FORM 20-F
As filed with the Securities and Exchange Commission on
March 14, 2007
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 |
OR |
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, 2006 |
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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 |
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The Netherlands |
(Translation of registrants
name into English) |
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(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:
897,395,042 common shares at December 31, 2006
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 þ Accelerated
filer o Non-accelerated
filer o
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
1
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this annual report or
Form 20-F (the
Form 20-F),
references to we, us and
Company are to STMicroelectronics N.V. together with
its consolidated subsidiaries, references to EU are
to the European Union, references to
and
the euro are to the euro currency of the EU,
references to the United States and U.S.
are to the United States of America and references to
$ or to U.S. dollars are to United
States dollars. References to mm are to millimeters
and references to nm are to nanometers.
We have compiled 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 2006 revenues
according to provisional industry data published by iSuppli and
2005 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). We also report certain non-U.S. GAAP
financial measures (net operating cash flow and net financial
position), which are derived from amounts presented in the
financial statements prepared under U.S. GAAP. Furthermore,
since 2005, we have been required by Dutch law to report our
statutory and consolidated financial statements, previously
reported using generally accepted accounting principles in the
Netherlands, in accordance with International Financial
Reporting Standards (IFRS). 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 all of which are highly variable and difficult to
predict; |
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the financial impact of obsolete 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 manage in an intensely competitive and cyclical
industry where a high percentage of our costs are fixed and
difficult to reduce in the short term, including our ability to
adequately utilize and operate our manufacturing facilities at
sufficient levels to cover fixed operating costs; |
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our ability to perform the announced strategic repositioning of
our Flash memories business in line with the requirements of our
customers and without adverse effect on existing alliances or
other agreements relating to this business; |
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our ability in an intensely competitive environment to secure
customer acceptance and to achieve our pricing expectations for
high volume supplies of new products in whose development we
have or are currently investing; |
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the anticipated benefits of research and development alliances
and cooperative activities, as well as the uncertainties
concerning the modalities, conditions and financial impact
beyond 2007 of the R&D and manufacturing activities in
Crolles, following the termination of our current agreement with
NXP Semiconductors and Freescale Semiconductor; |
2
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the ability of our suppliers to meet our demands for supplies
and materials and to offer competitive pricing; |
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significant variations in our gross margin compared to
expectations could be the result of changes in revenue levels,
product mix and pricing, capacity utilization, variations in
inventory valuation, excess or obsolete inventory, manufacturing
yields, changes in unit costs, impairments of long-lived assets,
including manufacturing, assembly/test and intangible assets,
and the timing and execution of the manufacturing ramp and
associated costs, including start-up costs; |
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changes in the economic, social or political environment,
including military conflict and/or terrorist activities, as well
as natural events such as severe weather, health risks,
epidemics or earthquakes in the countries in which we, our key
customers and our suppliers operate; |
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changes in our overall tax position as a result of changes in
tax laws or the outcome of tax audits, and our ability to
accurately estimate tax credits, benefits, deductions and
provisions and to realize deferred tax assets; |
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our ability to obtain required licenses on third-party
intellectual property on reasonable terms and conditions, the
impact of potential claims by third parties involving
intellectual property rights relating to our business, and the
outcome of litigation; and |
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the results of actions by our competitors, including new product
offerings and our ability to react thereto. |
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.
3
PART I
Item 1. Identity of Directors, Senior
Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected
Timetable
Not applicable.
Item 3. Key Information
Selected Financial Data
The table below sets forth our selected consolidated financial
data for each of the years in the five-year period ended
December 31, 2006. 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, 2006, 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
Information Financial Statements in this
Form 20-F.
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Year Ended December 31, | |
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2006 | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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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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$ |
9,838 |
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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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Other revenues
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16 |
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6 |
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4 |
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4 |
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48 |
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Net revenues
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9,854 |
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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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Cost of sales
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(6,331 |
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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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Gross profit
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3,523 |
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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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Operating expenses:
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Selling, general and administrative
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(1,067 |
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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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Research and development(1)
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(1,667 |
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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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Other income and expenses, net(1)
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(35 |
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(9 |
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10 |
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(4 |
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7 |
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Impairment, restructuring charges and other related closure costs
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(77 |
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(128 |
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(76 |
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(205 |
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(34 |
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Total operating expenses
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(2,846 |
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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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Operating income
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677 |
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244 |
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683 |
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334 |
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601 |
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Interest income (expense), net
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93 |
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34 |
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(3 |
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(52 |
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(68 |
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Loss on equity investments
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(6 |
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(3 |
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(4 |
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(1 |
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(11 |
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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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764 |
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275 |
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672 |
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242 |
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522 |
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Income tax benefit (expense)
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20 |
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(8 |
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(68 |
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14 |
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(89 |
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Income before minority interests
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784 |
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267 |
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604 |
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256 |
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433 |
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Minority interests
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(2 |
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(1 |
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(3 |
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(3 |
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(4 |
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Net income
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$ |
782 |
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$ |
266 |
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$ |
601 |
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$ |
253 |
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$ |
429 |
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Earnings per share (basic)
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$ |
0.87 |
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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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Earnings per share (diluted)
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$ |
0.83 |
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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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Number of shares used in calculating earnings per share (basic)
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896.1 |
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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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Number of shares used in calculating earnings per share (diluted)
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958.5 |
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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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4
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Year Ended December 31, | |
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2006 | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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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(2)
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$ |
1,963 |
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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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Marketable securities
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460 |
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Short-term deposits
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250 |
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Restricted cash for equity investments
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218 |
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Total assets
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14,198 |
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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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Short-term debt (including current portion of long-term debt)
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136 |
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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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Long-term debt (excluding current portion)(2)
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1,994 |
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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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Shareholders equity(2)
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9,747 |
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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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Capital stock(3)
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3,177 |
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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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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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$ |
0.12 |
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$ |
0.08 |
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$ |
0.04 |
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Capital expenditures(4)
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1,533 |
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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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Net cash provided by operating activities
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2,491 |
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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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Depreciation and amortization(4)
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1,766 |
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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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Net debt (cash) to total shareholders equity ratio(5)
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(0.078 |
) |
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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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(1) |
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 and non-current assets and the costs of
certain activities relating to intellectual property. 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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(2) |
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 2006, 637,109 shares were transferred to
employees upon vesting of stock awards. In August 2003, we
issued $1,332 million principal amount at maturity of our
convertible bonds due 2013 (our 2013 Convertible
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. In February 2006, we issued Zero Coupon
Senior Convertible Bonds due 2016 (our 2016 Convertible
Bonds) representing total gross proceeds of
$974 million. In March 2006, we issued
500 million
Floating Rate Senior Bonds due 2013 (our 2013 Senior
Bonds). In August 2006, as a result of almost all of the
holders of our 2013 Convertible Bonds exercising their August 4,
2006 put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds at a
conversion ratio of $985.09 per $1,000 aggregate principal
amount at issuance resulting in a cash disbursement of
$1,377 million. |
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(3) |
Capital stock consists of common stock and capital surplus. |
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(4) |
Capital expenditures are net of certain funds received through
government agencies, the effect of which is to decrease
depreciation. |
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(5) |
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, the Debt-to-Equity
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, marketable
securities, short-term deposits and restricted cash) 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. |
5
Risk Factors
Risks Related to the Semiconductor Industry
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The semiconductor industry is cyclical and downturns in
the semiconductor industry can negatively affect our results of
operations and financial condition. |
The semiconductor industry is cyclical and has been subject to
significant economic downturns at various times. Downturns are
typically characterized by diminished demand giving rise to
production overcapacity, accelerated erosion of average selling
prices, high inventory levels and reduced revenues. Downturns
may be the result of industry-specific factors, such as excess
capacity, product obsolescence, price erosion, evolving
standards, changes in end-customer demand, and/or macroeconomic
trends impacting the economies of one or more of the
worlds major regions: Asia, the United States, Europe and
Japan. Such macroeconomic trends relate to the semiconductor
industry as a whole and not necessarily to the individual
semiconductor markets to which we sell our products. The
negative effects on our business from industry downturns may
also be increased to the extent that such downturns are
concurrent with the timing of new increases in production
capacity in our industry.
We have experienced revenue volatility and market downturns in
the past and expect to experience downturns them in the future,
which could have a material adverse impact on our results of
operations and financial condition.
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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 semiconductor products 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,
$46.1 billion in 2005 and an estimated $55 billion in
2006, or approximately 27%, 19%, 18%, 22%, 20% and 23%,
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,
may exceed demand requirements, leading to overcapacity and
price erosion.
Overcapacity and cost optimization have led us, in recent years,
to close manufacturing facilities that used more mature process
technologies and, as a result, to incur significant impairment,
restructuring charges and related closure costs. In 2006, we
recorded impairment, restructuring charges and related closure
costs of $77 million. See Item 5. Operating and
Financial Review and Prospects Impairment, Restructuring
Charges and Other Related Closure Costs.
As of December 31, 2006, the 2005 restructuring plan was
substantially completed and had resulted in total charges of
approximately $73 million for intangible assets and
goodwill mainly related to the CPE product lines and
$86 million for headcount restructuring charges, out of an
estimated $175 million. Through the period ended
December 31, 2006, we have incurred $316 million of
the total expected of approximately $330 million in pre-tax
charges associated with the 150-mm restructuring plan, slightly
down from the original estimate of $350 million that was
defined on October 22, 2003, and which was substantially
completed by the end of 2006.
There can be no assurance that future changes in the market
demand for our products, overcapacity, obsolescence in our
manufacturing facilities and market downturns may not require us
to lower the prices we charge for our products as well as incur
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. |
We face significant competition in each of our product lines.
Like us, many of our competitors also offer a large variety of
products. Some of our competitors may have greater financial
and/or more focused research and development resources than we
do. If these competitors substantially increase the resources
they devote to developing and marketing products that compete
with ours, we may not be able to compete successfully. Any
consolidation among our competitors could also enhance their
product offerings, manufacturing efficiency and financial
resources, further strengthening their competitive position.
Given the intense competition in the semiconductor industry, if
our products are not selected based on any of the above factors,
our business, financial condition and results of operations
could be materially adversely affected.
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In many of the market segments in which we compete for
business, competition for the selection of suppliers to design
products for use in our customers equipment and products
is very intense, 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 its product plans, which could cause us to
generate no sales from a product, resulting in a materially
adverse affect on our results of operations and financial
condition. |
We regularly devote substantial resources to winning competitive
bid selection processes, known as product design
wins, to develop products for use in our customers
equipment and products. These selection processes can be lengthy
and can require us to incur significant design and development
expenditures, with no guarantee of winning or generating
revenue. Delays in developing new products with anticipated
technological advances 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.
Even after obtaining a product design win from one of our
customers, we may still experience delays in generating revenue
from our products as a result of the customers or our
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 at the time of such
delay or cancellation. Finally, if our customers fail to
successfully market and sell their own products, it could
materially adversely affect our business, financial condition
and results of operations as the demand for our products falls.
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Semiconductor and other products that we design and
manufacture are characterized by rapidly changing technology and
new product introductions, and our success depends on our
ability to develop and manufacture complex products cost-
effectively and to scale. |
Semiconductor design and process technologies are subject to
constant technological improvements and require large
expenditures for capital investments, advanced research and
technology development. Many of the resulting products that we
market, in turn, have short life cycles, with some being less
than one year.
If we experience substantial delays or are unable to develop new
design or process technologies, our results of operations or
financial condition could be adversely affected.
We also regularly incur costs to acquire technology from third
parties without any guarantee of realizing the anticipated value
of such expenditures due to changes in other available
technologies or market demand. For example, we charged
$52 million as annual amortization expense on our
consolidated statement of income in 2006 related to technologies
and licenses acquired from third parties through the end of
2006. As of December 31, 2006, the residual value, net of
amortization, registered in our consolidated balance sheet for
these technologies and licenses was $95 million. In
addition to amortization expenses, the value of these assets may
be subject to impairment with associated charges being made to
our consolidated financial statements.
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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
7
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. For
the years 2003 through 2005, our sales increased at a slower
pace than the semiconductor industry as a whole and our market
share declined, although we recovered in 2006 with an increase
in our sales of 11% compared to an increase of 9% for the
industry overall. There is no assurance that we will continue to
grow our market share, if we are not able to accelerate product
innovation, extend our customer base, realize manufacturing
improvements and/or otherwise control our costs. In addition, in
recent years the semiconductor industry has continued to
increase manufacturing capacity in Asia in order to access
lower-cost production and to benefit from higher overall
efficiency, which has led to a stronger competitive environment.
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, such
as increasing our production capacity in Asia or a
discontinuation of certain product families or additional
restructurings, which in turn may result in loss of revenues,
asset impairments and/or capital losses.
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, or
failure to find new partners in such alliances, in developing
new process technologies in line with market
requirements. |
We are dependent on alliances to develop or access new
technologies and there can be no assurance that these alliances
will be successful or that our partners will continue to
participate in the alliances. For example, we are currently
cooperating with Freescale Semiconductor, Inc. (formerly a
division of Motorola Inc.) (Freescale Semiconductor)
and NXP Semiconductors B.V. (formerly Philips Semiconductor
International B.V.) (NXP Semiconductors) 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 Crolles, France
(Crolles2). We initially formed the Crolles2
alliance with NXP Semiconductors in 2000 and renewed the
partnership in 2002 when Freescale Semiconductor joined the
alliance. The Crolles2 alliance was also extended in 2002
through a joint development program with TSMC for process
technology alignment, in 2004 by the Nanotec-300 research
program with CEA-LETI for the development of the 45-nm and 32-nm
process technology nodes, and again in 2005 by including 300-mm
wafer testing and packaging, as well as the development and
licensing of core libraries and IP.
In January 2007, NXP Semiconductors announced that it will
withdraw from the alliance at the end of 2007 and therefore our
Crolles2 alliance will expire on December 31, 2007.
Freescale Semiconductor has also notified us that the Crolles2
alliance will terminate as of such date. There can be no
assurance that we will be successful in finding new partners to
pursue joint R&D work and/or joint manufacturing production
at Crolles2 beyond 2007. In addition, the termination of our
R&D alliance in Crolles2 with Freescale Semiconductor and
NXP Semiconductors may significantly increase our future cost
and capital requirements to access advanced CMOS process
technologies and proprietary state-of-the-art derivative CMOS
technologies, and the operation of our Crolles2 manufacturing
facility.
We continue to believe that the shared R&D business model
contributes to the fast acceleration of semiconductor process
technology development while allowing us to lower our
development and manufacturing costs. However, there can be no
assurance that alliances will be successful or that new
alliances will be concluded to allow 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
terminate before our intended goals are accomplished we may lose
our investment, or incur additional unforeseen costs, and our
business, results of operations and prospects could be
materially adversely affected. In addition, if we are unable to
develop or otherwise access new technologies independently, we
may fail to keep pace with the rapid technology advances in the
semiconductor industry, our participation in the overall
semiconductor industry may decrease and we may also lose market
share in the market addressed by our products.
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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 37.9% in the third quarter of 2004 to a low of 32.9% in the
first quarter of 2005. We cannot guarantee that
8
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.
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The competitive environment of the semiconductor industry
has led to industry consolidation and we may face even more
intense competition from newly merged competitors or we may seek
to acquire a competitor or become an acquisition target. |
The intensely competitive environment of the semiconductor
industry and the high costs associated with developing
marketable products and manufacturing technologies may lead to
further consolidation in the industry. Such consolidation can
allow a company to further benefit from economies of scale,
provide improved or more diverse product portfolios and increase
the size of its serviceable market. Consequently, we may seek to
acquire a competitor to improve our market position and the
applications and products we can market. 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 may not be predictable and which can have a
materially adverse effect on our results of operations and
financial condition.
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Future acquisitions or divestitures may adversely affect
our business. |
Our strategies to improve our results of operations and
financial condition may lead us to make significant acquisitions
of businesses that we believe to be complementary to our own, or
to divest ourselves of activities that we believe do not serve
our longer term business plans. In addition, certain regulatory
approvals for potential acquisitions may require the divestiture
of business activities.
Our potential acquisition strategies depend in part on our
ability to identify suitable acquisition targets, finance their
acquisition and obtain required regulatory and other approvals.
Our potential divestiture strategies depend in part on our
ability to define the activities in which we should no longer
engage, and then determine and execute appropriate methods to
divest of them.
Acquisitions and divestitures involve a number of risks that
could adversely affect our operating results, including:
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diversion of managements attention; |
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difficult integration of acquired company operations and
personnel; |
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loss of activities and technologies that may have complemented
our remaining businesses; |
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assumption of potential liabilities, disclosed or undisclosed,
associated with the business acquired, which liabilities may
exceed the amount of indemnification available from the seller; |
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potential inaccuracies in the financial and accounting systems
utilized by the business acquired; |
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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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loss of important services provided by key employees that are
assigned to divested activities; |
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whether we are able to retain customers of the acquired entity;
and |
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goodwill and other intangible asset impairment, due to the
inability of the business to meet managements expectations
at the time of the acquisition. |
These and other factors may cause a materially adverse effect on
our results of operations and financial condition.
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The strategic repositioning of our memory business may
fail to produce the operational and strategic benefits which we
envisioned. |
As a result of a strategic review of our product portfolio, we
decided to actively pursue solutions aimed at strengthening the
competitive position of our memory business by deconsolidating
that segment from our financial results, and, if possible,
participate in industry consolidation. Consequently, on
December 13, 2006, we announced plans to create a
stand-alone Flash Memories Group. The Flash Memories Group
incorporates all Flash memory operations, including research and
development and product-related activities, front- and back-end
manufacturing, marketing and sales. Our initiative is intended
to result in a number of strategic benefits, including the
ability to benefit from increased scale and employee incentives
more directly tied to our financial performance. This initiative
may not produce the anticipated benefits, which could adversely
affect the results of our operations and future capital
requirements. It may also lead to disadvantages, including but
not limited to a
9
loss of synergies, economies of scale and one-time or ongoing
losses that are not fully offset by any expected benefits.
Furthermore, we have a joint development agreement with Hynix
Semiconductor Inc. (Hynix Semiconductor) for the
development of NAND Flash memories and a joint venture agreement
with Hynix Semiconductor for the building and operation of a
front-end memory manufacturing facility in Wuxi City, China.
In addition, we are building a new facility in Catania M6, where
facilitization is nearly completed and where we carry
approximately $400 million in assets, but which remains to
be equipped. Realization of the anticipated benefits depend on
the development of future partnerships in the Flash memories
business. Future capital investments for this facility should
benefit from certain public funding, which has been recently
approved by the requisite European Union and Italian
authorities. In case the repositioning of our memory business
results in a change of control, such business would cease to
benefit from those of our agreements which apply only to the
subsidiaries in which we have a minimum 50% controlling
interest, and our assets value and results of operations may
suffer a material adverse effect pursuant to such change of
control.
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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 2006 include income
and expense items translated at the average rate for the period.
In 2006, our effective average U.S. dollar exchange rate, which
reflects the current exchange rate levels and the impact of our
hedging contracts, was
1.00 for $1.24,
compared to our effective average exchange rate of
1.00 for $1.28
in 2005.
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 and
we spent $1.5 billion in 2006. See Item 5.
Operating and Financial Review and Prospects
Liquidity and Capital Resources. We have evolved our
strategy towards a less capital intensive structure and as such
we expect our capital expenditures to be $1.2 billion in
2007. Our costs may also increase 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.
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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 and we are running a 300-mm pilot line at
Crolles2, with our partners NXP Semiconductors and Freescale
Semiconductor. This relationship will expire at
December 31, 2007. There is no assurance that we will be
successful in finding alternative partnership opportunities to
replace the loading currently supported by NXP Semiconductors
and Freescale Semiconductor in Crolles2, which in turn may lead
to increased capital commitments and manufacturing costs. We
have also constructed a building in Catania (Italy), which is
not yet equipped, for the volume production of 300-mm wafers,
which has been allocated to our new Flash Memories Group. In
addition, we have a 33% equity interest in a joint venture
company with Hynix Semiconductor, which has built a new 300-mm
fab for the production of NAND memory products in Wuxi, China.
Since the joint venture is planning to expand its activity, we
may be required to make an additional capital investment to keep
this level of equity interest in the joint venture.
The construction, facilitization or equipment of
state-of-the-art manufacturing facilities 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 the 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 to 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 in 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 wafer
production facility in Catania (Italy) and there can be no
assurance that we will obtain this public funding, as planned,
or that we will be in a position to utilize the funding within
the planned time frame. 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
consequently 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 22 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. |
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 fluctuated, 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 guarantee 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 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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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, 2006, our largest customer was
Nokia, which accounted for 21.8% of our 2006 net revenues,
compared to 22.4% in 2005 and 17.1% in 2004. In 2006, our top
ten OEM customers accounted for approximately 51% of our net
revenues, compared to approximately 50% of our 2005 net revenues
and 44% of our 2004 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 19% of our net revenues were made
through distributors in 2006, compared to approximately 18% in
2005 and approximately 21% in 2004. 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,
12
seek alternate suppliers, increase its product returns or fail
to meet its payment obligations, our business financial
condition and results of operations could be materially
adversely affected. If customers do not purchase products made
specifically for them, we may not be able to resell such
products to other customers or require the customers who have
ordered these products to pay a cancellation fee. Furthermore,
developing industry trends, including customers use of
outsourcing and new and revised supply chain models, may reduce
our ability to forecast the purchase date for our products and
evolving customer demand, thereby affecting our revenues and
working capital requirements. For example, pursuant to industry
developments, some of our products are required to be delivered
on consignment to customer sites with recognition of revenue
delayed until such 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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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, 2006, the value registered on our audited
consolidated balance sheet for goodwill was $223 million
and the value for technologies and licenses acquired from third
parties was $95 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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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, as well as
other materials such as copper and gold whose prices on the
world markets have fluctuated significantly during recent
periods. Although supplies for the raw materials we currently
use are adequate, shortages could occur in various essential
materials due to interruption of supply or increased demand in
the industry. In addition, the costs of certain materials, such
as copper and gold, may increase due to market pressures and we
may not be able to pass on such cost increases to the prices we
charge to our customers. We also purchase semiconductor
manufacturing equipment from a limited number of suppliers and
because such equipment is complex it is difficult to replace one
supplier with another or to substitute one piece of equipment
for another. In addition, suppliers may extend lead times, limit
our supply or increase prices due to capacity constraints or
other factors. Furthermore, suppliers tend to focus their
investments on providing the most technologically advanced
equipment and materials and may not be in a position to address
our requirements for equipment or materials of older
generations. Shortages of supplies have in the past impacted and
may in the future impact the semiconductor industry, in
particular with respect to silicon wafers due to increased
demand and decreased production. Although we work closely with
our suppliers to avoid these types of shortages, there can be no
assurances that we will not encounter these problems in the
future. Our quarterly or annual results of operations would be
adversely affected if we were unable to obtain adequate supplies
of raw materials or equipment in a timely 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
13
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 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 or other
indemnification to maintain good customer relationships.
Furthermore, we could incur significant costs and liabilities if
litigation occurs to defend against such claims and if damages
are awarded against us. In addition, it is possible for one of
our customers to recall a product containing one of our parts.
Costs or payments we may make in connection with warranty claims
or product recalls may adversely affect our results of
operations. There is no guarantee that our insurance policies
will be available or adequate to protect against all such claims.
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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.
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We have from time to time received, and may in the future
receive, communications alleging possible infringement of
patents and other intellectual property rights. Furthermore, we
may become involved in costly litigation brought against us
regarding patents, mask works, copyrights, trademarks or trade
secrets. We are currently involved in patent litigation with
SanDisk Corporation with respect to our Flash memory products
and in litigation with Tessera, Inc. regarding packaging
technologies. 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 rights 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) banned the use of lead and some flame retardants in
electronic components as of 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, Regulation 1907/2006 of December 18, 2006
will require registration, evaluation, authorization and
restriction of a large number of chemicals (REACH)
starting June 1, 2007. The implementation of any such
legislation could adversely affect our manufacturing costs or
product sales by requiring us to acquire costly equipment,
materials or greenhouse gas allowances, or to incur other
significant expenses in adapting our manufacturing processes or
waste and emission disposal processes. We are not in a position
to quantify specific costs, in part because these costs are part
of our business process. Furthermore, environmental claims or
our failure to comply with present or future regulations could
result in the assessment of damages or imposition of fines
against us, suspension of production or a cessation of
operations. As with other companies engaged in similar
activities, any failure by us to control the use of, or
adequately restrict the discharge of, chemicals or hazardous
substances could subject us to future liabilities. Any specific
liabilities we identify as probable would be reflected in our
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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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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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 2006, we
had an income tax benefit of $20 million, as compared to an
income tax expense of $8 million in 2005. In 2006, we
benefited from a favorable assessment of our tax assets and
liabilities mainly due to a favorable outcome of a tax
litigation in one of our jurisdictions. 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
15
such tax claims. Our failure to do so and/or the need to
increase our provisions for such claims could have a material
adverse effect on our financial position.
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We have been 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
2006 accounts or as 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 requires 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 increase the complexity 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. 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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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 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 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, beginning in the fourth quarter of 2005, is now charged
directly against our earnings. This change could have an effect
on our earnings per share, which could negatively impact our
future stock price.
In addition, through the first half of 2005, we 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 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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If our internal control over financial reporting fail to
meet the requirements of Section 404 of the Sarbanes-Oxley
Act, it may have a materially adverse effect on our stock
price. |
The SEC, as required by Section 404 of the Sarbanes-Oxley
Act of 2002, adopted rules that require us to include a
management report assessing the effectiveness of our internal
control over financial reporting in our annual report on
Form 20-F. In
addition, we must also include an attestation by our independent
registered public accounting firm regarding the adequacy of
managements assessment and the effectiveness of our
internal control over financial reporting. We have successfully
completed our Section 404 assessment and received the
auditors attestation as of December 31, 2006.
However, in the future, if we fail to complete a favorable
assessment from our management or to obtain our auditors
attestation, we may be subject to regulatory sanctions or may
suffer a loss of investor confidence in the reliability of our
financial statements, which could lead to an adverse effect on
our stock price.
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Reduction in the amount of public funding available to us,
changes in existing public funding programs or demands for
repayment may increase our costs and impact our results of
operations. |
Like many other manufacturers operating in Europe, we benefit
from governmental funding for 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 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.
On April 9, 2002, the EU approved a grant to us by the
Italian Government of
542.3 million
(Decision N844/2001), representing approximately 26.25% of the
total cost (estimated at
2,066 million)
(the M6 Grant) for the building, facilitization and
equipment of a new 300-mm manufacturing facility in Catania M6
capable of producing approximately 5,000 wafers per week in 2006
for NOR and other nonvolatile memory products (the M6
Plant). The construction of the M6 Plant has not proceeded
as planned. In 2006, the Italian Government informed the EU
Commission about a proposed modification to the conditions for
the M6 Grant, as authorized on April 9, 2002. In a decision
on December 6, 2006 sent to the Italian Foreign Minister,
the EU Commission, according to the proposal made by the Italian
government, accepted to modify the conditions for the M6 Grant.
In particular, the EU Commission accepted the proposal of the
Italian government to provide for an extension of the authorized
time period for the completion of the planned investment and to
allocate, out of the
542.3 million
grants originally authorized,
446 million
for the completion of the M6 Plant if we made a further
investment of
1,700 million
between January 1, 2006 through the end of 2009. The
446 million
M6 Grant is conditional upon the conclusion of a Contratto di
Programma providing, inter alia, for (i) the
creation of a minimum number of new jobs, (ii) the fixed
assets remaining at least five years after the completion of the
M6 Plant, (iii) at least 31.25% of the total of
1,700 million
investment for the M6 Plant being either in the form of equity
or loan, (iv) an annual report on work progress being
submitted to the Italian authorities and the EU Commission, and
(v) a general verification of the consistency of the
project. For the period prior to December 31, 2006, the
Commission, upon the proposal of the Italian government,
considered that we would have been entitled to the remaining
96 million
grant (out of the total
542.3 million
originally granted) in the form of a tax credit if we had made a
total cumulated investment of
366 million
as of such date. As of December 31, 2006, we have invested
a cumulative amount of
298 million
instead of
366 million
and recorded a cumulative amount of tax credit of
78 million
out of the
96 million
to which we could have been entitled.
There is no assurance that the Contratto di Programma
will be concluded at acceptable conditions to both the
Italian authorities and us, and that, if concluded, such
contract will be approved by the EU Commission if the stated
conditions are not consistent with prior decisions by the EU
Commission concerning such grants. Failure to receive the grants
as anticipated may adversely impair our expected results of
operations linked to the equipment and operation of the M6 Plant.
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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, 2006,
STMicroelectronics Holding II B.V. (ST
Holding II), a wholly-owned subsidiary of
STMicroelectronics Holding N.V. (ST Holding), owned
250,704,754 shares, or approximately 27.5%, of our issued common
shares. ST Holding is therefore effectively in a position to
control actions that require shareholder approval, including
corporate actions, the election of our Supervisory Board and our
Managing Board and the issuance of new shares or other
securities.
We have also been informed that the shareholders agreement
among ST Holdings shareholders (the STH
Shareholders Agreement), to which we are not a
party, governs relations between our current indirect
shareholders Areva Group, 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 November 27, 2006, our Supervisory Board decided to
authorize us to enter into an option agreement with an
independent foundation, Stichting Continuïteit ST (the
Stichting), and to terminate a substantially similar
option agreement dated May 31, 1999, as amended, between us
and ST Holding II. Our Managing Board and our Supervisory Board,
along with the board of the Stichting, have declared that they
are jointly of the opinion that the Stichting is independent of
our Company and our major shareholders. Our Supervisory Board
approved the new option agreement to reflect changes in Dutch
legal requirements, not in response to any hostile takeover
attempt. On February 7, 2007, the May 31, 1999 option
agreement, as amended, was terminated by mutual consent by ST
Holding II and us and the new option agreement we concluded with
the Stichting became effective on the same date. The new option
agreement provides for the issuance of up to a maximum of
540,000,000 preference shares, the same number as the
May 31, 1999 option agreement, as amended. The Stichting
would have the option, which it shall exercise in its sole
discretion, to take up the preference shares. The preference
shares would be issuable in the event of actions considered
hostile by our Managing Board and Supervisory Board, such as a
creeping acquisition or an unsolicited offer for our common
shares, which are unsupported by our Managing Board and
Supervisory Board and which the board of the Stichting
determines would be contrary to the interests of our Company,
our shareholders and our other stakeholders. If the Stichting
exercises its call option and acquires preference shares, it
must pay at least 25% of the par value of such preference
shares. The preference shares may remain outstanding for no
longer then two years.
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 or otherwise taking actions considered hostile by our
Managing Board and Supervisory Board. In addition, any issuance
of additional capital within the limits of our authorized share
capital, as approved by our shareholders, is subject to the
requirements of our Articles of Association, see
Item 10. Additional Information
Memorandum and Articles of Association Share Capital as
of December 31, 2006 Issuance of Shares, Preemption
Rights and Preference Shares (Article 4).
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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 13, 2007, 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.
|
|
|
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
19
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 (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.
20
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 +31-20-654-3210. Our headquarters and
operational offices are located at 39 Chemin du Champ des
Filles, 1228 Plan-Les-Ouates, Geneva, Switzerland. Our main
telephone number there is +41-22-929-2929. Our agent for service
of process in the United States related to our registration
under the U.S. Securities Exchange Act of 1934, as amended, is
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 N.V.
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 2006 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 2006 results published by iSuppli, we believe we
were number one in industrial products, number two in analog
products and number three in wireless, automotive electronics
and NOR Flash. Based on industry results, we also believe we
ranked as a leading supplier of semiconductors in 2006 for
set-top boxes, Smartcards 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. Our major customers include
Alcatel-Lucent, Bosch,
Cisco, Conti, Delphi, Delta, Denso, Ericsson, Hewlett-Packard,
LG Electronics, Marelli, Maxtor, Motorola, Nokia, Philips,
Pioneer, Samsung, 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 2006, our
revenues grew at a compounded annual growth rate of 11.6%
compared to 7.7% for the industry as a whole.
We offer a broad and diversified product portfolio and develop
products for a wide range of market applications to reduce our
dependence on any single product, application or end market.
Within our diversified portfolio, we have focused on developing
products that leverage our technological strengths in creating
customized, system-level solutions with high-growth digital and
mixed-signal content. Our product families 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 nonvolatile memory and Smartcards.
Application Specific Products, which are generally less
vulnerable to market cycles than standard commodity products,
accounted for approximately 55% of our net revenues in 2006.
Memory Product sales accounted for approximately 22% of our net
revenues in 2006, while sales of Micro, Power and Analog
products accounted for approximately 23% of our net revenues in
2006.
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 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 (BiCMOS) for mixed-signal
applications, and diffused metal oxide semiconductor
(DMOS) technology and Bipolar, CMOS and DMOS
(BCD technologies) for intelligent power
applications and embedded memory
21
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
this date and until the end of 2006, we report our sales and
operating income in three product group segments:
|
|
|
|
|
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 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
comprised of all of our major complex products related to
automotive applications; |
|
|
|
the Memory Products Group (MPG) segment, comprised
of our memories and Smartcard businesses; and |
|
|
|
the Micro, Power, Analog Product Group (MPA)
segment, comprised of discrete and standard products plus
standard microcontroller and industrial devices (including the
programmable systems memories (PSM) division); this
segment was previously known as Micro, Linear and Discrete
Product Group, but no change has occurred in the segments
perimeter or organization. |
Effective January 1, 2007, to meet the evolving
requirements of the market together with the pursuit of a
strategic repositioning in Flash memory, we have reorganized our
product segment groups into the Application Specific Product
Groups, the Industrial and Multisegment Sector and the Flash
Memories Group. We will begin reporting sales and segment
financial information using this alignment beginning in the
first quarter of 2007.
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. All our product segments
share common research and development for process technology and
manufacturing capacity for most of their products. However,
beginning January 1, 2007, the stand-alone Flash Memories
Group (FMG), incorporates all the Flash memory operations (both
NOR and NAND), including Technology R&D, all product related
activities, front-end and back-end manufacturing, marketing and
sales worldwide. Keeping the same overall perimeter, our
Application Specific Groups (ASG) will now be comprised of
the newly created Mobile, Multimedia & Communications Group
(MMC) and the Home Entertainment & Displays Group
(HED) as well as the existing Automotive Product Group
(APG) and Computer Peripherals Group (CPG). The former MPA
segment plus non-Flash memory products (formerly under MPG) and
Micro-Electro-Mechanical Systems (MEMS) activity have been
combined to form a new sector, Industrial and Multisegment
Sector (IMS).
In the past two years, we have 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
focusing on our 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
applications and new major key accounts with a special focus on
the Chinese and Japanese markets with a view to increased
overall efficiencies, (iv) improving our manufacturing
competitiveness through the restructuring of our 150-mm wafer
production capacity, (v) launching and implementing various
cost-reduction initiatives through procurement savings, improved
asset management, general and administration centralization and
headcount restructuring, and (vi) establishing a less
capital-intensive business model.
22
Results of Operations
The tables below set forth information on our net revenues by
product group segment and by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Net Revenues by Product Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
$ |
5,396 |
|
|
$ |
4,991 |
|
|
$ |
4,902 |
|
Memory Products Group Segment (MPG)
|
|
|
2,137 |
|
|
|
1,948 |
|
|
|
1,887 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
2,243 |
|
|
|
1,882 |
|
|
|
1,902 |
|
Others(1)
|
|
|
78 |
|
|
|
61 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(3)
|
|
$ |
3,073 |
|
|
$ |
2,789 |
|
|
$ |
2,827 |
|
North America(6)
|
|
|
1,232 |
|
|
|
1,281 |
|
|
|
1,360 |
|
Asia Pacific(4)
|
|
|
2,084 |
|
|
|
1,860 |
|
|
|
1,852 |
|
Greater China(4)
|
|
|
2,552 |
|
|
|
2,203 |
|
|
|
1,859 |
|
Japan
|
|
|
400 |
|
|
|
307 |
|
|
|
403 |
|
Emerging Markets(3)(5)(6)
|
|
|
513 |
|
|
|
442 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Product Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Product Group Segment (ASG)
|
|
|
54.7 |
% |
|
|
56.2 |
% |
|
|
56.0 |
% |
Memory Products Group Segment (MPG)
|
|
|
21.7 |
|
|
|
21.9 |
|
|
|
21.5 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
22.8 |
|
|
|
21.2 |
|
|
|
21.7 |
|
Others(1)
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(3)
|
|
|
31.2 |
% |
|
|
31.4 |
% |
|
|
32.3 |
% |
North America(6)
|
|
|
12.5 |
|
|
|
14.4 |
|
|
|
15.5 |
|
Asia Pacific(4)
|
|
|
21.1 |
|
|
|
20.9 |
|
|
|
21.2 |
|
Greater China(4)
|
|
|
25.9 |
|
|
|
24.8 |
|
|
|
21.2 |
|
Japan
|
|
|
4.1 |
|
|
|
3.5 |
|
|
|
4.6 |
|
Emerging Markets(3)(5)(6)
|
|
|
5.2 |
|
|
|
5.0 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
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) |
As of January 1, 2006, we created a new region,
Greater China to focus exclusively on our operations
in China, Hong Kong and Taiwan. Net revenues for Asia Pacific
for prior periods were restated according to the new perimeter. |
|
(5) |
Emerging Markets in 2005 and 2006 included markets such as
India, Latin America (excluding Mexico), the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia. |
|
(6) |
As of July 2, 2006, the region North America
includes Mexico which was part of Emerging Markets in prior
periods. Amounts have been reclassified to reflect this change. |
23
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, which has moved from double-digit
growth to single-digit average growth over the last several
years; |
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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; |
|
|
|
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 to seek new
system-level, turnkey solutions from semiconductor suppliers; |
|
|
|
the evolution of the customer base from original equipment
manufacturers (OEM) to a mix of OEM, electronic
manufacturing service providers (EMS) and original
design manufacturers (ODM); |
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|
|
the expansion of available manufacturing capacity through
third-party providers; and |
|
|
|
the increased participation in the semiconductor industry of
private equity firms, exemplified by the takeovers in 2006 of
two of the top ten semiconductor companies, which may lead to
strategic repositionings of those companies and reorganization
amongst industry players. |
Our strategy within this challenging environment is designed to
focus on the following complementary key elements:
Broad, balanced market exposure. We offer a diversified
product portfolio and develop products for a wide range of
market applications using a variety of technologies, thereby
reducing our dependence on any single product, application or
end market. Within our diversified portfolio, we have focused on
developing products that leverage our technological strengths in
creating customized, system-level solutions for high-growth
digital 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 mice;
(iii) digital consumer, including set-top boxes, DVDs,
digital TVs, digital cameras and digital audio;
(iv) automotive, including engine, body and safety, car
radio, car multimedia and telematics; and (v) industrial
and multisegment products, including power supplies, and
motor-control, lighting, metering, banking and Smartcard.
Product strategy and innovation. We aim to be leaders in
multimedia convergence and power applications. In order to serve
these segments, our plan is to maintain and further establish
existing leadership positions for (i) platforms and chipset
solutions for digital consumer, cellular phone and car
navigation; and (ii) power applications, which are driving
system solutions for a wide consumer base in the field of
industrial applications, motor control, factory automation,
lighting, power supply and automotive, in particular, and which
require less research and development effort and manufacturing
capital intensity than more advanced and complex
application-specific devices.
We also dedicate significant resources to product innovation. We
have identified our key product offerings in each of the
targeted market segments and have concentrated our R&D
resources to develop leading-edge products for each. Examples
include: digital-base band and multi-media solutions for
wireless, digital consumer products focused on set-top boxes,
SoC offerings in data storage and system-oriented products for
the multisegment sector. We are also targeting new end markets,
such as medical applications.
Finally, we have decided to strategically reposition our
participation in the Flash memory business in order to limit our
exposure to the capital intensity of the industry as well as to
achieve the appropriate economies of scale which are demanded in
this competitive segment.
Customer-based initiatives. There are three tenets to our
sales strategy. First, we work with our key customers to
identify evolving needs and new applications and to develop
innovative products and product features. 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 which give our
customers access to our process technologies and manufacturing
infrastructure. We have formed alliances with customers
including
Alcatel-Lucent, Bosch,
Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate,
Siemens VDO, Thomson and Western Digital. Our strategic
alliances have been historically a major growth driver for us.
In 2004, 2005 and 2006, revenues from strategic customer
alliances accounted for approximately 39%, 44% and 41%
respectively of our net revenues. Secondly, we are targeting new
major key accounts, where we can leverage our position as a
supplier of application-specific products with a broad range
product portfolio to better address the requirements of large
users of semiconductor products with whom our penetration has
historically been quite low. Finally, we
24
have targeted the mass market, or those customers outside of our
traditional top 50 customers, who require system-level solutions
for multiple market segments. In addition, we have focused on
two regions as key ingredients in future sales growth, Greater
China and Japan, where we have reorganized regional management.
Global integrated manufacturing infrastructure. We have a
diversified, leading-edge manufacturing infrastructure,
comprising front-end and back-end facilities, capable of
producing silicon wafers using our broad process technology
portfolio, including our CMOS and BiCMOS technologies as well as
our memories and discretes technologies. 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. In 2006,
while confirming our mission to remain an integrated device
manufacturing company, we decided to reduce our capital
intensity in order to optimize opportunities between internal
and external front-end production, reduce our dependence on
market cycles that impact the loading of our fabs, and decrease
the burden of depreciation on our financial performance.
Research and development partnerships. The semiconductor
industry is increasingly characterized by higher costs and
technological risks involved in the research and development of
state-of-the-art processes. These higher costs and technological
risks have driven us to enter into cooperative partnerships.
From 2000 until now, we have been jointly developing advanced
CMOS technologies in Crolles (France) with Freescale
Semiconductor and NXP Semiconductors. At the end of 2006, one of
our partners notified us of their intention to continue their
participation in the Crolles2 alliance only through the end of
2007. We remain convinced that the shared R&D business model
contributes to the fast acceleration of semiconductor process
technology development, and we therefore remain committed to our
strategy of alliances to reinforce cooperation in the area of
technology development.
Integrated presence in key regional markets. We have
sought to develop a competitive advantage by building an
integrated presence in each of the worlds economic zones
that we target: Europe, Asia, China and America. An integrated
presence means having 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 also have design and
marketing capabilities in our Japan and Emerging Markets
regions. We have front-end manufacturing facilities in Europe,
in the United States and in Asia. 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.
Product quality excellence. We aim to develop the quality
excellence of our products and in the various applications we
serve and we have launched 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.
Return on capital employed. We remain focused on
providing our shareholders with value creation, measured in
particular in terms of return on net assets compared to the
weighted average cost of capital.
Products and Technology
We design, develop, manufacture and market a broad range of
products used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer
goods, automotive products and industrial automation and control
systems. Our products include discretes, 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 Smartcards. 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.
In 2006, we ran our business along product lines and managed our
revenues and internal operating income performance based on the
following product segments:
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Application Specific Product Group segment; |
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Memory Products Group segment; and |
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Micro, Power and Analog Product Group segment. |
25
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.
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Application Specific Product Group Segment |
The Application Specific Product Group (ASG) segment
is responsible for the design, development and manufacture of
application-specific products, as well as mixed analog/digital
semicustom-devices, using advanced bipolar, CMOS, BiCMOS
mixed-signal and power technologies. 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 certain
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).
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 the 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
functions (CODEC) and radio frequency ICs. We
estimate that we ship over 30%, by volume, of the mobile-phone
industrys primary energy-management devices and audio ICs.
We are transitioning from ICs to modular solutions in the field
of radio frequency and energy management for 3G handsets. In
December 2006, we announced a major design win for an ASIC
solution for use in 3G/3.5G digital basebands at Ericsson Mobile
Platforms. This award represents a significant new product
category for us. |
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(b) Application Processor Division. We offer a
family of products, known as the Nomadik family,
addressing the market for multimedia application processor
chips. 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 smart and feature
phones for three tier-one customers, Nokia, Samsung and LG. |
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(c) Imaging Division. We focus on the wireless
handset image-sensor market. We are in production of CMOS-based
camera modules and processors for low-and-high density pixel
resolutions, which also meet the auto focus, advanced fixed
focus and miniaturization requirements of this market. We have
cumulatively shipped approximately 200 million CMOS
camera-phone solutions since entering this market in 2003.
According to Prismark, we were tied for the number one position
in camera module manufacturing in 2006. |
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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
(WLAN), Bluetooth and connectivity requirements. Our
product offerings include WLAN and Bluetooth and Bluetooth FM
radio combination chips designed for low power consumption and a
small form factor. We have multiple design wins and are in
volume production for several customers in Asia and Europe for
our products. In particular, we are manufacturing in volume our
single-chip WLAN, Bluetooth and combination ICs for several
customers, including a tier-one cellphone manufacturer. Our next
generation of ICs increase combination options, with our
third-generation chips offering single-die multi-function
capability in 65-nm. |
(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 focuses on
products for digital retail, satellite, cable and IPTV set-top
box products and digital television offerings. We continue 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. In 2006, we reinforced the market leadership of our |
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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 90-nm 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. |
Our latest product, the STi7109, is our second-generation H.264
high-definition TV (HDTV) AVC and VC-1 decoder.
Building on the success of the STi710x, the worlds first
single-chip AVC and MPEG-2 decoder, the STi7109 adds VC-1
decoding, improved security, connectivity features, and support
for emerging DVD formats and security standards.
The STi7100-based set-top boxes are being rolled out for
satellite, IPTV, and terrestrial broadcast by several operators,
including Canal+, France Telecom and Telecom Italia. The
successor product, the STi7200, a single-chip dual-decode device
in 65-nm technology, is now being sampled by customers.
We address the digital television markets with a wide range of
highly integrated ASSPs and application-specific
microcontrollers. Significant numbers of televisions integrating
digital terrestrial capability using the STi55xx family as
digital plug-in solutions have been sold, primarily in Europe.
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 we have also introduced
our STD1000 device which offers both an improved feature set and
competitiveness for this growing market.
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(b) Interactive System Solutions Division. We offer
customers and partners the capability to jointly develop highly
integrated solutions for their consumer products. We utilize a
broad and proven base of expertise, advanced technologies and
hardware/software intellectual property to provide best-in-class
differentiated products for a select base of customers and
markets. |
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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 aimed primarily at home,
desktop and mobile applications with digital-to-digital complete
system solution capability that improve sound quality while
reducing power consumption, size and cost. |
(iii) Communications Infrastructure and Displays Group.
Our Communications Infrastructure and Displays Group
(CID) provides solutions for the wireless and
wireline infrastructure segments as well as displays and is
organized into three divisions.
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(a) Wireless Infrastructure Division. We formed the
Wireless Infrastructure division to develop dedicated
infrastructure chip solutions that will be focused on
third-generation telecom standards, while 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. |
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Our Greenside family of products combine the markets first
SoC baseband processor for wireless infrastructure applications
with multi-standard software libraries, optimized for GSM, EDGE,
W-CDMA, and WiMAX networks. This family of products is geared
toward addressing the needs of both Macro and Femto basestation
markets. |
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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. |
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(c) Display Division. Our products cover driver
chips for the flat-panel industry and CRT applications. Our
product development is focused mainly on driver chips for
various kinds of flat-panel display technologies such as small
and large LCDs, Plasma, OLED (Organic Light Emitting Diode) and
E-Paper. These products use proprietary technologies fitting the
various electrical parameters required by those market segments,
ranging from low to very high voltages and currents and from
junction to oxide isolation (SOI). |
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Computer Peripherals Products |
(i) Data Storage Division. We produce SoCs and
analog ASICs for several data storage applications, specializing
in disk drives with advanced solutions for read-and
write-channels, disk controllers, host interfaces,
27
digital power processing, motor controllers and micromachinery.
We believe that based on sales, we are, and have been for many
years, one of the largest semiconductor companies supplying the
hard disk drive market.
Complementing our strong position in SoCs, we believe we are the
market leader in motor controllers and we are providing
solutions for all market segments, including enterprise, desktop
and mobile applications. We are currently providing SoC
solutions based on proprietary IP in production at 130-nm 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. A market leader in the
data storage market selected our latest 90-nm SoC for its next
generation of desktop and mobile drives, which we expect to
begin shipping in volume in the second half of 2007. This SoC
includes a rich variety of our own IP including our proprietary
read/write channel, Serial ATA controller and microcomputer core.
(ii) Printer Division. We are focusing on inkjet and
multifunction printer components and are an important supplier
of pen chips, motor drivers, and 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 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 Avian Flu.
Our automotive products include alternator regulators, airbag
controls, anti-skid braking systems, vehicle stability control,
ignition circuits, injection circuits, multiplex wiring kits and
products for body and chassis electronics, engine management,
instrumentation systems, car radio and multimedia, as well as
car satellite and navigation systems. We hold a leading position
in the IC market for automotive products. We have developed a
joint initiative with Freescale Semiconductor for the
development of 90-nm embedded Flash technology and common
products based on cost-effective 32-bit microcontrollers for use
in all automotive applications.
(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.
(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 tolling, navigation and other telematic
applications. 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.
(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.
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Memory Products Group Segment |
The Memory Products Group segment designs, develops and
manufactures a broad range of semiconductor memory and Smartcard
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.
28
In December 2006, we announced our decision to establish a
stand-alone Flash Memories Group in 2007. This group will
consolidate all the Flash memory operations including NAND and
NOR Flash memories technology R&D, all product related
activities, front-end manufacturing, marketing and sales
worldwide. This strategic repositioning of Flash memories is
designed to facilitate the acquisition of dimension of scale
which we view as a necessity to compete successfully in this
business.
Prior to our December 2006 announcement, our memory business was
comprised as follows:
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(i) Wireless Flash Memories Division. Wireless
applications have very specific requirements in power
consumption, packaging and memory addressing. We offer a very
wide portfolio of wireless NOR Flash memories from single-die
low-density products through high-density 1-Gbit solutions, as
well as multiple chip packages containing several memory
technology components. |
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(ii) Standard Nonvolatile Memories Division. We
produce a broad range of industry-standard, general-purpose
Flash memories from 1 to 64 Mbit and we are in the process of
producing Flash memories that will go up to 128 Mbit. We
also produce the more mature erasable programmable read-only
memory (EPROM), from 64 Kilobit
(Kbit) to 32 Mbit. Efficient manufacturing, together
with our sales and distribution channels, has contributed to the
exploitation of our technological advantage in Flash and EPROM.
The same approach is being applied to industry-standard Flash. |
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(iii) Serial Nonvolatile Memories Division. We offer
serial electronically erasable programmable read-only memory
(EEPROM) up to 512 Kbit, 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 Mbit and 128 Mbit in
an 8-pin package for a large variety of applications. |
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(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
Semiconductor. Our efforts are targeted at the lower density
memory requirements evolving for embedded wireless applications.
Our most advanced offering, a single die 8 Gigabit
(Gbit) NAND Flash manufactured in
60-nm technology, is
now available in production. NAND Flash is primarily used to
store information such as music, still pictures, video and data
files in a variety of consumer applications, including mobile
phones, MP3 readers, universal serial bus (USB) keys
and digital still cameras. |
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(v) Smartcard IC Division. Smartcards 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
Smartcard ICs. Our expertise in security is a key to our
leadership in the finance and
pay-TV segments and
development of IT applications. If addition, our mastering of
the nonvolatile memory technologies is instrumental to offering
the highest memory sizes (up to 128 KBytes and even
1 MByte), particularly important to address the emerging
high-end mobile phone market. |
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(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 standalone organization and
also directly controls the sales force for this product offering. |
We have made significant progress on improving the cost position
of our Memory Product Group Segment, in particular widely
developing the two-bit-per-cell architecture and transitioning
to more advanced technologies, and 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. The announced creation of our new Flash
Memories Group is designed to facilitate the acquisition of the
dimension of scale, which remains a critical element for future
success and therefore we plan to strategically reposition our
presence in this market.
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Micro, Power and Analog Product Group Segment |
The Micro, Power and Analog Product Group segment (formerly
known as 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. In addition, this segment spearheads our
ongoing efforts to maintain and develop high-end analog products
and of consolidating our world leadership position in power
applications, with full solutions centered around
microcontroller applications. Due to the high degree of customer
fragmentation and the need for product diversity to meet these
numerous requirements, MPA designs and releases approximately
four new products each business day.
29
(i) Power MOSFET Division. We design, manufacture
and sell Power MOSFETs (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 lighting applications, where we
hold a leadership position from low-power, high-volume consumer
to high-power industrial 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 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 or Triacs for controlling current in
either direction) and other 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 and 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, and 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 using a wide
technology portfolio and are manufactured in processes capable
of embedding EPROM, EEPROM and Flash non volatile memories as
appropriate. We have improved our product offering in this
division, and now offer a new family of 8-bit microcontrollers
in addition to our line of 32-bit ARM7-based microcontrollers
optimized for multiple industrial applications, including
factory automation, appliances and security systems. We have
also updated our STR7 Software Library supporting our 32-bit
ARM7-based microcontrollers.
(vi) Industrial and Power Conversion Division. We
design and manufacture products for industrial automation
systems, lighting applications (lamp ballast), battery chargers
and Switched Mode Power Supplies (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.
(vii) Advanced Analog and Logic Division. We develop
innovative, differentiated and value-added analog products for a
number of markets and applications including point-of-sales
terminals, power meters and white goods. We recently introduced
our NEATSwitch portfolio of application-specific analog,
digital, and power switches and extended our supervisor and
reset-IC family. 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.
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-Lucent, 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.
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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 NXP Semiconductors
(formerly known as Philips Semiconductors) for the joint
development of advanced CMOS process technologies in Crolles,
France, since 1992. In 2003, we signed a new joint technology
cooperation agreement with Freescale Semiconductor and NXP
Semiconductors for the joint research and development of
advanced CMOS process technology 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. This agreement had also
been extended to include research and development related to
wafer testing and packaging and to cover the development and
licensing of core libraries. In January 2007, NXP Semiconductors
announced that it will withdraw from the alliance at the end of
2007. Freescale Semiconductor has also notified us that the
Crolles2 alliance will terminate as of such date. We remain
convinced that the shared R&D business model contributes to
the fast acceleration of semiconductor process technology
development and we will continue to actively pursue an expansion
of our portfolio of alliances to reinforce cooperation in the
area of technology development in Crolles2.
We have also established joint development programs with leading
suppliers such as Air Liquide, Applied Materials, ASM
Lithography, Canon, Gemalto, Hewlett-Packard, KLA-Tencor, LAM
Research, MEMC, Teradyne and Wacker and with electronic design
automation (EDA) 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 on a global basis with major research institutions and
universities.
In 2004, we signed and announced a joint venture agreement with
Hynix Semiconductor to build a front-end memory-manufacturing
facility in Wuxi City, China. The joint venture is an extension
of a NAND Flash Process/product joint development relationship.
The facility was inaugurated in October 2006. The fab employs
approximately 2,700 people and features a 200-mm wafer
production line that began production of DRAM in June 2006 and a
300-mm wafer production line, which began NAND production in
October 2006. The total investment in the project is
approximately $2 billion. We contributed 33% of the equity
financing, equivalent to $250 million, while Hynix
Semiconductor contributed 67%. In addition, we have provided
$218 million out of our total $250 million commitment
as debt financing to the joint venture by way of a guarantee.
The financing of the joint venture also includes funding from
local Chinese institutions, including long-term leasehold and
local debt financing.
Customers and Applications
We design, develop, manufacture and market thousands of products
that we sell to approximately 1,300 direct customers. Our major
customers include
Alcatel-Lucent, Bosch,
Cisco, Conti, Delphi, Delta, Denso, Ericsson, Hewlett-Packard,
LG Electronics, Marelli, Maxtor, Motorola, Nokia, Philips,
Pioneer, Samsung, Seagate, Siemens, Thomson, Vestel, Visteon and
Western Digital. To many of our key customers we provide a wide
range of products, including application-specific products,
discrete devices, memory products and programmable products. Our
position as a strategic supplier of application-specific
products to certain customers fosters close relationships that
provide us with opportunities to supply such customers
requirements for other products, including discrete devices,
programmable products and memory products. We also sell our
products through distributors and retailers, including Arrow
Electronics, Avnet, BSI Group, Wintech and Yosun.
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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BG/Tech |
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Alcatel-Lucent |
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Huawei |
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Nortel Networks |
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Siemens |
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BenQ |
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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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Samsung |
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TCL Corporation |
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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Portable multimedia
Telephone terminals
(wireline and wireless)
Wireless connectivity
(Bluetooth, WLAN,
FM radio)
Wireless infrastructure |
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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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Apple |
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Hewlett-Packard |
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Taiwan-Liton |
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Seagate |
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Xilinx |
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Intel |
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Maxtor |
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Western Digital |
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Dell |
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Lenovo-IBM |
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Microsoft |
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Wintech |
Applications:
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Data storage
Monitors and displays |
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Power management
Printers
Webcams |
Automotive |
Customers:
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Bosch |
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Harman |
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Hitachi |
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TRW |
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Conti |
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Hella |
|
Marelli |
|
Valeo |
|
|
Delphi |
|
Kostal |
|
Pioneer |
|
Visteon |
|
|
Denso |
|
Lear |
|
Siemens VDO |
|
Oasis |
|
|
|
|
|
|
Sirius |
|
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:
|
|
ADB |
|
LG Electronics |
|
Pace |
|
AOC |
|
|
Bose Corporation |
|
Nintendo |
|
Philips |
|
Sony |
|
|
Echostar |
|
Skyworth |
|
Samsung |
|
Thomson |
|
|
Humax |
|
Safran |
|
Scientific Atlanta |
|
TTE WW |
|
|
|
|
|
|
Matsushita |
|
Vestel |
Applications:
|
|
Audio processing (CD, DVD, Hi-Fi) |
|
|
|
DVDs
Imaging |
|
|
|
|
Analog/ digital TVs |
|
|
|
Set-top boxes |
|
|
|
|
Digital cameras |
|
|
|
VCRs |
|
|
|
|
Digital music players |
|
|
|
Displays |
|
|
Industrial/ Other
Applications |
Customers:
|
|
American Power Conversion |
|
Delta |
|
General Electric |
|
Philips |
|
|
Artesyn |
|
Gemalto |
|
Vodafone |
|
Siemens |
|
|
Astec |
|
Universal Lighting |
|
Nagra |
|
TIM |
|
|
Autostrade |
|
|
|
Giesecke & Devrient |
|
Mikron JSC |
Applications:
|
|
Battery chargers
Smartcard ICs
Intelligent power switches
Industrial automation/ control systems
Lighting systems
(lamp ballasts) |
|
MEMS
Motor controllers
Power supplies
Switch mode power
supplies |
In 2006, our largest customer, Nokia, represented 21.8% of our
net revenues, compared to 22.4% in 2005 and 17.1% in 2004. No
other single customer accounted for more than 10% of our net
revenues. Sales to our OEM customers accounted for approximately
81% of our net revenues in 2006, from approximately 82% of our
net revenues in 2005 and 79% in 2004. Sales to our top ten OEM
customers were approximately 51% of total revenues in 2006, 50%
in 2005 and 44% in 2004. 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
19% of our net revenues in 2006 were sold through distributors,
compared to 18% in 2005 and 21% in 2004. There can be no
assurance that such customers or distributors, or any other
customers, will continue to place orders with us in the future
at the same levels as in prior periods. See Item 3.
Key Information Risk Factors Risks
Related to Our Operations Disruptions in our
relationships with any one of our key customers could adversely
affect our results of operations.
Sales, Marketing and Distribution
We operate regional sales organizations in Europe, North
America, Asia Pacific, Greater China, Japan, and Emerging
Markets, which include Latin America, the Middle East and
Africa, Europe (non-EU and non-EFTA),
32
Russia and India. For a breakdown of net revenues by product
segment and geographic region for each of the three years ended
December 31, 2006, see Item 5. Operating and
Financial Review and Prospects Results of
Operations Segment Information.
The European region is divided into seven business units:
automotive, consumer and computers, Smartcard, telecom, EMS,
industrial, 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 Smartcard (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 2006, sales and marketing
segments were managed from our regional sales headquarters in
Singapore and organized into nine segments (computer and
peripheral, automotive, industrial/computer/ MPA, home
entertainment, communications and mobile multimedia, display,
Smartcard and security, distribution and EMS) with three
transversal support organizations (business management, field
quality and communications). We have sales offices in Korea,
Malaysia, Thailand and Australia. The Singapore sales
organization provides central marketing, customer service,
technical support, logistics, an application laboratory and
design services for the entire region. In addition, there is a
design center in Korea.
On January 1, 2006, we created a new sales region,
Greater China, which encompasses China, Taiwan and
Hong Kong. This new sales region is dedicated to sales, design
and support resources and is aimed at expanding on our many
years of successful participation in this quickly growing
market, not only with transnational customers that have
transferred their manufacturing to China, but also with domestic
customers. This market is expected to grow significantly in the
next few years according to industry analysts. In 2006, we grew
our sales in Greater China by 16% and industry analysts
estimated that we were one of the top five semiconductor
suppliers in China.
In Japan, the large majority of our sales have historically been
made through distributors, as is typical for foreign suppliers
to the Japanese market. However, we are now seeking to work more
directly with our major customers to address their requirements.
We provide marketing and technical support services to customers
through sales offices in Tokyo and Osaka. In addition, we have
established a 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. In 2006, we implemented
changes in our organization for Japan and are targeting, by
expanding our sales design and support resources, to improve our
coverage of this significant market for the products we serve.
In 2006, our sales grew by more than 30% in Japan, while the
Japanese market grew only 5%.
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.
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
33
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, incorporate our products into the
application-specific 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.
We are market driven in our research and development and focused
on leading-edge products and technologies developed 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 process technologies research and development
activities are managed by our new FTM organization.
In 2005, we reallocated approximately 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. In addition, we
focus on our key technology and product programs that set a
clear roadmap with defined milestones and that are reviewed at
least once every quarter by our Executive Committee.
We invest in a variety of research and development projects
ranging from long-term advanced research 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 digital
consumer, wireless communications and networking, computer
peripherals, Smartcards and car multimedia, among others.
We continue to make significant investments in research and
development, while reducing these investments as a percentage of
revenues. In 2006, we spent $1,667 million on research and
development, which represented approximately a 2% increase from
$1,630 million in 2005, while 2005 spending represented a
6% increase from $1,532 million in 2004. The table below
sets forth information with respect to our research and
development spending since 2004. Our reported research and
development expenses are mainly in product design, technology
and development and do not include marketing and 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, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Expenditures
|
|
$ |
1,667 |
|
|
$ |
1,630 |
|
|
$ |
1,532 |
|
As a percentage of net revenues
|
|
|
16.9 |
% |
|
|
18.3 |
% |
|
|
17.5 |
% |
Approximately 86% of our research and development expenses in
2006 were incurred in Europe, primarily in France and Italy. See
Public Funding below. As of
December 31, 2006, we employed approximately 10,300
employees in research and development activities worldwide.
34
We devote significant effort to R&D because semiconductor
manufacturers face immense pressure to be the first to make
breakthroughs that can be leveraged into competitive advantages;
new developments in semiconductor technology can make end
products significantly cheaper, smaller, faster 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 EAD
software, but also cell libraries that allow access to our rich
IP portfolio and a demonstrator product suitable for subsequent
commercialization. In this way, when a new process is delivered
to our product segments or made available to external customers,
they are more able to develop commercial products immediately.
Our R&D activities are conducted on a worldwide scale and
focus on 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 (Catania), France (Grenoble, Tours and
Rousset), the United States (Phoenix, Carrollton, and
San Diego), Canada (Ottawa), the United Kingdom (Bristol
and Edinburgh), Switzerland (Geneva), India (Noida and
Bangalore), China (Beijing, Shenzhen and Shanghai) and Singapore.
In Crolles we are cooperating through 2007 with NXP
Semiconductors and Freescale Semiconductor as part of the
Crolles2 alliance to jointly develop sub-micron CMOS logic
processes 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 smaller
technologies. 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 had been set
through December 31, 2007 and on January 12, 2007 NXP
Semiconductors informed us that they would cease participation
in the alliance at year end. Freescale Semiconductor has also
notified us that the Crolles2 alliance will terminate as of such
date. For our own core process technology development below
45-nm, we intend to
work with an industry leader, and are currently in negotiations
with potential partners. We intend, however, to continue to
develop state-of-the-art derivative technologies (defined as RF
CMOS, Power CMOS and CMOS Imaging) at Crolles2.
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 commercially implement them on satisfactory
terms, or that we will be able to successfully enter into new
alliances for the development of core CMOS technologies on
satisfactory terms beyond 2007, or that we will be able to find
new partners to pursue advanced technology developments in
Crolles2, upon the termination of our Crolles2 Agreement. 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, or failure to
find new partners in such alliances, in developing new process
technologies in line with market requirements.
Our 200-mm central R&D facility in Agrate (Italy)
(R2) is focused on the development of new generation
Flash memories from which other nonvolatile memory products are
derived: EEPROM, EPROM/ OTP, Smartcards and memory embedded
ASIC. We are currently developing new products for both NOR and
NAND in advanced technologies, with a strong focus on 2-bit per
cell technologies.
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. As part of the recently announced plans to
separate the activities of our Flash Memories Group, the
activities in Agrate will be split between those which will
remain with us and those attributed to the Flash Memories Group.
There is no assurance that we will be successful in implementing
such reorganization or enjoy the expected benefits.
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
35
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 from 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 Smartcards, 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 world-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 microarray for DNA amplification
and detection.
The Application Specific Discretes
(ASDtm)
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 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
STripFETTM
MOSFET families.
Our other specialized divisional R&D centers are located in
Grenoble (packaging R&D, IP center), and Rousset (Smartcard
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
Smartcard SoC, we have centers in Prague and Shanghai.
36
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
reconfigurable 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
3G base-stations. |
37
Property, Plants and Equipment
We currently operate 15 (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)
|
|
Application-specific 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
|
|
Application-specific products and microcontrollers |
|
Fab: 200-mm CMOS, BiCMOS, BCD |
Agrate, Italy
|
|
Nonvolatile memories, |
|
Fab 1: 200-mm BCD, nonvolatile |
|
|
microcontrollers and application- |
|
memories, MEMS |
|
|
specific products |
|
Fab 2: 200-mm Flash, embedded Flash, research and development on
nonvolatile memories and BCD technologies |
Rousset, France
|
|
Microcontrollers, nonvolatile |
|
Fab 1: 150-mm CMOS, Smartcard |
|
|
memories and Smartcard ICs and |
|
(phase-out to be completed in early |
|
|
application-specific products |
|
2007) |
|
|
|
|
Fab 2: 200-mm CMOS, Smartcard, embedded Flash |
Catania, Italy
|
|
Power transistors, Smart Power |
|
Fabs 1/2: 150-mm Power metal-on |
|
|
ICs and nonvolatile memories |
|
silicon oxide semiconductor process technology
(MOS),VIPpowertm,
MO-3 and Pilot Line RF |
|
|
|
|
Fab 3: 200-mm Flash, Smartcard, EEPROM 300-mm building
constructed but not fully facilitized and equipped |
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
|
|
Microcontrollers, power transistors, commodity products,
nonvolatile memories, and application-specific products |
|
Fab 1: 125-mm, power MOS, bipolar transistor, bipolar ICs,
standard linear
Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smartcard,
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
|
|
Application-specific 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 |
|
|
38
|
|
(1) |
Operated jointly with NXP Semiconductors and Freescale
Semiconductor. The agreement will terminate at the end of 2007. |
|
(2) |
Jointly operated with SHIC, a subsidiary of Shenzhen Electronics
Group. |
As of December 31, 2006, 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
280,000 square meters of back-end facilities.
At the end of 2006, our front-end facilities had total capacity
of approximately 125,000 200-mm equivalent wafer starts per
week. The number of wafer starts per week varies from facility
to facility and from period to period as a result of changes in
product mix. We have seven 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, 2006; as of
the same date, fabs (in Rousset, France and in Singapore) have
approximately two-thirds of the ultimate capacity installed. Our
latest 200-mm line in Agrate, Italy primarily planned for MEMS
products was still in the
start-up phase on
December 31, 2006.
We, along with our partners NXP Semiconductors and Freescale
Semiconductor, 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 2006, the pilot line produced
approximately 2,500 wafers per week.
At the end of 2006, the building shell for our future 300-mm
wafer volume manufacturing fabrication facility in Catania,
Italy and the first phase of facilitization were completed. In
December 2006, we received confirmation from the Italian
Government that the conditions concerning investment and
employment linked to the grant of subsidies for the
construction, facilitization and equipment of our new M6
facility could be met during the period 2006 to 2009, instead of
the original period expiring in 2006. Because of the location of
this new 300-mm facility as well as other 200-mm and 150-mm
facilities in southern Italy (Catania, Sicily), we face the risk
that an earthquake could damage such facilities. 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 a portion of total
manufacturing volumes to external suppliers. We have recently
announced that our goal is to reduce our capital investment
spending to sales ratio from above 20% in the past several years
to a target of 12%, due to the change in the structural growth
of the semiconductor market which has moved from double to
single digit over the last ten years. The reduction in our
capital investments is also designed to reduce our dependence on
economic cycles which affects the loading of our fabs and to
decrease the burden of depreciation on our financial performance
while optimizing opportunities between internal and external
front-end production.
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 finer 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, 2006, we had $467 million in
outstanding commitments for purchases of equipment for delivery
in 2007. The most significant of our 2007 capital expenditure
projects are expected to be: for the front-end facilities,
(i) in Agrate (Italy), related to the upgrading of our
200-mm pilot line, the
ramp-up of the 200-mm
line for MEMS and the expansion of capacity to our 200-mm fab;
(ii) the upgrading to finer geometry technologies for our
200-mm plant in Rousset (France); (iii) the upgrading of
our 200-mm plant in Singapore; and (iv) for the back-end
facilities, the capital expenditures will be mainly dedicated to
the capacity expansion in our plants in Shenzhen (China) and
Muar (Malaysia) and capacity upgrade in Malta and Toa Payoh
(Singapore). 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 2007 capital expenditures to be
approximately $1.2 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.
39
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 19 to the Consolidated Financial
Statements. In 2006, we were still incurring charges for
impairment, restructuring and other closure costs related to the
ongoing plans, which included the closing of the Casteletto,
Italy production facility and concentrating EWS activities in
Singapore. These actions were largely completed at
December 31, 2006; the total amount of these charges in
2006 was $77 million.
Through the period ended December 31, 2006, we have
incurred $316 million of the total expected of
approximately $330 million in pre-tax charges associated
with the 150-mm restructuring plan, slightly down from the
original estimate of $350 million that was defined on
October 22, 2003, and which was 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.
40
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 close to
9,000 patent families (each patent family containing all patents
originating from the same invention). We filed 609 new patent
applications around the world in 2006.
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 assets 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
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 from competitors or other parties
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 third or fourth quarter generating the highest
amount of revenues due to electronic products purchased from
many of our targeted market segments for 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.
41
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
lower than we had entering 2004. During 2005, our backlog
registered a solid increase. We entered 2006, with a backlog
higher than we had entering 2005, while, due to a more difficult
industry environment, we are entering 2007 with an order backlog
that is lower than what we had entering 2006.
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.
The primary international semiconductor companies that compete
with us include Analog Devices, Broadcom, IBM, Infineon
Technologies, Intel, International Rectifier, Fairchild
Semiconductor, Freescale Semiconductor, Linear Technology, LSI
Logic, Marvell Technology Group, Maxim Integrated Products,
Microchip Technology, National Semiconductor, Nippon Electric
Company, ON Semiconductor, NXP 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 subsidiaries. With the
exception of our subsidiaries in Shenzhen, China, in which we
own 60% of the shares and voting rights; Hynix, ST (China), a
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.
