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Qimonda AG 20-F 2007 Documents found in this filing:Table of Contents
As filed with the Securities and Exchange Commission on
November 16, 2007
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
For the transition period from
to
Commission file number 001-32972
(Exact name of Registrant as
specified in its charter)
Gustav-Heinemann-Ring 212
81739 Munich, Germany
+(49)(89) 60088-0
Securities registered or to be registered pursuant to Section
12(b) of the Act.
Securities registered or to be
registered pursuant to Section 12(g) of the Act.
None
(Title of class)
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act.
None
(Title of class)
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report.
As of September 30, 2007, 342,000,001 ordinary shares, of
no par value, of Qimonda AG were outstanding.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes o No þ
Note — Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o Not
applicable o.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
þ Large
accelerated
filer o Accelerated
filer o Non-accelerated
filer
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
(APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court.
Yes o No o
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CROSS
REFERENCES TO
FORM 20-F
Table of Contents
Table of Contents
Table of Contents
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Our combined and consolidated financial statements are prepared
in accordance with U.S. GAAP and expressed in euro, the
single currency of the participating member states in the Third
Stage of the European Economic and Monetary Union (EMU) of the
Treaty Establishing the European Community, as amended from time
to time. In this annual report, references to “euro”
or ‘‘€” are to euro and references to
“U.S. $” or “$” are to
U.S. dollars. In this annual report, for convenience only,
we have translated the euro amounts reflected in our combined
and consolidated financial statements as of and for the
financial year ended September 30, 2007, into
U.S. dollars at the rate of €1.00 = $1.4219, the noon
buying rate of the Federal Reserve Bank of New York for euro on
September 28, 2007, the last currency trading day in
September 2007. You should not assume that, on these or on any
other dates, one could have converted these amounts of euros
into dollars at these or any other exchange rates.
Our financial year ends on September 30 of each year. References
to any financial year refer to the year ended September 30 of
the calendar year specified.
This annual report contains market data that have been prepared
or reported by DRAMeXchange, Gartner Inc. (Gartner),
International Data Corporation (IDC), iSuppli Corporation
(iSuppli) and World Semiconductor Trade Statistics (WSTS).
The trademarks
Qimondatm,
TwinFlash®,
AENEON®
and
RLDRAM®
have been assigned to us by Infineon in connection with our
carve-out. Pursuant to a co-development agreement between
Infineon and Micron Technology, Inc., Micron has trademark
rights to
CellularRAM®
used on or in connection with products sold inside the United
States, whereas Infineon has those rights with respect to
products sold outside the United States. All other trademarks,
trade names or service marks appearing in this annual report are
the property of their respective owners.
Figures presented in tabular format may not add up to 100% due
to rounding.
Special terms used in the semiconductor industry are defined in
the glossary.
This annual report, including particularly the sections entitled
“Risk Factors”, “Selected Combined and
Consolidated Financial Data”, “Operating and Financial
Review”, “The Semiconductor Memory Industry”,
“Our Business”, “Management”,“Related
Party Transactions and Relationships” and “Additional
Information” contains forward-looking statements. These
forward-looking statements include statements regarding our
financial position; our expectations concerning future
operations, margins, profitability, liquidity and capital
resources; our business strategy and other plans and objectives
for future operations; and all other statements that are not
historical facts. In some cases, you can identify
forward-looking statements by terminology such as
“may”, “will”, “should”,
“expects”, “intends”, “plans”,
“anticipates”, “believes”,
“thinks”, “estimates”, “seeks”,
“predicts”, “potential”, and similar
expressions. Although we believe that these statements are based
on reasonable assumptions, they are subject to numerous factors,
risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These
factors, risks and uncertainties include those listed under
“Risk Factors” and elsewhere in this annual report.
Those factors, among others, could cause our actual results and
performance to differ materially from the results and
performance projected in, or implied by, the forward-looking
statements. As you read and consider this annual report, you
should carefully understand that the forward-looking statements
are not guarantees of performance or results.
These factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting
on our behalf. New risks and uncertainties arise from time to
time, and we cannot predict those events or how they may affect
us. Except for any ongoing obligations to disclose material
information as required by the federal securities laws, we do
not have any intention or obligation to update forward-looking
statements after we distribute this annual report.
In addition, this annual report contains information concerning
the semiconductor memory products market generally and the DRAM
market in particular, that is forward-looking in nature and is
based on a variety of assumptions regarding the ways in which
the semiconductor market and the DRAM market in particular will
develop. These assumptions have been derived from independent
market research and industry reports referred to in
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this annual report. Some data are also based on our good faith
estimates, derived from our review of internal surveys and the
independent sources listed above.
If any of the assumptions regarding the market are incorrect,
actual market results may differ from those predicted. Although
we do not know what impact any such differences may have on our
business, our future results of operations and financial
condition and the market price of our ADSs may be materially
adversely affected.
We were registered in the commercial register of the local court
of Munich on May 25, 2004 as Invot AG, a German stock
corporation and wholly-owned subsidiary of Infineon Technologies
AG, under number HRB 152545. We changed our name to Qimonda AG
on April 6, 2006. Our principal executive offices are
located at Gustav-Heinemann-Ring 212, 81739 Munich, Germany, and
our telephone number is +49-89-60088-0. Our website is
http://www.qimonda.com.
This website address is included in this annual report as an
inactive textual reference only. The information and other
content appearing on our website are not part of this annual
report. Our agent for service of process in the United States is
Qimonda North America Corp., Corporation Trust Center, 1209
Orange Street, Wilmington, County of New Castle, Delaware 19801.
This document contains
non-U.S. GAAP
financial measures.
Non-U.S. GAAP
financial measures are measures of our historical or future
performance, financial position or cash flows that contain
adjustments that exclude or include amounts that are included or
excluded, as the case may be, from the most directly comparable
measure calculated and presented in accordance with
U.S. GAAP in our combined and consolidated financial
statements. Earnings before interest and taxes
(“EBIT”) is an example of a
non-U.S. GAAP
financial measure. For descriptions of these
non-U.S. GAAP
financial measures and the adjustment made to the most directly
comparable U.S. GAAP financial measures to obtain them,
please refer to “Operating and Financial Review”.
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Investing in our ADSs involves a high degree of risk. You
should carefully consider the risk factors set forth below and
all other information contained in this annual report, including
our combined and consolidated financial statements and the
related notes, before making an investment decision regarding
our securities. The risks described below are those significant
risk factors, currently known and specific to us that we believe
are relevant to an investment in our securities. If any of these
risks materialize, our business, financial condition or results
of operations could suffer, the price of our ADSs could decline
and you could lose part or all of your investment. Additional
risks not currently known to us or that we now deem immaterial
may also harm us and adversely affect your investment in our
ADSs.
The market for DRAM products is highly cyclical, with frequently
mismatched demand and supply cycles. Because the majority of
DRAM products shipped, especially those for the PC market, is of
a commodity nature, DRAM prices are driven primarily by changes
in worldwide DRAM supply, which in turn is driven by
manufacturing capacity and, in part, by fluctuations in demand
for the end products that use memory semiconductors. A typical
DRAM market cycle is characterized by an initial period of high
demand for DRAM products, resulting in rising DRAM prices.
Higher prices and suppliers’ perception of increasing
demand lead many suppliers and manufacturers to decide to
construct, equip or contract new facilities to increase
capacity. We and our competitors are currently bringing new
capacity on-stream, in our case through the
ramp-up at
our DRAM manufacturing facility in Richmond, Virginia. Several
of our competitors and we have announced the construction of new
capacity, in our case a new DRAM manufacturing facility in
Singapore, which we expect will commence production in 2009.
However, the lead times for new or improved facilities to become
operational average one to two years. By the time these
facilities come on-stream, demand growth may have slowed or even
reversed. When many suppliers’ additional manufacturing
capacity comes on-stream, which may occur almost simultaneously,
industry-wide supply often rises to exceed demand and DRAM
prices fall, sometimes precipitously. This in turn can cause
DRAM manufacturers to incur losses. As a result of this
cyclicality, our results of operations have historically been
volatile from year to year and we expect them to remain so. The
cyclicality of the DRAM market is evidenced through the
development of market prices for the higher volume standardized
memory products. The average “spot” market price for
512Mb DDR2 DRAM as reported by DRAMeXchange fell from $6.36 on
December 29, 2006, to $1.45 on September 28, 2007, a
drop of 77.2%. We believe that part of this price decline,
especially towards the end of March 2007, was driven by seasonal
demand weakness, the effects of an earlier
build-up of
inventories at original equipment manufacturers (OEMs) ahead of
the introduction of the Windows Vista computer operating system
and capacity conversions from NAND to DRAM by some competitors
following severe price erosion in the NAND flash area. During
the three months ended June 30, 2007, the price decline
continued and was amplified by strong DRAM output growth across
the industry, driven, we believe, mostly by capacity increases
and technology conversions to more efficient technologies.
Although prices for DRAM products improved slightly in July 2007
compared to June 2007, in August 2007, prices resumed the
decline that has characterized the calendar year to date. These
price declines may have significant negative impact on operating
results of DRAM suppliers, including ours.
Because the fixed costs of building, equipping and operating
DRAM manufacturing facilities, or fabs, are very high and
constitute a high proportion of the costs of producing each DRAM
chip, DRAM manufacturers normally operate their factories at
full capacity, 24 hours per day and seven days per week,
even when prices are low or falling. A manufacturer would
typically continue production of DRAM products at full capacity
at a DRAM facility as long as the average selling price of the
DRAM chips the facility produces remains above that
facility’s variable cost of producing chips and provided
that the facility cannot be cost-effectively converted to
manufacture a more profitable product. For this reason, there is
typically little capacity or supply shrinkage in response to a
market downturn. Oversupply has in a number of periods
contributed to substantial declines in average selling prices.
It did
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so in the nine months ended September 30, 2007, and is
likely to do so again in the future. DRAM prices only begin to
recover when demand growth strengthens sufficiently to match
supply. While lower prices may lead to acceleration in demand if
PC manufacturers, in particular, increase the amount of DRAM
“bits per box”, or the amount of memory included in
each device, the absorption of the oversupply may require a
substantial increase in demand. As a result, oversupply-driven
downturns can last for prolonged periods. It is likely that the
DRAM industry will continue to suffer from cyclical downturns in
the future and that we will be adversely affected by these
downturns. Such downturns can have material adverse effects on
our business, financial condition and results of operations for
extended periods.
The average selling prices of semiconductor memory products,
including DRAMs, have declined in general for many years and we
expect that they will, irrespective of industry-wide
fluctuations, continue to decline as a result of, among other
factors, technological advancements and cost reductions.
Although we may from time to time be able to take advantage of
higher selling prices typically associated with new products and
technologies, the prices of new products also generally decline
over time, and in certain cases very rapidly, in the face of
market competition. Accordingly, we need to reduce our
per-megabit manufacturing costs even as we seek to maintain our
technological position. Despite our significant investments in
research and development and in modern manufacturing facilities,
the product and process technologies that we develop may fail to
keep pace with the industry’s continuous drive towards more
powerful, smaller devices with lower per-megabit costs. If our
development fails to keep pace, our competitors may be able to
offer their products on a more profitable basis. If the average
per-megabit selling price for DRAMs and other memory chips that
we produce decreases faster than we are able to reduce our
per-megabit manufacturing costs, our gross margins would
decrease and our business, financial condition and results of
operations may be materially and adversely affected.
To
reduce our costs, we need to make investments to implement
improvements and developments in our process technologies
quickly. If we are unable to do so, we may not be able to reduce
per-megabit manufacturing costs quickly enough to keep pace with
declines in average selling prices for DRAMs and other memory
products.
Implementing a significant new process technology, such as the
migration to a new process technology node (for example, from
90nm to 75nm), requires very significant long-term investments
and often many years of development effort. In addition, each
successive improvement in process technology generally involves
an increase in complexity that may increase the required level
of investment and demand more development effort. In 2003, we
experienced difficulties in our transition from the 140nm to the
110nm technology node because, at the same time, we moved our
development work from East Fishkill, New York to Dresden,
Germany and began to convert to 193nm lithography, both of which
introduced complexities to the technology node transition.
Product yields tend to be at relatively lower levels when new
process technologies are being implemented. If we experience
delays in implementing these technologies, we may not be able to
reduce our per-megabit manufacturing costs quickly enough to
avoid falling margins or keep our prices competitive. Our
business, results of operations and financial condition could be
hurt if we experience substantial delays in developing new
process technologies or if we do not implement production
technology transitions efficiently.
We sell our products for use in a variety of applications such
as PCs, servers, game consoles and mobile and consumer devices.
Our revenue growth depends not only on continued growth in the
number of these products sold into our customers’ end
markets, but also on the amount of DRAM “bits per
box”. We are likely to suffer slower growth or a decline in
demand for our products if our customers’ end markets do
not continue to grow or if the “bits per box” do not
continue to increase or if either decline. If this occurs during
a period already characterized by DRAM oversupply, our business
can suffer especially severe downturns. This occurred most
recently in 2001, when
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worldwide DRAM sales dropped from $29 billion in 2000, to
$11 billion in 2001, according to WSTS. According to
Gartner, 256Mb equivalent DRAM was priced at $36 in the third
quarter of 2000, but by the fourth quarter of 2001, this price
had fallen below $4. These declines had a material adverse
effect on our financial condition and results of operations and
those of our competitors in 2001 and 2002. Any sustained decline
in our customers’ markets for our products that may occur
in the future could have a material adverse effect on our
business, financial condition and results of operations.
Which DRAMs are required by the market at any particular time
depends on the platforms the manufacturers of PCs and other
electronic devices are using in their products at that time. In
general, DRAMs are designed, manufactured and assembled into
modules for use on a specified platform, or logic chipset and
its associated interfaces. If DRAM manufacturers are producing
DRAMs for which there is not enough demand because the supply of
the related platforms is low, the supply of these DRAMs may
exceed the demand for them, causing prices for the affected DRAM
products to fall. For example, the DDR2 generation of DRAMs is
designed to work together with a DDR2 logic chipset to operate a
PC. In the first quarter of our 2006 financial year, we and many
of our competitors were producing large volumes of DDR2 DRAMs,
but the PC manufacturers sourced far fewer DDR2 logic chipsets
than would permit the manufacture of enough PCs to absorb all of
the DDR2 DRAMs being produced. The result was a dramatic
oversupply and price decline in DDR2 DRAMs industry-wide. A
portion of the DDR2 DRAMs that we produced remained unsold and
in our inventory until supply of appropriate logic chipsets
created sufficient demand for these accumulated DDR2 DRAMs.
Given the significant risk of demand and supply mismatches
characteristic of our industry, we may find it necessary to
write down the carrying value of inventories in the future
depending on market conditions. For some of our products, the
significant price decline in our 2007 financial year resulted in
the write-down of inventory of those products to market value in
an amount of €85 million in accordance with our
policy. Due to the volatility of the DRAM market, write-downs of
this nature may continue to occur in periods of sharp price
decline. Any such write-downs could have a material adverse
effect on our business, financial condition and results of
operations.
The semiconductor memory industry is characterized by rapid
technological change, both in the design of memory chips and in
the manufacturing processes used to produce them. The following
technological developments are continuously driving the
improvements in the performance standards of most DRAM products:
In 2000, the industry-standard DRAM chip had a density of 64
megabits. By 2006, the density of the standard DRAM chip had
increased to 512 megabits with the 1 gigabit generation in
ramp-up
phase and higher densities in development. In the same period,
the interface generation has evolved from SDRAM past DDR to
DDR2, with DDR3 in the development phase. At the same time,
operating voltage has declined from 3.3 volts for SDRAM to
1.5 volts for DDR3. DRAM manufacturers have continuously
reduced the feature size of their technologies to enable them to
manufacture higher density memory offering higher speeds and
requiring lower operating voltages.
In addition, from time to time industry participants are able to
reduce the overall size of the storage cells on DRAM chips,
which could be a factor in reducing manufacturing costs by
increasing the number of chips that can be
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manufactured on a wafer, and is becoming increasingly important
for certain applications that require very small and
specifically tailored form factors.
For us to maintain or increase the competitiveness of our
products, we must continually develop or acquire the
technologies that allow us to increase memory capacity while
shrinking the size of our chips and to do so faster than our
competition. Our commitment to the development of new products
and process technologies, including making the substantial
investments that are required for these developments, must be
made well in advance of the introduction of those products and
technologies into the market. As part of this commitment, we
must continually be reviewing the technologies, architectures
and processes we use to make sure that they have the
technological properties and robustness to permit volume
manufacturing at competitive costs. Technology and industry
standards or customer demands may change during the development
process, rendering our products outdated or uncompetitive. Our
failure to keep pace with the technological advancements, to
anticipate changes that might render our technologies,
architectures and processes uncompetitive or to respond quickly
to market changes may materially and adversely affect our
business, financial condition and results of operations.
The
semiconductor memory industry is characterized by intense
competition, which could reduce our sales or put continued
pressure on our prices.
The semiconductor memory industry is highly competitive and has
been characterized by rapid technological change, short product
lifecycles, high capital expenditures, intense pricing pressure
from major customers, periods of oversupply and continuous
advancements in process technologies and manufacturing
facilities. We compete globally with other major DRAM suppliers,
including Samsung Electronics, Hynix Semiconductor, Elpida
Memory, Micron Technology and Nanya Technology Corporation
(Nanya), which is our joint venture partner in Inotera Memories,
Inc. Some of our competitors have substantially greater capital,
human and other resources and manufacturing capacities, more
efficient cost structures, higher brand recognition, larger
customer bases and more diversified product lines than we have.
See “Our Business — Competition”.
Competitors with greater resources and more diversified
operations may have long-term advantages, including the ability
to better withstand future downturns in the DRAM market and to
finance research and development activities. In addition, unfair
price competition, government support or trade barriers by or
for the benefit of our competitors can adversely affect our
competitive position.
To compete successfully in the DRAM market, we must:
Other factors affecting our ability to compete successfully are
largely beyond our control. These include:
Increased competitive pressure generally or the relative
weakening of our competitive position caused by these factors,
or other developments we have not anticipated, could materially
and adversely affect our business, financial condition and
results of operations.
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Retail demand for our customers’ products fluctuates
throughout the year and typically varies from region to region.
For example, as our product mix shifts towards applications used
in consumer electronics, we are increasingly exposed to the
seasonal sales patterns around the Christmas season. In
addition, demand in the retail sector of the PC market is often
stronger during the last three months of the calendar year as a
result of the Christmas holiday season. Many of the factors that
create and affect seasonal trends are beyond our control.
Further, if DRAM prices are relatively low, our customers may
react to reduced demand for their products by increasing
“bits per box” to offer the end-user a higher
performing product in an attempt to spur demand, such as when a
PC or notebook manufacturer offers to upgrade the amount of
memory included in a product at no additional cost. However, if
DRAM prices are relatively high at that time, our customers may
not increase the “bits per box” but instead use
another method to spur demand for their products. Alternatively,
if DRAM prices are high during a period in which retail demand
is relatively high, our customers may seek to limit the growth
of the “bits per box”, which may in turn slow or
reduce demand for DRAM and cause DRAM prices to fall. Measures
like these can easily obscure the seasonal factors. These uneven
sales patterns, especially when combined with the existing
dynamics of DRAM demand and supply cyclicality, make prediction
of net sales for each financial period difficult and increase
the risk of unanticipated variations in our results and
financial condition on a quarterly basis.
Some
of our agreements with strategic partners, such as our Inotera
Memories, Inc. joint venture with Nanya, have restrictions on
transfers of the shares of the ventures they create that could
cause our ownership or equity interest in these ventures to
revert to Infineon, if Infineon ceases to be our majority
owner.
Our joint venture with Nanya, Inotera Memories, Inc.
manufactures DRAM products on the basis of technology jointly
developed by Nanya and us pursuant to a separate joint
development agreement. Infineon has transferred its shares in
Inotera to us, other than a portion representing 0.24% of the
total Inotera shares, which Infineon holds in trust for us due
to Taiwanese legal restrictions.
If Infineon were to reduce its shareholding in Qimonda to a
minority level before the fifth anniversary of our carve-out
from Infineon and the early mass production using 58nm process
technology at our manufacturing site in Dresden has not been
achieved by that time, the joint venture agreement with Nanya,
as amended, could require us to retransfer these Inotera shares
to Infineon. We have agreed with Infineon that, in the event
Nanya requests a retransfer, we would transfer the Inotera
shares to Infineon in compliance with a trust agreement pursuant
to which Infineon has agreed it would hold the Inotera shares in
trust for us until they could be transferred back to us. If
Infineon acquires our shares in Inotera to hold in trust for us,
we would have to exercise our shareholder rights, including
board membership and voting rights, only through Infineon, which
would be required under the trust agreement to act according to
our instructions. This process is a more cumbersome and less
efficient method of exercising these rights than if we held the
shares directly. We do not believe that these administrative
complexities would have a material adverse effect on our
business, financial condition and results of operations.
Although the trust agreement was drafted in a manner designed
under German law to ensure that Qimonda could force the transfer
to it of the Inotera shares if Infineon were to become the
subject of insolvency proceedings, there is, in the absence of
any clear statutory provision or directly applicable judicial
interpretation on the issue, a risk that the shares would remain
subject to the insolvency proceeding in such a case. Were this
to occur, we would lose a portion or all of our investment in
Inotera.
In addition, our limited partnership agreement with Advanced
Micro Devices (AMD) and Toppan Photomasks Inc. relating to the
Advanced Mask Technology Center (AMTC) and the Maskhouse
Building Administration Company (BAC) in Dresden requires prior
written consent from the other partners before Infineon can
assign its partnership interest. In the case of a transfer to an
affiliate, the consent may not be unreasonably withheld. Under
the current agreement, the interest must be transferred back to
Infineon should Infineon cease to be our majority shareholder.
This could lead to similar administrative complexities as
described above in the case of Inotera.
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Infineon and we are currently finalizing negotiations with AMD
and Toppan concerning an agreement that would include the
consent to the assignment to us and address Infineon’s
intention to reduce its stake in us below 50%. Under this
agreement, a “change of control” that could lead to
termination of the agreements with AMD and Toppan would only be
deemed to occur if a direct competitor of AMD or Toppan becomes
the beneficial owner of 30% or more of our equity interests or
obtains the power to appoint the majority of the members of our
Supervisory Board.
We have suffered substantial losses in prior periods, when the
price of our products has dropped at a rate for which we could
not compensate through volume increases or reduced costs. For
example, in our 2001 and 2002 financial years, we incurred net
operating losses of €962 million and
€626 million. In addition, we have incurred quarterly
losses in net income and EBIT terms for individual quarters
within financial years in which we were profitable, including in
our 2006 financial year, in which we experienced significant
losses in the first quarter. In our 2007 financial year we
experienced significant losses in the third and fourth quarters.
We may also incur losses in future periods. If we sustain losses
like these, it would materially and adversely affect our
business, financial condition and results of operations. In
addition, our share price is likely to fall if we incur losses
in the future or if we report quarterly or annual results that
do not meet the expectations of industry analysts or are weaker
than those reported by our competitors.
The average selling prices of our principal DRAM products may
fluctuate significantly from quarter to quarter or even from
month to month. This may cause us to experience significant
fluctuations in our revenues. However, we have high fixed costs
of operations, resulting in large part from the
capital-intensive nature of our business. As a result, our
reported financial results can and often do fluctuate
significantly from period to period.
A high proportion of our revenues are derived from sales of
standard DRAM products for PC and workstation applications,
which accounted for 51% of our revenues in our 2005 financial
year, 47% of our revenues in our 2006 financial year and 39% in
our 2007 financial year. While we are, as part of our strategy
to reduce over-reliance on standard DRAMs, seeking to better
balance our product portfolio by offering a wider range of
application-specific DRAMs and to diversify our customer base by
focusing on customer-specific DRAMs, these products remain to a
greater or lesser extent exposed to the dynamics exemplified by
the standard DRAM market. Finally, after our carve-out, we are
no longer able to offer customers a range of logic products in
addition to memory products. Due to these factors, in the event
of a downturn in the DRAM market, our ability to offer
alternative products is very limited.
Some of our competitors have diversified production among DRAMs,
flash memory, image sensors and logic ICs, while at present we
remain generally focused on DRAMs. These competitors may be able
to offset the negative effects of DRAM downturns by selling
non-DRAM products, including flash memory. They may, when they
then perceive better pricing conditions in the DRAM market, be
able to quickly convert production to DRAM products,
significantly increasing their DRAM capacities in response to
positive environments and significantly decreasing their DRAM
capacities in response to negative environments. Conversely, if
the pricing for non-DRAM products such as flash memory
deteriorates, they can convert production back to DRAM products.
Because our production is narrowly focused on DRAMs, we are less
able to adjust our capacities in response to cyclical
developments. This lower ability to adjust capacity could
adversely affect our business, financial condition and results
of operations.
In addition, the potential ability of these competitors to
offset the negative effects of DRAM downturns by shifting their
sales to non-DRAM products may permit them to use the proceeds
from those sales to invest in their DRAM business. This may
cause us to be at a competitive disadvantage with regard to
technological advancements taking place in the DRAM industry and
reduce our relative ability to keep pace with these competitors.
This could adversely affect our business, financial condition
and results of operations.
The ability of some of our competitors to shift their production
among memory products may leave us relatively more exposed to
downturns in the DRAM industry and less able to finance
technological advancement.
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It is not industry practice to enter into firm, long-term
purchase commitments with respect to standard DRAMs. We
primarily use internal forecasts to determine the number and mix
of products that we manufacture. Although we also consult with
major customers, who typically provide us with short-term
rolling forecasts of their product requirements on a monthly
basis, customers may cancel orders or reduce quantities for a
number of reasons or discontinue their relationship with us at
any time. Customers frequently place orders requesting product
delivery almost immediately after the order is made, which makes
forecasting customer demand even more difficult. Other customers
also purchase chips on consignment, withdrawing from our stock
of products kept on our premises. They may reduce their
anticipated withdrawals from these stocks on very short notice.
Based on past experience, if we over-estimate demand for a
particular product, we may need to significantly reduce the
price for that product in order to sell our excess inventory. In
addition, due to the high fixed costs of operating manufacturing
facilities, it is not industry practice to reduce production in
response to or anticipation of demand slumps, which may lead to
excess inventory and cause us to incur additional inventory
carrying costs or write-downs. If we are unable to predict
accurately the appropriate amount of products needed to meet
customer requirements, or if our customers were to unexpectedly
cancel or reduce a large number of orders simultaneously, we
could fail to match our production with our customers’
demand. This could materially and adversely affect our business,
financial condition and results of operations.
