaranteed by
subordinated collateral of the joint ventures assets.
Furthermore, the Company has contingent future loading
obligations to purchase products from the joint venture,
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
which have not been included in the table above because at this
stage the amounts remain contingent and non-quantifiable.
Other obligations primarily relate to contractual firm
commitments with respect to cooperation agreements.
Other commitments
The Company has issued guarantees totalling $204 million
related to its subsidiaries debt.
23 CONTINGENCIES
The Company is subject to the possibility of loss contingencies
arising in the ordinary course of business. These include but
are not limited to: warranty cost on the products of the Company
not covered by insurance, breach of contract claims, claims for
unauthorized use of third party intellectual property, tax
claims and provisions for specifically identified income tax
exposures as well as claims for environmental damages. In
determining loss contingencies, the Company considers the
likelihood of a loss of an asset or the incurrence of a
liability as well as the ability to reasonably estimate the
amount of such loss or liability. An estimated loss is recorded
when it is probable that a liability has been incurred and when
the amount of the loss can be reasonably estimated. The Company
regularly reevaluates claims to determine whether provisions
need to be readjusted based on the most current information
available to the Company. Changes in these evaluations could
result in adverse, material impact on the Companys results
of operations, cash flows or its financial position for the
period in which they occur.
The Company received a tax assessment from the United States tax
authorities, which is currently under an appeals process. The
Company is confident that it can favourably respond to the claim
and intends to vigorously defend its position. The Company
believes that adequate provisions exist to cover any potential
losses associated with the claim.
24 CLAIMS AND LEGAL PROCEEDINGS
The Company has received and may in the future receive
communications alleging possible infringements, in particular in
case of patents and similar intellectual property rights of
others. Furthermore, the Company may become involved in costly
litigation brought against the Company regarding patents, mask
works, copyrights, trademarks or trade secrets. In the event
that the outcome of any litigation would be unfavorable to the
Company, the Company may be required to license the underlying
intellectual property right at economically unfavorable terms
and conditions, and possibly pay damages for prior use and/or
face an injunction, all of which individually or in the
aggregate could have a material adverse effect on the
Companys results of operations, cash flows or financial
position and ability to compete.
The Company is involved in various lawsuits, claims,
investigations and proceedings incidental to the normal conduct
of its operations, other than external patent utilization. These
matters mainly include the risks associated with claims from
customers or other parties and tax disputes. The Company has
accrued for these loss contingencies when the loss is probable
and can be estimated. The Company regularly evaluates claims and
legal proceedings together with their related probable losses to
determine whether they need to be adjusted based on the current
information available to the Company. Legal costs associated
with claims are expensed as incurred. In the event of litigation
which is adversely determined with respect to the Companys
interests, or in the event the Company needs to change its
evaluation of a potential third-party claim, based on new
evidence or communications, a material adverse effect could
impact its operations or financial condition at the time it were
to materialize.
During 2004, the Company has settled certain disputes with
respect to claims and litigation relating to possible
infringements of patents and similar intellectual property
rights of others. An accrual of $10 million was recorded as
at December 31, 2004 for such claims, which was paid in
2005 in accordance with the final settlements. No additional
accrual has been recorded in 2005 since no other risks were
estimated to result in a probable loss.
The Company is currently a party to legal proceedings including
legal proceedings with SanDisk Corporation (SanDisk)
and Tessera, Inc. Based on managements current assumptions
made with support of the Companys outside attorneys, the
Company does not believe that the SanDisk litigation will result
in a
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
probable loss. Concerning Tessera litigation, it is difficult,
if not impossible, to predict the outcome of the litigation.
25 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to changes in financial market conditions
in the normal course of business due to its operations in
different foreign currencies and its ongoing investing and
financing activities. Market risk is the uncertainty to which
future earnings or asset/liability values are exposed due to
operating cash flows denominated in foreign currencies and
various financial instruments used in the normal course of
operations.
