| CIRRUS LOGIC INC ITEM 1A Risk Factors Affecting Our Business and Prospects Our business faces significant risks |
| The risk factors set forth below may not be the only risks that we face |
| Additional risks that we are not aware of yet or that currently are not significant may adversely affect our business operations |
| You should read the following cautionary statements in conjunction with the factors discussed elsewhere in this and other of Cirrus Logic’s filings with the SEC These cautionary statements are intended to highlight certain factors that may affect the financial condition and results of operations of Cirrus Logic and are not meant to be an exhaustive discussion of risks that apply to companies such as ours |
| Our results may be affected by the fluctuation in sales in the consumer entertainment market |
| Because we sell products in the consumer entertainment market, we are likely to be affected by seasonality in the sales of our products |
| In particular, a significant portion of consumer electronics products are sold worldwide during the third calendar quarter in preparation for the fourth calendar quarter holiday seasons |
| As a result, we expect stronger sales of ICs into the consumer entertainment market to occur in our second and third fiscal quarters in anticipation of these seasons |
| Further, a decline in consumer confidence and consumer spending relating to economic conditions, terrorist attacks, armed conflicts, oil prices, global health conditions and/or the political stability of countries in which we operate or sell into could have a material adverse effect on our business |
| The highly cyclical and volatile nature of our industry may affect our operating results |
| We are subject to business cycles and it is difficult to predict the timing, length or volatility of these cycles |
| During downturns, customers usually reduce purchases, delay delivery of products, shorten lead times on orders and/or cancel orders |
| During upturns, our third party suppliers and contract manufacturers may have capacity or supply constraints that result in higher costs, longer lead times, and/or an inability to meet customer demand |
| These business cycles may create pressure on our sales, gross margins and/or operating results |
| We cannot assure that any future downturn or upturn will not have a material adverse effect on our business and results of operations |
| We cannot assure that we will not experience substantial period-to-period fluctuations in revenue due to general semiconductor industry conditions or other factors |
| Our failure to develop and timely introduce new products that gain market acceptance could harm our operating results |
| Our success depends upon our ability to develop new products for new and existing markets, to introduce these products in a timely and cost-effective manner, and to have these products gain market acceptance |
| New product Page 8 of 66 _________________________________________________________________ [59]Table of Contents introductions involve significant risks |
| For example, delays in new product introductions or less-than-anticipated market acceptance of our new products are possible and would have an adverse effect on our revenue and earnings |
| The development of new products is highly complex and, from time-to-time, we have experienced delays in developing and introducing these new products |
| Successful product development and introduction depend on a number of factors, including: • proper new product definition, • timely completion of design and testing of new products, • assisting our customers with integration of our components into their new products, including providing support from the concept stage through design, launch and production ramp, • successfully developing and implementing the software necessary to integrate our products into our customers’ products, • achievement of acceptable manufacturing yields, • availability of wafer, assembly and test capacity, • market acceptance of our products and the products of our customers, and • obtaining and retaining industry certification requirements |
| Although we seek to design products that have the potential to become industry standard products, we cannot assure that market leaders will adopt any products introduced by us, or that any products initially accepted by our customers who are market leaders will become industry standard products |
| Both revenues and margins may be materially affected if new product introductions are delayed, or if our products are not designed into successive generations of our customers’ products |
| We cannot assure that we will be able to meet these challenges, or adjust to changing market conditions as quickly and cost-effectively as necessary to compete successfully |
| Our failure to develop and introduce new products successfully could harm our business and operating results |
| Successful product design and development is dependent on our ability to attract, retain and motivate qualified design engineers, of which there is a limited number |
| Due to the complexity and variety of analog and high-precision analog and mixed-signal circuits, the limited number of qualified integrated circuit designers and the limited effectiveness of computer-aided design systems in the design of analog and mixed-signal ICs, we cannot assure that we will be able to successfully develop and introduce new products on a timely basis |
| Our products are complex and could contain defects, which could result in material costs to us |
| Product development in the markets we serve is becoming more focused on the integration of multiple functions on individual devices |
| There is a general trend towards increasingly complex products |
| The greater integration of functions and complexity of operations of our products increases the risk that our customers or end users could discover latent defects or subtle faults after volumes of product have been shipped |