In addition, because our markets are volatile and subject to
rapid technological and price changes, our forecasts may be
incorrect, and we may make too many or too few of certain
products. For example, in the first quarter of our 2006
financial year, we produced an excess of DDR2 DRAMs because the
corresponding DDR2 logic chipsets, which are produced by logic
semiconductor manufacturers, were not available in quantities
sufficient for PC manufacturers to absorb the supply of DDR2
DRAMs in the market. A portion of the DDR2 DRAMs that we
produced remained unsold and in our inventory until supply of
appropriate logic chipsets created sufficient demand for our
accumulated DDR2 DRAMs.
The DRAM product needs of manufacturers of servers, networking
and storage equipment and graphics, mobile and consumer devices
are becoming increasingly diverse in terms of product
specifications. This diversification requires us to devote
significant resources to product design and development in
cooperation with our customers. If we are unable to invest
sufficient resources to meet our customers’ specialized
needs, if we do so in an inefficient or untimely manner, or if
our working relationships with our customers otherwise
deteriorate, we may lose business opportunities or market share
as a result. We also may encounter difficulties penetrating
markets where our relationship with manufacturers is less
developed. In addition, our competitors may be able to implement
similar strategies more effectively than we can.
It is difficult to predict future supply and demand in the
market for DRAM and other memory products. Because it takes one
to two years to plan, finance, construct and equip a new
facility, we must make a decision to build a new facility, or to
re-equip an existing facility, with no reliable forecast of what
the supply and demand ratio is likely to be when the facility is
scheduled to come on-stream. The capital expenditures required
to construct and equip a semiconductor facility with competitive
economies of scale are typically between $2 to $3 billion.
In the 2005 financial year, commercial DRAM production began at
the 300mm facilities of our fab in Richmond, Virginia. In the
same year, our foundry partner SMIC ramped up its new 300mm
facility, in Beijing, China with our DRAM technology. In the
2006 financial year, our foundry partner Winbond ramped up a new
300mm fab in Taichung, Taiwan with our DRAM technology. In
addition, Inotera Memories, Inc. our joint venture with Nanya,
increased its capacity at its 300mm fab in Taoyuan, Taiwan in
the 2006 financial year, and has started manufacturing in its
second 300mm manufacturing module in December 2006. We are also
continuing the
ramp-up at
our 300mm manufacturing facility in Richmond, Virginia.
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We recently announced plans to build a new 300mm manufacturing
facility in Singapore with production expected to start there in
2009. A number of our competitors have also opened, or announced
their intentions to open, new 300mm production facilities. If
several new 300mm DRAM manufacturing plants come on-stream at
the same time, there is a risk that the resulting supply growth
might exceed demand at that point in time. This could result in
strongly reduced prices for our DRAM products at a time when we
have just made very substantial investments in new production.
If this happens, it may take longer for us to recoup our
investments, or we may not be able to do so at all. This could
materially and adversely affect our business, financial
condition and results of operations.
If prices are significantly declining during the time when we
are ramping up production at new facilities, we may take
measures to limit our cash outflows. These measures could
include cancelling or delaying the delivery of manufacturing
equipment at those facilities. As a consequence, these
facilities might not ramp up to their expected capacity in the
short term. This could prevent them from achieving the economies
of scale they were designed to achieve, such that the costs of
manufacture at these facilities might exceed the revenues from
the sales of the products produced there. This could force us to
decide to suspend manufacturing at these facilities. This would
also prevent us from recouping our investments as planned or at
all, which could have a material and adverse effect on our
business, financial condition and results of operations.
We may experience difficulty in ramping up production at new or
existing facilities in a timely manner, such as our 300mm fab in
Richmond, Virginia. Similarly, our joint ventures with Nanya and
CSVC, as well as SMIC and Winbond, foundry manufacturers who
provide some of our manufacturing capacity may experience
similar difficulties in ramping up production at their
production facilities. We may also experience delays in
converting to the next step in the technology improvements that
enable us to reduce the feature sizes on chips. This could be
due to a variety of factors, including an inability to hire and
train new personnel in a timely fashion, the unavailability of
equipment, difficulties or delays in implementing new
fabrication processes and an inability to achieve required yield
levels.
In the future, we may face delays in the construction, equipping
or ramp-up
of new facilities or the conversion of existing facilities to
new process technologies. Our failure to ramp up our production
on a timely basis may result in loss of sales or customers and a
loss of market share, which in turn could reduce our ability to
exploit economies of scale, negatively affecting our cost
position and our ability to finance investments in the future.
This failure could also prevent us from recouping our
investments in a timely manner or at all. Any of these effects
could materially and adversely affect our business, financial
condition and results of operations.
Historically, we have relied on a limited number of customers,
primarily among the largest PC manufacturers, for a substantial
portion of our total sales. In our 2007 financial year, our five
largest customers accounted for approximately 48% of our total
sales. HP, our largest customer accounted for approximately 17%
of our sales and Dell, our second largest customer accounted for
approximately 12% of our sales in that period. These major
customers generally purchase products on short-term purchase
orders, can easily cancel these orders and have no long-term
obligations to purchase products from us. Although we are
seeking to broaden our customer base, there are a limited number
of major manufacturers that purchase standard DRAM products in
large quantities, and most of them are existing customers of
ours. Our major customers generally seek to maintain multiple
sources of supply, and it may be difficult for us to
meaningfully increase our current sales volumes of existing
products to them. The loss of one of our major customers, or any
substantial reduction in sales to any of these customers, could
have a material adverse effect on our business, financial
condition and results of operations.
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In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with the DOJ’s investigation of alleged
antitrust violations in the DRAM industry. Pursuant to this plea
agreement, Infineon agreed to plead guilty to a single count of
conspiring with other unspecified DRAM manufacturers to fix the
prices of DRAM products between July 1, 1999 and
June 15, 2002, and pay a fine of $160 million. The
plea agreement requires Infineon to pay the fine (plus accrued
interest) in equal annual installments through 2009. Subsequent
to the commencement of the DOJ investigation, a number of
putative class action lawsuits were filed against Infineon, its
principal U.S. subsidiary and other DRAM suppliers in
various state and federal courts in the United States alleging
violations of the Sherman Act, California’s Cartwright Act,
other state laws and unfair competition law as well as unjust
enrichment in connection with the sale and pricing of memory
products. Each of the cases purports to be on behalf of a class
of individuals and entities who purchased DRAMs directly or
indirectly from Infineon in periods commencing in or after 1999.
Infineon reached a settlement agreement in the class action
cases filed by direct U.S. purchasers that were transferred
to the U.S. District Court for the Northern District of
California for coordinated proceedings. Under the terms of the
settlement agreement Infineon agreed to pay approximately
$21 million. We recorded a corresponding charge to other
operating expense in our financial year ended September 30,
2005. In addition to this settlement payment, Infineon agreed to
pay an additional amount if it is proven that sales of DRAM
products to the settlement class after opt-outs during the
settlement period exceeded $208.1 million. We would also be
responsible for this payment. The additional amount payable is
calculated by multiplying the amount by which these sales exceed
$208.1 million by 10.53%. We do not currently expect to pay
any additional amount to the class. In November 2006, the
District Court for the Northern District of California approved
the settlement with the direct U.S. purchasers, entered
final judgment and dismissed the class action claims with
prejudice. Between March 2006 and March 2007, six separate
lawsuits were filed by six direct and indirect purchasers of
DRAM against Infineon and various other DRAM suppliers seeking
unspecified damages and other relief based on the same
allegations. One of those lawsuits was voluntarily dismissed on
April 26, 2007, pursuant to a settlement. In October 2006,
these six plaintiffs along with a number of other individuals
and entities gave notice that they are opting out of the direct
U.S. purchaser class and settlement. As a consequence their
claims were not released by that settlement. As of the date
hereof, 62 indirect U.S. purchaser class action cases are
still pending in federal and state courts. A putative class
action brought on behalf of
non-U.S. direct
purchasers of DRAM was dismissed with prejudice by the court. In
July 2006, plaintiffs filed their opening brief on appeal in
that case and defendants filed their joint opening brief in
September 2006. No hearing date has yet been scheduled for the
appeal. Furthermore, in July and September 2006, the state
attorneys general of New York, California and 39 other states
and territories filed two separate actions in federal court in
New York and California against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of governmental entities and consumers who purchased
products containing DRAM beginning in 1998. The plaintiffs’
claims involve the same allegations of DRAM price-fixing and
artificial price inflation practices discussed above. The
plaintiffs are seeking to recover actual and treble damages in
unspecified amounts, penalties, costs and other relief. In
August 2007, the court granted the defendants’ motion to
dismiss in part, dismissing the claims on behalf of consumers,
businesses and governmental agencies in a number of states and
dismissing certain other claims with leave to amend. The
plaintiffs in both actions filed amended complaints in October
2007.
Between December 2004 and February 2005, two putative class
proceedings were also filed in the Canadian province of Quebec
and one was filed in each of Ontario and British Columbia
against Infineon, its principal U.S. subsidiary and other
DRAM manufacturers on behalf of all direct and indirect
purchasers resident in Canada who purchased DRAM or products
containing DRAM between July 1999 and June 2002. Plaintiffs
primarily allege conspiracy to unduly restrain competition and
to illegally fix the price of DRAM. In the British Columbia
action, the certification motion has been scheduled for August
2007 and will resume in November 2007. In one Quebec class
action, a tentative date for the motion for authorization
(certification) has been set for May 2008 (with the possibility
of a March 2008 date if the court calendar opens); the other
Quebec action has been stayed pending developments in the one
that is going forward.
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Infineon received a request for information regarding DRAM
industry practices from the European Commission in April 2003
and a notice of formal inquiry into alleged DRAM industry
competition law violations from the Canadian Competition Bureau
in May 2004. Infineon is fully cooperating with the
Commission’s investigation and the Competition
Bureau’s inquiry.
In the contribution agreement we entered into with Infineon, we
agreed to indemnify Infineon for all of the potential
liabilities and risks in connection with the civil and criminal
antitrust proceedings, including the costs of defending these
proceedings. As of June 30, 2007, we have accrued
liabilities in the amount of €101 million related to
potential liabilities and risks with respect to the DOJ and
European antitrust investigations and the direct and indirect
purchaser litigation and settlements described above, as well as
for legal expenses relating to the securities class actions and
the Canadian antitrust investigation and litigation described in
“Our Business — Legal Matters”. As
additional information becomes available, the potential
liability related to these matters will be reassessed and the
estimates revised, if necessary. These accrued liabilities would
be subject to change in the future based on new developments in
each matter, or changes in circumstances, which could have a
material adverse effect on our financial condition and results
of operations.
An adverse final resolution of the investigations or the civil
claims described above could cause us to bear significant
financial liability and other adverse effects. Irrespective of
the validity or the successful assertion of the above claims,
Infineon could incur significant costs in connection with the
defense or settlement of these claims, for which we are required
to indemnify Infineon under the contribution agreement. An
adverse final resolution or the incurrence of significant costs
could have a material adverse effect on our business, financial
condition and results of operations. See “Our
Business — Legal Matters” for more information on
these matters.
A consolidated putative class action lawsuit is pending against
Infineon and its U.S. subsidiary, and three of
Infineon’s current and former officers, one of which is
currently the chairman of our Supervisory Board, in
U.S. federal court on behalf of a putative class of
purchasers of Infineon’s shares who purchased them during
the period from March 2000 to July 2004. The plaintiffs allege
violations of the U.S. securities laws arising out of an
alleged failure to disclose Infineon’s alleged
participation in DRAM price fixing activities and seek
unspecified damages. In September 2006, the court dismissed the
complaint with leave to amend and in October 2006, the
plaintiffs filed a second amended complaint. In March 2007, the
plaintiffs withdrew the second amended complaint and were
granted a motion for leave to file a third amended complaint.
The plaintiffs filed a third amended complaint in July 2007 and
Infineon filed a further brief in support of its motion to
dismiss in October 2007. The court has scheduled a hearing on
the motion in November 2007. In the contribution agreement we
entered into with Infineon, we agreed to share any future
liabilities arising out of this lawsuit equally with Infineon,
including the cost of defending the suit.
We are currently unable to provide an estimate of the likelihood
of an unfavorable outcome to us or of the amount or range of
potential loss arising from the action. An adverse final
resolution of the class action litigation could cause us to bear
significant financial liability and other adverse effects.
Irrespective of the validity or the successful assertion of the
securities claims, Infineon could incur significant costs in
connection with the defense of these claims, and we are required
to indemnify Infineon for one-half of these, as stated above. An
adverse final resolution or the incurrence of significant costs
could have a material adverse effect on our business, financial
condition and results of operations. Infineon’s
directors’ and officers’ insurance carriers have
denied coverage in the securities class action and Infineon
filed suit against the carriers in December 2005 and August
2006. Infineon’s claims against one D&O insurance
carrier were finally dismissed in May 2007. The claims against
the other insurance carrier were dismissed in November 2006;
Infineon filed an appeal against this decision. See “Our
Business — Legal Matters” for more information on
this matter.
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Our success depends on our ability to obtain and maintain
patents, licenses and other intellectual property rights
covering our products and our design and manufacturing
processes. The process of seeking patent protection can be long
and expensive. Patents may not be granted on currently pending
or future applications or may not be of sufficient scope or
strength to provide us with meaningful protection or commercial
advantage. In addition, effective copyright and trade secret
protection may be unavailable or limited in some countries, and
our trade secrets may be vulnerable to disclosure or
misappropriation by employees, strategic partners and other
persons. See “ — Risks related to our carve-out
as a stand-alone company and our continuing relationship with
Infineon — We may lose rights to intellectual property
arrangements if Infineon’s ownership in our company drops
below certain levels.”
Infineon transferred to us substantially all of the patents
attributable to the Memory Products segment of Infineon in
connection with the carve-out of our company, while Infineon
retained ownership of all other Infineon patents. Qimonda’s
patent portfolio at the end of September 2007 included
approximately 20,000 patents and patent applications
(representing approximately 6,000 patent families) compared to
more than 23,000 patents and patent applications remaining with
Infineon at the time of the carve-out. Each of we and Infineon
has granted the other a perpetual, royalty free license to use
these patents in each of our respective businesses. However, our
rights to use these patents are subject to the limitations and
restrictions described in “Our Business —
Intellectual Property”.
We also may require rights to use patented technology owned by
third parties, including other semiconductor manufacturers, and
have entered into licenses and cross-license agreements to
obtain such rights (ourselves or through Infineon). We
anticipate that we will continue to enter into more of these
agreements in the future. If we are unable to enter into or
renew our technology licensing agreements on acceptable terms,
or not at all, we may lose the legal right to use some of the
processes we require to produce our products, which may prevent
us from manufacturing and selling some of our products,
including our key products. In addition, we could be at a
disadvantage if our competitors obtain licenses for protected
technologies on more favorable terms than we do, or if we are
unable to acquire on favorable terms any licenses we require for
patented technologies which we may determine we need to obtain
from third parties in order to maintain our competitive
situation.
In addition, our rights to use some third party patents are
currently based on cross-license agreements between Infineon and
those third parties. Some of these cross-license agreements will
terminate with respect to us if we cease to be a controlled
subsidiary of Infineon. Although our own patent portfolio may
provide us with leverage in negotiating cross-license agreements
with third parties, these agreements may be less favorable to us
than the existing Infineon agreements. If we are unable to
protect our intellectual property, or retain or obtain the
intellectual property we need from third parties to operate our
business, our business, financial condition and results of
operations could be materially and adversely affected.
Our industry is characterized by a complex series of license and
cross license agreements covering technology used in our
products and manufacturing processes and those of our
competitors. Accordingly, other companies have developed and
will continue to develop technologies that are protected by
patents and other intellectual property rights and that we may
require to manufacture our products. These technologies may
become unavailable to us or be offered to us only on unfavorable
terms and conditions. In other cases, other companies may claim
technology as theirs and seek to force us to stop using it, even
if we believe that we have developed or otherwise have rights to
exploit the technology in question. In either case, litigation,
which could require substantial financial and management
resources, is often necessary to defend against claims of
infringement of intellectual property rights brought against us
by others. In some cases, we might be able to avoid or settle
litigation on favorable terms because we in turn possess patents
that we could assert against a plaintiff or potential plaintiff.
In other cases, the plaintiffs are engaged principally in the
development and licensing of technology, and do not require
access to other parties’ patent portfolios, such as ours.
For example, in August 2006, we entered into a six year license
agreement with Tessera under which Tessera granted us a
worldwide, non exclusive, non transferable and non sublicensable
license to use a portfolio of Tessera patents. We paid Tessera a
one time fee of $40 million and are required to pay
additional royalties based on volume of components we sell that
are subject to the license.
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At any given time, Infineon and we are engaged in negotiations
with a number of third parties regarding assertions that
technologies we are using infringe those parties’ rights.
Infineon and we are currently in negotiations in a small number
of matters of this nature. In part as a result of the complex
series of license and cross-license agreements and the
uncertainty, time and expense of litigation, it is sometimes in
our interests to settle with these claimants in a way that
avoids litigation. These settlements may involve the payment of
license fees, royalties or other consideration over lengthy
periods in amounts that could be material for us. In the
contribution agreement we entered into with Infineon, we agreed
to indemnify Infineon for all of the potential liabilities and
risks in connection with any such settlement or litigation
relating to our business, and to bear 60% of the combined
license fee payments that Infineon and we must or may have to
pay in the future related to two of these negotiations, one of
which is still ongoing.
If any intellectual property infringement claims that may be
asserted against us in the future are successful, we may be
forced to refrain from selling DRAM products in certain markets,
seek to develop non-infringing technology, which may not be
feasible, license the underlying technology upon economically
unfavorable terms and conditions,
and/or pay
damages for prior use of the technology at issue. In addition,
our insurance excludes liability arising out of claims that we
have infringed the patent or other intellectual property rights
of third parties. Any of these results may have a material and
adverse effect on our business, financial condition and results
of operations.
We manufacture our products using our “trench” DRAM
architecture. In 2006, approximately 24% of DRAM chips produced
worldwide were manufactured using trench cell architecture, of
which we produced approximately two-thirds, according to
Gartner. The remaining 76% were produced using different kinds
of an alternative architecture known as “stack”
architecture. Although we believe that the physical
characteristics of trench cell technology can be exploited
during the 90nm node, which currently accounts for more than
half of our production, and during the next several technology
nodes, including the 58nm node that is currently in development,
to yield advantages over the various stack architectures, this
technology may not continue to perform as well as, or better
than, stack technology when migrating to smaller chip feature
sizes. As part of our commitment to the development of new
products and process technologies, we must continually be
reviewing the technologies, architectures and processes we use
to make sure that they provide the technological properties,
regarding performance, power consumption and form factor as well
as the robustness to permit volume manufacturing at competitive
costs. If we were required to transition from trench to other
technology platforms, the transition could require a substantial
period of time and a substantial investment of capital, and may
require us to acquire rights to additional technology.
To manufacture our trench cells, we need etching equipment that
is specially modified to etch the deep trench capacitors. We
cannot be certain that equipment manufacturers will continue to
develop and supply such equipment on favorable terms, if at all.
In the longer term, we face the potential risk of a fundamental
shift from the silicon-based technology on which the memory
industry has long been based. Although we do not believe that
any technology to rival silicon-based memory is likely to prove
feasible in at least the near- to medium-term, and although we
devote resources to basic research in order to keep abreast of a
wide range of potential new memory technologies, the fundamental
technology of the semiconductor memory business may not continue
to be broadly based on current technology. We may be unable to
respond quickly enough to any fundamental technological shift in
the industry. Our failure to implement successfully subsequent
technology generations or respond to technology developments may
materially and adversely affect our business, financial
condition and results of operations.
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We may also devote research and development resources to
technologies or products that turn out to be unsuccessful.
Commitments to developing any new product must be made well in
advance of sales, and customer demands and technology may change
while we are in development, rendering our products outdated or
uncompetitive before their introduction. We must therefore
anticipate both future demand and the technology features that
will be required to supply such demand. If we incur losses as a
result of a market downturn or otherwise, we may not be able to
devote sufficient resources to the research and development
needed to remain competitive. Our failure to properly allocate
research and development resources could materially and
adversely affect our business, financial condition and results
of operations.
Our manufacturing operations depend upon obtaining deliveries of
the equipment used in our manufacturing facilities and adequate
supplies of raw materials, including silicon wafers, masks,
chemicals and resists, at reasonable prices and on a timely
basis.
Although there are multiple sources for most types of equipment
that we use, the equipment is sophisticated and complex and it
is difficult for us to rapidly substitute one supplier for
another or one piece of equipment for another. We currently have
only one significant sole-source equipment supplier, Advantest,
which supplies some of our testing equipment. If we were to
experience supply or quality problems with Advantest, it could
take a long time for us to locate a secondary source of supply
for that equipment.
The expansion of fabrication facilities by us, our joint venture
counterparts, our foundry partners and other semiconductor
companies may put additional pressure on the supply of
equipment. Shortages of equipment could result in an increase in
prices and longer delivery times. The lead time for delivery of
some equipment may be as long as six to twelve months. If we are
unable to obtain equipment in a timely manner, we may be unable
to ramp up production according to our plan or fulfill our
customer orders, which could negatively impact our business,
financial condition and results of operations.
We generally have more than one source available for raw
materials, but materials meeting our standards are in some cases
available only from a limited number of vendors. The principal
suppliers for our silicon wafers are Siltronic, SEH, MEMC and
SUMCO. Our revenues and earnings could decline if we were unable
to obtain adequate supplies of high-quality raw materials in a
timely manner (for instance, due to interruption of supply or
increased industry demand) or if there were significant
increases in the costs of raw materials that we could not pass
on to our customers. In addition, the raw materials we need for
our business could become scarcer or more expensive as worldwide
demand for semiconductors and other products also produced with
the same raw materials increases. If we are unable to obtain
sufficient raw materials in a timely manner, we may experience
interruptions in production, which could in turn, leave us
unable to fulfill our customer orders, which could negatively
impact our business, financial condition and results of
operations.
In 2002, Infineon entered into agreements with each of SMIC, a
Chinese foundry, and Winbond, a Taiwanese foundry, for the
production of some of our memory products in their fabs. We
sourced 22% of our DRAM capacity from these unaffiliated foundry
partners in the 2006 financial year compared to 25% in the 2007
financial year and plan to reduce those levels somewhat in the
coming months as we increase the proportion of our capacity
sourced from Inotera. In addition, we sourced about 7% of our
capacity from Infineon’s 200mm fab in Dresden. We intend to
source at least 50% of our production capacity from our own
facilities to enable us to continue to develop our manufacturing
process technologies. There are relatively few foundries that
could manufacture our products, and we might not be able to
secure an agreement with an alternative foundry on acceptable
terms, particularly in a period of industry-wide under-capacity.
In the event that manufacturing capacity is reduced or
eliminated at one or more foundry facilities, or if we are
unsuccessful in negotiating additional capacity with our
existing foundry partners or
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in obtaining new foundry partners, we could have difficulties
fulfilling our customer’s needs, and our sales could
decline.
Our reliance on third-party manufacturing relationships also
subjects us to the following risks:
If any of these events, or others we have not foreseen, were to
occur, we could experience an interruption in our supply chain
or an increase in costs, which could delay or decrease our sales
or otherwise adversely affect our business, financial condition
and results of operations.
While building new capacity of our own would require
significantly higher capital expenditures than purchasing
products from foundries, purchasing products from foundries may
result in lower profit margins than we could obtain by
manufacturing the products on our own because we base the price
we pay for wafers from our foundry partners on a margin sharing
principle. Therefore, in times of high DRAM prices, the prices
we pay for wafers produced by our foundry partners are likely to
be higher than the cost of manufacturing using our own
capacities, resulting in lower profit margins.
As part of our strategy, we have entered into a number of
long-term strategic alliances with leading industry
participants, both to manufacture memory products and to develop
new manufacturing process technologies and products. For
example, we have entered into development agreements with Nanya
to develop the 75nm and 58nm process technology nodes and have
formed a joint venture with Nanya called Inotera Memories, Inc.
to manufacture DRAM. We participate in a joint venture with
Advanced Micro Devices and Toppan Photomasks to develop and
manufacture lithographic masks. We also established a joint
venture with China Singapore Suzhou Industrial Park Venture Co.
in Suzhou, China pursuant to which we constructed a facility for
assembly and testing of our memory products. We expect that our
investments in our Chinese joint venture until the end of our
2008 financial year, pursuant to our current contractual
obligations will be $86.5 million.
These strategic relationships and joint ventures are subject to
various risks that could cause us to lose the value of these
investments and damage our business. Some of those risks are:
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For example, the failure of Inotera Memories, Inc. to
successfully reach and continue production at anticipated output
levels could leave us with inadequate capacity to meet
customers’ needs and our growth targets. If any of our
strategic alliances do not accomplish our intended goals, we may
fail to keep pace with the rapid technological developments in
our industry, our revenues could be reduced and our business,
financial condition and results of operations could be
materially and adversely affected.
We require significant amounts of capital to build, expand,
modernize and maintain our sophisticated manufacturing
facilities and to fund our research and development efforts. For
example, we invested €686 million in property, plant
and equipment in our 2006 financial year and a further
€879 million in our 2007 financial year, largely for
capacity expansion of our 300mm facility in Richmond, Virginia
and for equipment upgrades at our 300mm facility in Dresden,
Germany. Due to the lead times between ordering and delivery of
equipment, a substantial amount of capital expenditures
typically is committed well in advance. As of September 30,
2007, approximately €237 million of capital
expenditures have been included in unconditional purchase
commitments, mostly for investments to be made in our front-end
and back-end manufacturing facilities. While we have reduced our
planned capital expenditures for the 2008 financial year,
through increased focus on our partnership model, we still
expect to spend between €650 million and
€750 million during the year.
Because of the cyclical nature of DRAM demand, the need to
invest in manufacturing facilities may arise at a time when our
cash flow from operations is low. We used net cash in our
investing activities of €972 million in our 2005
financial year, €801 million in our 2006 financial
year and €847 million in the 2007 financial year. Our
research and development expenses were €390 million in
our 2005 financial year, €433 million in our 2006
financial year and €401 million in our 2007 financial
year. We intend to continue to invest heavily in our
manufacturing facilities, including in the new manufacturing
facility we plan to construct in Singapore, and research and
development, while continuing the policy of cooperation with
other semiconductor companies to share these costs with us where
appropriate.
