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The following discussion should
be read in conjunction with our Consolidated Financial Statements and Notes
thereto included elsewhere in this annual report. The following discussion
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might
cause future actual results to differ materially from our recent results or
those projected in the forward-looking statements include, but are not limited
to, those discussed in “Cautionary Statement Regarding Forward-Looking
Statements” and under the caption “Risk Factors” in the
Company’s Form 20-F filed with the Securities and Exchange Commission on
May 15, 2001 (and any Form 20-F report filed thereafter) and below. We assume
no obligation to update the forward-looking statements or such
factors.
OVERVIEW
The semiconductor industry experienced very
difficult business conditions in 2001, registering the worst downturn in its
history. The industry’s downward trend, which began in the fourth quarter
of 2000, continued throughout all 2001. According to preliminary trade
association data, worldwide sales of semiconductor prod-ucts (the total
available market or “TAM”) decreased 32.0% in 2001 compared to 2000
after an increase in 2000 of 36.8% compared to 1999, and the market for
products produced by us (the serviceable available market, or “SAM” ,
which consists of the TAM without DRAMs and optoelectronic products) decreased
in 2001 by approximately 27.3% after an increase in 2000 of approximately 34.8%
compared to 1999. In 2001, the TAM was $139.0 billion, while the SAM was $120.4
billion. Starting from 2001, our SAM was redefined in order to be more in line
with our product portfolio, as such covering approximately 56% of total TAM and
excluding PC motherboard major devices such as microprocessors and their
peripherals, random access memories (RAMs), read-only memories (ROMs) and
semi-custom and discrete segments such as the small signal tran-sistor market
and optoelectronics devices. In 2001, our redefined SAM decreased by 24% over
2000 following an increase of 44.5% compared with 1999.
Our net
revenues in 2001 were $6,356.9 million, an 18.6% decrease from $7,813.2 million
in 2000, while in 2000 our net revenues increased 54.5% compared to
1999.
Based on these preliminary trade association data for 2001, we
believe we gained market share against both the TAM and the SAM compared to
2000.
Within a poor industry environment, characterized by significant
overcapacity and pricing pressures, we continued to outperform the industry in
the markets we serve and to further strengthen our financial position.
Importantly, we remained profitable during the most negative cycle in the
history of the semiconductor industry.
This was achieved through a
combination of cost reduction programs, yield improvements and optimization
measures that enabled us to avoid the major employee lay-offs that
characterized most of our industry. In 2001, the difficult business conditions
resulted in declining product demand from many of our end markets, which
negatively affected our revenues.
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These declines in product demand
were exacerbated in certain areas by excess inventory held by our customers.
The declining product demand and the inventory reduction programs initiated by
our customers produced a significant drop in our volumes of sales and
consequently, a strong decrease in the rates of utilization of our
manufacturing facilities. These neg-ative market conditions also generated
pressure on our average selling prices mainly for our standard and commodity
products. Furthermore, during the latter part of 2001, we launched a program to
reduce our inventory levels which succeeded in bringing our year-end inventory
level in line with the lower activity rates. All these factors resulted in the
decision to close certain wafer fabrication plants and in selective shutdowns,
mainly of the most mature 125mm and 150mm wafer fabrication plants. Our gross
margin was thus negatively impacted, both by reduced revenues and production
levels, decreasing significantly when compared to the previous year
period.
In response to the deteriorating conditions in the
semiconductor industry, we have taken actions designed to further enhance our
competitive position, both over the short- and medium/long-term. We believe
these actions are in keeping with our overall strategic direction:
On May
31, 2001, we announced the planned closing of our facility in Ottawa, Canada.
The closure was completed by the end of 2001 and all production has been
transferred to our other facilities around the world. In September 2001, we
ini-tiated a plan for the closure of our 150mm plant in Rancho Bernardo,
California. The closure was completed in April 2002. We recorded restructuring
charges and other related plant closure expenses of $25.9 million pursuant to
the clo-sures of our facilities in Ottawa, Canada, and Rancho Bernardo,
California. In addition, we recorded an impairment charge of $96.6 million for
some of the tangible assets of our facilities in Ottawa, Canada and Rancho
Bernardo, California.
We implemented several short-term temporary
shutdowns in many of our wafer fabrication plants, particularly in the more
mature plants.
During 2001, we implemented measures to decrease
selling, general and administrative costs and non-core research and development
expenditures. These measures, comprising pri-marily of a hiring freeze,
external contract renegotiations and discretionary cost reductions, contributed
significant savings in 2001 when compared to 2000.
We reduced our
capital expenditures in 2001, from an initial plan of $2.5 billion to $1.7
billion.
During 2001, we reviewed the carrying values of our tangible
and intangible assets in our balance sheet and, as a consequence, recorded an
impairment charge of $319.6 million for some of those assets, as a result of
the $96.6 million related to the closure of our plants of Ottawa, Canada and
Rancho Bernardo, California, of expected underutilization of certain mature
wafer fabrication plants and with respect to intangible assets pursuant to
acquisitions made in prior years.
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