Investors should consider the information contained in SMIC's filings with the U.S. Securities and Exchange Commission (SEC), including its annual report on 20-F, as amended, filed with the SEC on November 28, 2008, especially in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections, and such other documents that SMIC may file with the SEC or SEHK from time to time, including on Form 6-K. Other unknown or unpredictable factors also could have material adverse effects on SMIC's future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this press release may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this press release. Except as required by law, SMIC undertakes no obligation and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise.
Recent TSMC Legal Developments:
On August 25, 2006, TSMC filed a lawsuit against the Company and certain subsidiaries, namely SMIC (Shanghai), SMIC (Beijing) and SMIC (Americas) in the Superior Court of the State of California, County of Alameda for alleged breach of a 2005 Settlement Agreement, alleged breach of promissory notes and alleged trade secret misappropriation by the Company. TSMC seeks, among other things, damages, injunctive relief, attorneys' fees, and the acceleration of the remaining payments outstanding under the Settlement Agreement.
In the present litigation, TSMC alleges that the Company has incorporated TSMC trade secrets in the manufacture of the Company's 0.13 micron or smaller process products. TSMC further alleges that as a result of this claimed breach, TSMC's patent license is terminated and the covenant not to sue set forth in the 2005 Settlement Agreement no longer in effect with respect to the Company's larger process products. The Company has vigorously denied all allegations of misappropriation. The Court has made no finding that TSMC's claims are valid.
On September 13, 2006, the Company announced that in addition to filing a response strongly denying the allegations of TSMC in the United States lawsuit, it filed on September 12, 2006, a cross-complaint against TSMC seeking, among other things, damages for TSMC's breach of contract and breach of implied covenant of good faith and fair dealing.
On November 16, 2006, the High Court in Beijing, the People's Republic of China, accepted the filing of a complaint by the Company and its wholly-owned subsidiaries, namely, SMIC (Shanghai) and SMIC (Beijing), regarding the unfair competition arising from the breach of bona fide (i.e. integrity, good faith) principle and commercial defamation by TSMC ("PRC Complaint"). In the PRC Complaint, the Company is seeking, among other things, an injunction to stop TSMC's infringing acts, public apology from TSMC to the Company and compensation from TSMC to the Company, including profits gained by TSMC from their infringing acts.
On August 14, 2007, the Company filed an amended cross-complaint against TSMC seeking, among other things, damages for TSMC's breach of contract and breach of patent license agreement. TSMC thereafter denied the allegations of the Company's amended cross-complaint and subsequently filed additional claims that the Company breached the Settlement Agreement by filing an action in the Beijing High Court. The Company has denied these additional claims by TSMC.
On August 15-17, 2007, the California Court held a preliminary injunction hearing on TSMC's motion to enjoin use of certain process recipes in certain of the Company's 0.13 micron logic process flows.
On September 7, 2007, the Court denied TSMC's preliminary injunction motion, thereby leaving unaffected the Company's development and sales. However, the court required the Company to provide 10 days' advance notice to TSMC if the Company plans to disclose logic technology to non-SMIC entities under certain circumstances, to allow TSMC to object to the planned disclosure.
In May 2008, TSMC filed a motion in the California Court for summary adjudication against the Company on several of the Company's cross claims. The Company opposed the motion and on August 6, 2008, the Court granted in part and denied in part TSMC's motion.
On June 23, 2008, the Company filed in the California court a cross-complaint against TSMC seeking, among other things, damages for TSMC's unlawful misappropriation of trade secrets from SMIC to improve its competitive position against SMIC.
On July 10, 2008, the California Court held a preliminary injunction hearing on TSMC's motion to enjoin disclosure of information on certain process recipes in the Company's 0.30 micron logic process flows to 3rd parties. On August 8, 2008, the Court granted-in-part TSMC's motion and preliminarily enjoined SMIC from disclosing fourteen 0.30um process steps. On October 3, 2008, SMIC filed a notice of appeal of the Court's August 8, 2008 Order with the California Court of Appeal. This appeal is currently pending.
During the pre-trial proceedings in the matter, questions arose regarding the actual terms of the 2005 Settlement Agreement between SMIC and TSMC. Accordingly, the California Court held a preliminary trial on January 13 to 16, 2009, limited to a determination of the terms of the Settlement Agreement and an interpretation of any requirements to "meet and confer" prior to institution of litigation. On March 10, 2009, the Court issued a Statement of Decision finding, in part, that an agreement between the parties was executed on January 30, 2005, and thereafter amended on February 2, 2005, as urged by TSMC. The Court's ruling may be appealed by SMIC following the filing of a final judgement by the Court in this matter.
The California Court has scheduled a trial upon all liability issues related to a selected list of TSMC trade secret claims and SMIC trade secret claims to commence on September 8, 2009.
