Message from the President
![[PHOTO PISTORIO]](/stonline/company/annual/fy95/pistorio.gif)
" We took major steps to ensure our continued industry leadership into the next century."
I am pleased to report that
SGS-THOMSON enjoyed excellent business and financial results in
1995.
Our strong performance is evident, first of all, in the Company's
record sales and earnings.
In addition, we gained market share in our served market,
according to preliminary industry estimates.
Just as important as our accomplishments of the past year,
however, are the steps we took to ensure our continued industry
leadership as we approach a new century.
Toward that end, we continued to invest in the expansion of our
global manufacturing capacity, accelerated the pace of our
research and development efforts, and strengthened our financial
position through a second public offering of common stock.
These initiatives - along with our continuing drive to increase
our focus on differentiated products, concentrate on high growth
applications, and form constructive partnerships with our
customers - have given the Company a solid platform for new
achievements and successes.
1995 Financial Highlights .
Net revenues for 1995 increased
over 34% to a historical high of $3.55 billion. Gross profit was
$1.46 billion, representing an increase of nearly 31%. Operating
profit for 1995 rose more than 50%, to $651.0 million. While the
gross profit margin went from 42.2% in 1994 to 41.0% in 1995, the
operating profit margin moved upward to 18.3% from 16.4%. Net
earnings for 1995 reached $526.5 million, a 45% increase over
1994's figure of $362.5 million. Earnings per share for 1995 rose
almost 33%, to $4.03, based on 130.6 million weighted average
shares outstanding. In 1994, earnings per share were $3.04 based
on 119.4 million weighted average shares outstanding.
Reflecting our commitment to investing in the continued growth of
the Company, capital expenditures for 1995 totalled $1.0 billion,
up from $779.7 million in 1994. Research and development expenses
were $440.3 million for the last year, an increase of over 30%
from the 1994 R&D figure.
We ended 1995 with an extremely solid balance sheet. At the end
of the year, cash, cash equivalents and marketable securities
totalled $758.4 million, exceeding by $64.9 million our total
debt of $693.5 million, while working capital stood at $417.4
million. Shareholders" equity at December 31, 1995 was $2.66
billion.
Operating Performance.
Our record performance was the
result of strong growth across SGS-THOMSON's wide range of
product groups, geographic regions and end markets. In keeping
with our successful product strategy, sales of differentiated
products (dedicated/ASSPs, semicustom ICs and microcontrollers)
during 1995 rose 43% to total $1.8 billion, or 51% of net
revenues. The strong growth in differentiated products was the
result of rising customer demand, especially for chips with high
system content, to which we allocated significant capacity. In
terms of our primary product groups, sales of Dedicated Products
rose 38.9%, Programmable Products increased 40.4%, and Discrete
and Standard ICs advanced 31.7%. Memory Products revenues were up
15%, despite the limitations caused by our decision to allocate
capacity to differentiated products for which we were often the
sole source.
Sales trends by geographic region confirmed the Company's status
as a global force in the semiconductor industry. Revenues derived
from the Asia Pacific region increased 49.8% in 1995, followed by
Europe at 33.5%, North America at 25.7%, and Japan with 15.4%. In
1995, Europe accounted for 46% of net revenues, Asia/Pacific was
26%, the Americas were 24%, and Japan represented 4%. However, if
sales to Asian divisions of U.S. customers are combined with
their parent companies, our American revenues would be
approximately one-third of our total business.
The Company's emphasis on developing and manufacturing products
for high growth applications was rewarded in 1995. Sales of
industrial products rose nearly 37%, with a similar rate of
increase for telecommunications. Both automotive and computer
applications experienced revenue increases in the area of 36%.
Consumer-related products posted a 28% growth rate.
One important result of our strong growth in product sales was
that SGS-THOMSON maintained or increased its share in many of our
key markets. According to available industry data and current
estimates, we believe that we once again held the #1 position in
total analog ICs, mixed-signal ICs and smart power ICs for 1995.
We also were among the leaders in non-volatile memories and
dedicated telecom ICs.
Manufacturing and R&D Activities
During 1995, we continued to
build up SGS-THOMSON's manufacturing capacity. We announced plans
for a fourth 8-inch fab, to be based in Rousset, France, and we
are in the process of upgrading and expanding six facilities
around the world. In addition, we have identified two other
8-inch facilities, one of which will be in Singapore with the
other one - in Italy - now under consideration. Our second 8-inch
fab in Phoenix, Arizona, began volume production ahead of
schedule in July 1995. It will soon start manufacturing next
generation x86 microprocessors, and is qualified for several
other product families including MPEG decoders. The first wafers
should be available from our M5 8-inch module in Catania, Italy,
in the third quarter of 1996, with ramp-up starting in the fourth
quarter. Also, the construction of the Shenzhen assembly facility
in Southern China is nearing completion. This new plant, which is
a joint venture with the Shenzhen Electronics Group of China,
together with the investments that are being made at other
existing facilities, will contribute new back-end capacity to
serve increased front-end output.