42
The following list includes our principal subsidiaries and
equity investments and the percentage of ownership we held as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership | |
Legal Seat |
|
Name |
|
(Direct or Indirect) | |
|
|
|
|
| |
Australia Sydney
|
|
STMicroelectronics PTY Ltd |
|
|
100 |
|
Belgium Zaventem
|
|
STMicroelectronics Belgium N.V. |
|
|
100 |
|
Belgium Zaventem
|
|
Proton World International N.V. |
|
|
100 |
|
Brazil Sao Paolo
|
|
STMicroelectronics Ltda |
|
|
100 |
|
Brazil Sao Paulo
|
|
Incard do Brazil Ltda |
|
|
50 |
|
Canada Ottawa
|
|
STMicroelectronics (Canada), Inc. |
|
|
100 |
|
China Shenzhen
|
|
Shenzhen STS Microelectronics Co. Ltd |
|
|
60 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Co. Ltd |
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Manufacturing Co. Ltd |
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) R&D Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) R&D Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
Shanghai Blue Media Co. Ltd |
|
|
65 |
|
China Shanghai
|
|
STMicroelectronics (China) Investment Co. Ltd |
|
|
100 |
|
China Jiangsu(1)
|
|
Hynix-ST Semiconductor Ltd |
|
|
33 |
|
China Beijing
|
|
STMicroelectronics (Beijing) R&D Co. Ltd |
|
|
100 |
|
Czech Republic Prague
|
|
STMicroelectronics Design and Application s.r.o. |
|
|
100 |
|
Finland Lohja
|
|
STMicroelectronics OY |
|
|
100 |
|
France Crolles
|
|
STMicroelectronics (Crolles 2) SAS |
|
|
100 |
|
France Montrouge
|
|
STMicroelectronics S.A. |
|
|
100 |
|
France Rousset
|
|
STMicroelectronics (Rousset) SAS |
|
|
100 |
|
France Tours
|
|
STMicroelectronics (Tours) SAS |
|
|
100 |
|
France Grenoble
|
|
STMicroelectronics (Grenoble) SAS |
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics GmbH |
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics Design and Application GmbH |
|
|
100 |
|
Holland Amsterdam
|
|
STMicroelectronics Finance B.V. |
|
|
100 |
|
Hong Kong Hong Kong
|
|
STMicroelectronics LTD |
|
|
100 |
|
India Noida
|
|
STMicroelectronics Pvt Ltd |
|
|
100 |
|
Israel Netanya
|
|
STMicroelectronics Ltd |
|
|
100 |
|
Italy Catania
|
|
CO.RI.M.ME. |
|
|
100 |
|
Italy Aosta
|
|
DORA S.p.a. |
|
|
100 |
|
Italy Agrate Brianza
|
|
ST Incard S.r.l. |
|
|
100 |
|
Italy Naples
|
|
STMicroelectronics Services S.r.l. |
|
|
100 |
|
Italy Agrate Brianza
|
|
STMicroelectronics S.r.l. |
|
|
100 |
|
Italy Caivano(1)
|
|
INGAM Srl |
|
|
20 |
|
Japan Tokyo
|
|
STMicroelectronics KK |
|
|
100 |
|
Malaysia Kuala Lumpur
|
|
STMicroelectronics Marketing SDN BHD |
|
|
100 |
|
Malaysia Muar
|
|
STMicroelectronics SDN BHD |
|
|
100 |
|
Malta Kirkop
|
|
STMicroelectronics Ltd |
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Marketing, S. de R.L. de C.V. |
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Design and Applications, S. de R.L. de C.V. |
|
|
100 |
|
Morocco Rabat
|
|
Electronic Holding S.A. |
|
|
100 |
|
Morocco Casablanca
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Singapore Ang Mo Kio
|
|
STMicroelectronics ASIA PACIFIC Pte Ltd |
|
|
100 |
|
Singapore Ang Mo Kio
|
|
STMicroelectronics Pte Ltd |
|
|
100 |
|
Spain Madrid
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Sweden Kista
|
|
STMicroelectronics A.B. |
|
|
100 |
|
Switzerland Geneva
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Switzerland Geneva
|
|
INCARD SA |
|
|
100 |
|
Switzerland Geneva
|
|
INCARD Sales and Marketing SA |
|
|
100 |
|
Turkey Istanbul
|
|
STMicroelectronics Elektronik Arastirma ve Gelistirme Anonim
Sirketi |
|
|
100 |
|
United Kingdom Marlow
|
|
STMicroelecrtonics Limited |
|
|
100 |
|
United Kingdom Marlow
|
|
STMicroelectronics (Research & Development) Limited |
|
|
100 |
|
United Kingdom Bristol
|
|
Inmos Limited |
|
|
100 |
|
United Kingdom Reading
|
|
Synad Technologies Limited |
|
|
100 |
|
United States Carrollton
|
|
STMicroelectronics Inc. |
|
|
100 |
|
United States Wilmington
|
|
STMicroelectronics (North America) Holding, Inc. |
|
|
100 |
|
United States Wilsonville
|
|
The Portland Group, Inc. |
|
|
100 |
|
43
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.
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.
Some of our government funding contracts for research and
development involve advance payments that 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.
On April 9, 2002, the EU approved a grant to us by the
Italian Government of
542.3 million
(Decision N844/2001), representing approximately 26.25% of the
total cost (estimated at
2,066 million)
(the M6 Grant) for the building, facilitization and
equipment of a new 300-mm manufacturing facility in Catania M6
capable of producing approximately 5,000 wafers per week in 2006
for NOR and other nonvolatile memory products (the M6
Plant). The construction of the M6 Plant has not proceeded
as planned. In 2006, the Italian Government informed the EU
Commission about a proposed modification to the conditions for
the M6 Grant, as authorized on April 9, 2002. In a decision
on December 6, 2006 sent to the Italian Foreign Minister,
the EU Commission, according to the proposal made by the Italian
government, accepted to modify the conditions for the M6 Grant.
In particular, the EU Commission accepted the proposal of the
Italian government to provide for an extension of the authorized
time period for the completion of the planned investment and to
allocate, out of the
542.3 million
grants originally authorized,
446 million
for the completion of the M6 Plant if we made a further
investment of
1,700 million
between January 1, 2006 through the end of 2009. The
446 million
M6 Grant is conditional upon the conclusion of a Contratto
di Programma providing, inter alia, for (i) the
creation of a minimum number of new jobs, (ii) the fixed
assets remaining at least five years after the completion of the
44
M6 Plant, (iii) at least 31.25% of the total of
1,700 million
investment for the M6 Plant being either in the form of
equity or loan, (iv) an annual report on work progress
being submitted to the Italian authorities and the
EU Commission, and (v) a general verification of the
consistency of the project. For the period prior to
December 31, 2006, the Commission, upon the proposal of the
Italian government, considered that we would have been entitled
to the remaining
96 million
grant (out of the total
542.3 million
originally granted) in the form of a tax credit if we had made a
total cumulated investment of
366 million
as of such date. As of December 31, 2006, we have invested
a cumulative amount of
298 million
instead of
366 million
and recorded a cumulative amount of tax credit of
78 million
out of the
96 million
to which we could have been entitled.
There is no assurance that the Contratto di Programma
will be concluded at acceptable conditions to both the
Italian authorities and us, and that, if concluded, such
contract will be approved by the EU Commission if the
stated conditions are not consistent with prior decisions by the
EU Commission concerning such grants. Failure to receive
the grants as anticipated may adversely impair our expected
results of operations linked to the equipment and operation of
the M6 Plant.
In France, support for microelectronics is provided to over
30 companies with activities in the semiconductor industry.
The amount of support under French programs is decided annually
and subject to budget appropriation.
In 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 18 to our
Consolidated Financial Statements. Such funding has totaled
$54 million, $76 million and $84 million in the
years 2006, 2005 and 2004, respectively.
Government support for capital expenditures funding has totaled
$15 million, $38 million and $46 million in the
years 2006, 2005 and 2004, 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
$54 million, $66 million and $74 million in 2006,
2005 and 2004, respectively.
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 2006, 2005 and 2004, we had approximately
$125 million, $120 million and $156 million,
respectively, of indebtedness outstanding under state-assisted
financing programs at an average interest cost of 0.9%, 1.0% and
1.0%, 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
45
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, tracking
equipment, strippers, chemo-mechanical polishing equipment,
cleaners, inspection equipment, etchers, physical and chemical
vapor-deposition equipment, implanters, furnaces, testers,
probers and other specialized equipment. The manufacturing tools
that we use in the back-end process include bonders, burn-in
ovens, testers and other specialized equipment. The quality and
technology of equipment used in the IC manufacturing process
defines the limits of our technology. Demand for increasingly
smaller chip structures means that semiconductor producers must
quickly incorporate the latest advances in process technology to
remain competitive. Advances in process technology cannot be
brought about without commensurate advances in equipment
technology, and equipment costs tend to increase as the
equipment becomes more sophisticated.
Our manufacturing processes use many raw materials, including
silicon wafers, lead frames, mold compound, ceramic packages and
chemicals and gases. The prices of many of these raw materials
are volatile. We obtain our raw materials and supplies from
diverse sources on a
just-in-time basis.
Although supplies for the raw materials used by us are currently
adequate, shortages could occur in various essential materials
due to interruption of supply or increased demand in the
industry. See Item 3. Key Information
Risk Factors Risks Related to Our
Operations Because we depend on a limited number of
suppliers for raw materials and certain equipment, we may
experience supply disruptions if suppliers interrupt supply 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 Semiconductor for the
co-development and manufacturing of NAND products pursuant to
which Hynix Semiconductor from Korea is supplying the
co-developed NAND products to us. We have also set up a joint
venture in China which has built and operates a memory
manufacturing facility in Wuxi City, China and expect to receive
an amount of wafers produced at this facility at competitive
conditions and commensurate with our 33% equity interest in the
joint venture.
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. As a company, we have been certified to be in
compliance with the quality standard ISO9001:2000 and with the
technical specification ISO/TS16949:2002. In addition, all 15 of
our manufacturing facilities have been certified to conform to
the environmental standard ISO14001, to the Eco Management and
Audit Scheme (EMAS) and to the Health and Safety standard
OHSAS18001.
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
46
transposed by the EU Member States into national legislation by
August 13, 2004. In France, Directives 2002/95/EC and
2002/96/ EC have been implemented by a decree dated
July 20, 2005 and five ministerial orders published in
November 2005, December 2005 and March 2006. The French scheme
for the recovery and recycling of WEEE was officially launched
on November 15, 2006.
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
quotes are still being discussed between the French government
and the European Commission, but we intend to proactively comply
with these regulations. In the United States, we participated in
the first phase of the Chicago Climate Exchange program, a
voluntary greenhouse gas trading program whose members commit to
reduce emissions, for the period 2003-2006 and we intend to
continue our participation in the second phase for the period
2007-2010. We have also implemented voluntary reforestation
projects in several countries in order to sequester additional
carbon dioxide (CO(2)) emissions.
Furthermore, Regulation 1907/2006 of December 18, 2006
concerning the registration, evaluation, authorization and
restriction of chemicals (REACH) has been adopted
and will enter into force on June 1, 2007. We intend to
proactively implement such new legislation, in line with our
commitment toward environmental protection.
The implementation of any such legislation could adversely
affect our manufacturing costs or product sales by requiring us
to acquire costly equipment or materials, or to incur other
significant expenses in adapting our manufacturing processes or
waste and emission disposal processes. However, we are currently
unable to evaluate such specific expenses and therefore have no
specific reserves for environmental risks. Furthermore,
environmental claims or our failure to comply with present or
future regulations could result in the assessment of damages or
imposition of fines against us, suspension of production or a
cessation of operations and, as with other companies engaged in
similar activities, any failure by us to control the use of, or
adequately restrict the discharge of hazardous substances could
subject us to future liabilities. See Item 3. Key
Information Risk Factors Risks Related
to Our Operations Some of our production processes
and materials are environmentally sensitive, which could 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.
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 22% in 2006.
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 $45 billion in 1988 to $247.7 billion
in 2006 (growing at a compound annual growth rate of
approximately 9.9%). In 2005, the TAM increased by approximately
7% and in 2006 by approximately 9%. On a sequential,
quarter-by-quarter basis in 2006 (including actuators), the TAM
decreased by 1.3% in the first quarter over the fourth quarter
2005, while in the second quarter it increased by 0.4% over the
first quarter, it increased by 7.9% in the third quarter over
the second quarter, and increased by 1.9% 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
$35 billion in 1988 to $164.5 billion in 2006, growing
at a
47
compound annual rate of approximately 9%. The SAM increased by
approximately 8% in 2006 compared to 2005. In 2006,
approximately 18% of all semiconductors were shipped to the
Americas, 16% to Europe, 19% to Japan, and 47% to the Asia
Pacific region.
The following table sets forth information with respect to
worldwide semiconductor sales by type of semiconductor and
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Semiconductor Sales(1) | |
|
Compound Annual Growth Rates(2) | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
1998 | |
|
1988 | |
|
05-06 | |
|
04-05 | |
|
03-04 | |
|
88-06 | |
|
88-98 | |
|
98-03 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In billions) | |
|
(Expressed as percentages) | |
Integrated Circuits and Sensors
|
|
$ |
214.8 |
|
|
$ |
197.3 |
|
|
$ |
183.5 |
|
|
$ |
143.5 |
|
|
$ |
109.1 |
|
|
$ |
35.9 |
|
|
|
8.9 |
% |
|
|
7.5 |
% |
|
|
27.9 |
% |
|
|
10.5 |
% |
|
|
11.8 |
% |
|
|
5.6 |
% |
Analog, Sensors and Actuators
|
|
|
42.3 |
|
|
|
36.5 |
|
|
|
36.1 |
|
|
|
30.4 |
|
|
|
19.1 |
|
|
|
7.2 |
|
|
|
16.0 |
|
|
|
0.9 |
|
|
|
19.0 |
|
|
|
10.3 |
|
|
|
10.2 |
|
|
|
9.7 |
|
Digital Logic
|
|
|
114.1 |
|
|
|
112.4 |
|
|
|
100.3 |
|
|
|
80.7 |
|
|
|
67.0 |
|
|
|
17.8 |
|
|
|
1.5 |
|
|
|
12.1 |
|
|
|
24.3 |
|
|
|
10.9 |
|
|
|
14.2 |
|
|
|
3.8 |
|
Memory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DRAM
|
|
|
33.8 |
|
|
|
25.6 |
|
|
|
26.8 |
|
|
|
16.7 |
|
|
|
14.0 |
|
|
|
6.3 |
|
|
|
32.0 |
|
|
|
(4.7 |
) |
|
|
60.9 |
|
|
|
9.8 |
|
|
|
8.3 |
|
|
|
3.6 |
|
|
Others
|
|
|
24.7 |
|
|
|
22.9 |
|
|
|
20.3 |
|
|
|
15.8 |
|
|
|
9.0 |
|
|
|
4.6 |
|
|
|
7.7 |
|
|
|
13.0 |
|
|
|
28.3 |
|
|
|
9.8 |
|
|
|
6.9 |
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Memory
|
|
|
58.5 |
|
|
|
48.5 |
|
|
|
47.1 |
|
|
|
32.5 |
|
|
|
23.0 |
|
|
|
10.9 |
|
|
|
20.5 |
|
|
|
2.9 |
|
|
|
45.0 |
|
|
|
9.8 |
|
|
|
7.7 |
|
|
|
7.2 |
|
Total Digital
|
|
|
172.6 |
|
|
|
160.9 |
|
|
|
147.4 |
|
|
|
113.2 |
|
|
|
90.0 |
|
|
|
28.7 |
|
|
|
7.3 |
|
|
|
9.1 |
|
|
|
30.3 |
|
|
|
10.5 |
|
|
|
12.1 |
|
|
|
4.7 |
|
Discrete
|
|
|
16.6 |
|
|
|
15.2 |
|
|
|
15.8 |
|
|
|
13.3 |
|
|
|
11.9 |
|
|
|
7.0 |
|
|
|
8.8 |
|
|
|
(3.3 |
) |
|
|
18.1 |
|
|
|
4.9 |
|
|
|
5.5 |
|
|
|
2.3 |
|
Optoelectronics
|
|
|
16.3 |
|
|
|
14.9 |
|
|
|
13.7 |
|
|
|
9.5 |
|
|
|
4.6 |
|
|
|
2.1 |
|
|
|
9.3 |
|
|
|
8.6 |
|
|
|
43.8 |
|
|
|
12.0 |
|
|
|
8.1 |
|
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAM
|
|
$ |
247.7 |
|
|
$ |
227.5 |
|
|
$ |
213.0 |
|
|
$ |
166.4 |
|
|
$ |
125.6 |
|
|
$ |
45.0 |
|
|
|
8.9 |
% |
|
|
6.8 |
% |
|
|
28.0 |
% |
|
|
9.9 |
%(3) |
|
|
10.8 |
% |
|
|
5.8 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
39.9 |
|
|
|
39.3 |
|
|
|
39.4 |
|
|
|
32.3 |
|
|
|
29.4 |
|
|
|
8.1 |
|
|
|
1.6 |
|
|
|
(0.4 |
) |
|
|
22.0 |
|
|
|
9.3 |
|
|
|
13.8 |
|
|
|
1.9 |
|
Americas
|
|
|
44.9 |
|
|
|
40.7 |
|
|
|
39.1 |
|
|
|
32.3 |
|
|
|
41.4 |
|
|
|
13.4 |
|
|
|
10.3 |
|
|
|
4.3 |
|
|
|
20.8 |
|
|
|
6.9 |
|
|
|
11.9 |
|
|
|
(4.8 |
) |
Asia Pacific
|
|
|
116.5 |
|
|
|
103.4 |
|
|
|
88.8 |
|
|
|
62.8 |
|
|
|
28.9 |
|
|
|
5.4 |
|
|
|
12.7 |
|
|
|
16.5 |
|
|
|
41.3 |
|
|
|
18.6 |
|
|
|
18.3 |
|
|
|
16.8 |
|
Japan
|
|
|
46.4 |
|
|
|
44.1 |
|
|
|
45.8 |
|
|
|
38.9 |
|
|
|
25.9 |
|
|
|
18.1 |
|
|
|
5.3 |
|
|
|
(3.7 |
) |
|
|
17.5 |
|
|
|
5.4 |
|
|
|
3.7 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAM
|
|
$ |
247.7 |
|
|
$ |
227.5 |
|
|
$ |
213.0 |
|
|
$ |
166.4 |
|
|
$ |
125.6 |
|
|
$ |
45.0 |
|
|
|
8.9 |
% |
|
|
6.8 |
% |
|
|
28.0 |
% |
|
|
9.9 |
%(3) |
|
|
10.8 |
% |
|
|
5.8 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Source: WSTS. |
|
(2) |
Calculated using end points of the periods specified. |
|
(3) |
Calculated on a comparable basis, without information with
respect to actuators as they were not included in the indicator
before 2003. |
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.
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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
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chip of silicon to form a more complex circuit).
Compared to the market for ICs, there is typically less
differentiation among discrete products supplied by different
semiconductor manufacturers. Also, discrete markets have
generally grown at slower, but more stable, rates than IC
markets.
Semiconductors may also be classified as either standard
components, ASSPs or ASICs. Standard components are used for a
broad range of applications, while ASSPs and ASICs are designed
to perform specific functions in specific applications.
The two basic functional technologies for semiconductor products
are analog and digital. Mixed-signal products combine both
analog and digital functionality. Analog devices monitor,
condition, amplify or transform analog signals, which are
signals that vary continuously over a wide range of values.
Analog/digital (or mixed-signal) ICs combine analog
and digital devices on a single chip to process both analog
signals and digital data. System designers are increasingly
demanding system-level integration in which complete electronic
systems containing both analog and digital functions are
integrated on a single IC.
Digital devices are divided into two major types: memory
products and logic devices. Memory products, which are used in
electronic systems to store data and program instructions, are
classified as either volatile memories (which lose their data
content when power to the device is switched off) or nonvolatile
memories (which retain their data content without the need for
continuous power).
The primary volatile memory devices are DRAMs, which accounted
for approximately 58% of semiconductor memory sales in 2006, and
static RAMs (SRAMs), which accounted for
approximately 5% of semiconductor memory sales in 2006. 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 programming by exposure to ultraviolet light and can be
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 in-system, they are more flexible
than EPROMs and are therefore progressively replacing EPROMs in
many 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, because of their ability to store large
amounts of information, 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. They are used in a wide variety of consumer,
communications, automotive, industrial and computer products.
DSPs are parallel processors used for high complexity,
high-speed real-time computations in a wide variety of
applications.
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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.
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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 loading 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; other non-recurring special charges and stock-based
compensation 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;
provisions for specifically identified income tax exposures; and
evaluation of tax provisions. We base our estimates and
assumptions on historical experience and on various other
factors such as market trends and business plans that we believe
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities. While we regularly evaluate our
estimates and assumptions, our actual results may differ
materially and adversely from our estimates. To the extent there
are material differences between the actual results and these
estimates, our future results of operations could be
significantly affected.
We believe the following critical accounting policies require us
to make significant judgments and estimates in the preparation
of our Consolidated Financial Statements.
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Revenue recognition. Our policy is to recognize revenues
from sales of products to our customers when all of the
following conditions have been met: (a) persuasive evidence
of an arrangement exists; (b) delivery has occurred;
(c) the selling price is fixed or determinable; and
(d) collectibility is reasonably assured. This usually
occurs at the time of shipment. |
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Consistent with standard business practice in the semiconductor
industry, price protection is granted to distribution customers
on their existing inventory of our products to compensate them
for declines in market prices. The ultimate decision to
authorize a distributor refund remains fully within our control.
We accrue a provision for price protection based on a rolling
historical price trend computed on a monthly basis as a
percentage of gross distributor sales. This historical price
trend represents differences in recent months between the
invoiced price and the final price to the distributor, adjusted
if required, to accommodate a significant move in the current
market price. The short outstanding inventory time period,
visibility into the standard inventory product pricing (as
opposed to certain customized products) and long distributor
pricing history have enabled us to reliably estimate price
protection provisions at period-end. We record the accrued
amounts as a deduction of revenue at the time of the sale. If
market conditions differ from our assumptions, this could have
an impact on future periods; in particular, if market conditions
were to deteriorate, net revenues could be reduced due to higher
product returns and price reductions at the time these
adjustments occur. |
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Our customers occasionally return our products from time to time
for technical reasons. Our standard terms and conditions of sale
provide that if we determine that products are non-conforming,
we will repair or replace the non-conforming products, or issue
a credit or rebate of the purchase price. Quality returns are
not related to any technological obsolescence issues and are
identified shortly after sale in customer |
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quality control testing. Quality returns are always associated
with end-user customers, not with distribution channels. We
provide for such returns when they are considered as probable
and can be reasonably estimated. We record the accrued amounts
as a reduction of revenue. |
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Our insurance policies relating to product liability only cover
physical and other direct damages caused by defective products.
We do not carry insurance against immaterial, non-consequential
damages. We record a provision for warranty costs as a charge
against cost of sales based on historical trends of warranty
costs incurred as a percentage of sales which we have determined
to be a reasonable estimate of the probable losses to be
incurred for warranty claims in a period. Any potential warranty
claims are subject to our determination that we are at fault and
liable for damages, and such claims usually must be submitted
within a short period following the date of sale. This warranty
is given in lieu of all other warranties, conditions or terms
expressed or implied by statute or common law. Our contractual
terms and conditions typically limit our liability to the sales
value of the products which gave rise to the claims. |
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We maintain an allowance for doubtful accounts for potential
estimated losses resulting from our customers inability to
make required payments. We base our estimates on historical
collection trends and record a provision accordingly.
Furthermore, we are required to evaluate our customers
credit ratings from time to time and take an additional
provision for any specific account that we estimate as doubtful.
In 2006, we recorded specific provisions amounting to
$4 million related to the expected inability to fully
collect a certain customers receivables, in addition to
our standard provision of 1% of total receivables based on the
estimated historical collection trends. If we receive
information that the financial condition of our customers has
deteriorated, resulting in an impairment of their ability to
make payments, additional allowances could be required. |
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While the majority of our sales agreements contain standard
terms and conditions, we may, from time to time, enter into
agreements that contain multiple elements or non-standard terms
and conditions, which require revenue recognition judgments.
Where multiple elements exist in an arrangement, the arrangement
is allocated to the different elements based upon verifiable
objective evidence of the fair value of the elements, as
governed under Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
In 2006, we signed a $17 million licensing agreement which
included $10 million of upfront revenue recognition related
to the perpetual license granted and separate training and
consulting units that will be recognized as revenue as services
are provided. |
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Goodwill and purchased intangible assets. The purchase
method of accounting for acquisitions requires extensive use of
estimates and judgments to allocate the purchase price to the
fair value of the net tangible and intangible assets acquired,
including in-process research and development, which is expensed
immediately. Goodwill and intangible assets deemed to have
indefinite lives are not amortized but are instead subject to
annual impairment tests. The amounts and useful lives assigned
to other intangible assets impact future amortization. If the
assumptions and estimates used to allocate the purchase price
are not correct or if business conditions change, purchase price
adjustments or future asset impairment charges could be
required. At December 31, 2006, the value of goodwill in
our Consolidated Financial Statements amounted to
$223 million. |
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Impairment of goodwill. Goodwill recognized in business
combinations is not amortized and is instead subject to an
impairment test to be performed on an annual basis, or more
frequently if indicators of impairment exist, in order to assess
the recoverability of its carrying value. Goodwill subject to
potential impairment is tested at a reporting unit level, which
represents a component of an operating segment for which
discrete financial information is available and is subject to
regular review by segment management. This impairment test
determines whether the fair value of each reporting unit for
which goodwill is allocated is lower than the total carrying
amount of relevant net assets allocated to such reporting unit,
including its allocated goodwill. If lower, the implied fair
value of the reporting unit goodwill is then compared to the
carrying value of the goodwill and an impairment charge is
recognized for any excess. In determining the fair value of a
reporting unit, we usually estimate the expected discounted
future cash flows associated with the reporting unit.
Significant management judgments and estimates are used in
forecasting the future discounted cash flows including: the
applicable industrys sales volume forecast and selling
price evolution; the reporting units market penetration;
the market acceptance of certain new technologies and relevant
cost structure; the discount rates applied using a weighted
average cost of capital; and the perpetuity rates used in
calculating cash flow terminal values. Our evaluations are based
on financial plans updated with the latest available projections
of the semiconductor market evolution, our sales expectations
and our costs evaluation and are consistent with the plans and
estimates that we use to manage our business. It is possible,
however, that the plans and estimates used may be incorrect, and |
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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 2006, we recorded a
goodwill impairment charge of $6 million due to our
decision to discontinue developing products from our Tioga
Technologies Ltd. (Tioga) business acquisition. See
Note 7 to our Consolidated Financial Statements. |
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Intangible assets subject to amortization. Intangible
assets subject to amortization include the cost of technologies
and licenses purchased from third parties, internally developed
software which is capitalized and purchased software. Intangible
assets subject to amortization are reflected net of any
impairment losses. These are amortized over a period ranging
from three to seven years. The carrying value of intangible
assets subject to amortization is evaluated whenever changes in
circumstances indicate that the carrying amount 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 2006, we recorded an
impairment charge of $4 million due to the discontinuance
of product development related to our Tioga business
acquisition, which was determined to be without any alternative
use. See Note 8 to our Consolidated Financial Statements.
At December 31, 2006, the value of intangible assets in our
Consolidated Financial Statements subject to amortization
amounted to $211 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
the carrying value of 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. 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 |
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loss. In 2006, we recorded an impairment charge of
$7 million related to optimizing 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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Asset disposal. At December 31, 2006, we were
required to evaluate the likelihood of the announced
deconsolidation of our Flash memory business under Statement of
Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets
(FAS 144). Given the status of the project
at the closure date, we determined that the deconsolidation was
more likely than not to occur for accounting purposes, thus
triggering an impairment review for Flash memory activity. The
outcome of this test determined that no impairment was required
at December 31, 2006. |
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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 exiting any of our existing
activities. We recognize the fair value of a liability for costs
associated with exiting an activity when a probable liability
exists and it can be reasonably estimated. We record estimated
charges for non-voluntary termination benefit arrangements such
as severance and outplacement costs meeting the criteria for a
liability as described above. Given the significance 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 monitor and evaluate business
conditions on a regular basis. 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 2006, the
amount of restructuring charges and other related closure costs
amounted to $65 million before taxes. See Note 19 to
our Consolidated Financial Statements. |
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Share-based compensation. In December 2004, the FASB
issued revised Statement of Financial Accounting Standards
No. 123, Share-Based Payment
(FAS 123R), which requires companies to
expense employee share-based compensation for financial
reporting purposes. 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 were required to value our current and anticipated
future employee share-based compensation pursuant to a pricing
model, and then amortize that value against our reported
earnings over the vesting period in effect for those awards. Due
to this accounting treatment, 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 were 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 objective, the forfeitures and
the service period of our employees. As a result, we recorded in
2006 a total pre-tax charge of $13 million related to the
2005 stock-based compensation plan and are expecting a pre-tax
charge of approximately $2 million in each of the first two
quarters of 2007 and $1 million in each of the last two
quarters of 2007. The impact is further detailed in
Note 16.6 to our Consolidated Financial Statements.
Furthermore, on September 29, 2006 our Compensation
Committee gave its final approval of the 2006 stock-based
compensation plan which is contingent on Company performance
criteria. All performance criteria have been met; therefore, we
recorded for the 2006 stock-based compensation plan a pre-tax
charge of $15 million in 2006, of which $3 million was
capitalized in inventory, and are expecting a pre-tax charge of
approximately $15 million in the first quarter of 2007,
$9 million in the second quarter of 2007 and
$6 million in each of the last two quarters of 2007. |
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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. On the basis of this
assessment, at the end of 2006 we recorded a provision of
approximately $15 million in one of our tax jurisdictions.
As of December 31, 2006, 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, in our estimates of the valuation allowance, or a
change 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 received in the past a tax assessment from
the United States tax authorities, and accordingly we took a
provision at the moment the assessment was received. In the
second quarter of 2006, we received a favorable recommendation
from the United States tax authorities Appeals Team Case
Leader in relation to this tax assessment. This recommendation
was sent to the Joint Committee for Taxation for final ruling.
In December 2006, the Joint Committee for Taxation decided that
there was no tax liability for us and as a result we reversed
the entire $90 million provision we established to cover
these claims. See Note 24 to our Consolidated Financial
Statements. |
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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 we believe that 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
December 31, 2006, based on our assessment, we did not
record any provisions in our Consolidated Financial Statements
relating to those legal proceedings, because we had not
identified any risk of probable loss that is likely to arise out
of the proceedings. There can be no assurance, however, that we
will be successful in resolving these proceedings. If we are
unsuccessful, 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 pension schemes or in the above assumptions can
have an impact on our valuations. As of December 31, 2006,
the Company adopted Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment
of FASB Statements No. 87, 88, 106 and 132(R)
(FAS 158), which requires the Company to
account for the overfunded and underfunded status of defined
benefit and other post retirement plans in its consolidated
financial statements. As of |
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December 31, 2006, we had a total benefit obligation
estimated at $575 million, and total plan assets estimated
at $241 million resulting in an underfunded status of
$334 million, recorded in our balance sheet at
December 31, 2006. |
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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 we believe that 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 our provisions need to be
adjusted 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 that we need to change
our evaluation of a potential third party claim based on new
evidence or communications, this could have a material adverse
effect on our results of operations or financial condition at
the time it were to materialize. |
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 2006 ended on April 1,
2006. The second quarter of 2006 ended on July 1, 2006, and
the third quarter of 2006 ended on September 30, 2006. The
fourth quarter ended on December 31, 2006. Based on our
fiscal calendar, the distribution of our revenues and expenses
by quarter may be unbalanced due to a different number of days
in the various quarters of the fiscal year.
In 2006, the semiconductor market experienced a higher increase
in total sales compared to 2005, 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 by the World Semiconductor
Trade Statistics (WSTS), semiconductor industry
revenues increased year-over-year by approximately 9% for the
TAM and 8% for the SAM in 2006 to reach approximately
$248 billion and approximately $165 billion,
respectively. This increase was driven by unit demand while
average selling prices declined compared to 2005. In the fourth
quarter of 2006, the TAM and the SAM increased approximately 9%
and 4% year-over-year, respectively, while the TAM increased by
approximately 2% and the SAM decreased 1% sequentially.
Our 2006 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 11% to $9,854 million
compared to $8,882 million in 2005. Strong growth in
revenues was driven by double-digit increases in Wireless and
Industrial applications with mid-single digit contributions from
the Automotive, Consumer and Computer segments. Our 2006 sales
performance was above the TAM and the SAM growth rates.
With reference to the quarterly results, our fourth quarter 2006
revenues performance was below the TAM and flat with the SAM,
both on a year-over-year basis and on a sequential basis.
On a year-over-year basis, our fourth quarter 2006 revenues
increased by approximately 4% to $2,483 million compared to
$2,389 million in the fourth quarter of 2005, driven
primarily by Digital Consumer and Automotive segment
applications while we registered declines in Telecom and
Memories. On a year-over-year basis, the TAM and the SAM
registered increases of approximately 9% and 4%, respectively.
On a sequential basis, in the fourth quarter 2006, revenues
decreased approximately 1% mainly due to the overall weakness in
the Telecom sector. Our net revenues performance was at the low
end of our guidance, which indicated a sequential growth of
between -1% and +5%. Sequentially, the TAM registered an
increase of approximately 2% while the SAM registered a decrease
of 1%.
In 2006, our effective average U.S. dollar exchange rate
was 1.00 for
$1.24, which reflects the actual exchange rate levels and the
impact of certain hedging contracts, compared to our 2005
effective average
55
exchange rate of
1.00 for $1.28.
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.
On a total year basis, our gross margin increased from 34.2% in
2005 to 35.8% in 2006 due to overall improvements in volume,
manufacturing performances and product mix, which were partially
offset by the declining selling prices.
On a sequential basis, our gross margin increased from 36.0% to
36.3% in the fourth quarter 2006, due to improved manufacturing
efficiency and product mix, partially offset by the pricing
pressures and the unfavorable U.S. dollar exchange rate
impact. Our fourth quarter gross margin was within our guidance
that indicated a gross margin of approximately 37% plus or minus
one percentage point.
Our operating expenses combining selling, general and
administrative expenses and research and development were higher
in 2006 compared to 2005 due to higher spending in research and
development and the 2006 share-based compensation for our
employees and members and professionals of the Supervisory Board.
Our total impairment and restructuring charges for 2006 were
significantly lower compared to 2005 as our previously announced
restructuring plan costs were largely recognized in prior time
periods. Our manufacturing initiatives are now substantially
completed and were drivers of margin improvements in 2006.
The combined effect of the above mentioned factors and the other
operating items resulted in a quite favorable impact on our
operating income, that increased significantly from
$244 million in 2005 to $677 million in 2006. The
operating margin for 2006 improved over 400 basis points to
6.9%. This improvement was driven by higher sales volume, an
improved gross margin and a more favorable effective
U.S. dollar exchange rate. In the fourth quarter of 2006,
however, our operating income decreased both sequentially and on
a year-over-year basis as the result of an unfavorable industry
environment.
Our interest income significantly improved in 2006 mainly as the
result of rising interest rates on our available cash, which
significantly increased after the refinancing transactions in
the first quarter of 2006 and due to the continued generation of
positive net operating cash flow. Due to some favorable
adjustments in our tax position, our income tax for 2006
resulted in a benefit of $20 million.
In summary, our financial results for 2006 compared to the
results of 2005 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 a solid increase in our net
revenues over 2005; |
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continuous strong improvement of our manufacturing performance; |
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a more favorable effective exchange rate for the
U.S. dollar; |
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net interest income; |
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lower impairment, restructuring charges and other related
closure costs; and |
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income tax benefit. |
Our financial results in 2006 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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stock-based compensation charges related to 2005 and 2006
grants; and |
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higher amount of other expenses. |
In 2006, we continued to invest in upgrading and expanding our
manufacturing capacity. Total capital expenditures in 2006 were
$1,533 million, which were financed entirely by net cash
generated from operating activities. In fact, we generated
$666 million of net operating cash flow during the year.
Net operating cash flow is not a U.S. GAAP measure, as
further discussed in section Liquidity and
Capital Resources Liquidity Net
operating cash flow. At December 31, 2006, we had
cash, cash equivalents, marketable securities and short-term
deposits of $2,673 million. Total debt and bank overdrafts
were $2,130 million, of which $1,994 million were
long-term debt.
Looking at the fourth quarter and the near term environment, the
current market correction underway in some of the key
applications that we serve is more pronounced than forecasted.
Our wireless results, in particular, came in well below
historical seasonal patterns and were also negatively impacted
by product mix shift towards the low end, which put additional
pressure on our margins and operating performance in the
quarter. However, for the full year, we achieved double digit
year-over-year sales growth in a market that appears to be
growing in the high single digits. This is a clear signal that
the evolution of our product portfolio is delivering results
with higher
56
revenues, improved profitability, better leverage of our
research and development and capital investments, and expansion
of our market share.
During 2006, we made significant headway in delivering on our
most important business and strategic imperatives. Our product
portfolio continues to strengthen. We are driving a significant
reduction in our capital intensity. This is visible in our 2006
results, with our capital investments to sales ratio down to
15.6% from over 20% on average for 2004 and 2005. Further, we
have initiated a new mid-term target of 12% through a
combination of a less capital-intensive product portfolio,
increased usage of foundries for non-proprietary technologies
and optimization of our manufacturing facilities. As of
January 1, 2007, we have organized our NOR and NAND Flash
business into a stand-alone segment and are moving ahead on
creating a separate legal entity in connection with our
strategic repositioning of this business. In summary, we
achieved our primary objectives for 2006: gaining market share
while simultaneously improving financial performance in terms of
return on assets and cash flow.
Notwithstanding the current tougher environment as the market
works through inventory in selected applications in the first
half of 2007, we believe we are poised to make further important
progress on our ongoing key initiatives for sales expansion, new
product introduction and asset leverage, which will strengthen
our market opportunities and financial position.
As it is typical for the first quarter seasonality, we expect
our revenues for the first quarter of 2007 to decline from 2006
fourth quarter levels. Specifically, we expect sales to decrease
between 3% and 11% sequentially. This sales range, coupled with
our intention to control the absolute level of inventory, will
result in adverse fab loading conditions in the quarter, leading
to a gross margin of about 35%, plus or minus 1 percentage
point.
Our capital expenditures are currently budgeted to be
$1.2 billion for 2007, which is expected to further reduce
our capital expenditure to sales ratio from the previous
years level.
This guidance is based on an effective average U.S. dollar
exchange rate of approximately
1.00 for $1.29,
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.
As of January 1, 2006, we created 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.
As of January 1, 2006, we renamed the Micro, Linear and
Discrete Product Group (MLD) segment Micro, Power,
Analog Product Group (MPA) segment 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.
On January 26, 2006, we announced the appointment of
Mr. Jeffrey See as Corporate Vice President and General
Manager of our worldwide back-end operations. Effective
April 3, 2006, Mr. See took 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.
On February 20, 2006, we inaugurated our new design and
development facility in Greater Noida (India) and we announced
our plans to invest $30 million in local operations over
the next two years and to recruit 300 new engineers by the end
of 2006.
On February 23, 2006, we issued Zero Coupon Senior
Convertible Bonds due 2016 (2016 Convertible Bonds)
representing total gross proceeds of $974 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. The bonds are convertible into a maximum of
approximately 42 million of our underlying ordinary shares.
The conversion price at issuing date is $23.19, based on the
closing price of ordinary shares on the NYSE on
February 14, 2006, plus a 30% premium.
On March 13, 2006, we issued
500 million
Floating Rate Senior Bonds due 2013 in the Euro Debt Capital
Market (2013 Senior Bonds). These bonds will pay
interest quarterly at a rate equal to three-month Euribor plus
40 basis points.
57
On March 29, 2006, we announced our intention to further
expand our presence and support for the China market. In
addition to our joint venture with Hynix Semiconductor in Wuxi
and to supplement our existing plant in Shenzhen, we plan to
invest approximately $500 million to build our second
back-end plant in China, which is expected to start production
in the third quarter of 2008.
Following the decision by the Compensation Committee of our
Supervisory Board in April 2006, the number of shares granted
under our 2005 stock-based compensation plan will be a maximum
of approximately 2.7 million shares out of the maximum of
4.1 million non-vested shares granted to our employees and
CEO in 2005. In April 2006, the Compensation Committee of our
Supervisory Board determined that two out of the three
predetermined criteria linked to company performance had been
met.
At our annual general meeting of shareholders held in Amsterdam
on April 27, 2006, our shareholders approved the
following proposals of our Managing Board upon the
recommendation of our Supervisory Board:
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the Companys accounts, which were for the first time
reported in accordance with International Financial Reporting
Standards (IFRS); |
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a cash dividend of $0.12 per share, equal to last
years cash dividend distribution. The cash dividend was
distributed in May 2006. On May 22, 2006, our common shares
traded ex-dividend on the three stock exchanges on which they
are listed; |
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the reappointment of Mr. Doug Dunn for a new three-year
term until the 2009 annual general meeting of shareholders and
of Mr. Robert White for an additional one-year-term until
the 2007 annual general meeting of shareholders, as well as the
three-year term appointment of Mr. Didier Lamouche as a new
Supervisory Board member in replacement of Mr. Francis
Gavois whose mandate was up at this years annual
shareholders meeting; |
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the approval of the main principles of the 2006 stock-based
compensation plan for our employees and CEO. As part of such
plan and specifically as approved by the general meeting of
shareholders, our President and CEO will be entitled to receive
a maximum of 100,000 common shares; |
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the adoption of the compensation, including stock-based
compensation, for members of our Supervisory Board; and |
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the delegation of authority to our Supervisory Board for five
years to issue new shares, to grant rights, to subscribe for new
shares and to limit and/or exclude existing shareholders
pre-emptive rights. |
On June 20, 2006, we announced the appointment of two new
Corporate Vice Presidents. Mr. François Guibert,
Corporate Vice President, and formerly General Manager of our
Emerging Markets Region, was appointed to the position of
General Manager of our Asia Pacific region, effective
October 1, 2006. Mr. Guibert replaces Mr. Jean-Claude
Marquet, who retired in October. Succeeding
Mr. Guiberts position, Mr. Thierry Tingaud,
formerly Vice President Sales and Marketing Europe for
Telecommunications, was promoted to the position of Corporate
Vice President and General Manager of our Emerging Markets
Region, effective July 1, 2006.
On June 29, 2006, we sold to Sofinnova Capital V our 51%
interest in Accent, one of our subsidiaries based in Italy
specialized in hardware and software design and consulting
services for integrated circuit design and fabrication. We
recorded a net pre tax gain of $6 million relating to this
sale. We simultaneously entered into a license agreement with
Accent in which we granted them, for a total agreed lump sum
amount of $3 million, the right to use certain of our
specifically identified intellectual property currently used in
its business activities. In connection with this agreement, we
were granted warrants for 6,675 new shares of Accent. Such
warrants expire after 15 years and can only be exercised in
the event of a change of control or an initial public offering
of Accent above a predetermined value.
On August 7, 2006, as a result of almost all of the holders
of our 2013 Convertible Bonds exercising their August 4,
2006 put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds at a
conversion ratio of $985.09 per $1,000 aggregate principal
amount at issuance resulting in a cash disbursement of
$1,377 million.
On October 10, 2006, we, along with Hynix Semiconductor
officially inaugurated the new joint front-end
memory-manufacturing facility in Wuxi City, China. The facility
is currently producing DRAM memories and will begin production
of NAND Flash by the middle of 2007.
On November 27, 2006, our Supervisory Board approved
entering into an option agreement with an independent
foundation, Stichting Continuïteit ST, to replace a
substantially similar option agreement dated May 31, 1999,
as amended, between us and one of our shareholders, STH II
B.V. The new option agreement has
58
been entered into to reflect changes in Netherlands legal
requirements. It was not adopted in response to any hostile
takeover attempt.
Following the discovery in 2006 by our internal audit of a fraud
perpetrated by our former head of treasury operations, who
retired at the end of 2005, we filed a criminal complaint in
September 2006 with the prosecutor in Lugano, Switzerland, that
led to the arrest of our former treasurer. The criminal
proceeding is ongoing. Our Audit Committee appointed a U.S. law
firm last fall to conduct an independent investigation to
determine the nature of the fraud and whether the wrongdoing was
limited to our former treasurer. To date, based on this
investigation, which is substantially complete, and based on our
understanding of the available evidence from the criminal
proceeding, nothing has been brought to the attention of the
Audit Committee or the Company indicating that the fraud was
committed with the knowledge or involvement of any of our
current or former senior management team, or that such
transactions materially affected our financial statements for
the current or prior periods.
In an effort to better align our Company to meet the
requirements of the market, together with the pursuit of
strategic repositioning in Flash Memory, on December 13,
2006, we announced a reorganization of our product segment
groups effective as of January 1, 2007: the Application
Specific Groups, the Industrial and Multisegment Sector and the
Flash Memories Group. The Application Specific Groups include
the existing Automotive Products Group and Computer Peripherals
Group and the newly created Mobile, Multimedia &
Communications Group and Home Entertainment & Displays
Group. The Industrial and Multisegment Sector contain the
Microcontrollers, Memories & Smartcards Group and the
Analog, Power & MEMS Group. The Flash Memories Group
incorporates all Flash memory operations, including research and
development and product-related activities, front- and back-end
manufacturing, marketing and sales. In conjunction with this
realignment, we announced a number of new executive and
corporate vice presidents. These include Mr. Mario
Licciardello as the Corporate Vice President and General Manager
of the stand-alone Flash Memories Group; Mr. Carmelo Papa
was promoted to Executive Vice President leading the Industrial
and Multisegment Sector; Mr. Claude Dardanne as the new
Corporate Vice President leading the Microcontrollers,
Memories & Smartcards Group; Mr. Tommi Uhari was
promoted to Executive Vice President over Mobile,
Multimedia & Communications Group; and
Mr. Christos Lagomichos promoted to Corporate Vice
President for the Home Entertainment & Displays Group.
On January 16, 2007, we confirmed that the technology
development at Crolles will continue beyond 2007 despite the
announcement that NXP Semiconductors will withdraw from the
Crolles2 alliance at the end of 2007 and the joint technology
cooperation agreements with NXP Semiconductors and Freescale
Semiconductor will expire on December 31, 2007. The
Crolles2 alliance, in which we have partnered with NXP
Semiconductors and Freescale Semiconductor, will work together
to complete the program on 45-nm CMOS and manage the transition
throughout 2007.
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 divisions, which include 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 group
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 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 are
comprised of all of our major complex products related to
automotive applications; |
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the Memory Products Group (MPG) segment, comprised
of our memories and Smart Card businesses; and |
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the Micro, Power, Analog Product Group (MPA)
segment, comprised of discrete and standard products plus
standard microcontroller and industrial devices (including the
programmable systems memories |
59
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(PSM) division); this segment was previously known
as Micro, Linear and Discrete Product Group (MLD),
but no change has occurred in the segments perimeter or
organization. |
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 group segments, but on the basis of the semiconductor
business area. All these product group segments share common
research and development for process technology and
manufacturing capacity for most of their products.
We have restated our results in prior periods for illustrative
comparisons of our performance by product segment and by period.
The segment information of 2004 has been restated using the same
principles applied to the 2005 and 2006 years. 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 presentation for the 2004 year is representative of
2005 and 2006 years 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 group
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 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.
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Year Ended December 31, | |
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| |
|
|
2006 | |
|
2005 | |
|
2004 | |
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| |
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| |
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| |
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(In millions) | |
Net revenues by product group segment:
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|
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|
|
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|
Application Specific Product Group Segment (ASG)
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|
$ |
5,396 |
|
|
$ |
4,991 |
|
|
$ |
4,902 |
|
Memory Products Group Segment (MPG)
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|
|
2,137 |
|
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|
1,948 |
|
|
|
1,887 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
2,243 |
|
|
|
1,882 |
|
|
|
1,902 |
|
Others(1)
|
|
|
78 |
|
|
|
61 |
|
|
|
69 |
|
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|
|
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|
Total consolidated net revenues
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|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
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|
|
|
|
|
|
|
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|
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|
(1) |
Net revenues of Others include revenues from sales
of subsystems mainly and other products not allocated to product
group segments. |
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|
Year Ended December 31, | |
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| |
|
|
2006 | |
|
2005 | |
|
2004 | |
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| |
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| |
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| |
|
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(In millions) | |
Operating income (loss) by product group segment:
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|
|
|
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|
|
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|
Application Specific Product Group Segment (ASG)
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|
$ |
439 |
|
|
$ |
355 |
|
|
$ |
530 |
|
Memory Products Group Segment (MPG)
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|
34 |
|
|
|
(118 |
) |
|
|
42 |
|
Micro, Power, Analog Product Group Segment (MPA)
|
|
|
362 |
|
|
|
271 |
|
|
|
413 |
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|
|
|
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Total operating income of product group segments
|
|
|
835 |
|
|
|
508 |
|
|
|
985 |
|
Others(1)
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|
|
(158 |
) |
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|
(264 |
) |
|
|
(302 |
) |
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|
Total consolidated operating income
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|
$ |
677 |
|
|
$ |
244 |
|
|
$ |
683 |
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|
|
|
|
|
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|
|
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(1) |
Operating income (loss) of Others includes items
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 |
60
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other costs that are not allocated to the product group
segments, as well as operating earnings or losses of the
Subsystems and Other Products Group. Certain costs, mainly
R&D, formerly in the Others category, have been
allocated to the product group segments; comparable amounts
reported in this category have been reclassified accordingly in
the above table. |
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Year Ended | |
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|
December 31, | |
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| |
|
|
2006 | |
|
2005 | |
|
2004 | |
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|
| |
|
| |
|
| |
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|
(As a percentage of | |
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|
total net revenues) | |
Operating income (loss) by product group segment:
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Application Specific Product Group Segment (ASG)(1)
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8.1 |
% |
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7.1 |
% |
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10.8 |
% |
Memory Products Group Segment (MPG)(1)
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1.6 |
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(6.1 |
) |
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2.2 |
|
Micro, Power, Analog Product Group Segment (MPA)(1)
|
|
|
16.1 |
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|
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14.4 |
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|
|
21.7 |
|
Others(2)
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(1.6 |
) |
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|
(3.0 |
) |
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|
(3.5 |
) |
Total consolidated operating income(3)
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|
6.9 |
% |
|
|
2.7 |
% |
|
|
7.8 |
% |
|
|
(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 group 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 group
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, have been
allocated to the product group segments; comparable amounts
reported in this category have been reclassified accordingly in
the above table. |
|
(3) |
As a percentage of total net revenues. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Reconciliation to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product group segments
|
|
$ |
835 |
|
|
$ |
508 |
|
|
$ |
985 |
|
Operating Income of others(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic and other research and development programs
|
|
|
(17 |
) |
|
|
(49 |
) |
|
|
(91 |
) |
|
Start-up costs
|
|
|
(57 |
) |
|
|
(56 |
) |
|
|
(63 |
) |
|
Impairment, restructuring charges and other related closure costs
|
|
|
(77 |
) |
|
|
(128 |
) |
|
|
(76 |
) |
|
Subsystems
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
One-time compensation and special contributions(2)
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
Patent claim costs
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
Other non-allocated provisions(3)
|
|
|
(6 |
) |
|
|
(10 |
) |
|
|
(67 |
) |
Total operating income (loss) of others
|
|
|
(158 |
) |
|
|
(264 |
) |
|
|
(302 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income
|
|
$ |
677 |
|
|
$ |
244 |
|
|
$ |
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Operating income (loss) of Others includes items or
parts of them, which are not allocated to product group 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 group 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,
have been allocated to the product group 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 group segments. |
|
(3) |
Includes unallocated expenses such as certain corporate level
operating expenses and other costs. |
61
|
|
|
Net Revenues by Location of Order Shipment |
The table below sets forth information on our net revenues by
location of order shipment and as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(2)
|
|
$ |
3,073 |
|
|
$ |
2,789 |
|
|
$ |
2,827 |
|
North America(5)
|
|
|
1,232 |
|
|
|
1,281 |
|
|
|
1,360 |
|
Asia Pacific(3)
|
|
|
2,084 |
|
|
|
1,860 |
|
|
|
1,852 |
|
Greater China(3)
|
|
|
2,552 |
|
|
|
2,203 |
|
|
|
1,859 |
|
Japan
|
|
|
400 |
|
|
|
307 |
|
|
|
403 |
|
Emerging Markets(2)(4)(5)
|
|
|
513 |
|
|
|
442 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
$ |
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Location of Order Shipment:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe(2)
|
|
|
31.2 |
% |
|
|
31.4 |
% |
|
|
32.3 |
% |
North America(5)
|
|
|
12.5 |
|
|
|
14.4 |
|
|
|
15.5 |
|
Asia Pacific(3)
|
|
|
21.1 |
|
|
|
20.9 |
|
|
|
21.2 |
|
Greater China(3)
|
|
|
25.9 |
|
|
|
24.8 |
|
|
|
21.2 |
|
Japan
|
|
|
4.1 |
|
|
|
3.5 |
|
|
|
4.6 |
|
Emerging Markets(2)(4)(5)
|
|
|
5.2 |
|
|
|
5.0 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net revenues by location of order shipment region are classified
by location of customer invoiced. For example, products ordered
by U.S.-based companies
to be invoiced to Asia Pacific affiliates are classified as Asia
Pacific revenues. |
|
(2) |
Since January 1, 2005, the region Europe
includes the former East European countries that joined the
European Union 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) |
As of January 1, 2006, we created a new region
Greater China to focus exclusively on our operations
in China, Hong Kong and Taiwan. Net revenues for Asia Pacific
for prior periods were restated according to the new perimeter. |
|
(4) |
Emerging Markets in 2005 and 2006 included markets such as
India, Latin America (excluding Mexico), the Middle East and
Africa, Europe (non-EU and non-EFTA) and Russia. |
|
(5) |
As of July 2, 2006, the region North America
includes Mexico which was part of Emerging Markets in prior
periods. Amounts have been reclassified to reflect this change. |
|
|
|
Net Revenues by Market Segment |
The table below estimates, within a variance of 5% to 10% in the
absolute dollar amount, the relative weight of each of our
target segments in percentages of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(As a percentage of | |
|
|
net revenues) | |
Net Revenues by Market Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
|
15 |
% |
|
|
16 |
% |
|
|
15 |
% |
Consumer
|
|
|
16 |
|
|
|
18 |
|
|
|
21 |
|
Computer
|
|
|
17 |
|
|
|
17 |
|
|
|
16 |
|
Telecom
|
|
|
38 |
|
|
|
35 |
|
|
|
32 |
|
Industrial and Other
|
|
|
14 |
|
|
|
14 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
62
The following table sets forth certain financial data from our
consolidated statements of income since 2004, expressed in each
case as a percentage of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(As a percentage of | |
|
|
net revenues) | |
Net sales
|
|
|
99.8 |
% |
|
|
99.9 |
% |
|
|
100.0 |
% |
Other revenues
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales
|
|
|
(64.2 |
) |
|
|
(65.8 |
) |
|
|
(63.2 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
35.8 |
|
|
|
34.2 |
|
|
|
36.8 |
|
|
Selling, general and administrative
|
|
|
(10.8 |
) |
|
|
(11.6 |
) |
|
|
(10.8 |
) |
|
Research and development
|
|
|
(16.9 |
) |
|
|
(18.3 |
) |
|
|
(17.5 |
) |
|
Other income and expenses, net
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Impairment, restructuring charges and other related closure costs
|
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
Total operating expenses
|
|
|
(28.9 |
) |
|
|
(31.5 |
) |
|
|
(29.0 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6.9 |
|
|
|
2.7 |
|
|
|
7.8 |
|
Interest income (expense), net
|
|
|
0.9 |
|
|
|
0.4 |
|
|
|
|
|
Loss on equity investment
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
Loss on extinguishment of convertible debt
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
7.7 |
|
|
|
3.1 |
|
|
|
7.7 |
|
Income tax benefit (expense)
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
7.9 |
|
|
|
3.0 |
|
|
|
6.9 |
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7.9 |
% |
|
|
3.0 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
In 2006, based upon recent industry data, the semiconductor
industry experienced a year-over-year revenue increase of
approximately 9% for the total available market
(TAM) and an increase of approximately 8% for the
serviceable available market (SAM), respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net sales
|
|
$ |
9,838 |
|
|
$ |
8,876 |
|
|
|
10.8 |
% |
Other revenues
|
|
|
16 |
|
|
|
6 |
|
|
|
192.9 |
% |
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
9,854 |
|
|
$ |
8,882 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
The increase in our net revenues in 2006 was primarily due to
our higher sales volumes and improved product mix, which
exceeded the negative impact of the declining selling prices due
to the continuing pricing pressure in the markets we serve. Our
average selling prices decreased overall by approximately 8%,
which is the result of a tougher pure pricing effect mitigated
by a higher selling price from improved product mix.
All product group segments registered a positive revenue
performance with a particularly strong result by MPA. ASG net
revenues increased 8.1% over 2005, mainly driven by Imaging,
Computer Peripherals, Connectivity, Digital Consumer and
Automotive products. Cellular Communication slightly increased,
while Data Storage product registered a decline. Net revenues
for MPA significantly increased by 19.2% compared to 2005, with
all of the products lines generating strong revenue growth. MPG
net revenues increased 9.7% compared to 2005, supported by NOR
Flash for wireless applications and other memory products, while
Smartcard sales decreased.
By market segment application, the most important contribution
to net revenue growth came from Telecom and Industrial, while
Automotive, Consumer and Computer registered approximately
mid-single digit growth. Net revenues by market segment
increased in Telecom by approximately 19% and Industrial by
approximately 10%, while Automotive, Consumer and Computer each
increased by approximately 6%. 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.
63
By location of order shipment, Japan revenues strongly increased
by approximately 31%, all of the other regions registered a
solid double-digit growth, with the exception of North America
which slightly declined compared to last year.
In 2006, we had several large customers, with the largest one,
the Nokia Group of companies, accounting for approximately 22%
of our net revenues, which remained flat compared to 2005. Our
top ten OEM customers accounted for approximately 51% of our net
revenues in 2006, compared to approximately 50% of our net
revenues in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cost of sales
|
|
$ |
(6,331 |
) |
|
$ |
(5,845 |
) |
|
|
(8.3 |
)% |
Gross profit
|
|
$ |
3,523 |
|
|
$ |
3,037 |
|
|
|
16.0 |
|
Gross margin (as a percentage of net revenues)
|
|
|
35.8 |
% |
|
|
34.2 |
% |
|
|
|
|
The cost of sales increased at a lower pace than the net
revenues, therefore leveraging a 16% improvement of our gross
profit. The increase in gross profit was driven by sales volume,
more favorable product mix and improved manufacturing
efficiencies, which are the result of lower depreciation
charges, the cost savings realized from the 150-mm restructuring
plan that has been almost totally completed, and the benefit of
solid level of loading in our facilities over the first three
quarters of 2006. As a result of these improvements, which were
partially offset by the negative impact of severe price
pressures, our gross margin increased 160 basis points to
35.8%.
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Selling, general and administrative expenses
|
|
$ |
(1,067 |
) |
|
$ |
(1,026 |
) |
|
|
(4.0 |
)% |
As a percentage of net revenues
|
|
|
(10.8 |
)% |
|
|
(11.6 |
)% |
|
|
|
|
The increase in selling, general and administrative expenses was
largely due to the higher expenses associated with increased
activities and to the charges related to the share-based
compensation which amounted to $14 million. However, as a
percentage to sales ratio, the selling, general and
administrative expenses decreased to 10.8%.
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Research and development expenses
|
|
$ |
(1,667 |
) |
|
$ |
(1,630 |
) |
|
|
(2.3 |
)% |
As a percentage of net revenues
|
|
|
(16.9 |
)% |
|
|
(18.3 |
)% |
|
|
|
|
Research and development expenses increased 2.3% in 2006
resulting from a combination of higher spending in relation to
our activities and $8 million in share-based compensation
charges. As a percentage of net revenues, research and
development expenses decreased significantly by 140 basis
points to 16.9%. 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 |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Research and development funding
|
|
$ |
54 |
|
|
$ |
76 |
|
Start-up costs
|
|
|
(57 |
) |
|
|
(56 |
) |
Exchange gain (loss), net
|
|
|
(9 |
) |
|
|
(16 |
) |
Patent litigation costs
|
|
|
(22 |
) |
|
|
(14 |
) |
Patent pre-litigation costs
|
|
|
(7 |
) |
|
|
(8 |
) |
Gain on sale of Accent subsidiary
|
|
|
6 |
|
|
|
|
|
Gain on sale of non-current assets, net
|
|
|
2 |
|
|
|
12 |
|
Other, net
|
|
|
(2 |
) |
|
|
(3 |
) |
Other income and expenses, net
|
|
$ |
(35 |
) |
|
$ |
(9 |
) |
As a percentage of net revenues
|
|
|
(0.4 |
)% |
|
|
(0.1 |
)% |
64
Other income and expenses, net results include
miscellaneous items, such as research and development funding,
gains on sale of non-current assets,
start-up and phase-out
costs, net exchange gain or loss and patent claim costs.
Research and development funding includes 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; however, the funding significantly decreased in 2006 due
to restricted support in certain jurisdictions. The net gain on
sale of non-current assets is mainly related to the sale of a
minor investment.
Start-up and phase-out
costs in 2006 were related to our 150-mm fab expansion in
Singapore, 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.
|
|
|
Impairment, restructuring charges and other related
closure costs |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Impairment, restructuring charges and other related closure costs
|
|
$ |
(77 |
) |
|
$ |
(128 |
) |
As a percentage of net revenues
|
|
|
(0.8 |
)% |
|
|
(1.5 |
)% |
In 2006, we recorded impairment, restructuring charges and other
related closure costs of $77 million. This expense was
mainly composed of:
|
|
|
|
|
Our headcount restructuring plan announced in May 2005, which
resulted in total charges of $45 million mainly for
employee termination benefits; the total cost of this
restructuring plan was estimated to be approximately
$100 million and was substantially complete at the end of
2006, with total charges of $86 million incurred through
December 31, 2006; |
|
|
|
An impairment charge of approximately $10 million was
recorded pursuant to subsequent decisions to discontinue
adoption of Tioga related technologies in certain products, of
which $6 million corresponded to the write-off of Tioga
goodwill and $4 million to impairment charges on
technologies purchased as part of the Tioga business acquisition
which were determined to be without any alternative use; |
|
|
|
Our ongoing 150-mm restructuring plan and related manufacturing
initiatives generated restructuring charges of approximately
$22 million. As of December 31, 2006, we have incurred
$316 million of the total expected of approximately
$330 million in pre-tax charges in connection with this
restructuring plan, slightly down from the original estimate of
$350 million, which was announced in October 2003. |
In 2005, we incurred $128 million of impairment,
restructuring charges and other related closure costs mainly
related to our 2005 headcount restructuring plan and our 150-mm
restructuring plan. See Note 19 to our Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income
|
|
$ |
677 |
|
|
$ |
244 |
|
|
|
178.0 |
% |
As a percentage of net revenues
|
|
|
6.9 |
% |
|
|
2.7 |
% |
|
|
|
|
Operating income increased significantly in 2006 as the combined
effect of all of the factors presented above.
In 2006, all of our product group segments were profitable. ASG
registered an increase in its operating income from
$355 million in 2005 to $439 million in 2006, mainly
resulting from the contribution of an increase in sales volume.
MPA operating income increased significantly from
$271 million in 2005 to $362 million in 2006 driven by
the strong revenue leverage. MPG moved from an operating loss of
$118 million in 2005 to an operating income of
$34 million in 2006, in spite of significant negative price
impact on sales. All the product group segments were negatively
impacted by declines in pricing.
|
|
|
Interest income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Interest income (expense), net
|
|
$ |
93 |
|
|
$ |
34 |
|
The interest income, net significantly increased to
$93 million in 2006 from $34 million in 2005,
reflecting more effective placement of liquidity investments and
rising interest rates in the U.S. dollar and the euro on
our available cash, and the strong net operating cash flow which
further contributed additional cash during the year.
65
|
|
|
Loss on equity investments |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Loss on equity investments
|
|
$ |
(6 |
) |
|
$ |
(3 |
) |
During 2006, we recorded a loss of $6 million and in 2005
we recorded a loss of $3 million, mainly related to
start-up costs due to
our investment as a minority shareholder in our joint venture in
China with Hynix Semiconductor.
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Income tax benefit (expense)
|
|
$ |
20 |
|
|
$ |
(8 |
) |
In 2006, we had an income tax benefit of $20 million. This
is the result of our effective tax rate for the full year 2006
which was approximately 8% and the benefit of certain favorable
adjustments in our tax position that occurred during the year.
In particular, in 2006, we recorded a reversal of a
$90 million provision due to a favorable outcome of a tax
litigation in one of our jurisdictions and approximately a
$23 million benefit pursuant to the application of certain
favorable tax regimes. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income
|
|
|
$782 |
|
|
|
$266 |
|
|
|
193.9 |
% |
As a percentage of net revenues
|
|
|
7.9 |
% |
|
|
3.0 |
% |
|
|
|
|
For 2006, we reported a net income of $782 million, a
strong increase compared to 2005. Basic and diluted earnings per
share for 2006 were $0.87 and $0.83, respectively, compared to
basic and diluted earnings of $0.30 and $0.29 per share for
2005.
2005 vs. 2004
In 2005, based upon published industry data by WSTS, 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 group 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. MPA 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 group 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
66
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 strongly
in Greater China by approximately 18%, while net revenues were
flat in the Asia Pacific and declining in Japan, North America,
Emerging Markets and Europe 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 260 basis
points to 34.2% because the profitable contribution of higher
sales volume, improved product mix and manufacturing
efficiencies was offset by the negative impacts of the decline
in selling prices and of the effective U.S. dollar exchange
rate.
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Selling, general and administrative expenses
|
|
$ |
(1,026 |
) |
|
$ |
(947 |
) |
|
|
(8.4 |
)% |
As a percentage of net revenues
|
|
|
(11.6 |
)% |
|
|
(10.8 |
)% |
|
|
|
|
The increase in selling, general and administrative expenses was
largely due to the negative impact of the effective
U.S. dollar exchange rate, the one-time compensation
charges related to our former CEO and other retired senior
executives for $7 million, the new pension scheme for
executive management for $11 million, the share-based
compensation amounting to $5 million and the overall
increase in our expenditures.
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
67
|
|
|
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 headcount 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; |
|
|
|
Our ongoing 150-mm 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 of approximately
$330 million in pre-tax charges in connection with this
restructuring plan, slightly down from the original estimate of
$350 million, 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 150-mm restructuring plan. See Note 18 to
our 2005 Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
% Variation | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income
|
|
$ |
244 |
|
|
$ |
683 |
|
|
|
(64.3 |
%) |
As a percentage of net revenues
|
|
|
2.7 |
% |
|
|
7.8 |
% |
|
|
|
|
68
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 group 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. MPA 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
group 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. 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.
|
|
|
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.
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Quarterly Results of Operations
Certain quarterly financial information for the years 2006 and
2005 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 2006, based upon recently published
data by WSTS, the TAM and the SAM increased approximately 9% and
4% year-over-year, respectively, while the TAM increased
approximately 2% and the SAM decreased approximately 1%
sequentially.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Net sales
|
|
$ |
2,482 |
|
|
$ |
2,502 |
|
|
$ |
2,388 |
|
|
|
(0.8 |
)% |
|
|
3.9 |
% |
Other revenues
|
|
|
1 |
|
|
|
11 |
|
|
|
1 |
|
|
|
(89.0 |
) |
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
2,483 |
|
|
$ |
2,513 |
|
|
$ |
2,389 |
|
|
|
(1.2 |
)% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-year comparison |
The increase of our fourth quarter 2006 net revenues was
mainly driven by significantly higher volume that was largely
offset by the decline of our average selling prices. As a result
of ongoing pricing pressure in the semiconductor market, our
average selling prices decreased by approximately 6% during the
fourth quarter of 2006, compared to the fourth quarter of 2005
due totally to pure pricing effect.
The trend in net revenues was different for each of our main
product group segments, with a strong increase in MPA revenues,
a moderate increase in ASG revenues and a decline in MPG
revenues. ASG net revenues increased by approximately 3% due to
volume and improved product mix, while prices declined; the
revenue
70
increase was mainly driven by Digital Consumer which registered
double-digit growth, with Automotive products registering
single-digit growth, while revenues declined in Telecom. MPA net
revenues strongly increased by 21% driven by higher volumes and
improved product mix, while selling prices marginally decreased;
the revenue increase was generated by all the product families.
MPG net revenues decreased approximately 8% as the impact of the
price decline exceeded the higher volume; by product family, the
decrease was most significant in Flash.
Net revenues by market segment application increased in
Industrial and Consumer by approximately 14% and 10%,
respectively, in Automotive and Computer by approximately 4% and
3%, respectively, while Telecom registered a 2% decline. 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, our sales performance was
particularly strong in Japan registering a 40% increase,
Emerging Markets, Europe and Greater China registered an
increase of 17%, 7% and 3%, respectively, while there was a
decrease in North America by 6% and Asia Pacific by 2%.
The sequential variation of our revenues was the result of the
combined effect of a favorable improvement in product mix and of
a solid volume increase, partially negatively balanced by a
decrease of our selling prices, which registered a further
decline of approximately 3%.
While MPA revenues were flat, both ASG and MPG revenues slightly
declined on a sequential basis. Net revenues for ASG decreased
2% mainly due to continuously strong price pressure; by product
families, revenues increased in Digital Consumer, while
decreasing in the other families, particularly in Telecom
products, while Automotive products remained basically flat. MPA
revenues were basically flat, with improvements in product mix
offset by a decline in volume; by product families,
Microcontrollers and Power increased while Advanced Analog
decreased. MPG revenues decreased approximately 1% due to the
impact of a tougher pricing environment while the number of
units shipped was higher; Flash memory decreased by 2% and
Smartcard by 7%, while Other Memories increased.
Net revenues by segment market application increased in Consumer
by approximately 5%, in Industrial and Computer by 2%, while
they strongly decreased in Telecom by 6%. 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, our net revenues registered an
increase in North America, Japan and Greater China by
approximately 4%, 1%, and 1%, respectively, while they declined
in Asia Pacific by 6%, in Europe by 2% and Emerging Markets by
1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Cost of sales
|
|
$ |
(1,582 |
) |
|
$ |
(1,609 |
) |
|
$ |
(1,517 |
) |
|
|
1.7 |
% |
|
|
(4.3 |
)% |
Gross profit
|
|
$ |
901 |
|
|
$ |
904 |
|
|
$ |
872 |
|
|
|
(0.3 |
)% |
|
|
3.3 |
% |
Gross margin
|
|
|
36.3 |
% |
|
|
36.0 |
% |
|
|
36.5 |
% |
|
|
|
|
|
|
|
|
On a year-over-year basis, our gross profit increased due to the
combined effect of factors having a favorable impact including
manufacturing efficiencies, sales volume and improved product
mix and other factors having a negative impact including price
decline, underloading charges for some of our fabs and our
effective average U.S. dollar exchange rate, which was
equivalent to
1.00 for $1.28
for the fourth quarter 2006 and to
1.00 for $1.20
for the fourth quarter of 2005. As a result, our gross margin
slightly decreased 20 basis points to 36.3%.
On a sequential basis, our gross profit was basically unchanged
in absolute value in spite of declining revenues, since the
favorable contributions by manufacturing performances and
improved product mix exceeded the negative impact of price
decline and the effective U.S. dollar exchange rate. In
addition, in the fourth quarter of 2006, our gross profit was
also negatively impacted by charges associated with unused
capacity in some of our fabs. As a result of these factors, our
gross margin slightly improved 30 basis points to 36.3%.
71
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Selling, general and administrative expenses
|
|
$ |
(281 |
) |
|
$ |
(264 |
) |
|
$ |
(259 |
) |
|
|
(6.5 |
)% |
|
|
(8.2 |
)% |
As percentage of net revenues
|
|
|
(11.3 |
)% |
|
|
(10.5 |
)% |
|
|
(10.9 |
)% |
|
|
|
|
|
|
|
|
On a year-over-year basis, our selling, general and
administrative expenses increased mainly in relation to the
expansion of our activities, the negative impact of the
effective U.S. dollar exchange rate and the charges related
to the share-based compensation plan which amounted to
$9 million in the fourth quarter of 2006. This resulted in
an increase in the percentage of net revenues ratio from 10.9%
in the fourth quarter of 2005 to 11.3% in the fourth quarter of
2006.
On a sequential basis, the increase in our selling, general and
administrative expenses was also mainly due to the negative
impact of the effective U.S. dollar exchange rate and the
charges related to the share-based compensation plan. The
expenses to sales ratio for the fourth quarter 2006 increased
80 basis points to 11.3%, compared to the third quarter of
2006 due to the above factors and the decrease in our net
revenues.
|
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
% Variation | |
|
|
| |
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
Sequential | |
|
Year-Over-Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
|
|
Research and development expenses
|
|
$ |
(430 |
) |
|
$ |
(421 |
) |
|
$ |
(402 |
) |
|
|
(2.1 |
)% |
|
|
(7.0 |
)% |
As percentage of net revenues
|
|
|
(17.3 |
)% |
|
|
(16.8 |
)% |
|
|
(16.8 |
)% |
|
|
|
|
|
|
|
|
Our research and development expenses increased both on a
year-over-year basis, as well as on a sequential basis mainly
due to the negative impact of the effective U.S. dollar
exchange rate and the share-based compensation plan which
amounted to $5 million in the fourth quarter of 2006. As a
percentage of net revenues, the fourth quarter ratio was 17.3%,
due to the decline in revenues.
|
|
|
Other income and expenses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Research and development funding
|
|
$ |
21 |
|
|
$ |
19 |
|
|
$ |
29 |
|
Start-up costs
|
|
|
(16 |
) |
|
|
(15 |
) |
|
|
(10 |
) |
Exchange gain (loss) net
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(20 |
) |
Patent litigation costs
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
Patent pre-litigation costs
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
Gain on sale of other non-current assets
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Other, net
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
1 |
|
Other income and expenses, net
|
|
|
(7 |
) |
|
|
(5 |
) |
|
|
2 |
|
As a percentage of net revenues
|
|
|
(0.3 |
)% |
|
|
(0.2 |
)% |
|
|
0.1 |
% |
Other income and expenses, net results include miscellaneous
items such as research and development funding, gains on sale of
non-current assets and net exchange rate results, and as
expenses it mainly includes
start-up costs and
patent claim costs. In the fourth quarter 2006, 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. In the fourth quarter of 2006, these
factors resulted in a net expense of $7 million, which was
mainly the result of expenses associated with patent litigation
and with the
start-up/phase-out
costs 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 and of other income related to research and
development funding.