In the Company's action in the Beijing High People's Court, following an unsuccessful challenge to that Court's jurisdiction by TSMC, the Court has held evidentiary hearings on October 15, October 29, and November 25, 2008. There are no further hearings scheduled by that Court and it is expected that the Court will issue a ruling based on the evidence presented to it.
Under the provisions of SFAS 144, the Company is required to make a determination as to whether or not this pending litigation represents an event that requires a further analysis of whether the patent license portfolio has been impaired. We believe that the lawsuit is at a discovery stage and we are still evaluating whether or not the litigation represents such an event. The Company expects further information to become available to us, which will aid us in making a determination. The outcome of any impairment analysis performed under SFAS 144 might result in a material impact to our financial position and results of operations. Because the case is in its discovery stage, the Company is unable to evaluate the likelihood of an unfavourable outcome or to estimate the amount or range of potential loss.
Summary of First Quarter 2009 Operating Results Amounts in US$ thousands, except for EPS and operating data 1Q09 4Q08 QoQ 1Q08(3) YoY Revenue 146,519 272,479 -46.2% 362,369 -59.6% Cost of sales 275,900 347,114 -20.5% 394,940 -30.1% Gross loss (129,381) (74,635) 73.4% (32,571) 297.2% Operating expenses 46,681 46,445 0.5% 170,151 -72.6% Loss from operations (176,062) (121,080) 45.4% (202,722) -13.2% Other expenses, net (4,480) (4,146) 8.1% (3,596) 24.6% Income tax (expenses) credit 3,305 (745) -- (19,142) -- Net loss after income taxes (177,237) (125,972) 40.7% (225,460) -21.4% Loss from equity investment (874) (92) 850.0% (241) 262.7% Net loss (178,111) (126,064) 41.3% (225,701) -21.1% Accretion of interest to non-controlling interest holder (259) (13,394) -98.1% 846 -- Loss attributable to holders of ordinary shares (178,370) (139,458) 27.9% (224,855) (20.7%) Gross margin -88.3% -27.4% -9.0% Operating margin -120.2% -44.4% -55.9% Net loss per ordinary share - basic (1) (0.01) (0.01) (0.01) Net loss per ADS - basic (0.40) (0.37) (0.61) Net loss per ordinary share - diluted (1) (0.01) (0.01) (0.01) Net loss per ADS - diluted (0.40) (0.37) (0.61) Wafers shipped (in 8" wafers)(2) 168,682 323,175 (47.8%) 454,259 (62.9%) Capacity utilization 34.9% 67.7% 92.1% Note: (1) Based on weighted average ordinary shares of 22,344 million (basic) and 22,344 million (diluted) in 1Q09, 18,948 million (basic) and 18,948 million (diluted) in 4Q08 and 18,579 million (basic) and 18,579 million (diluted) in 1Q08 (2) Including copper interconnects (3) As restated in "SMIC Reports 2008 Second Quarter Results" issued on July 28, 2008 -- Revenue decreased to $146.5 million in 1Q09, down 46.2% QoQ from $272.5 million in 4Q08 and down 59.6% YoY from $362.4 million in 1Q08 due to lower wafer shipments. -- Cost of sales decreased to $275.9 million in 1Q09, down 20.5% QoQ from $347.1 million in 4Q08, primarily due to a decrease in wafer shipments. -- Gross loss increased to $129.4 million in 1Q09, up 73.4% QoQ from $74.6 million in 4Q08 and up 297.2% YoY from $32.6 million in 1Q08. -- Gross margins decreased to -88.3% in 1Q09 from -27.4% in 4Q08 primarily due to a significant decrease in wafer shipments as well as fab utilization QoQ. -- Total operating expenses increased to $46.7 million in 1Q09 from $46.4 million, an increase of 0.5% QoQ primarily due to a decrease in government R&D subsidies received in 1Q09. Excluding foreign exchange gain, total operating expenses in 1Q09 was $52.6 million as compared to the 1Q09 guidance of $53 million to $56 million. -- R&D expenses increased to $18.5 million in 1Q09, up 47.7% QoQ from $12.5 million due to a decrease in government subsidies received in 1Q09. Excluding the government subsidies, R&D expenses decreased by 6.2% due primarily to a decrease in engineer experiment related expenses. -- G&A expenses decreased to $14.9 million in 1Q09 from $16.1 million in 4Q08 primarily due to an increase in the foreign exchange gain related to operating