Treasury activities are regulated by the Companys
policies, which define procedures, objectives and controls. The
policies focus on the management of financial risk in terms of
exposure to currency rates and interest rates. Treasury controls
include systematic reporting to the Chief Executive Officer and
are subject to internal audits. Most treasury activities are
centralized, with any local treasury activities subject to
oversight from head treasury office. The majority of cash and
cash equivalents are held in U.S. dollars and are placed with
financial institutions rated A or higher. Marginal
amounts are held in other currencies. Foreign currency
operations and hedging transactions are performed to cover
commercial positions.
25.1 Foreign Currency Risk
The Company conducts its business on a global basis in various
major international currencies. As a result, the Company is
exposed to adverse movements in foreign currency exchange rates.
Foreign
Currency Forward Contracts Not Designated as a Hedge
The Company enters into foreign currency forward contracts and
currency options to reduce its exposure to changes in exchange
rates and the associated risk arising from the denomination of
certain assets and liabilities in foreign currencies at the
Companys subsidiaries. These include receivables from
international sales by various subsidiaries in foreign
currencies, payables for foreign currency denominated purchases
and certain other assets and liabilities arising in intercompany
transactions.
At December 31, 2005, only foreign currency forward
contracts were outstanding. The notional amount of these foreign
currency forward contracts totalled $1,461 million and
$7,013 million at December 31, 2005 and 2004,
respectively. The principal currencies covered are the Euro, the
U.S. dollar, the Japanese yen and the Canadian dollar.
The risk of loss associated with forward contracts is equal to
the exchange rate differential from the time the contract is
entered into until the time it is settled.
Foreign currency forward contracts not designated as cash flow
hedge outstanding as of December 31, 2005 have remaining
terms of 5 days to fourth months, maturing on average after
46 days.
Cash
Flow Hedges
To further reduce its exposure to U.S. dollar exchange rate
fluctuations, the Company hedged in 2005 and 2004 certain
euro-denominated forecasted transactions that cover at year-end
a large part of its research and development, selling, general
and administrative expenses, as well as a portion of its
front-end manufacturing costs of semi-finished goods.
For the year ended December 31, 2005, the Company recorded
as cost of sales and operating expenses $51 million and
$30 million, respectively, related to the realized loss
incurred on such hedged transactions. In addition, after
determining that it was not probable that certain forecasted
transactions would occur by the end of the originally specified
time period, the Company discontinued in the first quarter of
2005 certain of its cash flow hedges and reclassified a net loss
of $37 million as other income and expenses,
net into the statement of income from accumulated other
comprehensive income.
The notional amount of foreign currency forward contracts
designated as cash flow hedges totalled $745 million and
$1,839 million at December 31, 2005 and 2004,
respectively. The forecasted transactions hedged at
December 31, 2005 were determined to be probable of
occurrence.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
As of December 31, 2005, $13 million of deferred
losses on derivative instruments, net of tax of $1 million,
included in accumulated other comprehensive income are expected
to be reclassified as earnings during the next six months based
on the monthly forecasted research and development expenses,
corporate costs and semi-finished manufacturing costs. As of
December 31, 2004, $59 million of deferred gains on
derivative instruments, net of tax of $5 million, included
in accumulated other comprehensive income were expected to be
reclassified as earnings during the next six months based on the
monthly forecasted research and development expenses, corporate
costs and semi-finished manufacturing costs.
Foreign currency forward contracts designated as cash flow
hedges outstanding as of December 31, 2005 have remaining
terms of 5 days to four months, maturing on average after
59 days.
25.2 Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of
interest-bearing investments, foreign currency contracts and
trade receivables. The Company places its cash and cash
equivalents and certain other financial instruments with a
variety of high credit quality financial institutions and has
not experienced any material losses relating to such
instruments. The Company invests its excess cash in accordance
with its investment policy that aims at minimizing credit risk.