As of September 30, 2007, our external financial debt
included €148 million resulting from a dedicated
financing for our manufacturing facility in Portugal and a note
payable to a government entity related to our production
facility in Richmond, Virginia. We plan to service these
financings from cash generated from our operations beginning in
2008 and to refinance them upon their maturities in 2013 and
2027. In August 2006, we entered into a committed multicurrency
revolving loan facility in an aggregate principal amount of
€250 million, which we then voluntarily terminated on
September 28, 2007. We decided to terminate this facility,
under which we had made no drawdowns, because its restrictions
on asset dispositions were inconsistent with the sale and
leaseback transactions we had decided to enter into covering
some of our manufacturing equipment in our Richmond facility.
For more details on this termination and on the sale and
leaseback transactions, see “MD&A —
Liqidity and Capital Requirements”.
In the future, we may not be able to raise the amount of capital
required for our business or the repayment of our existing
financial obligations on acceptable terms due to a cyclical or
other downturn in the semiconductor memory industry, general
market and economic conditions, inadequate cash flow from
operations, unsuccessful asset management or other factors.
Because of the high risk profile of DRAM manufacturers (due
largely to the volatility of the DRAM market cycle) and our lack
of an independent credit history, we may be unable to secure
debt financing on acceptable terms. In general, our access to
capital on favorable terms may also be more limited now that we
are a stand-alone entity than it was when we operated as a
segment of the Infineon Group. In particular, we no longer have
access to Infineon’s pool of capital. Our business,
financial condition and results of operations may be materially
and adversely affected if we are not able to fund necessary
capital expenditures and research and development expenses.
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We manufacture our products using processes that are highly
complex and require advanced and costly equipment that must
continuously be maintained and modified to improve yields and
performance when implementing new technology generations.
We may face interruptions due to human error in the operation of
the machines, power outages, earthquakes and other natural
disasters or other incidences that have an impact on the
productive availability of machines, material or manpower.
Difficulties encountered in the manufacturing process can reduce
production yields or interrupt production and may make it
difficult for us to deliver products on time or in a
cost-effective, competitive manner.
In addition, semiconductors must be produced in a tightly
controlled, clean environment. Even small impurities in the
manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer,
the use of defective raw materials, defective vendor-provided
lead frames or component parts, or other factors can cause a
substantial percentage of wafers to be rejected or numerous
chips on each wafer to be non-functional. We may experience
problems in achieving an acceptable yield rate in the production
of chips. Reduced yields will reduce our sales revenues, which
could have a material adverse effect on our business, financial
condition and results of operations.
Our business, financial condition and results of operations have
been and may in the future be adversely affected by changes in
exchange rates, particularly between the euro and the
U.S. dollar. We are exposed both to the risk that currency
changes will reduce our revenues or margins on the products we
sell and the risk arising in connection with the translation
into euro of the results of subsidiaries using non-euro
currencies. In addition, we could lose money on the currency
transactions, such as currency hedging contracts that we use to
help us manage our exchange rate risk.
We prepare our combined and consolidated financial statements in
euro. However, most of our sales volumes, as well as costs
relating to our design, manufacturing, selling and marketing,
general and administrative, and research and development
activities are denominated in other currencies, principally the
U.S. dollar.
Memory products are generally priced worldwide in
U.S. dollars, even if invoices are denominated in another
currency, while 50% of our expenses in our 2007 financial year,
were denominated in euro and other currencies. In addition, the
balance sheet impact of currency translation adjustments has
been material in some periods and varies widely, and we expect
these characteristics to continue. Net foreign currency
derivative and transaction gains totaled €17 million
in our 2005 financial year, while net foreign currency
derivative and transaction losses were €2 million in
our 2006 financial year. Net foreign currency derivative and
transaction losses were €14 million in our financial
year 2007. We attempt to mitigate the effects of foreign
currency fluctuations on our business by entering into foreign
currency hedging contracts. These contracts can subject us to
risks of losses if the values of the hedged currencies move in
the opposite direction from what we expected when we entered
into the contracts.
Since its introduction in 1999, the euro has fluctuated in value
against the U.S. dollar, ranging from a high of €1.00
= $1.4691 on November 8, 2007 to a low of €1.00 =
$0.8270 on October 25, 2000. The relative weakness of the
euro against the dollar positively affected our revenues and
results of operations in the 2001 and 2002 financial years.
Since the beginning of 2003, the dollar has weakened sharply
against the euro, which has had a substantial negative effect on
our revenues and profitability, as reported in euro. The
exchange rate varied in our 2006 financial year between
€1.00 = $1.1667 on November 14, 2005, and €1.00 =
$1.2953 on June 5, 2006. On September 29, 2006, the
last currency trading day in September 2006, the noon buying
rate of the Federal Reserve Bank of New York for euro was
€1.00 = $1.2687. The dollar continued to weaken during our
2007 financial year. On September 28, 2007, the last
currency trading day in September 2007, the noon buying rate of
the Federal Reserve Bank of New York for euro was €1=
$1.4219. Any further weakening of the dollar against the euro
would negatively affect our reported results of operations.
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Our
business could suffer as a result of negative economic
developments, political instability, unfavorable legal
environments or negative currency developments in the different
parts of the world in which we operate, especially in the United
States, Taiwan and the developing markets of China and
Malaysia.
We operate in many locations around the world, with
manufacturing, assembly and testing, and research and
development facilities in eight countries on three continents,
including in Taiwan and the developing markets of China and
Malaysia. Manufacturing, assembly and testing sometimes take
place in different countries and even on different continents.
In the 2007 financial year 45% of our revenues were invoiced in
the Asia-Pacific region (including Japan), 37% were invoiced in
North America, 18% were invoiced in the Rest of Europe
(including Germany and in other regions), as described in
“Our Business — Customers, Sales and
Marketing”). In many cases, our products were shipped to
different countries than those from which our invoices were
paid. Our business is subject to risks involved in international
business, including:
Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
As is the case with many other semiconductor companies, our
reported expenses have been reduced in recent years by various
subsidies received from governmental entities. In particular, we
have received, and expect to continue to receive, subsidies for
investment projects as well as for research and development
projects, including our 300mm manufacturing facility in Dresden,
Germany, and our fab in Porto, Portugal. We recognized
governmental subsidies as a reduction of research and
development and of cost of goods sold in aggregate amounts of
€112 million in the 2006 financial year and
€100 million in the 2007 financial year. In addition,
we had received grants of €179 million and
€146 million as of September 30, 2006 and 2007,
respectively, which are deferred and will be recognized in
earnings over the useful life of the related assets in future
periods.
The availability of government subsidies is largely outside our
control. We may not continue to benefit from such support,
sufficient alternative funding may not be available on a timely
basis if necessary and any alternative funding would probably be
provided to us on terms less favorable to us than those we
currently receive. As a general rule, we believe that government
subsidies are becoming less available in each of the countries
in which we have received funding in the past, and the
competition for government funding is intensifying.
The application for and implementation of such subsidies often
involves compliance with extensive regulatory requirements,
including, in the case of subsidies to be granted within the
European Union, notification to the European Commission of the
contemplated grant prior to disbursement. In particular,
establishment of compliance with project related ceilings on
aggregate subsidies defined under European Union law often
involves highly complex economic evaluations. Many of the legal
and other criteria for receiving subsidies are more stringent
than they were in the past. If we fail to meet applicable formal
or other requirements, we may not be able to receive the
relevant subsidies or may be obliged to repay them, which could
have a material and adverse effect on our business, financial
condition and results of operations.
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In addition, the terms of certain of the subsidies we have
received impose conditions that may limit our flexibility to
utilize the subsidized facility as we deem appropriate, to
divert equipment to other facilities, to reduce employment at
the site, or to use related intellectual property outside the
European Union. This could impair our ability to operate our
business in the manner we believe is most cost effective.
Competition for qualified employees among companies that rely
heavily on engineering and technology is intense, and the loss
of qualified employees or an inability to attract, retain and
motivate additional highly skilled employees required for the
operation and expansion of our business could hinder our ability
to conduct research activities successfully and to develop
marketable products. The availability of highly skilled workers,
while generally constrained worldwide, is particularly
constrained in places such as Singapore, China, Germany and
Japan where the need for qualified employees in our industry is
strong. Since our carve-out, we have been competing, and will
continue to compete, directly with other semiconductor companies
for qualified personnel in certain geographic markets, which may
make our recruitment and retention efforts even more difficult.
As with other companies engaged in similar activities, we face
inherent risks of environmental liability in our current and
historical manufacturing activities. The manufacturing of
semiconductors involves the use of metals, solvents and other
chemical substances that, if handled improperly, can cause
damage to the environment or to the people working with them.
Recently, there has been increased media scrutiny and reporting
regarding a potential link between working in semiconductor
manufacturing clean room environments and certain illnesses,
primarily different types of cancers. Regulatory agencies and
associations have begun to study the issue to see if any actual
correlation exists. While we have monitored our employees using
bio-monitoring programs since 1990, we cannot be certain that in
the future no link between working in a clean room environment
and certain illnesses will be established.
Our operations are subject to many environmental laws and
regulations wherever we operate that govern, among other things,
air emissions, wastewater discharges, the use and handling of
hazardous substances, waste disposal and the investigation and
remediation of soil and ground water contamination. A recent
directive in the European Union known as Waste Electrical and
Electronic Equipment Directive, or WEEE, imposes
“take-back” obligations on manufacturers for the
financing of the collection, recovery and disposal of electrical
and electronic equipment. The implementation of the WEEE
directive has not been completed in most EU Countries and
therefore the potential costs are not foreseeable. We have begun
supplying WEEE-compliant products in the German market. The
related cost impact is minor in Germany, but could be higher in
other countries depending on their implementations of the
directive.
The Registration, Evaluation and Authorization of Chemicals used
in the European Union, or REACH Regulation, is a regulatory
framework that concerns the registration, evaluation and
authorization of certain chemicals. This regulatory framework
came into effect in December 2006. While it has not been fully
determined which chemicals will fall under these regulations, we
believe the regulation is targeted towards chemical companies
and industries in which significant volumes of chemicals are
used. As we use very few chemicals whose volume exceeds 100 tons
per year, we are classified as a “downstream user category
II” under this legislation. Furthermore, this legislation
contains a proposal to exempt companies who meet certain
standards from the authorization process. Due to these
uncertainties, we believe it is premature to estimate the
potential costs this regulation could impose on us.
In 2006 a European directive on the Restriction of the use of
Hazardous Substances, or RoHS, restricting the usage of
lead-based and other chemicals and compounds in products went
into effect and we were successful in limiting the cost impact
of this new legislation upon our business. A similar set of
rules has recently been implemented in the People’s
Republic of China. These rules impose labeling requirements on
all electronic information products, as defined in those rules
that are sold in the Chinese retail market. In addition, a
self-declaration containing details on the affected chemicals
and compounds must be created and communicated within
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the supply chain. The future implementation obligations of this
new law may impose additional costs upon our business or may
have an effect on our ability to timely meet customer demand for
our products in China.
Costs associated with future additional environmental
compliance, with remediation obligations or the costs of
litigation if claims were made with respect to damages resulting
from our operations or the former operations of Infineon or
Siemens at a site that we currently own or operate could have a
material and adverse effect on our business, financial condition
and results of operations. For a further description of
environmental issues that we face, see “Our
Business — Environmental Protection, Safety and
Health.” For more information on our ongoing relationship
with Infineon, see “Related Party Transactions and
Relationships — with Infineon” and note 27
“Related Parties” to the combined and consolidated
financial statements, and for more information on our ongoing
relationship with Siemens see “Related Party Transactions
and Relationships — with Siemens” and
note 27 “Related Parties” to the combined and
consolidated financial statements appearing elsewhere in this
annual report.
The design and production processes for memory products are
highly complex. It is possible that we may produce products that
do not meet customer specifications, contain or are perceived to
contain defects or errors, or are otherwise incompatible with
their intended uses. We may incur substantial costs in remedying
such defects or errors, which could include material inventory
write-downs. Moreover, if actual or perceived problems with
nonconforming, defective or incompatible products occur after we
have shipped the products, we might not only bear liability for
providing replacements or otherwise compensating customers for
damages incurred but could also suffer from long-term damage to
our relationship with important customers or to our reputation
in the industry generally. This could have a material adverse
effect on our business, financial condition and results of
operations.
Our future success may depend in part on the acquisition of
businesses or technologies intended to complement, enhance or
expand our current business or products or that might otherwise
offer us growth opportunities. Our ability to complete such
transactions may be hindered by a number of factors, including
potential difficulties in obtaining financing or in issuing our
own securities as payment in acquisitions. In particular, as
long as Infineon is our majority shareholder, it will have
substantial control over our ability to incur certain debt or to
issue equity, and may seek to limit any dilution of its interest
in our company. In addition, we may wish to avoid any securities
issuances that would dilute Infineon’s interest in our
company below the levels that would trigger adverse consequences
under any intellectual property licenses or other third-party
agreements from which we benefit as a majority-owned subsidiary
of Infineon.
Any acquisition that we do make would pose risks related to the
integration of the new business or technology with our business.
We cannot be certain that we will be able to achieve the
benefits we expect from a particular acquisition or investment.
Acquisitions may also strain our managerial and operational
resources, as the challenge of managing new operations may
divert our staff from monitoring and improving operations in our
existing operations. Our business, financial condition and
results of operations may be materially and adversely affected
if we fail to coordinate our resources effectively to manage
both our existing operations and any businesses we acquire.
We use highly combustible materials such as silane and hydrogen
in our manufacturing processes and are therefore subject to the
risk of loss arising from explosion and fire which cannot be
completely eliminated. Although we maintain comprehensive fire
and casualty insurances, including insurance for loss of
property and loss of profit resulting from business
interruption, our insurance coverage may not be sufficient to
cover all of our potential losses. If any of our fabs were to be
damaged or cease operations as a result of an explosion and
fire, it could reduce our manufacturing capacity and may cause
us to lose important customers.
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Risks
related to our carve-out as a stand-alone company and our
continuing relationship with Infineon
Our company was formed as a wholly-owned subsidiary of Infineon
in May 2004 as Invot AG. Substantially all of the assets and
liabilities of the Memory Products segment of Infineon were
contributed to our company on May 1, 2006. This excluded
the Memory Products operations in Korea and Japan, which have
since been transferred to us. Legal transfer of Infineon’s
investment in AMTC and BAC is subject to approval by the other
shareholders in the venture. Although we operated as a separate
segment within the Infineon Group, we had no experience in
conducting our operations on a stand-alone basis until May 2006.
We may encounter operational, administrative and strategic
difficulties as we adjust to operating as a stand-alone company,
which may cause us to react more slowly than our competitors to
market conditions, may divert our management’s attention
from running our business or may otherwise harm our operations.
While we were, as a business within Infineon, indirectly subject
to requirements to maintain an effective internal control
environment, and Infineon, as a U.S. listed company, is
currently in the process of ensuring that its own internal
control procedures comply with the regulatory requirements, our
management has been evaluating and continues to evaluate the
applicability of those procedures to Qimonda in light of our new
status as an independent company, and has been implementing
necessary changes to those procedures to account for that
status. We cannot guarantee that we will be able to do so in a
timely and effective manner.
Our
ability to operate our business effectively may suffer if we do
not, quickly and cost-effectively, establish our own financial,
administrative and other support functions in order to operate
as a stand-alone company, and we cannot assure you that the
transitional services Infineon has agreed to provide us will be
sufficient for our needs.
Historically, we have relied on financial, administrative and
other resources of Infineon to operate our business. In
conjunction with our carve-out, we will need to create our own
financial, administrative and other support systems or contract
with third parties to replace Infineon’s systems, as well
as establish our own independent internal controls referred to
above. We have entered into agreements with Infineon under which
Infineon provides certain transitional services to us, including
services related to information technology systems and financial
and accounting services. See “Related Party Transactions
and Relationships — with Infineon” for a
description of these services. These services may not be
sufficient to meet our needs, and, after these agreements with
Infineon expire, we may not be able to replace these services at
all or obtain these services at prices and on terms as favorable
as we currently have. Any failure or significant downtime in our
own financial or administrative systems or in Infineon’s
financial or administrative systems during the transitional
period could impact our results and prevent us from paying our
suppliers and employees, executing foreign currency transactions
or performing other administrative services on a timely basis
and could materially harm our business, financial condition and
results of operations.
The combined financial information included in this annual
report for periods prior to the legal carve-out of our company
has been prepared on a carve-out basis. We have made numerous
estimates, assumptions and allocations in our financial
information because Infineon did not account for us, and we did
not operate, as a single stand-alone business for any period
prior to May 1, 2006. The historical financial information
included in this annual report for these periods does not
reflect many significant changes that have occurred since we
have begun to operate as a separate company. The primary
categories of assumptions we have made relate to our allocation
of expenses that could not be specifically identified as
belonging to the Memory Products business.
Use of these assumptions and estimates means that the combined
financial statements for periods prior to our carve-out
presented in this annual report are likely not to be
representative of what our financial condition, results of
operations and cash flows would have been had we been a
separate, stand-alone entity during the periods presented.
Furthermore, the combined financial statements cannot be used to
forecast or predict our future financial condition, results of
operations or cash flows.
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As a majority-owned subsidiary of Infineon, we are the
beneficiary of some of Infineon’s intellectual property
arrangements, including cross-licensing arrangements with other
semiconductor companies and licenses from third parties of
technology incorporated in our products and used to operate our
business. We will no longer be a beneficiary under some of these
agreements if Infineon’s direct or indirect equity
ownership in our company no longer exceeds 50%. Infineon has
publicly announced that it aims to reduce its stake in Qimonda
to significantly below 50% by the time of Infineon’s Annual
Shareholder Meeting in 2009, at the latest.
With Infineon’s support, we are engaged in negotiating
assignments of existing agreements as well as our own agreements
and arrangements with some third parties for intellectual
property and technology that is important to our business and
that was previously obtained through our relationship with
Infineon. We may be unable to enter into these agreements
successfully. If we do not successfully conclude such agreements
and Infineon’s direct or indirect equity ownership of our
company no longer exceeds 50%, we may be exposed to infringement
claims or lose access to important intellectual property and
technology. We may not then be able to obtain or renegotiate
licensing arrangements or supply agreements on favorable terms
or at all. our patent portfolio at the end of September 2007
included approximately 20,000 patents and patent applications
(representing approximately 6,000 patent families) compared to
more than 23,000 patents and patent applications remaining with
Infineon at the time of the carve-out. This smaller patent
portfolio may make it more difficult for us to negotiate
third-party patent cross licenses on terms that are as favorable
to us as those previously negotiated by Infineon, especially
since partners under existing cross-license agreements with
Infineon will generally be able to continue to use patents
transferred to us as part of the carve-out under these
agreements even after Infineon’s ownership in us no longer
exceeds 50%. If as a result we were to infringe intellectual
property rights of others or otherwise lose access to
intellectual property or technology important in the conduct of
our business, it could have a material and adverse effect on our
business, financial condition and results of operations. We
could, for example, be forced to agree to make substantially
higher royalty payments to continue using that intellectual
property or technology or, if we are unable to agree on
licensing terms on our own, could have to cease manufacturing
products that use that intellectual property or technology. For
a detailed description of the intellectual property rights
contributed to us and retained by Infineon and the circumstances
under which our access to the rights retained by Infineon may be
affected if we cease to be a controlled subsidiary of Infineon,
see “Our Business — Intellectual Property.”
We are still in the early stages of establishing our own brand
identity. Prior to our carve-out, all memory products sold by
the Infineon Group were sold under either the Infineon or
AENEON®
brand names. The Infineon and
AENEON®
brand names are well known by memory customers, suppliers and
potential employees. We will need to expend significant time,
effort and resources to continue to establish the Qimonda brand
name in the marketplace. This effort may not be successful. If
we are unsuccessful in establishing our brand identity, our
business, financial condition or results of operations may be
materially adversely affected. We have applied for protection of
our Qimonda brand as a trademark, domain and company name, but
may not be successful in actually gaining much protection in
some jurisdictions.
During our 2004 financial year, we transferred ownership of the
entire 200mm fab in Dresden to Infineon’s Communications
segment. We continue to own the newer 300mm fab and the research
and development center in Dresden.
In April 2006, we entered into an agreement with Infineon for
the production of wafers in the Dresden 200mm fab. Pursuant to
the agreement, as amended in January 2007, Infineon has agreed
to manufacture specified semiconductor memory products at the
Dresden 200mm fab, using our manufacturing technologies and
masks, and to sell them to us at prices specified in the
agreement. These prices are based on the cost of manufacture. We
are required under this agreement to pay for idle costs
resulting from our purchasing fewer wafers from Infineon than
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agreed upon, if Infineon cannot otherwise utilize the capacity.
We are also obligated to indemnify Infineon against any third
party claims based on or related to any products manufactured
for us under this agreement and against any intellectual
property infringement claims related to the products covered by
the agreement. In addition, we agreed to share equally with
Infineon any potential restructuring costs that might be
incurred in connection with the ramp-down of production in the
Dresden 200mm fab if neither company can use that capacity.
Restructuring costs may include severance payments. Although no
restructuring plan has been established, these costs could be
material and adversely affect our financial condition and
results of operations. The capacity arrangements terminate on
September 30, 2009, unless we terminate them earlier.
We have historically been able to take advantage of
Infineon’s size and purchasing power in procuring goods,
technology and services, including insurance, employee benefit
support and audit services. Following our carve-out from
Infineon, we are a smaller and less diversified company than
Infineon. Although we anticipate that, while we are a
majority-owned subsidiary of Infineon, we will be able to
continue to take advantage of many of these benefits, we cannot
guarantee that this will continue to be the case. As a separate,
stand-alone company, we may be unable to obtain goods,
technology and services at prices and on terms as favorable as
those available to us prior to the carve-out, which could have a
material adverse effect on our business, financial condition and
results of operations.
We entered into our contribution and related agreements with
Infineon while we were a wholly owned subsidiary of Infineon,
and they may be less favorable to us than would be the case if
they were negotiated with unaffiliated third parties. Pursuant
to our contribution agreement with Infineon, we agreed to
indemnify Infineon for, among other things, liabilities arising
from litigation and other contingencies related to our business
such as guarantee commitments, and assumed these liabilities as
part of our carve-out from Infineon. The allocation of assets
and liabilities between Infineon and our company may not reflect
the allocation that would have been reached by two unaffiliated
parties.
Infineon currently holds, directly or indirectly, a 77.5% equity
interest in our company. This includes shares equal to 1% of the
equity interests in our company that Infineon loaned to an
affiliate of J.P. Morgan Securities Inc. in connection with
Infineon’s placement of bonds exchangeable into shares of
our company. Infineon has advised us that J.P. Morgan has
already returned some of these shares. The remainder must be
returned no later than August 31, 2010 upon the termination
of the loan. Infineon has publicly announced that it aims to
reduce its stake in our company to significantly below 50% by
the time of Infineon’s Annual Shareholder Meeting in 2009,
at the latest. Its equity shareholding gives it the power to
control actions that require shareholder approval, including the
election of the four shareholder representatives on our
Supervisory Board, which appoints our Management Board.
Even if Infineon ceases to own or control more than 50% of our
shares, for so long as it continues to have a substantial equity
interest in our company it may, as a practical matter, be in a
position to control many or all actions that require shareholder
approval. Under German law, for so long as Infineon holds more
than 25% of our shares, it will be in a position to block
shareholder action on any capital increase or decrease, merger,
consolidation, spin-off, sale or other transfer of all or
substantially all of our assets, a change in the corporate form
or business purpose of our company or the dissolution of our
company.
Significant corporate actions, including the incurrence of
material indebtedness or the issuance of a material amount of
equity securities, may require the consent of our shareholders.
Infineon might oppose any action that would dilute its equity
interest in our company, and may be unable or unwilling to
participate in a future financing of our company. Infineon, as
our majority shareholder, could block any such action and
thereby materially harm our business or prospects.
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Conflicts of interest may arise between Infineon and us in a
number of areas relating to our past and ongoing relationships.
Potential conflicts of interest that we have identified include
the following:
Although our company is an independent entity, we expect to
operate for as long as Infineon is our majority shareholder as a
part of the Infineon Group. Infineon may from time to time make
strategic decisions that it believes are in the best interests
of its business as a whole, including our company. These
decisions may be different from the decisions that we would have
made on our own. Infineon’s decisions with respect to us or
our business may be resolved in ways that favor Infineon and
therefore Infineon’s own shareholders, which may not
coincide with the interests of our company’s other
shareholders. We may not be able to resolve any potential
conflicts and, even if we do so, the resolution may be less
favorable to us than if we were dealing with an unaffiliated
party. Even if both parties seek to transact business on terms
intended to approximate those that could have been achieved
among unaffiliated parties, this may not succeed in practice.
Pursuant to the contribution agreement we entered into with
Infineon, Infineon agreed to retain all of its liabilities that
we do not expressly assume under that agreement. Liabilities we
expressly assumed include those arising out of legal matters
that relate to the business that was transferred to us at the
time of our carve-out. See “Our Business — Legal
Matters” for a description of the relevant indemnification
provisions.
Third parties may seek to hold us responsible for
Infineon’s retained liabilities. Under the contribution
agreement, Infineon agreed to indemnify us for claims and losses
relating to these retained liabilities. However, if those
liabilities are significant and we are ultimately held liable
for them, we might not be able to recover the full amount of our
losses from Infineon.
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We may face difficulty in completing the final steps in the
separation of our assets and resources from Infineon’s
assets and resources. In particular, we may experience
additional costs and delay in finalizing the transfers to us of
our interest in AMTC and BAC. Our business, financial condition
and results of operations could be harmed if we incur unexpected
costs in completing the separation.
Infineon holds, directly or indirectly, a 77.5% equity interest
in our company. Infineon does not anticipate owning a majority
of our shares over the long term and has publicly announced that
it intends to reduce its stake in our company to significantly
below 50% by the time of Infineon’s Annual Shareholders
Meeting in 2009, at the latest. In connection with an offering
of our shares in September 2007, Infineon agreed not to sell or
transfer any of the remaining shares they hold until
November 19, 2007. The underwriters may, however, waive
this restriction in their discretion. However, sales of
substantial numbers of the shares of our company by Infineon,
either in the public market or in private transactions, or the
perception that such sales may occur, could adversely affect the
market price of the shares and ADSs and could adversely affect
our ability to raise capital through subsequent offerings of
equity or equity-related securities.
The trading price of our ADSs may fluctuate widely and may fall
below the price at which ADSs were sold in our IPO or below our
net asset value. Among the factors that could affect the price
of our ADSs are the risk factors described in this section and
other factors, including:
Stock markets have experienced extreme volatility in recent
years that has often been unrelated to the operating performance
of a particular company. These broad market fluctuations may
adversely affect the trading price of our securities.
