UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

OF THE SECURITIES EXCHANGE ACT OF 1934 o
OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934 x

For the fiscal year ended September 30, 2009

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ­ ­to ­ ­. o

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934 o
Date of event requiring this shell company report ­ ­.

 

Commission file number: 1-15000

 

Infineon Technologies AG

(Exact name of Registrant as specified in its charter)

 

Federal Republic of Germany

(Jurisdiction of incorporation or organization)

 

Am Campeon 1-12,

D-85579 Neubiberg

Federal Republic of Germany

(Address of principal executive offices)

 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

Title of each class

 

American Depositary Shares, each representing one ordinary share, notional value €2.00 per share

 

Ordinary shares, notional value €2.00 per share*

 

 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

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. 1,086,742,085 ordinary shares, notional value €2.00 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes x 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 x

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No 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):

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o       International Financial Reporting Standards as issued by the International Accounting Standards Board x       Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 o Item 18 x

 

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 x

 

(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

 

 

 

INFINEON TECHNOLOGIES AG

 

ANNUAL REPORT ON FORM 20-F

FOR THE FISCAL YEAR ENDED

SEPTEMBER 30, 2009

 

 

 

CONTENTS

 

 

Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). Our consolidated financial statements are expressed in Euro. In this annual report, references to “Euro” or “€” are to Euro and references to “U.S. dollars” or “$” are to United States dollars. For convenience, this annual report contains translations of Euro amounts into U.S. dollars at the rate of €1.00 = $1.4630, the noon buying rate of the Federal Reserve Board for Euro on September 30, 2009. The noon buying rate for Euro on November 30, 2009 was €1.00 = $1.5022. Our fiscal year ends on September 30 of each year. References to any fiscal year refer to the year ended September 30 of the calendar year specified. In this annual report, references to:

 

 

This annual report contains market data that has been prepared or reported by Gartner Inc. and its unit Dataquest, Inc. (together “Gartner Dataquest”), Frost & Sullivan, iSuppli Corporation (“iSuppli”), IMS Research, Strategy Analytics, Inc. (“Strategy Analytics”), and World Semiconductor Trade Statistics (“WSTS”).

 

Amounts presented in tabular format may not add up due to rounding.

 

Special terms used in the semiconductor industry are defined in the glossary.

 

Forward-Looking Statements

 

This annual report contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections. Forward-looking statements speak 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 heading “Risk Factors” and elsewhere in this annual report.

 

Use of Non-GAAP Financial Measures

 

This document contains “non-GAAP” financial measures. Non-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 IFRS in our consolidated financial statements. For descriptions of these non-GAAP financial measures and the adjustments made to the most directly comparable IFRS financial measures, please refer to “Operating and Financial Review”.

 

Principal Business Address

 

Our principal business address is Am Campeon 1-12, D-85579 Neubiberg, Federal Republic of Germany.

 

You should read the following selected consolidated financial data in conjunction with our consolidated financial statements, the related notes and “Operating and Financial Review”, all of which appear elsewhere in this annual report.

 

We have derived the selected consolidated statements of operations and cash flow data for the 2007 through 2009 fiscal years and the selected consolidated balance sheet data at September 30, 2007 through 2009 from our consolidated financial statements, which have been prepared in accordance with IFRS and audited by KPMG AG Wirtschaftsprüfungsgesellschaft, an independent registered public accounting firm.

 

 

Notes

 

 

This discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and other financial information included elsewhere in this annual report. Our audited consolidated financial statements have been prepared on the basis of a number of policies and assumptions more fully explained in Note 1 (Description of Business and Basis of Presentation) and Note 2 (Summary of Significant Accounting Policies) to our audited consolidated financial statements appearing elsewhere in this annual report.

 

Effective October 1, 2008, to better align our business with its target markets, we reorganized our core business into five operating segments: Automotive, Industrial & Multimarket, Chip Card & Security, Wireless Solutions, and Wireline Communications. Furthermore, our Management Board changed the measure it uses to assess the operating performance of our operating segments to Segment Result⁽¹⁾ . In July 2009, we entered into an asset purchase agreement to sell our Wireline Communications business, which closed on November 6, 2009. As a result of the planned sale, the Management Board determined that Wireline Communications ceased to be an operating segment in September 2009. All periods presented have been recast to reflect the new segment presentation (see note 39 to our consolidated financial statements). All assets and liabilities of the Wireline Communications business to be sold are presented as “Assets classified as held for disposal” and “Liabilities associated with assets classified as held for disposal” in our consolidated balance sheet as of September 30, 2009, and the results of the Wireline Communications business to be sold are presented as “Discontinued operations, net of income taxes” in our consolidated statements of operations for all periods presented.

 

During our 2009 fiscal year, which ended September 30, the world economy entered into its deepest recession of the last 60 years. The global semiconductor market contracted 20 percent (in U.S. dollar terms) in the 2009 fiscal year compared to the prior fiscal year, according to WSTS (September 2009).

 

The following were the key developments in our business during the 2009 fiscal year:

 

Financial Results

 

 

 

 

 ⁽¹⁾ We define Segment Result as operating income (loss) excluding asset impairments, net, restructuring charges and other related closure costs, net,share-based compensation expense, acquisition-related amortization and gains (losses), gains (losses) on sales of assets, businesses, or interests in subsidiaries, and other income (expense), including litigation settlement costs.

 

 

Corporate Activities

 

 

 

 

We also made significant progress in reducing the number of employees. As of September 30, 2009, our workforce was 26,464 compared to 29,119 as of September 30, 2008, a reduction of 9 percent. Compared to June 30, 2008, (before we implemented the IFX10+ cost-reduction program), we reduced our workforce by 10 percent.

 

 

 

Product and Technology Developments

 

 

Energy Efficiency

 

 

 

Security

 

 

In government ID applications, roughly half of all government ID documents (excluding the China national ID project) issued in 2008 incorporated one of our security chips. Government ID applications include electronic documents, such as passports, national ID cards, health cards, drivers licenses and social security cards. Today, our products are used in the public domain of about one third of the 192 UN member states. A key success factor in this sensitive market is the ability to provide long-term security and robust, high-quality products with excellent contactless performance. In the payment market we are also a key partner of the secure chip card industry. We are a major supplier for many of the world’s largest financial card applications, including credit and debit card programs in France, Germany, the UK and Korea.

 

 

Communications

 

 

 

We design, develop, manufacture and market a broad range of semiconductors and complete system solutions used in a wide variety of microelectronic applications, including computer systems, telecommunications systems, consumer goods, automotive products, industrial automation and control systems, and chip card applications. Our products include standard commodity components, full-custom devices, semi-custom devices, and application-specific components for analog, digital, and mixed-signal applications. We have operations, investments, and customers located primarily in Europe, Asia and North America.

