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 IRSForm 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 ofnon-U.S. status (generally onForm W-8BEN) in connection with payments received in the United States or through certainU.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.
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 registeredhead office at Schiphol Airport Amsterdam, the Netherlands, at the registered offices of the SupervisoryManaging 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 SEC’s public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information. In addition, the SEC maintains an Internet site athttp://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 USU.S. WITH THE SEC MAY BE INSPECTED AND COPIED AT THE SEC’S 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).
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 Moody’s Investor Service and A- from Standard & Poor’s andor Fitch Ratings, invested as term deposits, treasury bills 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. TheseThe treasury bills have a value of $484 million and the FRN have a par value of $1,017 million,$548 million. They are classified asavailable-for-sale and are reported at fair value, with changes in fair value recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity.equity except if deemed to be other-than temporary. For that reason, as at December 31, 2009, after recent economic events and given our exposure to Lehman Brothers’ senior unsecured bonds for a purchase price of nearly €15 million, we had another-than-temporary charge of $11 million, recorded in 2008, which represents 50% of the face value of these Floating Rate Notes, according to recovery rate calculated from a major credit rating company. The change in fair value of these instruments amounting(excluding Lehman Brothers FRN) amounted to approximately $3$9 million before tax for the year ended December 31, 2007.
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 was reelected for a three-year term by our March 2005May 2008 shareholders’ meeting to expire at our shareholders’ meeting in 2008.2011.
152
The following table presents the aggregate fees for professional audit services and other services rendered by PricewaterhouseCoopers to us in 20052008 and 2006.2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of
| | | | Percentage of
| | | | | Percentage of
| | | | Percentage of
| |
| | 2007 | | Total Fees | | 2006 | | Total Fees | | | 2009(1) | | Total Fees | | 2008 | | Total Fees | |
|
Audit Fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Statutory audit, certification, audit of individual and Consolidated Financial Statements | | $ | 5,758,230 | | | | 97 | % | | $ | 4,866,174 | | | | 92 | % | | $ | 7,494,914 | | | | 98 | % | | $ | 5,384,962 | | | | 99 | % |
Audit-related fees | | $ | 194,940 | | | | 3 | % | | | 404,639 | | | | 8 | % | | $ | 155,867 | | | | 2 | % | | $ | 15,360 | | | | 0.2 | % |
Non-audit Fees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tax compliance fees | | | — | | | | | | | | — | | | | | | | $ | 3,883 | | | | — | | | $ | 40,880 | | | | 0.8 | % |
Other fees | | | — | | | | | | | | — | | | | | | | | — | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 5,953,170 | | | | 100 | % | | $ | 5,270,813 | | | | 100 | % | | $ | 7,654,614 | | | | 100 | % | | $ | 5,441,202 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | |
| | |
(1) | | These figures include the fees paid for the audit of ST-Ericsson. |
Audit Fees consist of fees billed for the annual audit of our company’s Consolidated Financial Statements, the statutory audit of the financial statements of the Company’s 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 andcarve-out audits in connection with strategic transactions, 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 certainagreed-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. We 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 (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 2006,2009, all services provided to us by PricewaterhouseCoopers were approved by the Audit Committee pursuant to paragraph (c)(7)(i) ofRule 2-01 ofRegulation S-X.
136
| |
Item 16D. | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
153
| |
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 | |
|
2007-01-012009-01-01 to2007-01-312009-01-31
| | | — | | | | — | | | | — | | | | — | |
2007-02-012009-02-01 to2007-02-282009-02-28
| | | — | | | | — | | | | — | | | | — | |
2007-03-012009-03-01 to2007-03-312009-03-31
| | | — | | | | — | | | | — | | | | — | |
2007-04-012009-04-01 to2007-04-302009-04-30
| | | — | | | | — | | | | — | | | | — | |
2007-05-012009-05-01 to2007-05-312009-05-31
| | | — | | | | — | | | | — | | | | — | |
2007-06-012009-06-01 to2007-06-302009-06-30
| | | — | | | | — | | | | — | | | | — | |
2007-07-012009-07-01 to2007-07-312009-07-31
| | | — | | | | — | | | | — | | | | — | |
2007-08-012009-08-01 to2007-08-312009-08-31
| | | — | | | | — | | | | — | | | | — | |
2007-09-012009-09-01 to2007-09-302009-09-30
| | | — | | | | — | | | | — | | | | — | |
2007-10-012009-10-01 to2007-10-312009-10-31
| | | — | | | | — | | | | — | | | | — | |
2007-11-012009-11-01 to2007-11-302009-11-30
| | | — | | | | — | | | | — | | | | — | |
2007-12-012009-12-01 to2007-12-312009-12-31
| | | — | | | | — | | | | — | | | | — | |
We currently hold 10,532,881As of December 31, 2009 we held 31,985,739 of our common shares in treasury pursuant to repurchases made in prior years.years, and we currently hold 31,976,451 of such shares. We did not purchase anyrepurchase our common shares in 2007. We2009 and we have not announced any additional repurchase programs.
| |
Item 16F. | Change in Registrant’s Certifying Accountant |
We note that on November 16, 2000, we issued $2,146 million initial aggregate principal amount
Not applicable.
| |
Item 16G. | Corporate Governance |
Our consistent commitment to the principles 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.good corporate governance is evidenced by:
| | |
| • | Our corporate organization under Dutch law that entrusts our management to a Managing Board acting under the supervision and control of a Supervisory Board totally independent from the Managing Board. Members of our Managing Board and of our Supervisory Board are appointed and dismissed by our shareholders. |
|
| • | Our early adoption of policies on important issues such as “business ethics” and “conflicts of interest” and strict policies to comply with applicable regulatory requirements concerning financial reporting, insider trading and public disclosures. |
|
| • | Our compliance with Dutch securities laws, because we are a company incorporated under the laws of the Netherlands, as well as our compliance with American, 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. |
|
| • | Our broad-based activities in the field of corporate social responsibility, encompassing environmental, social, health, safety, educational and other related issues. |
|
| • | Our implementation of a non-compliance reporting channel (managed by a third party) for issues regarding accounting, internal controls or auditing. A special ombudsperson has been appointed by our Supervisory Board, following the proposal of its Audit Committee, to collect all complaints, whatever their source, regarding accounting, internal accounting controls or auditing matters, as well as the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. |
|
| • | Our PSE, which require us to integrate and execute all of our business activities, focusing on our employees, customers, shareholders and global business partners; |
|
| • | Our Ethics Committee, whose mandate is to provide advice to management and employees about our PSE and other ethical issues; and |
154137
| | |
| • | Our Chief Compliance Officer, who reports directly to the Managing Board, acts as Executive Secretary to our Supervisory Board and chairs our Ethics Committee. |
As a Dutch company, we are subject to the Dutch Corporate Governance Code as revised by the Dutch Corporate Governance Monitoring Committee on December 10, 2008. 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. 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. We are committed to informing 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. As recommended by the Dutch Corporate Governance Monitoring Committee, we anticipate including a chapter in our 2009 statutory annual report on the broad outline of our corporate governance structure and our compliance with the Dutch Corporate Governance Code and will present this chapter to our 2010 annual shareholders’ meeting for discussion as a separate agenda item.
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, CEAand/or CDP, 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.” 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.” 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.
Our Supervisory Board has on various occasions discussed Dutch corporate governance standards, the implementing rules and corporate governance standards of the SEC and of the NYSE, as well as other corporate governance standards.
The Supervisory Board has determined, based on the evaluations by an ad hoc committee, 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. 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 addition, our Audit Committee has established procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and the confidential anonymous submission by our employees regarding questionable accounting or auditing matters.
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 thisForm 20-F, (ii) 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 thisForm 20-F or (iii) subject to any official public incriminationand/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 thisForm 20-F.
138
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 managing director of Areva SA, which is a controlled subsidiary of CEA, one of the members of our Supervisory Board is the Chairman of France Telecom and a member of the Board of Directors of Technicolor (formerly known as Thomson), another is the non-executive Chairman of the Board of Directors of ARM, two of our Supervisory Board members are non-executive directors of Soitec, one of our Supervisory Board members is the CEO of Groupe Bull, one of the members of the Supervisory Board is also a member of the Supervisory Board of BESI and one of the members of our Supervisory Board is a director of Oracle and Flextronics International. France Telecom and its subsidiaries Equant and Orange, as well as Oracle’s new subsidiary PeopleSoft supply certain services to our Company. We have a long-term joint R&D partnership agreement with LETI, a wholly-owned subsidiary of CEA. We have certain licensing agreements with ARM, and have conducted transactions with Soitec and BESI as well as with Technicolor, Flextronics and a subsidiary of Groupe Bull. We believe that each of these arrangements and transactions are made on an arms-length basis in line with market practices and conditions. Please see “Item 7. Major Shareholders and Related Party Transactions.”
139
PART III
| |
Item 17. | Financial Statements |
Not applicable.
| |
Item 18. | Financial Statements |
| | | | |
| | Page |
|
| | | | |
2007 | | | F-2 | |
2007 | | | F-4 | |
2008 | | | F-5 | |
2007 | | | F-6 | |
2007 | | | F-7 | |
| | | F-8 | |
Numonyx Holdings B.V. Consolidated Financial Statements for the Year Ended December 31, 2009 and the Nine Month Period Ended December 31, 2008 | | | F-79 | |
Financial Statement Schedule: | | | | |
| | | S-1 | |
| | |
| | Amended and Related Articles of Associations of STMicroelectronics N.V., dated May 15, 2007,20, 2009, as approvedadopted by the annual general meeting of Shareholders on April 26, 2007.May 20, 2009. |
4.1 | | The master agreement bySale and Contribution Agreement between STMicroelectronics N.V., Intel Corporation, Redwood Blocker S.A.R.L., and Francisco Partners II (Cayman) L.P.NXP B.V. dated May 22, 2007April 10, 2008 (incorporated by reference toForm 6-K20-F of STMicroelectronics N.V. filed on August 3, 2007)May 13, 2009). |
4.2 | | Form of ST Asset ContributionFramework Agreement by and between STMicroelectronics N.V. and Telefonaktiebolaget L.M. Ericsson dated August 19, 2008 (incorporated by reference toForm 6-K20-F of STMicroelectronics N.V. filed on August 3, 2007)May 13, 2009). |
| | Subsidiaries and Equity Investments of the Company. |
| | Certification of Carlo Bozotti, President and Chief Executive Officer of STMicroelectronics N.V., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | 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. |
| | 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)15.1 | | Consent of Independent Registered Public Accounting Firm. |
15.2 | | Consent of Independent Registered Public Accounting Firm for Numonyx Holdings B.V. |
155140
CERTAIN TERMS
| | |
ADSL | | AssymmetricalAsymmetrical 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 |
|
DRAMDRAMs | | 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 |
156141
| | |
OTP | | one-time programmable |
|
PDA | | personal digital assistant |
|
PFC | | power factor corrector |
|
PROM | | programmable read-only memory |
|
PSM | | programmable system memories |
|
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 |
157142
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
STMICROELECTRONICS N.V.
| | | | |
| | STMICROELECTRONICS N.V. |
| | | | |
Date: March 3, 200810, 2010 | | | | /s/ Carlo Bozotti
|
| | | | |
| | | | Carlo Bozotti President and Chief Executive Officer |
158143
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
| | | | |
| | Page | |
|
| | | | |
| | | F-2 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
| | | F-8 | |
| | | F-79 | |
| | | | |
| | | S-1 | |
F-1
Report of Independent Registered Public Accounting Firm
To the Supervisory Board and Shareholders of STMicroelectronics N.V.:
In our opinion, the consolidated financial statements of STMicroelectronics N.V. listed in the index appearing under Item 18 on page 155 of this 20072009 Annual Report to Shareholders onForm 20-F present fairly, in all material respects, the financial position of STMicroelectronics N.V. and its subsidiaries at December 31, 20072009 and December 31, 2006,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20072009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule of STMicroelectronics N.V. listed in the index appearing under Item 18 on page 155 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2009, based on criteria established inInternal Control —- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual“Management’s Report on Internal Control over Financial Reporting,Reporting”, appearing on page 151under Item 15 of this 20072009 Annual Report to Shareholders onForm 20-F. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our audits (which were integrated audits in 2007 and 2006).audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2005 and the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006.
A company’s 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 company’s 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
With offices in Aarau, Basel, Berne, Chur, Geneva, Lausanne, Lugano, Lucerne, Neuchâtel, 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 150 countries throughout the world.
F-2
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 company’s 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.
F-2
As described in “Management’s Report on Internal Control over Financial Reporting” appearing under Item 15, management has excluded ST-Ericsson AB Sweden and ST-Ericsson AS Norway from its assessment of internal control over financial reporting as of December 31, 2009 because they were acquired by the Company in a purchase business combination during 2009. Therefore, we have also excludedST-Ericsson AB Sweden andST-Ericsson AS Norway from our audit of internal control over financial reporting. ST-Ericsson AB Sweden and ST-Ericsson AS Norway, are consolidated subsidiaries whose total assets and total research and development expenses represent 0.44% and 8.2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
PricewaterhouseCoopers SA
| | |
/s/ Travis Randolph | | /s/ Felix Roth |
Michael FoleyTravis Randolph | | Felix Roth |
Geneva, March 3, 200810, 2010
F-3
STMicroelectronics N.V.
In millionmillions of U.S. dollars, except per share amounts
| | | | | | | | | | | | | |
| | Twelve Months Ended | | | | | | | | | | | | | |
| | (audited)
| | (audited)
| | (audited)
| | | Twelve Months Ended | |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| |
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
|
Net sales | | | 9,966 | | | | 9,838 | | | | 8,876 | | | | 8,465 | | | | 9,792 | | | | 9,966 | |
Other revenues | | | 35 | | | | 16 | | | | 6 | | | | 45 | | | | 50 | | | | 35 | |
| | | | | | | | | | | | | | |
Net revenues | | | 10,001 | | | | 9,854 | | | | 8,882 | | | | 8,510 | | | | 9,842 | | | | 10,001 | |
Cost of sales | | | (6,465 | ) | | | (6,331 | ) | | | (5,845 | ) | | | (5,884 | ) | | | (6,282 | ) | | | (6,465 | ) |
| | | | | | | | | | | | | | |
Gross profit | | | 3,536 | | | | 3,523 | | | | 3,037 | | | | 2,626 | | | | 3,560 | | | | 3,536 | |
Selling, general and administrative | | | (1,099 | ) | | | (1,067 | ) | | | (1,026 | ) | | | (1,159 | ) | | | (1,187 | ) | | | (1,099 | ) |
Research and development | | | (1,802 | ) | | | (1,667 | ) | | | (1,630 | ) | | | (2,365 | ) | | | (2,152 | ) | | | (1,802 | ) |
Other income and expenses, net | | | 48 | | | | (35 | ) | | | (9 | ) | | | 166 | | | | 62 | | | | 48 | |
Impairment, restructuring charges and other related closure costs | | | (1,228 | ) | | | (77 | ) | | | (128 | ) | | | (291 | ) | | | (481 | ) | | | (1,228 | ) |
| | | | | | | | | | | | | | |
Operating income (loss) | | | (545 | ) | | | 677 | | | | 244 | | |
Other -than-temporary impairment charge on financial assets | | | (46 | ) | | | — | | | | — | | |
Operating loss | | | | (1,023 | ) | | | (198 | ) | | | (545 | ) |
Other-than-temporary impairment charge and realized losses on financial assets | | | | (140 | ) | | | (138 | ) | | | (46 | ) |
Interest income, net | | | 83 | | | | 93 | | | | 34 | | | | 9 | | | | 51 | | | | 83 | |
Earnings (loss) on equity investments | | | 14 | | | | (6 | ) | | | (3 | ) | | | (337 | ) | | | (553 | ) | | | 14 | |
Gain (loss) on financial assets | | | | (8 | ) | | | 15 | | | | — | |
Gain on convertible debt buyback | | | | 3 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Income (loss) before income taxes and minority interests | | | (494 | ) | | | 764 | | | | 275 | | |
Income tax benefit (expense) | | | 23 | | | | 20 | | | | (8 | ) | |
Loss before income taxes and noncontrolling interest | | | | (1,496 | ) | | | (823 | ) | | | (494 | ) |
Income tax benefit | | | | 95 | | | | 43 | | | | 23 | |
| | | | | | | | | | | | | | |
Income (loss) before minority interests | | | (471 | ) | | | 784 | | | | 267 | | |
Minority interests | | | (6 | ) | | | (2 | ) | | | (1 | ) | |
Loss before noncontrolling interest | | | | (1,401 | ) | | | (780 | ) | | | (471 | ) |
Net loss (income) attributable to noncontrolling interest | | | | 270 | | | | (6 | ) | | | (6 | ) |
| | | | | | | | | | | | | | |
Net income (loss) | | | (477 | ) | | | 782 | | | | 266 | | |
Net loss attributable to parent company | | | | (1,131 | ) | | | (786 | ) | | | (477 | ) |
| | | | | | | | | | | | | | |
Earnings (loss) per share (Basic) | | | (0,53 | ) | | | 0,87 | | | | 0,30 | | |
Loss per share (Basic) attributable to parent company shareholders | | | | (1.29 | ) | | | (0.88 | ) | | | (0.53 | ) |
| | | | | | | | | | | | | | |
Earnings (loss) per share (Diluted) | | | (0,53 | ) | | | 0,83 | | | | 0,29 | | |
Loss per share (Diluted) attributable to parent company shareholders | | | | (1.29 | ) | | | (0.88 | ) | | | (0.53 | ) |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these audited consolidated financial statements
F-4
STMicroelectronics N.V.
In million of U.S. dollars
| | | | | | | | | |
| | As at | | | | | | | | | |
| | December 31,
| | December 31,
| | | As at | |
| | 2007 | | 2006 | | | December 31,
| | December 31,
| |
| | (Audited) | | (Audited) | | | 2009 | | 2008 | |
|
Assets | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 1,855 | | | | 1,659 | | | | 1,588 | | | | 1,009 | |
Marketable securities | | | 1,014 | | | | 764 | | | | 1,032 | | | | 651 | |
Short-term deposits | | | — | | | | 250 | | |
Trade accounts receivable, net | | | 1,605 | | | | 1,589 | | | | 1,367 | | | | 1,064 | |
Inventories, net | | | 1,354 | | | | 1,639 | | | | 1,275 | | | | 1,840 | |
Deferred tax assets | | | 205 | | | | 187 | | | | 298 | | | | 252 | |
Assets held for sale | | | 1,017 | | | | — | | | | 31 | | | | — | |
Other receivables and assets | | | 612 | | | | 498 | | | | 753 | | | | 685 | |
| | | | | | | | | | |
Total current assets | | | 7,662 | | | | 6,586 | | | | 6,344 | | | | 5,501 | |
| | | | | | | | | | |
Goodwill | | | 290 | | | | 223 | | | | 1,071 | | | | 958 | |
Other intangible assets, net | | | 238 | | | | 211 | | | | 819 | | | | 863 | |
Property, plant and equipment, net | | | 5,044 | | | | 6,426 | | | | 4,081 | | | | 4,739 | |
Long-term deferred tax assets | | | 237 | | | | 124 | | | | 333 | | | | 373 | |
Equity investments | | | — | | | | 261 | | | | 273 | | | | 510 | |
Restricted cash for equity investments | | | 250 | | | | 218 | | |
Restricted cash | | | | 250 | | | | 250 | |
Non-current marketable securities | | | 369 | | | | — | | | | 42 | | | | 242 | |
Other investments and other non-current assets | | | 182 | | | | 149 | | | | 442 | | | | 477 | |
| | | | | | | | | | |
| | | 6,610 | | | | 7,612 | | | | 7,311 | | | | 8,412 | |
| | | | | | | | | | |
Total assets | | | 14,272 | | | | 14,198 | | | | 13,655 | | | | 13,913 | |
| | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Bank overdrafts | | | — | | | | — | | | | — | | | | 20 | |
Current portion of long-term debt | | | 103 | | | | 136 | | | | 176 | | | | 123 | |
Trade accounts payable | | | 1,065 | | | | 1,044 | | | | 883 | | | | 847 | |
Other payables and accrued liabilities | | | 744 | | | | 664 | | | | 1,049 | | | | 996 | |
Dividends payable to shareholders | | | | 26 | | | | 79 | |
Deferred tax liabilities | | | 11 | | | | 7 | | | | 20 | | | | 28 | |
Accrued income tax | | | 154 | | | | 112 | | | | 126 | | | | 125 | |
| | | | | | | | | | |
Total current liabilities | | | 2,077 | | | | 1,963 | | | | 2,280 | | | | 2,218 | |
| | | | | | | | | | |
Long-term debt | | | 2,117 | | | | 1,994 | | | | 2,316 | | | | 2,554 | |
Reserve for pension and termination indemnities | | | 323 | | | | 342 | | | | 317 | | | | 332 | |
Long-term deferred tax liabilities | | | 14 | | | | 57 | | | | 37 | | | | 27 | |
Other non-current liabilities | | | 115 | | | | 43 | | | | 342 | | | | 350 | |
| | | | | | | | | | |
| | | 2,569 | | | | 2,436 | | | | 3,012 | | | | 3,263 | |
| | | | | | | | | | |
Total liabilities | | | 4,646 | | | | 4,399 | | | | 5,292 | | | | 5,481 | |
| | | | | | | | | | |
Commitment and contingencies | | | | | | | | | | | | | | | | |
Minority interests | | | 53 | | | | 52 | | |
| | | | | | |
Common stock (preferred stock: 540,000,000 shares authorized, not issued; common stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 910,293,420 shares issued, 899,760,539 shares outstanding) | | | 1,156 | | | | 1,156 | | |
Equity | | | | | | | | | |
Parent company shareholders’ equity | | | | | | | | | |
Common stock (preferred stock: 540,000,000 shares authorized, not issued; common stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 910,319,305 shares issued, 878,333,566 shares outstanding) | | | | 1,156 | | | | 1,156 | |
Capital surplus | | | 2,097 | | | | 2,021 | | | | 2,481 | | | | 2,324 | |
Accumulated result | | | 5,274 | | | | 6,086 | | | | 2,723 | | | | 4,064 | |
Accumulated other comprehensive income | | | 1,320 | | | | 816 | | | | 1,164 | | | | 1,094 | |
Treasury stock | | | (274 | ) | | | (332 | ) | | | (377 | ) | | | (482 | ) |
| | | | | | | | | | |
Shareholders’ equity | | | 9,573 | | | | 9,747 | | |
Total parent company shareholders’ equity | | | | 7,147 | | | | 8,156 | |
Noncontrolling interest | | | | 1,216 | | | | 276 | |
| | | | | | | | | | |
Total liabilities and shareholders’ equity | | | 14,272 | | | | 14,198 | | |
Total equity | | | | 8,363 | | | | 8,432 | |
Total liabilities and equity | | | | 13,655 | | | | 13,913 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these audited consolidated financial statements
F-5
STMicroelectronics N.V.
In million of U.S. dollars
| | | | | | | | | | | | | |
| | Twelve Months Ended | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | December 31,
| | | Twelve Months Ended | |
| | 2007 | | 2006 | | 2005 | | | December 31,
| | December 31,
| | December 31,
| |
| | (Audited) | | (Audited) | | (Audited) | | | 2009 | | 2008 | | 2007 | |
|
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | (477 | ) | | | 782 | | | | 266 | | |
Items to reconcile net income and cash flows from operating activities: | | | | | | | | | | | | | |
Net loss | | | | (1,401 | ) | | | (780 | ) | | | (471 | ) |
Items to reconcile net loss and cash flows from operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | | | 1,413 | | | | 1,766 | | | | 1,944 | | | | 1,367 | | | | 1,366 | | | | 1,413 | |
Amortization of discount on convertible debt | | | 18 | | | | 18 | | | | 5 | | | | 13 | | | | 18 | | | | 18 | |
Other-than-temporary impairment charge and realized losses on financial assets | | | | 140 | | | | 138 | | | | 46 | |
Unrealized gain on financial assets | | | | — | | | | (15 | ) | | | — | |
Loss on sale of financial assets | | | | 8 | | | | — | | | | — | |
Gain on convertible debt buyback | | | | (3 | ) | | | — | | | | — | |
Other non-cash items | | | 155 | | | | 50 | | | | 10 | | | | (64 | ) | | | 159 | | | | 109 | |
Minority interest in net income of subsidiaries | | | 6 | | | | 2 | | | | 1 | | |
Deferred income tax | | | (148 | ) | | | (74 | ) | | | (31 | ) | | | (24 | ) | | | (69 | ) | | | (148 | ) |
Earnings (loss) on equity investments | | | (14 | ) | | | 6 | | | | 3 | | |
(Earnings) loss on equity investments | | | | 337 | | | | 553 | | | | (14 | ) |
Impairment, restructuring charges and other related closure costs, net of cash payments | | | 1,173 | | | | 1 | | | | 72 | | | | (4 | ) | | | 371 | | | | 1,173 | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Trade receivables, net | | | 2 | | | | (104 | ) | | | (117 | ) | | | (300 | ) | | | 565 | | | | 2 | |
Inventories, net | | | 24 | | | | (161 | ) | | | (174 | ) | | | 553 | | | | (299 | ) | | | 24 | |
Trade payables | | | 19 | | | | 36 | | | | (71 | ) | | | (54 | ) | | | (34 | ) | | | 19 | |
Other assets and liabilities, net | | | 17 | | | | 169 | | | | (110 | ) | | | 248 | | | | (251 | ) | | | 17 | |
| | | | | | | | | | | | | | |
Net cash from operating activities | | | 2,188 | | | | 2,491 | | | | 1,798 | | | | 816 | | | | 1,722 | | | | 2,188 | |
| | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Payment for purchase of tangible assets | | | (1,140 | ) | | | (1,533 | ) | | | (1,441 | ) | | | (451 | ) | | | (983 | ) | | | (1,140 | ) |
Payment for purchase of marketable securities | | | (708 | ) | | | (864 | ) | | | — | | | | (1,730 | ) | | | — | | | | (708 | ) |
Proceeds from sale of marketable securities | | | 101 | | | | 100 | | | | — | | | | 1,371 | | | | 351 | | | | 101 | |
Investment in short-term deposits | | | — | | | | (903 | ) | | | — | | |
Proceeds from sale of non current marketable securities | | | | 75 | | | | — | | | | — | |
Proceeds from matured short-term deposits | | | 250 | | | | 653 | | | | — | | | | — | | | | — | | | | 250 | |
Restricted cash for equity investments | | | (32 | ) | | | (218 | ) | | | — | | |
Restricted cash | | | | — | | | | — | | | | (32 | ) |
Disposal of financial instrument | | | | 26 | | | | — | | | | — | |
Investment in intangible and financial assets | | | (208 | ) | | | (86 | ) | | | (49 | ) | | | (138 | ) | | | (91 | ) | | | (208 | ) |
Proceeds from the sale of Accent subsidiary | | | — | | | | 7 | | | | — | | |
Capital contributions to equity investments | | | — | | | | (213 | ) | | | (38 | ) | |
Proceeds received in business combinations | | | | 1,155 | | | | — | | | | — | |
Payment for business acquisitions, net of cash and cash equivalents acquired | | | | (18 | ) | | | (1,694 | ) | | | — | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (1,737 | ) | | | (3,057 | ) | | | (1,528 | ) | |
Net cash from (used in) investing activities | | | | 290 | | | | (2,417 | ) | | | (1,737 | ) |
| | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of long-term debt | | | 102 | | | | 1,744 | | | | 50 | | |
Proceeds from long-term debt | | | | 1 | | | | 663 | | | | 102 | |
Buyback of convertible debt | | | | (103 | ) | | �� | — | | | | — | |
Repayment of long-term debt | | | (125 | ) | | | (1,522 | ) | | | (110 | ) | | | (134 | ) | | | (187 | ) | | | (125 | ) |
Decrease in short-term facilities | | | — | | | | (12 | ) | | | (47 | ) | |
Increase (decrease) in short-term facilities | | | | (20 | ) | | | 20 | | | | — | |
Capital increase | | | 2 | | | | 28 | | | | 35 | | | | — | | | | — | | | | 2 | |
Dividends paid | | | (269 | ) | | | (107 | ) | | | (107 | ) | |
Dividends paid to minority interests | | | (6 | ) | | | | | | | | | |
Repurchase of common stock | | | | — | | | | (313 | ) | | | — | |
Dividends paid to shareholders | | | | (158 | ) | | | (240 | ) | | | (269 | ) |
Dividends paid to noncontrolling interests | | | | (5 | ) | | | (10 | ) | | | (6 | ) |
Purchase of equity from noncontrolling interests | | | | (92 | ) | | | — | | | | — | |
Other financing activities | | | — | | | | 1 | | | | 1 | | | | (2 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
Net cash from (used in) financing activities | | | (296 | ) | | | 132 | | | | (178 | ) | |
Net cash used in financing activities | | | | (513 | ) | | | (67 | ) | | | (296 | ) |
| | | | | | | | | | | | | | |
Effect of changes in exchange rates | | | 41 | | | | 66 | | | | (15 | ) | | | (14 | ) | | | (84 | ) | | | 41 | |
| | | | | | | | | | | | | | |
Net cash increase (decrease) | | | 196 | | | | (368 | ) | | | 77 | | | | 579 | | | | (846 | ) | | | 196 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of the period | | | 1,659 | | | | 2,027 | | | | 1,950 | | | | 1,009 | | | | 1,855 | | | | 1,659 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of the period | | | 1,855 | | | | 1,659 | | | | 2,027 | | | | 1,588 | | | | 1,009 | | | | 1,855 | |
| | | | | | | | | | | | | | |
Supplemental cash information: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest paid | | | 52 | | | | 29 | | | | 17 | | | | 34 | | | | 63 | | | | 52 | |
Income tax paid | | | 133 | | | | 117 | | | | 90 | | |
Income tax paid (refund) | | | | (141 | ) | | | 154 | | | | 133 | |
The accompanying notes are an integral part of these audited consolidated financial statements
F-6
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
In millionmillions of U.S. dollars, except per share amounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | �� | | | | | | | | Accumulated
| | | | | | | | | | | | | Accumulated
| | | | | |
| | | | | | | | | | Other
| | | | | | | | | | | | | Other
| | | | | |
| | Common
| | Capital
| | Treasury
| | Accumulated
| | Comprehensive
| | Shareholders’
| | | Common
| | Capital
| | Treasury
| | Accumulated
| | Comprehensive
| | Noncontrolling
| | Total
| |
| | Stock | | Surplus | | Stock | | Result | | income (loss) | | Equity | | | Stock | | Surplus | | Stock | | Result | | Income (Loss) | | Interests | | Equity | |
|
Balance as of December 31, 2004 (Audited) | | | 1,150 | | | | 1,924 | | | | (348 | ) | | | 5,268 | | | | 1,116 | | | | 9,110 | | |
| | | | | | | | | | | | | | |
Capital increase | | | 3 | | | | 32 | | | | | | | | | | | | | | | | 35 | | |
Stock-based compensation expense | | | | | | | 11 | | | | | | | | | | | | | | | | 11 | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | | | | | | | | | | | | | | 266 | | | | | | | | 266 | | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | (835 | ) | | | (835 | ) | |
| | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (569 | ) | |
Dividends, $0.12 per share | | | | | | | | | | | | | | | (107 | ) | | | | | | | (107 | ) | |
| | | | | | | | | | | | | | |
Balance as of December 31, 2005 (Audited) | | | 1,153 | | | | 1,967 | | | | (348 | ) | | | 5,427 | | | | 281 | | | | 8,480 | | |
| | | | | | | | | | | | | | |
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 (Audited) | | | 1,156 | | | | 2,021 | | | | (332 | ) | | | 6,086 | | | | 816 | | | | 9,747 | | |
Balance as of December 31, 2006 | | | | 1,156 | | | | 2,021 | | | | (332 | ) | | | 6,086 | | | | 816 | | | | 52 | | | | 9,799 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of FIN 48 adoption | | | | | | | | | | | | | | | (8 | ) | | | | | | | (8 | ) | | | | | | | | | | | | | | | (8 | ) | | | | | | | | | | | (8 | ) |
Capital increase | | | | | | | 2 | | | | | | | | | | | | | | | | 2 | | | | | | | | 2 | | | | | | | | | | | | | | | | | | | | 2 | |
Stock-based compensation expense | | | | | | | 74 | | | | 58 | | | | (58 | ) | | | | | | | 74 | | | | | | | | 74 | | | | 58 | | | | (58 | ) | | | | | | | | | | | 74 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Loss | | | | | | | | | | | | | | | (477 | ) | | | | | | | (477 | ) | |
Net income (loss) | | | | | | | | | | | | | | | | (477 | ) | | | | | | | 6 | | | | (471 | ) |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | 504 | | | | 504 | | | | | | | | | | | | | | | | | | | | 504 | | | | 1 | | | | 505 | |
| | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 27 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 34 | |
Dividends, $0.30 per share | | | | | | | | | | | | | | | (269 | ) | | | | | | | (269 | ) | | | | | | | | | | | | | | | (269 | ) | | | | | | | (6 | ) | | | (275 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 (Audited) | | | 1,156 | | | | 2,097 | | | | (274 | ) | | | 5,274 | | | | 1,320 | | | | 9,573 | | |
Balance as of December 31, 2007 | | | | 1,156 | | | | 2,097 | | | | (274 | ) | | | 5,274 | | | | 1,320 | | | | 53 | | | | 9,626 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | | | | | | | | | | (313 | ) | | | | | | | | | | | | | | | (313 | ) |
Issuance of shares by subsidiary | | | | | | | | 152 | | | | | | | | | | | | | | | | 246 | | | | 398 | |
Stock-based compensation expense | | | | | | | | 75 | | | | 105 | | | | (105 | ) | | | | | | | | | | | 75 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | (786 | ) | | | | | | | 6 | | | | (780 | ) |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | (226 | ) | | | (19 | ) | | | (245 | ) |
| | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,025 | ) |
Dividends, $0.36 per share | | | | | | | | | | | | | | | | (319 | ) | | | | | | | (10 | ) | | | (329 | ) |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2008 | | | | 1,156 | | | | 2,324 | | | | (482 | ) | | | 4,064 | | | | 1,094 | | | | 276 | | | | 8,432 | |
| | | | | | | | | | | | | | | | |
Purchase of equity from noncontrolling interest | | | | | | | | 119 | | | | | | | | | | | | | | | | (211 | ) | | | (92 | ) |
Business combination | | | | | | | | | | | | | | | | | | | | | | | | 1,411 | | | | 1,411 | |
Stock-based compensation expense | | | | | | | | 38 | | | | 105 | | | | (105 | ) | | | | | | | | | | | 38 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | (1,131 | ) | | | | | | | (270 | ) | | | (1,401 | ) |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | | 70 | | | | 15 | | | | 85 | |
| | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,316 | ) |
Dividends, $0.12 per share | | | | | | | | | | | | | | | | (105 | ) | | | | | | | (5 | ) | | | (110 | ) |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2009 | | | | 1,156 | | | | 2,481 | | | | (377 | ) | | | 2,723 | | | | 1,164 | | | | 1,216 | | | | 8,363 | |
| | | | | | | | | | | | | | | | |
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 share and per share amounts)
1 — THE COMPANY
STMicroelectronics N.V. (the “Company”) is registered in The Netherlands with its statutory domicilecorporate legal seat in Amsterdam, the Netherlands, 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 hasis focused on developing products that leverage its technological strengths in creating customized, system-level solutions with high-growth digital andmixed-signal content.
2 — ACCOUNTING POLICIES
The accounting policies of the Company conform to generally accepted 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 Company’s Articles of Association, the financial year extends from January 1 to December 31, which is the period-end of each fiscal year.
2.1 — Principles of consolidation
The consolidated financial statements of the Company have been prepared in conformity with U.S. GAAP. The Company’s consolidated financial statements include the assets, liabilities, results of operations and cash flows of its majority-owned subsidiaries. The ownership of other interest holdersSubsidiaries are fully consolidated from the date on which control is reflected as minority interests.transferred to the Company. They are de-consolidated from the date that control ceases. Intercompany balances and transactions have been eliminated in consolidation. Since the adoption in 2003 of Financial Accounting Standards Board Interpretation No. 46Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51(revised 2003) and the related FASB Staff Positions (collectively “FIN 46R”),In compliance with U.S. GAAP guidance, the Company assesses for consolidation any entity identified as a Variable Interest Entity (“VIE”) and consolidates any VIEs, if any, for which the Company is determined to be the primary beneficiary, as described in Note 2.20.2.19.
When the Company owns some, but not all, of the voting stock of an entity, the shares held by third parties represent a noncontrolling interest. The consolidated financial statements are prepared based on the total amount of assets and liabilities and income and expenses of the consolidated subsidiaries. However, the portion of these items that does not belong to the Company is reported on the line “Noncontrolling interest” in the consolidated financial statements.
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.assumptions. The primary areas that require significant estimates and judgments by management include, but are not limited to, to:
| | |
| • | sales returns and allowances, |
|
| • | determination of best estimate of selling price for deliverables in multiple element sale arrangements, |
|
| • | inventory reserves and normal manufacturing capacity thresholds to determine costs capitalized in inventory, |
|
| • | accruals for litigation and claims, |
|
| • | valuation at fair value of acquired assets including intangibles and assumed liabilities in a business combination, goodwill, investments and tangible assets as well as the impairment of their related carrying values, |
|
| • | the assessment in each reporting period of events, which could trigger interim impairment testing, |
|
| • | estimated value of the consideration to be received and used as fair value for asset groups classified as assets to be disposed of by sale and the assessment of probability to realize the sale, |
|
| • | measurement of the fair value of debt and equity securities classified as available-for-sale, including debt securities, for which no observable market price is obtainable, |
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share 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, assumptions used to discount monetary assets expected to be recovered beyond one-year, valuation of acquired intangibles, goodwill, investments and tangible assets as well as the impairment of their related carrying values, estimated value of the consideration to be received and used as fair value for disposal asset group classified as assets to be disposed of by sale, measurement of the fair value of marketable securities classified as available-for-sale for which no observable market price is obtainable, restructuring charges, assumptions used in calculating pension obligations and share-based compensation including assessment of the number of awards expected to vest upon future performance condition achievement, assumptions used to measure and recognize a liability for the fair value of the obligation the Company assumes at the inception of a guarantee, measurement 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 income tax uncertainties. per share amounts)
| | |
| • | the assessment of credit losses and other-than-temporary impairment charges on financial assets, |
|
| • | the valuation of noncontrolling interests, particularly in case of contribution in kind as part of a business combination, |
|
| • | restructuring charges, |
|
| • | assumptions used in calculating pension obligations, |
|
| • | assumptions used to measure and recognize a liability for the fair value of the obligation the Company assumes at the inception of a guarantee, |
|
| • | deferred income tax assets including required valuation allowances and liabilities as well as provisions for specifically identified income tax exposures and income tax uncertainties. |
The Company bases the estimates and assumptions on historical experience and on various other factors such as market trends and latest available 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. While the Company regularly evaluates its estimates and assumptions, the actual results experienced by the Company could differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations, cash flows and financial position could be significantly affected.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.3 — Foreign currency
The U.S. dollar is the reporting currency for the Company. The U.S.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 Company’s 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 adoptedof the Euro currency.zone.
The functional currency of each subsidiary throughoutof the groupCompany is either the local currency or the U.S.US dollar, determineddepending on the basis of the economicaleconomic environment in which each subsidiary operates. For consolidation 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 effectscurrency translation adjustments (“CTA”) generated by the conversion of translating the financial position and results of operations from local functional currencies are reported as a component of “Accumulated other comprehensive income”income (loss)” in the consolidated statements of changes in shareholders’ equity.
Assets, liabilities, revenues, expenses, gains or losses arising from transactions denominated in 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 entity’s 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 — Financial assets
The Company classifies its financial assets in the following categories: held-for-trading financial assets and available-for-sale financial assets.available-for-sale. The Company did not hold at December 31, 20072009 any investment classified as held-to-maturity financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its financial assets at initial recognition.recognition and reassesses the appropriateness of the classification at each reporting date. On January 1, 2008 upon adoption of the new U.S. GAAP guidance allowing the election of fair value treatment for any or all financial assets, the Company did not elect to apply the fair value option to any financial assets. Unlisted equity securities with no readily determinable fair value are carried at cost, as described in Note 2.20.2.19. They are neither classified as held-for-trading nor as available-for-sale.
Regular purchases and sales of financial assets are recognized on the trade date — the date on which the Company commits to purchase or sell the asset. Financial assets are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of income. Available-for-sale financial assets and held-for-trading financial assets are subsequently carried at fair value. Financial assets are derecognized when the
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership: the relevant gain (loss) is reported as a non-operating element on the consolidated statements of income.
The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable, the Company measures fair value by using assumptions and estimates. These assumptions and estimates include the use of recent arm’s length transactions; for debt securities without available observable market price, the Company establishes fair value by reference to publicly available indices of securities with the same rating and comparable underlying collaterals or industries’ exposure, which the Company believes approximates the orderly exit value in the current market. In measuring fair value, the Company makes maximum use of market inputs and relies as little as possible on entity-specific inputs.
Held-for-trading financial assets
A financial asset is classified in this category if it is a security acquired principally for the purpose of selling in the short term.term or if it is a derivative instrument not designated as a hedge. Assets in this category are classified as current assets when they are expected to be realized within twelve months of the balance sheet date. Derivatives are classified as held for trading unless they are designated as hedges, asAs described in Note 2.5.2.5, the Company enters into derivative transactions to hedge currency exposures resulting from its operating activities. For mark-to-market gains or losses on its trading derivatives that do not qualify as hedging instruments, gains and losses arising from changes in the fair value of the derivatives are reported in the consolidated statements of income within “Other income and expenses, net” in the period in which they arise, since the transactions for such instruments would only occur within the Company’s operating activities and, as such, should be included in operating income. Gains and losses arising from changes in the fair value of financial assets not related to the operating activities of the Company, such as discontinued fair value hedge on interest rate risk exposure or discontinued cash flow hedge for which the hedged forecasted transaction is not probable of occurrence anymore, are presented in the consolidated statements of income as a non-operating element within “Gain (loss) on financial assets” in the period in which they arise.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified as held-for-trading. They are included in non-current assets unless management intends to dispose of the investment within twelve months of the balance sheet date.
Regular purchases and sales of financial assets are recognized on the trade date — the date on which the Company commits to purchase or sell the asset. Financial assets are initially recognized at fair value, and transaction costs are expensed in the consolidated statements of income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and held-for-trading financial assets are subsequently carried at fair value.
Gains and losses arising from changesChanges in the fair value, of the financial assets classified as held-for-trading are presented in the consolidated statements of income within “Other income and expenses, net” in the period in which they arise. Changes in the fair valueincluding declines determined to be temporary, of securities classified as available-for-sale are recognized as a separate component of “Accumulated other comprehensive income”income (loss)” in the consolidated statements of changes in shareholders’ equity.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( The Company ceases to defer gains or losses in millions of U.S. dollars, except per share amounts)
When securities classified as available for sale are sold, the accumulated fair value adjustments previously recognizedconsolidated equity and reports an income or impairment charge in equity are included in “Other income and expenses, net” on the consolidated statements of income as gains and losses from marketable securities.
The fair values of quoted debt and equity securities are based on current market prices. If the market for a financial asset is not active and if no observable market price is obtainable,non-operating element when the Company measures fair value by using assumptions and estimates. For unquoted equity securities, these assumptions and estimates includewill be required to sell the use of recent arm’s length transactions; for debt securities without available observable market price, the Company establishes fair value by reference to public available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, using “mark to market” bids and “mark to model” valuations received from the structuring financial institutions. In measuring fair value, the Company makes maximum use of market inputs and relies as little as possible on entity-specific inputs.
security. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A significant or prolonged decline in the fair value of the security below its cost or a significant drop in the number of the transactions of the security which are becoming illiquid are considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss —or gain is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss-loss. If a credit loss exists, but the Company does not intend to sell the impaired security and is removed from equitynot more likely than not to be required to sell before recovery, the impairment is other than temporary and is separated into the estimated amount relating to credit loss, and the amount relating to all other factors. Only the estimated credit loss amount is recognized currently in the consolidated statements of incomeearnings on the line “Other-than-temporary impairment charge and realized losses on marketable securities”financial assets”, with the remainder of the loss amount recognized in accumulated other comprehensive income (loss). Impairment losses recognized in the consolidated statements of income are not reversed through earnings. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets classified as available-for-sale is impaired.
When securities classified as available for sale are sold, the accumulated fair value adjustments previously recognized in equity are reported as a non-operating element on the consolidated statements of income.income as gains or losses on financial assets. The cost of securities sold and the amount reclassified out of accumulated other comprehensive income into earnings is determined based on the specific identification of the securities sold.
2.5 — Derivative financial instruments and hedging activities
Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently measured at their fair value. The method of recognizing the resulting gain or loss resulting from the
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
derivative instrument depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either:
(a) hedges of the fair value of recognized liabilities (fair value hedge); or
(b) hedges of a particular risk associated with a highly probable forecastforecasted transaction (cash flow hedge)
The Company documents, at inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivative instruments that are not designated as hedges are classified as held-for-trading financial assets, as described in Note 2.4.
Derivative financial instruments classified as held for trading
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 Company’s 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”)as per U.S. GAAP guidance, and are marked-to- marketmarked-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, as described in Note 2.4.
Cash Flow Hedges
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company also hedges certain Euro-denominated forecasted transactions that cover at year-end a large part of its projected research and development, selling, general and administrative expenses as well as a portion of its projected 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 hedge. The criteria for designating a derivative as a hedge include the instrument’s effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(transaction, which enables the Company to conclude, based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction are the same, that changes in millions of U.S. dollars, except per share amounts)
cash flows attributable to the risk being hedged are expected to be completely offset by the hedging derivative. 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.
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”income (loss)” 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 consolidated statements of income line item as the impact of the hedged transaction. 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. 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.
TheWhen a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity is recognized immediately transferred to the consolidated statements of income within “Other income and expenses, net”. If the de-designated derivative is still related to operating activities, the changes in fair value subsequent to the discontinuance continue to be reported within “Other income and expenses, net” in the consolidated statements of income, whenas described in Note 2.4. If upon de-designation, the derivative instrument is held in view to be sold with no direct relation with current operating activities, changes in the fair value of the derivative instrument following de-designation are reported as a non-operating element on the line “Gain (loss) on financial assets” 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. When a hedging instrument expires or is sold, or when a hedge no longer meetsidentified, the criteria for hedge accounting, any cumulative gain or loss existingdeferred in equity at that time remains “Accumulated other comprehensive income
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in equitymillions of U.S. dollars, except share and is recognized when the forecasted transaction is ultimately recognizedper share amounts)
(loss)” in the consolidated statements of income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reportedchanges in equity is recognized immediately transferred toin “Other income and expenses, net” in the consolidated statements of income withinwhen it is probable that the forecasted transaction will not occur by the end of the originally specified time period.
In order to optimize its hedging strategy, the Company can be required to cease the designation of certain cash flow hedge transactions and enter into a new designated cash flow hedge transaction with the same hedged forecasted transaction but with a new hedging instrument. De-designation and re-designation are formally authorized and limited to the de-designation of purchased currency options with re-designation of the cash flow hedge through subsequent forward contract when the Euro/US dollar exchange rate is decreasing, the intrinsic value of the option is nil, the hedged transaction is still probable of occurrence and meets at re-designation date all criteria for hedge accounting. At de-designation date, the net derivative gain or loss related to the de-designated cash flow hedge deferred in “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity continues to be reported in net equity. From de-designation date, the change in fair value of the de-designated hedging item is recognized each period in the consolidated statements of income on the line “Other income and expenses, net”., as described in Note 2.4. The net derivative gain or loss related to the de-designated cash flow hedge deferred in net equity since de-designation date is reclassified to earnings in the same period in which the hedged transaction affects earnings, and within the same consolidated statements of income line item as the impact of the hedged transaction.
The principles regulating the hedging strategy for derivatives designated as cash flow hedge are established as follows: (i) for R&D and Corporate costs between 50% and 80% of the total forecasted transactions; (ii) for manufacturing costs between 40% and 70% of the total forecasted transactions. The maximum length of time over which the Company hedges its exposure to the variability of cash flows for forecasted transactions is 14 months.
Fair Value Hedges
In 2006,To the Company entered intoextent that cancellable swaps withheld as a combined notional value of $200 million to hedge against the fair value of a portion of theCompany’s convertible bonds due 2016 carrying a fixed interest rate. These financial instruments correspond to interest rate swaps with a cancellation feature depending on the Company’s bonds convertibility. They convert the fixed rate interest expense recorded on the convertible bond due 2016 to a variable interest rate based upon adjusted LIBOR. As of December 2007 and 2006, the cancelable swaps metmeet 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 sheets. 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. As of December 31, 2007 and 2006, the cancellable swaps are highly effective at hedging the change in fair value of the hedged bonds attributable to changes in interest rates. Any ineffectiveness of the hedge relationship is recorded as a gain or loss on derivatives as a component of “Other income and expenses, net”, in the consolidated statements of income. IfAt the hedge becomespoint that the cancellable swaps no longer highly effective,meet the hedged portion ofcriteria for designation as a fair value hedge, the bondsswaps will discontinue beingcontinue to be marked to fair value whilevalue. At such point, the changes in the fair value of the swaps are recorded in “Gain (loss) on financial assets”. Also, the associated bonds will no longer be marked to fair value and the difference between fair value and amortized costs will be amortized to earnings as a component of interest rateexpense. Results on the sale of the swaps will continue to be recordedare recognized in the line “Gain (loss) on financial assets” in the consolidated statements of income.income, as discussed in Note 25.