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Exchange rate fluctuations will affect the amount of
U.S. dollars our shareholders receive upon the payment of
cash dividends or other distributions paid in euro, if any.
Therefore, such fluctuations could also adversely affect the
value of our ADSs, and, in turn, adversely affect the
U.S. dollar proceeds holders receive from the sale of our
ADSs.
We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. Under the deposit
agreement for the ADSs, the depositary will not offer those
rights to ADS holders unless both the rights and the underlying
securities to be distributed to ADS holders are either
registered under the Securities Act or exempt from registration
under the Securities Act with respect to all holders of ADSs. We
are under no obligation to file a registration statement with
respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared
effective. In addition, we may not be able to take advantage of
any exemptions from registration under the Securities Act.
Accordingly, holders of our ADSs may be unable to participate in
our rights offerings and may experience dilution in their
holdings as a result.
If the depositary is unable to sell the rights that are not
exercised or not distributed or if the sale is not lawful or
reasonably practicable, it will allow the rights to lapse, in
which case you will receive no value for these rights.
Holders of ADSs may exercise voting rights with respect to the
ordinary shares represented by our ADSs only in accordance with
the provisions of the deposit agreement. The deposit agreement
provides that, upon receipt of notice of any meeting of holders
of our common shares, the depositary will, as soon as
practicable thereafter, fix a record date for the determination
of ADS holders who shall be entitled to give instructions for
the exercise of voting rights. Upon timely receipt of notice
from us, the depositary shall distribute to the holders as of
the record date (i) the notice of the meeting or
solicitation of consent or proxy sent by us, (ii) a
statement that such holder will be entitled to give the
depositary instructions and a statement that such holder may be
deemed, if we have appointed a proxy bank as set forth in the
deposit agreement, to have instructed the depositary to give a
proxy to the proxy bank to vote the ordinary shares underlying
the ADSs in accordance with the recommendations of the proxy
bank and (iii) a statement as to the manner in which
instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the
ordinary shares underlying your ADSs but only if we ask the
depositary to ask for your instructions. Otherwise, you will not
be able to exercise your right to vote, unless you withdraw our
ordinary shares underlying the ADSs you hold. However, you may
not know about the meeting far enough in advance to withdraw
those ordinary shares. If we ask for your instructions, the
depositary, upon timely notice from us, will notify you of the
upcoming vote and arrange to deliver our voting materials to
you. We cannot guarantee you that you will receive the voting
materials in time to ensure that you can instruct the depositary
to vote your ordinary shares. In addition, the depositary and
its agents are not responsible for failing to carry out voting
instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise
your right to vote, and there may be nothing you can do if the
ordinary shares underlying your ADSs are not voted as you
requested.
Under the deposit agreement for the ADS, we may choose to
appoint a proxy bank. In this event, the depositary will receive
a proxy which will be given to the proxy bank to vote our
ordinary shares underlying your ADSs at shareholders’
meetings if you do not vote in a timely fashion and in the
manner specified by the depositary.
The effect of this proxy is that you cannot prevent our ordinary
shares underlying your ADSs from being voted, and it may make it
more difficult for shareholders to influence the management of
our company, which could adversely affect your interests.
Holders of our ordinary shares are not subject to this proxy.
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The depositary of our ADSs has agreed to pay to you the cash
dividends or other distributions it or the custodian receives on
our ordinary shares or other deposited securities after
deducting its fees and expenses. You will receive these
distributions in proportion to the number of our ordinary shares
your ADSs represent. However, the depositary is not responsible
if it decides that it is unlawful or impractical to make a
distribution available to any holders of ADSs. We have no
obligation to take any other action to permit the distribution
of our ADSs, ordinary shares, rights or anything else to holders
of our ADSs. This means that you may not receive the
distributions we make on our ordinary shares or any value from
them if it is illegal or impractical for us to make them
available to you. These restrictions may have a material adverse
effect on the value of your ADSs.
Your ADSs, which may be evidenced by ADRs, are transferable on
the books of the depositary. However, the depositary may close
its books at any time or from time to time when it deems
expedient in connection with the performance of its duties. The
depositary may refuse to deliver, transfer or register transfers
of your ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary
think it is advisable to do so because of any requirement of law
or government or governmental body, or under any provision of
the deposit agreement, or for any other reason.
Our company is incorporated in Germany, and the rights of our
shareholders are governed by German law, which differs in many
respects from the laws governing corporations incorporated in
the United States. For example, individual shareholders in
German companies do not have standing to initiate a shareholder
derivative action, either in Germany or elsewhere, including the
United States unless they meet thresholds set forth under German
corporate law. Therefore, our public shareholders may have more
difficulty protecting their interests in the face of actions by
our management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a jurisdiction in
the United States.
Our company is incorporated in Germany and the majority of our
assets are located outside the United States. In addition, most
of the members of our Supervisory Board, Management Board and
other senior management, named in this annual report, are
nationals and residents of Germany. Most or all of the assets of
these individuals are located outside the United States. As a
result, it may be difficult or impossible for you to bring an
action against us or against these individuals in the United
States if you believe your rights have been infringed under the
securities laws or otherwise. In addition, a German court may
prevent you from enforcing a judgment of a United States court
against us or these individuals based on the securities law of
the United States or any state thereof. A German court may not
allow you to bring an action in Germany against us or these
individuals based on the securities laws of the United States or
any state thereof.
We have no present intention to pay dividends on our ordinary
shares in the foreseeable future. No earnings were available for
distribution as a dividend for our 2007 financial year, since
Qimonda AG, on a stand alone basis, as parent company, incurred
a cumulative loss (Bilanzverlust) as of
September 30, 2007. Any determination by our Supervisory
and Management Boards to pay dividends will depend on many
factors, including our financial condition, results of
operations, legal requirements and other factors. Accordingly,
if the price of our ADSs falls in
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the foreseeable future, you will lose money on your investment,
without the likelihood that this loss will be offset in part or
at all by cash dividends.
The
effect of Infineon’s loan of our ADSs to J.P. Morgan,
any exercise of the exchange rights under the exchangeable notes
Infineon Technologies Investment B.V. has offered or any sales
of our ADSs in short sale transactions by the investors in the
exchangeable notes may have a negative effect on the market
price of our ADSs. In addition, purchases of ADSs in connection
with the termination of Infineon’s loan of shares in our
company to J.P. Morgan may result in a temporary increase
in the market price of our ADSs during the loan unwind
period.
In September 2007, Infineon Technologies Investment B.V.
offered, in sales it has advised us were exempt from
registration under the U.S. Securities Act of 1933, as
amended, pursuant to Regulation S thereunder, notes
exchangeable into shares it currently holds in our company. We
have been advised by J.P. Morgan Securities Inc. that, in
connection with that offering, its affiliate has facilitated and
expects to continue to facilitate the establishment by the
investors in the exchangeable note of hedged positions in the
exchangeable notes through the entry into privately negotiated
derivative transactions with those investors. Infineon also
loaned approximately 3.5 million shares to an affiliate of
J.P. Morgan Securities, Inc. in connection with these
anticipated transactions. The increase in the number of our ADSs
outstanding upon exchanges of the exchangeable notes could have
a negative effect on the market price of our ADSs. The market
price of our ADSs also could be negatively affected by other
short sales of our ADSs by or on behalf of the investors in the
exchangeable notes to hedge their investments in the
exchangeable notes. In addition, purchases of ADSs in connection
with the termination of the loan may result in a temporary
increase in the market price of our ADSs during the loan unwind
period.
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The following table presents summary historical combined and
consolidated financial data for the periods indicated. We
derived the summary combined and consolidated financial data as
of and for the years ended September 30, 2004, 2005, 2006
and 2007 from our combined and consolidated financial statements
for those years. These combined and consolidated financial
statements have been audited by our independent registered
public accounting firm, KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we
refer to as KPMG. The combined and consolidated financial
statements as of September 30, 2006 and 2007 and for each
of the years in the three year period ended September 30,
2007, are included elsewhere in this annual report. We derived
the summary combined financial data as of and for the year ended
September 30, 2003, from our unaudited combined financial
statements for that year. In the opinion of our management,
these unaudited condensed combined and consolidated financial
statements include all adjustments necessary to present fairly
the financial information for the periods they represent.
We have been a segment of Infineon for all of the periods
indicated. Infineon did not allocate most non-operating
financial statement line items among its segments during the
periods prior to our carve-out from Infineon. This financial
data was prepared in accordance with U.S. GAAP and on a
basis consistent with the financial data for the later periods
we have presented. Infineon contributed our business to our
company on May 1, 2006. We refer to this contribution as
our carve-out. Our combined financial information for all
periods before the date of our carve-out from Infineon may not
be representative of what our results would have been had we
been a stand-alone company during any of those periods. In
addition, historical results are not necessarily indicative of
the results that you may expect for any future period.
In particular, the combined financial statements do not reflect
estimates of one-time and ongoing incremental costs required for
us to operate as a separate company. Infineon allocated to our
company costs it incurred relating to research and development,
logistics, purchasing, selling, information technology, employee
benefits, general corporate functions and other costs. General
corporate functions include accounting, treasury, tax, legal,
executive oversight, human resources and other services. These
and other allocated costs totaled €387 million for our
2004 financial year, €305 million for our 2005
financial year and €203 million before the carve-out
for our 2006 financial year. Following our carve-out from
Infineon, we are responsible for substantially all of these
items, subject to Infineon’s continued provision of some of
these services pursuant to service agreements. These agreements
are described in “Related Party Transactions and
Relationships — with Infineon”. As a result,
costs are no longer allocated after the carve-out, but rather
charged on the basis of these agreements. Had we been incurring
these costs directly during these periods before the carve-out,
they may have been materially different than the allocated
amounts in the combined financial statements.
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31
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This discussion and analysis of our financial condition and
results of operations is based on, and should be read in
conjunction with, our audited combined and consolidated
financial statements as of and for the years ended
September 30, 2005, 2006, 2007 and the other financial
information included elsewhere in this annual report. We have
prepared our combined and consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
This discussion and analysis of our financial condition and
results of operations contains forward-looking statements.
Statements that are not statements of historical fact, including
expressions of our beliefs and expectations, are forward-looking
in nature and are based on current plans, estimates and
projections. Forward-looking statements are applicable only as
of the date they are made, and we undertake no obligation to
update any of them in light of new information or future events.
Forward-looking statements involve inherent risks and
uncertainties. We caution you that a number of important factors
could cause actual results or outcomes to differ materially from
those expressed in any forward-looking statement. These factors
include those identified under the headings “Risk
Factors” and “Special Note Regarding Forward-Looking
Statements and Market Data”.
We are one of the world’s leading suppliers of
semiconductor memory products. We came into being as Qimonda
effective May 1, 2006 when Infineon contributed
substantially all of the assets, liabilities, operations and
activities, as well as the employees, of its former Memory
Products segment to us. On August 9, 2006 we completed our
IPO on the New York Stock Exchange under the symbol QI.
Infineon’s shareholding in our company was 77.5% as of
September 30, 2007, and Infineon has announced that it
wants to reduce its stake in Qimonda to significantly less than
50 percent by the time of its 2009 annual
shareholders’ meeting.
We prepared our combined and consolidated financial statements
on the basis of a number of assumptions and estimates. We
believe these assumptions and estimates to be reasonable. In
addition, there are a number of critical accounting policies
which we believe are essential to understanding our financial
statements. However, our financial statements may not be
indicative of our future performance. Several additional
factors, particularly the volatility of DRAM prices, strongly
affect our capital intensive business. We aim to increase
profitability by maintaining our product portfolio diversity in
applications outside the standard PC market, by reducing our
costs per bit and through strategic cooperations.
The single most important factor affecting our results of
operations in our 2007 financial year was the high rate of
decline of prices for the DRAM products we sell. While our
business model is premised on managing the continuous price
decline that characterizes our industry, the price declines in
2007 exceeded our ability to compensate through improvements in
technology and efficiency. After falling precipitously during
our second and third financial quarters — the average
“spot” market price for 512Mb DRAM as reported by
DRAMeXchange fell by nearly three-quarters in the first five
months of calendar year 2007 — prices stabilized and
increased briefly in July 2007 before resuming their decline
through our financial year end. The effects of these price
declines pushed us into a loss in the 2007 financial year after
a profitable 2006 financial year. However, in both financial
years, we believe we benefited strongly from the major elements
of our strategy, and that our implementation of that strategy
has helped us to reduce the impact of the very rough recent
market conditions and has enabled us to achieve strong results
when market conditions were less severe.
Our strategic responses to market conditions in both years has
been generally to increase our volumes of memory sold, to
maintain our efforts to push our product mix towards the
relatively higher priced infrastructure, graphics, consumer and
mobile DRAM products and to enhance our productivity. In
particular, the volume of memory we sold, based on bits of data
storage (which we refer to as our bit shipments) grew by 79% in
our 2006 financial year and 44% in our 2007 financial year. We
grew the share of our bit shipments for non-PC applications from
less than 50% on average in the 2006 financial year to more than
50% in the 2007 financial year, which, we believe, caused the
overall decline in our average selling prices to be smaller than
it would have been had our product mix remained unchanged from
its level of several years ago. In our production, we increased
the share of our capacities based on 300mm wafers to
approximately 75% in our 2007 financial year and enhanced our
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productivity in other ways, primarily through conversion of
capacities to the 90nm process node in the 2006 financial year
and to the 80nm and 75nm process nodes in the 2007 financial
year.
Despite the continuous price pressure, we were able to retain
positive operating income in both our 2005 and 2006 financial
years and in the first six months of our 2007 financial year.
However, due to the significant price decline for DRAM products
described above, we incurred operating losses in the second half
our 2007 financial year and for the full financial year. In our
2007 financial year, we incurred a net loss of
€249 million, compared to net income of
€74 million in our 2006 financial year.
We generated significant amounts of cash from operations in each
of our 2006 and 2007 financial years. We invested this cash,
together with proceeds from our IPO, in our manufacturing
facilities and on R&D, as we continued our migration to
300mm wafers and for the technical conversion to the 80nm and
smaller technology nodes. We also repaid the remainder of our
outstanding debt to Infineon during 2007 and entered into our
first sale and leaseback transaction, both in furtherance of our
strategy of developing a strong and independent capital
structure.
We are one of the world’s leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. For the full calendar year 2006, we were the
world’s third largest supplier of DRAM by revenue and bit
shipments, with a market share of approximately 16%, according
to Gartner. For the first nine months of the 2007 calendar year,
we remained the third largest supplier of DRAM by revenue and
were the fourth largest supplier of DRAM by bit shipments with
market shares of approximately 13% according to iSuppli’s
preliminary report in November 2007. Although our market share
fluctuates, in each of the past five calendar years, we captured
between 12% and 16% of the worldwide DRAM market based on
revenues, according to Gartner, and remained among the four
largest DRAM suppliers worldwide based on revenues.
Our principal products are DRAM components and modules for use
in a wide variety of electronic products. In our 2007 financial
year 39% of our net sales were of standard DRAMs for use in PC,
notebook and workstation applications and 60% were of DRAM
products for more advanced infrastructure applications and
graphics, mobile and consumer DRAMs. Flash memory, other
products and licensing revenue accounted for the remaining 1%.
For the financial year ended September 30, 2007, our net
sales were €3.608 million, our earnings before
interest and taxes (abbreviated as “EBIT”) was a loss
of €246 million and our net loss was
€249 million. For the financial year ended
September 30, 2006, our net sales were
€3,815 million, our EBIT was €213 million
and our net income was €74 million.
Effective May 1, 2006, Infineon contributed substantially
all of the assets, liabilities, operations and activities, as
well as the employees, of its former Memory Products segment to
us. We refer to this event as the “carve-out”. This
temporarily excluded the Memory Products operations in Korea and
Japan, which have since been transferred to us. While
Infineon’s investment in the Advanced Mask Technology
Center (AMTC) and the Maskhouse Building Administration Company
(BAC) in Dresden has been contributed to us, the legal transfer
of this investment is not yet effective because Infineon’s
co-venturers have not yet given the required consent to the
transfer of the AMTC and BAC interest. While pursuant to the
AMTC and BAC limited partnership agreements, such consent may
not be unreasonably withheld, we, Infineon and Infineon’s
co-venturers are finalizing negotiations on agreement that
provides such consent and also addresses Infineon’s
intention to reduce its stake in us to below 50%. Infineon is
obligated under the contribution agreement to hold the AMTC and
BAC interest for our economic benefit. For as long as Infineon
holds our interest in AMTC and BAC, we must exercise our
shareholder rights through Infineon, which is a more cumbersome
and less efficient method of exercising these rights than if we
held the interest directly. A similar arrangement was in place
for our joint venture with Nanya, Inotera Memories, Inc., where
Infineon held our shares in trust until March 2007. Infineon
transferred nearly all of these shares to us on March 13,
2007. Only a
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portion of shares representing less than 1% of the total Inotera
share capital remains in the trust. We do not expect these
administrative complexities to have a material adverse effect on
our business, financial condition and results of operations. We
refer to the former segment’s assets, liabilities,
operations and activities as the “Memory Products
business”.
In connection with our carve-out, some agreements (including
licensing, purchase and shareholding agreements) and investments
of Infineon relating to our business could not be transferred to
us. In other cases, as outlined above, the transfer of such
agreements and investments were delayed due to legal
restrictions. In the future, some of our interests could revert
to Infineon or be terminated. Any such reversion or termination
could materially adversely affect our financial condition and
results of operations. See “Risk Factors — Risks
related to our operations — Some of our agreements
with strategic partners, such as our Inotera Memories, Inc.
joint venture with Nanya, have restrictions on transfers of the
shares of the ventures they create that could cause our
ownership or equity interest in these ventures to revert to
Infineon, if Infineon ceases to be our majority owner”.
On August 9, 2006 we completed our initial public offering,
or IPO, on the New York Stock Exchange through the issuance of
42 million ordinary shares, which commenced trading as
American Depositary Shares (ADSs) under the symbol QI. We used
the offering proceeds of €415 million, net of offering
costs and tax benefits thereon, to finance investments in our
manufacturing facilities and for research and development. In
our 2007 financial year we invested these proceeds primarily in
our 300mm front-end manufacturing sites in Richmond, Virginia
and Dresden, Germany for capacity expansion and new equipment
for the technical conversion to the 80nm and smaller technology
nodes as well as approximately €77 million in our
ongoing research and development activities. After our IPO and
Infineon’s sale of 6.3 million shares upon the
exercise of the underwriters’ over-allotment option,
Infineon’s shareholding in our company was 85.9%.
On September 25, 2007, Infineon sold 28,750,000 Qimonda
shares to the public from its shareholdings in a secondary
public offering. On September 26, 2007 Infineon
Technologies Investment B.V. placed bonds exchangeable for up to
20.5 million Qimonda shares, equivalent to approximately
6.0% of our share capital. At the same time, Infineon loaned
3,550,098 Qimonda shares to an affiliate of J.P. Morgan
Securities, Inc. in connection with the placement of the
exchange bonds. These shares must be returned to Infineon no
later than August 31, 2010. Some of these shares have
already been returned to Infineon. As of September 30,
2007, Infineon’s shareholding in our company was 77.5%. For
more information, see “Risk Factors — Risks
related to the securities markets and ownership of our shares or
ADSs”
In August 2007, Infineon announced that it intends to reduce its
stake in Qimonda to significantly less than 50% by the time of
its 2009 annual shareholders’ meeting.
Our combined and consolidated financial statements have been
prepared in accordance with U.S. GAAP. These financial
statements are presented on a “carve-out” or combined
basis for all periods prior to our carve-out and comprise the
combined historical financial statements of the transferred
Memory Products business assuming that we had existed as a
separate legal entity for all of the financial periods
presented. Our financial statements are presented on a
consolidated basis for all periods thereafter. The combined
financial statements have been derived from the consolidated
financial statements and historical accounting records of
Infineon, employing the methods and assumptions we describe
below and in note 1 to the combined and consolidated
financial statements. Most of the assets, liabilities,
operations and activities of the Memory Products business are
those that comprised the Memory Products segment of Infineon
during the financial periods presented.
Methodology. Infineon took two broad steps to
reflect the structure of the Memory Products business in the
historical financial data for the periods presented in this
annual report. The first step was to determine which companies
and business areas of Infineon belong to the Memory Products
business. The second step was to combine these companies and
business areas for accounting purposes.
The combined financial statements differ from the segment data
in Infineon’s consolidated financial statements in terms of
their stated objectives as well as in aspects of the information
they convey. The objective of Infineon’s segment reporting
was to present its Memory Products business as an integral part
of Infineon. Infineon
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historically allocated most financial statement items among its
segments, including the Memory Products segment. However, for
purposes of reporting segment data, Infineon did not allocate
some items among its various segments, including certain
corporate overhead costs that supported Infineon’s
businesses overall, including the Memory Products business. The
combined financial statements are intended to present the Memory
Products business on a “carve-out” basis, which means
as if it had been a separate legal entity during all of the
periods presented in this annual report. In other words, the
combined financial statements present our historical financial
condition, statements of operations and cash flows based on the
fictitious assumption that our structure as it stands after the
carve-out had already existed in the past. The combined
financial statements therefore reflect further allocations to
us, consistent with our post-carve-out operation as a separate
legal entity.
Statements of Operations. The combined
statements of operations reflect all revenues and expenses that
were attributable to the Memory Products business. Operating
expenses or revenues of the Memory Products business that could
be specifically identified as pertaining to the Memory Products
business were charged or credited directly to it without
allocation or apportionment. This was the case for all of the
revenues appearing on the combined statements of operations.
Operating expenses that could not be specifically identified as
pertaining solely to the Memory Products business were allocated
to us to the extent they were related to us. The combined
statements of operations include expense allocations for certain
corporate functions historically provided to us by Infineon,
including basic research costs, employee benefits, incentives
and pension costs, interest expense, restructuring costs, the
costs of our share of central departments such as finance and
treasury and controlling and other costs. These allocations were
made on a specifically identifiable basis or using the relative
percentages, as compared to Infineon’s other businesses, of
total sales, cost of goods sold, other cost measures, headcount
or other reasonable methods. We and Infineon considered these
allocations to be a reasonable reflection of the utilization of
services provided. Our expenses as a separate, stand-alone
company may be higher or lower than the amounts reflected in the
statement of operations for historical periods. We describe the
allocation methods we used in note 1 to the combined and
consolidated financial statements.
Balance Sheets. As a general rule, the assets
and liabilities attributable to the Memory Products business
were contributed to us at their historical book values as shown
in Infineon’s balance sheet. Unless otherwise noted, all
assets and liabilities specifically identifiable as pertaining
to the Memory Products business are included in the combined
financial statements. Where legal entities and their businesses
are wholly allocable to the Memory Products business, the shares
of these entities were transferred to the Memory Products
business. In some cases, including at the Infineon parent
company level, the memory-related assets and liabilities were
identified and carved out by means of asset and liability
transfer transactions.
The assets and liabilities that were directly identifiable as
pertaining to Infineon’s Memory Products business include
inventories, fixed assets and accounts receivable. The
assumptions and allocations used for assets and liabilities that
were not specifically identifiable as being part of
Infineon’s Memory Products business are set forth in
note 1 to the combined and consolidated financial
statements.
Investments by and Advances from Infineon and our Capital
Structure. Because a direct ownership
relationship did not exist among the various entities comprising
the Memory Products business prior to our carve-out,
Infineon’s investments in and advances to the Memory
Products business represent Infineon’s interest in the
recorded net assets of the Memory Products business. These are
shown as business equity in lieu of shareholder’s equity in
the combined financial statements. All intercompany
transactions, including purchases of inventory and charges and
cost allocations for facilities, functions and services
performed by Infineon for the Memory Products business, are
reflected in this business equity. After we became a separate
company and Infineon contributed the Memory Products business to
us, this business equity in the amount of
€3,372 million became our shareholders’ equity.
Capital Structure. The Memory Products
business has historically relied on Infineon to provide
financing of its operations. Because we have historically used
more cash in our investing activities than we have generated
through our operations, we have historically relied on Infineon
to provide a portion of the financing necessary to fund our
capital expenditures. These financings were reflected in our
short-term debt (which included €344 million of
interest-bearing advances to us from Infineon at
September 30, 2006) and in our business equity before
the carve-out. The capital structure attributed to the Memory
Products business in connection with the preparation of the
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combined financial statements was based on the business equity,
and as such, is neither indicative of the capital structure that
the Memory Products business would have required had it been an
independent company during the financial periods presented
before the carve-out, nor is it indicative of the capital
structure that we may require in future. In April 2007, we
completely repaid our shareholder loan from Infineon.
The preparation of the accompanying combined and consolidated
financial statements required us to make estimates and
assumptions, as described in “— Critical Accounting
Policies” below. We believe that the estimates and
assumptions underlying the combined financial statements are
reasonable. However, the combined financial statements included
herein may not necessarily reflect our results of operations,
financial position and cash flows in the future or what our
results of operations, financial position and cash flows would
have been had we been a separate, stand-alone company during the
periods presented.
The average selling prices of standard DRAMs and, to a certain
extent, other semiconductor memory products, have generally
declined throughout the semiconductor memory industry during the
past ten years. We expect them to continue to do so in future
periods irrespective of industry-wide fluctuations as a result
of, among other factors, technological advancements and cost
reductions. Although we may from time to time be able to take
advantage of higher selling prices typically associated with new
products and technologies, we nevertheless expect the prices of
new products to also decline over time, in certain cases very
rapidly, primarily as a result of market competition. We have
adopted enhancements to our technology to reduce our per-megabit
manufacturing costs. These efforts have included the
introduction of new technology such as smaller feature sizes and
manufacturing using 300mm wafers. We expect that these measures
will enable us to reduce our costs per chip and thereby offset
declining chip prices. We will realize the full effects of these
manufacturing unit cost reductions after our conversion to the
80nm and 75nm technology nodes. In the meantime, we are
incurring higher
per-unit
costs in connection with this conversion which is expected to
extend through our 2008 financial year. We have also increased
our production in Asia, where we can take advantage of
lower-cost economies. Our margins are to a significant extent
dependent on the extent to which we can reduce our unit
manufacturing costs as prices decline.
