FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of June 2001
STMicroelectronics N.V.
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(Translation of registrant's name into English)
Route de Pre-Bois, ICC Bloc A, 1215 Geneva 15, Switzerland
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(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F]
Form 20-F X Form 40-F
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[Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934]
Yes No X
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[If "Yes" is marked, indicate below the file number assigned to the
Registrant in connection with Rule 12g3-2(b): 82-______]
Enclosure:
STMicroelectronics' First Quarter 2001 Operating and Financial Review
and Prospects.
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in millions of U.S. dollars, except per share data)
Three Months Ended
------------------------------------
March 31, 2001(1) April 1, 2000(1)
----------------- ----------------
Net sales ............................................... $ 1,906.0 $ 1,693.7
Other revenues .......................................... 15.1 8.5
------------ ------------
Net revenues ...................................... 1,921.1 1,702.2
Cost of sales ........................................... (1,065.3) (985.1)
------------ ------------
Gross profit ...................................... 855.8 717.1
Selling, general and administrative ..................... (176.8) (159.5)
Research and development (2) ............................ (272.1) (235.1)
Other income and expenses (2) ........................... 5.4 (30.5)
------------ ------------
Total operating expenses .......................... (443.5) (425.1)
Operating income .................................. 412.3 292.0
Net interest income (expense) ........................... 3.1 16.4
------------ ------------
Income before income taxes and minority interests.. 415.4 308.4
Income tax expense ...................................... (74.2) (69.4)
------------ ------------
Income before minority interests .................. 341.2 239.0
Minority interests ...................................... (0.4) (0.6)
------------ ------------
Net income ........................................ $ 340.8 $ 238.4
============ ============
Earnings per share (basic)(3) ..................... $ 0.38 $ 0.27
============ ============
Earnings per share (diluted)(3) ................... $ 0.38 $ 0.26
============ ============
Number of weighted average shares used in
calculating diluted earnings per share ............ 951.5 933.5
-----------------------
(1) Results of operations for interim periods are not necessarily indicative of
results to be expected for the full year.
(2) Other income and expenses include, among other things, funds received
through government agencies for research and development expenses, and the
cost of new plant start-ups, as well as foreign currency gains and losses,
the costs of certain activities relating to intellectual property and
goodwill amortization. Our reported research and development expenses do
not include marketing, design center, process engineering, pre-production
or industrialization costs.
(3) All share information has been adjusted to reflect the 2-for-1 stock split
effected in June 1999 and the 3-for-1 stock split effected in May 2000. See
Note 10 to the Interim Consolidated Financial Statements.
1
STMicroelectronics N.V.
CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars)
As at March 31, 2001 As at December 31, 2000
-------------------- -----------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 1,325.4 $ 2,295.7
Marketable securities ............................ 991.0 35.2
Trade accounts and notes receivable .............. 1,250.7 1,496.4
Inventories ...................................... 964.2 876.5
Other receivables and current assets ............. 584.9 554.0
----------- -----------
Total current assets ....................... 5,116.2 5,257.8
Intangible assets, net ........................... 331.1 286.1
Property, plant and equipment, net ............... 6,342.6 6,201.1
Investments and other non-current assets ......... 123.9 135.5
----------- -----------
6,797.6 6,622.7
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Total assets ............................... $ 11,913.8 $ 11,880.5
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts .................................. $ 11.8 $ 35.6
Current portion of long-term debt ................ 116.7 106.0
Trade accounts and notes payable ................. 1,557.4 1,745.6
Other payables and accrued liabilities ........... 494.4 509.2
Accrued and deferred income tax .................. 326.4 299.6
----------- -----------
Total current liabilities .................. 2,506.7 2,696.0
Long-term debt ................................... 2,716.9 2,700.5
Reserves for pension and termination indemnities.. 110.6 110.2
Other non-current liabilities .................... 219.3 216.2
----------- -----------
3,046.8 3,026.9
Total liabilities .......................... 5,553.5 5,722.9
Minority interests ............................... 33.3 33.0
Capital stock .................................... 1,134.1 1,133.7
Capital surplus .................................. 1,694.1 1,689.8
Accumulated result ............................... 4,318.1 3,977.3