| This could result in: • damage to our reputation, • a material recall and replacement costs for product warranty and support, • payments to our customer related to such recall claims as a result of various industry or business practices, or in order to maintain good customer relationships, • an adverse impact to our customer relationships by the occurrence of significant defects, • a delay in recognition or loss of revenues, loss of market share, or failure to achieve market acceptance, and • a diversion of the attention of our engineering personnel from our product development efforts |
| Page 9 of 66 _________________________________________________________________ [60]Table of Contents In addition, any defects or other problems with our products could result in financial or other damages to our customers who could seek damages from us for their losses |
| A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend |
| In particular, the sale of systems and components into certain applications for the automotive industry involves a high degree of risk that such claims may be made |
| While we believe that we are reasonably insured against these risks and contractually limit our financial exposure, we cannot assure that we will be able to obtain sufficient insurance, in terms of amounts or scope, to provide us with adequate coverage against all potential liability |
| We have historically experienced fluctuations in our operating results and expect these fluctuations to continue in future periods |
| Our quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect our net sales, gross margins and operating results |
| These factors include: • the volume and timing of orders received, • changes in the mix of our products sold, • market acceptance of our products and the products of our customers, • competitive pricing pressures, • our ability to introduce new products on a timely basis, • the timing and extent of our research and development expenses, • the failure to anticipate changing customer product requirements, • disruption in the supply of wafers, assembly or test services, • certain production and other risks associated with using independent manufacturers, assembly houses and testers, and • product obsolescence, price erosion, competitive developments, and other competitive factors |
| We may face increased risks and uncertainties related to our non-marketable securities |
| On occasion, we may invest in non-marketable securities of private companies |
| As of March 25, 2006, the carrying value of our investments in non-marketable securities totaled dlra7dtta9 million |
| Investments in non-marketable securities are inherently risky, and some of these companies are likely to fail |
| Their success (or lack thereof) is dependent on these companies product development, market acceptance, operational efficiency and other key business success factors |
| In addition, depending on these companies’ future prospects, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and our investments in them would likely become impaired |
| Shifts in industry-wide capacity and our practice of purchasing our products based on sales forecasts may result in significant fluctuations in our quarterly and annual operating results |
| As a fabless semiconductor developer, we rely on independent foundries and assembly and test houses to manufacture our products |
| Our reliance on these third parties involves certain risks and uncertainties |
| For example, shifts in industry-wide capacity from shortages to oversupply, or from oversupply to shortages, may result in significant fluctuations in our quarterly and annual operating results |
| We may order wafers and build inventory in advance of receiving purchase orders |
| Because our industry is highly cyclical and is subject to significant downturns resulting from Page 10 of 66 _________________________________________________________________ [61]Table of Contents excess capacity, overproduction, reduced demand, order cancellations, or technological obsolescence, there is a risk that we will forecast inaccurately and produce excess inventories of particular products |
| In addition, we generally order our products through non-cancelable purchase orders from third-party foundries based on our sales forecasts and our customers can generally cancel or reschedule orders they place with us without significant penalties |
| If we do not receive orders as anticipated by our forecasts, or our customers cancel orders that are placed, we may experience increased inventory levels |
| Due to the product manufacturing cycle characteristic of IC manufacturing and the inherent imprecision by our customers to accurately forecast their demand, product inventories may not always correspond to product demand, leading to shortages or surpluses of certain products |
| As a result of such inventory imbalances, future inventory write-downs and charges to gross margin may occur due to lower of cost or market accounting, excess inventory, and inventory obsolescence |
| Strong competition in the semiconductor market may harm our business |
| The IC industry is intensely competitive and is frequently characterized by rapid technological change, price erosion and design, technological obsolescence, and a push towards IC component integration |
| Because of shortened product life cycles and even shorter design-in cycles in a number of the markets that we serve, our competitors have increasingly frequent opportunities to achieve design wins in next-generation systems |
| In the event that competitors succeed in supplanting our products, our market share may not be sustainable and our net sales, gross margins and operating results would be adversely affected |
| Additionally, further component integration could eliminate the need for our products |
| We compete in a number of fragmented markets |
