| INTERNATIONAL RECTIFIER CORP /DE/ Item 1A Risk Factors Statement of Caution Under the Private Securities Litigation Reform Act of 1995 This Annual Report on Form 10-K Report includes some statements and other information that are not historical facts but are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 |
| The materials presented can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “may,” “should,” “view,” or “will” or the negative or other variations thereof |
| We caution that such statements are subject to a number of uncertainties, and actual results may differ materially |
| Factors that could affect our actual results include those set forth below under “Factors that May Affect Future Results” and other uncertainties disclosed in our reports filed from time to time with the Securities and Exchange Commission |
| Unless required by law, we undertake no obligation to publicly update or revise any forward looking statements, to reflect new information, future events or otherwise |
| Factors That May Affect Future Results Changes in end-market demand or downturns in the highly cyclical semiconductor industry could affect our operating results and the value of our business |
| We may experience significant changes in our profitability as a result of variations in sales, changes in product mix sought by customers, seasonality, price competition for orders and the costs associated with the introduction of new products and start-up of new facilities and additional capacity lines |
| The markets for our products depend on continued demand with the product technological platforms and in the mix we plan for and produce in the information technology, consumer, industrial, aerospace and defense and automotive markets |
| Changes in the demand mix, needed technologies and these end markets may adversely affect our ability to match our products, inventory and capacity to meet customer demand and could adversely affect our operating results and financial condition |
| In addition, the semiconductor industry is highly cyclical and the value of our business may decline during the down portion of these cycles |
| We have experienced these conditions in our business in the recent past and we cannot predict when we may experience such downturns in the future |
| Future downturns in the semiconductor industry, or any failure of the industry to recover fully from its recent downturns could seriously impact our revenue and harm our business, financial condition and results of operations |
| Although markets for our semiconductors appear stable, we cannot assure you that they will continue to be stable or that our markets will not experience renewed, possibly more severe and prolonged, downturns in the future |
| Consumer and/or corporate spending for the end-market applications which incorporate our products may be reduced due to increased oil prices or otherwise |
| Our revenue and gross margin guidance is dependent on a certain level of consumer and/or corporate spending for the specific mix of products we produce and have the capacity to produce |
| If our projections of these expenditures fail to materialize, or materialize in a mix different from that for which we anticipate and build inventory, whether due to reduced consumer or corporate spending from increased oil prices or otherwise, our revenue and gross margin could be adversely impacted |
| We maintain backlog of customer orders that is subject to cancellation, reduction or delay in delivery schedules, which may result in lower than expected revenue and margins |
| With certain exceptions related to products within our Aerospace and Defense and Non-Aligned Product segments, we manufacture primarily pursuant to purchase orders for current delivery or to forecast, rather than pursuant to long-term supply contracts |
| For example, in our Computing and Communications segment, we have announced substantial new design or program wins in next generation 16 ______________________________________________________________________ game stations and are currently manufacturing and shipping on that basis |
| The semiconductor industry is subject to rapid changes in customer outlooks or unexpected build ups of inventory in the supply channel as a result of shifts in end-market demand generally or in the mix of that demand |
| Accordingly, many of these purchase orders or forecasts may be revised or canceled without penalty |
| As a result, we must commit resources to the manufacturing of products, and a specific mix of products, without any advance purchase commitments from customers |
| Our inability to sell products after we devote significant resources to build them could have a material adverse effect on our levels of inventory (the value of our inventory), our revenue and our operating results generally |
| Additionally, cancellation or significant reduction in significant customer programs, like those for next generation game stations and servers, could materially affect our ability to achieve our revenue and margin targets |
| We build and maintain inventory in order to meet our historic and projected needs, but cannot guarantee that our inventory will be adequate to meet our needs or will be usable at a future date |
| At the end of fiscal year ended June 30, 2006, we reported net inventories of dlra214dtta1 million |
| We build and maintain inventory in order to meet our historic and projected needs, but cannot guarantee that the inventory we build will be adequate or the right mix of products to meet market demand |
| If we do not project and build the proper mix and amount of inventory, our revenue and gross margin may be adversely affected |
| Additionally, if we produce or have produced inventory that does not meet current or future demand, we may determine at some point that certain of the inventory may only be sold at a discount or may not be sold at all, resulting in the reduction in the carrying value of our inventory and a material adverse effect on our financial condition and operating results |
| The semiconductor business is highly competitive and increased competition could adversely affect the price of our products and otherwise reduce the value of an investment in our company |
| The semiconductor industry, including the sectors in which we do business, is highly competitive |