Accumulated other comprehensive income ........... (819.3) (676.2)
----------- -----------
Shareholders' equity ....................... 6,327.0 6,124.6
----------- -----------
Total liabilities and shareholders' equity.. $ 11,913.8 $ 11,880.5
=========== ===========
2
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions of U.S. dollars)
Three Months Ended
---------------------------------
March 31, 2001 April 1, 2000
-------------- -------------
Cash flows from operating activities:
Net income ....................................... $ 340.8 $ 238.4
Add (deduct) non-cash items:
Depreciation and amortization .................... 332.4 234.3
Amortization of discount on convertible debt ..... 19.7 5.6
Other non-cash items ............................. 4.5 6.2
Minority interest in net income of subsidiaries 0.4 0.6
Deferred taxes ................................... 19.9 (10.1)
Change in assets and liabilities:
Trade receivables ................................ 212.9 (202.6)
Inventories ...................................... (115.6) 6.1
Trade payables ................................... (20.7) 54.5
Other assets and liabilities, net ................ 10.1 76.1
---------- ----------
Net cash from operating activities ............... 804.4 408.8
Cash flows from investing activities:
Payments for purchases of tangible assets ........ (729.6) (622.1)
Other investing activities ....................... (70.2) (36.9)
Investment in marketable securities .............. (961.9) (526.0)
---------- ----------
Net cash used in investing activities ............ (1,761.7) (1,185.0)
Cash flows from financing activities:
Proceeds from issuance of long-term debt ......... 110.0 80.1
Repayment of long-term debt ...................... (88.3) (81.6)
Increase (decrease) in short term facilities ..... (24.3) 142.7
Capital increase ................................. 2.3 5.3
---------- ----------
Net cash from (used in) financing activities ..... (0.3) 146.5
Effect of changes in exchange rates .............. (12.7) (7.8)
---------- ----------
Net cash decrease ................................ (970.3) (637.5)
Cash and cash equivalents at beginning of period.. $ 2,295.7 $ 1,823.1
========== ==========
Cash and cash equivalents at end of period ....... $ 1,325.4 $ 1,185.6
========== ==========
3
STMicroelectronics N.V.
Notes to Interim Consolidated Financial Statements
1) The accompanying interim consolidated financial statements of
STMicroelectronics N.V. (the "Company") have been prepared in conformity
with accounting principles generally accepted in the United States of
America, consistent in all material respects with those applied in the
Annual Report on Form 20-F for the year ended December 31, 2000. Such
interim financial information is unaudited, but reflects those adjustments
that are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. The results of
operations for the interim period are not necessarily indicative of the
results to be expected for the entire year.
2) Certain prior year amounts have been reclassified to conform to the current
year presentation. The interim financial statements should be read in
conjunction with the financial statements incorporated by reference into
our Annual Report on Form 20-F for the year ended December 31, 2000.
3) As approved by the annual general meeting of shareholders, on April 25,
2001, we paid an annual cash dividend of $0.04 per share to shareholders of
record as of April 27, 2001. The total dividend paid was $35.8 million. At
the annual general meeting of shareholders the creation of a new five-year
management and selected employee stock option plan was also approved.
4) On April 17, 2000, the Supervisory Board approved a new employee share
purchase plan under which up to 4,500,000 common shares can be offered to
employees over a three-year period at a 15% discount on the market price.
Shares to be granted to employees may be a combination of both newly issued
and repurchased shares. In November 2000, a total of 559,929 shares were
issued at $38.68 to participating employees worldwide as a result of the
employee offering. In May 2001, a total of 580,817 shares were issued at
$32.32 to participating employees worldwide as a result of the employee
offering.
5) All share and per-share amounts in the accompanying consolidated financial
statements have been restated to reflect the stock splits in June 1999 and
May 2000.
6) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"), which is required to be
adopted in fiscal years after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and requires recognition
of all derivatives as assets or liabilities in the balance sheet and the
measure of those instruments at fair value. During the first quarter 2001,
the Company adopted FAS 133 and determined that the statement did not have
a material impact on its consolidated results of operations, financial
position or financial disclosure. The Company does not utilize any
derivative instruments that qualify as hedging instruments under FAS 133.
However, the Company does enter into foreign exchange forward contracts and
currency options to neutralize its exposure to changes in exchange rates
and the associated risk arising from the denomination of certain assets and
liabilities in foreign currencies in the Company's subsidiaries.
