20-F
As filed with the Securities and Exchange Commission on
March 3, 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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Date of event requiring this shell company report |
Commission file number: 1-13546
STMicroelectronics N.V.
(Exact name of registrant as specified in its charter)
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Not Applicable
(Translation of registrants
name into English) |
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The Netherlands
(Jurisdiction of incorporation
or organization) |
39, Chemin du Champ des Filles
1228 Plan-Les-Ouates
Geneva
Switzerland
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
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Title of Each Class: |
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Name of Each Exchange on Which Registered: |
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Common shares, nominal value
1.04 per
share
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New York Stock Exchange |
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close
of the period covered by the annual report:
894,424,279 common shares at December 31, 2005
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Exchange Act).
Yes o No þ
TABLE OF CONTENTS
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Page |
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PRESENTATION OF FINANCIAL AND OTHER
INFORMATION |
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3 |
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PART I |
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5 |
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Identity of Directors,
Senior Management and Advisers
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5 |
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Offer Statistics and
Expected Timetable
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5 |
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Key Information
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5 |
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Information on the
Company
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22 |
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Operating and Financial
Review and Prospects
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51 |
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Directors, Senior
Management and Employees
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87 |
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Major Shareholders and
Related-Party Transactions
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109 |
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Financial Information
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116 |
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Listing
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120 |
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Additional Information
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126 |
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Quantitative and
Qualitative Disclosures About Market Risk
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143 |
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Description of Securities
Other Than Equity Securities
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145 |
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PART II |
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146 |
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Defaults, Dividend
Arrearages and Delinquencies
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146 |
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Material Modifications to
the Rights of Security Holders and Use of Proceeds
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146 |
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Controls and Procedures
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146 |
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Audit Committee Financial
Expert
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146 |
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Code of Ethics
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146 |
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Principal Accountant Fees
and Services
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146 |
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Exemptions from the
Listing Standards for Audit Committees
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147 |
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Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
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148 |
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PART III |
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149 |
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Financial Statements
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149 |
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Financial Statements
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149 |
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Exhibits
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149 |
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SIGNATURES |
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152 |
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EX-1 |
EX-8.1 |
EX-12.1 |
EX-12.2 |
EX-13.1 |
EX-14.A |
2
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this annual report or
Form 20-F (the
Form 20-F),
references to we and us are to
STMicroelectronics N.V. together with its consolidated
subsidiaries, references to EU are to the European
Union, references to
and
the euro are to the euro currency of the EU,
references to the United States and U.S.
are to the United States of America and references to
$ or to U.S. dollars are to United
States dollars. References to mm are to millimeters
and references to nm are to nanometers.
We have compiled the market share, market size and competitive
ranking data in this annual report using statistics and other
information obtained from several third-party sources. Except as
otherwise disclosed herein, all references to our competitive
positions in this annual report are based on 2005 revenues
according to provisional industry data published by iSuppli and
2004 revenues according to industry data published by iSuppli
and Gartner, Inc., and references to trade association data are
references to World Semiconductor Trade Statistics
(WSTS). Certain terms used in this annual report are
defined in Certain Terms.
We report our financial statements in U.S. dollars and
prepare our consolidated financial statements in accordance with
generally accepted accounting principles in the United States
(U.S. GAAP). Furthermore, starting in 2005, we
are required by Dutch law to report our statutory and
consolidated financial statements, previously reported using
generally accepted accounting principles in the Netherlands, in
International Financial Reporting Standards (IFRS).
The financial statements reported in IFRS can differ materially
from the statements reported in U.S. GAAP.
Various amounts and percentages used in this
Form 20-F have
been rounded and, accordingly, they may not total 100%.
We and our affiliates own or otherwise have rights to the
trademarks and trade names, including those mentioned in this
annual report, used in conjunction with the marketing and sale
of our products.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this
Form 20-F that are
not historical facts, particularly in Item 3. Key
Information Risk Factors, Item 4.
Information on the Company and Item 5.
Operating and Financial Review and Prospects and
Business Outlook, are statements of
future expectations and other forward-looking statements (within
the meaning of Section 27A of the Securities Act of 1933 or
Section 21E of the Securities Exchange Act of 1934, each as
amended) that are based on managements current views and
assumptions and are conditioned upon, and also involve known and
unknown risks and uncertainties that could cause actual results,
performance or events to differ materially from those in such
statements due to, among other factors:
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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; |
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pricing pressures, losses or curtailments of purchases from key
customers; |
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the financial impact of inadequate or excess inventories if
actual demand differs from our anticipations; |
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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; |
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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; |
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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; |
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the ability of our suppliers to meet our demands for products
and to offer competitive pricing; |
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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; |
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changes in our overall tax position as a result of changes in
tax laws or the outcome of tax audits; |
3
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product liability or warranty claims for a product containing
one of our parts; and |
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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 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. Should one or
more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary
materially from those described in this
Form 20-F as
anticipated, believed or expected. We do not intend, and do not
assume any obligation, to update any industry information or
forward-looking statements set forth in this
Form 20-F to
reflect subsequent events or circumstances.
Unfavorable changes in the above or other factors listed under
Item 3. Key Information Risk
Factors from time to time in our Securities and Exchange
Commission (SEC) filings, could have a material
adverse effect on our business and/or financial condition.
4
PART I
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Item 1. |
Identity of Directors, Senior Management and Advisers |
Not applicable.
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Item 2. |
Offer Statistics and Expected Timetable |
Not applicable.
Selected Financial Data
The table below sets forth our selected consolidated financial
data for each of the years in the five-year period ended
December 31, 2005. Such data have been derived from our
consolidated financial statements. Consolidated audited
financial statements for each of the years in the three-year
periods ended December 31, 2005, including the Notes
thereto (collectively, the Consolidated Financial
Statements), are included elsewhere in this
Form 20-F, while
data for prior periods have been derived from our consolidated
financial statements used in such periods.
The following information should be read in conjunction with
Item 5. Operating and Financial Review and
Prospects, the Consolidated Financial Statements and the
related Notes thereto included in Item 8. Financial
Statements in this
Form 20-F.
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Year Ended December 31, | |
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2005(1) | |
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2004(1) | |
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2003(1) | |
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2002(1) | |
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2001(1) | |
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(In millions except per share and ratio data) | |
Consolidated Statement of Income Data:
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Net sales
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$ |
8,876 |
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$ |
8,756 |
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$ |
7,234 |
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$ |
6,270 |
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$ |
6,304 |
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Other revenues
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6 |
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4 |
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4 |
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48 |
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53 |
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Net revenues
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8,882 |
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8,760 |
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7,238 |
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6,318 |
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6,357 |
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Cost of sales
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(5,845 |
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(5,532 |
) |
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(4,672 |
) |
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(4,020 |
) |
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(4,047 |
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Gross profit
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3,037 |
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3,228 |
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2,566 |
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2,298 |
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2,310 |
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Operating expenses:
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Selling, general and administrative
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(1,026 |
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(947 |
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(785 |
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(648 |
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(641 |
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Research and development(2)
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(1,630 |
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(1,532 |
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(1,238 |
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(1,022 |
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(978 |
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Other income and expenses, net(2)
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(9 |
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10 |
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(4 |
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7 |
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(6 |
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Impairment, restructuring charges and other related closure costs
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(128 |
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(76 |
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(205 |
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(34 |
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(346 |
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Total operating expenses
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(2,793 |
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(2,545 |
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(2,232 |
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(1,697 |
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(1,971 |
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Operating income
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244 |
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683 |
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334 |
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601 |
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339 |
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Interest income (expense), net
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34 |
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(3 |
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(52 |
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(68 |
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(13 |
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Loss on equity investments
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(3 |
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(4 |
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(1 |
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(11 |
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(5 |
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Loss on extinguishment of convertible debt
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(4 |
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(39 |
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Income before income taxes and minority interests
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275 |
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672 |
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242 |
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522 |
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321 |
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Income tax benefit (expense)
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(8 |
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(68 |
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14 |
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(89 |
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(61 |
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Income before minority interests
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267 |
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604 |
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256 |
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433 |
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260 |
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Minority interests
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(1 |
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(3 |
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(3 |
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(4 |
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(3 |
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Net income
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$ |
266 |
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$ |
601 |
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$ |
253 |
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$ |
429 |
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$ |
257 |
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Earnings per share (basic)
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$ |
0.30 |
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$ |
0.67 |
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$ |
0.29 |
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$ |
0.48 |
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$ |
0.29 |
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Earnings per share (diluted)
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$ |
0.29 |
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$ |
0.65 |
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$ |
0.27 |
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$ |
0.48 |
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$ |
0.29 |
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Number of shares used in calculating earnings per share (basic)
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892.8 |
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891.2 |
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888.2 |
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887.6 |
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893.3 |
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Number of shares used in calculating earnings per share (diluted)
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935.6 |
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935.1 |
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937.1 |
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893.0 |
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902.0 |
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5
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Year Ended December 31, | |
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2005(1) | |
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2004(1) | |
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2003(1) | |
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2002(1) | |
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2001(1) | |
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(In millions except per share and ratio data) | |
Consolidated Balance Sheet Data (end of period):
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Cash and cash equivalents(1)
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$ |
2,027 |
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$ |
1,950 |
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$ |
2,998 |
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$ |
2,564 |
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$ |
2,444 |
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Total assets
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12,439 |
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13,800 |
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13,477 |
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12,004 |
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10,798 |
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Short-term debt (including current portion of long-term debt)
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1,533 |
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191 |
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151 |
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165 |
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130 |
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Long-term debt (excluding current portion)(1)
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269 |
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1,767 |
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2,944 |
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2,797 |
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2,772 |
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Shareholders equity(1)
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8,480 |
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9,110 |
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8,100 |
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6,994 |
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6,075 |
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Capital stock(3)
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3,120 |
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3,074 |
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3,051 |
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3,008 |
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|
2,978 |
|
Other Data:
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Dividends per share
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.08 |
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$ |
0.04 |
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$ |
0.04 |
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Capital expenditures(4)
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1,441 |
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2,050 |
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|
1,221 |
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|
995 |
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|
1,700 |
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Net cash provided by operating activities
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|
1,798 |
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|
2,342 |
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|
1,920 |
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|
1,713 |
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|
2,057 |
|
Depreciation and amortization(4)
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1,944 |
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1,837 |
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1,608 |
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|
1,382 |
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|
1,320 |
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Net debt (cash) to total shareholders equity ratio(5)
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(0.026 |
) |
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|
0.001 |
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|
0.012 |
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|
0.057 |
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|
0.075 |
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(1) |
On November 16, 2000, we issued $2,146 million initial
aggregate principal amount of zero-coupon senior convertible
bonds due 2010 (the 2010 Bonds), for net proceeds of
$1,458 million; in 2003, we repurchased on the market
approximately $1,674 million aggregate principal amount at
maturity of 2010 Bonds. During 2004, we completed the repurchase
of our 2010 Bonds and repurchased on the market approximately
$472 million aggregate principal amount at maturity for a
total amount paid of $375 million. In 2001, we redeemed the
remaining $52 million of our outstanding Liquid Yield
Option Notes due 2008 (our 2008 LYONs) and converted
them into common shares in May and June 2001. In 2001, we
repurchased 9,400,000 common shares for $233 million, and
in 2002, we repurchased an additional 4,000,000 shares for
$115 million. We reflected these purchases at cost as a
reduction of shareholders equity. The repurchased shares
have been designated to fund share compensation granted to
employees under our 2001 employee stock plan and may be used for
subsequent grants. In August 2003, we issued $1,332 million
principal amount at maturity of our 2013 Bonds 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. During 2004, we repurchased all of our
outstanding Liquid Yield Option Notes due 2009 (our 2009
LYONs) for a total amount of cash paid of
$813 million. |
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(2) |
Other income and expenses, net includes, among other
things, funds received through government agencies for research
and development expenses, the cost of new production facilities
start-ups, foreign
currency gains and losses, gains on sales of marketable
securities, the costs of certain activities relating to
intellectual property and, for periods prior to 2002, goodwill
amortization. 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 and process-transfer costs, which
are accounted for as cost of sales. |
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Capital stock consists of common stock and capital surplus. |
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Capital expenditures are net of certain funds received through
government agencies, the effect of which is to decrease
depreciation. |
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Net debt (cash) to total shareholders equity ratio is a
non-U.S. GAAP financial measure. The most directly
comparable U.S. GAAP financial measure is considered to be
Debt-to-Equity Ratio. However, this ratio measures
gross debt relative to equity, and does not reflect the current
cash position of the Company. We believe that our net debt
(cash) to total shareholders equity ratio is useful to
investors as a measure of our financial position and leverage.
The ratio is computed on the basis of our net financial position
divided by total shareholders equity. Our net financial
position is 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). For more information on our net financial position, see
Item 5. Operating and Financial Review and
Prospects Liquidity and Capital
Resources Capital Resources Net
financial position. Our computation of net debt (cash) to
total shareholders equity ratio may not be consistent with
that of other companies, which could make comparability
difficult. |
6
Risk Factors
Risks Related to the Semiconductor Industry
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The semiconductor industry is highly cyclical and periodic
downturns in the semiconductor industry affect our business and
results of operations. |
The semiconductor industry is highly cyclical and has been
subject to significant economic downturns at various times.
Downturns are typically characterized by production
overcapacity, accelerated erosion of average selling prices,
high inventory levels, diminished demand and reduced revenues.
Downturns may be the result of industry-specific factors, such
as excess capacity, product obsolescence, price erosion,
evolving standards, changes in end-customer demand, and/or
macroeconomic trends impacting the economies of one or more of
the worlds major regions: Asia, the United States, Europe
and Japan.
According to published industry data, worldwide sales of
semiconductor products, while generally increasing over the long
term, have fluctuated significantly on a yearly basis over the
past several years. According to the World Semiconductor Trade
Statistics (WSTS), sales increased in 1995, 1997,
1999, 2000, 2002, 2003, 2004 and 2005 but decreased in 1996 and
1998. For 2001, the market also decreased by approximately 32%.
For 2002, 2003, 2004 and 2005, the increase was approximately
1%, 18%, 28% and 7%, respectively.
In certain years, the increase in the sales of semiconductor
products is driven primarily by an increase in the number of
units sold, while industry overcapacity and excess supply over
demand worldwide have continued to exercise a downward pressure
on average selling prices. In 2005, the market increase was
driven both by improved demand and by an average selling price
increase, although in each case the improvement was less than in
2004.
Such macroeconomic trends relate to the semiconductor industry
as a whole and not necessarily to the individual semiconductor
markets to which we sell our products.
We have experienced revenue volatility and market downturns in
the past and may experience them in the future.
Downturns in the semiconductor industry, reduction in demand for
end products which incorporate the semiconductor products we
supply, or increased competition driven by overcapacity
exercising a downward pressure on prices, have in the past, and
could in the future, have a significant adverse impact on our
results of operations.
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Increases in production capacity for semiconductor
products may lead to overcapacity, which in turn may lead to
plant closures, asset impairments, restructuring charges and
inventory write-offs. |
Capital investments for semiconductor manufacturing equipment
are made both by integrated semiconductor companies like us and
by specialist semiconductor foundry companies, which are
subcontractors that manufacture semiconductors designed by
others.
According to data published by industry sources, investments in
worldwide semiconductor fabrication capacity totaled
approximately $37.7 billion in 2001, $26.1 billion in
2002, $29.5 billion in 2003, $45.7 billion in 2004 and
an estimated $46.1 billion in 2005, or approximately 27%,
19%, 18%, 22% and 20%, respectively, of the total available
market for these years. The net increase of manufacturing
capacity, defined as the difference between capacity additions
and capacity reductions pursuant to closures, may exceed demand
requirements, leading to over-supply situations, price erosion,
and industry downturns. Overcapacity and cost optimization have
led us, in recent years, to close manufacturing facilities that
used more mature process technologies. In 2001, we closed our
150-mm wafer manufacturing facility in Ottawa, Canada. In 2002,
we closed our 150-mm wafer manufacturing facility in Rancho
Bernardo, California, and in 2004, we closed our 150-mm wafer
manufacturing facility in Rennes, France and our back-end
facility in Tuas, Singapore. Pursuant to these closures and as a
result of some of our more mature fabrication facility capacity
being only partially used, in 2001 we recorded impairment,
restructuring charges and related closure costs totaling
$346 million. In 2002, we recorded impairment,
restructuring charges and related closure costs of
$34 million. In 2003, we recorded impairment, restructuring
charges and other related closure costs of $205 million in
connection with the plan announced in October 2003 to increase
our cost competitiveness by restructuring our 150-mm fab
operations and part of our back-end operations. In 2004, we
recorded impairment, restructuring charges and related closure
costs of $76 million. In 2005, the amount of impairment,
restructuring charges and other related closure pre-tax costs
7
amounted to $128 million. See Item 5. Operating
and Financial Review and Prospects Impairment,
Restructuring Charges and Other Related Closure Costs.
Through the period ended December 31, 2005, we have
incurred $294 million of the announced approximate
$350 million in pre-tax charges associated with the
restructuring plan that was defined on October 22, 2003,
and which is now expected to be substantially completed in the
second half of 2006.
In January 2005, we announced plans to reduce our Access
technology programs for customer premises equipment
(CPE) modem products. 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.
As of December 31, 2005, these decisions had resulted in
total charges of approximately $114 million for intangible
assets and goodwill related to the CPE product lines and the
other restructuring charges, out of an estimated range of $175
to $205 million.
No assurances can be given that future changes in the market
demand for our products, overcapacity, obsolescence in our
manufacturing facilities and market downturns may not require us
to test for and record additional impairment and restructuring
charges, which may have a material adverse effect on our
business, financial condition and results of operations.
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Competition in the semiconductor industry is intense, and
we may not be able to compete successfully if our product design
technologies, process technologies and products do not meet
market requirements. |
We compete in different product lines to various degrees on the
following characteristics:
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price; |
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technical performance; |
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product features; |
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product system compatibility; |
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product design and technology; |
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timely introduction of new products; |
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product availability; |
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manufacturing yields; and |
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sales and technical support. |
Competition in the semiconductor industry as a whole is intense,
and if our products are not selected based on any of these
factors, our business, financial condition and results of
operations could be materially adversely affected.
We also face significant competition in each of our product
lines. Like us, many of our competitors offer a large variety of
products. Some of our competitors may have greater financial
and/or more focused research and development resources than we
do. If these competitors substantially increase the resources
they devote to developing and marketing products which compete
with ours, we may not be able to compete effectively. Any
consolidation among our competitors could enhance their product
offerings, manufacturing efficiency and financial resources,
further strengthening their competitive position.
In
many of the market segments in which we compete for business, we
depend on winning highly competitive selection processes to
design products and technologies for use in our customers
equipment and products, and failure to be selected or to execute
could materially adversely affect our business in that market
segment. Even after we win and begin a product design, a
customer may cancel or change
8
its product plans, which could cause us to generate no
sales from a product and materially adversely affect our results
of operations.
One of our focuses is on winning competitive bid selection
processes, known as product design wins, to develop
products for use in our customers equipment and products.
These selection processes can be lengthy and require us to incur
significant design and development expenditures, with no
guarantee of winning or generating revenue. Delays in developing
new products with anticipated technological advances and failure
to win new design projects for customers or in commencing volume
shipments of new products may have an adverse effect on our
business. In addition, there can be no assurance that new
products, if introduced, will gain market acceptance or will not
be adversely affected by new technological changes or new
product announcements by other competitors that may have greater
resources or are more focused than we are. Because we typically
focus on only a few customers in a product area, the loss of a
design win can sometimes result in our failure to offer a
generation of a product. This can result in lost sales and could
hurt our position in future competitive selection processes
because we may be perceived as not being a technology or
industry leader.
After winning a product design from one of our customers, we may
still experience delays in generating revenue from our products
as a result of the lengthy development and design cycle. In
addition, a delay or cancellation of a customers plans
could significantly adversely affect our financial results, as
we may have incurred significant expense and generated no
revenue. Finally, if our customers fail to successfully market
and sell their own products, it could materially adversely
affect our business, financial condition and results of
operations as the demand for our products falls.
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Semiconductor and other products we design and manufacture
are characterized by rapidly changing technology, and our
success depends on our ability to develop and manufacture
complex products cost- effectively and to scale. |
The market for our products is characterized by rapidly changing
technology. Some of our products have average life cycles of
less than one year. Therefore, our success is highly dependent
upon our ability to develop and manufacture increasingly complex
new products quickly on a cost-effective basis and to scale.
Semiconductor design and process technologies are also subject
to constant technological improvements and require large
expenditures for capital investment, advanced research and
technology development. If we experience substantial delays or
are unable to develop new design or process technologies, our
results of operations could be adversely affected. In certain
cases, it may be necessary to incur costs to acquire technology
from third parties, which may affect our results of operations
and margins without any guarantee of success. We charged
$58 million as annual amortization expense on our
consolidated statement of income in 2005, related to
technologies and licenses acquired from third parties through
the end of 2005. As of December 31, 2005, the residual
value, net of amortization, registered in our consolidated
balance sheet for these technologies and licenses was
$110 million.
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The competitive environment of the semiconductor industry
may lead to further measures to improve our competitive position
and cost structure, which in turn may result in loss of
revenues, asset impairments and/or capital losses. |
We are continuously considering various measures to improve our
competitive position and cost structure in the semiconductor
industry. In February 2005, we decided to stop work on a
reference design chipset for the GSM/ GPRS market and announced
plans to reduce our Access technology programs for CPE products.
In May 2005, we announced additional restructuring efforts to
improve profitability. See Increases in
production capacity for semiconductor products may lead to
overcapacity, which in turn may lead to plant closures, asset
impairments, restructuring charges and inventory
write-offs. In recent years our sales have increased at a
slower pace than the semiconductor industry as a whole and our
market share has declined. There is no assurance that such
decline will not continue or accelerate, if we are not able to
accelerate product innovation, extend our customer base, realize
manufacturing improvements and/or otherwise control our costs.
We may also in the future, if we consider that market conditions
so require, consider additional measures to improve our cost
structure and competitiveness in the semiconductor market, which
may lead to discontinuation of certain product families or
additional restructurings, which in turn may result in loss of
revenues, asset impairments and/or capital losses.
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The competitive environment of the semiconductor industry
may lead to conditions in which we may seek to acquire a
competitor or become an acquisition target. |
The competitive environment of the semiconductor industry and
the high costs associated with developing our products and
manufacturing technologies may lead to further consolidation in
the industry in order to
9
improve economies of scale or improve the focus of our product
portfolio and/or market applications. In this environment, we
may seek to acquire a competitor to improve our market position
and related applications and products. We also may become a
target for a company looking to improve its competitive
position. Such an occurrence may take place at any time with
consequences that we are not in a position to predict.
Risks Related to Our Operations
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Our research and development efforts are increasingly
expensive and dependent on alliances, and our business, results
of operations and prospects could be materially adversely
affected by the failure or termination of such alliances in
developing new process technologies in line with market
requirements. |
We are increasingly dependent on alliances to develop or access
new technologies. For example, we are cooperating with Freescale
(formerly a division of Motorola Inc.) and Philips for the joint
research and development of CMOS process technology to provide
90-nm to 32-nm chip technologies on 300-mm wafers, as well as
the operation of a 300-mm wafer pilot line fab in Crolles2 under
a long-term agreement whose initial term has been set through
December 31, 2007 and which will be automatically extended
until December 3, 2010, unless either Freescale, Philips or
we serve a written notice of termination prior to
December 31, 2006. In 2005, we extended this agreement to
cover 300-mm wafer testing and packaging, as well as the
development and licensing of core libraries and IP. There can be
no assurance that we will be able to renew this agreement upon
expiration of its final term. Additionally, the agreement allows
for termination of the agreement if a change of control occurs
in one of the parties. The non-renewal or termination of our
Crolles2 alliance could have a material adverse effect on our
ability to continue the development of advanced CMOS process
technologies as currently proposed because it could require us
to significantly increase our expenses and/or require us to find
additional parties with no guarantee of success. Furthermore, we
have a joint development agreement with Hynix for the
development of NAND Flash memories and to build and operate a
front-end memory-manufacturing facility in Wuxi City, Jiangsu
Province, China. The development is dependent on financing from
Hynix and from local government authorities, which we cannot
assure will occur.
There can be no assurance that our alliances will be successful
or will enable us to develop and access new technologies in due
time, in a cost-effective manner and/or to meet customer
demands. Furthermore, if these alliances fail to accomplish
their intended goals or terminate before our intended goals are
accomplished we may lose our investment, or incur additional
unforeseen costs, and our business, results of operations and
prospects could be materially adversely affected. In addition,
if the Crolles2 or Hynix alliances or other alliances we enter
into do not succeed in developing or accessing technologies that
are commercially accepted, or if we are unable to develop or
otherwise access such new technologies independently, we may
fail to keep pace with the rapid technology advances in the
semiconductor industry, our participation in the overall
semiconductor industry may decrease and we may also lose market
share in the market addressed by our products.
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Loss of key employees could hurt our competitive
position. |
As is common in the semiconductor industry, success depends to a
significant extent upon our key senior executives and research
and development, engineering, marketing, sales, manufacturing,
support and other personnel. Our success also depends upon our
ability to continue to attract, retain and motivate qualified
personnel. The competition for such employees is intense, and
the loss of the services of any of these key personnel without
adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on us.
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In difficult market conditions, our high fixed costs
adversely impact our results. |
In less favorable industry environments, we are driven to reduce
prices in response to competitive pressures and we are also
faced with a decline in the utilization rates of our
manufacturing facilities due to decreases in product demand.
Since the semiconductor industry is characterized by high fixed
costs, we are not always able to reduce our total costs in line
with revenue declines. Reduced average selling prices for our
products, therefore adversely affect our results of operations.
Furthermore, in periods of reduced customer demand for our
products, our wafer fabrication plants (fabs) do not
operate at full capacity and the costs associated with the
excess capacity are charged directly to cost of sales. Over the
last five years, our gross profit margin has varied from a high
of 44.5% in the first quarter of 2001 to a low of 31.7% in the
fourth quarter of 2001. We cannot guarantee that difficult
market conditions will not adversely affect the capacity
utilization of our fabs and, consequently our future gross
margins. We cannot guarantee that increased competition in our
core product markets will not lead to further price erosion,
lower revenue growth rates and lower margins in the future.
10
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Our financial results can be adversely affected by
fluctuations in exchange rates, principally in the value of the
U.S. dollar. |
A significant variation of the value of the U.S. dollar
against the principal currencies which have a material impact on
us (primarily the euro, but also certain other currencies of
countries where we have operations) could result in a favorable
impact on our net income in the case of an appreciation of the
U.S. dollar, or a negative impact on our net income if the
U.S. dollar depreciates relative to these currencies.
Currency exchange rate fluctuations affect our results of
operations because our reporting currency is the
U.S. dollar, in which we receive the major part of our
revenues, while, more importantly, we incur the majority of our
costs in currencies other than the U.S. dollar. 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 incurred in the currencies of the jurisdictions in which our
operations are located.
In order to reduce the exposure of our financial results to the
fluctuations in exchange rates, our principal strategy has been
to balance as much as possible the proportion of sales to our
customers denominated in U.S. dollars with the amount of
purchases from our suppliers denominated in U.S. dollars
and to reduce the weight of the other costs, including labor
costs and depreciation, denominated in euros and in other
currencies. In order to further reduce our exposure to
U.S. dollar exchange rate fluctuations, we have hedged
certain line items on our income statement, in particular with
respect to a portion of the cost of goods sold, most of the
research and development expenses and certain selling and
general and administrative expenses located in the euro zone. No
assurance can be given that the value of the U.S. dollar
will not actually appreciate with the hedging transaction
potentially preventing us from benefiting from lower
euro-denominated manufacturing costs when translated into our
U.S. dollar-based accounts. See Item 5.
Operating and Financial Review and Prospects Impact
of Changes in Exchange Rates and Item 11.
Quantitative and Qualitative Disclosures About Market Risk.
Our Consolidated Financial Statements for 2005 include income
and expense items translated at the average rate for the period.
In 2005, the effective average U.S. dollar exchange rate,
which reflects the current exchange rate levels and the impact
of certain hedging contracts was
1.00 for $1.28
compared to an actual exchange rate of
1.00 for $1.23
in 2004.
A decline of the U.S. dollar compared to the other major
currencies that affect our operations negatively impacts our
expenses, margins and profitability, especially if we are unable
to balance or shift our euro-denominated costs to other currency
areas or to U.S. dollars. Any such actions may not be
immediately effective, could prove costly and their
implementation could prove demanding on our management resources.