activities, from $2.1 million in 4Q08 to $5.9 million in 1Q09. -- Selling & marketing expenses decreased to $4.2 million in 1Q09, down 28.0% QoQ from $5.8 million in 4Q08. Analysis of Revenues Sales Analysis By Application 1Q09 4Q08 1Q08 Computer 4.2% 4.5% 12.8% Communications 50.9% 45.9% 54.3% Consumer 32.9% 37.5% 25.9% Others 12.0% 12.1% 7.0% By Service Type 1Q09 4Q08 1Q08 Logic (1) 85.3% 85.6% 78.4% DRAM 2.8% 2.6% 12.1% Management Services 4.1% 2.2% 2.5% Mask Making, testing, others 7.8% 9.6% 7.0% By Customer Type 1Q09 4Q08 1Q08 Fabless semiconductor companies 70.9% 65.0% 54.4% Integrated device manufacturers (IDM) 11.4% 15.2% 31.6% System companies and others 17.7% 19.8% 14.0% By Geography 1Q09 4Q08 1Q08 North America 60.4% 59.9% 53.6% Greater China (2) 32.3% 33.6% 27.7% Asia Pacific (3) 5.2% 4.1% 6.1% Europe 2.1% 2.4% 12.6% Wafer Revenue Analysis By Technology 1Q09 4Q08 1Q08 0.065um 0.1% -- -- 0.09um 8.1% 11.1% 19.8% 0.13um 30.8% 34.4% 25.0% 0.15um 0.8% 2.2% 4.2% 0.18um 31.5% 32.5% 32.1% 0.25um 0.4% 0.6% 0.5% 0.35um 28.3% 19.2% 18.4% Note: (1) Including 0.13mm copper interconnects (2) Includes Hong Kong and Taiwan (3) Excluding Greater China Capacity* Fab / (Wafer Size) 1Q09 4Q08 Shanghai Mega Fab (8")(1) 85,000 88,000 Beijing Mega Fab (12")(2) 33,750 40,500 Tianjin Fab (8") 32,000 32,000 Total monthly wafer fabrication capacity 150,750 160,500 Note: * Wafers per month at the end of the period in 8" wafers (1) Shanghai Mega Fab is now comprised of Fab 1, Fab 2, and Fab 3 (2) Beijing Mega Fab is now comprised of Fab 4, Fab 5, and Fab 6 -- The change in capacity is due primarily to a change in product mix. Shipment and Utilization 8" equivalent wafers 1Q09 4Q08 1Q08 Wafer shipments including copper interconnects 168,682 323,175 454,259 Utilization rate (1) 34.9% 67.7% 92.1% Note: (1) Capacity utilization based on total wafer out divided by estimated capacity -- Wafer shipments decreased 47.8% QoQ to 168,682 units of 8-inch equivalent wafers in 1Q09 from 323,175 units of 8-inch equivalent wafers in 4Q08, and down 62.9% YoY from 454,259 8-inch equivalent wafers in 1Q08. Detailed Financial Analysis Gross Profit Analysis Amounts in US$ thousands 1Q09 4Q08 QoQ 1Q08 YoY Cost of sales 275,900 347,114 -20.5% 394,940 -30.1% Depreciation 130,375 183,916 -29.1% 159,715 -18.4% Other manufacturing costs 138,791 156,446 -11.3% 227,731 -39.1% Deferred cost amortization 5,886 5,886 -- 5,886 -- Share-based compensation 848 866 -2.1% 1,608 -47.3% Gross Profit (129,381) (74,636) 73.3% (32,571) 297.2% Gross Margin -88.3% -27.4% -9.0% -- Cost of sales decreased to $275.9 million in 1Q09, down 20.5% QoQ from $347.1 million in 4Q08, primarily due to a decrease in wafer shipments. -- Gross loss increased to $129.4 million in 1Q09, up 73.4% QoQ from $74.6 million in 4Q08 and up 297.2% YoY from $32.6 million in 1Q08. -- Gross margins decreased to -88.3% in 1Q09 from -27.4% in 4Q08 primarily due to a significant decrease in wafer shipments as well as fab utilization QoQ. Operating Expense Analysis Amounts in US$ thousands 1Q09 4Q08 QoQ 1Q08 YoY Total operating expenses 46,681 46,445 0.5% 170,151 -72.6% Research and development 18,494 12,524 47.7% 34,233 -46.0% General and administrative 14,928 16,146 -7.5% 18,606 -19.8% Selling and marketing 4,208 5,843 -28.0% 4,884 -13.8% Amortization of intangible assets 9,031 11,564 -21.9% 6,784 33.1% Impairment loss of long-lived assets -- 967 -- 105,774 -- Loss (Income) from disposal of properties 20 (599) -- (130) -- -- Total operating expenses increased to $46.7 million in 1Q09 from $46.4 million, an increase of 0.5% QoQ primarily due to a decrease in government R&D subsidies received in 1Q09. Excluding foreign exchange gain, total operating expenses in 1Q09 was $52.6 million as compared to 1Q09 guidance of $53 million to $56 million. -- R&D expenses increased to $18.5 million in 1Q09, up 47.7% from $12.5 million due to a decrease in government subsidies received in 1Q09. Excluding the government subsidies, R&D expenses decreased by 6.2% due primarily to a decrease in engineer experiment related expenses. -- G&A expenses decreased to $14.9 million in 1Q09 from $16.1 million in 4Q08 primarily