Declining prices have driven manufacturers, including ourselves,
to invest substantial sums to shrink die sizes and to construct
modern manufacturing facilities that permit the manufacture of
DRAM products using larger wafers at lower costs per chip. We
have made significant investments, individually and together
with the other companies with which we cooperate, to meet the
challenges these lower prices have brought. We invested a total
of €879 million in our 2007 financial year, a total of
€686 million during our 2006 financial year and a
total of €926 million in our 2005 financial year in
property, plant and equipment. As a result of this investment we
have substantially increased our ratio of bits manufactured
using 300mm wafers to the point where we believe we are ahead of
our major competitors on this measure. However, as we continue
to ramp up our 300mm capacity, many of our competitors are
expanding their own capacities. To the extent that demand for
DRAM does not keep pace with these capacity increases, an
oversupply situation could arise in the industry, as has
occurred on a cyclical basis in the past and as, we believe,
occurred during most of our 2007 financial year.
We recently announced plans to construct a new 300mm
manufacturing facility in Singapore, which we plan to fully own.
Depending on the growth and development of the world
semiconductor market, we intend to invest approximately
€2 billion in this facility over the next five years.
This facility may contribute to oversupply in the industry in
the future and we may have difficulty recovering our investment.
While we have reduced our planned capital expenditures for the
2008 financial year, through increased focus on our partnership
model, we still expect to spend between €650 million
to €750 million.
We are subject to two categories of exchange rate risks,
transaction and translation risk.
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Transaction risk arises where sales of a product are generated
in one currency but costs relating to those revenues are
incurred in a different currency. In the case of transaction
risk, changes in the value of the euro relative to the
U.S. dollar and other currencies generally have
interrelated consequences. For example, an increase in the value
of the euro relative to the U.S. dollar and other
currencies generally has these effects:
Conversely, as the value of the euro relative to the
U.S. dollar and other currencies decreases, generally has
these effects:
We prepare our combined and consolidated financial statements in
euro. However, most of our sales volumes, as well as many of our
worldwide costs, primarily those relating to our design,
manufacturing, selling and marketing, general and
administrative, and research and development activities, are
denominated in other currencies, principally the
U.S. dollar. The portions of our sales and costs
denominated in currencies other than the euro are exposed to
exchange rate fluctuations in the values of these currencies
relative to the euro. If our non-euro denominated expenses do
not match our non-euro denominated sales, this currency
difference may have an adverse effect on our operating result.
Over time, transaction risk could adversely affect our cash
flows and results of operations to the extent we are unable to
reflect changes in exchange rates in the pricing of the products
in local currency. Given our revenue and expense structure, in
which most of our revenues are denominated in dollars but a
substantial portion of the costs relating to those revenues are
in euro, we experienced pressure, on our gross margin in
particular, in our 2004 and 2005 financial years and in the
financial year ended September 30, 2007. In our 2006
financial year we benefited from changes in exchange rates. The
effects of transaction risk are not quantified in our combined
and consolidated financial statements.
Translation risk refers to the fact that the euro-denominated
amounts in our consolidated financial statements will differ
based on the exchange rates we use to prepare our
euro-denominated financial statements. Our subsidiaries located
outside the euro zone prepare their financial statements in
their local functional currencies. For us the most important
currency outside the euro zone is the U.S. dollar. The
U.S. dollar depreciated against the euro during our 2004
and 2005 financial years and appreciated against the euro during
our 2006 financial year, based on the average exchange rates we
use in our financial statements. The U.S. dollar
depreciated again during our 2007 financial year. The noon
buying rate of the Federal Reserve Bank of New York for euro
rose from €1.00=$1.2687 on September 29, 2006, the
last currency trading day in September 2006, to
€1.00=$1.4219 on September 28, 2007, the last currency
trading day in September 2007. Since the end of our financial
year, the noon buying rate has continued to rise to a high of
€1.00=$1.4691 on November 8, 2007. When we prepare our
financial statements, we translate the local functional currency
financial statements of our non-euro zone subsidiaries into
euro. Changes in the value of these currencies relative to the
euro from period to period therefore affect our results of
operations and financial condition as expressed in euro.
Currency translation risks do not affect local functional
currency cash flows or results of operations, but do affect our
consolidated annual financial statements. In general, an
increase in the euro value relative to the U.S. dollar and
other currencies will result in a lower euro value of the
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sales generated in currencies that have depreciated relative to
the euro. Even if the margin on these sales remains constant in
a non-euro currency, its value translated into euro will be
reduced.
Additional information on transaction and currency translation
risks and our efforts to manage them are contained in
“— Quantitative and Qualitative Disclosure About
Market Risk”.
We believe that cooperations, such as alliances for research and
development, and manufacturing and foundry partnerships, provide
us with access to several benefits that can be derived from
improved economies of scale. These benefits include sharing
risks and costs with our business partners, reducing our capital
requirements, developing a broader range of products, gaining
inter-cultural know-how and accessing additional production
capacities. We have invested substantial sums in these
cooperations in past periods. In addition, we have extensive
commitments to purchase products from our manufacturing
partners. These commitments can not be precisely quantified
because they are dependent on future market prices for memory
products. These purchases aggregated to approximately
€520 million in our 2005 financial year,
€1,185 million in our 2006 financial year and
€1,282 million in our 2007 financial year, as we
increased our share of foundry purchases from Winbond and SMIC,
and other purchases from Inotera.
The most significant of our current cooperations in terms of
impact on our financial statements are:
In March 2007, we announced plans to expand capacity at our
Qimonda Suzhou venture, for which we expect to make capital
expenditures of €250 million over the next three
years. The venture intends to arrange external financing for any
additional investment required to purchase further equipment. We
cannot assure you that this external financing can be obtained
on favorable terms or at all.
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Please see “Our Business” and “Arrangements
between Qimonda and the Infineon Group” for more details on
these strategic cooperations.
The preparation of our combined and consolidated financial
statements required us to apply accounting policies, and make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and revenues
and expenses during the years reported. We have identified the
following critical accounting policies and related assumptions,
estimates and uncertainties, which we believe are essential to
understanding the underlying financial reporting risks and the
impact that these accounting methods, assumptions, estimates and
uncertainties have on our reported financial results. These
policies have the potential to have a significant impact on our
combined and consolidated financial statements, either because
of the significance of the combined and consolidated financial
statement item to which they relate or because they require
judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are
continuous in nature. Actual results may differ from our
estimates under different assumptions and conditions. Our
critical accounting policies include:
The preparation of our combined financial statements requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, as well as disclosure of
contingent amounts and liabilities, at the dates of the
financial statements and the reported amounts of revenues and
expenses during the financial periods we present. Actual results
could differ materially from these estimates. In addition, due
to the significant relationship between Infineon and our
company, the terms of the carve-out transactions, the
allocations and estimations of assets and liabilities and of
expenses and other transactions between our business and
Infineon are not the same as those that would have resulted from
transactions among unrelated third parties. We believe that the
assumptions underlying the combined financial statements are
reasonable.
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Allocations from Infineon during the financial year ended
September 30, 2005, and the seven months ended
April 30, 2006 are reflected in the combined statements of
operations as follows:
The allocation during the 2006 financial year relates to the
seven-month period between October 1, 2005 and
April 30, 2006. After our carve-out on May 1, 2006,
costs were charged according to agreements with Infineon, which
amounted to €33 million for the five months period
ended September 30, 2006, and €56 million for the
year ended September 30, 2007. See note 1 to the
combined and consolidated financial statements for a description
of the assumptions used for periods prior to the carve-out.
However, these transactions, allocations and estimates are not
indicative of those that would have obtained had our company
actually operated on a stand-alone basis, nor are they
indicative of our future transactions or of our expenses or
results of operations. In addition, the process of preparing the
combined financial statements does not permit the revaluation of
historical transactions to attempt to introduce an arms’
length relationship where one did not at the time exist. We
believe that it is not practicable to estimate what the actual
costs of our company would have been on a stand-alone basis if
it had operated as an unaffiliated entity. Rather than
allocating the expenses that Infineon actually incurred on
behalf of our business, we would have had to choose from a wide
range of estimates and assumptions that could have been made
regarding joint overhead, joint financing, shared processes and
other matters. Any of these assumptions may have led to
unreliable results and would not have been more useful as an
indicator of historical business development and performance
than the methods employed in preparing the combined financial
statements.
Our business is extremely capital-intensive, and requires
significant investment in property, plant and equipment. Due to
rapid technological change in the semiconductor industry, we
anticipate the level of capital expenditures to be significant
in future periods. We invested a total of €879 million
in our 2007 financial year, a total of €686 million
during our 2006 financial year and a total of
€926 million in our 2005 financial year in property,
plant and equipment. At September 30, 2007, the carrying
value of our property, plant and equipment was
€2,186 million.
Prior to our carve-out Infineon acquired other businesses to
augment the Memory Products business. These acquisitions
resulted in the generation of significant amounts of long-lived
intangible assets, including goodwill. At September 30,
2007 we had long-lived intangible assets of
€143 million.
We apply the provisions of Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets”, and perform a test for impairment
at least once a year.
We also review long-lived assets, including intangible assets,
for impairment when events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying value of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment recognized is measured
by the amount by which the carrying value of the assets exceeds
the fair value of the assets. Estimated fair value is generally
based on either appraised value or discounted estimated future
cash flows. Considerable judgment is necessary to estimate
discounted future cash flows.
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In applying this policy we did not recognize any goodwill
impairment charges during our 2005 or 2007 financial years.
However, in light of the weak market conditions for commodity
NAND flash memories in the three months ended September 30,
2006, we decided to ramp down our flash production and stop the
current development of NAND-compatible flash memory products
based on Saifun’s proprietary NROM technology. We and
Saifun amended the license agreement relating to this technology
to terminate the payment of quarterly installments as of
December 31, 2006. As a result of the partial termination,
we reduced payables, goodwill and other intangible assets, and
recognized an impairment charge as of September 30, 2006 in
the aggregate amount of €9 million related to the
license (€7 million) and fixed assets
(€2 million) that were not considered to be
recoverable.
The memory industry has historically experienced periods of
extreme volatility in product demand and in industry capacity,
resulting in significant price fluctuations. See
“— Factors that Affect our Results of
Operations” and “Risk Factors — Risks
related to the semiconductor memory industry — The
DRAM industry is subject to cyclical fluctuations, including
recurring periods of oversupply, which result in large swings in
our operating results, including large losses.” These
significant price fluctuations have often occurred within
relatively short timeframes. For example, the average
“spot” market price for 512Mb DDR2 DRAM as reported by
DRAMeXchange fell from $6.36 on December 29, 2006 to $1.45
on September 28, 2007, a drop of 77% in nine months. Rapid
price increases can also occur. For example, the average
“spot” market price for 512Mb DDR2 DRAM as reported by
DRAMeXchange increased from $3.75 on January 2, 2006, to
$5.15 on February 2, 2006, a gain of over 37% in just one
month. Over the long term, however, DRAM prices have generally
tended to decline.
We value inventory on a quarterly basis at the lower of cost or
market value. Market value of inventory represents the net
realizable value for finished goods and
work-in-process.
As of September 30, 2006 and 2007, we had inventory of
€622 million and €619 million, respectively.
We review the recoverability of inventory based on regular
monitoring of the size and composition of inventory positions,
current economic events and market conditions, projected future
product demand and the pricing environment. This evaluation is
inherently judgmental and requires material estimates. These
estimates relate both to forecasted product demand and to the
pricing environment. Both of these are susceptible to rapid and
significant change.
In each of our three most recent financial years, we recorded
recurring adjustments to value our inventory according to this
policy. In the 2007 financial year, these adjustments amounted
to €85 million. These adjustments offset an increase
in the volume of inventory relating to the decision on our part
later in the 2007 financial year to hold finished products in
our inventory rather than sell them into an oversupplied market
characterized by swiftly falling prices. Our inventory in euro
terms was substantially the same as of September 30, 2006
and 2007 due to these offsetting factors. In future periods
write-downs on inventory may also be necessary due to one or
more of the following:
These factors could result in adjustments to the valuation of
inventory in future periods, and have a material adverse effect
on our consolidated financial statements.
We account for our pension-benefit liabilities and related
postretirement benefit costs in accordance with
SFAS No. 87 “Employers’ Accounting for
Pensions” and SFAS No. 158
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”.
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Prior to our carve-out, our employees participated in
Infineon’s defined benefit pension plans. The pension costs
and liabilities included in our combined and consolidated
financial statements for periods prior to the carve-out include
the portion of the Infineon pension costs and liabilities that
relate to our employees’ participation in the respective
Infineon pension plans. With the carve out, these pension
liabilities and related assets were legally transferred to us.
In September, 2006, we established the Qimonda Pension Trust for
the purpose of funding future pension benefit payments for our
employees in Germany. Subsequently, Infineon’s pension
trust transferred €26 million of cash, representing
our actuarially determined proportion of the funding in
Infineon’s pension trust as of the carve-out date, to this
trust for use in funding these pension benefit obligations. The
Qimonda Pension Trust’s investment strategy is to invest
this cash in a well-diversified portfolio of investments aimed
at maximizing long-term returns.
In February 2007,we established a uniform Qimonda Pension Plan
for Germany with effect from October 1, 2006, into which
the substantial majority of the employees were transferred,
representing more than 90% of the existing pension obligations.
The Qimonda Pension Plan is available to new employees. The
previous Infineon plan regulations continue to apply to existing
retirees and employees who did not consent to the new plan. The
Qimonda Pension Plan for Germany qualifies as a defined benefit
plan and, accordingly, the change from the previous defined
benefit plans is treated as a plan amendment pursuant to
SFAS No. 87, which increased the projected benefit
obligation by €4 million. This will be amortized as
part of net periodic pension cost in future periods.
The Infineon pension plan regulations continue to apply to our
foreign employees, although all respective assets and
obligations have been transferred to us.
Our pension costs and liabilities are actuarially calculated
using various assumptions, including discount rates, expected
return on plan assets, rate of compensation increase and rate of
projected future pension increases. These assumptions are based
on prevailing market conditions, long-term historical averages,
and estimates of future developments of rates of returns. Please
see note 28 to the combined and consolidated financial
statements for a quantification of the major assumptions
underlying our pension plan accounting, information on our plan
asset allocations and a discussion of our current funding
status. A significant variation in one or more of the underlying
assumptions could have a material effect on the measurement of
our long-term obligation or our pension cost and therefore our
financial condition or results of operations.
If the assumptions used to calculate the pension liabilities and
expected return on plan assets turn out to be accurate, we will
pay our recorded net liability as pension benefits to our
employees after they retire, and no adjustments to our balance
sheet accrual will be necessary. Prior to September 30,
2007, however, our actual experience differed from those
assumptions. This resulted in differences between our recorded
net liability and the related actuarially calculated amount.
Those differences, also referred to as actuarial gains and
losses, were generally not recognized in the consolidated
statements of operations as they occurred. Instead, due to the
long-term nature of pensions and the related assumptions, they
affected pension costs over the remaining service years of the
relevant employees.
We adopted the recognition provision of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans”, as of
September 30, 2007, pursuant to which the overfunded or
underfunded status of a defined benefit postretirement plan is
recognized as an asset or liability in the balance sheet and
changes in that funded status in the year in which the changes
occur through comprehensive income. As of September 30,
2007 the adoption of the Recognition Provision of
SFAS No. 158 resulted in a decrease in other
non-current liabilities of €5 million, an increase in
non-current deferred tax liabilities of €2 million and
an increase in accumulated other comprehensive income of
€3 million.
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The expense related to pension plans and similar commitments we
recognize in our consolidated financial statements is referred
to as net periodic pension cost (“NPPC”) and consists
of several separately calculated components. We estimate that
our NPPC for our 2008 financial year will be
€6.2 million. A one percentage point change in the
major assumptions mentioned above would result in the following
impact on the estimated pension cost for the 2008 financial year:
Increases and decreases in the discount rate, rate of
compensation increase and rate of projected future pension
increases, which are used in determining the pension obligation,
do not have a symmetrical effect on NPPC primarily due to the
compound interest effect created when determining the present
value of the future pension obligation. If more than one
assumption were changed simultaneously, the impact would not
necessarily be the same as if only one assumption were changed
in isolation.
Our pension plans were underfunded by an aggregate of
€29 million as of September 30, 2006, and after
adjusting for unrecognized actuarial losses as described above
of €7 million, we recognized the remaining
€22 million as a liability on our balance sheet. Our
pension plans were underfunded by an aggregate of
€25 million as of September 30, 2007. After
adopting the recognition provision of SFAS No. 158 as
described above, we recognized this underfunded status as a
liability on our balance sheet. Since the present value of
future benefits we expect to pay over the next five financial
years totals €9 million as of September 30, 2007,
we do not perceive a need to increase our plan funding in the
immediate future.
Income taxes as presented in the accompanying combined and
consolidated financial statements are determined on a separate
return basis. Although in numerous tax jurisdictions, including
Germany, the company was included in the consolidated tax
returns of Infineon before the carve-out, where the Memory
Products business was only a part of an Infineon entity, the tax
provision was prepared on an as-if separate company basis except
that, pursuant to the terms of the contribution agreement
between us and Infineon, any net operating losses generated by
the Memory Products business and carried forward are treated as
a reduction of equity at the end of the year, as such losses
were retained by Infineon. Infineon evaluates its tax position
and related tax strategies for its entire group as a whole,
which may differ from the tax strategies we would have followed
as a stand-alone company.
We recognize deferred income tax assets only if we determine
that it is more-likely-than-not that we will be able to realize
the tax benefits in the future from accumulated temporary
differences and net operating loss and credit carry-forwards. At
September 30, 2006 and 2007, our total net deferred tax
assets were €153 million and €151 million,
respectively. Our gross deferred tax assets increased from
€316 million as of September 30, 2006 to
€438 million as of September 30, 2007,
principally due to the tax benefits of net operating loss and
credit carry-forwards of approximately €32 million as
of September 30, 2006 and of approximately
€187 million as of September 30, 2007. These net
operating loss and credit carry-forwards are generally limited
to the amount used by the particular entity that generated the
loss or credit and in certain circumstances do not expire under
current law. Because as a general matter net operating loss and
credit carry-forwards are not transferable, certain net
operating loss and credit carry-forwards remained on
Infineon’s balance sheet because they were generated by
legal entities not transferred to us in connection with our
carve-out. In the future, Infineon will be able to offset its
tax expense with these carry-forwards. The retention of these
carry-forwards is shown on our balance sheets prior to our
carve-out as a reduction in our business equity of
€6 million as of September 30, 2005. We provided
valuation allowance
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against our total deferred tax assets of €70 million
and €204 million, as of September 30, 2006 and
2007, respectively.
We evaluate our deferred tax asset position and the need for a
valuation allowance on a regular basis. The assessment requires
the exercise of judgment on the part of our management with
respect to, among other things, benefits that can be realized
from available tax strategies and future taxable income. Our
ability to realize deferred tax assets depends on our ability to
generate future taxable income sufficient to use tax loss
carry-forwards or tax credits before their expiration. The
assessment is based on the benefits that could be realized from
available tax strategies, the reversal of taxable temporary
differences in future periods and, to the extent applicable, the
impact of forecasted future taxable income. If we do not expect
to be able to realize all of these benefits to the extent the
deferred tax asset would indicate, we increase the deferred tax
valuation allowance accordingly. As a result of this assessment,
we increased the deferred tax asset valuation allowance for our
2007 financial year by €134 million and in the 2006
financial year by €11 million to reduce the deferred
tax asset to an amount that we believe is more likely than not
expected to be realized in the future. The 2006 amount excluded
tax losses of €101 million before the carve-out that
could not be transferred to us and will instead be available to
Infineon in the future. The highly subjective character of many
of the determinations Statement of Financial Accounting
Standards (“SFAS”) No. 109 “Accounting
For Income Taxes” requires in measuring the valuation
allowance means that our deferred tax assets may be subject to
further reduction if our expectations, especially those relating
to the future taxable income from operations (and to benefits
from available tax strategies), prove to be too optimistic.
We sell our memory products throughout the world. Our policy is
to record revenue when persuasive evidence of an arrangement to
sell products exists, the price is fixed or determinable,
delivery has occurred and collectibility is reasonably assured.
In general, persuasive evidence of an arrangement exists when
the customer’s written purchase order has been accepted.
More judgment is required in the case of our licensing
agreements, whereas the revenues from most of our DRAM business
can be recognized using standardized processes.
We record reductions to revenue for estimated product returns
and allowances for discounts and price protection, based on
actual historical experience, at the time the related revenue is
recognized. We also establish reserves for sales discounts,
price protection allowances and product returns based upon our
evaluation of a variety of factors, including industry demand.
This process requires the exercise of substantial judgment in
evaluating the above-mentioned factors and requires material
estimates, including forecasted demand, returns and industry
pricing assumptions.
We have entered into licensing agreements for our technology in
the past, and anticipate that we will continue our efforts to
monetize the value of our technology in the future. As with
certain of our existing licensing agreements, any new licensing
arrangements may include capacity reservation agreements with
the licensee. Such transactions could represent multiple element
arrangements pursuant to SEC Staff Accounting Bulletin
(“SAB”) 104, “Revenue Recognition”,
and Emerging Issues Task Force (“EITF”) Issue
No. 00-21,
“Revenue Arrangements with Multiple
Deliverables”. This treatment can have the result of
deferring license revenues and recognizing them over the period
in which we are purchasing products from the licensee. The
process of determining the appropriate revenue recognition in
such transactions is highly complex and requires significant
judgment, which includes evaluating material estimates in the
determination of fair value and the level of our continuing
involvement.
We are subject to various legal actions and claims that arise in
the normal course of business. In particular, we are subject to
significant civil lawsuits that relate to the operations of the
Memory Products business prior to the carve-out, including the
civil antitrust litigation in the United States and Canada,
securities class actions and patent litigation. These matters
are described in “Our Business — Legal
Matters”. As part of our carve-out, we agreed to indemnify
Infineon with respect to claims (including any related expenses)
arising in connection with certain matters, which are described
under “Arrangements between Qimonda and the Infineon
Group”.
We regularly assess the likelihood of any adverse outcome or
judgments related to these matters and, where appropriate,
estimate the range of possible losses and recoveries. We record
liabilities, including accruals for
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significant litigation costs related to legal proceedings, when
it is probable that a liability has been incurred and the
associated amount of the loss can be reasonably estimated. Where
the estimated amount of loss is within a range of amounts and no
amount within the range is a better estimate than any other
amount or the range cannot be estimated, we accrue the minimum
amount. Accordingly, we have accrued a liability and charged
operating income in our combined and consolidated financial
statements related to certain asserted and unasserted claims
existing as of each balance sheet date. As additional
information becomes available, we assess any potential liability
related to these actions and revise the estimates, if necessary.
These accrued liabilities may be insufficient and are subject to
change in the future based on new developments in each matter,
or changes in circumstances. Any change we make in them could
have a material impact on our results of operations, financial
position and cash flows. See “Risk Factors —
Risks related to our operations — Sanctions in the
United States and other countries against us and other DRAM
producers for anticompetitive practices in the DRAM industry and
related civil litigation may have a direct or indirect material
adverse effect on our operations” and “— An
unfavorable outcome in the pending securities litigation against
Infineon or the incurrence of significant costs in the defense
of this litigation may have a direct or indirect material
adverse effect on our operations.”
The following table presents the various line items in our
combined and consolidated statements of operations expressed as
percentages of net sales for the periods indicated.
We generate our net sales primarily from the sale of our memory
products. Our memory products consist primarily of dynamic
random access memory (DRAM) components and modules, which are
used in a wide variety of electronic products including PC,
notebook and workstation applications, more advanced
infrastructure applications as well as graphics, mobile and
consumer electronic devices. In 2007 we ceased offering the
limited range of non-volatile flash memory products we had
previously marketed and sold. The vast majority of our memory
product sales are made through our direct sales force, whereas
approximately 12% of our total sales in our 2007 financial year
were made through distributors.
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We also generate a small stream of revenues from royalties and
license fees earned on technology that we own and license to
third parties. This often enables us to gain access to
manufacturing capacity at foundries through licensing and
capacity reservation arrangements, and also permits us to
recover a small portion of our research and development expenses.
The following table presents data on our net sales for the
periods indicated.
In our 2007 financial year our total net sales decreased by
€207 million, or 5%, to €3,608 million from
€3,815 million in our 2006 financial year. Primarily
responsible for the decrease were:
Offsetting these decreases in part were increases related to
higher bit shipments, which increased 44%
In our 2006 financial year our total net sales increased by
€990 million, or 35%, to €3,815 million from
€2,825 million in the 2005 our financial year.
Primarily responsible for the increase were:
Offsetting these increases in part were decreases related to:
Price declines and increases. While we
generally expect prices for DRAM products to decline over time,
and this in fact occurred during each of our 2005, 2006 and 2007
financial years, our 2007 financial year was characterized by
particularly steep price declines for DRAM products. After
remaining stable until the end of December 2006, prices declined
significantly thereafter. We believe that a part of this price
decline, especially towards the end of March 2007, was driven by
seasonal demand weakness, the effects of an earlier
build-up of
inventories at original equipment manufacturers (OEMs) ahead of
the introduction of the new Windows Vista computer operating
system and capacity conversions from NAND to DRAM by some
competitors, following severe price erosion in the NAND Flash
area. During the three months ended June 30, 2007 the price
decline continued and was amplified by strong DRAM output growth
across the industry driven, we believe, mostly by capacity
increases and technology conversions to more efficient
technologies. In the three months ended September 30, 2007,
prices initially showed signs of improvement, but then resumed
their decline and ended up on average at the same low level as
during the previous three months. The average daily
“spot” market price for 512Mb DRAM as reported by
DRAMeXchange fell from $6.36 on December 29, 2006 to $1.45
on September 28, 2007, a drop of 77%.
In our 2007 financial year we continued to focus on our
diversification strategy, as indicated by the relative portions
of our product mix comprising DRAMs for PC applications, on the
one hand, and for infrastructure, graphics, consumer and mobile
applications, on the other. Measured in bit shipments, our share
of DRAMs for non-
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PC applications was well above 50% during the seasonally
stronger December and September quarters and close to 50% in the
second and third quarters when there was a greater emphasis on
DRAMs for PC applications. The share of our net sales for non-PC
applications, which generally command higher and more stable
prices than standard DRAMs, increased to 60% in our 2007
financial year as compared to 51% in the 2006 financial year.
This increase was due both to seasonal factors and our ability
to increase bit shipments of DRAMs for non-PC applications.
Due, we believe, largely to our careful focus on market trends
and attention to our product mix, our average per-megabit
selling prices were 29% lower in the 2007 financial year than in
the 2006 financial year, a significantly smaller decline than
average market price decline for DRAM of 35%, based on data
reported by WSTS, over the same period.