72
|
|
|
Impairment, restructuring charges and other related
closure costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Impairment, restructuring charges and other related closure costs
|
|
$ |
(10 |
) |
|
$ |
(20 |
) |
|
$ |
(16 |
) |
As a percentage of net revenues
|
|
|
(0.4 |
)% |
|
|
(0.8 |
)% |
|
|
(0.7 |
)% |
Our impairment, restructuring charges and other related closure
costs of $10 million for the fourth quarter of 2006 were
composed of:
|
|
|
|
|
Our headcount restructuring plan announced in May 2005, which
resulted in charges of $4 million mainly for employee
termination benefits; |
|
|
|
Our ongoing 150-mm restructuring plan and related manufacturing
initiatives, which resulted in a charge of $6 million. |
See Note 19 to our Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating income
|
|
$ |
173 |
|
|
$ |
195 |
|
|
$ |
197 |
|
In percentage of net revenues
|
|
|
7.0 |
% |
|
|
7.7 |
% |
|
|
8.2 |
% |
On a year-over-year basis, our operating income slightly
decreased due the negative impact of selling prices and the
effective exchange rate of the U.S. dollar which were
partially compensated by overall improved efficiencies in our
manufacturing activities, higher volume of sales and an improved
product mix.
With respect to our product group segments, on a year-over-year
basis, MPA improved its operating income while the profitability
of both ASG and MPG declined. ASG registered a decrease in its
operating income from $137 million in the fourth quarter of
2005 to $111 million in the fourth quarter of 2006, due to
the negative impact of ongoing pricing pressure, increased
operating expenses and the negative impact of the effective
U.S. dollar exchange rate. MPA operating income increased
from $67 million in the fourth quarter of 2005 to
$103 million in the fourth quarter of 2006 mainly driven by
the strong volume increase. MPG profitability decreased from
$27 million in the fourth quarter of 2005 to break-even in
the fourth quarter of 2006 as a result of declining revenues and
the tough pricing environment.
On a sequential basis, our operating income also slightly
decreased, due again to the negative impact of the declining
selling prices and the effective U.S. dollar exchange rate.
On a sequential basis, the operating income of all of our
product group segments decreased. ASGs operating income
decreased in the fourth quarter to $111 million compared to
$125 million in the third quarter 2006 due to declining
revenues, product mix and difficult selling price environment.
MPAs operating income decreased slightly on flat revenues;
however, its profitability remained at a high ratio
corresponding to 17.3% of sales. MPG registered a break-even
after an operating income of $10 million in the third
quarter of 2006, which benefited from a one-time income
associated with a licensing deal.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Interest income, net
|
|
$ |
25 |
|
|
$ |
17 |
|
|
$ |
11 |
|
On a year-over-year basis, our interest income increased
significantly, due to the favorable impact of rising interest
rates on our available cash and cash equivalents, more effective
placement of liquidity investments and the additional favorable
operating cash flow generated during 2006. Furthermore, the
fourth quarter of 2006 benefited from a one-time interest
payment received by us in connection with the favorable outcome
of a tax litigation.
73
|
|
|
Loss on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Loss on equity investments
|
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
|
|
|
We did not record any major variation in the fourth quarter of
2006 in relation to our investments. Our current major
investment is as a minority shareholder in our joint venture in
China with Hynix Semiconductor, which is in a
start-up phase.
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Income tax benefit (expense)
|
|
$ |
80 |
|
|
$ |
(2 |
) |
|
$ |
(25 |
) |
During the fourth quarter of 2006, we recorded an income tax
benefit of $80 million, which is the result of certain
provision reversals and certain benefits, net of the actual tax
charges accrued in each jurisdiction for the total year. The
fourth quarter benefited from a provision reversal of
approximately $90 million due to the favorable outcome of a
tax litigation; these benefits were partially offset by some new
provisions of approximately $33 million related to certain
tax assessments.
Our tax rate is variable and depends on changes in the level of
operating income within various local jurisdictions and on
changes in the applicable taxation rates of these jurisdictions,
as well as changes in estimated tax provisions due to new
events. We currently enjoy certain tax benefits in some
countries; as such benefits may not be available in the future
due to changes in the local jurisdictions, our effective tax
rate could be different in future quarters and may increase in
the coming years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
Dec 31, 2006 | |
|
Sept 30, 2006 | |
|
Dec 31, 2005 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net income
|
|
$ |
276 |
|
|
$ |
207 |
|
|
$ |
183 |
|
As percentage of net revenues
|
|
|
11.1 |
% |
|
|
8.2 |
% |
|
|
7.7 |
% |
For the fourth quarter of 2006, we reported net income of
$276 million, a significant improvement compared to both
the fourth quarter of 2005 and the third quarter of 2006, which
is largely due to one-time income tax benefits. Basic and
diluted earnings per share for the fourth quarter of 2006 were
$0.31 and $0.30, respectively, improved compared to the basic
and diluted earnings of $0.20 per share for the fourth
quarter of 2005, and $0.23 and $0.22, respectively, per share
for the third quarter of 2006. The favorable impact of the
one-time income tax benefit on both our basic and diluted
earnings for the fourth quarter of 2006 has been estimated to be
approximately $0.10.
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 Singapore
dollar and the Japanese yen.
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) are quoted in currencies other than the U.S. dollar
and as such are directly affected by fluctuations in the value
of the U.S. dollar. As a result of currency variations, the
appreciation of the euro compared to the U.S. dollar could
increase, in the short term, our level of revenues when reported
in U.S. dollars; revenues for all other products, which are
either quoted in U.S. dollars and billed in
U.S. dollars or in local currencies for payment, tend not
to be affected significantly by fluctuations in exchange rates,
except to the extent that there is a lag between 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
non-U.S. dollar
currency areas, our costs tend to increase when translated into
U.S. dollars in case of dollar weakening or to decrease
when the U.S. dollar is strengthening.
74
In summary, as our reporting currency is the U.S. dollar,
currency exchange rate fluctuations affect our results of
operations: if the U.S. dollar weakens, we receive a
limited part of our revenues, and more importantly, we increase
a significant part of our costs, in currencies other than the
U.S. dollar. As described below, our effective average
U.S. dollar exchange rate strengthened during 2006,
particularly against the euro, causing us to report lower
expenses and positively impacting both our gross margin and
operating income. Our Consolidated Statement of Income for the
year ended December 31, 2006 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 $1.24 for
1.00 in 2006 and
it was $1.28 for
1.00 in 2005.
These effective exchange rates reflect the actual exchange rates
combined with the impact of hedging contracts matured in the
period.
As of December 31, 2006, the outstanding hedged amounts to
cover manufacturing costs were
190 million
and to cover operating expenses were
260 million,
at an average rate of about $1.30 and $1.29 per euro
respectively, maturing over the period from January 2007 to June
2007. As of December 31, 2006, these hedging contracts
represented a deferred gain of $13 million after tax,
recorded in other comprehensive income in shareholders
equity, compared to a deferred loss of $13 million as of
December 31, 2005. Our hedging policy is not intended to
cover the full exposure. In addition, in order to mitigate
potential exchange rate risks on our commercial transactions, we
purchased and entered into forward foreign currency exchange
contracts and currency options to cover foreign currency
exposure in payables or receivables at our affiliates. We may in
the future purchase or sell similar types of instruments. See
Item 11. Quantitative and Qualitative Disclosures
About Market Risk 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. In 2006,
as the result of cash flow hedging, we recorded a net profit of
$19 million, consisting of a profit of $5 million to
cost of sales, a profit of $11 million to research and
development expenses, and a profit of $3 million to
selling, general and administrative expenses, while in 2005, we
recorded total charges of $81 million. We recorded a net
loss of $9 million in Other income and expenses,
net due to the utilization in 2006 of foreign exchange
forward contracts on a rolling basis to hedge intercompany
payables and receivables in euros, the negative interest
differential between euro and dollars has been entirely
reflected in the $9 million loss. In the second half of
2006, the impact of the negative interest differential was
drastically reduced, and starting from the fourth quarter of
2006 no forward contracts are reported to hedge intercompany
payables and receivables; as such, no exchange losses have been
recorded for this hedging activity in the fourth quarter of
2006. In addition, no foreign exchange trading activities have
been conducted.
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, 2006, our
outstanding indebtedness was denominated mainly in
U.S. dollars and, to a limited extent, in euros and in
Singapore dollars.
Effective January 2006, our Corporate Treasury was reorganized
under the lead of a newly appointed Corporate Treasurer and now
reports to our Chief Financial Officer. Simultaneously, we
created a Treasury Committee to steer treasury activities and to
ensure compliance with corporate policies.
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.
75
Impact of Changes in Interest Rates
Our results of operations and financial condition can be
affected by material changes in interest rates, which can impact
the total interest income received on our cash and cash
equivalents and on our interest expense on our financial debt.
Our interest income, net is the balance between interest income
received mainly from our cash and interest expense paid on our
long-term debt. Our interest income is almost entirely dependent
on the fluctuations in the interest rates, mainly in the
U.S. dollar and the euro. Any increase or decrease in the
short-term market interest rates would mean an increase or
decrease in our interest income. Since we benefited from the
increases in the U.S. dollar-and euro-denominated interest
rates, our interest income (expense), net increased from
$(3) million in 2004, to $34 million in 2005 and to
$93 million in 2006. The interest expenses are mainly
related to long-term convertible debt, which are mainly issued
at fixed rates in U.S. dollars and to a euro-denominated
FRN issued at a floating rate in euros.
In response to the possible risk of interest rate mismatch, in
the second quarter of 2006, we entered into cancellable swaps to
hedge a portion of the fixed rate obligations on our outstanding
long-term debt with floating rate derivative instruments.
Of the $974 million in 2016 Convertible Bonds issued in the
first quarter of 2006, we entered into cancellable swaps for
$200 million of the principal amount of the bonds, swapping
the 1.5% yield equivalent on the bonds for 6 Month USD LIBOR
minus 3.375%. Our hedging policy is not intended to cover the
full exposure and all risks associated with these instruments.
As of December 31, 2006, the 10-year U.S. swap
interest rate was 5.12% as compared to 5.64% at the inception of
the transaction, on June 14, 2006. The fair value of the
swaps as of December 31, 2006 was $4 million since
they were executed at higher market rates. In compliance with
FAS 133 provisions on fair value hedges, the net impact of
the hedging transaction on our income statement was the
ineffective part of the hedge, which resulted in a net loss of
less than $1 million for 2006 and was recorded in
Other income and expenses, net. These cancellable
swaps were designed and are expected to effectively replicate
the bonds behavior through a wide range of changes in
financial market conditions and decisions made by both the
holders of the bonds and us, thus being classified as highly
effective hedges; however no assurance can be given that our
hedging activities will sufficiently protect us against future
significant movements in interest rates.
We may in the future enter into further cancellable swap
transactions related to the 2016 Convertible Bonds or other
fixed rate instruments. For full details of quantitative and
qualitative information, see Item 11. Quantitative
and Qualitative Disclosures About Market Risk.
Liquidity and Capital Resources
Treasury activities are regulated by our policies, which define
procedures, objectives and controls. The policies focus on the
management of our financial risk in terms of exposure to
currency rates and interest rates. Most treasury activities are
centralized, with any local treasury activities subject to
oversight from our head treasury office. The majority of our
cash and cash equivalents are held in U.S. dollars and
euros and are placed with financial institutions rated
A or better. Part of our liquidity is also held in
euros to naturally hedge intercompany payables in the same
currency and is placed with financial institutions rated at
least a single A long-term rating, meaning at least A3 from
Moodys Investor Service and A- from Standard &
Poors and Fitch Ratings. Marginal amounts are held in
other currencies. See Item 11. Quantitative and
Qualitative Disclosures About Market Risk.
At December 31, 2006, cash and cash equivalents totaled
$1,963 million, compared to $2,027 million as of
December 31, 2005 and $1,950 million as of
December 31, 2004. Overall, our available cash decreased in
2006 as a result of the early redemption of substantially all of
our 2013 Convertible Bonds in the third quarter of 2006. At
December 31, 2006, we also had investments of
$250 million in short-term deposits with a maturity between
three months and one year. These deposits are almost exclusively
held at various banks with a single A minimum rating in order to
diversify our credit concentration. Interest on these deposits
is paid at maturity with interest rates fixed at inception for
the duration of the deposits. The principal will be repaid at
final maturity. As of December 31, 2006 we had
$460 million in marketable securities, with primary
financial institutions with minimum rating of A1/ A+ (with
approximately 80% of the portfolio rated Aa3/ Aa- and
approximately 20% rated A1/ A+). As of December 31, 2005,
we did not have marketable securities or short-term deposits.
Changes in the instruments adopted to invest our liquidity in
future periods may occur and may significantly affect our
interest income/(expense), net.
76
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 2006 was cash provided by
operating activities. Our net cash from operating activities
totaled $2,491 million in 2006, increasing significantly
compared to $1,798 million in 2005 and $2,342 million
in 2004.
Changes in our operating assets and liabilities resulted in net
cash used of $60 million in 2006, compared to net cash used
of $472 million in 2005. The main variations were due to
the net cash used for inventory, balanced by trade payables and
by other assets and liabilities.
Net cash used in investing activities. Net cash used in
investing activities was $2,753 million in 2006, compared
to $1,528 million in 2005 and $2,134 million in 2004.
Payments for purchases of tangible assets were the main
utilization of cash, amounting to $1,533 million for 2006,
an increase over the $1,441 million in 2005. The 2006
payments are net of $660 million proceeds from matured
short-term deposits and from the sale of our Accent subsidiary.
In 2006, cash used for investments in intangible assets and
financial assets was $86 million and capital contributions
to equity investments was $213 million.
Capital expenditures for 2006 were principally allocated to:
|
|
|
|
|
the expansion of the 300-mm front-end joint project with NXP
Semiconductors and Freescale Semiconductor in Crolles2 (France); |
|
|
|
the capacity expansion and the upgrading to finer geometry
technologies for our 200-mm plant in Rousset (France); |
|
|
|
the capacity expansion and the upgrading of our 150-mm and
200-mm plant in Singapore; |
|
|
|
the upgrading of our 200-mm fab and pilot line in Agrate
(Italy); and |
|
|
|
the capacity expansion for our back-end facilities in Malta,
Shenzhen (China), Bouskoura (Morocco) and Muar (Malaysia). |
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 a 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 NXP
Semiconductors and Freescale Semiconductor 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. |
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, short-term
deposits and restricted cash. We believe net operating cash flow
provides useful information
77
for investors and management because it measures our capacity to
generate cash from our operating and investing activities to
sustain our operating activities. Net operating cash flow is not
a U.S. GAAP measure and does not represent total cash flow
since it does not include the cash flows generated by or used in
financing activities. In addition, our definition of net
operating cash flow may differ from definitions used by other
companies. Net operating cash flow is determined as follows from
our Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net cash from operating activities
|
|
$ |
2,491 |
|
|
$ |
1,798 |
|
|
$ |
2,342 |
|
Net cash used in investing activities
|
|
|
(2,753 |
) |
|
|
(1,528 |
) |
|
|
(2,134 |
) |
Payment for purchase and proceeds from sale of marketable
securities, short-term deposits and restricted cash, net
|
|
|
928 |
|
|
|
|
|
|
|
|
|
Net operating cash flow
|
|
$ |
666 |
|
|
$ |
270 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
|
In the last three years, our operating activities were capable
of generating cash in excess of our investing activities. As a
result, net operating cash flow consistently increased to reach
$666 million in 2006, compared to net operating cash flow
of $270 million in 2005 and of $208 million in 2004.
This cash flow was mainly generated by the strong increase in
cash from operating activities, while at the same time we were
able to reduce the level of our capital investments as a
percentage of sales.
Net cash used in financing activities. Net cash from
financing activities was $132 million in 2006 compared to
$178 million in 2005. The net cash used in financing
activities in 2006 is mainly due to the balance of the proceeds
from the issuance of our 2013 Senior Bonds and 2016 Convertible
Bonds, which amounted to $1,554 million net of issuance
costs, and the repayment of long-term debts, primarily the
redemption of the 2013 Convertible Bonds, of
$1,377 million. In 2004, 2005 and 2006, we paid dividends
in the amount of $107 million in each year. 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.
We define our net financial position as the difference between
our total cash position (cash, cash equivalents, marketable
securities, short-term deposits and restricted cash) 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, cash equivalents and marketable securities 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, 2006, December 31, 2005 and
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cash and cash equivalents
|
|
$ |
1,963 |
|
|
$ |
2,027 |
|
|
$ |
1,950 |
|
Marketable securities
|
|
|
460 |
|
|
|
|
|
|
|
|
|
Short-term deposits
|
|
|
250 |
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash position
|
|
|
2,891 |
|
|
|
2,027 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
|
|
|
|
|
(11 |
) |
|
|
(58 |
) |
Current portion of long-term debt
|
|
|
(136 |
) |
|
|
(1,522 |
) |
|
|
(133 |
) |
Long-term debt
|
|
|
(1,994 |
) |
|
|
(269 |
) |
|
|
(1,767 |
) |
|
|
|
|
|
|
|
|
|
|
Total financial debt
|
|
|
(2,130 |
) |
|
|
(1,802 |
) |
|
|
(1,958 |
) |
|
|
|
|
|
|
|
|
|
|
Net financial position
|
|
$ |
761 |
|
|
$ |
225 |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
The net financial position (cash, cash equivalents, marketable
securities, short-term deposits and restricted cash net of total
financial debt) as of December 31, 2006 moved to a positive
net financial cash position of $761 million, representing
an improvement from the net financial position of
$225 million as of December 31, 2005. The improvement
of the net financial position mainly results from favorable net
operating cash flow
78
generated during 2006. The restricted cash for 2006 is a
long-term deposit with a bank to guarantee a loan from the bank
to our joint venture in China with Hynix Semiconductor. In 2006,
the restricted cash amounted to $218 million.
At December 31, 2006, the aggregate amount of our long-term
debt was approximately $2,130 million, including
$2 million of our 2013 Convertible Bonds, $991 million
of our 2016 Convertible Bonds and $659 million of our 2013
Senior Bonds (corresponding to the
500 million
issuance). Additionally, the aggregate amount of our total
available short-term credit facilities, excluding foreign
exchange credit facilities, was approximately
$1,107 million, which were not used at December 31,
2006. Our long-term capital market financing instruments contain
standard covenants, but do not impose minimum financial ratios
or similar obligations on us. Upon a change of control, the
holders of our 2016 Convertible Bonds and 2013 Senior Bonds may
require us to repurchase all or a portion of such holders
bonds. See Note 15 to our Consolidated Financial Statements.
As of December 31, 2006, 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 |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 |
|
Thereafter | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(In millions) | |
Long-term debt (including current portion)
|
|
$2,130 |
|
$ |
136 |
|
|
$ |
89 |
|
|
$ |
83 |
|
|
$ |
45 |
|
|
$1,020 |
|
$ |
757 |
|
On August 7, 2006, as a result of almost all of the holders
of our 2013 Convertible Bonds exercising the August 4, 2006
put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds. The
outstanding 2013 Convertible Bonds, corresponding to
approximately $2 million and approximately 2,505 bonds, may
be redeemed, at the holders option, for cash on
August 5, 2008 at a conversion ratio of $975.28, or on
August 5, 2010 at a conversion ratio of $965.56, subject to
adjustments in certain circumstances.
During 2004, we redeemed all the outstanding 2009 LYONs for a
total amount of $813 million in cash.
As of the end of 2006, we have the following credit ratings on
our 2013 and 2016 Bonds:
|
|
|
|
|
|
|
|
|
|
|
Moodys Investors | |
|
Standard & | |
|
|
Service | |
|
Poors | |
|
|
| |
|
| |
Zero Coupon Senior Convertible Bonds due 2013
|
|
|
A3 |
|
|
|
A- |
|
Zero Coupon Senior Convertible Bonds due 2016
|
|
|
A3 |
|
|
|
A- |
|
Floating Rate Senior Bonds due 2013
|
|
|
A3 |
|
|
|
A- |
|
On September 30, 2006, Moodys issued a credit report
confirming the above ratings and a previously issued
negative outlook. On January 25, 2007,
Moodys issued a credit report with the outlook changed
from negative to under review for possible
downgrade. On January 9, 2007, Standard &
Poors confirmed the A- ratings and issued a
stable outlook.
In the event of a downgrade of these ratings, we believe we
would continue to have access to sufficient capital resources.
79
|
|
|
Contractual Obligations, Commercial Commitments and
Contingencies |
Our contractual obligations, commercial commitments and
contingencies as of December 31, 2006, and for each of the
five years to come and thereafter, were as follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Capital leases(3)
|
|
$ |
29 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
2 |
|
|
$ |
4 |
|
Operating leases(2)
|
|
|
304 |
|
|
|
54 |
|
|
|
44 |
|
|
|
40 |
|
|
|
31 |
|
|
|
28 |
|
|
|
107 |
|
Purchase obligations(2)
|
|
|
1,052 |
|
|
|
959 |
|
|
|
68 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchase
|
|
|
467 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry purchase
|
|
|
373 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, technology licenses and design
|
|
|
212 |
|
|
|
119 |
|
|
|
68 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hynix ST Joint Venture Debt Financing
|
|
|
32 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations(2)
|
|
|
110 |
|
|
|
67 |
|
|
|
23 |
|
|
|
11 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
Long-term debt obligations (including current portion)(3)(4)(5)
|
|
|
2,130 |
|
|
|
136 |
|
|
|
89 |
|
|
|
83 |
|
|
|
45 |
|
|
|
1,020 |
|
|
|
757 |
|
Pension obligations(3)
|
|
|
342 |
|
|
|
16 |
|
|
|
22 |
|
|
|
27 |
|
|
|
23 |
|
|
|
22 |
|
|
|
232 |
|
Other non-current liabilities(3)
|
|
|
43 |
|
|
|
8 |
|
|
|
9 |
|
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
20 |
|
Total
|
|
$ |
4,042 |
|
|
$ |
1,278 |
|
|
$ |
261 |
|
|
$ |
194 |
|
|
$ |
112 |
|
|
$ |
1,074 |
|
|
$ |
1,123 |
|
|
|
(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, 2006. |
|
(3) |
Items reflected on the Consolidated Balance Sheet at
December 31, 2006. |
|
(4) |
See Note 15 to our Consolidated Financial Statements at
December 31, 2006 for additional information related to
long-term debt and redeemable convertible securities. |
|
(5) |
Year of payment is based on maturity before taking into account
any potential acceleration that could result from a triggering
of the change of control provisions of the 2016 Convertible
Bonds and the 2013 Senior Bonds. |
Operating leases are mainly related to building leases. The
amount disclosed is composed of minimum payments for future
leases from 2007 to 2011 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 on
November 16, 2004 to build a front-end
memory-manufacturing facility in Wuxi City, Jiangsu Province,
China. We paid $250 million of capital contributions up to
December 31, 2006, of which $212 million was paid in
2006; we have completed our capital contribution in the joint
venture. We have also entered into a debt guarantee agreement
with a third party financial institution which is loaning up to
$250 million to the joint venture. 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,
convertible and non-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
Convertible Bonds were redeemable on August 4, 2006 at a
conversion ratio of $985.09.
On August 7, 2006, as a result of almost all of the holders
of our 2013 Convertible Bonds exercising the August 4, 2006
put option, we repurchased $1,397 million aggregate
principal amount of the outstanding convertible bonds. The
outstanding 2013 Convertible Bonds, corresponding to
approximately $2 million and approximately 2,505 bonds, may
be redeemed, at the holders option, for cash on
August 5, 2008 at a conversion ratio of $975.28, or on
August 5, 2010 at a conversion ratio of $965.56, subject to
adjustments in certain circumstances.
In February 2006, we issued $974 million principal amount
at maturity of Zero Coupon Senior Convertible Bonds due in
February 2016. The bonds are convertible by the holder at any
time prior to maturity at a conversion rate of
43.118317 shares per one thousand dollars face value of the
bonds corresponding to 41,997,240 equivalent shares. The holders
can also redeem the convertible bonds on February 23, 2011
at a price of $1,077.58, on February 23, 2012 at a price of
$1,093.81 and on February 24, 2014 at a price of
$1,126.99 per one thousand
80
dollars face value of the bonds. We can call the bonds at any
time after March 10, 2011 subject to our share price
exceeding 130% of the accreted value divided by the conversion
rate for 20 out of 30 consecutive trading days.
Subsequently, in March 2006, STMicroelectronics Finance B.V.
(ST BV), one of our wholly-owned subsidiaries,
issued Floating Rate Senior Bonds with a principal amount of
500 million
at an issue price of 99.873%. The notes, which mature on
March 17, 2013, pay a coupon rate of the three-month
Euribor plus 0.40% on the 17th of June, September, December
and March of each year through maturity. The notes have a put
for early repayment in case of a change of control.
Pension obligations and termination indemnities amounting to
$342 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. Upon adoption of a new
accounting pronouncement regarding defined benefit pension
plans, we recorded an additional $72 million to our pension
obligations. See Notes 2.25 and 14 to our Consolidated
Financial Statements. This amount does not include the
additional pension plan granted in the first quarter of 2005 by
our Supervisory Board to our former CEO and to a limited number
of retired senior executives and to our executive management in
the fourth quarter of 2005. This plan resulted in a liability of
$9 million and a payment of $10 million, which offset
the full liability.
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.
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|
Off-Balance Sheet Arrangements |
As described above, we signed a joint venture agreement in 2004
with Hynix Semiconductor to build a $2 billion front-end
memory-manufacturing facility in China. In the fourth quarter of
2006, we provided $218 million out of our total
$250 million commitment as debt financing to the joint
venture by way of a guarantee by depositing such amount with a
bank, which then loaned an equivalent amount to the joint
venture.
At December 31, 2006, 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
Note 15 to our Consolidated Financial Statements 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, 2006.
We currently expect that capital spending for 2007 will be
approximately $1.2 billion, a decrease compared to the
$1.5 billion spent in 2006. The major part of our capital
spending will be dedicated to the leading edge technology fabs
by aligning the capacity with the expected demand mix both in
the 300-mm and 200-mm fabs. We have the flexibility to modulate
our investments up or down in response to changes in market
conditions. At December 31, 2006, we had $467 million
in outstanding commitments for equipment purchases for 2007.
The most significant of our 2007 capital expenditure projects
are expected to be: for the front-end facilities, (i) in
Agrate (Italy), related to the upgrading of our 200-mm pilot
line, the ramp-up of
the 200-mm line for MEMS and the expansion of capacity to our
200-mm fab; (ii) the upgrading to finer geometry
technologies for our 200-mm plant in Rousset (France);
(iii) the upgrading of our 200-mm plant in Singapore;
(iv) for the back-end facilities, the capital expenditures
will be mainly dedicated to the capacity expansion in our plants
in Shenzhen (China) and Muar (Malaysia) and capacity upgrade in
Malta and Toa Payoh (Singapore). 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.
As part of our refinancing strategy, we issued Zero Coupon
Senior Convertible Bonds due 2016 representing total proceeds of
$974 million in the first quarter of 2006. Furthermore, in
the first quarter of 2006, we issued
81
500 million
Floating Rate Senior Bonds due 2013. We used the proceeds of
these offerings primarily for the repurchase of our 2013
Convertible Bonds on August 7, 2006 and for general
corporate purposes.
Impact of Recently Issued U.S. Accounting Standards
In February 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140 (FAS 155). The
statement amended Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133) and Statement
of Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 140).
The primary purposes of this statement were (1) to allow
companies to select between bifurcation of hybrid financial
instruments or fair valuing the hybrid as a single instrument,
(2) to clarify certain exclusions of FAS 133 related
to interest and principal-only strips, (3) to define the
difference between freestanding and hybrid securitized financial
assets, and (4) to eliminate the FAS 140 prohibition
of Special Purpose Entities holding certain types of
derivatives. The statement is effective for annual periods
beginning after September 15, 2006, with early adoption
permitted prior to a company issuing first quarter financial
statements. We chose not to early adopt FAS 155 during our
first quarter 2006. However, we do not expect FAS 155 to
have a material effect on our financial position and results of
operations upon final adoption.
In March 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
(FAS 156). This statement requires initial
fair value recognition of all servicing assets and liabilities
for servicing contracts entered in the first fiscal year
beginning after September 15, 2006. After initial
recognition, the servicing assets and liabilities are either
amortized over the period of expected servicing income or loss
or fair value is reassessed each period with changes recorded in
earnings for the period. We do not expect FAS 156 will have
a material effect on our financial position and results of
operations upon final adoption.
In June 2006, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). The interpretation seeks to
clarify the accounting for tax positions taken, or expected to
be taken, in a companys tax return and the uncertainty as
to the amount and timing of recognition in the companys
financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes (FAS 109). The interpretation sets a
two step process for the evaluation of uncertain tax positions.
The recognition threshold in step one permits the benefit from
an uncertain position to be recognized only if it is more likely
than not, or 50 percent assured that the tax position will
be sustained upon examination by the taxing authorities. The
measurement methodology in step two is based on cumulative
probability, resulting in the recognition of the largest
amount that is greater than 50 percent likely of being
realized upon settlement with the taxing authority. The
interpretation also addresses derecognizing previously
recognized tax positions, classification of related tax assets
and liabilities, accrual of interest and penalties, interim
period accounting, and disclosure and transition provisions. The
interpretation is effective for fiscal years beginning after
December 15, 2006. We continue to evaluate the potential
impact of adopting FIN 48, but we have currently estimated
an incremental FIN 48 liability in the range of
approximately $15 to $40 million, primarily related to
uncertain tax positions that are under audit in one tax
jurisdiction. This range is the result of analysis done based on
current assumptions that are true today, but upon certain
changes in events or circumstances may no longer be consistent
with the assumptions upon the date of adoption. As a result, the
amount to be recorded upon adoption is subject to revision as
the evaluations are concluded.
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157). This
statement defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. In addition, the statement defines a
fair value hierarchy which should be used when determining fair
values, except as specifically excluded (i.e. stock awards,
measurements requiring vendor specific objective evidence, and
inventory pricing). The hierarchy places the greatest relevance
on Level 1 inputs which include quoted prices in active
markets for identical assets or liabilities. Level 2
inputs, which are observable either directly or indirectly, and
include quoted prices for similar assets or liabilities, quoted
prices in non-active markets, and inputs that could vary based
on either the condition of the assets or liabilities or volumes
sold. The lowest level of the hierarchy, Level 3, is
unobservable inputs and should only be used when observable
inputs are not available. This would include company level
assumptions and should be based on the best available
information under the circumstances. FAS 157 is effective
for fiscal years beginning after November 15, 2007 with
early adoption permitted for fiscal year 2007 if first quarter
statements have not been issued. We will adopt FAS 157 when
effective and do not expect FAS 157 will have a material
effect on our financial position and results of operations.
82
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R)
(FAS 158). This statement requires
companies to account for the overfunded and underfunded status
of defined benefit and other post retirement plans in their
financial statements, with offsetting entries made to
accumulated other comprehensive income. The statement will also
require additional disclosures for such plans. The overfunded or
underfunded status of the defined benefit plans are calculated
as the difference between plan assets and the projected benefit
obligations. Overfunded plans may not be netted against
underfunded plans and must be shown separately in the financial
statements. The recording of the funded status removes the prior
requirements for recording additional minimum liabilities and
intangible assets on unfunded plans due to the requirement to
record the full unfunded amount as a liability. In addition to
the funding requirements, FAS 158 requires companies to
obtain actuarial valuations for the plans as of the year end,
and does not allow estimates based on dates up to three months
prior to year end as previously allowed under FAS 132(R).
The requirements to record the overfunded and underfunded
positions are effective for years ending after December 15,
2006. The requirements for performance of valuations at the end
of the year are effective for years ending after
December 15, 2007, with early adoption encouraged. We have
adopted both the funding requirements and the valuation date
requirements on a prospective basis for the year ended
December 31, 2006. The impact of such adoption is further
described in Note 16 of our Consolidated Financial
Statements.
In September 2006, the U.S. Securities and Exchange
Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). This
statement addresses the diversity in practice of quantifying
financial statement misstatements that result in the potential
build up of improper amounts on the balance sheet. SAB 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC
staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and
evaluate whether either approach results in a misstatement that
is material either quantitatively or qualitatively. SAB 108
is effective for fiscal years ending after November 15,
2006. SAB 108 allows a one-time transitional cumulative
effect adjustment to beginning retained earnings as of
January 1, 2006 for errors that were not previously deemed
material, but are material under the guidance in SAB 108.
We adopted SAB 108 in 2006 and it did not have any material
effect on our financial position and results of operations.
In February 2007, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities- Including an amendment of FASB Statement
No. 115 (FAS 159). This statement
permits companies to choose to measure eligible items at fair
value at specified election dates and report unrealized gains
and losses in earnings at each subsequent reporting date on
items for which the fair value option has been elected. The
objective of this statement is to improve financial reporting by
providing companies with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. A company may decide whether to elect the
fair value option for each eligible item on its election date,
subject to certain requirements described in the statement.
FAS 159 is effective for fiscal years beginning after
November 15, 2007 with early adoption permitted for fiscal
year 2007 if first quarter statements have not been issued. We
are currently evaluating the effect that adoption of this
statement will have on our financial position and results of
operations.
Impairment, Restructuring Charges and Other Related Closure
Costs
In 2006, we have incurred charges related to the main following
items: (i) the 150-mm restructuring plan started in 2003;
(ii) the headcount reduction plan announced in second
quarter of 2005; and (iii) 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 was substantially completed by the end of 2006. The total
plan of impairment and restructuring costs for the front-end and
back-end reorganization is estimated to be
83
$330 million in pre-tax charges, slightly down from the
original estimate of $350 million, of which
$316 million has been incurred as of December 31, 2006
($22 million in 2006, $13 million in 2005,
$76 million in 2004 and $205 million in 2003).
In the second quarter of 2005, we announced a restructuring plan
that, combined with other initiatives, aimed at exiting 3,000
members of our workforce outside Asia by the second half of
2006, of which 2,300 are planned for Europe. The total cost of
these measures was estimated to be approximately
$100 million pre-tax at the completion of the plan, of
which $86 million has been incurred as of December 31,
2006. We also upgraded the 150-mm production fabs to 200-mm,
optimized on a global scale our Electrical Wafer Sorting
(EWS) activities, and harmonized and streamlined our
support functions and disengaged from certain activities. This
plan was substantially completed by the end of 2006.
In the third quarter of 2006, we performed our annual impairment
tests in order to assess the recoverability of goodwill carrying
value. In addition, we decided to cease product development from
technologies inherited from Tioga business acquisitions, which
resulted in a $10 million charge in our 2006 accounts.
Impairment, restructuring charges and other related closure
costs incurred in 2006 are summarized as follows:
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Year Ended December 31, 2006 | |
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| |
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|
Total Impairment, | |
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|
Restructuring | |
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|
Charges and | |
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|
|
Restructuring | |
|
Other Related | |
|
Other Related | |
|
|
Impairment | |
|
Charges | |
|
Closure Costs | |
|
Closure Costs | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
150-mm fab plan
|
|
$ |
(1 |
) |
|
$ |
(7 |
) |
|
$ |
(14 |
) |
|
$ |
(22 |
) |
Restructuring plan decided in the second quarter 2005
|
|
|
(1 |
) |
|
|
(36 |
) |
|
|
(8 |
) |
|
|
(45 |
) |
Other
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(12 |
) |
|
$ |
(43 |
) |
|
$ |
(22 |
) |
|
$ |
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, total cash outlays for the restructuring plan amounted
to $76 million, corresponding mainly to the payment of
expenses consisting of $21 million related to our 150-mm
restructuring plan, $54 million related to our second
quarter 2005 restructuring plan and $1 million related to
other obligations accrued in 2005.
See Note 19 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,
84
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.
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. The fab employs approximately 2,700
people and features a 200-mm wafer production line that began
production in June 2006 and a 300-mm wafer production line,
which began production in October 2006. The total investment in
the project is $2 billion. We contributed 33% of the equity
financing, equivalent to $250 million, of which
$38 million was contributed in 2005 and $212 million
in 2006, while Hynix Semiconductor contributed 67%. We also
contributed $218 million out of $250 million as
long-term debt to the new joint venture, guaranteed by
subordinated collateral on the joint ventures assets. 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.
We have identified the joint venture as a Variable Interest
Entity (VIE) at December 31, 2006, and 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 $6 million as
Loss on equity investments in our 2006 Consolidated
Statement of Income compared to $4 million in 2005.
Backlog and Customers
We entered 2007 with a backlog (including frame orders) that was
lower than we had entering 2006. This decrease is due to the
correction in the semiconductor market that we registered in the
fourth quarter of 2006 that resulted in a reduced level of
bookings. In 2006, we had several large customers, with the
Nokia Group of companies being the largest and accounting for
approximately 22% of our revenues, flat compared to 2005. Total
original equipment manufacturers (OEMs) accounted
for approximately 81% of our net revenues, declining slightly
from approximately 82% in 2005. In 2006, our top ten OEM
customers accounted for approximately 51%, increasing slightly
from approximately 50% in 2005. Distributors accounted for
approximately 19% of our net revenues compared to approximately
18% in 2005. 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.
85
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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.
Our Supervisory Board advises our Managing Board and is
responsible for supervising the policies pursued by our Managing
Board and the general course of our affairs and business. Our
Supervisory Board consists of such number of members as is
resolved by our annual shareholders meeting upon a
non-binding proposal of our Supervisory Board, with a minimum of
six members. Decisions by our annual shareholders meeting
concerning the number and the identity of our Supervisory Board
members are taken by a simple majority of the votes cast at a
meeting, provided quorum conditions are met (15% of our issued
and outstanding share capital present or represented).
Our Supervisory Board had the following nine members since our
annual shareholders meeting on April 27, 2006:
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Name(1) |
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Position | |
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Year Appointed(2) | |
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Term Expires | |
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Age | |
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Gérald Arbola
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Chairman |
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2004 |
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2008 |
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58 |
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Bruno Steve
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Vice Chairman |
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1989 |
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2008 |
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65 |
|
Matteo del Fante
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Member |
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2005 |
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2008 |
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40 |
|
Tom de Waard
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Member |
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1998 |
|
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2008 |
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|
60 |
|
Douglas Dunn
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Member |
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|
2001 |
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2009 |
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62 |
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Didier Lamouche
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Member |
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2006 |
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|
2009 |
|
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47 |
|
Didier Lombard
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Member |
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2004 |
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2008 |
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65 |
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Antonino Turicchi
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Member |
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2005 |
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2008 |
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41 |
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Robert M. White
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Member |
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1996 |
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2007 |
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|
68 |
|
|
|
(1) |
Mr. Francis Gavois was a Supervisory Board member until our
2006 annual shareholders meeting, at which time he was
succeeded by Mr. Didier Lamouche. |
|
(2) |
As a member of the Supervisory Board. |
After our 2005 annual shareholders meeting, our
Supervisory Board appointed Mr. Gérald Arbola as
Chairman of our Supervisory Board and Mr. Bruno Steve as
Vice Chairman, each for a three-year term. On April 27,
2006, our Supervisory Board appointed Chairmen 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 Didier Lamouche 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. Mr. Tom de Waard
was appointed President of the Nomination and Corporate
Governance Committee and Messrs. Gérald Arbola, Bruno
Steve and Robert White were appointed as members.
During our annual shareholders meeting in 2007, the
mandate of Mr. White will expire. The mandates of
Messrs. Steve, Arbola, del Fante, de Waard, Lombard and
Turicchi will expire during our annual shareholders
meeting in 2008 and the mandates of Messrs. Dunn and
Lamouche will expire at our annual shareholders meeting in
2009.
Resolutions of the Supervisory Board require the approval of at
least three-quarters of its members in office. 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. In
2006, 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
shareholders meeting. The Supervisory Board may make a
proposal to the shareholders meeting for the suspension or
dismissal of one or
86
more of its members. The members of the Supervisory Board
receive compensation as authorized by the 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 is now Managing Director of
Areva S.A., where he had also served as Chief Financial
Officer, and is a member of the Executive Board of Areva since
his appointment on 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 Board of Directors of FT1CI and was the Chairman until his
resignation on November 15, 2006 of the Supervisory Board
of ST Holding, our largest shareholder.
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
Chairman of Statutory Auditors of Selex
S. & A. S. S.p.A., Chairman of Surveillance
Body of Selex S. & A. S. S.p.A and member of Statutory
Auditors of Pirelli Tyres 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 was
the Vice Chairman until his resignation on November 15,
2006 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. From
January 1, 2005 to January 1, 2007 he was a member of
the Management Committee of Clifford Chance. 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 BE Semiconductor Industries N.V.
(BESI) and of its audit and
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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.
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 ASML
Holding N.V. (ASML), an equipment supplier in the
semiconductor industry, a position from which he retired
effective October 1, 2004. Mr. Dunn was appointed
Chairman of the Board of Directors of ARM Holdings plc (United
Kingdom) in October 2006. In 2005, Mr. Dunn was appointed
to the board of Philips-LG LCD (Korea), TomTom N.V.
(Netherlands) and OMI, a privately-held company (Ireland), and
also serves as a non-executive director on the board of SOITEC
(France). He is also a member of the audit committees of ARM
Holdings plc, SOITEC and TomTom N.V. In 2005, Mr. Dunn
resigned from his position as a non-executive director on the
board of Sendo plc (United Kingdom). 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 (now NXP
Semiconductors). From 1980 to 1993 he held various positions at
Plessey Semiconductors.
Didier Lamouche has been a member of our Supervisory Board since
2006. Mr. Lamouche is currently a non-voting observer on
the Audit Committee of our Supervisory Board. Dr. Lamouche
is a graduate of Ecole Centrale de Lyon and holds a PhD in
semiconductor technology. He has 25 years experience in the
semiconductor industry. Dr. Lamouche started his career in
1984 in the R&D department of Philips before joining IBM
Microelectronics where he held several positions in France and
the United States. In 1995, he became Director of Operations of
Motorolas Advanced Power IC unit in Toulouse (France).
Three years later, in 1998, he joined IBM as General Manager of
the largest European semiconductor site in Corbeil (France) to
lead its turnaround and transformation into a joint venture
between IBM and Infineon: Altis Semiconductor. He managed Altis
Semiconductor as CEO for four years. In 2003, Dr. Lamouche
rejoined IBM and was the Vice President for Worldwide
Semiconductor Operations based in New York
(United States) until the end of 2004. Since December 2004,
Dr. Lamouche has been the Chairman and CEO of Groupe Bull, a
France-based global company operating in the IT sector. He is
also a member of the Board of Directors of CAMECA and SOITEC.
Didier Lombard was first appointed to our Supervisory Board at
the 2004 annual shareholders meeting and was reelected at
our 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 Thales and Thomson, one of our important
customers, as well as a member of the Supervisory Board of
Radiall. Mr. Lombard was also a member until his
resignation on November 15, 2006 of the Supervisory Board
of ST Holding, our largest shareholder. 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 SGI Federal. 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
88
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.
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Corporate Governance at ST |
Our consistent commitment to the principles of good corporate
governance is evidenced by:
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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. |
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Our early adoption of policies on important issues such as
business ethics and conflicts of
interest and strict policies to comply with applicable
regulatory requirements concerning financial reporting, insider
trading and public disclosures. |
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Our compliance with Dutch securities laws, because we are a
company incorporated under the laws of the Netherlands, as well
as our compliance with United States, French and Italian
securities laws, because our shares are listed in these
jurisdictions, in addition to our compliance with the corporate,
social and financial laws applicable to our subsidiaries in the
countries in which we do business. |
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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, 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
shareholders 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.
Our 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 as well as with ST
Holding or ST Holding II, our major shareholder. 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 our
stakeholders and of our business and must act independently in
their supervision of our management. Our 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 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
shareholders meeting, certain members for appointment to
our Supervisory Board. This agreement also contains other
corporate governance provisions, including
89
decisions to be taken by our Supervisory Board which are subject
to certain prior approvals, and 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.
Our Supervisory Board has on various occasions discussed the
Dutch corporate governance code, the implementing rules and
corporate governance standards of the SEC and of the NYSE, as
well as other corporate governance standards.
In 2005, the Supervisory Board, based on the evaluations by an
ad hoc committee, established the following independence
criteria for its members: Supervisory Board members must not
have any 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.
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 to the
Supervisory Board, 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, one of the members of our Supervisory Board is the
Chairman and CEO of France Telecom, one is a member of the Board
of Directors of Thomson, another is the non-executive Chairman
of the Board of Directors of ARM Holdings PLC and a
non-executive director of Soitec, and one is member of the
Supervisory Board of BESI. France Telecom and its subsidiaries
supply certain services to our Company and we entered into a
joint research and development partnership agreement with France
Telecom in February 2006. We have certain licensing agreements
with ARM, and have conducted transactions with Soitec and BESI
as well as Thomson. We believe that each of these transactions
is made on an arms-length basis in line with market practices
and conditions. Please see Item 7. Major Shareholders
and Related-Party Transactions.
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Supervisory Board Committees |
Membership and Attendance. Detailed information on
attendance at full Supervisory Board and Supervisory Board
Committee meetings during 2006 was as follows:
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Nomination | |
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and | |
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Corporate | |
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Audit | |
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Compensation | |
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Strategic | |
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Governance | |
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Ad hoc | |
Number of Meetings Attended in 2006(1) |
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Full Board | |
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Committee | |
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Committee | |
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Committee | |
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Committee | |
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Committees | |
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Gérald Arbola
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5 |
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4 |
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8 |
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1 |
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Matteo del Fante(3)
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13 |
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3 |
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Tom de Waard
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11 |
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14 |
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5 |
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8 |
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3 |
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Douglas Dunn
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7 |
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5 |
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Francis Gavois(2)(3)
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4 |
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6 |
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3 |
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Didier Lamouche(2)(3)(4)
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7 |
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4 |
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Didier Lombard
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8 |
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5 |
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4 |
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Bruno Steve
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11 |
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6 |
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4 |
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7 |
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Antonino Turicchi
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11 |
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6 |
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4 |
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7 |
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Robert M. White
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10 |
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13 |
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4 |
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(1) |
Includes meetings attended by way of conference call. |
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(2) |
Mr. Francis Gavois was a Supervisory Board member until our
2006 annual shareholders meeting, at which time he was
succeeded by Mr. Didier Lamouche. |
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(3) |
Appointed as non-voting observer to Audit Committee. |
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(4) |
Mr. Lamouches total attendance of seven Supervisory
Board meetings includes two meetings in which he was represented
by Mr. Arbola. |
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 14 times during 2006. 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 control
over financial reporting and reviewed managements
conclusions as to the effectiveness of internal control. The
Audit Committee reviewed our annual Consolidated Financial
Statements in U.S. GAAP for the year ended
December 31, 2006, and the associated press release
published on January 23, 2007. 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 our 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 2007.
Following the discovery in 2006 by our internal audit of a fraud
perpetrated by our former head of treasury operations, who
retired at the end of 2005, we filed a criminal complaint in
September 2006 with the prosecutor in Lugano, Switzerland, that
led to the arrest of our former treasurer. The criminal
proceeding is ongoing. Our Audit Committee appointed a U.S. law
firm last fall to conduct an independent investigation to
determine the nature of the fraud and whether the wrongdoing was
limited to our former treasurer. To date, based on this
investigation, which is substantially complete, and based on our
understanding of the available evidence from the criminal
proceeding, nothing has been brought to the attention of the
Audit Committee or the Company indicating that the fraud was
committed with the knowledge or involvement of any of our
current or former senior management team, or that such
transactions materially affected our financial statements for
the current or prior periods.
91
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). 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 and applicable provisions of Dutch law
that require us to prepare a set of accounts pursuant to IFRS in
advance of our 2006 and 2007 annual shareholders meetings.
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 and 2006 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
2006, we will not be able to provide reconciliations pursuant to
IFRS for periods prior to 2005, 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 April 27, 2006, our Supervisory Board re-appointed
Mr. de Waard as Chairman, and appointed Messrs. Dunn
and White as members. Messrs. del Fante and Lamouche 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 our executive officers and
key employees. The Compensation Committee met six times in 2006.
Among its main activities, the Compensation Committee reviewed
and approved the Managing Board bonus for 2005 and reviewed and
approved the Managing Boards Compensation policy for the
year 2006, which was subsequently adopted by our shareholders at
our 2006 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 2006, tied to our performance in 2006
according to quantifiable criteria fixed by our Supervisory
Board upon the proposal from its Compensation Committee. The
Compensation Committee also approved and monitored the criteria
relating to our performance in terms of sales, profits and
return on net assets which condition the vesting of stock awards
granted to our President and CEO, COO, Executive Officers and
other key persons pursuant to our Unvested Stock Award Plans.
The Compensation Committee also proposed to the Supervisory
Board an amendment to the Stock Based Compensation Plan for the
members of the Supervisory Board to clarify that if a
beneficiary ceases to be a member or professional of the
Supervisory Board, other than in case of voluntary resignation
or dismissal for cause, the beneficiary is entitled to exercise
the option rights within the duration of the plan. Furthermore,
in 2006, the Compensation Committee proposed to the Supervisory
Board to maintain the same compensation for Supervisory Board
members as was fixed at the 2005 annual shareholders
meeting. The Compensation Committee also reviewed the terms of
our Unvested Stock Award Plan for 2006, the principles of which
were approved by our 2006 annual shareholders meeting, and
recommended the approval of such terms by our Supervisory Board.
In particular, the Compensation Committee and the Supervisory
Board approved the provisions of our Unvested Stock Award Plan,
which provides for the accelerated vesting of stock awards in
the event of a change in control.
In 2007, and subject to the approval of our annual
shareholders meeting, the Compensation Committee proposed
to our Supervisory Board to maintain the compensation of
Supervisory Board members and
92
professionals as in 2006, but to increase the number of shares
awarded as stock-based compensation from 6,000 to 15,000 for
Supervisory Board members and from 3,000 to 7,500 for
professionals.
On April 27, 2006, 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.
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 2006, 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, including the evaluation of possible acquisitions.
In 2006, the Strategic Committee monitored our plans for our
Flash Memory Business which led to the announcement in December
2006 of the strategic repositioning of such activities and the
creation of a new Flash Memory Group.
On April 27, 2006, 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. Our
Nominating and Corporate Committee was created to establish the
selection criteria and appointment procedures for the
appointment of members to our Supervisory Board and Managing
Board, and to resolve issues relating to corporate governance.
Prior to 2006, our Nominating and Corporate Governance Committee
met with specialized consultants to evaluate candidates for
filling the vacancies on our Supervisory Board and make a
proposal to our Supervisory Board for the appointment of the
three Supervisory Board members to be elected by our 2006 annual
shareholders meeting.
Following the announced changes in Dutch legislation due to the
implementation of the EU Directive on capital markets, the
Nominating and Corporate Governance Committee also evaluated the
validity and enforceability of the Option Agreement relating to
our Preference Shares, and met with Dutch lawyers and designated
individuals to discuss the organization and
set-up of an
independent Dutch foundation, or Stichting, to take over the
rights and obligations of ST Holding pursuant to the Option
Agreement between the Company and STH relating to Preference
Shares. Finally, the Nominating and Corporate Governance
Committee met to evaluate candidates for the Supervisory Board
member position up for renewal at the 2007 annual
shareholders meeting. On April 27, 2006, 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. The Nominating and
Corporate Governance Committee met eight times in 2006.
Ad hoc Committees. During 2006, our Supervisory Board set
up two ad hoc committees. The first comprised of Mr. del Fante,
Mr. Gavois and Mr. de Waard and met three times to review
and approve the conditions of the 2016 Convertible Bonds and the
2013 Senior Bonds issued in the first quarter of 2006.
The second comprised of Mr. Arbola and Mr. Steve,
Chairman and Vice-Chairman of the Supervisory Board,
respectively. The committee met with the directors of the
Stichting, the independent foundation with which we entered into
a new option agreement, before their appointment.
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 primarily to organize meetings, ensure continuing
education and training of the Supervisory Board members, as well
as record-keeping. 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. Since March 18, 2005, Mr. Acciari
and Mr. Loubert serve as Secretary and Vice Secretary,
respectively, for the Supervisory Board, and for each of the
Compensation, Nominating and Corporate Governance and Strategic
Committees of our Supervisory Board, 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,
93
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. The Controllers generally meet once a month with
the management of the Company and report to the Supervisory
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 our 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 Company while continuing to make
available to us, as appropriate, his experience and insight into
the semiconductor, electronics and industrial worlds.
Our Managing Board consists of such number of members as
resolved by the shareholders meeting upon the proposal of
our Supervisory Board and currently comprises a sole member. The
members of the Managing Board are appointed for three-year
terms, which may be renewed one or more times in accordance with
our Articles of Association upon a non-binding proposal by our
Supervisory Board at the shareholders meeting adopted by a
simple majority of the votes cast at a shareholders
meeting where at least 15% of the issued and outstanding share
capital is present or represented. If our Managing Board were to
consist of more than one member, our Supervisory Board would
appoint one of the members of our Managing Board to be chairman
of our 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 in
office). Resolutions of our 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 shareholders meeting may suspend or dismiss one or
more members of our 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 our Supervisory Board. In
that case, a resolution to dismiss or to suspend a member of our
Managing Board can be taken by a simple majority of the votes
cast at a meeting where at least 15% of our issued and
outstanding share capital is present or represented. Our
Supervisory Board may suspend members of our Managing Board, but
a shareholders meeting must be convened within three
months after such suspension to confirm or reject the
suspension. Our 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 our 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. Our
Managing Board must seek prior approval from the
shareholders meeting for decisions regarding a significant
change in the identity or nature of the Company. Under our
Articles of Association, our Managing Board must obtain prior
approval from our 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
our Supervisory Board. In addition, under our Articles of
Association, our Supervisory Board and our shareholders
meeting may specify by resolution certain additional actions by
our Managing Board that require its prior approval.
94
In accordance with our Corporate Governance Charter, the sole
member of our Managing Board and our Executive Officers 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 our
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, since 2005, annual
accounts using IFRS, prior to submission for shareholder
adoption.
During a meeting held on September 23, 2000, our
Supervisory Board authorized our Managing Board to proceed with
acquisitions without prior consent of our Supervisory Board
subject to a maximum amount of $25 million per transaction,
provided our Managing Board keeps our Supervisory Board informed
of progress regarding such transactions and gives a full report
once the transaction is completed.
Our executive officers support our Managing Board in its
management of us, without prejudice to our Managing Boards
ultimate responsibility. Our executive officers at the end of
fiscal year 2006 were:
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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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Alain Dutheil
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Chief Operating Officer |
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Laurent Bosson
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Executive Vice President, Front-end Technology and Manufacturing |
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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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Carlo Ferro
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Executive Vice President, Chief Financial Officer (and for
Infrastructure and Services organization) |
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Philippe Geyres(1)
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Executive Vice President, HPC (and for the other product
segments) |
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Carmelo Papa(2)
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Executive Vice President, MPA |
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Tommi Uhari(2)(3)
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Executive Vice President, ASPG |
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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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Executive Staff
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Georges Auguste
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Corporate Vice President, Total Quality and Environmental
Management |
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Gian Luca Bertino
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Corporate Vice President, CPG |
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Ugo Carena
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Corporate Vice President, APG |
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Marco Luciano Cassis
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Corporate Vice President, Japan Region |
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Patrice Chastagner
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Corporate Vice President, Human Resources |
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Claude Dardanne(4)
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Corporate Vice President, General Manager, Microcontrollers,
Memories & Smartcards |
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François Guibert
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Corporate Vice President, Asia Pacific Region |
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Reza Kazerounian
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Corporate Vice President, North America Region |
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Otto Kosgalwies
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Corporate Vice President, Infrastructure and Services |
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Robert Krysiak
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Corporate Vice President and General Manager, Greater China
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Christos Lagomichos(4)
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Corporate Vice President, General Manager, Home
Entertainment & Displays Group |
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Mario Licciardello
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Corporate Vice President, MPG |
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Jean-Claude Marquet(5)
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Corporate Vice President, Asia Pacific Region |
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Carlo Ottaviani
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Corporate Vice President, Communications |
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Jeffrey See
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Corporate Vice President, Central Back-End General Manager |
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Giordano Seragnoli(6)
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Corporate Vice President, Back-end Manufacturing and Subsystems
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Thierry Tingaud
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Corporate Vice President, Emerging Markets Region |
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Philippe Geyres announced his resignation in December 2006. |
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In January 2007, Carmelo Papa and Tommi Uhari were appointed to
our Executive Committee. |
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Tommi Uhari joined us from Nokia in December 2006 as Manager of
the Personal Multimedia Group. |
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Claude Dardanne and Christos Lagomichos were promoted to
corporate vice presidents in January 2007. |
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Mr. Jean-Claude Marquet retired in October 2006. |
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Mr. Giordano Seragnoli retired in June 2006. |
Our President and Chief Executive Officer and sole member of our
Managing Board, Mr. Carlo Bozotti, has appointed a
Corporate Executive Committee, which is currently comprised of
six Executive Vice Presidents, the CEO and the COO. The
Executive Vice Presidents represent all the functions of the
organization: the product segments, sales and marketing
(including regions), the manufacturing and technology research
and development activities and the central functions. The role
of the Executive Committee is to set corporate policy,
coordinate strategies of the Companys various functions
representing its constituents, and drive major cross functional
programs. The Executive Committee, chaired by Mr. Bozotti,
or by Mr. Dutheil in Mr. Bozottis absence, meets
frequently (generally every two weeks), while executive staff
meetings are held on a quarterly basis with the attendance of
all corporate vice presidents. Under our organizational
structure, product segments and staff functions report directly
to Mr. Bozotti, while our sales, marketing, manufacturing
and technology research and development functions report to our
COO.
Carlo Bozotti is our President, Chief Executive Officer and the
sole member of our Managing Board. As CEO, Mr. Bozotti
chairs our Executive Committee. Prior to taking on this new role
at the 2005 annual shareholders meeting, Mr. Bozotti
served as Corporate Vice President, MPG since August 1998.
Mr. Bozotti joined SGS Microelettronica in 1977 after
graduating in Electronic Engineering from the University of
Pavia. Mr. Bozotti served as Product Manager for the
Industrial, Automotive and Telecom products in the Linear
Division and as Business Unit Manager for the Monolithic
Microsystems Division from 1987 to 1988. He was appointed
Director of Corporate Strategic Marketing and Key Accounts for
the Headquarters Region in 1988 and became Vice President,
Marketing and Sales, Americas Region in 1991. Mr. Bozotti
served as Corporate Vice
96
President, MPG from August 1998 through March 2005, after having
served as Corporate Vice President, Europe and Headquarters
Region from 1994 to 1998.
Alain Dutheil was appointed Chief Operating Officer in 2005,
with the endorsement of the Supervisory Board. He is also the
Vice Chairman of our Corporate Executive Committee. Prior to his
appointment as COO, he served as Corporate Vice President,
Strategic Planning and Human Resources from 1994 and 1992,
respectively. After graduating in Electrical Engineering from
the Ecole Supérieure dIngénieurs de Marseille
(ESIM), Mr. Dutheil joined Texas Instruments in
1969 as a Production Engineer, becoming Director for Discrete
Products in France and Human Resources Director in France in
1980 and Director of Operations for Portugal in 1982. He joined
Thomson Semiconductors in 1983 as General Manager of a plant in
Aix-en-Provence, France and then became General Manager of
SGS-Thomson Discrete Products Division. From 1989 to 1994,
Mr. Dutheil served as Director for Worldwide Back-end
Manufacturing, in addition to serving as Corporate Vice
President for Human Resources from 1992 until 2005.
Laurent Bosson is currently Executive Vice President of
Front-End Technology and Manufacturing. He is also a member of
our Corporate Executive Committee. He served as Corporate Vice
President, Front-end Manufacturing and VLSI Fabs from 1989 to
2004 and from 1992 to 1996 he was given additional
responsibility as President and Chief Executive Officer of our
operations in the Americas. Mr. Bosson remains Chairman of
the Board of STMicroelectronics Inc., our affiliate in the
United States. Mr. Bosson received a masters degree
in Chemistry from the University of Dijon in 1969. He joined
Thomson-CSF in 1964 and has held several positions in
engineering and manufacturing. In 1982, Mr. Bosson was
appointed General Manager of the Tours and Alençon
facilities of Thomson Semiconducteurs. In 1985, he joined the
French subsidiary of SGS Microelettronica as General
Manager of the Rennes, France manufacturing facility.
Andrea Cuomo is currently Executive Vice President for the
Advanced System Technology Group and Chief Strategy
Officer. Mr. Cuomo is also a member of our Corporate
Executive Committee. After studying at Milano Politecnico in
Nuclear Sciences, with a special focus on analog electronics,
Mr. Cuomo joined us in 1983 as a System Testing Engineer,
and from 1985 to 1989 held various positions to become Marketing
Manager in the automotive, computer and industrial product
segment. In 1989, Mr. Cuomo was appointed Director of
Strategy and Market Development for the Dedicated Products
Group, and in 1994 became Vice President responsible for
Marketing and Strategic Accounts within the Headquarters Region.
In 1998, Mr. Cuomo was appointed as Vice President
responsible for Advanced System Technology and in 2002,
Mr. Cuomo was appointed as Corporate Vice President and
Advanced System Technology General Manager. In 2004, he was
given the additional responsibility of serving as our Director
of Strategic Planning and was promoted to Executive Vice
President.
Carlo Ferro is Executive Vice President and Chief Financial
Officer. He is also a member of our Executive Committee.
Mr. Ferro has served as our CFO since May 2003.
Mr. Ferro graduated with a degree in Business and Economics
from the LUISS Guido Carli University in Rome, Italy in 1984,
and has a professional qualification as a Certified Public
Accountant. From 1984 through 1996, Mr. Ferro held a series
of positions in finance and control at Istituto per la
Ricostruzione Industriale-IRI S.p.A. (IRI), and
Finmeccanica. Mr. Ferro served as one of our Supervisory
Board Controllers from 1992 to 1996. Mr. Ferro was also a
part-time university professor of Planning and Control until
1996. From 1996 to 1999, Mr. Ferro held positions at EBPA
NV, a process control company listed on the NYSE, rising to Vice
President Planning and Control and principal financial officer.
Mr. Ferro joined us in June 1999 as Group Vice President
Corporate Finance, overseeing finance and accounting for all
affiliates worldwide, and served as Deputy CFO from April 2002
through April 2003. Mr. Ferro has been designated by us to
serve as the statutory auditor for DNP Europe Srl, one of our
joint venture partners.
Philippe Geyres served as our Executive Vice President for HPC
until the end of 2006. He also served on our Executive
Committee. He served as Corporate Vice President and General
Manager of our former Consumer and Microcontroller Group
(formerly Programmable Products Group) from 1990 until 2004.
Mr. Geyres graduated from the École Polytechnique in
1973 and began his career with IBM in France before joining
Schlumberger Group in 1980 as Data Processing Director. He was
subsequently appointed Deputy Director of the IC Division at
Fairchild Semiconductors. Mr. Geyres joined Thomson
Semiconducteurs in 1983 as Director of the Bipolar Integrated
Circuits Division. He was appointed Strategic Programs Director
in 1987 and, later the same year, became our Corporate Vice
President, Strategic Planning until 1990.
Carmelo Papa is our Executive Vice President and General Manager
of our Industrial & Multisegment Sector. He is also a member
of our Corporate Executive Committee. He received his degree in
Nuclear Physics at Catania University. Mr. Papa joined us
in 1983 and in 1986 was appointed Director of Product Marketing
and Customer Service for Transistors and Standard ICs. In 2000,
Mr. Papa was appointed Corporate Vice President, Emerging
Markets and in 2001, he took on additional worldwide
responsibility for our Electronic Manufacturing Service to drive
forward this new important channel of business. From January
2003 through December 2004, he was in charge of formulating and
leading our strategy to expand our customer base by providing
dedicated
97
solutions to a broader selection of customers, one of our key
growth areas. In 2005, he was named Corporate Vice President,
MPA.
Tommi Uhari was promoted to Executive Vice President and General
Manager of the Mobile, Multimedia & Communications Group in
January 2007. Mr. Uhari is also a member of our Executive
Committee. After graduating from the University of Oulu with a
Masters degree in Industrial Engineering and Management,
Mr. Uhari worked at Nokia in various R&D and management
positions. He started as a design engineer, working on digital
ASICs for mobile phones. In 2004, he was promoted Vice
President, Head of Wireless platforms. Mr. Uhari joined our
Company in 2006 as the Manager of the Personal Multimedia Group.
Enrico Villa is currently Executive Vice President, Europe
Region. He also serves on our Executive Committee, representing
the sales and marketing functions. He was appointed Corporate
Vice President, Europe Region on January 1, 2000, after
having served as Corporate Vice President, Region 5 (now
Emerging Markets) from January 1998 through 2000. Mr. Villa
has served in various capacities within our management since
1967 after obtaining a degree in Business Administration from
the University of Milan and has 40 years of experience in
the semiconductor industry. He is currently President of the
European Electronics Components Association (EECA)
as well as Chairman for Europe at the Joint Steering Committee
of the World Semiconductor Council.
Georges Auguste has served as Corporate Vice President, Total
Quality and Environmental Management since 1999.
Mr. Auguste received a degree in Engineering from the Ecole
Supérieure dElectricité (SUPELEC) in
1974 and a diploma in Business Administration from Caen
University in 1976. Prior to joining us, Mr. Auguste worked
with Philips Components from 1974 to 1986, in various positions
in the field of manufacturing. From 1990 to 1997, he headed our
operations in Morocco, and from 1997 to 1999, Mr. Auguste
served as Director of Total Quality and Environmental Management.
Gian Luca Bertino graduated in 1985 in Electronic Engineering
from the Polytechnic of Turin. From 1986 to 1997 he held several
positions within the Research and Development organization of
Olivettis semiconductor group before joining ST in 1997.
He was Group Vice President, Peripherals, General Manager of our
Data Storage Division within the Telecommunications, Peripherals
and Automotive (TPA) Groups, until he was appointed
Corporate Vice President, CPG.
Ugo Carena graduated in Mechanical Engineering from the
Polytechnic of Turin in 1970. His semiconductor career began in
1977 within Olivettis semiconductor group. He joined ST in
1997 and he held the position of Telecommunications, Peripherals
and Automotive (TPA) Groups Vice President, General Manager
Computer Peripherals and Industrial Group, until he was named
Corporate Vice President, APG in 2005.
Marco Luciano Cassis graduated from the Polytechnic of Milan
with a degree in Electronic Engineering. Cassis joined us in
1988 as a mixed-signal analog designer for car radio
applications. In 1993, Cassis moved to Japan to support our
newly created design center with his expertise in audio
products. Then in 2000, Cassis took charge of the Audio Business
Unit and a year later he was promoted to Director of Audio and
Automotive Group, responsible for design, marketing, sales,
application support, and customer services. In 2004, Cassis was
named Vice President of Marketing for the automotive, computer
peripheral, and telecom products. In 2005, he advanced to Vice
President APG and joined the Board of the Japanese subsidiary,
STMicroelectronics K.K. Mr. Cassis was appointed Corporate
Vice President, Japan region on September 6, 2005.
Patrice Chastagner is a graduate of the HEC business school in
France and in 1988 became the Grenoble Site Director, guiding
the emergence of this facility to become one of the most
important hubs in Europe for advanced, complex silicon chip
development and solutions. As Human Resources Manager for the
Telecommunications, Peripherals and Automotive
(TPA) Groups, which was our largest product group at the
time, he was also TQM Champion and applied the principle of
continuous improvement to human resources as well as to
manufacturing processes. Since March 2003, he has also been
serving as Chairman of STMicroelectronics S.A. in France. Upon
his promotion to Corporate Vice President, Human Resources in
January 2005, he took the leadership of a group with about
50,000 people.
Claude Dardanne was promoted to Corporate Vice President and
General Manager of our newly created Microcontrollers, Memories
& Smartcards (MMS) Group, part of our Industrial &
Multisegment Sector, in January 2007. Mr. Dardanne
graduated from the Ecole Supérieure dIngénieurs
en Génie Electrique de Rouen in France with a Masters
degree in Electronic Engineering. After graduation,
Mr. Dardanne spent five years at Thomson Semiconducteurs in
France before moving to North America as a Field Application
Engineer. From 1982, Mr. Dardanne was responsible for
marketing of Microcontrollers & Microprocessor products in
North America and, in 1987, Mr. Dardanne was appointed
Thomsons Worldwide Marketing Manager for Microcontrollers
& Microprocessors in France. In 1989, Mr. Dardanne
joined Apple Computer, France, as Marketing Director,
responsible for business development in segments including
Industrial, Education, Banking and Communications. From 1991 to
1994, Mr. Dardanne served as Marketing Director at
Alcatel-Mietec in Belgium
98
and in 1994, Mr. Dardanne rejoined Thomson (which by then
had merged with SGS Microelettronica) as Director of Central
Marketing for the Memory Products Group (MPG). In 1998,
Mr. Dardanne became the head of the EEPROM division. In
2002, Mr. Dardanne was promoted to Vice President of the
Memory Products Group and General Manager of the Serial
Non-Volatile Memories division and in 2004, he was promoted to
Deputy General Manager, Memory Products Group, where his
responsibilities included the management of our Smart Card
Division.
François Guibert was born in Beziers, France in 1953 and
graduated from the Ecole Supérieure dIngénieurs
de Marseilles in 1978. After three years at Texas Instruments,
he joined Thomson Semiconducteurs in 1981 as Sales Manager
Telecom. From 1983 to 1986, he was responsible for ICs and
strategic marketing of telecom products in North America. In
1988 he was appointed Director of our Semicustom Business for
Asia Pacific and in 1989 he became President of ST-Taiwan. Since
1992 he has occupied senior positions in Business Development
and Investor Relations and was Group Vice President, Corporate
Business Development which includes M&A activities from 1995
to the end of 2004. In January 2005, Mr. Guibert was
promoted to the position of Corporate Vice President, Emerging
Markets Region and in October 2006, he was appointed Corporate
Vice President, Asia Pacific Region.
Reza Kazerounian is a graduate of the University of Illinois and
received his PhD from the University of California, Berkeley in
electrical engineering and computer sciences. In 1985,
Mr. Kazerounian started his professional career as a
research and development engineer at WaferScale Integration
(WSI), specializing in Programmable System Devices. At WSI, he
became Vice President of Technology and Product Development
(1995) and later Chief Operating Officer in 1997. When we
acquired WSI in 2000, Mr. Kazerounian became the general
manager of the newly formed Programmable Systems Division,
charged with the development of 8- and 32-bit embedded systems.
In 2003, he was appointed Group Vice President and General
Manager of the Smart Card IC Division. Reza Kazerounian was
appointed Corporate Vice President for the North America Region
on September 6, 2005.
Otto Kosgalwies was appointed Corporate Vice President,
Infrastructure and Services in November 2004, with
responsibility for all of our corporate activities related to
Information Technology, Logistics, and Procurement and Material
Management, with particular emphasis on the complete supply
chain between customer demand, manufacturing execution,
inventory management, and supplier relations.
Mr. Kosgalwies has been with us since 1984 after graduating
with a degree in Economics from Munich University. From 1992
through 1995, he served as European Manager for Distribution,
from 1995 to 2000 as Sales and Distribution Director for Central
Europe, and since 1997 as CEO of our German subsidiary. In 2000,
Mr. Kosgalwies was appointed Vice President for Sales and
Marketing in Europe and General Manager for Supply Chain
Management, where he was responsible at a corporate level for
the effective flow of goods and information from suppliers to
end users.
Robert Krysiak graduated from Cardiff University with a degree
in Electronics and holds an MBA from the University of Bath. In
1983, Mr. Krysiak joined INMOS, as a VLSI Design Engineer.
Then in 1992, Mr. Krysiak formed a group dedicated to the
development of CPU products based on the Reusable-Micro-Core
architecture. Mr. Krysiak was appointed Group Vice
President and General Manager of our 16/32/64 and DSP division
in 1997. In 1999, Mr. Krysiak became Group Vice President
of the Micro Cores Development, and in 2001, he took charge of
our DVD division. Mr. Krysiak was appointed on
October 17, 2005 as Corporate Vice President and General
Manager of our Greater China region, which focuses exclusively
on our operations in China, Hong Kong and Taiwan. Before that,
Mr. Krysiak was Marketing Director for HPC.
Christos Lagomichos was promoted to Corporate Vice President and
General Manager of our newly created Home Entertainment &
Displays Group within the Companys Application Specific
Groups in January 2007. Mr. Lagomichos graduated from the
Technical University of Munich in 1981 with a degree in
electronic engineering. He began his professional career in
design engineering with Siemens Neuperlach, Munich in 1983.