| Competition is based on price, product performance, technology platform, product availability, quality, reliability and customer service |
| Price pressures often emerge as competitors attempt to gain a greater market share by lowering prices or by offering a more desirable technological solution |
| Pricing and other competitive pressures can adversely affect our revenue and gross margin, and hence, our profitability |
| We also compete in various markets with companies of various sizes, many of which are larger and have greater financial and other resources than we have, and thus they may be better able to withstand adverse economic or market conditions |
| In addition, companies not currently in direct competition with us may introduce competing products in the future |
| Failure to timely complete our expansion plans for our wafer fabrication facility could adversely affect our revenue growth and ability to achieve our margin targets |
| We operated at over 90 percent of our worldwide in-house wafer fabrication and assembly manufacturing capacities, without considering subcontract or foundry capacity |
| During the fiscal year 2006, our revenues were negatively affected by wafer fabrication constraints for certain fast growing Focus Products |
| In order to meet the high demand for our Focus Products, we accelerated our capital expansion plans and added capacity to our wafer fabrication manufacturing facility in Newport, Wales |
| In calendar year 2006, we expect we will have added incremental production capacity of dlra200 million to dlra300 million in annual revenue from this facility |
| We plan to use this fabrication capacity almost exclusively for our Focus Products |
| If we fail to timely execute on our plans in advance of demand for our products, our revenues could be adversely affected which may prevent us from achieving our margin targets |
| We cannot assure you that we will complete our plans timely, that the ramp-up of the expanded facilities will occur effectively and without error or delay, or that sufficient third party sources would be available to satisfy our ability to meet customer demand |
| Even if we fully execute and implement our plans, we cannot guarantee that we will have sufficient worldwide wafer fabrication and assembly manufacturing capacities to meet demand and there may be other unforeseen factors that could adversely impact our operating results |
| 17 ______________________________________________________________________ Delays in initiation of production at new facilities, implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies |
| Our manufacturing efficiency has been and will be an important factor in our future profitability, and we may not be able to maintain or increase our manufacturing efficiency |
| Our manufacturing and testing processes are complex, require advanced and costly equipment and are continually being modified in our efforts to improve yields and product performance |
| Difficulties in the manufacturing process can lower yields |
| Technical or other problems could lead to production delays, order cancellations and lost revenue |
| In addition, any problems in achieving acceptable yields, construction delays, or other problems in upgrading or expanding existing facilities, building new facilities, problems in bringing other new manufacturing capacity to full production or changing our process technologies, could also result in capacity constraints, production delays and a loss of future revenue and customers |
| Our operating results also could be adversely affected by any increase in fixed costs and operating expenses related to increases in production capacity if net sales in the appropriate mix do not increase proportionately, or in the event of a decline in demand for some or all of our products |
| If we are unable to implement our business strategy, our revenue and profitability may be adversely affected |
| Our future financial performance and success are largely dependent on our ability to implement our business strategy successfully of transforming our business to one led by our Focus Products and succeeding on our plans to restructure our company, including our plan for the potential sale of our entire Non-Focus Products business |
| We cannot assure you that we will continue to successfully implement our business strategy or that implementing our strategy will sustain or improve our results of operations |
| The failure to execute on our plans to divest or discontinue product lines that are not consistent with our business objectives, and replace those revenues with higher-margin product sales could adversely affect our operating results |
| We are actively considering a sale of our entire, or a significant portion of our, Non-Focus Product business (fiscal year 2006 revenues of dlra280 million), and certain complementary products of our Focus Product segments (fiscal year 2006 revenues of approximately dlra22 million) (the “Divestiture”) |
| If the Divestiture is completed, it is our goal that within the next couple of years, the remaining revenues will grow faster and the remaining business will be more profitable |
| We do not believe that the completion of the Divestiture will substantially alter the customer base that we serve or the competition that we face currently |
| However, to achieve our goals, for a few quarters following a successful completion of the Divestiture, we plan to more fully develop our Focus Product segments by realigning our sales, distribution and product development functions |
| We will also configure our manufacturing and support infrastructure to address at least initially lower revenue levels |
| Despite our plans and efforts, we cannot assure you that we will be successful in achieving our goals or carrying out plans for realignment |
| Completion of the Divestiture may require us to be involved in a significant transition of the divested business and assets with the buyer |
| We anticipate that the buyer may require manufacturing, sales and marketing and administrative support services, although we do not yet know the length of time the complete scope of support services that may be required |
| The activities involved with the divestiture could involve changes to various aspects of our business which could have a material adverse effect on our profitability to an extent we have not anticipated |
