OIL & GAS

Net revenues for the first quarter were $2,083 million, down 10.5% sequentially from the $2,328 million reported in the prior quarter, and 2.6% above the $2,029 million reported in last year's first quarter. The Company noted that revenue performance was at the lower end of its guidance range as somewhat stronger seasonal factors and price pressure impacted several of the Company's application markets. However, automotive and wireless applications grew at double-digit levels year over year, and data storage grew at a high single-digit rate sequentially. Gross margin performance in the first quarter primarily reflected increased price pressure and lower utilization rates in comparison to the prior and year-ago quarters as well as lower sales levels compared to the fourth quarter. Gross profit was $685 million and the gross margin was 32.9% for the 2005 first quarter. The sequential impact of the weaker U.S. dollar was approximately 100 basis points. Operating Expenses and Other Income/Expenses Research and development expenses in the first quarter were essentially level with the fourth quarter at $404 million, compared to $402 million in the fourth quarter. Selling, general, and administrative expenses were $265 million for the 2005 first quarter. R&D, SG&A and other income and expenses in the first quarter included a combined $24 million of one-time compensation expenses and other contributions. Excluding the one-time charges the Company noted that combined SG&A and R&D costs were basically flat sequentially in dollar terms. Operating Income, Net Income, and Earnings per Share As a result of the restructuring initiatives underway, the Company incurred $78 million covering impairment, restructuring charges, and other related closure costs during the 2005 first quarter compared to similar expenses of $18 million in the fourth quarter and $33 million in the year-ago first quarter. Net results for the first quarter also included a tax credit of $20 million. For the 2005 first quarter, the Company reported an operating loss of $68 million, and a net loss of $31 million or $0.03 per diluted share. Restructuring and net one-time items (tax credit and operating expenses) had a negative impact of $0.07 per diluted share in the 2005 first quarter. Cash Flow and Balance Sheet Highlights Net cash from operating activities in the first quarter was $359 million. Capital expenditures were $564 million in the 2005 first quarter. For the full year 2005, the Company reconfirmed capital spending plans of $1.5 billion, compared to $2.0 billion in 2004. At April 2, 2005, ST had cash, cash equivalents, and marketable securities of $1.69 billion. Total debt was $1.90 billion; net financial debt was $210 million and shareholders' equity was $8.7 billion. President and CEO Remarks Carlo Bozotti, President and Chief Executive Officer commented, "ST is sharply focused on improving the competitiveness of the Company. In addition to previously announced initiatives, we are undertaking several new actions designed to streamline our cost structure and strengthen our product portfolio, the two positive drivers of our gross margin. First, we expect the actions completed to date to progressively provide results which will ultimately yield approximately $100 million per quarter in manufacturing costs and expense savings in the fourth quarter of 2005 compared to the same period of 2004." The Company is migrating a portion of memory-wafer output to Asia. This, coupled with repatriation of wafer supply and assembly services, will improve both fab loading and manufacturing cost structure. The procurement cost reduction campaign underway since January has resulted in substantial savings thus far, and this effort continues. Moreover, the Company continues expense-reduction initiatives, including the consolidation of certain general and administrative functions as well as the closure of several non-manufacturing sites. "Second, from a product perspective, our objective is to accelerate innovation in order to increase our product leadership and importantly to strengthen our gross margin over the medium term. Our progress thus far is encouraging as we have a number of new products entering key markets, including: digital consumer SoCs in 90 nanometer technology, a first in our industry; system-in-package solutions for both RF and energy management in cellular phones; and new SoC solutions in data storage. We also have begun ASIC designs on 65 nanometer platforms for wireless terminal and infrastructure products with several key customers. "With our significant R&D resources and deep talent pool, we believe our product objectives can be accomplished through better focus and by selectively reallocating research and development resources to higher priority product categories. Therefore, in order to accelerate our R&D programs, we are redeploying approximately 1,000 engineers, representing 10% of ST's R&D workforce, from non-core programs, including FPGA and