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Because we have our own manufacturing facilities, our
capital needs are high compared to competitors who do not
produce their own products. |
As a result of our strategic choice to maintain control of our
advanced proprietary manufacturing technologies to serve our
customer base and develop our strategic alliances, we require
significant amounts of capital to build, expand, modernize and
maintain our facilities. Some of our competitors, however, do
not manufacture their own products and therefore do not require
significant capital expenditures for their facilities. Our
capital expenditures have been significant in recent years. See
Item 5. Operating and Financial Review and
Prospects Liquidity and Capital Resources. Our
capital expenditures were $1.4 billion in 2005 and we
currently expect our 2006 capital expenditures to be
approximately $1.8 billion. Our costs are also increasing
as the complexity of the individual manufacturing equipment
increases. We have the flexibility to modulate our investments
up or down in response to changes in market conditions, and we
are prepared to accelerate investments in leading-edge
technologies if market conditions require. We will continue to
monitor our level of capital spending taking into consideration
factors such as trends in the semiconductor market and capacity
utilization.
To stay competitive in the semiconductor industry, we must
transition certain products to 300-mm manufacturing technology,
which is much more expensive than 150-mm or 200-mm technologies.
Currently, all of our fabs process wafers with diameters of
150-mm or 200-mm. We are developing 300-mm process technology on
a pilot line at Crolles2, with our partners Philips and
Freescale. We have also constructed a building in Catania
(Italy), which is not yet equipped, for the volume production of
300-mm wafers. In addition, we are developing 300-mm technology
for the production of memory products with our joint venture
partner Hynix.
There can be no assurance that we will be successful in
transitioning certain products to 300-mm technology or that we
will be able to make further investments in developing 300-mm
technology. If we are unable to make further investments in or
access 300-mm technology or build 300-mm manufacturing
facilities for volume
11
production, our ability to develop and market new products could
suffer, which could, in turn, have a material adverse effect on
our business, financial condition and results of operations.
Any of the foregoing may require us to issue additional debt or
equity, or both, and if we are unable to access such capital on
acceptable terms, this may adversely affect our business and
results of operations. The timing and size of any new share,
convertible bond or straight bond offering would depend upon
market conditions as well as a variety of factors, and any such
transaction or any announcement concerning such a transaction
could materially impact market price of our common shares.
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We may also need additional funding in the coming years to
finance our investments, or purchase other companies or
technologies developed by third parties. |
In an increasingly complex and competitive environment, we may
need to invest in other companies, and/or in technology
developed by third parties to improve our position on the
market. We may also consider acquisitions to complement or
expand our existing business. Furthermore, we may need to rely
on public funding as we transition to 300-mm manufacturing
technology. We are dependent on public funding for equipping the
300-mm wafers production facility in Catania (Italy) and there
can be no assurance that we will obtain this public funding, as
planned. If such planned funding does not materialize, we may
lack financial resources to continue with our investment plan
for this facility, which in turn could lead us to discontinue
our investment in such facility and consequentially incur
significant impairments. Any of the foregoing may also require
us to issue additional debt, equity, or both. If we are unable
to access such capital on acceptable terms this may adversely
affect our business and results of operations. Existing loan
agreements for local funding of our Singapore and China legal
entities contain financial covenants.
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Our operating results may vary significantly from quarter
to quarter and annually and may differ significantly from our
expectations or guidance. |
Our operating results are affected by a wide variety of factors
that could materially and adversely affect revenues and
profitability or lead to significant variability of operating
results. These factors include, among others, the cyclicality of
the semiconductor and electronic systems industries, capital
requirements, inventory management, availability of funding,
competition, new product developments, technological changes and
manufacturing problems. Furthermore, our effective tax rate
currently takes into consideration certain favorable tax rates
and incentives, which, in the future, may not be available to
us. See Note 21 to our Consolidated Financial Statements.
In addition, a number of other factors could lead to
fluctuations in quarterly and annual operating results,
including:
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performance of our key customers in the markets they serve; |
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order cancellations or reschedulings by customers; |
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excess inventory held by customers leading to reduced bookings
or product returns by key customers; |
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manufacturing capacity and utilization rates; |
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restructuring and impairment charges; |
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fluctuations in currency exchange rates, particularly between
the U.S. dollar and other currencies in jurisdictions where
we have activities; |
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intellectual property developments; |
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changes in distribution and sales arrangements; |
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failure to win new design projects; |
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manufacturing performance and yields; |
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product liability or warranty claims; |
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litigation; |
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acquisitions or divestitures; |
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problems in obtaining adequate raw materials or production
equipment on a timely basis; and |
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property damage or business interruption losses resulting from a
catastrophic event not covered by insurance. |
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Unfavorable changes in any of the above factors have in the past
and may in the future adversely affect our operating results.
Furthermore, in periods of industry overcapacity or when our key
customers encounter difficulties in their end markets, orders
are more exposed to cancellations, reductions, price
renegotiation or postponements, which in turn reduce our
managements ability to forecast the next quarter or full
year production levels, revenues and margins. For these reasons
and others that we may not yet have identified, our revenues and
operating results may differ materially from our expectations or
guidance as visibility is reduced. See Item 4.
Information on the Company Backlog.
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Our business is dependent in large part on continued
growth in the industries and segments into which our products
are sold and in our ability to attract and retain new customers.
A market decline in any of these industries or our inability to
attract new customers could have a material adverse effect on
our results of operations. |
We derive and expect to continue to derive significant sales
from the telecommunications equipment and automotive industries,
as well as the home, personal and consumer segments generally.
Growth of demand in the telecommunications equipment and
automotive industries as well as the home, personal and consumer
segments, has in the past and may in the future, fluctuate
significantly based on numerous factors, including:
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spending levels of telecommunications equipment and/or
automotive providers; |
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development of new consumer products or applications requiring
high semiconductor content; |
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evolving industry standards; |
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the rate of adoption of new or alternative technologies; and |
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demand for automobiles, consumer confidence and general economic
conditions. |
We cannot assure you of the rate, or the extent to which, the
telecommunications equipment or automotive industries or the
home, personal or consumer segments will grow, if at all. Any
decline in these industries or segments could result in slower
growth or a decline in demand for our products, which could have
a material adverse effect on our business, financial condition
and results of operations. In recent years, our sales have
increased at a slower pace than the semiconductor industry as a
whole and our market share has declined.
In addition, projected industry growth rates may not materialize
as forecasted, resulting in spending on process and product
development well ahead of market requirements, which could have
a material adverse effect on our business, financial condition
and results of operations.
Our business is dependent upon our ability to attract and retain
new customers. The competition for such new customers is
intense. There can be no assurance that we will be successful in
attracting and retaining new customers. Our failure to do so
could materially adversely affect our business, financial
position and results of operations.
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Our operating results can also vary significantly due to
impairment of goodwill and other intangible assets incurred in
the course of acquisitions, as well as to impairment of tangible
assets due to changes in the business environment. |
Our operating results can also vary significantly due to
impairment of goodwill booked pursuant to acquisitions and to
the purchase of technologies and licenses from third parties. As
of December 31, 2005, the value registered on our audited
consolidated balance sheet for goodwill was $221 million
and the value for technologies and licenses acquired from third
parties was $110 million, net of amortization. Because the
market for our products is characterized by rapidly changing
technologies, and because of significant changes in the
semiconductor industry, our future cash flows may not support
the value of goodwill and other intangibles registered in our
balance sheet. Furthermore, the ability to generate revenues for
our fixed assets located in Europe may be impaired by an
increase in the value of the euro with respect to the
U.S. dollar, as the revenues from the use of such assets
are generated in U.S. dollars. We are required to annually
test goodwill and to assess the carrying values of intangible
and tangible assets when impairment indicators exist. As a
result of such tests, we could be required to book impairment in
our statement of income if the carrying value in our balance
sheet is in excess of the fair value. The amount of any
potential impairment is not predictable as it depends on our
estimates of projected market trends, results of operations and
cash flows. Any potential impairment, if required, could have a
material adverse impact on our results of operations.
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Disruptions in our relationships with any one of our key
customers could adversely affect our results of
operations. |
A substantial portion of our sales is derived from several large
customers, some of whom have entered into strategic alliances
with us. As of December 31, 2005, our largest customer was
Nokia, which accounted for 22.4% of our 2005 net revenues,
compared to 17.1% in 2004 and 17.9% in 2003. In 2005, our top
ten OEM customers accounted for approximately 50% of our net
revenues, compared to approximately 44% of our 2004 net
revenues and 46% of our 2003 net revenues. We cannot
guarantee that our largest customers will continue to book the
same level of sales with us that they have in the past and will
not solicit alternative suppliers. Many of our key customers
operate in cyclical businesses that are also highly competitive,
and their own demands and market positions may vary
considerably. Such customers have in the past, and may in the
future, vary order levels significantly from period to period,
request postponements to scheduled delivery dates or modify
their bookings. Approximately 18% of our net revenues were made
through distributors in 2003, increasing in 2004 to
approximately 21% and decreasing back to approximately 18% in
2005. We cannot guarantee that we will be able to maintain or
enhance our market share with our key customers or distributors.
If we were to lose one or more design wins for our products with
our key customers or distributors, or if any key customer were
to reduce or change its bookings, seek alternate suppliers,
increase its product returns or fail to meet its payment
obligations, our business financial condition and results of
operation could be materially adversely affected. If customers
do not purchase products made specifically for them, we may not
be able to resell such products to other customers or require
the customers who have ordered these products to pay a
cancellation fee. Furthermore, developing industry trends,
including customers use of outsourcing and new and revised
supply chain models, may reduce our ability to forecast the
purchase date for our products and evolving customer demand,
thereby affecting our revenues and working capital requirements.
For example, pursuant to industry developments, some of our
products are required to be delivered on consignment to customer
sites with recognition of revenue delayed until such time, which
must occur within a defined period of time, when the customer
chooses to take delivery of our products from our consignment
stock.
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Because we depend on a limited number of suppliers for raw
materials and certain equipment, we may experience supply
disruptions if suppliers interrupt supply or increase
prices. |
Our ability to meet our customers demand to manufacture
our products depends upon obtaining adequate supplies of quality
raw materials on a timely basis. A number of materials are
available only from a limited number of suppliers, or only from
a limited number of suppliers in a particular region. In
addition, we purchase raw materials such as silicon wafers, lead
frames, mold compounds, ceramic packages and chemicals and gases
from a number of suppliers on a
just-in-time basis.
Although supplies for the raw materials we currently use are
adequate, shortages could occur in various essential materials
due to interruption of supply or increased demand in the
industry. We also purchase semiconductor manufacturing equipment
from a limited number of suppliers and because such equipment is
complex it is difficult to replace one supplier with another or
to substitute one piece of equipment for another. In addition,
suppliers may extend lead times, limit our supply or increase
prices due to capacity constraints or other factors.
Furthermore, suppliers tend to focus their investments on
providing the most technologically advanced equipment and
materials and may not be in a position to address our
requirements for equipment or materials of older generations.
Shortages of supplies have in the past impacted and may in the
future impact the semiconductor industry, in particular with
respect to silicon wafers due to increased demand and decreased
production. Although we work closely with our suppliers to avoid
these types of shortages, there can be no assurances that we
will not encounter these problems in the future. Our quarterly
or annual results of operations would be adversely affected if
we were unable to obtain adequate supplies of raw materials or
equipment in a timely manner or if there were significant
increases in the costs of raw materials or problems with the
quality of these raw materials.
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Our manufacturing processes are highly complex, costly and
potentially vulnerable to impurities, disruptions or inefficient
implementation of production changes that can significantly
increase our costs and delay product shipments to our
customers. |
Our manufacturing processes are highly complex, require advanced
and increasingly costly equipment and are continuously being
modified or maintained in an effort to improve yields and
product performance. Impurities or other difficulties in the
manufacturing process can lower yields, interrupt production or
result in losses of products in process. As system complexity
and production changes have increased and sub-micron technology
has become more advanced, manufacturing tolerances have been
reduced and requirements for precision have become even more
demanding. Although in the past few years we have significantly
enhanced our manufacturing capability in terms of efficiency,
precision and capacity, we have from time to time experienced
bottlenecks and
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production difficulties that have caused delivery delays and
quality control problems, as is common in the semiconductor
industry. We cannot guarantee that we will not experience
bottlenecks, production or transition difficulties in the
future. In addition, during past periods of high demand for our
products, our manufacturing facilities have operated at high
capacity, which has led to production constraints. Furthermore,
if production at a manufacturing facility is interrupted, we may
not be able to shift production to other facilities on a timely
basis, or customers may purchase products from other suppliers.
In either case, the loss of revenue and damage to the
relationship with our customer could be significant.
Furthermore, we periodically transfer production equipment
between production facilities and must ramp up and test such
equipment once installed in the new facility before it can reach
its optimal production level.
As is common in the semiconductor industry, we have, from time
to time, experienced and may in the future experience
difficulties in transferring equipment between our sites,
ramping up production at new facilities or effecting transitions
to new manufacturing processes. Our operating results may be
adversely affected by an increase in fixed costs and operating
expenses linked to production if revenues do not increase
commensurately with such fixed costs and operating expenses.
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We may be faced with product liability or warranty
claims. |
Despite our corporate quality programs and commitment, our
products may not in each case comply with specifications or
customer requirements. Although our practice, in line with
industry standards, is to contractually limit our liability to
the repair, replacement or refund of defective products,
warranty or product liability claims could result in significant
expenses relating to compensation payments to maintain good
customer relationships or related to the costs of defending
against such claims and damages awarded if litigation occurs. In
the event of a warranty claim, we may also incur costs if we
decide to compensate the affected customer. There is no
guarantee that our insurance policies will be available or
adequate to protect against all such claims. In addition, it is
possible for one of our customers to recall a product containing
one of our parts. Costs or payments we may make in connection
with warranty claims or product recalls may adversely affect our
results of operation.
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If our outside foundry suppliers fail to perform, this
could adversely affect our ability to exploit growth
opportunities. |
We currently use outside suppliers or foundries primarily for
high-speed complementary metal-on silicon oxide semiconductor
(HCMOS) wafers and nonvolatile memory technology. If
our outside suppliers are unable to satisfy our demand, or
experience manufacturing difficulties, delays or reduced yields,
our results of operations and ability to satisfy customer demand
could suffer. In addition, purchasing rather than manufacturing
these products may adversely affect our gross profit margin if
the purchase costs of these products are higher than our own
manufacturing costs. Our internal manufacturing costs include
depreciation and other fixed costs, while costs for products
outsourced are based on market conditions. Prices for foundry
products also vary depending on capacity utilization rates at
our suppliers, quantities demanded, product technology and
geometry. Furthermore, these outsourcing costs can vary
materially from
quarter-to-quarter and,
in cases of industry shortages, they can increase significantly
further, negatively impacting our gross margin.
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We depend on patents to protect our rights to our
technology. |
We depend on our ability to obtain patents and other
intellectual property rights covering our products and their
design and manufacturing processes. We intend to continue to
seek patents on our inventions relating to product designs and
manufacturing processes. However, the process of seeking patent
protection can be long and expensive, and we cannot guarantee
that we will receive patents from currently pending or future
applications. Even if patents are issued, they may not be of
sufficient scope or strength to provide meaningful protection or
any commercial advantage. In addition, effective patent,
copyright and trade secret protection may be unavailable or
limited in some countries. Competitors may also develop
technologies that are protected by patents and other
intellectual property and therefore either be unavailable to us
or be made available to us subject to adverse terms and
conditions. We have in the past used our patent portfolio to
negotiate broad patent cross-licenses with many of our
competitors enabling us to design, manufacture and sell
semiconductor products, without fear of infringing patents held
by such competitors. We may not, however, in the future be able
to obtain licenses or other rights to protect necessary
intellectual property on acceptable terms for the conduct of our
business, and such failure may adversely impact our results of
operations.
We have from time to time received, and may in the future
receive, communications alleging possible infringement of
patents and other 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. We are
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currently involved in patent litigation with SanDisk Corporation
with respect to our flash memory products and in litigation with
Tessera, Inc. See Item 8. Financial
Information Legal Proceedings. In the event
that the outcome of any litigation would be unfavorable to us,
we may be required to obtain a license to the underlying
intellectual property right upon economically unfavorable terms
and conditions, possibly pay damages for prior use and/or face
an injunction, all of which, singly or in the aggregate, could
have a material adverse effect on our results of operations and
ability to compete.
Finally, litigation could cost us financial and management
resources necessary to enforce our patents and other
intellectual property rights or to defend against third party
intellectual property claims, when we believe that the amounts
requested for a license are unreasonable.
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Some of our production processes and materials are
environmentally sensitive, which could lead to increased costs
due to environmental regulations or to damage to the
environment. |
We are subject to a variety of laws and regulations relating,
among other things, to the use, storage, discharge and disposal
of chemicals, gases and other hazardous substances used in our
manufacturing processes, air emissions, waste water discharges,
waste disposal, as well as the investigation and remediation of
soil and ground water contamination. European Directive 2002/96/
EC (WEEE Directive) imposes a take back
obligation on manufacturers for the financing of the collection,
recovery and disposal of electrical and electronic equipment.
Additionally, European Directive 2002/95/ EC (ROHS
Directive) will ban the use of lead and some flame retardants in
electronic components beginning in July 2006. Our activities in
the EU are also subject to the European Directive 2003/87/ EC
establishing a scheme for greenhouse gas allowance trading, and
to the applicable national implementing legislation. In
addition, legislative proposals by the European Commission will
require the registration, evaluation and authorizations of a
large number of chemicals (REACH). The
implementation of any such legislation could adversely affect
our manufacturing costs or product sales by requiring us to
acquire costly equipment, materials or green-house gas
allowances, or to incur other significant expenses in adapting
our manufacturing processes or waste and emission disposal
processes. We are not in a position to quantify specific costs,
in part because these costs are part of our business process.
Furthermore, environmental claims or our failure to comply with
present or future regulations could result in the assessment of
damages or imposition of fines against us, suspension of
production or a cessation of operations and, as with other
companies engaged in similar activities, any failure by us to
control the use of, or adequately restrict the discharge of
chemicals or hazardous substances could subject us to future
liabilities. Any specific liabilities we identify as probable
would be reflected in our balance sheet. To date, we have not
identified any such specific liabilities. We therefore have not
booked specific reserves for any specific environmental risks.
See Item 4. Information on the Company
Environmental Matters.
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We operate in many jurisdictions with highly complex and
varied tax regimes. Changes in tax rules or the outcome of tax
assessments and audits could cause a material adverse effect on
our results. |
We operate in many jurisdictions with highly complex and varied
tax regimes. Changes in tax rules or the outcome of tax
assessments and audits could have a material adverse effect on
our results in any particular quarter. For example, in 2005, we
had an income tax expense of $8 million, as compared to an
income tax expense of $68 million in 2004. In 2005, we
benefitted from a favorable reassessment of our deferred tax
assets and liabilities due to changes in enacted tax rates, and
a favorable settlement of certain minor items relating to prior
years tax audits. 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, and these benefits may not be
available in the future due to changes within the local
jurisdictions. As a result, our effective tax rate could
increase in the coming years.
We are subject to the possibility of loss contingencies arising
out of tax claims and provisions for specifically identified
income tax exposures. There can be no assurance that we will be
successful in resolving such tax claims. Our failure to do so
and/or the need to increase our provisions for such claims could
materially adversely affect our financial position.
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We are required to prepare consolidated financial
statements using both International Financial Reporting
Standards (IFRS) beginning with our 2005 results in
addition to our consolidated financial statements prepared
pursuant to Generally Accepted Accounting Principles in the
United States (U.S. GAAP) and dual reporting
may impair the clarity of our financial reporting. |
We are incorporated in the Netherlands and our shares are listed
on Euronext Paris and on the Borsa Italiana, and, consequently,
we are subject to an EU regulation issued on September 29,
2003 requiring us to report our results of operations and
consolidated financial statements using IFRS (previously known
as International Accounting Standards or IAS). Since
our creation in 1987, we have always prepared our Consolidated
Financial Statements under U.S. GAAP and intend to continue
to do so, while at the same time complying with our reporting
obligations under IFRS by preparing a complementary set of our
2005 accounts or as may be otherwise requested by local stock
exchange authorities. Our decision to continue to apply
U.S. GAAP in our financial reporting is designed to ensure
the comparability of our results to those of our competitors and
the continuity of our reporting, thereby providing our investors
a clear understanding of our financial performance.
The obligation to report our Consolidated Financial Statements
under IFRS will require us to prepare our results of operations
using two different sets of reporting standards, U.S. GAAP
and IFRS, which are currently not consistent. Such dual
reporting could materially impair the clarity of our investor
communications. The main potential areas of discrepancy concern
capitalization and amortization of development expenses required
under IFRS and the accounting for compound financial
instruments. Furthermore, while we believe that all of our
accounting systems were in place in order to prepare a separate
set of accounts pursuant to IFRS in January 2005, we may not be
able to account for capitalization of development expenses
pursuant to IFRS in previous periods for comparative purposes.
Our financial condition and results of operations reported in
accordance with IFRS will differ from our financial condition
and results of operations reported in accordance with
U.S. GAAP, which could adversely affect the market price of
our common shares.
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Certain accounting principles of U.S. GAAP are in
flux and may lead to significant changes in the way we account
for our convertible debt instruments. These changes may lead to
significant changes in our financial statements. |
Certain U.S. GAAP accounting principles are in flux and
pending proposed amendments are likely to be made. Certain of
these proposed changes may bring U.S. GAAP more closely
into line with IFRS, while others are independent of the move to
converge generally accepted accounting principles. This state of
flux makes it difficult for us to predict how accounting rules
may evolve over the near- and medium-term.
In particular, the Financial Accounting Standards Board
(FASB) has identified accounting for convertible
debt instruments as an emerging accounting issue. FASB has
announced a proposal that would involve uncoupling the debt and
equity components of convertible debt instruments, in line with
the fair market value of the debt. Recognition of interest
expense in line with market rates under the FASB proposal may be
considerably higher than the interest currently being charged.
In particular, we may be required to show a high interest charge
with respect to our 2013 Bonds, if not redeemed in August 2006,
and to our zero-coupon senior convertible bonds due 2016
(2016 Bonds), which we issued on
February 23, 2006. See Item 5 Operating and
Financial Review and Prospects Capital
Resources. Balance sheets would also be impacted because
shareholders equity would be adjusted to show increased
additional paid-in capital for the value of the embedded
conversion option. The current proposal could apply both to our
existing convertible debt instruments and any such instruments
issued in the future. FASBs proposal draft and date of
effect is not yet defined. If a new rule is adopted in line with
the above proposals, and if there is no provision that limits
its applicability to only those instruments issued in the
future, we may be required to change the accounting for our
convertible bonds on our statement of income and on our balance
sheet. There can be no assurance that these proposed rules and
regulations or any other laws, rules or regulations, will not be
adopted in the future, any of which could adversely affect our
financial statements, make compliance more difficult or
expensive, or otherwise adversely affect our financial condition.
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Changes in the accounting treatment of stock options and
other share-based compensation could adversely affect our
results of operations. |
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 recognize 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. We adopted
FAS 123R in the fourth quarter of 2005. See
Item 5. Operating and Financial Review and
Prospects and the Notes to the Consolidated Financial
Statements. As a result, in the case
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of a distribution of new stock-based compensation, we are now
required to value our employee stock-based compensation pursuant
to a financial valuation model, and then amortize that value
against our reported earnings over the vesting period in effect
for those share-based compensation awards. This change in
accounting treatment of employee stock and other forms of
stock-based compensation could materially and adversely affect
our results of operations, as the share-based compensation
expense would be charged directly against our earnings. This
change resulted in a charge in the fourth quarter of 2005 and
could have, in the future, an effect on our earnings per share,
which could negatively impact our future stock price.
In addition, we have, through the first part of 2005, used stock
options as a key component of employee compensation in order to
align employees interests with the interests of our
shareholders, encourage employee retention, and provide
competitive compensation packages. To the extent that
FAS No. 123R or other new regulations make it more
difficult or expensive to grant options or other forms of
stock-based compensation to employees, we may incur increased
compensation costs, change our equity compensation strategy, or
find it difficult to attract, retain, and motivate employees.
Any of these results could materially and adversely affect our
business and operating results.
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Our common share price, operating results, net income, net
income per share and net financial position may be negatively
affected by potential acquisitions. |
While our growth to date has primarily been organic, we have in
the past and may in the future make selected acquisitions that
we believe would complement or expand our existing business. We
may pay for future acquisitions with cash, our common shares or
a combination of both. Acquisitions, if they occur, may have a
dilutive effect for existing shareholders and, whether they are
paid for in cash or common shares, may negatively affect our
common share price. Announcements concerning potential
acquisitions could be made at any time.
Acquisitions involve a number of risks that could adversely
affect our operating results, including:
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the diversion of managements attention; |
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the integration of acquired company operations and personnel; |
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the assumption of potential liabilities, disclosed or
undisclosed, associated with the business acquired, which
liabilities may exceed the amount of indemnification available
from the seller; |
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the risk that the financial and accounting systems utilized by
the business acquired will not meet our standards; |
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the risk that the businesses acquired will not maintain the
quality of products and services that we have historically
provided; |
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whether we are able to attract and retain qualified management
for the acquired business; |
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whether we are able to retain customers of the acquired
entity; and |
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the risk of goodwill and other intangible asset impairment, due
to the inability of the business to meet managements
expectations at the time of the acquisition. |
There can be no assurance that (a) we will be able to
consummate future acquisitions on satisfactory terms, if at all,
(b) adequate financing will be available for future
acquisitions on terms acceptable to us, if at all, or
(c) any operations acquired will be successfully integrated
or that such operations will ultimately have a positive impact
on our business.
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Reduction in the amount of state funding available to us
or demands for repayment may increase our costs and impact our
results of operations. |
Like many other manufacturers operating in Europe, we benefit
from governmental funding for research and development expenses
and industrialization costs (which include some of the costs
incurred to bring prototype products to the production stage),
as well as from incentive programs for the economic development
of underdeveloped regions. Public funding may also be
characterized by grants and/or low-interest financing for
capital investment and/or tax credit investments. See
Item 4. Information on the Company Public
Funding. We have entered into public funding agreements in
France and Italy, which set forth the parameters for state
support to us under selected programs. These funding agreements
may require compliance with EU regulations and approval by EU
authorities.
We rely on receiving funds on a timely basis pursuant to the
terms of the funding agreements. However, funding of programs in
France and Italy is subject to annual appropriation of available
resources and
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compatibility with the fiscal provisions of their annual
budgets, which we do not control, as well as to our continuing
compliance with all eligibility requirements. If we are unable
to receive anticipated funding on a timely basis, or if existing
government-funded programs were curtailed or discontinued, or if
we were unable to fulfill our eligibility requirements, this
could have a material adverse effect on our business, operating
results and financial condition. There is no assurance that any
alternative funding would be available, or that, if available,
it could be provided in sufficient amounts or on similar terms.
The application for and implementation of such grants often
involves compliance with extensive regulatory requirements
including, in the case of subsidies to be granted within the EU,
notification to the European Commission by the member state
making the contemplated grant prior to disbursement. In
particular, compliance with project-related ceilings on
aggregate subsidies defined under EU law often involves highly
complex economic evaluations. Furthermore, public funding
arrangements are generally subject to annual and
project-by-project reviews and approvals. If we fail to meet
applicable formal or other requirements, we may not be able to
receive the relevant subsidies or may be obliged to repay them
which could have a material adverse effect on our results of
operations.
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The interests of our controlling shareholders, which are
in turn controlled respectively by the French and Italian
governments, may conflict with investors interests. |
We have been informed that as of December 31, 2005,
STMicroelectronics Holding II B.V. (ST
Holding II), a wholly-owned subsidiary of
STMicroelectronics Holding N.V. (ST Holding), owned
250,704,754 shares, or approximately 27.6%, of our issued
common shares. ST Holding is therefore effectively in a position
to control actions that require shareholder approval, including
corporate actions, the election of our Supervisory Board and our
Managing Board and the issuance of new shares or other
securities.
We have also been informed that the shareholders agreement
among ST Holdings shareholders (the STH
Shareholders Agreement), to which we are not a
party, governs relations between our current indirect
shareholders Areva Group, Cassa Depositi e Prestiti S.p.A.
(CDP) and Finmeccanica S.p.A.
(Finmeccanica), each of which is ultimately
controlled by the French or Italian government, see
Item 7. Major Shareholders and Related-Party
Transactions Major Shareholders. The STH
Shareholders Agreement includes provisions requiring the
unanimous approval by shareholders of ST Holding before ST
Holding can make any decision with respect to certain actions to
be taken by us. Furthermore, as permitted by our articles of
association, the Supervisory Board has specified selected
actions by the Managing Board that require the approval of the
Supervisory Board. See Item 7. Major Shareholders and
Related-Party Transactions Major Shareholders.