7) In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), providing the staff's views on applying generally accepted
accounting principles to selected revenue recognition issues. For companies
with fiscal years that begin between December 16, 1999 and March 15, 2000,
portions of SAB 101 became effective in the fourth quarter of 2000.
Management believes that
4
adopting these portions of SAB 101 has not had a material effect on our
financial position or overall trends in results of operations.
8) Inventories consist of the following:
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited) (audited)
Raw materials............. $ 86.7 $ 88.5
Work-in-process........... 677.3 588.3
Finished products......... 200.2 199.7
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Total.............. $ 964.2 $ 876.5
============= =================
9) Long-term debt consists of the following:
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited) (audited)
STMicroelectronics SA (France)
o 5.41% bank loan due 2006...............................$ 34.3 $ 35.5
o 5.22% bank loan due 2006............................... 34.3 35.5
o 4.94% other bank loans. ............................... 124.2 128.6
STMicroelectronics s.r.l. (Italy)
o 5.68% bank loan due 2002............................... 31.9 32.9
o 5.35% government loan due 2006......................... 26.6 27.5
o 4.22% other bank loans................................. 56.1 58.0
STMicroelectronics N.V. (Netherlands)
o 1.75% Liquid Yield Option Notes due 2008............... 110.5 112.5
o 2.44% Liquid Yield Option Notes due 2009............... 747.9 743.4
o 3.75% Convertible Bonds due 2010....................... 1500.6 1,486.7
STMicroelectronics (other countries)
o 6.03% other bank loans................................. 167.2 145.9
------------- ----------------
Total long-term debt..................................... 2,833.6 2,806.5
Less current portion..................................... 116.7 106.0
------------- ----------------
Total long-term debt, less current portion...............$ 2,716.9 $ 2,700.5
============= ================
10) Basic Earnings Per Share ("EPS") is calculated based on net earnings
available to common shareholders and the weighted-average number of shares
outstanding during the reported period. Diluted EPS includes additional
dilution from potential common stock, such as stock issuable pursuant to
the exercise of stock options outstanding and the conversion of debt.
Three months ended
-------------------------------
March 31, 2001 April 1, 2000
-------------- -------------
(unaudited) (unaudited)
Basic EPS:
Net income.................................. 340.8 238.4
Weighted average shares outstanding......... 890.1 878.2
EPS (basic)................................. 0.38 0.27
Diluted EPS:
Net income.................................. 340.8 238.4
Interest expense on convertible debt,
net of tax ................................. 19.1 5.8
Net income, adjusted........................ 359.9 244.2
Weighted average shares outstanding......... 890.1 878.2
Dilutive effect of stock options............ 10.5 14.8
Dilutive effect of convertible debt......... 50.9 40.5
Number of shares used in calculating EPS.... 951.5 933.5
EPS (diluted)............................... 0.38 0.26
5
Operating and Financial Review and Prospects
Results of Operations
Business Outlook
Business conditions in the first three months of 2001 accelerated
their decline as the reverse in the trend in the semiconductor industry, which
began in the fourth quarter of 2000, continued in the first quarter of 2001.
According to trade association data for the first three months of 2001,
worldwide sales of semiconductor products (the total available market or "TAM")
and the estimated market for products produced by us (the serviceable available
market, or "SAM"), (which consists of the TAM without DRAMs and opto-electronic
products), decreased by approximately 4% and approximately 2%, respectively,
compared to the first three months of 2000 and decreased approximately 19%
sequentially. In 2000, the TAM was $204.4 billion, while the SAM was $165.7
billion.
Our net revenues for the first quarter of 2001 were $1,921.1
million, a 12.9% increase over the first quarter of 2000 and a 12.3% decline
versus the fourth quarter of 2000. Based on preliminary trade association data
for the first quarter of 2001, we gained market share against both the TAM and
the SAM compared to the first quarter of 2000. The increase reflected an
improved product mix and slightly higher volume of sales. The gross profit
margin increased from 42.1% in the first three months of 2000 to 44.5% in the
first three months of 2001, but decreased from 47.4% in the fourth quarter of
2000.
From late 1998 through the end of 2000, our backlog increased
steadily reaching in 2000 record incoming order rates and backlog levels.