| Even if we fully execute and implement our plans, there may be unforeseen factors that could have a material adverse impact on our operating results |
| The failure to implement and complete our restructuring programs and accomplish planned cost reductions could adversely affect our business |
| In December 2002, we announced a number of restructuring initiatives |
| Our goal was to reposition our company to better fit the market conditions and de-emphasize our commodity business |
| The restructuring includes consolidating and closing certain manufacturing sites, upgrading equipment and 18 ______________________________________________________________________ processes in designated facilities and discontinuing production in a number of others that cannot support more advanced technology platforms or products |
| The restructuring also includes lowering overhead costs across our support organization |
| We have substantially completed our restructuring plan and anticipate dlra1 million to dlra2 million in remaining charges |
| However, there may be unforeseen factors that could result in additional amount of charges to be taken or otherwise adversely impact our profitability and business |
| Our products may be found to be defective and, as a result, product claims may be asserted against us, which may harm our business and our reputation with our customers and significantly adversely affect our results and financial condition |
| Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated |
| Although we maintain rigorous quality control systems, we shipped large quantities of semiconductor devices in fiscal year 2006 to a wide range of customers around the world, in a variety of high profile and critical applications, and continue to do so |
| In the ordinary course of our business we receive warranty claims for some of these products that are defective, or that do not perform to published specifications |
| Since a defect or failure in our products could give rise to failures in the end products that incorporate them (and consequential claims for damages against our customers from their customers depending on applicable law and contract), we often need to defend against claims for damages that are disproportionate to the revenue and profit we receive from the products involved |
| In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business |
| Even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer’s business or goodwill or to settle claims to avoid protracted litigation |
| Our results of operations and business would be adversely affected as a result of a significant alleged quality or performance issues in our products, if we are required or choose to pay for the damages that result |
| In addition, in our Aerospace and Defense segment, we are sometimes subject to government procurement regulations and other laws that could result in costly investigations and other legal proceedings as a consequence of allegedly defective products or other actions |
| Although we currently have product liability and other types of insurance, we have certain deductibles and exclusions to such policies and may not have sufficient insurance coverage |
| We also may not have sufficient resources to satisfy all possible product liability or other types of product claims |
| In addition, any perception that our products are defective would likely result in reduced sales of our products, loss of customers and harm to our business and reputation |
| While we attempt to monitor the credit worthiness of our customers, we may from time to time be at risk due to the adverse financial condition of one or more customers |
| We have established procedures for the review and monitoring of the credit worthiness of our customers and/or significant amounts owing from customers |
| However, from time to time, we may find that, despite our efforts, one or more of our customers become insolvent or face bankruptcy proceedings (Delphi is currently one such customer) |
| Such events could have an adverse effect on our operating results if our receivables applicable to that customer become uncollectible in whole or in part, or if our customers’ financial situation result in reductions in whole or in part of our ability to continue to sell our products or services to such customers at the same levels or at all |
| If some original equipment manufacturers (“OEMs”) do not design our products into their equipment or convert design or program wins to actual sales, a portion of our revenue may be adversely affected |
| A “design win” or program award from a customer does not guarantee that the design or program win will become future sales to that customer |
| For example, in our Computing and Communications segment, we have announced new design or program wins in next generation game stations, and our other segments have had other design or program wins |
| We also are unable to guarantee that we will be able to convert design or program wins into sales for the life of any particular program, or at all, or that the revenue from such wins would be significant |
| We also cannot guarantee that we will achieve the same level of design or 19 ______________________________________________________________________ program wins as we have in the past, or at all |
| Without design or program wins from OEMs, we would only be able to sell our products to these OEMs as a second source, if at all |
| Once an OEM designs another supplier’s semiconductor into one of its product platforms, it is more difficult for us to achieve future design or program wins with that OEM’s product platform because changing suppliers involves significant cost, time, effort and risk |
| Achieving a design or program win with a customer does not ensure that we will receive significant revenue from that customer and we may be unable to convert design or program wins into actual sales |
| Corporate investment and expenditures in the Information Technology sector and in Information Technology purchases may not materialize as we have planned |
| Our revenue and gross margin guidance is dependent on a certain level of corporate investment and expenditures in the Information Technology sector and in Information Technology purchases |
| If our projections of these expenditures fail to materialize, whether due to increased oil prices, change in market conditions, or otherwise, our revenue and gross margin could be adversely impacted |