These requirements for the prior approval of various actions to
be taken by us and our subsidiaries may give rise to a conflict
of interest between our interests and investors interests,
on the one hand, and the interests of the individual
shareholders approving such actions, on the other, and may
affect the ability of our Managing Board to respond as may be
necessary in the rapidly changing environment of the
semiconductor industry. Furthermore, our ability to issue new
shares or other securities may be limited by the existing
shareholders desire to maintain their proportionate
shareholding at a certain minimum level. Such approval process
is, however, subject to the provisions of Dutch law requiring
members of our Supervisory Board to act independently in
supervising our management and applicable Dutch and non-Dutch
corporate governance standards.
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Our shareholder structure and our preference shares may
deter a change of control. |
On May 31, 1999, our shareholders approved the creation of
preference shares that entitle a holder to full voting rights at
any meeting of shareholders and to a preferential right to
dividends and distributions upon liquidation. Pursuant to
approval from our shareholders, and in order to protect
ourselves from a hostile takeover or other similar action, we
entered into an option agreement with ST Holding II, which
provides that up to 540,000,000 preference shares shall be
issued to ST Holding II upon its request and subject to the
adoption of a resolution of our Supervisory Board giving our
consent to the exercise of the option and upon payment of at
least 25% of the par value of the preference shares to be
issued. The option may only be exercised if ST Holding II
owns at least 19% of our issued share capital at the time of
exercise. No preference shares have been issued to date. The
effect of the preference shares may be to deter potential
acquirers from effecting an unsolicited acquisition resulting in
a change of control. In addition, any issuance of additional
capital within the limits of our authorized share capital, as
approved by our shareholders, is subject to the approval of our
Supervisory Board.
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Our direct or indirect shareholders may sell our existing
common shares or issue financial instruments exchangeable into
our common shares at any time while at the same time seeking to
retain their rights regarding our preference shares. In
addition, substantial sales by us of new common shares or
convertible bonds could cause our common share price to drop
significantly. |
The STH Shareholders Agreement, to which we are not a
party, permits our respective French and Italian indirect
shareholders to cause ST Holding to dispose of its stake in us
at its sole discretion at any time from their current level, and
to reduce the current level of their respective indirect
interests in our common shares to 9.5%. The details of the STH
Shareholders Agreement as declared by ST Holding II
in its Schedule 13G/ A filing dated February 14, 2006,
are further explained in Item 7. Major Shareholders
and Related-Party Transactions Major
Shareholders. Disposals of our shares by the parties to
the STH Shareholders Agreement can be made by way of the
issuance of financial instruments exchangeable for our shares,
equity swaps, structured finance transactions or sales of our
shares. An announcement with respect to one or more of such
dispositions could be made at any time without our advance
knowledge.
In addition, Finmeccanica Finance S.A. (Finmeccanica
Finance), a subsidiary of Finmeccanica, has issued
501 million
aggregate principal amount of exchangeable notes, exchangeable
into up to 20 million of our existing common shares due
2010 (the Finmeccanica Notes). The Finmeccanica
Notes have been exchangeable at the option of the holder into
our existing common shares since January 2, 2004. In
September 2005, France Telecom caused the sale of approximately
26 million of our common shares pursuant to the terms of a
convertible bond issued by France Telecom. In December 2005,
Finmeccanica caused the sale of approximately 1.5 million
of our common shares.
Further sales of our common shares or issue of bonds
exchangeable into our common shares or any announcements
concerning a potential sale by ST Holding, Areva, CDP or
Finmeccanica, could materially impact the market price of our
common shares. The timing and size of any future share or
exchangeable bond offering by ST Holding, Areva, CDP or
Finmeccanica would depend upon market conditions as well as a
variety of factors.
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Because we are a Dutch company subject to the corporate
law of the Netherlands, U.S. investors might have more
difficulty protecting their interests in a court of law or
otherwise than if we were a U.S. company. |
Our corporate affairs are governed by our articles of
association and by the laws governing corporations incorporated
in the Netherlands. The corporate affairs of each of our
consolidated subsidiaries are governed by the articles of
association and by the laws governing such corporations in the
jurisdiction in which such consolidated subsidiary is
incorporated. The rights of the investors and the
responsibilities of members of our Supervisory Board and
Managing Board under Dutch law are not as clearly established as
under the rules of some U.S. jurisdictions. Therefore,
U.S. investors may have more difficulty in protecting their
interests in the face of actions by our management, members of
our Supervisory Board or our controlling shareholders than
U.S. investors would have if we were incorporated in the
United States.
Our executive offices and a substantial portion of our assets
are located outside the United States. In addition, ST
Holding II and most members of our Managing and Supervisory
Boards are residents of jurisdictions other than the United
States and Canada. As a result, it may be difficult or
impossible for shareholders to effect service within the United
States or Canada upon us, ST Holding II, or members of our
Managing or Supervisory Boards. It may also be difficult or
impossible for shareholders to enforce outside the United States
or Canada judgments obtained against such persons in
U.S. or Canadian courts, or to enforce in U.S. or
Canadian courts judgments obtained against such persons in
courts in jurisdictions outside the United States or Canada.
This could be true in any legal action, including actions
predicated upon the civil liability provisions of
U.S. securities laws. In addition, it may be difficult or
impossible for shareholders to enforce, in original actions
brought in courts in jurisdictions located outside the United
States, rights predicated upon U.S. securities laws.
We have been advised by our Dutch counsel, De Brauw Blackstone
Westbroek N.V., that the United States and the Netherlands do
not currently have a treaty providing for reciprocal recognition
and enforcement of judgments (other than arbitration awards) in
civil and commercial matters. As a consequence, a final judgment
for the payment of money rendered by any federal or state court
in the United States based on civil liability, whether or not
predicated solely upon the federal securities laws of the United
States, will not be enforceable in the Netherlands. However, if
the party in whose favor such final judgment is rendered brings
a new suit in a competent court in the Netherlands, such party
may submit to the Netherlands court the final judgment that has
been rendered in the United States. If the Netherlands court
finds that the jurisdiction of the federal or state court in the
United States has been based on grounds that are internationally
acceptable and that proper legal procedures have been observed,
the court in the Netherlands would, under current practice, give
binding effect to
20
the final judgment that has been rendered in the United States
unless such judgment contravenes the Netherlands public
policy.
|
|
|
Removal of our common shares from the CAC 40 on Euronext
Paris, the S&P/ MIB on the Borsa Italiana or the
Philadelphia Stock Exchange Semiconductor Sector Index could
cause the market price of our common shares to drop
significantly. |
Our common shares have been included in the CAC 40 index on
Euronext Paris since November 12, 1997; the S&P/ MIB on
the Borsa Italiana, or Italian Stock Exchange since
March 18, 2002; and the Philadelphia Stock Exchange
Semiconductor Index (or the SOX) since June 23,
2003. However, our common shares could be removed from the CAC
40, the S&P/ MIB or the SOX at any time, and any such
removal or announcement thereof could cause the market price of
our common shares to drop significantly.
21
|
|
Item 4. |
Information on the Company |
History and Development of the Company
STMicroelectronics N.V. was formed and incorporated in 1987 and
resulted from the combination of the semiconductor business of
SGS Microelettronica (then owned by Società Finanziaria
Telefonica (S.T.E.T.), an Italian corporation) and the
non-military business of Thomson Semiconducteurs (then owned by
the former Thomson-CSF, now Thales, a French corporation). Until
1998, we operated as SGS-Thomson Microelectronics N.V. Our
length of life is indefinite. We are organized under the laws of
the Netherlands, we have our corporate legal seat in Amsterdam
and our head offices at WTC Schiphol Airport, Schiphol Boulevard
265, 1118 BH Schiphol Airport, Amsterdam, the Netherlands. Our
telephone number there is (+31-20) 406-9604. Our headquarters
and operational offices are located at 39 Chemin du Champ des
Filles, 1228 Plan-Les-Ouates, Geneva, Switzerland. Our main
telephone number there is (+41-22) 929-2929. Our agent for
service of process in the United States related to our
registration under the U.S. Securities Exchange Act of
1934, as amended, is STMicroelectronics, Inc., 1310 Electronics
Drive, Carrollton, Texas, 75006-5039 and the main telephone
number there is (+1-972) 466-6000. Our operations are also
conducted through our various subsidiaries, which are organized
and operated according to the laws of their country of
incorporation, and consolidated by STMicroelectronics NV.
We completed our initial public offering in December 1994 with
simultaneous listings on Euronext Paris and the New York Stock
Exchange. In 1998, we listed our shares on the Borsa Italiana.
Business Overview
We are a global independent semiconductor company that designs,
develops, manufactures and markets a broad range of
semiconductor products used in a wide variety of microelectronic
applications, including automotive products, computer
peripherals, telecommunications systems, consumer products,
industrial automation and control systems. According to
provisional industry data published by iSuppli, we have been
ranked the worlds fifth largest semiconductor company
based on forecasted 2005 total market sales and we held leading
positions in sales of Analog Products, Application Specific
Integrated Circuits (or ASICs) and Application
Specific Standard Products (or ASSPs). Based on
provisional 2005 results published by iSuppli, we believe we
were also number one in discretes and number two in automotive
electronics, industrial products and analog products and number
three in NOR Flash. Based on 2004 industry results, we also
believe we ranked as a leading supplier of semiconductors in
2005 for set-top boxes, Smart cards and power management
devices. Furthermore, based on our relationship with
Hewlett-Packard, which has a leading position in the printhead
market, we believe that we are a leading supplier of integrated
circuits for printheads. Major customers include Axalto,
Alcatel, Bosch, Delphi, Delta, Ericsson, Hewlett-Packard, LG
Electronics, Marelli, Maxtor, Motorola, Nokia, Philips, Pioneer,
Samsung, Scientific Atlanta, Seagate, Siemens, Thomson, Vestel,
Visteon and Western Digital. We also sell our products through
global distributors and retailers, including Arrow Electronics,
Avnet, BSI Group, Wintech and Yosun.
The semiconductor industry has historically been a cyclical one
and we have responded through emphasizing balance in our product
portfolio, in the applications we serve, and in the regional
markets we address. Consequently, from 1994 through 2005, our
revenues grew at a compounded annual growth rate of 11.6%
compared to 7.6% for the industry as a whole.
We offer a diversified product portfolio and develop products
for a wide range of market applications to reduce our dependence
on any single product, application or end market. Within our
diversified portfolio, we have focused on developing products
that leverage our technological strengths in creating
customized, system-level solutions with high-growth digital and
mixed-signal content. Our product families include
differentiated application specific products (which we define as
being our dedicated analog, mixed signal and digital ASIC and
ASSP offerings and semicustom devices), power microcontrollers
and discrete products and non-volatile memory and Smart cards.
Application specific products, which are generally less
vulnerable to market cycles than standard commodity products,
accounted for approximately 56% of our net revenues in 2005.
Memory product sales accounted for approximately 22% of our net
revenues in 2005, while sales of Micro linear and discrete
products accounted for approximately 21% of our net revenues in
2005.
Our products are manufactured and designed using a broad range
of manufacturing processes and proprietary design methods. We
use all of the prevalent function-oriented process technologies,
including complementary metal-on silicon oxide semiconductor
(CMOS), bipolar and nonvolatile memory technologies.
In addition, by combining basic processes, we have developed
advanced systems-oriented technologies that enable us to produce
differentiated and application-specific products, including
bipolar CMOS technologies
22
(BiCMOS) for mixed-signal applications and diffused
metal-on silicon oxide semiconductor (DMOS)
technology (BCD technologies) for intelligent power
applications and embedded memory technologies. This broad
technology portfolio, a cornerstone of our strategy for many
years, enables us to meet the increasing demand for
System-on-Chip
(SoC) solutions. Complementing this depth and
diversity of process and design technology is our broad
intellectual property portfolio that we also use to enter into
important patent cross-licensing agreements with other major
semiconductor companies.
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
product segments:
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the Application Specific Product Group (ASG)
segment, comprised of three product lines our Home,
Personal and Communication Products (HPC), our
Computer Peripherals Products (CPG) and our
Automotive Products (APG). Our HPC products are
comprised of the telecommunications and the audio divisions from
the former Telecommunications, Peripherals and Automotive Groups
combined with the consumer group from the former Consumer
Microcontroller Groups. Our CPG products cover computer
peripherals products, specifically disk drives and printers, and
our APG products now comprise all of our major complex products
related to automotive applications formerly within the
automotive group of Telecommunications, Peripherals and
Automotive Groups and in other product groups (notably from the
former Discrete and Standard ICs Group and the Microcontroller
Group); |
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|
|
the Memory Products Group (MPG) segment, comprised
of our memories and Smart card businesses; and |
|
|
|
the Micro, Linear and Discrete Product Group (MLD)
segment, comprised of the greater part of our former Discrete
and Standard ICs Group and our standard microcontroller and
industrial devices (including the programmable systems memories
(PSM) division previously forming part of MPG). |
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 segments, but on the basis of the semiconductor
business area. All these product segments share common research
and development for process technology and manufacturing
capacity for most of their products.
We have in 2005 pursued various initiatives to reshape our
company by (i) reorganizing our management team and setting
up an executive committee, (ii) increasing our research and
development effectiveness through a program focus on 20 key
initiatives, improved project control and redeployment of
certain resources with the aim to improve time to market for
both technologies and products, (iii) promoting sales
expansion for mass market application and new major key accounts
with a special focus on the Chinese and Japanese markets with a
view to increased overall efficiencies, (iv) executing a
plan to improve our manufacturing competitiveness through the
restructuring of our 150-mm wafer production capacity and
(v) launching and implementing various further cost
reduction initiatives through procurement savings, improved
asset management, general and administration centralization and
head count restructuring.
23
Results of Operations
The tables below set forth information on our net revenues by
product segment and by geographic region:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Net Revenues by Product Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
$ |
4,991 |
|
|
$ |
4,902 |
|
|
$ |
4,405 |
|
Memory Products Group Segment (MPG)
|
|
|
1,948 |
|
|
|
1,887 |
|
|
|
1,294 |
|
Micro, Linear and Discrete Product Group Segment (MLD)
|
|
|
1,882 |
|
|
|
1,902 |
|
|
|
1,469 |
|
Others(1)
|
|
|
61 |
|
|
|
69 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
$ |
7,238 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(3)
|
|
$ |
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(3)(4)
|
|
|
582 |
|
|
|
608 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
$ |
7,238 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Product Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
|
56.2 |
% |
|
|
56.0 |
% |
|
|
60.9 |
% |
Memory Products Group Segment (MPG)
|
|
|
21.9 |
|
|
|
21.5 |
|
|
|
17.9 |
|
Micro, Linear and Discrete Product Group Segment (MLD)
|
|
|
21.2 |
|
|
|
21.7 |
|
|
|
20.3 |
|
Others(1)
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(3)
|
|
|
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(3)(4)
|
|
|
6.6 |
|
|
|
6.9 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes revenues from sales of subsystems and other revenues
not allocated to product segments. |
|
(2) |
Net revenues by location of order shipment are classified by
location of customer invoiced. For example, products ordered by
companies to be invoiced to Asia Pacific affiliates are
classified as Asia Pacific revenues. |
|
(3) |
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. |
|
(4) |
Emerging Markets in 2005 included markets such as India, Latin
America, the Middle East and Africa, Europe (non-EU and
non-EFTA) and Russia. |
Strategy
The semiconductor industry is undergoing several significant
structural changes characterized by:
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the changing long-term structural growth of the overall market
for semiconductor products; |
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the strong development of new emerging applications in areas
such as wireless communications, solid state storage, digital TV
and video products and games; |
24
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|
the increasing importance of the Asia Pacific region and
emerging countries, particularly China, which represents the
fastest growing regional market; |
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the importance of convergence between wireless consumer and
computer applications, which drives customer demand for new
system-level, turnkey solutions; and |
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the evolution of the customer base from original equipment
manufacturers (OEM) to a mix of OEM, electronic
manufacturing service providers (EMS) and original
design manufacturers (ODM). |
Our strategy within this challenging environment is designed to
focus on the following complementary key elements:
Broad, balanced market exposure. We offer a diversified
product portfolio and develop products for a wide range of
market applications, thereby reducing our dependence on any
single product, application or end market. Within our
diversified portfolio, we have focused on developing products
that leverage our technological strengths in creating
customized, system-level solutions for high-growth digital and
mixed-signal applications. We target five key markets comprised
of: (i) communications, including wireless connectivity,
mobile phone imaging, portable multimedia and infrastructure;
(ii) computer peripherals, including data storage,
printers, monitors, displays and optical mouse;
(iii) digital consumer, including set-top boxes, DVD,
digital TVs, digital cameras and digital audio;
(iv) automotive, including engine, body and safety, car
radio, car multimedia and telematics; and (v) industrial
products, including banking, user ID/security, telephone Smart
card, power management and industrial control.
Product strategy. We aim to: (i) maintain and
further establish existing leadership positions for platforms
and chipset solutions for digital consumer, wireless and
multimedia digital cores offerings; (ii) maintain a
leadership position in conventional semiconductor products such
as discretes for power management, automotive and analog and
mixed signal applications, which require less research and
development effort and manufacturing capital intensity than more
advanced and complex application specific devices; and
(iii) participate, as appropriate, in the non-volatile
memory market for selected key applications.
Alliances and customer base expansion. We work with our
key customers to identify evolving needs and new applications
and to develop innovative products and product features. We also
leverage our position as a supplier of application-specific
products in seeking to sell a broad range of products and
emphasize strategic customer alliances to expand our customer
base. We have formal alliances with certain strategic customers
that allow us and our customers (with whom we jointly share
certain product developments) to exchange information and give
our customers access to our process technologies and
manufacturing infrastructure. We have formed alliances with
customers such as Alcatel, Bosch, Hewlett-Packard, Marelli,
Nokia, Nortel, Pioneer, Seagate, Siemens VDO, Thomson and
Western Digital, among others. Our twelve strategic alliances
with key customers have been a major growth driver for us. In
2003, 2004 and 2005, revenues from strategic customer alliances
accounted for approximately 43%, 39% and 44% respectively of our
net revenues. We are targeting new major key accounts,
particularly in the United States and in the Asia Pacific
region, with a focus on China and Japan where we are also
developing specific marketing efforts to increase our market
penetration. Furthermore, we have set up a new organization with
specific e-tools,
design and support resources to address broader market
applications.
Global integrated manufacturing infrastructure. We have a
diversified, leading-edge manufacturing infrastructure capable
of producing silicon wafers using our broad process technology
portfolio, including our CMOS, BiCMOS, BCD technologies and
memories. Assembling, testing and packaging of our semiconductor
products take place in our large and modern back-end facilities,
which generally are located in low-cost areas. We have also
developed relationships with outside contractors for foundry and
back-end services. We view these relationships as giving us the
flexibility when required by market demand to outsource up to a
maximum of 20% of each of our front-end and back-end production
requirements, enabling us to manage the supply chain to our
customers without a commensurate increase in capital spending.
In 2005, we decided to combine our front-end manufacturing and
our technology research and development into one organization in
order to improve our manufacturing competitiveness and
efficiency and our technology research and development
effectiveness. In the current competitive environment, we have
launched various cost reduction initiatives in the area of
manufacturing and our strategy consists of:
(i) establishing in the Asia Pacific region the major
portion of our 150-mm manufacturing activity;
(ii) organizing our 200-mm manufacturing to increase
operational efficiency through yield improvements, improved
leverage due to reduced depreciation from mature assets and full
saturation of all clean room areas; (iii) addressing
projected increase in demand for 300-mm manufacturing through an
appropriate ramp-up of
internal capacity; and (iv) gaining flexibility in terms of
capacity needs and employed capital through selected sourcing
from foundry manufacturers.
25
Industry partnerships. Partnerships with other
semiconductor companies and suppliers enable us to share the
increasing costs and technological risks involved in the
research and development of
state-of-the-art
processes, product architectures and digital cores and to
shorten the product development time of certain products. For
example, we are currently working under a joint research and
development technology cooperation program with Freescale
Semiconductor, Inc. (Freescale) and Philips
Semiconductors International B.V. (Philips) for the
joint research and development of CMOS process technology in
Crolles, France (Crolles2). In 2005, we extended
this agreement to cover 300-mm wafer testing and packaging, as
well as the development and licensing of core libraries and IP.
Additionally, we are co-developing NAND Flash memory products
with Hynix Semiconductor Inc. (Hynix) and have
started to build a jointly owned dedicated memory manufacturing
facility in China. Furthermore, we recently announced an
agreement with Intel Corporation (Intel) to
standardize hardware and software interfaces used in leading
edge NOR Flash products in the wireless market and are working
on various further initiatives.
Broad range of design and process technologies. We
continue to utilize our expertise and experience with a wide
range of process and design technologies to further develop our
capabilities. We are committed to maintaining and, in certain
areas, to increasing expenditures on core research and
development projects as well as to developing alliances with
other semiconductor companies and suppliers of software
development tools, as appropriate. In 2005, we redeployed
approximately 1,000 employees or 10% of our research and
development work force to emphasize our focus and commitment to
higher priority projects. Technological advances in the areas of
transistor performance and interconnection technologies are
being developed for our CMOS logic products and semicustom
devices. We work on an ongoing basis with key suppliers to
develop advanced and standardized design methodologies for our
CMOS, mixed signal and non-volatile memory processes, as well as
libraries of macrofunctions and megafunctions for many of our
products, and are focusing on improving our concurrent
engineering practices to better coordinate design activities and
reduce overall product development time.
Integrated presence in key regional markets. We have
sought to develop a competitive advantage by building an
integrated presence in each of the worlds major economic
zones: Europe, Asia (including China), North America and
Emerging Markets. An integrated presence means having
manufacturing and design, as well as sales and marketing
capabilities in each region, in order to ensure that we are well
positioned to anticipate and respond to our customers
business requirements. We have leading-edge, front-end
manufacturing facilities in Europe, in the United States and
increasingly in Asia where we sourced from internal and external
manufacturers approximately 44% of our wafers at the end of
2005. Our more labor-intensive back-end facilities are located
in Malaysia, Malta, Morocco, Singapore and China, enabling us to
take advantage of more favorable production cost structures,
particularly lower labor costs. Major design centers and local
sales and marketing groups are within close proximity of key
customers in each region, which we believe enhances our ability
to maintain strong relationships with our customers. As
appropriate, we intend to continue to build our integrated local
presence in those regions where we compete, such as China, which
has recently been set up as a separate marketing region and
where we have both a back-end facility and a design center and
have started to build with Hynix a jointly owned front-end
memory manufacturing plant in Wuxi City, as well as India, where
we have been expanding our design and software development
centers. We have also continued to develop our sales and support
organization for Emerging Markets.
Product Quality Excellence. We aim to develop a product
of quality excellence in the various applications we serve and
are planning the launch of a company-wide Product Quality
Awareness program built around a three-pronged approach:
(i) the improvement of our full product cycle involving
robust design and manufacturing, improved detection of potential
defects, and better anticipation of failures through improved
risk assessment, particularly in the areas of product and
process changes, (ii) improved responsiveness to customer
demands and (iii) ever increasing focus on quality and
discipline in execution.
Products and Technology
We design, develop, manufacture and market a broad range of
products used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer
goods, automotive products and industrial automation and control
systems. Our products include discrete, memories and standard
commodity components, ASICs (full custom devices and semicustom
devices) and ASSPs for analog, digital, and mixed-signal
applications. In addition, following the acquisition of Incard,
we manufacture Smart cards. Historically, we have not produced
dynamic random access memory (DRAMs) or x86
microprocessors, despite seeking to develop or acquire the
necessary intellectual property (IP) to use them as
components in SoC.
26
We run our business along product lines and manage our revenues
and internal operating income performance based on the following
product segments:
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|
|
Application Specific Product Group segment; |
|
|
|
Memory Products Group segment; and |
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|
Micro, Linear and Discrete Product Group segment. |
We also design, develop, manufacture and market subsystems and
modules for the telecom, automotive and industrial markets
including mobile phone accessories, battery chargers, ISDN power
supplies and in-vehicle equipment for electronic toll payment in
our Subsystems division. Based on its immateriality, we do not
report information separately for Subsystems.
Application Specific Product
Group Segment
The Application Specific Product Group (ASG) segment
is responsible for the design, development and manufacture of
application-specific products using advanced bipolar, CMOS,
BiCMOS mixed-signal and power technologies, as well as mixed
analog/digital semicustom-devices and Micro-Electro-Mechanical
System (MEMS) products. The businesses in the ASG
offer complete system solutions to customers in several
application markets. All products are ASSPs, full-custom or
semicustom devices that may also include digital signal
processor (DSP) and microcontroller cores. The
businesses in the ASG particularly emphasize dedicated ICs for
automotive, computer peripherals, consumer and industrial
application segments, as well as for mobile and fixed
communication, computing and networking application segments.
Our businesses in the ASG work closely with customers to develop
application-specific products using our technologies,
intellectual property, and manufacturing capabilities. The
breadth of our customer and application base provides us with a
better source of stability in the cyclical semiconductor market.
The ASG is comprised of three product lines our
Home, Personal and Communication Products (HPC), our
Computer Peripherals Products (CPG) and our
Automotive Products (APG).
|
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|
Home, Personal and Communication Products |
This product line encompasses two of our largest application
segments: wireless and consumer.
(i) Personal and Multimedia Group. Our Personal and
Multimedia Group (PMG) is focused on products
serving wireless and mobile product application space and is
organized into four divisions.
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|
(a) Cellular Communications Division. We focus our
product offerings on cellular phones serving several major OEMs,
with differentiated ICs. In this market, we are strategically
positioned in energy management, audio coding and decoding
function (CODEC) and radio frequency ICs. In
February 2005, we decided to stop work on a reference design
chipset for the GSM/ GPRS market. Research and development
engineers dedicated to this program were redeployed to other
wireless projects. We ship mobile phone energy-management
devices in volume to two of the worlds top five OEMs. We
are transitioning from ICs to modules in the field of radio
frequency and energy management for 3G telephones, which results
in a higher content of semiconductors expressed in
U.S. dollars. In addition, we are currently developing ASIC
solutions for use in 3G basebands for the OEM marketplace. |
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(b) Application Processor Division. We offer a
family of products addressing the market for multimedia
application processor chips, known as the Nomadik
family of products. These products are designed for 2.5/3G
mobile phones, portable wireless products and other
applications, and the chips are being sampled by a wide range of
potential customers. We have several design wins in 2.5/3G
mobile phones for tier-one European and Asian customers for
smart phones and feature phones. |
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(c) Imaging Division. Our Imaging Division focuses
on the wireless handset image sensor market. We are in
production of CMOS, camera modules and processors for video
graphic arrays (VGA), 1 and 2 mega pixels. We have
cumulatively shipped over 100 million CMOS camera phone
solutions since entering this market in 2003. According to
Prismark, we were the number one camera module manufacturer for
2005. |
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(d) Connectivity Division. To respond to the market
need for increased functionality of handsets, we created the
Connectivity Division to address wireless LAN, Bluetooth and
connectivity requirements. Our product offerings include
Wireless LAN and Bluetooth chips designed for low power
consumption and a small form factor. We have multiple design
wins and volume production for several customers in Asia and
Europe for our bluetooth and wireless products. In particular,
we have started to manufacture in volume our |
27
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single-chip STLC2500A Bluetooth IC for multiple cellular phones
and our single-chip Enhanced-Data-Rate STLC2500C with V2.0
capability has been adopted in more than 15 mobile-phone designs
by several customers, including a tier-one cellphone
manufacturer. Additionally, volume production has started on our
compact STLC4370 IEEE802.11g wireless local area network
(WLAN) module IC, which is being used in a new
cellular phone from a tier-one manufacturer. |
(ii) Home Entertainment Group. Our Home
Entertainment Group (HEG) addresses product
requirements for the digital consumer application market and has
four divisions.
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(a) Home Video Division. This division aims at
retail and satellite set-top box products and digital television
offerings. We continued to expand our product offerings and
customer base by introducing solutions for the set-top box
market with features such as web-browsing, digital video
recording and time-shifting capabilities. We reinforced the
market leadership of our OMEGA family of set-top box back-end
decoders with the introduction of the STi710x series of
products, the latest member of our OMEGA family of set-top box
decoder solutions. This family of single chip SoC device
addresses the high definition market, performs at an advanced
speed and has enhanced graphics and security features as well as
integrated DVR capability, while retaining compatibility with
our earlier products. We continue to strengthen our product
offerings by addressing software solutions supporting multiple
codes, including DVB-MHP (Java) and Microsoft Windows Media
based systems. |
In 2005, we launched the STB7109, our second-generation H.264
high-definition TV (HDTV) AVC and VC-1 decoder.