However, due to deterioration of the semiconductor industry recorded during the
first quarter of 2001, our backlog at the end of March 2001 declined in
comparison to the end of December 2000.
As a result of our performance during the period from 1996 to date
in 2001, we not only gained market share against both the TAM and the SAM, but,
according to rankings by leading market analysts, became the sixth largest
semiconductor company in the world in 2000. However, we believe that the general
market conditions have led some of our competitors to redirect their marketing
focus and manufacturing capacity toward products that compete with our products.
We believe increased competition in our core product markets is generating
greater pricing pressure, increased competition for market share in the SAM, and
a generally more challenging market environment for us.
There can be no assurance that we will experience revenue growth
at or above the growth rate for the TAM or the SAM, or that increased
competition in our core product markets will not lead to further price erosion,
lower revenue growth rates and lower margins for us. We estimate that the market
correction, which began abruptly with a sharp inventory adjustment in the fourth
quarter of 2000, is likely to continue through much of 2001. Its duration is
closely tied to macroeconomic conditions, particularly in the United States and
Japan, as well as to industry-specific issues such as overcapacity and excess
inventory levels.
With respect to the second quarter 2001, we anticipate reporting
revenues in the range of $1.55 billion to $1.60 billion, which would be below
the $1.88 billion reported in last year's second quarter. This would bring first
half 2001 revenues to a level slightly below that of the first half 2000. This
reflects year-over-year and sequential sales declines in telecom and computer
peripheral applications. Sales from memory products, while still slightly above
second quarter 2000 levels, are expected to decline sequentially versus first
quarter 2001 levels due to lower-than-expected demand and increased pricing
pressure. Revenues for smartcard devices are also expected to decline both
year-over-year and sequentially. Digital consumer revenues in the second quarter
of 2001 are likely to be down compared to the second quarter of 2000, but should
be comparable to those of the first quarter of 2001. The sequential revenue
decline anticipated for the second quarter of 2001 is likely to result in a
gross margin of
6
approximately 38%. In addition to the difficult pricing environment, our gross
margin has been affected by lower than expected utilization rates of our 150 mm
wafer fabs, while maintaining utilization rates averaging 85% at our five
leading-edge 200 mm wafer fabs. Within this challenging near term environment,
our strategy continues to be based upon profitable market share gains through
the development of world-leading products, strong customer alliances, efficient
global manufacturing and a modular approach to capital expenditure. While we
are disappointed by recent order postponements, we continue to maintain
relatively strong financial performance and to increase market share in our
targeted applications.
We continue to implement cost control initiatives in response to
difficult market and economic conditions:
o We have reduced 2001 expenditure plans from approximately
$1.9 billion to approximately $1.5 billion.
o We have decided to transfer our Ottawa, Canada, front-end
wafer-fabrication production to our other manufacturing
facilities around the world. The transfer of production
rationalizes our front-end manufacturing because the Ottawa
plant has recently been operating well below capacity. The
move to larger, lower-cost facilities will contribute to our
efforts to keep product costs competitive. The transfer is
expected to be completed by December 2001, and will involve
special cash and non-cash charges totaling approximately $30
million which will be recognized in the second quarter of
2001.
o We have taken steps to significantly reduce expenses during
this period of uncertain market conditions. A stringent cost
control program has been implemented throughout our company,
which includes a hiring freeze.
Other Developments
On March 5, 2001 we completed the acquisition of the Consumer
Electronics business of Ravisent Technologies. The acquisition enhances our
leading position in embedded solutions for digital multimedia applications,
including DVDs, set-top boxes and Digital TV and is an important step in
offering a complete system-on-chip platform for digital consumer appliances.
As approved by the annual general meeting of shareholders, on
April 25, 2001 we paid an annual cash dividend of $0.04 per share to
shareholders of record as of April 27, 2001, an increase from the $0.03 per
share paid in 2000. All share and per-share amounts in this report have been
restated to reflect the three-for-one stock split effected in May 2000 and the
two-for-one stock split effected in June 1999. Our shareholders also authorized
the acquisition of shares for the purpose of transferring those shares to our
employees (and employees of other companies controlled by us) under a scheme
applicable to such employees. We are required to seek the prior approval of our
Supervisory Board for any acquisition or, except in the context of an employee
scheme, disposal of our shares.