| New technologies could result in the development of new products and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand |
| Our failure to develop new technologies or react to changes in existing technologies could materially delay our development of new products, which could result in decreased revenue and a loss of market share to our competitors |
| Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the semiconductor industry |
| As a result, we must devote significant resources to research and development |
| Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis |
| We cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner, or that products or technologies developed by others will not render our products or technologies obsolete or noncompetitive |
| A fundamental shift in technologies in our product markets could have a material adverse effect on our competitive position within the industry |
| In addition, to remain competitive, we must continue to reduce die sizes and improve manufacturing yields |
| Our failure to obtain or maintain the right to use certain technologies may negatively affect our financial results |
| Our future success and competitive position may depend in part upon our ability to obtain or maintain certain proprietary technologies used in our principal products, which is achieved in part by defending and maintaining the validity of our patents and defending claims by our competitors of intellectual property infringement |
| We license certain patents owned by others |
| We have also been notified that certain of our products may infringe the patents of third parties |
| Although licenses are generally offered in such situations, we cannot eliminate the risk of litigation alleging patent infringement |
| We are currently a defendant in intellectual property claims and we could become subject to other lawsuits in which it is alleged that we have infringed upon the intellectual property rights of others |
| Our involvement in existing and future intellectual property litigation could result in significant expense, adversely affect sales of the challenged product or technologies and divert the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor |
| If any such infringements exist, arise or are claimed in the future, we may be exposed to substantial liability for damages and may need to obtain licenses from the patent owners, discontinue or change our processes or products or expend significant resources to develop or acquire non-infringing technologies |
| We cannot assure you that we would be successful in such efforts or that such licenses would be available under reasonable terms |
| Our failure to develop or acquire non-infringing technologies or to obtain licenses on 20 ______________________________________________________________________ acceptable terms or the occurrence of related litigation itself could have a material adverse effect on our operating results and financial condition |
| Our ongoing protection and reliance on our intellectual property assets expose us to risks and continued levels of revenue in our IP segment is subject to our ability to maintain current licenses, licensee and market factors not within our control and our ability to obtain new licenses |
| We have traditionally relied on our patents and proprietary technologies |
| Patent litigation settlements and royalty income substantially contribute to our financial results |
| Enforcement of our intellectual property rights is costly, risky and time-consuming |
| We cannot assure you that we can successfully continue to protect our intellectual property rights, especially in foreign markets |
| Our royalty income is largely dependent on the following factors: the remaining terms of our MOSFET patents; the continuing introduction and acceptance of products that are not covered by our patents; remaining covered under unexpired MOSFET patents; the defensibility and enforceability of our patents; changes in our licensees’ unit sales, prices or die sizes; the terms, if any, upon which expiring license agreements are renegotiated; and our ability to obtain revenue from new licensing opportunities |
| Market conditions and mix of licensee products, as well as sales of non-infringing devices can significantly adversely affect royalty income |
| We also cannot guarantee that we can obtain new licenses to offset reductions in royalties from existing licenses |
| While we try to predict the effects of these factors and efforts, often there are variations or factors that can significantly affect results different from that predicted |
| Accordingly, we cannot guarantee that our predictions of our IP segment revenue will be consistent with actual results |
| We also cannot guarantee that our royalty income will continue at levels consistent with prior periods |
| Any decrease in our royalty income could have a material adverse effect on our operating results and financial condition |
| Our international operations expose us to material risks |
| We expect revenue from foreign markets to continue to represent a significant portion of total revenue |
| We maintain or contract with significant operations in foreign countries |
| Among others, the following risks are inherent in doing business internationally: changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in the countries in which we manufacture or sell our products; trade restrictions; transportation delays; work stoppages; economic and political instability; and foreign currency fluctuations |
| In addition, certain of our operations and products are subject to restrictions or licensing under US export laws |
| If such laws or the implementation of these restrictions change, or if in the course of operating under such laws we become subject to claims, we cannot assure you that such factors would not have a material adverse effect on our financial condition and operating results |
| In addition, it is more difficult in some foreign countries to protect our products or intellectual property rights to the same extent as is possible in the United States |
| Therefore, the risk of piracy or misuse of our technology and products may be greater in these foreign countries |