Our R&D effort, which over the years has provided SGS-THOMSON
with many leading edge technologies, was even stronger in 1995.
We made important progress in virtually every area of technology,
from power devices to 16 Megabit Flash memories. Among the recent
achievements of our R&D team were the creation of the
Company's first engineering samples of CMOS 0.35 micron and
BiCMOS 0.5 micron technology, and the first silicon of BCD 5
high-power technology with integrated 0.6 micron CMOS logic.
Industry Dynamics and Direction
Over the long term, several
dynamic trends will present significant opportunities for our
industry in general, and for SGS-THOMSON in particular.
The first trend is technological change or, more specifically,
the changing role of microchip makers. Today, we have the ability
to create a single chip combining VLSI or ULSI technologies with
mixed-signal or mixed-power, together with the whole variety of
memory blocks, to replicate the functions of an electronic
system.
This trend is revolutionary, since it moves our industry into the
era of complete "system-solutions" on silicon.
There are three important implications of this changing
environment. First, there will be tremendous economic
opportunities for those companies that are positioned to meet the
need for system-on-a-chip technology. Second, to take advantage
of these opportunities, a semiconductor maker must be able to
master a vast breadth of technologies, possess strong financial
resources to support R&D at a very high level, and control
ample manufacturing resources. Third, because designing systems
on silicon is by nature a collaborative process, the successful
semiconductor companies will be those with the demonstrated
ability to form close strategic alliances with their customers.
These are the qualities which we have worked hard to foster at
SGS-THOMSON, and which are discussed in greater detail in this
annual report.
Geographic change is the second major trend I wish to highlight,
and in particular the fact that regionalized economies will
continue to prevail in the near-term, while the world is
proceeding with the trend of a long-term shift to a truly
globalized economy. In recent years, the most explosive growth in
our business (and, indeed, in many industries) has taken place in
Asia. This region offers enormous resources, a strong cost
advantage and high productivity. Thus, it appears that Asia will
lead the pack in terms of growth for the near future.
Fortunately, SGS-THOMSON has made the investment to establish an
integrated presence in this region, consisting of over 10 years
of front-end activity, extensive back-end operations (including a
new presence in China), and meaningful R&D, design, marketing
and sales resources. Over time, however, we believe that the
environmental differences between the various macro- economic
systems will tend to become more compatible. The boundary
conditions for a truly global economy will be in place and the
growth momentum will tend to equalize between Asia and other
regions, such as North America and Europe. When this occurs, we
will be well-positioned to benefit from our strong operations and
integrated presence in those areas, as well.
The other changes of note will occur in the cultural fabric of
companies. To grow and prosper, a corporate organization must
become more agile, responsive and decentralized, yet all parts of
the entity must function together as a coherent whole. The
company must foster a culture that encourages a commitment to
continuous improvement, total quality management and
environmental stewardship, and which empowers its members to
achieve these goals. This is the corporation we have been
striving to build at SGS-THOMSON.
Outlook for 1996; Vision 2000
We are entering 1996 in a healthy
financial and business condition, with demand exceeding our
capacity in the majority of our product portfolio. It is,
however, evident that the industry has started a correction from
the extraordinary growth of recent years to a much more modest
rate.
The most respected industry analysts expect a growth rate for
1996 well below that of last year, with disparities in growth
among different product families. We cannot anticipate how deep
or how long this correction phase will be. We are confident,
however, that the heavy emphasis on differentiated products in
our portfolio, our strong customer base and strategic alliances,
together with our well diversified sales base, both in terms of
applications and geography, should allow SGS-THOMSON to again
outpace the rate of growth in our served market.
Looking further ahead, SGS-THOMSON will continue to follow the
three main strategic guidelines that have served as our road map
since the Company's foundation: innovation, driven by market
needs as expressed through our alliances; globalization, which
for us means an integrated presence in the major macroeconomic
systems; and productivity, which results from a work-force that
is educated and empowered to achieve total quality management. By
following these strategic guidelines, we are aiming to:
These are the core elements of
our "Vision 2000". By working to realize this vision,
we look forward to producing continued value for our
shareholders, customers and associates.
![[SIGNATURE PISTORIO]](pistsign.gif)
Pasquale Pistorio
President and Chief Executive Officer