Some of the above statements contained in this "Business Outlook"
and in the rest of this document are forward looking statements that involve a
number of risks and uncertainties. In addition to factors discussed herein,
among the other factors that could cause actual results to differ materially are
the following: general business and economic conditions; the cyclicality of the
semiconductor and electronic systems industries; capital requirements and the
availability of funding; competition; excess or obsolete inventory and
variations in inventory valuation; new product development and technological
change, including acceptance of new products by particular market segments;
manufacturing risks; changes in customer order patterns, including loss of key
customers, order cancellations or reduced bookings; intellectual property
developments, international events and currency fluctuations; problems in
obtaining adequate raw materials on a timely basis; and the loss of key
personnel. Unfavorable changes in the above or other factors listed under "Risk
Factors" from time to time in our SEC filings, including in our Annual Report on
Form 20-F filed on May 15, 2001, could have a material adverse effect on our
business or financial condition.
7
The table below sets forth information on our net revenues by
product group and by geographic region:
Three Months Ended
----------------------------------
March 31, 2001 April 1, 2000
-------------- -------------
Net Revenues by Product Group:
Telecom, Peripheral & Automotive ......... $ 900.3 $ 765.9
Discrete and Standard ICs ................ 274.7 273.1
Memory Products .......................... 473.3 309.4
Consumer & Microcontrollers .............. 239.0 330.2
New Ventures Group and Others(1) ......... 33.8 23.6
---------- ----------
Total ............................. $ 1,921.1 $ 1,702.2
---------- ----------
Net Revenues by Geographic Region:(2)
Europe ................................... $ 742.9 $ 619.7
Americas ................................. 342.3 403.7
Asia Pacific ............................. 627.7 544.6
Japan .................................... 107.4 80.9
Emerging Markets(2) ...................... 100.8 53.3
---------- ----------
Total ............................. $ 1,921.1 $ 1,702.2
---------- ----------
----------------------
(1) Includes revenues from sales of subsystems and other products and from the
New Ventures Group, which was created in May 1994 to act as a center for
our new business opportunities.
(2) Revenues 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. Net revenues by
geographic region have been reclassified to reflect the creation of Region
Five in January 1998 which includes emerging markets such as South America,
Africa, Eastern Europe, the Middle East and India. In the fourth quarter of
2000, Region Five changed its name to become the Emerging Markets region.
The following table sets forth certain financial data from our
consolidated statements of income, expressed in each case as a percentage of net
revenues:
Three Months Ended
----------------------------------
March 31, 2001 April 1, 2000
-------------- -------------
Net sales................................... 99.2% 99.5%
Other revenues.............................. 0.8 0.5
----- -----
Net revenues............................ 100.0 100.0
Cost of sales............................... (55.5) (57.9)
----- -----
Gross profit............................ 44.5 42.1
----- -----
Operating expenses:.........................
Selling, general and administrative......... (9.2) (9.4)
Research and development.................... (14.2) (13.8)
Other income and expenses................... 0.4 (1.7)
----- -----
Total operating expenses................ (23.0) (24.9)
----- -----
Operating income........................ 21.5 17.2
Net interest income......................... 0.1 0.9
----- -----
Income before income taxes and
minority interests...................... 21.6 18.1
Income tax expense.......................... (3.8) (4.1)
----- -----
Income before minority interests........ 17.8 14.0
Minority interests.......................... (0.1) --
----- -----
Net income.............................. 17.7% 14.0%
===== =====
First Quarter 2001 vs First Quarter 2000
During the first quarter of 2001, the semiconductor industry
experienced a decline in revenues in excess of earlier forecasts, estimated at a
4% decrease versus the first quarter of 2000 and 19% sequentially. Based on
this, the latest forecasts by industry analysts estimate an 18% decline in the
TAM and a 15% decline in the SAM in 2001 compared to 2000. Our revenues have
been affected by the strong
8
negative market correction that is currently taking place. On a comparative
basis with the first quarter of 2000, our first quarter 2001 revenues recorded a
12.9% increase, in excess of the industry average, but 12.3% below the revenue
level reached in the fourth quarter of 2000. Operating income and net income
also increased by 41.2% and 43.0% respectively compared to the first quarter of
2000.