2.6 — Reclassifications
Certain prior-year amounts have been reclassified to conform to the current year presentation. In 2007, the Company determined that certain auction rate securities were to be more properly classified on its consolidated balance sheet as “Marketable securities” instead of “Cash and cash equivalents”, as reported in previous periods and namely as of December 31, 2006. The revision of the December 31, 2006 consolidated balance sheet results in a decrease of “Cash and cash equivalents” from $1,963 million to $1,659 million with an offsetting increase to “Marketable securities” from $460 million to $764 million. The revision of the December 31, 2006 consolidated statement of cash flows affects “Net cash used in investing activities”, which increased from $2,753 million to $3,057 million based on the increase in the investing activities line “Payment for purchase of marketable securities” from $460 million to $864 million and the increase of the line “Proceeds from sale of marketable securities” from $0 million to $100 million. The “Net cash increase (decrease)” caption was also reduced by $304 million from a decrease of $64 million to a decrease of $368 million, and the “Cash and cash equivalents at the end of the period” changes to match the $1,659 million on the revised consolidated balance sheet. There are no other changes on the consolidated statements of cash flows, including the “Cash and cash equivalents at the beginning of the period” as the Company started to purchase auction rate securities only in 2006.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.7 — 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 Company’s 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
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
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 Company’s customers occasionally return the Company’s products for technical reasons. The Company’s 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 Company’s 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 Company’s 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 expressexpressed or implied by statute or common law. The Company’s 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 Company’s 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 IssueNo. 00-21,Revenue Arrangements with Multiple Deliverables(“EITF 00-21”).for periods 2008 and prior, while allocation is based on verifiable objective evidence, third party evidence or management’s best estimate of selling price of the separable deliverables beginning in 2009. In 2009, the Company early adopted new US GAAP guidance for multiple deliverable arrangements. This new guidance removes the previous requirements of allocating revenue to delivered elements only to the extent that there was verifiable objective evidence of the fair value of all undelivered elements, and now requires the use of relative fair values based on either vendor specific objective evidence or third party evidence of fair values. If neither of these is available, the guidance requires the use of management’s best estimate of selling price for each separable deliverable. The early adoption of this new guidance was retroactively adopted back to January 1, 2009; however, it did not have a material effect on the consolidated statements of income of the Company for the year ended December 31, 2009. These arrangements generally do not include performance-, cancellation-, termination- or refund-type provisions.
Other revenues
Other revenues primarily consist of license revenue, andservice revenue related to transferring licenses, patent royalty income, which are recognized ratably over the termand sale of the agreements.scrap and manufacturing by-products.
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 Company’s 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 fundingfundings that require
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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 Company’s revenue recognition policy, funding related to these contracts is recorded when the conditions required by the contracts are met. The Company’s funding programs are classified under three general categories: funding for research and development activities, capital investment, and loansloans.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
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 Company’s 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. Furthermore, following the enactment of the French Finance Act for 2008, which included several changes to the research tax credit regime (“Crédit Impôt Recherche”), French research tax credits that in prior years were recorded as a reduction of tax expense were deemed to be grants in substance. Unlike other research and development funding, the amounts to be received are determinable in advance and accruable as the funded research expenditures are made. They were thus reported, starting from January 1, 2008, as a reduction of research and development expenses. The 2008 French research tax credits were classified as long term receivables in the consolidated balance sheet as at December 31, 2008. The 2009 French research tax credits were classified as current receivables in the consolidated balance sheet as at December 31, 2009. The research tax credits are to be reimbursed in cash by the French tax authorities within three years in case they are not deducted from income tax payable during this period of time. The Company considers such cash settlement features of the French research tax credits as long-term receivables.
Capital investment funding is recorded as a reduction of “Property, plant and equipment, net” and is recognized in the Company’s 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.
2.82.7 — Advertising costs
Advertising costs are expensed as incurred and are recorded as selling, general and administrative expenses. Advertising expenses for 2009, 2008 and 2007 2006 and 2005 were $12$9 million, $14$10 million and $14$12 million respectively.
2.92.8 — Research and development
Research and development expenses include costs incurred by the Company, the Company’s 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 Company’s research is recorded as research and development expenses. Research and development expenses also include charges originated from purchase accounting, such as in-process research and development recognized on business combinations concluded before January 1, 2009 and amortization of acquired intangible assets. Finally, starting January 1, 2008 the research and development expenses are reported net of research tax credits received in the French jurisdiction, as described in Note 2.6.
2.102.9 —Start-up and phase-out costs
Start-up costs represent costs incurred in thestart-up and testing of the Company’s new manufacturing facilities, before reaching the earlier of a minimum level of production or6-months after the fabrication line’s quality qualification. Similarly, phase-out costs for facilities during the closing stage are also included.Start-up costs are included in “Other income and expenses, net” in the consolidated statements of income. Similarly, phase-out costs for facilities during the closing stage are also included in “Other income and expenses, net” in the consolidated statements of income. The costs of phase-outs are associated with the latest stages of facilities closure when the relevant production volumes become immaterial.
2.112.10 — Income taxes
The provision for current taxes represents the income taxes expected to be paid or the benefit expected to be received related to the current year income or loss in each individual tax jurisdiction. Deferred tax assets and
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
liabilities are recorded for all temporary differences arising between the tax and book bases of assets and liabilities and for the benefits of tax credits and operating loss carry-forwards. Deferred income tax is determined using tax rates and laws that are enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The effect on deferred tax assets and liabilities from changes in tax law is recognized in the period of enactment. Deferred income tax assets are recognized in full, but the Company assesses whether it is probable that future taxable profit will be available against which the
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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. As described in Note 2.6, French research tax credits are recorded as grants starting from January 1, 2008 and reported as a reduction of research and development expenses. French research tax credits prior to January 1, 2008 were recorded as a reduction of tax expense and were reported as deferred tax assets as at December 31, 2008. No French research tax credits were reported as deferred tax assets as at December 31, 2009.
Deferred taxes on the undistributed earnings of the Company’s 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,Additionally, 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.
On January 1, 2007,A deferred tax is recognized on compensation for the grant of stock awards to the extent that such charge constitutes a temporary difference in the Company’s local tax jurisdictions. The measurement of the deferred tax asset is based on an estimate of the future tax deduction, for the amount of the compensation cost recognized for book purposes. Changes in the stock price do not thus impact the deferred tax asset or do not result in any adjustments prior to vesting. When the actual tax deduction is determined, generally upon vesting, it is compared to the estimated tax benefit as recognized over the vesting period. When a windfall tax benefit is determined (as the excess tax benefit of the actual tax deduction over the deferred tax asset) the excess tax benefit is recorded in equity on the line “Capital surplus” on the consolidated statements of changes in equity. In case of shortfall, only the actual tax benefit is to be recognized in the consolidated statements of income. The Company adopted Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertaintywrites off the deferred tax asset at the level of the actual tax deduction by charging first capital surplus to the extent of the pool of windfall benefits from prior years and then earnings. When the settlement of an award results in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”a net operating loss (“NOL”). carryforward, or increase existing NOLs, the excess tax benefit and the corresponding credit to capital surplus is not recorded until the deduction reduces income tax payable.
At each reporting date, the Company assesses all material open income tax positions in all tax jurisdictions to determine the appropriate amount ofany uncertain tax benefits that are recognizable under FIN 48. In compliance with FIN 48, thepositions. The Company uses a two-step process for the evaluation of uncertain tax positions. The recognition threshold in step one permits the benefit from an uncertain tax 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 a “cumulative probability”, approach, resulting in the recognition of the largest amount that is greater than 50 percent likely of being realized upon settlement with the taxing authority. Before adoption, the Company applied Statement of Financial Accounting Standards No. 5,Accounting for Contingencies(“FAS 5”) in accounting for income tax uncertainties and tax exposures. In compliance with FAS 5 provisions, liabilities and accruals for income tax uncertainties and specific tax exposures were recorded or reversed when it was probable that additional taxes would be due or refund. As such, a level of sustainability that met the “probable” threshold was necessary to recognize any benefit from a tax-advantaged transaction. The Company recorded as of the adoption date an incremental tax liability of $8 million for the difference between the amounts recognized under its previous accounting policies and the income tax benefits determined under the new guidance. The cumulative effect of the change in the accounting principle that the Company applied to uncertain income tax positions was recorded in 2007 as an adjustment to retained earnings.
The Company classifies accrued interest and penalties related to uncertain tax positions as components of income tax expense in its consolidated statements of income. Uncertain tax positions, unrecognized tax benefits and related accrued interest and penalties are further described in Note 23.21.
2.122.11 — Earnings per share (“EPS”)
Basic earnings per share are computed by dividing net income (loss) attributable to parent company shareholders 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 number of 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. If all necessary conditions have not been satisfied by the end of the period, the number of nonvested shares included in the computation of the
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
diluted EPS shall be based on the number of shares, if any that would be issuable if the end of the reporting period were the end of the contingency period and if the result would bewere dilutive.
2.132.12 — Cash and cash equivalents
Cash and cash equivalents represent cash on hand and deposits at call with external financial institutions with an original maturity of ninety days or less.less that are readily convertible in cash. Bank overdrafts are not netted against cash and cash equivalents and are shown as part of current liabilities on the consolidated balance sheets.
2.14 —2.13— Restricted cash
Restricted cash includeincludes collateral deposits used as security under arrangements for financing of certain entities.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2.152.14 — 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. The carrying amount of the receivable is thus reduced through the use of an allowance account, and the amount of the loss is recognized on the line “Selling, general and administrative expenses”administrative” in the consolidated statements of income. When a trade accounts receivable is uncollectible, it is written-off against the allowance account for trade accounts receivables. Subsequent recoveries, if any, of amounts previously written-off are credited against “Selling, general and administrative expenses”administrative” in the consolidated statements of income.
In the events of sale of receivables and factoring, the Company derecognizes the receivables and accounts for them as a sale only to the extent that the Company has surrendered control over the receivables in exchange for a consideration other than beneficial interest in the transferred receivables.
2.162.15 — Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is based on the weighted average cost by adjusting standard cost to approximate actual manufacturing costs on a quarterly basis; the cost is therefore dependent on the Company’s 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.expenses and cost of completion.
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.
2.172.16 — Goodwill
Goodwill recognized inrepresents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired business combinationsat the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Goodwill is not amortized but rather is subject to antested annually for 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.exist. 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 usuallyuses a market approach with financial metrics of comparable public companies and estimates the expected discounted future cash flows associated with the reporting unit. Significant
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
management judgments and estimates are used in forecasting the future discounted cash flows, including: the applicable industry’s sales volume forecast and selling price evolution, the reporting unit’s market penetration and its revenues evolution, the market acceptance of certain new technologies and products, the 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.
2.182.17 — Intangible assets
Intangible assets subject to amortization include the cost of technologies and licensesintangible assets purchased from third parties purchased softwarerecorded at cost 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 acquired in business combinations recorded at fair value, which include trademarks, technologies and compares this to their carrying value. An impairment loss is recognized in the consolidated statements of income for the amount by which the asset’s carryinglicenses, contractual customer relationships and computer software.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTrademarks and technology licenses
(in millions of U.S. dollars, except per share amounts)
amount exceeds itsSeparately acquired trademarks and licenses are recorded at historical cost. Trademarks and licenses acquired in a business combination are recognized at fair value.value at the acquisition date. Trademarks and licenses have a finite useful life and are carried at cost less accumulated amortization. Amortization is computedcalculated using the straight-line method to allocate the cost of trademarks and licenses over the estimated useful lives. The estimate useful lives on licenses range from 3 to 7 years while trademarks have a useful life ranging from 2 to 3 years.
Contractual customer relationships
Contractual customer relationships acquired in a business combination are recognized at fair value at the acquisition date. Contractual customer relationships have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated 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 | |
expected life of the customer relationships, which ranges from 4 to 12 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.Computer software
Separately acquired computer software is recorded at historical cost. Costs associated with maintaining computer software programmes are recognized as expenses as incurred. 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. Computer software recognized as assets are amortised over their estimated useful lives, which does not exceed 4 years.
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. An impairment loss is recognized in the consolidated statements of income for the amount by which the asset’s carrying amount exceeds its fair value. 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.
2.192.18 — Property, plant and equipment
Property, plant and equipment are stated at historical cost, net of government funding and any impairment losses. Major additions and improvements are capitalized, minor replacements and repairs are charged to current operations.
Land is not depreciated. Depreciation on fixed assets is computed using the straight-line method over the followingtheir estimated useful lives:lives, as follows:
| | | | |
Buildings | | | 33 years | |
Facilities & leasehold improvements | | | 5-10 years | |
Machinery and equipment | | | 3-63-10 years | |
Computer and R&D equipment | | | 3-6 years | |
Other | | | 2-5 years | |
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
In 2008, the Company launched its first300-mm production facility. Consequently, the Company assessed the useful life of its300-mm manufacturing equipment, based on relevant economic and technical factors. The conclusion was that the appropriate depreciation period for such300-mm equipment was 10 years. This policy was applied starting January 1, 2008.
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 asset’s 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 Company’s 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 are classified as assets held for sale when the following conditions arehave been met for the assets to be disposed of by sale: management has approved the plan to sell; assets are available for immediate sale; assets are actively being marketed; sale is probable within one year; price is reasonable in the market and it is unlikely tothat there will be significant changes in the assets to be sold or a withdrawal to the plan to sell. Assets classified as held for sale are reflectedreported as current assets 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 the held-for-sale accounting treatment requires an impairment charge for the difference between the carrying amount and the fair value, such impairment is reflected on the consolidated statements of income on the line “Impairment, restructuring charges and other related closure costs”.
If the long-lived assets no longer meet the held-for-sale model, they are reported as assets held for use and thus reclassified from current assets to the line “Property, plant and equipment, net” in the consolidated balance sheet. The assets are measured at the lower of their fair value at the date of the subsequent decision not to sell and their carrying amount prior to their classification as assets held for sale, adjusted for any depreciation that would have been recognized if the long-lived assets had not been classified as assets held for sale. The fair value at the date of the decision not to sell is based on the discounted cash flows expected from the use of the assets. Any required adjustment to the carrying value of the asset that is reclassified as held and used is recorded in the income statement at the time of the reclassification and reported in the same income statement caption that was used to report adjustments to the carrying value of the asset during the time it was held for sale (line “Impairment, restructuring charges and other related closure costs”). When property, plant and equipment are retired or otherwise disposed of, the net book value of the assets is removed from the Company’s books and the net gain or loss is included in “Other income and expenses, net” in the consolidated statements of income.
Leasing arrangements in which a significant portion of the risks and rewards of ownership are retained by the Company are classified as capital leases. Capital leases are included in “Property, plant and equipment, net” and
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
depreciated over the shorter of the estimated useful life or the lease term. Leasing arrangements classified as operating leases are arrangements in which the lessor retains a significant portion of the risks and rewards of ownership of the leased asset. Payments made under operating leases are charged to the consolidated statements of income 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.
2.202.19 — Investments
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 held-for-trading or available-for-sale as described in Note 2.4. Investments in equity securities 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
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
declines in value. The value of a cost method investment is estimated on a non-recurring basis when there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Other-than-temporary impairment losses are immediately recorded in the consolidated statements of income and are based on the Company’s assessment of any significant and sustained reductions in the investment’s fair value. For unquoted equity securities, assumptions and estimates used in measuring fair value include the use of recent arm’s length transactions when they reflect the orderly exit price of the investments. Gains and losses on investments sold are determined on the specific identification method and are recorded as a non-operating element on the line “Gain (loss) on financial assets” in the consolidated statements of income.
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. TheyEquity investments also include entities which the Company determines to be variable interest entities, as described below, if the Company has the ability to exercise significant influence over the entity’s operations even if the Company owns less than 20% and is not the primary beneficiary. Equity investments are presented on the face of the consolidated balance sheet on the line “Equity investments,” except if they meet the criteria for classification as assets held for sale.investments”. The Company’s share in its equity investments’ profit and loss is recognized in the consolidated statements of income as “Income (loss)“Loss on equity investments” and in the consolidated balance sheetsheets as an adjustment against the carrying amount of the investments. When the Company’s share of losses in an equity investment equals or exceeds its interest in the investee, including any unsecured receivable, 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 At each period-end, the Company does not haveassesses whether there is objective evidence that its interests in the ability to exercise significant influence are accounted for under the cost method. Under the cost method of accounting,equity investments are carriedimpaired. Once a determination is made that an other-then-temporary impairment exists, the Company writes down the carrying value of the equity investment to its fair value at historicalthe balance sheet date, which establishes a new cost and are adjusted only for declines in fair value.basis. The fair value of a cost methodan equity investment is estimated when there are identified events or changes in circumstances that may havemeasured on a significant adverse effect on the fair valuenon-recurring basis using a combination 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 as described in note 2.4. Other-than-temporary losses are recorded in netan income and areapproach, based on the Company’s assessmentdiscounted cash flows, and a market approach with financial metrics of any significant, sustained reductions in the investment’s market value and of the market indicators affecting the securities. Gains and losses on investments sold are determined on the specific identification method and are recorded as “Other income or expenses, net” in the consolidated statements of income.comparable public companies.
Since the adoption in 2003 of Financial Accounting Standards Board Interpretation No. 46Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51(revised 2003) and the related FASB Staff Positions (collectively “FIN 46R”), theThe 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 entity’s expected losses, receives the majority of its expected residual returns, or both as a result of holding variable interests. Assets, liabilities, and the non-controllingnoncontrolling interest of newly consolidated VIEs are initially measured at fair value in the same manner as if the consolidation resulted from a business combination. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.
TheFor business combinations concluded before January 1, 2009, the purchase method of accounting iswas used to account for a business combination if the acquired entity meetsmet the definition of a business. If the acquired entity iswas a development stage entity and hashad not commenced planned principal operations, it iswas presumed not to be a business, and the individual assets and liabilities arewere recognized at their relative fair values with no goodwill recognized in the consolidated balance sheet. In case of acquisition of a business, the cost of the acquisition iswas measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed, plus costs directly attributable to the acquisition. If part of the consideration iswas contingent on a future event, the additional cost iswas not generally recognized until the contingency iswas resolved, the amount iswas determinable, or beyond a reasonable doubt. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination arewere measured initially at their fair values at the acquisition date. Any acquired in-process research and development (“IPR&D”) iswas expensed immediately in the consolidated statements of income since it hashad no alternative future use. The excess of the cost of acquisition over the fair value of the Company’s share of the identifiable net assets acquired iswas recorded as goodwill. If the cost of acquisition iswas lower than the fair value of the Company’s share in the net assets of the entity acquired, the difference iswas used to reduce proportionately the fair value assigned and allocated on a pro-rata basis to all assets other than current and financial assets, assets to be sold, prepaid pension assets and deferred taxes. Any negative goodwill remaining iswas recognized as an extraordinary gain. Goodwill arising from a purchase of less than 100% of a business was valued as the difference between the purchase price paid by the Company and its proportionate share of the fair values of the identifiable net assets acquired, while the noncontrolling interest was reported based on the book value of net assets acquired. Consequently, there was no step up for the noncontrolling interests’ share of the excess of the fair value of net assets over book value. When the Company acquired a business and a portion of the consideration was a noncontrolling interest in one or more of the Company’s businesses, the Company valued the net assets of the subsidiaries in which the interest was being given at fair value and recorded the
F-17F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
difference between fair value and book value related to the interest on the line “Issuance of shares by subsidiary” in the consolidated statements of changes in equity.
The purchase accounting method applied to all business combinations concluded on or after January 1, 2009, was on the basis of the amended purchase accounting guidance. The net of the acquisition-date amount of the identifiable asset acquired, equity instruments issued, and liabilities assumed is measured at fair value on the acquisition date. Any contingent purchase price, and contingent assets and liabilities are recorded at fair value on the acquisition date, regardless of the likelihood of payment and acquisition-related transaction costs are expensed as incurred. Restructuring costs relating to the acquired business are expensed as incurred. Acquired in-process research and development (“IPR&D”) costs are no longer written off to earnings upon the acquisition; instead, IPR&D is capitalized and recorded as an intangible asset on the acquisition date, subject to impairment testing until the research or development is completed or abandoned. The excess of the aggregate of the consideration transferred and the fair value of any noncontrolling interest in the acquiree over the net of the acquisition-date amount of the identifiable assets acquired and liabilities assumed is recorded as goodwill. In case of a bargain purchase, the Company reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed; the noncontrolling interest in the acquiree, if any; the Company’s previously held equity interest in the acquiree, if any; and the consideration transferred. If after this review, a bargain purchase is still indicated, it is recognized in earnings attributed to the Company. The purchase of additional interests in a partially owned subsidiary is treated as an equity transaction as well as all transactions concerning the sale of subsidiary stock or the issuance of stock by the partially owned subsidiary as long as there is no change in control of the subsidiary. If as a consequence of selling subsidiary shares, the Company no longer controls the subsidiary, the Company recognizes a gain or loss in earnings.
2.212.20 — Employee benefits
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 or state institutions, 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. Theentity for which 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,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)(“FAS 158”), the
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 accounted 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, as described in note 18.7. 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,earnings, 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.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| |
(b) | Other post-employmentpost-retirement obligations |
The Company provides post-retirement benefits to some of its retirees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments, and changes in actuarial assumptions, are charged or credited to income over the expected average remaining working lives of the related employees. These obligations are valued annually by independent qualified actuaries.
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 termination benefit arrangements and
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
on-going termination benefit arrangements. A one-time termination 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) | Other long termlong-term employee benefits |
The Company provides long termlong-term employee benefits such as seniority awards in certain subsidiaries. The entitlement to these benefits is usually conditional on the employee completing a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments, and changes in actuarial assumptions, are charged or credited to incomeearnings in the period of change. These obligations are valued annually by independent qualified actuaries.
| |
(f) | Share-based compensation |
Stock options
At December 31, 2007, the Company had five employee and Supervisory Board stock-option plans, which are described in detail in Note 18. Until the fourth quarter of 2005, the Company applied the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25Accounting 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 Company’s 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.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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 Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(“FAS 123”) for the year ended December 31, 2005:
| | | | |
| | Year Ended
| |
| | December 31,
| |
| | 2005 | |
|
Net income (loss), as reported | | | 266 | |
of which compensation expense on nonvested shares, net of tax effect
| | | (7 | ) |
Deduct: Total stock-option employee compensation expense determined under FAS 123, net of related tax effects | | | (244 | ) |
Net income, pro forma | | | 22 | |
Earnings (loss) per share: | | | | |
Basic, as reported | | | 0.30 | |
Basic, pro forma | | | 0.02 | |
Diluted, as reported | | | 0.29 | |
Diluted, pro forma | | | 0.02 | |
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 Company’s 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
| |
| | December 31,
| |
| | 2005 | |
|
Expected life (years) | | | 6.1 | |
Historical Company share price volatility | | | 52.9 | % |
Risk-free interest rate | | | 3.84 | % |
Dividend yield | | | 0.69 | % |
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. Following the change in the Company’s compensation policy occurred in 2005, no stock option was granted in 2006 and in 2007.
Nonvested shares
In 2005, theThe Company began to grantgrants 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 The Company decided to early adopt Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Paymentand the related FASB Staff Positions (collectively “FAS 123R”), which requires a public entity to measuremeasures the cost of share-based service awards based on the grant-date fair value of
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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 Company early adopted FAS 123R usingCompensation is recognized only for 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 relatedawards that ultimately vest. The compensation cost are further explainedis recorded through earnings over the vesting period against equity, under “Capital surplus” in detailsthe consolidated statement of changes in Note 18.equity. The
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
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 tocost is calculated based on the number of nonvested shares subjectawards expected to vest, which includes assumptions on the number of awards to be forfeited due to the vesting modificationsemployees’ failing to provide the service condition, and incremental cost, if any, to be recognized ratablyforfeitures following the non-completion of one or more performance conditions. When the stock-award plan contains a market condition feature, the market condition is reflected in the estimated fair value of the award at grant date.
Liabilities for the Company’s portion of payroll taxes are not accrued for over the modified vesting period.period but are recognized at vesting, which is the event triggering the measurement of employee-related social charges, based on the intrinsic value of the share at vesting date, and payment of the social contributions in most of the Company’s local tax jurisdictions.
2.222.21 — Long-term 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 issubsequently stated at amortized over the term of the debt as interest expense using the effective 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.cost.
Debt issuance costs are included in long-termreported as non-current assets on the line “Other investments and other non-current assets” of the consolidated balance sheets. They are subsequently amortized inthrough earnings on the line “Interest income, (expense), net” of the consolidated statements of income until the first redemption right of the holder. Outstanding bondsbond amounts are classified in the consolidated balance sheet as “Current portion of long termlong-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 rate 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. The Company may from time to time enter into “repurchase agreements” with certain financial institutions and may give as collateral certain available-for-sale debt securities. The Company retains control over the pledged debt securities and consequently does not de-recognize the financial assets from its consolidated balance sheet upon transfer of the collateral. The Company accounts for such transactions as secured borrowings and recognizes the cash received upon transfer by recording a liability for the obligation to return the cash to the lending financial institution within a term which does not exceed three months. Such obligation is extinguished when the Company repurchases the pledged securities in accordance with the terms of the repurchase agreements.
2.232.22 — Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Where any subsidiarythe Company purchases the Company’sits 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 Company’s 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.
2.242.23 — Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of a business during a period except those changes resulting from investment by shareholders and distributions to shareholders. In the accompanying consolidated financial statements, “Accumulated other comprehensive income (loss)” consists of temporary unrealized gains or losses on marketable securities classified as available-for-sale, the unrealized gain (loss) on derivatives designated as cash flow hedgeshedge 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.
F-21F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
2.252.24 — 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 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,Guarantor’s 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”).guarantee. 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 a guarantor, is released from the risk underlying the guarantee.
2.262.25 — Recent accounting pronouncements
| |
(a) | Accounting pronouncements effective in 2007 and expected to impact the Company’s operations2009 |
In February 2006,The fair value measurement guidance specifically related to nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis, such as impaired long lived assets or goodwill, was previously deferred by 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”(“FASB”) and Statementbecame effective as of Financial Accounting Standards No. 140,Accounting for TransfersJanuary 1, 2009. For goodwill impairment testing and Servicingthe use of Financial Assetsfair value of tested reporting units, the Company reviewed its goodwill impairment model to measure fair value relying on external inputs and Extinguishmentsmarket participant’s assumptions rather than exclusively using discounted cash flows generated by each reporting entity. Such fair value measurement corresponds to a level 3 fair value hierarchy in the amended guidance, as described in Note 25. This new fair value measurement basis, when applied in a comparable market environment as in the last impairment campaign, had no significant impact on the results 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 hybridgoodwill impairment tests as performed in 2009. However, as a single instrument, (2) to clarify certain exclusionsresult of FAS 133the continuing downturn in market conditions and the general business environment, this new measurement of the fair value of the reporting units, when used in future goodwill and impairment testing, could generate impairment charges as the fair value will be estimated on business indicators that could reflect a distressed market.
In December 2007, the FASB issued guidance related to interestbusiness combinations 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 quarternoncontrolling interests in consolidated financial statements. The Company adopted FAS 155 in 2007guidance significantly changed how business acquisitions are accounted for and FAS 155 did not have any material effect on its financial position or results of operations.
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 clarifychanged the accounting and reporting for tax positions taken,minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. The significant changes from past practice are as follows: the new guidance expands the definitions of a business and business combination; it requires the recognition of contingent consideration at fair value on the acquisition date; acquisition-related transaction costs and restructuring costs are expensed as incurred; it changes the way certain assets are valued and requires retrospective application of measurement period adjustments. Additionally, for all business combinations (whether partial, full, or expected to be taken, in a company’s tax return andstep acquisitions), the uncertainty as toentity that acquires the amount and timingbusiness records 100% of recognition in the company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes(“FAS 109”). The interpretation also addresses derecognition of previously recognized tax positions, classification of related taxall assets and liabilities accrual of interestthe acquired business, including goodwill, generally at their fair values. The significant changes from past practice related to noncontrolling interests include that they are now considered as equity and penalties, interim period accounting,transactions between the parent company and disclosure and transition provisions. The interpretationthe noncontrolling interests are treated as equity transactions as far as these transactions do not create a change in control. Additionally, the guidance requires the recognition of noncontrolling interests at fair value rather than at book value as in past practice in cases of partial acquisitions. Such guidance is effective for fiscal years beginning on or after December 15, 2006.2008 and was adopted by the Company on January 1, 2009. The Company adopted FIN 48business combination guidance has been applied prospectively. The noncontrolling interest guidance required retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests. All other requirements of the noncontrolling interest guidance was applied prospectively. Acquisition-related costs, which amounted to $7 million and were capitalized as at December 31, 2008, were immediately recorded in earnings in the first quarter of 2009. Additionally, presentation and disclosures of noncontrolling interests generated a reclassification in all reporting periods as at January 1, 2007. The cumulative effect of2009 from the changemezzanine line “Minority interests” in the accounting principle that the Company appliedpreviously filed consolidated balance sheet as at December 31, 2008 to uncertain income tax positions was recorded in 2007 as an adjustment to retained earnings. The impactequity for a total amount of such adoption is detailed in Note 2.11. Uncertain tax positions, unrecognized tax benefits and related accrued interest and penalties are further described in Note 23.
| |
(b) | Accounting pronouncements effective in 2007 and not expected to impact the Company’s operations |
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. The Company adopted FAS 156 in 2007 and FAS 156 did not have any material effect on its financial position and results of operations.$276 million. No significant
F-22F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
changes were recorded upon adoption in valuation allowance for acquired deferred tax assets and the resolution of assumed uncertain tax positions on past business combinations.
In March 2008, the FASB amended the guidance on disclosures about derivative instruments and hedging activities intended to improve financial reporting about derivative instruments and hedging activities and to enable investors to better understand how these instruments and activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. This amendment is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company adopted the amendment in the first quarter of 2009 and included the new disclosure requirements in Note 25.
In November 2008, additional guidance was issued related to equity method investment accounting considerations. The guidance addresses a certain number of matters associated with the impact that the December 2007 amended guidance on business combinations and noncontrolling interests might have on the accounting for equity method investments. This additional guidance is effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008, with no early application permitted. This guidance must be applied prospectively to new investments acquired after the effective date and was adopted by the Company in the first quarter of 2009. There was no material effect on its financial position and results of operations as a result of adoption.
In November 2008, additional guidance was issued on accounting for defensive intangible assets. This additional guidance applies to all defensive assets, either acquired from a third party or through a business combination. However, it excludes from its scope in-process research and development acquired in a business combination. The additional guidance states that a defensive asset should be considered a separate unit of accounting and should not be combined with the existing asset whose value it may enhance. A useful life should be assigned that reflects the acquiring entity’s consumption of the defensive asset’s expected benefits. The guidance is effective prospectively to intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with no early application permitted. The Company adopted the guidance in the first quarter of 2009. The Company did not acquire significant defensive intangible assets.
In April 2009, the FASB issued clarifying guidance on the determination of fair values when volumes and levels of activity for assets or liabilities have significantly decreased and on identifying transactions that are not orderly. The guidance clarifies the issue of determining the fair values of assets and liabilities in non-active markets and that distressed or forced sales are not considered to represent fair value. It also requires additional disclosures in both interim and annual financial statements of the inputs and valuation techniques used in measuring fair value and disclosure of any changes in valuation techniques. The clarifying guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted in certain circumstances for periods ending after March 15, 2009. The Company adopted the guidance in the second quarter of 2009 and included all required disclosures in its consolidated financial statements beginning in the period ended June 27, 2009. This guidance did not have any impact on the Company’s financial position and results of operations.
In April 2009, the FASB also issued clarifying guidance on the recognition and presentation of other-than-temporary impairments. This guidance amends the impairment guidance for certain debt securities and requires an investor to assess the likelihood of selling the security prior to recovering its cost basis. If an investor is able to meet the criteria to assert that it will not have to sell the security before recovery, impairment charges related to credit losses, or the inability to collect cash flows sufficient to amortized cost basis, would be recognized in earnings, while impairment charges related to non-credit losses would be reflected in other comprehensive income. The guidance, which is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 required adoption through a cumulative effect adjustment. It also requires additional disclosures for both annual and interim periods on debt and equity securities. The Company adopted the guidance in the second quarter of 2009 and included all required disclosures in its consolidated financial statements beginning in the period ended June 27, 2009. The adoption did not have any impact on the Company’s financial position and results of operations.
In June 2009, the FASB issued guidance on subsequent events, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Although there is new terminology, the guidance is based on the same principles as those that existed prior to adoption. The guidance also includes a new required disclosure of the date through which an entity has evaluated subsequent events. The guidance is effective for interim and annual periods
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009 with no material impact on the consolidated financial statements.
In June 2009, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 112 (“SAB 112”), which updates and amends the SEC staff’s previous interpretive guidance relating to business combinations and noncontrolling interests. Specifically, SAB 112 updates various sections of the Staff Accounting Bulletin Series to bring it into conformity with the FASB guidance on business combinations and noncontrolling interests. The Company adopted SAB 112 in the second quarter of 2009, which did not have a material impact on the Company’s financial position and results of operations.
In July 2009, the FASB issued the Accounting Standards Codification (“Codification”). The Codification is a single authoritative source for U.S. GAAP. While not intended to change U.S. GAAP, the Codification significantly changes the way in which the accounting literature is organized. It is structured by accounting topic to identify the guidance that applies to a specific accounting issue. The Codification is effective for financial statements that cover interim and annual periods ending after September 15, 2009. The Company has adopted the Codification in its interim consolidated financial statements for the period ending September 26, 2009.
In October 2009, the FASB updated the Codification to provide share lenders with guidance on how to account for own-share lending arrangements. Specifically, a share lender should record as debt issuance cost the fair value of a share lending arrangement. The outstanding shares should be excluded from basic and diluted earnings per share, unless the counterparty defaults. When a default is probable, expense should be recognized with an offset to equity for the fair value of the shares less estimated recoveries. The guidance is effective for new share lending arrangements for interim and annual periods beginning on or after June 15, 2009. For existing arrangements, the guidance is effective for fiscal years beginning on or after December 15, 2009 and must be applied retrospectively for arrangements outstanding as of the effective date. The Company does not hold any share lending arrangements and thus the guidance did not have any impact on the Company’s financial position and results of operations upon adoption.
In October 2009, the FASB also released clarifying guidance on arrangements with multiple deliverables. The new guidance requires companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics through the use of relative fair values based on either vendor specific objective evidence or third party evidence of fair values. If neither of these is available, the guidance requires the use of management’s best estimate of selling price. The residual method of allocating arrangement consideration is no longer permitted. The new guidance also removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance. It finally requires expanded qualitative and quantitative disclosures. The new guidance is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted as early as interim periods ended September 30, 2009. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company has early adopted the guidance on a prospective basis, with effect as of January 1, 2009. The adoption resulted in no material effects to the Company’s financial position, timing of revenue recognition, units of accounting, allocation of consideration or results of operations and does not result in the restatement of any prior interim periods.
| |
(c)(b) | Accounting pronouncements expected to impact the Company’s operations that are not yet effective and have not been adopted early adopted by the Company |
In September 2006,June 2009, the Financial Accounting Standards BoardFASB issued Statementamendments to the guidance on accounting for transfers 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, 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. However, in November 2007, the Financial Accounting Standards Board drafted a proposed FASB Staff Position (“FSP”) that would partially defer the effective date of FAS 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis. The final FSP was issued in February 2008. However, it does not defer recognition and disclosure requirements for financial assets and the guidance on consolidation of variable interest entities. The amendment regarding accounting for transfers of financial liabilities orassets includes: (i) eliminating the qualifying special-purpose entity (“QSPE”) concept; (ii) a new unit of account definition that must be met for nonfinancialtransfers of portions of financial assets and nonfinancial liabilities that are measured at least annually. The Company has adopted FAS 157 as of January 1, 2008. FAS 157 adoption is prospective, with no cumulative effect of the change in the accounting guidance for fair value measurement to be recorded as an adjustment to retained earnings, excepteligible for the following: valuation of financial instruments previously measured with block premiums and discounts; valuation of certain financial instruments and derivatives at fair value using the transaction price; and valuation of a hybrid instrument previously measured at fair value using the transaction price. The Company will not record, upon adoption, any adjustment to retained earnings since it does not hold any of the three categories of instruments described above. Consequently, consolidated financial statements as of January 1, 2008 will reflect fair value measures in compliance with previous GAAP. Reassessment of fair value in compliance with FAS 157 will be dealt with as a change in estimates, if any, in the first quarter of 2008. The Company has identified the following items in its consolidated financial statements for which detailed assessment on FAS 157 impact was required: the valuation of available-for-sale securities for which no observable market price is obtainable; the annual goodwill impairment test based on the fair value of the tested reporting units; and FAS 144 held-for-sale model when applied to the Company’s flash memory business deconsolidation (the “FMG deconsolidation”). Concerning the valuation of available-for-sale debt securities which have currently, at the best of management’s visibility, no observable market price, management estimates that fair value of these instruments when measured in compliance with FAS 157 should not materially differ from current estimates and that fair value measure, even if using certain entity-specific assumptions, is in line with a Level 3 FAS 157 fair value hierarchy. For goodwill impairment testing and the use of fair value of tested reporting units, the Company is currently reviewing its goodwill impairment model to measure fair value on marketable comparables, instead of discounted cash flows generated by each reporting entity. Based on the Company’s preliminary assessment, management estimates that FAS 157 adoption could have an effect on certain future goodwill impairment tests, in the event the Company’s strategic plan could necessitate changes in the product portfolios, for which materiality will be further evaluated. Finally, the Company continues to evaluate the potential impact of adopting FAS 157, but management believes that, based on the current available evidence, the fair value measure on the consideration to be received upon FMG deconsolidation is in line with FAS 157 definition of fair value and that FAS 157 adoption should not have a material impact on the actual loss to be recorded at the date of the transaction closing. These conclusions are the results of analysis done based on current assumptions that are true today, but upon certain changes in events and circumstances may no longer be consistent with the assumptions upon the date of adoption. As a result, these conclusions on the impact of FAS 157 adoption are subject to revision as the evaluations are concluded.
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
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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 has adopted FAS 159 as of January 1, 2008 and will accordingly evaluate the assets and liabilities on which it has elected to apply the fair value option as of the end of the first quarter 2008.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (Revised 2007),Business Combinations (“FAS 141R”) and No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“FAS 160”). These new standards will initiate substantive and pervasive changes that will impact both the accounting for future acquisition deals and the measurement and presentation of previous acquisitions in consolidated financial statements. The standards continue the movement toward the greater use of fair values in financial reporting. FAS 141R will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. The significant changes from current practice resulting from FAS 141R are: the definitions of a business and a business combination have been expanded, resulting in an increased number of transactions or other events that will qualify as business combinations; for all business combinations (whether partial, full, or step acquisitions), the entity that acquires the business (the “acquirer”) will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; certain contingent assets and liabilities acquired will be recognized at their fair values on the acquisition date; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; in step acquisitions, previous equity interests in an acquiree held prior to obtaining control will be remeasured to their acquisition-date fair values, with any gain or loss recognized in earnings; when making adjustments to finalize initial accounting, companies will revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date; reversals of valuation allowances related to acquired deferred tax assetssale accounting; (iii) clarifications and changes to acquired income tax uncertainties will be recognized in earnings, exceptthe derecognition criteria for qualified measurement period adjustments (the measurement period is a period of uptransfer to one year during which the initial amounts recognized for an acquisition can be adjusted.; this treatment is similar to how changes in other assets and liabilities in a business combination will be treated, and different from current accounting under which such changes are treated as an adjustment of the cost of the acquisition); and asset values will no longer be reduced when acquisitions result in a “bargain purchase”, instead the bargain purchase will result in the recognition of a gain in earnings. The significant change from current practice resulting from FAS 160 is that since the noncontrolling interests are now considered as equity, transactions between the parent company and the noncontrolling interests will be treated as equity transactions as far as these transactions do not create a change in control. FAS 141R and FAS 160 are effective for fiscal years beginning on or after December 15, 2008. FAS 141R will be applied prospectively, with the exception of accounting for changes in a valuation allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48. FAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of FAS 160 shall be applied prospectively. Early adoption is prohibited for both standards. The Company is currently evaluating the effect the adoption of these statements will have on its financial position and results of operations.
| |
(d) | Accounting pronouncements that are not yet effective and are not expected to impact the Company’s operations |
In June 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 06-11,Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards(“EITF 06-11”). The issue applies to equity-classified nonvested shares on which dividends are paid prior to vesting, equity-classified nonvested share units on which dividends equivalents are paid, and equity-classified share options on which payments equal to the dividends paid on the underlying shares are made to the option-holder while the option is outstanding. The issue is applicable to the dividends or dividend equivalents that are (1) charged to retained earnings under the guidance in Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment(“FAS 123R”) and (2) result in an income tax deduction for the employer.EITF 06-11 states that a realized tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity-classified nonvested shares,
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
nonvested equity share units, and outstanding share options should be recognized as an increase to additionalpaid-in-capital. Those tax benefits are considered excess tax benefits (“windfall”) under FAS 123R.EITF 06-11 must be applied prospectively to dividends declared in fiscal years beginning after December 15, 2007 and interim periods within those fiscal years, with early adoption permitted for the income tax benefits of dividends on equity-based awards that are declared in periods for which financial statements have not yet been issued. The Company will adoptEITF 06-11 when effective. However, management does not expect thatEITF 06-11 will have a material effect on the Company’s financial position and results of operations.
In June 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-3,Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities(“EITF 07-3”). The issue addresses whether non-refundable advance payments for goods or services that will be used or rendered for research and development activities should be expensed when the advance payments are made or when the research and development activities have been performed.EITF 07-3 applies only to non-refundable advance payments for goods and services to be used and rendered in future research and development activities pursuant to an executory contractual arrangement.EITF 07-3 states that non-refundable advance payments for future research and development activities should be capitalized until the goods have been delivered or the related services have been performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense.EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. Earlier application is not permitted and entities should recognize the effect of applying the guidance in this Issue prospectively for new contracts entered into afterEITF 07-3 effective date. The Company will adoptEITF 07-3 when effective. However, management does not expect thatEITF 07-3 will have a material effect on the Company’s financial position and results of operations.
In November 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-1,Accounting for Collaborative arrangements(“EITF 07-1”). The consensus prohibits the application of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock(“APB 18”) and the equity method of accounting for collaborative arrangements unless a legal entity exists. Payments between the collaborative partners would be evaluated and reported in the consolidated statements of income based on applicable GAAP. Absent specific GAAP, the entities that participate in the arrangement would apply other existing GAAP by analogy or apply a reasonable and rational accounting policy consistently.EITF 07-1 is effective for periods that begin after December 15, 2008 and would apply to arrangements in existence as of the effective date. The effect of the new consensus will be accounted for as a sale; (iv) a change in accounting principle through retrospective application.to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (v) extensive new disclosures. The Company will adoptEITF 07-1amendment regarding consolidation of variable interest entities includes: (i) the elimination of exemption for QSPEs; (ii) a new approach for determining who should consolidate a variable-interest entity and (iii) changes to when it is necessary to reassess who should consolidate a variable-interest entity. Both amendments are effective and management does not expect thatEITF 07-1 will have a material effect onas of the Company’s financial position and resultsbeginning of operations.
In November 2007, the Emerging Issues Task Force reached final consensus on IssueNo. 07-6,Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause(“EITF 07-6”). The issue addresses whether the existence of a buy-sell arrangement would preclude partial sales treatment when real estate is sold to a jointly owned entity. The consensus provides that the existence of a buy-sell clause does not necessarily preclude partial sale treatment under Statement of Financial Accounting Standards No. 66,Accounting for Sales of Real Estate(“FAS 66”).EITF 07-6 is effective foran entity’s first fiscal yearsyear beginning after DecemberNovember 15, 20072009 and would be applied prospectively to transactions entered into after the effective date. The Company will adoptEITF 07-6 when effective and management does not expectfor interim periods within thatEITF 07-6 will have a material effect on the Company’s financial position and results of operations.
In November 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings(“SAB 109”). SAB 109 provides the Staff’s views regarding written loan commitments that are accounting for at fair value through earnings under GAAP. SAB 109 revises and rescinds portions of Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan Commitments(“SAB 105”). SAB 105 stated that in measuring the fair value of a derivative loan commitment it would be inappropriate to incorporate the expected net future cash flows related to the associated servicing of the loan. Consistent with FAS 156 and FAS 159, SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 does, however, retain the Staff’s views included in SAB 105 that no internally-developed intangible assets should be included in the measurement of the estimated fair value of a loan commitment derivative. SAB 109 first year. Earlier adoption is effective for all written loan commitments recorded at fair value that are entered into, or substantially modified, in fiscal quarters beginning after December 15,
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
2007.prohibited. The Company will adopt SAB 109 when effective but managementthe amendments as of January 1, 2010 and does not expect that SAB 109 will have a material effectany significant impact on the Company’s financial position and results of operations.
In January 2008,September 2009, the U.S. Securities and Exchange Commission (SEC)FASB issued Staff Accounting Bulletin No. 110,Year-End Help for Expensing Employee Stock Options (“SAB 110”). SAB 110 expressesfinal guidance on measuring the viewsfair value of liabilities. It amends the Codification primarily as follows: (i) it sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market is not available; (ii) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the Staff regardingliability; (iii) clarifies that both a quoted price in an active market for the useidentical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of a “simplified” method,the asset are required are Level 1 fair value measurements. The amended guidance is effective for the first reporting period beginning after issuance. The Company will adopt the amendment as of January 1, 2010 and does not expect any significant impact on the Company’s financial position and results of operations.
Changes in developing an estimatethe value of expected term of “plain vanilla” share optionsmarketable securities, as reported in accordance with FAS 123Rcurrent and amended its previous guidance under SAB 107 which prohibited entities from usingnon-current assets on the simplified method for stock option grants afterconsolidated balance sheets as at December 31, 2007. The Staff amended its previous guidance because additional information about employee exercise behavior has not become widely available. With SAB 110, the Staff permits entities to use, under certain circumstances, the simplified method beyond2009 and December 31, 2007 if2008 are detailed in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase in
| | Other than
| | | | | | | | | | |
| | | | fair value
| | temporary
| | | | | | | | | | |
| | | | included in
| | impairment
| | | | | | | | | | |
| | | | OCI* for
| | charge
| | | | | | Foreign
| | | | |
| | | | available-
| | and realized
| | | | | | exchange
| | Foreign
| | |
| | | | for-sale
| | losses
| | | | | | result
| | exchange
| | |
| | December 31,
| | marketable
| | on marketable
| | | | | | through
| | result
| | December 31,
|
| | 2008 | | securities | | securities | | Purchase | | Sale | | P&L | | through OCI | | 2009 |
| | In millions of U.S. dollars |
|
Aaa debt securities issued by the U.S. Treasury | | | — | | | | — | | | | — | | | | 1,060 | | | | (720 | ) | | | | | | | | | | | 340 | |
Aaa debt securities issued by foreign governments | | | — | | | | — | | | | — | | | | 670 | | | | (543 | ) | | | 14 | | | | 3 | | | | 144 | |
Senior debt Floating Rate Notes issued by financial institutions | | | 651 | | | | 8 | | | | | | | | | | | | (108 | ) | | | | | | | (3 | ) | | | 548 | |
Auction Rate Securities | | | 242 | | | | 15 | | | | (140 | ) | | | — | | | | (75 | ) | | | — | | | | — | | | | 42 | |
Total | | | 893 | | | | 23 | | | | (140 | ) | | | 1,730 | | | | (1,446 | ) | | | 14 | | | | — | | | | 1,074 | |
| | |
* | | Other Comprehensive Income |
The floating rate notes and the government bonds are reported as current assets on the line “Marketable Securities” on the consolidated balance sheet as at December 31, 2009, since they conclude that their data about employee exercise behavior does not providerepresent investments of funds available for current operations. The auction-rate securities, which have a reasonable basis for estimatingfinal maturity up to 40 years, were purchased in the expected-term assumption. SAB 110 is not relevantCompany’s account by Credit Suisse Securities LLC contrary to the Company’s operations sinceinstructions; they are classified as non-current assets on the line “Non-current marketable securities” on the consolidated balance sheet as at December 31, 2009. On February 16, 2009, the Company redefinedannounced that an arbitration panel of the Financial Industry Regulatory Authority (“FINRA”), in 2005a full and final resolution of the issues submitted for determination, awarded the Company, in connection with such unauthorized auction rate securities, approximately $406 million, comprising compensatory damages, as well as interest, attorney’s fees and consequential damages, which were assessed against Credit Suisse. In addition, the Company is entitled to retain an interest award of approximately $27 million, out of which $25 million has already been paid, plus interest at the rate of 4.64% on the par value of the portfolio from December 31, 2008 until the award is paid in full. The Company has petitioned the United States District Court for the Southern District of New York seeking enforcement of the award. Credit Suisse has responded by seeking to vacate the FINRA award. Upon receipt of the award, the Company will transfer ownership of the portfolio of unauthorized auction rate securities to Credit Suisse. Until the award is executed, the Company will continue to own the Auction Rate Securities and, consequently, will account for them in the same manner as in the prior periods. In December 2009, Credit Suisse, because of its compensation policycontingent interest in certain securities held by no longer granting stock options but rather issuing nonvested shares.us and issued by Deutsche Bank, requested that we either tender the securities or accept that the amount that would be received by us pursuant to such tender ($75 million) be deducted from the sum to be collected by us if and when the FINRA award is confirmed and enforced. Pursuant to legal advice, and while reserving our legal rights, we participated in the tender offer and paid $0.49 per dollar of face value. As a result, we sold Auction Rate Securities with a face value of $154 million, collected $75 million and registered $68 million as realized losses on financial assets. Losses as a result of this transaction should be recovered upon collection of the award. The
F-26
3 — BUSINESS COMBINATIONSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
On November 1, 2007Company is seeking confirmation of the award from the United States District Court of the Southern District of New York.