Mr. Lagomichos joined our Company in the Munich office in
1985 as a design engineer and became head of the Munich Design
Center for digital applications in 1988. The following year, he
accepted a position as Product Marketing Manager of our
Semicustom Business Unit in Agrate, Italy. In 1993,
Mr. Lagomichos moved to Carrollton, Texas to become
Director of our Semicustom Products Division for the Americas
and was subsequently appointed General Manager of the Semicustom
Products Division Worldwide. In 1997, Mr. Lagomichos was
appointed Group Vice President of the Semicustom Products
Division, which was later renamed to the Consumer Broad Band
Division. In 2004, Mr. Lagomichos was promoted to Group
Vice President, General Manager of our Home Entertainment Group.
Mario Licciardello was born in Catania, Italy, on
January 28, 1942. He graduated in Physics from the
University of Catania in 1964. Mr. Licciardello has spent
his entire career within companies that have evolved into the
current STMicroelectronics. In 1965 he joined ATES, a
predecessor of ST, initially in process
99
development, then in strategic planning, after one year spent at
the Catania University engaged in various research programs. In
1970, he joined the MOS field where he spent a large part of his
professional career in various positions ranging from Operations
Manager to Business Unit Manager contributing to the success in
the market of several product lines. From 1986 to 1990 he
covered the role of Director of Marketing and Business
Management for the Semicustom Product Division (named IST). The
position included the worldwide responsibility for the external
design centers network. From 1990 to 1993, as Director of
Corporate Strategic Planning with the relevant Corporate Central
Organization, his responsibility ranged from Capital Investment
Control to shareholder relations. He moved to MPG in 1993 and in
2003 was promoted from General Manager of our Flash Memories
Division to Deputy General Manager of MPG. In 2005, he was named
Corporate Vice President and General Manager of MPG.
Jean-Claude Marquet has served as Corporate Vice President, Asia
Pacific Region since July 1995. After graduating in Electrical
and Electronics Engineering from ESIEE Paris, Mr. Marquet
began his career in the French National Research Organization
and later joined Alcatel. In 1969, he joined Philips Components.
He remained at Philips until 1978, when he joined Ericsson,
eventually becoming President of Ericsson Components
French operations. In 1985, Mr. Marquet joined Thomson
Semiconducteurs as Vice President Sales and Marketing, France.
Thereafter, Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux, and Vice President Asia
Pacific and Director of Sales and Marketing for the region.
Carlo Emanuele Ottaviani was named Corporate Vice President,
Communications in March 2003. He began his career in 1965 in the
Advertisement and Public Relations Office of SIT-SIEMENS, today
known as ITALTEL. He later had responsibility for the activities
of the associated semiconductor company ATES Electronic
Components. ATES merged with the Milan-based SGS in 1971, and
Mr. Ottaviani was in charge of the advertisement and
marketing services of the newly formed SGS-ATES. In 1975, he was
appointed Head of Corporate Communication worldwide, and has
held this position since that time. In 2001, Mr. Ottaviani
was also appointed President of STMicroelectronics Foundation.
Jeffrey See was appointed Corporate Vice President, Central
Back-end General Manager in April 2006. After Mr. See
graduated from the Singapore Polytechnic in 1965, he became a
Chartered Electronic Engineer at the Institution of Electrical
Engineers (IEE) in the UK. In 1969, Mr. See joined SGS
Microelettronica, a forerunner company of ST, as a Quality
Supervisor at its first Assembly and Test facility in Toa Payoh,
Singapore and was promoted to Deputy Back-End Plant Manager in
1980. In 1983, Mr. See was appointed to manage the
start-up of the
regions first wafer fabrication plant (125-mm) in Ang Mo
Kio, Singapore and became General Manager of the front-end
operations in 1992. In 2001, Mr. See was appointed Vice
President and Assistant General Manager of Central Front-End
Manufacturing and General Manager of the Asia Pacific
Manufacturing Operations, responsible for wafer fabrication and
electrical wafer sort in the region.
Giordano Seragnoli has served as Corporate Vice President,
Subsystems Products Group since 1987 and since 1994, as Director
for Worldwide Back-end Manufacturing. After graduating in
Electrical Engineering from the University of Bologna,
Mr. Seragnoli joined the Thomson Group as RF Application
Designer in 1962 and joined SGS Microelettronica in 1965.
Thereafter, Mr. Seragnoli served in various capacities
within our management, including Strategic Marketing Manager and
Subsystems Division Manager, Subsystems Division Manager
(Agrate), Technical Facilities Manager, Subsystems Division
Manager and Back-End Manager.
Thierry Tingaud was promoted to Corporate Vice President,
Emerging Markets Region General Manager, responsible for our
sales and marketing operations in Africa and the Middle East,
India, Latin America, Russia and the Eastern European countries
in July 2006. Mr. Tingaud graduated from INSA Lyon in 1982
with a Masters degree in Electronic Engineering and he
also holds an MBA from Ecole Supérieure des Sciences
Economiques et Commerciales (ESSEC). Mr. Tingaud joined the
sales and marketing organization of Thomson Semiconducteurs, a
forerunner company of ST, in 1985. Three years later, he took
responsibility for the Companys telecommunications
business in France. In 1996, Mr. Tingaud moved to North
America as Corporate Strategic Key Account Director for our
Headquarters Region. In this role, he strengthened the strategic
alliance with a major key account, responsible for its
operations in Europe, North America, Mexico, and Malaysia. In
1999, Mr. Tingaud was appointed Vice President for Sales
and Marketing of Telecommunications in Europe.
As is common in the semiconductor industry, our success depends
to a significant extent upon, among other factors, the continued
service of our key senior executives and research and
development, engineering, marketing, sales, manufacturing,
support and other personnel, and on our ability to continue to
attract, retain and motivate qualified personnel. The
competition for such employees is intense, and the loss of the
services of any of these key personnel without adequate
replacement or the inability to attract new qualified personnel
could have a material adverse effect on us. We do not maintain
insurance with respect to the loss of any of our key personnel.
See Item 3. Key Information Risk
Factors Risks Related to Our Operations
Loss of key employees could hurt our competitive position.
100
Compensation
Pursuant to the decisions adopted by our shareholders at the
annual shareholders meeting held on April 27, 2006,
the aggregate compensation for the members and former members of
our Supervisory Board in respect of service in 2006 was
$1,429,500 before any withholding taxes and applicable mandatory
social contributions, as set forth in the following table.
|
|
|
|
|
Supervisory Board Member |
|
Directors Fees | |
|
|
| |
Gérald Arbola
|
|
$ |
215,500 |
|
Matteo del Fante
|
|
|
129,000 |
|
Tom de Waard(2)
|
|
|
246,500 |
|
Douglas Dunn
|
|
|
105,000 |
|
Francis Gavois(1)
|
|
|
17,000 |
|
Didier Lamouche(1)
|
|
|
98,500 |
|
Didier Lombard
|
|
|
132,000 |
|
Bruno Steve
|
|
|
213,500 |
|
Antonino Turicchi
|
|
|
138,500 |
|
Robert M. White
|
|
|
134,000 |
|
|
|
|
|
Total
|
|
$ |
1,429,500 |
|
|
|
|
|
|
|
(1) |
Mr. Francis Gavois was a Supervisory Board Member until the
2006 annual shareholders meeting, at which time he was
succeeded by Mr. Didier Lamouche. |
|
(2) |
Compensation, including attendance fees of $2,000 per
meeting of the Supervisory Board or committee thereof, was paid
to Clifford Chance LLP. |
The total amount paid as compensation in 2006 to our 23
executive officers, including Mr. Carlo Bozotti, the sole
member of our Managing Board and our President and CEO, was
approximately $13.5 million before any withholding taxes.
Such amount also includes the amounts of EIP paid to the
executive officers pursuant to a Corporate Executive Incentive
Program (the EIP) that entitles selected executives
to a yearly bonus based upon the individual performance of such
executives. The maximum bonus awarded under the EIP is based
upon a percentage of the executives salary and is adjusted
to reflect our overall performance. The participants in the EIP
must satisfy certain personal objectives that are focused
inter alia on return on net assets, customer service,
profit, cash flow and market share. The relative charges and
non-cash benefits were approximately $5.1 million. Within
such amount, the remuneration of our current sole member of our
Managing Board and President and CEO in 2006 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sole Member of Our Managing Board and |
|
|
|
|
|
Non-cash | |
|
|
President and CEO |
|
Salary | |
|
Bonus(1) | |
|
Benefits | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Carlo Bozotti
|
|
|
$720,000(2) |
|
|
$ |
680,000 |
|
|
$ |
70,000 |
(3) |
|
$ |
1,470,000 |
|
|
|
(1) |
The bonus paid to the sole member of our Managing Board and
President and CEO during the 2006 financial year was approved by
the Compensation Committee and approved by the Supervisory Board
in respect of the 2005 financial year, based on fulfillment of a
number of pre-defined objectives for 2005. |
|
(2) |
Our Supervisory Board, upon the recommendation of our
Compensation Committee, approved an annual salary for 2006 for
our Managing Board and President and CEO of $700,000. The
difference between the amount approved and the amount actually
received by Mr. Bozotti resulted because the salary was
paid partially in euros using an exchange rate of approximately
1.00 to $1.25
and partially in Swiss francs using an exchange rate of
approximately CHF 1.00 to $0.80. |
|
(3) |
Including employer social contributions, company car allowance
and miscellaneous allowances. |
Our Supervisory Board, upon the recommendation of our
Compensation Committee, approved certain basic terms of the
compensation for Mr. Carlo Bozotti, the sole member of our
Managing Board and President and Chief Executive Officer,
including an aggregate annual salary of approximately $700,000,
a maximum potential bonus subject to the achievement of
performance objectives of 150%, and the grant of up to 100,000
restricted shares subject to the achievement of performance
objectives. Our annual shareholders meeting held on
April 27, 2006 approved the compensation policy of our
Managing Board which includes the above mentioned terms. Our
Supervisory Board subsequently approved the terms of
Mr. Bozottis employment by us upon terms which are
consistent with this approved compensation policy.
Mr. Bozotti has two employment agreements with us, the
first with our Dutch parent company, which relates to his
activities as sole member of our Managing Board and
representative of the Dutch legal entity, and the second in
Switzerland, which relates to his activities as President and
CEO, and contain all benefits including Unvested Share Awards,
EIP, Pension and other items covered by the
101
compensation policy approved by our shareholders. We do not have
any service agreements with members of our Supervisory Board.
Our Supervisory Board has approved the establishment of a
complementary pension plan for our top executive management,
comprising the CEO, COO and other key executives to be selected
by the CEO according to the general criteria of eligibility and
service set up by the Supervisory Board upon the proposal of its
Compensation Committee. In respect to such plan, we have set up
an independent foundation under Swiss law which manages the Plan
and to which we make contributions. Pursuant to this plan, we
have made a contribution of $3.5 million to the plan of our
current and former President and Chief Executive Officers,
$0.6 million to the plan of our Chief Operating Officer,
and $6.2 million to the plan for all other beneficiaries.
We did not extend any loans, overdrafts or warranties to our
Supervisory Board members or to the sole member of our Managing
Board and President and CEO. Furthermore, we have not guaranteed
any debts or concluded any leases with our Supervisory Board
members or their families, or the sole member of the Managing
Board.
For information regarding stock options and other stock-based
compensation granted to members of our Supervisory Board, the
Managing Board and our executive officers, please refer to
Stock Awards and Options below.
The executive officers and the Managing Board were covered in
2006 under certain group life and medical insurance programs
provided by us. The aggregate additional amount set aside by us
in 2006 to provide pension, retirement or similar benefits for
executive officers and our Managing Board as a group is in
addition to the amounts allocated to the complementary pension
plan described above and estimated to have been approximately
$8.9 million, which includes statutory employer
contributions for state-run retirement, similar benefit programs
and other miscellaneous allowances.
Share Ownership
None of the members of our Supervisory Board and Managing Board
or our executive officers holds shares or options to acquire
shares representing more than 1% of our issued share capital.
Stock Awards and Options
Our Stock Options and Stock Award Plans are designed to
incentivize, attract and retain our Supervisory Board members,
executives and key employees by aligning compensation with our
success and the evolution of our share price.
In line with our 2005 and 2006 annual shareholders meeting
resolutions, we have transitioned our stock-based compensation
plans from stock-option grants to non-vested stock awards.
Pursuant to the shareholders resolutions adopted by our
2005 and 2006 annual shareholders meeting, our Supervisory
Board, upon the proposal of the Managing Board and the
recommendation of the Compensation Committee, took the following
actions:
|
|
|
|
|
approved the terms and conditions of the 2005 Supervisory Board
Stock-Based Compensation Plan for members and professionals
valid for a three year period; |
|
|
|
amended our 2001 Employee Stock Option Plan which expired at the
end of 2005 with the aim of enhancing our ability to retain key
employees and motivate them to shareholder value creation; |
|
|
|
approved the vesting conditions, linked to our future
performance and their continued service with us, to apply to
non-vested stock awards granted to employees in 2005; |
|
|
|
adopted our new 2006 Unvested Stock Award Plan for Executives
and Key Employees (the Employee USA Plan) with the
aim of enhancing our ability to retain key employees and
motivate them to shareholder value creation and approved vesting
conditions linked to our future performance and continued
service with us; and |
|
|
|
reviewed the terms of the 2007 Unvested Stock Award Plan for
Executives and Key Employees to be presented to our 2007 annual
shareholders meeting. |
We will use our treasury shares to cover the stock awards
granted in 2005, 2006 and 2007 under the Employee USA Plans. As
of December 31, 2006, 637,109 stock awards granted in
relation to the 2005 plan had vested, leaving an amount of
12,762,891 million treasury shares outstanding as of
December 31, 2006. The new unvested stock award plan have
generated an additional charge in the income statements of the
fourth quarter of 2006 of $12 million, which corresponds to
the compensation expense recognized for the non-vested stock
awards from the grant date over the vesting period. Additional
charges will be booked in the first quarter of 2007 and in
following quarters as the conditions relating to vesting of the
share awards granted in 2005 and 2006 are met.
102
The following table sets forth the number of restricted shares
granted to Supervisory Board members in 2005 and 2006 and the
number of stock options granted in 2004. Messrs. Turicchi
and del Fante declined their stock awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
Number of | |
|
|
|
|
|
|
|
|
Non-vested | |
|
Acquisition | |
|
Number of | |
|
Acquisition | |
|
Number of | |
|
|
|
|
Shares Granted | |
|
Price | |
|
Non-vested | |
|
Price | |
|
Stock Options | |
|
Grant Price | |
|
|
| |
|
| |
|
Shares Granted(1) | |
|
| |
|
Granted(2) | |
|
U.S.$ | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gérald Arbola
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Bruno Steve
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Tom de Waard
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Matteo del Fante(3)(4)
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
|
|
|
|
|
|
Douglas Dunn
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Francis Gavois(5)
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Didier Lamouche(5)
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Didier Lombard
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Antonino Turicchi(3)(4)
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
|
|
|
|
|
|
Robert M. White
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
6,000 |
|
|
|
1.04 |
|
|
|
12,000 |
|
|
|
22.71 |
|
Riccardo Gallo(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
|
22.71 |
|
Alessandro Ovi(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
|
22.71 |
|
|
|
(1) |
Pursuant to the 2005 Stock-Based Compensation Plan for
Supervisory Board Members and Professionals of the Supervisory
Board. |
|
(2) |
Pursuant to the 2002 Stock Option Plan for Supervisory Board
Members and Professionals of the Supervisory Board. |
|
(3) |
Messrs. Riccardo Gallo and Alessandro Ovi were Supervisory
Board Members until our 2005 annual shareholders meeting,
at which time they were succeeded by Messrs. Antonino
Turicchi and Matteo del Fante. |
|
(4) |
Messrs. Antonino Turicchi and Matteo del Fante declined
their grants of restricted shares. |
|
(5) |
Mr. Francis Gavois was a Supervisory Board Member until our
2006 annual shareholders meeting, at which time he was
succeeded by Mr. Didier Lamouche. |
Between January 1, 2006 and January 1, 2007, an
aggregate amount of 27,000 stock options and
2,000 stock awards were exercised by the Supervisory Board
members.
Mr. Bozotti was appointed as sole member of our Managing
Board and President and Chief Executive Officer of our company
by our annual shareholders meeting on March 18, 2005
for a three-year period. In each of 2005 and 2006,
Mr. Bozotti was granted pursuant to the compensation policy
appointed by the shareholders meeting up to 100,000 Unvested
Stock Awards. The vesting of such stock awards is conditional
upon certain performance criteria fixed by our Supervisory Board
being achieved and Mr. Bozottis continued service
with us.
With regard to Mr. Bozottis 2005 stock awards, only
two out of the three criteria fixed by the Supervisory Board
have been achieved, so Mr. Bozotti is entitled to receive
66,667 stock awards out of the 100,000 originally granted, which
shall vest as defined by the Plan one year, two years and three
years, respectively, after the date of grant, provided
Mr. Bozotti is still an employee at such time (subject to
the acceleration provisions in the event of a change in
control see below).
With respect to Mr. Bozottis 2006 stock awards, the
Supervisory Board has not yet determined whether the performance
criteria which condition the vesting have been met. During 2006,
Mr. Bozotti exercised 62,580 stock options granted to
him, but did not take up any vested stock awards or purchase or
sell any of our shares.
The exercise of stock options and the sale or purchase of shares
of our stock by the members of our Supervisory Board, the sole
member of our Managing Board and President and CEO, and all our
employees are subject to an internal policy which involves,
inter alia, certain blackout periods.
|
|
|
Employee and Managing Board Stock Option Plans |
1995 Stock Option Plan. On October 20, 1995, our
shareholders approved resolutions authorizing the Supervisory
Board for a period of five years to adopt and administer a stock
option plan that provides for the granting to our managers and
professionals of options to purchase up to a maximum of
33 million common shares (the 1995 Stock Option
Plan). We granted options to acquire a total of
31,561,941 shares pursuant to the 1995 Stock Option Plan as
indicated.
103
The description of our 1995 stock option plans as indicated in
the following table, takes into consideration the 2:1 stock
split effected on June 16, 1999 and the 3:1 stock split
effected on May 5, 2000. Taking into account these stock
splits, the total options outstanding as of December 31,
2006 give the right to acquire 55,611,252 common shares by
our employees (including executive officers) and 714,000 common
shares by members and professionals (including Supervisory Board
experts and controllers) of our Supervisory Board, or a total of
56,325,252 shares.
The term options outstanding means options existing
as of December 31, 2006 not cancelled or exercised by their
respective beneficiaries (employees and members or professionals
of our Supervisory Board). Options are cancelled either because
the beneficiary waives them or because the beneficiary loses the
right to exercise them when leaving the company (with the
exception of retirement or termination of employment pursuant to
collective plans or restructurings):
1995 Plan (Employees)
October 20, 1995
Annual Shareholders Meeting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 3 |
|
Tranche 4 |
|
Special Grant |
|
Tranche 5 |
|
Special Grant |
|
Tranche 6 |
|
Special Grant |
|
Tranche 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Supervisory Board Meeting
|
|
July 28, 1998 |
|
Sept 16, 1999 |
|
Jan 24, 2000 |
|
June 16, 2000 |
|
Sept 18, 2000 |
|
Dec 11, 2000 |
|
Dec 18, 2000 |
|
March 1, 2001 |
Total Number of Shares which may be purchased
|
|
3,900,000 |
|
8,878,200 |
|
150,000 |
|
5,331,250 |
|
70,000 |
|
2,019,640 |
|
26,501 |
|
113,350 |
Vesting Date
|
|
July 28, 2001 |
|
Sept 16, 2002 |
|
Jan 24, 2003 |
|
June 16, 2002 |
|
Sept 18, 2002 |
|
Dec 11, 2002 |
|
Dec 18, 2002 |
|
March 1, 2003 |
Expiration Date
|
|
July 28, 2006 |
|
Sept 16, 2007 |
|
Jan 24, 2008 |
|
June 16, 2008 |
|
Sept 18, 2008 |
|
Dec 11, 2008 |
|
Dec 18, 2008 |
|
March 1, 2009 |
Exercise Price
|
|
$12.03 |
|
$24.88 |
|
$55.25 |
|
$62.01 |
|
$52.88 |
|
$50.69 |
|
$44.00 |
|
$31.65 |
Terms of Exercise
|
|
50% on |
|
50% on |
|
50% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
|
July 28, 2001 |
|
Sept 16, 2002 |
|
Jan 24, 2003 |
|
June 16, 2002 |
|
Sept 18, 2002 |
|
Dec 11, 2002 |
|
Dec 18, 2002 |
|
March 1, 2003 |
|
|
50% on |
|
50% on |
|
50% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
|
July 28, 2002 |
|
Sept 16, 2003 |
|
Jan 24, 2004 |
|
June 16, 2003 |
|
Sept 18, 2003 |
|
Dec 11, 2003 |
|
Dec 18, 2003 |
|
March 1, 2004 |
|
|
|
|
|
|
|
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
|
|
|
|
|
|
|
June 16, 2004 |
|
Sept 18, 2004 |
|
Dec 11, 2004 |
|
Dec 18, 2004 |
|
March 1, 2005 |
Number of Shares to be acquired with Outstanding Options as of
Dec 31, 2006
|
|
0 |
|
7,661,670 |
|
1,980 |
|
4,507,280 |
|
39,745 |
|
1,572,610 |
|
20,527 |
|
49,690 |
Held by Managing Board/ Executive Officers
|
|
0 |
|
398,400 |
|
0 |
|
187,000 |
|
0 |
|
0 |
|
0 |
|
0 |
As of December 31, 2006 the total number of options
exercised pursuant to the 1995 Stock Option Plan was 14,523,601;
the number of options, which can no longer be exercised, because
they have been cancelled, was 3,184,838; and the number of
options outstanding, which can still be exercised, was
13,853,502. These outstanding options correspond to 13,853,502
common shares, which could be issued. No stock options have been
granted pursuant to our annual shareholders meeting in
2005.
2001 Stock Option Plan. At the annual shareholders
meeting on April 25, 2001, our shareholders approved
resolutions authorizing the Supervisory Board for a period of
five years to adopt and administer a stock option plan (in the
form of five annual tranches) that provides for the granting to
our managers and professionals of options to purchase up to a
maximum of 60 million common shares (the 2001 Stock
Option Plan). The amount of options granted to the sole
member of our Managing Board and President and CEO is determined
by our Compensation Committee, upon delegation from our
Supervisory Board and since 2005 is submitted for approval by
our annual shareholders meeting. The amount of stock
options granted to other employees and for other employees is
made by our Compensation Committee on delegation by our
Supervisory Board and following recommendation of the sole
member of our Managing Board and President and CEO. In addition,
the Supervisory Board delegates each year to the sole member of
our Managing Board and President and CEO the flexibility to
grant up to a determined number of share awards to our employees
pursuant to the 2001 Stock Option Plan in special cases or in
connection with an acquisition.
104
2001 Plan (Employees)
April 25, 2001
Annual Shareholders Meeting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 1 | |
|
Tranche 2 | |
|
Tranche 3 | |
|
Tranche 4 | |
|
Tranche 5 | |
|
Tranche 6 | |
|
Tranche 7 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Date of the grant
|
|
|
April 27, 2001 |
|
|
|
Sept 4, 2001 |
|
|
|
Nov 1, 2001 |
|
|
|
Jan 2, 2002 |
|
|
|
Jan 25, 2002 |
|
|
|
April 25, 2002 |
|
|
|
June 26, 2002 |
|
Total Number of Shares which may be purchased
|
|
|
9,521,100 |
|
|
|
16,000 |
|
|
|
61,900 |
|
|
|
29,400 |
|
|
|
3,656,103 |
|
|
|
9,708,390 |
|
|
|
318,600 |
|
Vesting Date
|
|
|
April 27, 2003 |
|
|
|
Sept 4, 2003 |
|
|
|
Nov 1, 2003 |
|
|
|
Jan 2, 2004 |
|
|
|
Jan 25, 2003 |
|
|
|
April 25, 2004 |
|
|
|
June 26, 2004 |
|
Expiration Date
|
|
|
April 27, 2011 |
|
|
|
Sept 4, 2011 |
|
|
|
Nov 1, 2011 |
|
|
|
Jan 2, 2012 |
|
|
|
Jan 25, 2012 |
|
|
|
April 25, 2012 |
|
|
|
June 26, 2012 |
|
Exercise Price
|
|
|
$39.00 |
|
|
|
$29.70 |
|
|
|
$29.61 |
|
|
|
$33.70 |
|
|
|
$31.09 |
|
|
|
$31.11 |
|
|
|
$22.30 |
|
|
|
|
32% on |
|
|
|
32% on |
|
|
|
32% on |
|
|
|
32% on |
|
|
|
50% on |
|
|
|
32% on |
|
|
|
32% on |
|
|
|
|
April 27, 2003 |
|
|
|
Sept 4, 2003 |
|
|
|
Nov 1, 2003 |
|
|
|
Jan 2, 2004 |
|
|
|
Jan 25, 2003 |
|
|
|
April 25, 2004 |
|
|
|
June 26, 2004 |
|
Terms of Exercise
|
|
|
32% on |
|
|
|
32% on |
|
|
|
32% on |
|
|
|
32% on |
|
|
|
50% on |
|
|
|
32% on |
|
|
|
32% on |
|
|
|
|
April 27, 2004 |
|
|
|
Sept 4, 2004 |
|
|
|
Nov 1, 2004 |
|
|
|
Jan 2, 2005 |
|
|
|
Jan 25, 2004 |
|
|
|
April 25, 2005 |
|
|
|
June 26, 2005 |
|
|
|
|
36% on |
|
|
|
36% on |
|
|
|
36% on |
|
|
|
36% on |
|
|
|
|
|
|
|
36% on |
|
|
|
36% on |
|
|
|
|
April 27, 2005 |
|
|
|
Sept 4, 2005 |
|
|
|
Nov 1, 2005 |
|
|
|
Jan 2, 2006 |
|
|
|
|
|
|
|
April 25, 2006 |
|
|
|
June 26, 2006 |
|
Number of Shares to be acquired with Outstanding Options as of
December 31, 2006
|
|
|
8,112,170 |
|
|
|
16,000 |
|
|
|
50,460 |
|
|
|
25,100 |
|
|
|
3,014,612 |
|
|
|
8,549,588 |
|
|
|
142,306 |
|
Held by Managing Board/ Executive Officers
|
|
|
247,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
93,500 |
|
|
|
280,000 |
|
|
|
0 |
|
2001 Plan (Employees) (continued)
April 25, 2001
Annual Shareholders Meeting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 8 |
|
Tranche 9 |
|
Tranche 10 |
|
Tranche 11 |
|
Tranche 12 |
|
Tranche 13 |
|
Tranche 14 |
|
Tranche 15 |
|
Tranche 16 |
|
Tranche 17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of the grant
|
|
Aug 1, 2002 |
|
Dec 17, 2002 |
|
March 14, 2003 |
|
June 3, 2003 |
|
Oct 24, 2003 |
|
Jan 2, 2004 |
|
April 26, 2004 |
|
Sept 1, 2004 |
|
Jan 31, 2005 |
|
March 17, 2005 |
Total Number of Shares which may be purchased
|
|
24,500 |
|
14,400 |
|
11,533,960 |
|
306,850 |
|
135,500 |
|
86,400 |
|
12,103,490 |
|
175,390 |
|
29,200 |
|
13,000 |
Vesting Date
|
|
Aug 1, 2004 |
|
Dec 17, 2004 |
|
March 14, 2005 |
|
June 3, 2005 |
|
Oct 24, 2005 |
|
Jan 2, 2006 |
|
April 26, 2006 |
|
Sept 1, 2006 |
|
Jan 31, 2007 |
|
March 17, 2007 |
Expiration Date
|
|
Aug 1, 2012 |
|
Dec 17, 2012 |
|
March 14, 2013 |
|
June 3, 2013 |
|
Oct 24, 2013 |
|
Jan 2, 2014 |
|
April 26, 2014 |
|
Sept 1, 2014 |
|
Jan 31, 2015 |
|
March 17, 2015 |
Exercise Price
|
|
$20.02 |
|
$21.59 |
|
$19.18 |
|
$22.83 |
|
$25.90 |
|
$27.21 |
|
$22.71 |
|
$17.08 |
|
$16.73 |
|
$17.31 |
|
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
|
Aug 1, 2004 |
|
Dec 17, 2004 |
|
March 14, 2005 |
|
June 3, 2005 |
|
Oct 24, 2005 |
|
Jan 2, 2006 |
|
April 26, 2006 |
|
Sept 1, 2006 |
|
Jan 31, 2007 |
|
March 17, 2007 |
|
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
|
32% on |
Terms of Exercise
|
|
Aug 1, 2005 |
|
Dec 17, 2005 |
|
March 14, 2006 |
|
June 3, 2006 |
|
Oct 24, 2006 |
|
Jan 2, 2007 |
|
April 26, 2007 |
|
Sept 1, 2007 |
|
Jan 31, 2008 |
|
March 17, 2008 |
|
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
36% on |
|
|
Aug 1, 2006 |
|
Dec 17, 2006 |
|
March 14, 2007 |
|
June 3, 2007 |
|
Oct 24, 2007 |
|
Jan 2, 2008 |
|
March 14, 2008 |
|
Sept 1, 2008 |
|
Jan 31, 2009 |
|
March 17, 2009 |
Number of Shares to be acquired with Outstanding Options as of
Dec 31, 2006
|
|
18,100 |
|
14,400 |
|
10,302,239 |
|
201,550 |
|
124,200 |
|
26,700 |
|
10,970,870 |
|
147,255 |
|
29,200 |
|
13,000 |
Held by Managing Board/ Executive Officers
|
|
0 |
|
0 |
|
352,000 |
|
0 |
|
31,000 |
|
0 |
|
465,000 |
|
0 |
|
0 |
|
0 |
In 2005, our shareholders, at our annual shareholders
meeting adopted the modification of our 2001 Stock Option Plan,
so as to provide for the grant of up to four million unvested
stock awards, instead of stock options, to our senior executives
and certain of our key employees, as well as for the grant of up
to 100,000 unvested stock awards to our President and CEO.
Pursuant to such approval, the Compensation Committee, upon
delegation from our Supervisory Board has approved the
conditions, which shall apply to the vesting of such awards.
These conditions relate both to our financial performance
meeting certain defined criteria in 2005 and during the first
quarter of 2006, and to the continued presence at the defined
vesting dates in 2006, 2007 and 2008, of the beneficiaries of
the unvested stock awards.
Furthermore, the Compensation Committee approved the list of
beneficiaries of the unvested stock awards and delegated to our
President and Chief Executive Officer the right to grant certain
additional unvested stock awards to key employees, in
exceptional cases, provided that the total number of unvested
stock awards granted to executives and key employees shall not
exceed for 2005 four million shares not including the grant of
up to 100,000 shares awards to which our President and CEO
may be entitled.
105
|
|
|
2006 Unvested Stock Award Plan |
In 2006, our shareholders at our annual shareholders
meeting approved the grant of up to five million unvested stock
awards to our senior executives and certain of our key
employees, as well as the grant of up to 100,000 Unvested Stock
Awards to our President and CEO. Up to 4,916,640 shares
have been awarded under such Plan as of December 31, 2006,
out of which up to 4,798,210 remain outstanding but unvested as
of December 31, 2006.
Pursuant to such approval, the Compensation Committee, upon
delegation from our Supervisory Board has approved the
conditions which shall apply to the vesting of such awards.
These conditions relate both to our financial performance,
meeting certain defined criteria in 2006, and to the continued
presence at the defined vesting dates in 2007, 2008 and 2009 of
the beneficiaries of the unvested stock awards.
Furthermore, the Compensation Committee approved the list of
beneficiaries of the unvested stock awards and delegated to our
President and Chief Executive Officer the right to grant certain
additional unvested stock awards to key employees, in
exceptional cases, provided that the total number of unvested
stock awards granted to executives and key employees shall not
exceed for 2006 five million shares, not including the grant of
up to 100,000 share awards to which our President and CEO
may be entitled.
|
|
|
2005 Unvested Stock Award Plan |
In 2005, our shareholders at our annual shareholders
meeting approved the grant of up to four million unvested stock
awards to our senior executives and certain of our key
employees, as well as the grant of up to 100,000 Unvested Stock
Awards to our President and CEO. Up to 4,159,915 shares have
been awarded under such Plan as of December 31, 2006, out of
which up to 1,993,444 remain outstanding but unvested as of
December 31, 2006.
|
|
|
Supervisory Board Stock Option Plans |
1996 Stock Option Plan for members and professionals of the
Supervisory Board. In June 1996, the annual
shareholders meeting approved the granting to members and
professionals of the Supervisory Board of options to purchase
approximately 400,500 of our common shares over a period of
three years, beginning in 1996 (the 1996 Stock Option
Plan).
Under this plan, no options were outstanding as of
December 31, 2006.
1999 Stock Option Plan for members and professionals of the
Supervisory Board. The 1996 Plan was renewed in 1999 for a
three-year period expiring on December 31, 2001 (the
1999 Stock Option Plan), providing for the grant of
at least the same number of options as were granted during the
1996-1999 period.
2002 Stock Option Plan for members and professionals of the
Supervisory Board. A 2002 Plan was adopted on March 27,
2002 (the 2002 Stock Option Plan). Pursuant to this
2002 Plan, the annual shareholders meeting authorized the
grant of 12,000 options per year to each of the members of our
Supervisory Board during the course of his three-year tenure
(during the three-year period from 2002-2005), and of 6,000
options per year to all of the professionals. Pursuant to the
1996, 1999, and 2002 Plans, stock options for the subscription
of 1,219,500 shares were already granted to the members of
the Supervisory Board and professionals. Options were granted to
members and professionals of our Supervisory Board under the
1996, 1999, and 2002 Stock Option Plans as shown in the table
below:
1996, 1999, and 2002 Plans
(for Supervisory Board Members and Professionals)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 1996 |
|
May 31, 1999 |
|
March 27, 2002 |
Date of Annual |
|
|
|
|
|
|
Shareholders Meeting |
|
Tranche 3 |
|
Tranche 1 |
|
Tranche 2 |
|
Tranche 3 |
|
Tranche 1 |
|
Tranche 2 |
|
Tranche 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of the grant
|
|
July 28, 1998 |
|
Sept 16, 1999 |
|
June 16, 2000 |
|
April 27, 2001 |
|
April 25, 2002 |
|
March 14, 2003 |
|
April 26, 2004 |
Total Number of Shares which
may be purchased
|
|
103,500 |
|
207,000 |
|
103,500 |
|
112,500 |
|
132,000 |
|
132,000 |
|
132,000 |
Vesting Date
|
|
July 28, 1999 |
|
Sept 16, 2000 |
|
June 16, 2001 |
|
April 27, 2002 |
|
May 25, 2002 |
|
April 14, 2003 |
|
April 26, 2004 |
Expiration Date
|
|
July 28, 2006 |
|
Sept 16, 2007 |
|
June 16, 2008 |
|
April 27, 2011 |
|
April 25, 2012 |
|
March 14, 2013 |
|
April 26, 2014 |
Exercise Price
|
|
$12.03 |
|
$24.88 |
|
$62.01 |
|
$39.00 |
|
$31.11 |
|
$19.18 |
|
$22.71 |
|
|
All exercisable |
|
All exercisable |
|
All exercisable |
|
All exercisable |
|
All exercisable |
|
All exercisable |
|
All exercisable |
Terms of Exercise
|
|
after 1 year |
|
after 1 year |
|
after 1 year |
|
after 1 year |
|
after 1 year |
|
after 1 year |
|
after 1 year |
Number of Shares to be acquired with Outstanding
Options as of December 31,
2006
|
|
0 |
|
153,000 |
|
90,000 |
|
99,000 |
|
120,000 |
|
120,000 |
|
132,000 |
106
As of December 31, 2006 options to purchase a total of
342,000 common shares were outstanding under the 1996 and 1999
Stock Option Plans. At the same date, options to purchase
372,000 common shares were outstanding under the 2002
Supervisory Board Stock Option Plan.
2005 Stock-based Compensation Plan for members and
professionals of the Supervisory Board. Our 2005 annual
shareholders meeting approved the adoption of a new
three-year stock-based compensation plan for Supervisory Board
members and professionals instead of a stock option plan. The
2005 Plan has the following terms and conditions:
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|
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|
|
a maximum number of 6,000 newly issued shares per year for each
member of the Supervisory Board and 3,000 newly issued shares
per year for each professional of the Supervisory Board; and |
|
|
|
at a price per share of
1.04 per
share, the nominal value of ST shares. |
In 2005, 66,000 shares have been granted to the
beneficiaries under such plan, out of which 34,000 were
outstanding as of December 31, 2006.
In 2006, 66,000 shares have been granted to the
beneficiaries under such plan, out of which 51,000 were
outstanding as of December 31, 2006.
The table below reflects the grants to the Supervisory Board
members and professionals under the 2005 Stock Based
Compensation Plan. See Note 16.6 to our Consolidated Financial
Statements.
|
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|
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Total number of Shares which may be purchased
|
|
|
34,000 |
|
|
|
51,000 |
|
Expiration date
|
|
|
October 25, 2015 |
|
|
|
April 29, 2016 |
|
Summary of Stock Options and Share Awards. The following
tables summarize the number of options and awards authorized but
remaining to be granted, the number of options and awards
exercised, the number of options and awards cancelled and the
number of options and awards outstanding as of December 31,
2006 for employees and Supervisory Board members.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Employees | |
|
|
| |
|
|
|
|
Total | |
|
|
|
|
2001 | |
|
|
|
(stock options | |
|
|
|
|
Amended | |
|
|
|
and stock | |
|
|
1995 Plan | |
|
2001 Plan | |
|
Plan | |
|
2006 Plan | |
|
awards) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Remaining amount authorized to be granted
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
301,790 |
|
|
|
301,790 |
|
Amount exercised (stock options) or vested (stock awads)
|
|
|
14,523,601 |
|
|
|
10,050 |
|
|
|
637,109 |
|
|
|
0 |
|
|
|
15,170,760 |
|
Amount cancelled
|
|
|
3,184,838 |
|
|
|
5,966,383 |
|
|
|
1,529,362 |
|
|
|
118,430 |
|
|
|
10,799,013 |
|
Amount outstanding
|
|
|
13,853,502 |
|
|
|
41,757,750 |
|
|
|
1,993,444 |
|
|
|
4,798,210 |
|
|
|
62,402,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supervisory Board | |
|
|
| |
|
|
1996 | |
|
1999 | |
|
2002 | |
|
2005 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Remaining amount authorized to be granted
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Amount exercised or vested for 2005 plan
|
|
|
328,500 |
|
|
|
18,000 |
|
|
|
0 |
|
|
|
17,000 |
|
|
|
363,500 |
|
Amount cancelled
|
|
|
72,000 |
|
|
|
63,000 |
|
|
|
24,000 |
|
|
|
30,000 |
|
|
|
189,000 |
|
Amount outstanding
|
|
|
0 |
|
|
|
342,000 |
|
|
|
372,000 |
|
|
|
85,000 |
|
|
|
799,000 |
|
We currently hold 12,762,891 treasury shares that we may grant
to those employees who become eligible to the vested stock
attributed to them in 2005 or 2006, or which may be attributed
in the future. We also may repurchase additional common shares
without additional shareholder approval for distribution to our
employees pursuant to employee stock award compensation plans.
The implementation of our Stock Based Compensation Plan for
Employees are subject to periodic proposals from our Managing
Board to our Supervisory Board, and recommendations by the
Compensation Committee of our Supervisory Board.
107
The tables below set forth the breakdown of employees by main
category of activity and geographic area for the past three
years.
|
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|
|
|
|
|
|
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|
|
At December 31, | |
|
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| |
|
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2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
France
|
|
|
10,660 |
|
|
|
10,330 |
|
|
|
9,990 |
|
Italy
|
|
|
10,320 |
|
|
|
10,500 |
|
|
|
10,940 |
|
Rest of Europe
|
|
|
1,580 |
|
|
|
1,550 |
|
|
|
1,660 |
|
United States
|
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|
3,280 |
|
|
|
3,120 |
|
|
|
3,180 |
|
Malta and Morocco
|
|
|
7,330 |
|
|
|
6,900 |
|
|
|
7,200 |
|
Asia
|
|
|
18,600 |
|
|
|
17,600 |
|
|
|
16,530 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
51,770 |
|
|
|
50,000 |
|
|
|
49,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Research and Development
|
|
|
10,300 |
|
|
|
9,700 |
|
|
|
9,800 |
|
Marketing and Sales
|
|
|
2,850 |
|
|
|
2,880 |
|
|
|
2,850 |
|
Manufacturing
|
|
|
33,420 |
|
|
|
32,400 |
|
|
|
32,150 |
|
Administration and General Services
|
|
|
2,600 |
|
|
|
2,550 |
|
|
|
2,400 |
|
Divisional Functions
|
|
|
2,600 |
|
|
|
2,470 |
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
51,770 |
|
|
|
50,000 |
|
|
|
49,500 |
|
|
|
|
|
|
|
|
|
|
|
Our future success, in particular in a period of strong
increased demand will also depend on our ability to continue to
attract, retain and motivate highly qualified technical,
marketing, engineering and management personnel. Unions are
represented at several of our manufacturing facilities. We use
temporary employees if required during production spikes and in
Europe during the summer vacations. We have not experienced any
significant strikes or work stoppages in recent years, other
than in Rennes, France in connection with the closure of this
plant and management believes that our relations with employees
are good.
As part of our commitment to the principles of TQEM, we founded
ST University in 1994 to develop an internal education
organization, responsible for organizing training courses to
executives, engineers, technicians and sales personnel within
STMicroelectronics and coordinating all training for our
employees.
|
|
Item 7. |
Major Shareholders and Related-Party Transactions |
Major Shareholders
The following table sets forth certain information with respect
to the ownership of our issued common shares based on
information available to us as of December 31, 2006:
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Common Shares Owned | |
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| |
Shareholders(1) |
|
Number | |
|
% | |
|
|
| |
|
| |
STMicroelectronics Holding II B.V. (ST
Holding II)
|
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250,704,754 |
|
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|
27.5 |
|
Public
|
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|
553,818,764 |
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|
|
60.8 |
|
Brandes Investment Partners
|
|
|
92,871,524 |
|
|
|
10.2 |
|
Treasury shares
|
|
|
12,762,891 |
|
|
|
1.4 |
|
|
|
(1) |
At the end of 2004, Capital Group International, Inc. owned more
than 5% of our share capital. As of December 31, 2006,
Capital Group International, Inc. no longer held more than 5% of
our share capital and is, consequently, no longer one of our
major shareholders. |
Our principal shareholders do not have different voting rights
from those of our other shareholders.
ST Holding II is a wholly-owned subsidiary of
STMicroelectronics Holding N.V. (ST Holding). As of
December 31, 2006, FT1CI (the French
Shareholder) and a consortium of Italian shareholders (the
Italian Shareholders) made up of CDP and
Finmeccanica directly held 50% each in ST Holding based on
voting rights. CDP held 30% in ST Holding and Finmeccanica held
20% in ST Holding based on voting rights. The indirect interest
of FT1CI and the Italian Shareholders is split on a 50%-50%
basis. Through a structured tracking stock system implemented in
the articles of association of ST Holding and ST Holding II,
FT1CI indirectly held 99,318,236 of our common shares,
representing 10.9% of our issued share capital as of
December 31, 2006, CDP indirectly held 91,644,941 of our
common shares, representing 10.1% of our issued share capital as
of
108
December 31, 2006 and Finmeccanica indirectly held
59,741,577 of our common shares, representing 6.6% of our issued
share capital as of December 31, 2006. Any disposals or, as
the case may be, acquisitions by ST Holding II on behalf of
respectively FT1CI, CDP and Finmeccanica, will decrease or, as
the case may be, increase the indirect interest of respectively
FT1CI, CDP and Finmeccanica in our issued share capital. FT1CI
was formerly a jointly held company set up by Areva and France
Telecom to control the interest of the French shareholders in ST
Holding. Following the transactions described below, Areva is
currently the sole shareholder of FT1CI. Areva (formerly known
as CEA-Industrie) is a corporation controlled by the French
atomic energy commission. Areva is listed on Euronext Paris in
the form of Investment Certificates. CDP is an Italian
corporation 70% owned by the Italian Ministero
dellEconomia e delle Finanze (the Ministry of
Economy and Finance) and 30% owned by a consortium of 66
Italian banking foundations. Finmeccanica is a listed Italian
holding company majority owned by the Italian Ministry of
Economy and Finance and the public. Finmeccanica is listed on
the Italian Mercato Telematico Azionario (MTA) and
is included in the S&P/ MIB 30 stock index.
ST Holding II owned 90% of our shares before our initial
public offering in 1994, and has since then gradually reduced
its participation, going below the 66% threshold in 1997 and
below the 50% threshold in 1999. ST Holding may further dispose
its shares as provided below in
Shareholders Agreements STH
Shareholders Agreement and
Disposals of our Common Shares and
pursuant to the eventual conversion of our outstanding
convertible instruments. Set forth below is a table of ST
Holding IIs holdings in us as of the end of each of
the past three financial years:
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|
|
|
|
|
|
|
|
Common Shares Owned | |
|
|
| |
|
|
Number | |
|
% | |
|
|
| |
|
| |
December 31, 2006
|
|
|
250,704,754 |
|
|
|
27.5 |
|
December 31, 2005
|
|
|
250,704,754 |
|
|
|
27.6 |
|
December 31, 2004
|
|
|
278,483,280 |
|
|
|
30.8 |
|
Announcements about additional disposals of our shares by ST
Holding II on behalf of one or more of its indirect
shareholders, Areva, CDP, FT1CI or Finmeccanica may come at any
time.
The chart below illustrates the shareholding structure as of
December 31, 2006:
|
|
(1) |
FT1CI owns 50% of ST Holding and indirectly holds 99,318,236 of
our common shares. |
|
(2) |
Not a legal entity, purely for illustrative purposes. |
|
(3) |
CDP and Finmeccanica own 50% of ST Holding and indirectly hold
91,644,941 and 59,741,577 of our common shares, respectively. |
|
(4) |
CDP owns 30% of ST Holding, while Finmeccanica owns 20% of ST
Holding. |
|
(5) |
The 71.1% owned by the public includes the 10.2% shareholding of
Brandes Investment Partners. |
|
(6) |
ST Holding II owns 27.5% of our shares, the Public owns
71.1% of our shares and we hold the remaining 1.4% as Treasury
Shares. |
On December 17, 2001, France Telecom issued
1,522,950,000
aggregate principal amount of 1.0% notes due
December 17, 2004, redeemable by way of exchange for up to
30 million of our existing common shares on or after
January 2, 2004 (the 2001 Notes). Pursuant to
the terms and conditions of the 2001 Notes, on March 9,
109
2004, France Telecom redeemed the 2001 Notes, and the shares
underlying the 2001 Notes held in escrow by BNP Paribas
Securities Services (France) were released from escrow. On
December 3, 2004, France Telecom sold through ST Holding
those 30 million of our common shares (corresponding to the
entire amount released from escrow) to institutional investors
in a block trade.
On July 30, 2002, France Telecom issued
442.2 million
aggregate principal amount of 6.75% notes due
August 6, 2005, mandatorily exchangeable into our existing
common shares held by France Telecom (the 2002
Notes). On August 6, 2005, the mandatory exchangeable
notes 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
held by France Telecom in our company. Following this
disposition, France Telecom is no longer a shareholder of FT1CI
or an indirect shareholder (through ST Holding and ST
Holding II) of our company. Since August 5, 2005,
France Telecom is no longer one of our indirect shareholders,
following the conversion of convertible notes issued in 2001 and
2002 into approximately 56.4 million of our common shares
to institutional investors.
On August 12, 2003, Finmeccanica Finance, a subsidiary of
Finmeccanica, issued
438,725,000
aggregate principal amount of 0.375% senior unsecured
exchangeable notes due 2010, guaranteed by Finmeccanica (the
Finmeccanica Notes). On September 1, 2003,
Finmeccanica Finance issued an additional
62,675,000
aggregate principal amount of Finmeccanica Notes, raising the
issue size to
501,400,000. The
Finmeccanica Notes have been exchangeable at the option of the
holder since January 2, 2004 into up to 20 million of
our existing common shares held by ST Holding II, or 2.3%
of our then-outstanding share capital. The Finmeccanica Notes
have an initial exchange ratio of 39.8883 shares per note.
As of December 31, 2006, none of the Finmeccanica Notes had
been exchanged for our common shares.
During the second half of 2003, ST Holding II sold on the
market a total of nine million shares, or approximately 1.0% of
our issued and outstanding common shares corresponding to
indirect shareholdings held by Finmeccanica. During 2004,
Finmeccanica sold three million shares to institutional
investors in block trades. During 2004, Finmeccanica lent
23 million of company shares it holds indirectly through ST
Holding. Finally, on December 23, 2004, Finmeccanica
transferred 93 million of its indirect holding of our
existing common shares to CDP, and CDP signed a deed of
adherence to the STH Shareholders Agreement (as defined
below).
Finmeccanica also caused ST Holding II to transfer seven
million shares corresponding to its indirect stake in us to an
account at BNP Paribas Securities Services, Luxembourg. We have
been informed that on December 20, 2005, ST Holding II
sold on behalf of Finmeccanica 1,355,122 of these seven million
shares at a net price of
15.34 per
share. We were also informed that in December 2005, CDP sold
1,355,123 of our common shares to Finmeccanica.
Announcements about additional disposals by ST Holding II
or our indirect shareholders may come at any time. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
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.
|
|
|
STH Shareholders Agreement |
We were formed in 1987 as a result of the decision by
Thomson-CSF (now called Thales) and STET (now called Telecom
Italia S.p.A.) to combine their semiconductor businesses and to
enter into a shareholders agreement on April 30,
1987, which was amended on December 10, 2001 and restated
on March 17, 2004, as amended, the STH Shareholders
Agreement. The current parties to the STH Shareholders
Agreement are Areva, CDP, Finmeccanica and FT1CI (CDP became
bound by the STH Shareholders Agreement pursuant to a deed
of adherence dated December 23, 2004 following its purchase
from Finmeccanica of a majority of Finmeccanicas indirect
interest in us through ST Holding). The March 17, 2004
amended and restated agreement supercedes and replaces all
previous agreements. CDP and Finmeccanica entered into an
agreement that provides for the transfer of certain of the
rights of Finmeccanica under the STH Shareholders
Agreement to CDP. See Other Shareholders
Agreements Italian Shareholders Pact
below. Therefore, references to the rights and obligations of
Finmeccanica under the STH Shareholders Agreement
described below also refer to CDP.
Pursuant to the terms of the STH Shareholders Agreement
and for the duration of such agreement, FT1CI, on the one hand,
and Finmeccanica/ CDP, on the other hand, have agreed to
maintain equal interests in our share capital. See further
details below.
110
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|
Restructuring of the Holding Companies |
If necessary, the parties agreed to restructure the two holding
companies (ST Holding and ST Holding II) to simplify the
structure to the extent possible or desirable. In any case, at
least one holding company will continue to exist to hold our
common shares. The Company that now holds or may hold our common
shares in the future for indirect shareholders is referred to
below as the holding company.
The STH Shareholders Agreement contains a standstill
provision that precludes any of the parties and the
parties affiliates from acquiring, directly or indirectly,
any of our common shares or any instrument providing for the
right to acquire any of our common shares other than through the
holding company. The standstill is in effect for as long as such
party holds our common shares through ST Holding. The parties
agreed to continue to hold their stakes in us at all times
through the current holding structure of ST Holding and ST
Holding II.
The STH Shareholders Agreement provides for a balanced
corporate governance of the indirect interests in us between
FT1CI and Finmeccanica (references to Finmeccanica now include
the stake transferred to CDP, as well as CDP, and together with
FT1CI, the STH shareholders) for the duration of the
Balance Period, despite actual differences in
indirect economic interest in us. The Balance Period
is defined as (i) a period through March 17, 2008,
provided that each of Areva (or its assignees) on the one hand
and Finmeccanica or CDP on the other hand own at all times a
voting stake at least equal to 9.5% of our issued and
outstanding shares, and (ii) subject to the aforementioned
condition, thereafter as long as each STH shareholder at any
time, including as a result of the exercise of the
Rebalancing Option (as defined below), owns a voting
stake equal to at least 47.5% of the total voting stakes. During
the Balance Period, each of FT1CI and Finmeccanica (together
with CDP) has an option to rebalance their shareholdings,
referred to as the Rebalancing Option, as further
described below.
During the Balance Period, the STH shareholders agree that the
holding company will have a managing board comprised of two
members (one member designated by FT1CI, and one designated by
common agreement of Finmeccanica and CDP pursuant to the Italian
Shareholders Pact as described below) and a supervisory
board comprised of eight members (four designated by FT1CI and
four designated by common agreement of Finmeccanica and CDP
pursuant to the Italian Shareholders Pact as described
below). In November 2006, FT1CI, CDP and Finmeccanica decided to
reduce the number of members of the supervisory board from eight
to six (three designated by FT1CI and three designated by common
agreement of Finmeccanica and CDP). The chairman of the
supervisory board of the holding company shall be designated for
a three-year term by one shareholder (with the other shareholder
entitled to designate the Vice Chairman), such designation to
alternate between Finmeccanica and CDP on the one hand and FT1CI
on the other hand. The current Chairman is Mr. Gilbert
Lehmann (following the resignation of Mr. Gérald
Arbola in November 2006). The parties agreed that the next
chairman of the supervisory board of the holding company will be
appointed by the Italian Shareholders.
During the Balance Period, any other decision, to the extent
that a resolution of the holding company is required, must be
pursuant to the unanimous approval of the shareholders,
including but not limited to the following: (i) the
definition of the role and structure of our Managing Board and
Supervisory Board, and those of the holding company;
(ii) the powers of the Chairman and the Vice Chairman of
our Supervisory Board, and that of the holding company;
(iii) information by our Managing Board and by our
Supervisory Board, and those of the holding company;
(iv) treatment of confidential information;
(v) appointment of any additional members of our Managing
Board and those of the holding company; (vi) remuneration
of the members of our Managing Board and those of the holding
company; (vii) internal audit of STMicroelectronics N.V.
and of the holding company; (viii) industrial and
commercial relationships between STMicroelectronics N.V. and
Finmeccanica or STMicroelectronics N.V. and FT1CI, or any of
their affiliates; and (ix) any of the decisions listed in
article 16.1 of our Articles of Association including our budget
and pluri-annual plans.
As regards STMicroelectronics N.V. during the Balance Period:
(i) each of the STH shareholders (FT1CI on the one hand,
and Finmeccanica and CDP on the other hand) shall have the right
to insert on a list prepared for proposal by the holding company
to our annual shareholders meeting the same number of
members for election to the Supervisory Board, and the holding
company shall vote in favor of such members; (ii) the STH
shareholders will cause the holding company to submit to our
annual shareholders meeting and to vote in favor of a
common proposal for the appointment of the Managing Board; and
(iii) any decision relating to the voting rights of the
holding company in us shall require the unanimous approval of
the holding company shareholders and shall be submitted by the
holding company to our annual shareholders meeting. The
STH shareholders also
111
agreed that the Chairman of our Supervisory Board will be
designated upon proposal of an STH shareholder for a three-year
term, and the Vice Chairman of our Supervisory Board will be
designated upon proposal of the other STH shareholder for the
same period, and vice-versa for the following three-year term.
The STH shareholders further agreed that the STH shareholder
proposing the appointment of the Chairman be entitled to propose
the appointment of the Assistant Secretary of our Supervisory
Board, and the STH shareholder proposing the appointment of the
Vice Chairman be entitled to propose the appointment of the
Secretary of our Supervisory Board. Finally, each STH
shareholder is entitled to appoint a Financial Controller to the
Supervisory Board. Our Secretary, Assistant Secretary and two
Financial Controllers are referred to as professionals (not
members) of our Supervisory Board.
In addition, the following resolutions, to the extent that a
resolution of the holding company is required, must be resolved
upon by a shareholders resolution of the holding company,
which shall require the unanimous approval of the STH
shareholders: (i) any alteration in the holding
companys articles of association; (ii) any issue,
acquisition or disposal by the holding company of its shares or
change in share rights; (iii) any alteration in our
authorized share capital or issue by us of new shares and/or of
any financial instrument giving rights to subscribe for our
common shares; any acquisition or disposal by the holding
company of our shares and/or any right to subscribe for our
common shares; any modification to the rights attached to our
common shares; any merger, acquisition or joint venture
agreement to which we are or are proposed to be a party; and any
other items on the agenda of our general shareholders
meeting; (iv) the liquidation or dissolution of the holding
company; (v) any legal merger, legal de-merger, acquisition
or joint venture agreement to which the holding company is
proposed to be a party; and (vi) the adoption or approval
of our annual accounts or those of the holding company or a
resolution concerning a dividend distribution by us.
At the end of the Balance Period, the members of our Supervisory
Board and those of the holding company designated by the
minority shareholder of the holding company will immediately
resign upon request of the holding companys majority
shareholder, subject to the rights described in the previous
paragraph.
After the end of the Balance Period, unanimous approval by the
shareholders of the holding company remains required to approve:
|
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(i) As long as any of the shareholders indirectly owns at
least equal to the lesser of 3% of our issued and outstanding
share capital or 10% of the remaining STH shareholders
stake in us at such time, with respect to the holding company,
any changes to the articles of association, any issue,
acquisition or disposal of shares in the holding company or
change in the rights of its shares, its liquidation or
dissolution and any legal merger, de-merger, acquisition or
joint venture agreement to which the holding company is proposed
to be a party. |
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(ii) As long as any of the shareholders indirectly owns at
least 33% of the holding company, certain changes to our
Articles of Association (including any alteration in our
authorized share capital, or any issue of share capital and/or
financial instrument giving the right to subscribe for our
common shares, changes to the rights attached to our shares,
changes to the preemptive rights, issues relating to the form,
rights and transfer mechanics of the shares, the composition and
operation of the Managing and Supervisory Boards, matters
subject to the Supervisory Boards approval, the
Supervisory Boards voting procedures, extraordinary
meetings of shareholders and quorums for voting at
shareholders meetings). |
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(iii) Any decision to vote our shares held by the holding
company at any shareholders meeting of our shareholders
with respect to any substantial and material merger decision. In
the event of a failure by the shareholders to reach a common
decision on the relevant merger proposal, our shares
attributable to the minority shareholder and held by the holding
company will be counted as present for purposes of a quorum of
shareholders at one of our shareholders meetings, but will
not be voted (i.e., will be abstained from the vote in a way
that they will not be counted as a negative vote or as a
positive vote). |
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(iv) In addition, the minority shareholder will have the
right to designate at least one member of the list of candidates
for our Supervisory Board to be proposed by the holding company
if that shareholder indirectly owns at least 3% of our total
issued and outstanding share capital, with the majority STH
shareholder retaining the right to appoint that number of
members to our Supervisory Board that is at least proportional
to such majority STH shareholders voting stake. |
Finally, at the end of the Balance Period, the unanimous
approval required for other decisions taken at the
STMicroelectronics N.V. level shall only be compulsory to the
extent possible, taking into account the actual power attached
to the direct and indirect shareholding jointly held by the STH
shareholders in our company.
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Disposals of our Common Shares |
The STH Shareholders Agreement provides that each STH
shareholder retains the right to cause the holding company to
dispose of its stake in us at its sole discretion, provided it
is pursuant to either (i) the issuance of financial
instruments, (ii) an equity swap, (iii) a structured
finance deal or (iv) a straight sale. ST Holding II
may enter into escrow arrangements with STH shareholders with
respect to our shares, whether this be pursuant to exchangeable
notes, securities lending or other financial instruments. STH
shareholders that issue exchangeable instruments may include in
their voting stake the voting rights of the underlying shares
provided they remain freely and continuously held by the holding
company as if the holding company were still holding the full
ownership of the shares. STH shareholders that issue financial
instruments with respect to our underlying shares may have a
call option over those shares upon exchange of exchangeable
notes for common shares.
As long as any of the parties to the STH Shareholders
Agreement has a direct or indirect interest in us, except in the
case of a public offer, no sales by a party may be made of any
of our shares or of FT1CI, ST Holding or ST Holding II
to any of our top ten competitors, or any company that controls
such competitor.
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Re-adjusting and Re-balancing options |
The STH Shareholders Agreement provides that the parties
have the right, subject to certain conditions, to re-balance
their indirect holdings in our shares to achieve parity between
FT1CI on the one hand and Finmeccanica and CDP on the other
hand. If at any time prior to March 17, 2008, the voting
stake in us of one of the STH shareholders (FT1CI on the one
hand, and Finmeccanica and CDP on the other hand) falls below
9.5% due either to (a) the exchange by a third party of any
exchangeable instruments issued by an STH shareholder or
(b) to an issuance by us of new shares subscribed to by a
third party, such STH shareholder will have the right to notify
the other STH shareholder of its intention to exercise a
Re-adjusting Option. In such case, the STH
shareholders will cause the holding company to purchase the
number of our common shares necessary to increase the voting
stake of such STH shareholder to 9.5% of our issued and
outstanding share capital.
If by December 17, 2007, the Balance Period has not already
expired and if on such date the voting stake of one of the STH
shareholders (FT1CI on the one hand, and Finmeccanica and CDP on
the other hand) has fallen below 47.5% of our issued and
outstanding share capital, such STH shareholder will have the
right to notify the other STH shareholder of its intention to
exercise a Re-balance Option no later than
30 business days prior to March 17, 2008. In such
case, the STH shareholders will cause the holding company to
purchase before March 17, 2008 the number of our common
shares necessary to re-balance at 50/50% the respective voting
stakes of the STH shareholders.
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Change of Control Provision |
The STH Shareholders Agreement provides for tag-along
rights, preemptive rights, and provisions with respect to a
change of control of any of the shareholders or any controlling
shareholder of FT1CI, on the one hand, and Finmeccanica, on the
other hand. The shareholders may transfer shares of the holding
company or FT1CI to any of the shareholders affiliates,
which would include the Italian state or the French state with
respect to entities controlled by a state. The shareholders and
their ultimate shareholders will be prohibited from launching
any takeover process on any of the other shareholders.
Pursuant to the terms of STH Shareholders Agreement,
neither we nor ST Holding are permitted, as a matter of
principle, to operate outside the field of semiconductor
products. The parties to the STH Shareholders Agreement
also undertake to refrain directly or indirectly from competing
with us in the area of semiconductor products, subject to
certain exceptions, and to offer us opportunities to
commercialize or invest in any semiconductor product
developments by them.
In the event of a disagreement that cannot be resolved between
the parties as to the conduct of the business and actions
contemplated by the STH Shareholders Agreement, each party
has the right to offer its interest in ST Holding to the
other, which then has the right to acquire, or to have a third
party acquire, such interest. If neither party agrees to acquire
or have acquired the other partys interest, then together
the parties are obligated to try to find a third party to
acquire their collective interests, or such part thereof as is
suitable to change the decision to terminate the agreement. The
STH Shareholders Agreement otherwise terminates in the
event that one of the parties thereto ceases to hold shares in
ST Holding.
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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. On the same day, in order to
protect ourselves from a hostile takeover or similar action, we
entered into an option agreement with ST Holding II, as
amended, which provided that up to a maximum of 540,000,000
preference shares would be issued to ST Holding II upon its
request and subject to the adoption of a resolution by our
Supervisory Board giving its 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. On November 27, 2006, our
Supervisory Board decided to authorize us to terminate the
May 31, 1999 option agreement, as amended, and to enter
into a new option agreement with an independent foundation,
Stichting Continuïteit ST (the Stichting). Our
Managing Board and our Supervisory Board, along with the board
of the Stichting, have declared that they are jointly of the
opinion that the Stichting is independent of our Company and our
major shareholders. Our Supervisory Board approved the new
option agreement to reflect changes in Dutch legal requirements,
not in response to any hostile takeover attempt. The
May 31, 1999 option agreement, as amended, was terminated
by mutual consent by ST Holding II and us on
February 7, 2007 and the new option agreement we concluded
with the Stichting became effective on that date.
The new option agreement provides for the issuance of up to a
maximum of 540,000,000 preference shares, the same number as the
May 31, 1999 option agreement, as amended. The Stichting
would have the option, which it shall exercise in its sole
discretion, to take up the preference shares. The preference
shares would be issuable in the event of actions considered
hostile by our Managing Board and Supervisory Board, such as a
creeping acquisition or an unsolicited offer for our common
shares, which are unsupported by our Managing Board and
Supervisory Board and which the board of the Stichting
determines would be contrary to the interests of our Company,
our shareholders and our other stakeholders. If the Stichting
exercises its call option and acquires preference shares, it
must pay at least 25% of the par value of such preference
shares. The preference shares may remain outstanding for no
longer than two years.
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 or otherwise taking actions considered hostile by our
Managing Board and Supervisory Board. In addition, any issuance
of additional capital within the limits of our authorized share
capital, as approved by our shareholders, is subject to the
requirements of our Articles of Association, see
Item 10. Additional Information
Memorandum and Articles of Association Share Capital
as of December 31, 2006 Issuance of Shares,
Preemptive Rights and Preference Shares (Article 4).
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Other Shareholders Agreements |
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Italian Shareholders Pact |
In connection with the transfer of an interest in ST Holding
from Finmeccanica to CDP, Finmeccanica and CDP entered into a
shareholders pact (the Italian Shareholders
Pact) on November 26, 2004 setting forth the rights
and obligations of their respective interests as shareholders of
ST Holding. Pursuant to the terms of the Italian
Shareholders Pact, CDP became a party to the STH
Shareholders Agreement. Under the Italian
Shareholders Pact, CDP will have the right to exercise
certain corporate governance rights in us previously exercised
by Finmeccanica under the STH Shareholders Agreement.
The Italian Shareholders Pact provides that CDP has the
right to appoint one of the two members of the
ST Holdings Managing Board. Moreover, CDP will have
the right to nominate a number of representatives to the
Supervisory Board of ST Holding, ST Holding II and
STMicroelectronics N.V. In particular, CDP has the right to
propose two members for membership on our Supervisory Board,
while one member will be proposed by Finmeccanica for so long as
Finmeccanica owns indirectly at least 3% of our capital. If and
when its indirect interest in us is reduced below such
threshold, Finmeccanica will cause its appointed director to
resign and be replaced by a director appointed by CDP.
As is the case with other companies controlled by the French
government, the French government has appointed a Commissaire
du Gouvernement and a Contrôleur dEtat for
FT1CI. Pursuant to Decree
No. 94-214, dated
March 10, 1994, these government representatives have the
right (i) to attend any board meeting of FT1CI, and
(ii) to veto any board resolution or any decision of the
president of FT1CI within ten days of such board meeting (or, if
they have not attended the meeting, within ten days of the
receipt of the board minutes or the notification of such
presidents decision); such veto lapses if not confirmed
within one month by the Ministry of the Economy or the Ministry
of the Industry. FT1CI is subject to certain points of the
Decree of August 9, 1953 pursuant to which the Ministry of
the Economy and any other relevant ministries have the authority
to approve
114
decisions of FT1CI relating to budgets or forecasts of revenues,
operating expenses and capital expenditures. The effect of these
provisions may be that the decisions taken by us and our
subsidiaries that, by the terms of the STH Shareholders
Agreement, require prior approval by FT1CI, may be adversely
affected by these veto rights under French law.
Pursuant to the principal Italian privatization law, certain
special government powers may be introduced into the bylaws of
firms considered strategic by the Italian government. In the
case of Finmeccanica, these powers were established by decrees
adopted by the Minister of the Treasury on November 8,
1999, and Finmeccanicas bylaws were subsequently amended
on November 23, 1999. The aforementioned decrees were
amended by the Law Decree 350 enacted on December 24, 2003,
and Finmeccanica has modified its bylaws accordingly. The
special powers of the Minister of the Treasury (who will act in
agreement with the Minister of Industry) include: (i) the
power to object to the acquisition of material interests in
Finmeccanicas share capital; (ii) the power to object
to material shareholders agreements relating to
Finmeccanicas share capital; (iii) the power to
appoint one member of Finmeccanicas board of directors
without voting rights; and (iv) the power to veto
resolutions to dissolve Finmeccanica, transfer its business,
merge, conduct spin-offs, transfer its registered office outside
of Italy, change its corporate purposes, or amend or modify any
of the Minister of the Treasurys special powers.
Pursuant to Law Decree 269 of September 30, 2003 and Decree
of the Ministry of the Economy and Finance of December 5,
2003, CDP was transformed from a public entity into a joint
stock limited liability company (società per
azioni). While transforming itself into a holding company,
CDP maintained its public interest purpose. CDPs core
business is to finance public investments and more specifically
infrastructure and other major public works sponsored by
regions, local authorities, public agencies and other public
bodies. By virtue of a special provision of Law Decree 269, the
Ministry of Economy and Finance will always be able to exercise
its control over CDP.
Related-Party Transactions
We entered into a joint research and development partnership
agreement with France Telecom on February 2, 2006, which
addresses the analysis of
end-to-end advanced
security for mobile devices and services. As is the case with
Thomson, this agreement was made on an arms length basis in line
with market practices and conditions.
One of the members of our Supervisory Board is the Chairman and
CEO of France Telecom, one is a member of the Board of Directors
of Thomson, another is the non-executive Chairman of the Board
of Directors of ARM Holdings plc and a non-executive director of
Soitec, and one is member of the Supervisory Board of BESI.
France Telecom and its subsidiaries supply certain services to
our Company and Thomson is one of our strategic customers. We
believe that these transactions are made on an arms-length basis
in line with market practices and conditions.
We have certain licensing agreements with ARM, which we believe
are made on an arms-length basis in line with market practices
and conditions. Our transactions with Soitec and BESI are also
conducted on an arms length basis.
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Item 8. |
Financial Information |
Financial Statements
Please see Item 18. Financial Statements for a
list of the financial statements filed with this
Form 20-F.
Legal Proceedings
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 from other semiconductor
companies or third parties alleging possible infringement of
patents. Furthermore, we may become involved in costly
litigation brought against us regarding patents, copyrights,
trademarks, trade secrets or mask works. 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.
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 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 legal proceedings with SanDisk.
On October 15, 2004, SanDisk filed a complaint against us
with the United States International Trade Commission (the
ITC) with respect to certain NAND memory products,
alleging patent infringement and seeking an order excluding our
NAND products from importation into the United States. On
November 15, 2004, the ITC instituted an investigation
against us in response to the complaint. On October 19,
2005, Administrative Law Judge Paul J. Luckern, in his Initial
Determination, ruled that our NAND products do not infringe on
the asserted SanDisk patent, and that there was no violation of
Section 337 of the U.S. Tariff Act of 1930
(Section 337). On December 5, 2005, the
ITC confirmed the Initial Determination. SanDisk appealed the
ITC decision to the United States Court of Appeals for the
Federal Circuit which affirmed the ITC decision without opinion
on March 6, 2007.
On October 15, 2004, SanDisk also filed a complaint for
patent infringement, and declaratory judgment of
non-infringement and patent invalidity against us with the
United States District Court for the Northern District of
California. The complaint seeks a declaratory judgment that
SanDisk does not infringe several of our U.S. patents. On
January 20, 2005, the court issued an order granting our
motion to dismiss the declaratory judgment causes of action.
SanDisk has appealed the order of dismissal to the United States
Court of Appeals for the Federal Circuit.
On February 4, 2005, we filed two complaints for patent
infringement against SanDisk with the United States District
Court for the Eastern District of Texas. The complaints allege
that SanDisk products infringe seven of our U.S. patents. On
April 22, 2005, SanDisk filed a counterclaim against us
alleging that our products infringe two SanDisk patents. On
January 12, 2007, the District Court Judge ruled in favor
of SanDisk in the first case, finding non-infringement of our
asserted patent. We are considering whether to appeal this
decision. In the second case, the District Court Judge has
ordered mediation between SanDisk and us to take place prior to
the trial which is currently scheduled for the second quarter of
2007.
On October 14, 2005, we filed a complaint against SanDisk
and its current CEO Dr. Eli Harari before the Superior
Court of California, County of Alameda. The complaint seeks,
among other relief, assignment of certain SanDisk patents that
resulted from inventive activity on the part of Dr. Harari
that took place while he was an employee, officer and/or
director of Waferscale Integration, Inc. We are the successor to
Waferscale Integration, Inc. by merger. On January 17,
2007, the State of California Court of Appeals ordered that the
case be transferred to the Superior Court of California, County
of Santa Clara where it is currently pending.
On January 10, 2006, SanDisk filed a complaint against us
with the ITC with respect to certain NAND and NOR memory
products, alleging patent infringement of three SanDisk patents
and seeking an order excluding our NAND and NOR products from
importation into the United States. In May 2006, SanDisk
voluntarily dismissed one of the three patents asserted in the
ITC action. The trial was held in Washington D.C. from December
4 to December 14, 2006. All post trial briefs have been
filed. The ITC, along with us, is advocating no violation of
Section 337. The administrative law judges Initial
Determination will be issued by June 1, 2007 and the
ITCs review of the Initial Determination will be completed
by October 1, 2007.