Net revenues. Net sales increased 12.5%, from $1,693.7 million in
the first quarter of 2000 to $1,906.0 million in the first quarter of 2001. In
comparison with first quarter 2000, first quarter 2001 sales increased due to an
improved product mix and slightly higher volume. Other revenues, consisting
primarily of co-development contract fees, certain contract indemnity payments
and patent royalty income, increased from $8.5 million in the first quarter of
2000 to $15.1 million in the first quarter of 2001 due primarily to an increase
in co-development contract services and other miscellaneous revenues. Net
revenues increased 12.9%, from $1,702.2 million in the first quarter of 2000 to
$1,921.1 million in the first quarter of 2001.
The Telecom, Peripheral & Automotive Groups' net revenues
increased 17.5% primarily as a result of higher sales of wireless and wireline
telecommunication products, computer products such as printer devices, and
automotive products. The Discrete and Standard ICs Groups' net revenues remained
basically flat as increased sales of discrete devices and transistors were
offset by sales declines in standard commodity products such as standard linear
devices and voltage regulators. Net revenues of the Memory Products Group
increased 53.0% as a result of a strong sales increase due to the combined
effects of an improved product mix and slightly higher volume in flash memories,
smartcards, EPROMs and EEPROMs. The Consumer & Microcontrollers Groups' net
revenues declined by 27.6% due principally to sales declines in digital video
products and analog television products.
Gross profit. Our gross profit increased 19.3%, from $717.1
million in the first quarter of 2000 to $855.8 million in the first quarter of
2001. As a percentage of net revenues, gross profit increased to 44.5% in the
first quarter of 2001 compared to 42.1% in the first quarter of 2000. This
improvement was mainly due to improved manufacturing efficiency and higher plant
utilization. Cost of sales increased from $985.1 million in the first quarter of
2000 to $1,065.3 million in the first quarter of 2001, principally due to the
increased depreciation associated with new capital investments and production
volume.
The impact of changes in exchange rates on gross profit in the
first quarter of 2001 compared to the first quarter of 2000 was estimated to be
marginally favorable since the appreciation of the U.S. dollar versus the
European currencies generated a favorable impact on the cost of sales higher
than the unfavorable impact on net revenues. See "Impact of Changes in Exchange
Rates".
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 10.8%, from $159.5 million in the first
quarter of 2000 to $176.8 million in the first quarter of 2001 due primarily to
increased efforts in the marketing and information technology areas. As a
percentage of net revenues, selling, general and administrative expenses
decreased slightly from 9.4% in the first quarter of 2000 to 9.2% in the first
quarter of 2001 as a result of the increased net revenues.
Research and development expenses. Research and development
expenses increased 15.7%, from $235.1 million in the first quarter of 2000 to
$272.1 million in the first quarter of 2001. We continued to invest heavily in
research and development and plan to continue our efforts in research and
development activities. Our reported research and development expenses do not
include marketing design center, process engineering, pre-production or
industrialization costs. As a percentage of net revenues, research and
development expenses increased from 13.8% in the first quarter of 2000 to 14.2%
in the first quarter of 2001.
Other income and expenses. Other income and expenses represents
the net effect of certain income items and expenses. It includes primarily funds
received from government agencies in connection with our research and
development programs, the cost of new plant start-ups, as well as foreign
currency gains and losses, the costs of certain activities relating to
intellectual property, including goodwill
9
amortization related to recent acquisitions, and miscellaneous revenues and
expenses. In the first quarter of 2001, the net effect of these items resulted
in income of $5.4 million compared to expense of $30.5 million in the first
quarter of 2000. This increase in income resulted primarily from a decrease in
the cost of new plant start-ups and a gain from the sale of certain marketable
securities.
Operating income. Our operating income increased 41.2%, from
$292.0 million in the first quarter of 2000 to $412.3 million in the first
quarter of 2001, primarily as a result of the increase in net revenues and
offset, in part, by higher research and development expenses, selling, general
and administrative expenses. The exchange rate impact on operating income was
estimated to be favorable, since the appreciation of the U.S. dollar generated a
favorable impact on cost of sales and operating expenses.
Net interest income. Net interest income decreased from $16.4
million in the first quarter of 2000 to $3.1 million in the first quarter of
2001 as a result of the increase in long term debt following the convertible
debt offering in November 2000.