No significant gain or loss was included in earnings as a result of floating rate notes sales. Out of the fifteen investment positions in floating-rate notes, with the only exception of a senior floating rate note of Euro 15 million issued by Lehman Brothers whose impairment was recorded as other-than-temporary in 2008, nine positions are in an unrealized loss position, which has been considered as temporary. For all floating rate notes, except the Lehman Brothers senior unsecured bonds described below, the Company acquiredexpects to recover the debt securities’ entire amortized cost basis. Since the duration of the floating rate note portfolio is less than two years on average and the securities have a minimum Moody’s rating of A3 (with the only exception of the Lehman Brothers senior unsecured bonds), the Company expects the value of the securities to return to par as the final maturity is approaching. In addition, the Company does not expect to be required to sell the securities before maturity. As such, no credit loss has been identified on these instruments. Thus, under the new clarifying guidance on other-than-temporary impairments issued in April 2009, as described in details in Note 2.25, these declines in fair value are considered as temporary. As a result, the change in fair value is recognized as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity and no cumulative effect adjustment was recorded in 2009 upon adoption of such guidance. The Company estimated the fair value of these financial assets based on publicly quoted market prices, which corresponds to a level 1 fair value measurement hierarchy.
For the Lehman Brothers senior unsecured bonds, the Company has been measuring fair value since Lehman Brothers Chapter 11 filing on September 15, 2008 based on information received from a major credit rating entity. Such fair value information relies on historical recovery rates and is assessed to correspond to a level 3 fair value hierarchy. At the date of Lehman Brothers Chapter 11 filing, the Company did not expect to recover the entire amortized cost basis of the securities and reported in earnings an other-than-temporary impairment charge representing 50% of the face value of the debt securities. Since all of this other-than-temporary impairment charge corresponded to credit losses, no cumulative effect adjustment was recorded in 2009 upon adoption of the new accounting guidance on recognition and presentation of other-than-temporary impairment charges. As at December 31, 2009, the Company assessed that it expected to recover the impaired amortized cost basis of the Lehman Brothers debt securities amounting to $11 million and no additional other-than-temporary impairment charge was recorded on the Lehman Brothers senior unsecured bonds in 2009.
The Company invested in 2009 $1,730 million in French and U.S. government bonds, of which $1,263 million was sold or matured in 2009. In 2009, the Company realized in earnings a $14 million exchange gain upon the sale of Euro 100 million French Government bonds. The change in fair value of the $484 million government debt securities classified as available-for-sale was not material as at December 31, 2009. The Company estimated the fair value of these financial assets based on publicly quoted market prices, which corresponds to a level 1 fair value measurement hierarchy. The duration of the government bonds portfolio is less than five months on average and the securities are rated Aaa by Moody’s.
Until the FINRA award is executed, the ownership of the auction-rate securities must be considered as a separate unit of accounting for impairment assessment. Consequently, upon adoption of the new accounting guidance on recognition and presentation of other-than-temporary impairment charges, the Company determined that in the assumption that the FINRA award was not executed the Company would not expect to recover the entire amortized cost basis of the securities resulting in an impairment of the securities based on credit losses. Consequently, the Company reported an other-than-temporary decline in fair value amounting to $72 million in 2009, which was immediately reported in the consolidated statement of income on the line “Other-than-temporary impairment charge on financial assets”. As this impairment assessment was in line with past accounting practice, no cumulative effect adjustment was recorded in 2009 upon adoption of the new accounting guidance. From the first quarter of 2008, the fair value measure of these securities, which corresponds to a level 3 fair value hierarchy, was based on a theoretical model using yields obtainable for comparable assets. The value inputs for the evaluation of these securities were publicly available indexes of securities with the same rating, similar duration and comparable/similar underlying collaterals or industries exposure (such as ABX for the collateralized debt obligation, ITraxx and IBoxx for the credit-linked notes), which the Company believes approximates the orderly exit value in the current market. In 2009, the value of the remaining ARS securities increased in value by $15 million, which has been recorded as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity. The estimated value of these securities could further decrease due to a
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
deterioration of the corporate industry indexes used for the evaluation. Fair value measurement information is further detailed in Note 25.
| |
4. | TRADE ACCOUNTS RECEIVABLE, NET |
Trade accounts receivable, net consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
|
Trade accounts receivable | | | 1,386 | | | | 1,089 | |
Less valuation allowance | | | (19 | ) | | | (25 | ) |
Total | | | 1,367 | | | | 1,064 | |
Bad debt expense in 2009, 2008 and 2007 was $2 million, $1 million and $1 million respectively. In 2009, 2008 and 2007, one customer, the Nokia group of companies, represented 16.1%, 17.5% and 21.1% of consolidated net revenues, respectively.
In 2009, $11 million of receivables due to ST Ericsson in 2009 were sold without recourse, with a financial cost of less than 0.2% of the factored amount. The Company enters into factoring transactions to accelerate the realization in cash of some trade accounts receivable.
Inventories, net of reserve, consisted of the following:
| | | | | | | | |
| | December 31,
| | December 31,
|
| | 2009 | | 2008 |
|
Raw materials | | | 73 | | | | 76 | |
Work-in-process | | | 769 | | | | 1,124 | |
Finished products | | | 433 | | | | 640 | |
Total | | | 1,275 | | | | 1,840 | |
As at December 31, 2008, inventories included $203 million related to the consolidation of the NXP wireless business. The fair value adjustment arising from the purchase accounting for the acquisition as discussed in Note 7 was totally expensed in cost of sales as at December 31, 2008.
| |
6. | OTHER RECEIVABLES AND ASSETS |
Other receivables and assets consisted of the following:
| | | | | | | | |
| | December 31,
| | December 31,
|
| | 2009 | | 2008 |
|
Receivables from government agencies | | | 208 | | | | 125 | |
Taxes and other government receivables | | | 272 | | | | 238 | |
Advances | | | 79 | | | | 83 | |
Prepayments | | | 50 | | | | 64 | |
Loans and deposits | | | 14 | | | | 18 | |
Interest receivable | | | 10 | | | | 16 | |
Financial instruments | | | 36 | | | | 37 | |
Held-for-trading cancellable swaps | | | — | | | | 34 | |
Other current assets | | | 84 | | | | 70 | |
Total | | | 753 | | | | 685 | |
Due to the high volatility in the interest rates generated by the recent financial turmoil, the Company assessed in 2008 that the swaps, entered into to hedge the fair value of a portion of the integrated circuit operations of the major wireless customer of its Application Specific Product Group product segment. The acquisition provides the Company with, among other things, engineering resources, equipmentconvertible bonds due 2016, had been no longer effective since November 1, 2008 and a license for certain technologies and other intellectual property. The transaction is also expected to strengthen the strategic relationship between the Company and the customer. Of the total purchase price of $92 million, $10 million was paid for the acquisition of the technology license, $24 million was allocated to the customer relationship based upon the expected value of future sales, $3 million was the fair value ofhedge relationship was discontinued. Consequently, the fixed assets acquired, $3 million in employee liabilitiesswaps were assumed, and the resulting goodwill was $58 million. The allocation to goodwill is supported by the significant value of the skills and technical knowledge of the acquired workforce and other assets not separately identifiable. The total purchase price includes current payments and a further $6 million based upon sales that the Company expects, beyond a reasonable doubt, to pay at the end of 2010, which accordingly is included in “Other non-current liabilities” on the consolidated balance sheet. Because substantially the entire purchase price was allocated to intangibleclassified asheld-for-trading financial assets and goodwill, the acquisition has been shown on the line “Investment in intangiblereported at fair value as a component of “Other receivables and financialcurrent assets” in the consolidated cash flowbalance sheet as at December 31, 2008 since the Company intended to hold the derivative instruments for a short period of time which will not exceed twelve months. An
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
unrealized gain was recognized in earnings from discontinuance date totaling $15 million and was reported on the line “Gain (loss) on financial assets” of the consolidated statement of income for the year ended December 31, 2007. This transaction resulted2008. During the first quarter of 2009, the Company sold these cancellable swaps and generated a loss of $8 million, which is included in an increase of the Company’s research and development expenses but did not have a material impactline “Gain (loss) on 2007 revenues or net income, and it is not expected to materially impact 2008 revenues or net income.financial assets”.
Genesis Microchip Inc.
On January 17, 2008, the Company acquired effective control of Genesis Microchip Inc. (“Genesis Microchip”) under the terms of a tender offer announced on December 11, 2007. On January 25, 2008, the Company completed a second-step merger in which the remaining common shares of Genesis Microchip that had not been acquired through the tender offer were converted into the right to receive the same $8.65 per share price paid in the tender offer. Payment of approximately $340 million for the acquired shares was made through a wholly-owned subsidiary of the Company that was merged with and into Genesis Microchip promptly thereafter.thereafter and received $170 million of cash and cash equivalents from Genesis Microchip. Additional direct costs associated with the acquisition are estimatedamounting to be approximately $2 million.$6 million were paid in 2008. On closing, Genesis Microchip became part of the Company’s Home Entertainment & Displays Groupbusiness activity which is part of the Application SpecificAutomotive Consumer Computer and Communications Infrastructure Product GroupGroups segment. At the dateThe acquisition of acquisition, Genesis Microchip hadwas performed to expand the Company’s leadership in the digital TV market. Genesis Microchip will enhance the Company’s technological capabilities for the transition to fully digital solutions in the segment and strengthen its product intellectual property portfolio.
Purchase price allocation resulted in the recognition of $11 million in marketable securities, $14 million in property, plant and equipment, $44 million of deferred tax assets, net of valuation allowance, while intangible assets included $44 million of core technologies, $27 million related to customer relationships, $2 million of trademarks, $15 million of goodwill primarily related to the workforce, and not deductible for tax purposes, and $2 million of liabilities net of other assets. During the course of 2008, the company reduced its estimate of direct cost associated with the acquisition and made a corresponding reduction in the amount of purchased goodwill. The Company also recorded in 2008 $21 million of acquired IP R&D with no alternative future use that the Company immediately wrote off. Such in-process research and development charge was recorded on the line “research and development expenses” in the consolidated statement of income in the first quarter of 2008. The core technologies have an average useful life of approximately four years, the customers’ relationship of seven years and the trademarks of approximately two years. The Company obtained a third party independent appraisal to assist in making its purchase price allocation although the Company takes full responsibility for such allocation.
NXP Wireless
On August 2, 2008, ST-NXP Wireless, a joint venture owned 80% by the Company, began operations based on contributions of the wireless businesses of the Company and NXP, as the noncontrolling interest holder. The Company paid to NXP $1.55 billion for the 80% stake, which included a control premium, and received cash and cash equivalents valued at $155from the NXP businesses of $33 million. The consideration also included a contribution in kind, measured at fair value, corresponding to a 20% interest in the Company’s wireless business. Additional direct costs associated with the acquisition amounted to $21 million and were fully paid as at December 31, 2009. On closing, ST-NXP Wireless was determined to be included in the Wireless segment.
Purchase price allocation resulted in the recognition of $308 million in property, plant and equipment, $72 million of tax receivables net of valuation allowances, inventory of $282 million which includes $88 million ofstep-up in value that increased charges against earnings in 2008 as the inventory was sold, deferred tax liabilities of $14 million, restructuring reserves of $44 million and $42 million in liabilities, net of other assets. In addition, intangible assets recognized included core technologies of $223 million, customer relationships of $405 million, and acquired IP R&D of $76 million. Such IP R&D did not have any alternative future use and was written-off immediately in the consolidated statement of income in 2008 to the line “Research and development.” The resulting goodwill in the transaction was $669 million at acquisition date. During 2009 the Company made final adjustments to the acquisition related goodwill and reduced its value by $12 million with offsetting adjustments in property, plant and equipment, tax receivables and net other assets and liabilities. The goodwill deductible for tax purposes amounts to approximately $108 million. The core technologies have useful lives ranging from approximately three and a half to six and a half years and the customer relationships’ average useful lives were estimated at 12 years. To assist in making the purchase price has not yet been completed.
4 — EQUITY INVESTMENTS
UPEK Inc.
In 2004,allocation for the contribution from the noncontrolling interest holder, the Company and Sofinnova Capital IV FCPR formedobtained a new company, UPEK Inc., as a venture capitalist-funded purchase of the Company’s TouchChip business. UPEK, Inc. was initially capitalized with the Company’s 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. In 2005, an additional $9 million was contributed by Sofinnova Capital IV FCPR, reducing the Company’s ownership to 33%. The Company accounted for its share in UPEK, Inc. under the equity method.
On June 30, 2005,third party independent appraisal although the Company soldremains fully responsible for the allocation. The contribution by the Company was carried over at 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 statements of income. Additionally, on June 30,book value. The restructuring reserves represent
F-26F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
2005,estimated redundancy costs incurred to achieve the rationalization of the combined organization as anticipated as part of the transaction and cover approximately 500 people, includingsub-contractors. The plan affects mainly employees in Belgium, China, Germany, India, the Netherlands, Switzerland and the United States of America.
On February 1, 2009, the Company was granted warrantsexercised its option to purchase the 20% noncontrolling interest of NXP in ST-NXP wireless for 2,000,000 shares of UPEK, Inc. at an exercisea price of $0.01$92 million. Transactions with noncontrolling interests are summarized in the table below:
| | | | | | | | |
| | Twelve Months Ended |
| | December 31,
| | December 31,
|
| | 2009 | | 2008 |
| | In millions of U.S. dollars |
|
Net loss attributable to parent company | | | (1,131 | ) | | | (786 | ) |
Transfers (to) from noncontrolling interests: | | | | | | | | |
Increase in parent company’s capital surplus for purchase of outstanding 20% of ST-NXP shares | | | 119 | | | | — | |
Change from net loss attributable to parent company and transfers (to) from noncontrolling interests | | | (1,012 | ) | | | (786 | ) |
Ericsson Mobile Platforms
On February 3, 2009, the Company closed a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, ST-Ericsson. ST-Ericsson combines the resources of the two companies and focuses on developing and delivering a complete portfolio of mobile platforms wireless semiconductor solutions across the broad spectrum of mobile technologies. The operations of ST-Ericsson are conducted through two groups of companies. The parent of one of the groups is ST-Ericsson Holding AG (“JVS”), which is owned 50% plus a controlling share by ST. JVS is responsible for the full commercial operation of the combined businesses, namely sales, marketing, supply and the full product responsibility. The parent of the other group, ST-Ericsson AT Holding AG (“JVD”), is owned 50% plus a controlling share by Ericsson and is focused on fundamental R&D activities. Both JVS and JVD are variable interest entities. The Company has determined that it is the primary beneficiary of JVS and therefore consolidates JVS, but that it is not the primary beneficiary of JVD and therefore accounts for its noncontrolling interest in JVD under the equity method of accounting. JVD is discussed further in Note 11. In addition to the contributions by ST and Ericsson of their respective businesses to the venture entities, the consideration received from Ericsson included $1,155 million in cash, of which $700 million was paid directly to the Company. The transaction has been accounted for as a business combination under the amended business combination guidance adopted by the Company as of January 1, 2009.
The purchase accounting results are the following, in millions of U.S. dollars:
| | | | |
Consideration transferred: | | | | |
Noncontrolling interest in the Company’s business contributed | | | 1,105 | |
Cash received by the Company | | | (700 | ) |
Equity investment in JVD | | | (99 | ) |
| | | | |
Total consideration transferred | | | 306 | |
Acquisition related costs included in SG&A | | | 9 | |
Assets acquired and liabilities assumed: | | | | |
Cash in JVS | | | 445 | |
Other current assets and liabilities — net | | | (47 | ) |
Customer relationships | | | 48 | |
Property, plant and equipment | | | 23 | |
Total identifiable net assets | | | 469 | |
Noncontrolling interest in EMP business acquired | | | (306 | ) |
Goodwill | | | 143 | |
Total | | | 306 | |
The goodwill arises principally due to expected synergies and the value of the assembled workforce. It is tax deductible for an amount of $26 million. In connection with this transaction, the Company recognized acquisition
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share.share amounts)
costs of $9 million, which were included in selling, general and administrative expenses in 2009. The warrantscustomer relationships have a useful life of four years. There are no contingent assets or liabilities recognized in the transaction.
The fair value of the noncontrolling interests was determined by the Company with the assistance of a third party evaluation of the fair values of the businesses contributed. Due to lack of comparable market transactions, the EMP business was valued using a discounted cash flow approach. The primary inputs used to measure the fair value were the stand alone business plan for the five-year period2009-2013, including certain cost synergies of the venture, and the weighted average cost of capital, which was determined to be 8.9%. This represents a Level 3 measurement of fair value in the fair value measurement hierarchy. The resulting value of the EMP business was then allocated between the two entities of the venture as follows: (a) specifically identifiable assets as well as customer-related intangibles and the cost synergies were allocated to the portion of the EMP business contributed to JVS, and (b) specifically identifiable assets as well as the value of the usage rights of the technology were allocated to the portion of the EMP business contributed to JVD. The fair value of the Company’s contribution of its ST-NXP Wireless business to JVS was determined based upon the valuation of the EMP business contributed to JVS and JVD and the cash consideration that was agreed upon between the Company and Ericsson to compensate for the difference in fair values between the two companies’ contributions. This valuation is therefore also considered Level 3. Due to the significant minority rights of the Company and Ericsson in JVD and JVS respectively, no control premium or discount was assigned in the valuation of the noncontrolling interests. Upon closing, JVS was determined to be included in the reportable segment “Wireless”.
The unaudited proforma information below assumes that JVS was created on January 1, 2009 and 2008 and incorporates the results of JVS beginning on those dates. The unaudited twelve months ended December 31, 2009 and December 31, 2008 information has been adjusted to incorporate the results of JVS on January 1, 2009 and January 1, 2008. Such results include estimated results of the business acquired, adjustments to conform to the Company’s accounting policies, additional depreciation and amortization resulting from the step up to the fair values of the tangible and intangible assets, consequential tax effects and noncontrolling interest adjustments. These amounts are presented for information purposes only and are not limited in time but can only be exercisedindicative of the results of operations that would have been achieved had the acquisition taken place as of January 1, 2009 and January 1, 2008.
| | | | | | | | |
| | Twelve Months Ended | |
| | December 31,
| | | December 31,
| |
Pro forma Statements of Income (unaudited) | | 2009 | | | 2008 | |
| | In millions of U.S. dollars | |
|
Net revenues | | | 8,536 | | | | 10,485 | |
Gross profit | | | 2,640 | | | | 4,027 | |
Operating expenses | | | (3,688 | ) | | | (4,308 | ) |
Operating loss | | | (1,048 | ) | | | (281 | ) |
Net loss attributable to parent company | | | (1,113 | ) | | | (798 | ) |
Loss per share (basic) | | | (1.27 | ) | | | (0.89 | ) |
Loss per share (diluted) | | | (1.27 | ) | | | (0.89 | ) |
| | | | | | | | |
| | Twelve Months Ended | |
| | December 31,
| | | December 31,
| |
Statements of Income, as reported | | 2009 | | | 2008 | |
| | In millions of U.S. dollars | |
|
Net revenues | | | 8,510 | | | | 9,842 | |
Gross profit | | | 2,626 | | | | 3,560 | |
Operating expenses | | | (3,649 | ) | | | (3,758 | ) |
Operating loss | | | (1,023 | ) | | | (198 | ) |
Net loss attributable to parent company | | | (1,131 | ) | | | (786 | ) |
Loss per share (basic) | | | (1.29 | ) | | | (0.88 | ) |
Loss per share (diluted) | | | (1.29 | ) | | | (0.88 | ) |
Net revenues of the EMP business for the period from the acquisition date of February 3, 2009 to December 31, 2009 included in the eventconsolidated statement of income were $300 million. Net income (loss) during this period is no
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
longer separately identifiable, as the EMP business was immediately integrated across a changelarge number of control orlegal entities combining the cost structures of the EMP and ST-NXP Wireless businesses.
Following the segment reorganization as described in Note 27, the Company has restated its results in prior periods for illustrative comparisons of its allocation of goodwill by product segment.
Changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Automotive
| | | | | | | | |
| | Consumer
| | | | | | | | |
| | Computer and
| | | | Industrial and
| | | | |
| | Communication
| | Wireless
| | Multisegment
| | | | |
| | Infrastructure
| | Sector
| | Sector
| | | | |
| | (“ACCI”) | | (“Wireless”) | | (“IMS”) | | Other | | Total |
|
December 31, 2007 | | | 41 | | | | 147 | | | | 100 | | | | 2 | | | | 290 | |
Business Combination | | | 15 | | | | 669 | | | | — | | | | — | | | | 684 | |
PGI goodwill impairment | | | (4 | ) | | | — | | | | — | | | | (2 | ) | | | (6 | ) |
Incard goodwill impairment | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) |
Foreign currency translation | | | (1 | ) | | | — | | | | (2 | ) | | | — | | | | (3 | ) |
December 31, 2008 | | | 51 | | | | 816 | | | | 91 | | | | — | | | | 958 | |
Business Combination | | | — | | | | 131 | | | | — | | | | — | | | | 131 | |
Vision goodwill impairment | | | (6 | ) | | | — | | | | — | | | | — | | | | (6 | ) |
Foreign currency translation | | | (2 | ) | | | (11 | ) | | | 1 | | | | — | | | | (12 | ) |
December 31, 2009 | | | 43 | | | | 936 | | | | 92 | | | | — | | | | 1,071 | |
Gross goodwill recognized amounted to respectively $1,138 million and $1,019 million as at December 31, 2009 and 2008. Accumulated impairment amounted to respectively $67 million and $61 million as at December 31, 2009 and 2008.
On February 3, 2009, the Company closed a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, named ST-Ericsson. An amount of $143 million of the purchase price for this transaction was allocated to goodwill. This business combination is discussed in details in Note 7. Additionally, at the beginning of the third quarter of 2009, the Company made final adjustments to the NXP business combination and decreased goodwill by $12 million.
In 2008, the Company acquired 100% of Genesis Microchip Inc. and 80% of the NXP wireless business. Amounts of $15 million and $669 million, respectively, of the purchase price for these two transactions were allocated to goodwill. These business combinations are discussed in details in Note 7.
During the first half of 2009, the Company performed an Initialimpairment test on goodwill and based on this test, impairment charge totaling $6 million was recorded on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statement of income for the period ended December, 2009. This impairment charge is further described in Note 19.
In the third quarter of 2009 and 2008, the Company performed its annual impairment test on goodwill and indefinite long-lived assets, which did not evidence any additional impairment charge to be recorded in 2009 and charges totaling $13 million were recorded on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statement of income for the year ended December 31, 2008. These impairment charges are further described in Note 19.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| |
9. | OTHER INTANGIBLE ASSETS |
Other intangible assets consisted of the following:
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2009 | | Cost | | | Amortization | | | Cost | |
|
Technologies & licences | | | 787 | | | | (501 | ) | | | 286 | |
Contractual customer relationships | | | 485 | | | | (70 | ) | | | 415 | |
Purchased software | | | 302 | | | | (226 | ) | | | 76 | |
Other intangible assets | | | 119 | | | | (77 | ) | | | 42 | |
| | | | | | | | | | | | |
Total | | | 1,693 | | | | (874 | ) | | | 819 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2008 | | Cost | | | Amortization | | | Cost | |
|
Technologies & licences | | | 707 | | | | (365 | ) | | | 342 | |
Contractual customer relationships | | | 436 | | | | (22 | ) | | | 414 | |
Purchased software | | | 253 | | | | (200 | ) | | | 53 | |
Other intangible assets | | | 125 | | | | (71 | ) | | | 54 | |
| | | | | | | | | | | | |
Total | | | 1,521 | | | | (658 | ) | | | 863 | |
| | | | | | | | | | | | |
The line Other intangible assets in the table above consists primarily of internally developed software. The amortization expense on capitalized software costs in 2009, 2008 and 2007 was $20 million, $15 million, and $11 million, respectively.
On February 3, 2009, the Company closed a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, named ST-Ericsson. An amount of $48 million of the purchase price for this transaction was allocated to customer relationships. This business combination is discussed in details in Note 7.
The amortization expense in 2009, 2008 and 2007 was $208 million, $141 million, and $82 million, respectively.
The estimated amortization expense of the existing intangible assets for the following years is:
| | | | |
Year | | | |
|
2010 | | | 235 | |
2011 | | | 215 | |
2012 | | | 155 | |
2013 | | | 58 | |
2014 | | | 39 | |
Thereafter | | | 117 | |
Total | | | 819 | |
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| |
10. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following:
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2009 | | Cost | | | Depreciation | | | Cost | |
|
Land | | | 96 | | | | — | | | | 96 | |
Buildings | | | 1,004 | | | | (294 | ) | | | 710 | |
Capital leases | | | 79 | | | | (61 | ) | | | 18 | |
Facilities & leasehold improvements | | | 3,158 | | | | (2,332 | ) | | | 826 | |
Machinery and equipment | | | 13,765 | | | | (11,632 | ) | | | 2,133 | |
Computer and R&D equipment | | | 544 | | | | (458 | ) | | | 86 | |
Other tangible assets | | | 252 | | | | (146 | ) | | | 106 | |
Construction in progress | | | 106 | | | | — | | | | 106 | |
| | | | | | | | | | | | |
Total | | | 19,004 | | | | (14,923 | ) | | | 4,081 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2008 | | Cost | | | Depreciation | | | Cost | |
|
Land | | | 89 | | | | — | | | | 89 | |
Buildings | | | 1,001 | | | | (264 | ) | | | 737 | |
Capital leases | | | 68 | | | | (53 | ) | | | 15 | |
Facilities & leasehold improvements | | | 3,153 | | | | (2,115 | ) | | | 1,038 | |
Machinery and equipment | | | 13,700 | | | | (11,037 | ) | | | 2,663 | |
Computer and R&D equipment | | | 528 | | | | (440 | ) | | | 88 | |
Other tangible assets | | | 187 | | | | (127 | ) | | | 60 | |
Construction in progress | | | 49 | | | | — | | | | 49 | |
Total | | | 18,775 | | | | (14,036 | ) | | | 4,739 | |
| | | | | | | | | | | | |
As described in note 7, an amount of $23 million of the purchase price for the business of Ericsson Mobile Platforms (“EMP”) was allocated to property, plant and equipment.
Upon the acquisition of Genesis, the Company recorded in January 2008 property, plant and equipment totaling $14 million. The integration of NXP wireless business in 2008 resulted in the consolidation of long-lived assets totaling $302 million, of which $25 million corresponded to fair valuestep-up on the Company’s 80% interest.
In 2008, as described in Note 19, the Company recorded $77 million impairment charge on long-lived assets of the Company’s manufacturing sites in Carrollton (Texas) and in Phoenix (Arizona), of which $75 million on Phoenix site that had previously been designated for closure as part of the 2007 restructuring plan.
The depreciation charge in 2009, 2008 and 2007 was $1,159 million, $1,225 million and $1,331 million, respectively.
Capital investment funding has totaled $4 million, $4 million and $9 million in the years ended December 31, 2009, 2008 and 2007, respectively. Public Offeringfunding reduced depreciation charges by $22 million, $25 million and $33 million in 2009, 2008 and 2007 respectively.
For the years ended December 31, 2009, 2008 and 2007 the Company made equipment sales for cash proceeds of UPEK Inc. above a predetermined value.$10 million, $8 million and $4 million respectively.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Equity investments as at December 31, 2009 and 2008 were as follows:
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Carrying
| | | Ownership
| | | Carrying
| | | Ownership
| |
| | value | | | Percentage | | | value | | | Percentage | |
| | (In millions of USD, except percentages) | |
|
Numonyx Holdings B.V | | | 193 | | | | 48.6 | % | | | 496 | | | | 48.6 | % |
ST-Ericsson AT Holding | | | 67 | | | | 49.9 | % | | | — | | | | — | |
Other equity investments | | | 13 | | | | | | | | 14 | | | | | |
Total | | | 273 | | | | | | | | 510 | | | | | |
Numonyx
In 2007, the Company entered into an agreement with Intel Corporation and Francisco Partners L.P. to create a new independent semiconductor company from the key assets of the Company’s Flash Memory Group and Intel’s flash memory business (“FMG deconsolidation”). Under the terms of the agreement, the Company would sell its flash memory assets, including its NAND joint venture interest with Hynix STas described below and other NOR resources, to the new company, which was called Numonyx Holdings B.V. (“Numonyx”), while Intel would sell its NOR assets and resources. In connection with this announcement, the Company reported in 2007 an impairment charge of $1,106 million to adjust the value of these assets to fair value less costs to sell.
The Numonyx transaction closed on March 30, 2008. At closing, through a series of steps, the Company contributed its flash memory assets and businesses as previously announced, for 109,254,191 common shares of Numonyx, representing a 48.6% equity ownership stake valued at $966 million, and $156 million in long-term subordinated notes, as described in Note 12. As a consequence of the final terms and balance sheet at the closing date and additional agreements on assets to be contributed, coupled with changes in valuation for comparable Flash memory companies, the Company incurred an additional pre-tax loss of $190 million for the year ended December 31, 2008, which was reported on the line “Impairment, restructuring charges and other related closure costs” of the consolidated statement of income.
Upon creation, Numonyx entered into financing arrangements for a $450 million term loan and a $100 million committed revolving credit facility from two primary financial institutions. The loans have a four-year term. Intel and the Company have each granted in favor of Numonyx a 50% debt guarantee not joint and several. In the event of default, the banks will exercise the Company’s rights, subordinated to the repayment to senior lenders, to recover the amounts paid under the guarantee through the sale of the assets. The debt guarantee was evaluated under the FASB guidance on guarantee liabilities. It resulted in the recognition of a $69 million liability, corresponding to the fair value of the guarantee at inception of the transaction. The same amount was also added to the value of the equity investment. The debt guarantee obligation was reported on the line “Other non-current liabilities” in the consolidated balance sheet as at December 31, 2009 and 2008. As at December 31, 2009, the guarantee was not exercised. As at December 31 2009, Numonyx was current on their debt obligations, not in default of any debt covenants and did not expect to be in default on these obligations in the foreseeable future.
The Company accounts for its share in Numonyx under the equity method based on the actual results of the venture. In the valuation of Numonyx investment under the equity method, the Company applies a one-quarter lag reporting. For the year ended December 31, 2009 the Company reported on the line “Earnings (loss) on equity investments” on the Company’s consolidated statement of income $171 million of equity loss in Numonyx equity investment, that represents the Company’s proportional share of the loss reported by Numonyx in the fourth quarter of 2008 and the three first quarters of 2009, a benefit of $69 million related to the amortization of basis differences arising principally from impairment charges recorded by the Company in prior periods. Furthermore, the Company evaluates on a quarterly basis the fair value of the investment in Numonyx based upon a combination of (i) an income approach, using net equity adjusted for net debt, and (ii) a market approach, using the metrics of comparable public companies, both in relation to actual results and the most updated available forecast. In the first quarter of 2009, the Company recorded an impairment charge of $200 million considered asother-than-temporary, resulting from a re-assessment by the Company of the fair value of its investment in Numonyx following the deterioration of both the global economic situation and the memory market segment, as well as a revision by Numonyx of its 2009 projected results. At December 31, 2009 the Company’s investment in Numonyx, including the amount of the debt guarantee, amounted to $193 million.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The Company’s current maximum exposure to loss as a result of its involvement with Numonyx is limited to its equity investment, its investment in subordinated notes and its debt guarantee obligation.
Summarized unaudited financial information for Numonyx, as of September 26, 2009 and for the twelve months then ended that, because of the one-quarter lag discussed above, correspond to the amounts included in the Company’s Consolidated Financial Statements as of December 31, 2009 and for the twelve months then ended, are as follows:
| | | | |
| | In million of US dollars | |
|
Statement of Income Information: | | | | |
Net sales | | | 1,673 | |
Gross profit | | | 289 | |
Net income (loss) | | | (352 | ) |
Financial Position Information: | | | | |
Current assets | | | 1,322 | |
Noncurrent assets | | | 1,220 | |
Current liabilities | | | 348 | |
Noncurrent liabilities | | | 894 | |
Net worth | | | 1,300 | |
ST-Ericsson AT Holding
As disclosed in Note 7, on February 3, 2009, the Company announced the closing of a transaction to combine the businesses of Ericsson Mobile Platforms (“EMP”) and ST-NXP Wireless into a new venture, namedST-Ericsson. As part of the transaction, the Company received an interest in ST-Ericsson AT Holding AG (“JVD”). JVD, in which the Company owns 50% less a controlling share held by Ericsson, is the parent company of a group of entities that perform fundamental R&D activities for the ST-Ericsson venture. The Company has determined that JVD is a variable interest entity, but has determined that the Company is not the primary beneficiary of the entity. Accordingly, the Company accounts for its noncontrolling interest in JVD under the equity method of accounting. The Company’s investment in JVD at the date of the transaction was valued at $99 million. In 2009, the line “Loss on equity investments” in the Company’s consolidated statement of income included a charge of $32 million related to JVD. This amount includes the amortization of basis differences. The Company’s current maximum exposure to loss as a result of its involvement with JVD is limited to its equity investment, which was shown at $67 million on the consolidated balance sheet at December 31, 2009.
Hynix-Numonyx Joint Venture
TheIn 2004, the Company signed in 2004, a joint-venturejoint venture agreement with Hynix Semiconductor Inc. to build a front-end memory-manufacturingmemory 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,Additionally, 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-venture’sjoint venture’s assets. The Company made the total $250 million capital contributions as previously planned in the joint venture agreement in 2006. The Company accounted for its share in the Hynix ST joint venture under the equity method based on the actual results of the joint venture through the fourth quarter of 2007. As such, the Company recorded earnings totaling $14 million in 2007 and a loss of $6 million and $3 million in 2006 and 2005 respectively, reported as “Earnings (loss) on equity investments” in the consolidated statements of income.
In 2007, Hynix Semiconductor Inc. invested an additional $750 million in additional shares of the joint venture to fund a facility expansion. As a result of this investment, in October, when the Chinese authorities formally approved the additional investment, the Company’s interest in the joint venture declined from approximately 33% to 17%. At December 31, 2007On March 30, 2008, the investment in the joint venture, which amounted to $276$291 million andat the time, was included in assets held for sale on the consolidated balance sheet as it is expected to be transferred to Numonyx upon the formation of that company, as described in note 7. The Company (or Numonyx following the transfer of the Company’s interest in the joint venture to Numonyx) has the option to purchase from Hynix Semiconductor Inc. up to $250 million in shares to increase its interest in the joint venture back to a maximum of 33%.
entity. Due to regulatory and withholding tax issues the Company could not directly provide the joint venture with the $250 million long-term financing as originally planned. As a consequence,result, 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 Company’s rights, subordinated to the repayment to senior lenders, to recover the amounts paid under the guarantee through the sale of the joint-venture’sjoint venture’s assets. In 2006, the Company placed $218 million of cash on the guarantee deposit account. In 2007, the Company placed the remaining $32 million of cash, which totaledThe $250 million, as at December 31,which has been on deposit since 2007, and washas been reported as “Restricted cash for equity investments”cash” on the consolidated balance sheet.
sheet as at December 2009 and 2008. The debt guarantee was evaluated under FIN 45. It resulted in the recognition of a $17 million liability, corresponding to the fair value of the guarantee at inception of the transaction. The liability wasdebt guarantee obligation continues to be reported on the line “Other non-current liabilities” in the consolidated balance sheet as at December 31, 2007 and was recorded against the value of the equity investment, which totaled $293 million. The Company reported the debt guarantee on the line “Other investments and other non-current assets”2009, since the terms of the FMG sale agreement dodeconsolidation did not include the transfer of the debt guarantee. As at
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The Company identifiedDecember 31, 2009, the joint ventureguarantee was not exercised. To the best of management’s knowledge as a Variable Interest Entity (VIE) at December 31, 2006, principally because2009, the joint venture was current on their debt obligations, not in default of any debts covenants and did not expect to be in default on these obligations in the development stage, but it determined that the Company was not the primary beneficiary of the VIE. Because of events that occurred in 2007 including the facility expansion and additional investment, it was determined that the joint venture was no longer in the development stage and accordingly that the joint venture no longer met the criteria for qualification as a VIE.foreseeable future. The Company’s current maximum exposure to loss as a result of its involvement with the joint venture is limited to its equityindirect investment through Numonyx and the debt guarantee obligation.
| |
12. | OTHER INVESTMENTS AND OTHER NON-CURRENT ASSETS |
Other investments and debt guarantee commitments.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
5 — TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, netother non-current assets consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Trade accounts receivable | | | 1,626 | | | | 1,620 | |
Less valuation allowance | | | (21 | ) | | | (31 | ) |
| | | | | | | | |
Total | | | 1,605 | | | | 1,589 | |
| | | | | | | | |
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
|
Investments carried at cost | | | 29 | | | | 32 | |
Available-for-sale equity securities | | | 10 | | | | 5 | |
Long-term notes from equity investment | | | 173 | | | | 168 | |
Held-for-trading equity securities | | | 7 | | | | 7 | |
Long-term receivables related to funding | | | 8 | | | | 8 | |
Long-term receivables related to tax refund | | | 170 | | | | 206 | |
Debt issuance costs, net | | | 4 | | | | 7 | |
Prepaid for pension | | | 2 | | | | 1 | |
Deposits and other non-current assets | | | 39 | | | | 43 | |
| | | | | | | | |
Total | | | 442 | | | | 477 | |
| | | | | | | | |
Bad debt expense in 2007, 2006 and 2005 was $1 million, $7 million and $7 million respectively.Investments carried at cost are equity securities with no readily determinable fair value. In 2007, 2006 and 2005, one customer, the Nokia group of companies, represented 21.1%, 21.8% and 22.4% of consolidated net revenues, respectively.
6 — INVENTORIES, NET
Inventories, net of reserve consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Raw materials | | | 72 | | | | 80 | |
Work-in-process | | | 808 | | | | 1,032 | |
Finished products | | | 474 | | | | 527 | |
| | | | | | | | |
Total | | | 1,354 | | | | 1,639 | |
| | | | | | | | |
As at December 31, 2007 inventories amounting to $329 million were reported as a component of the line “Assets held for sale” on the consolidated balance sheet as part of the assets to be transferred to Numonyx, the newly created flash memory company upon FMG deconsolidation.
7 — ASSETS HELD FOR SALE
On May 22, 2007,2009, the Company announced that it had entered into a definitive agreement with Intel Corporation and Francisco Partners L.P to create a new independent semiconductor company from the key assets of the Company’s Flash Memory Group and Intel’s flash memory business (“FMG deconsolidation”). Under the terms of the agreement, the Company will sell its flash memory assets, including its NAND joint venture interest and other NOR resources, to the new company, which will be called Numonyx, while Intel will sell its NOR assets and resources. In exchange, the Company was expected to receive, at closing, a combination of cash and a 48.6% equity ownership stake in the new company; Intel was expected to receive cash and a 45.1% equity ownership stake; and Francisco Partners L.P was to invest $150 million in cash to purchase participating convertible preferred stock with certain liquidation preferences and convertible into a 6.3% ownership interest, subject to adjustments in certain circumstances.
As a result of the signing of the definitive agreement for the FMG deconsolidation and upon meeting FAS 144 criteria for assets held for sale, the Company reclassified the assets to be transferred to Numonyx from their original balance sheet classification to the line “Assets held for sale” in the second quarter of 2007. Coincident with this classification, the Company recorded anincurredother-than-temporary impairment charge on one of $857its investments for $3 million to adjust the value of these assets to fair value less costs to sell at June 30, 2007, reporting the lossthat was recorded on the line “Impairment, restructuring charges and other related closure costs” ofin the consolidated statements of income for the period. Fair value less costs to sell wasyear ended December 31, 2009. The impairment is based on the net consideration provided for in the agreement and significant estimates.
Although the transaction was originally expected to close in the second halfa review of 2007, the closing was delayed due, among other things, to the significant turmoil in the debt capital markets which in turn resulted in certain revisions to the terms of the transaction. Based on the revised structure, Numonyx is expected to have at closing a similar level of cash but a lower level of indebtedness compared to what had originally been anticipated. The term debt and revolving credit agreement of Numonyx, totalling $525 million, will be guaranteed by the Company and Intel. Both the Company and Intel now expect to receive the same equity stakes as originally agreed, however the balance of their consideration will be lower in total value than the cash payment that had previously been expected and it will be paid in a combination of cash and long-term, interest-bearing subordinated notes and cash. As had been anticipated earlier, Francisco Partners will invest $150 million in exchange for its convertible preferred
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
interest. The three parties currently anticipate that the transaction will close during the first quarter of 2008. As a consequence of the changes to the terms of the transaction, in combination with changes to the levels of assets used by the business and exchange rates, as well as a general decline in market valuations for comparable companies during the second half of 2007 that impacted the valuation of the equity stake to be received, the estimated value of the total consideration to be received byentity upon liquidation. In 2008, the Company in the transaction was reduced in the fourth quarter of 2007, resulting in an additionalincurredother-than-temporary impairment charge during the period of $249 million.
The final impairment charge could be materially different subject to further adjustments due to business and market evolution prior to the closing of the transaction.
Assets held for sale consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Inventories, net | | | 329 | | | | — | |
Other intangible assets, net | | | 12 | | | | — | |
Property, plant and equipment, net | | | 394 | | | | | |
Long term deferred tax assets | | | 6 | | | | — | |
Equity investment | | | 276 | | | | | |
| | | | | | | | |
Total | | | 1,017 | | | | — | |
| | | | | | | | |
As required under FAS 144held-for-sale model, the Company ceased to record amortization and depreciationcharges on intangible and tangible assets classified as assets held for sale.
8 — OTHER RECEIVABLES AND ASSETS
Other receivables and assets consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Receivables from government agencies | | | 143 | | | | 122 | |
Taxes and other government receivables | | | 258 | | | | 194 | |
Advances to suppliers | | | 5 | | | | 5 | |
Advances to employees | | | 9 | | | | 13 | |
Advances to State and government agencies | | | 9 | | | | 12 | |
Insurance prepayments | | | 5 | | | | 4 | |
Rental prepayments | | | 3 | | | | 3 | |
License and technology agreement prepayments | | | 17 | | | | 7 | |
Other prepaid expenses | | | 17 | | | | 23 | |
Loans and deposits | | | 15 | | | | 15 | |
Accrued income | | | 11 | | | | 9 | |
Interest receivable | | | 28 | | | | 27 | |
Long-lived assets held for sale | | | 8 | | | | 4 | |
Foreign exchange forward contracts | | | 1 | | | | 14 | |
Sundry debtors within cooperation agreements | | | 30 | | | | 31 | |
Receivables for payments on behalf of Numonyx | | | 26 | | | | | |
Purchased currency options | | | 12 | | | | 1 | |
Other current assets | | | 15 | | | | 14 | |
| | | | | | | | |
Total | | | 612 | | | | 498 | |
| | | | | | | | |
Long-lived assets held for sale (other than those related to the FMG deconsolidation) are property, machinery and equipment that satisfied as at December 31, 2007 and 2006 all of the criteria required forheld-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, 2007, the Company identified certain machinery and equipment to be disposed of by sale, amounting to $8 million, which was primarily located in Morocco and Singapore,
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
following the decision of the Company to get disengaged from certain activities as parttwo of its latest restructuring initiatives. These assets are reflected at their carrying value,investments, 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, 2006, assets held for sale amounted to $4totaled $6 million and were located in the Company’s back-end sites in Morocco and Malaysia.
Amounts shown in the table above on the line “Receivables for payments on behalf of Numonyx” represent costs to create the infrastructure necessary to prepare Numonyx to operate immediately following the FMG deconsolidation, for which the Company has paid and will be reimbursed by Numonyx following the closing of the transaction.
9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | |
| | Application
| | | | | | | | | | |
| | Specific
| | | Memory
| | | | | | | |
| | Products | | | Products | | | Other | | | Total | |
|
December 31, 2005 | | | 134 | | | | 85 | | | | 2 | | | | 221 | |
Tioga goodwill impairment | | | (6 | ) | | | — | | | | — | | | | (6 | ) |
Foreign currency translation | | | — | | | | 8 | | | | — | | | | 8 | |
| | | | | | | | | | | | | | | | |
December 31, 2006 | | | 128 | | | | 93 | | | | 2 | | | | 223 | |
| | | | | | | | | | | | | | | | |
Business Combination | | | 58 | | | | — | | | | — | | | | 58 | |
Foreign currency translation | | | — | | | | 9 | | | | — | | | | 9 | |
| | | | | | | | | | | | | | | | |
December 31, 2007 | | | 186 | | | | 102 | | | | 2 | | | | 290 | |
| | | | | | | | | | | | | | | | |
As discussed in Note 3, on November 1, 2007 the Company acquired a portion of the integrated circuit operations of one of the significant wireless customers of its Application Specific Products Group product segment. $58 million of the purchase price for this transaction was allocated to goodwill.
During the third quarter of 2007, the Company performed the annual review of impairment of goodwill and based on this test no impairment charges were required to be recorded.
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 reportedrecorded on the line “Impairment, restructuring charges and other related closure costs” ofin the consolidated statements of income for the year ended December 31, 2006.
10 — OTHER INTANGIBLE ASSETS
Other intangible assets consisted of2008. For one investment, the following:
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2007 | | Cost | | | Amortization | | | Cost | |
|
Technologies & licences | | | 431 | | | | (303 | ) | | | 128 | |
Purchased software | | | 230 | | | | (179 | ) | | | 51 | |
Internally developed software | | | 128 | | | | (69 | ) | | | 59 | |
| | | | | | | | | | | | |
Total | | | 789 | | | | (551 | ) | | | 238 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2006 | | Cost | | | Amortization | | | Cost | |
|
Technologies & licences | | | 353 | | | | (258 | ) | | | 95 | |
Purchased software | | | 193 | | | | (149 | ) | | | 44 | |
Internally developed software | | | 134 | | | | (62 | ) | | | 72 | |
| | | | | | | | | | | | |
Total | | | 680 | | | | (469 | ) | | | 211 | |
| | | | | | | | | | | | |
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
As at December 31, 2007 other intangible assets amounting to $12 million were reported as a component of the line “Assets held for sale” on the consolidated balance sheet as part of the assets to be transferred to Numonyx, the newly created flash memory company upon FMG deconsolidation.
As at December 31, 2007, the Company recorded a $2 million impairment charge on certain technologies without any alternative future usewas based on the Company’s products’ roadmap.
Pursuant to its decision to cease product development from technologies inherited from Tioga business acquisition,valuation for the Company recorded in 2006underlying investment of a $4 million impairment charge on technologies purchased as partnew round of Tioga business acquisition, which were determined to be without any alternative use and for whichthird party financing. For the other one, the valuation at 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 statements of income for the year ended December 31, 2006.
The aggregate amortization expense in 2007, 2006 and 2005 was $82 million, $93 million and $98 million, respectively.