SanDisk filed corresponding federal court actions to the two ITC
complaints in the United States District Court for the Northern
District of California. Those actions have been consolidated and
stayed pending the final determination of the ITC investigations.
We are also a party to legal proceedings with Tessera.
On January 31, 2006, Tessera filed suit and added us as a
co-defendant, along with several other semiconductor companies,
to a lawsuit previously filed by Tessera on October 7, 2005
against Advanced Micro Devices Inc. and Spansion Inc. in the
United States District Court for the Northern District of
California. Tessera is claiming that our BGA packages practice
certain technology and patents owned by Tessera, and that we are
liable for royalties. Trial is currently scheduled for the first
quarter of 2008. We recently filed, together with our
co-defendants, a request for reexamination by the United States
Patent and Trademark Office of all patents being asserted by
Tessera in the lawsuit.
On September 15, 2006, we filed a criminal complaint with
the Public Prosecutor in Lugano, Switzerland following the
discovery by our management in 2006 of a fraud perpetrated by
our former treasurer, who retired at the end of 2005, relating
to certain foreign exchange transactions that took place from
1998 until the end of 2005. Following such complaint, our former
treasurer was arrested and charged in November 2006, along with
three individuals not employed by us. We are currently actively
pursuing the recovery of the amounts that had been illegally
misappropriated.
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Risk Management and Insurance
We cover our industrial and business risks through insurance
contracts with top ranking insurance carriers, to the extent
reasonably permissible by the insurance market which does not
provide insurance coverage for certain risks and imposes certain
limits, terms and conditions on coverage that it does provide.
Risks may be covered either through local policies or through
corporate policies negotiated on a worldwide level for the ST
Group of Companies. Corporate policies are negotiated when the
risks are recurrent in various STMicroelectronics affiliated
companies.
Currently we have four corporate policies covering the following
risks:
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Property damage and business interruption; |
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General liability and product liability; |
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Directors and officers liability; and |
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Transportation risks. |
Our policies generally cover a twelve-month period. They are
subject to certain terms and conditions, exclusions and
limitations, generally in line with prevailing conditions,
exclusions and limitations, in the insurance market. Pursuant to
such conditions, risks such as terrorism, earthquake, fire,
floods and loss of production, may not be fully insured and we
may not, in the event of a claim under a policy, receive an
indemnification from our insurers commensurate with the full
amount of the damage we have incurred. Furthermore, our product
liability insurance covers physical and direct damages, which
may be caused by our products, however, immaterial,
non-consequential damages resulting from failure to deliver or
delivery of defective products are not covered because such
risks are considered to occur in the ordinary course of business
and cannot be insured. We may decide to subscribe for excess
coverage in addition to the coverage provided by our standard
policies. If we suffer damage or incur a claim, which is not
covered by one of our corporate insurance policies, this may
have a material adverse effect on our results of operations.
We also perform annual assessments through an external
consultant of our risk exposure in the field of property
damage/business interruption in our production sites, to assess
potential losses, and actual risk exposure. Such assessments are
provided to our underwriters. We do not own or operate any
insurance captive, or act as an insurer for any of our risks.
Reporting Obligations in International Financial Reporting
Standards (IFRS)
We are incorporated in the Netherlands and our shares are listed
on Euronext Paris and Borsa Italiana. 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).
We will continue to use U.S. GAAP as our primary set of
reporting standards, as U.S. GAAP has been our reporting
standard since our creation in 1987. 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, as well as the continuity of our reporting, thereby
providing our investors with 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 increase the complexity of our
investor communications. The main potential areas of discrepancy
concern capitalization and later amortization of development
expenses required under IFRS and the accounting for compound
financial instruments.
We will comply with our reporting obligations under IFRS by
presenting a complementary set of accounts or as may be
otherwise requested by local stock exchange authorities.
Dividend Policy
We seek to use our available cash in order to develop and
enhance our position in the very capital-intensive semiconductor
market while at the same time managing our cash resources to
reward our shareholders for their investment and trust in us.
Based on our annual results, projected capital requirements as
well as business conditions and prospects, the Managing Board
proposes each year to the Supervisory Board the allocation of
our earnings involving, whenever deemed possible and desirable
in line with our objectives and financial situation, the
distribution of a cash dividend.
117
The Supervisory Board, upon the proposal of the Managing Board,
decides each year, in accordance with this policy, which portion
of the profits shall be retained in reserves to fund future
growth or for other purposes and makes a proposal to the
shareholders concerning the amount, if any, of the annual cash
dividend. This policy was discussed at our 2005 annual
shareholders meeting. See Item 10. Additional
Information Memorandum and Articles of
Association Articles of Association
Distribution of Profits (Articles 37, 38, 39 and 40).
Upon the approval of our Supervisory Board, we plan to announce
the proposed agenda for our upcoming annual shareholders
meeting and the amount of the cash dividend with respect to the
year ended December 31, 2006.
In the past five years, we have paid the following dividends:
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On April 27, 2006, our shareholders approved the payment of
a cash dividend with respect to the year ended December 31,
2005 of $0.12 per share payable to Dutch Registry
Shareholders of record on May 22, 2006 and New York
Registry Shareholders as of May 24, 2006. This dividend was
approximately 40% of our earnings in 2005. |
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On March 18, 2005, our shareholders approved the payment of
a cash dividend with respect to the year ended December 31,
2004 of $0.12 per share payable to Dutch Registry
Shareholders of record on May 23, 2005 and New York
registry shareholders as of May 25, 2005. This dividend was
approximately 18% of our earnings in 2004. |
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On April 23, 2004, our shareholders approved the payment of
a cash dividend with respect to the year ended December 31,
2003 of $0.12 per share payable to Dutch Registry
shareholders of record on May 21, 2004 and New York
registry shareholders as of May 26, 2004. This dividend was
approximately 42% of our earnings for 2003. |
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In 2003, we paid a cash dividend with respect to the year ended
December 31, 2002 of $0.08 per share. This dividend
was approximately 17% of our earnings for 2002. |
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In 2002, we paid a cash dividend with respect to the year ended
December 31, 2001 of $0.04 per share. This dividend
was approximately 14% of our earnings for 2001. |
In the future, we may consider proposing dividends representing
a proportion of our earnings for a particular year. Future
dividends will depend on our capacity to generate profitable
results, our profit situation, our financial situation and any
other factor that the Supervisory Board deems important.
Trading History of the Companys Shares
Since 1994, our common shares have been traded on the New York
Stock Exchange under the symbol STM and on Euronext
Paris (formerly known as ParisBourse) and were quoted on SEAQ
International. On June 5, 1998, our common shares were also
listed for the first time on the Borsa Italiana (Italian Stock
Exchange), where they have been traded since that date.
Our common shares have been included since November 12,
1997, in the CAC 40, the main benchmark for Euronext Paris which
tracks a sample of 40 stocks selected from among the top 100
market capitalization and the most active stocks listed on
Euronext Paris, and which is the underlying asset for options
and futures contracts. The base value was 1,000 at
December 31, 1987.
On December 1, 2003, the CAC 40 index shifted to free-float
weightings. As of this date, the CAC 40 weightings are based on
free-float capitalization instead of total market
capitalization. On February 21, 2005, Euronext Paris
created a new range of indices; along with four existing indices
including the CAC 40, six new indices have been created.
On March 18, 2002, we were admitted into the S&P/ MIB
(formerly the MIB 30 Index), which is comprised of the 40
leading stocks, based upon market capitalization and liquidity,
listed on the Borsa Italiana. It features free-float adjustment,
high liquidity and broad, accurate representation of market
performance based on the leading companies in leading
industries. The index aims to cover 80% of the Italian equity
universe.
Since 1994, our common shares have been traded on the NYSE under
the symbol STM and on Euronext Paris (formerly known
as ParisBourse) and were quoted on SEAQ International. On
June 5, 1998, our common shares were also listed for the
first time on the Borsa Italiana (Italian Stock Exchange), where
they have been traded since that date.
118
Our common shares have been included since November 12,
1997, in the CAC 40, the main benchmark for Euronext Paris which
tracks a sample of 40 stocks selected from among the top 100
market capitalization and the most active stocks listed on
Euronext Paris, and which is the underlying asset for options
and futures contracts. The base value was 1,000 at
December 31, 1987.
On December 1, 2003, the CAC 40 index shifted to free-float
weightings. As of this date, the CAC 40 weightings are based on
free-float capitalization instead of total market
capitalization. On February 21, 2005, Euronext Paris
created a new range of indices; along with four existing indices
including the CAC 40, six new indices have been created.
On March 18, 2002, we were admitted into the S&P/ MIB
(formerly the MIB 30 Index), which is comprised of the 40
leading stocks, based upon market capitalization and liquidity,
listed on the Borsa Italiana. It features free-float adjustment,
high liquidity and broad, accurate representation of market
performance based on the leading companies in leading
industries. The index aims to cover 80% of the Italian equity
universe.
On June 23, 2003, we were admitted into the Semiconductor
Sector Index (or SOX) of the Philadelphia Stock
Exchange. The SOX is a widely followed, price-weighted index
composed of 18 companies that are primarily involved in the
design, distribution, manufacturing and sale of semiconductors.
The tables below indicate the range of the high and low prices
in U.S. dollars for the common shares on the New York Stock
Exchange, and the high and low prices in euros for the common
shares on Euronext Paris, and the Borsa Italiana annually for
the past five years, during each quarter in 2004 and 2005, and
monthly for the past 18 months. In December 1994, we
completed our Initial Public Offering of 21,000,000 common
shares at an initial price to the public of $22.25 per
share. On June 16, 1999, we effected a
2-to-1 stock split and
on May 5, 2000, we effected a
3-to-1 stock split. The
tables below have been adjusted to reflect the split. Each range
is based on the highest or lowest rate within each day for
common share price ranges for the relevant exchange.
119
Euronext Paris(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Trading | |
|
|
|
|
|
|
Volumes | |
|
|
|
|
| |
|
Price Ranges | |
|
|
Number of | |
|
|
|
| |
Calendar Period |
|
Shares | |
|
Capital | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
() | |
|
() | |
|
() | |
Annual Information for the Past Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
39.70 |
|
|
|
11.10 |
|
2003
|
|
|
|
|
|
|
|
|
|
|
24.74 |
|
|
|
15.20 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
23.81 |
|
|
|
13.25 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
15.81 |
|
|
|
10.83 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
16.56 |
|
|
|
11.34 |
|
Quarterly Information for the Past Two Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
|
|
|
|
|
14.47 |
|
|
|
12.38 |
|
|
Second quarter
|
|
|
|
|
|
|
|
|
|
|
13.71 |
|
|
|
10.83 |
|
|
Third quarter
|
|
|
|
|
|
|
|
|
|
|
15.17 |
|
|
|
12.58 |
|
|
Fourth quarter
|
|
|
|
|
|
|
|
|
|
|
15.81 |
|
|
|
13.21 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
|
|
|
|
|
16.56 |
|
|
|
13.98 |
|
|
Second quarter
|
|
|
|
|
|
|
|
|
|
|
15.97 |
|
|
|
11.82 |
|
|
Third quarter
|
|
|
|
|
|
|
|
|
|
|
13.91 |
|
|
|
11.34 |
|
|
Fourth quarter
|
|
|
|
|
|
|
|
|
|
|
14.45 |
|
|
|
13.03 |
|
Monthly Information for the Past 18 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
4,864,941 |
|
|
|
67,454,878 |
|
|
|
14.52 |
|
|
|
13.01 |
|
|
October
|
|
|
5,057,766 |
|
|
|
70,267,543 |
|
|
|
14.82 |
|
|
|
13.21 |
|
|
November
|
|
|
4,984,709 |
|
|
|
72,487,638 |
|
|
|
15.19 |
|
|
|
13.40 |
|
|
December
|
|
|
3,947,090 |
|
|
|
61,022,011 |
|
|
|
15.81 |
|
|
|
15.02 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6,316,739 |
|
|
|
99,311,771 |
|
|
|
16.56 |
|
|
|
15.03 |
|
|
February
|
|
|
5,298,108 |
|
|
|
78,369,620 |
|
|
|
15.43 |
|
|
|
14.22 |
|
|
March
|
|
|
6,951,076 |
|
|
|
101,914,860 |
|
|
|
15.49 |
|
|
|
13.98 |
|
|
April
|
|
|
6,521,910 |
|
|
|
99,578,697 |
|
|
|
15.97 |
|
|
|
14.51 |
|
|
May
|
|
|
6,408,609 |
|
|
|
86,134,611 |
|
|
|
14.92 |
|
|
|
12.36 |
|
|
June
|
|
|
5,591,297 |
|
|
|
69,327,001 |
|
|
|
13.11 |
|
|
|
11.82 |
|
|
July
|
|
|
5,547,263 |
|
|
|
66,749,417 |
|
|
|
12.82 |
|
|
|
11.34 |
|
|
August
|
|
|
4,328,541 |
|
|
|
52,985,109 |
|
|
|
13.20 |
|
|
|
11.38 |
|
|
September
|
|
|
6,107,356 |
|
|
|
79,814,418 |
|
|
|
13.91 |
|
|
|
12.35 |
|
|
October
|
|
|
5,944,635 |
|
|
|
80,676,802 |
|
|
|
14.24 |
|
|
|
13.03 |
|
|
November
|
|
|
5,187,519 |
|
|
|
71,998,052 |
|
|
|
14.45 |
|
|
|
13.20 |
|
|
December
|
|
|
4,750,629 |
|
|
|
66,096,256 |
|
|
|
14.36 |
|
|
|
13.38 |
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6,022,753 |
|
|
|
86,746,809 |
|
|
|
15.00 |
|
|
|
13.57 |
|
|
February
|
|
|
5,135,836 |
|
|
|
74,885,620 |
|
|
|
15.31 |
|
|
|
14.13 |
|
|
March (through March 9, 2007)
|
|
|
6,577,348 |
|
|
|
94,366,147 |
|
|
|
14.75 |
|
|
|
14.02 |
|
Sources: Reuters (for monthly high and low prices) and Bloomberg
(for average daily trading volumes at average closing prices).
120
Borsa Italiana (Milan)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Trading | |
|
|
|
|
|
|
Volumes | |
|
|
|
|
| |
|
Price Ranges | |
|
|
Number of | |
|
|
|
| |
Calendar Period |
|
Shares | |
|
Capital | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
() | |
|
() | |
|
() | |
Annual Information for the Past Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
39.65 |
|
|
|
11.09 |
|
2003
|
|
|
|
|
|
|
|
|
|
|
24.75 |
|
|
|
15.21 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
23.81 |
|
|
|
13.25 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
15.82 |
|
|
|
10.82 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
16.55 |
|
|
|
11.33 |
|
Quarterly Information for the Past Two Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
|
|
|
|
|
14.48 |
|
|
|
12.37 |
|
|
Second quarter
|
|
|
|
|
|
|
|
|
|
|
13.71 |
|
|
|
10.82 |
|
|
Third quarter
|
|
|
|
|
|
|
|
|
|
|
15.18 |
|
|
|
12.59 |
|
|
Fourth quarter
|
|
|
|
|
|
|
|
|
|
|
15.82 |
|
|
|
13.21 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
|
|
|
|
|
16.55 |
|
|
|
13.99 |
|
|
Second quarter
|
|
|
|
|
|
|
|
|
|
|
15.94 |
|
|
|
11.81 |
|
|
Third quarter
|
|
|
|
|
|
|
|
|
|
|
13.92 |
|
|
|
11.33 |
|
|
Fourth quarter
|
|
|
|
|
|
|
|
|
|
|
14.46 |
|
|
|
13.07 |
|
Monthly Information for the Past 18 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
13,187,754 |
|
|
|
183,520,785 |
|
|
|
14.52 |
|
|
|
13.00 |
|
|
October
|
|
|
13,057,791 |
|
|
|
181,424,948 |
|
|
|
14.79 |
|
|
|
13.21 |
|
|
November
|
|
|
11,546,608 |
|
|
|
167,933,867 |
|
|
|
15.20 |
|
|
|
13.42 |
|
|
December
|
|
|
9,162,791 |
|
|
|
141,711,726 |
|
|
|
15.82 |
|
|
|
15.00 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
13,055,279 |
|
|
|
205,085,378 |
|
|
|
16.55 |
|
|
|
15.05 |
|
|
February
|
|
|
9,938,177 |
|
|
|
146,977,188 |
|
|
|
15.43 |
|
|
|
14.21 |
|
|
March
|
|
|
11,358,887 |
|
|
|
166,535,110 |
|
|
|
15.49 |
|
|
|
13.99 |
|
|
April
|
|
|
11,466,922 |
|
|
|
175,035,563 |
|
|
|
15.94 |
|
|
|
14.52 |
|
|
May
|
|
|
10,073,843 |
|
|
|
135,548,140 |
|
|
|
14.92 |
|
|
|
12.40 |
|
|
June
|
|
|
8,157,664 |
|
|
|
101,218,438 |
|
|
|
13.11 |
|
|
|
11.81 |
|
|
July
|
|
|
8,726,601 |
|
|
|
105,018,826 |
|
|
|
12.82 |
|
|
|
11.33 |
|
|
August
|
|
|
8,251,367 |
|
|
|
100,977,598 |
|
|
|
13.20 |
|
|
|
11.38 |
|
|
September
|
|
|
11,221,327 |
|
|
|
146,557,480 |
|
|
|
13.92 |
|
|
|
12.35 |
|
|
October
|
|
|
12,183,594 |
|
|
|
165,369,033 |
|
|
|
14.25 |
|
|
|
13.07 |
|
|
November
|
|
|
11,129,232 |
|
|
|
154,443,388 |
|
|
|
14.46 |
|
|
|
13.19 |
|
|
December
|
|
|
8,004,114 |
|
|
|
111,322,904 |
|
|
|
14.36 |
|
|
|
13.37 |
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
10,773,375 |
|
|
|
155,258,040 |
|
|
|
15.00 |
|
|
|
13.63 |
|
|
February
|
|
|
9,588,295 |
|
|
|
140,184,233 |
|
|
|
15.32 |
|
|
|
14.13 |
|
|
March (through March 9, 2007)
|
|
|
10,410,714 |
|
|
|
149,396,724 |
|
|
|
14.76 |
|
|
|
14.02 |
|
Sources: Reuters (for monthly high and low prices) and Bloomberg
(for average daily trading volumes at average closing prices).
121
New York Stock Exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Trading | |
|
|
|
|
|
|
Volumes | |
|
|
|
|
| |
|
Price Ranges | |
|
|
Number of | |
|
|
|
| |
Calendar Period |
|
Shares | |
|
Capital | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(U.S.$) | |
|
(U.S.$) | |
|
(U.S.$) | |
Annual Information for the Past Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
35.81 |
|
|
|
11.00 |
|
2003
|
|
|
|
|
|
|
|
|
|
|
28.67 |
|
|
|
16.67 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
29.90 |
|
|
|
16.36 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
19.47 |
|
|
|
13.96 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
19.90 |
|
|
|
14.55 |
|
Quarterly Information for the Past Two Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
|
|
|
|
|
19.47 |
|
|
|
16.13 |
|
|
Second quarter
|
|
|
|
|
|
|
|
|
|
|
16.85 |
|
|
|
13.96 |
|
|
Third quarter
|
|
|
|
|
|
|
|
|
|
|
18.34 |
|
|
|
15.58 |
|
|
Fourth quarter
|
|
|
|
|
|
|
|
|
|
|
18.86 |
|
|
|
15.98 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
|
|
|
|
|
|
|
|
19.90 |
|
|
|
16.67 |
|
|
Second quarter
|
|
|
|
|
|
|
|
|
|
|
19.60 |
|
|
|
14.83 |
|
|
Third quarter
|
|
|
|
|
|
|
|
|
|
|
17.79 |
|
|
|
14.55 |
|
|
Fourth quarter
|
|
|
|
|
|
|
|
|
|
|
18.82 |
|
|
|
16.50 |
|
Monthly Information for the Past 18 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
914,219 |
|
|
|
15,613,946 |
|
|
|
17.77 |
|
|
|
16.27 |
|
|
October
|
|
|
1,100,181 |
|
|
|
18,353,219 |
|
|
|
17.63 |
|
|
|
15.98 |
|
|
November
|
|
|
909,276 |
|
|
|
15,600,448 |
|
|
|
17.75 |
|
|
|
16.15 |
|
|
December
|
|
|
715,167 |
|
|
|
13,095,423 |
|
|
|
18.86 |
|
|
|
17.86 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
1,121,390 |
|
|
|
21,417,428 |
|
|
|
19.90 |
|
|
|
18.23 |
|
|
February
|
|
|
720,832 |
|
|
|
12,742,785 |
|
|
|
18.58 |
|
|
|
16.90 |
|
|
March
|
|
|
805,387 |
|
|
|
14,168,858 |
|
|
|
18.58 |
|
|
|
16.67 |
|
|
April
|
|
|
967,905 |
|
|
|
18,144,658 |
|
|
|
19.60 |
|
|
|
18.11 |
|
|
May
|
|
|
939,291 |
|
|
|
16,209,172 |
|
|
|
18.76 |
|
|
|
16.00 |
|
|
June
|
|
|
854,141 |
|
|
|
13,431,366 |
|
|
|
16.76 |
|
|
|
14.83 |
|
|
July
|
|
|
885,240 |
|
|
|
13,474,681 |
|
|
|
16.28 |
|
|
|
14.55 |
|
|
August
|
|
|
786,000 |
|
|
|
12,346,351 |
|
|
|
16.97 |
|
|
|
14.59 |
|
|
September
|
|
|
1,215,410 |
|
|
|
20,286,408 |
|
|
|
17.79 |
|
|
|
15.75 |
|
|
October
|
|
|
1,363,027 |
|
|
|
23,423,624 |
|
|
|
17.82 |
|
|
|
16.50 |
|
|
November
|
|
|
1,753,133 |
|
|
|
31,380,252 |
|
|
|
18.66 |
|
|
|
16.91 |
|
|
December
|
|
|
1,453,165 |
|
|
|
26,690,282 |
|
|
|
18.82 |
|
|
|
17.85 |
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2007
|
|
|
1,611,140 |
|
|
|
30,090,456 |
|
|
|
19.40 |
|
|
|
17.97 |
|
|
February
|
|
|
1,901,586 |
|
|
|
36,437,396 |
|
|
|
20.18 |
|
|
|
18.40 |
|
|
March (through March 9, 2007)
|
|
|
1,903,501 |
|
|
|
35,818,453 |
|
|
|
19.25 |
|
|
|
18.41 |
|
Sources: Reuters (for monthly high and low prices) and Bloomberg
(for monthly average daily trading volumes at average closing
prices).
At December 31, 2006, there were 897,395,042 common shares
outstanding, not including (i) common shares issuable under
our various employee stock option plans or employee share
purchase plans, (ii) common shares issuable upon conversion
of our outstanding convertible debt securities and
(iii) 12,762,891 common shares repurchased in 2001 and
2002. Of the 897,395,042 common shares outstanding as of
December 31, 2006, 76,669,364 or 9% were registered in the
common share registry maintained on our behalf in New York and
122
593,019,157 or 66% of our common shares outstanding were listed
on Euroclear France and traded on Euronext Paris and on the
Borsa Italiana in Milan.
Market Information
On September 22, 2000, upon successful completion of an
exchange offer, the
Paris-BourseSBF
SA, or the SBF, the Amsterdam Stock Exchange and the
Brussels Stock Exchange merged to create Euronext, the first
pan-European stock exchange. Through the exchange offer, all the
shareholders of SBF, the Amsterdam Stock Exchange and the
Brussels Stock Exchange contributed their shares to Euronext
N.V. (Euronext), a Dutch holding company, and the
Portugal Exchange was included in Euronext in January 2002.
Following the creation of Euronext, the SBF changed its name to
Euronext Paris SA (Euronext Paris). Securities
quoted on exchanges participating in Euronext cash markets are
traded and cleared over common Euronext platforms but remain
listed on their local exchanges. NSC is the common
Euronext platform for trading and Clearing 21 for
clearing. In addition, Euronext, through Euroclear, anticipates,
but not before 2008, implementation of central settlement and
custody structure over a common system. In January 2002,
Euronext acquired the London International Financial Futures and
Options Exchange (LIFFE), Londons derivatives
market and created Euronext.liffe. Euronext.liffe is the
international derivatives business of Euronext, comprising the
Amsterdam, Brussels, Lisbon, London and Paris derivatives
markets. Euronext.liffe creates a single market for derivatives,
by bringing all its derivatives products together on the one
electronic trading platform, LIFFE
CONNECTR.
On February 21, 2005, Euronext Paris created a single
regulated market, Eurolist by
EuronextTM
(Eurolist), to replace the three former regulated
markets operated by Euronext Paris: the Premier Marché,
Second Marché and Nouveau Marché. The
revised listing format was inaugurated in Paris before being
rolled out in all Euronext markets. As part of Euronext,
Euronext Paris retains responsibility for the admission of
shares on Eurolist as well as the regulation of this market.
Our shares have been listed on the Premier Marché of
Euronext Paris since July 2001 and are now listed on compartment
A of Eurolist. In accordance with Euronext Paris rules, the
shares issued by domestic and other companies listed on Euronext
are classified in capitalization compartments. The shares of
listed companies are distributed between three capitalization
compartments, according to the criteria set by Euronext Paris:
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Compartment A comprises the companies with market
capitalizations above
1 billion; |
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|
Compartment B comprises the companies with market
capitalizations from
150 million
and up to and including
1 billion; and |
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Compartment C comprises the companies with capitalizations below
150 million. |
Our common shares are listed on the compartment A under the ISIN
Code NL0000226223.
Securities listed on Euronext Paris are placed in one of two
categories (Continu or Fixing) depending on the
volume of transactions. Our common shares are listed in the
category known as Continu, which includes the most
actively traded securities. The minimum yearly trading volume
required for a security of a listed company on a regulated
market of Euronext Paris in the Continu category is 2,500
trades.
Securities listed on Eurolist are traded through providers of
investment services (investment companies and other financial
institutions). The trading of our common shares takes place
continuously on each business day from 9:00 a.m. to
5:25 p.m. (Paris time), with a pre-opening session from
7:15 a.m. to 9:00 a.m. (Paris time) and a pre-closing
session from 5:25 p.m. to 5:30 p.m. (Paris time)
during which transactions are recorded but not executed and a
closing auction at 5:30 p.m. (Paris time). From
5:30 p.m. to 5:40 p.m. (Paris time) (trading at
last phase), transactions are executed at the closing
price. Any trade effected after the close of a stock exchange
session will be recorded, on the next Euronext Paris trading
day, at the closing price for the relevant security at the end
of the previous days session. Euronext Paris publishes a
daily official price list that includes price information on
each listed security. Euronext Paris has introduced continuous
electronic trading during trading hours for most actively traded
securities. Any trade of a security that occurs outside trading
hours is effected at a price within a range of 1% of the closing
price for that security.
Trading in the listed securities of an issuer may be suspended
by Euronext Paris if a quoted price exceeds certain price limits
defined by the regulations of Euronext Paris. In particular, if
the quoted price of a Continu security varies by more
than 10% from a reference price, Euronext may suspend trading
(for the portion of the orders which would be traded outside of
the 10% threshold) for up to four minutes. The reference price
is usually
123
the opening price, or, with respect to the first quoted price of
the given trading day, the last traded price of the previous
trading day, as adjusted if necessary by Euronext Paris to take
into account available information. Further suspensions for up
to four minutes are also possible if the price again varies by
more than 10% from a new reference price equal to the price
which caused the first trading suspension. If the quoted price
of a Continu security varies by more than 2% from the
last quoted price, trading may be suspended for up to four
minutes. Euronext Paris may also suspend trading of a listed
security in certain other limited circumstances, including, for
example, the occurrence of unusual trading activity in such
security. In addition, in exceptional cases, the
Autorité des marchés financiers (the
AMF) (the regulatory authority over French stock
exchanges) may also suspend trading.
All trades of securities listed on Eurolist are performed on a
cash-settlement basis on the third trading day after the trade.
Market intermediaries are also permitted to offer investors a
deferred settlement service (Service à Réglement
Différé or SRD) for a fee. The SRD
allows investors who elect this service to benefit from leverage
and other special features of the monthly settlement market. The
SRD is reserved for securities which have both a total market
capitalization of at least
1 billion
and represent a minimum daily trading volume of
1 million
and which are normally cited on a list published by Euronext
Paris. Investors in securities eligible for the SRD can elect on
the determination date (date de liquidation), which is,
at the latest, the fifth trading day before the end of the
month, either to settle the trade by the last trading day of the
month or to pay an additional fee and postpone the settlement
decision to the determination date of the following month. Our
common shares are eligible for the SRD.
Ownership of securities traded on a deferred settlement basis
belongs to the market intermediary (in whose account they are
registered at the date set by market rules) pending registration
in the buyers account. According to the rules of Euronext
Paris, the market intermediary is entitled to the dividends and
coupons pertaining to the securities he has full title, provided
he is responsible for paying the buyer, when the settlement
matured, the exact cash equivalent of the rights received.
Prior to any transfer of securities held in registered form on
Eurolist, the securities must be converted into bearer form and
accordingly inscribed in an account maintained by an accredited
intermediary with Euroclear France SA (Euroclear), a
registered clearing agency. Transactions in securities are
initiated by the owner giving instructions (through an agent, if
appropriate) to the relevant accredited intermediary. Trades of
securities listed on Eurolist are cleared through
Clearing 21, a common Euronext platform, and settled
through Euroclear using a continuous net settlement system. A
fee or a commission is payable to the broker-dealer or other
agent involved in the transaction.
Our common shares have been included in the CAC 40, the
principal index published by Euronext Paris, since
November 12, 1997. The CAC 40 is derived daily by comparing
the total market capitalization of 40 stocks included in the
monthly settlement market of Euronext Paris to a baseline
established on December 31, 1987. Adjustments are made to
allow for expansion of the sample due to new issues. The CAC 40
indicates the trends in the French stock market as a whole and
is one of the most widely followed stock price indices in France.
Our common shares could be removed from the CAC 40 at any time,
and the exclusion or the announcement thereof could cause the
market price of our common shares to drop significantly.
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Securities Trading in Italy |
The Mercato Telematico Azionario (the MTA), the
Italian automated screen-based quotation system on which our
common shares are listed, is organized and administered by Borsa
Italiana S.p.A. (Borsa Italiana) subject to the
supervision of the Commissione Nazionale per le Società e
la Borsa (CONSOB) the public authority charged,
inter alia, with regulating investment companies, securities
markets and public offerings of securities in Italy to ensure
the transparency and regularity of dealings and protect
investors. Borsa Italiana was established to manage the Italian
regulated financial markets (including the MTA) as part of the
implementation in Italy of the EU Investment Services Directive
pursuant to Legislative Decree No. 415 of July 23,
1996 (the Eurosim Decree) and as modified by
Legislative Decree No. 58 of February 24, 1998, as
amended (the Financial Act). Borsa Italiana became
operative in January 1998, replacing the administrative body
Consiglio di Borsa, and has issued rules governing the
organization and the administration of the Italian stock
exchange, futures and options markets as well as the admission
to listing on and trading in these markets. The shareholders of
Borsa Italiana are primarily financial institutions.
A three-day rolling cash settlement period applies to all trades
of equity securities in Italy effected on a regulated market.
Any person, through an authorized intermediary, may purchase or
sell listed securities following (i) in the case of sales,
deposit of the securities; and (ii) in the case of
purchases, deposit of 100% of such securities value in
cash, or deposit of listed securities or government bonds of an
equivalent amount. No closing price is reported for
the electronic trading system, but an official price
for each security calculated
124
as a weighted average of all trades effected during the trading
day net of trades executed on a cross order basis,
and a reference price for each security calculated
as a weighted average of the last 10% of the trades effected
during such day net of trades executed on a cross
order basis are published daily.
If the opening price of a security (established each trading day
prior to the commencement of trading based on bids received)
differs by more than 10% (or such other amount established by
Borsa Italiana) from the previous days reference price,
trading in that security will not be permitted until Borsa
Italiana authorizes it. If in the course of a trading day the
price of our securities fluctuates by more than 5% from the last
reported sale price (or 10% from the previous days
reference price), an automatic five minute suspension in the
trading of that security will be declared by the Borsa Italiana.
In the event of such a suspension, orders already placed may not
be modified or cancelled and new orders may not be processed.
Borsa Italiana has the authority to suspend trading in any
security, among other things, in response to extreme price
fluctuations. In urgent circumstances, CONSOB may, where
necessary, adopt measures required to ensure the transparency of
the market, orderly trading and protection of investors.
Italian law requires that trading of equity securities, as well
as any other investment services, may be carried out
vis-à-vis the public on a professional basis by
SIMS, banks and certain types of finance companies. In addition,
banks and investment firms organized in any member state of the
EU are permitted to operate in Italy either on a branch or on a
cross-border basis provided that the intent of such bank or
investment firm is communicated to CONSOB and the Bank of Italy
by the competent authorities of the member state according to
specific procedures. Non-EU banks and non-EU investment firms
may operate in Italy subject to the specific authorization of
CONSOB and the Bank of Italy.
The settlement of Italian stock exchange transactions is
facilitated by Monte Titoli, a centralized securities clearing
system owned by the Italian stock exchange. Most Italian banks
and certain Italian securities dealers have securities accounts
with Monte Titoli and act as depositories for investors.
Beneficial owners of shares may hold their interests through
custody accounts with any such institution. Beneficial owners of
shares held with Monte Titoli may transfer their shares, collect
dividends, create liens and exercise other rights with respect
to those shares through such accounts.
Participants in Euroclear and Clearstream may hold their
interests in shares and transfer the shares, collect dividends,
create liens and exercise their shareholders rights
through Euroclear and Clearstream. A holder may require
Euroclear and Clearstream to transfer its shares to an account
of such holder with an Italian bank or any authorized broker.
Our common shares are included in the S&P/ MIB Index. Our
common shares could be removed from the S&P/ MIB Index at
any time, and the exclusion or announcement thereof could cause
the market price of our common shares to drop significantly.
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Item 10. |
Additional Information |
Memorandum and Articles of Association
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Applicable
non-U.S. Regulations |
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Applicable Dutch Legislation |
We were incorporated under the law of the Netherlands by deed of
May 21, 1987, and we are governed by Book 2 of the Dutch
Civil Code. Set forth below is a summary of certain provisions
of our Articles of Association and relevant Dutch corporate law.
The summary below does not purport to be complete and is
qualified in its entirety by reference to our Articles of
Association and relevant Dutch corporate law.
The summary below sets forth our current Articles of Association
as most recently amended.
We are subject to various provisions of the Dutch Financial
Markets Supervision Act (Wet op het financieel
toezicht) (the FMSA) and, in particular,
to the provisions summarized below.
Unless an exemption applies, we are subject to (i) a
prohibition from offering securities in the Netherlands without
the publication of an approved prospectus (and the same
prohibition applies for such offers in other jurisdictions of
the European Economic Area (the EEA)); (ii) a
prohibition of proceeding with any transaction in our financial
instruments admitted to trading on a regulated market in the EEA
or in any other financial instrument the value of which depends
in part on these instruments, in the event where we would
possess inside information; and (iii) certain restrictions
(related to market manipulation) in repurchasing our shares.
Furthermore we are required to inform the Dutch Authority for
the Financial Markets (Autoriteit Financiële
Martken) (the AFM) immediately if our
issued and outstanding share capital or voting rights change by
1 percent or more since our previous notification. Other
changes in our share capital or voting rights need to be
notified periodically. Also, the sole member of our Managing
Board and the members of our Supervisory Board (unless
125
they have already notified pursuant to the requirements
described below in Disclosure of
Holdings), certain of their relatives, entities closely
related with them and (under certain circumstances) members of
senior management must notify the AFM of all transactions
conducted on their own account relating to our financial
instruments admitted to trading on a regulated market in the EEA
or in any other financial instrument the value of which depends
in part on these instruments. The AFM keeps a public register of
all notifications made pursuant to the FMSA. We must once a year
file with the AFM a document containing or referencing all
information we were required to make public over the twelve
months preceding the publication of our annual accounts under
securities rules (Dutch and other) to which we are subject. The
provisions of the FMSA regarding statements of holdings in our
share capital and voting rights are described below in
Disclosure of Holdings.
Currently, there is no obligation under Dutch law for a
shareholder whose interest in a companys share capital or
voting rights passes certain thresholds to launch a public offer
for all or part of the outstanding shares in the share capital
of the company. However, when Directive 2004/25/ EC on takeover
bids (the Takeover Directive) will be fully
implemented in the Netherlands, a shareholder who has acquired
30% of the voting rights in our shareholders meeting will
be obliged to make a public offer for all our issued and
outstanding shares. Several exemptions to the mandatory offer
rule will apply.
Full implementation of the Takeover Directive is likely to place
in the first half of 2007. On May 20, 2006, the Dutch
Ministry of Finance issued a temporary exemption regulation for
public offers (Tijdelijke vrijstellingsregeling
overnamebiedingen), as amended on January 1, 2007
(the Exemption Regulation), implementing
several provisions of the Takeover Directive (but not the
mandatory offer rule). The Exemption Regulation will be
withdrawn once the draft legislation enters into effect.
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Applicable French Legislation |
As our registered offices are based in the Netherlands, the AMF
is not the competent market authority to control our disclosure
obligations. The AMF General Regulation only requires that the
periodic and ongoing information to be disclosed pursuant to the
EU Transparency Directive and which content is controlled by the
Netherlands Authority (for instance the annual, half-yearly and
quarterly financial reports or any inside information) be also
disclosed at the same time in France and made available on our
Internet website.
In addition, as our shares are listed on Eurolist, in France, we
must (i) disclose the amount of the fees paid to its
statutory auditors (pursuant to
Article 222-8 of
the AMF General Regulation), (ii) disclose a report on
internal control procedures (pursuant to
Article 222-9 of
the AMF General Regulation and (iii) inform the AMF of any
modification of its bylaws and articles of incorporation
(pursuant to
Article 223-20 of
the AMF General Regulation).
The AMF can also ask our company to disclose information
relating to threshold crossings as well as information on the
total number of shares and voting rights composing our capital
(pursuant to
Article 223-14 seq.
of the AMF General Regulation). This information is then
disclosed to the public by the AMF.
Articles 241-1 to
241-6 of the AMF General Regulation on buyback programs for
equity securities admitted to trading on a regulated market and
transaction reporting requirements are also applicable to our
company as well as
Articles 611-1 to
632-1 of the AMF General Regulation on market abuse (insider
dealing and market manipulation).
As a general rule, the information disclosed to the public must
be accurate, precise and fairly presented.
Following the opening of Eurolist by
Euronexttm,
all financial instruments formerly traded on the Premier,
the Second and the Nouveau Marché are now
distributed between three capitalization compartments, A, B, and
C, whose regulations are generally applicable to us. See
Item 9. Listing.
Other provisions of French securities regulations are not
applicable to us.
Regarding the regulation of public tender offers, articles 231-1
to 237-13 of the AMF General Regulations shall apply to our
shares, except for the provisions concerning the standing offer,
the mandatory filing of a tender offer and the squeeze out.
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Applicable Italian Legislation |
Because our common shares are listed on the MTA, as described in
Item 9. Listing above, we are required to
publish certain information in order to comply with (i) the
Financial Act and related regulations promulgated by the CONSOB
and (ii) certain rules of the Borsa Italiana. These
requirements are related to: (i) disclosure of
price-sensitive information (such as capital increases, mergers,
creation of joint subsidiaries, major acquisitions);
(ii) periodic information (such as financial statements to
be provided in compliance with the jurisdiction of the country
of incorporation) or information on the exercise of
shareholders rights (such as the calling of the
126
shareholders meeting or the exercise of pre-emptive
rights); and (iii) the publication of research, budgets and
projections.
As a result of our admission to the S&P/ MIB Index, we now
must comply with certain additional stock market rules. These
additional provisions require that we announce through a press
release, within one month from our year-end closing (i) the
month in which the payment of the dividend for the year ended,
where applicable, is planned to take place (if different from
the month when the previous dividend was distributed), and
(ii) our intent, if any, of adopting a policy of
distributing interim dividends for the current year, mentioning
the months when the distribution of dividends and interim
dividends will take place. In the event of a modification of the
policy of distributing dividends, we shall be required to
promptly update such information in another press release. In
addition, stock splits and certain other transactions must be
carried out in accordance with the Borsa Italianas
calendar. We must notify the Italian stock market of any
modification to the amount and distribution of our share
capital. The notification must be made no later than one day
after the modification has become effective under the rules to
which we are subject.
We are required to communicate to the CONSOB and the Borsa
Italiana S.p.A. the same information that we are required to
disclose to the AMF and the AFM regarding transactions in our
securities and any exercise of stock options by our Supervisory
Board members and executive officers, as described below.
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Purposes of the Company (Article 2) |
Article 2 of our Articles of Association sets forth the
purposes of our company. According to Article 2, our
purposes shall be to participate in or take, in any manner, any
interests in other business enterprises; to manage such
enterprises; to carry on business in semiconductors and
electronic devices; to take and grant licenses and other
industrial property interests; to assume commitments in the name
of any enterprises with which we may be associated within a
group of companies; and to take any other action, such as but
not limited to the granting of securities or the undertaking of
obligations on behalf of third parties, which in the broadest
sense of the term, may be related or contribute to the
aforementioned objects.
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Company and Trade Registry |
We are registered with the Chamber of Commerce and Industry in
Amsterdam (Kamer van Koophandel en Fabrieken voor Amsterdam)
under no. 33194537.
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Supervisory Board and Managing Board |
Our Articles of Association do not include any provisions
related to a Supervisory Board members:
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power to vote on proposals, arrangements or contracts in which
such member is directly interested; |
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power, in the absence of an independent quorum, to vote on
compensation to themselves or any members of the Supervisory
Board; or |
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borrowing powers exercisable by the directors and how such
borrowing powers can be varied. |
Our Supervisory Board Charter, however, explicitly prohibits
members of our Supervisory Board from participating in voting on
matters where any such member has a conflict of interest. Our
Articles of Association provide that our shareholders
meeting must adopt the compensation of our Supervisory Board
members.
Neither our Articles of Association nor our Supervisory Board
Charter have a requirement or policy that Supervisory Board
members hold a minimum number of our common shares.
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Compensation of our Managing Board (Article 12) |
Our Supervisory Board determines the compensation of the sole
member of our Managing Board, within the scope of the
compensation policy adopted by our shareholders meeting
upon the proposal of our Supervisory Board. Our Supervisory
Board will submit for approval by the shareholders meeting
a proposal regarding the compensation in the form of shares or
rights to acquire shares. This proposal sets forth at least how
many shares or rights to acquire shares may be awarded to our
Managing Board and which criteria apply to an award or a
modification.
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Compensation of our Supervisory Board (Article 23) |
Our shareholders meeting determines the compensation of
our Supervisory Board members. Our shareholders meeting
shall have the authority to decide whether such compensation
will consist of a fixed amount and/or an amount that is variable
in proportion to profits or any other factor.
127
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Information from our Managing Board to our Supervisory Board
(Article 18) |
At least once per year our Managing Board shall inform our
Supervisory Board in writing of the main features of our
strategic policy, our general and financial risks and our
management and control systems.
Our Managing Board shall then submit to our Supervisory Board
for approval:
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our operational and financial objectives; |
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our strategy designed to achieve the objectives; and |
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the parameters to be applied in relation to our strategy,
inter alia, regarding financial ratios. |
For more information on our Supervisory Board and our Managing
Board, see Item 6. Directors, Senior Management and
Employees.
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Adoption of Annual Accounts and Discharge of Management and
Supervision Liability (Article 25) |
Each year, our Managing Board must prepare our annual accounts,
certified by one or several auditors appointed by our
shareholders meeting, and submit them to our
shareholders meeting for adoption within five months after
the end of our financial year, unless our shareholders
meeting has extended this period by a maximum of six months on
account of special circumstances.
Each year, our shareholders meeting votes whether or not
to discharge the members of our Supervisory Board and of our
Managing Board for their supervision and management,
respectively, during the previous financial year. In accordance
with the applicable Dutch legislation, the discharge of the
members of our Managing Board and the Supervisory Board must, in
order to be effective, be the subject of a specific resolution
on the agenda of our shareholders meeting. Under Dutch
law, this discharge does not extend to matters not disclosed to
our shareholders meeting.
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Distribution of Profits (Articles 37, 38, 39 and 40) |
Subject to certain exceptions, dividends may only be paid out of
the profits as shown in our adopted annual accounts. Our profits
must first be used to set up and maintain reserves required by
Dutch law and our Articles of Association. Our Supervisory Board
may, upon proposal of our Managing Board, also establish
reserves out of our annual profits. The portion of our annual
profits that remains after the establishment or maintaining of
reserves is at the disposal of our shareholders meeting.
If our shareholders meeting resolves to distribute
profits, preference shareholders shall first be paid a dividend
if any preference shares are outstanding, which will be a
percentage of the paid up part of the nominal value of their
preference shares. No distribution may be made to our
shareholders when the equity after such distribution is or
becomes inferior to the fully-paid share capital, increased by
the legal reserves. The profits remaining after payment has been
made to preference shareholders may be distributed to our common
shareholders.
Our shareholders meeting may, upon the proposal of our
Supervisory Board, declare distributions out of our share
premium reserve and other reserves available for shareholder
distributions under Dutch law. Pursuant to a resolution of our
Supervisory Board, distributions adopted by the
shareholders meeting may be fully or partially made in the
form of our new shares to be issued. Our Supervisory Board may,
subject to certain statutory provisions, make one or more
interim distributions in respect of any year before the accounts
for such year have been adopted at a shareholders meeting.
Rights to cash dividends and distributions that have not been
collected within five years after the date on which they became
due and payable shall revert to us.
For the history of dividends paid by us to our shareholders in
the past five years, see Item 8. Financial
Information Dividend Policy.
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Shareholders Meetings, Attendance at
Shareholders Meetings and Voting Rights |
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Notice Convening the Shareholders Meeting
(Articles 25, 26, 27, 28 and 29) |
Our ordinary shareholders meetings are held at least
annually, within six months after the close of each financial
year, in Amsterdam, Haarlemmermeer (Schiphol Airport), Rotterdam
or The Hague, the Netherlands. Extraordinary shareholders
meetings may be held as often as our Supervisory Board deems
necessary, and must be held upon the written request of
registered shareholders or other persons entitled to attend
shareholders meetings of at least 10% of the total
outstanding share capital to our Managing Board or our
Supervisory Board specifying in detail the business to be dealt
with. In the event that the Managing Board or the Supervisory
Board does not convene the shareholders meeting within six
weeks of such a request, the aforementioned shareholders or
individuals may be authorized by a competent judicial authority.
We will give notice by mail to registered holders of shares of
each shareholders meeting, and will publish notice thereof
in a national daily newspaper distributed throughout the
Netherlands and in at least one daily
128
newspaper in France and Italy, where our shares are also
admitted for official quotation. Such notice shall be given no
later than the twenty-first day prior to the day of the meeting
and shall either state the business to be considered or state
that the agenda is open to inspection by our shareholders and
other persons entitled to attend shareholders meetings at
our offices.
The notice of the shareholders meeting must include
details on the agenda of the meeting and must indicate that the
agenda may be consulted at our registered office,
notwithstanding the provisions of Dutch law. The agenda is fixed
by the author of the notice of the meeting; however, one or more
shareholders or other persons entitled to attend
shareholders meetings representing at least one-tenth of
our issued share capital may, provided that the request was made
at least five days prior to the date of convocation of the
meeting, request that proposals be included on the agenda.
Notwithstanding the previous sentence, proposals of persons who
are entitled to attend shareholders meetings will be
included on the agenda, if such proposals are made in writing to
our Managing Board within a period of sixty days before that
meeting by persons who are entitled to attend our
shareholders meetings who, solely or jointly, represent at
least 1% of our issued share capital or a market value of at
least 50,000,000
unless we determine that such proposal would conflict with our
substantial interests.
We are exempt from the proxy rules under the United States
Securities Exchange Act of 1934. Euroclear France will provide
notice of shareholders meetings to, and compile voting
instructions from, holders of shares held directly or indirectly
through Euroclear France at the request of the Company, the
Registrar or the voting Collection Agent. A voting collection
agent must be appointed; Netherlands Management Company B.V.
acts as our voting collection agent. DTC will provide notice of
shareholders meetings to holders of shares held directly
or indirectly through DTC and the New York Transfer Agent and
Registrar will compile voting instructions. In order for holders
of shares held directly or indirectly through Euroclear France
to attend shareholders meetings in person, such holders
must withdraw their shares from Euroclear France and have such
shares registered directly in their name or in the name of their
nominee. In order for holders of shares held directly or
indirectly through DTC to attend shareholders meetings of
shareholders in person, such holders need not withdraw such
shares from DTC but must follow rules and procedures established
by the New York Transfer Agent and Registrar.
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Attendance at Shareholders Meetings and Voting Rights
(Articles 30, 31 and 33) |
Each share is entitled to one vote.
All shareholders and other persons entitled to attend and to
vote at shareholders meetings are entitled to attend the
shareholders meeting either in person or represented by a
person holding a written proxy, to address the
shareholders meeting and, as for shareholders and other
persons entitled to vote, to vote, subject to our Articles of
Association. Our shareholders meeting may set forth rules
regulating, inter alia, the length of time during which
shareholders may speak in the shareholders meeting. If
there are no such applicable rules, the chairman of the meeting
may regulate the time during which shareholders are entitled to
speak if desirable for the orderly conduct of the meeting.
In order to exercise the aforementioned voting rights,
shareholders and other persons entitled to attend
shareholders meetings must notify us in writing of their
intention to do so by the date mentioned on the notice of the
annual shareholders meeting and at the place mentioned on
the notice of the shareholders meeting. In addition,
holders of type II shares must notify us of the number of
shares they hold. Type II shares are common shares in the
form of an entry in our shareholders register with issue of a
share certificate consisting of a main part without dividend
coupon. In addition to type II shares, type I shares are
available. Type I shares are common shares in the form of an
entry in our shareholders register without issue of a share
certificate. Type II shares are only available should our
Supervisory Board decide. Our preference shares are in the form
of an entry in our shareholders register without issue of a
share certificate.
Shareholders and other persons entitled to attend
shareholders meetings may only exercise their rights at
the shareholders meeting for shares from which they can
derive said rights both on the day referred to above and on the
day of the meeting. We shall send a card of admission to the
meeting to shareholders and other persons entitled to attend
shareholders meetings who have notified us of their
intention to attend. Shareholders and other persons entitled to
attend meetings of shareholders may be represented by proxies
with written authorization, which must be shown for admittance
to the meeting. All matters regarding admittance to the
shareholders meeting, the exercise of voting rights and
the result of voting, as well as any other matters regarding the
business of the shareholders meeting, shall be decided
upon by the chairman of that meeting, in accordance with the
requirements of Section 13 of the Dutch Civil Code.
Our Articles of Association allow for separate meetings for
holders of common shares and for holders of preference shares.
At a meeting of holders of preference shares at which the entire
issued capital of shares of such class is represented, valid
resolutions may be adopted even if the requirements in respect
of the place of the
129
meeting and the giving of notice have not been observed,
provided that such resolutions are adopted by unanimous vote.
Also, valid resolutions of preference shareholder meetings may
be adopted outside a meeting if all holders of preference shares
and holders of a right of usufruct on preference shares indicate
by letter, telegram, telex communication or facsimile that they
vote in favor of the proposed resolution, provided that no
depositary receipts for preference shares have been issued with
our cooperation.
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Authority of the Shareholders Meeting
(Articles 12, 16, 19, 25, 28 and 41) |
Our shareholders meeting decide upon (i) the approval
of the written report of our Managing Board on the course of our
business and the conduct of our affairs during the past
financial year and the report of our Supervisory Board on the
annual accounts; (ii) the adoption of our annual accounts
and the distribution of dividends; (iii) the appointment of
the members of our Supervisory Board and our Managing Board; and
(iv) any other resolutions listed on the agenda by our
Supervisory Board, our Managing Board or our shareholders and
other persons entitled to attend shareholders meetings.
Furthermore, our shareholders meeting has to approve
resolutions of our Managing Board regarding a significant change
in the identity or nature of us or our enterprise, including in
any event (i) transferring our enterprise or practically
our entire enterprise to a third party, (ii) entering into
or canceling any long-term cooperation between us or a
subsidiary (dochtermaatschappij) of us and
any other legal person or company or as a fully liable general
partner of a limited partnership or a general partnership,
provided that such cooperation or the cancellation thereof is of
essential importance to us, and (iii) us or a subsidiary
(dochtermaatschappij) of us acquiring or
disposing of a participating interest in the capital of a
company with a value of at least one-third of our total assets
according to our consolidated balance sheet and notes thereto in
our most recently adopted annual accounts.
Our Articles of Association may only be amended (and our
liquidation can only be decided on) if amendments are proposed
by our Supervisory Board and approved by a simple majority of
the votes cast at a shareholders meeting at which at least
15% of the issued and outstanding share capital is present or
represented. The complete proposal for the amendment (or
liquidation) must be made available for inspection by the
shareholders and the other persons entitled to attend
shareholders meetings at our offices as from the day of
the notice convening such meeting until the end of the meeting.
Any amendment of our Articles of Association that negatively
affects the rights of the holders of a certain class of shares
requires the prior approval of the meeting of holders of such
class of shares.
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Quorum and Majority (Articles 4, 13 and 32) |
Unless otherwise required by our Articles of Association or
Dutch law, resolutions of shareholders meetings of
shareholders require the approval of a majority of the votes
cast at a meeting at which at least 15% of the issued and
outstanding share capital is present or represented, subject to
the provisions explained below. We may not vote our common
shares held in treasury. Blank and invalid votes shall not be
counted.
A quorum of shareholders, present or represented, holding at
least half of our issued share capital, is required to dismiss a
member of our Managing Board, unless the dismissal is proposed
by our Supervisory Board. In the event of the lack of a quorum,
a second shareholders meeting must be held within four
weeks, with no applicable quorum requirement. Any decision or
authorization by the shareholders meeting which has or
could have the effect of excluding or limiting preferential
subscription rights must be taken by a majority of at least
two-thirds of the votes cast, if at the shareholders
meeting less than 50% of the issued and outstanding share
capital is present or represented. Otherwise such a resolution
can be taken by a simple majority at a meeting or which at least
15% of the issued and outstanding share capital is represented.
Holders of our shares or rights to acquire shares (which
includes options and convertible bonds) may be subject to
notification obligations under Chapter 5.3 of the Dutch
Financial Markets Supervision Act (the FMSA).
Under Chapter 5.3 of the FMSA any person whose direct or
indirect interest (including potential interest, such as options
and convertible bonds) in our share capital or voting rights
reaches or crosses a threshold percentage must notify the AFM
either (a) immediately, if this is the result of an
acquisition or disposal by it; or (b) within 4 trading
days after such reporting, if this is the result of a change in
our share capital or votes reported in the AFMs public
register. The threshold percentages are 5, 10, 15,
20, 25, 30, 40, 50, 60, 75 and 95 percent.
Furthermore, persons holding 5 percent or more in our
voting rights or capital interest must within four weeks after
December 31 notify the AFM of any changes in the
composition of their interest since their last notification.
130
The following instruments qualify as shares:
(i) shares, (ii) depositary receipts for shares (or
negotiable instruments similar to such receipts),
(iii) negotiable instruments for acquiring the instruments
under (i) or (ii) (such as convertible bonds), and
(iv) options for acquiring the instruments under
(i) or (ii). Among others the following shares and votes
qualify as shares and votes held by a person:
(i) those directly held by him; (ii) those held by his
subsidiaries; (iii) shares held by a third party for such
persons account and the votes such third party may
exercise; (iv) the votes held by a third party if such
person has concluded an oral or written agreement with such
party which provides for a lasting common policy on voting;
(v) the votes held by a third party if such person has
concluded an oral or written agreement with such party which
provides for a temporary and paid transfer of the shares; and
(vi) the votes which a person may exercise as a proxy but
in his own discretion. Special rules apply to the attribution of
the ordinary shares which are part of the property of a
partnership or other community of property. A holder of a pledge
or right of usufruct in respect of our shares can also be
subject to a notification obligation if such person has, or can
acquire, the right to vote on our shares. If a pledgor or
usufructuary acquires such voting rights, this may trigger a
notification obligation for the holder of our shares.
Under Section 5.48 of the FMSA, the sole member of our
Managing Board and each of the members of our Supervisory Board
must without delay notify the AFM of any changes in his interest
or potential interest in our share capital or voting rights.
The AFM will publish all notifications on its public website
(www.afm.nl).
Non-compliance with the notification obligations of
Chapter 5.3 of the FMSA can lead to imprisonment or
criminal fines, or administrative fines or other administrative
sanctions. In addition, non-compliance with these notification
obligations may lead to civil sanctions, including, without
limitation, suspension of the voting rights attaching to our
shares held by the offender for a maximum of three years,
(suspension and) nullification of a resolution adopted by our
shareholders meeting (if it is likely that such resolution
would not have been adopted if the offender had not voted) and a
prohibition for the offender to acquire our shares or votes for
a period of not more than five years.
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Share Capital as of December 31, 2006 |
Our authorized share capital amounts to
1,809,600,000,
allowing the issuance of 1,200,000,000 common shares and
540,000,000 preference shares, with a nominal value of
1.04 per
share. The shares may not be issued at less than their par
value; our common shares must be fully paid up at the time of
their issuance. Our preference shares must be paid up for at
least 25% of their par value at the time of their issuance.
As of December 31, 2006, we had issued 910,157,933 of our
common shares, representing issued share capital of
approximately
947 million.
As of December 31, 2006, 897,395,042 common shares were
outstanding, not including (i) common shares issuable under
our various employee stock option plans or employee unvested
share plans; (ii) common shares issuable upon conversion of
our outstanding convertible debt securities; and
(iii) 12,762,891 million shares repurchased in 2001
and 2002, as compared to 894,424,279 common shares outstanding
as of December 31, 2005. As of December 31, 2006, the
book value of our common shares held by us or our subsidiaries
was approximately $332 million and the face value was
approximately
13 million.
As of December 31, 2006 options to acquire approximately
56 million common shares were outstanding. In addition,
there were approximately 7 million of non-vested shares. No
preference shares are currently outstanding.
All of our issued common shares are fully paid up. Our
authorized share capital is not restricted by redemption
provisions, sinking fund provisions or liability to further
capital calls by the company. There are no conditions imposed by
our Memorandum and Articles of Association governing changes in
capital which are more stringent than is required by law.
Shares can be issued in registered form only. Share registers
are maintained in New York by The Bank of New York, the New York
Transfer Agent and Registrar (the New York
Registry), and in Amsterdam, the Netherlands, by
Netherlands Management Company B.V., the Dutch Transfer Agent
and Registrar (the Dutch Registry). Shares of New
York Registry held through DTC are registered in the name of
Cede & Co., the nominee of DTC, and shares of Dutch
Registry held through the French clearance and settlement
system, Euroclear France, are registered in the name of
Euroclear France or its nominee.
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Non-issued Authorized Share Capital as of December 31,
2006 |
Non-issued authorized share capital, which is different from
issued share capital, allows us to proceed with capital
increases excluding the preemptive rights, upon our Supervisory
Boards decision, within the limits of the authorization
granted by our shareholders meeting of April 27,
2006. Such a decision can be taken to allow us to
131
benefit from the best conditions offered by the international
capital markets in our interest and that of all of our
shareholders. In the past, particularly in 1994, 1995, and 1998,
we proceeded with capital increases, upon the single decision of
our Supervisory Board, to accompany sales of our shares made by
our shareholders. However, it is not possible to predict if we
will request such an authorization again and at what time and
under what conditions. The impact of any future capital
increases within the limit of our authorized share capital, upon
the decision of our Supervisory Board acting on the delegation
granted to it by our shareholders meeting, cannot
therefore be evaluated.
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Other Securities Giving Access to Our Share Capital as of
December 31, 2006 |
Other securities in circulation which give access to our share
capital include (i) the options giving the right to
subscribe to our shares granted to our employees, including the
sole member of our Managing Board and our executive officers;
(ii) the options giving the right to subscribe to our
shares granted to the members of our Supervisory Board, its
secretaries and controllers, as described in Item 6.
Directors, Senior Management and Employees; (iii) the
exchangeable bonds convertible into our shares issued by
Finmeccanica Finance in August and September 2003, which are
described above in Item 7. Major Shareholders and
Related-Party Transactions Major Shareholders;
(iv) our 2013 Convertible Bonds as described above; and
(v) our 2016 Convertible Bonds.
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Securities Not Representing Our Share Capital |
None.
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Issuance of Shares, Preemptive Rights and Preference Shares
(Article 4) |
Unless excluded or limited by the shareholders meeting or
our Supervisory Board according to the conditions described
below, each holder of common shares has a pro rata preemptive
right to subscribe to an offering of common shares issued for
cash in proportion to the number of common shares which he owns.
There is no preemptive right with respect to an offering of
shares for non-cash consideration, with respect to an offering
of shares to our employees or to the employees of one of our
subsidiaries, or with respect to preference shares.
The shareholders meeting, upon proposal and on the terms
and conditions set by our Supervisory Board, has the power to
issue shares. The shareholders meeting may also authorize
our Supervisory Board, for a period of no more than five years,
to issue shares and to determine the terms and conditions of
share issuances. Our shares cannot be issued at below par and as
for our common shares must be fully paid up at the time of their
issuance. Our preference shares must be paid up for at least 25%
of their par value.
The shareholders meeting, upon proposal by the Supervisory
Board, also has the power to limit or exclude preemptive rights
in connection with new issuances of shares. Such a resolution of
the shareholders meeting must be taken with a majority of
at least two-thirds of the votes cast if at such
shareholders meeting less than 50% of the issued and
outstanding share capital is present or represented. Otherwise
such a resolution can be taken by a simple majority of the votes
cast at a shareholders meeting at which at least 15% of
our issued and outstanding share capital is present or
represented. The shareholders meeting may authorize our
Supervisory Board, for a period of no more than five years, to
limit or exclude preemptive rights.
Pursuant to a shareholders resolution adopted at our
annual shareholders meeting on April 27, 2006, our
Supervisory Board has been authorized for a period of five years
to resolve to (i) issue any number of common shares and/or
preference shares as comprised in our authorized share capital
from time to time; (ii) to fix the terms and conditions of
share issuance; (iii) to exclude or to limit preemptive
rights of existing shareholders; and (iv) to grant rights
to subscribe for common shares and/or preference shares, all for
a period of five years from the date of such annual
shareholders meeting.
Except as stated below, our Supervisory Board has not yet acted
on its authorization to increase the registered capital to the
limits of the authorized registered capital.
Upon the proposal of our Supervisory Board, our
shareholders meeting may, in accordance with the legal
provisions, reduce our issued capital by canceling the shares
that we hold in treasury, by reducing the par value of the
shares or by canceling our preference shares.
See Item 7. Major Shareholders and Related-Party
Transactions for details on changes in the distribution of
our share capital over the past three years.
We may issue preference shares in certain circumstances. On
November 27, 2006, our Supervisory Board decided to
authorize us to enter into an option agreement with an
independent foundation, Stichting Continuïteit ST (the
Stichting), and to terminate a substantially similar
option agreement dated May 31, 1999, as amended, between us
and ST Holding II. On February 7, 2007, the
May 31, 1999 option agreement, as amended, was
132
terminated by mutual consent by ST Holding II and us and
the new option agreement with the Stichting became effective on
the same date. The new option agreement provides for the
issuance of up to a maximum of 540,000,000 preference shares,
the same number as the May 31, 1999 option agreement, as
amended. The preference shares would be issuable in the event of
actions considered hostile by our Managing Board and Supervisory
Board, such as a creeping acquisition or an unsolicited offer
for our common shares, which are unsupported by our Managing
Board and Supervisory Board and which the board of the Stichting
determines would be contrary to the interests of our Company,
our shareholders and our other stakeholders. See
Item 7. Major Shareholders and Related-Party
Transactions Major Shareholders
Shareholders Agreements Preference
Shares.
The effect of the preference shares may be to deter potential
acquirers from effecting an unsolicited acquisition resulting in
a change of control or otherwise taking action as considered
hostile by our Managing Board and Supervisory Board. See
Item 3. Key Information Risk
Factors Risks Related to Our Operations
Our shareholder structure and our preference shares may deter a
change of control.
No preference shares have been issued to date and therefore none
are currently outstanding.
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Changes to Our Share Capital and Stock Option Grants |
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Cumulative | |
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Nominal Value | |
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Amount of | |
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Nominal | |
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Amount of | |
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Cumulative | |
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of Increase/ | |
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Issue | |
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Cumulative | |
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Number of | |
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Value | |
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Capital | |
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Number of | |
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Reduction in | |
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Premium | |
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Issue Premium | |
Year |
|
Transaction | |
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Shares | |
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(Euro) | |
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(Euro) | |
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Shares | |
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Capital | |
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(Euro) | |
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(Euro) | |
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March 31, 2001
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Exercise of options |
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277,695 |
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1.04 |
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925,765,341 |
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890,158,982 |
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288,803 |
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2,319,055 |
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1,486,731,074 |
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March 31, 2001
|
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LYONs conversion |
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151,251 |
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|
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1.04 |
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925,922,642 |
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890,310,233 |
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157,301 |
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2,453,756 |
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1,489,184,830 |
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December 31, 2001
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Exercise of options |
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2,062,234 |
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1.04 |
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928,067,365 |
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892,372,467 |
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2,144,723 |
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44,383,800 |
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1,533,568,630 |
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December 31, 2001
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LYONs conversion |
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6,726,714 |
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1.04 |
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935,063,148 |
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899,099,181 |
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6,995,782 |
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114,600,190 |
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1,648,168,820 |
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March 30, 2002
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Exercise of options |
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140,455 |
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1.04 |
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935,209,221 |
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899,239,636 |
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146,073 |
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1,081,691 |
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1,649,250,511 |
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September 28, 2002
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LYONs conversion |
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945 |
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1.04 |
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935,210,204 |
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899,240,581 |
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983 |
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30,482 |
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1,649,280,993 |
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Exercise of options and employee stock |
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September 28, 2002
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purchases |
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601,284 |
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1.04 |
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935,835,540 |
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899,841,865 |
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625,335 |
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10,830,842 |
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1,660,111,835 |
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Exercise of options and employee stock |
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December 31, 2002
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purchases |
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1,081,689 |
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1.04 |
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936,960,496 |
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900,923,554 |
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1,124,957 |
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15,671,916 |
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1,675,783,751 |
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March 29, 2003
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Exercise of options |
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91,146 |
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1.04 |
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937,055,288 |
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901,014,700 |
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94,792 |
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404,011 |
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1,676,187,762 |
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Exercise of options and employee stock |
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June 28, 2003
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purchases |
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217,490 |
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1.04 |
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937,281,478 |
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901,232,190 |
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226,190 |
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2,075,922 |
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1,678,263,684 |
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September 27, 2003
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Exercise of options |
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903,283 |
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1.04 |
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938,220,892 |
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902,135,473 |
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939,414 |
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10,857,587 |
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1,689,121,271 |
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December 31, 2003
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Exercise of options |
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634,261 |
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1.04 |
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938,880,523 |
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|
|
902,769,734 |
|
|
|
659,631 |
|
|
|
4,458,391 |
|
|
|
1,693,579,662 |
|
March 27, 2004
|
|
Exercise of options |
|
|
1,964,551 |
|
|
|
1.04 |
|
|
|
940,923,656 |
|
|
|
904,734,285 |
|
|
|
2,043,133 |
|
|
|
9,048,811 |
|
|
|
1,702,628,473 |
|
June 26, 2004
|
|
Exercise of options |
|
|
84,740 |
|
|
|
1.04 |
|
|
|
941,011,786 |
|
|
|
904,819,025 |
|
|
|
88,130 |
|
|
|
1,640,712 |
|
|
|
1,704,269,185 |
|
September 25, 2004
|
|
Exercise of options |
|
|
65,990 |
|
|
|
1.04 |
|
|
|
941,080,416 |
|
|
|
904,885,015 |
|
|
|
68,630 |
|
|
|
605,542 |
|
|
|
1,704,874,727 |
|
September 25, 2004
|
|
Bonds conversion |
|
|
101 |
|
|
|
1.04 |
|
|
|
941,080,521 |
|
|
|
904,885,116 |
|
|
|
105 |
|
|
|
7,006 |
|
|
|
1,704,881,733 |
|
December 31, 2004
|
|
Exercise of options |
|
|
422,120 |
|
|
|
1.04 |
|
|
|
941,519,525 |
|
|
|
905,307,236 |
|
|
|
439,005 |
|
|
|
4,021,536 |
|
|
|
1,708,903,269 |
|
December 31, 2004
|
|
LYONs conversion |
|
|
1,761 |
|
|
|
1.04 |
|
|
|
941,521,357 |
|
|
|
905,308,997 |
|
|
|
1,831 |
|
|
|
46,225 |
|
|
|
1,708,949,494 |
|
April 2, 2005
|
|
Exercise of options |
|
|
63,270 |
|
|
|
1.04 |
|
|
|
941,587,158 |
|
|
|
905,372,267 |
|
|
|
65,801 |
|
|
|
571,525 |
|
|
|
1,709,521,019 |
|
April 2, 2005
|
|
LYONs conversion |
|
|
59 |
|
|
|
1.04 |
|
|
|
941,587,219 |
|
|
|
905,372,326 |
|
|
|
61 |
|
|
|
1,448 |
|
|
|
1,709,522,467 |
|
June 2, 2005
|
|
Exercise of options |
|
|
145,454 |
|
|
|
1.04 |
|
|
|
941,738,491 |
|
|
|
905,517,780 |
|
|
|
151,272 |
|
|
|
1,436,236 |
|
|
|
1,710,958,703 |
|
October 1, 2005
|
|
Exercise of options |
|
|
2,079,369 |
|
|
|
1.04 |
|
|
|
943,901,035 |
|
|
|
907,597,149 |
|
|
|
2,162,544 |
|
|
|
21,629,617 |
|
|
|
1,732,651,320 |
|
December 31, 2005
|
|
Exercise of options |
|
|
227,130 |
|
|
|
1.04 |
|
|
|
944,137,250 |
|
|
|
907,824,279 |
|
|
|
236,215 |
|
|
|
2,062,234 |
|
|
|
1,734,713,554 |
|
April 1, 2006
|
|
Exercise of options |
|
|
201,340 |
|
|
|
1.04 |
|
|
|
944,346,644 |
|
|
|
908,025,619 |
|
|
|
209,394 |
|
|
|
2,360,525 |
|
|
|
1,737,074,079 |
|
July 1, 2006
|
|
Exercise of options |
|
|
1,398,210 |
|
|
|
1.04 |
|
|
|
945,800,782 |
|
|
|
909,423,829 |
|
|
|
1,454,138 |
|
|
|
9,009,053 |
|
|
|
1,746,083,132 |
|
September 30, 2006
|
|
Exercise of options |
|
|
731,904 |
|
|
|
1.04 |
|
|
|
946,561,962 |
|
|
|
910,155,733 |
|
|
|
761,180 |
|
|
|
8,447,102 |
|
|
|
1,754,530,234 |
|
December 31, 2006
|
|
Exercise of options |
|
|
2,200 |
|
|
|
1.04 |
|
|
|
946,564,250 |
|
|
|
910,157,933 |
|
|
|
2,288 |
|
|
|
2,420 |
|
|
|
1,754,532,654 |
|
|
|
|
Liquidation Rights (Articles 42 and 43) |
In the event of our dissolution and liquidation, after payment
of all debts and liquidation expenses, the holders of preference
shares if issued, would receive the paid up portion of the par
value of their preference shares. Any assets then remaining
shall be distributed among the registered holders of common
shares in proportion to the par value of their shareholdings.
|
|
|
Acquisition of Shares in Our Own Share Capital
(Article 5) |
We may acquire our own shares, subject to certain provisions of
Dutch law and of our Articles of Association, if and to the
extent that (i) the shareholders equity less the
payment required to make the acquisition does not fall below the
sum of the paid-up and
called-up portion of
the share capital and any reserves required by Dutch law and
(ii) the aggregate nominal value of shares that we or our
subsidiaries acquire, hold or hold in pledge would not exceed
one-tenth of our issued share capital. Share acquisitions may be
effected by our
133
Managing Board, subject to the approval of our Supervisory
Board, only if the shareholders meeting has authorized our
Managing Board to effect such repurchases, which authorization
may apply for a maximum period of 18 months. We may not
vote shares we hold in treasury. Our purchases of our own shares
are not subject to any acquisition price conditions.
Our Articles of Association have been amended effective as of
May 5, 2000, implementing a resolution of our
shareholders meeting held on April 26, 2000, to
provide that we shall be able to acquire shares in our own share
capital in order to transfer these shares under employee stock
option or stock purchase plans, without an authorization of the
annual shareholders meeting.