| Our principal competitors in these markets include AKM Semiconductors, Analog Devices, Freescale Semiconductor, LSI Logic, Maxim, Micronas, Samsung Semiconductor, Texas Instruments, and Wolfson Microelectronics, many of whom have substantially greater financial, engineering, manufacturing, marketing, technical, distribution and other resources, broader product lines, greater intellectual property rights and longer relationships with customers |
| We also expect intensified competition from emerging companies and from customers who develop their own IC products |
| In addition, some of our current and future competitors maintain their own fabrication facilities, which could benefit them in connection with cost, capacity and technical issues |
| Increased competition could adversely affect our business |
| We cannot assure that we will be able to compete successfully in the future or that competitive pressures will not adversely affect our financial condition and results of operations |
| Competitive pressures could reduce market acceptance of our products and result in price reductions and increases in expenses that could adversely affect our business and our financial condition |
| We may be unable to protect our intellectual property rights |
| Our success depends on our ability to obtain patents and licenses and to preserve our other intellectual property rights covering our products |
| We seek patent protection for those inventions and technologies for which we believe such protection is suitable and is likely to provide a competitive advantage to us |
| We also rely substantially on trade secrets, proprietary technology, non-disclosure and other contractual agreements, and technical measures to protect our technology and manufacturing knowledge |
| We work actively to foster continuing technological innovation to maintain and protect our competitive position |
| We cannot assure that steps taken by us to protect our intellectual property will be adequate, that our competitors will not independently develop or patent substantially equivalent or superior technologies or be able to design around our patents, or that our intellectual property will not be misappropriated |
| In addition, the laws of some non-US countries may not protect our intellectual property as well as the laws of the United States |
| Any of these events could materially adversely affect our business, operating results and financial condition |
| Policing infringement of our technology is difficult, and litigation may be necessary in the future to enforce our intellectual property rights |
| Any such litigation could be expensive, take significant time and divert management’s attention from other business concerns |
| Page 11 of 66 _________________________________________________________________ [62]Table of Contents Potential intellectual property claims and litigation could subject us to significant liability for damages and could invalidate our proprietary rights |
| The IC industry is characterized by frequent litigation regarding patent and other intellectual property rights |
| We may find it necessary to initiate a lawsuit to assert our patent or other intellectual property rights |
| These legal proceedings could be expensive, take significant time and divert management’s attention from other business concerns |
| We cannot assure that we will ultimately be successful in any lawsuit, nor can we assure that any patent owned by us will not be invalidated, circumvented, or challenged |
| We cannot assure that rights granted under the patent will provide competitive advantages to us, or that any of our pending or future patent applications will be issued with the scope of the claims sought by us, if at all |
| As is typical in the IC industry, we and our customers have from time to time received and may in the future receive, communications from third parties asserting patents, mask work rights, or copyrights |
| In the event third parties were to make a valid intellectual property claim and a license was not available on commercially reasonable terms, our operating results could be harmed |
| Litigation, which could result in substantial cost to us and diversion of our management, technical and financial resources, may also be necessary to defend us against claimed infringement of the rights of others |
| An unfavorable outcome in any such suit could have an adverse effect on our future operations and/or liquidity |
| Our products may be subject to average selling prices that decline over short time periods |
| If we are unable to increase our volumes, introduce new or enhanced products with higher selling prices or reduce our costs, our business and operating results could be harmed |
| Historically in the semiconductor industry, average selling prices of products have decreased over time |
| If the average selling price of any of our products declines and we are unable to increase our unit volumes, introduce new or enhanced products with higher margins and/or reduce manufacturing costs to offset anticipated decreases in the prices of our existing products, our operating results may be adversely affected |
| In addition, because of procurement lead times, we are limited in our ability to reduce total costs quickly in response to any revenue shortfalls |
| Because of these factors, we may experience material adverse fluctuations in our future operating results on a quarterly or annual basis |
| We have significant international sales, and risks associated with these sales could harm our operating results |
| Export sales, principally to Asia, include sales to US-based customers with manufacturing plants overseas and accounted for 66 percent, 67 percent, and 72 percent of our net sales in fiscal years 2006, 2005, and 2004, respectively |
| We expect export sales to continue to represent a significant portion of product sales |
| This reliance on international sales subjects us to the risks of conducting business internationally, including political and economic stability and global health conditions, especially in Asia |