Income tax expense. Provision for income tax was $69.4 million in
the first quarter of 2000 compared to $74.2 million in the first quarter of
2001, as a result of the increase in income before income taxes and minority
interests. The effective tax rate decreased from 22.5% in the first quarter of
2000 to 17.9% in the first quarter of 2001. The favorable 2000 rate was mainly
due to the application of benefits in certain countries. As such benefits may
not be available after 2001, the effective tax rate could increase in the coming
years.
Net income. Net income for the period reached $340.8 million,
43.0% above last year's first quarter levels of $238.4 million. Diluted earnings
per share for the 2001 first quarter was $0.38, a 46.2% increase compared to
$0.26 for the corresponding 2000 period but a 24.0% decrease compared to $0.50
for the prior quarter. All per share figures have been adjusted to reflect the
2-for-1 split stock effected in June 1999 and the 3-for-1 stock split effected
in May 2000.
10
Impact of Changes in Exchange Rates
Our results of operations and financial condition can be
significantly affected by changes in exchange rates between the U.S. dollar and
other currencies, particularly the euro (with respect to prior periods, the
Italian lira, the French franc, the German mark), the Japanese yen and other
Asian currencies.
Revenues for certain products (primarily dedicated products sold
in Europe and Japan) that are quoted in currencies other than the U.S. dollar
are directly affected by fluctuations in the value of the U.S. dollar. Revenues
for all other products, which are quoted in U.S. dollars and translated into
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.
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 jurisdictions where our operations are located. Fluctuations in the value of
these currencies, particularly the euro, compared to the U.S. dollar can affect
our costs and therefore our profitability.
The appreciation in the U.S. dollar during the first three months
of 2001 against the principal European and Asian currencies (excluding the
Japanese yen, which appreciated compared to the U.S. dollar) that have a
material impact on us resulted in a favorable impact on results of operations
because of the favorable impact on cost of sales and operating expenses.
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.
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. The
balance sheet impact of such translation adjustments has been, and may be
expected to be, significant from period to period.
Our principal strategies to reduce the risks associated with
exchange rate fluctuations have been (i) to increase the proportion of sales to
customers denominated in U.S. dollars, (ii) to purchase raw materials and
services in transactions denominated in U.S. dollars (thereby reducing the
exchange rate risk for costs relative to revenues, which are principally
denominated or determined by reference to the U.S. dollar), and (iii) to manage
certain other costs, such as financial costs, to maintain an appropriate balance
between U.S. dollars and other currencies based upon the currency environment at
the time. From time to time, we purchase or sell currencies forward to cover
currency risk in obligations or receivables. We have not experienced significant
gains or losses as a result of exchange coverage activities. Our management
strategies to reduce exchange rate risks have served to mitigate, but not
eliminate, the positive or negative impact of exchange rate fluctuations.
Furthermore, the introduction of the euro as of January 1, 1999, has served to
reduce the number of currencies whose exchange rate fluctuations versus the U.S.
dollar may impact our results, thus making our exposure to exchange rate
fluctuations more concentrated.
Liquidity and Capital Resources
On November 16, 2000, we issued $2,145.9 million face value of
zero-coupon unsubordinated convertible bonds, due 2010, for net proceeds of
$1,457.8 million. The debt discount of $665.9 million is amortized straight-line
over the term of the debt and recorded as interest expense. The notes are
convertible at any time by the holders at the rate of 9.32 shares of our common
stock for each one thousand dollar face value of the notes. The notes may be
redeemed by the holders on November 16, 2005 or by us on or after that date at
the book value, payable in cash. The notes are unsubordinated to all of our
other existing and future indebtedness. In May 2001, we issued a notice of
redemption of all outstanding Liquid Yield Option(TM) Notes due 2008. As a
result, virtually all of the LYONs due 2008 were converted into common shares.
11
We had a negative net financial position (total debt, net of cash,
cash equivalents and marketable securities) at March 31, 2001 of $529.0 million
compared to a negative net financial position of $511.2 million at December 31,
2000. Cash and cash equivalents and marketable securities totaled $2,316.4
million at March 31, 2001 compared to $2,330.9 million at December 31, 2000.