DRAM prices were under substantial pressure during the first
quarter of our 2006 financial year, after which they recovered
over the remaining three quarters. Our average per-megabit
selling prices for DRAM products in the 2006 financial year were
approximately 20% less than they had been in with the 2005
financial year. The per-megabit selling prices in
U.S. dollars in the spot market of our major products with
DDR2 interfaces declined sharply at the start of our 2006
financial year, declining around 26% over the first three
months. During this quarter, we produced an excess of DDR2 DRAMs
because the corresponding DDR2 logic chipsets, which are
produced by logic semiconductor manufacturers, were not
available in quantities sufficient for PC manufacturers to
absorb the supply of DDR2 DRAMs in the market. A portion of the
DDR2 DRAMs that we produced remained unsold and in our inventory
until supply of appropriate logic chipsets created sufficient
demand for our accumulated DDR2 DRAMs. After December 2005
prices recovered somewhat and remained relatively stable until
May, when DDR2 pricing experienced some erosion until July
before again rising through to September 30, 2006 due to
tight market supply. DDR prices recovered steadily, albeit more
slowly than DDR2 prices, from the December 2005 low points,
continuing to increase through to the end of our 2006 financial
year.
In our 2006 financial year sales of DRAM products for use in
game consoles drove significant growth in bit shipments of
graphic products. This contributed to the increased share of net
sales from DRAMs for infrastructure, graphics, mobile and
consumer applications to 50% as compared to 38% in the 2005
financial year. Our average per-bit selling prices in the 2006
financial year were 27% lower than in our 2005 financial year.
DRAM prices remained relatively stable for most of the 2006
financial year. Towards the end of the year prices increased, we
believe, due to strong demand exceeding supply (our fourth
quarter has proven in recent years to be the strongest for DRAM
products for consumer electronics such as gaming consoles in
advance of the end-year peak retailing season). Early in our
2007 financial year, DRAM suppliers started to heavily increase
their output and bit growth rates, causing prices to come under
more pressure and to fall precipitously during our second and
third financial quarters.
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The following graphic shows the average monthly market prices
for DRAM (expressed in 512Mb equivalents), as reported by WSTS,
for the three years ended September 30, 2007.
(Source: WSTS)
Increase in bit shipments. Our bit shipments
increased by 44% during the 2007 financial year compared to the
2006 financial year due to:
The growth in our bit shipments was offset in part by our
decision, later in the financial year, to hold some products in
our inventory rather than sell them into a particularly
unfavorable market.
Our bit shipments increased by 79% during the 2006 financial
year as compared to the 2005 financial year. This growth was
primarily a result of:
Exchange rate effects. The U.S. dollar
weakened against the euro in the 2007 financial year, with the
average exchange rate for the period 8% lower than it was for
the 2006 financial year. This unfavorable U.S. dollar euro
exchange rate negatively affected our revenues during our 2007
financial year. We have calculated the effect of this change in
exchange rate on our revenues as follows: we would have achieved
€298 million more in net sales in the
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2007 financial year had the average exchange rates we used to
translate our non-euro denominated sales into euros been the
same in the 2007 financial year as they were in the 2006
financial year.
The U.S. dollar/euro exchange rate had an opposite effect
in our 2006 financial year. Although the U.S. dollar was
slightly weaker on September 30, 2006 than it had been one
year earlier, the average exchange rate of U.S. dollars for
euro over the financial year was 3% higher than it was for the
2005 financial year. We have calculated the effect of this
change in exchange rate on our revenues as follows: we would
have achieved €117 million less in net sales in our
2006 financial year had the average exchange rates we used to
translate our non-euro denominated sales into euros been the
same in the 2006 financial year as they were in the 2005
financial year.
Decline in license revenue. In the 2005
financial year our license revenue increased to
€160 million, primarily due to the settlement Infineon
reached with ProMOS in November 2004. Under this agreement,
which resolved an intellectual property dispute that had begun
in 2003, Infineon licensed DRAM technology to ProMOS for ongoing
use by ProMOS, resulting in recognition of
€118 million in revenue during the 2005 financial
year. We recorded significantly less license revenue in our 2006
and 2007 financial years, and do not expect license revenues in
future periods to be as substantial as they were in our 2005
financial year.
The following table sets forth our sales by region for the
periods indicated. We categorize our sales geographically based
on the location where the customer chooses to be billed.
Delivery might be to another location and the customer may ship
the products on for further use.
The increased sales in Japan during our financial year ended
September 30, 2007 resulted from a strong growth in demand
for our specialty products, in particular for graphics and
consumer applications, as well as additional demand for standard
DRAM products for PC applications through an expansion of our
customer base. The decrease in sales in North America for 2007,
as compared to the previous period, was primarily caused by OEM
customers shifting their production to Asia.
The percentage of net sales in the Asia/Pacific region were
relatively high in our 2005 financial year due to the
recognition of license revenue of €118 million
relating to the ProMOS license agreement.
Our cost of goods sold consists principally of expenses relating
to:
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In addition to factors that affect our revenues and those
affecting the components of cost of goods sold listed above, the
following factors, not all of which were material in the periods
under review, affected our gross margin:
The following table sets forth our cost of goods sold and
related data for the periods indicated.
Cost of goods sold increased by €342 million, or 11%,
from €3,048 million in our 2006 financial year to
€3,390 million in our 2007 financial year. The
increase in our cost of goods sold was due primarily to:
Offsetting these increases in part were
Cost of goods sold increased by €884 million, or 41%,
from €2,164 million in our 2005 financial year to
€3,048 million in our 2006 financial year. The
increase in our cost of goods sold was due primarily to:
Offsetting these increases in part were improvements in our
productivity.
Higher bit shipments. The 44% increase in bit
shipments in our 2007 financial year and the 79% increase in bit
shipments in our 2006 financial year were due primarily to the
increase of production volumes at our Richmond 300mm facility,
at Inotera and at those of our foundry partners manufacturing on
300mm wafers. In our 2006 financial year, we sourced in bits
over 198% more chips from these partners than we had during our
2005 financial year. As discussed below, we believe that
productivity improvements were partially responsible for holding
the percentage increase in costs below the percentage increase
in bit shipments, as was the spreading out of our fixed costs
over a greater level of bit shipments.
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Inventory revaluation and reserves. We value
our inventory on a quarterly basis at the lower of cost or
market value. If the market price declines below the full
production cost of a particular product, then all inventories of
that product are written down to its market price. For some of
our products, the significant price decline in our 2007
financial year resulted in the write-down of inventory to market
value in an amount of €85 million in accordance with
our policy. Due to the volatility of the DRAM market,
write-downs of this nature may occur in periods of sharp price
decline and negatively impact our cost of sales and margins.
Productivity improvements. Similar to our 2006
financial year, we achieved productivity improvements in our
2007 financial year through the increased conversion of
capacities to 90nm, 80nm and 75nm process technologies and the
increasing share of our chips produced on 300mm wafers. The
increase of 300mm capacities at our Richmond facility, our joint
venture Inotera and our foundry partners SMIC and Winbond
contributed to the increased share of production on 300mm
wafers. Measured in wafer starts, 75% of our total production
(including capacity sourced from our joint ventures and foundry
partners) was on 300mm wafers in our 2007 financial year as
compared to 68% of our production in our 2006 financial year. We
believe that productivity improvements helped to increase our
bit shipments so that although our absolute costs increased, we
could achieve unit cost reductions because of the larger sales
volume over which our fixed costs are spread.
In our 2006 financial year we achieved productivity improvements
through the conversion of capacities to 110nm and 90nm process
technologies and the increasing share of our chips produced on
300mm wafers. The
ramp-up of
300mm capacities at our manufacturing facility at Richmond,
Virginia, at our joint venture Inotera and at our foundry
partner SMIC contributed to the increased share of production on
300mm wafers. Measured in wafer starts, 68% of our total
production (including capacity sourced from our strategic and
foundry partners) was on 300mm wafers in our 2006 financial year
as compared to 53% of our production in our 2005 financial year.
Exchange rate effects. The weaker exchange
rate of U.S. dollars for euro in the 2007 financial year,
as compared to the 2006 financial year, decreased the euro value
of our costs that are denominated in U.S. dollars by
approximately €188 million. This means that we would
have incurred approximately €188 million more in costs
of goods sold in our 2007 financial year, had the average
exchange rates we use to translate our non-euro expenses into
euros been the same in the 2007 financial year as they were in
the 2006 financial year. However, given the decrease in our net
sales due to foreign exchange effects, foreign currency
movements overall had a negative net effect on our gross margin
during the 2007 financial year.
The relative strength of the exchange rate of the
U.S. dollar against the euro in the 2006 financial year, as
compared to the 2005 financial year, increased the euro value of
our costs that are denominated in U.S. dollars by
approximately €45 million. This means that we would
have incurred approximately €45 million less in costs
of goods sold in our 2006 financial year, had the average
exchange rates we use to translate our non-euro expenses into
euros been the same in the 2006 financial year as they were in
the 2005 financial year. However, given the increase in our net
sales due to foreign exchange effects, foreign currency
movements overall had a positive net effect on our gross margin
during the 2006 financial year.
Purchases from foundries. Our purchases from
our joint ventures and other associated and related companies,
such as Inotera, amounted to €546 million in the 2007
financial year, €438 million in our 2006 financial
year and €247 million in our 2005 financial year. In
addition, we purchased €736 million of inventory from
our foundry partners in our 2007 financial year as compared to
€747 million in our 2006 financial year and
€273 million in our 2005 financial year.
Our gross margin decreased to 6% in our 2007 financial year,
from 20% in our 2006 financial year, primarily due to lower
average selling prices and inventory write downs. These could
not be offset by lower production cost per unit resulting from
increased manufacturing productivity and lower unit costs from
foundry partners.
Research and development (R&D) expenses consist primarily
of salaries and benefits for research and development personnel,
materials costs, depreciation and maintenance of equipment used
in our research and development efforts and contracted
technology development costs. Materials costs include expenses
for development wafers and costs relating to pilot production
activities prior to the commencement of commercial
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production. R&D expenses also include our joint technology
development arrangements with partners such as Nanya. Some of
our research and development projects qualify for subsidies from
local and regional governments in the countries where we do
business. If the criteria to receive a grant are met, the
subsidies received reduce R&D expenses over the project
term as expenses are incurred.
The following table sets forth our R&D expenses and
government subsidies for the periods indicated:
In our 2007 financial year, R&D expenses decreased by 7%,
from €433 million to €401 million, due to
the completion of R&D work on our 80nm and 75nm technology
platforms earlier in the 2007 financial year and due to our
focus on production support research before development efforts
took off on our 58nm technology platform towards the end of the
2007 financial year. We also initiated cost saving measures in
an effort to increase the productivity of our development
efforts. Furthermore, the increase in governmental subsidies
from €17 million in our 2006 financial year to
€24 million in our 2007 financial year reduced the
development expenses.
In our 2006 financial year, R&D expenses increased by 11%,
from €390 million to €433 million, due to
our effort to strengthen the development capabilities with
respect to the next generation of memory technologies and
further diversify our portfolio of memory products. We also paid
€10 million for research services provided by Infineon
during the five months after the carve-out to our 2006 financial
year end, and €28 million during our 2007 financial
year.
Selling expenses consist primarily of salaries and benefits for
personnel engaged in sales and marketing activities, costs of
customer samples, non-R&D costs related to developing
prototypes, distribution center costs, other marketing
incentives and related marketing expenses.
General and administrative expenses consist primarily of
salaries and benefits for administrative personnel,
non-manufacturing related overhead costs, consultancy, legal and
other fees for professional services, and recruitment and
training expenses.
The following table sets forth information on our selling,
general and administrative (SG&A) expenses for the periods
indicated.
During the 2007 financial year SG&A expenses decreased by
7% as compared to the 2006 financial year, from
€215 million to €199 million. The primary
reason for the decline was that during the 2007 financial year
the combined costs under our post carve-out service agreements
with Infineon and to build out our corporate functions were less
than the costs Infineon allocated to us for the 2006 financial
year. We also incurred lower costs in the 2007 financial year
than we did for the same period one year earlier for special
projects, such as our carve-out and IPO.
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Due to the decrease in net sales during our 2007 financial year,
SG&A expenses relative to net sales remained constant
compared to our 2006 financial year.
During the 2006 financial year SG&A expenses increased by
4% as compared to the 2005 financial year, from
€206 million to €215 million. The increase
was driven by higher cost allocations from Infineon through
April 30, 2006 and project costs related to the carve-out
and IPO. We also paid €14 million for corporate
services provided by Infineon during the five months after the
carve-out to our 2006 financial year end, and
€15 million during our 2007 financial year.
In addition, in the 2006 financial year we had expenses of
€8 million relating to stock-based compensation, of
which €3 million are included in SG&A expenses.
The remaining portion is reflected in different expense
categories based on the cost centers of the employees concerned.
These employees received these options on Infineon shares when
they were Infineon employees in periods prior to our carve-out.
We issued our own stock options for the first time in our 2007
financial year. Together with the cost of Infineon stock
options, we had total stock-based compensation expenses in our
2007 financial year of €6 million, of which
€2 million are included in SG&A expenses.
We did not incur any restructuring charges in our 2006 or 2007
financial years. In our 2005 financial year, we accrued charges
of €1 million for restructuring and cost-saving
efforts taken by Infineon, which included downsizing our
workforce and consolidating certain functions and operations.
In March 2007, we announced the building of a new DRAM module
manufacturing facility in Johor, Malaysia. Following the
construction of this facility, we plan to move the backend
production from our existing Malacca plant to this new backend
production facility. As of September 30, 2007 we have
implemented a restructuring plan pursuant to
SFAS No. 88, but we cannot yet make a reasonable
estimate of the amount of involuntary benefits to be paid.
Other operating (expenses) income, net contains various items
related to our operations, and may fluctuate from period to
period due to the more or less infrequent nature of these items,
which include subsidies, grants, insurance proceeds and accruals
for legal matters.
The following table sets forth information on our other
operating (expenses) income, net for the periods indicated.
Other operating income, net in our 2007 financial year related
primarily to subsidies, proceeds from insurance claims and the
adjustment of accruals for legal matters to reflect current
estimates. In our 2006 financial year other operating expenses,
net reflected expenses related to litigation settlement charges
of €54 million as well as impairment charges of
€9 million related to our decision to ramp down our
flash production and NROM development activities. Other
operating expenses, net in our 2005 financial year principally
reflected expenses related to antitrust matters.
The equity in earnings of associated companies with financial
year ends that differ by not more than three months from the
Company’s financial year end is recorded with a three month
delay. This applies in particular to our joint venture Inotera
Memories, which has a December 31 financial year-end.
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The following table sets forth information on our equity in
losses or earnings of associated companies for the periods
indicated.
In the last three financial years, Inotera contributed most of
our equity in earnings from associated companies. This increased
in the 2006 financial year and the beginning of 2007, primarily
due to the increased volume production by Inotera and selling
prices that were at that time, on average, higher and stable.
Our equity in Inotera’s earnings is, however, sensitive not
only to fluctuations in the price of DRAM and production
volumes, but also to changes in the portion of our inventory
which we purchased from Inotera and that remains unsold. This is
because we eliminate Inotera’s profit from the inventory we
have not yet sold.
The following table sets forth information on Gain on associated
company share issuance for the periods indicated.
On March 17, 2006 Inotera successfully completed its
initial public offering on the Taiwanese stock exchange of
200 million ordinary shares. On May 10, 2006 Inotera
successfully completed a public offering on the Luxembourg stock
exchange of 40 million global depositary shares
(representing 400,000,000 common shares). As a result, our
ownership was diluted from 45.9% to 36.0% while our proportional
share of Inotera’s equity increased by
€72 million. We reflected this gain as part of
non-operating income during the 2006 financial year.
Other non-operating income, net consists of various items from
period to period not directly related to our principal
operations, including gains and losses on sales of marketable
securities.
The following table sets forth information on other
non-operating expenses or income for the periods indicated.
In the 2007 financial year other non-operating income related
principally to valuation of derivatives, dividend income and a
gain of €2 million on the sale of our investment in
Ramtron. In the 2006 financial year, other non-operating income
related principally to non-operating foreign currency
transaction gains. In the 2005 financial year, other
non-operating income, net included €18 million related
principally to non-operating foreign currency transaction gains,
which were partially offset by investment-related impairment
charges of €6 million.
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We define EBIT as net income (loss) plus interest expense and
income tax expense. EBIT is not defined under U.S. GAAP and
may not be comparable with measures of the same or similar title
that are reported by other companies. Under SEC rules, EBIT is
considered a non-GAAP financial measure. It should not be
considered as a substitute for, or confused with, any
U.S. GAAP financial measure. We believe the most comparable
U.S. GAAP measure is net income. Our management uses EBIT
as a measure to establish budgets and operational goals, to
manage our business and to evaluate its performance. Because
many operating decisions, such as allocations of resources to
individual projects, are made on a basis for which the effects
of financing the overall business and of taxation are of
marginal relevance, management finds a metric that excludes the
effects of interest on financing and tax expense useful. In
addition, in measuring operating performance, particularly for
the purpose of making internal decisions such as those relating
to personnel matters, it is useful for management to consider a
measure that excludes items over which the individuals being
evaluated have minimal control, such as enterprise-level
taxation and financing. We report EBIT information because we
believe that it provides investors with meaningful information
about our operating performance in a manner similar to that
which management uses to assess and direct the business. EBIT is
not a substitute for net income, however, because the exclusion
of interest and tax expense is not appropriate when reviewing
the overall profitability of our company. Although EBIT is our
primary measure of evaluating operating performance, we also
evaluate the costs and benefits associated with various
financing structures and the income tax consequences, where
relevant and material independent of the operational assessment.
EBIT is determined from the consolidated statements of
operations as follows:
We derive interest income primarily from cash, cash equivalents
and marketable securities. Interest expense is primarily
attributable to loans from Infineon and external banks and
excludes interest capitalized on manufacturing facilities under
construction.
The following table sets forth information on our net interest
income (expense) for the periods indicated.
We earned interest income on cash and cash equivalents and
marketable securities in the 2007 financial year. Our interest
expense decreased in the 2007 financial year as compared to the
2006 financial year, due to our lower average borrowings from
Infineon, as we fully repaid a total of €344 million
of outstanding debt to Infineon. Our interest expense increased
in the 2006 financial year as compared to the 2005 financial
year, due to our higher average borrowings from Infineon.
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We no longer have any outstanding debt to Infineon. With the
establishment of our own independent capital structure,
including our recent capital lease of 200mm equipment, we expect
interest expense to increase in future periods compared to the
2007 financial year. See “-Capital Requirements”.
The following table sets forth information on our income taxes
for the periods indicated.
We assess our deferred tax asset and the need for a valuation
allowance pursuant to SFAS No. 109. As a result of
this assessment, we have increased our deferred tax asset
valuation allowance in our 2005, 2006 and 2007 financial years
to reduce the net deferred tax asset to an amount that is more
likely than not expected to be realized in future periods. Our
effective tax rate in the 2006 financial year was substantially
higher than our statutory tax rate due to increases in our
valuation allowances, for losses which can not be utilized by us
and have been retained by Infineon. In the 2007 financial year
our effective rate decreased but was still higher than our
statutory rate, due to losses in jurisdictions for which tax
benefits could not be recognized.
Our net income had improved from a net income of
€18 million in the 2005 financial year to
€74 million in the 2006 financial year before falling
to a net loss of €249 million in the 2007 financial
year.
The following table sets forth selected items from our
consolidated balance sheets for the periods indicated.
As of September 30, 2007, our current assets decreased
significantly as compared to September 30, 2006, primarily
due to lower trade accounts receivables which resulted from
lower revenues and faster collections in the 2007 financial year
compared to the 2006 financial year. This effect was partially
offset by investments made in marketable securities pending use
in capital expenditures and an increase of other current assets
mainly due to an increase of income tax refunds and the fair
value of derivatives. Inventory was essentially unchanged as
compared to September 30, 2006. While bit production growth
exceeded bit shipments during the financial year, and we held
some unsold inventory late in the year rather than sell it into
a very unfavorable market, these factors were offset by
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the reduction in our manufacturing costs and our write-down of
inventory during the year ended September 30, 2007.
Non-current assets increased slightly because capital
expenditures exceeded the corresponding depreciation in the 2007
financial year.
As of September 30, 2007, current liabilities decreased as
compared to September 30, 2006 primarily as a result of the
full repayment of €344 million on our short-term loan
due to Infineon during the year ended September 30, 2007.
As of September 30, 2007, non-current liabilities increased
compared to September 30, 2006, mainly due to the increase
in capital lease obligations following the sale and lease back
of 200mm equipment.
As of September 30, 2007, our shareholders’ equity
decreased as compared to September 30, 2006 mainly due to
our net loss of €249 million and additional foreign
currency translation losses affecting equity of
€124 million during the 2007 financial year.
Our combined and consolidated statement of cash flows shows the
sources and uses of cash during the reported periods. It is of
key importance for the evaluation of our financial position.
Although our combined statements of operations and balance
sheets prior to our carve-out include allocations of financial
statement line items from Infineon’s financial statements,
the combined and consolidated statements of cash flows are
determined indirectly from these statements and do not reflect
any additional allocations.
Cash flows from investing and financing activities are both
indirectly determined based on payments and receipts. Cash flows
from operating activities are determined indirectly from net
income (loss). In accordance with U.S. GAAP, the line items
on the cash flow statement that reflect changes in balance sheet
items have been adjusted for the effects of foreign currency
exchange fluctuations and for changes in the scope of
consolidation. Therefore, they do not conform to the
corresponding changes you will find between the balance sheets
themselves.
Our operating cash flow increased from an inflow of
€326 million in the 2006 financial year to an inflow
of €980 million in the 2007 financial year. The growth
in cash generated was primarily due to working capital
improvements resulting from the substantial decrease in our
trade accounts receivable (which had increased in our 2006
financial year). The working capital improvements also result
from faster collections and improved payment terms with various
customers and suppliers and include some prepayments to secure
supply. Also positively affecting cash flow from operations as
compared with the prior year were the effect of, non-cash
inventory write-downs taken during the 2007 financial year and
with comparably larger decreases in other current assets and
larger increases in other liabilities. The effect of these
increases in operating cash flow was partially offset by our net
loss in the 2007 financial year, a comparably smaller increase
in trade accounts payable and decreases in accrued liabilities.
Cash used in investing activities in these periods principally
reflect the capital expenditures and investments in associated
companies during this period. Our cash used in investing
activities increased in the 2007 financial year, mainly because
we had higher capital expenditures than in the 2006 financial
year. This outflow was partially offset
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by proceeds received of €156 million from our sale and
leaseback of 200mm equipment in Richmond in September 2007.
Cash used in financing activities in our 2007 financial year
mainly reflects the full repayment of our short term loan from
Infineon, By comparison, cash provided by financing activities
in the 2006 financial year mainly came from our IPO proceeds of
€415 million and advances by Infineon prior to our
carve-out.
Our operating cash flow in the 2006 financial year declined from
an inflow of €483 million to a €326 million
inflow. The reduction in cash generated was primarily due to
increases in our trade accounts receivable, inventory and trade
accounts payable, reflecting our sales growth. This was in part
offset by our higher net income and by depreciation and
amortization, which increased by €175 million mainly
as a result of our new facilities in Richmond, Virginia and
Suzhou.
Cash used in investing activities in both periods reflect the
capital expenditures and investments in associated companies
during both periods. Our cash used in investing activities was
lower in the 2006 financial year, mainly because we had lower
capital expenditures compared to the 2005 financial year, which
was partially offset by increased investments in marketable
securities.
Cash provided by financing activities in both periods relates
principally to investments by and advances from Infineon and, in
the 2006 financial year, our IPO proceeds of
€415 million, net of offering costs and tax benefits
thereon. Infineon advanced €484 million to us in the
2006 financial year, as compared to €500 million in
the same period one year earlier. We repaid
€163 million to Infineon in the 2006 financial year.
We define free cash flow as cash from operating and investing
activities excluding purchases or sales of marketable
securities. Free cash flow is not defined under U.S. GAAP
and may not be comparable with measures of the same or similar
title that are reported by other companies. Under SEC rules,
“free cash flow” is considered a non-GAAP financial
measure. It should not be considered as a substitute for, or
confused with, any U.S. GAAP financial measure. We believe
the most comparable U.S. GAAP measure is net cash provided
by operating activities. Since we operate in a capital-intensive
industry, we report free cash flow to provide investors with a
measure that can be used to evaluate changes in liquidity after
taking capital expenditures into account. It is not intended to
represent residual cash flow available for discretionary
expenditures, since debt service requirements or other
non-discretionary expenditures are not deducted. Free cash flow
is determined as follows from our combined and consolidated
statements of cash flows:
Free cash flow was negative in our 2005 and 2006 financial years
because capital expenditures exceeded the cash provided by
operating activities. Prior to our carve-out this shortfall was
financed principally by advances from Infineon and subsequent to
our carve-out was financed by our available cash balances.
Our free cash flow in the 2007 financial year was positive
mainly due to working capital improvements that increased our
operating cash flow by an amount in excess of our capital
expenditures.
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Net Cash
Position
The following table presents our gross and net cash positions
and the maturity of our debt. It is not intended to be a
forecast of cash available to us in future periods.
Our gross cash position (which we define as cash and cash
equivalents plus marketable securities) amounted to
€1.011 million at September 30, 2007, compared to
€1.070 million at September 30, 2006. As part of
Infineon, our historical capital structure was based on the
assumption that our net cash position was zero. Our net cash
position increased to €707 million at
September 30, 2007, compared to €575 million at
September 30, 2006 mainly as a result of our positive free
cashflow during the 2007 financial year. We fully repaid the
shareholder loan from Infineon by April 2007.
Long-term debt at September 30, 2007 principally consists
of an unsecured bank loan of €124 million related to
our Porto, Portugal backend facility, and a capital lease
obligation of €128 related to the sale and lease back of
200mm equipment.
To secure our cash position and to maintain flexibility with
regards to liquidity, we have implemented a risk management
policy with risk limits with respect to counterparty, credit
rating, sector, duration, credit support and type of instrument.
See note 30 to the combined and consolidated financial
statements included elsewhere in this annual report.
In addition to EBIT, our management has committed itself since
the beginning of the 2007 financial year to focus on measuring
the profitability of the Company using a measure that compares
net income, with adjustments it believes necessary to make the
measure a meaningful assessment tool, to the capital that has
been required for the business. We began calculating and
reporting the financial indicator Return on Capital Employed or
“RoCE” for this purpose.