| For example, the financial instability in a given region, such as Asia, may have an adverse impact on the financial position of end users in the region, which could affect future orders and harm our results of operations |
| Our international sales operations involve a number of other risks, including: • unexpected changes in government regulatory requirements, • changes to countries’ banking and credit requirements, • changes in diplomatic and trade relationships, • delays resulting from difficulty in obtaining export licenses for technology, • tariffs and other barriers and restrictions, • competition with non-US companies or other domestic companies entering the non-US markets in which we operate, • longer sales and payment cycles, Page 12 of 66 _________________________________________________________________ [63]Table of Contents • problems in collecting accounts receivable, • political instability, and • the burdens of complying with a variety of non-US laws |
| In addition, our competitive position may be affected by the exchange rate of the US dollar against other currencies |
| Consequently, increases in the value of the dollar would increase the price in local currencies of our products in non-US markets and make our products relatively more expensive |
| Alternatively, decreases in the value of the dollar will increase the relative cost of our and our vendors’ operations that are based overseas |
| We cannot assure that regulatory, political and other factors will not adversely affect our operations in the future or require us to modify our current business practices |
| Failure to manage our distribution channel relationships could adversely affect our business |
| The future of our business, as well as the future growth of our business, will depend in part on our ability to manage our relationships with current and future distributors and external sales representatives and to develop additional channels for the distribution and sale of our products |
| The inability to successfully manage these relationships could adversely affect our business |
| Our international operations subject our business to additional political and economic risks that could have an adverse impact on our business |
| In addition to export sales constituting a majority of our net sales, we maintain significant international operations, including design, sales and technical support personnel |
| We are also using contract manufacturers in Asia for foundry, assembly and test operations |
| International expansion has required and will continue to require significant management attention and resources |
| There are risks inherent in expanding our presence into non-US regions, including, but not limited to: • difficulties in staffing and managing non-US operations, • failure of non-US laws to adequately protect our US intellectual property, patent, trademarks, copyrights, know-how and other proprietary rights, • global health conditions and potential natural disasters, • political and economic instability in international regions, • international currency controls and exchange rate fluctuations, • additional vulnerability from terrorist groups targeting American interests abroad, and • legal uncertainty regarding liability and compliance with non-US laws and regulatory requirements |
| If we fail to attract, hire and retain qualified personnel, we may not be able to develop, market, or sell our products or successfully manage our business |
| Competition for personnel in our industry is intense |
| The number of technology companies in the geographic areas in which we operate is greater than it has been historically and we expect competition for qualified personnel to intensify |
| There are only a limited number of people in the job market with the requisite skills |
| Our Human Resources organization focuses significant efforts on attracting and retaining individuals in key technology positions |
| For example, start-up companies generally offer larger equity grants to attract individuals from more established companies |
| The loss of the services of key personnel or our inability to hire new personnel with the requisite skills could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers, or manage our business effectively |
| Page 13 of 66 _________________________________________________________________ [64]Table of Contents We will be required to expense share-based payments to our employees and we may have a significant material adverse charge to our financial statements |
| SFAS Nodtta 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period |
| Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative |
| SFAS Nodtta 123(R), as amended, is effective for all stock-based awards granted in fiscal years beginning after June 15, 2005 |
| In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date |
| Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS Nodtta 123 |
| We may be faced with increased risk due to the volatility of our stock price and our ability to predict the exercise patterns of our stock |
| In general, we view our volatility as greater than our competitors |
| As a result, our adoption of this standard may adversely impact our earnings disproportionately from our competitors |
| Further, we may have difficulty in predicting our operating profitability due to our stock option expense, which could affect future earnings or guidance |
| Our adoption of this accounting standard on March 26, 2006, may result in a material adverse impact on our financial results |
| We will be required to expense stock options and other share-based payments to employees and directors, which will require us to record a significant charge to earnings |
| We continue to evaluate our stock-based compensation programs to determine what our alternatives may be to reduce this charge in the future |
| If we choose not to issue stock options at the levels we have in the past, or our shareholders do not approve the use of certain stock-based compensation programs, we believe we may face difficult challenges in attracting and retaining employees |