Building on the success of the STB7100, the worlds first
single-chip AVC and MPEG-2 decoder, the STB7109 adds VC-1
decoding, improved security, connectivity features, and support
for emerging DVD formats and security standards.
Furthermore, adding to the multiple design wins already achieved
by both our STB7100 and STB7109, in 2005 Loewe GmbH adopted our
STB7100 for use across its high-end integrated DTV product range
and we announced with Sagem the availability of the worlds
first MPEG-4 set-top boxes based on a single-chip decoder,
enabling broadcasters and service operators worldwide to offer
end users HDTV and/or many more TV channels, by using their
existing broadcast network. The new STB7100-based boxes are
being rolled out for satellite, IPTV, and terrestrial broadcast
by several operators, including Canal+, France-Telecom and
Telecom Italia. Additionally, the STB7100, together with our
STB0899 front-end satellite demodulator, is being used in a
Philips STB for Premiere.
We address the analog and digital television markets with a wide
range of highly integrated ASSPs and application-specific
microcontrollers. We have several design wins in Asia (China,
Korea and Japan) for the STD2000, our single chip solution in
90-nm for integrated Digital TV, which supports all display
types and both standard and high definition formats and are
planning to sample our STD1000 in the second quarter of 2006.
Finally, we have announced the development of an affordable,
ready-to-implement HDTV
platform for the Japanese market with BHA Corporation, designed
to catalyze the adoption of digital TV in Japan. In China, our
affiliate company Shanghai-BMC released a complete middleware
solution for STBs intended for the Chinese market, as well as
for international operators. And for the first time in Brazil,
by working in conjunction with the leading Brazilian
laboratories and universities, in 2005 we publicly demonstrated
the transmission of digital terrestrial TV (DTT) signal in
HDTV format from a transmitter to an end-user terminal.
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(b) Cable and IP Division. We offer products
designed specifically for the cable and IP set-top box markets
that take advantage of our significant expertise, product
know-how and years of experience in supplying operator supported
video markets. Our latest products in standard definition and
high definition are designed to serve the evolving requirements
in the growing global cable segment and the emerging IP set-top
box market and we have multiple design wins in these areas. |
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(c) Home Display Peripherals Division. This division
offers products aimed at the analog TV market, switches and
sound processors as well as CRT monitors. |
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(d) Audio Division. We design and manufacture a wide
variety of components for use in audio applications. Our audio
products include audio power amplifiers, audio processors and
graphic-equalizer ICs. We recently introduced a family of class
D audio amplifier offerings that improve sound
quality while reducing power consumption, size and cost aimed
primarily at home, desktop and mobile applications. |
28
(iii) Communications Infrastructure and Displays
Group. Our Communications Infrastructure and Displays Group
(CID) provides solutions for the wireless and
wireless infrastructure segments as well as displays and is
organized into three divisions.
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(a) Wireless Infrastructure Division. We formed the
Wireless Communications Infrastructure division to develop
dedicated infrastructure chip solutions that will be focused on
primarily the new third-generation telecom standards, but
supporting existing standards as well. We have already developed
all of the technologies required for the wireless infrastructure
ASIC market due to our many years of experience in the fields of
digital baseband chip, radio frequency and mixed signal products. |
During 2005, we unveiled a chipset for pico-cell base-station
modems, combining the markets first SoC baseband processor
for wireless infrastructure applications, the STW51000, with
multi-standard software libraries, optimized for GSM, EDGE, W
CDMA, and WiMAX networks.
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(b) Wireline Infrastructure Division. Our wireline
telecommunications products, both ASIC and ASSP, are used in
telephone sets, modems, subscriber line interface cards
(SLICs) for digital central office switching
equipment and the high-speed electronic and optical
communications networks. In January 2005, we announced that we
would scale back our presence in the CPE ADSL modem market. This
initiative resulted in an impairment charge of $61 million
and was recorded in the first quarter of 2005. |
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(c) Display Division. We offer products for the
monitor and television peripheral market, as well as plasma
display drivers and small-scale displays. Our display drivers
address a number of display solutions, including thin film
transistors, liquid crystal displays and organic light emitting
diodes. |
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Computer Peripherals Products |
(i) Data Storage Division. We produce ICs for
several data storage applications, specializing in disk drives
with advanced solutions for read and write digital channels,
disk controllers, host interfaces, digital power processing,
preamplifiers and micromachinery. We are actively working on
super-integrating these macro-functions into SoC solutions. We
believe that we are one of the largest semiconductor companies
supplying the hard-disk-drive market based on sales.
A market leader in the data storage market selected our SoC for
its next generation desktop drives. This SoC includes a rich
variety of our own IP including our read/write channel, Serial
ATA controller and microcomputer core. Complementing our leading
position in components for desktop and server applications, we
supply a kit including a SoC disk controller and a motion
control power combo to a leading maker of drives for mobile
applications. We have SoC solutions based on proprietary IP in
production at 130-nm. In 2005, we also shipped 177 million
units of our motor controller product. We are also expanding our
presence in preamplifiers with new design wins for desktop and
laptops at major hard disk drive manufacturers.
(ii) Printer Division. We are focusing on inkjet and
multifunction printer components and are an important supplier
of pen chips, motor drivers, head drivers, digital engines,
including those in high-performance photo-quality applications
and digital color copiers. We are also expanding our offerings
to include a reconfigurable ASSP product family, known as SPEAr,
designed for flexibility and ease of use by printer
manufacturers. We have successfully validated and released our
SPEAr Head, a new member of our SPEAr (Structured Processor
Enhanced Architecture) family of configurable SoCs that address
various applications, including digital engines for printers,
scanners, and other embedded-control applications. Additionally
in this area, our partnership with one of our major customers
expanded with two new digital engine designs wins in
next-generation printer and MultiFunction platforms.
(iii) Microfluidics Division. This division builds
on the years of our success in the field of microfluidic product
design, developed primarily for the inkjet print head product
line, and expands our offering into related fields, such as
molecular and health diagnostics. As a result, we announced an
agreement with MobiDiag to create a complete system for
genomic-based detection of infectious diseases based on our
silicon MEMS
Lab-on-Chip technology
and with Veredus for the detection of the Avian Flu.
Our automotive products include alternator regulators, airbag
controls, anti-skid braking systems, ignition circuits,
injection circuits, multiplex wiring kits and products for body
and chassis electronics, engine management, instrumentation
systems and car multimedia. We hold a leading position in the IC
market for automotive products.
29
(i) Powertrain and Safety Division. From engine and
transmission control to mechanical-electronic solutions,
microelectronics are steadily pervading all sectors of the
automotive industry. Our robust family of automotive products,
including MEMS accelerometers, complete standard solutions for
DC-motor control and automotive grade 16-bit microcontrollers
with embedded Flash memory, provide a broad range of features
that enhance performance, safety and comfort while reducing the
environmental impact of the automobile. We have in particular
obtained design wins for (i) new generation braking systems
(ABS vehicle control and traction control) from Bosch for 2009
models; (ii) power steering applications, with production
in 2008 from a major Japanese tier-one customer;
(iii) engine control from a major European system maker to
be used in 2008 models having as final customers GM, Ford, and
Chrysler; and (iv) a new car networking kit for a major
European manufacturer for the U.S. market. We are working
with Mobileye to develop, produce and commercialize chips for
the visual-aid driving-assistance segment of the automotive
market.
(ii) Car Body Division. We manufacture products for
the body and chassis electronics requirements of the car. These
products range from microcontrollers used in lighting, door and
window/wiper applications to junction boxes, power solutions,
dashboards and climate control needs.
(iii) Car, Radio and Multimedia Division. We provide
auto manufacturers with full solutions for analog and digital
car radio solutions for wireless communication, tolling,
navigation and other telematic functionalities. The increasingly
complex requirements of the car/driver interface have opened a
market for us in the area of car multimedia. We have the
know-how and experience to offer to the market complete
telematics solutions, which include circuits for GPS navigation,
voice recognition, audio amplification and audio signal
processing. In 2005, we also made available new software
libraries for our STA2051 32-bit GPS baseband controller, which
enables the delivery of both higher performance and additional
functionality for GPS and telematics applications.
(iv) Digital Broadcast Radio Division. Our products
are used by the fast growing satellite radio segment. We provide
a number of components to this application, including base band
products for the reception of signals by the market leaders. Our
penetration in the digital satellite broadcast market is growing
with the success of the two American providers who reached more
than 9 million subscribers in the fourth quarter of 2005.
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Memory Products Group Segment |
The Memory Products Group segment designs, develops and
manufactures a broad range of semiconductor memory and Smart
card products.
Flash memory technology, which is one of the enablers of digital
convergence, is the core of our nonvolatile memory activity. The
products developed by the various nonvolatile memory divisions
are complementary and are addressing different functions and/or
market segments.
In 2003, we made two acquisitions which complemented our product
portfolio in the Smart card field: Proton World International (a
company with expertise in the field of operating software and
applications development) and Incard (a company with expertise
in card manufacturing and electrical and graphical
personalization and global delivery and support for the Smart
card market, particularly in the high-end mobile phone market).
(i) Wireless Flash Memories Division. Wireless
applications have very specific requirements in terms of power
consumption, packaging and memory addressing. We offer a very
wide portfolio of wireless Flash memories. The latest 512
Megabit (M-bit), 2 bit/cell, 1.8V serves the needs
of the next generation of multimedia phones. The production of 2
bit per cell wireless Flash was approximately 80% of our
wireless NOR Flash in the fourth quarter of 2005 helping us
enrich the mix of our product offerings. We also offer
multi-memory subsystems, which combine LP-SDRAM and NAND memory.
We recently announced an agreement with Intel to standardize
hardware and software interfaces used in leading edge NOR Flash
products in the wireless market. The goal of this initiative is
to allow handset OEMs to lower their development costs and
improve their time to market by ensuring through similar ST and
Intel technical roadmaps and common specifications, availability
of hardware and software compatible NOR Flash products for
feature rich phones. Accordingly, we introduced our first 90-nm
NOR Flash-based multi-chip memory subsystems, which combine our
512-and 256M-bit NOR devices with PSRAM and LP-SDRAM memory.
(ii) Standard Nonvolatile Memories Division. We
produce a broad range of industry standard, general purpose
Flash memories from 1 to 64 M-bit and we are in the process of
producing Flash memories that will go up to 128 M-bit. We also
produce the more mature erasable programmable read-only memory
(EPROM), from 16 Kilobit (K-bit) to 32
M-bit. Efficient manufacturing, together with our sales and
distribution channels, has
30
contributed to the exploitation of our technological advantage
in EPROM. The same approach is being applied to industry
standard Flash.
(iii) Serial Nonvolatile Memories Division. We offer
serial Electronically Erasable Programmable Read-Only Memory
(EEPROM) up to 512 K-bit, and serial Flash memories
(SNVM). Serial EEPROMs are the most popular type of
EEPROMs and are used in computer, automotive and consumer
applications. Combining the typical interface of serial EEPROM
and Flash technology, we pioneered the concept of serial Flash.
Serial Flash allows integration of up to 64 M-bit and 128 M-bit
in an 8-pin package for a large variety of applications.
(iv) NAND Flash and Storage Media Division. In 2004,
we began offering NAND Flash memory products pursuant to a
co-development and manufacturing agreement with Hynix. Our
efforts are targeted at the lower density memory requirements
evolving for embedded wireless applications. Our most advanced
offering, a single die 4 Gigabit (G-bit) at 70-nm
chip, is now available in production. NAND Flash is primarily
used to store information such as music, still pictures, video,
data files in a variety of consumer applications, including
mobile phones, MP3 readers, universal serial bust
(USB) keys and digital still cameras.
(v) Smart card IC Division. Smart cards are card
devices containing ICs that store data and provide an array of
security capabilities. They are used in a wide and growing
variety of applications, including public pay telephone systems,
cellular telephone systems and banks, as well as pay television
systems and ID/passport cards. Other applications include
medical record applications, card-access security systems,
toll-payment and secure transactions over the Internet
applications. We have a long track record of leadership in Smart
card ICs. Our expertise in security is a key in leading the
finance and pay-TV
segments and developing the IT applications. Our mastering of
the nonvolatile memory technologies is instrumental to offer the
highest memory sizes (up to 128 KBytes and even
1 MByte), particularly important to address the emerging
high end mobile phone market. Our offer in embedded software
provides added value to our silicon and contributes to
facilitate the Smart card market development. Proton World
International is now part of the Smart card IC division.
In 2005, On Track Innovation (OTI) announced that
OTIs contactless Smart card, based on the ST19WR02
contactless, secure microcontroller, was the first to be
approved by Visa International for use in its contactless
program in the United States. We are also working with SmardTech
to develop a Smart card solution, based on our ST19W contactless
secure microcontrollers, as part of an electronic ticketing
system for a German transport application.
(vi) Incard Division. The division develops,
manufactures and sells plastic cards (both memory- and
microprocessors-based) for banking, identification and telecom
applications. Incard operates as a stand alone organization and
also directly controls the sales force for this product offering.
We have done important work on our cost position of our Memory
Product Group Segment, in particular widely developing the two
bit per cell architecture, which has generated an operating
profit for the Memory Product Group in the fourth quarter of
2005. We will continue to seek to enhance our competitive
position on all fronts of the memory market we serve both by
adding new products and improving manufacturing costs. However,
in the memory business the dimension of scale remains a critical
element and therefore we continue to be active in strategic
discussions with the aim of addressing that issue and generating
more value for our shareholders.
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Micro, Linear and Discrete Product Group Segment |
The Micro, Linear and Discrete Product Group segment is
responsible for the design, development and manufacture of
discrete power devices, (power transistors and other discrete
power devices), standard linear and logic ICs, and radio
frequency products. As of January 1, 2006, we renamed this
segment the Micro, Power and Analog Group to better reflect our
efforts of developing high-end analog products and of
consolidating our world leadership position in power
applications, with full solutions centered around micro
applications.
(i) Power MOSFET Division. We design, manufacture and sell
Power Mosfet (Metal-Oxide-Silicon Field Effect) transistors
ranging from 20 to 1000 volts for most of the
switching applications on the market today. Our
products are particularly well suited for high voltage switch
mode power supplies and in lighting applications, where we hold
a leadership position in high current and high voltage devices
for a variety of switching and pulse-mode applications.
(ii) Power Bipolar, IGBT and RF Division. Our bipolar power
transistors are used in a variety of voltage applications,
including television/monitor horizontal deflection circuits,
lighting systems and high power supplies. Our family of ESBT
(Emitter Switch Bipolar Transistor) is suitable for very high
current very high voltage applications, such as
welding machines and PFC (Power Factor Corrector) devices. The
IGBT transistors
31
are well suited for Automotive applications, such as motor
control and high voltage electronic ignition actuators. Within
this Division we also supply RF transistors used in television
broadcasting transmission systems, radars, telecommunications
systems and avionic equipment.
(iii) ASD and IPAD Division. This division offers a full
range of rectifiers, protection thyristors (silicon controlled
rectifiers or SCRs and three-terminal semiconductors
for controlling current in either direction or
Triacs) and protection devices. These components are
used in various applications, including telecommunications
systems (telephone sets, modems and line cards), household
appliances and industrial systems (motor control and power
control devices). More specifically, rectifiers are used in
voltage converters and regulators, protection devices, while
thyristors vary current flows through a variety of electrical
devices, including lamps and household appliances. We are
leaders in a highly successful range of new products built with
our proprietary Application Specific Discrete
(ASDtm)
technology, which allows a variety of discrete components
(diodes, rectifiers, thyristors) to be merged into a single
device optimized for specific applications such as
electromagnetic interference filtering for cellular phones.
Additionally, we are leaders in electronic devices integrating
both passive and active components on the same chip, also known
as Integrated Passive and Active Devices (IPAD),
which are widely used in the wireless handset market.
(iv) Linear and Interface Division. We offer a broad
product portfolio of linear and switching regulators along with
operational amplifiers, comparators, serial and parallel
interfaces covering a variety of applications like decoders,
DC-DC converters and mobile phones.
(v) Microcontroller Division. We focus on
high-volume 8, 16 and 32 bit microcontrollers in this
division. These products have been developed with a wide
technology portfolio and processes capable of embedding EPROM,
EEPROM and Flash non volatile memories as appropriate. In 2003,
we introduced new products for the ST7Lite series of integrated
8-bit Flash microcontrollers. The ST7FLite1 and ST7Flite2 are
suited for a wide range of high volume applications including
appliances, alarms, sensors, battery-powered products,
industrial controls and many other portable and low cost
systems. In 2005, we introduced a line of 32-bit ARM7-based
microcontrollers optimized for multiple industrial applications,
including factory automation, appliances and security systems.
We also updated our STR7 Software Library supporting our 32-bit
ARM7-based microcontrollers. Additionally, we gained design wins
for our ST7MC microcontroller in a new generation of brushless
electric motors for refrigerators with Chinas leading
home-appliance maker and with one of the worlds top five
refrigeration compressor manufacturers.
(vi) Industrial and Power Conversion Division. We design
and manufacture products for industrial automation systems,
lighting applications (lamp ballast), battery chargers and SMPS.
Our key products are power ICs for motor controllers and
read/write amplifiers, intelligent power ICs for spindle motor
control and head positioning in computer disk drives and battery
chargers for portable electronic systems, including mobile
telephone sets. In 2005, we introduced an innovative and
patented DC/ DC converter chip that for the first time, allows
two different output voltages to be generated using a single
external coil. The STw4141 is specifically designed to
efficiently supply power to digital baseband and multimedia
processors in portable applications. We also introduced the
PM6685 mobile PC power management IC, a dual step-down
controller that provides the four output voltages necessary for
notebook system power. Also in this area, we introduced our
L6668 current-mode primary-controller IC for single-ended
switching power converters to be used in high-end AC/ DC
adapters and chargers for notebook or laptop PCs. Our family of
Viper products and Omnifets exhibit the operating
characteristics of power transistors while incorporating full
thermal, short-circuit and over-current protection and allowing
logic-level input typical of ICs. They are primarily used in low
power switch mode power supplies where protection against
overvoltage and or overtemperature is needed.
(vii) Advanced Analog and Logic Division. We develop
innovative, differentiated and value-added analog products for a
number of markets and applications such as point of sales
terminals, power meters and white goods. In 2005, we introduced
our
NEATSwitchtm
portfolio of application-specific analog, digital, and power
switches and extended our supervisor and reset IC family with
the STM1061 low-power precision voltage detectors for
applications in systems where signal levels need to be
monitored. Also in this area, we gained a design win for a
multiple-voltage microprocessor reset IC with a major Set Top
Box manufacturer. In addition, we introduced the STM1404,
the worlds first FIPS (Federal Information Processing
Standard) level 4 security supervisor for
point-of-sale
equipment. We also produce a variety of HCMOS logic device
families, which include clocks, registers, gates, latches and
buffers. Such devices are used in a variety of applications,
including portable computers, computer networks and
telecommunications systems.
32
Strategic Alliances with Customers and Industry
Partnerships
We believe that strategic alliances with customers and industry
partnerships are critical to success in the semiconductor
industry. We have entered into several strategic customer
alliances, including alliances with Alcatel, Bosch,
Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate,
Siemens VDO, Thomson and Western Digital, among others. Customer
alliances provide us with valuable systems and application
know-how and access to markets for key products, while allowing
our customers to share some of the risks of product development
with us and to gain access to our process technologies and
manufacturing infrastructure. We are actively working to expand
the number of our customer alliances, targeting OEMs in the
United States, Europe and in Asia.
Partnerships with other semiconductor industry manufacturers
permit costly research and development and manufacturing
resources to be shared to mutual advantage for joint technology
development. We have been collaborating with Philips for the
joint development of CMOS process technologies in Crolles,
France, since 1992. In 2003, we began cooperating with Freescale
and Philips for the joint research and development of CMOS
process technology to provide 90-nm to 32-nm chip technologies
on 300-mm wafers, as well as for the operations of a 300-mm
wafer pilot line fab which has been built in Crolles2 with the
stated goal of accelerating the development of future
technologies and their proliferation throughout the
semiconductor industry. We have extended this agreement to cover
the development and licensing of core libraries.
We began working with Texas Instruments in 2002 to jointly
define and promote an open standard for wireless application
processor interfaces. This initiative has now broadened and is
known as the MIPI Alliance. It now includes over 92 members that
collaborate as mobile industry leaders with the objective of
defining and promoting open standards for interfaces to mobile
application processors. Through these open standards, the MIPI
Alliance intends to speed deployment of new services to mobile
users by establishing specifications for standard hardware and
software interfaces to mobile application processors and
encouraging the adoption of those standards throughout the
industry. We are members of the MIPI alliance.
We have also established joint development programs with leading
suppliers such as Air Liquide, Applied Materials, ASM
Lithography, Axalto, Canon, Hewlett-Packard, KLA-Tencor, LAM
Research, MEMC, Teradyne and Wacker and with computer-aided
design (CAD) tool producers, including Cadence, Co
Ware and Synopsys. We also participate in joint European
research programs, such as the MEDEA+ and ITEA programs, and
cooperate with major research institutions and universities.
In 2004, we signed and announced a joint venture agreement with
Hynix to build a front-end memory-manufacturing facility in Wuxi
City, 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 joint venture, guaranteed by subordinated
collateral on the joint ventures assets. The financing
will also include funding from local Chinese institutions
including long-term leasehold and local debt financing which
remains to be implemented. 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.
Customers and Applications
We design, develop, manufacture and market thousands of products
that we sell to approximately 1,300 direct customers. Major
customers include Axalto, Alcatel, Bosch, Delphi, Delta,
Ericsson, Hewlett-Packard, LG Electronics, Marelli, Maxtor,
Motorola, Nokia, Philips, Pioneer, Samsung, Scientific Atlanta,
Seagate, Siemens, Thomson, Vestel, Visteon and Western Digital.
To many of our key customers we provide a wide range of
products, including dedicated products, discrete devices, memory
products and programmable products. Our position as a strategic
supplier of application-specific products to certain customers
fosters close relationships that provide us with opportunities
to supply such customers requirements for other products,
including discrete devices, programmable products and memory
products. We also sell our products through distributors,
including Arrow Electronics, Avnet Inc., BSI Group, Wintech and
Yosun.
33
The following table sets forth certain of our significant
customers and certain applications for our products:
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Telecommunications |
Customers:
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2Wire |
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Finisar |
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Nokia |
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Sagem |
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Alcatel |
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Huawei |
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Nortel Networks |
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Siemens |
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Cellon |
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LG Electronics |
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Philips |
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Sony Ericsson |
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Cisco |
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Motorola |
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Sanyo |
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TCL Corporation |
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Portable multimedia
Telephone terminals (wireline and |
Applications:
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Camera modules/ mobile imaging
Central office switching systems
Data transport (routing, switching for electronic and
optical networks)
Digital cellular telephones
Internet access (XDSL) |
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wireless)
Wireless connectivit WLAN, FM radio)
Wireless infrastruct |
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y (Bluetooth, ure |
Computer Peripherals |
Customers:
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Agilent |
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Delta |
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Lexmark |
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Samsung |
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BenQ |
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Hewlett-Packard |
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Logitech |
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Seagate |
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Creative Technology |
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Intel |
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Maxtor |
|
Western Digital |
|
|
Dell |
|
Lenovo-IBM |
|
Microsoft |
|
Xerox |
Applications:
|
|
Data storage
Monitors and displays |
|
Power management
Printers
Webcams |
Automotive |
Customers:
|
|
Alpine |
|
Denso |
|
Marelli |
|
Sirius |
|
|
Bosch |
|
Harman |
|
Motorola |
|
Valeo |
|
|
Conti |
|
Hella |
|
Pioneer |
|
Visteon |
|
|
Delphi |
|
Lear |
|
Siemens |
|
XM Satellite |
Applications:
|
|
Airbags
Anti-lock braking systems
Body and chassis electronics
Engine management systems
(ignition and injection) |
|
Global positioning systems
Multimedia
Radio/ satellite radio
Telematics
Vehicle stability control |
Consumer |
Customers:
|
|
Bose Corporation |
|
LG Electronics |
|
Pace |
|
Skardin |
|
|
Echostar |
|
Matsushita |
|
Philips |
|
Sony |
|
|
Humax |
|
Microsoft |
|
Samsung |
|
Thomson |
|
|
Kenwood |
|
Motorola |
|
Scientific Atlanta |
|
Tomen
Vestel |
Applications:
|
|
Audio processing (CD, DVD, Hi-Fi) |
|
|
|
DVDs
Imaging |
|
|
|
|
Analog/ digital TVs |
|
|
|
Set-top boxes |
|
|
|
|
Digital cameras |
|
|
|
VCRs |
|
|
|
|
Digital music players |
|
|
|
|
|
|
Industrial/ Other Applications |
Customers:
|
|
American Power Conversion |
|
Delta |
|
Gillette |
|
Philips |
|
|
Astec |
|
Echelon |
|
Hewlett-Packard |
|
Siemens |
|
|
Autostrade |
|
Enel |
|
Nagra |
|
Toppan |
|
|
Axalto |
|
Gemplus |
|
Oberthur |
|
Taiwan Liton |
Applications:
|
|
Battery chargers
Smart card ICs
Industrial automation/ control systems
Intelligent power switches |
|
Lighting systems (lamp ballasts)
Motor controllers
Power supplies
Switch mode power supplies |
In 2005, our largest customer, Nokia, represented 22.4% of our
net revenues, compared to 17.1% in 2004 and 17.9% in 2003. No
other single customer accounted for more than 10% of our net
revenues. Sales to our OEM customers accounted for approximately
82% of our net revenues in 2005, from approximately 79% of our
net revenues in 2004 and 82% in 2003. Sales to our top ten OEM
customers were approximately 50% of total revenues in 2005, 44%
in 2004 and 46% in 2003. We have several large customers,
certain of whom have entered into strategic alliances with us.
Many of our key customers operate in cyclical businesses and
have in the past, and may in the future, vary order levels
significantly from period to period. In addition, approximately
18% of our net revenues in 2005 were sold through distributors,
compared to 21% in 2004 and 18% in 2003. There can
34
be no assurance that such customers or distributors, or any
other customers, will continue to place orders with us in the
future at the same levels as in prior periods. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
Disruptions in our relationships with any one of our key
customers could adversely affect our results of operations.
Sales, Marketing and Distribution
We operate regional sales organizations in Europe, North
America, Asia Pacific, Japan and Emerging Markets, which include
Latin America, the Middle East and Africa, Europe (non-EU and
non-EFTA), Russia and India. For a breakdown of net revenues by
product segment and geographic region for each of the three
years ended December 31, 2005, see Item 5.
Operating and Financial Review and Prospects Results
of Operations Segment Information.
The European region is divided into five business units:
automotive, consumer and computers, Smart card, telecom, EMS and
distribution. Additionally, for all products, including
commodities and Dedicated ICs, we actively promote and support
the sales of these products through sales force, field
application engineers, supply-chain management and
customer-service, and a technical competence center for
system-solutions, with support functions provided locally.
In the North America region, the sales and marketing team is
organized into seven business units. They are located near major
centers of activity for either a particular application or
geographic region: automotive (Detroit, Michigan), industrial
(Boston, Massachusetts), consumer (Chicago, Illinois), computer
and peripheral equipment (San Jose, California and
Longmont, Colorado), RFID and Smart card (Longmont, Colorado),
communications (Dallas, Texas) and distribution (Boston,
Massachusetts). Each regional business unit has a sales force
that specializes in the relevant business sector, providing
local customer service, market development and specialized
application support for differentiated system-oriented products.
This structure allows us to monitor emerging applications, to
provide local design support, and to identify new products for
development in conjunction with the various product divisions as
well as to develop new markets and applications with our current
product portfolio. A central product marketing operation in
Boston provides product support and training for standard
products for the North American region, while a logistics center
in Phoenix, Arizona supports
just-in-time delivery
throughout North America. In addition, a comprehensive
distribution business unit provides product and sales support
for the regional distribution network.
In the Asia Pacific region during 2005, sales and marketing
segments was managed from our regional sales headquarters in
Singapore and organized into nine segments (computer and
peripheral, automotive, industrial/computer/ MLD, home
entertainment, communications and mobile multimedia, display,
Smart card and security, distribution and EMS) with three
transversal support organizations (business management, field
quality and communications). We have sales offices in Taiwan,
Korea, China, Hong Kong, Malaysia, Thailand and Australia. The
Singapore sales organization provides central marketing,
customer service, technical support, logistics, application
laboratory and design services for the entire region. In
addition, there are design centers in Korea and China.
On January 1, 2006, we created a new sales region,
Greater China, which encompasses China, Taiwan and
Hong Kong. This new sales region will be dedicated to sales,
design and support resources and is aimed at expanding on our
many years of successful participation in this quickly growing
market. This market is also expected to grow significantly in
the next few years according to industry analysts. In 2004,
industry analysts estimated that we were one of the top five
semiconductor suppliers in China. Our intent is to meet the
needs of our transnational customers there, as well as to build
new relationship with the evolving local market.