In 2001, we acquired 9.4 million of our common shares, and
in May 2002, we acquired an additional 4.0 million of our
common shares to fund attributions of stock options to managers
and employees pursuant to our 2001 Stock Option Plan, which was
adopted by our shareholders meeting on April 25,
2001. As a result of these two repurchases and disposals after
these repurchases, as of December 31, 2006, we held
12,762,891 million of our common shares in treasury. We may
in the future proceed with additional repurchases of our common
shares to fund further attributions of stock-based compensation
pursuant to the 2001 plan.
|
|
|
Changes to Our Share Capital, Stock Option Grants and
Other Matters |
The following table sets forth changes to our share capital as
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal | |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative | |
|
|
|
Value of | |
|
Amount of | |
|
|
|
|
|
|
|
|
Nominal | |
|
Amount of | |
|
Cumulative | |
|
Increase/ | |
|
Issue | |
|
Cumulative | |
|
|
|
|
Number of | |
|
Value | |
|
Capital | |
|
Number of | |
|
Reduction | |
|
Premium | |
|
Issue Premium | |
Year |
|
Transaction | |
|
Shares | |
|
(Euro) | |
|
(Euro) | |
|
Shares | |
|
in Capital | |
|
(Euro) | |
|
(Euro) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
December 31, 2004
|
|
|
LYONs conversion |
|
|
|
1,761 |
|
|
|
1.04 |
|
|
|
941,521,357 |
|
|
|
905,308,997 |
|
|
|
1,831 |
|
|
|
46,225 |
|
|
|
1,708,949,494 |
|
December 31, 2005
|
|
|
Conversion of bonds |
|
|
|
59 |
|
|
|
1.04 |
|
|
|
941,521,418 |
|
|
|
905,309,056 |
|
|
|
61 |
|
|
|
1,448 |
|
|
|
1,708,950,942 |
|
December 31, 2005
|
|
|
Exercise of options |
|
|
|
2,515,223 |
|
|
|
1.04 |
|
|
|
944,137,250 |
|
|
|
907,824,279 |
|
|
|
2,615,832 |
|
|
|
25,762,612 |
|
|
|
1,734,713,554 |
|
December 31, 2006
|
|
|
Exercise of options |
|
|
|
2,333,654 |
|
|
|
1.04 |
|
|
|
946,564,250 |
|
|
|
910,157,933 |
|
|
|
2,427,000 |
|
|
|
19,819,100 |
|
|
|
1,754,532,654 |
|
The following table summarizes the amount of stock options and
awards authorized to be granted, exercised, cancelled and
outstanding as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees | |
|
|
| |
|
|
|
|
Total | |
|
|
|
|
2001 | |
|
|
|
(stock options | |
|
|
|
|
Amended | |
|
|
|
and stock | |
|
|
1995 Plan | |
|
2001 Plan | |
|
Plan | |
|
2006 Plan | |
|
awards) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Remaining amount authorized to be granted
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
301,790 |
|
|
|
301,790 |
|
Amount exercised (stock options) or vested (stock awads)
|
|
|
14,523,601 |
|
|
|
10,050 |
|
|
|
637,109 |
|
|
|
0 |
|
|
|
15,170,760 |
|
Amount cancelled
|
|
|
3,184,838 |
|
|
|
5,966,383 |
|
|
|
1,530,112 |
|
|
|
118,430 |
|
|
|
10,799,763 |
|
Amount outstanding
|
|
|
13,853,502 |
|
|
|
41,757,750 |
|
|
|
1,993,444 |
|
|
|
4,798,210 |
|
|
|
62,402,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supervisory Board | |
|
|
| |
|
|
1996 | |
|
1999 | |
|
2002 | |
|
2005 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Remaining amount authorized to be granted
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Amount exercised or vested for 2005 plan
|
|
|
328,500 |
|
|
|
18,000 |
|
|
|
0 |
|
|
|
17,000 |
|
|
|
363,500 |
|
Amount cancelled
|
|
|
72,000 |
|
|
|
63,000 |
|
|
|
24,000 |
|
|
|
30,000 |
|
|
|
189,000 |
|
Amount outstanding
|
|
|
0 |
|
|
|
342,000 |
|
|
|
372,000 |
|
|
|
85,000 |
|
|
|
799,000 |
|
No options were granted in 2006.
In line with the resolutions of our 2005 annual
shareholders meeting, we have transitioned our stock-based
compensation plans from stock-option grants to non-vested stock
awards. Pursuant to the shareholders resolutions adopted
by our 2006 annual shareholders meeting, our Supervisory
Board, upon the recommendation of the Compensation Committee,
approved the terms and conditions of the 2006 Supervisory Board
Stock-Based Compensation Plan for members and professionals,
which resulted in a $12 million charge in 2006.
134
Pursuant to shareholders resolutions adopted by our 2006
annual shareholders meeting, our Supervisory Board, upon
the proposal of our Managing Board and the recommendation of the
Compensation Committee, took the following actions:
|
|
|
|
|
determined that for the 2005 stock-based compensation plan, two
out of the three criteria linked to the performance of our
Company had been met; consequently, a maximum of approximately
2.7 million shares of the total 4.1 million shares
granted are expected to vest; and |
|
|
|
approved the vesting conditions, linked to our future
performance and their continued service with us, to apply to
non-vested stock awards granted to employees in 2006, the
maximum number of which will be 5.1 million. |
We intend to use 5.1 million of our shares held by us in
treasury (out of the approximately 12.8 million currently
available) to cover the five million non-vested stock awards
granted to our employees in 2006 as well as the granting of up
to 100,000 non-vested shares to the sole member of our Managing
Board that was also approved by shareholders at the 2006 annual
shareholders meeting.
Following these decisions, the share-based compensation plans
generated a total additional charge in our income statement of
2006 of $12 million pre-tax. This charge corresponded to
the compensation expense to be recognized for the non-vested
stock awards from the grant date over the vesting period. The
vesting of the awards depends on the following performance
achievement: (i) one-third if the evolution of our sales
for 2006 compared to 2005 is equal to or greater than the
evolution of the sales of top ten semiconductor companies;
(ii) one-third if our actual return on net assets achieved
in 2006 is equal to or higher than our target as per 2006 budget
and (iii) one-third if the evolution of our operating
profit excluding restructuring charges as expressed as a
percentage of sales for 2006 compared to 2005 is equal to or
greater than the evolution of operating income excluding
restructuring charges as expressed as a percentage of sales of
the top ten semiconductor companies.
Limitations on Right to Hold or Vote Shares
There are currently no limitations imposed by Dutch law or by
our Articles of Association on the right of non-resident holders
to hold or vote the shares.
Material Contracts
We have not entered into any material contracts, other than
those entered into in the ordinary course of business, during
the past two years.
Exchange Controls
None.
Taxation
This is a general summary and the tax consequences as
described here may not apply to a holder of common shares. Any
potential investor should consult his own tax adviser for more
information about the tax consequences of acquiring, owning and
disposing of common shares.
This taxation summary solely addresses the principal Dutch tax
consequences of the acquisition, the ownership and disposition
of common shares. It does not discuss every aspect of taxation
that may be relevant to a particular holder of common shares
under special circumstances or who is subject to special
treatment under applicable law. Where in this summary English
terms and expressions are used to refer to Dutch concepts, the
meaning to be attributed to such terms and expressions shall
therefore be the meaning to be attributed to the equivalent
Dutch concepts under Dutch tax law.
This summary is based on the tax laws of the Netherlands as they
are in force and in effect on the date of this
Form 20-F. The
laws upon which this summary is based are subject to change,
possibly with retroactive effect. A change to such laws may
invalidate the contents of this summary, which will not be
updated to reflect any such changes.
|
|
|
Taxes on income and capital gains |
The summary set out in this section Dutch taxation
only applies to a holder of common shares who is a Non-resident
holder of common shares.
135
You are a Non-resident holder of common shares if
you satisfy the following tests:
|
|
|
(a) you are neither resident, nor deemed to be resident, in
the Netherlands for purposes of Dutch income tax or corporation
tax, as the case may be, and, if you are an individual, you have
not elected to be treated as a resident of the Netherlands for
Dutch income tax purposes; |
|
|
(b) your common shares and any benefits derived or deemed
to be derived therefrom have no connection with your past,
present or future employment or membership of a management board
(bestuurder) or a supervisory board
(commissaris); |
|
|
(c) your common shares do not form part of a substantial
interest or a deemed substantial interest in us within the
meaning of Chapter 4 of the Dutch Income Tax Act 2001,
unless such interest forms part of the assets of an enterprise; |
|
|
(d) if you are not an individual, no part of the benefits
derived from your common shares is exempt from Dutch corporation
tax under the participation exemption as laid down in the Dutch
Corporation Tax Act 1969; and |
|
|
(e) you are not an entity that is a resident in a Member
State of the European Union and that is not subject to a tax on
profits levied there. |
Generally, if a person holds an interest in us, such interest
forms part of a substantial interest or a deemed substantial
interest in us if any one or more of the following circumstances
is present.
|
|
|
1. Such person alone or, if he is an individual, together
with his partner (partner, as defined in Article 1.2
of the Dutch Income Tax Act 2001), if any, owns, directly or
indirectly, a number of shares in us representing 5% or more of
our total issued and outstanding capital (or the issued and
outstanding capital of any class of our shares), or rights to
acquire, directly or indirectly, shares, whether or not already
issued, representing 5% or more of our total issued and
outstanding capital (or the issued and outstanding capital of
any class of our shares), or the ownership of profit
participating certificates (winstbewijzen) relating to 5%
or more of our annual profit or to 5% or more of our liquidation
proceeds. |
|
|
2. Such persons shares, profit participating
certificates or rights to acquire shares or profit participating
certificates in us have been acquired by him or are deemed to
have been acquired by him under a non-recognition provision. |
|
|
3. Such persons partner or any of his relatives by
blood or by marriage in the direct line (including
foster-children) or of those of his partner has a substantial
interest (as described under 1. and 2. above) in us. |
A person who is entitled to the benefits from shares or profit
participating certificates (for instance a holder of a right of
usufruct) is deemed to be a holder of shares or profit
participating certificates, as the case may be, and his
entitlement to benefits is considered a share or profit
participating certificate, as the case may be.
If you are a holder of common shares and you satisfy test a.,
but do not satisfy any one or more of tests b., c., d. and e.,
your Dutch income tax position or corporation tax position, as
the case may be, is not discussed in this
Form 20-F.
If you are a Non-resident holder of common shares you will not
be subject to any Dutch taxes on income or capital gains (other
than the dividend withholding tax described below) in respect of
any benefits derived or deemed to be derived by you from common
shares, including any capital gains realized on the disposal
thereof, except if:
|
|
|
1. (i) you derive profits from an enterprise as an
entrepreneur (ondernemer) or pursuant to a co-entitlement
to the net value of such enterprise, other than as a
shareholder, if you are an individual, or other than as a holder
of securities if you are not an individual; (ii) such
enterprise is either managed in the Netherlands or carried on,
in whole or in part, through a permanent establishment or a
permanent representative in the Netherlands; and (iii) your
common shares are attributable to such enterprise; or |
|
|
2. you are an individual and you derive benefits from
common shares that are taxable as benefits from miscellaneous
activities in the Netherlands. You may, inter alia,
derive benefits from common shares that are taxable as benefits
from miscellaneous activities if your investment activities go
beyond the activities of an active portfolio investor, for
instance in the case of the use of insider knowledge
(voorkennis) or comparable forms of special knowledge, on
the understanding that such benefits will be taxable in the
Netherlands only if such activities are performed or deemed to
be performed in the Netherlands. |
Dividends distributed by us are generally subject to a
withholding tax imposed by the Netherlands at a rate of 15%.
136
The concept dividends distributed by us as used in
this section Dutch Taxation includes, but is not
limited to, the following:
|
|
|
|
|
distributions in cash or in kind, deemed and constructive
distributions and repayments of capital not recognized as
paid-in for Dutch dividend withholding tax purposes; |
|
|
|
liquidation proceeds and proceeds of repurchase or redemption of
shares in excess of the average capital recognized as paid-in
for Dutch dividend withholding tax purposes; |
|
|
|
the par value of shares issued by us to a holder of shares or an
increase of the par value of shares, as the case may be, to the
extent that it does not appear that a contribution, recognized
for Dutch dividend withholding tax purposes, has been made or
will be made; and |
|
|
|
partial repayment of capital, recognized as paid-in for Dutch
dividend withholding tax purposes, if and to the extent that
there are net profits (zuivere winst), unless
(a) our general shareholders meeting has resolved in
advance to make such repayment and (b) the par value of the
shares concerned has been reduced by an equal amount by way of
an amendment to our Articles of Association. |
If a Non-resident holder of common shares is resident in the
Netherlands Antilles or Aruba or in a country that has concluded
a double taxation treaty with the Netherlands, such holder may
be eligible for a full or partial relief from the dividend
withholding tax, provided such relief is timely and duly
claimed. Pursuant to domestic rules to avoid dividend stripping,
dividend withholding tax relief will only be available to the
beneficial owner of dividends distributed by us. The Dutch tax
authorities have taken the position that this
beneficial-ownership test can also be applied to deny relief
from dividend withholding tax under double tax treaties and the
Tax Arrangement for the Kingdom (Belastingregeling voor het
Koninkrijk). A holder of common shares who receives proceeds
therefrom shall not be recognized as the beneficial owner of
such proceeds if, in connection with the receipt of the
proceeds, it has given a consideration, in the framework of a
composite transaction including, without limitation, the mere
acquisition of one or more dividend coupons or the creation of
short-term rights of enjoyment of shares (kortlopende
genotsrechten op aandelen), whereas it may be presumed that
(i) such proceeds in whole or in part, directly or
indirectly, inure to a person who would not have been entitled
to an exemption from dividend withholding tax, or who would have
been entitled to a smaller reduction or refund of, or credit
for, dividend withholding tax than the actual recipient of the
proceeds; and (ii) such person acquires or retains,
directly or indirectly, an interest in common shares or similar
instruments, comparable to its interest in common shares prior
to the time the composite transaction was first initiated.
In addition, a Non-resident holder of common shares that is not
an individual and that is resident in a Member State of the
European Union is entitled to an exemption from dividend
withholding tax, provided that the following tests are satisfied:
|
|
|
1. it takes one of the legal forms listed in the Annex to
the EU Parent Subsidiary Directive (Directive 90/435/ EEC, as
amended) or a legal form designated by ministerial decree; |
|
|
2. any one or more of the following threshold conditions
are satisfied: |
|
|
|
a. at the time the dividend is distributed by us, it holds
common shares representing at least 5% of our nominal paid up
capital; or |
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b. it has held common shares representing at least 5% of
our nominal paid up capital for a continuous period of more than
one year at any time during the four years preceding the time
the dividend is distributed by us, provided that such period
ended after December 31, 2006; or |
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c. it is connected with us within the meaning of article
10a, paragraph 4 of the Dutch Corporation Tax Act; or |
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d. an entity connected with it within the meaning of
article 10a, paragraph 4 of the Dutch Corporation Tax Act
holds at the time the dividend is made available by us, common
shares representing at least 5% of our nominal paid up capital; |
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3. it is subject to the tax levied in its country of
residence as meant in article 2, paragraph 1, letter c
of the EU Parent Subsidiary Directive (Directive 90/435/ EEC, as
amended) without the possibility of an option or of being
exempt; and |
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4. it is not considered to be resident outside the Member
States of the European Union under the terms of a double
taxation treaty concluded with a third State. |
The exemption from dividend withholding tax is not available if
pursuant to a provision for the prevention of fraud or abuse
included in a double taxation treaty between the Netherlands and
the country of residence of the Non-resident holder of common
shares, such holder would not be entitled to the reduction of
tax on dividends provided for by such treaty. Furthermore, the
exemption from dividend withholding tax will only be available to
137
the beneficial owner of dividends distributed by us. If a
Non-resident holder of common shares is resident in a Member
State of the European Union with which the Netherlands has
concluded a double taxation treaty that provides for a reduction
of tax on dividends based on the ownership of the number of
voting rights, the tests under 2.a. and 2.b. above are also
satisfied if such holder owns, or has owned, as the case may be,
5% of the voting rights in us.
The convention of December 18, 1992, between the Kingdom of
the Netherlands and the United States of America for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income (the U.S./ NL
Income Tax Treaty) provides for an exemption for dividends
received by exempt pension trusts and exempt organizations, as
defined therein. In such case, a refund may be obtained of the
difference between the amount withheld and the amount that the
Netherlands was entitled to levy in accordance with the U.S./ NL
Income Tax Treaty by filing the appropriate forms with the Dutch
tax authorities within the term set therefor.
Reduction. If we receive a profit distribution from a
qualifying foreign entity, or a repatriation of qualifying
foreign branch profit, that is exempt from Dutch corporate
income tax and that has been subject to a foreign withholding
tax of at least 5%, we may be entitled to a reduction of the
amount of Dutch dividend withholding tax that must be paid over
to the Dutch tax authorities in respect of dividends distributed
by us. Such reduction is the lesser of:
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3% of the dividends paid by us in respect of which Dutch
dividend withholding tax is withheld; and |
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3% of the qualifying profit distributions grossed up by the
foreign tax withheld on such distributions received from foreign
subsidiaries and branches prior to the distribution of the
dividend by us during the current calendar year and the two
preceding calendar years (to the extent such distributions have
not been taken into account previously when applying this test). |
Non-resident holders of common shares are urged to consult their
tax advisers regarding the general creditability or
deductibility of Dutch dividend withholding tax and, in
particular, the impact on such investors of our potential
ability to receive a reduction as described in the previous
paragraph.
See the section Taxes on income and capital gains
for a description of the term Non-resident holder of common
shares.
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Gift and inheritance taxes |
If you acquire common shares as a gift (in form or in substance)
or if you acquire or are deemed to acquire common shares on the
death of an individual, you will not be subject to Dutch gift
tax or to Dutch inheritance tax, as the case may be, unless:
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the donor is, or the deceased was, resident or deemed to be
resident in the Netherlands for purposes of gift or inheritance
tax (as the case may be); or |
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the common shares are or were attributable to an enterprise or
part of an enterprise that the donor or deceased carried on
through a permanent establishment or a permanent representative
in the Netherlands at the time of the gift or of the death of
the deceased; or |
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the donor made a gift of common shares, then became a resident
or deemed resident of the Netherlands, and died as a resident or
deemed resident of the Netherlands within 180 days of the
date of the gift. |
No Dutch registration tax, transfer tax, stamp duty or any other
similar documentary tax or duty will be payable in the
Netherlands in respect of or in connection with the
subscription, issue, placement, allotment or delivery of the
common shares.
United States Federal Income Taxation
The following discussion is a general summary of the material
U.S. federal income tax consequences to a U.S. holder
(as defined below) of the ownership and disposition of our
common shares. You are a U.S. holder only if you are a
beneficial owner of common shares:
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that is, for U.S. federal income tax purposes, (a) a
citizen or individual resident of the United States, (b) a
U.S. domestic corporation or a domestic entity taxable as a
corporation, (c) an estate the income of which is subject
to U.S. federal income taxation regardless of its source,
or (d) a trust if a court within the United States can
exercise primary supervision over the administration of the
trust and one or more U.S. persons are authorized to
control all substantial decisions of the trust; |
138
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that owns, directly, indirectly or by attribution, less than 10%
of our voting power or outstanding share capital; |
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that holds the common shares as capital assets; |
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whose functional currency for U.S. federal income tax
purposes is the U.S. dollar; |
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that is a resident of the United States and not also a resident
of the Netherlands for purposes of the U.S./NL Income Tax Treaty; |
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that is entitled, under the limitation on benefits
provisions contained in the U.S./ NL Income Tax Treaty, to the
benefits of the U.S./ NL Income Tax Treaty; and |
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that does not have a permanent establishment or fixed base in
the Netherlands. |
This summary does not discuss all of the tax consequences that
may be relevant to you in light of your particular
circumstances. Also, it does not address holders that may be
subject to special rules including, but not limited to,
U.S. expatriates, tax-exempt organizations, persons subject
to the alternative minimum tax, banks, securities
broker-dealers, financial institutions, regulated investment
companies, insurance companies, traders in securities who elect
to apply a
mark-to-market method
of accounting, persons holding our common shares as part of a
straddle, hedging or conversion transaction, or persons who
acquired common shares pursuant to the exercise of employee
stock options or otherwise as compensation. Because this is a
general summary, you are advised to consult your own tax advisor
with respect to the U.S. federal, state, local and
applicable foreign tax consequences of the ownership and
disposition of our common shares. In addition, you are advised
to consult your own tax advisor concerning whether you are
entitled to benefits under the U.S./ NL Income Tax Treaty.
If a partnership (including for this purpose any entity treated
as a partnership for U.S. federal income tax purposes)
holds common shares, the tax treatment of a partner generally
will depend upon the status of the partner and the activities of
the partnership. If you are a partner in a partnership that
holds common shares, you are urged to consult your own tax
advisor regarding the specific tax consequences of the ownership
and the disposition of common shares.
This summary is based on the Internal Revenue Code of 1986, as
amended (the Code), the U.S./ NL Income Tax Treaty,
judicial decisions, administrative pronouncements and existing,
temporary and proposed Treasury regulations as of the date of
this Form 20-F,
all of which are subject to change or changes in interpretation,
possibly with retroactive effect.
In general, you must include the gross amount of distributions
paid (including the amount of any Dutch taxes withheld from
those distributions) to you by us with respect to the common
shares in your gross income as foreign-source taxable dividend
income. A dividends-received deduction will not be allowed with
respect to dividends paid by us. The amount of any distribution
paid in foreign currency (including the amount of any Dutch
withholding tax thereon) will be equal to the U.S. dollar
value of the foreign currency on the date of actual or
constructive receipt by you regardless of whether the payment is
in fact converted into U.S. dollars at that time. Gain or
loss, if any, realized on a subsequent sale or other disposition
of such foreign currency will be
U.S.-source ordinary
income or loss. Special rules govern and specific elections are
available to accrual method taxpayers to determine the
U.S. dollar amount includible in income in the case of
taxes withheld in a foreign currency. Accrual basis taxpayers
are urged to consult their own tax advisors regarding the
requirements and elections applicable in this regard.
Subject to applicable limitations, Dutch taxes withheld from a
distribution paid to you at a rate not exceeding the rate
provided in the U.S./ NL Income Tax Treaty will be eligible for
credit against your U.S. federal income tax liability. As
described in Taxation Dutch
Taxation above, under limited circumstances we may be
permitted to deduct and retain from the withholding a portion of
the amount that otherwise would be required to be remitted to
the taxing authorities in the Netherlands. If we withhold an
amount from dividends paid to you that we then are not required
to remit to any taxing authority in the Netherlands, the amount
in all likelihood would not qualify as a creditable tax for
U.S. federal income tax purposes. We will endeavor to
provide you with information concerning the extent to which we
have applied the reduction described above to dividends paid to
you. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of
income. For this purpose, dividends distributed by us with
respect to the common shares generally will constitute
passive income or, in the case of certain
U.S. holders, financial services income. For
taxable years beginning after December 31, 2006, dividend
income generally will constitute passive category
income or in the case of certain U.S. holders,
general category income. The use of foreign tax
credits is subject to complex rules and limitations. In lieu of
a credit, a U.S. holder who itemizes deductions may elect
to deduct all of such holders foreign taxes in the taxable
year. A deduction does not reduce tax on a dollar-for-dollar
basis like a
139
credit, but the deduction for foreign taxes is not subject to
the same limitations applicable to foreign tax credits. You
should consult your own tax advisor to determine whether and to
what extent a credit would be available to you.
Certain non-corporate U.S. holders (including individuals)
are eligible for reduced rates of U.S. federal income tax
(currently at a maximum of 15%) in respect of qualified
dividend income received in taxable years beginning before
January 1, 2011. For this purpose, qualified dividend
income generally includes dividends paid by a
non-U.S. corporation
if, among other things, the U.S. holders meet certain
minimum holding period and other requirements and the
non-U.S. corporation
satisfies certain requirements, including either that
(i) the shares of the
non-U.S. corporation
are readily tradable on an established securities market in the
United States, or (ii) the
non-U.S. corporation
is eligible for the benefits of a comprehensive income tax
treaty with the United States (such as the U.S./ NL Income Tax
Treaty) which provides for the exchange of information. We
currently believe that dividends paid by us with respect to our
common shares should constitute qualified dividend
income for U.S. federal income tax purposes; however,
this is a factual matter and subject to change. You are urged to
consult your own tax advisor regarding the availability to you
of a reduced dividend tax rate in light of your own particular
situation.
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Sale, Exchange or Other Disposition of Common
Shares |
Upon a sale, exchange or other disposition of common shares, you
generally will recognize capital gain or loss in an amount equal
to the difference between the amount realized and your tax basis
in the common shares, as determined in U.S. dollars. This
gain or loss generally will be
U.S.-source gain or
loss, and will be treated as long-term capital gain or loss if
you have held the common shares for more than one year. If you
are an individual, capital gains generally will be subject to
U.S. federal income tax at preferential rates if specified
minimum holding periods are met. The deductibility of capital
losses is subject to significant limitations.
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Passive Foreign Investment Company Status |
We believe that we will not be classified as a passive foreign
investment company (a PFIC) for U.S. federal
income tax purposes for the year ended December 31, 2006
and do not expect to become a PFIC in the foreseeable future.
This conclusion is a factual determination that must be made
annually at the close of each taxable year and therefore we can
provide no assurance that we will not be a PFIC in our current
or any future taxable year. If we were to be characterized as a
PFIC for any taxable year, the tax on certain distributions on
our common shares and on any gains realized upon the disposition
of common shares may be materially less favorable than as
described herein. In addition, if we were a PFIC in the taxable
year we pay dividends or the prior taxable year, such dividends
would not be qualified dividend income (as described
above) and would be taxed at the higher rates applicable to
other items of ordinary income. You should consult your own tax
advisor regarding the application of the PFIC rules to your
ownership of our common shares.
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U.S. Information Reporting and Backup
Withholding |
Dividend payments with respect to common shares and proceeds
from the sale, exchange, retirement or other disposition of our
common shares may be subject to information reporting to the
U.S. Internal Revenue Service (the IRS) and
possible U.S. backup withholding at a current rate of 28%.
Backup withholding will not apply to you, however, if you
furnish a correct taxpayer identification number or certificate
of foreign status and make any other required certification or
if you are otherwise exempt from backup withholding.
U.S. persons required to establish their exempt status
generally must provide certification on IRS
Form W-9.
Non-U.S. holders
generally will not be subject to U.S. information reporting
or backup withholding. However, these holders may be required to
provide certification of
non-U.S. status
(generally on
Form W-8BEN) in
connection with payments received in the United States or
through certain
U.S.-related financial
intermediaries. Backup withholding is not an additional tax.
Amounts withheld as backup withholding may be credited against
your U.S. federal income tax liability, and you may obtain
a refund of any excess amounts withheld under the backup
withholding rules by timely filing the appropriate claim for
refund with the IRS and furnishing any required information.
Documents on Display
Any statement in this
Form 20-F about
any of our contracts or other documents is not necessarily
complete. If the contract or document is filed as an exhibit to
this Form 20-F the
contract or document is deemed to modify the description
contained in this
Form 20-F. You
must review the exhibits themselves for a complete description
of the contract or document.
Our Articles of Association, the minutes of our annual
shareholders meetings, reports of the auditors and other
corporate documentation may be consulted by the shareholders and
any other individual authorized to attend the meetings at our
registered office at Schiphol Airport Amsterdam, the
Netherlands, at the registered
140
offices of the Supervisory Board in Geneva, Switzerland and at
Crédit Agricole-Indosuez, 9, Quai du Président
Paul-Doumer, 92400 Courbevoie, France.
You may review a copy of our filings with the
U.S. Securities and Exchange Commission (the
SEC), including exhibits and schedules filed with
it, at the SECs public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for
further information. In addition, the SEC maintains an Internet
site at http://www.sec.gov that contains reports and other
information regarding issuers that file electronically with the
SEC. These SEC filings are also available to the public from
commercial document retrieval services.
WE ARE REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH THE
SEC UNDER THE SECURITIES EXCHANGE ACT OF 1934. REPORTS AND OTHER
INFORMATION FILED BY US WITH THE SEC MAY BE INSPECTED AND
COPIED AT THE SECS PUBLIC REFERENCE FACILITIES DESCRIBED
ABOVE OR THROUGH THE INTERNET AT HTTP:// WWW.SEC.GOV. AS A
FOREIGN PRIVATE ISSUER, WE ARE EXEMPT FROM THE RULES UNDER
THE EXCHANGE ACT PRESCRIBING THE FURNISHING AND CONTENT OF PROXY
STATEMENTS AND OUR OFFICERS, DIRECTORS AND PRINCIPAL
SHAREHOLDERS ARE EXEMPT FROM THE REPORTING AND SHORT-SWING
PROFIT RECOVERY PROVISIONS CONTAINED IN SECTION 16 OF THE
EXCHANGE ACT. UNDER THE EXCHANGE ACT, AS A FOREIGN PRIVATE
ISSUER, WE ARE NOT REQUIRED TO PUBLISH FINANCIAL STATEMENTS AS
FREQUENTLY OR AS PROMPTLY AS UNITED STATES COMPANIES.
In addition, material filed by us with the SEC can be inspected
at the offices of the New York Stock Exchange at 20 Broad
Street, New York, NY 10005 and at the offices of The Bank
of New York, as New York Share Registrar, at One Wall Street,
New York, NY 10286 (telephone: 1-888-269-2377).
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Item 11. |
Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to changes in financial market conditions in the
normal course of business due to our operations in different
foreign currencies and our ongoing investing and financing
activities. Market risk is the uncertainty to which future
earnings or asset/liability values are exposed due to operating
cash flows denominated in foreign currencies and various
financial instruments used in the normal course of operations.
The major risks to which we are exposed are related to the
fluctuations of the U.S. dollar exchange rate compared to
the euro and the other major currencies, the coverage of our
foreign currency exposures, the variation of the interest rates
and the risks associated to the investments of our available
cash. We have established policies, procedures and internal
processes governing our management of market risks and the use
of financial instruments to manage our exposure to such risks.
Our Income Statement is exposed to the fluctuations of the
exchange rates such as the U.S. dollar, the euro and the
other major currencies since our revenues are mainly denominated
in U.S. dollars while a large part of our costs is
denominated in euros or other major currencies. We enter into
cash flow hedges to cover a portion of our costs denominated in
euro. Our balance sheet is also exposed to these exchange rates
fluctuations since the functional currency of our subsidiaries
is generally the local currency and as such, foreign exchange
fluctuations are generating adjustments for the translation into
U.S. dollar consolidated reporting of their assets and
liabilities. For further details, see Item 5.
Operating and Financial Review and Prospects Impact
of Changes in Exchange Rates.
We have exposures in foreign currencies since our operating cash
flows are denominated in various foreign currencies as a result
of our international business activities and certain of our
borrowings are exposed to changes in foreign exchange rates. The
functional currency of our subsidiaries is either the local
currency or the U.S. dollar. We continuously evaluate our
foreign currency exposures based on current market conditions
and the business environment. In order to mitigate the impact of
changes in foreign currency exchange rates, we enter into
forward exchange and currency options contracts. The magnitude
and nature of such outstanding instruments are detailed in
Note 26 to our Consolidated Financial Statements. Forward
and currency option contracts outstanding as of
December 31, 2006 have remaining terms of three days to
five months, which mature on average after 38 days. The
notional amounts of foreign exchange forward contracts totaled
$825 million and $2,206 million at December 31,
2006 and 2005, respectively. The principal currencies hedged are
the U.S. dollar, the euro, the Japanese yen and the
Singapore dollar. The risk of loss associated with these forward
contracts is equal to the exchange rate differential from the
date the contract is made until the time it is settled.
We are exposed to changes in interest rates primarily as a
result of our borrowing activities which include long-term debt
used to fund business operations. We borrow in U.S. dollars
as well as in other currencies from banks and other sources. We
primarily enter into debt obligations to support general
corporate and local purposes including capital expenditures and
working capital needs. The nature and amount of our long-term
debt can be
141
expected to vary as a result of future business requirements,
market conditions, and other factors. The principal risks are
related to interest rates variations to which we are exposed in
regard to our long-term obligations. Our long-term obligations
have been partially hedged, thus we do not expect changes in
interest rates to have a material effect on income or cash flows
related to financial assets and liabilities apart from the cash
balance in 2007.
We place our cash and cash equivalents, or a part of it, with
high credit quality financial institutions with at least single
A long-term rating from two of the major rating
agencies, meaning at least A3 from Moodys Investor Service
and A- from Standard & Poors and Fitch Ratings,
placed as term deposits and FRN marketable securities and, as
such we are exposed to the fluctuations of the market interest
rates on our placement and our cash, which can have an impact on
our accounts. We manage the credit risks associated with
financial instruments through credit approvals, investment
limits and centralized monitoring procedures but do not normally
require collateral or other security from the parties to the
financial instruments.
We do not anticipate any material adverse effect on our
financial position, result of operations or cash flows resulting
from the use of our instruments in the future. There can be no
assurance that these strategies will be effective or that
transaction losses can be minimized or forecasted accurately.
The information below summarizes our market risks associated
with cash equivalents, marketable securities, debt obligations,
and other significant financial instruments as of
December 31, 2006. The information below should be read in
conjunction with Note 26 to the Consolidated Financial
Statements.
The table below presents principal amounts and related
weighted-average interest rates by year of maturity for our
investment portfolio and debt obligations (in millions of
U.S. dollars, except percentages):
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Fair Value at | |
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Total | |
|
2007 | |
|
2008 | |
|
2009 | |
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2010 | |
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2011 | |
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Thereafter | |
|
December 31, 2006 | |
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| |
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| |
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| |
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| |
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| |
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Assets:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash equivalents
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1,963 |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,963 |
|
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Average interest rate
|
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|
4.28 |
% |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Marketable securities
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460 |
|
|
Average interest rate
|
|
|
4.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Short-term deposits
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250 |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
Average interest rate
|
|
|
5.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Restricted Cash
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218 |
|
|
Average interest rate
|
|
|
6.06 |
% |
|
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|
|
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Long-term debt:
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|
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Fixed rate
|
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2,130 |
|
|
|
136 |
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|
|
89 |
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|
83 |
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|
45 |
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|
|
30 |
|
|
|
1,747 |
|
|
|
2,131 |
|
|
Average interest rate
|
|
|
2.82 |
% |
|
|
3.35 |
% |
|
|
4.26 |
% |
|
|
4.34 |
% |
|
|
3.46 |
% |
|
|
4.22 |
% |
|
|
2.59 |
% |
|
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|
|
|
|
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|
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Amounts in Millions | |
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of U.S. Dollars | |
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Long-term debt by currency as of December 31, 2006:
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U.S. dollar
|
|
|
1,242 |
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Euro
|
|
|
818 |
|
|
Singapore dollar
|
|
|
65 |
|
Other currencies
|
|
|
5 |
|
|
|
|
|
Total in U.S. dollars
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|
|
2,130 |
|
|
|
|
|
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Amounts in Millions | |
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of U.S. Dollars | |
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| |
Long-term debt by currency as of December 31, 2005:
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|
|
U.S. dollar
|
|
|
1,454 |
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Euro
|
|
|
206 |
|
|
Singapore dollar
|
|
|
120 |
|
Other currencies
|
|
|
11 |
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Total in U.S. dollars
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1,791 |
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142
The following table provides information about our foreign
exchange forward contracts at December 31, 2006 (in
millions of U.S. dollars):
FORWARD CONTRACTS AS AT DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount | |
|
Average Rate | |
|
Fair Value | |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
Buy
|
|
|
EUR |
|
|
|
Sell |
|
|
|
USD |
|
|
|
594 |
|
|
|
1.3 |
|
|
|
12 |
|
Buy
|
|
|
USD |
|
|
|
Sell |
|
|
|
CAD |
|
|
|
8 |
|
|
|
1.2 |
|
|
|
0 |
|
Buy
|
|
|
JPY |
|
|
|
Sell |
|
|
|
EUR |
|
|
|
11 |
|
|
|
153.1 |
|
|
|
0 |
|
Buy
|
|
|
INR |
|
|
|
Sell |
|
|
|
USD |
|
|
|
27 |
|
|
|
45.2 |
|
|
|
0 |
|
Buy
|
|
|
USD |
|
|
|
Sell |
|
|
|
JPY |
|
|
|
20 |
|
|
|
117.5 |
|
|
|
0 |
|
Buy
|
|
|
JPY |
|
|
|
Sell |
|
|
|
USD |
|
|
|
1 |
|
|
|
117.4 |
|
|
|
0 |
|
Buy
|
|
|
SGD |
|
|
|
Sell |
|
|
|
USD |
|
|
|
74 |
|
|
|
1.5 |
|
|
|
1 |
|
Buy
|
|
|
MYR |
|
|
|
Sell |
|
|
|
USD |
|
|
|
27 |
|
|
|
3.5 |
|
|
|
0 |
|
Buy
|
|
|
GBP |
|
|
|
Sell |
|
|
|
USD |
|
|
|
43 |
|
|
|
2.0 |
|
|
|
0 |
|
Buy
|
|
|
CHF |
|
|
|
Sell |
|
|
|
USD |
|
|
|
9 |
|
|
|
1.2 |
|
|
|
0 |
|
Buy
|
|
|
SEK |
|
|
|
Sell |
|
|
|
USD |
|
|
|
11 |
|
|
|
6.7 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our foreign
exchange forward contracts at December 31, 2005 (in
millions of U.S. dollars):
FORWARD CONTRACTS AS AT DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount | |
|
Average Rate | |
|
Fair Value | |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
Buy
|
|
|
USD |
|
|
|
Sell |
|
|
|
JPY |
|
|
|
71 |
|
|
|
116.6 |
|
|
|
0 |
|
Sell
|
|
|
USD |
|
|
|
Buy |
|
|
|
JPY |
|
|
|
48 |
|
|
|
116.3 |
|
|
|
0 |
|
Buy
|
|
|
USD |
|
|
|
Sell |
|
|
|
CAD |
|
|
|
72 |
|
|
|
1.17 |
|
|
|
0 |
|
Sell
|
|
|
USD |
|
|
|
Buy |
|
|
|
SGD |
|
|
|
37 |
|
|
|
1.66 |
|
|
|
0 |
|
Sell
|
|
|
USD |
|
|
|
Buy |
|
|
|
INR |
|
|
|
3 |
|
|
|
45.9 |
|
|
|
0 |
|
Sell
|
|
|
USD |
|
|
|
Buy |
|
|
|
SEK |
|
|
|
12 |
|
|
|
8.0 |
|
|
|
0 |
|
Buy
|
|
|
GBP |
|
|
|
Sell |
|
|
|
USD |
|
|
|
33 |
|
|
|
1.73 |
|
|
|
0 |
|
Buy
|
|
|
EUR |
|
|
|
Sell |
|
|
|
USD |
|
|
|
1,771 |
|
|
|
1.20 |
|
|
|
(27 |
) |
Sell
|
|
|
EUR |
|
|
|
Buy |
|
|
|
USD |
|
|
|
130 |
|
|
|
1.18 |
|
|
|
0 |
|
Sell
|
|
|
EUR |
|
|
|
Buy |
|
|
|
CHF |
|
|
|
4 |
|
|
|
1.55 |
|
|
|
0 |
|
Sell
|
|
|
EUR |
|
|
|
Buy |
|
|
|
JPY |
|
|
|
25 |
|
|
|
139.8 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,206 |
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 12. |
Description of Securities Other Than Equity Securities |
Not applicable.
143
PART II
|
|
Item 13. |
Defaults, Dividend Arrearages and Delinquencies |
None.
|
|
Item 14. |
Material Modifications to the Rights of Security Holders and
Use of Proceeds |
None.
|
|
Item 15. |
Controls and Procedures |
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and
procedures (as defined in
Rule 13a-15(e) of
the Exchange Act) as of the end of the period covered by the
Form 20-F. Based
on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the evaluation
date, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Commissions rules and forms and
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding required
disclosure.
Managements Annual Report on Internal Control over
Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rule 13a-15(f)
under the Exchange Act). Our internal control over financial
reporting is a process designed under the supervision of our
principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for
external purposes in accordance with U.S. GAAP.
Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP, and that receipts and
expenditures are being made only in accordance with
authorizations of management under the control of our
Supervisory Board; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our management has assessed the effectiveness of its internal
control over financial reporting as of December 31, 2006
based on the framework established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, our management has
determined that our internal control over financial reporting
was effective as of December 31, 2006.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers SA, an independent registered public
accounting firm, as stated in their report which appears in this
Form 20-F.
Attestation Report of the Registered Public Accounting
Firm
Please see the Report of Independent Registered Accounting
Firm included in our Consolidated Financial Statements.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the period covered by the
Form 20-F that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, other
than enhancements made to our internal control systems in our
treasury department following organizational changes within that
department in early 2006.
144
|
|
Item 16A. |
Audit Committee Financial Expert |
On April 27, 2006, our Supervisory Board concluded that Tom
de Waard, a member of our Audit Committee and an independent
member of our Supervisory Board qualified as an audit
committee financial expert as defined in Item 16A of
Form 20-F during
fiscal year 2006.
Policy on Business Conduct and Ethics
Since 1987, we have had a corporate policy on Business Conduct
and Ethics (the Policy) for all of our employees,
including our chief executive officer and chief financial
officer. We have adapted this Policy to reflect recent
regulatory changes. The Policy is designed to promote honest and
ethical business conduct, to deter wrongdoing and to provide
principles to which our employees are expected to adhere and
which they are expected to advocate.
The Policy provides that if any officer to whom it applies acts
in contravention of its principles, we will take appropriate
steps in terms of the procedures in place for fair disciplinary
action. This action may, in cases of severe breaches, include
dismissal.
Our Policy on Business Conduct and Ethics is posted on our
internet website at http://www.st.com. There have been no
amendments or waivers, express or implicit, to our Policy since
its inception.
|
|
Item 16C. |
Principal Accountant Fees and Services |
PricewaterhouseCoopers has served as our independent registered
public accounting firm for each of the fiscal years since 1996.
The auditors are elected by the shareholders meeting once
every three years. PricewaterhouseCoopers was reelected for a
three-year term by our March 2005 shareholders
meeting to expire at our shareholders meeting in 2008.
The following table presents the aggregate fees for professional
audit services and other services rendered by
PricewaterhouseCoopers to us in 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
Percentage of | |
|
|
2006 | |
|
Total Fees | |
|
2005 | |
|
Total Fees | |
|
|
| |
|
| |
|
| |
|
| |
Audit Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory audit, certification, audit of individual and
consolidated financial statements
|
|
$ |
4,866,174 |
|
|
|
92 |
% |
|
$ |
2,494,626 |
|
|
|
94 |
% |
Audit-related fees
|
|
|
404,639 |
|
|
|
8 |
% |
|
|
138,312 |
|
|
|
5 |
% |
Non-audit Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax compliance fees
|
|
|
|
|
|
|
|
|
|
|
24,028 |
|
|
|
1 |
% |
Other fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,270,813 |
|
|
|
100 |
% |
|
$ |
2,656,966 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees consist of fees billed for the annual audit of our
companys consolidated financial statements, the statutory
audit of the financial statements of the Companys
subsidiaries and consultations on complex accounting issues
relating to the annual audit. Audit Fees also include services
that only our independent auditor can reasonably provide, such
as comfort letters, certain regulatory-required attest and
certifications letters, consents and the review of documents
filed with U.S., French and Italian stock exchanges.
Audit-related services are assurance and related fees consisting
of the audit of employee benefit plans, due diligence services
related to acquisitions and certain agreed-upon procedures.
Tax Fees include fees billed for tax compliance services,
including the preparation of original and amended tax returns
and claims for refund; tax consultations, such as assistance in
connection with tax audits and expatriate tax compliance.
|
|
|
Audit Committee Pre-approval Policies and
Procedures |
Our Audit Committee is responsible for selecting the independent
registered public accounting firm to be employed by us to audit
our financial statements, subject to ratification by the
Supervisory Board and approval by our shareholders for
appointment. Our Audit Committee also assumes responsibility (in
accordance with Dutch law) for the retention, compensation,
oversight and termination of any independent auditor employed by
us. The Company has adopted a policy (the Policy),
which was approved in advance by our Audit Committee, for the
pre-approval of audit and permissible non-audit services
provided by our independent auditors
145
(PricewaterhouseCoopers). The Policy defines those audit-related
services eligible to be approved by the Audit Committee.
All engagements with the external auditors, regardless of
amount, must be authorized in advance by our Audit Committee,
pursuant to the Policy and its pre-approval authorization or
otherwise.
The independent auditors submit a proposal for audit-related
services to our Audit Committee on a quarterly basis in order to
obtain prior authorization for the amount and scope of the
services. The independent auditors must state in the proposal
that none of the proposed services affect their independence.
The proposal must be endorsed by the office of our CFO with an
explanation of why the service is needed and the reason for
sourcing it to the audit firm and validation of the amount of
fees requested.
We do not intend to retain our independent auditors for
permissible non-audit services other than by exception and
within a limited amount of fees, and the Policy provides that
such services must be explicitly authorized by the Audit
Committee.
The Corporate Audit Vice-President is responsible for monitoring
that the actual fees are complying with the pre-approval amount
and scope authorized by the Audit Committee. During 2006, all
services provided to us by PricewaterhouseCoopers were approved
by the Audit Committee pursuant to paragraph (c)(7)(i) of
Rule 2-01 of
Regulation S-X.
|
|
Item 16D. |
Exemptions from the Listing Standards for Audit Committees |
Not applicable.
|
|
Item 16E. |
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number | |
|
|
|
|
|
|
Total Number of | |
|
of Securities that | |
|
|
Total Number of | |
|
|
|
Securities Purchased | |
|
May yet be | |
|
|
Securities | |
|
Average Price Paid | |
|
as Part of Publicly | |
|
Purchased Under | |
Period |
|
Purchased | |
|
per Security | |
|
Announced Programs | |
|
the Programs | |
|
|
| |
|
| |
|
| |
|
| |
2006-01-01 to 2006-01-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-02-01 to 2006-02-28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-03-01 to 2006-03-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-04-01 to 2006-04-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-05-01 to 2006-05-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-06-01 to 2006-06-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-07-01 to 2006-07-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-08-01 to 2006-08-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-09-01 to 2006-09-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-10-01 to 2006-10-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-11-01 to 2006-11-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-12-01 to 2006-12-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We currently hold 12,762,891 of our common shares in treasury
pursuant to repurchases made in prior years. We did not purchase
any common shares in 2006. We have not announced any additional
repurchase programs.
We note that 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. The 2010
Bonds are not equity securities, as they were not
registered in the United States. As previously disclosed, while
not noted in the table above, in 2003 we repurchased on the
market approximately $1,674 million aggregate principal
amount at maturity of 2010 Bonds and in 2004, we completed the
repurchase of our 2010 Bonds and repurchased on the market
approximately $472 million aggregate principal amount at
maturity of a total amount paid of $375 million.
146
PART III
|
|
Item 17. |
Financial Statements |
Not applicable.
|
|
Item 18. |
Financial Statements |
|
|
|
|
|
|
|
Page | |
|
|
| |
Financial Statements:
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
S-1 |
|
|
|
|
8.1
|
|
Subsidiaries and Equity Investments of the Company. |
12.1
|
|
Certification of Carlo Bozotti, President and Chief Executive
Officer of STMicroelectronics N.V., pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
12.2
|
|
Certification of Carlo Ferro, Executive Vice President and Chief
Financial Officer of STMicroelectronics N.V., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
13.1
|
|
Certification of Carlo Bozotti, President and Chief Executive
Officer of STMicroelectronics N.V., and Carlo Ferro, Executive
Vice President and Chief Financial Officer of STMicroelectronics
N.V., pursuant to 18 U.S.C. §1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002. |
14(a)
|
|
Consent of Independent Registered Public Accounting Firm. |
147
CERTAIN TERMS
|
|
|
ADSL |
|
assymetrical digital subscriber line |
|
ASD |
|
application-specific discrete technology |
|
ASIC |
|
application-specific integrated circuit |
|
ASSP |
|
application-specific standard product |
|
BCD |
|
bipolar, CMOS and DMOS process technology |
|
BiCMOS |
|
bipolar and CMOS process technology |
|
CAD |
|
computer aided design |
|
CMOS |
|
complementary metal-on silicon oxide semiconductor |
|
CODEC |
|
audio coding and decoding functions |
|
CPE |
|
customer premises equipment |
|
DMOS |
|
diffused metal-on silicon oxide semiconductor |
|
DRAMs |
|
dynamic random access memory |
|
DSL |
|
digital subscriber line |
|
DSP |
|
digital signal processor |
|
EMAS |
|
Eco-Management and Audit Scheme, the voluntary European
Community scheme for companies performing industrial activities
for the evaluation and improvement of environmental performance |
|
EEPROM |
|
electrically erasable programmable read-only memory |
|
EPROM |
|
erasable programmable read-only memory |
|
EWS |
|
electrical wafer sorting |
|
G-bit |
|
gigabit |
|
GPRS |
|
global packet radio service |
|
GPS |
|
global positioning system |
|
GSM |
|
global system for mobile communications |
|
GSM/ GPRS |
|
European standard for mobile phones |
|
HCMOS |
|
high-speed complementary metal-on silicon oxide semiconductor |
|
IC |
|
integrated circuit |
|
IGBT |
|
insulated gate bipolar transistors |
|
IPAD |
|
integrated passive and active devices |
|
ISO |
|
International Organization for Standardization |
|
K-bit |
|
kilobit |
|
LAN |
|
local area network |
|
M-bit |
|
megabit |
|
MEMS |
|
micro-electro-mechanical system |
|
MOS |
|
metal-on silicon oxide semiconductor process technology |
|
MOSFET |
|
metal-on silicon oxide semiconductor field effect transistor |
|
MPEG |
|
motion picture experts group |
|
ODM |
|
original design manufacturer |
|
OEM |
|
original equipment manufacturer |
|
OTP |
|
one-time programmable |
|
PDA |
|
personal digital assistant |
|
PFC |
|
power factor corrector |
|
PROM |
|
programmable read-only memory |
|
PSM |
|
programmable system memories |
148
|
|
|
RAM |
|
random access memory |
|
RF |
|
radio frequency |
|
RISC |
|
reduced instruction set computing |
|
ROM |
|
read-only memory |
|
SAM |
|
serviceable available market |
|
SCR |
|
silicon controlled rectifier |
|
SLIC |
|
subscriber line interface card |
|
SMPS |
|
switch-mode power supply |
|
SoC |
|
system-on-chip |
|
SRAM |
|
static random access memory |
|
SNVM |
|
serial nonvolatile memories |
|
TAM |
|
total available market |
|
USB |
|
universal serial bus |
|
VIPpowerTM |
|
vertical integration power |
|
VLSI |
|
very large scale integration |
|
XDSL |
|
digital subscriber line |
149
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on
Form 20-F and that
it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
Date: March 14, 2007
|
|
|
|
|
Carlo Bozotti |
|
President and Chief Executive Officer |
150
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
Page | |
|
|
| |
Financial Statements:
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
F-1
Report of Independent Registered Public Accounting Firm
To the Supervisory Board and Shareholders of STMicroelectronics
N.V.:
We have completed an integrated audit of STMicroelectronics
N.V.s December 31, 2006 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2006 and audits of its December 31,
2005 and December 31, 2004 consolidated financial
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated financial
statements listed in the index appearing under Item 18 on
page 147 of this 2006 Annual Report to Shareholders on
Form 20-F present
fairly, in all material respects, the financial position of
STMicroelectronics N.V. and its subsidiaries at
December 31, 2006 and December 31, 2005, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 18 on page 147 presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements and financial
statement schedule in accordance with the standards of the
Public Company Accounting Oversight Board (United States).Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements and financial statement schedule, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment as of January 1, 2005 and Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans as of December 31, 2006.
With offices in Aarau, Basei, Berne, Chur, Geneva, Lausanne,
Lugano, Lucerne, Neuchatel, Sitten, St. Gallen, Thun,
Winterthur, Zug and Zurich, PricewaterhouseCoopers AG is a
provider of auditing services and tax, legal and business
consultancy services. PricewaterhouseCoopers AG is a partner in
a global network of companies that are legally independent of
one another and is located in some 140 countries throughout the
world.
F-2
Internal control over financial reporting
Also, in our opinion managements assessment, included in
Managements Annual Report on Internal Control over
Financial Reporting appearing under Item 15 of this 2006
Annual Report to Shareholders on
Form 20-F, that
the Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers SA
M
Foley H-J
Hofer
Geneva, March 12, 2007
F-3
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF INCOME
In million of U.S. dollars except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
|
9,838 |
|
|
|
8,876 |
|
|
|
8,756 |
|
Other revenues
|
|
|
16 |
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
9,854 |
|
|
|
8,882 |
|
|
|
8,760 |
|
Cost of sales
|
|
|
(6,331 |
) |
|
|
(5,845 |
) |
|
|
(5,532 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,523 |
|
|
|
3,037 |
|
|
|
3,228 |
|
Selling, general and administrative
|
|
|
(1,067 |
) |
|
|
(1,026 |
) |
|
|
(947 |
) |
Research and development
|
|
|
(1,667 |
) |
|
|
(1,630 |
) |
|
|
(1,532 |
) |
Other income and expenses, net
|
|
|
(35 |
) |
|
|
(9 |
) |
|
|
10 |
|
Impairment, restructuring charges and other related closure costs
|
|
|
(77 |
) |
|
|
(128 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
677 |
|
|
|
244 |
|
|
|
683 |
|
Interest income (expense), net
|
|
|
93 |
|
|
|
34 |
|
|
|
(3 |
) |
Loss on equity investments
|
|
|
(6 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
Loss on extinguishment of convertible debt
|
|
|
0 |
|
|
|
0 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests
|
|
|
764 |
|
|
|
275 |
|
|
|
672 |
|
Income tax benefit (expense)
|
|
|
20 |
|
|
|
(8 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
784 |
|
|
|
267 |
|
|
|
604 |
|
Minority interests
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
782 |
|
|
|
266 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Basic)
|
|
|
0.87 |
|
|
|
0.30 |
|
|
|
0.67 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Diluted)
|
|
|
0.83 |
|
|
|
0.29 |
|
|
|
0.65 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-4
STMicroelectronics N.V.
CONSOLIDATED BALANCE SHEETS
In million of U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
As at | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,963 |
|
|
|
2,027 |
|
Marketable securities
|
|
|
460 |
|
|
|
0 |
|
Short-term deposits
|
|
|
250 |
|
|
|
0 |
|
Trade accounts receivable, net
|
|
|
1,589 |
|
|
|
1,490 |
|
Inventories, net
|
|
|
1,639 |
|
|
|
1,411 |
|
Deferred tax assets
|
|
|
187 |
|
|
|
152 |
|
Other receivables and assets
|
|
|
498 |
|
|
|
531 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,586 |
|
|
|
5,611 |
|
|
|
|
|
|
|
|
Goodwill
|
|
|
223 |
|
|
|
221 |
|
Other intangible assets, net
|
|
|
211 |
|
|
|
224 |
|
Property, plant and equipment, net
|
|
|
6,426 |
|
|
|
6,175 |
|
Long-term deferred tax assets
|
|
|
124 |
|
|
|
55 |
|
Equity investments
|
|
|
261 |
|
|
|
34 |
|
Restricted cash for equity investments
|
|
|
218 |
|
|
|
0 |
|
Other investments and other non-current assets
|
|
|
149 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
7,612 |
|
|
|
6,828 |
|
|
|
|
|
|
|
|
Total assets
|
|
|
14,198 |
|
|
|
12,439 |
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
|
0 |
|
|
|
11 |
|
Current portion of long-term debt
|
|
|
136 |
|
|
|
1,522 |
|
Trade accounts payable
|
|
|
1,044 |
|
|
|
965 |
|
Other payables and accrued liabilities
|
|
|
664 |
|
|
|
642 |
|
Deferred tax liabilities
|
|
|
7 |
|
|
|
7 |
|
Accrued income tax
|
|
|
112 |
|
|
|
152 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,963 |
|
|
|
3,299 |
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,994 |
|
|
|
269 |
|
Reserve for pension and termination indemnities
|
|
|
342 |
|
|
|
270 |
|
Long-term deferred tax liabilities
|
|
|
57 |
|
|
|
55 |
|
Other non-current liabilities
|
|
|
43 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
2,436 |
|
|
|
610 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,399 |
|
|
|
3,909 |
|
|
|
|
|
|
|
|
Commitment and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
52 |
|
|
|
50 |
|
|
|
|
|
|
|
|
Common stock (preferred stock: 540,000,000 shares
authorized, not issued; common stock: Euro 1.04 nominal
value, 1,200,000,000 shares authorized,
910,157,933 shares issued, 897,395,042 shares outstanding)
|
|
|
1,156 |
|
|
|
1,153 |
|
Capital surplus
|
|
|
2,021 |
|
|
|
1,967 |
|
Accumulated result
|
|
|
6,086 |
|
|
|
5,427 |
|
Accumulated other comprehensive income
|
|
|
816 |
|
|
|
281 |
|
Treasury stock
|
|
|
(332 |
) |
|
|
(348 |
) |
|
|
|
|
|
|
|
Shareholders equity
|
|
|
9,747 |
|
|
|
8,480 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
14,198 |
|
|
|
12,439 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-5
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In million of U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
782 |
|
|
|
266 |
|
|
|
601 |
|
|
Items to reconcile net income and cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,766 |
|
|
|
1,944 |
|
|
|
1,837 |
|
|
|
Amortization of discount on convertible debt
|
|
|
18 |
|
|
|
5 |
|
|
|
28 |
|
|
|
Loss on extinguishment of convertible debt
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
Other non-cash items
|
|
|
50 |
|
|
|
10 |
|
|
|
5 |
|
|
|
Minority interest in net income of subsidiaries
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
Deferred income tax
|
|
|
(74 |
) |
|
|
(31 |
) |
|
|
(6 |
) |
|
|
Loss on equity investments
|
|
|
6 |
|
|
|
3 |
|
|
|
4 |
|
|
|
Impairment, restructuring charges and other related closure
costs, net of cash payments
|
|
|
1 |
|
|
|
72 |
|
|
|
8 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
|
(104 |
) |
|
|
(117 |
) |
|
|
(119 |
) |
|
|
Inventories, net
|
|
|
(161 |
) |
|
|
(174 |
) |
|
|
(144 |
) |
|
|
Trade payables
|
|
|
36 |
|
|
|
(71 |
) |
|
|
128 |
|
|
|
Other assets and liabilities, net
|
|
|
169 |
|
|
|
(110 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
2,491 |
|
|
|
1,798 |
|
|
|
2,342 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for purchase of tangible assets
|
|
|
(1,533 |
) |
|
|
(1,441 |
) |
|
|
(2,050 |
) |
|
Payment for purchase of marketable securities
|
|
|
(460 |
) |
|
|
|
|
|
|
|
|
|
Investment in short-term deposits
|
|
|
(903 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from matured short-term deposits
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
Restricted cash for equity investments
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
Investment in intangible and financial assets
|
|
|
(86 |
) |
|
|
(49 |
) |
|
|
(79 |
) |
|
Proceeds from the sale of Accent subsidiary
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Capital contributions to equity investments
|
|
|
(213 |
) |
|
|
(38 |
) |
|
|
(2 |
) |
|
Payment of acquisitions, net of cash received
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,753 |
) |
|
|
(1,528 |
) |
|
|
(2,134 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,744 |
|
|
|
50 |
|
|
|
91 |
|
|
Repayment of long-term debt
|
|
|
(1,522 |
) |
|
|
(110 |
) |
|
|
(1,288 |
) |
|
Increase (decrease) in short-term facilities
|
|
|
(12 |
) |
|
|
(47 |
) |
|
|
10 |
|
|
Capital increase
|
|
|
28 |
|
|
|
35 |
|
|
|
23 |
|
|
Dividends paid
|
|
|
(107 |
) |
|
|
(107 |
) |
|
|
(107 |
) |
|
Other financing activities
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
132 |
|
|
|
(178 |
) |
|
|
(1,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates
|
|
|
66 |
|
|
|
(15 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
Net cash increase (decrease)
|
|
|
(64 |
) |
|
|
77 |
|
|
|
(1,048 |
) |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
2,027 |
|
|
|
1,950 |
|
|
|
2,998 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
|
1,963 |
|
|
|
2,027 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
29 |
|
|
|
17 |
|
|
|
16 |
|
Income tax paid
|
|
|
117 |
|
|
|
90 |
|
|
|
84 |
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
In million of U.S. dollars, except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
Common | |
|
Capital | |
|
Treasury | |
|
Accumulated | |
|
Comprehensive | |
|
Shareholders | |
|
|
Stock | |
|
Surplus | |
|
Stock | |
|
Result | |
|
income (loss) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2003
|
|
|
1,146 |
|
|
|
1,905 |
|
|
|
(348 |
) |
|
|
4,774 |
|
|
|
623 |
|
|
|
8,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital increase
|
|
|
4 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601 |
|
|
|
|
|
|
|
601 |
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094 |
|
Dividends, $0.12 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
1,150 |
|
|
|
1,924 |
|
|
|
(348 |
) |
|
|
5,268 |
|
|
|
1,116 |
|
|
|
9,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital increase
|
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Stock-based compensation expense
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
266 |
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(835 |
) |
|
|
(835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(569 |
) |
Dividends, $0.12 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
1,153 |
|
|
|
1,967 |
|
|
|
(348 |
) |
|
|
5,427 |
|
|
|
281 |
|
|
|
8,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital increase
|
|
|
3 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
Stock-based compensation expense
|
|
|
|
|
|
|
29 |
|
|
|
16 |
|
|
|
(16 |
) |
|
|
|
|
|
|
29 |
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
782 |
|
|
|
|
|
|
|
782 |
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535 |
|
|
|
535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317 |
|
Dividends, $0.12 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
1,156 |
|
|
|
2,021 |
|
|
|
(332 |
) |
|
|
6,086 |
|
|
|
816 |
|
|
|
9,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these audited
consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
1 THE COMPANY
STMicroelectronics N.V. (the Company) is registered
in The Netherlands with its statutory domicile in Amsterdam, and
its corporate headquarters located in Geneva, Switzerland.
The Company is a global independent semiconductor company that
designs, develops, manufactures and markets a broad range of
semiconductor integrated circuits (ICs) and discrete
devices. The Company offers a diversified product portfolio and
develops products for a wide range of market applications,
including automotive products, computer peripherals,
telecommunications systems, consumer products, industrial
automation and control systems. Within its diversified
portfolio, the Company has focused on developing products that
leverage its technological strengths in creating customized,
system-level solutions
with high-growth
digital and
mixed-signal content.
2 ACCOUNTING POLICIES
The accounting policies of the Company conform with accounting
principles generally accepted in the United States of America
(U.S. GAAP). All balances and values in the current
and prior periods are in millions of dollars, except share and
per-share amounts.
Under Article 35 of the Companys Articles of
Association, the financial year extends from January 1 to
December 31, which is the
period-end of each
fiscal year. Certain prior year amounts have been reclassified
to conform to the current year presentation.
2.1 Principles of consolidation
The consolidated financial statements of the Company have been
prepared in conformity with U.S. GAAP. The Companys
consolidated financial statements include the assets,
liabilities, results of operations and cash flows of its
majority-owned
subsidiaries. The ownership of other interest holders is
reflected as minority interests. Intercompany balances and
transactions have been eliminated in consolidation. Since the
adoption in 2003 of Financial Accounting Standards Board
Interpretation No. 46 Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (revised
2003) and the related FASB Staff Positions (collectively
FIN 46R), the Company assesses for
consolidation any entity identified as a Variable Interest
Entity (VIE) and consolidates VIEs, if any, for
which the Company is determined to be the primary beneficiary,
as described in Note 2.19.
2.2 Use of estimates
The preparation of financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of net
revenue and expenses during the reporting period. The primary
areas that require significant estimates and judgments by
management include, but are not limited to, sales returns and
allowances, allowances for doubtful accounts, inventory reserves
and normal manufacturing capacity thresholds to determine costs
capitalized in inventory, accruals for warranty costs,
litigation and claims, valuation of acquired intangibles,
goodwill, investments and tangible assets as well as the
impairment of their related carrying values, restructuring
charges, assumptions used in calculating pension obligations and
share-based
compensation, assessment of hedge effectiveness of derivative
instruments, deferred income tax assets including required
valuation allowances and liabilities as well as provisions for
specifically identified income tax exposures and tax
uncertainties. The Company bases the estimates and assumptions
on historical experience and on various other factors such as
market trends and business plans that it believes to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities. The actual results experienced by the
Company could differ materially and adversely from
managements estimates. To the extent there are material
differences between the estimates and the actual results, future
results of operations, cash flows and financial position could
be significantly affected.
2.3 Foreign currency
The U.S. dollar is the reporting currency for the Company. The
US dollar is the currency of the primary economic environment in
which the Company operates since the worldwide semiconductor
industry uses the U.S. dollar as a currency of reference
for actual pricing in the market. Furthermore, the majority of
the Companys transactions are denominated in U.S. dollars,
and revenues from external sales in U.S. dollars largely exceed
revenues in any other currency. However, labor costs are
concentrated primarily in the countries that have adopted the
Euro currency.
The functional currency of each subsidiary throughout the group
is either the local currency or the US dollar, determined on the
basis of the economical environment in which each subsidiary
operates. For consolidation
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
purposes, assets and liabilities of these subsidiaries having
the local currency as functional currency are translated at
current rates of exchange at the balance sheet date. Income and
expense items are translated at the monthly average exchange
rate of the period. The effects of translating the financial
position and results of operations from local functional
currencies are reported as a component of accumulated
other comprehensive income in the consolidated statements
of changes in shareholders equity.
Assets, liabilities, revenues, expenses, gains or losses arising
from foreign currency transactions are recorded in the
functional currency of the recording entity at the exchange rate
in effect during the month of the transaction. At each balance
sheet date, recorded balances denominated in a currency other
than the recording entitys functional currency are
measured into the functional currency at the exchange rate
prevailing at the balance sheet date. The related exchange gains
and losses are recorded in the consolidated statements of income
as Other income and expenses, net.
2.4 Derivative instruments
Derivative
instruments Not Designated as a Hedge
The Company conducts its business on a global basis in various
major international currencies. As a result, the Company is
exposed to adverse movements in foreign currency exchange rates.
The Company enters into foreign currency forward contracts and
currency options to reduce its exposure to changes in exchange
rates and the associated risk arising from the denomination of
certain assets and liabilities in foreign currencies at the
Companys subsidiaries. These instruments do not qualify as
hedging instruments under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133) and are
marked-to-market at
each period-end with
the associated changes in fair value recognized in other
income and expenses, net in the consolidated statements of
income.
Derivative
instruments Designated as Cash Flow Hedge
To further reduce its exposure to U.S. dollar exchange rate
fluctuations, the Company also hedged in 2006, 2005 and 2004
certain
euro-denominated
forecasted transactions that cover at
year-end a large part
of its research and development, selling general and
administrative expenses as well as a portion of its
front-end manufacturing
production costs of
semi-finished goods.
The foreign currency forward contracts and currency options used
to hedge foreign currency exposures are reflected at their fair
value in the consolidated balance sheet and meet the criteria
for designation as cash flow hedges. The criteria for
designating a derivative as a hedge include the
instruments effectiveness in risk reduction and, in most
cases, a one-to-one
matching of the derivative instrument to its underlying
transaction. Foreign currency forward contracts and currency
options used as hedges are effective at reducing the Euro/ U.S.
dollar currency fluctuation risk and are designated as a hedge
at the inception of the contract and on an
on-going basis over the
duration of the hedge relationship. Effectiveness on
transactions hedged through purchased currency options is
measured on the full fair value of the option, including the
time value of the option. For these derivatives, ineffectiveness
appears if the hedge relationship is not perfectly effective or
if the cumulative gain or loss on the derivative hedging
instrument exceeds the cumulative change in the expected future
cash flows on the hedged transactions. The ineffective portion
of the hedge is immediately reported in other income and
expenses, net in the consolidated statements of income.
For derivative instruments designated as cash flow hedge, the
gain or loss from the effective portion of the hedge is reported
as a component of accumulated other comprehensive
income in the consolidated statements of changes in
shareholders equity and is reclassified into earnings in
the same period in which the hedged transaction affects
earnings, and within the same income statement line item as the
impact of the hedged transaction. The gain or loss is recognized
immediately in other income and expenses, net in the
consolidated statements of income when a designated hedging
instrument is either terminated early or an improbable or
ineffective portion of the hedge is identified.
Derivative
instruments Designated as Fair Value Hedge
In 2006, the Company entered into cancellable swaps to hedge the
fair value of a portion of the convertible bonds due 2016
carrying a fixed interest rate. These financial instruments
correspond to interest rate swaps with a cancellation feature
depending on the Companys convertible bonds
convertibility. They convert the fixed rate interest expense
recorded on the convertible bond due to 2016 to a variable
interest rate based upon adjusted LIBOR. The interest rate swaps
meet the criteria for designation as a fair value hedge and, as
such, both the interest rate swaps and the hedged portion of the
bonds are reflected at their fair values in the consolidated
balance sheet. The criteria for designating a derivative as a
hedge include evaluating whether the instrument is
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
highly effective at offsetting changes in the fair value of the
hedged item attributable to the hedged risk. Hedged
effectiveness is assessed on both a prospective and
retrospective basis at each reporting period. The interest rate
swaps are highly effective for hedging the change in fair value
of the hedged bonds attributable to changes in interest rates
and were designated as a fair value hedge at their inception.
Any ineffectiveness of the hedge relationship is recorded as a
gain or loss on derivatives as a component of other income
and expenses, net. If the hedge becomes no longer highly
effective, the hedged portion of the bonds will discontinue
being marked to fair value while the changes in the fair value
of the interest rate swaps will continue to be recorded in the
consolidated statements of income.
2.5 Revenue Recognition
Revenue is recognized as follows:
Net
sales
Revenue from products sold to customers is recognized, pursuant
to SEC Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104), when all the
following conditions have been met: (a) persuasive evidence
of an arrangement exists; (b) delivery has occurred;
(c) the selling price is fixed or determinable; and
(d) collection is reasonably assured. This usually occurs
at the time of shipment.
Consistent with standard business practice in the semiconductor
industry, price protection is granted to distribution customers
on their existing inventory of the Companys products to
compensate them for declines in market prices. The ultimate
decision to authorize a distributor refund remains fully within
the control of the Company. The Company accrues a provision for
price protection based on a rolling historical price trend
computed on a monthly basis as a percentage of gross distributor
sales. This historical price trend represents differences in
recent months between the invoiced price and the final price to
the distributor, adjusted if required, to accommodate a
significant move in the current market price. The short
outstanding inventory time period, visibility into the standard
inventory product pricing (as opposed to certain customized
products) and long distributor pricing history have enabled the
Company to reliably estimate price protection provisions at
period-end. The Company
records the accrued amounts as a deduction of revenue at the
time of the sale.
The Companys customers occasionally return the
Companys products for technical reasons. The
Companys standard terms and conditions of sale provide
that if the Company determines that products are
non-conforming, the
Company will repair or replace the
non-conforming
products, or issue a credit or rebate of the purchase price.
Quality returns are not related to any technological
obsolescence issues and are identified shortly after sale in
customer quality control testing. Quality returns are usually
associated with
end-user customers, not
with distribution channels. The Company provides for such
returns when they are considered as probable and can be
reasonably estimated. The Company records the accrued amounts as
a reduction of revenue.
The Companys insurance policy relating to product
liability only covers physical damage and other direct damages
caused by defective products. The Company does not carry
insurance against immaterial non consequential damages. The
Company records a provision for warranty costs as a charge
against cost of sales, based on historical trends of warranty
costs incurred as a percentage of sales, which management has
determined to be a reasonable estimate of the probable losses to
be incurred for warranty claims in a period. Any potential
warranty claims are subject to the Companys determination
that the Company is at fault for damages, and such claims
usually must be submitted within a short period following the
date of sale. This warranty is given in lieu of all other
warranties, conditions or terms express or implied by statute or
common law. The Companys contractual terms and conditions
limit its liability to the sales value of the products which
gave rise to the claims.
While the majority of the Companys sales agreements
contain standard terms and conditions, the Company may, from
time to time, enter into agreements that contain multiple
elements or
non-standard terms and
conditions, which require revenue recognition judgments. Where
multiple elements exist in an arrangement, the arrangement is
allocated to the different elements based upon verifiable
objective evidence of the fair value of the elements, as
governed under Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF
00-21). These
arrangements generally do not include
performance-,
cancellation-,
termination-or
refund-type provisions.
Other
revenues
Other revenues primarily consist of license revenue and patent
royalty income, which are recognized ratably over the term of
the agreements.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Funding
Funding received by the Company is mainly from governmental
agencies and income is recorded as recognized when all
contractually required conditions are fulfilled. The
Companys primary sources for government funding are
French, Italian, other European Union (EU)
governmental entities and Singapore agencies. Such funding is
generally provided to encourage research and development
activities, industrialization and local economic development.