| Although we have not experienced any material adverse effect on our operating results as a result of these and other factors, we cannot assure you that such factors will not have a material adverse effect on our financial condition and operating results in the future |
| 21 ______________________________________________________________________ Delays in initiation of production at new facilities, implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies |
| Our manufacturing efficiency will be an important factor in our future profitability, and we cannot assure you that we will be able to maintain or increase our manufacturing efficiency to the same extent as our competitors |
| Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance |
| Impurities, defects or other difficulties in the manufacturing process can lower yields |
| In addition, as is common in the semiconductor industry, we have from time to time experienced difficulty in beginning production at new facilities or in effecting transitions to new manufacturing processes |
| As a consequence, we have experienced delays in product deliveries and reduced yields |
| We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenue |
| Our operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenue does not increase proportionately |
| We have transferred manufacturing from our Krefeld, Germany to our Swansea, Wales and Tijuana, Mexico facilities |
| We are ramping up our Newport, Wales facility |
| We have experienced some delays and/or technical problems in moving our various facilities |
| Continued delays and/or technical problems in completing the remaining transfers could lead to increased costs, reduced yields, delays in product deliveries, order cancellations and/or lost revenue |
| Interruptions, delays or cost increases affecting our materials, parts or equipment may impair our competitive position and our operations |
| Our manufacturing operations depend upon obtaining adequate supplies of materials, parts and equipment, including silicon, mold compounds and leadframes, on a timely basis from third parties |
| Our results of operations could be adversely affected if we were unable to obtain adequate supplies of materials, parts and equipment in a timely manner from our third party suppliers or if the costs of materials, parts or equipment increase significantly |
| From time to time, suppliers may discontinue products, extend lead times, limit supplies or increase prices due to capacity constraints or other factors |
| We have a limited number of suppliers or sole suppliers for some materials, parts and equipment, and any interruption could materially impair our operations and adversely affect our customer relations |
| We manufacture a substantial portion of our wafer product at our Temecula, California and Newport, Wales facilities |
| Any disruption of operations at those facilities could have a material adverse effect on our business, financial condition and results of operations |
| Also, some of our products are assembled and tested by third party subcontractors |
| We do not have any long-term assembly agreements with these subcontractors |
| Due to the amount of time often required to qualify assemblers and testers and the high cost of qualifying multiple parties for the same products, we could experience delays in the shipment of our products if we are forced to find alternative third parties to assemble or test them |
| Any product delivery delays in the future could have a material adverse effect on our operating results and financial condition |
| Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated |
| 22 ______________________________________________________________________ We must commit resources to product manufacturing prior to receipt of purchase commitments and could lose some or all of the associated investment |
| We sell products primarily pursuant to purchase orders for current delivery or to forecast, rather than pursuant to long-term supply contracts |
| As a result, we must commit resources to the manufacturing of products without any advance purchase commitments from customers |
| Our inability to sell products after we devote significant resources to them could have a material adverse effect on our levels of inventory and our business, financial condition and results of operations |
| We receive a significant portion of our revenue from a small number of customers and distributors |
| Historically, a significant portion of our revenue has come from a relatively small number of customers and distributors |
| The loss or financial failure of any significant customer or distributor, any reduction in orders by any of our significant customers or distributors, or the cancellation of a significant order, could materially and adversely affect our business |
| We may fail to attract or retain the qualified technical, sales, marketing and managerial personnel required to operate our business successfully |
| Our future success depends, in part, upon our ability to attract and retain highly qualified technical, sales, marketing and managerial personnel |
| Personnel with the necessary semiconductor expertise are scarce and competition for personnel with these skills is intense |
| We cannot assure you that we will be able to retain existing key technical, sales, marketing and managerial employees or that we will be successful in attracting, assimilating or retaining other highly qualified technical, sales, marketing and managerial personnel in the future |
| If we are unable to retain existing key employees or are unsuccessful in attracting new highly qualified employees, our business, financial condition and results of operations could be materially and adversely affected |
| We have acquired and may continue to acquire other companies and may be unable to successfully integrate such companies with our operations |
| We have acquired several companies over the past few years |
| We may continue to expand and diversify our operations with additional acquisitions |
| If we are unsuccessful in integrating these companies with our operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business, financial condition and results of operations |
| The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future |
| Our common stock, which is traded on The New York Stock Exchange, has experienced and may continue to experience significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance |
| In addition, we believe that factors such as quarterly fluctuations in financial results, earnings below analysts’ estimates and financial performance and other activities of other publicly traded companies in the semiconductor industry could cause the price of our common stock to fluctuate substantially |
| In addition, in recent periods, our common stock, the stock market in general and the market for shares of semiconductor industry-related stocks in particular have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies |
| Any similar fluctuations in the future could adversely affect the market price of our common stock |
| Our investments in certain securities expose us to market risks |
| We invest excess cash in marketable securities consisting primarily of commercial paper, corporate notes, corporate bonds and governmental securities |
| We also hold as strategic investments the common stock of two publicly-traded Japanese companies, one of which is Nihon Inter Electronics Corporation 23 ______________________________________________________________________ (“Nihon”) |
| While we have sold 7dtta8 percent of our previous holdings in Nihon, we have retained a 9dtta7 percent interest |
| The value of our investments is subject to market fluctuations, which if adverse, could have a material adverse effect on our financial position and if sold at the down turn, could have a material adverse effect on our operating results |
| If we fail to maintain an effective system of internal control over financial reporting or discover material weaknesses in our internal control over financial reporting or financial reporting practices, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our stock |
| Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud |
| We are required to periodically evaluate the effectiveness of the design and operation of our internal controls |
| These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable |
| As noted with the material weakness that we disclosed and remediated in fiscal year 2006, while management evaluates the effectiveness of our internal controls on a regular basis, we cannot provide absolute assurance that these controls will always be effective or any assurance that the controls, accounting processes, procedures and underlying assumptions will not be subject to revision |
| There are also inherent limitations on the effectiveness of internal controls and financial reporting practices, including collusion, management override, and failure of human judgment |
| If we fail to maintain an effective system of internal control over financial reporting or if and for so long as management or our independent registered public accounting firm were to discover material weaknesses in our internal control over financial reporting (or if our system of controls and audits result in a change of practices or new information or conclusions about our financial reporting) like the disclosed material weakness, we may be unable to produce reliable financial reports or prevent fraud and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our stock price |
| Large potential environmental liabilities, including those relating to a former operating subsidiary, may adversely impact our financial position |
| Federal, state, foreign and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our semiconductor manufacturing processes, and on the operation of our facilities and equipment |
| We believe we use reasonable efforts to maintain a system of compliance and controls for these laws and regulations |
| However, we cannot provide absolute assurance that these controls will always be effective or that issues with respect to these matters will not from time to time occur |
| There are also inherent limitations on the effectiveness of controls including the failure of human judgment |
| Under some laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination |
| Under other laws, we may be subject to fines and penalties if facilities or equipment are not operated in technical compliance with permit conditions or if required reports are not timely filed with applicable agencies |
| Also, we may be subject to common law claims if we release substances that damage or harm third parties |
| Further, we cannot assure you that changes in environmental laws or regulations will not require additional investments in capital equipment or the implementation of additional compliance programs in the future |
| Additionally, as we prepare for the contemplated divestiture of certain of our facilities, such facilities may undergo further environmental review and investigation which may lead to previously unknown environmental liabilities |
| Any present or prior failure to comply with environmental laws or regulations could subject us to serious liabilities and could have a material adverse effect on our operating results and financial condition |
| 24 ______________________________________________________________________ Some of our facilities are located near major earthquake fault lines |
| Our corporate headquarters, one of our manufacturing facilities, one of our research facility and certain other critical business operations are located near major earthquake fault lines |
| We could be materially and adversely affected in the event of a major earthquake |
| Although we maintain earthquake insurance, we can give you no assurance that we have obtained or will maintain sufficient insurance coverage |
| There can be no assurance that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment |
| The semiconductor industry is capital intensive |
| Semiconductor manufacturing requires a constant upgrading of process technology to remain competitive, as new and enhanced semiconductor processes are developed which permit smaller, more efficient and more powerful semiconductor devices |
| We maintain certain of our own manufacturing, assembly and test facilities, which have required and will continue to require significant investments in manufacturing technology and equipment |
| We are also attempting to add the appropriate level and mix of capacity to meet our customers’ future demand |
| There can be no assurance that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment |
| Although we believe that anticipated cash flows from operations, existing cash reserves and other equity or debt financings that we may obtain will be sufficient to satisfy our future capital expenditure requirements, there can be no assurance that this will be the case or that alternative sources of capital will be available to us on favorable terms or at all |
| The maturity of our outstanding Convertible Subordinated Notes due in July 2007 may expose us to risks |
| While we intend to refinance or pay down such notes prior to maturity, if we decide to refinance such notes, in whole or in part, we cannot guarantee that the terms, including interest rate and costs, would be comparable to the current interest rates and costs, and if higher, could adversely affect our future results |
| Additionally, if we elect in whole or in part to pay down such notes, it would lower the amount of funds we have available for operations or investment |
| A failure to renew or replace our existing dlra150 Million revolving credit facility may expose us to risks |
| Our dlra150 million revolving credit facility with BNP Paribas as administrative agent expires in November 2006 |
| While we currently intend to replace such facility with another facility of at least comparable size, we cannot guarantee that the size and terms (including interest rate and costs), would be comparable to those under the current facility, and if adversely different, could adversely affect our future results |
| Additionally, if we do not replace or fail to replace such facility it would lower the amount of readily available funds for operations or investment |
| Unforeseen changes in market conditions, tax laws and other factors could impact our judgment about the realizability of our deferred tax assets |
| We have made certain judgments regarding the realizability of our deferred tax assets |
| In accordance with SFAS Nodtta 109, “Accounting for Income Taxes”, the carrying value of the net deferred tax assets is based on the belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets, after considering all available positive and negative evidence |
| If our assumptions and estimates change in the future given unforeseen changes in market conditions, tax laws or other factors, then the valuation allowances established may be increased, resulting in increased income tax expense |
| Conversely, if we are ultimately able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the related portion of the valuation allowance will be released to income as a credit to income tax expense |
| 25 ______________________________________________________________________ Our Aerospace and Defense segment is subject to governmental regulation that exposes us to additional risks |
| Our Aerospace and Defense segment manufactures and sells certain products that are subject to US export control laws and regulations |
| The Aerospace and Defense segment also manufactures and sells products that are sold directly or indirectly to the US government and may subject us to certain government procurement regulations, investigations or review |
| While we maintain a system of control of such products and compliance with such laws and regulations, we cannot provide absolute assurance that these controls will always be effective |
| If we fail to maintain an effective system of control or are otherwise found non-compliant with applicable laws and regulations, violations could lead to governmental investigations, fines, penalties and limitations on our ability to export product, all of which could have a material affect on our results |
| Final outcomes from the various tax authorities’ audits are difficult to predict and an unfavorable finding may negatively impact our financial results |
| As is common with corporations of our size, we are from time to time under audit by various taxing authorities |
| It is often difficult to predict the final outcome or the timing of resolution of any particular tax matter |
| We have provided certain tax reserves which have been included in the determination of our financial results |
| However, unpredicted unfavorable settlements may require additional use of cash and negatively impact our financial position or results of operations |
| Terrorist attacks, such as those that took place on September 11, 2001, or threats or occurrences of other terrorist activities whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability |
| Terrorist attacks, such as those that took place on September 11, 2001, or threats or occurrences of other terrorist or related activities, whether in the United States or internationally, may affect the markets in which our common stock trades, the markets in which we operate and our profitability |
| Future terrorist or related activities could affect our domestic and international sales, disrupt our supply chains and impair our ability to produce and deliver our products |
| Such activities could affect our physical facilities or those of our suppliers or customers, and make transportation of our supplies and products more difficult or cost prohibitive |
| Due to the broad and uncertain effects that terrorist attacks have had on financial and economic markets generally, we cannot provide any estimate of how these activities might affect our future results |
| Natural disasters, like those related to Hurricanes Katrina and Wilma, or occurrences of other natural disasters whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability |
| Natural disasters, like those related to Hurricanes Katrina and Wilma, or threats or occurrences of other similar events, whether in the United States or internationally, may affect the markets in which our common stock trades, the markets in which we operate and our profitability |
| Such events could affect our domestic and international sales, disrupt our supply chains, and impair our ability to produce and deliver our products |
| While we do not have facilities located near the affected areas, such activities could affect physical facilities, primarily for raw materials and process chemicals and gases of our suppliers or customers, and make transportation of our supplies and products more difficult or cost prohibitive |
| Due to the broad and uncertain effects that natural events have had on financial and economic markets generally, we cannot provide any estimate of how these activities might affect our future results |