 

Our core business is currently organized in four operating segments: Automotive, Industrial & Multimarket, Chip Card & Security, and Wireless Solutions:

 

 

Our current segment structure reflects a reorganization of our operations effective October 1, 2008. To better align our business with our target markets, we reorganized our core business into five operating segments: Automotive, Industrial & Multimarket, Chip Card & Security, Wireless Solutions, and Wireline Communications. In July 2009, we entered into an asset purchase agreement to sell our Wireline Communications business, which closed on November 6, 2009. As a result of the planned sale, our Management Board determined that the Wireline Communications business ceased to be an operating segment in September 2009, and the results of the Wireline Communications business are reported as discontinued operations in our consolidated statements of operations for all periods presented. Segment results for all periods presented have been recast to be consistent with the current reporting structure and presentation, as well as to facilitate analysis of operating segment information. Assets and liabilities of the Wireline Communications business in the consolidated balance sheet as of September 30, 2009 are classified as “held for disposal”.

 

We have two additional segments for reporting purposes, our Other Operating Segments, which includes remaining activities for certain product lines that have been disposed of, and other business activities, and our Corporate and Eliminations segment, which contains items not allocated to our

operating segments, such as certain corporate headquarters’ costs, strategic investments, unabsorbed excess capacity and restructuring costs.

 

In addition, we currently hold a 77.5 percent interest in Qimonda, which was carved-out in 2006. On January 23, 2009, Qimonda and its wholly owned subsidiary Qimonda Dresden GmbH & Co. oHG (“Qimonda Dresden”) filed an application to commence insolvency proceedings, and formal insolvency proceedings were opened on April 1, 2009. Formal insolvency proceedings have also been commenced by several additional subsidiaries of Qimonda in various jurisdictions. The final resolution of the insolvency proceedings, including the final disposition of the remaining assets and liabilities of Qimonda, cannot be predicted at this time. As a result of the application, we deconsolidated Qimonda during the second quarter of the 2009 fiscal year. During the second quarter of the 2008 fiscal year, we committed to a plan to dispose of Qimonda. As a result, the assets and liabilities of Qimonda in the consolidated balance sheet as of September 30, 2008, were classified as “held for disposal”, and the results of Qimonda are reported in our consolidated statements of operations as discontinued operations through deconsolidation for all periods presented.

 

Our business and the semiconductor industry generally are highly cyclical and characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life-cycles and wide fluctuations in product supply and demand.

 

Cyclicality

 

The market for semiconductors has historically been volatile. Supply and demand have fluctuated cyclically and have caused pronounced fluctuations in prices and margins. According to WSTS (November 2009), the overall market growth (in U.S. dollar terms) compared to the previous year was 8.9 percent in 2006 and 3.2 percent in 2007, before decreasing by 2.8 percent in 2008. WSTS predicts that the overall market will contract by approximately 11 percent in the 2009 calendar year.

 

The industry’s cyclicality results from a complex set of factors, including, in particular, fluctuations in demand for the end products that use semiconductors and fluctuations in manufacturing capacity. This cyclicality is especially pronounced in the memory portion of the industry. Semiconductor manufacturing facilities (so-called fabrication facilities, or “fabs”) can take several years to plan, construct, and begin operations. Semiconductor manufacturers have in the past made capital investments in plant and equipment during periods of favorable market conditions, in response to anticipated demand growth for semiconductors. If more than one of these newly built fabs comes on-line at about the same time, the supply of chips to the market can be vastly increased. Without sustained growth in demand, this cycle has typically led to manufacturing over-capacity and oversupply of products, which in turn has led to sharp drops in semiconductor prices. When prices drop, manufacturers have in the past cut back on investing in new fabs. As demand for chips grows over time, without additional fabs coming on-line, prices tend to rise, leading to a new cycle of investment. The semiconductor industry has generally been slow to react to declines in demand, due to its capital-intensive nature and the need to make commitments for equipment purchases well in advance of planned expansion.

 

We attempt to mitigate the impact of cyclicality by investing in manufacturing capacities throughout the cycle and entering into alliances and foundry manufacturing arrangements that provide flexibility in responding to changes in the cycle.

 

Substantial Capital and Research & Development Expenditures

 

Semiconductor manufacturing is very capital-intensive. The manufacturing capacities that are essential to maintain a competitive cost position require large capital investments. The top 10 capital spenders in the industry, according to IC Insights, account for approximately 60 percent of the industry’s projected 2009 capital spending budgets. Manufacturing processes and product designs are based on leading-edge technologies that require considerable research and development expenditures. A high percentage of the

cost of operating a fab is fixed; therefore, increases or decreases in capacity utilization can have a significant effect on profitability.

 

Because pricing, for commodity products in particular, is market-driven and largely beyond our control, a key factor in achieving and maintaining profitability is to continually lower our per-unit costs by reducing total costs and by increasing unit production output through productivity improvements.

 

To reduce total costs, we intend to continue to seek to share the costs of our research and development (“R&D”) and manufacturing with third parties, either by establishing alliances or through the use of foundry facilities for manufacturing. We believe that cooperation in alliances for R&D, as well as manufacturing and foundry partnerships, provide us with a number of important benefits, including the sharing of risks and costs, reductions in our own capital requirements, acquisitions of technical know-how, and access to additional production capacities. Our principal alliances are with the International Semiconductor Development Alliance (“ISDA”), a technology alliance among IBM, GlobalFoundries Inc., Chartered Semiconductor Manufacturing Ltd. (“Chartered Semiconductor”), Freescale Seminconductor, Inc., NEC Corporation, Samsung Electronics Ltd., STMicroelectronics NV, Toshiba Corporation and Infineon for CMOS development and manufacturing at 45-nanometer and 32-nanometer process technologies. We have established foundry relationships with United Microelectronics Corporation (“UMC”) for 130-nanometer, 90-nanometer and 65-nanometer manufacturing as well as with Chartered Semiconductor and Taiwan Semiconductor Manufacturing Company (“TSMC”) for 65-nanometer manufacturing. Further, we announced in November 2009 the signing of a joint development agreement for 65-nanometer embedded Flash technology with TSMC.

 

In the backend field, STMicroelectronics NV, STATS ChipPAC Ltd. and Infineon are jointly developing the next-generation of embedded Wafer-Level Ball Grid Array (“eWLB”) technology, based on our first-generation technology, for use in manufacturing future-generation semiconductor packages. This builds on our existing eWLB packaging technology, which we have licensed to our development partners. The new R&D effort, for which the resulting IP will be jointly owned by the three companies, will focus on using both sides of a reconstituted wafer to provide solutions for semiconductor devices with a higher integration level and a greater number of contact elements.

 

We expect to continue to increase unit production output through improvements in manufacturing, which is achieved by producing chips with smaller structure sizes (more bits per chip) and by producing more chips per silicon wafer (by using larger wafers). Currently, a substantial portion of our capacity is based on 130-nanometer and 90-nanometer structure sizes. Our 130-nanometer process technology, with up to eight layers of copper metallization, is in volume production at several manufacturing sites, including our Dresden facility. Additional 130-nanometer process options have been developed to fulfill the needs of specialty applications. Our 90-nanometer technology is in production. We are currently manufacturing 65-nanometer technology at several foundry partners and are developing products based on 40-nanometer technology which we currently plan to manufacture initially at one of our manufacturing partners.