The estimated amortization expense of the existing intangible assets for the following years is:
| | | | |
Year | | | |
|
2008 | | | 90 | |
2009 | | | 66 | |
2010 | | | 39 | |
2011 | | | 25 | |
2012 | | | 14 | |
Thereafter | | | 4 | |
| | | | |
Total | | | 238 | |
| | | | |
11 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | | | | | | | | | | | |
| | Gross
| | | Accumulated
| | | Net
| |
December 31, 2007 | | Cost | | | Depreciation | | | Cost | |
|
Land | | | 91 | | | | — | | | | 91 | |
Buildings | | | 1,036 | | | | (344 | ) | | | 692 | |
Capital leases | | | 71 | | | | (49 | ) | | | 22 | |
Facilities & leasehold improvements | | | 3,205 | | | | (1,975 | ) | | | 1,230 | |
Machinery and equipment | | | 13,938 | | | | (11,183 | ) | | | 2,755 | |
Computer and R&D equipment | | | 554 | | | | (458 | ) | | | 96 | |
Other tangible assets | | | 185 | | | | (128 | ) | | | 57 | |
Construction in progress | | | 101 | | | | — | | | | 101 | |
| | | | | | | | | | | | |
Total | | | 19,181 | | | | (14,137 | ) | | | 5,044 | |
| | | | | | | | | | | | |
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
As at December 31, 2007 property, plant and equipment amounting to $394 million were reported as a component of the line “Assets held for sale” on the consolidated balance sheet as part of the assets to be transferred to Numonyx, the newly created flash memory company upon FMG deconsolidation.
The depreciation charge in 2007, 2006 and 2005 was $1,331 million, $1,673 million and $1,846 million, respectively.
Capital investment funding has totaled $9 million, $15 million and $38 million in the years ended December 31 2007, 2006 and 2005, respectively. Public funding reduced the depreciation charge by $33 million, $54 million and $66 million in 2007, 2006 and 2005 respectively.
For the years ended December 31, 2007, 2006 and 2005 the Company made equipment sales for cash proceeds of $4 million, $22 million and $82 million respectively.
12 —AVAILABLE-FOR-SALE FINANCIAL ASSETS
As at December 31, 2007, the Company had financial assets classified asavailable-for-sale corresponding to equity and debt securities.
The amount invested in equity securities was $5 million at December 31, 2007 and 2006. These investments correspond to financial assets held as part of a long-term incentive plan in one of the Company’s subsidiaries. They are reported on the line “Other investments and other non-current assets” on the consolidated balance sheet as at December 31, 2007 and 2006. The Company did not record any significant change in fair value on these equity securities classified asavailable-for-sale in the years ended December 31, 2007 and 2006.
As at December 31, 2007, the Company had investments in debt securities amounting to $1,383 million, composed of $1,014 million invested in senior debt floating rate notes issued by primary financial institutions rated at least A1 from “Moody’s Investment services” and $369 million invested in auction rate securities which are regularly paying monthly interests and whose rating at December 31, 2007 was AAA from at least one major rating agency. The floating rate notes are reported as current assets on the line “Marketable securities” on the consolidated balance sheet as at December 31, 2007 since they represent investments of funds available for current operations. The auction-rate securities, which have a final maturity between ten and forty years, are classified as non-current assets on the line “Non-current marketable securities” on the consolidated balance sheet as at December 31, 2007 since the Company intends to hold these investments beyond one year.
In 2007, the Company invested $536 million of existing cash in floating rate notes with primary financial institutions with minimum Moody’s rating “A1” with a maturity between twenty one months and six years, of which $40 million were sold in 2007. In 2006, the Company invested $460 million of existing cash in eleven floating rate notes with primary financial institutions with minimum Moody’s rating “A1”. 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, 2007 and 2006. The changes in the fair value of this derivative instrument were recorded in the consolidated statements of income as part of “Other income and expenses, net” and did not exceed $1 million for the years ended December 31, 2007 and 2006. Additionally, the amount of auction-rate securities purchased and
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
sold in 2007 is $172 million and $61 million respectively. In addition, the Company determined that these financial assets were to be more properly classified on its consolidated balance sheet as of December 31, 2006 as “Marketable securities” instead of “Cash and cash equivalents”, as reported previously. The revision of the December 31, 2006 consolidated balance sheet results in a decrease of “Cash and cash equivalents” by $304 million with an offsetting increase to “Marketable securities”. This reclassification also affects the consolidated statement of cash flows for the year ended December 31, 2006 based on the increase in the investing activities line “Payment for purchase of marketable securities” by $404 million and the increasevaluation of the line “Proceeds from sale of marketable securities” by $100 million corresponding to the amount the Company sold in 2006. There are no other changes on the consolidated financial statements for previous years, since the Company started to purchase auction-rate securities only in 2006.
All these debt securities are classified asavailable-for-sale and recorded at fair value as at December 31, 2007 and 2006, with changes in fair value, including temporary declines, recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity. As of December 31, 2007 the Company reported a pre-tax decline in fair value on the floating rate notes totaling $3 million due to the widening of credit spreads. Out of the 25 investment positions in floating-rate notes, 11 positions are in an unrealized loss position.entity upon liquidation. The Company estimated the fair value of these financial assets based on public quoted market prices. This change in fair value was recognized as a separate component of “Accumulated other comprehensive income” in the consolidated statement of changes in shareholders’ equity since the Company assessed that this decline in fair value was temporary and that the Company was in a position to recover the totalaggregate carrying amount of thesecost method investments on subsequent periods. Sincethat the duration of the floating-rate note portfolio in only 2.6 years on average and the securities have a minimum Moody’s rating “A1”, the Company expects the value of the securities to tend at par as the final maturity is approaching. On the auction-rate securities, the Company reported another-than-temporary decline in fair value amounting to $46 million, which was immediately recorded in the consolidated statements of income on the line“Other-than-temporary impairment charge on financial assets”. These securities were evaluated based on the weighted average of available information (i) from publicly available indexes of securities with same rating and comparable/similar underlying collaterals or industries exposure (such as ABX, ITraxx and IBoxx) and (ii) using ’mark to market’ bids and ’mark to model’ valuations received from the structuring financial institutions of the outstanding auction rate securities, weighting the different information at 80% and 20% respectively, which the Company believes approximates the orderly exit value in the current market. The estimated value of these securities could further decrease in the future as a result of credit market deteriorationand/or other downgrading.
13 — 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 were 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 Companyinvestor did not roll over $653evaluate for impairment in 2009 and 2008 because there was no triggering event is $29 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.
In 2007, the Company did not roll over the remaining $250and $32 million, of short term deposits. Consequently, no amount of existing cash was held in short term deposits as at December 31, 2007.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
14 — OTHER INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Investments carried at cost | | | 34 | | | | 34 | |
Available-for-sale equity securities | | | 5 | | | | 5 | |
Long-term receivables related to funding | | | 46 | | | | 36 | |
Long-term receivables related to tax refund | | | 34 | | | | 33 | |
Debt issuance costs, net | | | 11 | | | | 12 | |
Cancellable swaps designated as fair value hedge | | | 8 | | | | 4 | |
Deposits and other non-current assets | | | 44 | | | | 25 | |
| | | | | | | | |
Total | | | 182 | | | | 149 | |
| | | | | | | | |
respectively.
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 Company’s 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, 2007,2009, the Company’s 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 Company’s 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 and France 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 received upon the Company entered into cancellable swapscreation of Numonyx long-term subordinated notes amounting to $156 million at inception, bearing interest at market rates and 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 27 and are reflected at their fair value in the consolidated balance sheetmaturity as at December 31, 2007,March 30, 2038. These long-term notes yield 9.5% interest, generally payable in kind for seven years and in cash thereafter. In liquidation events in which was positive for approximately $8 million.
Depositsproceeds are insufficient to pay off the term loan, revolving credit facilities and other long-term receivables include, in addition to Hynix ST joint venture debt guarantee as detailed in note 4, individually insignificant amounts as of December 31, 2007 and December 31, 2006.the Francisco Partners’ preferential
F-34F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
payout rights, the subordinated notes will be deemed to have been retired. These notes are also classified as15 — OTHER PAYABLES AND ACCRUED LIABILITIESavailable-for-sale financial assets. The nominal value of the notes was accreted since inception by $27 million ofpaid-in-kind interests receivable, of which $16 million was recognized in 2009. Changes in fair value were recognized as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated statements of changes in equity and corresponded to a pre-tax cumulative $11 million deferred loss as of December 31, 2009. This decline in fair value was assessed to be temporary as the Company expects to recover the debt securities’ entire amortized cost basis, and, in compliance with the accounting guidance onother-than-temporary impairment charges on debt securities, it does not intend to sell the securities or is not more likely than not to be required to sell them before recovery. Consequently, no cumulative effect adjustment was recorded upon adoption of the new accounting guidance. Fair value measurement, which corresponds to a level 3 fair value measurement hierarchy, is based on publicly available swap rates for fixed income obligations with similar maturities. Fair value measurement information is further detailed in Note 25.
| |
13. | OTHER PAYABLES AND ACCRUED LIABILITIES |
Other payables and accrued liabilities consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Taxes other than income taxes | | | 91 | | | | 78 | |
Salaries and wages | | | 300 | | | | 308 | |
Social charges | | | 143 | | | | 124 | |
Advances received on government funding | | | 28 | | | | 28 | |
Advances from customers | | | 10 | | | | 10 | |
Foreign exchange forward contracts | | | 1 | | | | 1 | |
Current portion of provision for restructuring | | | 43 | | | | 28 | |
Pension and termination benefits | | | 23 | | | | 10 | |
Warranty and product guarantee provisions | | | 4 | | | | 6 | |
Accrued interest | | | 6 | | | | 4 | |
Royalties | | | 20 | | | | 8 | |
Other | | | 75 | | | | 59 | |
| | | | | | | | |
Total | | | 744 | | | | 664 | |
| | | | | | | | |
| | | | | | | | |
| | December 31,
| | December 31,
|
| | 2009 | | 2008 |
|
Payroll | | | 325 | | | | 319 | |
Social charges | | | 149 | | | | 146 | |
Taxes other than income taxes | | | 80 | | | | 91 | |
Advances | | | 47 | | | | 51 | |
Payables to equity investments | | | 30 | | | | 7 | |
Obligations for capacity rights | | | 21 | | | | 29 | |
Financial instruments | | | 34 | | | | 5 | |
Provision for restructuring | | | 180 | | | | 197 | |
Pension and long-term benefits | | | 30 | | | | 21 | |
Royalties | | | 35 | | | | 14 | |
Acquisition-related expenses | | | 0 | | | | 17 | |
Others | | | 118 | | | | 99 | |
Total | | | 1,049 | | | | 996 | |
The terms of the agreement for the inception of Numonyx included rights granted to Numonyx to use certain assets retained by the Company. As at December 31, 2009 and 2008 the value of such rights totaled $65 million and $87 million respectively, of which $18 million and $24 million respectively were reported as a current liability. The remaining obligations for capacity rights is due to the terms of the agreement for the integration of NXP wireless business that included rights for NXP to obtain products from the Company at preferential pricing.
Other payables and accrued liabilities also include individually insignificant amounts as of December 31, 20072009 and December 31, 2006.
16 — POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS
The Company and its subsidiaries have a number of both funded and unfunded defined benefit pension plans and other long-term employees’ benefits covering employees in various countries. The defined benefits plans provide for pension benefits, the amounts of which are calculated based on factors such as years of service and employee compensation levels. The other long-term employees’ plans provide for benefits due during the employees’ period of service after certain seniority levels. Consequently, the Company reported for 2007, 2006 and 2005 those plans under a separate tabular presentation. The Company uses a December 31 measurement date for the majority of its plans. Eligibility is generally determined in accordance with local statutory requirements. In 2007, the Company recorded a one-time charge of $21 million, which is included on the line “Plan amendment” in the table below, for adjustments to the expenses of a seniority program in prior periods. These prior period adjustments individually and in the aggregate are not material to the financial results for previously issued annual consolidated financial statements or for the consolidated statements for the year ended December 31, 2007.
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 31, 2007, in compliance with the Emerging Issues Task Force IssueNo. 88-1, Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan(“EITF 88-1”). The TFR was reported according to FAS 132(R), as any other defined benefit plan until the new Italian regulation concerning employee retirement schemes enacted on July 1, 2007. Since that date, the future TFR has been accounted for as a defined contribution plan the accruals being maintained as a Defined Benefit plan in the company books.
As at December 31, 2007 the Company reports all its defined benefit pension plan information according to FAS 132(R), and all its other long-term employees’ benefits information according to APB 12.
The changes in benefit obligation and plan assets were as follows:
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Long-Term Benefits | |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | | 572 | | | | 503 | | | | 3 | | | | 2 | |
Service cost | | | 19 | | | | 38 | | | | 3 | | | | 1 | |
Interest cost | | | 28 | | | | 25 | | | | 2 | | | | — | |
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Long-Term Benefits | |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Employee contributions | | | 3 | | | | 3 | | | | — | | | | — | |
Benefits paid | | | (26 | ) | | | (41 | ) | | | (1 | ) | | | — | |
Effect of settlement | | | (1 | ) | | | (6 | ) | | | — | | | | — | |
Effect of curtailment | | | (7 | ) | | | | | | | — | | | | — | |
Actuarial gain | | | (41 | ) | | | (14 | ) | | | (4 | ) | | | — | |
Foreign currency translation adjustment | | | 38 | | | | 48 | | | | 8 | | | | — | |
Plan amendment | | | 2 | | | | 16 | | | | 31 | | | | — | |
Other | | | 3 | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | | 590 | | | | 572 | | | | 42 | | | | 3 | |
| | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Plan assets at fair value at beginning of year | | | 241 | | | | 194 | | | | — | | | | — | |
Expected return on plan assets | | | 15 | | | | 13 | | | | — | | | | — | |
Employer contributions | | | 16 | | | | 28 | | | | — | | | | — | |
Employee contributions | | | 2 | | | | 3 | | | | — | | | | — | |
Benefits paid | | | (9 | ) | | | (11 | ) | | | — | | | | — | |
Settlement | | | (1 | ) | | | (6 | ) | | | — | | | | — | |
Actuarial gain | | | 7 | | | | 2 | | | | — | | | | — | |
Foreign currency translation adjustments | | | 7 | | | | 16 | | | | — | | | | — | |
Other | | | | | | | 2 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Plan assets at fair value at end of year | | | 278 | | | | 241 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | — | | | | — | |
Funded status | | | (312 | ) | | | (331 | ) | | | (42 | ) | | | (3 | ) |
| | | | | | | | | | | | | | | | |
Net amount recognized in the balance sheet consisted of the following: | | | | | | | | | | | | | | | | |
Non current assets | | | 4 | | | | 3 | | | | — | | | | — | |
Current liabilities | | | (6 | ) | | | — | | | | (13 | ) | | | (3 | ) |
Non Current liabilities | | | (310 | ) | | | (334 | ) | | | (29 | ) | | | — | |
Prepaid benefit cost | | | — | | | | — | | | | — | | | | — | |
Accrued benefit liability | | | — | | | | — | | | | — | | | | — | |
Intangible asset | | | — | | | | — | | | | — | | | | — | |
Accumulated other comprehensive income | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net amount recognized | | | (312 | ) | | | (331 | ) | | | (42 | ) | | | (3 | ) |
| | | | | | | | | | | | | | | | |
Changes in Other Comprehensive Income were as follows:
| | | | | | | | | | | | | | | | |
| | Before tax
| | | | | | Foreign
| | | Net of tax
| |
| | amount as at
| | | | | | currency
| | | amount as at
| |
| | December 31,
| | | Tax (expense or
| | | translation
| | | December 31,
| |
| | 2007 | | | benefit) | | | adjustment | | | 2007 | |
|
Net actuarial gain generated in current year | | | 48 | | | | (9 | ) | | | (2 | ) | | | 37 | |
Amortization of actuarial gain | | | (3 | ) | | | — | | | | — | | | | (3 | ) |
Effect of curtailment, net | | | 6 | | | | — | | | | — | | | | 6 | |
Net prior service cost arising during period | | | (2 | ) | | | — | | | | — | | | | (2 | ) |
Amortization of prior service cost | | | 2 | | | | — | | | | — | | | | 2 | |
| | | | | | | | | | | | | | | | |
Changes in Other comprehensive income | | | 51 | | | | (9 | ) | | | (2 | ) | | | 40 | |
| | | | | | | | | | | | | | | | |
F-36
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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Long-term Benefits | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| | | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | |
|
Service cost | | | 19 | | | | 38 | | | | 41 | | | | 3 | | | | 1 | | | | 1 | |
Interest cost | | | 28 | | | | 25 | | | | 24 | | | | 2 | | | | — | | | | — | |
Expected return on plan assets | | | (15 | ) | | | (13 | ) | | | (11 | ) | | | | | | | — | | | | — | |
Amortization of unrecognized transition obligation | | | — | | | | — | | | | — | | | | | | | | — | | | | — | |
Amortization of actuarial net loss (gain) | | | (3 | ) | | | 4 | | | | 3 | | | | (4 | ) | | | — | | | | — | |
Amortization of prior service cost | | | 2 | | | | (4 | ) | | | — | | | | 31 | | | | — | | | | — | |
Effect of settlement | | | — | | | | 6 | | | | — | | | | | | | | — | | | | — | |
Effect of curtailment | | | (1 | ) | | | | | | | | | | | | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | 30 | | | | 56 | | | | 57 | | | | 32 | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | | 2007 | | | 2006 | | | 2005 | |
|
Discount rate | | | 5.43 | % | | | 4.86 | % | | | 4.54 | % |
Salary increase rate | | | 3.24 | % | | | 2.95 | % | | | 3.75 | % |
Expected long-term rate of return on funds for the pension expense of the year | | | 6.34 | % | | | 6.05 | % | | | 6.34 | % |
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, 2007 and 2006 and target allocation for 2007 are as follows:
| | | | | | | | | | | | |
| | | | | Percentage of Plan Assets at
| |
| | Target allocation
| | | December | |
Asset Category | | 2007 | | | 2007 | | | 2006 | |
|
Equity securities | | | 51 | % | | | 54 | % | | | 55 | % |
Fixed income securities | | | 30 | % | | | 27 | % | | | 33 | % |
Real estate | | | 9 | % | | | 9 | % | | | 4 | % |
Other | | | 10 | % | | | 10 | % | | | 8 | % |
| | | | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
The Company’s 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 Company’s 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 Company’s equity portfolios are managed in such a way as to achieve optimal diversity. The Company does not manage any assets internally.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
After considering the funded status of the Company’s 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 $16 million and $28 million in 2007 and 2006 respectively and the Company expects to contribute cash of $34 million in 2008.
The Company’s estimated future benefit payments as of December 2007 are as follows:
| | | | | | | | |
Years | | Pension Benefits | | | Other Long-term Benefits | |
|
2008 | | | 32 | | | | 1 | |
2009 | | | 9 | | | | 2 | |
2010 | | | 11 | | | | 2 | |
2011 | | | 12 | | | | 2 | |
2012 | | | 17 | | | | 2 | |
| | | | | | | | |
From 2013 to 2017 | | | 111 | | | | 18 | |
| | | | | | | | |
The Company has certain defined contribution plans, which accrue 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 $7 million and $16 million, as of December 31, 2007 and 2006 respectively. The annual cost of these plans amounted to approximately $69 million, $28 million and $42 million in 2007, 2006 and 2005, respectively. The benefits accrued to the employees on a pro-rata basis, during their employment period are based on the individuals’ salaries.
17 — LONG-TERM DEBT
Long-term debt consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | |
|
Bank loans: | | | | | | | | |
2.54% (weighted average), due 2007, fixed interest rate | | | — | | | | 65 | |
5.68% (weighted average rate), due 2007, variable interest rate | | | — | | | | 30 | |
5.21% due 2008, floating interest rate at Libor + 0.40% | | | 43 | | | | 49 | |
5.51% due 2009, floating interest rate at Libor + 0.40% | | | 50 | | | | 35 | |
Funding program loans: | | | | | | | | |
1.44% (weighted average), due 2009, fixed interest rate | | | 13 | | | | 18 | |
0.88% (weighted average), due 2010, fixed interest rate | | | 38 | | | | 45 | |
2.74% (weighted average), due 2012, fixed interest rate | | | 12 | | | | 12 | |
0.49% (weighted average), due 2014, fixed interest rate | | | 9 | | | | 8 | |
3.33% (weighted average), due 2017, fixed interest rate | | | 80 | | | | 53 | |
4.98% due 2014, floating interest rate at Libor + 0.017% | | | 205 | | | | 140 | |
Capital leases: | | | | | | | | |
4,97% (weighted average), due 2011, fixed interest rate | | | 22 | | | | 23 | |
Senior Bonds: | | | | | | | | |
5.35%, due 2013, floating interest rate at Euribor + 0.40% | | | 736 | | | | 659 | |
Convertible debt: | | | | | | | | |
(0.50)% convertible bonds due 2013 | | | 2 | | | | 2 | |
1.5% convertible bonds due 2016 | | | 1,010 | | | | 991 | |
Total long-term debt | | | 2,220 | | | | 2,130 | |
Less current portion | | | (103 | ) | | | (136 | ) |
| | | | | | | | |
Total long-term debt, less current portion | | | 2,117 | | | | 1,994 | |
| | | | | | | | |
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Long-term debt consisted of the following:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | |
|
Bank loans: | | | | | | | | |
2.10% due 2009, floating interest rate at Libor + 0.40% | | | — | | | | 50 | |
1.79% due 2010, floating interest rate at Libor + 1.0% | | | 40 | | | | 50 | |
Funding program loans: | | | | | | | | |
2.00% (weighted average), due 2009, fixed interest rate | | | — | | | | 4 | |
0.90% (weighted average), due 2010, fixed interest rate | | | 12 | | | | 24 | |
3.27% (weighted average), due 2012, fixed interest rate | | | 6 | | | | 10 | |
0.50% (weighted average), due 2013, fixed interest rate | | | 3 | | | | 2 | |
0.50% (weighted average), due 2014, fixed interest rate | | | 8 | | | | 10 | |
0.50% (weighted average), due 2016, fixed interest rate | | | 2 | | | | — | |
3.24% (weighted average), due 2017, fixed interest rate | | | 67 | | | | 72 | |
0.27% due 2014, floating interest rate at Libor + 0.017% | | | 100 | | | | 120 | |
0.31% due 2015, floating interest rate at Libor + 0.026% | | | 56 | | | | 65 | |
0.33% due 2016, floating interest rate at Libor + 0.052% | | | 136 | | | | 136 | |
0.57% due 2016, floating interest rate at Libor + 0.317% | | | 180 | | | | 180 | |
0.49% due 2016, floating interest rate at Libor + 0.213% | | | 200 | | | | 200 | |
Capital leases: | | | | | | | | |
5.39% (weighted average), due 2011, fixed interest rate | | | 8 | | | | 13 | |
6.00% (weighted average), due 2014, fixed interest rate | | | 9 | | | | — | |
5.29% (weighted average), due 2017, fixed interest rate | | | 2 | | | | 2 | |
Senior Bonds: | | | | | | | | |
1.12%, due 2013, floating interest rate at Euribor + 0.40% | | | 720 | | | | 703 | |
Convertible debt: | | | | | | | | |
-0.50% convertible bonds due 2013 | | | — | | | | — | |
1.50% convertible bonds due 2016 | | | 943 | | | | 1,036 | |
| | | | | | | | |
Total long-term debt | | | 2,492 | | | | 2,677 | |
Less current portion | | | (176 | ) | | | (123 | ) |
| | | | | | | | |
Total long-term debt, less current portion | | | 2,316 | | | | 2,554 | |
| | | | | | | | |
Long-term debt is denominated in the following currencies:
| | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
|
| | 2007 | | 2006 | | | 2009 | | 2008 |
|
U.S. dollar | | | 1,313 | | | | 1,242 | | | | 1,666 | | | | 1,840 | |
Euro | | | 907 | | | | 818 | | | | 826 | | | | 837 | |
Singapore dollar | | | — | | | | 65 | | |
Other | | | — | | | | 5 | | | | — | | | | — | |
| | | | | | |
Total | | | 2,220 | | | | 2,130 | | | | 2,492 | | | | 2,677 | |
| | | | | | |
The European Investment Bank’s loans denominated in EUR, but drawn in USD, are classified as USD denominated debt. The 2008 figures have been updated accordingly.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Aggregate future maturities of total long-term debt outstanding (including current portion) are as follows:
| | | | | | | | |
| | December 31,
| | | December 31,
| |
| | 2007 | | | 2009 | |
|
2008 | | | 103 | | |
2009 | | | 114 | | |
2010 | | | 60 | | | | 176 | |
2011 | | | 1,053 | | | | 1,063 | |
2012 | | | 41 | | | | 119 | |
2013 | | | | 836 | |
2014 | | | | 114 | |
Thereafter | | | 849 | | | | 184 | |
| | | | | | |
Total | | | 2,220 | | | | 2,492 | |
| | | | | | |
In August 2003, the Company issued $1,332 million principal amount at issuance of zero coupon unsubordinated convertible bonds due 2013. The bonds were issued2013 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 totalled $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 Company’s 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 holder’s option, the redemption occurred in August 2006.. Pursuant to the terms of the convertible bonds due 2013, the Company was required to purchase, atrepurchased the optionlargest part of the holders, 1,397,493 convertible bonds at a price of $985.09 each betweenin 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 millionwas not material as at December 31, 2007,2009 corresponding to the remaining 2,505188 bonds valued at August 5, 20082010 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 remaining convertible bonds subject to the level of the Company’s share price.
In February 2006, the Company issued $1,131 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 43.36308743.833898 shares per one thousand dollar face value of the bonds corresponding to 42,235,64642,694,216 equivalent shares. This conversion rate has been adjusted from 43.11831743.363087 shares per one thousand dollar face value of the bonds as at issuance,May 21, 2007, as the result of the extraordinary cash dividend approved by the Annual General Meeting of Shareholders held on April 26, 2007.May 14, 2008. This new conversion has been effective since May 21, 2007. The19, 2008. Upon a change of control, 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 Company’s 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. InDuring December 2009 the second quarterCompany repurchased 98 thousand bonds corresponding to $106 million principal amount for a total cash consideration of $103 million, realizing a gain on the repurchase of $3 million. During January 2010, the Company repurchased around 200 thousand bonds corresponding to $215 million principal amount for a total cash consideration of $212 million, realizing a gain on the repurchase of $3 million. The total of bonds repurchased in December and January represented approximately 30% of the total amount originally issued. The repurchased bonds have been cancelled in accordance with their terms. 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 these convertible bonds. As a result of thethese cancellable swap hedging transactions, aswhich are described in further detail in Note 27,25, the effective yield on the $200 million principal amount of the hedged convertible bonds has increasedchanged from a nominal interest rate of 1.50% to 1.95%an effective yield of -0.27% as of December 31, 2007.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(at November 1, 2008, date on which the fair value hedge relationship was discontinued, as described in millions of U.S. dollars, except per share amounts)
Note 6.
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€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 17th17th 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.
The Company entered in 2008 into repurchase agreements with certain financial institutions and gave as collateral $262 million principal amount of floating rate notes classified asavailable-for-sale. The Company
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
retained control over the pledged debt securities and consequently did not de-recognize the financial assets from its consolidated balance sheet upon transfer of the collateral. The Company accounted for such transactions as secured borrowings and recognized the cash received upon transfer by recording a liability for the obligation to return the cash to the lending financial institution within a term which did not exceed 57 days. Such obligation, with a weighted average interest rate of 2.94%, amounted to $249 million and was extinguished during 2008 when the Company repurchased the pledged securities in accordance with the terms of the repurchase agreements.
Credit facilities
The Company had unutilized committed medium term credit facilities with core relationship banks totalling $500 million. In addition, the aggregate amount of the Company’s and its subsidiaries has uncommittedsubsidiaries’ total available short-term credit facilities, with several financial institutions totalling $1,212excluding foreign exchange credit facilities, was approximately $759 million as at December 31, 2007.2009. In addition, ST-Ericsson had $25 million of unutilized committed line from Ericsson as parent company. The Company has also a $736 million (€500 million ) long-termhad two committed credit facilityfacilities with the European Investment Bank as part of R&D funding programs. The first one, for a funding program loan,total of €245 million for R&D in France was fully drawn in U.S. dollars for a total amount of $341 million, of which $205$49 million was usedwere paid back as at December 31, 2007.2009. The second one, signed on July 21, 2008, for a total amount of €250 million for R&D projects in Italy, was fully drawn in U.S. dollars for $380 million as at December 31, 2009. The Company maintains also uncommitted foreign exchange facilities totalling $939$714 million at December 31, 2007.2009. At December 31, 2007,2009 and December 31, 2006,2008, amounts available under the short-term lines of credit were not reduced by any borrowing.
| |
15. | POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEES BENEFITS |
The Company and its subsidiaries have a number of defined benefit pension plans, mainly unfunded, and other long-term employees’ benefits covering employees in various countries. The defined benefit plans provide for pension benefits, the amounts of which are calculated based on factors such as years of service and employee compensation levels. The other long-term employees’ plans provide for benefits due during the employees’ period of service after certain seniority 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”), generated before July 1, 2007, the Company continues to measure the vested benefits to which Italian employees are entitled as if they retired immediately as of December 31, 2009, in compliance with U.S. GAAP guidance on determining vested benefit obligations for defined benefit pension plans.
F-41
18 — SHAREHOLDERS’ EQUITYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The changes in benefit obligation and plan assets were as follows:
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Long-Term Benefits |
| | December 31,
| | December 31,
| | December 31,
| | December 31,
|
| | 2009 | | 2008 | | 2009 | | 2008 |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | | 587 | | | | 590 | | | | 42 | | | | 42 | |
Service cost | | | 22 | | | | 20 | | | | 4 | | | | 4 | |
Interest cost | | | 25 | | | | 32 | | | | 2 | | | | 3 | |
Employee contributions | | | 4 | | | | 3 | | | | — | | | | — | |
Benefits paid | | | (25 | ) | | | (35 | ) | | | (2 | ) | | | (8 | ) |
Effect of settlement | | | (16 | ) | | | (5 | ) | | | (3 | ) | | | — | |
Effect of curtailment | | | (2 | ) | | | (1 | ) | | | — | | | | — | |
Actuarial (gain) loss | | | 29 | | | | 15 | | | | (1 | ) | | | 1 | |
Transfer in | | | 12 | | | | 70 | | | | 1 | | | | 8 | |
Transfer out | | | (5 | ) | | | (53 | ) | | | (1 | ) | | | (5 | ) |
Plan amendment | | | — | | | | (3 | ) | | | — | | | | — | |
Foreign currency translation adjustment | | | 23 | | | | (46 | ) | | | 1 | | | | (3 | ) |
Benefit obligation at end of year | | | 654 | | | | 587 | | | | 43 | | | | 42 | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Plan assets at fair value at beginning of year | | | 262 | | | | 278 | | | | — | | | | — | |
Expected return on plan assets | | | 16 | | | | 18 | | | | — | | | | — | |
Employer contributions | | | 46 | | | | 16 | | | | — | | | | — | |
Employee contributions | | | 5 | | | | 2 | | | | — | | | | — | |
Benefits paid | | | (13 | ) | | | (11 | ) | | | — | | | | — | |
Effect of settlement | | | (14 | ) | | | (2 | ) | | | — | | | | — | |
Actuarial gain (loss) | | | 25 | | | | (59 | ) | | | — | | | | — | |
Transfer in | | | 7 | | | | 54 | | | | — | | | | — | |
Transfer out | | | (6 | ) | | | (5 | ) | | | — | | | | | |
Foreign currency translation adjustments | | | 11 | | | | (28 | ) | | | — | | | | — | |
Other | | | — | | | | (1 | ) | | | — | | | | — | |
Plan assets at fair value at end of year | | | 339 | | | | 262 | | | | — | | | | — | |
Funded status | | | (315 | ) | | | (325 | ) | | | (43 | ) | | | (42 | ) |
Net amount recognized in the balance sheet consisted of the following: | | | | | | | | | | | | | | | | |
Non current assets | | | 2 | | | | 1 | | | | — | | | | — | |
Current liabilities | | | (8 | ) | | | (5 | ) | | | (9 | ) | | | (2 | ) |
Non Current liabilities | | | (309 | ) | | | (321 | ) | | | (34 | ) | | | (40 | ) |
Net amount recognized | | | (315 | ) | | | (325 | ) | | | (43 | ) | | | (42 | ) |
The components of accumulated other comprehensive income (loss) before tax effects were as follows:
| | | | | | | | | | | | |
| | Actuarial
| | | Prior service
| | | | |
| | (gains)/losses | | | cost | | | Total | |
|
Other comprehensive income as at December 31, 2007 | | | 12 | | | | 10 | | | | 22 | |
Net amount generated/arising in current year | | | 74 | | | | (2 | ) | | | 72 | |
Amortization | | | (3 | ) | | | (2 | ) | | | (5 | ) |
Foreign currency translation adjustment | | | (9 | ) | | | — | | | | (9 | ) |
Other comprehensive income as at December 31, 2008 | | | 74 | | | | 6 | | | | 80 | |
Net amount generated/arising in current year | | | 4 | | | | — | | | | 4 | |
Amortization | | | (6 | ) | | | (2 | ) | | | (8 | ) |
Foreign currency translation adjustment | | | 4 | | | | — | | | | 4 | |
Effect of curtailment/settlement | | | (4 | ) | | | — | | | | (4 | ) |
Other comprehensive income as at December 31, 2009 | | | 72 | | | | 4 | | | | 76 | |
In 2010, we expect to amortize $4 million of actuarial losses and $1 million of past service cost.
F-42
18.1NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The components of the net periodic benefit cost included the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Long-term Benefits | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| | | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | |
|
Service cost | | | 22 | | | | 20 | | | | 19 | | | | 4 | | | | 4 | | | | 3 | |
Interest cost | | | 25 | | | | 32 | | | | 28 | | | | 2 | | | | 3 | | | | 2 | |
Expected return on plan assets | | | (16 | ) | | | (18 | ) | | | (15 | ) | | | — | | | | — | | | | — | |
Amortization of actuarial net loss (gain) | | | 6 | | | | 2 | | | | (3 | ) | | | (1 | ) | | | 1 | | | | (4 | ) |
Amortization of prior service cost | | | 2 | | | | 2 | | | | 2 | | | | — | | | | — | | | | 31 | |
Effect of settlement | | | 2 | | | | (3 | ) | | | — | | | | — | | | | — | | | | — | |
Effect of curtailment | | | (2 | ) | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | 39 | | | | 34 | | | | 30 | | | | 5 | | | | 8 | | | | 32 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The weighted average assumptions used in the determination of the benefit obligation and the plan asset for the pension plans and the other long term benefits were as follows:
| | | | | | | | | | | | |
| | December 31,
| | December 31,
| | December 31,
|
Assumptions | | 2009 | | 2008 | | 2007 |
|
Discount rate | | | 5.11 | % | | | 5.23 | % | | | 5.43 | % |
Salary increase rate | | | 3.08 | % | | | 3.46 | % | | | 3.24 | % |
Expected long-term rate of return on funds for the pension expense of the year | | | 5.28 | % | | | 5.69 | % | | | 6.34 | % |
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’s pension plan asset allocation at December 31, 2009 and 2008 are as follows:
| | | | | | | | |
| | Percentage of Plan Assets at December |
Asset Category | | 2009 | | 2008 |
|
Equity securities | | | 38 | % | | | 36 | % |
Bonds securities remunerating regular interest | | | 33 | % | | | 37 | % |
Real estate | | | 9 | % | | | 6 | % |
Other | | | 20 | % | | | 21 | % |
Total | | | 100 | % | | | 100 | % |
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The Company’s detailed pension plan asset allocation including the fair-value measurements of those plan assets as at December 31, 2009 is as follows:
| | | | | | | | | | | | | | | | |
| | | | Quoted Prices in
| | | | Significant
|
| | | | Active Markets
| | Significant Other
| | Unobservable
|
| | | | for Identical
| | Observable Inputs
| | Inputs
|
| | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) |
|
Cash and cash equivalents | | | 27 | | | | 27 | | | | — | | | | — | |
Equity securities | | | 128 | | | | 111 | | | | 17 | | | | — | |
Government debt securities | | | 57 | | | | 57 | | | | — | | | | — | |
Corporate debt securities | | | 56 | | | | 52 | | | | 4 | | | | — | |
Derivatives | | | 22 | | | | 16 | | | | 6 | | | | — | |
Investment funds | | | 1 | | | | — | | | | 1 | | | | — | |
Real estate | | | 30 | | | | 3 | | | | 20 | | | | 7 | |
Other (mainly insurance assets — contracts and reserves) | | | 18 | | | | 1 | | | | 12 | | | | 5 | |
TOTAL | | | 339 | | | | 267 | | | | 60 | | | | 12 | |
The Company’s 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 Company’s 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 Company’s equity portfolios are managed in such a way as to achieve optimal diversity and in certain jurisdictions they are entirely managed by the multi-employer funds. The Company does not manage any assets internally.
After considering the funded status of the Company’s 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 $46 million and $16 million in 2009 and 2008 respectively and the Company expects to contribute cash of $18 million in 2010.
The Company’s estimated future benefit payments as of December 2009 are as follows:
| | | | | | | | |
Years | | Pension Benefits | | Other Long-term Benefits |
|
2010 | | | 41 | | | | 3 | |
2011 | | | 21 | | | | 2 | |
2012 | | | 28 | | | | 2 | |
2013 | | | 28 | | | | 3 | |
2014 | | | 37 | | | | 3 | |
From 2015 to 2019 | | | 192 | | | | 17 | |
The Company has certain defined contribution plans, which accrue 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 $13 million and $11 million, as of December 31, 2009 and 2008 respectively. The annual cost of these plans amounted to approximately $81 million, $72 million and $66 million in 2009, 2008 and 2007, respectively. Major changes as compared to previous periods are mainly related to the acquisition of the NXP wireless business and the formation of the ST-Ericsson joint-venture. The benefits accrued to the employees on a pro-rata basis, during their employment period are based on the individuals’ salaries.
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, 20072009 the number of shares of common stock issued was 910,293,420910,319,305 shares (910,157,933(910,307,305 at December 31, 2006)2008).
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
As of December 31, 20072009 the number of shares of common stock outstanding was 899,760,539 (897,395,042878,333,566 (874,276,833 at December 31, 2006)2008).
18.216.2 — 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 Company’s 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 Company’s 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 January 22, 2008, following the termination of the existing option agreement between the Company and STMicroelectronics Holding II B.V. and the constitution in December 2006 of an independent Dutch Foundation “Stichting Continuïteit ST”, a new option agreement of substantially similar terms was concluded between the Company and Stichting Continuïteit ST. This new option agreement provides for the issuance of 540,000,000 preference shares. Any such shares wouldshould 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 Company’s 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 were no preference shares issued as of December 31, 2007.2009.
18.316.3 — Treasury stock
In 2002 and 2001,Following the authorization by the Supervisory Board, announced on April 2, 2008, to repurchase up to 30 million shares of its common stock, the Company repurchased 13,400,000 of its ownacquired 29,520,220 shares as at December 31, 2008, for a total amount of $348approximately $313 million, which werealso reflected at cost as a reduction of the shareholders’ equity. No treasuryThis repurchase intends to cover the transfer of shares were acquired in 2007, 2006 and 2005.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millionsto employees upon vesting of U.S. dollars, except perfuture share amounts)based remuneration programs.
The treasury shares have been designated for allocation under the Company’s share based remuneration programs onof non-vested shares including such plans as approved by the 2005, 2006, 2007, 2008 and 20072009 Annual General Meeting of Shareholders. As of December 31, 2007, 2,867,1192009, 10,934,481 of these treasury shares were transferred to employees under the Company’s share based remuneration programs of which 4,044,733 in the year ended December 31, 2009, following the full vesting as of April 27,the 2006 stock-award plan, the vesting of the first and second tranches of the 2007 stock-award plan, the vesting of the first tranche of the stock award plan granted in 2005, as of April 27, 2007 of the second tranche of the stock award plan granted in 2005 and the first tranche of the2008 stock-award plan granted in 2006, the vesting as of October 26, 2007 of first tranche of the stock awards granted under the 2005 French subplan of 2005 (representing 64% of shares granted under this sub plan) andtogether with the acceleration of the vesting of a limited number of stock awards.stock-awards.
As of December 31, 2007,2009, the Company owned a residual number of treasury shares equivalent to 10,532,881.31,985,739.
18.416.4 — 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, 2007,2008, under the 1995 plan, 1,98042,300 of the granted options outstanding originally vest 50% after three years and 50% after four years following the date of the grant; 5,944,752 of the granted options vestvested 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 consolidated statements of income.
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 period1996-1998, 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 period1999-2001, 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.
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
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 willwould vest 30 days after the date of grant. The options expire ten years after the date of grant.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
A summary of the stock option activity for the plans for the three years ended December 31, 2007, 20062009, 2008 and 20052007 follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Price Per Share | | | | | Price Per Share | |
| | | | | | Weighted
| | | | | | | Weighted
| |
| | Number of Shares | | Range | | Average | | | Number of Shares | | Range | | Average | |
|
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 | | | | 56,325,252 | | | $ | 12.03 - $62.01 | | | $ | 30.50 | |
| | | | | | | | | | | | | | |
Options granted: | | | | | | | | | | | | | | | | | | | | | | | | |
2001 Plan | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Supervisory Board Plan | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Options expired | | | (7,566,170 | ) | | $ | 24.88 | | | $ | 24.88 | | | | (7,566,170 | ) | | $ | 24.88 | | | $ | 24.88 | |
Options forfeited | | | (1,861,960 | ) | | $ | 16.73 - $62.01 | | | $ | 31.19 | | | | (1,861,960 | ) | | $ | 16.73 - $62.01 | | | $ | 31.19 | |
Options exercised | | | (131,487 | ) | | $ | 17.08 - $19.18 | | | $ | 18.90 | | | | (131,487 | ) | | $ | 17.08 - $19.18 | | | $ | 18.90 | |
Outstanding at December 31, 2007 | | | 46,765,635 | | | $ | 16.73 - $62.01 | | | $ | 31.42 | | | | 46,765,635 | | | $ | 16.73 - $62.01 | | | $ | 31.42 | |
| | | | | | | | | | | | | | |
Options granted: | | | | | | | | | | | | | |
2001 Plan | | | | — | | | | — | | | | — | |
Supervisory Board Plan | | | | — | | | | — | | | | — | |
Options expired | | | | (5,923,552 | ) | | $ | 44.00 - $62.01 | | | $ | 59.1 | |
Options forfeited | | | | (1,410,650 | ) | | $ | 16.73 - $62.01 | | | $ | 27.9 | |
Options exercised | | | | — | | | | — | | | | — | |
Outstanding at December 31, 2008 | | | | 39,431,433 | | | $ | 16.73 - $39.00 | | | $ | 27.35 | |
| | | | | | | | |
Options granted: | | | | | | | | | | | | | |
2001 Plan | | | | — | | | | — | | | | — | |
Supervisory Board Plan | | | | — | | | | — | | | | — | |
Options expired | | | | — | | | | — | | | | — | |
Options forfeited | | | | (1,487,601 | ) | | $ | 17.08 - $39.00 | | | $ | 27.69 | |
Options exercised | | | | — | | | | — | | | | — | |
Outstanding at December 31, 2009 | | | | 37,943,832 | | | $ | 16.73 - $39.00 | | | $ | 27.33 | |
| | | | | | | | |
Stock options exercisable following acceleration in 2005 of vesting for all outstanding unvested stock options were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
|
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 |
|
Options exercisable | | | 46,765,635 | | | | 56,325,252 | | | | 60,558,567 | | | | 37,943,832 | | | | 39,431,433 | | | | 46,765,635 | |
Weighted average exercise price | | $ | 31,42 | | | $ | 30.50 | | | $ | 29.80 | | | $ | 27.33 | | | $ | 27.35 | | | $ | 31,42 | |
| | | | | | | | | | | | | | |
The weighted average remaining contractual life of options outstanding as of December 31, 2009, 2008 and 2007 2006was 2.9, 3.9 and 2005 was 4.3 4.7 and 5.5 years, respectively.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The range of exercise prices, the weighted average exercise price and the weighted average remaining contractual life of options exercisable as of December 31, 20072009 were as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Weighted
| |
| | | | | | | Weighted
| | | average
| |
| | | | Option price
| | | average
| | | remaining
| |
| | Number of shares | | range | | | exercise price | | | contractual life | |
|
| | | 149,191 | | | $ | 16.73 - $17.31 | | | $ | 17.06 | | | | 6.8 | |
| | | 21,094,641 | | | $ | 19.18 - $24.88 | | | $ | 21.03 | | | | 5.8 | |
| | | 202,060 | | | $ | 25.90 - $29.70 | | | $ | 27.18 | | | | 5.2 | |
| | | 19,357,388 | | | $ | 31.09 - $44.00 | | | $ | 34.37 | | | | 3.9 | |
| | | 5,962,355 | | | $ | 50.69 - $62.01 | | | $ | 59.09 | | | | 0.6 | |
| | | | | | | | | | | | | | |
| | | | | | Weighted
|
| | | | Weighted
| | average
|
| | Option price
| | average
| | remaining
|
Number of shares | | range | | exercise price | | contractual life |
|
| 133,966 | | | $ | 16.73 - $17.31 | | | $ | 17.05 | | | | 4.7 | |
| 19,744,709 | | | $ | 19.18 - $24.88 | | | $ | 21.02 | | | | 3.8 | |
| 167,350 | | | $ | 25.90 - $29.70 | | | $ | 26.96 | | | | 3.3 | |
| 17,897,807 | | | $ | 31.09 - $39.00 | | | $ | 34.37 | | | | 1.8 | |
18.516.5 — EmployeeNonvested share purchase plansawards
No employee share purchase plan was offered in 2007, 2006 or 2005.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
18.6 — Share Awards Plans
In 2005, the Company redefined its equity-based compensation strategy by no longer granting options but rather share awards. 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 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 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 October 26, 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, which is not considered as an extension of the requisite service period. 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 original plan, representing 637,109 shares, vested as at April 27, 2006. In 2007, the second tranche of the original plan, representing 598,649 shares, vested as at April 27, 2007, and the first tranche of the subplan, representing 434,592 shares, vested as at October 26, 2007. In addition, 6,303 additional shares were accelerated during the year, of which 864 were under the subplan. These shares were transferred to employees from the 13,400,000 treasury shares owned by the Company. At December 31, 2007, 911,281 nonvested shares were outstanding, of which 243,467 under the 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: one third after 6 months, one third after 18 months and one third 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.
In 2007, the second tranche of the plan, representing 17,000 shares vested as at April 27, 2007. As of December 31 2007, 17,000 awards were outstanding.
On April 29, 2006 the Compensation Committee (on behalf of the entire Supervisory Board and with its approval) granted 66,000 stock-based awardsnon vested shares to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2006 Supervisory Board Plan”), of which 15,000 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third 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. In 2007, the first tranche of the plan, representing 17,000 shares vested as at April 27, 2007. In 2008, the second tranche of the plan, representing 16,000 shares vested as at April 27, 2008. Furthermore, following the end of mandate of one of the members of the Board, 4,000 shares were accelerated in 2008. In 2009, the third tranche of the plan, representing 14,000 shares vested as at April 27, 2009. As of December 31 2007, 34,0002009, no awards were outstanding.outstanding under the 2006 Supervisory Board Plan.
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 and the Supervisory Board also authorized on September 29, 2006 the future grant of additional shares to selected employees upon designationnomination by the Managing Board of the Company. These additional shares were granted in 2006 and 2007, as detailed below. The shares were granted for free to employees, and vested 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 Company’s European subsidiaries for whom a subplan was simultaneously created on September 29,
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
2006 for statutory payroll tax purposes, the nonvested shares vestvested 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 iswas required for the nonvested shares granted under the local subplan: 64% of the granted stock awards vestvested two years from grant date and 36% as at April 27, 2009. In addition, the sale by the employees of the shares included in the subplan, once vested, is restricted over an additional two-year period which is not considered as an extension of the requisite service period.
In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 1,120,234 shares, vested as at April 27, 2007. In addition, 10,120 additional shares were accelerated during the year, of which 340 under the subplan. In 2008, the second tranche of the original plan, representing 1,079,952 shares, vested as at April 27, 2008, and the first tranche of the subplan, representing 748,394 shares vested as at September 30, 2008. In addition, 30,590 shares were accelerated during the year, of which 5,941 under the subplan. These shares were transferred to employees from the 13,400,000 treasury shares owned by the Company. In 2009, the third tranche of the original plan, representing 1,155,238 shares and the third tranche of the subplan, representing 400,149 shares vested as at April 27, 2009. In addition, 9,446 shares were accelerated during the year, of which 4,035 under the subplan. At December 31, 2007, 3,489,9742009, no nonvested shares from the 2006 plan were outstanding, of which 1,189,115 under the subplan.outstanding.