third-party design services, and from CPE modem and GSM chipset activities," Mr. Bozotti concluded. Additional First Quarter 2005 Financial and Operating Data The following tables and commentary provide a breakdown of revenues and operating income (loss) by product group and segment revenues by targeted market. Net Revenues and Operating Income by Group: In Million US$ Q1 2005 Net % of Net Operating Revenues Revenues income Group (loss) Application Specific Product Groups* 1,188 57.1% 65 MLD (Microcontroller, Linear & Discrete Group) 457 21.9% 71 MPG (Memory Products Group) 421 20.2% -62 Others (1)(2) 17 0.8% -142 TOTAL 2,083 100% -68 Certain costs, mainly R&D costs formerly in the "Others" category, have been allocated to the groups. Application Specific Product Groups' revenue increased 2.3% year-over-year while operating profit declined to $65 million. MLD had sales growth of nearly 9% compared to Q1 2004, while operating income was constant over the prior year quarter. MPG sales were down approximately 2.4% year-over-year while the operating loss increased to $62 million. All groups experienced sequential sales and operating income declines. Q1 2005 Net Revenues Breakdown by Market Segment The following table estimates, within a variance of 5% to 10% in the absolute dollar amount, the relative weighting of each of the Company's target market segments in the first quarter of 2005. % of Net revenues Automotive 16% Consumer 19% Computer 18% Telecom 32% Industrial & Other 15% All market segments experienced sequential sales declines. Year-over-year growth rates in Automotive and Computer were greater than the company average of 2.6% equaling approximately 13% and 5% respectively. Consumer and Industrial & Other segments experienced lower sales compared to the first quarter of 2004. Net Revenues and Operating Income by Group for 2004: The following tables reflect previously announced 2004 net revenues and operating income of the Company according to the new organizational footprint put in place at the beginning of 2005. 2004 segment information has been restated in order to conform to the current year presentation following the redefinition of segment reporting. The preparation of segment information in accordance with the new organization of the groups, due to the significant changes in the segment structure, requires the use of significant estimates and assumptions in determining 2004 operating income of the new groups, which can affect the reported amounts for the previous year. Net Revenues In Million US$ Q1 Q2 Q3 Q4 Group Net Revenues 2004 2004 2004 2004 FY 04 Application Specific Product Groups 1,161 1,180 1,231 1,329 4,902 MLD (Microcontroller, Linear & Discrete Group) 420 487 501 494 1,902 MPG (Memory Products Group) 431 488 482 486 1,887 Others 17 17 17 18 69 TOTAL 2,029 2,172 2,231 2,328 8,760 Operating Income In Million US$ Q1 Q2 Q3 Q4 Group Operating Income (Loss) 2004 2004 2004 2004 FY 04 Application Specific Product Groups 118 118 137 157 530 MLD (Microcontroller, Linear & Discrete Group) 71 109 133 107 421 MPG (Memory Products Group) -3 29 14 6 45 Others* -106 -77 -71 -60 -313 TOTAL 80 179 213 210 683 Outlook Mr. Bozotti observed, "We are beginning to see signs of improvement in certain segments of the marketplace: the first indications of increased order flow from the distribution market, as well as a pattern of strengthening in wireless. However, we still see strong price pressure in several markets, notably memory. "Looking ahead, with the present order visibility, we expect sales to grow sequentially in the range of -1% to 7%. For the 2005 second quarter, the gross margin is expected to be about 33.5%, plus or minus one percentage point, reflecting both price pressure and progressive cost reduction." This guidance is based on a currency exchange rate of $1.30 = 1 Euro. Products, Technology and Design Wins -- ST announced the first three additions to the Company's award-winning Nomadik family of mobile multimedia application processors. These new engines will offer mobile phones and other mobile multimedia products compelling features, functions, and services that were previously out of reach, while maintaining Nomadik's intrinsic qualities of scalable performance, exceptional video and audio quality, and affordability on an ultra-low power, open platform. -- The Nomadik family earned several design-wins in both cellular phones and other portable terminals. In addition, ST is now introducing a complete Nomadik-based reference design for videophone applications, enabling the deployment by telecom operators of new and attractive revenue-generating services. -- At the 3GSM World Congress, ST and Telecom Italia Lab, the R&D branch of the Telecom Italia Group, showcased a first prototype of an open and configurable mobile platform based on Nomadik that provides operators with a secure environment where they can develop and customize reliable and portable proprietary applications. Additionally ST, Orange, and Trusted Logic