RoCE and its constituents, earnings before interest, capital
employed are non-GAAP financial measures, which means they are
not defined under U.S. GAAP and may not be comparable with
measures of the same or similar title that are reported by other
companies. Under SEC rules, “Return on Capital
Employed” is considered a non-GAAP financial measure. It
should not be considered as a substitute for, or confused with,
any U.S. GAAP financial measure. Reconciliations to the
closest GAAP measures net (loss) income to shareholders’
equity ratio, net (loss) income and shareholders’ equity
are presented below. We calculate our capital employed as our
end period shareholders’ equity less the net cash position
on that data. RoCE is calculated as earnings before interest
divided by capital employed. RoCE is determined as follows from
the consolidated financial statements:
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We require capital in our 2008 financial year to:
We expect to meet these requirements through:
As of September 30, 2007, we required funds for our 2008
financial year aggregating €905 million. This
consisted of €828 million for commitments and
€77 million of short term debt. In addition, known
contingencies of less than one year as of September 30,
2007 totaled €126 million. In our 2007 financial year
we spent €879 million in capital expenditures.
Approximately €237 million capital expenditures have
been committed and included in unconditional purchase
commitments for the 2008 fiscal year. We had a gross cash
position of €1,070 million as of September 30,
2006 and €1,011 million as of September 30, 2007.
Our sources of funding, in addition to this cash position,
include our cash flows from operations — we generated
cash flows from operations of €326 million in our 2006
financial year and €980 million during the financial
year ended September 30, 2007. We can also draw, for
short-term purposes, on the working capital lines we maintain in
several locations in an aggregate amount of
€161 million.
We are also exploring whether other kinds of longer term
financing transactions may be arranged on favorable terms. One
kind of transaction that is common in our industry is a sale and
leaseback involving manufacturing equipment. We entered into
such an agreement as of September 28, 2007 for a part of
the 200mm equipment of our Richmond, Virginia, plant which
resulted in net proceeds of €156 million. We are
currently discussing further potential transactions of this
nature and evaluating whether to engage in other bilateral or
syndicated financing arrangements. Whether we do so depends on
market conditions and the attractiveness of the terms we are
able to achieve.
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The following table sets forth information on our commitments
and known contingencies by due date or expiration.
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Our capital expenditures of €879 million for the 2007
financial year consisted primarily of equipment upgrades at our
300mm facility in Dresden, Germany capacity expansion at our
300mm facility in Richmond, Virginia and extension of our wafer
test and component capacities in Porto, Portugal. During the
2006 financial year we invested primarily in the capacity
expansion at our 300mm facility in Richmond, our 300mm facility
in Dresden and our back-end venture in Suzhou, China. In our
2005 financial year, we completed the construction of the 300mm
facility in Richmond, ramped up production there and also
invested in our back-end venture in Suzhou.
We have reduced our planned capital expenditures for the 2008
financial year to a range between €650 million to
€750 million and aim to increase our collaboration
with our partners. As of September 30, 2007, approximately
€237 million of capital expenditures have been
committed and included in unconditional purchase commitments for
our 2008 financial year. Due to the lead times between ordering
and delivery of equipment, a substantial amount of capital
expenditures typically is committed well in advance. The
majority of these expected capital expenditures will be made in
our front-end and back-end manufacturing facilities.
In March 2007, we announced plans to expand capacity at our
back-end manufacturing facility in Suzhou, China for which we
expect capital expenditures of €250 million over the
next three years. We also plan to invest up to
€150 million over the next five years to build a new
DRAM module manufacturing facility in Johor, Malaysia. In April
2007, we also announced plans to construct a new front-end
manufacturing facility in Singapore, for which we plan to invest
approximately €2 billion over the next five years.
We have historically relied (directly or indirectly) on Infineon
to provide financing for a portion of our financing and capital
requirements. Under our Master Loan Agreement with Infineon
Technologies Holding B.V., we had $435 million
(€344 million) drawn at September 30, 2006 with
initial maturities in July and August 2007. We fully repaid this
shareholder loan by April 2007. We have also agreed not to draw
further amounts under the agreement.
In addition we have established both short- and long-term credit
facilities with a number of different financial institutions in
order to meet our anticipated funding requirements. We can draw,
for short term purposes, on the working capital lines we
maintain in several locations in an aggregate amount of
€161 million as of September 30, 2007. We already
drew €28 million under this short-term facility for
working capital purposes in China and fully repaid it on
October 10, 2007.
In August 2006 we entered into a multicurrency revolving loan
facility in an aggregate principal amount of
€250 million which we voluntarily cancelled on
September 28, 2007. Before cancellation, we did not have
any drawdown at any time from this revolving loan facility. This
cancellation was due to certain restrictions on asset
dispositions which limited us from pursuing engagements in sale
and leaseback transactions involving manufacturing equipment. We
entered into such an agreement on September 28, 2007 for a
portion of the 200mm equipment in our Richmond, Virginia, USA
plant and are considering further potential transactions of this
nature.
Subject to conditions in the capital markets, we expect from
time to time (but subject to the
lock-up
agreement we have agreed with the underwriters for the secondary
offering of our ADSs on September 20, 2007 by Infineon) to
consider engaging in additional financing transactions.
A €124 million non-recourse project financing facility
for the expansion of the Porto, Portugal manufacturing facility
was fully drawn as of September 30, 2007.
A €24 million note payable to a government entity in
connection with our Richmond, Virginia, USA plant had been fully
drawn as of September 30, 2007.
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We plan to fund our working capital requirements from cash
provided by operations, available funds, bank loans, other
potential financing transactions, government subsidies and, if
needed, the issuance of additional debt or equity securities. We
have also applied for governmental subsidies in connection with
certain capital expenditure projects, but can provide no
assurance that such subsidies will be granted on a timely basis
or at all. We can provide no assurance that we will be able to
obtain additional financing for our research and development,
working capital or investment requirements or that any such
financing, if available, will be on terms favorable to us.
Taking into consideration the financial resources available to
us, including our internally generated funds and currently
available borrowing facilities, we believe that we will be in a
position to fund our capital requirements in our 2008 financial
year.
The following table sets forth the status of our pension plan
funding for the periods indicated.
As of September 30, 2006, we recognized the funded status,
net of €7 million unrecognized actuarial losses as a
liability on our balance sheet. As of September 30, 2007 we
adopted SFAS No. 158 and recognized the funded status
as a liability on our balance sheet and recorded an actuarial
gain and prior service cost of €5 million as part of
equity. Since the present value of future benefits we expect to
pay over the next five financial years totals
€9 million as of September 30, 2007, we do not
perceive a need to increase our plan funding in the immediate
future.
We have estimated the return on plan assets for the next
financial year to be 6.3% for domestic plans and 6.4% for
foreign plans. The actual return on plan assets between the last
measurement dates amounted to 8.8% for domestic plans and 9.6%
for foreign plans, compared to the expected return on plan
assets for that period of 5.9% for domestic plans and 6.4% for
foreign plans.
Our investment approach with respect to the pension plans
involves employing a sufficient level of flexibility to capture
investment opportunities as they occur, while maintaining
reasonable parameters to ensure that prudence and care are
exercised in the execution of the investment program. The
pension plans’ assets are invested with an investment
manager in co-operation with an investment consultant.
Considering the duration of the underlying liabilities, a
portfolio of investments of plan assets in equity securities,
debt securities and other assets is targeted to maximize the
long-term return on plan assets for a given level of risk.
Investment risk is monitored on an ongoing basis through
periodic portfolio reviews, meetings with investment managers
and liability measurements. Investment policies and strategies
are periodically reviewed to ensure the objectives of the plans
are met considering any changes in benefit plan design, market
conditions or other material items.
Our asset allocation targets for pension plan assets are based
on our assessment of business and financial conditions,
demographic and actuarial data, funding characteristics, related
risk factors, market sensitivity analyses and other relevant
factors. The overall allocation is expected to help protect the
plans’ level of funding while generating sufficiently
stable real returns (i.e., net of inflation) to meet current and
future benefit payment needs. Due to active portfolio
management, the asset allocation may differ from the target
allocation up to certain limits. As a matter of policy, our
pension plans are not permitted to invest in our company or
Infineon Technologies AG shares. The Qimonda Pension Trust has
adopted an asset allocation strategy similar to that of the
Infineon Pension Trust, which employs a mix of active and
passive investment management programs. In September and October
2006 Infineon Pension Trust transferred €26 million of
cash to the Qimonda Pension Trust for use in funding these
pension benefit obligations, thereby reducing accrued pension
liabilities. In October 2006 the Qimonda Pension Trust invested
this cash in a diversified portfolio of investments aimed at
maximizing long term returns.
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Research and development form a significant part of our
operations. Our research and development expenses were
€401 million in the 2007 financial year and
€433 million in the 2006 financial year. We intend to
fund these expenditures in the normal course of business through
cash provided by operating activities. For a description of our
research and development policies, please see “Our
Business — Research and Development”.
Market risk is the risk of loss related to adverse changes in
market prices, including commodity prices, foreign exchange
rates and interest rates, of financial instruments. We are
exposed to various financial market risks in our ordinary course
of business transactions, primarily from changes in commodity
prices, foreign exchange rates and interest rates.
We use financial instruments, including derivatives, to manage
foreign exchange rate risks and interest rate risks. Since our
carve-out from Infineon, we have set up a separate financial
risk management function. We enter into diverse financial
transactions with several counterparties to limit our risk.
Derivative instruments are only used for hedging purposes and
not for speculative purposes.
You should read the following discussion of categories of market
risk to which we are exposed in conjunction with notes 2,
29 and 30 to our combined and consolidated financial statements.
A significant portion of our business is exposed to fluctuations
in market prices for standard DRAM products. For these products,
the sales price responds to market forces in a way similar to
that of other commodities. This price volatility can be extreme
and has resulted in significant fluctuations within relatively
short time-frames. We attempt to mitigate the effects of
volatility by continuously improving our cost position, by
entering into new strategic partnerships and by focusing our
product portfolio on application-specific products that are
subject to less volatility, such as DRAM products for
infrastructure, graphics, mobile and consumer applications.
We are also exposed to commodity price risks with respect to raw
materials used in the manufacture of our products. We seek to
minimize these risks through our sourcing policies (including
the use of multiple sources, where possible) and our operating
procedures.
We do not use financial instruments to manage any exposure to
fluctuations in commodity prices remaining after the operating
measures we describe above.
Foreign
Exchange Rate Risk
Although we prepare our combined and consolidated financial
statements in euro, most of our sales volumes, as well as
slightly over one-half of our costs, (primarily those relating
to design, manufacturing, selling, marketing, general and
administrative functions, and research and development of
products), are denominated in other currencies, primarily
U.S. dollars. The portions of our sales and expenses
denominated in currencies other than the euro are exposed to
exchange rate fluctuations in the values of these currencies
relative to the euro. We are therefore subject to both
transaction and translation risk. For more information on these
risks, please refer to “— Factors that Affect our
Results of Operations — Exchange Rate
Fluctuations”. Exchange rate fluctuations may have
substantial effects on our sales, our costs and our overall
results of operations. Although the U.S. dollar was weaker
on September 30, 2006 than it had been one year earlier,
the average exchange rate of U.S. dollars for euro over the
2006 financial year was stronger than it had been in the 2005
financial year, increasing 3% from U.S. $1.00 =
€0.7869 to U.S. $1.00 = €0.8117. During the 2007
financial year, by contrast, the average exchange rate decreased
by 8% from U.S. $1.00 = €0.8117 to U.S. $1.00 =
€0.7497.
The table below provides information about derivative financial
instruments as of September 30, 2006 and as of
September 30, 2007, including those foreign currency
forward contracts sensitive to changes in foreign currency
exchange and interest rates. For foreign currency forward
contracts related to certain sale and purchase transactions, the
table presents the notional amounts and the weighted average
contractual foreign exchange rates.
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The euro equivalent notional amounts in millions and fair values
of our derivative instruments as of September 30, 2006 and
as of September 30, 2007 are as follows:
Our policy with respect to limiting short-term foreign currency
exposure generally is to economically hedge at least 75% of our
estimated net exposure for a minimum period of two months in
advance and, depending on the nature of the underlying
transactions, a significant portion of the period thereafter.
Our foreign currency exposure resulting from differences between
actual and forecasted amounts cannot be mitigated. We calculate
this net exposure on a cash-flow basis taking into account
balance sheet items, actual orders received or made and all
other planned revenues and expenses.
We record our derivative instruments according to the provisions
of SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities”, as amended.
SFAS No. 133 requires all derivative instruments to be
recorded on the balance sheet at their fair value. Gains and
losses resulting from changes in the fair values of those
derivatives are accounted for depending on the use of the
derivative instrument and whether it qualifies for hedge
accounting. Our economic hedges are generally not considered
hedges under SFAS No. 133. We report these derivatives
at fair value in our combined and consolidated financial
statements, with changes in fair values recorded on our
statement of operations.
In the 2007 financial year, our allocated foreign exchange
transaction loss amounted to €39 million and was
offset by gains from our economic hedge transactions of
€25 million, resulting in a net loss of
€14 million. This compares to foreign exchange gains
of €2 million, offset by hedging losses of
€4 million, resulting in a net loss of
€2 million in the 2006 financial year. For purposes of
the carve-out, foreign exchange gains and losses were allocated
based on Infineon’s segments’ proportions of total
costs.
We are exposed to interest rate risk through our fixed term
deposits and loans. Due to the high volatility of our core
business and to maintain high operational flexibility, we have
historically kept a substantial amount of cash and cash
equivalents. These assets are mainly invested in instruments
with contractual maturities ranging from three to twelve months,
bearing interest at short-term rates. To reduce the risk caused
by changes in market interest rates, we attempt to align the
duration of the interest rates of our debts and current assets
by the use of interest rate derivatives. We had no outstanding
interest rate derivatives at September 30, 2007. However,
we anticipate making use of such instruments depending on the
nature of our debt financing in the future.
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Fluctuating interest rates have an impact on parts of our
financial instruments such as cash and marketable securities as
well as our interest-bearing debt obligations.
Based on our long and short term debt outstanding on
September 30, 2007 and the interest rates in effect at that
time for those loans, a 1% increase or decrease in our overall
interest rate environment would (keeping all other variables
constant) have increased or decreased our annualized debt
service cost by an estimated €3 million.
We have no off-balance sheet arrangements other than operating
leases in respect of office space, manufacturing land and office
equipment including PCs and workstations. As of
September 30, 2006, we had contractual commitments for
operating lease payments of €107 million. As of
September 30, 2007, those contractual commitments decreased
to €95 million.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”, which
requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization
(“Recognition Provision”). SFAS No. 158 does
not change the basic approach to measuring net periodic pension
cost. We adopted the Recognition Provision of
SFAS No. 158 as of September 30, 2007 as
described above in ‘‘— Critical Accounting
Policies — Pension Plan Accounting”.
In September 2006, the SEC issued SAB No. 108,
“Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements”. SAB No. 108 provides
interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements.
SAB No. 108 requires us to quantify misstatements
using both an income statement (“rollover”) and
balance sheet (“iron curtain”) approach and to
evaluate whether either approach results in a misstatement that,
when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been
previously considered immaterial are considered material upon
adoption based on either approach, no restatement is required so
long as management properly applied its previous approach and
all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is
recorded in opening accumulated earnings (deficit) as of the
beginning of the year of adoption. We adopted
SAB No. 108 as of the year ended September 30,
2007 which did not result in restatement or cumulative effect
adjustment.
In July 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109”
(“FIN 48”) which defines the threshold for
recognizing the benefits of tax return positions in the
financial statements as “more-likely-than-not” to be
sustained by the taxing authority. FIN 48 also provides
guidance on the de-recognition measurement and classification of
income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning
accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded
income tax uncertainties. FIN 48 is effective for us from
our financial year beginning October 1, 2007. The
differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the
amounts reported after adoption will be accounted for as a
cumulative-effect adjustment recorded to the beginning balance
of retained earnings. We are in the process of determining the
impact, if any, that the adoption of FIN 48 will have on
our consolidated financial position and results of operations.
In September 2006, the FASB released SFAS No. 157,
“Fair Value Measurements”, which provides
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
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measurements. The standard also responds to investors’
requests for more information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect that fair
value measurements have on earnings. SFAS No. 157 will
apply whenever another standard requires (or permits) assets or
liabilities to be measured at fair value. SFAS No. 157
does not expand the use of fair value to any new circumstances.
SFAS No. 157 is effective for us from our financial
years beginning after October 1, 2008, and interim periods
within those financial years. We are in the process of
evaluating the impact that the adoption of
SFAS No. 157 will have on our consolidated financial
position and results of operations.
SFAS No. 158 also requires an employer to measure the
funded status of a plan as of the date of its year-end statement
of financial position, with limited exceptions
(“Measurement Date Provision”). We currently measure
the funded status of our plans annually on June 30. The
Measurement Date Provision is effective for us as of the end of
the fiscal year ending September 30, 2009. We do not expect
the application of the Measurement Date Provision of
SFAS No. 158 annually on September 30 to have a
significant impact on our results of operations or financial
position.
In February 2007, the FASB issued SFAS No. 159
“The Fair Value Option for Financial Assets and
Financial Liabilities — including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits
entities to choose to measure certain financial assets and
liabilities and other eligible items at fair value, which are
not otherwise currently required to be measured at fair value.
Under SFAS No. 159, the decision to measure items at
fair value is made at specified election dates on an irrevocable
instrument-by-instrument
basis. Entities electing the fair value option would be required
to recognize changes in fair value in earnings and to expense
upfront cost and fees associated with the item for which the
fair value option is elected. Entities electing the fair value
option are required to distinguish on the face of the statement
of financial position, the fair value of assets and liabilities
for which the fair value option has been elected and similar
assets and liabilities measured using another measurement
attribute. If elected, SFAS No. 159 is effective as of
the beginning of the first fiscal year that begins after
November 15, 2007, with earlier adoption permitted provided
that the entity also early adopts all of the requirements of
SFAS No. 157. We are currently evaluating whether to
elect the option provided for in this standard.
The following significant events occurred after
September 30, 2007:
On October 2, 2007 we and Sony Corporation announced that
we have signed an agreement to found the joint venture Qreatic
Design. The scope of the joint venture is the design of
high-performance, low power, embedded and customer specific
DRAMs for consumer and graphic applications. According to the
agreement, the 50:50 joint venture is intended to start with up
to 30 specialists from Sony and Qimonda, bringing together their
engineering expertise for the mutual benefit of both companies.
Qreatic Design, which will be located in Tokyo, Japan, is
planned to start operations by the end of the 2007 calendar
year, subject to regulatory approvals and other closing
conditions, and to substantially expand its capacities by hiring
additional designers.
On October 8, 2007, we entered into a rental agreement for
new headquarter offices south of Munich, Germany. The agreement
involves the construction of a building by a third party lessor,
and includes a 15 year non-cancelable lease term, which is
expected to start in early 2010. We have an option to extend the
lease for two 5 year periods at similar lease terms to the
initial non-cancelable lease term. The minimum rental payments
aggregate €96 million over the initial lease term. The
lease contract provides for rent escalation in line with
market-based increases in rent. The agreement will be accounted
for as an operating lease with monthly lease payments expensed
on a straight-line basis over the lease term.
On October 15, 2007, the court entered an order denying the
motion to dismiss in the Unisys and the DRAM Liquidation Trust
cases without prejudice. On October 29, 2007, Infineon
answered the Unisys complaint, denying liability and asserting a
number of affirmative defenses. On November 1, 2007,
Infineon answered the DRAM Claims Liquidation Trust complaint,
denying liability and asserting a number of affirmative
defenses. See “Our Business — Legal Matters”
for more information on these matters.
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On November 9, our Supervisory Board allocated 200,000
options for grant to our Management Board in the 2008 financial
year.
Our revenues are a function of the bit volume we ship and the
selling price we achieve for our products. While we have an
influence over our production growth, through capacity additions
and productivity improvements, our sales volume depends on the
extent to which our product offerings match market demand. Our
selling prices are a function of the supply and demand
relationship in the DRAM market. These market forces are beyond
our control and accordingly, it is difficult for us to reliably
estimate what these future sales prices, and the resulting
revenues and the contribution to our earnings will be.
In the first quarter of the 2008 financial year, we expect our
bit production to grow by approximately 5%, mainly based on
productivity improvements from the ongoing conversion to 80nm
and 75nm technologies and including effects from declining 200mm
capacities.
For the full 2008 financial year, we expect bit demand for DRAM
to be driven by the continued strong growth in graphics,
consumer and communication applications, by price elasticity and
the move to higher density modules in the PC market. For the
2008 financial year, we estimate an increase in bit production
of approximately 50%. We target our share of bit shipments to
non-PC applications to be more than 50% for the full financial
year.
We are continuously taking steps to reduce our
cost-per-bit
in manufacturing, such as the introduction of advanced process
technologies featuring smaller die-sizes, the
ramp-up of
more productive
300-mm
capacities and other cost savings and productivity improvement
measures. By the end of the first quarter of our 2008 financial
year we expect more than 50% of our manufacturing capacity to be
using 80nm and smaller die sizes, and we are targeting to
increase this share to approximately 75% by the end of the
second quarter.
We expect to make capital expenditures in the 2008 financial
year of between €650 and €750 million. In the
years thereafter our aim is to have capital expenditures of
approximately 15% to 25% of revenues on average over the DRAM
cycle.
Depreciation and amortization is estimated to range between
€700 million and €800 million for the 2008
financial year. For the years thereafter depreciation and
amortization is expected to be in line with capital expenditures.
Research and development expenses are anticipated to be between
€450 million and €490 million for the 2008
financial year. In the years thereafter our aim is to have
research and development expenses of approximately 10% of sales
on average over the DRAM cycle.
Selling, general and administrative expenses are expected to
range between €210 million and €230 million
for the 2008 financial year. In the years thereafter our aim is
to have selling, general and administrative expenses of
approximately 5% of sales on average over the DRAM cycle.
We anticipate that our number of employees will increase
moderately in certain areas in the current year due to the
expansion of our business and the diversification of our product
portfolio.
We no longer have any outstanding debt to Infineon. With the
establishment of our own independent capital structure, such as
the recent sale and leaseback of 200mm equipment, we expect
interest expense to increase in future periods compared to the
2007 financial year.
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Semiconductor devices, generally referred to as integrated
circuits, or ICs, enable a wide variety of everyday electronic
products and systems to capture, process, store and transmit
data. In addition to their familiar use in computers,
semiconductors also increasingly enable or control functions in
mobile telephones, digital still cameras, digital audio players,
GPS devices, DVD recorders, digital TVs, electronic gaming
consoles and other telecom, consumer, automotive and industrial
electronic devices.
Semiconductor devices generally fall within three broad
categories: processors, which process instructions; logic
devices, which capture, manipulate and transmit data or monitor
or control functions within electronic devices; and memory
devices, which store data in digital form. Electronic devices
generally require a combination of processing, logic and memory
functions. Although these may be combined on a single chip, the
three are more typically produced on separate chips and then
integrated in a module or chipset or in an end product through
hardware and software interfaces.
There are three major types of semiconductor memory:
DRAM manufacturers can sell either individual DRAM chips, known
as dies, or components, which are packaged dies, or DRAM
modules, which are printed circuit boards generally containing
between four and thirty-six components.
According to Gartner, DRAM sales in calendar year 2006 were
$34 billion, representing 56% of the $61 billion
semiconductor memory industry, which in turn represented 23% of
the $263 billion semiconductor industry. Sales of NAND
flash memory reached $14 billion or 22% of the
semiconductor memory industry in calendar year 2006.
The increasing complexity of the electronic devices in which
memory ICs are used, including the ever more sophisticated
software needed to operate them, has required growing amounts of
memory to permit efficient and high-speed operation. At the same
time, many of these electronic devices are themselves becoming
smaller or more portable, with limited room to accommodate, and
limited power to operate, the additional semiconductors they
contain. These factors have driven continuous efforts to improve
semiconductor design and process technologies over the years to
enable manufacturers to produce ever smaller, more complex and
more powerful memory products at a lower
cost-per-megabit.
The principal technical features that DRAM suppliers have
focused on to meet these requirements are:
Density of a DRAM chip is the amount of data it can store and is
usually measured in megabits (Mb) or gigabits (Gb). Density of a
DRAM module is measured in megabytes (MB) and gigabytes (GB),
where each byte contains eight bits. DRAM chips are currently
offered in a variety of densities for different end uses,
generally ranging from 4Mb to 2Gb per chip, or 128MB to 8GB per
module for high-end modules. In recent years, the maximum
density of standard DRAM chips has generally doubled every
24 months. Smaller amounts of older generations of DRAM
(4Mb, 16Mb, 64Mb and 128Mb densities) continue to be supplied
for applications where memory density is less
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critical, such as printers. The industry has migrated from a
256Mb standard density to a 512Mb standard density. According to
Gartner, the percentage of standard chips produced with 512Mb
was 14% in calendar year 2004 and increased to 75% in 2006.
The following table shows the percentage of worldwide DRAM bit
shipments in the period from 2000 to 2006, according to Gartner.
Data transfer rate is the rate at which the IC transfers data
and is usually measured either in megabytes per second or by the
clock frequency, which is measured in megahertz. DRAM interfaces
have constantly developed towards increasing the data transfer
rate from the DRAM to a device’s CPU, or central processing
unit, over the last decade. Data transfer rate is important
because it affects overall system performance, causing loss of
CPU speed if the data transfer rate is low compared to the
computation power of CPU. The rate of data transfer between the
DRAM and the CPU is governed by the clock frequency, which
operates in a wave-like cycle and has driven increasing clock
frequencies for CPUs and demand for faster data transfer from
the DRAM. In a synchronous DRAM (SDRAM) interface, data is
transferred from the DRAM to the CPU according to the system
clock rate. The most common current interfaces are double data
rate (DDR) SDRAM and double data rate 2 (DDR2) SDRAM. DDR SDRAM
supports data transfer on both edges of each clock cycle. Clock
frequencies for DDR reach a maximum of 200MHz, resulting in a
data transfer rate of approximately 3.2GB per second for a
standard PC module. The industry standard DRAM chip interface
has transitioned from DDR to DDR2. The DDR2 interface further
improves data transfer rates to a maximum of 6.4GB per second
for a standard PC module operating at the highest clock
frequencies. In the area of high-end specialty DRAM products,
such as graphics DRAM, clock frequencies today reach up to 1GHz,
resulting in data transfer rates of 32GB per second on a high
end graphic card. According to Gartner, the percentage of chips
produced with the DDR2 interface was 7% in calendar year 2004
and increased to 55% in calendar year 2006. The next generation,
higher bandwidth interface, double data rate 3 (DDR3), is
currently in the early production phase at some manufacturers,
including ourselves.