On December 19, 2006, the Compensation Committee recorded(on behalf of the grant of anentire Supervisory Board and with its approval) granted additional 62,360 shares to selected employees designated by the Managing Board of the Company as part of the 2006 Employee Plan. This additional grant hashad the same terms and conditions as the original plan. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 8,885 shares, vested as at April 27, 2007. At2007, and the first tranche of the subplan, representing 21,648 shares vested as at December 20, 2008. In 2008, the second tranche of the plan, representing 8,885 shares, vested as at April 27, 2008. In 2009, the third tranche of the plan, representing 9,264 shares and the third tranche of the subplan representing 12,147 shares vested as at April 27, 2009. As at December 31, 2007 53,1302009, no nonvested shares were outstanding as part of this additional grant,grant.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of which 34,255 under the local subplan.U.S. dollars, except share and per share amounts)
On February 27, 2007, the Compensation Committee recorded(on behalf of the grant of anentire Supervisory Board and with its approval) granted additional 215,000 shares to selected employees designated by the Managing Board of the Company as part of the 2006 Employee Plan. This additional grant hashad the same terms and conditions as the original plan. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 50,031 shares, vested as at April 27, 2007. In addition, 1,196 additional shares were accelerated during the year. AtIn 2008, the second tranche of the plan, representing 47,551 shares vested as at April 27, 2008. In addition, 598 shares were accelerated during the year. In 2009, the first tranche of the subplan, representing 36,122 shares vested as at February 28, 2009. The third tranche of the plan representing 51,514 shares and the third tranche of the subplan representing 20,174 shares vested as at April 27, 2009. In addition, 108 shares were accelerated during the year. As at December 31, 2007 159,3452009, no nonvested shares were outstanding as part of this additional grant, of which 57,390 under the local subplan.grant.
On April 2928, 2007, following the decision by the Annual Shareholders’ meeting to increase the number of share awards to membersCompensation Committee (on behalf of the entire Supervisory Board and Professionals of the Supervisory Board under the 2006 Supervisory Board plan, the Compensation Committeewith its approval) granted 165,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2007 Supervisory Board Plan”), of which 22,500 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third 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. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 45,000 shares, vested as at April 28, 2008. Furthermore, following the end of mandate of one of the members of the Board, 7,500 shares were accelerated in 2008. The second tranche of this plan, representing 45,000 shares, vested as at April 28, 2009. As of December 31, 2007, 142,5002009, 45,000 awards were outstanding.outstanding under the 2007 Supervisory Board Plan.
On June 18, 2007, the Company granted 5,691,840 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2007 Employee Plan”). The Compensation Committee and the Supervisory Board also authorized the future grant of additional shares to selected employees upon nomination by the Managing Board of the Company.Company as detailed below. 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 two of the Company’s European subsidiaries for whom a subplan was simultaneously created, the nonvested shares vest over the following requisite service period: 32% as at April 26, 2008, 32% as at April 26, 2009 and 36% as at April 26, 2010. The following requisite service period is required for the nonvested shares granted under the two local subplans: for the first one, 64% of the granted stock awards vest as at June 19, 2009 and 36% as at June 19, 2010. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. For the second one,subplan, 32% vest as at June 19, 2008, 32% as at April 26, 2009 and 36% as at April 26, 2010. In 2008, the Company failed to meet one performance condition during one semester. Consequently, one sixth of the shares granted, totaling 926,121 shares, of which 242,233 on the first subplan and 2,634 on the second subplan, was lost for vesting. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 1,097,124 shares, vested as at April 26, 2008. The first tranche of one of the local subplans, representing 4,248 shares, vested as at June 19, 2008. In addition, 31,786 shares were accelerated during the year, of which 2,999 under the subplans. These shares were transferred to employees from the treasury shares owned by the Company. The second tranche of the original plan, representing 1,048,429 shares and the second tranche of one of the local subplans, representing 3,914 shares, vested as at April 26, 2009. The first tranche of the other local subplan, representing 768,157 shares, vested as at June 19, 2009. In addition, 32,360 shares were accelerated during the year, of which 4,974 under the subplans. These shares were transferred to employees from the treasury shares owned by the Company. At December 31, 2007 5,618,3502009, 1,539,083 nonvested shares were outstanding, of which 1,459,635409,491 under the first subplan and 15,9004,395 under the second one.
On December 6, 2007, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 84,450 shares to selected employees designated by the Managing Board of the Company as part of the 2007 Employee Plan. This additional grant has the same terms and conditions as the original plan. As a consequence of the forecastfailed performance condition results, as explained above, one half14,023 shares were lost for vesting, of which 498 on the subplan. In compliance with the graded vesting of the grants are estimated to be lost for vesting.grant, the first tranche of the original plan, representing 10,434 shares, vested as at April 26, 2008. In addition, 11,311 shares were accelerated during the year. The second tranche of the original plan, representing 21,585 shares, vested as at April 26, 2009. The first tranche of the subplan, representing 1,602 shares, vested as at December 7, 2009. At December 31, 2007 84,4502009, 24,711 nonvested shares were outstanding as part of this additional grant, of which 3,000900 under the first local subplan and 42,400 under the second one.subplan.
F-44F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
On February 19, 2008, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 135,550 shares to selected employees designated by the Managing Board of the Company as part of the 2007 Employee Plan. This additional grant has the same terms and conditions as the original plan. As a consequence of the failed performance condition explained above, 22,559 shares were lost for vesting, of which 5,887 on the local subplan. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 26,407 shares, vested as at April 26, 2008. In addition, 320 shares were accelerated during the year. The second tranche of the original plan, representing 21,978 shares, vested as at April 26, 2009. In addition, 567 shares were accelerated during the year. At December 31, 2009, 37,534 nonvested shares were outstanding as part of this additional grant, of which 12,821 under the local subplan.
On May 16, 2008, the Compensation Committee (on behalf of the entire Supervisory Board and with its approval) granted 165,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2008 Supervisory Board Plan”), of which 22,500 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third 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. In compliance with the graded vesting of the grant, the first tranche of this plan, representing 47,500 shares, vested as at May 16, 2009. As of December 31, 2009, 95,000 awards were outstanding under the 2008 Supervisory Board Plan.
On July 22, 2008, the Company granted 5,723,305 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2008 Employee Plan”). The Compensation Committee also authorized the future grant of additional 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 two of the Company’s European subsidiaries for whom a subplan was simultaneously created, the nonvested shares vest over the following requisite service period: 32% as at May 14, 2009, 32% as at May 14, 2010 and 36% as at May 14, 2011. The following requisite service period is required for the nonvested shares granted under the two local subplans: for the first one, 64% of the granted stock awards vest as at July 23, 2010 and 36% as at May 14, 2011. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. For the second one, 32% vest as at July 22, 2009, 32% as at May 14, 2010 and 36% as at May 14, 2011. In 2009, based on the final calculations, it turned out that the Company failed to meet two performance conditions. Consequently, two third of the shares granted, totaling 3,747,193 shares, of which 1,020,134 on the first subplan and 35,598 on the second subplan, was lost for vesting. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 427,324 shares, vested as at May 14, 2009. The first tranche of one of the local subplans, representing 5,719 shares, vested as at July 23, 2009. In addition, 15,588 shares were accelerated during the year. These shares were transferred to employees from the treasury shares owned by the Company. At December 31, 2009, 1,399,373 nonvested shares were outstanding, of which 509,324 under the first local subplan and 11,906 under the second local subplan.
On February 27, 2009, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 50,400 shares to selected employees designated by the Managing Board of the Company as part of the 2008 Employee Plan. This additional grant has the same terms and conditions as the original plan. As a consequence of the failed performance condition explained above, 33,589 shares were lost for vesting, of which 11,365 on the first local subplan and 1,332 on the second local subplan. In compliance with the graded vesting of the grant, the first tranche of the original plan, representing 3,348 shares, vested as at May 14, 2009. At December 31, 2009, 12,329 nonvested shares were outstanding as part of this additional grant, of which 5,685 under the first local subplan and 668 under the second local subplan.
On May 20, 2009, the Compensation Committee (on behalf of the entire Supervisory Board and with its approval) granted 165,000 stock-based awards to the members of the Supervisory Board and professionals of the Supervisory Board (“The 2009 Supervisory Board Plan”), of which 7,500 awards were immediately waived. These awards are granted at the nominal value of the share of €1.04 and vest over the following period: one third after 12 months, one third after 24 months and one third 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 2009, 157,500 awards were outstanding under the 2009 Supervisory Board Plan.
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
On July 28, 2009, the Company granted 5,575,240 nonvested shares to senior executives and selected employees to be issued upon vesting from treasury stock (“The 2009 Employee Plan”). The Compensation Committee also authorized the future grant of additional 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 Company’s European subsidiaries for whom a subplan was simultaneously created, the nonvested shares vest over the following requisite service period: 32% as at May 20, 2010, 32% as at May 20, 2011 and 36% as at May 20, 2012. 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 July 29, 2011 and 36% as at May 20, 2012. In addition, the sale by the employees of the shares once vested is restricted over an additional two-year period, which is not considered as an extension of the requisite service period. At December 31, 2009, 5,532,440 nonvested shares were outstanding, of which 1,438,185 under the subplan.
On November 30, 2009, the Managing Board of the Company, as authorized by the Supervisory Board of the Compensation Committee, granted additional 8,300 shares to selected employees designated by the Managing Board of the Company as part of the 2009 Employee Plan. This additional grant has the same terms and conditions as the original plan. At December 31, 2009, 8,300 nonvested shares were outstanding as part of this additional grant.
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
A summary of the nonvested share activity for the years ended December 31, 20072009 and December 31, 20062008 is presented below:
| | | | | | | | | | | | | | | | |
Nonvested Shares | | Number of Shares | | Exercise price | | | Number of Shares | | Exercise price | |
|
Outstanding as at December 31, 2005 | | | 3,965,220 | | | $ | 0-€1.04 | | |
| | | | | | |
Outstanding as at December 31, 2007 | | | | 10,510,030 | | | $ | 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 | | |
| | | | | | |
Awards granted: | | | | | | | | | |
2006 Employee Plan | | | 215,000 | | | $ | 0 | | |
2007 Employee Plan | | | 5,776,290 | | | $ | 0 | | | | 135,550 | | | $ | 0 | |
2007 Supervisory Board Plan | | | 165,000 | | | € | 1.04 | | |
2008 Employee Plan | | | | 5,723,305 | | | $ | 0 | |
2008 Supervisory Board Plan | | | | 165,000 | | | € | 1.04 | |
Awards forfeited: | | | | | | | | | | | | | | | | |
2005 Employee Plan | | | (42,619 | ) | | $ | 0 | | | | (7,900 | ) | | $ | 0 | |
2006 Employee Plan | | | (120,295 | ) | | $ | 0 | | | | (62,162 | ) | | $ | 0 | |
2007 Employee Plan | | | (73,490 | ) | | $ | 0 | | | | (141,201 | ) | | $ | 0 | |
2007 Supervisory Board Plan | | | (22,500 | ) | | € | 1.04 | | |
2008 Employee Plan | | | | (56,185 | ) | | $ | 0 | |
2008 Supervisory Board Plan | | | | (22,500 | ) | | € | 1.04 | |
Awards cancelled on failed vesting conditions: | | | | | | | | | |
2007 Employee Plan | | | | (962,703 | ) | | $ | 0 | |
Awards vested: | | | | | | | | | | | | | | | | |
2005 Employee Plan | | | (1,039,544 | ) | | $ | 0 | | | | (903,381 | ) | | $ | 0 | |
2005 Supervisory Board Plan | | | (17,000 | ) | | € | 1.04 | | | | (17,000 | ) | | € | 1.04 | |
2006 Employee Plan | | | (1,190,466 | ) | | $ | 0 | | | | (1,937,618 | ) | | $ | 0 | |
2006 Supervisory Board Plan | | | (17,000 | ) | | € | 1.04 | | | | (20,000 | ) | | € | 1.04 | |
Outstanding as at December 31, 2007 | | | 10,510,030 | | | $ | 0-€1.04 | | |
2007 Employee Plan | | | | (1,181,630 | ) | | $ | 0 | |
2007 Supervisory Board Plan | | | | (52,500 | ) | | € | 1.04 | |
Outstanding as at December 31, 2008 | | | | 11,169,105 | | | $ | 0-€1.04 | |
Awards granted: | | | | | | | | | |
2008 Employee Plan | | | | 50,400 | | | $ | 0 | |
2009 Employee Plan | | | | 5,583,540 | | | $ | 0 | |
2009 Supervisory Board Plan | | | | 165,000 | | | € | 1.04 | |
Awards forfeited: | | | | | | | | | |
2006 Employee Plan | | | | (8,507 | ) | | $ | 0 | |
2007 Employee Plan | | | | (52,896 | ) | | $ | 0 | |
2008 Employee Plan | | | | (73,057 | ) | | $ | 0 | |
2009 Employee Plan | | | | (42,800 | ) | | $ | 0 | |
2009 Supervisory Board Plan | | | | (7,500 | ) | | € | 1.04 | |
Awards cancelled on failed vesting conditions: | | | | | | | | | |
2008 Employee Plan | | | | (3,780,782 | ) | | $ | 0 | |
Awards vested: | | | | | | | | | |
2006 Employee Plan | | | | (1,694,162 | ) | | $ | 0 | |
2006 Supervisory Board Plan | | | | (14,000 | ) | | € | 1.04 | |
2007 Employee Plan | | | | (1,898,592 | ) | | $ | 0 | |
2007 Supervisory Board Plan | | | | (45,000 | ) | | € | 1.04 | |
2008 Employee Plan | | | | (451,979 | ) | | $ | 0 | |
2008 Supervisory Board Plan | | | | (47,500 | ) | | € | 1.04 | |
Outstanding as at December 31, 2009 | | | | 8,851,270 | | | $ | 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.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
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% |
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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.U.S. GAAP guidance. 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.
The weighted average grant date fair value of nonvested shares granted to employees under the 2006 Employee Plan was $17.35. 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 February 27, 2007, the Compensation Committee approved the statement that the three performance conditions were met (as per initial assumption).met. Consequently, the compensation expense recorded on the 2006 Employee Plan reflects the statement that all of the awards granted will vest, as far as the service condition is met.
The weighted average grant date fair value of nonvested shares granted to employees under the 2007 Employee Plan was $19.35. On the 2007 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 April 1, 2008, the Compensation Committee approved the statement that two performance conditions were fully met and that for one condition only one half of it was achieved. Consequently, the compensation expense recorded on the 2007 Employee Plan reflects the statement that five sixths of the awards granted will vest, as far as the service condition is met.
The grant date fair value of nonvested shares granted to employees under the 2008 Employee Plan was $10.64. On the 2008 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 March 23, 2009, the Compensation Committee approved the statement that one performance condition was fully met. Consequently, the compensation expense recorded on the 2008 Employee Plan reflects the statement that one third of the awards granted will vest, as far as the service condition is met.
The grant date fair value of nonvested shares granted to employees under the 2009 Employee Plan was $7.54. On the 2009 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. At December 31, 2007,2009, a final determination of the achievement of the performance conditions had not yet been made by the Compensation Committee of the Supervisory Board. However, the Company has estimated that half of numbertwo third of awards isare expected to vest. Consequently, the compensation expense recorded for the 20072009 Employee Plan reflects the vesting of halftwo third of the awards granted, subject to the service condition being met.
The compensation expense recorded for nonvested sharesassumption of the expected number of awards to be vested upon achievement of the performance conditions is subject to changes based on the final measurement of the conditions, which is expected to occur in 2006 included a reduction for future forfeitures, estimated at a pluri-annual ratethe first quarter of 4.99%, reflecting the historical trend of forfeitures on past stock award plans. This estimate was adjusted in 2007 at a pluri-annual rate of 4.40%. This estimate will be adjusted for actual forfeitures upon vesting. 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 2007, the Company recorded immediately the unrecognized compensation expense as at the acceleration date.2010.
The following table illustrates the classification of pre-payroll tax and social contribution stock-based compensation expense included in the consolidated statements of income for the year ended December 31, 2007,2009, December 31, 20062008 and December 31, 2005,2007, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| |
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
|
Cost of sales | | | 14 | | | | 6 | | | | 2 | | | | 7 | | | | 15 | | | | 14 | |
Selling, general and administrative | | | 37 | | | | 14 | | | | 6 | | | | 19 | | | | 37 | | | | 37 | |
Research and development | | | 22 | | | | 8 | | | | 3 | | | | 11 | | | | 24 | | | | 22 | |
Total compensation | | | 73 | | | | 28 | | | | 11 | | |
| | | | | | | | |
Loss on equity investment | | | | 1 | | | | 2 | | | | — | |
Total pre-payroll tax and social contribution compensation | | | | 38 | | | | 78 | | | | 73 | |
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Compensation cost, excluding payroll tax and social contribution, capitalized as part of inventory was $2 million at December 31, 2009, $3 million at December 31, 2008 whereas it amounted to $6 million at December 31, 2007 whereas it amounted to $3 million at December 31, 2006.2007. As of December 31, 20072009 there was $58$27 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 16.4approximately 16.3 months.
The total deferred income tax expense recognized in the consolidated statements of income related to unvested share-based compensation expense amounted to $8 million for the year ended December 31, 2009, including a shortfall recorded on the 2006 Employee Plan closed during 2009 due to the vesting fair value being significantly lower than the grant fair value. The total deferred income tax benefit recognized in the consolidated statements of income related to unvested share-based compensation expense amounted to $3 million and $9 million for the yearyears ended December 31, 2008 and 2007, $7 million for the year ended December 31, 2006 and $2 million for the year ended December 31, 2005.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)respectively.
18.716.6 — Accumulated other comprehensive income (loss)
The accumulated balances related to each component of Other comprehensive income (loss) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Unrealized
| | | | Minimum
| | | | | | | | | Unrealized
| | | | Guidance on
| | | |
| | Foreign
| | gain (loss) on
| | Unrealized
| | pension
| | FAS 158
| | Accumulated
| | | Foreign
| | gain (loss) on
| | Unrealized
| | defined benefit
| | Accumulated
| |
| | currency
| | available-for-sale
| | gain (loss) on
| | liability
| | adoption
| | other
| | | currency
| | available-for-sale
| | gain (loss) on
| | plans adoption
| | other
| |
| | translation
| | financial assets,
| | derivatives,
| | adjustment,
| | adjustment,
| | comprehensive
| | | translation
| | financial assets,
| | derivatives,
| | adjustment,
| | comprehensive
| |
| | income (loss) | | net of tax | | net of tax | | net of tax | | net of tax | | income (loss) | | | income (loss) | | net of tax | | net of tax | | net of tax | | income (loss) | |
|
Balance as of December 31, 2004 | | | 1,098 | | | | 0 | | | | 59 | | | | (41 | ) | | | — | | | | 1,116 | | |
Other comprehensive income (loss) | | | (770 | ) | | | — | | | | (72 | ) | | | 7 | | | | — | | | | (835 | ) | |
| | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 328 | | | | 0 | | | | (13 | ) | | | (34 | ) | | | — | | | | 281 | | |
Other comprehensive income (loss) | | | 532 | | | | — | | | | 26 | | | | 34 | | | | (57 | ) | | | 535 | | |
| | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 860 | | | | 0 | | | | 13 | | | | — | | | | (57 | ) | | | 816 | | | | 860 | | | | 0 | | | | 13 | | | | (57 | ) | | | 816 | |
Other comprehensive income (loss) | | | 467 | | | | (2 | ) | | | (1 | ) | | | | | | | 40 | | | | 504 | | | | 467 | | | | (2 | ) | | | (1 | ) | | | 40 | | | | 504 | |
| | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | | 1,327 | | | | (2 | ) | | | 12 | | | | — | | | | (17 | ) | | | 1,320 | | | | 1,327 | | | | (2 | ) | | | 12 | | | | (17 | ) | | | 1,320 | |
| | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | | (163 | ) | | | (14 | ) | | | (1 | ) | | | (48 | ) | | | (226 | ) |
Balance as of December 31, 2008 | | | | 1,164 | | | | (16 | ) | | | 11 | | | | (65 | ) | | | 1,094 | |
Other comprehensive income (loss) | | | | 61 | | | | 10 | | | | (5 | ) | | | 4 | | | | 70 | |
Balance as of December 31, 2009 | | | | 1,224 | | | | (6 | ) | | | 6 | | | | (60 | ) | | | 1,164 | |
For the year ended December 31, 2009, the net amount of accumulated other comprehensive income reclassified as earnings was approximately $11 million related to cash flow hedge transactions outstanding as at December 31, 2008, for which the forecasted hedged transaction occurred in 2009.
18.816.7 — Dividends
In 2007,At the Company paidCompany’s Annual General meeting of Shareholders held on May 20, 2009, the distribution of a cash dividend of $105 million or $0.12 per common share to be paid in four equal installments was adopted by the Company’s shareholders. Through December 31, 2009, payments were made for an amount of $79 million including the payment of $3 million for related withholding tax. The remaining $0.03 per share cash dividend to be paid in the first quarter of 2010 totaled $26 million and was reported as “dividends payable to shareholders” on the consolidated balance sheet as at December 31, 2009.
At the Annual General Meeting of Shareholders on May 14, 2008 shareholders adopted the distribution of $0.36 per share in cash dividends, payable in four equal quarterly installments. Through December 31, 2008, payments totaled $0.27 per share or approximately $240 million. The remaining $0.09 per share cash dividend to be paid in the first quarter of 2009 totaled $79 million and was reported as “dividends payable to shareholders” on the consolidated balance sheet as at December 31, 2008.
In 2008 the cash dividend paid was of $0.36 per share for a total amount of $319 million. In 2007, the cash dividend paid was $0.30 per share for a total amount of $269 million. In 2006 and 2005, the cash dividend paid was of $0.12 per share for a total amount of $107 million each year.
F-53
19 — EARNINGS (LOSS) PER SHARENOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| |
17. | EARNINGS (LOSS) PER SHARE |
For the years ended December 31, 2007, 20062009, 2008 and 2005,2007, earnings (loss) per share (“EPS”) was calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended
| | Year Ended
| | Year Ended
| |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| |
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
|
Basic EPS | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | (477 | ) | | | 782 | | | | 266 | | | | (1,131 | ) | | | (786 | ) | | | (477 | ) |
Weighted average shares outstanding | | | 898,731,154 | | | | 896,136,969 | | | | 892,760,520 | | | | 876,928,190 | | | | 891,955,940 | | | | 898,731,154 | |
Basic EPS | | | (0.53 | ) | | | 0.87 | | | | 0.30 | | | | (1.29 | ) | | | (0.88 | ) | | | (0.53 | ) |
Diluted EPS | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | (477 | ) | | | 782 | | | | 266 | | | | (1,131 | ) | | | (786 | ) | | | (477 | ) |
Convertible debt interest, net of tax | | | — | | | | 17 | | | | 5 | | |
| | | | | | | | |
Net income (loss) adjusted | | | (477 | ) | | | 799 | | | | 271 | | | | (1,131 | ) | | | (786 | ) | | | (477 | ) |
Weighted average shares outstanding | | | 898,731,154 | | | | 896,136,969 | | | | 892,760,520 | | | | 876,928,190 | | | | 891,955,940 | | | | 898,731,154 | |
Dilutive effect of stock options | | | — | | | | 211,770 | | | | 854,523 | | | | — | | | | — | | | | — | |
Dilutive effect of nonvested shares | | | — | | | | 1,252,996 | | | | 116,233 | | | | — | | | | — | | | | — | |
Dilutive effect of convertible debt | | | — | | | | 60,941,995 | | | | 41,880,104 | | | | — | | | | — | | | | — | |
| | | | | | | | |
Number of shares used in calculating diluted EPS | | | 898,731,154 | | | | 958,543,730 | | | | 935,611,380 | | | | 876,928,190 | | | | 891,955,940 | | | | 898,731,154 | |
Diluted EPS | | | (0.53 | ) | | | 0.83 | | | | 0.29 | | | | (1.29 | ) | | | (0.88 | ) | | | (0.53 | ) |
At December 31, 2007,2009, if the Company had reported an income, outstanding stock options would have included anti-dilutive shares totalledtotalling approximately 46,722,25537,943,832 shares. At December 31, 20062008 and 2005,2007, outstanding stock options included anti-dilutive shares totalledtotalling approximately 56,113,482 shares39,431,433 and 59,704,04446,722,255 shares, respectively.
There was also the equivalent of 38,404,118 common shares outstanding for convertible debt, out of which 5,624 for the 2013 bonds and 38,398,494 for the 2016 bonds, with no dilutive effect. None of these bonds have been converted to shares during 2009.
| |
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,
| |
| | 2009 | | | 2008 | | | 2007 | |
|
Research and development funding | | | 202 | | | | 83 | | | | 97 | |
Start-up and phase-out costs | | | (39 | ) | | | (17 | ) | | | (24 | ) |
Exchange gain, net | | | 11 | | | | 20 | | | | 1 | |
Patent costs, net of gain from settlement | | | (5 | ) | | | (24 | ) | | | (28 | ) |
Gain on sale of long-lived assets, net | | | 3 | | | | 4 | | | | 2 | |
Other, net | | | (6 | ) | | | (4 | ) | | | — | |
| | | | | | | | | | | | |
Total | | | 166 | | | | 62 | | | | 48 | |
| | | | | | | | | | | | |
The Company receives significant public funding from governmental agencies in several jurisdictions. 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 have been met.
Start-up costs represent costs incurred in thestart-up and testing of the Company’s new manufacturing facilities, before reaching the earlier of a minimum level of production or six months after the fabrication line’s quality certification. Phase-out costs for facilities during the closing stage are treated in the same manner.
Exchange gains and losses included in “Other income and expenses, net” represent the portion of exchange rate changes on transactions denominated in currencies other than an entity’s functional currency and the changes in fair value ofheld-for-trading derivative instruments which are not designated as hedge and which have a cash flow effect related to operating transactions.
F-47F-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
There was also the equivalent of 42,310,582 common shares outstanding for convertible debt, out of which 74,936 for the 2013 bonds and 42,235,646 for the 2016 bonds. None of these bonds have been converted to shares during 2007.
20 — OTHER INCOME AND EXPENSES, NET
Other income and expenses,Patent costs, net consisted of the following:
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
Research and development funding | | | 97 | | | | 54 | | | | 76 | |
Start-up costs | | | (24 | ) | | | (57 | ) | | | (56 | ) |
Exchange gain (loss), net | | | 1 | | | | (9 | ) | | | (16 | ) |
Patent litigation costs | | | (18 | ) | | | (22 | ) | | | (14 | ) |
Patent pre-litigation costs | | | (10 | ) | | | (7 | ) | | | (8 | ) |
Gain on sale of investment in Accent | | | — | | | | 6 | | | | — | |
Gain on sale of other non-current assets, net | | | 2 | | | | 2 | | | | 12 | |
Other, net | | | — | | | | (2 | ) | | | (3 | ) |
| | | | | | | | | | | | |
Total | | | 48 | | | | (35 | ) | | | (9 | ) |
| | | | | | | | | | | | |
Patent litigation costssettlement agreements, include legal and attorney fees and payment offor claims, and patent pre-litigation costs are composed of consultancy fees and legal fees. Patentfees, netted against settlements, which primarily includes reimbursements of prior 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.costs.
As at December 31, 2008 and 2007, the caption “Other, net” included a $3 million and a $7 million income respectively, net of attorney and consultancy fees that the Company received in its ongoing pursuit to recover damages related to the case with its former Treasurer as previously disclosed.
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 statements 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 Accent’s business activities. The total consideration was recognized immediately in 2006 and recorded as “Other revenues” in the consolidated statements 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. | 21 — IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER RELATED CLOSURE COSTS |
Impairment, restructuring charges and other related closure costs incurred in 2009, 2008, and 2007 are summarized as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total impairment,
| |
| | | | | | | | | | | restructuring
| |
| | | | | | | | | | | charges and other
| |
| | | | | Restructuring
| | | Other related
| | | related closure
| |
Year Ended December 31, 2009 | | Impairment | | | charges | | | closure costs | | | costs | |
|
2007 restructuring plan | | | (25 | ) | | | (69 | ) | | | (32 | ) | | | (126 | ) |
STE restructuring plan | | | — | | | | (99 | ) | | | (1 | ) | | | (100 | ) |
Goodwill annual impairment test | | | (6 | ) | | | — | | | | — | | | | (6 | ) |
Other restructuring initiatives | | | (4 | ) | | | (53 | ) | | | (2 | ) | | | (59 | ) |
Total | | | (35 | ) | | | (221 | ) | | | (35 | ) | | | (291 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total impairment,
| |
| | | | | | | | | | | restructuring
| |
| | | | | | | | | | | charges and other
| |
| | | | | Restructuring
| | | Other related
| | | related closure
| |
Year Ended December 31, 2008 | | Impairment | | | charges | | | closure costs | | | costs | |
|
2007 restructuring plan | | | (77 | ) | | | (79 | ) | | | (8 | ) | | | (164 | ) |
FMG deconsolidation | | | (190 | ) | | | (2 | ) | | | (24 | ) | | | (216 | ) |
Goodwill annual impairment test | | | (13 | ) | | | — | | | | — | | | | (13 | ) |
Other restructuring initiatives | | | (10 | ) | | | (75 | ) | | | (3 | ) | | | (88 | ) |
Total | | | (290 | ) | | | (156 | ) | | | (35 | ) | | | (481 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total impairment,
| |
| | | | | | | | | | | restructuring
| |
| | | | | | | | | | | charges and other
| |
| | | | | Restructuring
| | | Other related
| | | related closure
| |
Year Ended December 31, 2007 | | Impairment | | | charges | | | closure costs | | | costs | |
|
2007 restructuring plan | | | (11 | ) | | | (62 | ) | | | — | | | | (73 | ) |
FMG deconsolidation | | | (1,107 | ) | | | — | | | | (5 | ) | | | (1,112 | ) |
Other restructuring initiatives | | | (5 | ) | | | (8 | ) | | | (30 | ) | | | (43 | ) |
Total | | | (1,123 | ) | | | (70 | ) | | | (35 | ) | | | (1,228 | ) |
| | | | | | | | | | | | | | | | |
Impairment charges and disposal loss
In 2007,2009, the Company has incurred impairment and restructuring charges related to the following items: (i) the valuation of assets to be disposed of within Flash memory business deconsolidation under FAS 144 held-for-sale model; (ii) the manufacturing plan committed to by the Company in the second quarter of 2007 (the “2007 restructuring plan”); (iii) the 150mm restructuring plan started in 2003; (iv) the headcount reduction plan announced in the second quarter of 2005; (v)recorded impairment charges on certain financial investments carried at cost and on intangible assets pursuant to the annual impairment test in order to assess recoverability of the carrying value of goodwill and related intangible assets.for $35 million relating primarily to:
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
| | |
| • | $25 million impairment linked to the 2007 restructuring plan. These impairment charges were triggered by the reclassification of the Company’s long-lived assets of its manufacturing site in Carrollton (Texas) (previously designated for closure as part of the 2007 restructuring plan) on the line “Assets held for sale” on the consolidated balance sheets, pursuant to its decision to sell the facility. The reclassified assets are primarily property and other long-lived assets that satisfied all of the criteria required for the“held-for-sale” classification guidance. The carrying value of the assets to be sold totalled $51 million at the date of the reclassification, while fair value less costs to sell amounted to approximately $30 million, which generated an impairment charge of $21 million. Fair value less costs to sell was based on the consideration to be received upon the sale, which is expected to occur within one year. This fair value measure corresponds to a level 2 fair value hierarchy for nonfinancial assets measured at fair value on a nonrecurring basis, as described in Note 25. The Company also recorded impairment charges totalling |
F-48F-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| | |
| | $4 million on certain specific equipment of the Company’s manufacturing site in Phoenix (Arizona), for which no alternative future use existed within the Company. Fair value was estimated based on broker prices available for similar assets from past sales, which corresponds to a level 2 fair value hierarchy for nonfinancial assets measured at fair value on a nonrecurring basis, as described in Note 25. |
Rennes (France)
The long-lived assets affected by the restructuring plans are owned by the Company and were assessed for impairment using theheld-for-use model when they did not satisfy all of the criteria required forheld-for-sale status. In 2009, 2008 and 2007, apart from assets held for sale within FMG deconsolidation and long-lived assets of the manufacturing site in Carrollton (Texas), the closure as soon as operationally feasibleCompany did not identify any significant tangible asset to be disposed 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 waferramp-ups at existing facilities in these locations, which will be expanded or upgraded to accommodate additional finer geometry wafer capacity. The Company incurred the balance of the restructuring charges related to this manufacturing restructuring plan in 2007, later than previously anticipated to accommodate unforeseen qualification requirements of the Company’s customers.sale.
| | |
| • | $6 million impairment on goodwill, pursuant to the interim impairment test on goodwill performed during the first and second quarter of 2009. As a result of this testing and a decline in the business outlook for the Vision business acquired in 1999, the Company recorded a $6 million impairment charge. The Vision business is included in the Automotive Consumer Computer and Communication infrastructure Product Group reporting segment and is dedicated to image sensors, camera modules and image processors for mobile phones. |
|
| • | $3 millionother-than-temporary impairment on an investment carried at cost based on the liquidation value of the investment. |
|
| • | $1 million of other non-cash charges. |
In the first quarter of 2005,2008, the Company decided to reduce its Access technology productsrecorded impairment charges and disposal loss for Customer Premises Equipment (“CPE”) modem products. This decision was intended to eliminate certain low volume, non-strategic product families whose returns in the current environment did not meet internal targets. Additional restructuring initiatives were also implemented in the first quarter of 2005 such as the closure of a research and development design center in Karlsruhe (Germany) and in Malvern (U.S.A.), and the discontinuation of a development project in Singapore. In May 2005, the Company announced additional restructuring efforts to improve profitability. These initiatives were aimed to reduce the Company’s 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.$290 million corresponding primarily to:
| | |
| • | $190 million loss on FMG deconsolidation, which, together with the $1,107 million recorded in the year ended December 31, 2007, gives the total loss of the FMG deconsolidation of $1,296 million. |
|
| • | $75 million impairment charge on long-lived assets of the Company’s manufacturing site Phoenix (Arizona). |
|
| • | $13 million impairment on goodwill, pursuant to the annual impairment test on goodwill and indefinite long-lived assets. |
|
| • | $6 millionother-than-temporary impairment on investments carried at cost. |
|
| • | $4 million impairment on certain specific equipment with no alternative future use. |
In the second quarter of 2007, the Company announced it had entered intorecorded impairment charges for $1,123 million corresponding primarily to $1,107 million impairment as a result of the signing of the definitive agreement with Intel to create a new independent semiconductor company fromfor the key assets ofFMG deconsolidation and upon meeting the Company’s and Intel’s Flash memory business as described in details in Note 7. Upon meeting FAS 144 criteria for assets held for sale, to adjust the Company reclassified the assets to be transferred pursuant FMG deconsolidation from their original balance sheet classification to the line “Assets held for sale”, reflectingvalue of the to-be-contributed assets atto fair value less costs to sell. Fair value less costs to sell was based on the net consideration provided for in the agreement and significant estimates.
Restructuring charges and other related closure costs
The Company is currently engaged in two major restructuring plans, the STE restructuring plan and the 2007 restructuring plan that are briefly described hereafter. The Company is also engaged in various initiatives launched in 2008 and 2009 aimed at reducing the operating expenses through a workforce reduction.
In addition,April 2009, ST-Ericsson announced a restructuring plan to be completed by mid-2010 (the “STE restructuring plan”). The main actions included in the second halfrestructuring plan are a re-alignment of 2007,product roadmaps to create a more agile and cost-efficient R&D organization and a reduction in workforce of 1,200 worldwide to reflect further integration activities following the Company started to incur certainmerger. On December 3, 2009, ST-Ericsson expanded its restructuring charges related toplan, targeting additional annualized savings in operating expenses and spending, along with an extensive R&D efficiency program. The targeted time of completion of this new plan is the disposalend of FMG business.2010.
The Company announced in the third quarter of 2007 that management committed to a new restructuring plan (“the 2007 restructuring plan”). This plan is aimed at redefining the Company’s manufacturing strategy in order to be more competitive in the semiconductor market.market (the “2007 restructuring plan”). In addition to the prior restructuring measures undertaken in the past years, this new manufacturing plan willwould pursue, among other initiatives: the transfer of 150mm production from Carrollton Texas(Texas) to Asia, the transfer of 200mm production from Phoenix Arizona,(Arizona), to Europe and Asia and the restructuring of the
F-56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
manufacturing operations in Morocco with a progressive phase out of the activities in Ain Sebaa site synchronized with a significant growth in Bouskoura site.
In the third quarter of 2007,2009, the Company also performed the yearly impairment test in order to assess the recoverability of the goodwill carrying value.
Impairment,incurred restructuring charges and other related closure costs incurred in 2007, 2006, and 2005 are summarized as follows:for $256 million relating primarily to:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total impairment,
| |
| | | | | | | | | | | restructuring
| |
| | | | | | | | | | | charges and other
| |
| | | | | Restructuring
| | | Other related
| | | related closure
| |
Year ended December 31, 2007 | | Impairment | | | charges | | | closure costs | | | costs | |
|
150mm fab plan | | | — | | | | (2 | ) | | | (27 | ) | | | (29 | ) |
2005 restructuring initiatives | | | — | | | | (6 | ) | | | (3 | ) | | | (9 | ) |
2007 restructuring plan | | | (11 | ) | | | (62 | ) | | | — | | | | (73 | ) |
FMG deconsolidation | | | (1,107 | ) | | | — | | | | (5 | ) | | | (1,112 | ) |
Other | | | (5 | ) | | | — | | | | — | | | | (5 | ) |
| | | | | | | | | | | | | | | | |
Total | | | (1,123 | ) | | | (70 | ) | | | (35 | ) | | | (1,228 | ) |
| | | | | | | | | | | | | | | | |
| | |
| • | $100 million for the STE restructuring plan for on-going termination benefits for involuntary leaves pursuant to the closure of certain locations in Europe, the Unites States of America and Asia. |
|
| • | $101 million for the 2007 restructuring plan primarily related to closure costs and one-time termination benefits to be paid to employees who render services until the complete closure of the Carrollton (Texas) and Phoenix (Arizona) fabs. |
|
| • | $55 million restructuring charges related to former committed restructuring initiatives. These restructuring charges consisted primarily of termination benefits in Asia and voluntary termination arrangements in certain European locations. Additionally, the Company paid $39 million related to the restructuring plan announced upon the integration of NXP wireless business, as described in Note 7. The amounts paid were charged against the liability recorded in 2008 in the purchase price allocation. |
In 2008, the Company incurred restructuring charges and other related closure costs for $191 million relating primarily to:
| | |
| • | $87 million for the 2007 restructuring plan primarily related to $75 million accrued one-time termination benefits for employees who provide services beyond the legal retention period until the complete closure of the manufacturing sites of Carrollton (Texas) and Phoenix (Arizona) and $12 million of other costs in Morocco and France. |
|
| • | $26 million of restructuring charges related to FMG disposal consisting primarily in phase-out costs. |
|
| • | $78 million of other restructuring initiatives, consisting primarily of $69 million in termination benefits for voluntary leaves and early retirement arrangements in certain European locations and $9 million final costs relating to the former restructuring plans of the Company. |
|
| • | In connection with the integration of Genesis and of the wireless business from NXP, the Company launched in 2008 new restructuring initiatives aimed at rationalizing its operations and its worldwide workforce. The restructuring provisions related to the newly integrated businesses amounted to $46 million at acquisition date, of which $44 million recorded on the ST-NXP business combination. The latter represented estimated redundancy costs that will be incurred to achieve the rationalization of the combined organization as anticipated as part of the transaction. It covers approximately 500 people includingsub-contractors. The plan affects mainly employees in Belgium, China, Germany, India, the Netherlands, Switzerland and the United States. |
In 2007, the company incurred restructuring charges and other related closure costs for $105 million relating primarily to:
| | |
| • | $62 million for the 2007 restructuring plan |
|
| • | $5 million of other related closure costs incurred as a result of the FMG deconsolidation |
|
| • | $38 million on other restructuring initiatives (150 mm fab plan and the 2005 headcount reduction plan) |
F-49F-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total impairment,
| |
| | | | | | | | | | | restructuring
| |
| | | | | | | | | | | charges and other
| |
| | | | | Restructuring
| | | Other related
| | | related closure
| |
Year ended December 31, 2006 | | Impairment | | | charges | | | closure costs | | | 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 and other
| |
| | | | | Restructuring
| | | Other related
| | | related closure
| |
Year ended December 31, 2005 | | Impairment | | | charges | | | closure costs | | | costs | |
|
150mm fab plan | | | — | | | | (4 | ) | | | (9 | ) | | | (13 | ) |
2005 restructuring initiatives | | | (66 | ) | | | (46 | ) | | | (2 | ) | | | (114 | ) |
Other | | | (1 | ) | | | — | | | | — | | | | (1 | ) |
Total | | | (67 | ) | | | (50 | ) | | | (11 | ) | | | (128 | ) |
| | | | | | | | | | | | | | | | |
Impairment charges
In 2007, the Company recorded impairment charges as follows:
| | |
| • | $1,106 million impairment as a result of the signing of the definitive agreement for the FMG deconsolidation and upon meeting FAS 144 criteria for assets held for sale, to adjust the value of the to-be-contributed assets to fair value less costs to sell. Fair value less costs to sell was based on the net consideration provided for in the agreement and significant estimates. The final impairment charge could be different subject to further adjustments due to business and market evolution prior to the closing of the transaction; |
|
| • | $1 million impairment charge on certain specific equipment that could not be transferred as part of FMG deconsolidation and for which no alternative future use could be found in the Company; |
|
| • | $11 million impairment on certain tangible assets, mainly equipment, that the Company identified without alternative future use following its commitment to the closure of two front-end sites and one back-end site as part of the 2007 restructuring plan; |
|
| • | $2 million impairment on technologies without any alternative future use based on the Company’s products’ roadmap; |
|
| • | $3 million other-than-temporary impairment charge on a minority equity investment carried at cost. The impairment loss was based on the valuation for the underlying investment of a new round of third party financing |
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 Company’s European 150 mm sites. |
F-50
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 pursuantChanges 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 any 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. |
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 FAS 144 when they did not satisfy all of the criteria required for held-for-sale status. In 2007, apart from assets held for sale within FMG deconsolidation, the Company did not identify any significant tangible asset to be disposed of by sale. 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 disengage from SPG activities as part of its latest restructuring initiatives. These assets did not generate any impairment charge and were reflected at their carrying valueprovisions recorded on the line “Other receivables and assets” of the consolidated balance sheet as at December 31, 2006. These assets were soldof the company in 2007, which generated a gain amounting to $2 million reported on the line “Other income2009 and expenses, net” in the consolidated statements of income for the year ended December 31, 2007.
In January 2007, NXP Semiconductors B.V. announced that it would withdraw from the alliance the Company operates jointly with Freescale Semiconductor, Inc. for certain research and development activities and the operation of a 300mm wafer pilot line fab in Crolles (France) (“Crolles2 alliance”). Therefore, the Crolles2 alliance expired on December 31, 2007. Freescale Semiconductor, Inc. had also notified the Company that it would terminate its participation to the Crolles2 alliance as of such date.
Restructuring charges and other related closure costs in 2007, 2006 and 20052008 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 150mm fab plan | | | | | | 2005
| | | 2007
| | | | | | Total restructuring
| |
| | | | | Other related
| | | | | | restructuring
| | | restructuring
| | | FMG
| | | & other related
| |
| | Restructuring | | | closure costs | | | Total | | | initiatives | | | plan | | | disposal | | | closure costs | |
|
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charges incurred in 2007 | | | 4 | | | | 27 | | | | 31 | | | | 9 | | | | 62 | | | | 5 | | | | 107 | |
Reversal of provision | | | (2 | ) | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | | | (2 | ) |
Amounts paid | | | (4 | ) | | | (27 | ) | | | (31 | ) | | | (19 | ) | | | (2 | ) | | | (3 | ) | | | (55 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision as at December 31, 2007 | | | 12 | | | | — | | | | 12 | | | | 8 | | | | 60 | | | | 2 | | | | 82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | STE
| | | 2007
| | | | | | Other
| | | | |
| | Restructuring
| | | Restructuring
| | | FMG
| | | restructuring
| | | | |
| | plan | | | plan | | | disposal | | | initiatives | | | Total | |
|
Provision as at December 31, 2007 | | | — | | | | 60 | | | | 2 | | | | 20 | | | | 82 | |
Charges incurred in 2008 | | | — | | | | 87 | | | | 51 | | | | 78 | | | | 216 | |
Provision on business combinations | | | — | | | | — | | | | — | | | | 46 | | | | 46 | |
Amounts paid | | | — | | | | (34 | ) | | | (33 | ) | | | (43 | ) | | | (110 | ) |
Provision as at December 31, 2008 | | | — | | | | 113 | | | | 20 | | | | 101 | | | | 234 | |
Charges incurred in 2009 | | | 100 | | | | 101 | | | | — | | | | 55 | | | | 256 | |
Amounts paid | | | (17 | ) | | | (156 | ) | | | (20 | ) | | | (103 | ) | | | (296 | ) |
Provision as at December 31, 2009 | | | 83 | | | | 58 | | | | — | | | | 53 | | | | 194 | |
| | | | | | | | | | | | | | | | | | | | |
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
150mm fab plan:
Restructuring charges incurred in 2007 on this plan amounted to $31 million, primarily related to transfer, maintenance and decontamination associated with the closure and transfer of production for the sites of Rousset (France) and Agrate (Italy). In 2007, the Company reversed a $2 million provision recorded in 2003 to cover the Company’s legal obligation to pay penalties to the French governmental institutions related to the closure of Rennes production site since the French authorities decided in 2007 to waive the payment of such penalties.
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.
2005 restructuring initiatives:
In 2007, the Company recorded a total restructuring charge amounting to $9 million, detailed as follows: (i) $6 million corresponded to workforce reduction initiatives in Europe; and (ii) $3 million was related to reorganization actions aiming at optimizing the Company’s EWS activities.
In 2006, the Company recorded a total restructuring charge amounting to $44 million, of which $37 million corresponded to workforce reduction initiatives in Europe and $7 million were related to reorganization of its EWS activities as part of the plan of reorganization and optimization of its activities as defined in 2005.
In 2005, the Company commenced these restructuring initiatives and recorded the following charges:
| | |
| • | 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. |
|
| • | In order to streamline its research and development sites, the Company decided to cease its activities in two locations, Karlsruhe (Germany) and Malvern (U.S.A.). 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. |
|
| • | In addition, charges totalling $2 million were paid in 2005 by the Company for voluntary termination benefits for certain employees. The Company also incurred a $2 million charge in 2005 related to additional restructuring initiatives, mainly in the United States and Mexico. |
|
| • | The Company recorded a total restructuring charge amounting to $38 million related to termination incentives for two of the Company’s subsidiaries in Europe, who accepted special termination arrangements. |
2007 restructuring plan:
The Company recorded a total restructuring charge for its latest restructuring plan amounting to $62 million, mainly related to termination benefits for involuntary leaves. This total charge includes the provision for contractual, legal and past practice termination benefits to be paid for an estimated number of employees primarily in the United States, France and Morocco amounting to $37 million, and $25 million corresponding to one-time termination benefits established by the restructuring plan as communicated in the United States, which specifies certain retention and completion bonuses to be paid to employees who are required to render service until full closure of the manufacturing sites.
FMG disposal:
In 2007, the Company recorded $5 million restructuring charges related to FMG disposal group of assets, mainly related to transfer, maintenance and decontamination costs.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Total impairment, restructuring charges and other related closure costs:costs
The 2003 restructuring150mm fab plan and related manufacturing initiatives were largelyfully completed in 2007. Of the total $330 million2008. The expected pre-tax charges to be incurred under the plan $345were estimated to total $330 million, have beenwhile $347 million were incurred as of December 31, 2007 ($29 million in 2007, $22 in 2006, $13 million in 2005, $76 million in 2004 and $205 million in 2003).2008.
The 2005 headcount reduction plan, which was nearly fully completed as at December 31, 2007,2008, was originally expected to result in pre-tax charges of $100 million, out of which $95while $102 million have beenwere incurred as at December 31, 2007 ($9 million in 2007, $45 in 2006 and $41 million in 2005).2008.
The 2007 restructuring plan is expected to result in pre-tax charges in the range of $270 to $300 million, of which $62$250 million have been incurred as of December 31, 2007.2009. This plan is expected to be completed in the second half of 2010.
The STE restructuring plan, which is expected to result in a total pre-tax charge in the range of $135 million to $155 million, registered a total charge of $100 million as of December 31, 2009. This plan is expected to be completed by end of 2010.
In 2007,2009, total amounts paid for restructuring and related closure costs amounted to $55$296 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.
22 — INTEREST INCOME (EXPENSE), NET
Interest income, (expense), net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended
| | Year Ended
| | Year Ended
| |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| |
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
|
Income | | | 156 | | | | 143 | | | | 53 | | | | 59 | | | | 132 | | | | 156 | |
Expense | | | (73 | ) | | | (50 | ) | | | (19 | ) | | | (50 | ) | | | (81 | ) | | | (73 | ) |
| | | | | | | | | | | | | | |
Total | | | 83 | | | | 93 | | | | 34 | | | | 9 | | | | 51 | | | | 83 | |
| | | | | | | | | | | | | | |
No borrowing cost was capitalized in 20072009, 2008 and 2006, while capitalized interest was $2 million in 2005.2007. Interest income on floating rate notes classified asavailable-for-sale marketable securities amounted to $8 million for the year ended December 31, 2009, $37 million for the year ended December 31, 2008 and to $41 million for the year ended December 31, 2007. Interest income on auction rate securities totaled $7 million, $14 million and $24 million for the years ended December 31, 2009, 2008 and 2007 andrespectively. Interest income on Numonyx long term notes classified asavailable-for-sale amounted to $5$16 million for the year ended December 31, 2006. Interest income on auction rate securities amounted to $24 million2009 and $9$11 million for the yearsyear ended December 31, 2007 and 2006 respectively.2008.