 

About half of our internal fab capacity is used for the manufacture of power semiconductors used in automotive and industrial applications. We have power semiconductor manufacturing sites in Regensburg, Germany, in Villach, Austria and in Kulim, Malaysia. We continue to focus on innovation for power semiconductors, introducing power copper metallization and special processes to fabricate ever thinner wafers to optimize electrical resistance.

 

Technological Development and Competition

 

Sales prices per unit are volatile and generally decline over time due to technological developments and competitive pressure. Although logic products generally have a certain degree of application specification, unit sales prices for logic products typically decline over time as technology develops.

 

We aim to offset the effects of declining unit sales prices on total revenue by optimizing product mix, by increasing unit sales volume and by continually reducing per-unit production costs. The growth in volume

depends in part on productivity improvements in manufacturing, for example by moving to ever-smaller structure sizes.

 

Seasonality

 

Our sales are affected by seasonal and cyclical influences, with sales historically strongest in our fourth fiscal quarter. These short cycles are influenced by longer cycles that are a response to innovative technical solutions from our customers that incorporate our products. The short-term and mid-term cyclicality of our sales reflects the supply and demand fluctuations for the products that contain our semiconductors. If anticipated sales or shipments do not occur when expected, expenses and inventory levels in a given quarter can be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, may be adversely affected.

 

Product Development Cycles

 

For our products, the cycle for test, evaluation and adoption of our products by customers before the start of volume production can range from several months to more than one year. Due to this lengthy cycle, we may experience significant delays from the time we incur expenses for R&D, marketing efforts, and investments in inventory, to the time we generate corresponding revenue, if any.

 

Acquisition and Divestiture Strategy

 

A key element of our core business strategy is to seek to reduce the time required to develop new technologies and products and bring them to market, and to optimize our existing product offerings, market coverage, engineering workforce, and technological capabilities. We plan to continue to evaluate strategic opportunities as they arise, including business combination transactions, strategic relationships, capital investments, and the purchase or sale of assets or businesses.

 

Intellectual Property

 

Due to the high-technology nature of the semiconductor industry, Intellectual Property (“IP”), meaning intangible assets relating to proprietary technology, is of significant importance. We also derive modest revenues from the licensing of our IP, generally pursuant to cross licensing agreements. Our IP rights include patents, copyrights, trade secrets, trademarks, utility models and designs. The subjects of our patents primarily relate to IC designs and process technologies. We believe that our intellectual property is a valuable asset not only to protect our investment in technology but also a vital prerequisite for cross licensing agreements with third parties.

 

As of September 30, 2009, we owned more than 20,800 patent applications and patents (both referred to as “patents” below) in over 40 countries throughout the world. These patents belong to approximately 8,150 “patent families” (each patent family containing all patents originating from the same invention). 1,900 of those patent applications and patents (approximately 820 patent families) were transferred to Lantiq upon the closing of the sale of our Wireline Communications business on November 6, 2009.

 

We record assets on our balance sheet for self-developed IP. Costs for development activities may be capitalized if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and we intend, and have sufficient resources, to complete development and use or sell the asset. The costs capitalized include the cost of materials, direct labor and directly attributable general overhead expenditures that serve to prepare the asset for use. Costs of research activities which do not fulfill the criteria for capitalization are expensed as incurred. IP licensed from others or acquired through a business combination is also reflected on our balance sheet, and reduced through amortization over its expected useful life. The value of such acquired IP is often complex and difficult to estimate.

Challenges that Lie Ahead

 

Going forward, our success will remain highly dependent on our ability to stay at the leading edge of technology development, and to continue to optimize our product portfolio. We must achieve both objectives to ensure that we have the flexibility to react to fluctuations in market demand for different types of semiconductor products. We believe that the ability to offer and the flexibility to manufacture a broad portfolio of products will be increasingly important to our long-term success in many markets in the semiconductor industry. Establishing and maintaining advantageous technology, development and manufacturing alliances, including the use of third-party foundries, and continuing our efforts to broaden our product portfolio will make it easier for us to respond to changes in market conditions and to improve our financial performance.

 

Semiconductor Market Conditions in the 2009 Fiscal Year

 

According to WSTS (September 2009), the global semiconductor market contracted (in U.S. dollar terms) by 20 percent through the first nine months of the 2009 calendar year compared to the same period in the prior year, following a market contraction of 2.8 percent in the 2008 calendar year. In November 2009, WSTS predicted the global semiconductor market would shrink by approximately 11 percent in the full 2009 calendar year. Sales in North America are expected to decrease by 1 percent and in Europe by 24 percent in the 2009 calendar year, according to WSTS. The semiconductor market in Asia/Pacific (excluding Japan) is expected to contract by 7 percent; the Japanese market is expected to contract by 21 percent compared to the 2008 calendar year. Sales of non-memory products (logic chips, analog, and discretes), which accounted for 81 percent of the entire market in the first nine months of the 2009 calendar year, are predicted to decrease by 12 percent compared with the 2008 calendar year. Sales of memory products are predicted to decline by 8 percent compared with the 2008 calendar year. In the 2008 calendar year, the memory market contracted by 20 percent (WSTS, November 2009).

 

Results of Operations as a Percentage of Revenue

 

The following table presents the various line items in our consolidated statements of operations expressed as percentages of revenue.

 

 

 

Reorganization

 

Our organizational structure for the period through March 31, 2008, became effective on May 1, 2006, following the legal separation of our memory products business into the stand-alone legal company Qimonda. Effective March 31, 2008, the results of Qimonda until deconsolidation are reported as discontinued operations in our consolidated statements of operations for all periods presented, and the assets and liabilities of Qimonda have been classified as held for disposal in the consolidated balance sheet as of September 30, 2008.

 

Following the completion of the Qimonda carve-out, certain corporate overhead expenses are no longer apportioned to Qimonda and are instead allocated to our segments. In addition, Other Operating Segments includes revenue and earnings that our 200-millimeter production facility in Dresden recorded from the sale of wafers to Qimonda under a foundry agreement, which was cancelled during the 2008 fiscal year. The Corporate and Eliminations segment reflects the elimination of these revenue and earnings. Also, effective October 1, 2007, we record gains and losses from sales of investments in marketable debt and equity securities in the Corporate and Eliminations segment.

 

Effective October 1, 2008, to better align our business with our target markets, we reorganized our core business into five operating segments: Automotive, Industrial & Multimarket, Chip Card & Security,

Wireless Solutions and Wireline Communications. On July 7, 2009, we entered into an asset purchase agreement to sell our Wireline Communications business which closed on November 6, 2009. As a result of the planned sale, our Management Board determined that the Wireline Communications business ceased to be an operating segment in September 2009, and the results of the Wireline Communications business are reported as discontinued operations in our consolidated statements of operations for all periods presented, and the assets and liabilities of the Wireline Communications Business in the consolidated balance sheet as of September 30, 2009 are classified as “held for disposal”.