demonstrated an Orange secure electronic payment concept implementing the Operator Virtual Machine (OVM) secure framework technology on a Nomadik processor. -- In mobile imaging, ST introduced its latest single-chip VGA camera module for entry-level mobile phones and other portable devices. Delivering best-in-class performance, the device leverages three main imaging strengths of ST's advanced optical packaging, the latest 3.6-micron pixel design, and SoC (System-on-Chip) integration expertise. Additionally, ST is ramping up production of SVGA and 1-mega-pixel camera modules. More than 60 million camera modules have been delivered, mostly for use in mobile phones. -- In connectivity, ST's single-chip Bluetooth IC has gained multiple design-wins for volume applications in mobile phones. And Wireless LAN 802.11 modules were qualified for use in several phones, with volume production now beginning. Three Months Ended (Unaudited) (Unaudited) April 2, March 27, 2005 2004 Net sales 2,081 2,028 Other revenues 2 1 NET REVENUES 2,083 2,029 Cost of sales -1,398 -1,311 GROSS PROFIT 685 718 Selling, general and administrative -265 -230 Research and development -404 -363 Other income and expenses, net -6 -12 Impairment, restructuring charges and other related closure costs -78 -33 Total Operating Expenses -753 -638 OPERATING INCOME (LOSS) -68 80 Interest income (expense), net 7 -4 INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS -61 76 Income tax benefit 31 1 INCOME (LOSS) BEFORE MINORITY INTERESTS -30 77 Minority interests -1 0 NET INCOME (LOSS) -31 77 EARNINGS (LOSS) PER SHARE (BASIC) -0.03 0.09 EARNINGS (LOSS) PER SHARE (DILUTED) -0.03 0.08 NUMBER OF WEIGHTED AVERAGE SHARES USED IN CALCULATING 893.1 938.7 DILUTED EARNINGS (LOSS) PER SHARE STMicroelectronics N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended April 2, March 27, In million of U.S. dollars 2005 2004 (Unaudited) (Unaudited) Cash flows from operating activities: Net income (loss) -31 77 Items to reconcile net income and cash flows from operating activities Depreciation and amortization 506 421 Amortization of discount on convertible debt 1 11 Other non-cash items 2 -3 Minority interest in net income of subsidiaries 1 0 Deferred income tax -23 -3 Impairment, restructuring charges and other related closure costs, net of cash payments 60 23 Changes in assets and liabilities: Trade receivables, net -24 -125 Inventories, net -65 44 Trade payables -57 169 Other assets and liabilities, net -11 -62 Net cash from operating activities 359 552 Cash flows from investing activities: Payment for purchases of tangible assets -564 -321 Payment for purchases of marketable securities -525 -1,030 Investment in intangible and financial assets -11 -13 Payment for acquisitions, net of cash received 0 -3 Net cash used in investing activities -1,100 -1,367 Cash flows from financing activities: Repayment of long-term debt -20 -50 Decrease in short-term facilities -19 -41 Capital increase 1 14 Net cash used in financing activities -38 -77 Effect of changes in exchange rates -9 -3 Net cash decrease -788 -895 Cash and cash equivalents at beginning of the period 1,950 2,998 Cash and cash equivalents at end of the period 1,162 2,103 STMicroelectronics N.V. CONSOLIDATED BALANCE SHEETS As at April 2, December 31, March 27, In million of U.S. dollars 2005 2004 2004 (Unaudited) (Audited) (Unaudited) ASSETS Current assets: Cash and cash equivalents 1,162 1,950 2,103 Marketable securities 525 0 1,030 Trade accounts receivable, net 1,414 1,408 1,398 Inventories, net 1,369 1,344 1,071 Deferred tax assets 141 140 104 Other receivables and assets 740 785 605 Total current assets 5,351 5,627 6,311 Goodwill 228 264 260 Other intangible assets, net 250 291 312 Property, plant and equipment, net 7,039 7,442 6,447 Long-term deferred tax assets 59 59 43 Investments and other non-current assets 119 117 104 7,695 8,173 7,166 Total assets 13,046 13,800 13,477 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdrafts 37 58 4 Current portion of long-term debt 158 133 443 Trade accounts payable 1,027 1,352 1,230 Other payables and accrued liabilities 852 776 686 Deferred tax liabilities 7 17 8 Accrued income tax 157 176 160 Total current liabilities 2,238 2,512 2,531 Long-term debt 1,702 1,767 2,555 Reserve for pension and termination indemnities 265 285 236 Long-term deferred tax liabilities 50 63 35 Other non-current liabilities 22 15 38 2,039 2,130 2,864 Total liabilities 4,277 4,642 5,395 Commitment and contingencies Minority interests 49 48 45 Common stock (preferred stock: 540,000,000 shares authorized, not issued; 1,150 1,150 1,150 common stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 905,372,326 shares issued, 891,972,326 shares outstanding) Capital surplus 1,925 1,924 1,915 Accumulated result 5,237 5,268 4,851 Accumulated other comprehensive income 756 1,116 469 Treasury stock -348 -348 -348 Shareholders' equity 8,720 9,110 8,037 Total liabilities and shareholders' equity 13,046 13,800 13,477