Operating Income, Net Income and Earnings per Share
Excluding impairment and restructuring charges, Q2 2008 operating income and margin were $159 million and 6.7%, respectively. Net income per diluted share was $0.18, excluding $224 million in pre-tax charges from restructuring, impairment, and other-than-temporary impairments on financial assets.
During the second quarter of this year, ST entered into advanced negotiations to sell its Phoenix, Arizona, USA, fab as an ongoing business. Accordingly, the Company has revised the original restructuring plan for this site and intends to pursue the sale of the fab in order to realize substantial advantages in operational and financial impacts. As a result, in the second quarter of 2008 ST recorded a $114 million, non-cash impairment charge related to the intended sale of the Phoenix manufacturing facility.
In total, second quarter 2008 impairment and restructuring charges amounted to $185 million, with $36 million coming primarily from previously announced restructuring programs, $35 million from remaining FMG separation costs and $114 million from the planned sale of ST's Phoenix fab.
Based upon impairment, restructuring charges and other closure costs, ST reported an operating loss of $26 million in the second quarter of 2008. In the year-ago quarter, the Company reported an operating loss of $772 million -- including FMG -- ($134 million with a 5.5% operating margin, excluding restructuring and impairment charges), and in the prior quarter the Company reported an operating loss of $88 million -- including FMG -- (operating income was $116 million, an operating margin of 4.7%, excluding restructuring and impairment charges and one-time in process R&D totaling $204 million).
Following the prior announcements of impairment recognition in certain asset-backed securities, in the 2008 second quarter an accounting revaluation resulted in an additional $39 million, pre-tax, other-than-temporary impairment to the value of these financial assets. The Company has initiated legal action against Credit Suisse Securities (USA) LLC and will continue to pursue all options to recover its losses in these investments, which resulted directly from deviating from ST's specific authorization.
ST reported a net loss of $47 million or -$0.05 per share in the 2008 second quarter compared to the year-ago quarter net loss -- including FMG -- of $758 million or -$0.84 per share ($0.15 per diluted share excluding restructuring and impairment charges) and the prior quarter net loss -- including FMG -- of $84 million, or -$0.09 per share ($0.13 per diluted share excluding restructuring, impairment charges including other-than-temporary impairment on marketable securities and in-process R&D).
Cash Flow and Balance Sheet Highlights
Net cash from operating activities was $416 million in the 2008 second quarter. Net operating cash flow* was $128 million, compared to $225 million in the year-ago quarter. For the first half, net cash from operating activities was $918 million and net operating cash flow was $347 million, excluding the $170 million expenditure for the purchase of Genesis Microchip.
Capital expenditures were $272 million during the second quarter of 2008, compared to $258 million in the prior quarter and $222 million in the year-ago quarter. For the 2008 first half, capital expenditures were $530 million, or 10.9% of net sales, compared to $507 million or 10.8% of net sales in the first half of 2007. These 2008 capital spending amounts reflect the previously announced purchase of ST's former partner's production equipment in Crolles2, biased toward the first half of the year. The Company reiterated its expectation to be at or below a capex-to-sales ratio of 10% for the full year 2008.
In the 2008 second quarter, ST repurchased $83 million of common stock under the most recently approved plan, as well as paid $81 million in dividends. For the third quarter, 2008 the global ex-dividend date will be August 18, 2008 and the dividend of $0.09 is planned to be paid on or after this date in accordance with the previously announced schedule.
Inventory was $1.58 billion at quarter end, with inventory turns accelerating to 3.8 times.
At June 28, 2008, ST's cash and cash equivalents, marketable securities (current and non-current), short-term deposits and restricted cash equaled $3.58 billion. Total debt was $2.47 billion. ST's net financial position** was $1.1 billion. Shareholders' equity was $9.36 billion.
* Net operating cash flow is a non-US GAAP metric, which the Company's management utilizes as a measure of cash-generation capability. It is defined as net cash from operating activities ($416 million in the second quarter of 2008) minus net cash used in investing activities (primarily capital expenditures of $272 million) excluding restricted cash ($250 million), payments for purchase of and proceeds from the sale of marketable securities (current and non-current) and investment in and proceeds from matured short-term deposits ($288 million in the second quarter of 2008). ** Net financial position is a non-US GAAP metric used by the Company's management to help assess financial flexibility. It is defined as cash and cash equivalents, marketable securities (current and non-current), short-term deposits and restricted cash ($3,584 million) minus total debt (bank overdrafts $0 million + current portion of long-term debt $153 million + long-term debt $2,313 million).
Net Revenues by Market Segment for Q2 2008
The following table estimates, within a variance of 5% to 10% in the absolute dollar amount, the relative weighting of each of the Company's target market segments for the 2008 second quarter.
As % of Net Revenues Q2 2008 Market Segment ST Automotive 17% Consumer 17% Computer 16% Telecom 32% Industrial & Other 18%
In comparison to the year-ago quarter, all market segments posted growth, led by Industrial & Other which increased 20% and Telecom which increased 19%, followed by Computer and Consumer which increased 12% and 11%, respectively, and Automotive, which increased approximately 7%.
Sequentially, performance was led by the 14% growth of both Telecom and Industrial & Other. Consumer was up 11%, while Automotive gained 5%. Computer was essentially flat with the prior quarter.
Financial and Operating Data by Product Segment for Q2 2008
The following table provides a breakdown of revenues and operating income by product segment. In Million US$ and % Q2 2008 Operating Segment Net % of Net income Revenues Revenues (loss) ASG (Application Specific Product Groups) $1,511 63.2% $35 IMS (Industrial and Multisegment Sector) 865 36.2% 132 Others (1)(2) 15 0.6% (193) TOTAL $2,391 100% $(26) (1) Net revenues of "Others" include revenues from sales of Subsystems and Other Products not allocated to product segments. (2) Operating loss of "Others" includes items such as impairment, restructuring charges, and other related closure costs, start-up costs, and other unallocated expenses such as strategic or special research and development programs, acquired in-process R&D, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products.