F-58
In 2005, 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 amounted to $18 million.
23 — INCOME TAXNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Income (loss) before income tax expense is comprised of the following:
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
Income (loss) recorded in The Netherlands | | | (54 | ) | | | (12 | ) | | | (60 | ) |
Income from foreign operations | | | (440 | ) | | | 776 | | | | 335 | |
| | | | | | | | | | | | |
Income before income tax expense | | | (494 | ) | | | 764 | | | | 275 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| | | Year Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
|
Loss recorded in The Netherlands | | | (376 | ) | | | (1,232 | ) | | | (54 | ) |
Income (loss) from foreign operations | | | (1,120 | ) | | | 409 | | | | (440 | ) |
| | | | | | | | | | | | |
Loss before income tax expense | | | (1,496 | ) | | | (823 | ) | | | (494 | ) |
| | | | | | | | | | | | |
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.
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Income tax benefit (expense) is comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended
| | Year Ended
| | Year Ended
| |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| |
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
|
The Netherlands taxes — current | | | (4 | ) | | | (7 | ) | | | (6 | ) | | | 4 | | | | (1 | ) | | | (4 | ) |
Foreign taxes — current | | | (121 | ) | | | (47 | ) | | | (33 | ) | | | (54 | ) | | | (25 | ) | | | (121 | ) |
| | | | | | | | | | | | | | |
Current taxes | | | (125 | ) | | | (54 | ) | | | (39 | ) | | | (50 | ) | | | (26 | ) | | | (125 | ) |
Foreign deferred taxes | | | 148 | | | | 74 | | | | 31 | | | | 145 | | | | 69 | | | | 148 | |
| | | | | | | | | | | | | | |
Income tax benefit (expense) | | | 23 | | | | 20 | | | | (8 | ) | |
Income tax benefit | | | | 95 | | | | 43 | | | | 23 | |
| | | | | | | | | | | | | | |
The principal items comprising the differences in income taxes computed at the Netherlands statutory rate of 25.5% in 2007, 29.6% in 20062009, 2008 and 34.5% in 20052007, and the effective income tax rate are the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended
| | Year Ended
| | Year Ended
| |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| |
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
|
Income tax expense computed at statutory rate | | | 126 | | | | (226 | ) | | | (95 | ) | |
Permanent and other differences | | | (20 | ) | | | (27 | ) | | | (26 | ) | |
Income tax benefit computed at statutory rate | | | | 382 | | | | 210 | | | | 126 | |
Non-deductible, non-taxable and other permanent differences, net | | | | (34 | ) | | | — | | | | (20 | ) |
Loss on equity investment | | | | (84 | ) | | | (139 | ) | | | — | |
Valuation allowance adjustments | | | (1 | ) | | | (8 | ) | | | — | | | | (56 | ) | | | (18 | ) | | | (1 | ) |
Impact of prior years adjustments | | | (17 | ) | | | 63 | | | | 28 | | | | 21 | | | | 48 | | | | (17 | ) |
Effects of change in enacted tax rate on deferred taxes | | | (21 | ) | | | — | | | | — | | | | (7 | ) | | | — | | | | (21 | ) |
Current year credits | | | 63 | | | | 49 | | | | 20 | | | | 76 | | | | 66 | | | | 63 | |
Other tax and credits | | | (3 | ) | | | (1 | ) | | | (2 | ) | | | (4 | ) | | | 2 | | | | (3 | ) |
Benefits from tax holidays | | | 122 | | | | 134 | | | | 48 | | | | 2 | | | | 34 | | | | 122 | |
Current year tax risk | | | | (23 | ) | | | (31 | ) | | | — | |
Impact of FMG deconsolidation | | | (113 | ) | | | — | | | | — | | | | — | | | | (77 | ) | | | (113 | ) |
Earnings of subsidiaries taxed at different rates | | | (113 | ) | | | 36 | | | | 19 | | | | (178 | ) | | | (52 | ) | | | (113 | ) |
| | | | | | | | | | | | | | |
Income tax benefit (expense) | | | 23 | | | | 20 | | | | (8 | ) | | | 95 | | | | 43 | | | | 23 | |
| | | | | | | | | | | | | | |
The linelines “Impact of prior years’ adjustments” includesand “Current year tax risk” include amounts that are further disclosed at “Changes to the uncertain tax positions of prior years” in the uncertain tax position reconciliation table included in this note.
TheAs detailed in Note 2.6, following the passage of the French Finance Act for 2008, which included several changes to the research tax credit regime, beginning on January 1, 2008, French research tax credits that in prior years were accounted for as a reduction in income tax expense were deemed to be grants in substance. These tax credits, totaling $146 million and $161 million, were reported as a reduction of research and development expenses in the statement of income for the years ended December 31, 2009 and 2008, respectively.
In 2009 and 2008, the line “Earnings of subsidiaries taxed at different rates” includes a decrease of $123 million and $99 million, respectively, related to significant losses in countries subject to tax holidays. In 2007, this line includes a $97 million decrease related to the FMG deconsolidation for amounts that were deductible in tax jurisdictions with statutory tax rates substantially below the Netherlands statutory rate. In 2009, the Company
F-59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
In 2006, asreceived $121 million for research tax credits for the resultperiod prior to January 1, 2009 resulting in a decrease in deferred tax assets of favourable events that occurred in that year, 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.same amount.
The tax holidays represent a tax exemption period aimed to attract foreign technological investment in certain tax jurisdictions. The effect of the tax benefits on basic earnings per share was $0.14, $0.15,$0.00, $0.04, and $0.05$0.14 for the years ended December 31, 2007, 2006,2009, 2008, and 2005,2007, 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 Company’s tax holidays expire at various dates through the year ending December 31, 2019.
F-54
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,
| | | December 31,
| | December 31,
|
| | 2007 | | 2006 | | | 2009 | | 2008 |
|
Tax loss carryforwards and investment credits | | | 213 | | | | 159 | | | | 639 | | | | 460 | |
Inventory valuation | | | 38 | | | | 25 | | | | 34 | | | | 29 | |
Impairment and restructuring charges | | | 76 | | | | 18 | | | | 95 | | | | 102 | |
Fixed asset depreciation in arrears | | | 61 | | | | 81 | | | | 53 | | | | 64 | |
Receivables for government funding | | | 169 | | | | 116 | | | | 18 | | | | 189 | |
Tax allowances granted on past capital investments | | | 1,054 | | | | 975 | | | | 1,096 | | | | 1,086 | |
Pension service costs | | | 24 | | | | 29 | | | | 41 | | | | 39 | |
Stock awards | | | | 11 | | | | 26 | |
Commercial accruals | | | 10 | | | | 11 | | | | 7 | | | | 9 | |
Other temporary differences | | | 67 | | | | 52 | | | | 62 | | | | 45 | |
| | | | | | |
Total deferred tax assets | | | 1,712 | | | | 1,466 | | | | 2,056 | | | | 2,049 | |
Valuation allowances | | | (1,123 | ) | | | (1,039 | ) | | | (1,337 | ) | | | (1,283 | ) |
| | | | | | |
Deferred tax assets, net | | | 589 | | | | 427 | | | | 719 | | | | 766 | |
| | | | | | |
Accelerated fixed asset depreciation | | | (110 | ) | | | (118 | ) | | | (66 | ) | | | (86 | ) |
Acquired intangible assets | | | (11 | ) | | | (8 | ) | | | (31 | ) | | | (61 | ) |
Advances of government funding | | | (24 | ) | | | (25 | ) | | | (13 | ) | | | (17 | ) |
Other temporary differences | | | (27 | ) | | | (30 | ) | | | (35 | ) | | | (32 | ) |
| | | | | | |
Deferred tax liabilities | | | (172 | ) | | | (181 | ) | | | (145 | ) | | | (196 | ) |
| | | | | | |
Net deferred income tax asset | | | 417 | | | | 246 | | | | 574 | | | | 570 | |
| | | | | | |
For a particular tax-paying component of the Company and within a particular tax jurisdiction, all current deferred tax liabilities and assets are offset and presented as a single amount, similarly to non-current deferred tax liabilities and assets. The Company does not offset deferred tax liabilities and assets attributable to different tax-paying components or to different tax jurisdictions.
As of December 31, 2007,2009, the Company and its subsidiaries have gross deferred tax assets on tax loss carryforwards and investment credits that expire starting 2008,2010, as follows:
| | | | | | | |
Year | | | | | |
|
2007 | | | 1 | | |
2008 | | | 10 | | |
2009 | | | 9 | | |
2010 | | | 21 | | | | 9 | |
2011 | | | | 23 | |
2012 | | | | 57 | |
2013 | | | | 16 | |
Thereafter | | | 172 | | | | 534 | |
| | | | | | |
Total | | | 213 | | | | 639 | |
| | | | | | |
The valuation allowance for a particular tax jurisdiction is allocated between current and non-current deferred tax assets for that jurisdiction on a pro rata basis. 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%1.45% per annum). The credits may be utilized through 2020 or later depending on the Company meeting certain program criteria. In addition to this agreement, starting in 2007 the
F-60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Company will continuecontinues to receive tax credits on future years’the yearly capital investments, which may be used to offset that year’s tax liabilities and increases by the legal inflationary rate. 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 $59 million in net operating losses acquired in business combinations, which continue to be fully provided for at December 31, 2007. 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 expensebenefit (expense) recorded as a component of other comprehensive income (loss) was ($8)3) million and $7$17 million in 20072009 and 20062008 respectively and related primarily to the tax effects of the recognized unfunded status on defined benefits plans and unrealized gains on derivatives. The amount of deferred tax expense recorded as a component of other comprehensive income (loss) was $6 million in 2005 and related primarily to the tax effects of unrealized gains (losses) on derivatives as well as minimum pension liability adjustments.
F-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
With the adoption of FIN 48 in the first quarter of 2007, the Company applies a two-step process forFor the evaluation of uncertain income tax positions based on a “more likely than not” threshold, the Company applies a two-step process to determine if a tax position will be sustained upon examination by the taxing authorities. 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 Company recorded as of the adoption date an incremental tax liability of $8 million for the difference between the amounts recognized under its previous accounting policies and the income tax benefits determined under the new guidance. Total unrecognized tax benefits as of the date of adoption amounts to $82 million, of which $74 million correspond to tax exposure provisions recorded under accounting principles applicable prior to FIN 48 adoption. The cumulative effect of the change in the accounting principle that the Company applied to uncertain income tax positions was recorded in the first quarter of 2007 as an adjustment to retained earnings. A reconciliation of the 2009 beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | |
Balance at January 1, 2007 | | $ | 82 | | |
Balance at December 31, 2008 | | | $ | 153 | |
Additions based on tax positions related to the current year | | | 4 | | �� | | 38 | |
Additions for tax positions of prior years | | | 72 | | | | 10 | |
Reductions for tax positions of prior years | | | (25 | ) | | | (9 | ) |
Settlements | | | (6 | ) | | | — | |
Reductions for lapse of statute of limitations | | | (28 | ) | | | — | |
Foreign currency translation | | | | 1 | |
| | | | | | |
Balance at December 31, 2007 | | $ | 99 | | |
Balance at December 31, 2009 | | | $ | 193 | |
| | | | | | |
The reconciliation of unrecognized tax benefits in 2008 was as follows:
| | | | |
Balance at December 31, 2007 | | $ | 99 | |
Additions based on tax positions related to the current year | | | 20 | |
Additions for tax positions of prior years | | | 58 | |
Reductions for tax positions of prior years | | | (18 | ) |
Settlements | | | (3 | ) |
Reductions for lapse of statute of limitations | | | — | |
Foreign currency translation | | | (3 | ) |
Balance at December 31, 2008 | | $ | 153 | |
The total amount of these unrecognized tax benefits would affect the effective tax rate, if recognized. It is reasonably possible that certain of the uncertain tax positions disclosed in the table above could increase by up to $64$71 million based upon tax examinations that are expected to be completed within the next 12 months.
Additionally, the Company elected to classify accrued interest and penalties related to uncertain tax positions as components of income tax expense in its consolidated statements of income. Interest and penalties are not material for the year or on a cumulative basis.
The tax years that remain open for review in the Company’s major tax jurisdictions are from 19961997 to 2007.
24 — COMMITMENTS
The Company’s commitments as of December 31, 2007 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | Thereafter | |
| | In million U.S.$ | | | | |
|
Operating leases | | | 300 | | | | 57 | | | | 41 | | | | 30 | | | | 25 | | | | 18 | | | | 129 | |
Purchase obligations | | | 1,200 | | | | 1,100 | | | | 65 | | | | 30 | | | | 5 | | | | | | | | | |
of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equipment and other asset purchase | | | 683 | | | | 683 | | | | | | | | | | | | | | | | | | | | | |
Foundry purchase | | | 266 | | | | 266 | | | | | | | | | | | | | | | | | | | | | |
Software, technology licenses and design | | | 251 | | | | 151 | | | | 65 | | | | 30 | | | | 5 | | | | | | | | | |
Other obligations | | | 622 | | | | 463 | | | | 92 | | | | 37 | | | | 9 | | | | 8 | | | | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 2,122 | | | | 1,620 | | | | 198 | | | | 97 | | | | 39 | | | | 26 | | | | 142 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As a consequence of the Company’s July 10 announcement, the future shutdown of the Company’s plants in the United States will lead to negotiations with some of the Company’s suppliers. As no final date has been set, none of the contracts as reported above have been terminated nor do the reported amounts take into account any termination fees. This concerns approximately $51 million commitments (operating leases and purchasing obligations.)2009.
F-56F-61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The Company’s commitments as of December 31, 2009 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | |
| | In million US$ | |
|
Operating leases | | $ | 481 | | | $ | 131 | | | $ | 98 | | | $ | 68 | | | $ | 43 | | | $ | 26 | | | $ | 115 | |
Purchase obligations | | | 741 | | | | 604 | | | | 62 | | | | 37 | | | | 20 | | | | 18 | | | | — | |
of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equipment purchase | | | 267 | | | | 267 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Foundry purchase | | | 182 | | | | 182 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Software, technology licenses and design | | | 292 | | | | 155 | | | | 62 | | | | 37 | | | | 20 | | | | 18 | | | | — | |
Other obligations | | | 532 | | | | 263 | | | | 135 | | | | 125 | | | | 6 | | | | 2 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 1,754 | | | | 998 | | | | 295 | | | | 230 | | | | 69 | | | | 46 | | | | 116 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As a consequence of the Company’s July 10, 2007 announcement concerning the planned closures of certain of its manufacturing facilities, the shutdown of its plants in the United States is ongoing and negotiations with some of its suppliers continue. As no final date has been set, some of the contracts as reported above have been terminated. The termination fees for the sites still in operation have not been taken into account.
Operating leases are mainly related to building and equipment leases. The amount disclosed is composed of minimum payments for future leases from 2010 to 2014 and thereafter. The Company leases land, buildings, plants and equipment under operating leases that expire at various dates under non-cancellable lease agreements. Operating lease expenseexpenses was $174 million, $92 million and $62 million $56 million and $61 million in 2007, 2006 and 2005, respectively.
As described in Note 4,for 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 ofyears ended December 31, 2009, 2008 and 2007, $250 million has been loaned to the joint venture and a deposit placed by the Company with the bank in a like amount. 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.respectively.
Purchase obligations are primarily comprised of purchase commitments for equipment, and other assets, for outsourced foundry wafers and for software licenses. Following the termination of the Crolles2 alliance with Freescale Semiconductor and NXP Semiconductors, the Company signed an agreement with its two partners to commit to purchasing their300-mm equipment during 2008. The timing of the purchase has been agreed on the basis of the Company’s current visibility of the loading for the wafer fab. The contracts provide for the following schedule of purchases of the equipment: $140 million on March 14, 2008; $135 million on April 18, 2008; and, $129 million on June 30, 2008.
Other obligations primarily relate to firm contractual firm commitments with respect to partnership and cooperation agreements. Following the agreement signed on December 11, 2007 to acquire Genesis Microchip Inc. (“Genesis Microchip”), the Company committed to a cash tender offer to purchase all of the outstanding shares of Genesis Microchip for $8.65 per share, net to the holder in cash, for a total amount of $345 million approximately. Transaction has been completed in January 2008.
Other commitments
The Company has issued guarantees totalling $785$733 million related to its subsidiaries’ debt. Furthermore, the Company has umbrella facilities for an amount of $480 million extendable to its subsidiaries on a fully guaranteed basis. In addition, the Company and Intel have each granted in favor of Numonyx, in which the Company holds a 48.6% equity investment, a 50% guarantee not joint and several, for indebtedness related to the financing arrangements entered into by Numonyx for a $450 million term loan and a $100 million committed revolving credit facility.
25 — CONTINGENCIESSubject to the terms of the revolving facility agreement signed on December 4, 2009 between the Company and Telefonaktiebolaget LM Ericsson as lenders on one side and ST-Ericsson SA as borrower on the other side, the Company committed itself to make available to the borrower the amount of $25 million as a revolving facility.
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 partythird-party intellectual property, tax claims beyond assessed uncertain tax positions 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 an adverse material impact on the Company’s results of operations, cash flows or its financial position for the period in which they occur.
F-62
26 — CLAIMS AND LEGAL PROCEEDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| |
24. | CLAIMS AND LEGAL PROCEEDINGS |
The Company has received and may in the future receive communications alleging possible infringements, in particular in the case of patents and similar intellectual property rights of others. Furthermore, the Company periodically conducts patent cross license discussions with other industry participants. The Company may become involved in costly litigation brought against the Company regarding patents, mask works, copy-rights, trade-marks or trade secrets. In the event that the outcome of any litigation would be unfavorable to the Company, the Company may be required to license the underlyingpatentsand/or other intellectual property rightrights at economically unfavorable terms and conditions, and possibly pay damages for prior useand/or face an injunction, all of which individually or in the aggregate could have a material adverse effect on the Company’s results of operations, cash flows or financial position and ability to compete.
The Company is otherwise also 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
F-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)business and operations.
with claims from customers or other parties and tax disputes beyond assessed uncertain tax positions. The Company is currently one amongst several co-defendants to legal proceedings initiated with the International Trade Commission (the “ITC”) by Tessera Technologies, Inc (“Tessera”). See “ Item 8. Financial Information — Legal Proceedings.”
On December 4, 2009 the Company has accruedreceived from the International Chamber of Commerce the notification of a request for thesearbitration filed by NXP Semiconductors Netherlands BV “NXP” against the Company, claiming in excess of $46 million in alleged compensation for so called underloading costs, pursuant to a Manufacturing Services Agreement entered into between NXP and ST-NXP Wireless, at the time of the creation of the Company’s wireless semiconductor products joint venture with NXP, in August 2008. The Company is contesting this claim vigorously and filed its answer with the ITC on February 12, 2010. The arbitration tribunal has been constituted but has yet to meet.
The Company accrues loss contingencies when thea 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 Company’s 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 As of December 31, 2009 provisions have been recorded by the Company is currently a partywith respect to legal proceedings with SanDisk Corporation (“SanDisk”)when it is probable that a liability has been incurred and Tessera Technologies, Inc (“Tessera”). Based on management’s current assumptions made with support of the Company’s outside attorneys, the Company is not currently in a position to evaluate any probable loss, which may arise out of such litigation.associated amount can be reasonably estimated.
| |
25. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
27 — FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
27.125.1 Financial risk factors
The Company is exposed to changes in financial market conditions in the normal course of business due to its operations in different foreign currencies and its ongoing investing and financing activities. The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures.
Risk management is carried out by a central treasury department (Corporate Treasury) reporting to the Chief Financial Officer. Simultaneously, a Treasury Committee, was created to steerchaired by the CFO, steers treasury activities and to ensureensures compliance with corporate policies approved by the Board of Directors. Treasury activities are thus regulated by the Company’s policies, which define procedures, objectives and controls. The policies focus on the management of financial risk in terms of exposure to market risk, credit risk and liquidity risk. Treasury controls are subject to internal audits. Most treasury activities are centralized, with any local treasury activities subject to oversight from head treasury office. Corporate Treasury identifies, evaluates and hedges financial risks in close cooperation with the Company’s operating units. It provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. 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 Moody’s Investor Service and A- from Standard & Poor’s and Fitch Ratings. Marginal amounts are held in other currencies. Foreign
F-63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
currency operations and hedging transactions are performed only to hedge exposures deriving from industrial and commercial activities.
Market risk
Foreign exchange 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, primarily with respect to the Euro. Foreign exchange risk mainly arises from future commercial transactions and recognized assets and liabilities at the Company’s subsidiaries.
Management has set up a policy to require the Company’s subsidiaries to hedge their entire foreign exchange risk exposure with the Company through financial instruments transacted by Corporate Treasury. To manage their foreign exchange risk arising from recognizedforeign-currency-denominated assets and liabilities, entities in the Company use forward contracts and purchased currency options, transacted by Corporate Treasury. Foreign exchange risk arises when recognized assets and liabilities are denominated in a currency that is not the entity’s functional currency. These instruments do not qualify as hedging instruments. In addition, forward contracts and currency options are also used by the Company to reduce its exposure to U.S. dollar fluctuations in Euro-denominated forecasted intercompany transactions that cover a large part of its research and development, selling general and administrative expenses
F-58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
as well as a portion of its front-end manufacturing production costs of semi-finished goods. The derivative instruments used to hedge these forecasted transactions meet the criteria for designation as cash flow hedge. The hedged forecasted transactions are all highly probable of occurrence for hedge accounting purposes.
It is the Company’s policy to keep the foreign exchange exposures in all the currency pairs hedged month by month against the monthly standard rate. Each month end, the forecasted flows for the coming month are hedged together with the fixing of the new standard rate. For this reason the hedging transactions will have an exchange rate very close to the standard rate at which the forecasted flows will be recorded on the following month. As such, the foreign exchange exposure of the Company, which consists in the balance sheet positions and other contractually agreed transactions, is always equivalent to zero and any movement of the foreign exchange rates will not therefore influence the exchange effect on consolidated statements of income items. Any discrepancy from the forecasted values and the actual results is constantly monitored and prompt actions are eventually taken.taken, as needed.
Derivative Instruments Not Designated as a Hedge
As described above, 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 Company’s 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 these financial instruments totalled $254$717 million, $232$505 million and $1,461$254 million at December 31, 2007, 20062009, 2008 and 2005,2007, respectively. The principal currencies covered are the Euro, the Singapore dollar, the Japanese yen, the Swiss franc, the Swedish krona, the British pound 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. The risk of loss associated with purchased currency options is equal to the premium paid when the option is not exercised.
Foreign currency forward contracts and currency options not designated as cash flow hedge outstanding as of December 31, 20072009 have remaining terms of 24 days to 53 months, maturing on average after 2735 days.
Derivative Instruments Designated as a Hedge
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company hedges 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. The maximum length of time over which the Company hedges its exposure to the variability of cash flows for forecasted transactions is 12 months.
F-64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
For the year ended December 31, 2009 the Company recorded a reduction in cost of sales and operating expenses of $29 million and $42 million, respectively, related to the realized gain incurred on such hedged transactions. For the year ended December 31, 2008 the Company recorded a reduction in cost of sales of $4 million and an increase of operating expenses of $3 million related to the realized gain (loss) incurred on such hedged transactions. For the year ended December 31, 2007 the Company recorded a reduction in cost of sales and operating expenses of $16 million and $20 million, respectively, related to the realized gain incurred on such hedged transactions. ForNo significant ineffective portion of the year ended December 31, 2006hedge was recorded on 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 2007 and 2006 and, as such, no amount was reclassified asline “Other income and expenses, net” intoof the consolidated statements of income from Accumulated other comprehensive income. Forfor the yearyears ended December 31, 2005 the Company recorded as cost of sales2009, 2008 and operating expenses $51 million and $30 million, respectively, related to the realized loss incurred on 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 2005 certain of its cash flow hedges and reclassified a net loss of $37 million as “Other income and expenses, net” into the consolidated statements of income from Accumulated other comprehensive income.2007.
The notional amount of foreign currency forward contracts and currency options designated as cash flow hedges totalled $482, $593$1,354, $763 and $745$482 million at December 31, 2007, 20062009, 2008 and 20052007, respectively. The forecasted transactions hedged at December 31, 20072009 were determined to be probable of occurrence.
As of December 31, 2007, $122009, $6 million of deferred gains on derivative instruments, net of tax of $1 million, included in Accumulated“Accumulated other comprehensive incomeincome/(loss)” were expected to be reclassified as earnings during the next sixtwelve months based on the monthly forecasted research and development expenses, corporate costs and semi-finished manufacturing costs. No amount was reclassified as “Other income and expenses, net” into the consolidated statements of income from “Accumulated other comprehensive income/(loss)” in the consolidated statement of equity. As of December 31, 2006,2008, $13 million of deferred gains on derivative instruments, net of tax
F-59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
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 wereincome/(loss) have been 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 and currency options designated as cash flow hedges outstanding as of December 31, 20072009 have remaining terms of 98 days to 511 months, maturing on average after 43119 days.
As at December 31, 2009, the Company had the following outstanding derivative instruments that were entered into to hedge Euro-denominated forecasted transactions:
| | | | | | | | |
| | Notional amount for
| | |
| | hedge on R&D and other
| | Notional amount for
|
| | operating expense
| | hedge on manufacturing
|
| | forecasted costs | | forecasted costs |
| | In millions of Euros |
|
Forward contracts | | | 388 | | | | 272 | |
Currency options | | | 120 | | | | 160 | |
Cash flow and fair value interest rate risk
The Company’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk.
The Company analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Since all the liquidity of the Company is invested in floating rate instruments, the Company’s interest rate risk arises from the mismatch of fixed rate liabilities and floating rate assets.
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 convertconverted the fixed rate interest expense recorded on the convertible bond due 2016 to a variable interest rate based upon adjusted LIBOR. As of December 31, 2007 and 2006 the cancellable swaps met the criteria for designation as a fair value hedge and, as such, both the swaps and the hedged portion of the bonds arewere reflected at their fair values in the consolidated balance sheets.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 iswas assessed on both a prospective and retrospective basis at each reporting period. At December 31, 2007 and 2006 the cancellable swaps are highly effective at hedging the change in fair value of the hedged bonds attributable to changes in interest rates. Any ineffectiveness of the hedge relationship iswas recorded as a gain or loss on derivatives as a component of “Other income and expenses, net” in the consolidated statements of income. 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 statements of income. The net lossgain (loss) recognized in “Other income and expenses, net” for the year ended December 31, 2007 as a result of the ineffective portion of this fair value hedge amounted to $1 million while itgain and $1 million loss for the years ended December 31, 2008 and 2007, respectively.
F-65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
At December 31, 2008 the cancellable swaps were not designated as fair value hedge and were reported asheld-for-trading financial assets on the line “Other receivables and assets” of the consolidated balance sheet, as described in Note 6. The Company determined that the swaps had been no longer effective at offsetting changes in the fair value of the hedged bonds since November 1, 2008 and the fair value hedge relationship was consequently discontinued on that date. Unrealised gain recognized in earnings from discontinuance date totalled $15 million and was reported on the line “Gain(loss) on financial assets” of the consolidated statements of income for the year ended December 31, 2008. The swaps were sold in 2009, as described in Note 6.
Information on fair value of derivative instruments and their location in the consolidated balance sheets as at December 31, 2009 and December 31, 2008 is presented in the table below:
| | | | | | | | | | | | |
| | As at December 31, 2009 | | | As at December 31, 2008 | |
| | Balance sheet
| | Fair
| | | Balance sheet
| | Fair
| |
Asset Derivatives | | location | | value | | | location | | value | |
| | In millions of U.S. dollars | |
|
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Foreign exchange forward contracts | | Other receivables and assets | | | 24 | | | Other receivables and assets | | | 19 | |
Currency options | | Other receivables and assets | | | 9 | | | Other receivables and assets | | | 8 | |
| | | | | | | | | | | | |
Total derivatives designated as hedging instruments | | | | | 33 | | | | | | 27 | |
| | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Foreign exchange forward contracts | | Other receivables and assets | | | 3 | | | Other receivables and assets | | | 10 | |
Currency options | | Other receivables and assets | | | — | | | Other receivables and assets | | | — | |
Cancellable swaps | | | | | — | | | Other receivables and assets | | | 34 | |
| | | | | | | | | | | | |
Total derivatives not designated as hedging instruments: | | | | | 3 | | | | | | 44 | |
| | | | | | | | | | | | |
Total Derivatives | | | | | 36 | | | | | | 71 | |
| | | | | | | | | | | | |
F-66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| | | | | | | | | | | | |
| | As at December 31, 2009 | | | As at December 31, 2008 | |
| | Balance sheet
| | Fair
| | | Balance sheet
| | Fair
| |
Liability Derivatives | | location | | value | | | location | | value | |
| | In millions of U.S. dollars | |
|
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Foreign exchange forward contracts | | Other payables and accrued liabilities | | | (19 | ) | | Other payables and accrued liabilities | | | (3 | ) |
Currency options | | Other payables and accrued liabilities | | | (8 | ) | | Other payables and accrued liabilities | | | (1 | ) |
| | | | | | | | | | | | |
Total derivatives designated as hedging instruments | | | | | (27 | ) | | | | | (4 | ) |
| | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Foreign exchange forward contracts | | Other payables and accrued liabilities | | | (7 | ) | | Other payables and accrued liabilities | | | (1 | ) |
Currency options | | Other payables and accrued liabilities | | | — | | | Other payables and accrued liabilities | | | — | |
Total derivatives not designated as hedging instruments: | | | | | (7 | ) | | | | | (1 | ) |
| | | | | | | | | | | | |
Total Derivatives | | | | | (34 | ) | | | | | (5 | ) |
| | | | | | | | | | | | |
The effect on the consolidated statements of income for the year ended December 31, 2009 and December 31, 2008 of derivative instruments designated as fair value hedge is presented in the table below:
| | | | | | | | | | |
| | | | Amount of gain
|
| | | | (loss) recognized in
|
| | Location of gain (loss)
| | earnings on derivative |
| | recognized in earnings
| | December 31,
| | December,
|
| | on derivative | | 2009 | | 2008 |
| | In millions of U.S. dollars |
|
Cancellable swaps | | Interest income, net | | | 3 | | | | — | |
| | Other income and expenses, net | | | — | | | | 1 | |
| | Gain(loss) on financial assets | | | (8 | ) | | | 15 | |
The effect on the consolidated statements of income for the year ended December 31, 2009 and December 31, 2008 and on the Other comprehensive income (“OCI”) as reported in the statement of changes in equity as at
F-67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
December 31, 2009 and December 31, 2008 of derivative instruments designated as cash flow hedge is presented in the table below:
| | | | | | | | | | | | | | | | | | |
| | Gain (loss) deferred in
| | Location of gain
| | | | |
| | OCI on derivative | | (loss) reclassified
| | Gain (loss) reclassified from OCI into earnings |
| | December 31,
| | December 31,
| | from OCI into
| | December 31,
| | December 31,
|
| | 2009 | | 2008 | | earnings | | 2009 | | 2008 |
| | In millions of U.S. dollars |
|
Foreign exchange forward contracts | | | 2 | | | | 11 | | | Cost of sales | | | 31 | | | | 6 | |
Foreign exchange forward contracts | | | 1 | | | | 2 | | | Selling, general and administrative | | | 7 | | | | (3 | ) |
Foreign exchange forward contracts | | | 6 | | | | 4 | | | Research and development | | | 38 | | | | (5 | ) |
Currency options | | | (1 | ) | | | 1 | | | Cost of sales | | | (2 | ) | | | (2 | ) |
Currency options | | | — | | | | — | | | Selling, general and administrative | | | (1 | ) | | | 1 | |
Currency options | | | (1 | ) | | | — | | | Research and development | | | (2 | ) | | | 4 | |
Total | | | 7 | | | | 18 | | | | | | 71 | | | | 1 | |
No significant ineffective portion of the cash flow hedge relationships and no amount excluded from effectiveness assessment was recorded on the line “Other income and expenses, net” of the consolidated statements of income for year ended December 31, 2009 and December 31, 2008.
The effect on the consolidated statements of income for the year ended December 31, 2009 and December 31, 2008 of derivative instruments not materialdesignated as a hedge is presented in 2006.the table below:
| | | | | | | | | | |
| | | | Gain (Loss) Recognized in
| |
| | | | Earnings | |
| | Location of Gain Recognized in
| | December 31,
| | | December 31,
| |
| | Earnings | | 2009 | | | 2008 | |
| | In millions of U.S. dollars | |
|
Foreign exchange forward contracts | | Other income and expenses, net | | | 20 | | | | (36 | ) |
Credit risk
The Company selects banksand/or financial institutions that operate with the group based on the criteria of long term rating from at least two major Rating Agencies and keeping a maximum outstanding amount per instrument with each bank group within a thresholdnot to exceed 20% of 20%.the total.
Due to the credit market turmoil, the Company has decided to further tighten the counterparty concentration and credit risk profile. The maximum outstanding counterparty risk has been reduced and currently does not exceed 15% for major international banks with large market capitalization.
The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. If certain customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal and external ratings in accordance with limits set by management. The utilisation of credit limits is regularly monitored. Sales to customers are primarily settled in cash. At December 31, 20072009 and 2006,2008, one customer, the Nokia Group of companies, represented 26.9%20.8% and 26.2%16.7% 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.
F-60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Liquidity risk
Prudent liquidity risk management includes maintaining sufficient cash and cash equivalents, short-term deposits and marketable securities, the availability of funding from an adequate of committed credit facilities and the ability to close out market positions. The Company’s objective is to maintain a significant cash position and a low debt to
F-68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
equity ratio, which ensure adequate financial flexibility. Liquidity management policy is to finance the Company’s investments with net cash provided from operating activities.
Management monitors rolling forecasts of the Company’s liquidity reserve on the basis of expected cash flows.
27.225.2 Capital risk management
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, or issue new shares.
Consistent with others in the industry, the Company monitors capital on the basis of thedebt-to-equity ratio. This ratio is calculated as the net financial position of the Company, defined as the difference between total cash position (cash and cash equivalents, marketable securities — current and non-current-, short-term deposits and restricted cash) net of total financial debt (bank overdrafts, current portion of long-term debt and long-term debt), divided by total equity attributable to the shareholders of the Company.
27.3 —25.3 Fair value estimationmeasurement
The fair values of quoted financial instruments are based on current market prices. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Company is the bid price. If the market for a financial asset is not active and if no observable market price is obtainable, the Company measures fair value by using significant assumptions and estimates. In measuring fair value, the Company makes maximum use of market inputs and relies as little as possible on entity-specific inputs.
| | | | | | | | | | | | | | | | |
| | 2007 | | | 2006 | |
| | Carrying
| | | Estimated
| | | Carrying
| | | Estimated
| |
| | Amount | | | Fair Value | | | Amount | | | Fair Value | |
|
Long-term debt | | | | | | | | | | | | | | | | |
— Bank loans (including current portion) | | | 472 | | | | 465 | | | | 478 | | | | 466 | |
— Senior Bonds | | | 736 | | | | 734 | | | | 659 | | | | 655 | |
— Convertible debt | | | 1,012 | | | | 965 | | | | 993 | | | | 1,010 | |
Marketable securities | | | | | | | | | | | | | | | | |
— Floating-rate notes | | | 1,014 | | | | 1,014 | | | | 460 | | | | 460 | |
— Auction rate securities | | | 369 | | | | 369 | | | | 304 | | | | 304 | |
Other receivables and assets | | | | | | | | | | | | | | | | |
— Foreign exchange forward contracts and currency options | | | 13 | | | | 13 | | | | 14 | | | | 14 | |
Other investments and other non current assets | | | | | | | | | | | | | | | | |
— Cancellable swaps designated as fair value hedge | | | 8 | | | | 8 | | | | 4 | | | | 4 | |
— Equity securities classified as available-for-sale | | | 5 | | | | 5 | | | | 5 | | | | 5 | |
Other payables and accrued liabilities | | | | | | | | | | | | | | | | |
— Foreign exchange forward contracts and currency options | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
The table below details financial assets (liabilities) measured at fair value on a recurring basis as at December 31, 2009:
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | | | Quoted Prices in
| | | | |
| | | | Active Markets for
| | Significant Other
| | Significant
|
| | December 31,
| | Identical Assets
| | Observable Inputs
| | Unobservable Inputs
|
| | 2009 | | (Level 1) | | (Level 2) | | (Level 3) |
|
Description | | | | | | | | | | | | | | | | |
In millions of U.S. dollars | | | | | | | | | | | | | | | | |
Available-for-sale marketable debt securities | | | 1,032 | | | | 1,021 | | | | — | | | | 11 | |
Available-for-sale non-current marketable debt securities | | | 42 | | | | — | | | | — | | | | 42 | |
Available-for-sale long term subordinated notes | | | 173 | | | | — | | | | — | | | | 173 | |
Available-for-sale equity securities | | | 10 | | | | 10 | | | | — | | | | — | |
Equity securities held for trading | | | 7 | | | | 7 | | | | — | | | | — | |
Derivative instruments designated as cash flow hedge | | | 6 | | | | 6 | | | | — | | | | — | |
Derivative instruments not designated as hedge | | | (4 | ) | | | (4 | ) | | | — | | | | — | |
F-69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
For assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2009 and December 31, 2009 is presented as follows:
| | | | |
| | Fair Value
| |
| | Measurements Using
| |
| | Significant
| |
| | Unobservable Inputs
| |
| | (Level 3) | |
| | In millions of U.S. dollars | |
|
January 1, 2009 | | | 421 | |
Increase in fair value included in OCI foravailable-for-sale marketable securities | | | 15 | |
Other-than-temporary impairment charge and losses on auction-rate securities included in earnings on the line“Other-than-temporary impairment charge on financial assets” | | | (140 | ) |
Paid-in-kind interest on Numonyx subordinated notes | | | 16 | |
Change in fair value on Numonyx subordinated notes — pre-tax | | | (11 | ) |
Settlements and redemptions | | | (75 | ) |
| | | | |
December 31, 2009 | | | 226 | |
| | | | |
Amount of total losses for the period included in earnings attributable to assets still held at the reporting date | | | 72 | |
The table below details financial and non financial assets (liabilities) measured at fair value on a nonrecurring basis as at December 31, 2009:
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | | | Quoted Prices in
| | | | |
| | | | Active Markets for
| | Significant Other
| | Significant
|
| | December 31,
| | Identical Assets
| | Observable Inputs
| | Unobservable Inputs
|
| | 2009 | | (Level 1) | | (Level 2) | | (Level 3) |
|
Description | | | | | | | | | | | | | | | | |
In millions of U.S. dollars | | | | | | | | | | | | | | | | |
Investments in equity securities carried at cost | | | 29 | | | | — | | | | — | | | | 29 | |
Numonyx equity investment | | | 193 | | | | — | | | | — | | | | 193 | |
Assets held for sale | | | 31 | | | | — | | | | 31 | | | | — | |
Total | | | 253 | | | | — | | | | 31 | | | | 222 | |
For assets (liabilities) measured at fair value on a non recurring basis using significant unobservable inputs (Level 3), the reconciliation between January 1, 2009 and December 31, 2009 is presented as follows:
| | | | |
| | Fair Value
| |
| | Measurements Using
| |
| | Significant
| |
| | Unobservable Inputs
| |
| | (Level 3) | |
| | In millions of U.S. dollars | |
|
January 1, 2009 | | | 528 | |
Investments in equity securities carried at cost | | | (3 | ) |
Impairment in Numonyx equity | | | (200 | ) |
Equity share in Numonyx loss | | | (103 | ) |
| | | | |
December 31, 2009 | | | 222 | |
| | | | |
Amount of total losses for the period included in earnings attributable to assets still held at the reporting date | | | (303 | ) |
F-70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
The following table includes additional fair value information on other financial assets and liabilities recorded at amortized cost as at December 31, 2009:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 |
| | Carrying
| | Estimated Fair
| | Carrying
| | Estimated Fair
|
Description | | Amount | | Value | | Amount | | Value |
| | | | In millions of U.S. dollars | | |
|
Long-term debt | | | | | | | | | | | | | | | | |
— Bank loans (including current portion) | | | 829 | | | | 829 | | | | 938 | | | | 937 | |
— Senior Bonds | | | 720 | | | | 712 | | | | 703 | | | | 580 | |
— Convertible debt | | | 943 | | | | 918 | | | | 1,036 | | | | 918 | |
Total | | | 2,492 | | | | 2,459 | | | | 2,677 | | | | 2,435 | |
The table below details securities that currently are in an unrealized loss position. The securities are segregated by investment type and the length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2009.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2009 | |
| | Less than 12 months | | | More than 12 months | | | Total | |
| | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
Description | | Values | | | Losses | | | Values | | | Losses | | | Values | | | Losses | |
|
Senior debt floating rate notes | | | 105 | | | | (2 | ) | | | 209 | | | | (7 | ) | | | 314 | | | | (9 | ) |
Long-term subordinated notes | | | 173 | | | | (11 | ) | | | — | | | | — | | | | 173 | | | | (11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 278 | | | | (13 | ) | | | 209 | | | | (7 | ) | | | 487 | | | | (20 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The methodologies used to estimate fair value are as follows:
Marketable securities
The fair value of floating rate notes is estimated based upon quoted market prices for the identical instruments. For Lehman Brothers senior unsecured bonds, fair value measurement was reassessed in 2008 from a Level 1 fair value measurement hierarchy to a Level 3 following Lehman Brothers Chapter 11 filing. Fair value measurement for these debt securities relies on an information received from a major credit rating entity based on historical recovery rates.
For auction rate securities, which are debt securities without available observable market price, the Company establishes fair value by reference to public available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, as described in details in Note 3.
Foreign exchange forward contracts and currency options
The fair value of these instruments is estimated based upon quoted market prices for identical instruments.
Cancellable swaps held for trading
The fair value of these instruments was estimated based on inputs other than quoted prices received from two market counterparties which held the derivative contracts, which the Company estimates reflected the orderly exit price of the instruments when correlated to other observable market data such as interest rates and yield curves observable at commonly quoted intervals.
Equity securities classified asavailable-for-sale
The fair values of these instruments are estimated based upon market prices for the same or similar instruments.
Equity securities held for trading
The fair value of these instruments is estimated based upon quoted market prices for the same instruments.
Equity securities carried at cost
The non-recurring fair value measurement was based on the valuation of the underlying investments on a new round of third party financing or upon liquidation.
F-71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Numonyx equity investment
The non-recurring fair value measurement was based upon a combination of an income approach, using discounted cash flows, and a market approach, using metrics of comparable public companies, which the Company assesses as a fair approximation of the orderly exit value in the current market.
Subordinated notes received in Numonyx transaction
The fair value of these instruments is estimated based on publicly available fixed interest swap rates for instruments with similar maturities, taking into account the credit risk feature of the issuer of the debt securities.
Long-term debt and current portion of long-term debt
The fair value of long-term debt was determined based on quoted market prices, and by estimating future cash flows on aborrowing-by-borrowing basis and discounting these future cash flows using the Company’s incremental borrowing rates for similar types of borrowing arrangements.
Cash and cash equivalents, accounts receivable, bank overdrafts, short-term borrowings, and 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.
F-61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Marketable securities
The fair value of floating rate notes is estimated based upon quoted market prices for the same or similar instruments.
For auction rate securities, which are debt securities without available observable market price, the Company establishes fair value by reference to public available indexes of securities with the same rating and comparable or similar underlying collaterals or industries’ exposure, using “mark to market” bids and “mark to model” valuations received from the structuring financial institutions.
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 aborrowing-by-borrowing basis and discounting these future cash flows using the Company’s 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.
Cancellable swaps
The fair values of these instruments are estimated based upon market prices for similar instruments.
Equity securities classified as available-for-sale
The fair values of these instruments are estimated based upon market prices for the same instruments.
28 — RELATED PARTY TRANSACTIONS
| |
26. | RELATED PARTY TRANSACTIONS |
Transactions with significant shareholders, their affiliates and other related parties were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
|
| | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 |
|
Sales & other services | | | 272 | | | | 118 | | | | 158 | | | | 356 | | | | 325 | | | | 272 | |
Research and development expenses | | | (68 | ) | | | (43 | ) | | | (48 | ) | | | (201 | ) | | | (63 | ) | | | (68 | ) |
Other purchases | | | (85 | ) | | | (70 | ) | | | (16 | ) | | | (167 | ) | | | (77 | ) | | | (85 | ) |
Other income and expenses | | | (11 | ) | | | (21 | ) | | | (12 | ) | | | — | | | | (7 | ) | | | (11 | ) |
Accounts receivable | | | 44 | | | | 20 | | | | 29 | | | | 58 | | | | 63 | | | | 44 | |
Accounts payable | | | 40 | | | | 20 | | | | 12 | | | | 60 | | | | 65 | | | | 40 | |
Other assets | | | 2 | | | | — | | | | 11 | | | | — | | | | — | | | | 2 | |
For the years ended December 31, 2007,2009, December 31, 20062008 and 2005,2007, 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: Commissariat à l’Energie Atomique (LETI) Areva, France Telecom Equant, Orange, Finmeccanica, Cassa Depositi e Prestiti, Flextronics, Oracle and Thomson. For 2007, theThe related party transactions presented in the table above also include transactions with Flextronics, Oraclebetween the Company and KLA-Tenkor. its equity investments as listed in Note 11.
Since the formation of ST-Ericsson, the Company purchases R&D services from ST-Ericsson AT (“JVD”), a significant equity investment of the Company. For the year ended December 31, 2009, the total R&D services purchased from ST-Ericsson AT amounted to $150 million and outstanding trade payables amounted to $30 million as at December 31, 2009.
Upon FMG deconsolidation and the creation of Numonyx, the Company performed until November 2008 certain purchasing, service and revenue on-behalf of Numonyx. The Company had a net payable balance of $7 million as at December 31, 2008 as the result of these transactions. Additionally the Company recorded in 2007 costs amounting to $26 million to create the infrastructure necessary to prepare Numonyx to operate immediately following the FMG deconsolidation. These costs were reimbursed by Numonyx in 2008 following the closing of the transaction. Upon creation, Numonyx also entered into financing arrangements for a $450 million term loan and a $100 million committed revolving credit facility from two primary financial institutions. Intel and the Company have each granted in favor of Numonyx a 50% debt guarantee not joint and several. This debt guarantee is described in details in Note 11. The final terms at the closing date of the agreements on assets to be contributed included rights granted to Numonyx by the Company to use certain assets retained by the Company. The Company recorded a provision amounting respectively to $65 million and $87 million, as at December 31, 2009 and 2008, to reflect the value of such rights granted to its equity investment. The parties also retained the obligation to fund the severance payment (“trattamento di fine rapporto”) due to certain transferred employees which qualifies as a defined benefit
F-72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
plan and was classified on the line “Other non-current liabilities”. The liability amounted to respectively $31 million and $35 million as at December 31, 2009 and 2008. Finally, the Company recorded in 2008 a net long-term receivable amounting to $6 million corresponding to a tax credit Numonyx will pay back to the Company once cashed-in from the relevant taxing authorities. As at December 31, 2009, this receivable is still outstanding.
Additionally the Company incurred in 2008 and 2007 and 2006 significant amounts fromon transactions with Hynix Semiconductor Inc., with which the Company hashad until March 30, 2008 a significant equity investment, Hynix Numonyx joint venture (formerly Hynix ST joint venture,venture), described in detail in note 4.Note 11. In 2007 and 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 volumes of specific products as requested by the Company. The amount of purchases and other expenses from Hynix Semiconductor Inc. was $161 million in 2007 and $161 million in 2006.2007. The amount of sales and other services made in 2007 was $2 million. These transactions significantly decreased in 2008 upon the transfer of the joint venture to Numonyx, as described in Note 11. The amount of purchases and other expenses and the amount of sales and other services from Hynix Semiconductor Inc. was $2 million and $5 million in 2008, respectively. The Company had no significant payable or receivable balance as at December 31, 2008, while it had a payable amount ofamounting to $18 million as at December 31, 2007 and $13 million as at December 31, 2006.towards Hynix Semiconductor Inc.
Additionally, as detailed in note 8, the Company recorded costs amounting to $26 million to create the infrastructure necessary to prepare Numonyx to operate immediately following the FMG deconsolidation, for which the Company has paid and will be reimbursed by Numonyx following the closing of the transaction.
F-62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
In addition,Besides, 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 was not material in 2009 and amounted to $1$9 million income in 2008 and 1 million expense in 2007 and 2006 and to $5 million expense in 2005. At2007. As at December 31, 20072009, 2008 and 2006,2007, the Company had no receivable or payable amount. At December 31, 2005, the Company had a net receivable amount of $1 million.
The Company made no contribution in 2009 and contributed cash amounts totalling $1 million, for the years ended December 31, 2007, 20062008 and 20052007 to the ST Foundation, a non-profit organization established to deliver and coordinate independent programs in line with its mission. Certain members of the Foundation’s Board are senior members of the Company’s management.