due to an increase in the foreign exchange gain related to operating activities, from $2.1 million in 4Q08 to $5.9 million in 1Q09. -- Selling & marketing expenses decreased to $4.2 million in 1Q09, down 28.0% QoQ from $5.8 million in 4Q08. Other Income (Expenses) Amounts in US$ thousands 1Q09 4Q08 QoQ 1Q08 YoY Other income (expenses) (4,480) (4,146) 8.1% (3,596) 24.6% Interest income 436 1,184 -63.2% 3,758 -88.4% Interest expense (5,498) (7,133) -22.9% (17,267) -68.2% Foreign currency exchange gain (loss) (357) (2,543) -86.0% 10,317 -- Other, net 939 4,346 -78.4% (404) -- -- Interest income declined in 1Q09 due to significantly lower bank deposit rate. -- Overall interest expense decreased to $5.5 million in 1Q09 from $7.1 million in 4Q08 primarily due to a lower average loan balance and lower interest rates; however, the effect was partially offset by lower government interest subsidies received in 1Q09. -- Foreign exchange loss arising from non-operating activities decreased to $0.4 million in 1Q09 from $2.5 million in 4Q08. Combined with the foreign exchange gain arising from operating activities, the Company recorded an overall foreign exchange gain of $5.5 million in 1Q09 as compared to a foreign exchange loss of $0.4 million in 4Q08. -- Other, net decreased to $0.9 million in 1Q09 from $4.3 million in 4Q08. Depreciation and Amortization -- Total depreciation and amortization in 1Q09 was $207.8 million as compared to $207.7 million in 4Q08. Liquidity Amounts in US$ thousands 1Q09 4Q08 Cash and cash equivalents 502,016 450,230 Restricted Cash 11,228 6,255 Short term investments 20,732 19,928 Accounts receivable 156,177 199,372 Inventory 154,783 171,637 Others 78,728 79,437 Total current assets 923,664 926,859 Accounts payable 135,352 185,919 Short-term borrowings 270,078 201,258 Current portion of long-term debt 359,080 360,629 Others 144,146 151,967 Total current liabilities 908,656 899,773 Cash Ratio 0.5x 0.5x Quick Ratio 0.7x 0.7x Current Ratio 1.0x 1.0x Capital Structure Amounts in US$ thousands 1Q09 4Q08 Cash and cash equivalents 502,016 450,230 Restricted Cash 11,228 6,255 Short-term investment 20,732 19,928 Current portion of promissory note 29,493 29,242 Promissory note 23,792 23,590 Short-term borrowings 270,078 201,258 Current portion of long-term debt 359,080 360,629 Long-term debt 533,090 536,518 Total debt 1,162,248 1,098,405 Shareholders' equity 2,573,891 2,749,365 Total debt to equity ratio 45.2% 40.0% -- The increase in debt to equity ratio as of end of 1Q09 is primarily due to a decrease in shareholders' equity as a result of the net income loss recorded in 1Q09. Cash Flow Amounts in US$ thousands 1Q09 4Q08 Net cash from operating activities 78,117 171,213 Net cash from investing activities (81,785) (120,085) Net cash from financing activities 54,846 6,460 Net change in cash 51,786 57,349 Capex Summary -- Capital expenditures for 1Q09 were $24 million as compared to the 1Q09 guidance of $40 million to $45 million. -- Total planned capital expenditures for 2009 will be approximately $190 million and will be adjusted based on market conditions. Recent Highlights and Announcements -- FlipChip International, LLC, Announces 300mm Strategic Partnership with SMIC [2009-3-16] -- Grant of Options [2009-2-17] -- Further Announcement [2009-2-10] -- Change in Directorate [2009-2-5] -- SMIC Reports 2008 Fourth Quarter Results [2009-2-5] -- Extraordinary General Meeting Held on February 3, 2009 Poll Results [2009-2-3] -- Change in Directorate [2009-1-29] -- SMIC releases preliminary version of three 65-nanometer Standard Cell Libraries [2009-1-21] -- Notice of Extraordinary General Meeting [2009-1-15] -- Letter to Shareholders: Website notification letter [2009-1-15] -- Non-Exempt Continuing Connected Transactions and Refreshment of General Mandate to Allot and Issue Shares [2009-1-15] -- Change in Directorate [2009-1-14] -- Closure of Register of Members [2009-1-12] -- Notification of Board Meeting [2009-1-9] -- SMIC (NYSE: SMI ) Schedules Fourth Quarter 2008 Webcast Conference Call [2009-1-9] -- Non-Exempt Continuing Connected Transactions [2009-1-8] -- Unusual Increase in Share Trading Price [2009-1-7]