In Japan, the large majority of our sales are made through
distributors, as is typical for foreign suppliers to the
Japanese market. However, our sales and marketing engineers in
Japan work directly with customers as well as with the
distributors to meet customers needs. We provide marketing
and technical support services to customers through sales
offices in Tokyo and Osaka. In addition, we have established a
design center and application laboratory in Tokyo. The design
center designs custom ICs for Japanese clients, while the
application laboratory allows Japanese customers to test our
products in specific applications. We have recently announced
changes in our organization for Japan and have targeted to
increase our presence in this significant market, by expanding
our sales design and support resources.
Our Emerging Markets organization includes Latin America, the
Middle East and Africa, Europe (non-EU and non-EFTA) and Russia
as well as our design and software development centers in India,
which employed approximately 1,500 people.
35
The sales and marketing activities carried out by our regional
sales organizations are supported by the product marketing that
is carried out by each product division, which also include
product development functions. This matrix system reinforces our
sales and marketing activities and our broader strategic
objectives. We have initiated a program to expand our customer
base. This programs key elements include adding sales
representatives, adding regional competence centers and new
generations of electronic tools for customer support.
Except for Emerging Markets, each of our regional sales
organizations operates dedicated distribution organizations. To
support the distribution network, we operate logistic centers in
Saint Genis, France, Phoenix, Arizona and Singapore.
We also use distributors and representatives to distribute our
products around the world. Typically, distributors handle a wide
variety of products, including products that compete with our
products, and fill orders for many customers. Most of our sales
to distributors are made under agreements allowing for price
protection and/or the right of return on unsold merchandise. We
generally recognize revenues upon transfer of ownership of the
goods at shipment. Sales representatives generally do not offer
products that compete directly with our products, but may carry
complementary items manufactured by others. Representatives do
not maintain a product inventory; instead, their customers place
large quantity orders directly with us and are referred to
distributors for smaller orders.
At the request of certain of our customers, we are also selling
and delivering our products to EMS, which, on a contractual
basis with our customers, incorporates our products into the
dedicated products which they manufacture for our customers.
Certain customers require us to hold inventory on consignment in
their hubs and only purchase inventory when they require it for
their own production. This may lead to delays in recognizing
revenues as such customers may choose within a specific period
of time the moment when they accept delivery of our products.
Research and Development
We believe that research and development is critical to our
success, and we are committed to increasing research and
development expenditures in the future. The main research and
development (R&D) challenge we face is to
continually increase the functionality, speed and
cost-effectiveness of our semiconductor devices, while ensuring
that technological developments translate into profitable
commercial products as quickly as possible.
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 institutes, key customers and global
equipment manufacturers working at the cutting edge of their own
markets. On January 1, 2005, we created a new Front-End
Technology and Manufacturing organization (FTM)
encompassing the present front-end manufacturing and central
research and development functions in order to improve our
technology research and development effectiveness and our
manufacturing competitiveness and efficiency. The research and
development activities relating to new products are managed by
the Product Segments and consist mainly of design activities
while the technologies research and development activities are
managed by our new FTM organization.
In 2005, we reallocated 10% of our research and development
resources in favor of higher priority projects for both process
technology development and product design with the aim to
increase the efficiency of our research and development activity
and accelerate product innovation. We selected 20 key technology
and product programs that set a clear roadmap with defined
milestones and that are reviewed on a monthly basis by our
Executive Committee.
We invest in a variety of research and development projects
ranging from long-term advanced research for the acceleration,
in line with industry requirements and roadmaps such as the
International Technology Roadmap for Semiconductors
(ITRS), of our broad range of process technologies
including BiCMOS; bipolar, CMOS and DMOS (BCD); High
Performance Logic; and stand-alone and embedded Flash and other
nonvolatile memories; to the continued expansion of our system
level design expertise and IP creation for advanced architecture
for SoC integration, as well as new products for many key
applications in the field of digital consumer wireless
communications and networking, computer peripherals, Smart cards
and car multimedia among others.
We continue to make significant investments in research and
development, while reducing our other general expenses. In 2005,
we spent $1,630 million on research and development, which
represented approximately a 6% increase from $1,532 million
in 2004, while 2004 spending represented a 24% increase from
$1,238 million in 2003. The table below sets forth
information with respect to our research and development
spending since 2003. Our reported research and development
expenses are mainly in the areas of product design, technology
and
36
development and do not include marketing design center costs
which are accounted for as selling expenses, or process
engineering, pre-production and process-transfer costs, which
are accounted for as cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Expenditures
|
|
$ |
1,630 |
|
|
$ |
1,532 |
|
|
$ |
1,238 |
|
As a percentage of net revenues
|
|
|
18.3 |
% |
|
|
17.5 |
% |
|
|
17.1 |
% |
Approximately 88% of our research and development expenses in
2005 were incurred in Europe, primarily in France and Italy. See
Public Funding below. As of
December 31, 2005, approximately 9,700 employees were
employed in research and development activities worldwide.
We devote significant effort to R&D because semiconductor
manufacturers face immense pressure to be the first to make
breakthroughs that can be leveraged into competitive advantages;
new developments in semiconductor technology can make end
products significantly cheaper, faster or more reliable than
their predecessors and enable, through their timely appearance
on the market, significant value creation opportunities.
To ensure that new technologies can be exploited in commercial
products as quickly as possible an integral part of our R&D
philosophy is concurrent engineering, meaning that new
fabrication processes and the tools needed to exploit them are
developed simultaneously. Typically, these include not only CAD
software, but also cell libraries that allow access to our rich
IP portfolio and a demonstrator product suitable for subsequent
commercialization. In this way, when a new process is delivered
to our product segments or made available to external customers,
they are more able develop commercial products immediately.
Our R&D activities are conducted on a worldwide scale and
focus on the very large scale integration (VLSI)
technology. Our major centers for VLSI technology development
are located in Crolles (France) and Agrate Brianza (Italy).
Other advanced R&D centers are strategically located around
the world: in Italy (Castelletto and Catania), France (Grenoble,
Tours and Rousset), USA (Phoenix, Carrollton, and
San Diego), Canada (Ottawa), UK (Bristol and Edinburgh),
Switzerland (Geneva and Lugano), India (Noida and Bangalore),
China (Beijing, Shenzhen and Shanghai) and Singapore.
In Crolles we cooperate with Philips and Freescale as part of
the Crolles2 alliance to jointly develop sub-micron CMOS logic
processes to provide 90-nm to 32-nm chip technologies on 300-mm
wafers and to build and operate an advanced 300-mm wafer pilot
line in Crolles, France. The pilot line was officially
inaugurated on February 27, 2003, and the first silicon
rolled off the line during the first quarter of 2003 with the
stated goal of accelerating the development of future
technologies and their proliferation throughout the
semiconductor industry. On January 31, 2005, the Crolles2
alliance extended the scope of the joint semiconductor research
and development activities to include research and development
related to wafer testing and packaging. The agreement reflects
the special needs of wafer testing and packaging for devices
produced on 300-mm wafers in 90-nm and beyond. In September
2005, we extended this agreement to cover the development and
licensing of core libraries. The initial five-year term of our
Crolles2 agreement has been set through December 31, 2007
and will be automatically extended until December 31, 2010,
unless either Freescale, Philips or we serve a written notice of
termination prior to December 31, 2006. There is no
assurance, however, that we will be able to extend this
agreement beyond its initial five year term or that it will not
terminate in the event a change of control occurs in one of the
parties. The non-renewal or termination of our Crolles2 alliance
could have a material adverse effect on our business. In such an
event, we may incur additional unforeseen costs, and our
business, results of operation and prospects may be
substantially affected.
In addition, our manufacturing facility in Crolles, France
houses a research and development center that is operated in the
legal form of a French Groupement dintérêt
économique (GIE) named Centre Commun de
Microelectronique de Crolles. Laboratoire
dElectronique de Technologie dInstrumentation
(LETI), a research laboratory of Commissariat de
lEnergie Atomique (CEA), an affiliate of Areva
Group (one of our indirect shareholders), is our partner.
There can be no assurance that we will be able to develop future
technologies and proliferate them on satisfactory terms, that
the alliance will be successful or will enable us to effectively
meet customer demands or that its operations will not be
adversely affected by unforeseen events and the sizeable risks
related to such development of new technologies, which could
materially adversely affect our business, results of operations
and prospects. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations Our research and development
efforts are increasingly expensive and dependent on alliances,
and our business, results of operations and prospects could be
materially adversely affected by the failure or termination of
such alliances in developing new process technologies in line
with market requirements.
37
Our 200-mm central R&D facility in Agrate (Italy)
(R2) is focused on the development of new generation
Flash memories from which other non-volatile memory products are
derived: EEPROM, EPROM/ OTP, Smart Cards and memory embedded
ASIC. We are currently developing new products for both NOR and
NAND in advanced technologies, with a strong focus on 2bit per
cell.
The Agrate R2 activity encompasses prototyping, pilot and volume
production of the newly developed technologies with the
objective to accelerate process industrialization and time to
market.
Our center in Phoenix works on technologies for digital
integrated circuits. These are also areas of great strategic
importance and the advances made in recent years have placed us
among the world leaders in logic technology. In addition, our
contacts with universities, such as the University of California
at Berkeley and Carnegie Mellon in the United States, have made
innovative product development possible.
Our intellectual property design center in Noida, India supports
all of our major design activities worldwide and hosts a major
central R&D activity focused on software and core libraries
development, with a strong emphasis on system solutions. Our
corporate technology R&D teams work in a wide variety of
areas that offer opportunities to harness our deep understanding
of microelectronics and our ability to synthesize knowledge from
around the world. These include:
|
|
|
|
|
Soft Computing, in which a variety of problem-solving techniques
such as fuzzy logic, neural networks and genetic algorithms are
applied to situations where the knowledge is inexact or the
computational resources required to obtain a complete solution
would be excessive using traditional computing architectures.
Potential applications include more effective automotive engine
control, emerging fuel cell technology and future quantum
computing techniques that will offer much greater computational
speeds than are currently achievable; |
|
|
|
Nano-Organics, which encompasses a variety of emerging
technologies that deal with structures smaller than the deep
sub-micron scale containing as little as a few hundred or
thousand atoms. Examples include carbon nanotubes, which have
potential applications in displays and memories, and all
applications that involve electronic properties of large
molecules such as proteins; and |
|
|
|
Micro-Machining, in which the ability to precisely control the
mechanical attributes of silicon structures is exploited. There
are many potential applications, including highly sensitive
pressure and acceleration sensors, miniature microphones,
microfluidic devices and optical devices. In addition, along
with its optical properties, the mechanical properties of
silicon represent one of the most important links between
conventional SoC technology and all the emerging technologies
such as bioelectronics that can benefit our semiconductor
expertise. |
The fundamental mission of our Advanced System Technology
(AST) organization is to create system knowledge that
supports our
system-on-chip (SoC)
development. ASTs objective is to develop the advanced
architectures that will drive key strategic applications,
including digital consumer, wireless communications, computer
peripherals and smart cards, as well as the broad range of
emerging automotive applications such as car multimedia. The
group has played a key role in establishing our pre-eminence in
mobility, connectivity, multimedia, storage and security, the
core competences required to drive todays convergence
markets.
ASTs challenge is to combine the expertise and
expectations of our customers, industrial and academic partners,
our central R&D teams and product segments to create a
cohesive, practical vision that defines the hardware, software
and system integration knowledge that we will need in the next
three to five years and the strategies required to master them.
In addition, AST includes a team dedicated to longer term system
research, which works in synergy with university research teams,
allowing a continuous flow of ideas from top class research
centers. AST has eight large laboratories around the world, plus
a number of smaller locations located near universities and
research partners. Its major laboratories are located in: Agrate
Brianza; Catania; Castelletto; Geneva; Grenoble; Lecce; Noida;
Portland, Oregon; Rousset; and San Diego, California.
We also have divisional R&D centers such as those in
Castelletto, Catania and Tours that carry out more specialized
work that benefits from their close relationship to their
markets. For example, Castelletto pioneered the BCD process that
created the world smart-power market and has developed advanced
MEMS (Micro-Electronic-Mechanical Systems) technologies used to
build products such as inkjet printheads, accelerometers and the
worlds first single chip for DNA amplification and
detection.
The Application Specific Discretes (ASD) technology
developed at Tours has allowed ST to bring to the market
numerous products that can handle high bi-directional currents,
sustain high voltages or integrate various
38
discrete elements in a single chip, like the Integrated Passive
and Active Devices (IPADs). ASD technology has proved
increasingly successful in a variety of telecom, computer and
industrial applications: ESD protection and AC switching are key
areas together with RF filter devices.
The Catania facility hosts a wide range of R&D activities
and its major divisional R&D achievements in recent years
include the development of our revolutionary PowerMESHTM and
STripFET TM MOSFET families.
Our other specialized divisional R&D centers are located in
Grenoble (packaging R&D, IP center), and Rousset (smart card
and microcontroller development), in addition to a host of
centers focusing on providing a complete system approach in
digital consumer applications, such as TVs, DVD players, set-top
boxes and cameras. These centers are located in various
locations including: Beijing; Bristol; Carrollton, Texas;
Edinburgh; Grenoble; Noida; Rousset; and Singapore. For Smart
card SoC, we have centers in Prague and Shanghai.
All of these worldwide activities create new ideas and
innovations that enrich our portfolio of intellectual property
and enhance our ability to provide our customers with winning
solutions.
Furthermore, an array of important strategic customer alliances
ensures that our R&D activities closely track the changing
needs of the industry, while a network of partnerships with
universities and research institutes around the world ensures
that we have access to leading-edge knowledge from all corners
of the world. We also play leadership roles in numerous projects
running under the European Unions IST (Information Society
Technologies) programs. We actively participate in these
programs and continue collaborative R&D efforts within the
MEDEA+ research program.
Finally, we believe that platforms are the answer to the growing
need for full system integration, as customers require from
their silicon suppliers not just chips, but an optimized
combination of hardware and software. More than 1,500 engineers
and designers are currently developing the five platforms we
selected to spearhead our future growth in some of the fastest
developing markets of the microelectronics industry. The five
platforms include:
|
|
|
|
|
Two in the area of consumer: set-top boxes, ranging from digital
terrestrial, to cable, and satellite to Internet Protocol based
devices, and Integrated Digital TV, which will include the
expected promising new wave of High-Definition sets; |
|
|
|
One in the area of computer peripherals: the SPEAr family of
re-configurable SoC ICs for printers and related
applications; and |
|
|
|
Two in the area of wireless: Application Processors, namely our
Nomadik platform that is bringing multimedia to the
next-generation mobile devices and Wireless Infrastructure for
3-G base-stations. |
Property, Plants and Equipment
We currently operate 16 (as per table below) main
manufacturing sites around the world. The table below sets forth
certain information with respect to our current manufacturing
facilities, products and technologies. Front-end manufacturing
facilities are wafer fabrication plants, known as fabs, and
back-end facilities are assembly, packaging and final testing
plants.
|
|
|
|
|
Location |
|
Products |
|
Technologies |
|
|
|
|
|
Front-end facilities
|
|
|
|
|
Crolles1, France
|
|
Application specific products |
|
Fab: 200-mm CMOS and BiCMOS, research and development on
VLSI sub-micron technologies |
Crolles2, France(1)
|
|
Dedicated products and leading edge logic products |
|
Fab: 300-mm research and development on deep sub-micron (90-nm
and below) CMOS and system-on-chip (SoC) technology
development |
Phoenix, Arizona
|
|
Dedicated products and microcontrollers |
|
Fab: 200-mm CMOS, BiCMOS, BCD |
39
|
|
|
|
|
Location |
|
Products |
|
Technologies |
|
|
|
|
|
Agrate, Italy
|
|
Nonvolatile memories, microcontrollers and dedicated products |
|
Fab 1: 150-mm BCD, nonvolatile memories, MEMS. (converting to
200-mm)
Fab 2: 200-mm Flash, embedded Flash, research and development on
nonvolatile memories and BCD technologies |
Rousset, France
|
|
Microcontrollers, nonvolatile memories and Smart card ICs and
dedicated products |
|
Fab 1: 150-mm CMOS, Smart card (phase-out planned in 2006)
Fab 2: 200-mm CMOS, Smart card, embedded Flash |
Catania, Italy
|
|
Power transistors, Smart Power ICs and nonvolatile memories |
|
Fabs 1/2: 150-mm Power metal-on silicon oxide semiconductor
process technology (MOS),
VIPpowertm,
MO-3 and Pilot Line RF
Fab 3: 200-mm Flash, Smart card, EEPROM
300-mm building constructed but not fully facilitized and
equipped. |
Castelletto, Italy
|
|
Smart power BCD |
|
Fab: 150-mm BCD and MEMS pilot line (closure planned for the end
of Q2 2006) |
Tours, France
|
|
Protection thyristors, diodes and application-specific
discrete-power transistors |
|
Fab: 125-mm,150-mm and 200-mm pilot line discrete |
Ang Mo Kio, Singapore
|
|
Dedicated products, microcontrollers, power transistors,
commodity products, nonvolatile memories, and dedicated products |
|
Fab 1: 125-mm, power MOS, bipolar transistor, bipolar ICs,
standard linear
Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smart card,
Micros
Fab 3: 200-mm BiCMOS, Flash Memories |
Carrollton, Texas
|
|
Memories and Application specific products |
|
Fab: 150-mm BiCMOS, BCD and CMOS |
Back-end facilities
|
|
|
|
|
Muar, Malaysia
|
|
Dedicated and standard products, microcontrollers |
|
|
Kirkop, Malta
|
|
Application specific products |
|
|
Toa Payoh, Singapore
|
|
Nonvolatile memories and power ICs |
|
|
Ain Sebaa, Morocco
|
|
Discrete and standard products |
|
|
Bouskoura, Morocco
|
|
Nonvolatile memories, discrete and standard products,
micromodules, RF and subsystems |
|
|
Shenzhen, China(2)
|
|
Nonvolatile memories, discrete and standard products |
|
|
|
|
(1) |
Operated jointly with Philips and Freescale. |
|
(2) |
Jointly operated with SHIC, a subsidiary of Shenzhen Electronics
Group. |
As of December 31, 2005, we had a total of approximately
610,000 square meters of front-end facilities, comprised of
approximately 370,000 square meters in Europe,
approximately 90,000 square meters in the United States and
approximately 150,000 square meters in Asia (these numbers
exclude Crolles2 and M6). We also had a total of approximately
240,000 square meters of back-end facilities.
At the end of 2005, our front-end facilities had total capacity
of approximately 230,000 150-mm equivalent wafer starts per
week. The number of wafer starts per week varies from facility
to facility and from period to period as a result of changes in
product mix. We have six 200-mm wafer production facilities
currently in operation. Of these, four (at Crolles, France;
Agrate, Italy; Catania, Italy; and Phoenix, Arizona) have full
design capacity installed as of December 31, 2005; as of
the same date, fabs (in Rousset, France and in Singapore) have
approximately two-thirds of the ultimate capacity installed.
40
We, along with our partners Philips and Freescale, began volume
production in our advanced 300-mm wafer pilot-line fabrication
facility in Crolles, France in the first half of 2004. By the
end of 2005, the pilot line, initially designed to produce up to
1,000 wafers per week, produced approximately 1,500 wafers per
week.
The building shell for our future 300-mm wafer volume
manufacturing fabrication facility in Catania, Italy is
completed and in 2005 the first phase of facilitization was also
completed. Because of the location of this facility in southern
Italy (Catania, Sicily), we face the risk that an earthquake
could damage this facility. Any disruption in our product
development capability or our manufacturing capability arising
from earthquakes could cause significant delays in the
production or shipment of our products until we are able to
shift development or production to different facilities or
arrange for third parties to manufacture our products. Such
risks, like other risks, may not be fully or adequately covered
under our corporate insurance policies. See Item 8.
Financial Information Risk Management and
Insurance.
We own all of our manufacturing facilities, except Crolles2,
France, which is the subject of a capital lease.
We have historically subcontracted approximately up to 20% of
total volumes for back-end operations to external suppliers. In
periods of high demand, we intend to outsource up to 20% of our
front-end production requirements to external foundries,
reducing outsourcing as needed to meet market conditions, when,
due to reduced customer demand, the average level of front-end
subcontracting was significantly lower.
During the most recent downturns in the industry, we limited our
capital investment, allocating it to strategic projects such as
the evolution of the production capability to lower geometries
in the 200-mm facilities; the development of advanced
manufacturing processes (90-nm and 65-nm); the improvement in
the quality of our operations; the
ramp-up of the new
200-mm production facility in Singapore; the continuation of the
two 300-mm projects (Crolles, France, for pilot-line; Catania,
Italy, for volume manufacturing); the
ramp-up to volume
manufacturing of the new Bouskoura, Morocco back-end facility;
and the completion of the extension of the back-end Shenzhen,
China facility. We have also increased overall installed
front-end capacity.
As of December 31, 2005, we had $576 million in
outstanding commitments for purchases of equipment for delivery
in 2006. The most significant of our 2006 capital expenditure
projects are expected to be (i) the expansion of the 300-mm
front-end joint project with Philips and Freescale in Crolles2,
France, (ii) the preliminary equipment installation in our
300-mm front-end plant in Catania (Italy), (iii) the
upgrading to finer geometries of our 200-mm fab in Rousset
(France), (iv) the upgrading of our 200-mm facility in Ang
Mo Kio (Singapore), (v) the upgrading of our 200-mm
front-end facility and pilot line in Agrate (Italy) and
(vi) the capacity expansion of our back-end plants in
Shenzhen (China), Muar (Malaysia), and Bouskoura (Morocco). We
will continue to monitor our level of capital spending, however,
taking into consideration factors such as trends in the
semiconductor industry, capacity utilization and announced
additions. We plan 2006 capital expenditures to be approximately
$1.8 billion, although we have the flexibility to modulate
our investments to changes in market conditions. The major part
of this amount will be allocated to leading-edge technologies
and research and development programs.
Although each fabrication plant is dedicated to specific
processes, our strategy is to develop local presence to better
serve customers and mitigate manufacturing risks by having key
processes operated in different manufacturing plants. In certain
countries, we have been granted tax incentives by local
authorities in line with local regulations, being recognized as
an important contributor to the economies where our plants are
located. In periods of industry capacity limitations we have
sought to minimize our capital expenditure needs, by purchasing
from subcontractors both wafer foundry and back-end services. In
difficult market conditions, we may face overcapacity issues,
particularly in our older fabrication facilities that use mature
process technologies. Like other semiconductor manufacturers, we
could have mature fabrication facility capacity being only
partially used, which may affect our cost of operations. Such
overcapacity has led us, in recent years, to close manufacturing
facilities using more mature process technologies and
restructure our 150-mm manufacturing. In 2002, we completed the
closure of our 150-mm wafer manufacturing facility in Rancho
Bernardo, California. Pursuant to such closure in 2002, we
recorded impairment, restructuring charges and related closure
costs of $34 million. In 2003, we recorded impairment,
restructuring charges and other related closure costs of
$205 million pursuant to a plan announced in October 2003
to increase our cost competitiveness by restructuring our 150-mm
fab operations and part of our back-end operations. In 2004, our
150-mm wafer manufacturing facility in Rennes, France and our
back-end facility in Tuas, Singapore were closed pursuant to
this restructuring initiative and the total amount of
impairment, restructuring charges and other related closure
pre-tax costs amounted to $76 million. In 2005, the amount
of impairment, restructuring charges and other related closure
pre-tax costs amounted to $128 million. See
Item 5. Operating and Financial Review and
Prospects and Note 18 to the Consolidated Financial
Statements.
41
Through the period ended December 31, 2005, we have
incurred $294 million of the announced approximate
$350 million in pre-tax charges associated with the
restructuring plan that was defined on October 22, 2003,
and which is now expected to be substantially completed in the
second half of 2006.
Our manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an
effort to improve yields and product performance. Impurities or
other difficulties in the manufacturing process can lower
yields, interrupt production or result in losses of products in
process. As system complexity has increased and sub-micron
technology has become more advanced, manufacturing tolerances
have been reduced and requirements for precision and excellence
have become even more demanding. Although our increased
manufacturing efficiency has been an important factor in our
improved results of operations, we have from time to time
experienced production difficulties that have caused delivery
delays and quality control problems, as is common in the
semiconductor industry.
No assurance can be given that we will be able to increase
manufacturing efficiency in the future to the same extent as in
the past or that we will not experience production difficulties
in the future.
As is common in the semiconductor industry, we have from time to
time experienced difficulty in ramping up production at new
facilities or effecting transitions to new manufacturing
processes and, consequently, have suffered delays in product
deliveries or reduced yields. There can be no assurance that we
will not experience manufacturing problems in achieving
acceptable yields, product delivery delays or interruptions in
production in the future as a result of, among other things,
capacity constraints, production bottlenecks, construction
delays, equipment failure or maintenance, ramping up production
at new facilities, upgrading or expanding existing facilities,
changing our process technologies, or contamination or fires,
storms, earthquakes or other acts of nature, any of which could
result in a loss of future revenues. In addition, the
development of larger fabrication facilities that require
state-of-the-art
sub-micron technology and larger-sized wafers has increased the
potential for losses associated with production difficulties,
imperfections or other causes of defects. In the event of an
incident leading to an interruption of production at a fab, we
may not be able to shift production to other facilities on a
timely basis, or our customers may decide to purchase products
from other suppliers, and, in either case, the loss of revenues
and the impact on our relationship with our customers could be
significant. Our operating results could also be adversely
affected by the increase in our fixed costs and operating
expenses related to increases in production capacity if revenues
do not increase commensurately. Finally, in periods of high
demand, we increase our reliance on external contractors for
foundry and back-end service. Any failure to perform by such
subcontractors could impact our relationship with our customers
and could materially affect our results of operations.
Intellectual Property
Intellectual property rights that apply to our various products
include patents, copyrights, trade secrets, trademarks and mask
work rights. A mask work is the two or three-dimensional layout
of an integrated circuit. We own more than 19,000 patents or
pending patent applications which have been registered in
several countries around the world and correspond to more than
8,000 patent families (each patent family containing all patents
originating from the same invention). We filed 720 new patent
applications around the world in 2005.
Our success depends in part on our ability to obtain patents,
licenses and other intellectual property rights covering our
products and their design and manufacturing processes. To that
end, we intend to continue to seek patents on our circuit
designs, manufacturing processes, packaging technology and other
inventions. The process of seeking patent protection can be long
and expensive, and there can be no assurance that patents will
issue from currently pending or future applications or that, if
patents are issued, they will be of sufficient scope or strength
to provide meaningful protection or any commercial advantage to
us. In addition, effective copyright and trade secret protection
may be unavailable or limited in certain countries. Competitors
may also develop technologies that are protected by patents and
other intellectual property rights and therefore such
technologies may be unavailable to us or available to us subject
to adverse terms and conditions. Management believes that our
intellectual property represents valuable property and intends
to protect our investment in technology by enforcing all of our
intellectual property rights. We have used our patent portfolio
to enter into several broad patent cross-licenses with several
major semiconductor companies enabling us to design, manufacture
and sell semiconductor products without fear of infringing
patents held by such companies, and intend to continue to use
our patent portfolio to enter into such patent cross-licensing
agreements with industry participants on favorable terms and
conditions. As our sales increase compared to those of our
competitors, the strength of our patent portfolio may not be
sufficient to guarantee the conclusion or renewal of broad
patent cross-licenses on terms which do not affect our results
of operations. Furthermore, as a result of litigation, or to
address our business needs, we may be required to take a license
to third-party intellectual property rights upon economically
42
unfavorable terms and conditions, and possibly pay damages for
prior use, and/or face an injunction, all of which could have a
material adverse effect on our results of operations and ability
to compete.
From time to time, we are involved in intellectual property
litigation and infringement claims. See Item 8.
Financial Information Legal Proceedings. In
the event a third-party intellectual property claim were to
prevail, our operations may be interrupted and we may incur
costs and damages, which could have a material adverse effect on
our results of operations, cash flow and financial condition.
Finally, we have received from time to time, and may in the
future receive communications alleging infringement of certain
patents and other intellectual property rights of others, which
has been and may in the future be followed by litigation.
Regardless of the validity or the successful assertion of such
claims, we may incur significant costs with respect to the
defense thereof, which could have a material adverse effect on
our results of operations, cash flow or financial condition. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
We depend on patents to protect our rights to our
technology.