 

Segment results for all periods presented have been recast to be consistent with the current reporting structure and presentation, as well as to facilitate analysis of operating segment information.

 

Revenue

 

We generate our revenues primarily from the sale of our semiconductor products and systems solutions. Our semiconductor products include a wide array of chips and components used in electronic applications ranging from wireless communication systems, to chip cards, automotive electronics, and industrial applications.

 

We generated the majority of our product revenues in the 2009 fiscal year through our direct sales force, with approximately 20 percent of revenues derived from sales made through distributors.

 

We derive our modest license revenue from royalties and license fees earned on technology that we own and license to third parties. This enables us to recover a portion of our research and development expenses, and also often allows us to gain access to manufacturing capacity at foundries through joint licensing and capacity reservation arrangements.

 

Our revenues fluctuate in response to a combination of factors, including the following:

 

 

 

In the 2008 fiscal year, revenues increased primarily as a result of the revenue increase in the Wireless Solutions segment, partially offset by the revenue decline in other operating segments due to the sale of our HDD business to LSI in April 2008. The slight revenue decreases in our Automotive and our Industrial & Multimarket segments were offset by revenue increases in our Chip Card & Security segment.

In the 2009 fiscal year, revenues decreased by 22 percent compared to the 2008 fiscal year, primarily due to the economic slowdown. Revenues decreased across all of our segments.

 

The strength of the Euro (primarily against the U.S. dollar) during the 2007 and 2008 fiscal years negatively impacted revenue, while the partial recovery of the U.S. dollar against the Euro in the 2009 fiscal year positively impacted our revenues. The effect of foreign exchange over the prior year is calculated as the estimated change in current year revenues if the average exchange rate for the preceding year were applied as a constant rate in the current year.

 

Revenues for the 2008 fiscal year include the effect of the acquisition of the mobility products business from LSI from October 25, 2007 and Primarion Inc. from April 28, 2008. The impact of acquisitions over the prior fiscal year reflects the increase in revenue resulting from business acquisitions since the beginning of the prior fiscal year, and in particular the inclusion of a full-year consolidation of revenue from such acquisition in the year after the initial acquisition.

 

Actual Revenues in the 2009 Fiscal Year Compared to Previously Reported Outlook

 

When we initially presented our outlook for the 2009 fiscal year, in December 2008, our visibility with respect to economic developments in the 2009 fiscal year was very limited. Based on forecasts at that time, we forecast that total revenues in the 2009 fiscal year would decrease by at least 15 percent compared to the 2008 fiscal year. In April 2009, we revised our outlook for the 2009 fiscal year; however, considerable uncertainties regarding the economic situation remained. Based on the results for the first six months of the 2009 fiscal year, as of April we forecasted revenues for the 2009 fiscal year to decrease by more than 20 percent compared to the 2008 fiscal year.

 

As expected, the economic slowdown during the 2009 fiscal year resulted in revenue decreases in all our segments. As we forecasted in April 2009 in our revised outlook for the 2009 fiscal year, our overall revenue decreased by 22 percent in the 2009 fiscal year compared to the 2008 fiscal year. Revenues of each of our operating segments, other than Wireless Solutions, decreased by more than 20 percent each in the 2009 fiscal year compared to the 2008 fiscal year. As we forecasted, the economic slowdown had the least impact on our Wireless Solutions segment, which experienced a decrease of revenues of only 3 percent in the 2009 fiscal year compared to the 2008 fiscal year.

 

Revenue by Segment

 

 

 

 

 

Revenue by Region and Customer

 

 

The absolute and relative increase in the share of revenues in Asia/Pacific in the 2008 fiscal year was primarily due to the acquisition of the mobility products business from LSI and higher shipments of mobile phone platforms solutions to customers in Asia/Pacific in our Wireless Solutions segment.

 

The regional distribution of revenues in the 2009 fiscal year changed slightly compared to the 2008 fiscal year, primarily reflecting changes in the revenues of the segments. The shift in the regional distribution from Germany, Other Europe, and North America to Asia/Pacific resulted primarily from the significant revenue decreases of our Automotive segment, whose customers are based largely in Germany, Other Europe and North America. Furthermore, increased revenues of our Wireless Solutions segment in Asia/Pacific during the 2009 fiscal year compared to the 2008 fiscal year contributed to the changes in the regional distribution of revenues.

 

No single customer accounted for more than 10 percent of our revenues in the 2009 fiscal year, while our top 25 customers accounted for 72 percent of our revenues.

 

Cost of Goods Sold and Gross Margin

 

Our cost of goods sold consists principally of:

 

 

In addition to factors that affect our revenue, our gross margin is impacted by:

 

 

 

 

We include in cost of goods sold the cost of inventory purchased from our joint ventures and other associated and related companies. Our purchases from these associated and related companies amounted to €47 million, €148 million and €138 million in the 2007, 2008 and 2009 fiscal years, respectively.

 

During the 2008 fiscal year our gross margin slightly increased primarily as a result of productivity measures. In the 2009 fiscal year our gross margin decreased significantly from 34 percent to 22 percent. In particular during the first half of the 2009 fiscal year, lower sales volumes and significantly higher idle capacity costs, reflecting fixed cost in production that could not be reduced proportionately to the reduced sales volume, resulted in a significant decline of our gross margin. The increased sales volumes during the second half of the 2009 fiscal year compared to the first half of the 2009 fiscal year resulted in a partial recovery of our gross margin in the second half of the 2009 fiscal year.

 

 

Research and Development Expenses

 

R&D expenses consist primarily of salaries and benefits for R&D personnel, material costs, depreciation and maintenance of equipment used in our R&D efforts, and contracted technology development

costs. R&D expenses also include our joint technology development arrangements with partners. Costs of research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding are expensed as incurred. Costs for development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, are capitalized if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and we intend, and have sufficient resources, to complete development and use or sell the asset. The costs capitalized include the cost of materials, direct labor and directly attributable general overhead expenditure that serves to prepare the asset for use.

 

We continue to focus our investments on the development of leading-edge manufacturing technologies and products with high potential for growth and profitability.

 

 

Some of our R&D projects qualify for subsidies from local and regional governments 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.

 

In the 2008 fiscal year R&D expenses decreased by €15 million or 2 percent compared to the 2007 fiscal year, and further decreased in the 2009 fiscal year by €138 million or 23 percent compared to the 2008 fiscal year. The absolute decline during our 2009 fiscal year resulted from our IFX10+ cost-reduction program, savings from short-time work and unpaid leave, and deferred R&D activities. Furthermore, reduced expenses reflecting lower profit-related bonuses contributed to cost reduction in the 2009 fiscal year. Continued increases in our R&D efficiency also contributed to the decline of R&D expenses in the 2009 fiscal year compared to the 2008 fiscal year. We believe that the cost savings achieved have not harmed our technological competitive position.