| Because we depend on subcontractors primarily located in Asia to perform key manufacturing functions for us, we are subject to political and economic risks that could disrupt the assembly, packaging, or testing of our products |
| We depend on third-party subcontractors, primarily in Asia, for the assembly, packaging and testing of our products |
| International operations and sales may be subject to political and economic risks, including changes in current tax laws, political instability, global health conditions, currency controls, exchange rate fluctuations and changes in import/export regulations, tariff and freight rates, as well as the risks of natural disaster |
| Although we seek to reduce our dependence on subcontractors, this concentration of subcontractors and manufacturing operations in Asia subjects us to the risks of conducting business internationally, including political and economic conditions in Asia |
| Disruption or termination of the assembly, packaging or testing of our products could occur and such disruptions could harm our business and operating results |
| We may acquire other companies or technologies, which may create additional risks associated with our ability to successfully integrate them into our business |
| We continue to consider future acquisitions of other companies, or their technologies or products, to improve our market position, broaden our technological capabilities and expand our product offerings |
| However, we may not be able to acquire, or successfully identify, the companies, products or technologies that would enhance our business |
| In addition, if we are able to acquire companies, products or technologies, we could experience difficulties in integrating them |
| Integrating acquired businesses involves a number of risks, including, but not limited to: • the potential disruption of our ongoing business, • unexpected costs or incurring unknown liabilities, • the diversion of management resources from other business concerns while involved in identifying, completing, and integrating acquisitions, • the inability to retain the employees of the acquired businesses, Page 14 of 66 _________________________________________________________________ [65]Table of Contents • difficulties relating to integrating the operations and personnel of the acquired businesses, • adverse effects on the existing customer relationships of acquired companies, • the potential incompatibility of business cultures, • adverse effects associated with entering into markets and acquiring technologies in areas in which we have little experience, and • acquired intangible assets becoming impaired as a result of technological advancements, or worse-than-expected performance of the acquired company |
| If we are unable to successfully address any of these risks, our business could be harmed |
| Future transactions may limit our ability to use our net operating loss carryforwards |
| As of March 25, 2006, we had US federal tax net operating loss (“NOL”) carryforwards of approximately dlra465dtta8 million |
| These NOL carryforwards may be used to offset future taxable income and thereby reduce our US federal income taxes otherwise payable |
| There is a risk we may not be able to generate taxable income in the future in the amount necessary to fully utilize all of these NOLs |
| Section 382 of the Internal Revenue Code of 1986 (“the Code”), as amended, imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its NOL carry forwards to reduce its tax liability |
| Due in part to potential changes in our shareholder base, we may at some point in the future experience an “ownership change” as defined in Section 382 of the Code |
| Accordingly, our use of the net operating loss carryforwards and credit carryforwards may be limited by the annual limitations described in Sections 382 and 383 of the Code |
| Our stock price may be volatile |
| The market price of our common stock fluctuates significantly |
| This fluctuation is the result of numerous factors, including: • actual or anticipated fluctuations in our operating results, • announcements concerning our business or those of our competitors, customers or suppliers, • changes in financial estimates by securities analysts or our failure to perform as anticipated by the analysts, • announcements regarding technological innovations or new products by us or our competitors, • announcements by us of significant acquisitions, strategic partnerships, joint ventures, or capital commitment, • announcements by us of significant divestitures or sale of certain assets or intellectual property, • litigation arising out of a wide variety of matters, including, among others, employment matters and intellectual property matters, • departure of key personnel, • single significant shareholders selling for reasons unrelated to the business, • general assumptions made by securities analysts, • general conditions in the IC industry, and • general market conditions and interest rates |
| Page 15 of 66 _________________________________________________________________ [66]Table of Contents We have provisions in our charter, and are subject to certain provisions of Delaware law, which could prevent, delay or impede a change of control of our company |
| These provisions could affect the market price of our stock |
| Certain provisions of our Certificate of Incorporation and By-Laws, and Delaware law could make it more difficult for a third party to acquire us, even if our stockholders support the acquisition |
| These provisions include: • the inability of stockholders to call a special meeting of stockholders; • a prohibition on stockholder action by written consent; and • a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders |
| We are also subject to the anti-takeover laws of Delaware that may prevent, delay or impede a third party from acquiring or merging with us, which may adversely affect the market price of our common stock |