In addition, pursuant to the Supervisory Board’s 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.
29 — 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.
Beginning with the first quarter of 2005, the Company reported until December 31, 2006 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, Analog (“MPA”) segment. |
In an effort to better align the Company to meet the requirements of the market, together with the pursuit of strategic repositioning in Flash Memory, the Company announced in December 2006 a reorganization of its product segments into three main segments:
| | |
| • | Application Specific Product Groups (“ASG”) segment; |
|
| • | Industrial and Multisegment Sector (“IMS”) segment; and |
|
| • | Flash Memory Group (“FMG”) segment. |
ASG segment includes the existing APG and CPG product lines and the newly created Mobile, Multimedia and Communications Group and Home, Entertainment and Display Group. IMS segment contains the Microcontrollers, Memories and Smartcards Group and the Analog, Power and MEMS Group. FMG segment incorporates all Flash Memory operations, including research and development and product-related activities, front- and back-end manufacturing, marketing and sales. The new product segments became effective on January 1, 2007. The Company has restated its results in prior periods for illustrative comparisons of its performance by product segment. 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 segments for the prior reporting periods. However management believes the 2006 quarter’s presentation is representative of 2007 and is using these comparatives when managing the Company.
The Company’s principal investment and resource allocation decisions in the Semiconductor business area are for expenditures on research and development and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the Semiconductor Business area.
F-63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
All these product segments share common research and development for process technology and manufacturing capacity for most of their products.
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 Statementthe U.S. GAAP guidance.
Since March 31, 2008, following the creation with Intel of Financial Accounting Standards No. 131,Disclosures about SegmentsNumonyx, a new independent semiconductor company from the key assets of an Enterpriseits and Related Information(“FAS 131”Intel’s Flash memory business (“FMG deconsolidation”), the Company has ceased reporting under the FMG segment.
Starting August 2, 2008, as a consequence of the creation of the joint venture company with NXP, the Company reorganized its groups. A new segment was created to report wireless operations; the product line Mobile, Multimedia & Communications Group (“MMC”) which was part of segment Application Specific Groups (“ASG”) was abandoned and its divisions were reallocated to different product lines. The remaining part of ASG is now comprised of Automotive Consumer Computer and Telecom Infrastructure Product Groups (“ACCI”).
The new organization is as follows:
| | |
| • | Automotive Consumer Computer and Communication Infrastructure (“ACCI”), comprised of four product lines: |
| | |
| • | Home Entertainment & Displays (“HED”), |
|
| • | Automotive Products Group (“APG”); |
|
| • | Computer and Communication Infrastructure (“CCI”); and |
F-73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
| | |
| • | Imaging (“IMG”, starting January 1, 2009). |
| | |
| • | Industrial and Multisegment Sector (“IMS”), comprised of: |
| | |
| • | Analog, Power and Micro-Electro-Mechanical Systems (“APM”); and |
|
| • | Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”). |
| | |
| • | Starting February 3, 2009, as a consequence of the merger of ST-NXP Wireless and Ericsson Mobile Platforms to create ST-Ericsson with Ericsson, the Wireless sector (“Wireless”) has been adjusted and is comprised of: |
| | |
| • | Wireless Multi Media (“WMM”); |
|
| • | Connectivity & Peripherals (“C&P”); |
|
| • | Cellular Systems (“CS”); |
|
| • | Mobile Platforms (“MP”); |
in which, since February 3, 2009, the Company reports the portion of sales and operating results ofST-Ericsson as consolidated in the Company’s revenue and operating results, and
| | |
| • | Other Wireless, in which the Company reports manufacturing margin, R&D revenues and other items related to the wireless business but outside the ST-Ericsson JVS. |
The Company has restated its results in prior periods for illustrative comparisons of its performance by product segment. 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 segments for the prior reporting periods. Management believes that the restated 2008 and 2007 presentation is consistent with 2009 and is using these comparatives when managing the Company.
Starting January 1, 2010 there was a new organization change within the Wireless sector, which is now comprised of the following lines:
| | |
| • | 2 GE TD-SCDMA & Connectivity; |
|
| • | 3G Multimedia & Platforms; |
|
| • | LTE & 3G Modem Solutions; |
in which the Company reports the portion of sales and operating results of ST-Ericsson as consolidated in the Company’s revenue and operating results, and
| | |
| • | Other Wireless, in which the Company reports manufacturing margin, R&D revenues and other items related to the wireless business but outside the ST-Ericsson JVS. |
The Company’s principal investment and resource allocation decisions in the Semiconductor business area are for expenditures on research and development and capital investments in front-end and back-end manufacturing facilities. These decisions are not made by product segments, but on the basis of the Semiconductor Business area. All these product segments share common research and development for process technology and manufacturing capacity for most of their products.
The following tables present the Company’s 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 the Company’s 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
F-74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
manufacturing facilities, some strategic and special research and development programs or other corporate-sponsored initiatives, including certain corporate levelcorporate-level operating expenses and certain other miscellaneous charges.
Net revenues by product segment
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
In million of U.S dollars | | | | | | | | | | | | |
Net revenues by product segment: | | | | | | | | | | | | |
Application Specific Product Groups segment | | | 5,439 | | | | 5,395 | | | | 4,991 | |
Industrial and Multisegment Sector segment | | | 3,138 | | | | 2,842 | | | | 2,482 | |
Flash Memory Group segment | | | 1,364 | | | | 1,570 | | | | 1,351 | |
Others(1) | | | 60 | | | | 47 | | | | 58 | |
| | | | | | | | | | | | |
Total consolidated net revenues | | | 10,001 | | | | 9,854 | | | | 8,882 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
| | In million of U.S dollars | |
|
Net revenues by product segment: | | | | | | | | | | | | |
Automotive Consumer Computer and Communication Infrastructure (ACCI) | | | 3,198 | | | | 4,129 | | | | 3,944 | |
Industrial and Multisegment Sector (IMS) | | | 2,641 | | | | 3,329 | | | | 3,138 | |
Wireless | | | 2,585 | | | | 2,030 | | | | 1,495 | |
Flash Memory Group (FMG) | | | — | | | | 299 | | | | 1,364 | |
Others(1) | | | 86 | | | | 55 | | | | 60 | |
| | | | | | | | | | | | |
Total consolidated net revenues | | | 8,510 | | | | 9,842 | | | | 10,001 | |
| | | | | | | | | | | | |
| | |
(1) | | Includes revenues from sales of subsystems and other products not allocated to product segments. |
Operating income (loss)Net revenues by product segment and by product line
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
Application Specific Product Groups segment | | | 303 | | | | 439 | | | | 355 | |
Industrial and Multisegment Sector segment | | | 469 | | | | 441 | | | | 336 | |
Flash Memory Group segment | | | (51 | ) | | | (53 | ) | | | (199 | ) |
Total operating income of product groups | | | 721 | | | | 827 | | | | 492 | |
Others(1) | | | (1,266 | ) | | | (150 | ) | | | (248 | ) |
| | | | | | | | | | | | |
Total consolidated operating income (loss) | | | (545 | ) | | | 677 | | | | 244 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
| | In million of U.S dollars | |
|
Net revenues by product lines: | | | | | | | | | | | | |
Automotive Products Group (“APG”) | | | 1,051 | | | | 1,460 | | | | 1,419 | |
Computer and Communication Infrastructure (“CCI”) | | | 932 | | | | 1,077 | | | | 1,123 | |
Home Entertainment & Displays (“HED”) | | | 787 | | | | 1,086 | | | | 963 | |
Imaging (“IMG”) | | | 417 | | | | 499 | | | | 439 | |
Others | | | 11 | | | | 7 | | | | — | |
Automotive Consumer Computer and Communication Infrastructure (ACCI) | | | 3,198 | | | | 4,129 | | | | 3,944 | |
Analog, Power and Micro-Electro-Mechanical Systems (“APM”) | | | 1,887 | | | | 2,393 | | | | 2,313 | |
Microcontrollers, non-Flash, non-volatile Memory and Smart Card products (“MMS”) | | | 752 | | | | 936 | | | | 825 | |
Others | | | 2 | | | | — | | | | — | |
Industrial and Multisegment Sector (IMS) | | | 2,641 | | | | 3,329 | | | | 3,138 | |
Cellular Systems (“CS”)(1) | | | 748 | | | | 321 | | | | — | |
Connectivity & Peripherals (“C&P”) | | | 416 | | | | 416 | | | | 207 | |
Mobile Platforms (“MP”) | | | 300 | | | | — | | | | — | |
Wireless Multi Media (“WMM”) | | | 1,110 | | | | 1,293 | | | | 1,288 | |
Others | | | 11 | | | | — | | | | — | |
Wireless | | | 2,585 | | | | 2,030 | | | | 1,495 | |
Others | | | 86 | | | | 55 | | | | 60 | |
Flash Memory Group (FMG) | | | — | | | | 299 | | | | 1,364 | |
Total consolidated net revenues | | $ | 8,510 | | | $ | 9,842 | | | $ | 10,001 | |
| | |
(1) | | Cellular Systems includes the largest part of the revenues contributed by NXP Wireless and, as such, there are no comparable numbers available for 2007. |
F-75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Operating income (loss) by product segment
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
| | In million of U.S dollars | |
|
Automotive Consumer Computer and Communication Infrastructure (ACCI) | | | (91 | ) | | | 136 | | | | 198 | |
Industrial and Multisegment Sector (IMS) | | | 113 | | | | 482 | | | | 469 | |
Wireless | | | (356 | ) | | | (65 | ) | | | 105 | |
Flash Memory Group (FMG) | | | — | | | | 16 | | | | (51 | ) |
| | | | | | | | | | | | |
Total operating income of product groups | | | (334 | ) | | | 569 | | | | 721 | |
Others(1) | | | (689 | ) | | | (767 | ) | | | (1,266 | ) |
| | | | | | | | | | | | |
Total consolidated operating loss | | | (1,023 | ) | | | (198 | ) | | | (545 | ) |
| | | | | | | | | | | | |
| | |
(1) | | Operating income (loss)loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses such as: strategic or special research and development programs, acquired In-Process R&D, certain corporate-levelcorporate level operating expenses, certain patent claims and litigations,litigation, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products Group.Group, including, beginning in the second quarter of 2008, the remaining FMG costs. The 2008 “Others” also includes non-recurring purchase accounting items. |
F-64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
Reconciliation to consolidated operating income (loss):
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | December 31,
| | December 31,
| | December 31,
| |
| | December 31,
| | December 31,
| | December 31,
| | | 2009 | | 2008 | | 2007 | |
| | 2007 | | 2006 | | 2005 | | | In million of U.S dollars | |
|
Total operating income of product groups | | | 721 | | | | 827 | | | | 492 | | | | (334 | ) | | | 569 | | | | 721 | |
| | | | | | | | | | | | | | |
Strategic R&D and other R&D programs | | | (20 | ) | | | (12 | ) | | | (28 | ) | |
Start-up costs | | | (24 | ) | | | (57 | ) | | | (56 | ) | |
Strategic R&D, other R&D programs and R&D funding | | | | (22 | ) | | | (24 | ) | | | (20 | ) |
Phase-out andstart-up costs | | | | (39 | ) | | | (17 | ) | | | (24 | ) |
Impairment & restructuring charges | | | (1,228 | ) | | | (77 | ) | | | (128 | ) | | | (291 | ) | | | (481 | ) | | | (1,228 | ) |
Unused capacity charges | | | | (322 | ) | | | (57 | ) | | | — | |
Subsystems and Other Products Group | | | 6 | | | | (1 | ) | | | 1 | | | | — | | | | 3 | | | | 6 | |
One-time compensation and special contributions(1) | | | | | | | | | | | (22 | ) | |
Acquired In-Process R&D and other non-recurring purchase accounting(1) | | | | — | | | | (185 | ) | | | — | |
Seniority awards | | | (21 | ) | | | | | | | | | | | — | | | | — | | | | (21 | ) |
Other non-allocated provisions(2) | | | 21 | | | | (3 | ) | | | (15 | ) | | | (15 | ) | | | (6 | ) | | | 21 | |
| | | | | | | | | | | | | | |
Total operating loss Others(3) | | | (1,266 | ) | | | (150 | ) | | | (248 | ) | |
Total operating loss Others(3) | | | | (689 | ) | | | (767 | ) | | | (1,266 | ) |
Total consolidated operating income (loss) | | | (545 | ) | | | 677 | | | | 244 | | | | (1,023 | ) | | | (198 | ) | | | (545 | ) |
| | | | | | | | | | | | | | |
| | |
(1) | | One-time compensationIn 2008 non-recurring purchase accounting items were related to Genesis business combination with In-Process R&D charge for $21 million and special contributions to the Company’s former CEOWireless business acquisition from NXP for $164 million, composed of $76 million as In-Process R&D charge and other executives were not allocated to product groups.$88 million as inventorystep-up charge. |
|
(2) | | Includes unallocated expenses such as certain corporate level operating expenses and other costs. . |
|
(3) | | Operating income (loss)loss of “Others” includes items such as unused capacity charges, impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses such as: strategic or special research and development programs, acquired In-Process R&D, certain corporate-levelcorporate level operating expenses, certain patent claims and litigations,litigation, and other costs that are not allocated to the product groups,segments, as well as operating earnings or losses of the Subsystems and Other Products Group. Certain costs, mainly R&D, formerlyGroup, including, beginning in the “Others” category, have been allocated tosecond quarter of 2008, the groups since 2005; comparable amounts reported in this category have been reclassified accordingly in the above table.remaining FMG costs. |
The following is a summary of operations by entities located within the indicated geographic areas for 2007, 20062009, 2008 and 2005.2007. 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(PP&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.
Net revenues
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
The Netherlands | | | 3,123 | | | | 3,114 | | | | 2,864 | |
France | | | 223 | | | | 240 | | | | 268 | |
Italy | | | 220 | | | | 230 | | | | 203 | |
USA | | | 1,027 | | | | 1,030 | | | | 1,066 | |
Singapore | | | 4,795 | | | | 4,698 | | | | 4,041 | |
Japan | | | 483 | | | | 400 | | | | 306 | |
Other countries | | | 130 | | | | 142 | | | | 134 | |
| | | | | | | | | | | | |
Total | | | 10,001 | | | | 9,854 | | | | 8,882 | |
| | | | | | | | | | | | |
F-65F-76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Net revenues
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
| | In million of U.S dollars | |
|
The Netherlands | | | 1,553 | | | | 2,737 | | | | 3,123 | |
France | | | 139 | | | | 178 | | | | 223 | |
Italy | | | 121 | | | | 185 | | | | 220 | |
USA | | | 798 | | | | 1,032 | | | | 1,027 | |
Singapore | | | 4,697 | | | | 4,939 | | | | 4,795 | |
Japan | | | 300 | | | | 492 | | | | 483 | |
Other countries | | | 902 | | | | 279 | | | | 130 | |
| | | | | | | | | | | | |
Total | | | 8,510 | | | | 9,842 | | | | 10,001 | |
| | | | | | | | | | | | |
Long-lived assets
| | | | | | | | | |
| | | | | | | | | | | | | | December 31,
| | December 31,
| |
| | December 31,
| | December 31,
| | December 31,
| | | 2009 | | 2008 | |
| | 2007 | | 2006 | | 2005 | | | In million of U.S dollars | |
|
The Netherlands | | | 413 | | | | 318 | | | | 333 | | | | 24 | | | | 14 | |
France | | | 1,906 | | | | 1,781 | | | | 1,618 | | | | 1,623 | | | | 1,728 | |
Italy | | | 1,265 | | | | 1,745 | | | | 1,698 | | | | 850 | | | | 1,000 | |
Other European countries | | | 193 | | | | 204 | | | | 176 | | | | 158 | | | | 229 | |
USA | | | 393 | | | | 470 | | | | 458 | | | | 74 | | | | 217 | |
Singapore | | | 735 | | | | 1,642 | | | | 1,684 | | | | 546 | | | | 675 | |
Malaysia | | | 288 | | | | 356 | | | | 321 | | | | 264 | | | | 306 | |
Other countries | | | 379 | | | | 344 | | | | 332 | | | | 542 | | | | 570 | |
| | | | | | | | | | | | |
Total | | | 5,572 | | | | 6,860 | | | | 6,620 | | | | 4,081 | | | | 4,739 | |
| | | | | | | | | | | | |
Payment for purchase of tangible assets
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
| | In million of U.S dollars | |
|
The Netherlands | | | 8 | | | | 5 | | | | 4 | |
France | | | 242 | | | | 462 | | | | 396 | |
Italy | | | 44 | | | | 138 | | | | 279 | |
Other European countries | | | 29 | | | | 66 | | | | 53 | |
USA | | | 6 | | | | 2 | | | | 47 | |
Singapore | | | 27 | | | | 106 | | | | 180 | |
Malaysia | | | 35 | | | | 104 | | | | 99 | |
Other countries | | | 60 | | | | 100 | | | | 82 | |
| | | | | | | | | | | | |
Total | | | 451 | | | | 983 | | | | 1,140 | |
| | | | | | | | | | | | |
F-66F-77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except share and per share amounts)
Depreciation and amortization
| | | | | | | | | | | | |
| | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2007 | |
| | In million of U.S. dollars | |
|
The Netherlands | | | 37 | | | | 47 | | | | 60 | |
France | | | 430 | | | | 497 | | | | 432 | |
Italy | | | 249 | | | | 287 | | | | 327 | |
Other European countries | | | 186 | | | | 93 | | | | 56 | |
USA | | | 62 | | | | 81 | | | | 102 | |
Singapore | | | 207 | | | | 195 | | | | 284 | |
Malaysia | | | 83 | | | | 79 | | | | 75 | |
Other countries | | | 113 | | | | 87 | | | | 77 | |
| | | | | | | | | | | | |
Total | | | 1,367 | | | | 1,366 | | | | 1,413 | |
| | | | | | | | | | | | |
On February 10, 2010, the Company announced that, together with its partners Intel Corporation and Francisco Partners, has entered into a definitive agreement with Micron Technology Inc. (“Micron”), pursuant to which Micron will acquire Numonyx in an all-stock transaction. Upon the closing of the transaction, which is subject to customary regulatory approvals, and based on Micron’s closing stock price on February 9, 2010 of $9.08 per share, the Company will receive — in exchange for our 48.6% stake in Numonyx and the cancellation of the30-year note due to the Company by Numonyx — approximately 66.6 million shares of Micron common stock (taking into account a payable of $77.8 million due by the Company to Francisco Partners). At closing, Numonyx will repay the full amount of its outstanding $450 million term loan, while simultaneously terminating the Company’s $225 million guarantee of its debt. There is no guaranty as to when, or if, the transaction will close.
F-78
NUMONYX HOLDINGS B.V.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 2008
F-79
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page |
|
| | | F-87 | |
| | | F-88 | |
| | | F-93 | |
| | | F-94 | |
| | | F-94 | |
| | | F-94 | |
| | | F-95 | |
| | | F-95 | |
| | | F-96 | |
| | | F-97 | |
| | | F-97 | |
| | | F-97 | |
| | | F-100 | |
| | | F-101 | |
| | | F-102 | |
| | | F-102 | |
| | | F-103 | |
| | | F-103 | |
| | | F-104 | |
| | | F-104 | |
| | | F-107 | |
| | | F-108 | |
| | | F-108 | |
| | | F-111 | |
F-80
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Numonyx Holdings B.V.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, cash flows and changes in shareholders’ equity present fairly, in all material respects, the financial position of Numonyx Holdings B.V and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of its operations and its cash flows for the year ended December 31, 2009 and the period from March 30, 2008 to December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers SA
| | |
| | |
Rolf Johner | | Kenneth Postal |
Geneva, February 28, 2010
F-81
NUMONYX HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Net sales | | $ | 1,760,703 | | | $ | 1,623,189 | |
Other revenues | | | 305 | | | | 456 | |
| | | | | | | | |
Net revenues | | | 1,761,008 | | | | 1,623,645 | |
Cost of sales | | | (1,421,017 | ) | | | (1,280,463 | ) |
| | | | | | | | |
Gross profit | | | 339,991 | | | | 343,182 | |
Selling, general, and administrative expenses | | | (203,599 | ) | | | (223,984 | ) |
Research and development expenses | | | (273,002 | ) | | | (207,685 | ) |
Impairment and restructuring charges | | | (27,404 | ) | | | (74,350 | ) |
Other income and expenses, net | | | 607 | | | | (37,547 | ) |
| | | | | | | | |
Operating loss | | | (163,407 | ) | | | (200,384 | ) |
Interest expense, net | | | (74,449 | ) | | | (57,060 | ) |
Income from equity investment | | | 11,605 | | | | 5,748 | |
| | | | | | | | |
Loss before income taxes | | | (226,251 | ) | | | (251,696 | ) |
Income tax expense | | | (20,529 | ) | | | (19,125 | ) |
| | | | | | | | |
Net loss | | $ | (246,780 | ) | | $ | (270,821 | ) |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-82
NUMONYX HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Net loss | | $ | (246,780 | ) | | $ | (270,821 | ) |
Other comprehensive (loss) / income, net of tax: | | | | | | | | |
Foreign currency translation adjustments | | | (463 | ) | | | 6,720 | |
Defined benefit pension plans: | | | | | | | | |
Actuarial loss during the period | | | (2,916 | ) | | | (414 | ) |
| | | | | | | | |
Other comprehensive (loss) / income | | | (3,379 | ) | | | 6,306 | |
| | | | | | | | |
Comprehensive Loss | | $ | (250,159 | ) | | $ | (264,515 | ) |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-83
NUMONYX HOLDINGS B.V.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and December 31, 2008
In thousands of US dollars
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 546,979 | | | $ | 476,810 | |
Restricted cash | | | 4,972 | | | | 4,991 | |
Trade accounts receivable, net | | | 173,738 | | | | 230,901 | |
Inventories | | | 511,000 | | | | 582,140 | |
Assets held for sale | | | 78,000 | | | | — | |
Deferred tax assets | | | 7,506 | | | | 5,386 | |
Other receivables and assets | | | 81,760 | | | | 159,058 | |
| | | | | | | | |
Total current assets | | | 1,403,955 | | | | 1,459,286 | |
Intangible assets, net | | | 149,641 | | | | 208,322 | |
Property, plant and equipment, net | | | 365,901 | | | | 563,725 | |
Restricted cash | | | 20,620 | | | | 24,795 | |
Deferred tax assets | | | 33,228 | | | | 79,100 | |
Equity investment | | | 314,529 | | | | 303,371 | |
Other non-current assets | | | 233,688 | | | | 132,819 | |
| | | | | | | | |
| | | 1,117,607 | | | | 1,312,132 | |
| | | | | | | | |
Total assets | | | 2,521,562 | | | | 2,771,418 | |
| | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Debt obligations to related parties | | | 78,000 | | | | — | |
Current portion of long-term debt | | | 941 | | | | — | |
Trade accounts payable | | | 214,744 | | | | 245,645 | |
Other payables and accrued liabilities | | | 140,148 | | | | 146,091 | |
Deferred tax liabilities | | | 1,962 | | | | 3,995 | |
| | | | | | | | |
Total current liabilities | | | 435,795 | | | | 395,731 | |
Long-term debt | | | 451,616 | | | | 450,000 | |
Debt obligations to related parties | | | 296,297 | | | | 341,822 | |
Pension liability | | | 31,290 | | | | 28,941 | |
Long-term deferred tax liabilities | | | — | | | | 3,640 | |
Other non-current liabilities | | | 45,862 | | | | 40,423 | |
| | | | | | | | |
Total Liabilities | | | 1,260,860 | | | | 1,260,557 | |
Commitments and contingencies (Note 22) | | | | | | | | |
Share Capital: | | | | | | | | |
Common stock (Ordinary shares: 250,000,000 shares authorized, 210,700,758 shares issued) | | | 332,703 | | | | 332,703 | |
Preferred stock (Preferred A shares: 14,204,545 shares authorized and issued, PreferredA-1 shares: 142,045 shares authorized, none issued) | | | 22,429 | | | | 22,429 | |
Additional paid-in capital | | | 1,420,244 | | | | 1,420,244 | |
| | | | | | | | |
| | | 1,775,376 | | | | 1,775,376 | |
Accumulated deficit | | | (517,601 | ) | | | (270,821 | ) |
Accumulated other comprehensive income | | | 2,927 | | | | 6,306 | |
| | | | | | | | |
Shareholders’ equity | | | 1,260,702 | | | | 1,510,861 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 2,521,562 | | | $ | 2,771,418 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-84
NUMONYX HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 2009 and nine month period ended December 31, 2008
In thousands of US dollars
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (246,780 | ) | | $ | (270,821 | ) |
Adjustments to reconcile net loss to cash flows generated from / (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | 243,048 | | | | 171,349 | |
Amortization of debt guarantees | | | 36,999 | | | | 27,750 | |
Non-cash interest expense | | | 32,475 | | | | 22,734 | |
Changes in deferred income taxes | | | 1,979 | | | | (18,446 | ) |
Income from equity investment | | | (11,605 | ) | | | (5,748 | ) |
Impairment and restructuring charges, net of cash payments | | | 17,942 | | | | 70,541 | |
Gain on sale of other non-current assets | | | (1,157 | ) | | | (2,770 | ) |
Other non-cash items | | | 6,445 | | | | (8,965 | ) |
Changes in assets and liabilities: | | | | | | | | |
Trade accounts receivable, net | | | 57,163 | | | | (230,901 | ) |
Inventories | | | 71,140 | | | | (1,035 | ) |
Trade accounts payable | | | (30,901 | ) | | | 58,052 | |
Other assets and liabilities, net | | | (24,075 | ) | | | 171,738 | |
| | | | | | | | |
Net cash generated from / (used in) operating activities | | | 152,673 | | | | (16,522 | ) |
Cash flows from investing activities: | | | | | | | | |
Payment for purchase of tangible assets | | | (66,907 | ) | | | (78,100 | ) |
Proceeds from sales of tangible assets | | | 5,984 | | | | 4,579 | |
Investments in intangible assets | | | (16,500 | ) | | | (48,600 | ) |
Changes in restricted cash | | | (4,194 | ) | | | (29,786 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (81,617 | ) | | | (151,907 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from borrowings, net of issuance costs | | | — | | | | 444,410 | |
Proceeds from issuance of preference shares | | | — | | | | 131,155 | |
Proceeds from issuance of related party loan note | | | — | | | | 19,087 | |
Cash received as part of business combination | | | — | | | | 50,587 | |
Repayments of debt | | | (887 | ) | | | — | |
| | | | | | | | |
Net cash (used in) / provided by financing activities | | | (887 | ) | | | 645,239 | |
Net cash increase | | $ | 70,169 | | | $ | 476,810 | |
Cash and cash equivalents at beginning of the period | | | 476,810 | | | | — | |
| | | | | | | | |
Cash and cash equivalents at end of the period | | $ | 546,979 | | | $ | 476,810 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Interest paid | | | (5,500 | ) | | | (11,847 | ) |
Income taxes paid | | | (22,040 | ) | | | (12,300 | ) |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
Upon formation, Numonyx Holdings B.V. acquired the contributed assets of Intel | | | | | | | | |
Corporation’s NOR flash business. Details of the transaction were as follows: | | | | | | | | |
Value of non cash assets contributed by Intel Corporation | | | — | | | | 771,313 | |
Common stock issued | | | — | | | | (677,472 | ) |
Related party note issued | | | — | | | | (144,428 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-85
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated
| | | | |
| | | | | Common
| | | | | | Preferred
| | | Additional
| | | | | | Other
| | | Total
| |
| | Common
| | | Stock
| | | Preferred
| | | Stock
| | | Paid in
| | | Accumulated
| | | Comprehensive
| | | Shareholders’
| |
| | Stock | | | (Shares) | | | Stock | | | (Shares) | | | Capital | | | Deficit | | | income | | | Equity | |
|
Balance at March 30, 2008 | | $ | 172,531 | | | | 109,263,907 | | | | | | | | | | | $ | 794,218 | | | | | | | | | | | $ | 966,749 | |
Issuance of common stock | | | 160,172 | | | | 101,436,851 | | | | | | | | | | | | 517,300 | | | | | | | | | | | | 677,472 | |
Issuance of preferred stock | | | | | | | | | | $ | 22,429 | | | | 14,204,545 | | | | 108,726 | | | | | | | | | | | | 131,155 | |
Net loss | | | | | | | | | | | | | | | | | | | | | | $ | (270,821 | ) | | | | | | | (270,821 | ) |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 6,306 | | | | 6,306 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | $ | 332,703 | | | | 210,700,758 | | | $ | 22,429 | | | | 14,204,545 | | | $ | 1,420,244 | | | $ | (270,821 | ) | | $ | 6,306 | | | $ | 1,510,861 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | (246,780 | ) | | | | | | | (246,780 | ) |
Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,379 | ) | | | (3,379 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | $ | 332,703 | | | | 210,700,758 | | | $ | 22,429 | | | | 14,204,545 | | | $ | 1,420,244 | | | $ | (517,601 | ) | | $ | 2,927 | | | $ | 1,260,702 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-86
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Numonyx Holdings B.V. (“Numonyx” or “the Company”) is a global manufacturer of non-volatile memory solutions (also commonly referred to as flash memory products). Numonyx focuses on supplying non-volatile memory solutions for a variety of consumer and industrial devices including cellular phones, MP3 players, digital cameras, computers and other high-tech equipment. The Company was formed in 2008 to be the holding company for the combination of the entire flash memory business of ST Microelectronics (‘STM’), of part of the NOR flash memory business of Intel Corporation (‘Intel’), and a cash investment from a private equity firm, Francisco Partners (‘FP’). STM, Intel and FP own 48.6%, 45.1% and 6.3% voting ownership in Numonyx, respectively.
Since the Company’s formation, to support the establishment and stabilization of Numonyx, STM and Intel provided certain services to Numonyx including supply chain, procurement, site manufacturing, information technology, human resource, and finance &’ accounting services. Numonyx compensated STM and Intel for such services in accordance with the terms of the Transition Services Agreements’ which govern the provision of these services. Details of these transactions are included within Note 23, ‘Related Party Transactions’, in the consolidated financial statements.
In accordance with US GAAP, the formation of Numonyx was considered a business combination and STM was considered the accounting acquirer. The impact of this determination is that Numonyx recorded assets contributed by STM at net book value, and assets contributed by Intel at fair market value.
On March 30, 2008 the Company acquired the contributed NOR flash business of Intel in exchange for a 45.1% equity interest in the Company, representing 101,436,851 ordinary shares of Numonyx Holdings B.V. and an interest-bearing long-term loan note in the principal amount of $144.4 million. The results of these operations have been included in the consolidated financial statements since that date.
The aggregate purchase price of the business from Intel was $822 million. The value of the business was determined based on third party valuations of the contributed business performed using a combination of discounted cash flows and market comparable data.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.
| | | | |
| | 2008 | |
|
At March 30, 2008 (In Millions) | | | | |
Cash | | $ | 51 | |
Inventory | | | 239 | |
Fixed assets | | | 356 | |
Intangible assets | | | 114 | |
Fair value of favorable operating lease | | | 70 | |
Liabilities assumed | | | (8 | ) |
| | | | |
Total | | $ | 822 | |
| | | | |
Of the $114 million of acquired intangible assets, $5 million was assigned to research and development assets that were written off at the date of acquisition in accordance with US GAAP. Those write-offs are included in research and development expenses. The remaining $109 million of acquired intangible assets have a weighted-average useful life of approximately 3 years. The intangible assets that make up that amount include a loan guarantee of $79 million(4-year useful life), supply agreement of $19 million(9-month useful life) and product and process technology of $11 million(3-year and7-year useful lives respectively).
There was no goodwill associated with this business combination.
Given the Company’s inception on March 30, 2008, the 2008 financial statements include only the 9 month period ended December 31, 2008.
F-87
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). All balances and values in the current period are shown in thousands of US dollars unless otherwise stated.
2.1 — Principles of Consolidation
The consolidated financial statements include the accounts of Numonyx Holdings B.V. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. The Company uses the equity method to account for equity investments in instances in which it owns common stock or similar interests and has the ability to exercise significant influence, but not control, over the investee. The Company’s share in its equity investment’s profit and loss is recognized in the consolidated statement of operations as ‘Income from equity investment’ and in the consolidated balance sheet as an adjustment against the carrying amount of the investment.
Certain amounts for prior years have been reclassified to conform with the current year financial statement presentation.
2.2 — Use of Estimates
The preparation of consolidated financial statements and disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting period. The primary areas that require significant estimates and judgments by management include sales returns and allowances, allowance for doubtful accounts, inventory reserves and normal manufacturing thresholds to determine costs capitalized in inventory, restructuring charges, assumptions used in calculating pension obligations and deferred income tax assets and liabilities including required valuation allowances. The actual results experienced by the Company could differ materially and adversely from management’s estimates.
2.3 — Foreign Currency
The U.S. dollar is the reporting currency of the Company. The U.S. dollar is the currency of the primary economic environment in which the Company operates since the worldwide semiconductor industry uses the dollar as a currency of reference for actual pricing in the market. The U.S. dollar is the functional currency for the Company and its subsidiaries. The Company’s equity investment has a functional currency other than the US dollar. Monetary transactions and accounts denominated innon-U.S. currencies, such as cash or payables to vendors, have been remeasured to the U.S. dollar at current exchange rates; non-monetary items such as inventory and fixed and intangible assets, are remeasured at historical exchange rates.
2.4 — Revenue Recognition
In accordance with U.S. GAAP, revenue from products sold to customers is recognized when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) selling price is fixed or determinable; and (d) collection is reasonably assured. This usually occurs at the time of shipment except for sales to certain distribution customers.
During 2008, STM and Intel sold products to, and invoiced customers on behalf of the Company. Billings and related returns and provisions information was then communicated to the Company and recorded in the Company’s financial systems. Revenue was therefore generated in accordance with the terms and conditions of sale of STM and Intel, and recognized in accordance with STM and Intel’s existing policies and procedures. In December 2008, the arrangement with STM ceased and Numonyx began to bill customers directly, in accordance with the Company’s own established terms and conditions.
During 2009, in addition to revenue generated directly by Numonyx, Intel continued to sell products to customers, invoice customers and collect monies due from customers on behalf of the Company. Billings and related returns and provisions information was then communicated to the Company and recorded in the Company’s financial systems. The revenue generated through Intel continued to be generated in accordance with the terms and conditions of sale of Intel, and therefore continued to be recognized in accordance with Intel’s existing policies and
F-88
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
procedures. Differences exist between Numonyx terms and conditions of sale and those of Intel. These are described below.
Consistent with standard business practice in the memory industry, price protection is granted to distribution customers on their existing inventory of the Company’s products to compensate them for declines in market prices. For revenue generated directly by Numonyx to distribution customers which relates primarily to revenues assumed from the legacy STM business, revenue is recorded when inventory is shipped. At the time revenue is recorded, the Company records estimated reductions to sales based upon historical experience of product returns, and the impact of price protection. In order to make such estimates, the Company analyzes historical returns, current economic conditions, customer demand and any relevant specific customer information. If the Company is unable to reasonably estimate the level of product returns or other revenue allowances, it could have a significant impact on revenue recognition, potentially requiring deferral of the recognition of additional sales until customers sell the products to their end customers.
For revenue generated through Intel for distribution customers, the Company is unable to reasonably estimate the level of product returns and the impact of price protection based on the terms and conditions of arrangements entered into between Intel and our customers. The Company defers revenue and its related cost of sales, under agreements allowing price protection and /or right of return until the distributors sell the merchandise to their end customers. The net amount is recorded as deferred income on shipments to distributors and is included within ‘Other payables and accrued liabilities’ in the consolidated balance sheet.
Pricing allowances, including discounts based on contractual arrangements with customers, are recorded when revenue is recorded as a reduction to both accounts receivable and revenue.
The Company’s customers occasionally return products for technical reasons. The Company’s standard terms and conditions of sale provide that, if the Company determines that the products are non-conforming, the Company will repair or replace the non-conforming products, or issue a credit or rebate of the purchase price. The Company estimates returns at the time of sale and records the accrued amounts as a reduction of revenue.
The Company includes shipping charges billed to customers in net sales, and includes the related shipping costs in cost of sales.
2.5 — Other revenue
Other revenues consist primarily of sales of materials or scrap product.
2.6 — Research and Development
Research and development costs are charged to expense as incurred. The amortization recognized on technologies and licenses acquired to facilitate the Company’s research is recorded as research and development expenses. Funding for research and development is obtained from governmental agencies and the amounts are recorded as a reduction to research and development expenses.
2.7 — Property, Plant and Equipment
Property, plant, and equipment contributed from STM and Intel upon the formation of the Company were initially stated at carrying value for the assets contributed by STM, and at fair value for the assets contributed by Intel, consistent with the treatment of the formation of the Company as a business combination in accordance with U.S. GAAP and with the determination of STM being the accounting acquirer in the business combination. These assets are being depreciated over their respective remaining useful lives at the time of the transaction. Property, plant and equipment purchased since the formation of the Company are stated at historical cost.
Additions and major improvements are capitalized, minor replacements and repairs and maintenance are charged to operations in the period in which they are incurred.
F-89
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Land is not depreciated. Depreciation on fixed assets acquired after the formation of the Company is computed using the straight-line method over the following estimated useful lives:
| | |
Buildings | | 33 years |
Facilities and Leasehold Improvements | | 5-10 years |
Machinery and Equipment | | 6 years |
Computer and Research & Development Equipment | | 3-7 years |
Reviews are performed if facts and circumstances indicate that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. If an impairment indicator exists, the Company assesses the recoverability of its assets held for use by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is measured on the excess of the carrying amount over the fair value of those assets. If the Company determines that the useful lives are shorter than originally estimated, the net book values of the assets are depreciated prospectively over the newly determined remaining useful lives.
Property, plant and equipment is reclassified as held for sale and depreciation ceases to be recorded when an asset or asset group meets the held for sale criteria as defined under U.S. GAAP. An impairment charge may be taken against the assets if the estimated selling price is less than the carrying value of the assets.
When property, plant and equipment are retired, sold, or otherwise disposed of, the net book value of the assets is removed from the Company’s books and the net gain or loss is included in ‘Other income and expenses, net’ in the consolidated statement of operations.
Leasing agreements in which a significant portion of the risks and rewards of ownership are retained by the Company are classified as finance leases. These leases are included in ‘Property, Plant and Equipment’ and depreciated over the shorter of the estimated useful life or the lease term. Leasing agreements classified as operating leases are arrangements in which the lessor retains a significant portion of the risks and rewards of ownership of the leased asset. Payments made under operating leases are charged to the consolidated statement of operations on a straight-line basis over the period of the lease.
2.8 — 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 over the average period of inventory holding; the cost is therefore dependent on the Company’s 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 in the period incurred. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
The Company continuously evaluates the net realizable value of inventory and writes off inventory which has the characteristics of slow-moving, old production date and technical obsolescence. Additionally, the Company evaluates 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 and anticipated future sales, order backlog and production plans.
2.9 — Income Taxes
The provision for incomes 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 tax jurisdiction. Deferred tax assets and liabilities are recorded for all temporary differences arising between the tax and book basis of assets and liabilities and for the benefits of tax credits and operating loss carryforwards. Deferred income tax is determined using tax rates and laws that are enacted on the balance sheet date and that are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized in full but the Company assesses whether it is more likely than not that future taxable profit will be available against which the temporary differences will 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.
F-90
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.10 — Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand with external financial institutions with an original maturity of less than ninety days.
2.11 — Restricted Cash
Restricted cash includes collateral deposits used as security for the provision of certain services to the Company, lease deposits on office space and deposits required by customs authorities. The restricted cash is held in highly liquid funds placed with financial institutions.
2.12 — Trade Accounts Receivable
Trade accounts receivable are recognized at their sales value, net of allowances for doubtful accounts and sales returns. 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. When a trade receivable is uncollectible, it is written-off against the allowance account for trade receivables. Subsequent recoveries, if any, of amounts previously written-off are credited against ‘Selling, general and administrative expenses’ in the consolidated statement of operations.
In addition to revenue generated directly by Numonyx, during 2009 Intel sold products to customers, invoiced customers and collected monies due from customers on behalf of the Company, under the terms of the Transition Services Agreement between Numonyx and Intel. Trade accounts receivable disclosed on the balance sheet related to revenue generated by Intel represent monies owed from end customers which have not been collected by Intel, and therefore not yet remitted to Numonyx.
2.13 — Intangible Assets
Details of intangible assets held by the Company, and the related amortization periods, are detailed below:
| | | | |
Loan guarantees | | | 4 years | |
Loan arrangement fees | | | 4 years | |
Contributed technology | | | 3-7 years | |
Software and licenses | | | 3-5 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.
The Company evaluates the remaining useful life of intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.
2.14 — Employee Benefits
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 for a defined contribution plan if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
The Company accounts for the overfunded and underfunded status of defined benefit plans in its consolidated financial statements as at December 31, 2009. The overfunded or underfunded status of the defined benefit plans are calculated as the difference between the fair value of plan assets and the projected benefit obligations.
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
F-91
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Termination Benefits
Termination benefits are payable when an employee is involuntarily terminated, or whenever an employee accepts voluntary termination in exchange for these benefits. All termination benefits payable by the Company relate to one-time benefit 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.
Stock Options
During 2008, an equity incentive plan was established by the Company but no equity grants were made. During 2009, the first restricted stock unit grants were issued from the plan. Under the terms of the plan, vesting is contingent upon a qualified public offering of shares in the Company, or other change in control of the Company occurring. As at December 31, 2009, a qualified public offering was not imminent and a change in control of the Company was not considered probable and therefore no stock based compensation expense has been recorded in the consolidated statement of operations for the year ended December 31, 2009.
2.15 — Long Term Debt and Debt Obligations to Related Parties
Bank loans are recognized at historical cost. Debt obligations to related parties relate to long-term loan notes issued to shareholders in partial consideration for the assets contributed upon the formation of Numonyx, plus the interest accrued to date. The bank loan is classified as a long term liability as it is not repayable, either in part or fully, before December 31, 2010. The element of debt obligations to related parties which is expected to be repaid before December 31, 2010 is classified as a short term liability, the remainder are classified as long term liabilities.
2.16 — Share Capital
Ordinary shares and preference shares are classified as equity.
2.17 — Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business during a period except those changes resulting from investment by or distributions to shareholders. In the accompanying consolidated financial statements, ‘Accumulated other comprehensive loss’ consists of the after tax effects of foreign currency translation adjustments relating to the Company’s equity investment and the impact of recognizing the underfunded status of defined benefit plans.
2.18 — Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 810 (originally issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”. Among other items, ASC 810 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities. ASC 810 is effective for calendar year companies beginning on January 1, 2010. The Company does not believe the adoption of ASC 810 will have a significant impact on its financial position, results of operations, cash flows, or disclosures.
On September 23, 2009, the FASB ratified Emerging Issues Task Force IssueNo. 08-1, “Revenue Arrangements with Multiple Deliverables”(EITF 08-1).EITF 08-1 updates the current guidance pertaining to multiple-element revenue arrangements included in ASC Subtopic605-25, which originated primarily fromEITF 00-21, also titled “Revenue Arrangements with Multiple Deliverables.”EITF 08-1 will be effective for annual reporting periods beginning January 1, 2011 for calendar-year entities. The Company does not believe the adoption ofEITF 08-1 will have a significant impact on its financial position, results of operations, cash flows, or disclosures.
F-92
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has evaluated subsequent events through February 28, 2010, the date the Company’s consolidated financial statements were issued.
Hynix Numonyx Semiconductor Ltd.
Upon the formation of Numonyx, STM transferred a 17% equity interest it had in a venture which it established with Hynix Semiconductor Inc. This venture was originally established in 2004 via a signed agreement between STM and Hynix Semiconductor Inc. to build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. Upon transfer of the interest to Numonyx, the venture was renamed Hynix Numonyx Semiconductor Ltd.
Numonyx’ equity interest in the venture decreased to 16% during the fourth quarter of 2008, due to an additional investment made by a new investor in the venture, Hynix Semiconductor Wuxi Ltd. Since then, Numonyx has invested an additional $100 million in the joint venture ($50 million investment made in both 2008 and 2009) to increase the Company’s equity interest. However, at the balance sheet date, Numonyx had not received final approval from the Chinese authorities for these increases in equity investment. As such, the $100 million investment is recorded as a long term prepayment within ‘Other non-current assets’ in the consolidated balance sheet. Once approval is obtained, the investment will be recorded as an increase to ‘Equity investment’, and Numonyx’ interest will increase to 21%. In 2008, the $50 million investment made was originally recorded within ‘Other current receivables and assets’ in the consolidated balance sheet. Due to the length of time being taken to obtain approval, and absent a definitive date of when approval will be obtained, the $50 million investment was reclassified to ‘Other non-current assets’.
Under the terms of the joint venture, Numonyx has the option to purchase from Hynix Semiconductor Inc. an additional $150 million in share capital to increase the Company’s interest in the venture to approximately 25%. The members of the joint venture also have certain put and call rights (i.e., the right to “put” and sell their interest to the other member or to “call” and purchase the other member’s interest), with the price being based on the book value, less liabilities, times the applicable ownership percentage. In the case of the contemplated change in control of Numonyx as described in Note 24, ‘Subsequent events’, Numonyx would have the right to “put” its interest to Hynix and this would also trigger the ability of Hynix to “call” the Numonyx interest. In addition, as happened with the transfer of STM’s interest to Numonyx upon formation of the Company, Hynix could be requested to agree to the change of control and Numonyx’s interest could be transferred to the new controlling entity, Micron Technology Inc. Such changes are also subject to and contingent upon multiple levels of Chinese governmental approvals. The Company believes that there is no fair value associated with these options.
Although the Company does not currently own 20% of the venture, the Company uses the equity method to account for this investment based on the fact that it has the ability to exercise significant influence, but not control, over this investee coupled with the future ability to own more than 20% of this investment.
Summarized financial information of the Company’s equity investment is shown below:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Operating results: | | | | | | | | |
Revenues | | $ | 1,557,184 | | | $ | 1,772,070 | |
Net profit | | | 74,392 | | | | 14,442 | |
Balance sheet: | | | | | | | | |
Assets | | $ | 3,732,933 | | | $ | 4,103,446 | |
Liabilities | | | 1,691,583 | | | | 2,168,779 | |
F-93
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
4. | TRADE ACCOUNTS RECEIVABLE, NET |
Trade accounts receivable, net consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Trade accounts receivable | | $ | 175,993 | | | $ | 233,340 | |
Less allowance for doubtful accounts | | | (2,255 | ) | | | (2,439 | ) |
| | | | | | | | |
Total | | $ | 173,738 | | | $ | 230,901 | |
| | | | | | | | |
Bad debt expense in 2009 was $2.2 million (2008: $2.4 million).
Inventories consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Raw materials | | $ | 3,612 | | | $ | 2,712 | |
Work in process | | | 403,337 | | | | 478,728 | |
Finished goods | | | 104,051 | | | | 100,700 | |
| | | | | | | | |
Total | | $ | 511,000 | | | $ | 582,140 | |
| | | | | | | | |
On December 30, 2009, an option agreement was signed by the Company, granting STM the option to acquire the majority of the assets at the Company’s facility in Catania, Italy, including the factory building, office building and the majority of the tools and equipment located in the plant. In addition, a number of employees would transfer to STM upon execution of the option, along with all contracts related to the facilities and any other assets, liabilities and rights relating to the facilities. The agreement also specifies that the tax carrying amount of assets and any non-operating losses would also be transferred as part of the sale. Upon execution of the option, the consideration payable would be the cancellation of $78 million of long term notes held by STM. The option agreement expires on June 30, 2010, with an option to extend by a further three months, subject to agreement by the Company.
As a result of entering into this agreement, and upon meeting the held for sale criteria as defined under U.S. GAAP, the Company reclassified the assets to be sold from their original balance sheet classification to ‘Assets held for Sale’ and adjusted the values of these assets to fair value less costs to sell at December 31, 2009, recording the charge within ‘Impairment and restructuring charges’ in the consolidated statement of operations. Fair value less costs to sell was based on the net consideration provided for in the option agreement.
Assets held for sale consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Property, plant and equipment | | $ | 45,733 | | | | — | |
Long term deferred tax assets | | | 36,114 | | | | — | |
Less impairment charge | | | (3,847 | ) | | | — | |
| | | | | | | | |
Total | | $ | 78,000 | | | | — | |
| | | | | | | | |
As required by U.S. GAAP, the Company has ceased to record depreciation on the property, plant and equipment classified as held for sale.
F-94
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
7. | OTHER RECEIVABLES AND CURRENT ASSETS |
Other receivables and current assets consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Receivables from related parties | | $ | 1,622 | | | $ | 2,491 | |
Receivables from government agencies | | | 54,460 | | | | 65,716 | |
Prepayments, advances and other debtors | | | 25,678 | | | | 90,851 | |
| | | | | | | | |
Total | | $ | 81,760 | | | $ | 159,058 | |
| | | | | | | | |
In 2008, Prepayments, advances and other debtors included $50 million relating to a payment made to increase the Company’s equity stake in Hynix Numonyx Semiconductor Ltd. but for which approval from Chinese authorities had not been obtained, as described in Note 3, ‘Equity Investment’. During 2009, this payment was reclassified to ‘Other investments and non-current assets’ as approval had still not been obtained and the date of final approval is not known.