The EU has developed model contracts for research and
development funding that require beneficiaries to disclose the
results to third parties on reasonable terms. The conditions for
receipt of government funding may include eligibility
restrictions, approval by EU authorities, annual budget
appropriations, compliance with European Commission regulations,
as well as specifications regarding objectives and results.
Certain specific contracts contain obligations to maintain a
minimum level of employment and investment during a certain
period of time. There could be penalties if these objectives are
not fulfilled. Other contracts contain penalties for late
deliveries or for breach of contract, which may result in
repayment obligations. In accordance with SAB 104 and the
Companys revenue recognition policy, funding related to
these contracts is recorded when the conditions required by the
contracts are met. The Companys funding programs are
classified under three general categories: funding for research
and development activities, capital investment, and loans.
Funding for research and development activities is the most
common form of funding that the Company receives. Public funding
for research and development is recorded as other income
and expenses, net in the Companys consolidated
statements of income. Public funding for research and
development is recognized ratably as the related costs are
incurred once the agreement with the respective governmental
agency has been signed and all applicable conditions are met.
Capital investment funding is recorded as a reduction of
property, plant and equipment, net and is recognized
in the Companys consolidated statements of income
according to the depreciation charges of the funded assets
during their useful lives. The Company also receives capital
funding in Italy, which is recovered through the reduction of
various governmental liabilities, including income taxes,
value-added tax and
employee-related social charges. The funding has been classified
as long-term receivable
and is reflected in the balance sheet at its discounted net
present value. The subsequent accretion of the discount is
recorded as
non-operating income in
interest income (expense), net.
The Company receives certain loans, mainly related to large
capital investment projects, at preferential interest rates. The
Company records these loans as debt in its consolidated balance
sheet.
2.6 Advertising costs
Advertising costs are expensed as incurred and are recorded as
selling, general and administrative expenses. Advertising
expenses for 2006, 2005 and 2004 were $14 million,
$14 million and $17 million respectively.
2.7 Research and development
Research and development expenses include costs incurred by the
Company, the Companys share of costs incurred by other
research and development interest groups, and costs associated
with co-development contracts. Research and development expenses
do not include marketing design center costs, which are
accounted for as selling expenses and process engineering,
pre-production or process transfer costs which are recorded as
cost of sales. Research and development costs are charged to
expense as incurred. The amortization expense recognized on
technologies and licenses purchased by the Company from third
parties to facilitate the Companys research is recorded as
research and development expenses.
2.8 Start-up costs
Start-up costs
represent costs incurred in the start-up and testing of the
Companys new manufacturing facilities, before reaching the
earlier of a minimum level of production or 6-months after the
fabrication lines quality qualification. Start-up costs
are included in other income and expenses, net in
the consolidated statements of income.
2.9 Income taxes
The provision for current taxes represents the income taxes
expected to be paid or the benefit expected to be received
related to the current year income or loss in each individual
tax jurisdiction. Provisions for specific tax exposures are also
estimated and recorded when an additional tax payment is
determined probable. Deferred tax assets and liabilities are
recorded for all temporary differences arising between the tax
and book bases of assets
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
and liabilities and for the benefits of tax credits and
operating loss carry-forwards. Deferred income tax is determined
using tax rates and laws that are enacted by the balance sheet
date and are expected to apply when the related deferred income
tax asset is realized or the deferred income tax liability is
settled. The effect on deferred tax assets and liabilities from
changes in tax law is recognized in the period of enactment.
Deferred income tax assets are recognized in full but the
Company assesses whether it is probable that future taxable
profit will be available against which the temporary differences
can be utilized. A valuation allowance is provided where
necessary to reduce deferred tax assets to the amount for which
management considers the possibility of recovery to be more
likely than not. The Company utilizes the
flow-through method to
account for its investment credits, reflecting the credits as a
reduction of tax expense in the year they are recognized.
Similarly, research and development tax credits are classified
as a reduction of tax expense in the year they are recognized.
Deferred taxes on the undistributed earnings of the
Companys foreign subsidiaries are provided for unless the
Company intends to indefinitely reinvest the earnings in the
subsidiaries. In case the Company does not have this intention,
a distribution of the related earnings would not have any
material tax impact. Thus, the Company did not provide for
deferred taxes on the earnings of those subsidiaries.
2.10 Earnings per share
Basic earnings per share are computed by dividing net income by
the weighted average number of common shares outstanding during
the period. Diluted earnings per share are computed using the
treasury stock method by dividing net income
(adding-back interest
expense, net of tax effects, related to convertible debt if
determined to be dilutive) by the weighted average number of
common shares and common share equivalents outstanding during
the period. The weighted average shares used to compute diluted
earnings per share include the incremental shares of common
stock relating to
stock-options granted,
nonvested shares and convertible debt to the extent such
incremental shares are dilutive. Nonvested shares with
performance or market conditions are included in the computation
of diluted earnings per share if their conditions have been
satisfied at the balance sheet date and if the awards are
dilutive.
2.11 Cash and cash equivalents
Cash and cash equivalents represents cash on hand, deposits at
call with banks, highly liquid investments with insignificant
interest rate risk purchased with an original maturity of ninety
days or less.
2.12 Restricted cash
Restricted cash include collateral deposits used as security
under arrangements for financing of certain entities.
2.13 Marketable securities
Management determines the appropriate classification of
investments in debt and equity securities at the time of
purchase and reassesses the classification at each reporting
date. For those marketable securities with a readily
determinable fair value and that are classified as
available-for-sale, the
securities are reported at fair value with changes in fair value
recognized as a separate component of accumulated other
comprehensive income (loss) in the consolidated statements
of changes in shareholders equity. Other-than-temporary
losses are recorded in net income based on the Companys
assessment of any significant, sustained reductions in the
investments market value and of the market indicators
affecting the securities. Gains and losses on securities sold
are determined based on the specific identification method and
are recorded as other income and expenses, net.
2.14 Trade accounts receivable
Trade accounts receivable are recognized at their sales value,
net of allowances for doubtful accounts. The Company maintains
an allowance for doubtful accounts for potential estimated
losses resulting from its customers inability to make
required payments. The Company bases its estimates on historical
collection trends and records a provision accordingly. In
addition, the Company is required to evaluate its
customers financial condition periodically and records an
additional provision for any specific account the Company
estimates as doubtful.
2.15 Inventories
Inventories are stated at the lower of cost or net realizable
value. Cost is based on the weighted average cost by adjusting
standard cost to approximate actual manufacturing costs on a
quarterly basis; the cost is therefore
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
dependent on the Companys manufacturing performance. In
the case of underutilization of manufacturing facilities, the
costs associated with the excess capacity are not included in
the valuation of inventories but charged directly to cost of
sales. Net realizable value is the estimated selling price in
the ordinary course of business, less applicable variable
selling expenses.
The Company performs on a continuous basis inventory
write-off of products,
which have the characteristics of slow-moving, old production
date and technical obsolescence. Additionally, the Company
evaluates its product inventory to identify obsolete or
slow-selling stock and records a specific provision if the
Company estimates the inventory will eventually become obsolete.
Provisions for obsolescence are estimated for excess uncommitted
inventory based on the previous quarter sales, orders
backlog and production plans.
2.16 Intangible assets subject to amortization
Intangible assets subject to amortization include the cost of
technologies and licenses purchased from third parties,
purchased software and internally developed software which is
capitalized. Intangible assets subject to amortization are
reflected net of any impairment losses. The carrying value of
intangible assets subject to amortization is evaluated whenever
changes in circumstances indicate that the carrying amount may
not be recoverable. In determining recoverability, the Company
usually estimates the fair value based on the projected
discounted future cash flows associated with the intangible
assets and compares this to their carrying value. An impairment
loss is recognized in the income statement for the amount by
which the assets carrying amount exceeds its fair value.
Amortization is computed using the straight-line method over the
following estimated useful lives:
|
|
|
|
|
Technologies & licenses
|
|
|
3-7 years |
|
Purchased software
|
|
|
3-4 years |
|
Internally developed software
|
|
|
4 years |
|
The Company evaluates the remaining useful life of an intangible
asset at each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization.
The capitalization of costs for internally generated software
developed by the Company for its internal use begins when
preliminary project stage is completed and when the Company,
implicitly or explicitly, authorizes and commits to funding a
computer software project. It must be probable that the project
will be completed and will be used to perform the function
intended.
2.17 Goodwill
Goodwill recognized in business combinations is not amortized
but rather is subject to an impairment test to be performed on
an annual basis or more frequently if indicators of impairment
exist, in order to assess the recoverability of its carrying
value. Goodwill subject to potential impairment is tested at a
reporting unit level, which represents a component of an
operating segment for which discrete financial information is
available and is subject to regular review by segment
management. This impairment test determines whether the fair
value of each reporting unit for which goodwill is allocated is
lower than the total carrying amount of relevant net assets
allocated to such reporting unit, including its allocated
goodwill. If lower, the implied fair value of the reporting unit
goodwill is then compared to the carrying value of the goodwill
and an impairment charge is recognized for any excess. In
determining the fair value of a reporting unit, the Company
usually estimates the expected discounted future cash flows
associated with the reporting unit. Significant management
judgments and estimates are used in forecasting the future
discounted cash flows, including: the applicable industrys
sales volume forecast and selling price evolution, the reporting
units market penetration, the market acceptance of certain
new technologies, relevant cost structure, the discount rates
applied using a weighted average cost of capital and the
perpetuity rates used in calculating cash flow terminal values.
2.18 Property, plant and equipment
Property, plant and equipment are stated at historical cost, net
of government fundings and any impairment losses. Major
additions and improvements are capitalized, minor replacements
and repairs are charged to current operations.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Land is not depreciated. Depreciation on fixed assets is
computed using the straight-line method over the following
estimated useful lives:
|
|
|
|
|
Buildings
|
|
|
33 years |
|
Facilities & leasehold improvements
|
|
|
5-10 years |
|
Machinery and equipment
|
|
|
3-6 years |
|
Computer and R&D equipment
|
|
|
3-6 years |
|
Other
|
|
|
2-5 years |
|
The Company evaluates each period whether there is reason to
suspect that tangible assets or groups of assets might not be
recoverable. Several impairment indicators exist for making this
assessment, such as: significant changes in the technological,
market, economic or legal environment in which the Company
operates or in the market to which the asset is dedicated, or
available evidence of obsolescence of the asset, or indication
that its economic performance is, or will be, worse than
expected. In determining the recoverability of assets to be held
and used, the Company initially assesses whether the carrying
value of the tangible assets or group of assets exceeds the
undiscounted cash flows associated with these assets. If
exceeded, the Company then evaluates whether an impairment
charge is required by determining if the assets carrying
value also exceeds its fair value. This fair value is normally
estimated by the Company based on independent market appraisals
or the sum of discounted future cash flows, using market
assumptions such as the utilization of the Companys
fabrication facilities and the ability to upgrade such
facilities, change in the selling price and the adoption of new
technologies. The Company also evaluates, and adjusts if
appropriate, the assets useful lives, at each balance
sheet date or when impairment indicators exist. Assets
classified as held for disposal are reflected at the lower of
their carrying amount or fair value less selling costs and are
not depreciated during the selling period. Costs to sell include
incremental direct costs to transact the sale that would not
have been incurred except for the decision to sell.
When property, plant and equipment are retired or otherwise
disposed of, the net book value of the assets is removed from
the Companys books and the net gain or loss is included in
other income and expenses, net in the consolidated
statements of income.
Capital leases are included in property, plant and
equipment, net and depreciated over the shorter of the
estimated useful life or the lease term. Payments made under
operating leases are charged to the income statement on a
straight-line basis over the period of the lease.
Borrowing costs incurred for the construction of any qualifying
asset are capitalized during the period of time that is required
to complete and prepare the asset for its intended use. Other
borrowing costs are expensed.
2.19 Investments
Equity investments are all entities over which the Company has
the ability to exercise significant influence but not control,
generally representing a shareholding of between 20% and 50% of
the voting rights. These investments are accounted for by the
equity method of accounting and are initially recognized at
cost. The Companys share in its equity investments
results is recognized in the consolidated income statement as
Income (loss) on equity investments and in the
consolidated balance sheet as an adjustment against the carrying
amount of the investments. When the Companys share of
losses in an equity investment equals or exceeds its interest in
the investee, the Company does not recognize further losses,
unless it has incurred obligations or made payments on behalf of
the investee.
Investments without readily determinable fair values and for
which the Company does not have the ability to exercise
significant influence are accounted for under the cost method.
Under the cost method of accounting, investments are carried at
historical cost and are adjusted only for declines in fair
value. The fair value of a cost method investment is estimated
when there are identified events or changes in circumstances
that may have a significant adverse effect on the fair value of
the investment. For investments in public companies that have
readily determinable fair values and for which the Company does
not exercise significant influence, the Company classifies these
investments as available-for-sale and, accordingly, recognizes
changes in their fair values as a separate component of
accumulated other comprehensive income (loss) in the
consolidated statements of changes in shareholders equity.
Other-than-temporary losses are recorded in net income and are
based on the Companys assessment of any significant,
sustained reductions in the investments market value and
of the market indicators affecting the securities. Gains and
losses on investments sold are determined on the specific
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
identification method and are recorded as other income or
expenses, net in the consolidated statements of income.
Since the adoption in 2003 of Financial Accounting Standards
Board Interpretation No. 46 Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(revised 2003) and the related FASB Staff Positions
(collectively FIN 46R), the Company assesses
for consolidation entities identified as a Variable Interest
Entity (VIE) and consolidates the VIEs, if any, for
which the Company is determined to be the primary beneficiary.
The primary beneficiary of a VIE is the party that absorbs the
majority of the entitys expected losses, receives the
majority of its expected residual returns, or both as a result
of holding variable interests. Assets, liabilities, and the
non-controlling interest of newly consolidated VIEs are
initially measured at fair value in the same manner as if the
consolidation resulted from a business combination.
2.20 Employee benefits
(a) Pension
obligations
The Company sponsors various pension schemes for its employees.
These schemes conform to local regulations and practices in the
countries in which the Company operates. They are generally
funded through payments to insurance companies or
trustee-administered funds, determined by periodic actuarial
calculations. Such plans include both defined benefit and
defined contribution plans. A defined benefit plan is a pension
plan that defines the amount of pension benefit that an employee
will receive on retirement, usually dependent on one or more
factors such as age, years of service and compensation. A
defined contribution plan is a pension plan under which the
Company pays fixed contributions into a separate entity. The
Company has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay
all employees the benefits relating to employee service in the
current and prior periods.
With the adoption in 2006 of Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R) (FAS 158), the liability
recognized in the consolidated balance sheet in respect of
defined benefit pension plans is the present value of the
defined benefit obligation at the balance sheet date less the
fair value of plan assets. The Company accounts thus for the
overfunded and underfunded status of defined benefit plans and
other post retirement plans in its financial statements as at
December 31, 2006, with offsetting entries made at adoption
to accumulated other comprehensive income (loss) in
the consolidated statement of changes in shareholders
equity. The overfunded or underfunded status of the defined
benefit plans are calculated as the difference between plan
assets and the projected benefit obligations. Overfunded plans
are not netted against underfunded plans and are shown
separately in the financial statements. Prior to FAS 158
adoption in 2006, the liability recognized in the consolidated
balance sheet in respect of defined benefit pension plans was
the present value of the defined benefit obligation at the
balance sheet date less the fair value of plan assets, together
with adjustments for unrecognized actuarial gains and losses and
past service costs. Additional minimum liability was required
when the accumulated benefit obligation exceeded the fair value
of the plan assets and the amount of the accrued liability. Such
minimum liability was recognized as a component of
accumulated other comprehensive income (loss) in the
consolidated statements of changes in shareholders equity.
Significant estimates are used in determining the assumptions
incorporated in the calculation of the pension obligations,
which is supported by input from independent actuaries.
Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are charged or credited to
income over the employees expected average remaining
working lives. Past-service costs are recognized immediately in
income, unless the changes to the pension scheme are conditional
on the employees remaining in service for a specified period of
time (the vesting period). In this case, the past-service costs
are amortized on a straight-line basis over the vesting period.
The net periodic benefit cost of the year is determined based on
the assumptions used at the end of the previous year.
For defined contribution plans, the Company pays contributions
to publicly or privately administered pension insurance plans on
a mandatory, contractual or voluntary basis. The Company has no
further payment obligations once the contributions have been
paid. The contributions are recognized as employee benefit
expense when they are due. Prepaid contributions are recognized
as an asset to the extent that a cash refund or a reduction in
the future payments is available.
(b) Other
post-employment obligations
The Company provides post-retirement benefits to some of its
retirees. The entitlement to these benefits is usually
conditional on the employee remaining in service up to
retirement age and to the completion of a
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
minimum service period. The expected costs of these benefits are
accrued over the period of employment using an accounting
methodology similar to that for defined benefit pension plans.
Actuarial gains and losses arising from experience adjustments,
and changes in actuarial assumptions, are charged or credited to
income over the expected average remaining working lives of the
related employees. These obligations are valued annually by
independent qualified actuaries.
(c) Termination
benefits
Termination benefits are payable when employment is
involuntarily terminated, or whenever an employee accepts
voluntary termination in exchange for these benefits. For the
accounting treatment and timing recognition of the involuntarily
termination benefits, the Company distinguishes between one-time
benefit arrangements and on-going termination arrangements. A
one-time benefit arrangement is one that is established by a
termination plan that applies to a specified termination event
or for a specified future period. These one-time involuntary
termination benefits are recognized as a liability when the
termination plan meets certain criteria and has been
communicated to employees. If employees are required to render
future service in order to receive these one-time termination
benefits, the liability is recognized ratably over the future
service period. Termination benefits other than one-time
termination benefits are termination benefits for which criteria
for communication are not met but that are committed to by
management, or termination obligations that are not specifically
determined in a new and single plan. These termination benefits
are all legal, contractual and past practice termination
obligations to be paid to employees in case of involuntary
termination. These termination benefits are accrued for at
commitment date when it is probable that employees will be
entitled to the benefits and the amount can be reasonably
estimated.
In the case of special termination benefits proposed to
encourage voluntary termination, the Company recognizes a
provision for voluntary termination benefits at the date on
which the employee irrevocably accepts the offer and the amount
can be reasonably estimated.
(d) Profit-sharing
and bonus plans
The Company recognizes a liability and an expense for bonuses
and profit-sharing plans when it is contractually obliged or
where there is a past practice that has created a constructive
obligation.
(e) Share-based
compensation
Stock
options
At December 31, 2006, the Company had five employee and
Supervisory Board stock-option plans, which are described in
detail in Note 16. Until the fourth quarter of 2005, the
Company applied the intrinsic-value-based method prescribed by
Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees (APB 25), and its
related implementation guidance, in accounting for stock-based
awards to employees. For all option grants prior to the fourth
quarter of 2005, no stock-based employee compensation cost was
reflected in net income as all options under those plans were
granted at an exercise price equal to the market value of the
underlying common stock on the date of grant.
In 2005, the Company redefined its equity-based compensation
strategy by no longer granting options but rather issuing
nonvested shares. In July 2005, the Company amended its latest
Stock Option Plans for employees, Supervisory Board and
Professionals of the Supervisory Board accordingly. As part of
this revised stock-based compensation policy, the Company
decided in July 2005 to accelerate the vesting period of all
outstanding unvested stock options, following authorization from
the Companys shareholders at the annual general meeting
held on March 18, 2005. As a result, underwater options
equivalent to approximately 32 million shares became
exercisable immediately in July 2005 with no earnings impact.
The following tabular presentation provides pro forma
information on net income and earnings per share required to be
disclosed as if the Company had applied the fair value
recognition provisions prescribed by
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS
123) for the years ended December 31, 2006, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income, as reported
|
|
|
782 |
|
|
|
266 |
|
|
|
601 |
|
of which compensation expense on nonvested shares, net of tax
effect
|
|
|
(20 |
) |
|
|
(7 |
) |
|
|
|
|
Deduct: Total stock-option employee compensation expense
determined under FAS 123, net of related tax effects
|
|
|
|
|
|
|
(244 |
) |
|
|
(166 |
) |
Net income, pro forma
|
|
|
782 |
|
|
|
22 |
|
|
|
435 |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
|
0.87 |
|
|
|
0.30 |
|
|
|
0.67 |
|
|
Basic, pro forma
|
|
|
0.87 |
|
|
|
0.02 |
|
|
|
0.49 |
|
|
Diluted, as reported
|
|
|
0.83 |
|
|
|
0.29 |
|
|
|
0.65 |
|
|
Diluted, pro forma
|
|
|
0.83 |
|
|
|
0.02 |
|
|
|
0.47 |
|
The Company has amortized the pro forma compensation expense
over the nominal vesting period for employees. The pro forma
information presented above for the year ended December 31,
2005 includes an approximate $182 million charge relating
to the effect of accelerating the vesting period of all
outstanding unvested stock options during the third quarter of
2005, which has been recognized immediately in the pro forma
result for the amount that otherwise would have been recognized
ratably over the remaining vesting period.
The fair value of the Companys stock-options was estimated
under FAS 123 using a Black-Scholes option pricing model since
the simple characteristics of the stock-options did not require
complex pricing assumptions. Forfeitures of options are
reflected in the pro forma charge as they occur. For those stock
option plans with graded vesting periods, the Company has
determined that the historical exercise activity actually
reflects that employees exercise the option after the close of
the graded vesting period. Therefore the Company recognizes the
estimated pro forma charge for stock option plans with graded
vesting period on a straight-line basis.
The fair value of stock-options under FAS 123 provisions was
estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Expected life (years)
|
|
|
|
|
|
|
6.1 |
|
|
|
6.1 |
|
Historical Company share price volatility
|
|
|
|
|
|
|
52.9 |
% |
|
|
56.4 |
% |
Risk-free interest rate
|
|
|
|
|
|
|
3.84 |
% |
|
|
3.6 |
% |
Dividend yield
|
|
|
|
|
|
|
0.69 |
% |
|
|
0.56 |
% |
The Company has determined the historical share price volatility
to be the most appropriate estimate of future price activity.
The weighted average fair value of stock options granted during
2005 was $8.60 ($12.14 in 2004). Following the change in the
Companys compensation policy that occurred in 2005, no
stock option was granted in 2006.
Nonvested
shares
In 2005, the Company began to grant nonvested shares to senior
executives, selected employees and members of the Supervisory
Board. The shares are granted for free to employees and at their
nominal value for the members of the Supervisory Board. The
awards granted to employees will contingently vest upon
achieving certain market or performance conditions and upon
completion of an average three-year service period. Shares
granted to the Supervisory Board vest unconditionally along the
same vesting period as employees and are not forfeited even if
the service period is not completed.
In the fourth quarter of 2005 the Company decided to early adopt
Statement of Financial Accounting Standards No. 123
(revised 2004),
Share-Based Payment
and the related FASB Staff Positions (collectively
FAS 123R), which requires a public entity to
measure the cost of share-based service awards based on the
grant-date fair value
of the award. That cost is recognized over the period during
which an employee is required to provide service in exchange for
the award or the requisite service period, usually the vesting
period. The
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Company early adopted FAS 123R using the modified
prospective application method. As such, the Company has not
restated periods prior to adoption to reflect the recognition of
stock-based
compensation cost. Nonvested share grants and the related
compensation cost are further explained in details in
Note 16.
Furthermore, the Company created in 2006 a local subplan for the
2005 stock awards. The Company elected to apply the pool
approach, as set forth in FAS 123R to account for the
modification of the original plan. Under the pool approach, the
Company determined as at the modification date the unrecognized
compensation expense related to the number of nonvested shares
subject to the vesting modifications and incremental cost, if
any, to be recognized ratably over the modified vesting period.
2.21 Long-term debt
(a) Convertible
debt
Zero-coupon convertible bonds are recorded at the principal
amount on maturity in long -term debt and are presented net
of the debt discount on issuance. This discount is amortized
over the term of the debt as interest expense using the interest
rate method.
Zero-coupon convertible bonds issued with a negative yield are
initially recorded at their accreted value as of the first
redemption right of the holder. The negative yield is recorded
as capital surplus and represents the difference between the
principal amount at issuance and the lower accreted value at the
first redemption right of the holder.
Debt issuance costs are included in long-term investments and
are amortized in interest income (expense), net
until the first redemption right of the holder. Outstanding
bonds amounts are classified in the consolidated balance sheet
as current portion of long term debt in the year of
the redemption right of the holder.
(b) Bank
loans and Senior bonds
Bank loans, including
non-convertible senior
bonds, are recognized at historical cost, net of transaction
costs incurred. They are subsequently stated at amortized cost;
any difference between the proceeds (net of transaction costs)
and the redemption value is recognized in the consolidated
statements of income over the period of the borrowings using the
effective interest method.
Borrowings are classified as current liabilities unless the
Company has an unconditional right to defer settlement of the
liability for at least twelve months after the balance sheet
date.
2.22 Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares or options are
shown in equity as a deduction, net of tax, from the proceeds.
Where any subsidiary purchases the Companys equity share
capital (treasury shares), the consideration paid, including any
directly attributable incremental costs (net of income taxes),
is deducted from equity attributable to the Companys
shareholders until the shares are cancelled, reissued or
disposed of. Where such shares are subsequently sold or
reissued, any consideration received net of directly
attributable incremental transaction costs and the related
income tax effect is included in equity.
2.23 Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in
equity of a business during a period except those resulting from
investment by shareholders and distributions to shareholders. In
the accompanying consolidated financial statements,
accumulated other comprehensive income (loss)
consists of, unrealized gains or losses on marketable securities
classified as
available-for-sale, the
unrealized gain (loss) on derivatives, the change in the
excess of the minimum pension liability over the unrecognized
prior service cost of certain pension plans prior to
FAS 158 adoption and the impact of recognizing the
overfunded and underfunded status of defined benefit plans upon
FAS 158 adoption as at December 31, 2006, all net of
tax as well as foreign currency translation adjustments.
2.24 Provisions
Provisions are recognized when: the Company has a present legal
or constructive obligation as a result of past events; it is
probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated.
Provisions are not recognized for future operating losses. Where
there are a number of similar obligations, the likelihood that
an outflow will be required in settlements is determined by
considering the
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
class of obligations as a whole. A provision is recognized even
if the likelihood of the outflow with respect to any one item
included in the same class of obligations may be small.
The Company, when acting as a guarantor, recognizes, at the
inception of a guarantee, a liability for the fair value of the
obligation the Company assumes under the guarantee, in
compliance with FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57 and
107 and Rescission of FASB Interpretation No. 34
(FIN 45). When the guarantee is issued in
conjunction with the formation of a partially owned business or
a venture accounted for under the equity method, the recognition
of the liability for the guarantee results in an increase to the
carrying amount of the investment. The liabilities recognized
for the obligations of the guarantees undertaken by the Company
are measured subsequently on each reporting date, the initial
liability being reduced as the Company, as guarantor, is
released from the risk underlying the guarantee.
2.25 Recent accounting pronouncements
In February 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140 (FAS 155). The
statement amended Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133) and Statement
of Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 140).
The primary purposes of this statement were (1) to allow
companies to select between bifurcation of hybrid financial
instruments or fair valuing the hybrid as a single instrument,
(2) to clarify certain exclusions of FAS 133 related
to interest and
principal-only strips,
(3) to define the difference between freestanding and
hybrid securitized financial assets, and (4) to eliminate
the FAS 140 prohibition of Special Purpose Entities holding
certain types of derivatives. The statement is effective for
annual periods beginning after September 15, 2006, with
early adoption permitted prior to a company issuing first
quarter financial statements. The Company chose not to early
adopt FAS 155 during its first quarter 2006. However,
management does not expect FAS 155 will have a material
effect on its financial position and results of operations upon
final adoption.
In March 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
(FAS 156). This statement requires initial
fair value recognition of all servicing assets and liabilities
for servicing contracts entered in the first fiscal year
beginning after September 15, 2006. After initial
recognition, the servicing assets and liabilities are either
amortized over the period of expected servicing income or loss
or fair value is reassessed each period with changes recorded in
earnings for the period. Management does not expect FAS 156
will have a material effect on its financial position and
results of operations upon final adoption.
In June 2006, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). The interpretation seeks to
clarify the accounting for tax positions taken, or expected to
be taken, in a companys tax return and the uncertainty as
to the amount and timing of recognition in the companys
financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes (FAS 109). The interpretation sets a
two step process for the evaluation of uncertain tax positions.
The recognition threshold in step one permits the benefit from
an uncertain position to be recognized only if it is more likely
than not, or 50 percent assured that the tax position will
be sustained upon examination by the taxing authorities. The
measurement methodology in step two is based on cumulative
probability, resulting in the recognition of the largest
amount that is greater than 50 percent likely of being
realized upon settlement with the taxing authority. The
interpretation also addresses derecognising previously
recognized tax positions, classification of related tax assets
and liabilities, accrual of interest and penalties, interim
period accounting, and disclosure and transition provisions. The
interpretation is effective for fiscal years beginning after
December 15, 2006. The Company continues to evaluate the
potential impact of adopting FIN 48, but has currently
estimated a FIN 48 incremental liability in the range of
approximately $15 to $40 million, primarily related to
uncertain tax positions that are under audit in one tax
jurisdiction. This range is the result of analysis done based on
current assumptions that are true today, but upon certain
changes in events or circumstances may no longer be consistent
with the assumptions upon the date of adoption. As a result, the
amount to be recorded upon adoption is subject to revision as
the evaluations are concluded.
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157). This
statement defines fair value as the price that
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. In addition, the statement
defines a fair value hierarchy which should be used when
determining fair values, except as specifically excluded (i.e.
stock awards, measurements requiring vendor specific objective
evidence, and inventory pricing). The hierarchy places the
greatest relevance on Level 1 inputs which include quoted
prices in active markets for identical assets or liabilities.
Level 2 inputs, which are observable either directly or
indirectly, and include quoted prices for similar assets or
liabilities, quoted prices in non-active markets, and inputs
that could vary based on either the condition of the assets or
liabilities or volumes sold. The lowest level of the hierarchy,
Level 3, is unobservable inputs and should only be used
when observable inputs are not available. This would include
company level assumptions and should be based on the best
available information under the circumstances. FAS 157 is
effective for fiscal years beginning after November 15,
2007 with early adoption permitted for fiscal year 2007 if first
quarter statements have not been issued. The Company will adopt
FAS 157 when effective and management does not expect
FAS 157 will have a material effect on its financial
position and results of operations.
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R)
(FAS 158). This statement requires
companies to account for the overfunded and underfunded status
of defined benefit and other post retirement plans in their
financial statements, with offsetting entries made to
accumulated other comprehensive income. The statement will also
require additional disclosures for such plans. The overfunded or
underfunded status of the defined benefit plans are calculated
as the difference between plan assets and the projected benefit
obligations. Overfunded plans may not be netted against
underfunded plans and must be shown separately in the financial
statements. The recording of the funded status removes the prior
requirements for recording additional minimum liabilities and
intangible assets on unfunded plans due to the requirement to
record the full unfunded amount as a liability. In addition to
the funding requirements, FAS 158 requires companies to
obtain actuarial valuations for the plans as of the year end,
and does not allow estimates based on dates up to three months
prior to year end as previously allowed under FAS 132(R).
The requirements to record the overfunded and underfunded
positions are effective for years ending after December 15,
2006. The requirements for performance of valuations at the end
of the year are effective for years ending after
December 15, 2007, with early adoption encouraged. The
Company has adopted both the funding requirements and the
valuation date requirements on a prospective basis for the year
ended December 31, 2006. The impact of such adoption is
further described in Note 16.
In September 2006, the U.S. Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(SAB 108). This statement addresses the
diversity in practice of quantifying financial statement
misstatements that result in the potential build up of improper
amounts on the balance sheet. SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a
current year misstatement. The SEC staff believes that
registrants should quantify errors using both a balance sheet
and an income statement approach and evaluate whether either
approach results in a misstatement that is material either
quantitatively or qualitatively. SAB 108 is effective for
companies with fiscal years ending after November 15, 2006.
SAB 108 allows a
one-time transitional
cumulative effect adjustment to beginning retained earnings as
of January 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in
SAB 108. The Company adopted SAB 108 in 2006 and
SAB 108 did not have any material effect on the
Companys financial position and results of operations.
In February 2007, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-
Including an amendment of FASB Statement No. 115
(FAS 159). This statement permits companies to
choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses in
earnings at each subsequent reporting date on items for which
the fair value option has been elected. The objective of this
statement is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. A company may decide whether to elect the
fair value option for each eligible item on its election date,
subject to certain requirements described in the statement.
FAS 159 is effective for fiscal years beginning after
November 15, 2007 with early adoption permitted for fiscal
year 2007 if first quarter statements have not been issued. The
Company is currently evaluating the effect that adoption of this
statement will have on its financial position and results of
operations.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
3 EQUITY INVESTMENTS
SuperH Joint Venture
In 2001, the Company and Renesas Technology Corp. (previously
known as Hitachi, Ltd.) formed a joint venture to develop and
license RISC microprocessors. The joint venture,
SuperH Inc., was initially capitalized with the
Companys contribution of $15 million of cash plus
internally developed technologies with an agreed intrinsic value
of $14 million for a 44% interest. Renesas Technology Corp.
contributed $37 million of cash for a 56% interest. The
Company accounted for its share in the SuperH, Inc. joint
venture under the equity method based on the actual results of
the joint venture. During 2002 and 2003, the Company made
additional capital contributions on which accumulated losses
exceeded the Companys total investment, which was shown at
a zero carrying value.
In 2003, the shareholders agreement was amended to require
an additional $3 million cash contribution from the
Company. This amount was fully accrued, based on the inability
of the joint venture to meet its projected business plan
objectives. In 2004, the shareholders agreed to restructure the
joint venture by transferring the intellectual properties to
each shareholder and continuing any further development
individually. Based upon estimates of forecasted cash
requirements of the joint venture, the Company paid an
additional $2 million, which was reflected in the 2004
consolidated statement of income as loss on equity
investments. In 2005, the joint venture was liquidated
with no further losses incurred by the Company.
UPEK
Inc.
In 2004, the Company and Sofinnova Capital IV FCPR formed a
new company, UPEK Inc., as a venture
capitalist-funded
purchase of the Companys TouchChip business.
UPEK, Inc. was initially capitalized with the
Companys transfer of the business, personnel and
technology assets related to the fingerprint biometrics
business, formerly known as the TouchChip Business Unit, for a
48% interest. Sofinnova Capital IV FCPR contributed
$11 million of cash for a 52% interest. During the first
quarter of 2005, an additional $9 million was contributed
by Sofinnova Capital IV FCPR, reducing the Companys
ownership to 33%. The Company accounted for its share in UPEK,
Inc. under the equity method and in 2004 recorded losses of
approximately $2 million, which were reflected in the 2004
consolidated statement of income as Loss on equity
investments.
On June 30, 2005, the Company sold its interest in UPEK
Inc. for $13 million and recorded a gain amounting to
$6 million in Other income and expenses, net on
its consolidated statement of income. Additionally, on
June 30, 2005, the Company was granted warrants for
2,000,000 shares of UPEK, Inc. at an exercise price of
$0.01 per share. The warrants are not limited in time but can
only be exercised in the event of a change of control or an
Initial Public Offering of UPEK Inc. above a predetermined value.
Hynix
ST Joint Venture
The Company signed in 2004 a
joint-venture agreement
with Hynix Semiconductor Inc. to build a
front-end
memory-manufacturing
facility in Wuxi City, Jiangsu Province, China. Under the
agreement, Hynix Semiconductor Inc. contributed
$500 million for a 67% equity interest and the Company
contributed $250 million for a 33% equity interest. In
addition, the Company originally committed to grant
$250 million in
long-term financing to
the new joint venture guaranteed by the subordinated collateral
of the
joint-ventures
assets. The Company made the total $250 million capital
contributions as previously planned in the joint venture
agreement by December 31, 2006, of which $38 million
and $213 million, including $1 million
deal-related costs,
were paid in 2005 and 2006, respectively. The Company accounts
for its share in the Hynix ST joint venture under the equity
method based on the actual results of the joint venture. As
such, the Company recorded losses totalling $6 million and
$4 million in 2006 and 2005, respectively, reported as
loss on equity investments in the consolidated
statements of income.
Due to regulatory and withholding issues the Company could not
directly provide the joint venture with the $250 million
long-term financing as
originally planned. As a consequence, in the fourth quarter of
2006, the Company entered into a ten-year term debt guarantee
agreement with an external financial institution through which
the Company guaranteed the repayment of the loan by the joint
venture to the bank. The guarantee agreement includes the
Company placing up to $250 million in cash on a deposit
account. The guarantee deposit will be used by the bank in case
of repayment failure from the joint venture, with
$250 million as the maximum potential amount of future
payments the Company, as the guarantor, could be required to
make. In the event of default and failure to repay the loan from
the joint venture, the bank will exercise the Companys
rights, subordinated to the repayment to senior lenders, to
recover the amounts paid under the guarantee through the sale
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
of the
joint-ventures
assets. In 2006 the Company placed $218 million of cash on
the guarantee deposit account, which was reported as
restricted cash for equity investments on the
consolidated balance sheet as at December 31, 2006.
The debt guarantee was evaluated under FIN 45. It resulted
in the recognition of a $15 million liability,
corresponding to the fair value of the guarantee at inception of
the transaction. The liability was reported on the line
Other non-current
liabilities in the consolidated balance sheet as at
December 31, 2006 and was recorded against the value of the
equity investment, which amounted to $261 million as at
December 31, 2006.
The Company has identified the joint venture as a Variable
Interest Entity (VIE) at December 31, 2006, but has
determined that it is not the primary beneficiary of the VIE.
The Companys current maximum exposure to loss as a result
of its involvement with the joint venture is limited to its
equity investments and debt guarantee commitments.
4 TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Trade accounts receivable
|
|
|
1,620 |
|
|
|
1,517 |
|
Less valuation allowance
|
|
|
(31 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
Total
|
|
|
1,589 |
|
|
|
1,490 |
|
|
|
|
|
|
|
|
Bad debt expense in 2006, 2005 and 2004 was $7 million,
$7 million and $5 million respectively. In 2006, 2005
and 2004, one customer, the Nokia group of companies,
represented 21.8%, 22.4% and 17.1% of consolidated net revenues,
respectively.
5 INVENTORIES, NET
Inventories, net of reserve consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Raw materials
|
|
|
80 |
|
|
|
60 |
|
Work-in-process
|
|
|
1,032 |
|
|
|
880 |
|
Finished products
|
|
|
527 |
|
|
|
471 |
|
|
|
|
|
|
|
|
Total
|
|
|
1,639 |
|
|
|
1,411 |
|
|
|
|
|
|
|
|
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
6 OTHER RECEIVABLES AND ASSETS
Other receivables and assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Receivables from government agencies
|
|
|
122 |
|
|
|
168 |
|
Taxes and other government receivables
|
|
|
194 |
|
|
|
200 |
|
Advances to suppliers
|
|
|
5 |
|
|
|
2 |
|
Advances to employees
|
|
|
13 |
|
|
|
10 |
|
Advances to State and government agencies
|
|
|
12 |
|
|
|
11 |
|
Insurance prepayments
|
|
|
4 |
|
|
|
6 |
|
Rental prepayments
|
|
|
3 |
|
|
|
2 |
|
License and technology agreement prepayments
|
|
|
7 |
|
|
|
- |
|
Other prepaid expenses
|
|
|
23 |
|
|
|
29 |
|
Loans and deposits
|
|
|
15 |
|
|
|
12 |
|
Accrued income
|
|
|
9 |
|
|
|
15 |
|
Interest receivable
|
|
|
27 |
|
|
|
5 |
|
Long-lived assets held for sale
|
|
|
4 |
|
|
|
4 |
|
Foreign exchange forward contracts
|
|
|
14 |
|
|
|
3 |
|
Sundry debtors within cooperation agreements
|
|
|
31 |
|
|
|
32 |
|
Other current assets
|
|
|
15 |
|
|
|
32 |
|
|
|
|
|
|
|
|
Total
|
|
|
498 |
|
|
|
531 |
|
|
|
|
|
|
|
|
Long-lived assets held
for sale are property, machinery and equipment that satisfied as
at December 31, 2006 and 2005 all of the criteria required
for held-for-sale
status, as set forth in Statement of Financial Accounting
Standards No. 144, Accounting for the impairment or
disposal of long-term assets (FAS 144). As at
December 31, 2006, the Company identified certain machinery
and equipment to be disposed of by sale, amounted to
$4 million, located in its
back-end sites in
Morocco and Malaysia, following the decision of the Company to
get disengaged from certain activities as part of its latest
restructuring initiatives. These assets are reflected at their
carrying value, which did not exceed their selling price less
selling costs. These long-lived assets are not depreciated until
disposal by sale which is expected to occur within one year. As
at December 31, 2005, assets held for sale amounted to
$4 million and primarily consisted of land to be disposed
of by sale located in France. The property was sold as
originally planned in 2006 and generated a gain on sale of
non-current assets amounting to $3 million.
7 GOODWILL
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application | |
|
|
|
|
|
|
|
|
Specific | |
|
Memory | |
|
|
|
|
|
|
Products | |
|
Products | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
December 31, 2004
|
|
|
173 |
|
|
|
88 |
|
|
|
3 |
|
|
|
264 |
|
CPE goodwill impairment
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
(39 |
) |
Foreign currency translation
|
|
|
|
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
134 |
|
|
|
85 |
|
|
|
2 |
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tioga goodwill impairment
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Foreign currency translation
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
128 |
|
|
|
93 |
|
|
|
2 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, the Company decided to cease product development from
technologies inherited from Tioga business acquisition. The
Company reports Tioga business as part of the Application
Specific Product Groups (ASG) product segment.
Following this decision, the Company incurred in 2006 a
$6 million impairment charge corresponding to the write-off
of Tioga goodwill. This impairment charge was reported on the
line Impairment, restructuring charges and other related
closure costs of the consolidated statement of income for
the year ended December 31, 2006.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In 2005, the Company decided to reduce its Access technology
products for Customer Premises Equipment (CPE) modem
products. The Company reports CPE business as part of the Access
reporting unit, included in the Application Specific Product
Groups (ASG). Following the decision to discontinue
a portion of this reporting unit, the Company, as set forth in
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS
142), reassessed the allocation of goodwill between the
continuing Access reporting unit and the business to be disposed
of according to their relative fair values using market
comparables. The reassessment resulted in $39 million of
goodwill impairment in 2005. This impairment charge was reported
on the line Impairment, restructuring charges and other
related closure costs of the consolidated statement of
income for the year ended December 31, 2005.
8 INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
December 31, 2006 |
|
Gross Cost | |
|
Amortization | |
|
Net Cost | |
|
|
| |
|
| |
|
| |
Technologies & licenses
|
|
|
353 |
|
|
|
(258 |
) |
|
|
95 |
|
Purchased software
|
|
|
193 |
|
|
|
(149 |
) |
|
|
44 |
|
Internally developed software
|
|
|
134 |
|
|
|
(62 |
) |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
680 |
|
|
|
(469 |
) |
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
December 31, 2005 |
|
Gross Cost | |
|
Amortization | |
|
Net Cost | |
|
|
| |
|
| |
|
| |
Technologies & licenses
|
|
|
309 |
|
|
|
(199 |
) |
|
|
110 |
|
Purchased software
|
|
|
162 |
|
|
|
(114 |
) |
|
|
48 |
|
Internally developed software
|
|
|
114 |
|
|
|
(48 |
) |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
585 |
|
|
|
(361 |
) |
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
Pursuant to its decision to cease product development from
technologies inherited from Tioga business acquisition, the
Company recorded in 2006 a $4 million impairment charge on
technologies purchased as part of Tioga business acquisition,
which were determined to be without any alternative use and for
which fair value was determined by estimating the discounted
expected cash flows associated with their future use. This
impairment charge was reported on the line Impairment,
restructuring charges and other related closure costs of
the consolidated statement of income for the year ended
December 31, 2006.
Following its decision to reduce its Access technology products
for Customer Premises Equipment (CPE) modem
products, the Company recorded a $22 million impairment
charges on purchased technologies that were identified without
an alternative use following the discontinuation of CPE product
lines. This impairment charge was reported on the line
Impairment, restructuring charges and other related
closure costs of the consolidated statement of income for
the year ended December 31, 2005.
The aggregate amortization expense in 2006, 2005 and 2004 was
$93 million, $98 million and $112 million,
respectively.
The estimated amortization expense of the existing intangible
assets for the following years is:
|
|
|
|
|
Year |
|
|
|
|
|
2007
|
|
|
100 |
|
2008
|
|
|
61 |
|
2009
|
|
|
31 |
|
2010
|
|
|
12 |
|
2011
|
|
|
4 |
|
Thereafter
|
|
|
3 |
|
|
|
|
|
Total
|
|
|
211 |
|
|
|
|
|
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
9 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Accumulated | |
|
Net | |
December 31, 2006 |
|
Cost | |
|
Depreciation | |
|
Cost | |
|
|
| |
|
| |
|
| |
Land
|
|
|
91 |
|
|
|
|
|
|
|
91 |
|
Buildings
|
|
|
1,208 |
|
|
|
(319 |
) |
|
|
889 |
|
Capital leases
|
|
|
61 |
|
|
|
(39 |
) |
|
|
22 |
|
Facilities & leasehold improvements
|
|
|
3,135 |
|
|
|
(1,668 |
) |
|
|
1,467 |
|
Machinery and equipment
|
|
|
14,463 |
|
|
|
(10,940 |
) |
|
|
3,523 |
|
Computer and R&D equipment
|
|
|
551 |
|
|
|
(441 |
) |
|
|
110 |
|
Other tangible assets
|
|
|
156 |
|
|
|
(118 |
) |
|
|
38 |
|
Construction in progress
|
|
|
286 |
|
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,951 |
|
|
|
(13,525 |
) |
|
|
6,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Accumulated | |
|
Net | |
December 31, 2005 |
|
Cost | |
|
Depreciation | |
|
Cost | |
|
|
| |
|
| |
|
| |
Land
|
|
|
84 |
|
|
|
|
|
|
|
84 |
|
Buildings
|
|
|
1,071 |
|
|
|
(267 |
) |
|
|
804 |
|
Capital leases
|
|
|
55 |
|
|
|
(29 |
) |
|
|
26 |
|
Facilities & leasehold improvements
|
|
|
2,715 |
|
|
|
(1,294 |
) |
|
|
1,421 |
|
Machinery and equipment
|
|
|
12,473 |
|
|
|
(9,063 |
) |
|
|
3,410 |
|
Computer and R&D equipment
|
|
|
492 |
|
|
|
(381 |
) |
|
|
111 |
|
Other tangible assets
|
|
|
131 |
|
|
|
(103 |
) |
|
|
28 |
|
Construction in progress
|
|
|
291 |
|
|
|
|
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,312 |
|
|
|
(11,137 |
) |
|
|
6,175 |
|
|
|
|
|
|
|
|
|
|
|
The depreciation charge in 2006, 2005 and 2004 was
$1,673 million, $1,846 million and
$1,725 million, respectively.
Capital investment funding has totaled $15 million,
$38 million and $46 million in the years ended
December 31 2006, 2005 and 2004, respectively. Public
funding reduced the depreciation charge by $54 million,
$66 million and $74 million in 2006, 2005 and
2004 respectively.
For the years ended December 31, 2006, 2005 and 2004 the
Company made equipment sales for cash proceeds of
$22 million, $82 million and $10 million
respectively.
10 AVAILABLE-FOR-SALE FINANCIAL ASSETS
In 2006, the Company invested $460 million of existing
cash in eleven floating rate notes with primary financial
institutions with minimum Moodys rating A1
with a maturity between twenty one months and
six years. These marketable securities were reported as
current assets as at December 31, 2006 since they represent
investments of funds available for current operations. These
financial assets are classified as
available-for-sale and
are recorded at fair value as at December 31, 2006, with
changes in fair value recognized as a separate component of
accumulated other comprehensive income in the
consolidated statement of changes in shareholders equity.
Subsequently, the Company entered into a basis asset swap for
one floating rate note for a notional amount of $50 million
in order to purchase it at par. Even if strictly related to the
underlying note, the swap is contractually transferable
independently from the marketable security to which it is
attached. As such, the asset swap was recorded separately from
the underlying financial asset and was reflected at its fair
value in the consolidated balance sheet on the line Other
receivables and assets as at December 31, 2006. The
changes in the fair value of this derivative instrument were
recorded in the consolidated statement of income as part of
Other income and expenses, net and did not exceed
$1 million for the year ended December 31, 2006.
In 2006 and 2005, no financial asset classified as
available-for-sale was
sold. As at December 31, 2005, the Company did not report
any financial assets classified as
available-for-sale. In
2004, the Company sold certain equity securities held as
strategic investments in various companies that were all
classified as available-for-sale. The gross gains associated
with the sale of these marketable securities realized in 2004
amounted to $5 million.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
11 SHORT-TERM DEPOSITS
In 2006, the Company invested $903 million of existing cash
in short-term deposits with a maturity between three months and
one year. These deposits are held at various banks with
A3/ A-
minimum long-term
rating from at least two major rating agencies. Interest on
these deposits is paid at maturity with interest rates fixed at
inception for the duration of the deposits. The principal will
be repaid at final maturity. In 2006, the Company did not roll
over $653 million of these
short-term deposits,
primarily pursuant to the early redemption in cash of 2013
convertible bonds at the option of the holders which occurred on
August 7, 2006.
12 OTHER INVESTMENTS AND OTHER NON-CURRENT
ASSETS
Investments and other non-current assets consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cost investments
|
|
|
39 |
|
|
|
36 |
|
Long-term receivables related to funding
|
|
|
36 |
|
|
|
33 |
|
Long-term receivables related to tax refund
|
|
|
33 |
|
|
|
27 |
|
Debt issuance costs, net
|
|
|
12 |
|
|
|
3 |
|
Cancellable swaps designated as fair value hedge
|
|
|
4 |
|
|
|
|
|
Deposits and other long-term receivables
|
|
|
25 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Total
|
|
|
149 |
|
|
|
119 |
|
|
|
|
|
|
|
|
The Company entered into a joint venture agreement in 2002 with
Dai Nippon Printing Co, Ltd for the development and production
of Photomask in which the Company holds a 19% equity interest.
The joint venture, DNP Photomask Europe S.p.A, was initially
capitalized with the Companys contribution of
2 million
of cash. Dai Nippon Printing Co, Ltd contributed
8 million
of cash for an 81% equity interest. In the event of the
liquidation of the joint-venture, the Company is required to
repurchase the land at cost, and the facility at 10% of its net
book value, if no suitable buyer is identified. No provision for
this obligation has been recorded to date. At December 31,
2006, the Companys total contribution to the joint venture
is $10 million. The Company continues to maintain its 19%
ownership of the joint venture, and therefore continues to
account for this investment under the cost method. The Company
has identified the joint venture as a Variable Interest Entity
(VIE), but has determined that it is not the primary beneficiary
of the VIE. The Companys current maximum exposure to loss
as a result of its involvement with the joint venture is limited
to its equity investment.
Long-term receivables related to funding are mainly public
grants to be received from governmental agencies in Italy as
part of long-term
research and development, industrialization and capital
investment projects.
Long-term receivables
related to tax refund correspond to tax benefits claimed by the
Company in certain of its local tax jurisdictions, for which
collection is expected beyond one year.
In 2006, the Company entered into cancellable swaps with a
combined notional value of $200 million to hedge the fair
value of a portion of the convertible bonds due 2016 carrying a
fixed interest rate. The cancellable swaps convert the fixed
rate interest expense recorded on the convertible bonds due 2016
to a variable interest rate based upon adjusted LIBOR. The
cancellable swaps meet the criteria for designation as a fair
value hedge, as further detailed in Note 26 and are
reflected at their fair value in the consolidated balance sheet
as at December 31, 2006.
Deposits and other
long-term receivables
include individually insignificant amounts as of
December 31, 2006 and December 31, 2005.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
13 OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Taxes other than income taxes
|
|
|
78 |
|
|
|
77 |
|
Salaries and wages
|
|
|
308 |
|
|
|
248 |
|
Social charges
|
|
|
124 |
|
|
|
110 |
|
Advances received on government funding
|
|
|
28 |
|
|
|
24 |
|
Advances from customers
|
|
|
10 |
|
|
|
3 |
|
Foreign exchange forward contracts
|
|
|
1 |
|
|
|
31 |
|
Current portion of provision for restructuring
|
|
|
28 |
|
|
|
40 |
|
Pension and termination benefits
|
|
|
10 |
|
|
|
21 |
|
Warranty and product guarantee provisions
|
|
|
6 |
|
|
|
7 |
|
Accrued interest
|
|
|
4 |
|
|
|
3 |
|
Other
|
|
|
67 |
|
|
|
78 |
|
|
|
|
|
|
|
|
Total
|
|
|
664 |
|
|
|
642 |
|
|
|
|
|
|
|
|
Other payables and accrued liabilities also include individually
insignificant amounts as of December 31, 2006 and
December 31, 2005.
14 RETIREMENT PLANS
The Company and its subsidiaries have a number of defined
benefit pension plans covering employees in various countries.
The plans provide for pension benefits, the amounts of which are
calculated based on factors such as years of service and
employee compensation levels. The Company uses a
December 31 measurement date for the majority of its plans.
Eligibility is generally determined in accordance with local
statutory requirements.
For Italian termination indemnity plan (TFR), the
Company continues to measure the vested benefits to which
Italian employees are entitled as if they retired immediately as
of December 2006, in compliance with the Emerging Issues
Task Force Issue
No. 88-1,
Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan
(EITF 88-1).
Nevertheless, since December 31, 2006, the TFR has been
reported according to FAS 132(R), as any other defined
benefit plan.
As at December 31, 2006 the Company reports all defined
benefit pension plan information according to FAS 132(R),
and reports all plans under a global tabular presentation.
Presentation of previous years has been modified accordingly.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The changes in benefit obligation and plan assets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
505 |
|
|
|
478 |
|
Service cost (net of employee contributions)
|
|
|
39 |
|
|
|
42 |
|
Interest cost
|
|
|
25 |
|
|
|
24 |
|
Employee contributions
|
|
|
3 |
|
|
|
1 |
|
Benefits paid
|
|
|
(41 |
) |
|
|
(28 |
) |
Settlement
|
|
|
(6 |
) |
|
|
|
|
Actuarial losses (gain)
|
|
|
(14 |
) |
|
|
34 |
|
Foreign currency translation adjustments
|
|
|
48 |
|
|
|
(50 |
) |
Plan amendments
|
|
|
16 |
|
|
|
3 |
|
Other
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
575 |
|
|
|
505 |
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Plan assets at fair value at beginning of year
|
|
|
194 |
|
|
|
181 |
|
Expected return on plan assets
|
|
|
13 |
|
|
|
11 |
|
Employer contributions
|
|
|
28 |
|
|
|
12 |
|
Employee contributions
|
|
|
3 |
|
|
|
4 |
|
Benefits paid
|
|
|
(11 |
) |
|
|
(10 |
) |
Settlement
|
|
|
(6 |
) |
|
|
|
|
Actuarial gain
|
|
|
2 |
|
|
|
10 |
|
Foreign currency translation adjustments
|
|
|
16 |
|
|
|
(14 |
) |
Other
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value at end of year
|
|
|
241 |
|
|
|
194 |
|
|
|
|
|
|
|
|
Funded status
|
|
|
(334 |
) |
|
|
(311 |
) |
Unrecognized prior service cost
|
|
|
11 |
|
|
|
(3 |
) |
Unrecognized transition obligation
|
|
|
(1 |
) |
|
|
(1 |
) |
Unrecognized actuarial loss
|
|
|
62 |
|
|
|
77 |
|
Recognized unfunded status as at FAS 158 adoption
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
|
(334 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
|
Net amount recognized in the balance sheet consisted of the
following:
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
3 |
|
|
|
|
|
Current liabilities
|
|
|
(3 |
) |
|
|
|
|
Non-current liabilities
|
|
|
(334 |
) |
|
|
|
|
Prepaid benefit cost
|
|
|
|
|
|
|
2 |
|
Accrued benefit liability
|
|
|
|
|
|
|
(275 |
) |
Intangible asset
|
|
|
|
|
|
|
1 |
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
Net amount recognized
|
|
|
(334 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
|
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The components of the net periodic benefit cost included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Service cost
|
|
|
39 |
|
|
|
42 |
|
|
|
42 |
|
Interest cost
|
|
|
25 |
|
|
|
24 |
|
|
|
22 |
|
Expected return on plan assets
|
|
|
(13 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
Amortization of unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
4 |
|
|
|
3 |
|
|
|
8 |
|
Settlement
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(4 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
57 |
|
|
|
58 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used in the determination of
the benefit obligation for the pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
Assumptions |
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
4.86 |
% |
|
|
4.54 |
% |
|
|
5.02 |
% |
Salary increase rate
|
|
|
2.95 |
% |
|
|
3.75 |
% |
|
|
3.34 |
% |
Expected long-term rate of return on funds for the pension
expense of the year
|
|
|
6.05 |
% |
|
|
6.34 |
% |
|
|
6.44 |
% |
The discount rate was determined by comparison against
long-term corporate
bond rates applicable to the respective country of each plan. In
developing the expected
long-term rate of
return on assets, the Company modelled the expected
long-term rates of
return for broad categories of investments held by the plan
against a number of various potential economic scenarios.
The Company pension plan asset allocation at December 31,
2006 and 2005 and target allocation for 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
|
Plan Assets at | |
|
|
|
|
December | |
|
|
Target allocation | |
|
| |
Asset Category |
|
2006 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
Equity securities
|
|
|
53 |
% |
|
|
55 |
% |
|
|
61 |
% |
Fixed income securities
|
|
|
33 |
% |
|
|
33 |
% |
|
|
37 |
% |
Real estate
|
|
|
5 |
% |
|
|
4 |
% |
|
|
2 |
% |
Other
|
|
|
9 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The Companys investment strategy for its pension plans is
to maximize the
long-term rate of
return on plan assets with an acceptable level of risk in order
to minimize the cost of providing pension benefits while
maintaining adequate funding levels. The Companys practice
is to periodically conduct a review in each subsidiary of its
asset allocation strategy. A portion of the fixed income
allocation is reserved in
short-term cash to
provide for expected benefits to be paid. The Companys
equity portfolios are managed in such a way as to achieve
optimal diversity. The Company does not manage any assets
internally. After considering the funded status of the
Companys defined benefit plans, movements in the discount
rate, investment performance and related tax consequences, the
Company may choose to make contributions to its pension plans in
any given year in excess of required amounts. The Company
contributions to plan assets were $28 million and
$12 million in 2006 and 2005 respectively and the Company
expects to contribute cash of $32 million in 2007.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The Companys estimated future benefit payments as of
December 2006 are as follows:
|
|
|
|
|
|
|
Estimated future | |
Years |
|
benefit payments | |
|
|
| |
2007
|
|
|
16 |
|
2008
|
|
|
25 |
|
2009
|
|
|
27 |
|
2010
|
|
|
27 |
|
2011
|
|
|
22 |
|
From 2012 to 2016
|
|
|
142 |
|
The Company has certain defined contribution plans, which
accrued benefits for employees on a pro-rata basis during their
employment period based on their individual salaries. The
Company accrued benefits related to defined contribution pension
plans of $16 million and $21 million, as of
December 31, 2006 and 2005 respectively. The annual cost of
these plans amounted to approximately $28 million,
$42 million and $29 million in 2006, 2005 and 2004,
respectively. The benefits accrued to the employees on a
pro-rata basis, during their employment period are based on the
individuals salaries.
15 LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Bank loans:
|
|
|
|
|
|
|
|
|
3.42% (weighted average), due 2006, floating interest rate at
Libor + 0.30%
|
|
|
|
|
|
|
45 |
|
2.54% (weighted average), due 2007, fixed interest rate
|
|
|
65 |
|
|
|
120 |
|
5.68% (weighted average rate), due 2007, variable interest rate
|
|
|
30 |
|
|
|
36 |
|
5.72% due 2008, floating interest rate at Libor + 0.40%
|
|
|
49 |
|
|
|
25 |
|
5.81% due 2009, floating interest rate at Libor + 0.40%
|
|
|
35 |
|
|
|
|
|
5.81% due 2010, floating interest rate at Libor + 0.40%
|
|
|
|
|
|
|
25 |
|
Funding program loans:
|
|
|
|
|
|
|
|
|
5.35% (weighted average), due 2006, fixed interest rate
|
|
|
|
|
|
|
4 |
|
1.43% (weighted average), due 2009, fixed interest rate
|
|
|
18 |
|
|
|
22 |
|
0.90% (weighted average), due 2010, fixed interest rate
|
|
|
45 |
|
|
|
50 |
|
2.87% (weighted average), due 2012, fixed interest rate
|
|
|
12 |
|
|
|
12 |
|
0.50% (weighted average), due 2014, fixed interest rate
|
|
|
8 |
|
|
|
|
|
0.83% (weighted average), due 2017, fixed interest rate
|
|
|
53 |
|
|
|
47 |
|
5.38% due 2014, floating interest rate at Libor + 0.017%
|
|
|
140 |
|
|
|
|
|
Capital leases:
|
|
|
|
|
|
|
|
|
4.89% (weighted average), due 2011, fixed interest rate
|
|
|
23 |
|
|
|
26 |
|
Senior Bonds:
|
|
|
|
|
|
|
|
|
4.08%, due 2013, floating interest rate at Euribor + 0.40%
|
|
|
659 |
|
|
|
|
|
Convertible debt:
|
|
|
|
|
|
|
|
|
-0.50% convertible bonds due 2013
|
|
|
2 |
|
|
|
1,379 |
|
1.5% convertible bonds due 2016
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
2,130 |
|
|
|
1,791 |
|
Less current portion
|
|
|
(136 |
) |
|
|
(1,522 |
) |
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
|
1,994 |
|
|
|
269 |
|
|
|
|
|
|
|
|
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Long-term debt is denominated in the following currencies:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
U.S. dollar
|
|
|
1,242 |
|
|
|
1,454 |
|
Euro
|
|
|
818 |
|
|
|
206 |
|
Singapore dollar
|
|
|
65 |
|
|
|
120 |
|
Other
|
|
|
5 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total
|
|
|
2,130 |
|
|
|
1,791 |
|
|
|
|
|
|
|
|
Aggregate future maturities of total long-term debt outstanding
are as follows:
|
|
|
|
|
|
|
December 31, | |
|
|
2006 | |
|
|
| |
2007
|
|
|
136 |
|
2008
|
|
|
89 |
|
2009
|
|
|
83 |
|
2010
|
|
|
45 |
|
2011
|
|
|
30 |
|
Thereafter
|
|
|
1,747 |
|
|
|
|
|
Total
|
|
|
2,130 |
|
|
|
|
|
In August 2003, the Company issued $1,332 million principal
amount at maturity of zero coupon unsubordinated convertible
bonds due 2013. The bonds were issued with a negative yield of
0.5% that resulted in a higher principal amount at issuance of
$1,400 million and net proceeds of $1,386 million. The
negative yield through the first redemption right of the holder
totals $21 million and was recorded in capital surplus. The
bonds are convertible at any time by the holders at the rate of
29.9144 shares of the Companys common stock for each one
thousand dollar face value of the bonds. The holders may redeem
their convertible bonds on August 5, 2006 at a price of
$985.09, on August 5, 2008 at $975.28 and on August 5,
2010 at $965.56 per one thousand dollar face value of the bonds.
As a result of this holders redemption option in August
2006, the outstanding amount of 2013 bonds was classified as
current portion of long-term debt in the
consolidated balance sheet as at December 31, 2005.
Pursuant to the terms of the convertible bonds due 2013, the
Company was required to purchase, at the option of the holders,
1,397,493 convertible bonds, at a price of $985.09 each between
August 7 and August 9, 2006. This resulted in a cash
payment of $1,377 million. The outstanding long-term debt
corresponding to the 2013 convertible debt amounted to
approximately $2 million as at December 31, 2006,
corresponding to the remaining 2,505 bonds valued at
August 5, 2008 redemption price. At any time from
August 20, 2006 the Company may redeem for cash at their
negative accreted value all or a portion of the convertible
bonds subject to the level of the Companys share price.
In February 2006, the Company issued $974 million principal
amount at maturity of zero coupon senior convertible bonds due
in February 2016. The bonds were issued at 100% of principal
with a yield to maturity of 1.5% and resulted in net proceeds to
the Company of $974 million less transaction fees. The
bonds are convertible by the holder at any time prior to
maturity at a conversion rate of 43.118317 shares per one
thousand dollar face value of the bonds corresponding to
41,997,240 equivalent shares. The holders can also redeem the
convertible bonds on February 23, 2011 at a price of
$1,077.58, on February 23, 2012 at a price of $1,093.81 and
on February 24, 2014 at a price of $1,126.99 per one
thousand dollar face value of the bonds. The Company can call
the bonds at any time after March 10, 2011 subject to the
Companys share price exceeding 130% of the accreted value
divided by the conversion rate for 20 out of 30 consecutive
trading days. The Company may redeem for cash at the principal
amount at issuance plus accumulated gross yield all, but not a
portion, of the convertible bonds at any time if 10% or less of
the aggregate principal amount at issuance of the convertible
bonds remain outstanding in certain circumstances or in the
event of changes to the tax laws of the Netherlands or any
successor jurisdiction. In the second quarter 2006, the Company
entered into cancellable swaps with a combined notional value of
$200 million to hedge the fair value of a portion of these
convertible bonds. As a result of the cancellable swap hedging
transactions, as described in further detail in Note 26,
the effective yield on the $200 million principal amount of
the hedged convertible bonds has increased from 1.5% to 2.08% as
of December 31, 2006.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In March 2006, STMicroelectronics Finance B.V. (ST
BV), a wholly owned subsidiary of the Company, issued
floating rate senior bonds with a principal amount of Euro
500 million at an issue price of 99.873%. The notes, which
mature on March 17, 2013, pay a coupon rate of the
three-month Euribor plus 0.40% on the
17th
of June, September, December and March of each year through
maturity. In the event of changes to the tax laws of the
Netherlands or any successor jurisdiction, ST BV or the Company,
may redeem the full amount of senior bonds for cash. In the
event of certain change in control triggering events, the
holders can cause ST BV or the Company to repurchase all or a
portion of the bonds outstanding.
Credit facilities
The Company and its subsidiaries has uncommitted short-term
credit facilities with several financial institutions totalling
$1,107 million at December 31, 2006. The Company has
also a $323 million long-term credit facility with the
European Investment Bank as part of a funding program loan, of
which $140 million were used as at December 31, 2006.
The Company maintains also uncommitted foreign exchange
facilities totalling $846 million at December 31,
2006. At December 31, 2006, amounts available under the
short-term lines of credit were not reduced by any borrowing. As
at December 31, 2005, amounts available under the lines of
credit were reduced by borrowings of $11 million at a
weighted average interest rate of 4.40%.
16 SHAREHOLDERS EQUITY
16.1 Outstanding shares
The authorized share capital of the Company is EUR
1,810 million consisting of 1,200,000,000 common shares and
540,000,000 preference shares, each with a nominal value of EUR
1.04. As at December 31, 2006 the number of shares of
common stock issued was 910,157,933 shares (907,824,279 at
December 31, 2005).
As of December 31, 2006 the number of shares of common
stock outstanding was 897,395,042 (894,424,279 at
December 31, 2005).
16.2 Preference shares
The 540,000,000 preference shares, when issued, will entitle a
holder to full voting rights and to a preferential right to
dividends and distributions upon liquidation. On May 31,
1999, the Company entered into an option agreement with
STMicroelectronics Holding II B.V. in order to protect the
Company from a hostile takeover or other similar action. The
option agreement provided for 540,000,000 preference shares to
be issued to STMicroelectronics Holding II B.V. upon their
request based on approval by the Companys Supervisory
Board. STMicroelectronics Holding II B.V. would be required to
pay at least 25% of the par value of the preference shares to be
issued, and to retain ownership of at least 30% of the
Companys issued share capital. An amendment was signed in
November 2004 which reduced the threshold required for
STMicroelectronics Holding II B.V. to exercise its right to
subscribe preference shares of the Company, down to 19% issued
share capital compared to the previous requirement of at least
30%.
On November 27, 2006 the Supervisory Board of the Company
approved the termination of the existing option agreement
between the Company and STMicroelectronics Holding II B.V. and
the substitution of such agreement by a new agreement of
substantially similar terms between the Company and a Dutch
independent Foundation, Stichting Continuïteit ST. The new
option agreement provides for the issuance of 540,000,000
preference shares. Any such shares would be issued by the
Company to the Foundation, upon its request and in its sole
discretion, upon payment of at least 25% of the par value of the
preference shares to be issued. The issuing of the preference
shares is conditional upon (i) the Company receiving an
unsolicited offer or there being the threat of such an offer;
(ii) the Companys Managing and Supervisory Boards
deciding not to support such an offer and; (iii) the Board
of the Foundation determining that such an offer or acquisition
would be contrary to the interests of the Company and its
stakeholders. The preference shares may remain outstanding for
no longer than two years. There was no preference shares issued
as of December 31, 2006.
16.3 Treasury stock
In 2002 and 2001, the Company repurchased 13,400,000 of its own
shares, for a total amount of $348 million, which were
reflected at cost as a reduction of the shareholders
equity. No treasury shares were acquired in 2006, 2005 and 2004.
The treasury shares have been designated for allocation under
the Companys share based remuneration programs on
non-vested shares including such plans as approved by the 2005
and 2006 Annual General Meeting
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
of Shareholders. As of December 31, 2006, 637,109 of these
treasury shares were transferred to employees under the
Companys share based remuneration programs, following the
vesting as of April 27, 2006 of the first tranche of the
stock award plan granted in 2005 and the acceleration of the
vesting of a limited number of stock awards.
16.4 Stock option plans
In 1995, the Shareholders voted to adopt the 1995 Employee Stock
Option Plan (the 1995 Plan) whereby options for up
to 33,000,000 shares may be granted in installments over a
five-year period. Under the 1995 Plan, the options may be
granted to purchase shares of common stock at a price not lower
than the market price of the shares on the date of grant. At
December 31 2006, under the 1995 plan, 7,663,650 of the granted
options outstanding originally vest 50% after three years and
50% after four years following the date of the grant; 6,189,852
of the granted options vest 32% after two years, 32% after three
years and 36% after four years following the date of the grant.
The options expire 10 years after the date of grant. During
2005, the vesting periods for all options under the plan were
accelerated with no impact on the income statement.
In 1996, the Shareholders voted to adopt the Supervisory Board
Option Plan whereby each member of the Supervisory Board was
eligible to receive, during the
three-year period
1996-1998, 18,000
options for 1996 and 9,000 options for both 1997 and 1998, to
purchase shares of common stock at the closing market price of
the shares on the date of the grant. In the same three-year
period, the professional advisors to the Supervisory Board were
eligible to receive 9,000 options for 1996 and 4,500 options for
both 1997 and 1998. Under the Plan, the options vest over one
year and are exercisable for a period expiring eight years from
the date of grant.
In 1999, the Shareholders voted to renew the Supervisory Board
Option Plan whereby each member of the Supervisory Board may
receive, during the three-year period 1999-2001, 18,000 options
for 1999 and 9,000 options for both 2000 and 2001, to
purchase shares of capital stock at the closing market price of
the shares on the date of the grant. In the same three-year
period, the professional advisors to the Supervisory Board may
receive 9,000 options for 1999 and 4,500 options for both 2000
and 2001. Under the Plan, the options vest over one year and are
exercisable for a period expiring eight years from the date of
grant.
In 2001, the Shareholders voted to adopt the 2001 Employee Stock
Option Plan (the 2001 Plan) whereby options for up
to 60,000,000 shares may be granted in installments over a
five-year period. The options may be granted to purchase shares
of common stock at a price not lower than the market price of
the shares on the date of grant. In connection with a revision
of its equity-based compensation policy, the Company decided in
2005 to accelerate the vesting period of all outstanding
unvested stock options. The options expire ten years after the
date of grant.
In 2002, the Shareholders voted to adopt a Stock Option Plan for
Supervisory Board Members and Professionals of the Supervisory
Board. Under this plan, 12,000 options can be granted per year
to each member of the Supervisory Board and 6,000 options per
year to each professional advisor to the Supervisory Board.