 

We capitalized development costs of €22 million, €38 million and €43 million in the 2007, 2008 and 2009 fiscal year, respectively.

 

 

Selling, General and Administrative Expenses

 

Selling expenses consist primarily of salaries and benefits for personnel engaged in sales and marketing activities, costs of customer samples, 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, and consultancy, legal and other fees for professional services.

 

 

The year-on-year increase in absolute terms in the 2008 fiscal year primarily reflects increased selling expenses following the acquisition of the mobility products business from LSI. In the 2009 fiscal year selling, general and administrative expenses decreased by €125 million or 24 percent compared to the 2008 fiscal year. This decrease reflects cost savings as a result of our IFX10+ cost-reduction program, short-time work, and unpaid leave. Additionally, the reversal of bonus provisions and lower bonus and incentive expenses due to our 2009 fiscal year results contributed to the decrease in selling, general and administrative expenses in the 2009 fiscal year. As a percentage of revenues, selling, general and administrative expenses remained broadly unchanged for the 2009 fiscal year compared to the 2008 fiscal year.

 

Other Operating Income and Other Operating Expense

 

 

Other Operating Income.  In the 2007 fiscal year, other operating income consisted primarily of gains of €17 million from the sale of the Polymer Optical fiber (“POF”) business to Avago Technologies Ltd. (“Avago”), and gains of €3 million from the sale of the Sci-Worx business to Silicon Image Inc. Other operating income increased by €83 million from €37 million in the 2007 fiscal year to €120 million in the 2008 fiscal year, and decreased to €29 million in the 2009 fiscal year. Other operating income in the 2008 fiscal year related primarily to the gains of €80 million from the sale of 40 percent of our interest in Bipolar to Siemens, the sale of our HDD business to LSI, and the sale of our bulk acoustic wave filter business (“BAW”) to Avago. Additionally, we realized gains from disposals of long-term assets of €4 million in the 2008 fiscal year. Included in other operating income for the 2009 fiscal year were €10 million of payments from the insolvency administrator of BenQ, a former customer.

 

Other Operating Expense.  Other operating expense increased by €308 million from €57 million in the 2007 fiscal year to €365 million in the 2008 fiscal year, and decreased to €48 million in the 2009 fiscal year by €317 million compared to the 2008 fiscal year. Other operating expense in the 2008 fiscal year related primarily to higher restructuring and impairment charges in the 2008 fiscal year compared to the 2007 fiscal year. To address rising risks in the market environment, adverse currency trends and partially below benchmark margins, we implemented the IFX10+ cost-reduction program in the third quarter of the

2008 fiscal year. The IFX10+ cost-reduction program targeted certain areas to reduce costs including product portfolio management, manufacturing costs reduction, value chain optimization, processes efficiency, reorganization of our structure along our target markets, and reductions in workforce. Approximately 10 percent of our workforce worldwide was impacted by IFX10+. In the 2008 fiscal year, we recorded restructuring charges totaling €188 million, of which €172 million was attributable to the IFX10+ cost-reduction program. We recorded impairment charges of €130 million on property, plant and equipment and intangible assets during the 2008 fiscal year, primarily relating to the write-down of ALTIS Semiconductor S.N.C, Essonnes, France (“ALTIS”), to its estimated fair value. In August 2007, we and IBM signed an agreement in principle to divest our shares in ALTIS via a sale to Advanced Electronic Systems AG (“AES”). As of September 30, 2008, negotiations with AES had not progressed as previously anticipated and could not be completed. Despite the fact that negotiations were ongoing with additional parties, the outcome of these negotiations was uncertain. As a result, we reclassified related assets and liabilities previously classified as “held for sale” into “held and used” in the consolidated balance sheet as of September 30, 2008, and recognized an impairment of ALTIS to its estimated fair value, which contributed to the increase in other operating expense in the 2008 fiscal year. Additionally, we recorded a write-down of in-process R&D acquired from LSI of €14 million as no future economic benefit from its use or disposal was expected in the 2008 fiscal year. In the 2009 fiscal year, impairment charges of only €3 million were recognized in other operating expense. Furthermore, in the 2009 fiscal year as most significant effects, we recognized a partial reversal of €25 million of provisions for expected termination benefits attributable to the IFX10+ cost-reduction program and €5 million of additional restructuring charges in other operating expense. Also included in other operating expense is a loss before tax of €17 million from the sale of the business of SensoNor. Other miscellaneous operating expenses in the 2009 fiscal year remained unchanged compared to the 2008 fiscal year.

 

Operating Income (Loss)

 

In the 2007 fiscal year, our operating income was €101 million, compared to an operating loss of €46 million and €220 million in the 2008 and 2009 fiscal years, respectively.

 

Segment Result

 

Segment Result for our separate reporting segments was as follows:

 

 

Segment Result development for our reporting segments was as follows:

 

 

 

The following table provides the reconciliation of Segment Result to our operating income (loss):

 

 

Financial Income and Expense

 

 

Financial Income.  In the 2008 fiscal year, financial income decreased by €49 million compared to the 2007 fiscal year, primarily as a result of the negative impact of the worldwide financial crisis in the 2008 fiscal year. This resulted in lower income derived from the valuation of available-for-sale financial assets and gains realized on the sale of available-for-sale financial assets. This lower income was only partly offset by higher interest income in the 2008 fiscal year compared to the 2007 fiscal year, which we derive primarily from cash and cash equivalents and available-for-sale financial assets. In the 2009 fiscal year, financial income increased by €43 million to €101 million. This increase primarily resulted from the €61 million gain realized from the repurchase of our exchangeable subordinated notes due 2010 and our convertible subordinated notes due 2010, which was partially offset by lower other interest income we realized during the 2009 fiscal year compared to the 2008 fiscal year. In addition, gains from the valuation of interest rate swaps contributed to the increase of financial income during the 2009 fiscal year.