Backlog
Our sales are made primarily pursuant to standard purchase
orders that are generally booked from one to twelve months in
advance of delivery. Quantities actually purchased by customers,
as well as prices, are subject to variations between booking and
delivery and, in some cases, to cancellation due to changes in
customer needs or industry conditions. During periods of
economic slowdown and/or industry overcapacity and/or declining
selling prices, customer orders are not generally made far in
advance of the scheduled shipment date. Such reduced lead time
can reduce managements ability to forecast production
levels and revenues. When the economy rebounds, our customers
may strongly increase their demands, which can result in
capacity constraints due to our inability to match manufacturing
capacity with such demand.
In addition, our sales are affected by seasonality, with the
first quarter generally showing lowest revenue levels in the
year, and the fourth quarter generating the highest amount of
revenues due to electronic products purchased from many of our
targeted market segments during the holiday period.
We also sell certain products to key customers pursuant to frame
contracts. Frame contracts are annual contracts with customers
setting forth quantities and prices on specific products that
may be ordered in the future. These contracts allow us to
schedule production capacity in advance and allow customers to
manage their inventory levels consistent with
just-in-time principles
while shortening the cycle times required to produce ordered
products. Orders under frame contracts are also subject to a
high degree of volatility, because they reflect expected market
conditions which may or may not materialize. Thus, they are
subject to risks of price reduction, order cancellation and
modifications as to quantities actually ordered resulting in
inventory build-ups.
Furthermore, developing industry trends, including
customers use of outsourcing and their deployment of new
and revised supply chain models, may reduce our ability to
forecast changes in customer demand and may increase our
financial requirements in terms of capital expenditures and
inventory levels.
Our backlog (defined here to include frame orders) decreased
significantly in 2001 from the levels of 2000, reflecting the
most severe downturn in the semiconductor industry. Starting in
2002 we steadily registered an increase in the backlog compared
to 2001, which continued in 2003 compared to 2002. We entered
2004 with a backlog approximately 30% higher than we had
entering 2003. Following the industry-wide over-inventory
situation and the declining level of order booking in the second
half of 2004, we entered 2005 with an order backlog that was
approximately 9% lower than we had entering 2004. During 2005,
our backlog registered a solid increase and we are entering 2006
with an order backlog that is significantly higher than what we
had entering 2005.
Competition
Markets for our products are intensely competitive. While only a
few companies compete with us in all of our product lines, we
face significant competition in each of our product lines. We
compete with major international semiconductor companies, some
of which may have substantially greater financial and other more
focused resources than we do with which to pursue engineering,
manufacturing, marketing and distribution of their products.
Smaller niche companies are also increasing their participation
in the semiconductor market, and semiconductor foundry companies
have expanded significantly, particularly in Asia. Competitors
include manufacturers of standard semiconductors, ASICs and
fully customized ICs, including both chip and board-level
products, as well as customers who develop their own IC products
and foundry operations. Some of our competitors are also our
customers.
43
The primary international semiconductor companies that compete
with us include Advanced Micro Devices, Agere Systems, Analog
Devices, Broadcom, IBM, Infineon Technologies, Intel,
International Rectifier, Freescale Semiconductor, Marvell
Technology Group, National Semiconductor, Nippon Electric
Company, ON Semiconductor, Philips Semiconductors, Qualcomm,
Renesas, Samsung, Spansion, Texas Instruments and Toshiba.
We compete in different product lines to various degrees on the
basis of price, technical performance, product features, product
system compatibility, customized design, availability, quality
and sales and technical support. In particular, standard
products may involve greater risk of competitive pricing,
inventory imbalances and severe market fluctuations than
differentiated products. Our ability to compete successfully
depends on elements both within and outside of our control,
including successful and timely development of new products and
manufacturing processes, product performance and quality,
manufacturing yields and product availability, customer service,
pricing, industry trends and general economic trends.
Organizational Structure and History
We are a multinational group of companies that designs,
develops, manufactures and markets a broad range of products
used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer
goods, automotive products and industrial automation and control
systems. We are organized in a matrix structure with
geographical regions interacting with product divisions, both
being supported by central functions, bringing all levels of
management closer to the customer and facilitating communication
among research and development, production, marketing and sales
organizations.
While STMicroelectronics N.V. is the parent company, we also
conduct our operations through our consolidated subsidiaries.
Except for our subsidiaries in Shenzhen, China, in which we own
60% of the shares and voting rights, Accent S.r.L. (Italy), in
which we own 51% of the shares and voting rights, Hynix, ST
(China) joint venture company, in which we own a 33% equity
participation, Shanghai Blue Media Co. Ltd (China), in which we
own 65%, and Incard do Brazil, in which we own 50% of the shares
and voting rights, STMicroelectronics N.V. owns directly or
indirectly 100% of all of our significant operating
subsidiaries shares and voting rights, which have their
own organization and management bodies, and are operated
independently in compliance with the laws of their country of
incorporation. We provide certain administrative, human
resources, legal, treasury, strategy, manufacturing, marketing
and other overhead services to our consolidated subsidiaries
pursuant to service agreements for which we receive compensation.
The simplified organigram below shows the principal industrial
subsidiaries of ST:
Public Funding
We participate in certain programs established by the EU,
individual countries and local authorities in Europe
(principally France and Italy). Such funding is generally
provided to encourage research and development activities,
industrialization and the economic development of underdeveloped
regions. These programs are characterized by direct partial
support to research and development expenses or capital
investment or by low-interest financing.
44
Public funding in France, Italy and Europe generally is open to
all companies, regardless of their ownership or country of
incorporation, for research and development and for capital
investment and low-interest-financing related to incentive
programs for the economic development of under-developed
regions. The EU has developed model contracts for research and
development funding that require beneficiaries to disclose the
results to third parties on reasonable terms. As disclosed, the
conditions for receipt of government funding may include
eligibility restrictions, approval by EU authorities, annual
budget appropriations, compliance with European Commission
regulations, as well as specifications regarding objectives and
results.
In the research and development context, some of our government
funding contracts involving advance payments requires us to
justify our expenses after receipt of funds. Certain specific
contracts (Crolles2, Rousset, France and Catania, Italy) contain
obligations to maintain a minimum level of employment and
investment during a certain amount of time. There could be
penalties (partial refund) if these objectives are not
fulfilled. Other contracts contain penalties for late deliveries
or for breach of contract, which may result in repayment
obligations. However, the obligation to repay such funding is
never automatic.
The main programs for research and development in which we are
involved include: (i) the Micro-Electronics Development for
European Application (MEDEA+) cooperative research
and development program; (ii) EU research and development
projects with FP6 (Sixth Frame Program) for Information
Technology; and (iii) national or regional programs for
research and development and for industrialization in the
electronics industries involving many companies and
laboratories. The pan-European programs cover a period of
several years, while national programs in France and Italy are
subject mostly to annual budget appropriation.
The MEDEA+ cooperative research and development program was
launched in June 2000 by the Eureka Conference and is designed
to bring together many of Europes top researchers in a
12,000 man-year program that covers the period 2000-2008. The
MEDEA+ program replaced the joint European research program
called MEDEA, which was a European cooperative project in
microelectronics among several countries that covered the period
1996 through 2000 and involved more than 80 companies. In
Italy, there are some national funding programs established to
support the FIRB (Fondo per gli Investimenti della Ricerca di
Base, aimed to fund fundamental research), the FAR (Fondo
per le Agevolazioni alla Ricerca, to fund industrial
research), and the FIT (Fondo per lInnovazione
Tecnologica, to fund precompetitive development). These
programs are not limited to microelectronics. Italian programs
often cover several years, but funding from each of FIRB, FAR
and FIT is subject to annual budget appropriations. During 2004,
the FAR and FIT suspended funding of new projects, including the
MEDEA+ projects whose Italian activities are subject to FAR
rules and availability. In September 2005, however, the Italian
Government began considering funding new projects, and in doing
so called for limited Strategic programmes on areas
selected by the Government. One of these areas was
semiconductors where we have submitted several proposals, which
are presently under review. Furthermore, there are some regional
funding tools that can be addressed by local initiatives,
primarily the regions Puglia and Val DAosta, provided that
a reasonable regional socio-economic impact could be recognized
in terms of industrial exploitation, new professional hiring
and/or cooperation with local academia and public laboratories.
In France, support for microelectronics is provided to over
30 companies manufacturing or using semiconductors. The
amount of support under French programs is decided annually and
subject to budget appropriation.
In accordance with SEC Statement Accounting
Bulletin No. 104 Revenue Recognition
(SAB 104) and our revenue recognition policy, funding
related to these contracts is booked when the conditions
required by the contracts are met. Our funding programs are
classified in three general categories for accounting purposes:
funding for research and development activities, funding for
research and development capital investments, and loans.
Funding for research and development activities is the most
common form of funding that we receive. Public funding for
research and development is recorded as Other Income and
Expenses, net in our consolidated statements of income.
Public funding for research and development is booked pro rata
in relation to the relevant cost once the agreement with the
applicable government agency has been signed and as any
applicable conditions are met. See Note 17 to our
Consolidated Financial Statements. Such funding has totaled
$76 million, $84 million and $76 million in the
years 2005, 2004 and 2003, respectively.
Government support for capital expenditures funding has totaled
$38 million, $46 million and $62 million in the
years 2005, 2004 and 2003, respectively. Such funding has been
used to support our capital investment. Although receipt of
these funds is not directly reflected in our results of
operations, the resulting lower amounts recorded in property,
plant and equipment costs reduce the level of depreciation
recognized by us. Public funding reduced depreciation charges by
$66 million, $74 million and $80 million in 2005,
2004 and 2003, respectively.
45
As a third category of government funding, the Company receives
some loans, mainly related to large capital investment projects,
at preferential interest rates. The Company recognizes these
loans as debt on its balance sheet in accordance with
paragraph 35 of Statements of Financial Accounting Concepts
No. 6, Elements of Financial Statements (CON 6). Low
interest financing has been made available (principally in
Italy) under programs such as the Italian Republics Fund
for Applied Research, established in 1988 for the purpose of
supporting Italian research projects meeting specified program
criteria. At year-end 2005, 2004 and 2003, we had
$120 million, $156 million and $84 million,
respectively, of indebtedness outstanding under state-assisted
financing programs at an average interest cost of 1.0%, 1.0% and
1.1%, respectively.
Funding of programs in France and Italy is subject to annual
appropriation, and if such governments or local authorities were
unable to provide anticipated funding on a timely basis or if
existing government- or local authority-funded programs were
curtailed or discontinued, or if we were unable to fulfill our
eligibility requirements, such an occurrence could have a
material adverse effect on our business, operating results and
financial condition. Furthermore, we may need to rely on public
funding as we transition to 300-mm manufacturing technology. We
are dependent on public funding for equipping the 300-mm wafers
production facility in Catania (Italy). If such planned funding
does not materialize, we may lack financial resources to
continue with our investment plan for this facility, which in
turn could lead us to discontinue our investment in such
facility and consequentially incur significant impairments. From
time to time, we have experienced delays in the receipt of
funding under these programs. As the availability and timing of
such funding are substantially outside our control, there can be
no assurance that we will continue to benefit from such
government support, that funding will not be delayed from time
to time, that sufficient alternative funding would be available
if necessary or that any such alternative funding would be
provided on terms as favorable to us as those previously
committed.
Due to changes in legislation and/or review by the competent
administrative or judicial bodies, there can be no assurance
that government funding granted to us may not be revoked or
challenged or discontinued in whole or in part, by any competent
state or European authority, until the legal time period for
challenging or revoking such funding has fully lapsed. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
Reduction in the amount of state funding available to us or
demands for repayment may increase our costs and impact our
results of operations.
Suppliers
We use three main critical types of suppliers in our business:
equipment suppliers, raw material suppliers and external
subcontractors.
In the front-end process, we use steppers, scanners, track
equipment, strippers, chemo-mechanical polishing equipment,
cleaners, inspection equipment, etchers, physical and chemical
vapor-deposition equipment, implanters, furnaces, testers,
probers and other specialized equipment. The manufacturing tools
that we use in the back-end process include bonders, burn-in
ovens, testers and other specialized equipment. The quality and
technology of equipment used in the IC manufacturing process
defines the limits of our technology. Demand for increasingly
smaller chip structures means that semiconductor producers must
quickly incorporate the latest advances in process technology to
remain competitive. Advances in process technology cannot be
brought about without commensurate advances in equipment
technology, and equipment costs tend to increase as the
equipment becomes more sophisticated.
Our manufacturing processes use many raw materials, including
silicon wafers, lead frame, mold compound, ceramic packages and
chemicals and gases. The prices of many of these raw materials
are volatile. We obtain our raw materials and supplies from
diverse sources on a
just-in-time basis.
Although supplies for the raw materials used by us are currently
adequate, shortages could occur in various essential materials
due to interruption of supply or increased demand in the
industry. See Item 3. Key Information
Risk Factors Risks Related to Our
Operations Because we depend on a limited number of
suppliers for raw materials and certain equipment, we may
experience supply disruptions if suppliers interrupt supply or
increase prices.
Finally, we also use external subcontractors to outsource wafer
manufacturing and assembly and testing of finished products. See
Property, Plants and Equipment above. We
also have an agreement with Hynix for the co-development and
manufacturing of NAND products pursuant to which Hynix from
Korea is supplying the co-developed NAND products to us, in part
using equipment that we have provided on consignment for
capacity dedicated to us. We have also set up a joint venture in
China to build a memory manufacturing facility in Wuxi City,
China.
46
Environmental Matters
Our manufacturing operations use many chemicals, gases and other
hazardous substances, and we are subject to a variety of
evolving environmental and health and safety regulations
related, among other things, to the use, storage, discharge and
disposal of such chemicals and gases and other hazardous
substances, emissions and wastes, as well as the investigation
and remediation of soil and ground water contamination. In most
jurisdictions in which we operate, our manufacturing activities
are subject to obtaining permits, licences or other
authorizations, or to prior notification. Because a large
portion of our manufacturing activities are located in the EU,
we are subject to European Commission regulation on
environmental protection, as well as regulations of the other
jurisdictions where we have operations.
Consistent with our Total Quality Environmental Management
(TQEM) principles, we have established proactive
environmental policies with respect to the handling of
chemicals, gases, emissions and waste disposals from our
manufacturing operations, and we have not suffered material
environmental claims in the past. We believe that our activities
comply with presently applicable environmental regulations in
all material respects. We have engaged outside consultants to
audit all of our environmental activities and created
environmental management teams, information systems and
training. We have also instituted environmental control
procedures for new processes used by us as well as our
suppliers. All of our 16 manufacturing facilities have been
certified to conform to International Organization for
Standardization (ISO) international quality
standards and Eco Management and Audit Scheme (EMAS).
We have participated in various working groups set up by the
European Commission for the adoption of two directives on
January 27, 2003: Directive 2002/95/ EC on the restriction
of the use of certain hazardous substances in electrical and
electronic equipment (ROHS Directive, as amended by
Commission Decision 2005/618/ EC of August 18, 2005) and
Directive 2002/96/ EC on waste electrical and electronic
equipment (WEEE Directive, as modified by Directive
2003/108/ EC of December 8, 2003). Directive 2002/95/ EC
aims at banning the use of lead and other flame-retardant
substances in manufacturing electronic components by
July 1, 2006. Directive 2002/96/ EC promotes the recovery
and recycling of electrical and electronic waste. Both
directives had to be transposed by the EU Member States into
national legislation by August 13, 2004. In France, a
decree partially implementing the Directives 2002/95/ EC and
2002/96/ EC was adopted on July 27, 2005.
Our activities in the EU are also subject to the European
Directive 2003/87/ EC establishing a scheme for greenhouse gas
allowance trading (as modified by Directive 2004/101/ EC), and
the applicable national legislation. In particular, in France,
one of our manufacturing sites has been allocated a quota of
greenhouse gas for the period 2005-2007. Failure to comply with
this quota would force us to acquire potentially expensive
additional emission allowance from third parties and to pay a
fee for each extra ton of gas emitted. We do not know what our
obligations with regard to greenhouse gas reductions will be in
the future, in particular for the period 2008-2012 for which the
regulations should be adopted before December 31, 2006, but
we intend to proactively comply with these regulations. In the
United States, we are part of the Chicago Climate Exchange
program, a voluntary greenhouse gas trading program whose
members commit to reduce emissions for the period 2003-2006. We
have also implemented voluntary reforestation projects in
several countries in order to sequester additional carbon
dioxide
(CO2)
emissions.
Furthermore, new legislative proposals by the European
Commission deal with the registration, evaluation and
authorization of chemicals (REACH), a draft of which
has been adopted on first reading by the European Parliament on
November 17, 2005. We intend to proactively implement such
new legislation when enacted, in line with our commitment toward
environmental protection.
The implementation of any such legislation could adversely
affect our manufacturing costs or product sales by requiring us
to acquire costly equipment or materials, or to incur other
significant expenses in adapting our manufacturing processes or
waste and emission disposal processes. However, we are currently
unable to evaluate such specific expenses and therefore have no
specific reserves for environmental risks. Furthermore,
environmental claims or our failure to comply with present or
future regulations could result in the assessment of damages or
imposition of fines against us, suspension of production or a
cessation of operations and, as with other companies engaged in
similar activities, any failure by us to control the use of, or
adequately restrict the discharge of hazardous substances could
subject us to future liabilities. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations Some of our production processes
and materials are environmentally sensitive, which could lead to
increased costs due to environmental regulations or to damage to
the environment. Any specific liabilities that we identify
will be reflected on our balance sheet. To date we have not
identified any such specific liabilities.
47
Industry Background
Semiconductors are the basic building blocks used to create an
increasing variety of electronic products and systems. Since the
invention of the transistor in 1948, continuous improvements in
semiconductor process and design technologies have led to
smaller, more complex and more reliable devices at a lower cost
per function. As performance has increased and size and cost
have decreased, semiconductors have expanded beyond their
original primary applications (military applications and
computer systems) to applications such as telecommunications
systems, consumer goods, automotive products and industrial
automation and control systems. In addition, system users and
designers have demanded systems with more functionality, higher
levels of performance, greater reliability and shorter design
cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a
percentage of system cost. Calculated on the basis of the total
available market (the TAM), which includes all
semiconductor products, as a percentage of worldwide revenues
from production of electronic equipment according to published
industry data, semiconductor content has increased from
approximately 12% in 1992 to approximately 21% in 2005.
Semiconductor sales have increased significantly over the long
term but have experienced significant cyclical variations in
growth rates. According to trade association data, the TAM
increased from $32.5 billion in 1987 to $227.5 billion
in 2005 (growing at a compound annual growth rate of
approximately 11%). In 2004, the TAM increased by approximately
28% and in 2005 by approximately 7%. On a sequential,
quarter-by-quarter basis in 2005 (including actuators), the TAM
was virtually flat in the first quarter over the fourth quarter
2004, while in the second quarter it decreased by 2.2% over the
first quarter, it increased 8.9% in the third quarter over the
second quarter, and increased by 2.0% in the fourth quarter over
the third quarter. To better reflect our corporate strategy and
our current product offering, we measure our performance against
our serviceable available market (SAM), redefined as
the TAM without DRAMs, microprocessors and optoelectronic
products. The SAM increased from approximately
$27.8 billion in 1987 to $152 billion in 2005, growing
at a compound annual rate of approximately 10%. The SAM
increased by approximately 7% in 2005 compared to 2004. In 2005,
approximately 18% of all semiconductors were shipped to the
Americas, 17% to Europe, 19% to Japan, and 46% to the Asia
Pacific region.
The following table sets forth information with respect to
worldwide semiconductor sales by type of semiconductor and
geographic region:
|
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|
|
|
|
Worldwide Semiconductor Sales(1) | |
|
Compound Annual Growth Rates(2) | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
1997 | |
|
1987 | |
|
04-05 | |
|
03-04 | |
|
02-03 | |
|
87-05 | |
|
87-97 | |
|
97-02 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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| |
|
| |
|
| |
|
| |
|
|
(In billions) | |
|
(Expressed as percentages) | |
Integrated Circuits and Sensors
|
|
$ |
197.3 |
|
|
$ |
183.5 |
|
|
$ |
143.5 |
|
|
$ |
121.6 |
|
|
$ |
119.5 |
|
|
$ |
25.4 |
|
|
|
7.5 |
% |
|
|
27.9 |
% |
|
|
18.1 |
% |
|
|
12.1 |
% |
|
|
16.8 |
% |
|
|
0.3 |
% |
Analog, Sensors and Actuators
|
|
|
36.5 |
|
|
|
36.1 |
|
|
|
30.4 |
|
|
|
25.0 |
|
|
|
20.0 |
|
|
|
6.0 |
|
|
|
0.9 |
|
|
|
19.0 |
|
|
|
21.6 |
|
|
|
10.5 |
|
|
|
12.8 |
|
|
|
4.6 |
|
Digital Logic
|
|
|
112.4 |
|
|
|
100.3 |
|
|
|
80.7 |
|
|
|
69.6 |
|
|
|
70.2 |
|
|
|
14.0 |
|
|
|
12.1 |
|
|
|
24.3 |
|
|
|
15.9 |
|
|
|
12.3 |
|
|
|
17.5 |
|
|
|
0.2 |
|
Memory:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DRAM
|
|
|
25.6 |
|
|
|
26.8 |
|
|
|
16.7 |
|
|
|
15.3 |
|
|
|
19.8 |
|
|
|
2.4 |
|
|
|
(4.7 |
) |
|
|
60.9 |
|
|
|
9.4 |
|
|
|
14.1 |
|
|
|
23.5 |
|
|
|
(5.1 |
) |
|
Others
|
|
|
22.9 |
|
|
|
20.3 |
|
|
|
15.8 |
|
|
|
11.8 |
|
|
|
9.5 |
|
|
|
3.0 |
|
|
|
13.0 |
|
|
|
28.3 |
|
|
|
34.2 |
|
|
|
12.0 |
|
|
|
12.2 |
|
|
|
4.4 |
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Memory
|
|
|
48.5 |
|
|
|
47.1 |
|
|
|
32.5 |
|
|
|
27.0 |
|
|
|
29.3 |
|
|
|
5.4 |
|
|
|
2.9 |
|
|
|
45.0 |
|
|
|
20.2 |
|
|
|
13.0 |
|
|
|
18.4 |
|
|
|
(1.6 |
) |
Total Digital
|
|
|
160.9 |
|
|
|
147.4 |
|
|
|
113.2 |
|
|
|
96.6 |
|
|
|
99.6 |
|
|
|
19.4 |
|
|
|
9.1 |
|
|
|
30.3 |
|
|
|
17.1 |
|
|
|
12.5 |
|
|
|
17.8 |
|
|
|
(0.6 |
) |
Discrete
|
|
|
15.2 |
|
|
|
15.8 |
|
|
|
13.3 |
|
|
|
12.3 |
|
|
|
13.2 |
|
|
|
5.8 |
|
|
|
(3.3 |
) |
|
|
18.1 |
|
|
|
8.1 |
|
|
|
5.5 |
|
|
|
8.5 |
|
|
|
0.3 |
|
Optoelectronics
|
|
|
14.9 |
|
|
|
13.7 |
|
|
|
9.5 |
|
|
|
6.8 |
|
|
|
4.5 |
|
|
|
1.3 |
|
|
|
8.6 |
|
|
|
43.8 |
|
|
|
40.6 |
|
|
|
14.5 |
|
|
|
13.2 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
TAM
|
|
$ |
227.5 |
|
|
$ |
213.0 |
|
|
$ |
166.4 |
|
|
$ |
140.7 |
|
|
$ |
137.2 |
|
|
$ |
32.5 |
|
|
|
6.8 |
% |
|
|
28.0 |
% |
|
|
18.3 |
%(3) |
|
|
11.4 |
% |
|
|
15.5 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
Europe
|
|
|
39.3 |
|
|
|
39.4 |
|
|
|
32.3 |
|
|
|
27.8 |
|
|
|
29.1 |
|
|
|
6.2 |
|
|
|
(0.4 |
) |
|
|
22.0 |
|
|
|
16.3 |
|
|
|
10.8 |
|
|
|
16.7 |
|
|
|
(0.9 |
) |
Americas
|
|
|
40.7 |
|
|
|
39.1 |
|
|
|
32.3 |
|
|
|
31.3 |
|
|
|
45.8 |
|
|
|
10.3 |
|
|
|
4.3 |
|
|
|
20.8 |
|
|
|
3.4 |
|
|
|
7.9 |
|
|
|
16.1 |
|
|
|
(7.4 |
) |
Asia Pacific
|
|
|
103.4 |
|
|
|
88.8 |
|
|
|
62.8 |
|
|
|
51.2 |
|
|
|
30.2 |
|
|
|
3.3 |
|
|
|
16.5 |
|
|
|
41.3 |
|
|
|
22.8 |
|
|
|
21.1 |
|
|
|
24.8 |
|
|
|
11.1 |
|
Japan
|
|
|
44.1 |
|
|
|
45.8 |
|
|
|
38.9 |
|
|
|
30.5 |
|
|
|
32.1 |
|
|
|
12.7 |
|
|
|
(3.7 |
) |
|
|
17.5 |
|
|
|
27.7 |
|
|
|
7.2 |
|
|
|
9.7 |
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAM
|
|
$ |
227.5 |
|
|
$ |
213.0 |
|
|
$ |
166.4 |
|
|
$ |
140.7 |
|
|
$ |
137.2 |
|
|
$ |
32.5 |
|
|
|
6.8 |
% |
|
|
28.0 |
% |
|
|
18.3 |
%(3) |
|
|
11.4 |
% |
|
|
15.5 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Source: WSTS. |
|
(2) |
Calculated using end points of the periods specified. |
|
(3) |
Calculated on a comparable basis, that is, without information
with respect to actuators, which was not included in the
indicator before 2003, the TAM increased 16.8%. |
48
Although cyclical changes in production capacity in the
semiconductor industry and demand for electronic systems have
resulted in pronounced cyclical changes in the level of
semiconductor sales and fluctuations in prices and margins for
semiconductor products from time to time, the semiconductor
industry has experienced substantial growth over the long term.
Factors that are contributing to long-term growth include the
development of new semiconductor applications, increased
semiconductor content as a percentage of total system cost,
emerging strategic partnerships and growth in the electronic
systems industry in the Asia Pacific region.
|
|
|
Semiconductor Classifications |
The process technologies, levels of integration, design
specificity, functional technologies and applications for
different semiconductor products vary significantly. As
differences in these characteristics have increased, the
semiconductor market has become highly diversified as well as
subject to constant and rapid change. Semiconductor product
markets may be classified according to each of these
characteristics.
Semiconductors can be manufactured using different process
technologies, each of which is particularly suited to different
applications. Since the mid-1970s, the two dominant processes
have been bipolar (the original technology used to produce ICs)
and CMOS. Bipolar devices typically operate at higher speeds
than CMOS devices, but CMOS devices consume less power and
permit more transistors to be integrated on a single IC. CMOS
has become the prevalent technology, particularly for devices
used in personal computers and consumer applications. Advanced
technologies have been developed during the last decade that are
particularly suited to more systems-oriented semiconductor
applications. BiCMOS technologies have been developed to combine
the high-speed and high-voltage characteristics of bipolar
technologies with the low power consumption and high integration
of CMOS technologies. BCD technologies have been developed that
combine bipolar, CMOS and DMOS technologies. Such
systems-oriented technologies require more process steps and
mask levels, and are more complex than the basic
function-oriented technologies.
Semiconductors are often classified as either discrete devices
(such as individual diodes, thyristors and transistors, as well
as optoelectronic products) or ICs (in which thousands of
functions are combined on a single chip of silicon
to form a more complex circuit). Compared to the market for ICs,
there is typically less differentiation among discrete products
supplied by different semiconductor manufacturers. Also,
discrete markets have generally grown at slower, but more
stable, rates than IC markets.
Semiconductors may also be classified as either standard
components, ASSPs or ASICs. Standard components are used for a
broad range of applications, while ASSPs and ASICs are designed
to perform specific functions in specific applications.
The two basic functional technologies for semiconductor products
are analog and digital. Mixed-signal products combine both
analog and digital functionality. Analog devices monitor,
condition, amplify or transform analog signals, which are
signals that vary continuously over a wide range of values.
Analog/digital (or mixed-signal) ICs combine analog
and digital devices on a single chip to process both analog
signals and digital data. System designers are increasingly
demanding system-level integration in which complete electronic
systems containing both analog and digital functions are
integrated on a single IC.
Digital devices are divided into two major types: memory
products and logic devices. Memory products, which are used in
electronic systems to store data and program instructions, are
classified as either volatile memories (which lose their data
content when power supplies are switched off) or nonvolatile
memories (which retain their data content without the need for
constant power supply).