The net cash generated from operations totaled $804.4 million in
the first three months of 2001, compared to $408.8 million in the first three
months of 2000. Capital expenditure payments totaled $729.6 million in the first
three months of 2001 compared to $622.1 million in the same period of the
previous year. Net cash used in investing activities increased from $1,185.0
million in the first three months of 2000 to $1,761.7 million in the first three
months of 2001, primarily due to an increase in investment in marketable
securities and payment for tangible assets. Net operating cash flows (cash flows
from operating activities less cash flows from investing activities) in the
first three months of 2001 was negative of $957.3 million in comparison with the
negative amount of $776.2 million of the first three months of 2000. The
negative variation was primarily a result of the increase in marketable
securities and capital investments. Net cash from financing activities was
negative of $0.3 million in the first three months of 2001 compared to a
positive $146.5 million in the first three months of 2000. The decrease was
primarily due to lower proceeds from a decrease in short-term credit facilities.
At March 31, 2001, the aggregate amount of our long-term debt was approximately
$2,833.6 million, and the aggregate amount of our short-term facilities was
approximately $870.3 million, of which approximately $11.8 million of
indebtedness was outstanding. At March 31, 2001, we had approximately $116.7
million of long-term indebtedness that will become due within one year, and we
expect to fund such debt repayments from available cash.
We expect to have significant capital requirements in the coming
years, and we are expecting capital expenditure for 2001 to be approximately
$1.5 billion. However, we will continue to monitor our level of capital spending
taking into consideration factors such as trends in the semiconductor market,
capacity utilization and announced additional capacity. 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 from operations,
available funds, available support from third parties (including state support),
borrowings under available credit lines and, to the extent necessary or
attractive based on market conditions prevailing at the time, the sale of debt
or additional equity securities. There can be no assurance that additional
financing will be available as necessary to fund our working capital
requirements, research and development, industrialization costs or expansion
plans, or that any such financing, if available, will be on terms acceptable to
us.
Impact of Recently Issued U.S. Accounting Standards
In June 1998, the U.S. Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement No. 133"), which is required to be adopted in fiscal years beginning
after June 15, 2000. Statement No. 133 requires us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not used for hedging
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. We have adopted the standards required by this statement
in the first quarter of 2001. We believe that adoption of Statement No. 133 has
not had a material effect on our financial position or results of operations.
In December 1999, the U.S. Securities and Exchange Commission
released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB 101"), providing the staff's views on applying generally
accepted accounting principles to selected revenue recognition issues. For
companies with fiscal years that begin between December 16, 1999 and March 15,
2000, portions of SAB
12
101 became effective in the fourth quarter of 2000. We believe that adoption of
these portions of SAB 101 has not had a material effect on our financial
position or overall trends in results of operations.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
national currencies and the euro. The participating countries agreed to adopt
the euro as their common legal currency on that date. Until January 1, 2002,
either the euro or a participating country's present currency (a "national
currency") will be accepted as legal currency. On January 1, 2002,
euro-denominated bills and coins will be issued and national currencies will be
withdrawn from circulation during the subsequent six months. We do not expect
that the introduction and use of the euro will materially affect our foreign
exchange activities, or our use of derivatives and other financial instruments,
or will result in any material increase in costs to us. We will continue to
assess the impact of the introduction of the euro currency over the transition
period as well as the period subsequent to the transition, as applicable.
Backlog
Our backlog has increased steadily since the end of 1998, reaching
record incoming order rates and backlog levels during 2000. In order to meet
this backlog, we have ramped up production at the new 200mm Rousset, France, and
Agrate, Italy, facilities and are continuing the expansion of the Catania fabs
and the construction of the new 200mm fab in Singapore. Orders under frame
contracts also increased during 2000. Frame contracts are annual fixed-price
contracts with customers setting forth the forecasted quantities and schedule
for purchase and sale of specific products that may be ordered in the future.
Frame contracts are intended to secure capacity availability for the customer
and improved visibility with respect to customer requirements. However, during
difficult market conditions, frame contracts may be subject to adjustments both
in terms of prices and volumes. Due to the deterioration of the semiconductor
industry recorded during the first quarter of 2001, our backlog at the end of
March 2001 declined in comparison to the end of December 2000.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
STMicroelectronics N.V. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: June 29, 2001 STMicroelectronics N.V.
By: /s/ Pasquale Pistorio
----------------------------------
Name: Pasquale Pistorio
Title: President and Chief
Executive Officer