 

Financial Expense.  In the 2007 fiscal year, financial expense was €242 million compared to €181 million in the 2008 fiscal year and €156 million in the 2009 fiscal year. During the quarter ended March 31, 2007, we entered into agreements with Molstanda Vermietungsgesellschaft mbH (“Molstanda”) and a financial institution. Molstanda is the owner of a parcel of land located in the vicinity of our headquarters south of Munich. Pursuant to SIC 12 “Consolidation — Special Purpose Entities”, we determined that Molstanda meets the criteria of a Special Purpose Entity (“SPE”) and, as a result of the agreements, we control it. Accordingly, we consolidated Molstanda’s assets with a fair value of €41 million and liabilities with a fair value of €76 million beginning in the second quarter of the 2007 fiscal year. The €35 million excess in fair value of liabilities over the fair value of identifiable assets was recorded as other financial expense during the second quarter of the 2007 fiscal year. Due to our loss situation, no tax benefit was provided on this loss. We subsequently acquired the majority of the outstanding capital of

Molstanda during the fourth quarter of the 2007 fiscal year. Furthermore, we incurred lower valuation charges and losses on sales of available-for-sale financial assets in the 2008 fiscal year compared to the 2007 fiscal year. This decrease was partially offset by the €8 million loss we incurred in connection with the repurchase during the 2008 fiscal year of notional amounts of €100 million of our convertible subordinated notes due 2010. In the 2009 fiscal year, financial expense further decreased by €25 million compared to the 2008 fiscal year to €156 million. This was due primarily to reduced interest expense of €24 million in the 2009 fiscal year compared to the 2008 fiscal year, which resulted from lower interest rates and lower indebtedness as well as lower losses incurred in connection with repurchases of our exchangeable subordinated notes due 2010 and our convertible subordinated notes due 2010.

 

Income from Investments Accounted for Using the Equity Method

 

In the 2007, 2008 and 2009 fiscal years, income from investments accounted for using the equity method was €1 million, €4 million and €7 million, respectively, and primarily reflected our share in the net income of Bipolar.

 

Income Tax Benefit (Expense)

 

 

Generally, deferred tax assets in tax jurisdictions that have a three-year cumulative loss are subject to a valuation allowance excluding the impact of forecasted future taxable income. In the 2007, 2008 and 2009 fiscal years we continued to have a three-year cumulative loss in certain tax jurisdictions and, accordingly, we recorded increases in the valuation allowance of €25 million, €183 million and €88 million in those periods, respectively. We assess our deferred tax asset position on a regular basis. Our ability to realize benefits from our deferred tax assets is dependent on our ability to generate future taxable income sufficient to utilize tax loss carry-forwards or tax credits before expiration. We expect to continue to recognize no tax benefits in these jurisdictions until we have ceased to be in a cumulative loss position for the preceding three-year period.

Loss from Discontinued Operations, Net of Income Taxes

 

The results of Qimonda and the Wireline Communications business, which are presented in the consolidated statements of operations as discontinued operations for the 2007, 2008 and 2009 fiscal years, consist of the following components:

 

 

 

Qimonda

 

In the 2008 fiscal year Qimonda’s total revenues decreased by €1,823 million, or 51 percent, to €1,785 million from €3,608 million in the 2007 fiscal year. This decrease resulted primarily from a significant decrease in DRAM prices and to a lesser extent the average exchange rate of the U.S. dollar against the Euro. These decreases were partly offset by increases of higher bit shipments.

 

Cost and expenses of Qimonda decreased by €183 million from €3,956 million in the 2007 fiscal year to €3,773 million in the 2008 fiscal year, primarily as a result of a decrease in cost of goods sold. This decrease was partly offset by restructuring charges, impairment charges and higher R&D expenses primarily related to Qimonda’s efforts in the new Buried Wordline technology for 65-nanometers and 46-nanometers. Restructuring expenses of Qimonda during the 2008 fiscal year related primarily to the relocation of the back-end production in Malaysia, the combination of the research centers in

North America, a comprehensive cost reduction program, the shutdown of Qimonda’s Flash activities in Italy and a global repositioning program. During the 2008 fiscal year, Qimonda recognized impairment charges for goodwill and for long-lived assets of the Richmond 200-millimeter facility. Additionally, as a result of Qimonda’s agreement to sell its 35.6 percent interest in Inotera Memories Inc. (“Inotera”) to Micron Technology, Inc. (“Micron”) for U.S. dollar 400 million, Qimonda recognized impairment charges to reduce the carrying value of its investment in Inotera to the sales price less costs to sell. Furthermore, we recognized a write-down of €1,475 million to reduce Qimonda to its estimated fair value less cost to sell.

 

On January 23, 2009, Qimonda and its wholly owned subsidiary Qimonda Dresden filed an application at the Munich Local Court to commence insolvency proceedings. As a result of this application, we deconsolidated Qimonda in accordance with IAS 27 “Consolidated and Separate Financial Statements” during the second quarter of the 2009 fiscal year. On April 1, 2009, the insolvency proceedings formally opened. Formal insolvency proceedings have also been commenced by several additional subsidiaries of Qimonda in various jurisdictions. The final resolution of the insolvency proceedings, including the final disposition of the remaining assets and liabilities of Qimonda, cannot be predicted at this time.

 

The results presented for Qimonda from October 1, 2008 through January 23, 2009 (the date of deconsolidation) are based on preliminary results provided by Qimonda prior to its insolvency filing, and were prepared on a going concern basis. Financial statements on a liquidation basis, which would be required when the going concern assumption is not assured, are not available from Qimonda. There can be no assurance that recorded book values of individual assets and liabilities held for disposal by us would not be materially different if presented on a liquidation basis; however, as the net assets of Qimonda held for disposal by us through deconsolidation are already valued at the fair value less costs to sell of zero as of September 30, 2008, the net value presented in the consolidated financial statements would not be impacted.

 

The operating losses of Qimonda from October 1, 2008 through the date of deconsolidation, exclusive of depreciation, amortization and impairment of long-lived assets, were offset by a partial reversal of €460 million of the write-downs recorded in the 2008 fiscal year to reduce the net assets of Qimonda to fair value less costs to sell of zero.

 

During the fiscal year 2009, Qimonda-related amounts included in loss from discontinued operations, net of income taxes consisted principally of:

 

 

As a result of the commencement of insolvency proceedings by Qimonda, we are exposed to further potential liabilities arising in connection with the Qimonda business, which include, among others, the following:

 

 

 

In addition to the matters described above, we may be subject to claims by the insolvency administrator under German insolvency laws for repayment of certain amounts received by us from Qimonda, such as payments for intra-group services and supplies during defined periods prior to the commencement of insolvency proceedings. Depending on future developments in Qimonda’s operations in Portugal, there is a possibility that claims could be made against us in connection with governmental subsidies received by Qimonda Portugal, S.A. prior to the carve-out. No such claims have been made to date, and no reasonable estimated amount can be attributed at this time to the size or potential outcome of any such claims. The insolvency of Qimonda may also subject us to other claims arising in connection with the contracts, offers, uncompleted transactions, continuing obligations, risks, encumbrances and other liabilities contributed to Qimonda in connection with the carve-out of the Qimonda business, as we expect that Qimonda will not be able to fulfill its obligation to indemnify us against any such liabilities. Moreover, we may lose rights and licenses to Qimonda’s intellectual property rights to which we are entitled under the contribution agreement in connection with the carve-out of the Qimonda business, due to fact that the administrator has declared non-performance of this agreement. We are evaluating the scope of any potentially affected intellectual property, and are unable to provide reasonable estimates at this time of any potential costs in this regard.