The following table shows the percentage of worldwide DRAM bit
shipments by interface generation in the period from 2000 to
2006, according to Gartner.
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Another trend that is becoming increasingly important for DRAM
products is the continuous reduction of operating voltage and
power consumption. Whereas SDR SDRAM products are operated at
3.3 Volt, the voltage has been reduced to 2.5 Volt for DDR SDRAM
and to 1.5 Volt for DDR3 SDRAM products, thus constantly
reducing the power consumption by mainstream DRAMs. With the
increasing number of battery powered mobile applications such as
mobile phones, smart handheld devices and digital audio players,
the demand for ultra low-power memories has increased
significantly. Specifically designed DRAM products, such as
“mobile DRAM”, include active power saving features
that allow the further reduction of power consumption and thus
an increase in battery life for mobile applications. Recently,
heat dissipation has become an additional important driver for
low-power demand for DRAM products. The heat produced by high
density DRAM content in server farms and the related
expenditures for electricity has reached a level that has driven
server manufacturers to focus on low power DRAM products in the
market. Heat dissipation is also an important topic for
non-portable consumer applications such as digital TVs that use
slim cases and must avoid noisy cooling systems such as fans for
aesthetic reasons.
A DRAM storage cell consists of a capacitor and a transistor,
and a key element in the physical layout of DRAM chips produced
today is the arrangement of capacitors and transistors on the
chip. In early DRAM chips, capacitors and transistors were
arranged in a plane across the surface of the chip. As DRAM
feature sizes have become smaller, the planar space for the
capacitor has become too small to hold a sufficient amount of
charges and the capacitor had to move in the third dimension.
Two different technological approaches have evolved to address
this issue, one in which the capacitor is laid into holes etched
into the surface of the silicon, commonly referred to as the
“trench” process, and another in which the capacitor
is laid on top of the silicon, commonly referred to as the
“stack” process. In the market today, each of several
manufacturers using stack technology has developed a unique
stack architecture, while all manufacturers using trench
architecture use technology first developed by Infineon, Toshiba
and IBM during the 1990s. We later advanced the trench
technology and have been developing it further in cooperation
with Nanya. Both stack and trench cell technology have to date
been accepted in the market. According to Gartner, based on bit
shipments, in 2006, trench-based DRAMs accounted for
approximately 24% of the worldwide DRAM market, while the
various stack technologies accounted for the remainder.
DRAM technology development has generally followed
“Moore’s Law”, which estimates that the number of
transistors per square inch of silicon doubles every two years.
Manufacturers have achieved this progress in chip productivity
by “shrinking” the circuitry on chips — that
is, by reducing the minimum distance between circuits, known as
the feature size. Smaller feature sizes require increasingly
sophisticated manufacturing process technology, including
advanced masks and photolithography techniques for printing the
circuitry on the chip. The distance between circuits on a
standard DRAM chip is measured in nanometers (nm) where one nm
equals
one-billionth
of a meter. The minimum feature size has declined from 250nm in
1998 to 75nm today. The future shrinkage of feature sizes is
estimated by the International Technology Roadmap for
Semiconductors, or ITRS, which provides details and naming
conventions for upcoming feature sizes called “technology
nodes”. The current and next technology nodes outlined by
the ITRS also generally referred to as the “shrinkage
roadmap”, are 90nm, 80nm, 70nm, 65nm, 57nm and 50nm.
However, the actual feature sizes of the technology nodes that
individual industry participants implement may differ from the
node naming convention because each participant adjusts its
technology to meet its manufacturing and capital requirements.
Industry participants are currently introducing and ramping
process technology for 75/70nm and are in the advanced stages of
developing process technology for 65/60nm feature sizes. They
anticipate the development down to approximately 50nm in the
coming years. We believe that industry participants are
currently working on concepts for smaller process technologies
and alternative platforms. The transition from one generation to
the next, for example from 170nm to 140nm technology, has
typically occurred every 12 to 18 months. Due to increasing
space restrictions necessitated by feature sizes of 70nm and
below, transistors are starting to move into the third dimension
in future feature size generations of both trench
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and stack architectures. It is not yet clear if either approach
will produce greater space or cost efficiencies as chips become
still smaller and memory densities continue to increase.
Semiconductor manufacturing is a very capital intensive process,
with substantial fixed costs for fabrication facilities, known
as “fabs”, and for manufacturing equipment. Moreover,
given the rapid technology transitions in the industry,
manufacturers must depreciate this equipment over short periods
of time, increasing the ratio of fixed costs to variable costs
per chip produced. The manufacturing process, which is
substantially the same for both DRAM and flash memory products,
is generally divided into two steps, referred to as the
front-end process and the back-end process.
In the front-end process, electronic circuits are produced on a
silicon wafer. This process involves several hundred process
steps and takes place over a period of approximately two months
in a clean room environment in which humidity, temperature and
particle contamination are precisely controlled. Because of the
very small geometries involved in wafer processing, highly
complex and specialized equipment, materials and techniques are
used. The main process steps to build the circuit structures
include oxidation or deposition steps, photolithography, etching
and ion implantation. At the end of the front-end process the
chips are tested on the wafer for functionality.
Wafer processing is conducted in specialized fabrication
facilities, or fabs. A fab’s capacity is generally stated
in terms of the number of wafers on which processing can begin
in a given period, or “wafer starts per” week or
month. The standard diameter of silicon wafers used to produce
semiconductors increased from 50mm in 1970, to 100mm by 1980,
150mm by 1990 and 200mm by 1995, and has increased to 300mm
since 2000, although the industry transition to 300mm wafers is
still underway. To transition a fabrication facility to larger
wafer sizes requires the acquisition of adequate equipment and a
lengthy testing and
ramp-up
period to achieve satisfactory manufacturing yields. The
transition to still larger 450mm wafers, if and when it occurs,
will likely require a similarly long transition and substantial
investments.
While larger silicon wafers cost more than smaller ones and the
equipment used to manufacture chips on larger wafers costs more
than equipment used for smaller wafers, these additional costs
are more than offset by the productivity gains provided by the
larger wafer. These productivity gains are primarily driven by
the increase in the number of chips produced from each wafer.
For example, the surface area of 300mm wafers is approximately
2.25 times greater than that of 200mm wafers, which yields
approximately 140% more chips per wafer. Because the cost of
labor and certain other fixed costs are largely independent of
the size of the wafers used, the use of larger wafers results in
reduction of the costs per chip.
Increasing complexity and capital intensiveness of front-end
processing has facilitated emergence of front-end foundries, who
partner with semiconductor designers or manufacturers to perform
front-end processing services.
In the back-end process, also called the packaging, assembly and
test phase, processed wafers are diced into individual chips,
which, after having interconnecting pins added, are encapsulated
into a packaged component using a compound material. Packaged
components are tested extensively to ensure quality and
technical specifications are maintained. After final testing,
components are often soldered onto printed circuit boards to
create modules, which themselves undergo application testing.
Increasing requirements for higher component performance and
smaller size have led to development of back-end processing
technologies and innovative package types that optimize speed
and reliability of device interconnects while reducing the extra
size added by a chip’s packaging. Because back-end
processing can take place in a different location than the
front-end processing, several back-end foundries have emerged to
specialize on back-end processing and offer outsourced services
to semiconductor manufacturers who desire to specialize in
front-end processing alone or augment their in-house back-end
capacity.
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DRAM, the most common type of memory IC, is found in a wide
variety of electronic devices, including servers and
workstations, personal and notebook computers, upgrade modules,
graphic cards, game consoles, mobile phones, printers, digital
TVs, set-top boxes and other consumer electronic devices.
Because these applications require different DRAM products, we
believe the DRAM’s intended application determines its
pricing and competitive dynamics. We have identified the
following main applications for DRAMs:
PCs, workstations and other computing applications were the
first users of DRAM and have historically represented the
majority of DRAM sales. DRAM components and modules for use in
desktop and notebook PCs and workstations accounted for
approximately 54% of global DRAM bit shipments in 2006,
according to Gartner’s report for the third quarter of the
2007 calendar year. These components and modules can be best
described as “standard DRAMs”, because they are
standardized across suppliers with respect to performance and
package specifications and trade like a commodity in a
relatively liquid market. They combine high-density and
high-speed data storage and retrieval with the lowest cost
per-megabit of any volatile memory product.
Typical customers of these standard DRAMs are large PC
manufactures, such as Dell, HP and Lenovo, either directly or
through contract manufacturers that assemble PCs for the large
manufacturers, as well as local original equipment
manufacturers, or OEMs, and module manufacturers, such as
Kingston. We believe that these customers tend to select their
standard DRAM suppliers on the basis of price and ability to
supply high volumes of product reliably. Some standard DRAM
customers also produce infrastructure equipment such as servers,
and networking and storage equipment, and we believe a
supplier’s ability to offer other DRAM products is an
additional factor that may influence these customers’
selection of standard DRAM suppliers.
The market for standard DRAMs has been characterized by intense
competition, often involving price cuts, and significant
volatility of revenues and operating results of market
participants. The major DRAM manufacturers typically have
contracts with each of their major OEM customers, with specific
prices negotiated twice per month. However, there are many
suppliers in the standard DRAM market, including module
manufacturers and smaller DRAM manufacturers, whose DRAM sales
prices are often based on spot market average selling prices, or
ASPs, which fluctuate daily.
The high performance equipment that forms the backbone of the
Internet, such as servers and other networking and storage
equipment, also use DRAMs. DRAMs for these applications
accounted for approximately 18% of global DRAM bit shipments in
2006, according to Gartner’s report for the third quarter
of the 2007 calendar year. Due to the large data volume that is
handled by these applications, these customers usually demand
DRAM products with higher memory capacities. DRAM modules for
infrastructure applications differ from the modules used in PCs
by providing extra high densities and error correction features
to provide highest reliability. We believe that, because these
high-performance products often perform critical tasks, their
producers select DRAM suppliers whose DRAMs display advanced
features and reliability and whose manufacturing processes have
proven to be of high quality. In addition there is also demand
for customized products by some customers, who typically provide
their product specifications to DRAM suppliers, who in turn
design and produce the requested product. The customer will
“validate” the DRAM supplied, testing it rigorously
over a process that may last several months. DRAM products for
infrastructure applications such as Registered DIMMs generally
command a higher
per-unit
price than standard DRAM products. Typical customers who
purchase DRAM products for infrastructure applications are
server producers such as Sun Microsystems and network and
storage equipment vendors such as Cisco Systems and EMC.
Because DRAMs used in infrastructure applications tend to be
less standardized and more customer- or application-specific,
interchangeability is lower relative to standard DRAMs and
consequently the level of competition among suppliers is less
intense. In addition, there are fewer suppliers of these types
of DRAM products than standard DRAMs and these suppliers
typically sell infrastructure DRAM products pursuant to
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contract. The smaller number of suppliers and high percentage of
these products sold pursuant to contract tends to result in the
prices for these DRAM products being less volatile than those
for standard DRAM products.
With the growth of the mobile communication industry and the
digitalization of consumer products during the last decade, the
range of applications using DRAM products has significantly
broadened. Graphics applications such as game consoles and
graphics cards are requiring and driving demand for
high-performance graphics DRAMs that support the increasingly
advanced graphics in computer games. The increasing number of
communication and consumer mobile devices, including mobile
phones and digital still cameras and audio players, has driven
growth in demand for low-power DRAM products that allow for
longer battery lifetimes. As a result, a variety of specialty
DRAM components have been developed to address the specific
needs of these applications. In addition there are a growing
number of other consumer applications such as digital TVs, DVD
players and recorders and set-top boxes that require a whole
range of standard or even customized DRAM products. Products for
graphics, mobile and consumer applications accounted for about
19% of DRAM bit shipments in 2006, according to Gartner’s
report for the third quarter of the 2007 calendar year.
Successful DRAM suppliers maintain close relationships with
mobile phone, game console and consumer electronic device
producers, to understand the customer’s requirements early
in their product development stage. Many of these customers
expect their DRAM suppliers to be able to proactively provide
advanced products so that customers can integrate them into
their product design. As a result, compared to standard DRAMs
with the same density, these DRAMs tend to be relatively higher
in price. Typical customers of these types of DRAMs include
mobile handset manufacturers such as Motorola, Nokia and Sony
Ericsson, graphic card manufacturers such as AMD and nVidia,
game console manufacturers such as Microsoft, Sony and Nintendo
and major consumer electronics manufacturers.
Unlike standard DRAMs, DRAM products for graphics, mobile and
consumer applications tend to be customer- and
application-specific, and, therefore, prices for these DRAM
products tend to be more stable, with prices fixed by
comparatively long-term contracts.
According to Gartner’s report for the third quarter of the
2007 calendar year, between calendar years 1998 and 2006, bit
shipments grew at a CAGR of 55% over the period. Historically,
growth of DRAM bit shipments was driven by DRAM’s primary
application, computing, and depended on growth in units shipped
and DRAM content per unit. Rapid adoption of PCs by business and
home users, combined with operating system upgrades that
demanded more DRAM per unit, drove strong growth in bit demand.
However, as more DRAM components began to be used in a broader
range of applications, DRAMs for infrastructure and graphics,
mobile and consumer applications began to represent a larger
share of total DRAM bit shipments. In calendar year 2006, PCs,
workstations and memory modules and upgrades represented only
54% of total DRAM consumption as compared to 66% in 2001.
Current estimates by Gartner predict continued strong growth in
DRAM bit shipments at a CAGR of 52% between calendar years 2006
and 2011, according to Gartner’s report for the third
quarter of the 2007 calendar year. Overall semiconductor memory
sales were $61 billion in 2006, and DRAM sales were
$34 billion in that year. Market research firms expect DRAM
sales to remain volatile, as increases in bit shipments are
offset to varying levels of declines in the average selling
prices for DRAM products. Key drivers of the growth in DRAM bit
demand include the following:
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Given the standardized nature of a significant share of DRAM bit
shipments, supply plays a crucial role in determining DRAM
selling prices, which, in turn, drive industry revenues and the
financial performance of suppliers. Historically, DRAM supply
has grown at high rates to meet the increasing bit demand,
although time lags associated with increasing supply, coupled
with unexpected changes in demand have resulted in periods of
excess DRAM supply or demand. These mismatches of supply and
demand have caused severe price fluctuations that, in turn have
led to revenue fluctuations, such as the 51% increase in DRAM
revenues from calendar years 1998 to 1999, the 63% decline from
calendar years 2000 to 2001 and the 50% increase from calendar
years 2003 to 2004, according to Gartner. Further, DRAM supply
is relatively inelastic. In periods of declining selling prices,
suppliers nonetheless continue production at full capacity as
long as prices exceed their variable costs of production,
whereas in periods of increasing selling prices, suppliers
usually need a long time, up to two years, to bring new
capacities on-stream.
Supply of DRAM components involves constructing and equipping
complex and expensive fabrication, assembly and test facilities
as well as developing and continuously improving semiconductor
manufacturing technologies. Growth of DRAM supply is driven by
several factors, including:
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We have observed the following trends in DRAM supply in recent
periods:
Among companies seeking to share the risks and costs of
manufacturing investments, these factors have likewise increased
the attractiveness of joint venture and partnership
arrangements, as well as of licensing and cross-licensing
arrangements. For companies with substantial intellectual
property portfolios, including manufacturing know-how, licensing
arrangements present an opportunity to supplement income from
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manufacturing semiconductors. Because technological know-how is
very concentrated in the semiconductor memory industry, many
manufacturers would be unable to produce memory chips were it
not for their access to the relevant technology through
licensing. For example, we estimate that four of the nine
largest DRAM suppliers today license most of their technology
from the other top-nine suppliers.
We believe that the above trends are having an effect on the
fundamentals of the DRAM industry and may be facilitating a
reduction in the severity of supply and demand imbalances, and
of price fluctuations, in the future.
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We are one of the world’s leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. We began operations within the Semiconductor
Group of Siemens AG, whose roots in semiconductor R&D and
manufacturing date back to 1952, and operated as the Memory
Products segment of Infineon Technologies AG since its carve-out
from Siemens AG in 1999. In each of the past five calendar
years, we captured between 12% and 16% of the worldwide DRAM
market based on revenues, according to industry research firm
Gartner. Although our market share fluctuates, and we may gain
or lose market share
quarter-to-quarter
(for example, we lost market share in the fourth quarter of the
2006 calendar year and in the first quarter of the 2007 calendar
year) or year-to-year, in each of those five years, we remained
among the four largest DRAM suppliers worldwide based on
revenues. For the full calendar year 2006, we were the
world’s third largest supplier of DRAM, with market share
of approximately 16% both in revenues and bit shipments,
according to Gartner. For the first nine months of the 2007
calendar year, we remained the third largest supplier of DRAM by
revenue and were the fourth largest supplier of DRAM by bit
shipments with market shares of approximately 13%, according to
iSuppli’s preliminary report in November 2007.
Our revenues are derived from:
The memory products business of Infineon, substantially all of
which Infineon has contributed to us, had a long-standing
reputation as a supplier of high-quality DRAMs. We intend to
continue to build on this reputation to broaden our product
portfolio and, in turn, our customer base, by focusing on DRAM
products for infrastructure and for graphics, mobile and
consumer applications. In our experience, demand for DRAM
products used in these applications is generally more stable
than the demand for standard DRAM products due to their
customized nature and advanced features, making them subject to
relatively less price volatility. We believe that increasing the
share of our revenues from these products will improve our
average selling price and make our operating results more stable.
Our customers include the world’s largest suppliers of
computers and electronic devices. Our current principal
customers include major computing original equipment
manufacturers, or OEMs in the PC and Server markets, including
HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer
coverage and breadth, we also sell a wide range of products to
memory module manufacturers that have diversified customer bases
such as Kingston, and to a number of distributors. More recently
and in connection with the ongoing expansion of our product
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portfolio, especially into graphics applications, we have added
customers with a strong focus on enabling these applications,
such as nVidia, AMD and customers who are active in the game
console market, such as Microsoft, Sony and Nintendo. In
addition, we have added customers in the area of consumer and
mobile applications, such as LG, Spansion and SanDisk. We
believe that having a close relationship with these customers
can benefit us in the development of future memory generations
by making it easier to develop memory solutions for future end
applications and improve our product designs.
We supply our customers through our own front-end facilities in
Germany and the United States, and through our back-end
facilities in Germany, Portugal and Malaysia. We supplement our
manufacturing capacity through two joint ventures, Inotera
Memories, Inc. and Qimonda Technologies (Suzhou) Co., Ltd.,
China, and through supply agreements with the DRAM foundries
SMIC and Winbond. In addition, we supplement our back-end
manufacturing through agreements with several subcontractors. We
operate these facilities as a coherent unit via our “fab
cluster” concept, which enables us to share manufacturing
best practice and gain operational flexibility through customer
qualification of our entire cluster of fabs.
We believe that we are well positioned to benefit from the
projected growth in the semiconductor memory industry and to
remain at its technological forefront. We consider our key
strengths to include the following:
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In formulating our strategy, we aim to leverage our key
strengths to address our target markets and emerging
opportunities that we have identified. The key elements of our
strategy include the following:
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We began operations as a part of Siemens’s Semiconductor
Group, whose roots in semiconductor R&D and manufacturing
date back to 1952, four years after the invention of the
transistor. In 1999, Siemens contributed substantially all of
its Semiconductor Group, including both logic and memory
semiconductor activities, to its subsidiary, Infineon
Technologies AG. Following the formation of Infineon, we
continued operations as the Memory Products segment of Infineon.
Infineon contributed substantially all of the assets,
liabilities, operations and activities, as well as the
employees, of its Memory Products segment to our company
effective May 1, 2006. This excluded the Memory Products
operations in Korea and Japan, which were placed in trust for us
by Infineon pending their contribution and transfer. The
operations in Korea and Japan have since been transferred to us.
While Infineon’s investment in the Advanced Mask Technology
Center (AMTC) and the Maskhouse Building Administration Company
(BAC) in Dresden has been contributed to us, the legal transfers
of these investments are not yet effective, since
Infineon’s co-venturers have not yet given the required
consent to the transfer of the AMTC and
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BAC interest. While pursuant to the AMTC and BAC limited
partnership agreements, such consent may not be unreasonably
withheld. Infineon and we are currently finalizing negotiations
with AMD and Toppan concerning an agreement that provides the
consent to the assignment to us and addresses Infineon’s
intention to reduce its stake in us below 50%. The AMTC and BAC
interest is held by Infineon for our economic benefit pursuant
to the contribution agreement. For as long as Infineon holds our
interests in AMTC and BAC, we must exercise our shareholder
rights with respect to these investments through Infineon, which
is a more cumbersome and less efficient method of exercising
these rights than if we held the interests directly. We do not
expect these administrative complexities to have a material
adverse effect on our business, financial condition and results
of operations.
We believe that operating as an independent company allows us to
realize the following benefits:
We design semiconductor memory technologies and develop,
manufacture, market and sell a large variety of semiconductor
memory products with various packaging and configuration
options, architectures and performance characteristics on a
chip, component and module level. We currently offer
technologically more advanced DRAM products for infrastructure,
graphics, mobile and consumer applications, as well as standard
DRAM products for PCs, notebooks and workstations. We also
offered a small number of non-volatile NAND-compatible flash
memory products, but discontinued production of these products
in our 2007 financial year.
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The following table sets forth our revenues provided by category
of activity for the periods indicated:
Most of our products are sold under our Qimonda brand, and we
are working to establish a brand identity for ourselves using
the Qimonda name. See “Risk Factors — Risks
related to our carve-out as a stand-alone company and our
continuing relationship with Infineon — We may not be
successful in establishing a brand identity.” We have
applied for protection of our Qimonda brand as a trademark,
domain and company name, but may not gain protection in all
jurisdictions. Qimonda is intended to be the market brand for
memory products exclusively sold to OEMs (Original Equipment
Manufacturers) in the IT industry. We also sell DRAM products
under our
AENEON®
brand. Our AENEON brand is positioned as a separate memory
brand, dedicated to serving the needs of the “channel”
& “retail” market. “Channel” refers to
the hundreds of small PC manufacturers and systems integrators
or system builders worldwide. They typically assemble and
install PC systems serving both consumer and corporate segments
that require these services. “Retail” refers typically
to retail storefronts or online retail that sell computer
systems, components and upgrade parts to consumers. It also
covers specialists who configure individual PCs and sell memory
upgrades to consumers. The products sold under the AENEON brand
include DRAM modules for notebooks, PC desktops and servers; as
well as flash based products such as USB sticks, SD cards and
MicroSD cards. We test the quality of our
AENEON®
products through testing the compatibility with major PC and
notebook platforms. This process is often shorter and more
cost-efficient than the testing required by high-end
applications of our OEM customers. We sell our
AENEON®
products via an extensive network of distributors and retailers
worldwide, and have recently begun to offer them through a
dedicated online sales channel.
We design, manufacture and sell technologically advanced DRAM
components and modules for use in servers, networking and
storage equipment and a variety of specialty DRAMs for use
primarily in graphics, as well as in mobile and consumer
applications.
Our current portfolio of DRAMs for use in servers, networking
and storage equipment includes FB-DIMMs, which we believe will
serve as the next generation of memory used in high-end servers,
and very-low-profile-DIMMs, intended for the blade server
market. DRAM consumption in entry level servers is expected to
enjoy 60%
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compound annual growth rate (CAGR) (based on bits shipped) from
2006 to 2011, according to iSuppli. We believe we are the only
FB-DIMM supplier who has in-house capabilities to design a key
component of this module, a logic chip called Advanced Memory
Buffer, or AMB. This allows us to customize the AMB design
specifically for our memory modules, providing us better
know-how transfer from chip to system level and vice versa. We
also provide customized modules to server manufacturers, in each
case specifically designed to meet the individual
customer’s unique platform requirements. We expect the
markets for servers to grow substantially in the next few years,
and we are currently engaged in the development of products we
believe will address that growth. For example, we are developing
new generations of standard DRAM with 2 gigabits of capacity for
use in future IT infrastructure applications.
We offer a broad portfolio of graphics DRAMs that support
applications with performance ranging from entry level to very
advanced. Due to their speed, low power consumption and limited
heat generation, our graphics DRAM components are used in game
consoles, graphics cards, PCs and notebook computers. In some
cases, we make customized products for use in entertainment
applications, including game consoles and imaging devices. We
believe that the trend towards the extensive use of
sophisticated graphics applications will result in strong growth
in high performance graphics systems which we believe will in
turn drive the demand for our graphics DRAM products.
We offer low-power specialty DRAM products, such as Mobile-RAM
and
CellularRAM®,
that are suited for use in a variety of mobile and consumer
applications, such as:
Our Mobile-RAM is specifically designed for ultra-low power
consumption that is increasingly demanded by today’s
battery powered mobile communication, especially in high end
phones and handheld consumer products. We intend to focus
further on driving technological innovations in this area and we
believe we were the first to produce chips with a temperature
sensor integrated onto the chip as well as the first to
introduce a DDR interface for a Mobile-RAM to further reduce
power consumption or alternatively offer higher performance. We
also expect that new consumer products that combine more
features will require DRAMs that consume very low power, yet
operate at adequate speeds. We believe that the
trench-architecture-based products we currently offer allow for
a significantly longer battery life and reduced heat
dissipation, both important features for potential customers and
their end users.
Our
CellularRAM®
is designed to be the best choice of memory for entry and mid
range handset models. This market segment is characterized by
stringent low power requirements, but more moderate density and
bandwidth needs. CellularRAM balances low power efficiency with
high data throughput. We are also a founding member of the
CellularRAM®
specification co-development team and together with six other
industry members, we create common specifications for
high-performance pseudo-SRAM devices, enabling us to take an
active role in the development of DRAM memory products for one
of the fastest-growing technology sectors.
Both our Mobile-RAM and
CellularRAM®
products are offered as components and as so-called
Known-Good-Dies, or KGDs, for use in Multi-Chip-Packages, or
MCPs. MCPs combine different memory chips, usually a
non-volatile
flash chip, and a faster, volatile RAM, and are increasingly
used in mobile communication and consumer devices due to their
lower space consumption. We supply our Mobile-RAM and
CellularRAM®
as KGDs on wafer level to MCP manufacturers.
We also offer a broad range of DRAM products for consumer
applications, some of which are of smaller memory densities or
older interface generations, such as SDRAM. These are often
referred to as “legacy” DRAM products. For example the
manufacturers of hard disk drives, DVD players, home gateways
and some printers do not
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