The primary volatile memory devices are DRAMs, which accounted
for approximately 53% of semiconductor memory sales in 2005, and
static RAMs (SRAMs), which accounted for
approximately 11% of semiconductor memory sales in 2005. SRAMs
are roughly four times as complex as DRAMs. DRAMs are used in a
computers main memory. SRAMs are principally used as
caches and buffers between a computers microprocessor and
its DRAM-based main memory and in other applications such as
mobile handsets.
Nonvolatile memories are used to store program instructions.
Among such nonvolatile memories, read-only memories
(ROMs) are permanently programmed when they are
manufactured while programmable ROMs (PROMs) can be
programmed by system designers or end-users after they are
manufactured. Erasable PROMs (EPROMs) may be erased
after exposure to ultraviolet light and reprogrammed several
times using an external power supply. Electrically erasable
PROMs (EEPROMs) can be erased byte by byte and
reprogrammed in-system without the need for removal.
Flash memories are products that represent an
intermediate solution between EPROMs and EEPROMs based on their
cost and functionality. Because Flash memories can be erased and
reprogrammed electrically and
49
in-system, they are more flexible than EPROMs and, therefore,
are progressively replacing EPROMs in many of their current
applications. Flash memories are typically used in high volume
in digital mobile phones and digital consumer applications
(set-top boxes, DVDs, digital cameras, MP3 digital music
players) and are also suitable for solid-state mass storage of
data and emerging high-volume applications.
Logic devices process digital data to control the operation of
electronic systems. The largest segment of the logic market
includes microprocessors, microcontrollers and DSPs.
Microprocessors are the central processing units of computer
systems. Microcontrollers are complete computer systems
contained on single ICs that are programmed to specific customer
requirements. Microcontrollers control the operation of
electronic and electromechanical systems by processing input
data from electronic sensors and generating electronic control
signals and are used in a wide variety of consumer,
communications, automotive, industrial and computer products.
DSPs are parallel processors used for high complexity,
high-speed real-time computations in a wide variety of
applications.
50
|
|
Item 5. |
Operating and Financial Review and Prospects |
Overview
The following discussion should be read in conjunction with
our Consolidated Financial Statements and Notes thereto included
elsewhere in this
Form 20-F. The
following discussion contains statements of future expectations
and other forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, or
Section 21E of the Securities Exchange Act of 1934, each as
amended, particularly in the sections Critical
Accounting Policies Using Significant Estimates,
Business Outlook and
Liquidity and Capital Resources
Financial Outlook. Our actual results may differ
significantly from those projected in the forward-looking
statements. For a discussion of factors that might cause future
actual results to differ materially from our recent results or
those projected in the forward-looking statements in addition to
the factors set forth below, see Cautionary
Note Regarding Forward-Looking Statements and
Item 3. Key Information Risk
Factors. We assume no obligation to update the
forward-looking statements or such risk factors.
|
|
|
Critical Accounting Policies Using Significant
Estimates |
The preparation of our Consolidated Financial Statements in
accordance with U.S. GAAP requires us to make estimates and
assumptions 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.
|
|
|
|
|
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. |
|
|
|
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. |
|
|
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 replace the non-conforming products, or issue
a credit or rebate of the purchase price. Quality returns |
51
|
|
|
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. |
|
|
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. |
|
|
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. |
|
|
|
|
|
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. |
|
|
|
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 |
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carrying amount may not be recoverable. In determining
recoverability, we initially assess whether the carrying value
exceeds the undiscounted cash flows associated with the
intangible assets. If exceeded, we then evaluate whether an
impairment charge is required by determining if the assets
carrying value also exceeds its fair value. An impairment loss
is recognized for the excess of the carrying amount over the
fair value. We normally estimate the fair value 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 adopted
FAS 123R early 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 on 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 existing 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 |
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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
Information Risk Factors Risks Related
to Our Operations We depend on patents to protect
our rights to our technology. |
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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. See Item 8. Financial
Information Legal Proceedings. 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. |
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.
55
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.
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
product segments:
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the Application Specific Product Groups (ASG)
segment, comprised of three product lines our Home,
Personal and Communication Products (HPC), our
Computer Peripherals Products (CPG) and our
Automotive Products (APG). Our new HPC Sector is
comprised of the telecommunications, audio and digital consumer
groups. Our CPG products cover computer peripherals products,
specifically disk drives and printers, and our APG products now
comprise 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 Product Group (MLD)
segment, comprised of discrete and standard products plus
standard microcontroller and industrial devices (including the
programmable systems memories (PSM) division). |
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 segments, but on the basis of the semiconductor
business area. All these product segments 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.
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
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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 gross
margin was 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 of 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:
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higher sales volume and a more favorable product mix in our
revenues, which contributed to an increase in our net revenues
over 2004; |
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continuous improvement of our manufacturing performances; |
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net interest income; and |
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lower income tax expense. |
Our financial results in 2005 were negatively affected by the
following factors:
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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; |
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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
being significantly higher than the favorable impact on our
revenues; |
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higher impairment, restructuring charges and other related
closure costs due to the new restructuring and reorganization
activities initiated in 2005; and |
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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 our 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
$1,441 million, which were financed entirely by net cash
generated from operating
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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 of 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 year. 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.
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
Information Risk Factors in this
Form 20-F.
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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 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,
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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, the
Managing Boards 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. In 2005, a provision has been recorded totaling
$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.
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.
59
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
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 product
segments:
|
|
|
|
|
Application Specific Product Groups (ASG) segment,
comprised of three product lines Home, Personal and
Communication Products (HPC), Computer Peripherals
Products (CPG) and new Automotive Products
(APG); |
|
|
|
Memory Product Group (MPG) segment; and |
|
|
|
Micro, Linear and Discrete Product 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 segments, but on the basis of the semiconductor
business area. All these product segments share common research
and development for process technology and manufacturing
capacity for most of their products. Please see
Item 4. Information on the Company
Business Overview.
We have restated our results in prior periods for illustrative
comparisons of our performance by product segment 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 segment
structure requires management to make significant estimates,
assumptions and judgments in determining the operating income of
the new segments 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 segments internal financial
measurements, we use certain internal rules of allocation for
the costs not directly chargeable to the segments, including
cost of sales, selling, general and administrative expenses and
a significant part of research and development expenses.
Additionally, in compliance with our internal policies, certain
cost items are not charged to the segments, including
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
60
quarter of 2005, we allocated the
start-up costs to
expand our marketing and design presence in new developing areas
to each segment, and we restated prior years results
accordingly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net revenues by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
$ |
4,991 |
|
|
$ |
4,902 |
|
|
$ |
4,405 |
|
Memory Product Group Segment (MPG)
|
|
|
1,948 |
|
|
|
1,887 |
|
|
|
1,294 |
|
Micro, Linear and Discrete Product Group Segment (MLD)
|
|
|
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 segments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income (loss) by product segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
$ |
355 |
|
|
$ |
530 |
|
|
$ |
582 |
|
Memory Product Group Segment (MPG)
|
|
|
(118 |
) |
|
|
42 |
|
|
|
(65 |
) |
Micro, Linear and Discrete Product Group Segment (MLD)
|
|
|
271 |
|
|
|
413 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product segments
|
|
|
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 segments 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 segments, as
well as operating earnings or losses of the Subsystems and Other
Products segment. Certain costs, mainly R&D, formerly in the
Others category, are now being allocated to the
segments; 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 segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)(1)
|
|
|
7.1 |
% |
|
|
10.8 |
% |
|
|
13.2 |
% |
Memory Product Group Segment (MPG)(1)
|
|
|
(6.1 |
) |
|
|
2.2 |
|
|
|
(5.0 |
) |
Micro, Linear and Discrete Product Group Segment (MLD)(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 segment. |
|
(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 segments 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 segments, as
well as operating earnings or losses of the Subsystems and Other
Products segment. Certain costs, mainly R&D, formerly in the
Others category, are now being allocated to the
product segments; comparable amounts reported in this category
have been reclassified accordingly in the above table. |
|
(3) |
As a percentage of total net revenues. |
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Reconciliation to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product segments
|
|
$ |
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 segments 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 segments, as
well as operating earnings or losses of the Subsystems and Other
Products segment. Certain costs, mainly R&D, formerly in the
Others category, are now being allocated to the
segments; 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 segments. |
|
(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. |
62
|
|
(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. |
|
(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).
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 segments. 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 market segment 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 increased in the
Asia/ Pacific region by approximately 10%, while Japan, North
America, Emerging Markets and Europe net revenues decreased 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
2.6 percentage 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 |
)% |
|
|
|
|
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.
64
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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; |
65
|
|
|
|
|
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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, an increase in our total operating expenses as
well as an 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 product segments 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
$4 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.
|
|
|
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.
66
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 segments and in particular in MPG and
MLD.
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
segments experienced declining average sale prices during 2004.
See Results of Operations above.
67
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
68
|
|
|
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 details 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 Information
Legal Proceedings 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
69
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 product segments were profitable in 2004 despite the
negative effect of the effective U.S. dollar exchange rate,
which impacted the profitability of all segments. 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 segment 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.
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In millions) | |
Interest expense, net
|
|
$ |
(3 |
) |
|
$ |
(52 |
) |
The decrease in interest expense in 2004 was mainly due to the
repurchases of our 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 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
70
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, respectively, 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.
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 market segment 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.
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.
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 to 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.
73
|
|
|
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 with 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, which 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
partially compensated by overall improved efficiencies in our
manufacturing activities and higher volume of sales.
74
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
75
changes in the local jurisdictions, our effective tax rate could
be different in future quarters and may increase in the coming
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, a significant improvement compared to
$89 million in the third quarter of 2005. On a
year-over-year basis, our net income was basically flat compared
to net income of $187 million in the fourth quarter of
2004, and declined to 7.7% as a percentage of net revenues.
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. As described below, our
effective average U.S. dollar exchange rate declined in
value in 2005, 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
76
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. See Item 11. Quantitative and
Qualitative Disclosures About Market Risk for full details
of outstanding contracts and their fair values. 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.
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
Information Risk Factors Risks Related
to Our Operations Our financial results can be
adversely affected by fluctuations in exchange rates,
principally in the value of the U.S. dollar.
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.
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.
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.
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.
77
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), Shenzhen (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
78
may differ from definitions used by other companies. Net
operating cash flow is determined as follows from our
Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
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
79
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 |
|
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 | |
|
Standard & | |
|
|
Investors 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.
On February 23, 2006, we issued zero-coupon senior
convertible bonds due 2016 totaling gross proceeds of
$928 million. The amount due to bondholders upon redemption
or at maturity based on the accreted value of the bonds will
produce a yield equivalent to 1.5% per annum on a
semi-annual bond equivalent basis. 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
bonds 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 the New York Stock Exchange on February 14, 2006,
plus a 30% premium.
On February 28, 2006, we announced plans for an inaugural
senior unsecured bonds offering in the range of
500 million,
which we anticipate will be launched in the near future, subject
to market conditions.
80
|
|
|
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(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Capital leases(3)
|
|
$ |
26 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
1 |
|
Operating leases(2)
|
|
|
271 |
|
|
|
50 |
|
|
|
37 |
|
|
|
32 |
|
|
|
28 |
|
|
|
22 |
|
|
|
102 |
|
Purchase obligations(2)
|
|
|
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.(2)(5)
|
|
|
212 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations(2)
|
|
|
112 |
|
|
|
59 |
|
|
|
44 |
|
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
Long-term debt obligations (including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
current portion)(3)(4)
|
|
|
1,791 |
|
|
|
1,522 |
|
|
|
119 |
|
|
|
58 |
|
|
|
30 |
|
|
|
22 |
|
|
|
40 |
|
Pension obligations(3)
|
|
|
270 |
|
|
|
29 |
|
|
|
20 |
|
|
|
22 |
|
|
|
26 |
|
|
|
28 |
|
|
|
145 |
|
Other non-current liabilities(3)
|
|
|
16 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Total
|
|
$ |
3,751 |
|
|
$ |
2,820 |
|
|
$ |
306 |
|
|
$ |
157 |
|
|
$ |
93 |
|
|
$ |
81 |
|
|
$ |
294 |
|
|
|
(1) |
Contingent liabilities which cannot be quantified are excluded
from the table above. |
|
(2) |
Items not reflected on the Consolidated Balance Sheet at
December 31, 2005. |
|
(3) |
Items reflected on the Consolidated Balance Sheet at
December 31, 2005. |
|
(4) |
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. |
|
(5) |
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. (Hynix), 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.
81
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.
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.
Off-Balance Sheet
Arrangements
As described above, we signed a joint-venture agreement in 2004
with Hynix to build a $2 billion front-end
memory-manufacturing facility in China. At December 31,
2005, we had identified the joint venture as a Variable Interest
Entity (VIE), but had determined that we are not the primary
beneficiary of the VIE. We account for our share in the Hynix ST
joint venture under the equity method. As of December 31,
2005, we had not provided any debt financing to the joint
venture under our commitments described above. 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.
At December 31, 2005, we had convertible debt instruments
outstanding. Our convertible debt instruments contain certain
conversion and redemption options that are not required to be
accounted for separately in our financial statements. See the
discussion below for more information about our convertible debt
instruments and related conversion and redemption options.
We have no other material off-balance sheet arrangements at
December 31, 2005.
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 facilitization of a
portion of our 300-mm plant in Catania (Italy); (iii) the
upgrading to finer geometry technologies for our 200-mm plant in
Rousset (France); (iv) the capacity expansion and 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,
82
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 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 our 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 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 adopted FAS 153 early 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
83
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 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, aims 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.
84
Impairment, restructuring charges and other related closure
costs incurred in 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
|
|
Total Impairment, | |
|
|
|
|
Restructuring | |
|
|
|
|
Charges and | |
|
|
|
|
Restructuring | |
|
Other Related | |
|
Other Related | |
|
|
Impairment | |
|
Charges | |
|
Closure Costs | |
|
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 in 2004.
See Note 18 to our Consolidated Financial Statements.
Equity Method Investments
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 in cash
plus internally developed technologies with an agreed intrinsic
value of $14 million for a 44% interest. Renesas Technology
Corp. contributed $37 million in 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.
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 in 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.
85
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. However, the level of frame orders
included in our backlog is high and is 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.
86
|
|
Item 6. |
Directors, Senior Management and Employees |
Directors and Senior Management
The management of our company is entrusted to the Managing Board
under the supervision of the Supervisory Board.
The Supervisory Board advises the Managing Board and is
responsible for supervising the policies pursued by the Managing
Board and the general course of our affairs and business. The
Supervisory Board consists of such number of members as is
resolved by the annual shareholders meeting upon a non-binding
proposal of the Supervisory Board, with a minimum of six
members. Decisions by the annual shareholders meeting concerning
the number and the identity of our Supervisory Board members are
made by a simple majority of the votes cast at a meeting,
provided quorum conditions are met (15% of our outstanding share
capital present or represented).
Our Supervisory Board had the following nine members since our
annual shareholders meeting on March 18, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name(1) |
|
Position | |
|
Year Appointed(2) | |
|
Term Expires | |
|
Age | |
|
|
| |
|
| |
|
| |
|
| |
Gérald Arbola
|
|
|
Chairman |
|
|
|
2004 |
|
|
|
2008 |
|
|
|
57 |
|
Bruno Steve
|
|
|
Vice Chairman |
|
|
|
1989 |
|
|
|
2008 |
|
|
|
64 |
|
Matteo del Fante
|
|
|
Member |
|
|
|
2005 |
|
|
|
2008 |
|
|
|
39 |
|
Tom de Waard
|
|
|
Member |
|
|
|
1998 |
|
|
|
2008 |
|
|
|
59 |
|
Douglas Dunn
|
|
|
Member |
|
|
|
2001 |
|
|
|
2006 |
|
|
|
61 |
|
Francis Gavois
|
|
|
Member |
|
|
|
1998 |
|
|
|
2006 |
|
|
|
70 |
|
Didier Lombard
|
|
|
Member |
|
|
|
2004 |
|
|
|
2008 |
|
|
|
64 |
|
Antonino Turicchi
|
|
|
Member |
|
|
|
2005 |
|
|
|
2008 |
|
|
|
40 |
|
Robert M. White
|
|
|
Member |
|
|
|
1996 |
|
|
|
2006 |
|
|
|
67 |
|
|
|
(1) |
Messrs. Riccardo Gallo and Alessandro Ovi, who were
Supervisory Board Members throughout fiscal year 2004, were
replaced by Messrs. Antonino Turicchi and Matteo del Fante
at the annual general meeting on March 18, 2005. |
|
(2) |
As a member of the Supervisory Board. |
After our annual general meeting of shareholders, the
Supervisory Board appointed Mr. Gérald Arbola as
Chairman of the Supervisory Board and Mr. Bruno Steve as
Vice Chairman, each for a three-year term. In addition, the
Supervisory Board appointed Presidents and members to the
Strategic Committee, the Audit Committee and the Compensation
Committee. Mr. Gérald Arbola was appointed President
of the Strategic Committee, and Messrs. Bruno Steve,
Antonino Turicchi, Didier Lombard and Robert White were
appointed as members. Mr. Tom de Waard was appointed
President of the Audit Committee, Messrs. Robert White and
Doug Dunn were appointed members and Messrs. Matteo del
Fante and Francis Gavois were appointed as observers.
Mr. Gérald Arbola was appointed President of the
Compensation Committee, and Messrs. Bruno Steve, Antonino
Turicchi, Didier Lombard and Tom de Waard were appointed as
members.
During our annual shareholders meeting in 2006, the mandates of
three of our Supervisory Board members, Messrs. Dunn,
Gavois and White, will expire. Messrs. Steve, Arbola, del
Fante, de Waard, Lombard and Turicchi all have mandates which
will expire at our annual shareholders meeting in 2008.
Resolutions of the Supervisory Board require the approval of at
least three-quarters of its members. The Supervisory Board must
meet upon request by two or more of its members or by the
Managing Board. The Supervisory Board has established procedures
for the preparation of Supervisory Board resolutions and the
calendar for Supervisory Board meetings. The Supervisory Board
meets at least five times a year, including once a quarter to
approve our quarterly and annual accounts and their release. Our
Supervisory Board has adopted a Supervisory Board Charter
setting forth its duties, responsibilities and operations, as
mentioned below. This charter is available on our website at
http://www.st.com/stonline/company/governance/index.htm. As part
of those duties, Supervisory Board members in 2004 performed a
self-evaluation, and evaluated the Managing Board. In 2005, the
Supervisory Board approved an updated version of its charter.
There is no mandatory retirement age for members of our
Supervisory Board pursuant to Dutch law. Members of the
Supervisory Board may be suspended or dismissed by the annual
shareholders meeting. The
87
Supervisory Board may make a proposal to the annual shareholders
meeting for the suspension or dismissal of one or more of its
members. The members of the Supervisory Board receive
compensation as authorized by the annual shareholders meeting.
Each member of the Supervisory Board must resign no later than
three years after appointment, as described in our Articles of
Association, but may be reappointed following the expiry of such
members term of office.
Gérald Arbola was appointed to our Supervisory Board at the
2004 annual shareholders meeting and was reelected at the 2005
annual shareholders meeting. Mr. Arbola was appointed the
Chairman of our Supervisory Board on March 18, 2005.
Mr. Arbola previously served as Vice Chairman of our
Supervisory Board from April 23, 2004 until March 18,
2005. Mr. Arbola is also Chairman of our Supervisory
Boards Compensation Committee and Strategic Committee, and
serves on its Nominating and Corporate Governance Committee.
Mr. Arbola has served as Chief Financial Officer and member
of the Executive Board of Areva since July 3, 2001.
Mr. Arbola joined the Cogema group in 1982 as Director of
Planning and Strategy for SGN, then served as Chief Financial
Officer at SGN from 1985 to 1989, becoming Executive Vice
President of SGN in 1988 and Chief Financial Officer of Cogema
in 1992. He was appointed as a member of the executive committee
in 1999, and also served as Chairman of the Board of SGN in 1997
and 1998. Mr. Arbola is currently a member of the boards of
directors of Cogema, Framatome ANP, Areva T&D Holdings and
Chairman of Areva Finance Gestion S.A. and Cogerap.
Mr. Arbola is a graduate of the Institut dEtudes
Politiques de Paris and holds an advanced degree in economics.
Mr. Arbola is the Chairman of the Supervisory Board of ST
Holding and a Chairman of the Board of Directors of FT1CI.
Bruno Steve has been a member of our Supervisory Board since
1989 and was appointed Vice Chairman of our Supervisory Board on
March 18, 2005, and previously served as Chairman of our
Supervisory Board from March 27, 2002 through
March 18, 2005, from July 1990 through March 1993, and from
June 1996 until May 1999. He also served as Vice Chairman of the
Supervisory Board from 1989 to July 1990 and from May 1999
through March 2002. Mr. Steve serves on our Supervisory
Boards Compensation Committee as well as on its Nominating
and Corporate Governance and Strategic Committees. He was with
Istituto per la Ricostruzione Industriale-IRI S.p.A.
(IRI), a former shareholder of Finmeccanica,
Finmeccanica and other affiliates of I.R.I. in various senior
positions for over 17 years. Mr. Steve is currently
President of the board of statutory auditors of Alitalia S.p.a.
Until December 1999, he served as Chairman of MEI. He served as
the Chief Operating Officer of Finmeccanica from 1988 to July
1997 and Chief Executive Officer from May 1995 to July 1997. He
was Senior Vice President of Planning, Finance and Control of
I.R.I. from 1984 to 1988. Prior to 1984, Mr. Steve served
in several key executive positions at Telecom Italia. He is also
a professor at LUISS Guido Carli University in Rome.
Mr. Steve was Vice Chairman from May 1999 to March 2002,
Chairman from March 2002 to May 2003 and member until his
resignation on April 21, 2004 of the Supervisory Board of
ST Holding, our largest shareholder.
Matteo del Fante was appointed to our Supervisory Board at our
2005 annual shareholders meeting. Mr. del Fante is also a
non-voting observer on its Audit Committee. Mr. del Fante
has served as the Chief Financial Officer of CDP in Rome since
the end of 2003. Prior to joining CDP, Mr. del Fante held
several positions at JPMorgan Chase in London, England, where he
became Managing Director in 1999. During his 13 years with
JPMorgan Chase, Mr. del Fante worked with large European
clients on strategic and financial operations. Mr. del
Fante obtained his degree in Economics and Finance from
Università Bocconi in Milan in 1992, and followed graduate
specialization courses at New York Universitys Stern
Business School. Mr. del Fante is the Vice Chairman of the
Supervisory Board of ST Holding, our largest shareholder.
Tom de Waard has been a member of our Supervisory Board since
1998. Mr. de Waard was appointed Chairman of the Audit
Committee by the Supervisory Board in 1999 and Chairman of the
Nominating and Corporate Governance Committee in 2004 and 2005,
respectively. He also serves on our Supervisory Boards
Compensation Committee. Mr. de Waard has been a partner of
Clifford Chance, a leading international law firm, since March
2000 and was the Managing Partner of Clifford Chance Amsterdam
office from May 1, 2002 until May 1, 2005. As of
January 1, 2005, he was elected to the Management Committee
of Clifford Chance, where he represents Continental Europe.
Prior to joining Clifford Chance, he was a partner at Stibbe,
where he held several positions since 1971 and gained extensive
experience working with major international companies,
particularly with respect to corporate finance. He is a member
of the Amsterdam bar and was President of the Netherlands Bar
Association from 1993 through 1995. He received his law degree
from Leiden University in 1971. Mr. de Waard is a member of
the Supervisory Board of BESI N.V. and of its audit and
nominating committees. He is also chairman of BESIs
compensation committee. Mr. de Waard is a member of the
board of the foundation Stichting Sport en Zaken.
88
Douglas Dunn has been a member of our Supervisory Board since
2001. He is a member of its Audit Committee since such date. He
was formerly President and Chief Executive Officer of ASM
Lithography Holding N.V. (ASML), an equipment
supplier in the semiconductor industry, a position from which he
retired effective October 1, 2004. Mr. Dunn currently
serves as a non-executive director on the Board of Directors of
ARM Holdings plc, a UK company, LG.Philips LCD, a Korean
company, OMI, an Irish company, SOITEC, a French company, and on
the board of TomTom NV, a Dutch company. He is also a member of
the audit committees of ARM Holdings plc, SOITEC and TomTom NV,
a Dutch company. He is also a member of the audit committees of
ARM Holdings plc, SOITEC and TomTom N.V. Mr. Dunn was a
member of the Managing Board of Royal Philips Electronics in
1998. From 1996 to 1998 he was Chairman and Chief Executive
Officer of Philips Consumer Electronics and from 1993 to 1996
Chairman and Chief Executive Officer of Philips Semiconductors.
From 1980 to 1993 he held various positions at Plessey
Semiconductors.
Francis Gavois has been a member of our Supervisory Board since
1998. Mr. Gavois is currently a non-voting observer on the
Audit Committee of our Supervisory Board after previously having
served as a voting member through March 18, 2005.
Mr. Gavois is a member of the Boards of Directors and of
the audit committee of Plastic Omnium and the Consortium de
Réalisation (CDR). He also served as the Chairman of the
Supervisory Board of ODDO et Cie until May 2003. From 1984 to
1997, Mr. Gavois held several positions, including Chairman
of the Board of Directors and Chief Executive Officer of Banque
Française du Commerce Extérieur (BFCE). Prior to that
time Mr. Gavois held positions in the French government. He
is Inspecteur des Finances and a graduate of the Institut
dEtudes Politiques de Paris and the Ecole Nationale
dAdministration. Mr. Gavois is also a member of the
Supervisory Boards of ST Holding and FT1CI.
Didier Lombard was first appointed to the Supervisory Board at
the 2004 annual shareholders meeting and was reelected at the
2005 Annual Shareholders Meeting. He serves on the Compensation
and Strategic Committees of our Supervisory Board.
Mr. Lombard was appointed Chairman and Chief Executive
Officer of France Telecom in March 2005. Mr. Lombard began
his career in the Research and Development division of France
Telecom in 1967. From 1989 to 1990, he served as scientific and
technological director at the Ministry of Research and
Technology. From 1991 to 1998, he served as General Director for
industrial strategies at the French Ministry of Economy,
Finances and Industry, and from 1999 to 2003 he served as
Ambassador at large for foreign investments in France and as
President of the French Agency for International Investments.
From 2003 through February 2005, he served as France
Telecoms Senior Executive Vice President in charge of
technologies, strategic partnerships and new usages and as a
member of France Telecoms Executive Committee.
Mr. Lombard also spent several years as Ambassador in
charge of foreign investment in France. Mr. Lombard is also
Chairman of the Board of Directors of Orange and a member of the
Board of Directors of Thomson, one of our important customers,
and Wanadoo, as well as a member of the Supervisory Board of ST
Holding (our largest shareholder) and Radiall. Mr. Lombard
is a graduate of the Ecole Polytechnique and the Ecole Nationale
Supérieure des Télécommunications.
Antonino Turicchi was appointed as a member of our Supervisory
Board at our 2005 annual shareholders meeting. He serves on its
Compensation and Strategic Committees. Mr. Turicchi earned
a degree cum laude in Economics and Business from the University
of Rome and, after receiving a scholarship from Istituto
San Paolo di Torino, he attended the masters program
in Economics at the University of Turin in 1991 and 1992. In
1993, he was awarded a grant from the European Social Fund to
attend the masters program in International Finance and
Foreign Trade. Mr. Turicchi has been Managing Director of
CDP in Rome since June 2002. From 1994, Mr. Turicchi held
positions with the Italian Ministry of the Treasury (now known
as the Ministry of the Economy and Finance). In 1999, he was
promoted to director responsible for conducting securitization
operations and managing financial operations as part of the
treasurys debt management functions. Between 1999 and June
2002, Mr. Turicchi was also a member of the board of
Mediocredito del Friuli; from 1998 until 2000, he served on the
board of Mediocredito di Roma, and from 2000 until 2003, he
served on the board of EUR S.p.A.
Robert M. White has been a member of our Supervisory Board since
1996. He serves on its Strategic and Audit Committees.
Mr. White is a University Professor Emeritus at Carnegie
Mellon University and serves as a member of several corporate
boards, including that of Silicon Graphics, Inc., as well as on
its audit committee and nominating and corporate governance
committee. He is a former director of Read-Rite Corporation,
which filed for bankruptcy in July 2003. Mr. White is a
member of the U.S. National Academy of Engineering and the
recipient of the American Physical Societys Pake Prize for
research and technology management in 2004. From 1990 to 1993,
Mr. White served as Under Secretary of Commerce for
Technology in the United States government. Prior to 1990,
Mr. White served in several key executive positions,
including Principal Scientist for Xerox Corporation and Vice
President and Chief Technology Officer for Control Data
Corporation. He received a doctoral degree in Physics from
Stanford University and graduated with a degree in physics from
Massachusetts Institute of Technology.