 

As of September 30, 2009, we recorded aggregate liabilities of €21 million and provisions of €163 million in connection with these matters. The recorded provisions are primarily reflected within “Current provisions”, and the remainder are recorded within “Long-term provisions”. The recorded provisions reflect the amount of those liabilities that management believes are probable and can be estimated with reasonable accuracy at that time. There can be no assurance that such provisions recorded will be sufficient to cover all liabilities that may ultimately be incurred in relation to these matters. Disclosure of individual amounts with respect to these matters could seriously prejudice our legal or negotiating position, and therefore have been omitted. No reasonable estimate can be made at this time related to those potential liabilities that may be incurred, but that are currently not viewed to be probable.

 

Wireline Communications Business

 

In the 2008 fiscal year, revenues of the Wireline Communications business were €418 million, a slight increase compared to €414 million in the 2007 fiscal year, primarily due to growth in broadband solutions, mainly driven by the consolidation of the Customer Premises Equipment (“CPE”) business acquired from Texas Instruments, Inc. The increase was partially offset by declining legacy revenues and negative currency effects. In the 2009 fiscal year, revenues decreased by 20 percent to €333 million. This decrease was primarily driven by the economic slowdown that affected both the CPE and the infrastructure businesses.

In the 2008 fiscal year, profit before tax of the Wireline Communications business was €18 million, an increase of €28 million compared to a loss before tax of €10 million in the 2007 fiscal year. This increase primarily resulted from efficiency gains and cost reduction measures initiated during the 2007 fiscal year.

 

In 2009 fiscal year, profit before tax of the Wireline Communications business was €24 million, an increase of €6 million compared to the 2008 fiscal year despite a 20 percent revenue decline compared to the 2008 fiscal year. This positive development was a result of the measures implemented under the IFX10+ cost-reduction program as well as cost reductions realized from short-time work and unpaid leave.

 

Net Loss

 

In the 2007 fiscal year, net loss was significantly impacted by the results from discontinued operations, net of income tax, primarily due to Qimonda’s net loss, which resulted from the deterioration in memory product prices and a weaker U.S. dollar, and consequently a significant decrease in Qimonda’s gross margin. Net loss from discontinued operations in the 2007 fiscal year also included an €84 million loss from the sale of 28.75 million Qimonda ADSs. Restructuring charges of €45 million and the expenses of €35 million resulting from the consolidation of Molstanda also contributed to the net loss in the 2007 fiscal year.

 

In the 2008 fiscal year, the increase in net loss to €3,747 million was primarily due to the increase in losses from discontinued operations, resulting from Qimonda’s net loss and the write-downs of €1,475 million to reduce Qimonda to its estimated current fair value less costs to sell. Furthermore, restructuring charges of €188 million primarily related to the IFX10+ program, and impairment charges of €130 million on property, plant and equipment and intangible assets, contributed to the net loss in the 2008 fiscal year.

 

In the 2009 fiscal year, our net loss significantly decreased, to €671 million. Our operating segments were deeply impacted by the economic slowdown, in particular during the first half of the 2009 fiscal year. Additionally, the results of discontinued operations, net of income taxes, significantly impacted our net loss in the first half of the 2009 fiscal year, which primarily resulted from the deconsolidation of Qimonda and the charges for provisions and allowances in connection with Qimonda’s insolvency. We experienced a significant reduction in our net loss in the second half of the 2009 fiscal year and reached break even for the fourth quarter of the 2009 fiscal year. This improvement resulted from the partial recovery of the economy during the second half of the 2009 fiscal year, together with the positive impact of our cost saving measures and significantly lower charges in connection with Qimonda’s insolvency in the second half of the 2009 fiscal year compared to the first half of the 2009 fiscal year.

 

 

As of September 30, 2009, our total assets decreased by 34 percent to €4,606 million from €6,982 million as of September 30, 2008. This decrease was primarily due to the deconsolidation of Qimonda, which led to a reduction in total assets of €2,129 million that were presented as assets classified as held for disposal in the prior year. In connection with the sale of the Wireline Communications business, assets and liabilities to be transferred to Lantiq were presented as assets and liabilities classified as held for disposal in the consolidated balance sheet as of September 30, 2009, thus decreasing non-current assets by €67 million and non-current liabilities by €1 million and increasing current assets and liabilities, accordingly.

 

Within current assets, cash and cash equivalents increased significantly, by €665 million from €749 million as of September 30, 2008 to €1,414 million as of September 30, 2009, primarily as a result of our share capital increase and the issuance of new convertible subordinated notes due 2014, which were partly offset by repurchases and redemptions of convertible subordinated notes and exchangeable subordinated notes due 2010. The receipt of €120 million from the German banks’ deposit protection fund throughout the 2009 fiscal year also contributed positively to cash and cash equivalents. This increase in current assets was partly offset by a reduction of trade and other receivables by €285 million to €514 million and of inventory by €205 million to €460 million as of September 30, 2009, primarily due to lower revenues followed by improved working capital management. The change in inventory also relates to a reclassification of €43 million to assets held for disposal in connection with the sale of the Wireline Communications business. Furthermore, the receipt of €120 million from the German banks’ deposit protection fund in the 2009 fiscal year and allowances for doubtful accounts recorded on receivables against Qimonda following Qimonda’s insolvency proceedings contributed to the decrease in trade and other receivables.

 

Within non-current assets, property, plant and equipment decreased by €382 million from €1,310 million to €928 million, primarily as capital expenditures were more than offset by depreciation and amortization during the 2009 fiscal year. Furthermore, the sale of the SensoNor business contributed to the decrease in property, plant and equipment and €9 million were reclassified as assets held for disposal, mainly in connection with the sale of the Wireline Communications business. Out of goodwill and other intangible assets, €58 million in connection with our Wireline Communications business were classified as assets held for disposal, which also includes the goodwill relating to the acquisition of the CPE business from Texas Instruments Inc. (see note 4 of our consolidated financial statements).

 

Total liabilities decreased by €2,548 million, or 53 percent, from €4,821 million as of September 30, 2008, to €2,273 million as of September 30, 2009. This decrease was primarily caused by the

deconsolidation of Qimonda, which led to a reduction in total liabilities of €2,123 million, which were classified as liabilities associated with assets held for disposal as of September 30, 2008.

 

Furthermore, in June 2009, we reclassified €487 million of our convertible subordinated notes due 2010 with notional amounts of €522 million from long-term debt into short-term debt and current maturities of long-term debt, as they mature in June 2010. Subsequently, we repurchased notional amounts of €74 million of our convertible subordinated notes due 2010. As of September 30, 2009, notional amounts of our convertible subordinated notes due 2010 of €448 million and a book value of €425 million were included in our short term debt. Other changes in current liabilities related to a decrease in trade and other payables as of September 30, 2009, by €113 million compared to September 30, 2008, primarily resulting from lower trade accounts payables due to lower purchased services and lower capital expenditures. Also, other current liabilities decreased by €116 million, resulting from the decrease of employee-related liabilities, primarily due to payments of termination benefits in connection with our IFX 10+ cost-reduction program, which were recorded in the 2008 financial statements, and the reduction of liabilities for bonus payments.