Intangible assets consisted of the following as at December 31, 2009:
| | | | | | | | | | | | |
| | | | | Accumulated
| | | | |
| | Gross Value | | | Amortization | | | Net Value | |
|
Loan guarantees | | $ | 148,000 | | | $ | (64,749 | ) | | $ | 83,251 | |
Loan arrangement fees | | | 6,750 | | | | (2,954 | ) | | | 3,796 | |
Product and process technology | | | 10,800 | | | | (3,752 | ) | | | 7,048 | |
Software development and licenses | | | 77,767 | | | | (22,221 | ) | | | 55,546 | |
| | | | | | | | | | | | |
December 31, 2009 | | $ | 243,317 | | | $ | (93,676 | ) | | $ | 149,641 | |
| | | | | | | | | | | | |
During 2009, the Company capitalized $16.5 million (2008: $48.6 million) of software and licenses and software development costs related to significant system implementations and changes that the Company has undertaken since its formation. In addition the Company fully impaired self developed software of $14.9 million during the year. The software was contributed by STM upon the formation of Numonyx and had never been put into use by the Company. The impairment is recorded within ‘Impairment and restructuring charges’ in the consolidated statement of operations.
Intangible assets consisted of the following as at December 31, 2008:
| | | | | | | | | | | | |
| | | | | Accumulated
| | | | |
| | Gross Value | | | Amortization | | | Net Value | |
|
Loan guarantees | | $ | 148,000 | | | $ | (27,750 | ) | | $ | 120,250 | |
Loan arrangement fees | | | 6,750 | | | | (1,266 | ) | | | 5,484 | |
Product and process technology | | | 10,800 | | | | (1,608 | ) | | | 9,192 | |
Software development and licenses | | | 76,256 | | | | (2,860 | ) | | | 73,396 | |
Supply agreement | | | 18,982 | | | | (18,982 | ) | | | — | |
| | | | | | | | | | | | |
December 31, 2008 | | $ | 260,788 | | | $ | (52,466 | ) | | $ | 208,322 | |
| | | | | | | | | | | | |
In March 2008, the Company obtained a $450 million bank loan plus $100 million revolving credit facility from financial institutions. These facilities are repayable in full on March 25, 2012. STM and Intel agreed to act as guarantors of the facilities, each company guaranteeing 50% of the outstanding balance in the event that Numonyx defaults on repayment. Both guarantees were recorded as intangible assets in order to recognize the fair value of the benefit to Numonyx of these guarantees. The guarantees were recorded at fair value at the date of issuance and are being amortized over the term of the loan, 4 years. The amortization is recorded as interest expense.
Loan arrangement fees are costs directly related to the securing of the debt financing described above. These fees are also being amortized over the 4 year period of the loan and are recorded as part of ‘Interest expense, net’ in the consolidated statement of operations.
F-95
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product and process technology relates to technologies contributed by Intel to Numonyx upon formation of the Company. The technologies were recorded at fair value and are being amortized over their expected useful lives, 3 and 7 years respectively, within cost of sales in the consolidated statement of operations.
Software development and licenses consist of costs relating to the development of IT systems and software and of software and related licenses acquired. Software development costs include external consulting costs and payroll costs directly associated with development of the system infrastructure. These costs were capitalized in accordance with U.S. GAAP. Software and licenses are currently amortized over a period of between 3 and 5 years and amortization is recorded primarily within ‘Selling, general and administrative expenses’ within the consolidated statement of operations, starting when the software is placed in operation.
The aggregate amortization expense in 2009 was $60.2 million (2008: $52.5 million).
The estimated amortization of the existing intangible assets for the following years is:
| | | | |
| | Amortization
| |
Year | | Expense | |
|
2010 | | $ | 64,000 | |
2011 | | | 60,000 | |
2012 | | | 15,000 | |
2013 | | | 5,000 | |
2014 | | | 4,000 | |
| | | | |
Total | | $ | 148,000 | |
| | | | |
| |
9. | PROPERTY, PLANT, AND EQUIPMENT |
Property, plant, and equipment consist of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Land | | $ | 570 | | | $ | 2,515 | |
Buildings, facilities and leasehold improvements | | | 56,967 | | | | 89,582 | |
Machinery and Equipment | | | 637,602 | | | | 597,187 | |
Computer and R&D Equipment | | | 18,938 | | | | 16,951 | |
Other Tangible Assets | | | 3,046 | | | | 2,123 | |
Construction in progress | | | 7,276 | | | | 2,000 | |
| | | | | | | | |
Total Gross Cost | | $ | 724,399 | | | $ | 710,358 | |
Total Accumulated Depreciation | | $ | (358,498 | ) | | $ | (146,633 | ) |
| | | | | | | | |
Total Net Cost | | $ | 365,901 | | | $ | 563,725 | |
| | | | | | | | |
Depreciation expense for 2009 was $219.8 million (2008: $146.6 million). There is no depreciation expense on construction in progress.
During 2008, the Company determined that due to changes in market conditions the carrying value of its partially constructed building in Catania, Italy should be re-assessed. This building, in order to be placed into service, requires a significant investment of additional capital to purchase and install tools and equipment which cannot be currently justified. The Company determined that the value at which this building was recorded was in excess of a reasonable assessment of its fair market value. The fair market value is based on a range of values from a third party with the experience of valuing such assets and its own assessment. The resultant impairment charge recorded on this asset in 2008 was $62 million which is included within ‘Impairment and restructuring charges’ in the consolidated statement of operations.
As at December 31, 2009, Property Plant and Equipment totaling $43.8 million (comprising $45.7 million original net book value less $1.9 million impairment) were reported as a component of the line ‘Assets held for Sale’ on the consolidated balance sheet, relating to the Company’s facility in Catania, Italy for which a sale option agreement was signed, as explained in Note 6, ‘Assets Held for Sale’.
F-96
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
10. | OTHER INVESTMENTS AND NON-CURRENT ASSETS |
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Payments for additional equity investment | | $ | 100,000 | | | $ | — | |
Fair value of the favorable operating lease | | | 64,511 | | | | 67,420 | |
Long term receivable related to tax refund | | | 42,128 | | | | 40,423 | |
Related party receivable | | | 24,048 | | | | 24,527 | |
Deposits | | | 3,001 | | | | 449 | |
| | | | | | | | |
Total | | $ | 233,688 | | | $ | 132,819 | |
| | | | | | | | |
The investment in related party relates to payments made to Hynix Numonyx Semiconductor Ltd., to increase the Company’s equity stake in the Company, but which have not yet been approved by Chinese authorities, as explained in Note 3, ‘Equity Investment’. This includes $50 million which in 2008 was recorded within ‘Other receivables and current assets’ and which was reclassified to ‘Other investments and non-current assets’ during 2009.
The favorable operating lease relates to the Company’s manufacturing facility in Israel. This relates to the fair value of the future minimum lease payments that were included as part of the assets contributed by Intel upon the formation of Numonyx. This is being amortized over the period of the lease, 24 years.
The long term receivable related to tax refund is a tax credit in Italy which was generated through the operations of STM Italy, before the operations were contributed to Numonyx. Upon the formation of Numonyx, a long term liability was established as the amounts received from the Italian government will be reimbursed to STM. Such amount is included within ‘Other non-current liabilities’ in the consolidated balance sheet.
The related party receivable relates to an end of employment liability in Italy, for employees transferred from STM Italy to Numonyx Italy and for which STM have agreed to reimburse Numonyx. The payable portion of this balance is also included within pension liability in the consolidated balance sheet.
Deposits relate mainly to rental deposits on leased office buildings and deposits paid to service providers.
| |
11. | OTHER PAYABLES AND ACCRUED LIABILITIES |
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Taxes other than income tax | | $ | 12,327 | | | $ | 33,360 | |
Salaries, wages and social charges | | | 66,960 | | | | 37,747 | |
Provision for restructuring | | | 4,041 | | | | 8,541 | |
Deferred income on shipments to distributors | | | 12,649 | | | | 4,525 | |
Current portion of pension liability | | | 2,268 | | | | 2,155 | |
Accrued income tax | | | 9,350 | | | | 13,035 | |
Other accrued liabilities | | | 32,553 | | | | 46,728 | |
| | | | | | | | |
Total | | $ | 140,148 | | | $ | 146,091 | |
| | | | | | | | |
Within current portion of pension liability above, $1.4 million (2008: $2.1 million) relates to the Italy end of employment fund. This amount is shown also as a receivable from related party within ‘Other investments and non-current assets’ as the amount will be reimbursed to Numonyx by STM.
| |
12. | POST-RETIREMENT AND OTHER LONG-TERM EMPLOYEE BENEFITS |
The Company has 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. Eligibility is generally determined in accordance with the local statutory requirements. The Company’s major defined benefit pension plans and long-term employee benefit plans are in Israel, Italy, Switzerland, Japan, Korea, and Philippines.
The Company adopted the provisions of U.S. GAAP which require that the funded status of defined benefit post-retirement plans be recognized on the consolidated balance sheet, and changes in the funded status be reflected
F-97
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in comprehensive income. U.S. GAAP also requires the measurement date of the plan’s funded status to be the same as the Company’s financial year-end. The measurement date for all plans was the Company’s financial year end.
On December 31, 2009, the Company adopted changes issued by the FASB to employers’ disclosures about postretirement benefit plan assets. These changes provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets. Other than the required disclosures, the adoption of these changes had no impact on the consolidated financial statements.
Funding Policy
The Company’s practice is to fund the various pension plans in amounts at least sufficient to meet the minimum requirements of applicable local laws and regulations. The assets of the various plans are invested in corporate equities, corporate debt securities, government debt securities, and other institutional arrangements. The portfolio of each plan depends on plan design and applicable local laws. Depending on the design of the plan, local customs, and market circumstances, the liabilities of a plan may exceed qualified plan assets.
Benefit Obligation and Plan Assets
The changes in the benefit obligation and plan assets for the plans described above were as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Change in projected benefit obligation: | | | | | | | | |
Benefit obligation at beginning of period | | $ | 60,165 | | | $ | 30,175 | |
Service cost | | | 5,018 | | | | 4,149 | |
Interest cost | | | 3,143 | | | | 2,703 | |
Plan participant contributions | | | 397 | | | | 278 | |
Actuarial (gain)/loss | | | 3,521 | | | | (119 | ) |
Benefits paid | | | (6,305 | ) | | | (5,375 | ) |
Benefit obligation of acquired business | | | — | | | | 38,203 | |
Currency exchange impact | | | 5,138 | | | | (9,849 | ) |
Other | | | (89 | ) | | | — | |
| | | | | | | | |
Ending projected benefit obligation | | $ | 70,988 | | | $ | 60,165 | |
| | | | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Change in plan assets: | | | | | | | | |
Fair value of the assets at beginning of the period | | $ | 29,069 | | | $ | — | |
Actual return on plan assets | | | 3,184 | | | | 176 | |
Employer contributions | | | 7,977 | | | | 7,925 | |
Plan participants’ contributions | | | 397 | | | | 278 | |
Benefits paid | | | (6,305 | ) | | | (5,375 | ) |
Plan assets of acquired business | | | — | | | | 31,161 | |
Currency impact | | | 1,486 | | | | (5,096 | ) |
Other | | | 1,622 | | | | — | |
| | | | | | | | |
Ending fair value of plan assets | | $ | 37,430 | | | $ | 29,069 | |
| | | | | | | | |
F-98
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the consolidated balance sheet are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Current liabilities | | $ | 2,268 | | | $ | 2,155 | |
Non-current liabilities | | | 31,290 | | | | 28,941 | |
| | | | | | | | |
Total | | $ | 33,558 | | | $ | 31,096 | |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive income / (loss) net of taxes are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Net actuarial loss | | $ | (2,916 | ) | | $ | (414 | ) |
| | | | | | | | |
Total | | $ | (3,327 | ) | | $ | (417 | ) |
| | | | | | | | |
The estimated amounts that will be amortized from ‘Accumulated other comprehensive loss’ at December 31, 2009 into net periodic benefit cost (pre-tax) in 2010 is $0.1 million.
Change in accumulated other comprehensive income (loss) net of taxes are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Net actuarial loss at beginning of the period | | $ | (417 | ) | | $ | — | |
Amortization of actuarial loss | | | 370 | | | | — | |
Current year actuarial loss | | | (3,280 | ) | | | (417 | ) |
| | | | | | | | |
Total | | $ | (3,327 | ) | | $ | (417 | ) |
| | | | | | | | |
Included in the aggregate data in the tables below are the amounts applicable to our pension plans with accumulated benefit obligations in excess of plan assets, as well as plans with projected benefit obligations in excess of plan assets. Amounts related to such plans were as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Plans with accumulated benefit obligations in excess of plan assets: | | | | | | | | |
Accumulated benefit obligations | | $ | 69,420 | | | $ | 56,950 | |
Fair value of plan assets | | $ | 37,430 | | | $ | 28,863 | |
Plans with projected benefit obligations in excess of plan assets: | | | | | | | | |
Projected benefit obligations | | $ | 70,988 | | | $ | 60,165 | |
Fair value of plan assets | | $ | 37,430 | | | $ | 29,069 | |
Assumptions
Weighted-average assumptions used in the determination of the benefit obligations were as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Discount rate | | | 5.09 | % | | | 5.19 | % |
Average increase in compensation | | | 3.90 | % | | | 3.24 | % |
Weighted-average actuarial assumptions used to determine costs for the plans were as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Discount rate | | | 5.19 | % | | | 5.64 | % |
Expected long term rate on plan assets | | | 4.88 | % | | | 5.35 | % |
Average increase in compensation | | | 3.24 | % | | | 4.30 | % |
The discount rate was determined by analyzing long term corporate AA bond rates and matching the bond maturity with the average duration of the pension liabilities. In certain markets where there are not corporate bonds, government bond rates are used.
F-99
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Periodic Benefit Cost
The net periodic benefit cost for the plans included the following components:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Service cost | | $ | 5,018 | | | $ | 4,149 | |
Interest cost | | | 3,143 | | | | 2,703 | |
Expected return on plan assets | | | (1,581 | ) | | | (1,322 | ) |
Other | | | (632 | ) | | | 678 | |
| | | | | | | | |
Net periodic pension cost | | $ | 5,948 | | | $ | 6,208 | |
| | | | | | | | |
Plan Assets
The plans’ investments are managed predominantly by insurance companies, and to a lesser extent by third-party trustees, or pension funds consistent with regulations or market practice of the country where the assets are invested. Investments that are managed by qualified insurance companies or pension funds under standard contracts follow local regulations, and the Company is not actively involved in the investment strategy. In general, the investment strategy followed is designed to accumulate a diversified portfolio among markets, asset classes, or individual securities in order to reduce market risk and assure that the pension assets are available to pay benefits as they come due. Alternatively, individual plan members may decide on individual investment strategies for their plan. As such, the Company does not set target allocations of plan assets and does not measure actual allocations of plan assets versus target allocations.
The fair value of plan assets by asset type as at December 31, 2009 are summarized below:
| | | | | | | | | | | | | | | | |
| | | | | Quoted Prices
| | | | | | | |
| | | | | in Active
| | | | | | | |
| | | | | Markets for
| | | Significant
| | | Significant
| |
| | | | | Identical
| | | Observable
| | | Unobservable
| |
| | | | | Assets
| | | Inputs
| | | Inputs
| |
Asset Category | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
|
Insurance contracts | | $ | 37,430 | | | | — | | | $ | 37,430 | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 37,430 | | | | — | | | $ | 37,430 | | | | — | |
| | | | | | | | | | | | | | | | |
Funding Expectations
Expected funding for the plans during 2010 is approximately $7 million.
Estimated Future Benefit Payments
Estimated benefits to be paid from the Company’s pension plans through 2019 are as follows:
| | | | |
Years | | Pension Benefits | |
|
2010 | | | 4,192 | |
2011 | | | 4,909 | |
2012 | | | 4,610 | |
2013 | | | 5,225 | |
2014 | | | 5,628 | |
From 2015 to 2019 | | | 28,324 | |
| |
13. | SHARE BASED COMPENSATION |
During 2008, an equity incentive plan was established by the Company, but no equity grants were made. 25 million stock units are available for issuance under the plan. During 2009, the first restricted stock unit grants were issued from the plan. The stock units vest over 3 or 4 years from the grant date. However, vesting is also contingent upon a change in control of the Company taking place. The vesting of certain grants made to Executive Officers of the Company are contingent on certain performance targets being met each year and the change in control provision noted above.
F-100
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As the share capital of the Company is not currently traded on any Exchange, the value assigned to stock grants is based on the fair value of the equity of the Company at the time the grants were made.
Under the terms of the equity incentive plan, vesting is contingent upon a qualified public offering of shares in the Company, or other change in control of the Company occurring. As at December 31, 2009, because any change in control was contingent upon circumstances beyond the Company’s control, no stock based compensation expense has been recorded in the consolidated statement of operations for the year ended December 31, 2009.
Restricted stock unit activity during 2009 is detailed below (no restricted stock units were issued in 2008):
| | | | | | | | |
| | | | | Weighted
| |
(In thousands, except weighted average fair value amounts) | | Number of Shares | | | Average Fair Value | |
|
As at December 31, 2008 | | | — | | | $ | — | |
Granted | | | 11,180 | | | | 2.83 | |
Vested | | | — | | | | — | |
Forfeited | | | (468 | ) | | | 2.83 | |
| | | | | | | | |
As at December 31, 2009 | | | 10,712 | | | $ | 2.83 | |
| | | | | | | | |
Expected to vest as of December 31, 2009 | | | 10,712 | | | $ | 2.83 | |
| | | | | | | | |
| |
14. | LONG-TERM DEBT AND DEBT OBLIGATIONS TO RELATED PARTIES |
Debt obligations to related parties
Upon the formation of Numonyx, long-term notes were issued to STM, Intel, and FP valued at $155,572, $144,428 and $19,087 respectively. The notes are payable upon the earlier of liquidation of the Company, or March 31, 2038. The interest rate applied to these notes is 9.5% and is payable in the form of additional notes until 2015. Interest also accrues, at the same rate, on the new notes issued. After 2015, the interest is payable in the form of cash. Interest on these notes is recorded as interest expense in the consolidated statement of operations. Total interest accrued during the year ended December 31, 2009 was $32.5 million (2008: $22.7 million) and is included within ‘Debt obligations to related parties’ in the consolidated balance sheet.
The long-term loan notes include covenants which prevent the Company and its subsidiaries from taking on additional debt in excess of $100 million if the total existing debt recorded on the balance sheet is $1,250 million or less, or additional debt in excess of $50 million if the total existing debt recorded on the balance sheet is more than $1,250 million. In addition, the Company may not issue new equity or securities exchangeable into equity that would rank senior to or on parity with the long-term loan notes and may not make dividend distributions other than distributions between subsidiaries of the Company and distributions on the preferred shares. Repayment of the debt obligations to related parties is subordinated to repayment of debt obligations to third parties.
On December 30, 2009 an option agreement was signed by Numonyx and STM, granting STM the option to acquire from Numonyx the majority of the assets held at the Company’s facility in Catania, Italy. In consideration for the assets, STM agreed that $78 million of the notes issued to them by Numonyx would be cancelled on completion of the sale. As the option agreement expires on June 30, 2009 with an option to extend by a further three months, these loan notes have been reclassified to short term debt on the consolidated balance sheet.
Debt obligations to third parties
Long term debt obligations to third parties consisted of the following as at December 31, 2009:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Bank loan | | $ | 450,000 | | | $ | 450,000 | |
Finance lease obligations | | | 1,616 | | | | — | |
| | | | | | | | |
Total | | $ | 451,616 | | | $ | 450,000 | |
| | | | | | | | |
Upon formation, the Company entered into a dollar term loan facility in the amount of $450 million and a multicurrency revolving loan facility in the amount of $100 million. As at December 31, 2009, the $100 million revolving facility had not been drawn down. The facilities are repayable in full on March 25, 2012. Interest of three-
F-101
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
month LIBOR + 60 basis points is payable every 3 months and is recorded within interest expense in the consolidated statement of operations.
Covenants on the loan facility include a mandatory prepayment of 50% of the facility by the borrowers if the credit rating of either Intel or STM were to be downgraded to a rating by Moody’s that is below Baa3 or by Standard and Poor’s that is below BBB-. In addition, should Intel or STM take on debt at or in excess of $500 million, then the facility would become immediately repayable.
The assessment of fair value of the debt obligation to third parties would require the determination of an appropriate credit spread over the benchmark rates for a facility similar to that held by the Company and the application of an adjustment factor for, amongst other factors, illiquidity. The Company has not sought additional similar funding since formation, particularly given market conditions impacting the availability of credit.
Finance lease obligations relate to Machinery and Equipment purchased by the Company during the year. The short term element of finance lease obligations is recorded within ‘Current portion of long-term debt’ in the consolidated balance sheet.
Aggregate future maturities of total long term debt outstanding (including current portion) are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
2010 | | $ | 78,941 | | | | — | |
2011 | | | 1,077 | | | | — | |
2012 | | | 450,539 | | | | 450,000 | |
2013 | | | — | | | | — | |
2014 | | | — | | | | — | |
Thereafter | | | 296,297 | | | | 341,822 | |
| | | | | | | | |
Total | | $ | 826,854 | | | $ | 791,822 | |
| | | | | | | | |
| |
15. | OTHER NON-CURRENT LIABILITIES |
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Related party payable | | $ | 42,489 | | | $ | 40,423 | |
Other | | | 3,373 | | | | — | |
| | | | | | | | |
Total | | $ | 45,862 | | | $ | 40,423 | |
| | | | | | | | |
The related party payable relates to a tax credit in Italy. This tax credit, which is also shown as a long term receivable in the consolidated balance sheet of Numonyx, was generated through the operations of STM Italy, before the operations were contributed to Numonyx. Since the tax credit was generated by STM, when the tax credit is paid by the Italian authorities to Numonyx, the Company will reimburse STM.
Outstanding Shares
The authorized share capital of the Company amounts to EUR 264,205,965. It is divided into:
| | |
| • | 250,000,000 ordinary shares of one Euro each; |
|
| • | 14,204,545 convertible preferred shares ‘A’ of one Euro each; and |
|
| • | 142,045 preferred shares ‘A-1’ of one eurocent (EUR 0.01) each. |
As at December 31, 2009, 210,700,758 ordinary shares were issued.
Preference Shares
As at December 31, 2009, the Company had issued 14,204,545 convertible preferred shares ‘A’ to FP. These preference shares entitle the holder to full voting rights and to a preferential right to distributions upon liquidation or change in control of the Company. Specifically the holders are entitled to a repayment of 1.85 times the original issue price of the shares. The preferred shares ‘A’ may be converted into preferred shares ‘A-1’ or ordinary shares,
F-102
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on terms agreed between the Company and the holders of the preferred shares ‘A’. Such terms must be unanimously approved at a General Meeting of the shareholders.
The preferred shares ‘A-1’ entitle holders to a repayment of 1.85 times the original issue price of the shares and also to an amount out of the annual profits equal to 1% of the weighted average of the par value of their shares during the financial year. The dividend preference is non-cumulative. The shares also carry voting rights. No preferred shares ‘A-1’ had been issued at the balance sheet date.
| |
17. | OTHER INCOME AND EXPENSES, NET |
Other income and expenses, net, consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Start up costs | | $ | — | | | $ | 39,433 | |
Foreign exchange gains | | | (1,777 | ) | | | (986 | ) |
Gain on sale of other non-current assets, net | | | (1,157 | ) | | | (2,770 | ) |
Other | | | 2,327 | | | | 1,870 | |
| | | | | | | | |
Total | | $ | (607 | ) | | $ | 37,547 | |
| | | | | | | | |
Start up costs relate to costs incurred in the formation of Numonyx in 2008.
| |
18. | IMPAIRMENT AND RESTRUCTURING CHARGES |
Impairment and restructuring charges consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Impairment charges | | $ | 18,703 | | | $ | 62,000 | |
Restructuring charges | | | 8,701 | | | | 12,350 | |
| | | | | | | | |
Total | | $ | 27,404 | | | $ | 74,350 | |
| | | | | | | | |
The impairment charges are explained in Note 6, ‘Assets held for Sale’ and Note 8, ‘Intangible Assets’.
During 2008, the Company recorded charges of $8.6 million in employee severance costs related to a workforce reduction action in our California Technology Center and $3.4 million in employee severance costs related to personnel at Pudong, China which was originally to be part of the assets contributed by Intel to Numonyx upon formation, but which the Company decided not to acquire. These charges were incurred due to the termination of approximately 700 employees. The Company may incur additional restructuring charges in the future for employee severance and benefit arrangements, and facility-related or other exit activities.
In 2009, the Company reversed $3.7 million of the provision related to the action in the California Technology Center as a result of a subsequent decision to retain a number of employees that were previously expected to be terminated.
During 2009, the Company incurred charges of $8.1 million in employee severance costs related to a workforce reduction action across multiple sites, as part of a program to reduce costs in response to the global economic crisis. These charges were incurred due to the termination of approximately 130 employees. The Company also incurred an additional $4.3 million in employee severance costs related to personnel at Pudong, China.
The Company may incur additional restructuring charges in the future for employee severance and benefit arrangements, and facility-related or other exit activities.
F-103
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring charges incurred during 2009 and 2008 are summarized as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Provision as at January 1, 2009 | | $ | 8,541 | | | $ | — | |
Charges incurred during the period | | | 8,701 | | | | 12,350 | |
Change in estimate related to reduction in force | | | (3,739 | ) | | | — | |
Amounts paid | | | (9,462 | ) | | | (3,809 | ) |
| | | | | | | | |
Provision as at December 31, 2009 | | $ | 4,041 | | | $ | 8,541 | |
| | | | | | | | |
| |
19. | INTEREST INCOME AND EXPENSES |
Interest income and expense consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Amortization of loan guarantees | | $ | 36,999 | | | $ | 27,750 | |
Interest on debt obligations to related parties | | | 32,475 | | | | 22,734 | |
Interest on long-term debt | | | 5,488 | | | | 11,847 | |
Other interest | | | 827 | | | | 1,266 | |
| | | | | | | | |
Total interest expense | | | 75,789 | | | | 63,597 | |
Interest income | | | 1,340 | | | | 6,537 | |
| | | | | | | | |
Total interest expense, net | | $ | 74,449 | | | $ | 57,060 | |
| | | | | | | | |
The provision for income taxes consists of the following components:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Current: | | | | | | | | |
Netherlands | | $ | — | | | $ | — | |
Foreign | | | 20,800 | | | | 22,229 | |
| | | | | | | | |
Total current | | | 20,800 | | | | 22,229 | |
Deferred: | | | | | | | | |
Netherlands | | | — | | | | — | |
Foreign | | | (271 | ) | | | (3,104 | ) |
| | | | | | | | |
Total deferred | | | (271 | ) | | | (3,104 | ) |
| | | | | | | | |
Total provision for income taxes | | $ | 20,529 | | | $ | 19,125 | |
| | | | | | | | |
The loss before provision for income taxes included a loss from the Netherlands of approximately $57.6 million (2008: $273.8 million) and losses of approximately $168.7 million from other foreign subsidiaries during fiscal year 2009 (2008: income of $84.2 million).
F-104
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes differs from the amount estimated by applying the statutory Netherlands income tax rate of 25.5% to income before provision for income taxes as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Provision computed at Dutch statutory rate | | $ | (57,694 | ) | | $ | (64,182 | ) |
Foreign rate differential | | | (2,040 | ) | | | 171 | |
Permanent differences | | | 463 | | | | 3,534 | |
Research and development tax credits | | | (2,055 | ) | | | (3,427 | ) |
Current year losses not benefited | | | 78,319 | | | | 84,184 | |
Others | | | 3,536 | | | | (1,155 | ) |
| | | | | | | | |
Provision for income taxes | | $ | 20,529 | | | $ | 19,125 | |
| | | | | | | | |
Effective tax rate | | | (9.1 | )% | | | (7.6 | )% |
| | | | | | | | |
The components of deferred tax assets and liabilities consisted of the following:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Deferred tax assets: | | | | | | | | |
Accrued compensation | | $ | 2,820 | | | $ | 5,106 | |
Other reserves and accruals | | | — | | | | 658 | |
Accounts receivable | | | 157 | | | | — | |
Fixed assets | | | 60,438 | | | | 118,280 | |
Inventory | | | 4,854 | | | | — | |
Unrealized foreign exchange loss | | | 182 | | | | 660 | |
Research and development credit carryover | | | 2,618 | | | | 987 | |
Net operating loss carryover | | | 99,850 | | | | 96,678 | |
Others | | | 1,607 | | | | 5,332 | |
| | | | | | | | |
Total deferred tax assets | | | 172,526 | | | | 227,701 | |
Less: valuation allowance | | | (129,626 | ) | | | (142,229 | ) |
| | | | | | | | |
Net deferred tax assets | | | 42,900 | | | | 85,472 | |
Deferred tax liabilities: | | | | | | | | |
Accrued compensation | | | (1,643 | ) | | | — | |
Fixed assets | | | (2 | ) | | | (3,640 | ) |
Inventory | | | (169 | ) | | | (1,776 | ) |
Accounts receivable | | | (352 | ) | | | (3,205 | ) |
Unrealized foreign exchange gain | | | (822 | ) | | | — | |
Others | | | (1,140 | ) | | | — | |
| | | | | | | | |
Total deferred tax liabilities | | | (4,128 | ) | | | (8,621 | ) |
| | | | | | | | |
Total net deferred tax assets | | $ | 38,772 | | | $ | 76,851 | |
| | | | | | | | |
In addition to the net deferred tax assets shown above, $36.1 million of deferred tax assets relating to the Company’s facilities in Catania, Italy are recorded within ‘Assets held for Sale’ on the consolidated balance sheet.
In evaluating its ability to utilize its deferred tax assets in future periods, the Company considered all available positive and negative factors. The Company considered various sources of taxable income including future reversals of existing taxable temporary differences, taxable income in prior carryback years if carryback is permitted under the tax law, tax planning strategies that would, if necessary, be implemented to prevent a loss carryforward or tax credit carryforward from expiring unused and predictions of future taxable income exclusive of reversing temporary differences and carryforwards. As a result, the Company determined a valuation allowance of $129.6 million was required as at December 31, 2009 (2008: $142.2 million). After consideration of the valuation allowance, the Company had total net deferred tax assets of approximately $74.9 million as at December 31, 2009 ($36.1 million of which is classified as ‘Assets held for sale’) and $76.9 million as at December 31, 2008. The net deferred tax assets
F-105
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are primarily comprised of net operating loss carryforwards and future deductible amounts relating primarily to fixed assets.
As at December 31, 2009, the Company had net operating loss and capital allowance carryforwards of approximately $339 million combined for The Netherlands and Switzerland (2008: $270 million), $125 million in Singapore (2008: $160 million), $25 million in Italy (2008: $48 million) and $l million in the Philippines. For the carryforwards related to The Netherlands and Switzerland, the Company currently estimates that 100% relate to The Netherlands. This assumption may change. The Company, however, has recorded a full valuation allowance against this portion of the carryforwards. In addition in 2008, the Company had approximately $23 million of operating loss and capital allowances carryforwards in Malaysia, but these have been absorbed by profits earned during 2009. The net operating loss carryforwards in The Netherlands and Italy can be carried forward for 9 years and 5 years respectively. The net operating loss carryforwards in the Philippines can be carried forward for 3 years and the net operating loss carryforwards in Singapore can be carried forward indefinitely.
The expiration of the tax losses carried forward as at December 31, 2009, on which no deferred tax has been recognized, is summarized below:
| | | | | | | | |
Expires by: | | 2009 | | | 2008 | |
|
2010 | | $ | — | | | $ | — | |
2011 | | | 23,768 | | | | — | |
2012 | | | 1,937 | | | | — | |
2013 | | | — | | | | 48,000 | |
2014 | | | — | | | | — | |
After 2014 | | | 463,897 | | | | 453,000 | |
| | | | | | | | |
Total | | $ | 489,602 | | | $ | 501,000 | |
| | | | | | | | |
Unrecognized tax credits | | | 436 | | | | — | |
| | | | | | | | |
The valuation allowances are mainly provided against net deferred tax assets in the Netherlands, Italy and Singapore. In the event that all of the deferred tax assets become realizable, the reversal of the valuation allowance would result in a $129.6 million reduction in income tax expense.
Unrecognized Tax Benefits
The changes in the gross amount of unrecognized tax benefits are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Beginning of the year | | $ | 2,369 | | | $ | — | |
Gross amount of the decrease in unrecognized tax benefits of tax positions taken during a prior year | | | (629 | ) | | | — | |
Gross amount of the increases in unrecognized tax benefits as a result of tax positions taken during the current year | | | 3,460 | | | | 2,369 | |
| | | | | | | | |
End of year | | $ | 5,200 | | | $ | 2,369 | |
| | | | | | | | |
As at December 31, 2009, $5.2 million (2008: $2.4 million) of unrecognized tax benefits would, if recognized, reduce the effective tax rate.
No significant changes in unrecognized taxed benefits are anticipated within the next 12 months. The Company will re-evaluate its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled matters under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.
Upon adoption of ASC 740 the Company adopted an accounting policy to classify interest and penalties on unrecognized tax benefits as income tax expense. The total amount of interest and penalties recognized in the consolidated statement of operations during fiscal 2009 was $0.4 million (2008: $0). The Company has filed its initial tax returns in most of its jurisdictions. The Company’s major jurisdictions include the Netherlands,
F-106
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Switzerland, U.S., Japan, Singapore, Israel, Italy, Malaysia, and Philippines, all of which are subject to exam by income tax authorities for 2009.
The Netherlands statute of limitations will remain open until December 31, 2013. The Switzerland statute of limitations will remain open until December 31, 2018. The U.S. and Israel statutes of limitations will remain open until three years after the returns are filed. In certain instances, Israel may extend its statute of limitations. The Japan, Singapore, and Malaysia statutes of limitations will remain open until December 31, 2014. The Italy statute of limitations will remain open until December 31, 2014. The Philippines provides no statute of limitations with regard to transfer pricing. Therefore, the Philippines return will remain open indefinitely.
| |
21. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
Financial Risk Factors
The Company is exposed to changes in financial market conditions in the normal course of business due to its operations in different foreign currencies and its ongoing investing and financing activities. The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize the volatility on the Company’s financial performance. The Company uses forward exchange contracts and currency options to hedge certain risk exposures.
Risk management is carried out by a central Corporate Treasury Department, reporting to the Chief Financial Officer. Corporate Treasury identifies, evaluates and hedges financial risks in close cooperation with the Company’s operating units. Treasury activities are regulated by the Company’s policies, which define procedures, objectives and controls. The policies focus on the management of financial risk in terms of exposure to market risk, credit risk and liquidity risk. Most treasury activities are centralized, with any local activities subject to oversight from the Company. The majority of cash and cash equivalents is held in US dollars and is deposited with financial institutions. Marginal amounts are held in Euro, Japanese Yen and Singapore Dollar.
Foreign currency hedging transactions are performed only to hedge exposures deriving from industrial and commercial activities.
Foreign exchange risk
The Company conducts its business on a global basis in various major international currencies. Foreign exchange risk arises when recognized assets and liabilities as well as cash flows are denominated in a currency that is not the Company’s functional currency. The majority of these transactions relate to purchases and certain other assets and liabilities arising in intercompany transactions denominated in foreign currencies.
Management has established a policy to hedge significant foreign exchange risk exposure through financial instruments transacted by Corporate Treasury. Foreign currency hedging transactions are performed only to hedge exposures deriving from industrial and commercial activities. The Company uses forward exchange contracts and options to hedge certain balance sheet risk exposures. These instruments do not qualify as hedging instruments and as such are accounted for at fair value with changes in fair value accounted for in the consolidated statement of operations. The notional value of these instruments at December 31, 2009 totaled $100.8 million (2008: $14.4 million). All of the transactions were entered into during the fourth quarter of 2009 and the currencies covered were the Euro, the Israeli Shekel, the Singapore Dollar and the Swiss Franc. During 2009, the Company realized net losses of $0.6 million for contracts settled during the year. The losses are recorded within ‘Other income and expenses, net’ in the consolidated statement of operation. In 2008, there were no contracts settled during the period and therefore no realized losses or gains. The amounts recorded in the consolidated balance sheets as at December 31, 2009 and December 31, 2008 were $0 in both years.
Interest rate risk
Interest rate risk is minimized as the Company’s bank borrowings and deposits are held on a floating rate basis.
F-107
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit risk
The Company selects banksand/or financial institutions that operate with the group based on the criteria of long term rating from at least two of the major Rating Agencies and keeping within prescribed diversification and limit guidelines.
The Company monitors the credit worthiness of its customers to which it grants credit terms in the normal course of business. For sales made by Intel on behalf of Numonyx, in line with the ‘Transition Services Agreements’, this monitoring was performed by Intel on behalf of Numonyx. If certain customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, the Company assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal and external ratings in accordance with limits set by management. The utilization of credit limits is regularly monitored. Reserves are provided for estimated amounts of accounts receivable that may not be collected.
At December 31, 2009, two customers represented approximately 35% of trade accounts receivable, net. 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.
Liquidity risk
Prudent liquidity risk management includes maintaining sufficient cash and cash equivalents, short term deposits, and availability of funding from an adequate amount of committed credit facilities. The Company’s objective is to maintain sufficient funds in instruments that can be easily converted to cash.
The Company’s commitments as at December 31, 2009 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | |
|
Operating Leases | | $ | 63,739 | | | $ | 8,032 | | | $ | 7,654 | | | $ | 6,405 | | | $ | 6,380 | | | $ | 5,147 | | | $ | 30,121 | |
Purchase Commitments | | | 486,556 | | | | 320,608 | | | | 54,631 | | | | 53,623 | | | | 32,125 | | | | 25,569 | | | | — | |
of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equipment and other asset purchases | | | 29,060 | | | | 28,762 | | | | 298 | | | | — | | | | — | | | | — | | | | — | |
Transition Service and Supply Agreement Fees | | | 2,988 | | | | 2,988 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other operational expenses | | | 454,508 | | | | 288,858 | | | | 54,333 | | | | 53,623 | | | | 32,125 | | | | 25,569 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 550,295 | | | $ | 328,640 | | | $ | 62,285 | | | $ | 60,028 | | | $ | 38,505 | | | $ | 30,716 | | | $ | 30,121 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company leases land, buildings and equipment under operating leases that expire at various dates under non-cancellable operating leases. Operating lease expense was approximately $10 million in 2009 (2008: $13 million).
Purchase commitments consist primarily of purchases of tangible fixed asset and goods and services under non-cancellable contracts and of fees payable to Intel under the Transition Services Agreement.
| |
23. | RELATED PARTY TRANSACTIONS |
As described in Note 1, ‘The Company’ STM, Intel and FP own 48.6%, 45.1% and 6.3% voting ownership in Numonyx, respectively. The Company has an eight member governing body (“Supervisory Board”) which is composed of three members nominated by STM, three members nominated by Intel and two members nominated by FP. Each shareholder unilaterally nominates its chosen members to the Supervisory Board as long as there are no significant changes in their investment in Numonyx.
The ordinary shares in the Company are owned by STM and Intel and the Preferred Shares ‘A’ are owned by FP. The ordinary shares have the same voting rights as the preferred shares.
F-108
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2009, and the nine month period ended December 31, 2008, Numonyx recorded sales and incurred expenses that related to business conducted with Intel, STM, and Hynix and had transactions with FP. The following tables and notes present the significant related party transactions and account balances with these related parties.
Intel:
Transactions during the year ended December 31, 2009 and period ended December 31, 2008:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Net Sales to Intel | | $ | 487 | | | $ | 664 | |
Supply Agreement(1) | | | 96,834 | | | | 141,596 | |
Service Agreement(2) | | | 14,664 | | | | 28,561 | |
Transition Service Agreement Fees(3) | | | 39,814 | | | | 49,664 | |
Period Costs(4) | | | 289,998 | | | | 413,164 | |
| | |
(1) | | During 2008 and 2009, Numonyx purchased wafers from Intel’s facility in Ireland. These costs are recorded within cost of sales. This supply agreement ended during 2009. |
|
(2) | | Intel’s Pudong facility performs research and development and assembly/test services for Numonyx. These costs are primarily recorded within cost of sales and research and development expenses. This service agreement substantially ended during 2009. |
|
(3) | | These expenses include supply chain, procurement, site manufacturing, information technology, human resource, and finance and accounting services. These costs are primarily recorded within cost of sales and selling, general and administrative expenses. The transition service agreement substantially ended in 2009. |
|
(4) | | Intel incurs facility-related expenses on Numonyx’ behalf for the Israel and Philippines sites. These costs are recorded primarily within cost of sales. These costs substantially ended during 2009. |
Balances as at December 31, 2009 and December 31, 2008:
| | | | | | | | |
| | 2009 | | 2008 |
|
Trade Accounts Receivable from Intel, net(1) | | $ | 8,686 | | | $ | 80,105 | |
Prepaid operating lease with Intel(2) | | | 64,511 | | | | 67,420 | |
Accounts payable to Intel(3) | | | 37,586 | | | | 149,188 | |
Other receivables from Intel | | | 1,589 | | | | 4,700 | |
Other accrued liabilities to Intel | | | — | | | | 5,717 | |
| | |
(1) | | Trade accounts receivable from Intel, net represents monies outstanding from customers to Intel, and therefore not yet remitted to Numonyx, relating to revenues generated by Intel on behalf of Numonyx. |
|
(2) | | See Note 10, ‘Other Investments and Non Current assets’ for an explanation of the prepaid operating lease. |
|
(3) | | Accounts payable and other accrued liabilities to Intel relate to amounts payable by Numonyx for supply agreement, service agreement and other services provided by Intel under the Transition Services Agreement. |
In addition, as explained in Note 14 ‘Long Term Debt and Debt Obligations to Related Parties’, Intel holds a long-term loan note from Numonyx, valued at $144.4 million plus accrued interest of $25.0 million at the balance sheet date. Intel also acted as guarantor, in conjunction with STM, of the bank loan obtained by Numonyx upon formation. The fair value of the benefit of this guarantee is recorded within ‘Intangible Assets, Net’ in the consolidated balance sheet.
STM:
Transactions during the year ended December 31, 2009 and period ended December 31, 2008:
| | | | | | | | |
| | 2009 | | 2008 |
|
Transition Services Agreement Fees(1) | | $ | 10,136 | | | $ | 29,108 | |
Cost sharing arrangement(2) | | | 29,669 | | | | 54,879 | |
Period costs(3) | | | 16,198 | | | | — | |
F-109
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | |
(1) | | These expenses include supply chain, procurement, information technology, human resource, and finance and accounting services provided by STM to Numonyx. These costs are primarily recorded within cost of sales and selling, general and administrative expenses. The transition services agreement substantially ended during 2009. |
|
(2) | | The cost sharing arrangement is an agreement with STM in relation to the Company’s facility in Agrate, Italy, under which facilities and certain costs are shared between STM and Numonyx. The number disclosed above is the net costs paid by Numonyx to STM during the period. |
|
(3) | | These costs relate primarily to utilities costs at shared manufacturing facilities. The costs incurred by Numonyx as disclosed above are net of recharges made by Numonyx to STM and are primarily recorded within cost of sales and selling, general and administrative expenses. Period costs in 2008 are included within Transition Services Agreement Fees in the table above. |
Balances as at December 31, 2009 and December 31, 2008:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Trade accounts receivable from STM, net | | $ | — | | | $ | 111,682 | |
Other current receivables from STM(2) | | | 1,622 | | | | 13,200 | |
Other long term receivable from STM(1) | | | 24,048 | | | | 24,527 | |
Accounts payable to STM(3) | | | 5,400 | | | | 9,890 | |
Other long term payable to STM(4) | | | 42,489 | | | | 40,423 | |
| | |
(1) | | The long term receivable from STM relates to the end of employment fund in Italy (see Note 10, ‘Other Investments and Non-Current Assets’). |
|
(2) | | Other current receivables from STM relate to non-trade receivables. |
|
(3) | | Accounts payable to STM relate to Transition Services Agreements fees and the Cost Sharing Arrangement in Italy. |
|
(4) | | The long term payable to STM relates to a tax refund in Italy (see Note 10, ‘Other Investments and Non-Current Assets’ and Note 15, ‘Other Non Current Liabilities’. |
In addition, as detailed in Note 14 ‘Long Term Debt and Debt Obligations to Related Parties’, STM holds a long-term loan note from Numonyx, valued at $155.6 million plus accrued interest of $26.9 million at the balance sheet date. The loan note is split into a short term element of $78 million, and a long term element of $104.5 million. STM also acted as guarantor, in conjunction with Intel, of the bank loan obtained by Numonyx upon formation. The fair value of the benefit of this guarantee is recorded within Intangible Assets, Net.
Francisco Partners:
As described in Note 1, ‘The Company’, upon formation of Numonyx on March 30, 2008, FP contributed $150 million in cash in exchange for preference shares representing a 6.3% equity interest in the newly formed Company, and a long-term loan note valued at $19.1 million, which is classified within debt obligations to related parties on the consolidated balance sheet. As at December 31, 2009, accrued interest on the loan note totaled $3.3 million.
Hynix Numonyx Semiconductor Ltd.:
As described in Note 3, ‘Equity Investments’, STM contributed their interest in a venture with Hynix Semiconductor upon formation of Numonyx.
Transactions during the year ended December 31, 2009 and period ended December 31, 2008:
| | | | | | | | |
| | 2009 | | 2008 |
|
Purchases of semi-finished product | | $ | 268,000 | | | $ | 77,470 | |
Balances as at December 31,2009 and December 31,2008:
| | | | | | | | |
| | 2009 | | 2008 |
|
Payments for additional equity interest | | $ | 100,000 | | | $ | 50,000 | |
Accounts payable to Hynix Numonyx Semiconductor Ltd. | | | 22,680 | | | | 9,635 | |
Other accrued liabilities to Hynix Numonyx Semiconductor Ltd | | | 11,113 | | | | 4,053 | |
F-110
NUMONYX HOLDINGS B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 9, 2010, the Company entered into a definitive agreement with Micron Technology Inc. under which Micron has agreed to purchase the entire share capital of Numonyx in exchange for a minimum of 140 million Micron common shares. An additional 10 million common shares may be payable to Numonyx shareholders to the extent the volume weighted average price of Micron shares for the 20 trading days, ending two days prior to the close of the transaction, ranges between $7.00 and $9.00 per share. As part of deal closing, the long term related party loan notes will also be cancelled via a capital contribution. The transaction is subject to regulatory review and other customer closing conditions and is currently anticipated to close within 4 to 6 months of the date this definitive agreement was signed.
F-111
STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at
| | | | Charged to
| | | | Balance at
| | | Balance at
| | | | Charged to
| | | | Balance
|
| | beginning
| | Translation
| | costs and
| | | | end of
| | |
Valuation and qualifying accounts deducted from the related asset accounts | | of period | | adjustment | | expenses | | Deductions | | period | | |
Valuation and Qualifying Accounts Deducted
| | | Beginning
| | Translation
| | Costs and
| | Additions/
| | at End of
|
From the Related Asset Accounts | | | of Period | | Adjustment | | Expenses | | (Deductions) | | Period |
| | (Currency — millions of U.S. dollars) | | | (Currency—millions of U.S. dollars) |
|
2009 | | | | | | | | | | | | | | | | |
Inventories | | | | 72 | | | | | | | 102 | | | | (124 | ) | | | 50 | |
Accounts Receivable | | | | 25 | | | | | | | 2 | | | | (8 | ) | | | 19 | |
Deferred Tax Assets | | | | 1,283 | | | | 6 | | | | 79 | | | | (31 | ) | | | 1,337 | |
2008 | | | | | | | | | | | | | | | | |
Inventories | | | | 39 | | | | | | | 108 | | | | (75 | ) | | | 72 | |
Accounts Receivable | | | | 21 | | | | | | | 1 | | | | 3 | | | | 25 | |
Deferred Tax Assets | | | | 1,123 | | | | (6 | ) | | | 170 | | | | (4 | ) | | | 1,283 | |
2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Inventories | | | 47 | | | | | | | | 72 | | | | (80 | ) | | | 39 | | | | 47 | | | | | | | 72 | | | | (80 | ) | | | 39 | |
Accounts Receivable | | | 31 | | | | | | | | 1 | | | | (11 | ) | | | 21 | | | | 31 | | | | | | | 1 | | | | (11 | ) | | | 21 | |
Deferred Tax Assets | | | 1,039 | | | | 6 | | | | 79 | | | | (1 | ) | | | 1,123 | | | | 1,039 | | | | 6 | | | | 79 | | | | (1 | ) | | | 1,123 | |
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 | | |
S-1