89
|
|
|
Corporate Governance at ST |
Since our formation in 1987, we have demonstrated a consistent
commitment to the principles of good corporate governance,
evidenced by:
|
|
|
|
|
Our corporate organization under Dutch law that entrusts our
management to a Managing Board acting under the supervision and
control of a Supervisory Board totally independent from the
Managing Board. Members of our Managing Board and of our
Supervisory Board are appointed and dismissed by our
shareholders. |
|
|
|
Our early adoption of policies on important issues such as
business ethics and conflicts of
interest and our strict policies, implemented since our
1994 initial public offering, to comply with applicable
regulatory requirements concerning financial reporting, insider
trading and public disclosures. |
|
|
|
Our compliance with United States, French and Italian securities
laws, because our shares are listed in these jurisdictions, and
with Dutch securities laws, because we are a company
incorporated under the laws of the Netherlands, as well as our
compliance with the corporate, social and financial laws
applicable to our subsidiaries in the countries in which we do
business. |
|
|
|
Our broad-based activities in the field of corporate social
responsibility, encompassing environmental, social, health,
safety, educational and other related issues. |
As a Dutch company, we became subject to the Dutch Corporate
Governance Code (the Code) effective January 1,
2004. As we are listed on the NYSE, Euronext Paris and the Borsa
Italiana in Milan, but not in the Netherlands, our policies and
practices cannot be in every respect consistent with all Dutch
Best Practice recommendations contained in the Code.
We have summarized our policies and practices in the field of
corporate governance in the ST Corporate Governance Charter,
including our corporate organization, the remuneration
principles which apply to our Managing and Supervisory Boards,
our information policy and our corporate policies relating to
business ethics and conflicts of interests. Our Charter was
discussed with and approved by our shareholders at our 2004
annual shareholders meeting. The ST Corporate Governance Charter
was updated in 2005 and will be further updated and expanded
whenever necessary or advisable. We are committed to inform our
shareholders of any significant changes in our corporate
governance policies and practices at our annual general meeting.
Along with our Supervisory Board Charter (which includes the
charters of our Supervisory Board Committees) and our Code of
Business Conduct and Ethics, the current version of our ST
Corporate Governance Charter is posted on our website, at
http:/www.st.com/stonline/company/governance/index.htm, and
these documents are available in print to any shareholder who
may request them.
The Supervisory Board is carefully selected based upon the
combined experience and expertise of its members. Certain of our
Supervisory Board members, as disclosed in their biographies set
forth above, have existing relationships or past relationships
with Areva, CDP, and/or Finmeccanicca, who are currently parties
to the STH Shareholders Agreement. See Item 7.
Major Shareholders and Related-Party Transactions
Shareholders Agreements STH Shareholders
Agreement. Such relationships may give rise to potential
conflicts of interest. However, in fulfilling their duties under
Dutch law, Supervisory Board members serve the best interests of
all of STs stakeholders and of STs business and must
act independently in their supervision of STs management.
The Supervisory Board has adopted criteria to assess the
independence of its members in accordance with corporate
governance listing standards of the NYSE.
We have been informed in 2004 that our then principal direct and
indirect shareholders, Areva, Finmeccanica, and France Telecom,
FT1CI S.A. (FT1CI), and ST Holding and ST
Holding II, signed a new shareholders agreement in
March 2004, to which we are not a party (the STH
Shareholders Agreement). We have been informed that
CDP joined this agreement at the end of 2004 and that since
September 2005 France Telecom is no longer a shareholder of
FT1CI or an indirect shareholder (through ST Holding and ST
Holding II) of our company, pursuant to the disposition by
France Telecom of approximately 26.4 million of our
currently existing common shares, representing the totality of
the shares held by France Telecom in our company. Under the STH
Shareholders Agreement, Finmeccanica, CDP and FT1CI have
provided for their right, subject to certain conditions, to
insert on a list, prepared for proposal by ST Holding II to
our annual shareholders meeting, certain members for appointment
to our Supervisory Board. This agreement also contains other
corporate governance provisions, including decisions to be taken
by our Supervisory Board which are subject to certain prior
approvals, which are described in Item 7. Major
Shareholders and Related-Party Transactions. See also
Item 3. Key Information Risk
Factors Risks Related to Our Operations
The interests of our controlling shareholders, which are in turn
controlled respectively by the French and Italian governments,
may conflict with investors interests.
90
Our Supervisory Board held several meetings in 2003, 2004 and
2005 to discuss the new Dutch corporate governance code, the
implementing rules and corporate governance standards of the SEC
and of the NYSE. It created an Ad Hoc Committee composed of
Messrs. de Waard (Chairman), Steve and Gavois. The
committee considered our independence criteria, Corporate
Governance Charter and Supervisory Board Charter. Based on the
work of the Ad Hoc Committee, our Supervisory Board also
considered, with respect to such matters, our unique history as
a European company incorporated in the Netherlands following the
combination of the Italian and French semiconductor businesses
and our shareholding structure, with approximately 70% of our
shares held by the public and approximately 30% indirectly held
by French and Italian state-controlled companies.
Based on all these factors, in 2005, the Supervisory Board
established the following independence criteria for its members:
Supervisory Board members must have no material relationship
with STMicroelectronics N.V., or any of our consolidated
subsidiaries, or our management. A material
relationship can include commercial, industrial, banking,
consulting, legal, accounting, charitable and familial
relationships, among others, but does not include a relationship
with direct or indirect shareholders.
The Supervisory Board also adopted the specific bars to
independence established by the NYSE. On that basis, the
Supervisory Board in March 2005 concluded, in its business
judgment, that all members qualified as independent based on the
criteria set forth above.
We believe we are fully compliant with all material NYSE
corporate governance standards, to the extent possible for a
Dutch company listed on Euronext Paris, Borsa Italiana, as well
as the NYSE. Two of our Supervisory Board members with
affiliations to our largest shareholder, ST Holding, and its
French and Italian state-controlled shareholders, are non-voting
observers on our Audit Committee. Because we are a Dutch
company, the Audit Committee is an advisory committee, which
reports to the Supervisory Board, and our shareholders must
approve the selection of our statutory auditors. Our Audit
Committee has established a charter outlining its duties and
responsibilities with respect to the monitoring of our
accounting, auditing, financial reporting and the appointment,
retention and oversight of our external auditors. In 2005, in
compliance with NYSE requirements, our Audit Committee
established procedures for the receipt, retention and treatment
of complaints regarding accounting, internal accounting controls
or auditing matters, and the confidential anonymous submission
by employees of the Company regarding questionable accounting or
auditing matters. These procedures were approved by our
Supervisory Board and implemented under the responsibility of
our Managing Board. Thereupon, our chief executive officer
provided a written affirmation of our compliance with NYSE
standards as applicable to
non-U.S. companies
like ST.
No member of the Supervisory Board or Managing Board has been
(i) subject to any convictions in relation to fraudulent
offenses during the five years preceding the date of this
Form 20-F,
(ii) other than Mr. White who is a former director of
Read-Rite Corporation, which filed for bankruptcy in July 2003,
no member has been associated with any company in bankruptcy,
receivership or liquidation in the capacity of member of the
administrative, management or supervisory body, partner with
unlimited liability, founder or senior manager in the five years
preceding the date of this
Form 20-F or
(iii) subject to any official public incrimination and/or
sanction by statutory or regulatory authorities (including
professional bodies) or disqualified by a court from acting as a
member of the administrative, management or supervisory bodies
of any issuer or from acting in the management or conduct of the
affairs of any issuer during the five years preceding the date
of this Form 20-F.
We have demonstrated a consistent commitment to the principles
of good corporate governance evidenced by our early adoption of
policies on important issues such as conflicts of
interest. Pursuant to our Supervisory Board Charter, the
Supervisory Board is responsible for handling and deciding on
potential reported conflicts of interests between the company on
the one hand and members of the Supervisory Board and Managing
Board on the other hand.
For example in 2005, our Managing Board requested that our
Supervisory Board decide upon the renewal of a contract for the
provision of various telecom-related services with EQUANT, a
subsidiary of France Telecom. One of our Supervisory Board
members is Chairman and CEO of France Telecom. The Supervisory
Board noted the Managing Boards assessment of the positive
commercial benefits of such contract and noted that the contract
was concluded at normal and competitive conditions and was based
on a long-standing proven business relationship between EQUANT
and us. Additionally in 2005, our Managing Board requested that
our Supervisory Board decide upon a development and license
agreement to be concluded with Quadrics Limited, a company owned
by Alenia Aeronautica that is in turn owned by Finmeccanica, one
of our principal shareholders. The Supervisory Board noted that
the contract was concluded in the ordinary course of business at
normal conditions and that it was considered mutually beneficial
for Quadrics Limited and us. Additionally, one of our
Supervisory Board members is a member of the Board of Directors
of Thomson, which is one of our strategic customers. We believe
that the transactions with Thomson are made on an arms length
basis in line with market
91
practices and conditions with neither Thomson nor us benefiting
from terms any more favorable than those which could be obtained
in a bona fide transaction with a third party. Please see
Item 7. Major Shareholders and Related-Party
Transactions.
|
|
|
Supervisory Board Committees |
Membership and Attendance. Detailed information on
attendance at full Supervisory Board and Supervisory Board
Committee meetings during 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit | |
|
Compensation | |
|
Strategic | |
Number of Meetings Attended in 2005(1) |
|
Full Board | |
|
Committee | |
|
Committee | |
|
Committee | |
|
|
| |
|
| |
|
| |
|
| |
Bruno Steve
|
|
|
7 |
|
|
|
|
|
|
|
5 |
|
|
|
4 |
|
Gérald Arbola
|
|
|
7 |
|
|
|
|
|
|
|
5 |
|
|
|
4 |
|
Tom de Waard
|
|
|
7 |
|
|
|
11 |
|
|
|
5 |
|
|
|
|
|
Douglas Dunn
|
|
|
7 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
Francis Gavois(2)(3)
|
|
|
7 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
Antonino Turicchi
|
|
|
5 |
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Didier Lombard
|
|
|
7 |
|
|
|
|
|
|
|
3 |
|
|
|
4 |
|
Matteo del Fante(2)(3)
|
|
|
5 |
|
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7 |
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Robert M. White
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7 |
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11 |
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4 |
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Riccardo Gallo(2)
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2 |
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4 |
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Alessandro Ovi(2)
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2 |
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1 |
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(1) |
Includes meetings attended by way of conference call. |
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(2) |
Messrs. Riccardo Gallo and Alessandro Ovi, who were
Supervisory Board Members throughout fiscal year 2004, were
replaced by Messrs. Antonino Turicchi and Matteo del Fante
at the annual general meeting on March 18, 2005. |
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(3) |
Appointed as non-voting observer to Audit Committee. |
Audit Committee. The Audit Committee was established in
1996 to assist the Supervisory Board in fulfilling its oversight
responsibilities relating to corporate accounting, reporting
practices, and the quality and integrity of our financial
reports as well as our auditing practices, legal and regulatory
related risks, execution of our auditors recommendations
regarding corporate auditing rules and the independence of our
external auditors.
The Audit Committee met 11 times during 2005. At many of
these meetings, the Audit Committee received presentations on
current financial and accounting issues and had the opportunity
to interview our CEO, CFO, General Counsel, external and
internal auditors. On several occasions, the Audit Committee met
with outside U.S. legal counsel, who explained and analyzed
actions required by the new NYSEs final and amended
corporate governance rules and the Sarbanes-Oxley Act. In
compliance with NYSE requirements, the Audit Committee
established procedures for the receipt, retention and treatment
of complaints regarding accounting, internal accounting controls
or auditing matters, and the confidential anonymous submission
by employees of the Company regarding questionable accounting
and auditing matters. In addition, the Audit Committee regularly
discussed the progress of implementation of internal controls
over financial reporting and reviewed managements
conclusions as to the effectiveness of internal controls. The
Audit Committee in early 2005 made a proposal to reappoint our
external auditors, which was submitted and adopted at our
2005 shareholders meeting. The Audit Committee reviewed our
annual Consolidated Financial Statements in U.S. GAAP for
the year ended December 31, 2005, and the associated press
release published on January 24, 2006. Additionally, the
Audit Committee reviewed our external auditors statement
of independence with them. The Audit Committee also approved the
compensation of our external auditors and approved the scope of
their audit, audit-related and non-audit-related services.
Furthermore, the Audit Committee held separate meetings with the
external auditors and discussed with them STs critical
accounting policies with our external auditors, outside the
presence of our management. The Audit Committee also reviewed
and approved our internal audit plan for 2006.
At the end of each quarter, prior to each Supervisory Board
meeting to approve our results and quarterly earnings press
release, the Audit Committee reviewed our interim financial
information and the proposed press release and had the
opportunity to raise questions to management and the independent
registered public accounting firm. In addition, the Audit
Committee reviewed our quarterly Operating and Financial
Review and Prospects and interim consolidated financial
statements (and notes thereto) before they were filed with the
SEC and voluntarily certified by the CEO and the CFO (pursuant
to sections 302 and 906 of the Sarbanes-Oxley Act).
92
The Audit Committee also reviewed Operating and Financial Review
and Prospects and our Consolidated Financial Statements
contained in this
Form 20-F.
Furthermore, the Audit Committee monitors our compliance with
the European Directive that requires us to prepare a set of
accounts pursuant to IFRS in advance of our 2006 annual
shareholders meeting. In this respect, the Audit Committee has
approved our decision to continue to report our Consolidated
Financial Statements under U.S. GAAP, while complying with
our reporting obligations under IFRS by preparing a
complementary set of our 2005 accounts. Furthermore, our Audit
Committee has noted that while our accounting systems are in
place to prepare a separate set of accounts pursuant to IFRS for
financial year 2005, we will not be able to provide
reconciliations pursuant to IFRS for previous periods, in
particular critical items such as capitalization of our
development expenses. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations.
The Audit Committee also proceeded with its annual review of our
internal audit, as well as the scope, planning and costs of our
external audit activities.
The Audit Committee reviewed its charter with the assistance of
our outside U.S. counsel, completed a self-evaluation and
reported regularly to the Supervisory Board. The Audit Committee
Charter is posted on our website.
On March 18, 2005, our Supervisory Board re-appointed
Mr. de Waard as Chairman, and appointed Messrs. Dunn
and White as members. Messrs. del Fante and Gavois were
appointed non-voting observers to the Audit Committee. The Audit
Committee also determined that three members of the Audit
Committee qualified as audit committee financial
experts and that all of its members are financially
literate.
Compensation Committee. Our Compensation Committee
proposes to our Supervisory Board the compensation for our
President and Chief Executive Officer, the sole member of our
Managing Board, including the variable portion of such
compensation based on performance criteria recommended by our
Compensation Committee. It also approves any increase in the
incentive component of compensation for our executive officers.
The Compensation Committee is also informed of the compensation
plans for our executive officers and specifically approves
stock-based compensation plans for all employees. The
Compensation Committee met five times in 2005, including one
meeting outside the presence of management, the CEO and the COO.
Among its main activities, the Compensation Committee reviewed
and approved the Managing Board compensation for 2004 and
reviewed and approved the Managing Boards Compensation
policy for the year 2005 which was subsequently adopted by our
shareholders at our 2005 annual shareholders meeting. The
Compensation Committee also proposed to the Supervisory Board,
which approved it, the CEOs total compensation package,
including the part of stock-based compensation granted to our
CEO for services to be rendered in 2005, tied to our performance
in 2005 according to quantifiable criteria fixed by our
Supervisory Board upon the proposal from its Compensation
Committee.
The Compensation Committee also reviewed and approved a proposal
by the Managing Board to amend the existing 2001 Stock Option
Plan for senior executives and key employees of the Company to
provide for the grant of stock-based compensation instead of
stock options. The Compensation Committee reviewed the status of
past grants, which were no longer functioning as a retention
tool, and approved amendments with the objective of better
incentivizing our senior executives and key employees through
the grant of stock awards as approved by our 2005 annual
shareholders meeting. Furthermore, the Compensation Committee
reviewed and recommended the criteria relating to our sales and
financial performance as well as the continued service
requirements to be met for the granted shares to vest in favor
of their designated beneficiaries. The Compensation Committee
also approved the list of proposed beneficiaries and the amount
of granted shares in 2005 pursuant to the proposal of our
management and upon the delegation from our Supervisory Board.
Furthermore, the Compensation Committee with the approval of the
Supervisory Board authorized the sole member of the Managing
Board to grant up to 159,935 restricted share awards plus the
shares related to employees who left the Company, so that the
total number of shares granted to executives and key employees
under the plan in addition to the 100,000 shares which may
be received by our President and CEO for 2005 may reach
4.1 million shares in accordance with the authorizations
granted by our 2005 annual shareholders meeting. See
Stock Awards and Options Employee
and Managing Board Stock Option Plans 2001 Stock
Option Plan below.
On March 18, 2005, our Supervisory Board appointed
Mr. Gérald Arbola as President of the Compensation
Committee, and Messrs. Bruno Steve, Antonino Turicchi,
Didier Lombard and Tom de Waard were appointed as members.
93
Strategic Committee. Our Strategic Committee was created
to monitor key developments within the semiconductor industry
and our overall strategy, and is particularly involved in
supervising the execution of strategic transactions.
The Strategic Committee met four times in 2005, in the presence
of the CEO, the COO, the Director of Strategic Planning and the
CFO. Among its main activities, the Strategic Committee reviews
our long-term plans and prospects and various possible scenarios
and opportunities to meet the challenges of the semiconductor
market.
On March 18, 2005, our Supervisory Board appointed
Mr. Gérald Arbola as President of the Strategic
Committee, and Messrs. Bruno Steve, Antonino Turicchi,
Didier Lombard and Robert White were appointed as members.
Nominating and Corporate Governance Committee. The
Supervisory Board met after the April 23, 2004 annual
shareholders meeting to resolve upon the Charter and composition
of the new Nominating and Corporate Governance Committee. The
Charter of the Committee was posted on our website thereafter.
At the time of its creation in 2004, our Nominating and
Corporate Governance Committee devoted its efforts to evaluating
the structure and composition of our Supervisory Board in view
of the expiration of the terms of all prior members at the 2005
annual shareholders meeting. On October 25, 2005, our
Supervisory Board appointed Mr. Tom de Waard as President
of the Nominating and Corporate Governance Committee and
Messrs. Gérald Arbola, Bruno Steve, Antonino Turicchi
and Didier Lombard were appointed as members. Our Nominating and
Corporate Governance Committee began in the fall of 2005 to
evaluate the profiles of candidates to fill the three positions
up for renewal at our 2006 annual shareholders meeting.
Secretariat and Controllers. Our Supervisory Board
appoints and dismisses a Secretary and Assistant Secretary as
proposed by the Supervisory Board. Furthermore, the Managing
Board makes an Executive Secretary available to the Supervisory
Board, who is appointed and dismissed by the Supervisory Board.
The Secretary, Assistant Secretary and Executive Secretary
constitute the Secretariat of the Board. The mission of the
Secretariat is to organize meetings, ensure continuing education
and training of the Supervisory Board members, record-keeping,
and similar functions. Through March 18, 2005, the
Secretary was Mr. Bertrand Loubert, the Assistant Secretary
was Mr. Luciano Acciari, and the Executive Secretary was
Mr. Pierre Ollivier, who is also our General Counsel.
Mr. Willem Steenstra Toussaint also supports the activities
of the Secretariat. Mr. Acciari and Mr. Loubert
currently serve as Secretary and Vice Secretary for the
Supervisory Board, and for each of the Compensation, Nominating
and Corporate Governance and Strategic Committees of our
Supervisory Board, respectively, while Mr. Steenstra
Toussaint serves as Secretary of the Audit Committee.
Mr. Ollivier continues to serve as Executive Secretary of
our Supervisory Board.
Our Supervisory Board appoints and dismisses two financial
experts (Controllers). The mission of the
Controllers is primarily to assist the Supervisory Board in
evaluating our operational and financial performance, business
plan, strategic initiatives and the implementation of
Supervisory Board decisions, as well as to review the
operational reports provided under the responsibility of the
Managing Board. Following our 2005 annual shareholders meeting,
the current Controllers are Messrs. Christophe Duval and
Andrea Novelli.
The STH Shareholders Agreement among our principal direct
and indirect shareholders contains provisions with respect to
the appointment of the Secretary, Assistant Secretary and
Controllers, which are described in Item 7. Major
Shareholders and Related-Party Transactions.
In accordance with Dutch law, our management is entrusted to the
Managing Board under the supervision of the Supervisory Board.
From our creation in 1987 through our 2005 annual shareholders
meeting, Mr. Pasquale Pistorio was our President and Chief
Executive Officer and served as the sole member of the Managing
Board. Upon Mr. Pistorios recommendation, our
Supervisory Board proposed, and our 2005 annual shareholders
meeting approved, the appointment of Mr. Carlo Bozotti as
sole member of the Managing Board with the function of President
and Chief Executive Officer for a three-year term to expire at
our 2008 annual shareholders meeting. The 2005 annual
shareholders meeting was also informed of the appointment, upon
the proposal of Mr. Carlo Bozotti, and with the endorsement
of the Supervisory Board, of Mr. Alain Dutheil as Chief
Operating Officer, reporting to Mr. Bozotti. In recognition
of Mr. Pistorios role in steering the Company since
its creation in 1987 to become one of the leaders in the
semiconductor industry, our Supervisory Board approved the
decision taken by the new sole member of our Managing Board and
President and CEO to appoint Mr. Pistorio as non-executive
Honorary Chairman of the Company. In that position,
Mr. Pistorio acts as Ambassador of the
94
Company while continuing to make available to us, as
appropriate, his experience and insight into the semiconductor,
electronics and industrial worlds.
The Managing Board consists of such number of members as
resolved by the annual shareholders meeting upon the proposal of
the Supervisory Board. The members of the Managing Board are
appointed for three-year terms as defined in our Articles of
Association upon a non-binding proposal by the Supervisory Board
at the annual shareholders meeting adopted by a simple majority
of the votes cast at a meeting where at least 15% of the
outstanding share capital is present or represented. If the
Managing Board were to consist of more than one member, our
Supervisory Board would appoint one of the members of the
Managing Board to be chairman of the Managing Board for a
three-year term, as defined in our Articles of Association (upon
approval of at least three-quarters of the members of the
Supervisory Board). Resolutions of the Managing Board require
the approval of a majority of its members. Since its creation,
our Managing Board has always been comprised of a sole member.
The annual shareholders meeting may suspend or dismiss one or
more members of the Managing Board at a meeting at which at
least one-half of the outstanding share capital is present or
represented. If the quorum is not present, a further meeting
shall be convened, to be held within four weeks after the first
meeting, which shall be entitled, irrespective of the share
capital represented, to pass a resolution with regard to the
suspension or dismissal. Such a quorum is not required if a
suspension or dismissal is proposed by the Supervisory Board. In
that case, a resolution to dismiss or to suspend a member of the
Managing Board can be taken by a simple majority of the votes
cast at a meeting where at least 15% of our outstanding share
capital is present or represented. The Supervisory Board may
suspend members of the Managing Board, but a shareholders
meeting must be convened within three months after such
suspension to confirm or reject the suspension. The Supervisory
Board shall appoint one or more persons who shall, at any time,
in the event of absence or inability to act of all the members
of the Managing Board, be temporarily responsible for our
management.
Under Dutch law, our Managing Board is entrusted with our
general management and the representation of the Company. The
Managing Board must seek prior approval from the annual
shareholders meeting for decisions regarding a significant
change in the identity or nature of the Company. Under the
Articles of Association, the Managing Board must obtain prior
approval from the Supervisory Board for (i) all proposals
to be submitted to a vote at a shareholders meeting;
(ii) the formation of all companies, acquisition or sale of
any participation, and conclusion of any cooperation and
participation agreement; (iii) all of our multi-year plans
and the budget for the coming year, covering investment policy,
policy regarding research and development, as well as commercial
policy and objectives, general financial policy, and policy
regarding personnel; and (iv) all acts, decisions or
operations covered by the foregoing and constituting a
significant change with respect to decisions already taken by
the Supervisory Board. In addition, under the Articles of
Association, the Supervisory Board and our shareholders meeting
may specify by resolution certain additional actions by the
Managing Board that require its prior approval.
In accordance with our Corporate Governance Charter, the sole
member of our Management Board and our Executive Officer may not
serve on the board of a public company without the prior
approval of our Supervisory Board. We are not aware of any
potential conflicts of interests between the private interest or
other duties of our sole Management Board member and our
Executive Officers and their duties to our Company.
Pursuant to the charter adopted by our Supervisory Board, the
following decisions by our Managing Board with regards to ST and
any of our direct or indirect subsidiaries require prior
approval from our Supervisory Board: (i) any modification
of our Articles of Association other than those of our
wholly-owned subsidiaries; (ii) any change in our
authorized share capital, issue, acquisition or disposal of our
own shares, change in any shareholder rights or issue of any
instruments granting an interest in our capital or profits other
than those of our wholly-owned subsidiaries; (iii) any
liquidation or disposal of all or a substantial and material
part of our assets or any shares we hold in any of our
subsidiaries; (iv) entering into any merger, acquisition or
joint venture agreement (and, if substantial and material, any
agreement relating to intellectual property) or formation of a
new company; (v) approval of such companys draft
consolidated balance sheets and financial statements or any
profit distribution by such company; (vi) entering into any
agreement that may qualify as a related-party transaction,
including any agreement with ST Holding, ST Holding II,
FT1CI, Areva, CDP or Finmeccanica; (vii) the key challenges
of our five-year plans and our consolidated annual budgets, as
well as any significant modifications to said plans and budgets,
or any one of the matters set forth in Article 16.1 of the
Articles of Association and not included in the approved plans
or budgets; (viii) approval of operations of exceptional
importance which have to be submitted for Supervisory Board
prior approval although their financing was provided for in the
approved annual budget; and (ix) approval of the quarterly,
semiannual and annual Consolidated Financial Statements prepared
in accordance with U.S. GAAP and beginning with the 2005
annual accounts IFRS, prior to submission for shareholder
adoption.
95
During a meeting held on September 23, 2000, the
Supervisory Board authorized the Managing Board to proceed with
acquisitions without prior consent of the Supervisory Board
subject to a maximum amount of $25 million per transaction,
provided the Managing Board keeps the Supervisory Board informed
of progress regarding such transactions and gives a full report
once the transaction is completed.
Our executive officers support the Managing Board in its
management of us, without prejudice to the Managing Boards
ultimate responsibility. Our executive officers at the end of
fiscal year 2005 were:
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Years in | |
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Years with | |
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Semi-conductor | |
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Name |
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Position |
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Company | |
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Industry | |
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Age | |
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Executive Committee
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Carlo Bozotti
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President and Chief Executive Officer |
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29 |
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29 |
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53 |
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Alain Dutheil
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Chief Operating Officer |
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23 |
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36 |
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60 |
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Laurent Bosson
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Executive Vice President, Front-end Technology and Manufacturing |
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23 |
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23 |
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63 |
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Andrea Cuomo
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Executive Vice President, Advanced System Technology and Chief
Strategic Officer (and for other staff functions) |
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23 |
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23 |
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51 |
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Carlo Ferro
|
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Executive Vice President, Chief Financial Officer (and for
Infrastructure and Services organization) |
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6 |
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6 |
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45 |
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Philippe Geyres
|
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Executive Vice President, HPC (and for the other product
segments) |
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22 |
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29 |
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53 |
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Enrico Villa
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Executive Vice President, Europe Region (and for Sales and
Marketing organizations) |
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39 |
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39 |
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64 |
|
Executive Staff
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Georges Auguste
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Corporate Vice President, Total Quality and Environmental
Management |
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19 |
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32 |
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56 |
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Gian Luca Bertino
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Corporate Vice President, CPG |
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9 |
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20 |
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46 |
|
Patrice Chastagner
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Corporate Vice President, Human Resources |
|
|
20 |
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|
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20 |
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58 |
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Ugo Carena
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Corporate Vice President, APG |
|
|
9 |
|
|
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28 |
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62 |
|
Marco Luciano Cassis
|
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Corporate Vice President, STMicroelectronics Japan |
|
|
18 |
|
|
|
18 |
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|
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42 |
|
François Guibert
|
|
Corporate Vice President, Emerging Markets Region |
|
|
25 |
|
|
|
28 |
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52 |
|
Reza Kazerounian
|
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Corporate Vice President, North America Region |
|
|
6 |
|
|
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21 |
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|
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48 |
|
Otto Kosgalwies
|
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Corporate Vice President, Infrastructure and Services |
|
|
22 |
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22 |
|
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50 |
|
Robert Krysiak
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Corporate Vice President and General Manager of our new
Greater China sales region |
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17 |
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23 |
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