1995 ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The Company was formed in 1987 as a result of the combination of the non-military business of Thomson Semiconducteurs, the microelectronics business of the French state-controlled defense electronics company Thomson-CSF, and SGS Microelettronica, the microelectronics business owned by STET, the Italian state-controlled telephone company. Since its formation, the Company has significantly broadened and upgraded its range of products and technologies and has strengthened its manufacturing and distribution capabilities in Europe, North America, and the Asia Pacific region, while at the same time restructuring its operations to improve efficiency.
From 1991 to 1995, the Company's net revenues increased from $1,374.0 million to $3,554.4 million, with strongest revenue growth occurring in 1993, 1994 and 1995. Such revenue gains were achieved despite the Company's absence during that period from the market for DRAMs (a commodity memory product) and, until the second half of 1994, from the market for personal computer microprocessors (such as the x86 family of products) and DRAMs. According to trade association data, the TAM (total available market) increased from $54.6 billion in 1991 to a preliminary estimate of $144.4 billion in 1995, while the SAM (serviceable available market, which prior to 1995 consisted of the TAM without DRAMs, microprocessors and opto-electronic products and commencing in 1995 and for all prior periods compared therewith includes microprocessors as a result of the Company's production of x86 products) increased from $45.6 billion in 1991 to a preliminary estimate of $99.2 billion in 1995. The Company's share of the TAM remained relatively constant at 2.5% during this period, while the Company's share of the SAM increased from 3.0% in 1991 to 3.6% in 1995. Revenue growth within the Company from 1991 through 1995 was particularly significant for dedicated products, EPROMs and semicustom devices. The Company has also succeeded in becoming a more global semiconductor supplier--the proportion of the Company's revenues derived outside Europe increased from approximately 42% in 1991 to approximately 54% in 1995.
Differentiated ICs (which the Company defines as being its dedicated products, semicustom devices and microcontrollers) accounted for just over 51% of the Company's net revenues in 1995, compared to approximately 48% in 1994. Such products foster close relationships with customers, resulting in early knowledge of their evolving requirements and opportunities to access their markets for other products, and are less vulnerable to competitive pressures than standard commodity products. In 1995, analog ICs (including mixed signal ICs), the majority of which are also differentiated ICs, accounted for approximately 46% of the Company's net revenues (compared to approximately 43% in 1994), while discrete devices accounted for approximately 17% of the Company's net revenues (compared to approximately 15% in 1994). In recent years, analog ICs and discrete devices have experienced less volatility in sales growth rates and average selling prices than the overall semiconductor industry.
In addition to increasing revenues, management's efforts to rationalize operations and increase manufacturing and other efficiencies have generated significant improvements in profitability. The Company's gross profit margin increased from 27.6% in 1991 to 41.0% in 1995. Such increases in gross profit margins have combined with significant reductions in selling, general and administrative expenses as a percentage of net revenues and reduced interest costs to significantly increase profitability in an improved industry environment in 1993, 1994 and 1995. In 1995, the gross profit margin decreased to 41.0% from 42.2% in 1994 due primarily to costs associated with the conversion of certain manufacturing facilities from the production of 4-inch and 5-inch wafers to production of 5-inch and 6-inch wafers, the increase in the cost of sales attributable to the new plant in Phoenix, Arizona, which completed the start-up phase at the end of the 1995 second quarter and whose costs, as of the 1995 third quarter, are therefore included in the cost of sales and, in the second and third quarters of 1995, the negative impact of the weakening of the U.S. dollar, and to a lesser extent due to higher depreciation resulting from increased capital spending.
According to preliminary estimated trade association data, in 1995 TAM revenues increased approximately 42% over 1994 while SAM revenues increased approximately 32%. Such growth rates have exceeded the historical TAM compound annual growth rates since 1983 (19%, according to preliminary estimated trade association data). Although it cannot predict the timing or degree of any softening in the semiconductor market, management believes that the industry growth rates and average selling prices in the period from 1993 through 1995 are unlikely to be sustained. In less favorable industry environments, the Company has in the past been requested to reduce prices to limit the level of order cancellations. As only a portion of the Company's expenses varies with its revenues, there can be no assurance that the Company will be able to reduce costs promptly or adequately in relation to revenue declines in less favorable industry environments. Slower revenue growth rates or reduced average selling prices for the Company's products would therefore adversely affect the Company's results of operations.
