Following the prior announcements of impairment recognition in certain asset-backed securities, in the 2009 first quarter an updated accounting valuation resulted in a further $58 million of pre-tax other-than-temporary impairment charges of certain financial assets. The Company is currently seeking confirmation from the United States District Court for the Southern District of New York of an arbitration award dated February 12, 2009 rendered by The Financial Industry Regulatory Authority (FINRA). This award orders Credit Suisse Securities (USA) LLC to pay the Company an amount of approximately $406 million plus interest against the transfer to Credit Suisse Securities (USA) LLC by the Company of its entire portfolio of asset-backed securities. At collection, ST will transfer ownership of its portfolio of unauthorized "auction rate securities" with Credit Suisse, and should be able to record a pre-tax gain of over $220 million to reverse impairment losses accrued in the Company's income statements of prior periods.
In the first quarter of 2009, ST registered a non-cash loss on equity investments of $232 million primarily related to Numonyx including $200 million of impairment on Numonyx equity investment to reflect further deteriorated conditions in the memory industry as well as ST's $29 million share of equity loss on Numonyx's Q4 2008 results. As of March 28, 2009, Numonyx held approximately $440 million in cash on its balance sheet.
For the 2009 first quarter ST reported a net loss of $541 million, or -$0.62 per share, compared to a net loss of $366 million and $84 million in the prior quarter and year-ago period, respectively. On an adjusted basis, ST reported a net loss excluding impairment, restructuring and OTTI charges of $267 million, or -$0.31 per share(*).
For the 2009 first quarter, the effective average exchange rate for the Company was approximately $1.33 to euro 1.00 compared to $1.40 to euro 1.00 for the 2008 fourth quarter and $1.47 to euro 1.00 for the 2008 first quarter.
(*) Adjusted earnings per share is a non-U.S. GAAP measure. For additional information please refer to Attachment A..
Mr. Bozotti commented, "We made solid progress on reducing our costs through the realignment of manufacturing operations and streamlining of expenses. In the first quarter, we discontinued manufacturing operations at our Ain Sebaa assembly plant in Morocco and in mid-April we closed our Carrollton, Texas wafer fab. Overall, in the first quarter of 2009 we reduced headcount by 3,200, excluding the wireless transaction. I believe these actions and others demonstrate that we are well aligned with our goal to reduce costs by over $700 million in 2009 compared to the Company's 2008 fourth quarter annualized base. Also, ST-Ericsson just announced an additional restructuring program which is expected to contribute to the joint venture approximately $230 million in annualized cost savings at completion by the second quarter of 2010."
Cash Flow and Balance Sheet Highlights
First quarter 2009 cash flow data are estimated following a delayed calendar for the final closing of the cash flow statement due to the purchase accounting of acquisitions.
Net operating cash flow(*) is estimated at -$136 million for the first quarter 2009, before the cash flow movements related to M&A transactions that resulted into a net cash flow of $608 million for the Company plus $400 million for the consolidated ST-Ericsson joint venture. Net operating cash flow was $154 million in the prior quarter, and $49 million, or $219 million excluding M&A transactions, in the year-ago quarter.
Capital expenditures were $92 million during the first quarter of 2009, compared to $206 million in the prior quarter and $258 million in the year-ago quarter.
Inventory was $1.66 billion at quarter end, down from $1.84 billion at December 31, 2008. The decrease in the inventory was attributable to sharply reduced fab loadings.The Company expects to continue to reduce inventory and manage a low level of fab loadings in the second quarter of 2009.
At March 28, 2009, ST's cash and cash equivalents, marketable securities (current and non-current), short-term deposits and restricted cash equaled $2.9 billion. Excluding cash of $358 million related to ST-Ericsson and a $250 million deposit as collateral for the Company's Hynix-Numonyx loan and $184 million of non-current securities the Company's liquidity totals $2.1 billion. Total debt was $2.65 billion. ST's net financial position(*) was net cash of $254 million from a net debt of $545 million as of December 31, 2008. Total equity was $8.95 billion, including noncontrolling interest of $1.39 billion.
(*) Net financial position is a non-U.S. GAAP measure. For additional information please refer to Attachment A.
Business Outlook
Mr. Bozotti stated, "It is clear that the global economic environment deteriorated further during the first quarter of 2009. While we have recently begun to see some indicators of improvement in booking activity and visibility, we believe it is still too early to determine how sustainable these signs are across all applications and geographies.
"We remain focused on advancing our key priorities for 2009, as we execute on our ongoing product development, marketing, productivity and cost savings programs."
Current uncertainty in the global financial markets, economic recession in the world's major economies, seasonality, and the effect on demand for semiconductor products in the key application markets and from key customers served by our products makes it extremely difficult to accurately forecast product demand and other related matters. Consequently, this quarter the Company will only provide approximate revenue and gross margin internal planning targets with respect to the second quarter of 2009. The Company is currently planning for revenues in the second quarter 2009 to be in the range of $1.73 billion to $1.93 billion. As ST continues its efforts to reduce inventory levels during this timeframe, fab loading will run at levels of about 50%, driving gross margin to an extraordinary low level which the Company is planning for internal purposes to be in the mid 20s, as a percentage of sales. Gross margin is subject to changes in demand levels and pricing that could impact fab loading, inventory write-offs, mix and unit costs, and combined with currency fluctuations could potentially create additional margin variability.
Key Information on Consolidation / Deconsolidation
ST completed the deconsolidation of its Flash Memory Group (FMG) segment and took an equity interest in Numonyx on March 30, 2008, which is reported under the equity method of valuation with an anticipated one quarter lag in reporting.
ST-NXP Wireless, a joint venture initially owned 80% by ST, began operations on August 2, 2008 and was fully consolidated into ST's operating results. On February 1, 2009 and prior to the closing of the merger of ST-NXP Wireless and Ericsson Mobile Platforms to create ST-Ericsson, ST exercised its option to buyout NXP's 20% ownership stake of ST-NXP Wireless.
ST-Ericsson, a joint venture owned 50% by ST, began operations on February 2, 2009 and is consolidated into ST's operating results as of that date. ST-Ericsson will be led by a development and marketing company. This company will be consolidated by ST. A separate platform design company will provide platform designs mostly to the development and marketing company and ST will account for it using the equity method.
Recent Corporate Developments
On April 16, ST announced the main resolutions to be submitted for shareholder approval at the Company's Annual General Meeting, which will be held in Amsterdam on May 20, 2009. The main resolutions, proposed by the Supervisory Board, include:
-- Approval of the Company's 2008 accounts reported in accordance with
International Financial Reporting Standards (IFRS);
-- The reappointment for a three-year term, expiring at the 2012 Annual
General Meeting, for the following members of the Supervisory Board: Mr.
Doug Dunn and Mr. Didier Lamouche; and
-- The distribution of a cash dividend of US$0.12 per share, to be paid in
four equal quarterly installments in May, August and November 2009 and
February 2010 to shareholders of record in the month of each quarterly
payment. If approved, for the first installment, the Company's common
shares will trade ex-dividend on Euronext Paris and the Milan Stock
Exchange (Borsa Italiana), on Monday, May 25, 2009, and the payment date
will be Thursday, May 28, 2009. For holders of shares listed on the New
York Stock Exchange, shares will trade ex-dividend on Friday, May 22,
2009, the record date will be Wednesday, May 27, 2009, and the payment
date will be on or after Tuesday, June 2, 2009. Transfers between New
York and European (Dutch) registered shares will be closed from the end
of business in Europe on Friday, May 22, 2009, until the open of
business in New York on Thursday, May 28, 2009.