Options will vest 30 days after the date of grant. The
options expire ten years after the date of grant.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
A summary of stock option activity for the plans for the three
years ended December 31, 2006, 2005 and 2004 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Per Share | |
|
|
|
|
| |
|
|
|
|
|
|
Weighted | |
|
|
Number of Shares | |
|
Range | |
|
Average | |
|
|
| |
|
| |
|
| |
Outstanding at December 31, 2003
|
|
|
56,769,297 |
|
|
$ |
6.04-$62.01 |
|
|
$ |
29.71 |
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan
|
|
|
12,365,280 |
|
|
$ |
17.08-$27.21 |
|
|
$ |
22.66 |
|
|
Supervisory Board Plan
|
|
|
132,000 |
|
|
$ |
22.71 |
|
|
$ |
22.71 |
|
Options forfeited
|
|
|
(1,304,969 |
) |
|
$ |
6.04-$62.01 |
|
|
$ |
29.20 |
|
Options exercised
|
|
|
(2,537,401 |
) |
|
$ |
6.04-$24.88 |
|
|
$ |
8.93 |
|
Outstanding at December 31, 2004
|
|
|
65,424,207 |
|
|
$ |
12.03-$62.01 |
|
|
$ |
29.18 |
|
|
|
|
|
|
|
|
|
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan
|
|
|
42,200 |
|
|
$ |
16.73-$17.31 |
|
|
$ |
16.91 |
|
|
Supervisory Board Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(2,364,862 |
) |
|
$ |
12.03-$62.01 |
|
|
$ |
29.65 |
|
Options exercised
|
|
|
(2,542,978 |
) |
|
$ |
12.03-$14.23 |
|
|
$ |
13.88 |
|
Outstanding at December 31, 2005
|
|
|
60,558,567 |
|
|
$ |
12.03-$62.01 |
|
|
$ |
29.80 |
|
|
|
|
|
|
|
|
|
|
|
Options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supervisory Board Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(16,832 |
) |
|
$ |
12.03 |
|
|
$ |
12.03 |
|
Options forfeited
|
|
|
(1,912,584 |
) |
|
$ |
12.03-$62.01 |
|
|
$ |
30.66 |
|
Options exercised
|
|
|
(2,303,899 |
) |
|
$ |
12.03-$17.08 |
|
|
$ |
12.03 |
|
Outstanding at December 31, 2006
|
|
|
56,325,252 |
|
|
$ |
12.03-$62.01 |
|
|
$ |
30.50 |
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable following acceleration in 2005 of
vesting for all outstanding unvested stock options were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Options exercisable
|
|
|
56,325,252 |
|
|
|
60,558,567 |
|
|
|
32,212,680 |
|
Weighted average exercise price
|
|
$ |
30.50 |
|
|
$ |
29.80 |
|
|
$ |
33.84 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options
outstanding as of December 31, 2006, 2005 and 2004 was 4.7,
5.5 and 6.3 years, respectively.
The range of exercise prices, the weighted average exercise
price and the weighted average remaining contractual life of
options exercisable as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Weighted | |
|
average | |
|
|
|
|
Option price | |
|
average | |
|
remaining | |
|
|
Number of shares | |
|
range | |
|
exercise price | |
|
contractual life | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
189,455 |
|
|
|
$12.03 $17.31 |
|
|
$ |
17.04 |
|
|
|
7.8 |
|
|
|
|
29,716,135 |
|
|
|
$19.18 $24.88 |
|
|
$ |
22.04 |
|
|
|
5.2 |
|
|
|
|
217,360 |
|
|
|
$25.90 $29.70 |
|
|
$ |
27.20 |
|
|
|
6.2 |
|
|
|
|
19,990,687 |
|
|
|
$31.09 $44.00 |
|
|
$ |
34.37 |
|
|
|
4.9 |
|
|
|
|
6,211,615 |
|
|
|
$50.69 $62.01 |
|
|
$ |
59.08 |
|
|
|
1.6 |
|
16.5 Employee share purchase plans
No employee share purchase plan was offered in 2006, 2005 and
2004.
16.6 Nonvested share awards
In 2005, the Company redefined its equity-based compensation
strategy by no longer granting options but rather issuing
nonvested shares. In July 2005, the Company amended its latest
Stock Option Plans for employees, Supervisory Board and
Professionals of the Supervisory Board accordingly.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
As part of this revised stock-based compensation policy, the
Company granted on October 25, 2005 3,940,065 nonvested
shares to senior executives and selected employees, to be issued
upon vesting from treasury stock (The 2005 Employee
Plan). The Compensation Committee also authorized the
future grant of 219,850 additional shares to selected employees
upon nomination by the Managing Board of the Company. These
additional shares were granted in 2006. The shares were granted
for free to employees and would vest upon completion of market
and internal performance conditions. Under the program, if the
defined market condition was met in the first quarter of 2006,
each employee would receive 100% of the nonvested shares
granted. If the market condition was not achieved, the employee
could earn one third of the grant for each of the two
performance conditions. If neither the market or performance
conditions were met, the employee would receive none of the
grant. In addition to the market and performance conditions, the
nonvested shares vest over the following requisite service
period: 32% after 6 months, 32% after 18 months and
36% after 30 months following the date of the grant. In
2006, the Company failed to meet the market condition while the
performance conditions were reached. Consequently, one third of
the shares granted, amounting to 1,364,902 shares, was lost for
vesting. In addition, in compliance with the graded vesting of
the grant and pursuant to the acceleration of a limited number
of stock awards, the first tranche of the plan, representing
637,109 shares, vested as at April 27, 2006 and were
transferred to employees from the 13,400,000 treasury shares
owned by the Company. At December 31, 2006 1,993,444
nonvested shares were outstanding. In March 2006 the Company
decided to modify the original plan to create a subplan for the
employees in one of its European subsidiaries for statutory
payroll tax purposes. The original plan terms and conditions
were modified to extend for these employees the requisite
service period as follows: 64% of the granted stock awards vest
as at April 27, 2007 and 36% as at April 27, 2008
following the date of the grant. In addition, the sale by the
employees of the shares once vested is restricted over an
additional two-year period, during which the employees must
still be rendering service to the Company in order to be
entitled to the full rights of the shares. At December 31,
2006, out of the total 1,993,444 outstanding nonvested shares of
the granted plan, 694,257 were outstanding as part of the newly
created subplan.
On October 25 2005, the Compensation Committee granted 66,000
stock-based awards to the members of the Supervisory Board and
professionals of the Supervisory Board (The 2005
Supervisory Board Plan). These awards are granted at the
nominal value of the share of
1.04 and vest
over the following period: 32% after 6 months, 32% after
18 months and 36% after 30 months following the date
of the grant. Nevertheless, they are not subject to any market,
performance or service conditions. As such, their associated
compensation cost was recorded immediately at grant. In 2006, in
compliance with the graded vesting of the grant, the first
tranche of the plan, representing 17,000 shares, vested as
at April 27, 2006. As of December 31 2006,
34,000 awards were outstanding.
On April 29, 2006, the Compensation Committee granted
66,000 stock-based
awards to the members of the Supervisory Board and professionals
of the Supervisory Board (The 2006 Supervisory Board
Plan). These awards are granted at the nominal value of
the share of
1.04 and vest
over the following period: 32% after 12 months, 32% after
24 months and 36% after 36 months following the date
of the grant. Nevertheless, they are not subject to any market,
performance or service conditions. As such, their associated
compensation cost was recorded immediately at grant. As of
December 31, 2006, 51,000 awards were outstanding.
On September 29, 2006 the Company granted
4,854,280 nonvested shares to senior executives and
selected employees to be issued upon vesting from treasury stock
(The 2006 Employee Plan). The Compensation Committee
also authorized on September 29, 2006 the future grant of
245,720 shares to selected employees upon nomination by the
Managing Board of the Company. The shares were granted for free
to employees, and will vest upon completion of three internal
performance conditions, each weighting for one third of the
total number of awards granted. Except for employees in one of
the Companys European subsidiaries for whom a subplan was
simultaneously created on September 29, 2006, the nonvested
shares vest over the following requisite service period: 32% as
at April 27, 2007, 32% as at April 27, 2008 and 36% as
at April 27, 2009. The following requisite service period
is required for the nonvested shares granted under the local
subplan: 64% of the granted stock awards vest as at
April 27, 2008 and 36% as at April 27, 2009. In
addition, the sale by the employees of the shares once vested is
restricted over an additional
two-year period, during
which the employees must still be rendering service to the
Company in order to be entitled to the full rights of the
shares. At December 31, 2006 4,735,850 nonvested
shares were outstanding, of which 1,224,440 under the local
subplan.
On December 19, 2006, the Compensation Committee granted
additional 62,360 shares to selected employees designated
by the Managing Board of the Company as part of the 2006
Employee Plan. This
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
additional grant has the same terms and conditions as the
original plan. At December 31, 2006 62,360 nonvested
shares were outstanding as part of this additional grant, of
which 34,600 under the local subplan.
A summary of the nonvested share activity for the years ended
December 31, 2006 and December 31, 2005 is presented
below:
|
|
|
|
|
|
|
|
|
|
Nonvested Shares |
|
Number of Shares | |
|
Exercise price | |
|
|
| |
|
| |
Outstanding at December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards granted:
|
|
|
|
|
|
|
|
|
|
2005 Employee Plan
|
|
|
3,940,065 |
|
|
$ |
0 |
|
|
2005 Supervisory Board Plan
|
|
|
66,000 |
|
|
|
1.04 |
|
Awards forfeited:
|
|
|
|
|
|
|
|
|
|
2005 Employee Plan
|
|
|
(25,845 |
) |
|
$ |
0 |
|
|
2005 Supervisory Board Plan
|
|
|
(15,000 |
) |
|
|
1.04 |
|
Awards vested
|
|
|
|
|
|
|
|
|
Outstanding as at December 31, 2005
|
|
|
3,965,220 |
|
|
$ |
0-1.04 |
|
|
|
|
|
|
|
|
Awards granted:
|
|
|
|
|
|
|
|
|
|
2005 Employee Plan
|
|
|
219,850 |
|
|
$ |
0 |
|
|
2006 Employee Plan
|
|
|
4,916,640 |
|
|
$ |
0 |
|
|
2006 Supervisory Board Plan
|
|
|
66,000 |
|
|
|
1.04 |
|
Awards forfeited:
|
|
|
|
|
|
|
|
|
|
2005 Employee Plan
|
|
|
(138,615 |
) |
|
$ |
0 |
|
|
2006 Employee Plan
|
|
|
(118,430 |
) |
|
$ |
0 |
|
|
2006 Supervisory Board Plan
|
|
|
(15,000 |
) |
|
|
1.04 |
|
Awards cancelled on failed vesting
|
|
|
|
|
|
|
|
|
conditions:
|
|
|
|
|
|
|
|
|
|
2005 Employee Plan
|
|
|
(1,364,902 |
) |
|
$ |
0 |
|
Awards vested:
|
|
|
|
|
|
|
|
|
|
2005 Employee Plan
|
|
|
(637,109 |
) |
|
$ |
0 |
|
|
2005 Supervisory Board Plan
|
|
|
(17,000 |
) |
|
|
1.04 |
|
Outstanding as at December 31, 2006
|
|
|
6,876,654 |
|
|
$ |
0-1.04 |
|
|
|
|
|
|
|
|
The Company recorded compensation expense for the nonvested
share awards based on the fair value of the awards at the grant
date. The fair value of the awards granted in 2005 represents
the $16.61 share price at the date of the grant. On the
2005 Employee Plan, the fair value of the nonvested shares
granted, since they are affected by a market condition, reflects
a discount of 49.50%, using a Monte Carlo
path-dependent pricing
model to measure the probability of achieving the market
condition.
The following assumptions were incorporated into the Monte Carlo
pricing model to estimate the 49.50% discount:
|
|
|
|
|
|
|
2005 | |
|
|
Employee Plan | |
|
|
| |
Historical share price volatility
|
|
|
27.74% |
|
Historical volatility of reference index
|
|
|
25.5% |
|
Three-year average dividend yield
|
|
|
0.55% |
|
Risk-free interest rates used
|
|
|
4.21%-4.33% |
|
|
|
|
|
Consistent with fair value calculations of stock option grants
in prior years, the Company has determined the historical share
price volatility to be the most appropriate estimate of future
price activity. The weighted average
grant-date fair value
of nonvested shares granted to employees under the 2005 Employee
Plan was $8.50.
In 2006, the Company accounted for the impact of the
modification of the 2005 Employee Plan with the creation of a
local subplan in compliance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123R) provisions related to
stock awards subject to a market condition and for which the
original vesting period is extended. Such modification did not
generate any incremental cost since, when measured as at the
modification date, the fair value was discounted at 100% due to
the nil probability as at March 2006 to achieve the market
condition.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
The weighted average grant date fair value of nonvested shares
granted to employees under the 2006 Employee Plan was $17.28. On
the 2006 Employee Plan, the fair value of the nonvested shares
granted, did not reflect any discount since they are not
affected by a market condition. On the contrary, the Company
estimates the number of awards expected to vest by assessing the
probability of achieving the performance conditions. As at
December 31, 2006, the Company determined that one of the
three performance conditions was met and estimated that it was
probable that the other two performance conditions would be
achieved. Consequently, the compensation expense recorded on the
2006 Employee Plan reflects the assumption that all of the
awards granted will vest, as far as the service condition is met.
The compensation expense recorded for nonvested shares
in 2006 and 2005 included a reduction for estimated
forfeitures, reflecting the historical trend of forfeitures on
past stock award plans. This estimate will be adjusted for
actual forfeitures. For employees eligible for retirement during
the requisite service period, the Company records compensation
expense over the applicable shortened period. For awards for
which vesting was accelerated in 2006, the Company recorded
immediately the unrecognized compensation expense as at the
acceleration date.
The following table illustrates the classification of
stock-based
compensation expense included in the consolidated statements of
income for the year ended December 31, 2006,
December 31, 2005 and December 31, 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cost of sales
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
Selling, general and administrative
|
|
|
14 |
|
|
|
6 |
|
|
|
|
|
Research and development
|
|
|
8 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation
|
|
|
28 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost capitalized as part of inventory was
$3 million at December 31, 2006 and amounted to
$2 million at December 31, 2005. As of
December 31, 2006 there was $73 million of total
unrecognized compensation cost related to the grant of nonvested
shares, which is expected to be recognized over a weighted
average period of 14 months.
The total deferred income tax benefit recognized in the income
statement related to
share-based
compensation expense amounted to $7 million for the year
ended December 31, 2006 and $2 million for the year
ended December 31, 2005.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
16.7 Accumulated other comprehensive income
(loss)
The accumulated balances related to each component of other
comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
|
|
Minimum | |
|
|
|
|
|
|
Foreign | |
|
gain (loss) on | |
|
Unrealized | |
|
pension | |
|
FAS 158 | |
|
Accumulated | |
|
|
currency | |
|
available-for-sale | |
|
gain (loss) on | |
|
liability | |
|
adoption | |
|
other | |
|
|
translation | |
|
financial assets, | |
|
derivatives, | |
|
adjustment, | |
|
adjustment, | |
|
comprehensive | |
|
|
income (loss) | |
|
net of tax | |
|
net of tax | |
|
net of tax | |
|
net of tax | |
|
income (loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance as of December 31,
2003
|
|
|
657 |
|
|
|
3 |
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
623 |
|
Other comprehensive income (loss)
|
|
|
441 |
|
|
|
(3 |
) |
|
|
59 |
|
|
|
(4 |
) |
|
|
|
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
1,098 |
|
|
|
|
|
|
|
59 |
|
|
|
(41 |
) |
|
|
|
|
|
|
1,116 |
|
Other comprehensive income (loss)
|
|
|
(770 |
) |
|
|
|
|
|
|
(72 |
) |
|
|
7 |
|
|
|
|
|
|
|
(835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
328 |
|
|
|
|
|
|
|
(13 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
281 |
|
Other comprehensive income (loss)
|
|
|
532 |
|
|
|
|
|
|
|
26 |
|
|
|
34 |
|
|
|
(57 |
) |
|
|
535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
|
860 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
(57 |
) |
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2006, the Company adopted Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R) (FAS 158). The impact
upon adoption of the recognition in the consolidated financial
statements of the overfunded and underfunded status of defined
benefit and other post retirement plans as measured at
December 31, 2006, amounted to $67 million before
income tax effect and was recorded, as set forth in
FAS 158, net of tax as a component of accumulated other
comprehensive income.
16.8 Dividends
In 2006, 2005 and 2004, the Company paid a cash dividend of
$0.12 per share for a total amount of $107 million each
year.
17 EARNINGS PER SHARE
For the years ended December 31, 2006, 2005 and 2004,
earnings per share (EPS) was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
782 |
|
|
|
266 |
|
|
|
601 |
|
Weighted average shares outstanding
|
|
|
896,136,969 |
|
|
|
892,760,520 |
|
|
|
891,192,542 |
|
Basic EPS
|
|
|
0.87 |
|
|
|
0.30 |
|
|
|
0.67 |
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
782 |
|
|
|
266 |
|
|
|
601 |
|
Convertible debt interest, net of tax
|
|
|
17 |
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Net income adjusted
|
|
|
799 |
|
|
|
271 |
|
|
|
605 |
|
Weighted average shares outstanding
|
|
|
896,136,969 |
|
|
|
892,760,520 |
|
|
|
891,192,542 |
|
Dilutive effect of stock options
|
|
|
211,770 |
|
|
|
854,523 |
|
|
|
2,038,369 |
|
Dilutive effect of nonvested shares
|
|
|
1,252,996 |
|
|
|
116,233 |
|
|
|
|
|
Dilutive effect of convertible debt
|
|
|
60,941,995 |
|
|
|
41,880,104 |
|
|
|
41,880,160 |
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in calculating diluted EPS
|
|
|
958,543,730 |
|
|
|
935,611,380 |
|
|
|
935,111,071 |
|
Diluted EPS
|
|
|
0.83 |
|
|
|
0.29 |
|
|
|
0.65 |
|
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
At December 31, 2006, 2005 and 2004, outstanding stock
options included anti-dilutive shares totalling approximately
56,113,482 shares, 59,704,044 shares and 63,385,838 shares,
respectively.
18 OTHER INCOME AND EXPENSES, NET
Other income and expenses, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Research and development funding
|
|
|
54 |
|
|
|
76 |
|
|
|
84 |
|
Start-up costs
|
|
|
(57 |
) |
|
|
(56 |
) |
|
|
(63 |
) |
Exchange gain (loss), net
|
|
|
(9 |
) |
|
|
(16 |
) |
|
|
33 |
|
Patent litigation costs
|
|
|
(22 |
) |
|
|
(14 |
) |
|
|
(31 |
) |
Patent pre-litigation costs
|
|
|
(7 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
Gain on sale of non-current assets, net
|
|
|
8 |
|
|
|
12 |
|
|
|
6 |
|
Other, net
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income and expenses, net
|
|
|
(35 |
) |
|
|
(9 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
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.
On June 29, 2006, the Company sold to Sofinnova Capital V
its participation in Accent Srl, a subsidiary based in Italy.
Accent Srl, in which the Company held a 51% interest, was
jointly formed with Cadence Design Systems Inc. and is
specialized in hardware and software design and consulting
services for integrated circuit design and fabrication. The
total consideration amounting to $7 million was received in
cash on June 29, 2006. Net of consolidated carrying amount
and transactions related expenses, the divestiture resulted in a
net pre-tax gain of
$6 million which was recorded in Other income and
expenses, net in the 2006 consolidated statement of
income. In addition the Company simultaneously entered into a
license agreement with Accent by which the Company granted to
Accent, for a total agreed lump sum amount of $3 million,
the right to use as is and with no right to future
development certain specific intellectual property of the
Company that are currently used in Accents business
activities. The total consideration was recognized immediately
in 2006 and recorded as Other revenues in the
consolidated statement of income. The Company was also granted
warrants for 6,675 new shares of Accent. Such warrants expire
after 15 years and can only be exercised in the event of a
change of control or an Initial Public Offering of Accent above
a predetermined value.
19 IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER
RELATED CLOSURE COSTS
In 2006, the Company has incurred charges related to the main
following items: (i) the 150mm restructuring plan started
in 2003; (ii) the headcount reduction plan announced in the
second quarter of 2005 and (iii) the yearly impairment
review.
During the third quarter of 2003, the Company commenced a plan
to restructure its 150mm fab operations and part of its back-end
operations in order to improve cost competitiveness. The 150mm
restructuring plan focuses on cost reduction by migrating a
large part of European and U.S. 150mm production to Singapore
and by upgrading production to finer geometry 200mm wafer fabs.
The plan includes the discontinuation of the 150mm production of
Rennes (France), the closure as soon as operationally feasible
of the 150mm wafer pilot line in Castelletto (Italy) and the
downsizing by approximately one-half of the 150mm wafer fab in
Carrollton, Texas. Furthermore, the 150mm wafer fab productions
in Agrate (Italy) and Rousset (France) will be gradually
phased-out in favor of 200mm wafer ramp-ups at existing
facilities in these locations, which will be expanded or
upgraded to accommodate additional finer geometry wafer
capacity. The Company is expecting to incur the balance of the
restructuring charges related to this manufacturing
restructuring plan in early 2007, later than previously
anticipated to accommodate unforeseen qualification requirements
of the Companys customers.
In the first quarter of 2005, the Company decided to reduce its
Access technology products for Customer Premises Equipment
(CPE) modem products. This decision was intended to
eliminate certain low volume, non-strategic product families
whose returns in the current environment did not meet internal
targets. Additional restructuring initiatives were also
implemented in the first quarter of 2005 such as the closure of
a research and
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
development design center in Karlsruhe (Germany) and in Malvern
(USA), and the discontinuation of a development project in
Singapore.
In May 2005, the Company announced additional restructuring
efforts to improve profitability. These initiatives will aim to
reduce the Companys workforce by 3,000 outside Asia by the
second half of 2006, of which 2,300 are planned for Europe. The
Company plans to reorganize its European activities by
optimizing on a global scale its EWS activities (wafer testing);
harmonizing its support functions; streamlining its activities
outside its manufacturing areas and by disengaging from certain
activities.
In the third quarter of 2006, the Company performed the
impairment test on an annual basis in order to assess the
recoverability of the goodwill carrying value. In addition, the
Company decided to cease product development from technologies
inherited from Tioga business acquisition.
Impairment, restructuring charges and other related closure
costs incurred in 2006, 2005, and 2004 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, | |
|
|
|
|
|
|
|
|
restructuring charges | |
|
|
|
|
Restructuring | |
|
Other related | |
|
and other related | |
Year ended December 31, 2006 |
|
Impairment | |
|
charges | |
|
closure costs | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
150mm fab plan
|
|
|
(1 |
) |
|
|
(7 |
) |
|
|
(14 |
) |
|
|
(22 |
) |
2005 restructuring initiatives
|
|
|
(1 |
) |
|
|
(36 |
) |
|
|
(8 |
) |
|
|
(45 |
) |
Other
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(12 |
) |
|
|
(43 |
) |
|
|
(22 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, | |
|
|
|
|
|
|
|
|
restructuring charges | |
|
|
|
|
Restructuring | |
|
Other related | |
|
and other related | |
Year ended December 31, 2005 |
|
Impairment | |
|
charges | |
|
closure costs | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
150mm fab plan
|
|
|
|
|
|
|
(4 |
) |
|
|
(9 |
) |
|
|
(13 |
) |
2005 restructuring initiatives
|
|
|
(66 |
) |
|
|
(46 |
) |
|
|
(2 |
) |
|
|
(114 |
) |
Other
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(67 |
) |
|
|
(50 |
) |
|
|
(11 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, | |
|
|
|
|
|
|
|
|
restructuring charges | |
|
|
|
|
Restructuring | |
|
Other related | |
|
and other related | |
Year ended December 31, 2004 |
|
Impairment | |
|
charges | |
|
closure costs | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
150mm fab plan
|
|
|
|
|
|
|
(29 |
) |
|
|
(35 |
) |
|
|
(64 |
) |
Intangible assets and investments
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Other
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(8 |
) |
|
|
(33 |
) |
|
|
(35 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charges
In 2006, the Company recorded impairment charges as follows:
|
|
|
|
|
$6 million impairment of goodwill pursuant to the decision
of the Company to cease product development from technologies
inherited from Tioga business acquisition. The Company reports
Tioga business as part of the Application Specific Product
Groups (ASG) product segment. Following this
decision, the Company recorded the full write-off of Tioga
goodwill carrying amount. |
|
|
|
$4 million impairment on technologies purchased as part of
Tioga business acquisition, which were determined to be without
any alternative use; |
|
|
|
$1 million impairment on equipment and machinery pursuant
to the decision of the Company to discontinue a production line
in one of its back-end sites; |
|
|
|
$1 million impairment on equipment and machinery identified
without any alternative use in one of the Companys
European 150 mm sites. |
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In 2005, the Company recorded impairment charges as follows:
|
|
|
|
|
$39 million impairment of goodwill pursuant to the decision
of the Company to reduce its Access technology products for
Customer Premises Equipment (CPE) modem products.
The Company reports CPE business as part of the Access reporting
unit, included in the Application Specific Products Group
(ASG). Following the decision to discontinue a
portion of this reporting unit, the Company, in compliance with
FAS 142 reassessed the allocation of goodwill between the
Access reporting unit and the business to be disposed of
according to their relative fair values using market comparables; |
|
|
|
$22 million of purchased technologies were identified
without an alternative use following the discontinuation of CPE
product lines; |
|
|
|
$6 million for technologies and other intangible assets
pursuant to the decision of the Company to close its research
and development design centre in Karlsruhe (Germany), the
discontinuation of a development project in Singapore, the
optimization of its EWS (wafer testing) in the United States and
other intangibles determined to be obsolete. |
During the year 2004, impairment charges were incurred relating
to $5 million for purchased technologies primarily
associated with ASG product group that were determined to be
obsolete and $3 million for financial assets with
other-than-temporary losses based on a valuation used for
additional third party financing in the underlying investment.
The long-lived assets affected by the restructuring plans are
owned by the Company and were assessed for impairment using the
held-for-use model defined in Statement of Financial Accounting
Standards No. 144, Accounting for the impairment or
disposal of long-term assets (FAS 144) when they
did not satisfy all of the criteria required for held-for-sale
status, as set forth in FAS 144. In 2006, the Company identified
certain machinery and equipment to be disposed of by sale in one
of its back-end sites in Morocco, following the decision of the
Company to get disengaged from SPG activities as part of its
latest restructuring initiatives. These assets did not generate
any impairment charge and were reflected at their carrying value
on the line Other receivables and assets of the
consolidated balance sheet as at December 31, 2006.
At December 31, 2006, the Company was required to evaluate
the likelihood of the announced expected deconsolidation of its
Flash memory business under FAS 144. Given the status of the
project at year-end, the Company determined that the
deconsolidation was more likely than not to occur for accounting
purposes, thus triggering an impairment review for Flash memory
activity. The outcome of this test determined that no impairment
was required at December 31, 2006.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Restructuring charges and other related closure costs in 2006
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150mm fab plan | |
|
|
|
|
|
Total | |
|
|
| |
|
2005 | |
|
|
|
restructuring & | |
|
|
|
|
Other related | |
|
|
|
restructuring | |
|
|
|
other related | |
|
|
Restructuring | |
|
closure costs | |
|
Total | |
|
initiatives | |
|
Other | |
|
closure costs | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Provision as at December 31, 2003
|
|
|
34 |
|
|
|
1 |
|
|
|
35 |
|
|
|
|
|
|
|
3 |
|
|
|
38 |
|
Charges incurred in 2004
|
|
|
32 |
|
|
|
32 |
|
|
|
64 |
|
|
|
|
|
|
|
4 |
|
|
|
68 |
|
Amounts paid
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(68 |
) |
Currency translation effect
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2004
|
|
|
36 |
|
|
|
1 |
|
|
|
37 |
|
|
|
|
|
|
|
3 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2005
|
|
|
10 |
|
|
|
9 |
|
|
|
19 |
|
|
|
48 |
|
|
|
|
|
|
|
67 |
|
Reversal of provision
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Amounts paid
|
|
|
(23 |
) |
|
|
(10 |
) |
|
|
(33 |
) |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(56 |
) |
Currency translation effect
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2005
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
27 |
|
|
|
1 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2006
|
|
|
7 |
|
|
|
14 |
|
|
|
21 |
|
|
|
44 |
|
|
|
|
|
|
|
65 |
|
Amounts paid
|
|
|
(7 |
) |
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(54 |
) |
|
|
(1 |
) |
|
|
(76 |
) |
Currency translation effect
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2006
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
18 |
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150mm
fab plan:
Restructuring charges incurred in 2006 amounted to
$7 million termination benefits, and $14 million of
other closure costs mainly related to maintenance and
decontamination incurred in Agrate (Italy) and Rousset (France)
sites. Restructuring charges incurred in 2005 amounted to
$10 million, mainly related to termination benefits, and
$9 million of other related closure costs for transfers of
production.
In 2005 management decided to continue a specific back-end
fabrication line in Rennes (France), which had originally been
designated for full closure. This decision resulted in a
$6 million reversal of the restructuring provision.
Restructuring charges in 2004 primarily related to
$32 million in estimated one-time involuntary termination
benefits and $32 million of other charges associated with
the closure and transfers of production.
2005
restructuring initiatives:
The Company commenced several restructuring initiatives during
2005, including:
|
|
|
|
|
Pursuant to the decision of reducing its Access technology
products for Customer Premises Equipment (CPE) modem
products, the Company committed to an exit plan in Zaventem
(Belgium) and recorded in 2005 $4 million of workforce
termination benefits. No additional cost was incurred for these
restructuring initiatives in 2006. |
|
|
|
In order to streamline its research and development sites, the
Company decided to cease its activities in two locations,
Karlsruhe (Germany) and Malvern (USA). The Company incurred in
2005 $1 million restructuring charges corresponding to
employee termination costs and of $1 million of unused
lease charges related to the closure of these two sites. These
restructuring initiatives were completed in 2005. |
|
|
|
In addition, charges totaling $2 million were paid in 2005
by the Company for voluntary termination benefits for certain
employees. The Company also incurred a $2 million charge in
2005 related to additional restructuring initiatives, mainly in
the United States and Mexico. No additional cost was incurred in
2006. |
|
|
|
The Company defined in 2005 a plan of reorganization and
optimization of its activities. This plan focuses on workforce
reduction, mainly in Europe, but will, whenever possible,
encourage voluntary |
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
|
|
|
|
|
redundancy such as early retirement measures and other special
termination arrangements with the employees. The plan also
includes the non-renewal of some temporary positions. For the
year ended December 31, 2006 the Company recorded a total
restructuring charge for its latest restructuring plan amounting
to $44 million, of which $37 million corresponded to
workforce reduction initiatives in Europe and $7 million
were related to reorganization actions aiming at optimizing the
Companys EWS activities. In 2005, the Company recorded a
total restructuring charge amounting to $38 million related
to termination incentives for two of the Companys
subsidiaries in Europe, who accepted special termination
arrangements. |
Other:
During the year 2004, charges totaling $4 million were paid
by the Company, mainly for a voluntary termination benefit
program.
Total impairment, restructuring charges and other related
closure costs:
The 2003 restructuring plan and related manufacturing
initiatives are expected to be largely completed early 2007. Of
the total $330 million expected pre-tax charges to be
incurred under the plan, $316 million have been incurred as
of December 31, 2006 ($22 in 2006, $13 million in
2005, $76 million in 2004 and $205 million in 2003).
The 2005 headcount reduction plan, which was nearly fully
completed as at December 31, 2006, was originally expected
to result in pre-tax charges of $100 million, out of which
$86 million have been incurred as at December 31, 2006
($45 in 2006 and $41 million in 2005).
In 2006, total amounts paid for restructuring and related
closure costs amounted to $76 million.
The total actual costs that the Company will incur may differ
from these estimates based on the timing required to complete
the restructuring plan, the number of people involved, the final
agreed termination benefits and the costs associated with the
transfer of equipment, products and processes.
20 INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Income
|
|
|
143 |
|
|
|
53 |
|
|
|
41 |
|
Expense
|
|
|
(50 |
) |
|
|
(19 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
93 |
|
|
|
34 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
No borrowing cost was capitalized in 2006, while capitalized
interest was $2 million and $3 million in 2005 and
2004, respectively. Interest income on floating rate notes
classified as available-for-sale marketable securities amounted
to $5 million for the year ended December 31, 2006. In
2005 and 2004, the Company invested available cash in
credit-linked deposits issued by several primary banks, which
maturity was scheduled before year-end. Interest income on these
marketable securities for the years ended December 31, 2005
and December 31, 2004 amounted to $18 million and
$16 million, respectively.
21 LOSS ON EXTINGUISHMENT OF CONVERTIBLE DEBT
In 2004, the Company repurchased on the market all of the
remaining 3.75% zero coupon convertible bonds due in 2010 for a
cash amount totalling $375 million. The repurchased
convertible bonds were equivalent to 4,403,075 shares and were
cancelled. In relation to this repurchase, the Company recorded
a non-operating pre-tax charge in 2004 of $4 million, of
which $3 million related to the price paid in excess of the
repurchased convertible bonds accreted value and $1 million
related to the write-off of the related bond issuance costs.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
22 INCOME TAX
Income before income tax expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Income (loss) recorded in The Netherlands
|
|
|
(12 |
) |
|
|
(60 |
) |
|
|
12 |
|
Income from foreign operations
|
|
|
776 |
|
|
|
335 |
|
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
764 |
|
|
|
275 |
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
|
STMicroelectronics N.V. and its subsidiaries are individually
liable for income taxes in their jurisdictions. Tax losses can
only offset profits generated by the taxable entity incurring
such loss.
Income tax benefit (expense) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
The Netherlands taxes current
|
|
|
(7 |
) |
|
|
(6 |
) |
|
|
(6 |
) |
Foreign taxes current
|
|
|
(47 |
) |
|
|
(33 |
) |
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
|
(54 |
) |
|
|
(39 |
) |
|
|
(58 |
) |
Foreign deferred taxes
|
|
|
74 |
|
|
|
31 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
20 |
|
|
|
(8 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
The principal items comprising the differences in income taxes
computed at The Netherlands statutory rate, of 29.6% in 2006,
34.5% in 2005 and 35% in 2004, and the effective income tax rate
are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended | |
|
Year ended | |
|
Year ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Income tax expense computed at statutory rate
|
|
|
(226 |
) |
|
|
(95 |
) |
|
|
(232 |
) |
Permanent and other differences
|
|
|
(27 |
) |
|
|
(26 |
) |
|
|
(11 |
) |
Valuation allowance adjustments
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
Impact of prior years adjustments
|
|
|
63 |
|
|
|
28 |
|
|
|
3 |
|
Effects of change in enacted tax on deferred taxes
|
|
|
|
|
|
|
|
|
|
|
18 |
|
Current year credits
|
|
|
49 |
|
|
|
20 |
|
|
|
28 |
|
Other tax and credits
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
Benefits from tax holidays
|
|
|
134 |
|
|
|
48 |
|
|
|
77 |
|
Earnings of subsidiaries taxed at different rates
|
|
|
36 |
|
|
|
19 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
20 |
|
|
|
(8 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
As the result of favourable events that occurred in 2006, the
Company recognized approximately $23 million in tax
benefits related to Research and Development Credits and
Extraterritorial Income Exclusions in the United States for
prior periods. In addition the Company reversed $90 million
in income tax provisions related to a previously received tax
assessment in the United States based on a final settlement upon
appeals. See Note 24 for further information. These amounts
were partially offset by tax assessments or probable tax
assessments in various tax jurisdictions.
The tax holidays represent a tax exemption period aimed to
attract foreign technological investment in certain tax
jurisdictions. The effect of the tax holiday benefits on basic
earnings per share was $0.15, $0.05, and $0.09 for the years
ended December 31, 2006, 2005, and 2004, respectively.
These agreements are present in various countries and include
programs that reduce up to and including 100% of taxes in years
affected by the agreements. The Companys tax holidays
expire at various dates through the year ending
December 31, 2013.
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Tax loss carryforwards and investment credits
|
|
|
159 |
|
|
|
150 |
|
Inventory valuation
|
|
|
25 |
|
|
|
28 |
|
Impairment and restructuring charges
|
|
|
18 |
|
|
|
24 |
|
Fixed asset depreciation in arrears
|
|
|
81 |
|
|
|
73 |
|
Receivables for government funding
|
|
|
116 |
|
|
|
66 |
|
Tax allowances granted on past capital investments
|
|
|
975 |
|
|
|
761 |
|
Pension service costs
|
|
|
29 |
|
|
|
13 |
|
Commercial accruals
|
|
|
11 |
|
|
|
11 |
|
Other temporary differences
|
|
|
52 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,466 |
|
|
|
1,171 |
|
Valuation allowances
|
|
|
(1,039 |
) |
|
|
(854 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
427 |
|
|
|
317 |
|
|
|
|
|
|
|
|
Accelerated fixed asset depreciation
|
|
|
(118 |
) |
|
|
(116 |
) |
Acquired intangible assets
|
|
|
(8 |
) |
|
|
(7 |
) |
Advances of government funding
|
|
|
(25 |
) |
|
|
(31 |
) |
Other temporary differences
|
|
|
(30 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(181 |
) |
|
|
(172 |
) |
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
|
246 |
|
|
|
145 |
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company and its subsidiaries
have tax loss carryforwards and investment credits that expire
starting 2007, as follows:
|
|
|
|
|
Year |
|
|
|
|
|
2007
|
|
|
50 |
|
2008
|
|
|
3 |
|
2009
|
|
|
|
|
2010
|
|
|
|
|
Thereafter
|
|
|
106 |
|
|
|
|
|
Total
|
|
|
159 |
|
|
|
|
|
The Tax allowances granted on past capital
investments mainly related to a 2003 agreement granting
the Company certain tax credits for capital investments
purchased through the year ending December 31, 2006. Any
unused tax credits granted under the agreement will continue to
increase yearly by a legal inflationary index (currently 7% per
annum). The credits may be utilized through 2020 or later
depending on the Company meeting certain program criteria. In
addition to this agreement, the Company will continue to receive
tax credits on future years capital investments, which may
be used to offset that years tax liabilities. However,
pursuant to the inability to utilize these credits currently and
in future years, the Company did not recognize any deferred tax
asset on such tax allowance. As a result, there is no financial
impact to the net deferred tax assets of the Company.
Tax loss carryforwards include $54 million in net operating
losses acquired in business combinations, which continue to be
fully provided for at December 31, 2006. Any eventual use
of these tax loss carryforwards would result in a reduction of
the goodwill recorded in the original business combination.
The amount of deferred tax benefit recorded as a component of
other comprehensive income (loss) was $7 million in
2006. This related primarily to the tax effects of the
recognized unfunded status on defined benefits plans pursuant to
FAS 158 adoption and unrealized gains on derivatives. The amount
of deferred tax expense recorded as a component of other
comprehensive income (loss) was $6 million and
$5 million in 2005 and 2004, respectively. This related
primarily to the tax effects of unrealized gains
(losses) on derivatives as well as minimum pension
liability adjustments.
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
23 COMMITMENTS
The Companys commitments as of December 31, 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating leases
|
|
$ |
304 |
|
|
$ |
54 |
|
|
$ |
44 |
|
|
$ |
40 |
|
|
$ |
31 |
|
|
$ |
28 |
|
|
$ |
107 |
|
Purchase obligations
|
|
|
1,052 |
|
|
|
959 |
|
|
|
68 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchase
|
|
|
467 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry purchase
|
|
|
373 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, technology licenses and design
|
|
|
212 |
|
|
|
119 |
|
|
|
68 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hynix ST Joint Venture
|
|
|
32 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other obligations
|
|
|
110 |
|
|
|
67 |
|
|
|
23 |
|
|
|
11 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,498 |
|
|
$ |
1,112 |
|
|
$ |
135 |
|
|
$ |
76 |
|
|
$ |
36 |
|
|
$ |
29 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases land, buildings, plants, and equipment under
operating leases that expire at various dates under
non-cancellable lease agreements. Operating lease expense was
$56 million, $61 million and $45 million in 2006,
2005 and 2004, respectively.
As described in Note 3, the Company and Hynix Semiconductor
signed on November 16, 2004 a
joint-venture agreement
to build a front-end
memory-manufacturing
facility in Wuxi City, Jiangsu Province, China. The business
license was obtained in April 2005 and the Company paid
$213 million, including $1 million of
deal-related expenses
in 2006 and $38 million of capital contributions in 2005.
The Company has also entered into a debt guarantee agreement
with a third party financial institution which will loan up to
$250 million to the joint venture. Repayment of the loan by
the joint venture is guaranteed by a deposit from the Company to
the bank in an offsetting amount. As of December 31, 2006,
$218 million has been loaned to the joint venture and a
deposit placed by the Company with the bank in a like amount.
The remaining $32 million is expected to be loaned to the
joint venture, with an offsetting deposit by the Company in the
first quarter of 2007. Furthermore, the Company has 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.
Other obligations primarily relate to contractual firm
commitments with respect to cooperation agreements.
Other commitments
The Company has issued guarantees totalling $790 million
related to its subsidiaries debt.
24 CONTINGENCIES
The Company is subject to the possibility of loss contingencies
arising in the ordinary course of business. These include but
are not limited to: warranty cost on the products of the
Company, breach of contract claims, claims for unauthorized use
of third party intellectual property, tax claims and provisions
for specifically identified income tax exposures as well as
claims for environmental damages. In determining loss
contingencies, the Company considers the likelihood of a loss of
an asset or the incurrence of a liability as well as the ability
to reasonably estimate the amount of such loss or liability. An
estimated loss is recorded when it is probable that a liability
has been incurred and when the amount of the loss can be
reasonably estimated. The Company regularly reevaluates claims
to determine whether provisions need to be readjusted based on
the most current information available to the Company. Changes
in these evaluations could result in adverse, material impact on
the Companys results of operations, cash flows or its
financial position for the period in which they occur.
The Company previously received a tax assessment from the United
States tax authorities, which was under an appeals process. In
2006, the Company received the final settlement from the Joint
Committee on Taxation with no adjustment to filed tax returns.
This resulted in a reversal of $90 million in income tax
provisions that the Company had previously recorded to cover any
potential losses associated with the claim.
25 CLAIMS AND LEGAL PROCEEDINGS
The Company has received and may in the future receive
communications alleging possible infringements, in particular in
case of patents and similar intellectual property rights of
others. Furthermore, the Company may become involved in costly
litigation brought against the Company regarding patents, mask
works, copyrights, trademarks or trade secrets. In the event
that the outcome of any litigation would be unfavorable to the
Company,
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
the Company may be required to license the underlying
intellectual property right at economically unfavorable terms
and conditions, and possibly pay damages for prior use and/or
face an injunction, all of which individually or in the
aggregate could have a material adverse effect on the
Companys results of operations, cash flows or financial
position and ability to compete.
The Company is involved in various lawsuits, claims,
investigations and proceedings incidental to the normal conduct
of its operations, other than external patent utilization. These
matters mainly include the risks associated with claims from
customers or other parties and tax disputes. The Company has
accrued for these loss contingencies when the loss is probable
and can be estimated. The Company regularly evaluates claims and
legal proceedings together with their related probable losses to
determine whether they need to be adjusted based on the current
information available to the Company. Legal costs associated
with claims are expensed as incurred. In the event of litigation
which is adversely determined with respect to the Companys
interests, or in the event the Company needs to change its
evaluation of a potential
third-party claim,
based on new evidence or communications, a material adverse
effect could impact its operations or financial condition at the
time it were to materialize.
The Company is currently a party to legal proceedings with
SanDisk Corporation (SanDisk) and Tessera,
Technologies, Inc. (Tessera). Based on
managements current assumptions made with support of the
Companys outside attorneys, the Company is not currently
in a position to evaluate any probable loss, which may arise out
of such litigation.
On September 15, 2006, the Company filed a criminal
complaint with the Public Prosecutor in Lugano, Switzerland
following the discovery by its management in 2006 of a fraud
perpetrated by its former treasurer, who retired at the end of
2005, relating to certain foreign exchange transactions that
took place from 1998 until the end of 2005. Following such
complaint, the former treasurer was arrested and charged in
November 2006, along with three individuals not employed by the
Company. The Company is currently actively pursuing the recovery
of the amounts that had been illegally misappropriated.
26 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Effective January 2006, Corporate Treasury has been reorganized
under the lead of a newly appointed Corporate Treasurer,
reporting to the Chief Financial Officer. Simultaneously, a
Treasury Committee was created to steer treasury activities and
to ensure compliance with corporate policies. Treasury
activities are regulated by the Companys policies, which
define procedures, objectives and controls. The policies focus
on the management of financial risk in terms of exposure to
currency rates and interest rates. Most Treasury activities are
centralized, with any local treasury activities subject to
oversight from the head treasury office. The majority of cash
and cash equivalent is held in U.S. dollars and Euro and is
placed with financial institutions rated at least a single
A long term rating from two of the major rating
agencies, meaning at least A3 from Moodys Investor Service
and A- from Standard & Poors and Fitch Ratings.
Marginal amounts are held in other currencies. Foreign currency
operations and hedging transactions are performed only to hedge
exposures deriving from industrial and commercial activities.
26.1 Foreign Currency Risk
The Company conducts its business on a global basis in various
major international currencies. As a result, the Company is
exposed to adverse movements in foreign currency exchange rates.
Foreign
Currency Forward Contracts Not Designated as a Hedge
The Company enters into foreign currency forward contracts to
reduce its exposure to changes in exchange rates and the
associated risk arising from the denomination of certain assets
and liabilities in foreign currencies at the Companys
subsidiaries. These include receivables from international sales
by various subsidiaries in foreign currencies, payables for
foreign currency denominated purchases and certain other assets
and liabilities arising in intercompany transactions.
The notional amount of the foreign currency forward contracts
totalled $232 million, $1,461 million and
$7,013 million at December 31, 2006, 2005 and 2004,
respectively. The principal currencies covered are the Euro, the
Singapore dollar, the Japanese yen, the Swiss franc and the
Malaysian ringgit.
The risk of loss associated with forward contracts is equal to
the exchange rate differential from the time the contract is
entered into until the time it is settled.
Foreign currency forward contracts not designated as cash flow
hedge outstanding as of December 31, 2006 have remaining
terms of 3 days to 5 months, maturing on average after
19 days.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Derivative
Instruments Designated as a Hedge
To further reduce its exposure to U.S. dollar exchange rate
fluctuations, in 2004 the Company started to hedge certain
euro-denominated forecasted transactions that cover at year-end
a large part of its research and development, selling, general
and administrative expenses, as well as a portion of its
front-end manufacturing costs of semi-finished goods through the
use of currency forward contracts and currency options.
For the year ended December 31, 2006 the Company recorded a
reduction in cost of sales and operating expenses of
$5 million and $14 million, respectively, related to
the realized gain incurred on such hedged transactions. In
addition, no cash flow hedge transaction was discontinued in
2006 and no amount was reclassified as other income and
expenses, net into the statement of income from
accumulated other comprehensive income. For the year ended
December 31, 2005 the Company recorded as cost of sales and
operating expenses $51 million and $30 million,
respectively, related to the realized loss incurred on such
hedged transactions. In addition, after determining that it was
not probable that certain forecasted transactions would occur by
the end of the originally specified time period, the Company
discontinued in the first quarter of 2005 certain of its cash
flow hedges and reclassified a net loss of $37 million as
other income and expenses, net into the statement of
income from accumulated other comprehensive income.
The notional amount of foreign currency forward contracts and
currency options designated as cash flow hedges totalled $593,
$745 and $1,839 million at December 31, 2006, 2005 and
2004 respectively. The forecasted transactions hedged at
December 31, 2006 were determined to be probable of
occurrence.
As of December 31, 2006, $13 million of deferred gains
on derivative instruments, net of tax of $2 million,
included in accumulated other comprehensive income were expected
to be reclassified as earnings during the next six months based
on the monthly forecasted research and development expenses,
corporate costs and semi-finished manufacturing costs. As of
December 31, 2005, $13 million of deferred losses on
derivative instruments, net of tax of $1 million, included
in accumulated other comprehensive income were reclassified as
earnings during the next six months based on the monthly
forecasted research and development expenses, corporate costs
and semi-finished manufacturing costs.
Foreign currency forward contracts designated as cash flow
hedges outstanding as of December 31, 2006 have remaining
terms of 5 days to 5 months, maturing on average after
45 days.
26.2 Interest rate risk
In 2006, the Company entered into cancellable swaps with a
combined notional value of $200 million to hedge the fair
value of a portion of the convertible bonds due 2016 carrying a
fixed interest rate. The cancellable swaps convert the fixed
rate interest expense recorded on the convertible bond due to
2016 to a variable interest rate based upon adjusted LIBOR. The
cancellable swaps meet the criteria for designation as a fair
value hedge and, as such, both the swaps and the hedged portion
of the bonds are reflected at their fair values in the
consolidated balance sheet. The criteria for designating a
derivative as a hedge include evaluating whether the instrument
is highly effective at offsetting changes in the fair value of
the hedged item attributable to the hedged risk. Hedged
effectiveness is assessed on both a prospective and
retrospective basis at each reporting period. The cancellable
swaps are highly effective for hedging the change in fair value
of the hedged bonds attributable to changes in interest rates
and were designated as a fair value hedge at their inception.
Any ineffectiveness of the hedge relationship is recorded as a
gain or loss on derivatives as a component of other income
and expenses, net. If the hedge becomes no longer highly
effective, the hedged portion of the bonds will discontinue
being marked to fair value while the changes in the fair value
of the cancellable swaps will continue to be recorded in the
consolidated income statement.
The net loss recognized in other income and expenses,
net for the year ended December 31, 2006 as a result
of the ineffective portion of this fair value hedge was not
material.
26.3 Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of
interest-bearing investments, foreign currency contracts and
trade receivables.
The company selects banks and/or financial institutions that
operate with the ST group based on the criteria of single
A long term rating from two of the major rating
agencies, meaning at least A3 from Moodys Investor Service
and A-from
Standard & Poors and Fitch Ratings. A monthly
review of the counterparty banks is conducted to verify that the
credit criteria still apply and prompt action is taken, if
needed. The Company also
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
sets limits for each instrument used. The maximum outstanding
amount per instrument with each individual bank is set to a 20%
threshold of the total outstanding. The Company monitors and
manages its Treasury activities within these limits. The credit
risk exposure is calculated on 100% of cash and debt capital
market instruments and on positive marked to market for foreign
exchange forwards, interest rate swaps and currency and interest
rate options.
At December 31, 2006 and 2005, one customer, the Nokia
Group of companies, represented 26.2% and 15.7% of trade
accounts receivable, net respectively. Any remaining
concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers and their
dispersion across many geographic areas. The Company monitors
the creditworthiness of its customers to which it grants credit
terms in the normal course of business. The Company does not
anticipate non-performance by counterparties, which could have a
significant impact on its financial position or results of
operations.
26.4 Fair value of financial instruments
The estimates of fair value were obtained using prevailing
financial market information resulting from various valuation
techniques.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Estimated | |
|
Carrying | |
|
Estimated | |
|
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans (including current portion)
|
|
|
478 |
|
|
|
466 |
|
|
|
412 |
|
|
|
400 |
|
Senior Bonds
|
|
|
659 |
|
|
|
655 |
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
993 |
|
|
|
1,010 |
|
|
|
1,379 |
|
|
|
1,342 |
|
Other receivables and assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts and currency options
|
|
|
14 |
|
|
|
14 |
|
|
|
3 |
|
|
|
3 |
|
Other investments and other non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellable swaps designated as fair value hedge
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Other payables and accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts and currency options
|
|
|
1 |
|
|
|
1 |
|
|
|
31 |
|
|
|
31 |
|
The methodologies used to estimate fair value are as follows:
Cash and cash equivalents, accounts receivable, bank
overdrafts, short-term borrowings, accounts payable
The carrying amounts reflected in the consolidated financial
statements are reasonable estimates of fair value due to the
relatively short period of time between the origination of the
instruments and their expected realization.
Long-term debt and current portion of long-term debt
The fair values of
long-term debt were
determined based on quoted market prices, and by estimating
future cash flows on a
borrowing-by-borrowing
basis and discounting these future cash flows using the
Companys incremental borrowing rates for similar types of
borrowing arrangements.
Foreign exchange forward contracts and currency options
The fair values of these instruments are estimated based upon
quoted market prices for the same or similar instruments.
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Cancellable swaps
The fair values of these instruments are estimated based upon
market prices for similar instruments.
27 RELATED PARTY TRANSACTIONS
Transactions with significant shareholders, their affiliates and
other related parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Sales & other services
|
|
|
118 |
|
|
|
158 |
|
|
|
9 |
|
Research and development expenses
|
|
|
(43 |
) |
|
|
(48 |
) |
|
|
(46 |
) |
Other purchases
|
|
|
(70 |
) |
|
|
(16 |
) |
|
|
(23 |
) |
Other income and expenses
|
|
|
(21 |
) |
|
|
(12 |
) |
|
|
(25 |
) |
Accounts receivable
|
|
|
20 |
|
|
|
29 |
|
|
|
6 |
|
Accounts payable
|
|
|
20 |
|
|
|
12 |
|
|
|
18 |
|
Other assets
|
|
|
|
|
|
|
11 |
|
|
|
2 |
|
For the years ended December 31, 2006, 2005 and 2004, the
related party transactions were primarily with significant
shareholders of the Company, or their subsidiaries and companies
in which management of the Company perform similar policymaking
functions. These include, but are not limited to: Areva, France
Telecom, Equant, Orange, Finmeccanica, Cassa Depositi e Prestiti
and Thomson. Additionally, the Company incurred in 2006
significant amounts from Hynix Semiconductor Inc., with which
the Company has a significant equity investment, Hynix ST joint
venture, described in detail in Note 3. In 2006, Hynix
Semiconductor Inc. increased its business transactions with the
Company in order to supply products on behalf of the joint
venture, which was not ready to fully produce and supply the
requested volumes to the Company. The amount of purchases and
other expenses made in 2006 from Hynix Semiconductor Inc. was
$161 million. The Company had a payable amount of $13 million as
at December 31, 2006.
In addition, the Company participates in an Economic Interest
Group (E.I.G.) in France with Areva and
France Telecom to share the costs of certain research and
development activities, which are not included in the table
above. The share of income (expense) recorded by the
Company as research and development expenses incurred by E.I.G
amounted to $1 million expense, $5 million expense and
to $3 million income in 2006, 2005 and 2004. At
December 31, 2006, the Company had no receivable or payable
amount. At December 31, 2005 and 2004, the Company had a
net receivable amount of $1 million.
The Company contributed cash amounts totalling $1 million,
$1 million and $3 million for the years ended
December 31, 2006, 2005 and 2004 respectively to the ST
Foundation, a non-profit organization established to deliver and
coordinate independent programs in line with its mission.
Certain members of the Foundations Board are senior
members of the Companys management.
In addition, pursuant to the Supervisory Boards approval,
the Company paid in 2005 a special contribution amounting to
$4 million to a non-profit charitable institution in the
field of sustainable development and social responsibility on
behalf of its former President and Chief Executive Officer.
28 SEGMENT INFORMATION
The Company operates in two business areas: Semiconductors and
Subsystems.
In the Semiconductors business area, the Company designs,
develops, manufactures and markets 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, the
Company further participates in the manufacturing value chain of
Smartcard products through its Incard division, which includes
the production and sale of both silicon chips and Smartcards.
In the Semiconductors business area, effective January 1,
2005, the Company realigned its product groups to increase
market focus and realize the full potential of its products,
technologies, and sales and marketing channel.
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Beginning with the first quarter of 2005, the Company now
reports its semiconductor sales and operating income in three
segments:
|
|
|
|
|
Application Specific Product Groups (ASG) segment,
comprised of three product lines Home, Personal and
Communication (HPC), Computer Peripherals
(CPG) and new Automotive Product (APG); |
|
|
|
|
|
Memory Products Group (MPG) segment; and |
|
|
|
Micro, Power and Analog (MPA) segment. |
The Companys principal investment and resource allocation
decisions in the Semiconductor business area are for
expenditures on research and development and capital investments
in front-end and back-end manufacturing facilities. These
decisions are not made by product groups, but on the basis of
the Semiconductor Business area. All these product groups share
common research and development for process technology and
manufacturing capacity for most of their products.
The Company has restated its results in prior periods for
illustrative comparisons of its performance by product group and
by period. The segment information of 2004 has been restated
using the same principles applied to the years 2005 and 2006.
The preparation of segment information according to the new
group structure requires management to make significant
estimates, assumptions and judgments in determining the
operating income of the groups for the prior years. However
management believes that the 2004 years presentation
is representative of 2006 and 2005 and is using these
comparatives when managing the Company.
In the Subsystems business area, the Company designs, develops,
manufactures and markets 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 its 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 the Companys consolidated net
revenues and consolidated operating income by semiconductor
product segment. For the computation of the Groups
internal financial measurements, the Company uses certain
internal rules of allocation for the costs not directly
chargeable to the Groups, including cost of sales, selling,
general and administrative expenses and a significant part of
research and development expenses. Additionally, in compliance
with its internal policies, certain cost items are not charged
to the Groups, including impairment, restructuring charges and
other related closure costs, start-up costs of new manufacturing
facilities, some strategic and special research and development
programs or other corporate-sponsored initiatives, including
certain corporate level operating expenses and certain other
miscellaneous charges. Starting in the first quarter of 2005,
the Company allocated the start-up costs to expand its marketing
and design presence in new developing areas to each Group. The
company restated 2004 results accordingly.
Net revenues by product group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Application Specific Product Groups
|
|
|
5,396 |
|
|
|
4,991 |
|
|
|
4,902 |
|
Memory Products Group
|
|
|
2,137 |
|
|
|
1,948 |
|
|
|
1,887 |
|
Micro, Power and Analog
|
|
|
2,243 |
|
|
|
1,882 |
|
|
|
1,902 |
|
Others(1)
|
|
|
78 |
|
|
|
61 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net revenues
|
|
|
9,854 |
|
|
|
8,882 |
|
|
|
8,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes revenues from sales of subsystems mainly and other
products not allocated to product groups. |
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Operating Income by product group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Application Specific Product Groups
|
|
|
439 |
|
|
|
355 |
|
|
|
530 |
|
Memory Products Group
|
|
|
34 |
|
|
|
(118 |
) |
|
|
42 |
|
Micro, Power and Analog
|
|
|
362 |
|
|
|
271 |
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
Total operating income of product groups
|
|
|
835 |
|
|
|
508 |
|
|
|
985 |
|
Others(1)
|
|
|
(158 |
) |
|
|
(264 |
) |
|
|
(302 |
) |
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income
|
|
|
677 |
|
|
|
244 |
|
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Operating income (loss) of Others includes
items such as impairment, restructuring charges and other
related closure costs, start-up costs, and other unallocated
expenses, such as: strategic or special research and development
programs, certain corporate-level operating expenses, certain
patent claims and litigations, and other costs that are not
allocated to the product groups, as well as operating earnings
or losses of the Subsystems and Other Products Group. Certain
costs, mainly R&D, formerly in the Others
category, are now being allocated to the groups; comparable
amounts reported in this category have been reclassified
accordingly in the above table. |
Reconciliation to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Total operating income of product groups
|
|
|
835 |
|
|
|
508 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
Strategic R&D and other R&D programs
|
|
|
(8 |
) |
|
|
(49 |
) |
|
|
(91 |
) |
Start-up costs
|
|
|
(57 |
) |
|
|
(56 |
) |
|
|
(63 |
) |
Impairment & restructuring charges
|
|
|
(77 |
) |
|
|
(128 |
) |
|
|
(76 |
) |
Subsystems and Other Products Group
|
|
|
(9 |
) |
|
|
1 |
|
|
|
(1 |
) |
One-time compensation and special
contributions(1)
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
Patents claim costs
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Other non-allocated
provisions(2)
|
|
|
(7 |
) |
|
|
(10 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating loss
Others(3)
|
|
|
(158 |
) |
|
|
(264 |
) |
|
|
(302 |
) |
Total consolidated operating income
|
|
|
677 |
|
|
|
244 |
|
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
One-time compensation and special contributions to the
Companys former CEO and other executives were not
allocated to product groups. |
|
(2) |
Includes unallocated expenses such as certain corporate level
operating expenses and other costs. . |
|
(3) |
Operating income (loss) of Others includes
items such as impairment, restructuring charges and other
related closure costs, start-up costs, and other unallocated
expenses, such as: strategic or special research and development
programs, certain corporate-level operating expenses, certain
patent claims and litigations, and other costs that are not
allocated to the product groups, as well as operating earnings
or losses of the Subsystems and Other Products Group. Certain
costs, mainly R&D, formerly in the Others
category, have been allocated to the groups since 2005;
comparable amounts reported in this category have been
reclassified accordingly in the above table. |
The following is a summary of operations by entities located
within the indicated geographic areas for 2006, 2005 and 2004.
Net revenues represent sales to third parties from the country
in which each entity is located. Long-lived assets consist of
property, plant and equipment, net (P,P&E, net) and
intangible assets, net including goodwill. A significant portion
of property, plant and equipment expenditures is attributable to
front-end and back-end facilities, located in the different
countries in which the Company operates. As such, the Company
mainly allocates capital spending resources according to
geographic areas rather than along product segment areas.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
The Netherlands
|
|
|
3,114 |
|
|
|
2,864 |
|
|
|
2,702 |
|
France
|
|
|
240 |
|
|
|
268 |
|
|
|
359 |
|
Italy
|
|
|
230 |
|
|
|
203 |
|
|
|
254 |
|
USA
|
|
|
1,030 |
|
|
|
1,066 |
|
|
|
1,262 |
|
Singapore
|
|
|
4,698 |
|
|
|
4,041 |
|
|
|
3,671 |
|
Japan
|
|
|
400 |
|
|
|
306 |
|
|
|
403 |
|
Other countries
|
|
|
142 |
|
|
|
134 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,854 |
|
|
|
8,882 |
|
|
|
8,760 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
The Netherlands
|
|
|
318 |
|
|
|
333 |
|
|
|
438 |
|
France
|
|
|
1,781 |
|
|
|
1,618 |
|
|
|
2,206 |
|
Italy
|
|
|
1,745 |
|
|
|
1,698 |
|
|
|
2,216 |
|
Other European countries
|
|
|
204 |
|
|
|
176 |
|
|
|
209 |
|
USA
|
|
|
470 |
|
|
|
458 |
|
|
|
414 |
|
Singapore
|
|
|
1,642 |
|
|
|
1,684 |
|
|
|
1,828 |
|
Malaysia
|
|
|
356 |
|
|
|
321 |
|
|
|
367 |
|
Other countries
|
|
|
344 |
|
|
|
332 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,860 |
|
|
|
6,620 |
|
|
|
7,997 |
|
|
|
|
|
|
|
|
|
|
|
29 SUBSEQUENT EVENTS
On January 22, 2007, a new option agreement was enacted
with an independent foundation, Stichting Continuïteit ST
(the Stichting), which will have an independent
board. The new option agreement provides for the issuance of up
to a maximum of 540,000,000 preference shares. The Stichting
would have the option, which it shall exercise in its sole
discretion, to take up the preference shares. The preference
shares would be issuable if the board of the Stichting
determines that hostile actions, such as a creeping acquisition
or an unsolicited offer for the Companys common shares,
would be contrary to the interests of the Company, its
shareholders, or its other stakeholders. If the Stichting
exercises its call option and acquires preference shares, it
must pay at least 25% of the par value of such preference
shares. The new option agreement with the Stichting reflects
changes in Dutch legal requirements, not a response to any
hostile takeover attempt.
F-53
STMicroelectronics N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency millions of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and |
|
|
|
|
|
|
|
|
|
|
Qualifying Accounts |
|
|
|
|
|
|
|
|
|
|
Deducted from the |
|
Balance at | |
|
|
|
|
|
|
|
|
Related Asset |
|
Beginning of | |
|
Translation | |
|
Charged to Costs | |
|
|
|
Balance at End of | |
Accounts |
|
Period | |
|
Adjustment | |
|
and Expenses | |
|
Deductions | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
51 |
|
|
|
|
|
|
|
78 |
|
|
|
(82 |
) |
|
|
47 |
|
Accounts Receivable
|
|
|
27 |
|
|
|
1 |
|
|
|
7 |
|
|
|
(4 |
) |
|
|
31 |
|
Deferred Tax Assets
|
|
|
854 |
|
|
|
101 |
|
|
|
135 |
|
|
|
(51 |
) |
|
|
1,039 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
47 |
|
|
|
|
|
|
|
73 |
|
|
|
(69 |
) |
|
|
51 |
|
Accounts Receivable
|
|
|
21 |
|
|
|
(1 |
) |
|
|
10 |
|
|
|
(3 |
) |
|
|
27 |
|
Deferred Tax Assets
|
|
|
855 |
|
|
|
(110 |
) |
|
|
109 |
|
|
|
|
|
|
|
854 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
30 |
|
|
|
|
|
|
|
85 |
|
|
|
(68 |
) |
|
|
47 |
|
Accounts Receivable
|
|
|
16 |
|
|
|
1 |
|
|
|
6 |
|
|
|
(2 |
) |
|
|
21 |
|
Deferred Tax Assets
|
|
|
709 |
|
|
|
62 |
|
|
|
84 |
|
|
|
|
|
|
|
855 |
|
S-1
EX-8.1
Exhibit 8.1
SUBSIDIARIES AND EQUITY INVESTMENTS OF THE COMPANY
The consolidated financial statements include the accounts of
STMicroelectronics N.V. and the following entities as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership | |
Legal Seat |
|
Name |
|
(Direct or Indirect) | |
|
|
|
|
| |
Australia Sydney
|
|
STMicroelectronics PTY Ltd |
|
|
100 |
|
Belgium Zaventem
|
|
STMicroelectronics Belgium N.V. |
|
|
100 |
|
Belgium Zaventem
|
|
Proton World International N.V. |
|
|
100 |
|
Brazil Sao Paolo
|
|
STMicroelectronics Ltda |
|
|
100 |
|
Brazil Sao Paulo
|
|
Incard do Brazil Ltda |
|
|
50 |
|
Canada Ottawa
|
|
STMicroelectronics (Canada), Inc. |
|
|
100 |
|
China Shenzhen
|
|
Shenzhen STS Microelectronics Co. Ltd |
|
|
60 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Co. Ltd |
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Manufacturing Co. Ltd |
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) R&D Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) R&D Co. Ltd |
|
|
100 |
|
China Shanghai
|
|
Shanghai Blue Media Co. Ltd |
|
|
65 |
|
China Shanghai
|
|
STMicroelectronics (China) Investment Co. Ltd |
|
|
100 |
|
China Jiangsu(1)
|
|
Hynix-ST Semiconductor Ltd |
|
|
33 |
|
China Beijing
|
|
STMicroelectronics (Beijing) R&D Co. Ltd |
|
|
100 |
|
Czech Republic Prague
|
|
STMicroelectronics Design and Application s.r.o. |
|
|
100 |
|
Finland Lohja
|
|
STMicroelectronics OY |
|
|
100 |
|
France Crolles
|
|
STMicroelectronics (Crolles 2) SAS |
|
|
100 |
|
France Montrouge
|
|
STMicroelectronics S.A. |
|
|
100 |
|
France Rousset
|
|
STMicroelectronics (Rousset) SAS |
|
|
100 |
|
France Tours
|
|
STMicroelectronics (Tours) SAS |
|
|
100 |
|
France Grenoble
|
|
STMicroelectronics (Grenoble) SAS |
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics GmbH |
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics Design and Application GmbH |
|
|
100 |
|
Holland Amsterdam
|
|
STMicroelectronics Finance B.V. |
|
|
100 |
|
Hong Kong Hong Kong
|
|
STMicroelectronics LTD |
|
|
100 |
|
India Noida
|
|
STMicroelectronics Pvt Ltd |
|
|
100 |
|
Israel Netanya
|
|
STMicroelectronics Ltd |
|
|
100 |
|
Italy Catania
|
|
CO.RI.M.ME. |
|
|
100 |
|
Italy Aosta
|
|
DORA S.p.a. |
|
|
100 |
|
Italy Agrate Brianza
|
|
ST Incard S.r.l. |
|
|
100 |
|
Italy Naples
|
|
STMicroelectronics Services S.r.l. |
|
|
100 |
|
Italy Agrate Brianza
|
|
STMicroelectronics S.r.l. |
|
|
100 |
|
Italy Caivano(1)
|
|
INGAM Srl |
|
|
20 |
|
Japan Tokyo
|
|
STMicroelectronics KK |
|
|
100 |
|
Malaysia Kuala Lumpur
|
|
STMicroelectronics Marketing SDN BHD |
|
|
100 |
|
Malaysia Muar
|
|
STMicroelectronics SDN BHD |
|
|
100 |
|
Malta Kirkop
|
|
STMicroelectronics Ltd |
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Marketing, S. de R.L. de C.V. |
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Design and Applications, S. de R.L. de C.V. |
|
|
100 |
|
Morocco Rabat
|
|
Electronic Holding S.A. |
|
|
100 |
|
Morocco Casablanca
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Singapore Ang Mo Kio
|
|
STMicroelectronics ASIA PACIFIC Pte Ltd |
|
|
100 |
|
Singapore Ang Mo Kio
|
|
STMicroelectronics Pte Ltd |
|
|
100 |
|
Spain Madrid
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Sweden Kista
|
|
STMicroelectronics A.B. |
|
|
100 |
|
Switzerland Geneva
|
|
STMicroelectronics S.A. |
|
|
100 |
|
Switzerland Geneva
|
|
INCARD SA |
|
|
100 |
|
Switzerland Geneva
|
|
INCARD Sales and Marketing SA |
|
|
100 |
|
Turkey Istanbul
|
|
STMicroelectronics Elektronik Arastirma ve Gelistirme Anonim
Sirketi |
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100 |
|
United Kingdom Marlow
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|
STMicroelecrtonics Limited |
|
|
100 |
|
United Kingdom Marlow
|
|
STMicroelectronics (Research & Development) Limited |
|
|
100 |
|
United Kingdom Bristol
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Inmos Limited |
|
|
100 |
|
United Kingdom Reading
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Synad Technologies Limited |
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100 |
|
United States Carrollton
|
|
STMicroelectronics Inc. |
|
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100 |
|
United States Wilmington
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STMicroelectronics (North America) Holding, Inc. |
|
|
100 |
|
United States Wilsonville
|
|
The Portland Group, Inc. |
|
|
100 |
|
E-1
EX-12.1
Exhibit 12.1
CERTIFICATION
I, Carlo Bozotti, certify that:
1. I have reviewed this annual report on
Form 20-F of
STMicroelectronics N.V.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the company as of, and
for, the periods presented in this report;
4. The companys other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and 15d-15(f)) for the
company and have:
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a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the company, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared; |
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b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; |
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c) Evaluated the effectiveness of the companys
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
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d) Disclosed in this report any change in the
companys internal control over financial reporting that
occurred during the period covered by the annual report that has
materially affected, or is reasonably likely to materially
affect, the companys internal control over financial
reporting; and |
5. The companys other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the companys auditors
and the audit committee of the companys board of directors
(or persons performing the equivalent functions):
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a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
companys ability to record, process, summarize and report
financial information; and |
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b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
companys internal control over financial reporting. |
Date: March 14, 2007
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Carlo Bozotti |
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President and Chief Executive Officer |
EX-12.2
Exhibit 12.2
CERTIFICATION
I, Carlo Ferro, certify that:
1. I have reviewed this annual report on
Form 20-F of
STMicroelectronics N.V.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the company as of, and
for, the periods presented in this report;
4. The companys other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and 15d-15(f)) for the
company and have:
|
|
|
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the company, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared; |
|
|
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; |
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c) Evaluated the effectiveness of the companys
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
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d) Disclosed in this report any change in the
companys internal control over financial reporting that
occurred during the period covered by the annual report that has
materially affected, or is reasonably likely to materially
affect, the companys internal control over financial
reporting; and |
5. The companys other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the companys auditors
and the audit committee of the companys board of directors
(or persons performing the equivalent functions):
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a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
companys ability to record, process, summarize and report
financial information; and |
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b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
companys internal control over financial reporting. |
Date: March 14, 2007
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Carlo Ferro |
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Executive Vice President and Chief Financial Officer |
EX-13.1
Exhibit 13.1
CERTIFICATION OF CARLO BOZOTTI, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
OF STMICROELECTRONICS N.V. AND CARLO FERRO, EXECUTIVE VICE
PRESIDENT
AND CHIEF FINANCIAL OFFICER OF STMICROELECTRONICS N.V.,
PURSUANT TO SECTION 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of STMicroelectronics N.V.
(the Company) on
Form 20-F for the
period ending December 31, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the
Report), the undersigned hereby certify that to the
best of our knowledge:
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1. The Report fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of
1934; and |
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2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company. |
Date: March 14, 2007
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Name: Carlo Bozotti |
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Title: President and Chief Executive
Officer |
Date: March 14, 2007
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Title: |
Executive Vice President
and Chief Financial Officer |
EX-14.A
Exhibit 14(a)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the
Registration Statements on
Form S-8
(No. 333-7226 and
No. 333-109572) of
STMicroelectronics N.V. of our report dated March 12,
2007, relating to the financial statements, financial statement
schedule, managements assessment of the effectiveness of
internal control over financial reporting and the effectiveness
of internal control over financial reporting, which appears in
this Form 20-F.
PricewaterhouseCoopers SA
M
Foley H-J
Hofer
Geneva, March 12, 2007
With offices in Aarau, Basei, Berne, Chur, Geneva, Lausanne,
Lugano, Lucerne, Neuchatel, Sitten, St. Gallen, Thun,
Winterthur, Zug and Zurich, PricewaterhouseCoopers AG is a
provider of auditing services and tax, legal and business
consultancy services. PricewaterhouseCoopers AG is a partner in
a global network of companies that are legally independent of
one another and is located in some 140 countries throughout the
world.