 

Non-current liabilities decreased as of September 30, 2009, by €533 million compared to September 30, 2008. This was primarily due to the reclassification of convertible subordinated notes due 2010 from long-term debt into short-term debt and current maturities of long-term debt and due to repurchases and redemptions of notional amounts of our exchangeable subordinated notes due 2010 of €215 million and of our convertible subordinated notes due 2010 of €152 million including the repurchase of €74 million as described above. This decrease was partly offset by the issuance of new convertible subordinated notes due 2014 with a notional amount of €196 million, resulting in an increase of long-term debt by €145 million as September 30, 2009, net of debt issuance cost, discount and the conversion component recognized in equity. Long-term provisions increased by €62 million, primarily for potential liabilities resulting from Qimonda’s insolvency.

 

Total equity increased by €172 million as of September 30, 2009, as a result of our share capital increase of €680 million, which was partly offset by the net loss incurred in the 2009 fiscal year.

 

 

The aforementioned financial condition ratios are calculated as follows:

 

 

 

In the 2008 fiscal year, the net loss incurred was primarily the result of Qimonda’s operating losses and the recorded write-down in order to remeasure Qimonda to its current fair value less cost to sell. Accordingly, our equity and total assets decreased significantly compared to 2007. This resulted in significant decreases in non-current asset intensity, equity ratio, return on equity, and return on assets, while current asset intensity and debt to equity ratios increased. In the 2009 fiscal year, we deconsolidated Qimonda, which led to a further reduction in total assets, and thus led to an increase in non-current asset intensity and equity ratio.

 

In the 2008 fiscal year, lower net capital expenditures in property, plant and equipment resulted in an increase in our degree of wear of fixed assets and a decrease in our depreciation rate of fixed assets. This development continued in the 2009 fiscal year as a result of the ongoing decrease of our investing activities year-over-year.

 

While the debt-to-equity ratio significantly increased in the 2008 fiscal year compared to the 2007 fiscal year due to the equity decrease as a result of the Qimonda losses, in the 2009 fiscal year the debt-to-equity, equity and return on equity ratios improved considerably and decreased as a result of the share capital increase and repurchases and redemptions of exchangeable subordinated notes and convertible subordinated notes due 2010. This was partially offset by the issuance of new convertible subordinated notes due 2014.

 

The development of the ratios inventory turnover, inventory reach in days, and days sales outstanding was strongly impacted by the change in business environment, which occurred primarily in the first and second quarters of the 2009 fiscal year, followed by strict working capital management. This resulted in significantly lower accounts receivable and strong decreases in inventory throughout the 2009 fiscal year.

 

Cash Flow

 

Our consolidated statements of cash flows show the sources and uses of cash and cash equivalents during the reported periods. They are of key importance for the evaluation of our financial position.

 

Cash flows from investing and financing activities are both directly determined based on payments and receipts. Cash flows from operating activities are determined indirectly from net loss. The 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 in the respective balance sheet line items.

 

 

Cash flow from operating activities

 

Net cash provided by operating activities from continuing operations was €268 million in the 2009 fiscal year, and reflected primarily the loss from continuing operations of €273 million, excluding non-cash charges for depreciation and amortization of €513 million, and €17 million resulting from the sale of the SensoNor business. Net cash provided by operating activities from continuing operations included €19 million received from the German banks’ deposit protection fund as well as €10 million received from the BenQ insolvency administrator, and was also positively impacted by income tax refunds received of €16 million and interest received of €21 million. Interest paid of €49 million reduced net cash provided by operating activities.

 

Cash flow from investing activities

 

Net cash used in investing activities from continuing operations of €14 million in the 2009 fiscal year mainly reflects capital expenditures of €51 million for the capitalization of internally developed intangible assets and the purchase of intangible assets and of €103 million for the purchase of property, plant and equipment. This was offset by €101 million principal amount received from the German banks’ deposit protection fund in the second and third quarters of the 2009 fiscal year for cash deposits. Furthermore, net proceeds (sales less purchases) of €33 million from available-for-sale financial assets and the consideration of €4 million received from the sale of the SensoNor business contributed positively to cash used in investing activities from continuing operations.

 

Cash flow from financing activities

 

Net cash provided by financing activities from continuing operations was €391 million for the year ended September 30, 2009, compared to net cash used in financing activities from continuing operations of €230 million for the year ended September 30, 2008. In the 2009 fiscal year, we increased our ordinary share capital by €674 million, with the net excess issuance proceeds reflected in additional paid-in-capital. This increased our net cash provided by financing activities from continuing operations by €680 million. Further increases resulted from proceeds of €182 million, net of debt issuance cost and discount, from the issuance of convertible subordinated notes due 2014 with a notional amount of €196 million. This was partly offset by principal repayments of long-term debt of €455 million, of which the majority related to the

repurchase and redemption of our exchangeable subordinated notes due 2010 and our convertible subordinated notes due 2010 for an aggregate of €285 million in cash including transaction costs of €3 million. Additional debt repayments related primarily to the repayment of our syndicated loan.

 

Change in cash and cash equivalents from discontinued operations

 

The net decrease in cash and cash equivalents from discontinued operations was €393 million in the 2009 fiscal year, compared to €291 million in the prior year. The net decrease in cash and cash equivalents from discontinued operations primarily reflected Qimonda’s net cash used in operating activities of €416 million as well as cash used in financing activities of €40 million, which was partly offset by Qimonda’s net cash provided by investing activities of €21 million. Qimonda’s cash used in operating activities primarily reflected Qimonda’s net loss in the first quarter, before Qimonda was deconsolidated. The net cash provided by investing activities of €21 million consisted primarily of cash received by Qimonda in connection with the sale of Inotera to Micron in November 2008 for 400 million U.S. dollars (approximately €296 million), partially offset, due to the deconsolidation of Qimonda, by the cash and cash equivalents totaling €286 million of Qimonda as of January 23, 2009, the date Qimonda filed an application to commence insolvency proceedings.

 

In the 2009 fiscal year our Wireline Communications business contributed €36 million to the operating cash flow from discontinued operations, primarily reflecting net income excluding depreciation and amortization, and contributed €6 million to net cash provided by investing activities from discontinued operations, reflecting €13 million received as a refund of contingent consideration from Texas Instruments Inc. due to the failure to achieve agreed revenue targets of the CPE business and €7 million paid for investments in intangible assets and property, plant and equipment.

 

Free Cash Flow

 

We define free cash flow as cash flow from operating and investing activities from continuing operations excluding purchases or sales of available-for-sale financial assets. Since we hold a portion of our available monetary resources in the form of readily available-for-sale financial assets, and 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. Free cash flow is not intended to represent the residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. Free cash flow includes only amounts from continuing operations, and is determined as follows from the consolidated statements of cash flows: