| INTEGRATED DEVICE TECHNOLOGY INC ITEM 1A RISK FACTORS Our operating results can fluctuate dramatically |
| For example, we recorded a net loss of dlra81dtta7 million in fiscal 2006 after recording net income of dlra13dtta3 million and dlra6dtta4 million in fiscal 2005 and 2004, respectively |
| Fluctuations in operating results can result from a wide variety of factors, including: • The cyclicality of the semiconductor industry and industry-wide wafer processing capacity; • Difficulty in predicting customer product requirements; • Adverse financial conditions experienced by any of our large customers; • Changes in demand for our products and in the markets we and our customers serve; • The success and timing of new product and process technology announcements and introductions from us or our competitors; • Potential loss of market share among a concentrated group of customers; • Competitive pricing pressures; 6 ______________________________________________________________________ • Changes in the demand for and mix of products sold; • Production difficulties and interruptions caused by our complex manufacturing and logistics operations; • Difficulty in managing fixed costs of our manufacturing capability in the face of changes in demand; • Reduced control over our manufacturing and product delivery as a result of our increasing reliance on subcontractors; • Availability and costs of raw materials, and of foundry and other manufacturing services; • Unexpected changes in customer product requirement forecasts; • Costs associated with other events, such as intellectual property disputes, or other litigation; and • Political and economic conditions in various geographic areas |
| Many of these factors also impact the recoverability of the carrying value of certain of our manufacturing, tax, goodwill, and other tangible and intangible assets |
| As business conditions change, future write-downs or abandonment of these assets may occur |
| For example, in Q1 2006 and Q4 2006, we recorded impairment charges of dlra1dtta7 million and dlra0dtta6 million, respectively, for our investment portfolio and intangibles related to our acquisition of Newave |
| In Q1 2005 and Q4 2005, we recorded impairment charges of dlra12dtta8 million and dlra0dtta7 million, respectively, for related to our investment in NetLogic and intangibles related to our acquisition of Newave |
| Further, we may be unable to compete successfully in the future against existing or potential competitors, and our operating results could be harmed by increased competition |
| Our operating results are also impacted by changes in overall economic conditions, both domestically and abroad |
| Should economic conditions deteriorate, domestically or overseas, our sales and business results could be harmed |
| The cyclicality of the semiconductor industry exacerbates the volatility of our operating results |
| The semiconductor industry is highly cyclical |
| Significant changes in demand for our products have occurred rapidly and suddenly in the past |
| In addition, market conditions characterized by excess supply relative to demand and resulting selling price declines have also occurred in the past |
| Significant shifts in demand for our products and selling price declines resulting from excess supply may occur in the future |
| Significant and rapid swings in demand and average selling prices for our products can result in lower revenues and underutilization of our fixed cost infrastructure, both of which would cause material fluctuations in our gross margins and our operating results |
| In connection with our merger with ICS, we reviewed and modified our combined IDT and ICS distributor network |
| In Asia Pacific, in particular, we made changes to our distributors and the terms and conditions under which our distribution business is conducted |
| As a result of these changes, a higher percentage of our revenue in this region is now recognized at the time we sell product to our distributors |
| Consequently, we now have reduced visibility over both inventory levels at our distributors and end customer demand for our products |
| Further, the distributors have assumed more risk associated with changes in end demand for our products |
| Accordingly, significant changes in end demand in the semiconductor business in general, or for our products in particular, may be difficult for us to detect or otherwise measure, which could cause us to incorrectly forecast demand for our products |
| If we are not able to accurately forecast end demand for our products our business and financial results could be adversely affected |
| A significant amount of our accounts receivable is concentrated with a relatively small number of our customers |
| For example, Maxtek and its affiliates represented 14prca of our gross accounts receivable balance as of April 2, 2006 |
| If any one or more of these global distributors were to file for bankruptcy or otherwise experience significantly adverse financial conditions, our business and financial results could be adversely impacted |
| Demand for our products depends primarily on demand in the communications, personal computer (PC), and consumer markets |
| Our products consist primarily of timing and communications chips in the communications, PC, and consumer markets |
| Our strategy and resources will be directed at the development, production and marketing of products to these markets |
| To the extent we are unable to develop, produce and market our products on a timely basis ahead of competitive products or alternative products and at competitive prices, our products may not be selected by current and potential customers and demand for such products may decline |
| In addition, the markets for our products will depend on continued and growing demand for communications equipment, PCs and consumer electronics |
| These end-user markets may experience changes in demand that would adversely affect our business |
| To the extent demand for our products or markets for our products do not grow, our business could be adversely affected |
| The majority of our products are incorporated into our customers’ systems in enterprise/carrier class network, wireless infrastructure, and access network applications |
| A smaller percentage of our products also serve in customers’ computer storage, computer-related, and other applications |
| The communications markets in which we sell these products have historically been characterized by rapid technological change and significant fluctuations in demand |
| Demand for a significant portion of our products, and therefore potential increases in revenue, depends upon growth in the communications market, particularly in the data networking and wireless telecommunications infrastructure markets and, to a lesser extent, the PC market |
| Any slowdown in the communications or PC market could materially adversely affect our operating results A majority of the sales of ICS’ products depend largely on sales of PCs and peripherals for PCs |
| Following the merger with ICS, a significant portion of our sales continue to be in the PC market |
| The PC industry is subject to price competition, rapid technological change, evolving standards, short product life cycles and continuous erosion of average selling prices |
| Should the PC market decline or experience slower growth, then a decline in the order rate for our products could occur and sales could decline |
| A downturn in the communications or PC markets could also affect the financial health of some of our customers, which could affect our ability to collect outstanding accounts receivable from such customers |
| Our results are dependent on the success of new products |
| The markets we serve are characterized by price competition, rapid technological change, evolving standards, short product life cycles and continuous erosion of average selling prices |
| Consequently, our future success will be highly dependent upon our ability to continually develop new products using the latest and most cost-effective technologies, introduce our products in commercial quantities to the marketplace ahead of the competition and have our products selected for inclusion in leading systems manufacturers’ 7 ______________________________________________________________________ products |
| In addition, new products and wafer processing technology will continue to require significant R&D expenditures |
| If we are unable to successfully develop, produce and market new products in a timely manner, to have our products available in commercial quantities ahead of competitive products or to have our products selected for inclusion in products of systems manufacturers and to sell them at gross margins comparable to or better than our current products, our future results of operations could be adversely impacted |
| In addition, our future revenue growth is also partially dependent on our ability to penetrate new markets, where we have limited experience and where competitors are already entrenched |
| Even if we are able to develop, produce and successfully market new products in a timely manner, such new products may not achieve market acceptance |
| We are dependent on a concentrated group of customers for a significant part of our revenues |
| A large portion of our revenues depend on sales to a limited number of customers |
| If these relationships were to diminish, and if these customers were to develop their own solutions or adopt a competitor’s solution instead of buying our products, our results could be adversely affected |
| For example, any diminished relationship with Cisco or other key customers could adversely affect our results |
| While we historically have made few sales to Cisco directly, when all channels of distribution are considered, including sales of product to electronic manufacturing service providers (“EMS”) customers, we estimate that Cisco represented between 21-24prca of our total revenues in fiscal 2006 |
| As a result of the ICS merger, our Cisco business has become a smaller percentage of our total revenues, but Cisco still represents our largest customer |
| Many of our end-customer OEMs have outsourced their manufacturing to a concentrated group of global EMSs who then buy product directly from us on behalf of the OEM EMSs have achieved greater autonomy in the design win, product qualification and product purchasing decisions, especially for commodity products |
| Furthermore, these EMSs have generally been centralizing their global procurement processes |
| This has had the effect of concentrating a significant percentage of our revenue with a small number of companies |
| For example, one EMS, Solectron, accounted for approximately 9prca of our fiscal 2006 revenues and represented 12prca of our accounts receivable as of April 2, 2006 |
| Competition for the business of these EMSs is intense and there is no assurance we can remain competitive and retain our existing market share with these customers |
| If these companies were to allocate a higher share of commodity or second-source business to our competitors instead of buying our products, our results would be adversely affected |
| Furthermore, as EMSs have represented a growing percentage of our overall business, our concentration of credit and other business risks with these customers has increased |
| Competition among global EMSs is intense as they operate on extremely thin margins |
| Overall, the financial condition of EMSs, on average, declined significantly during the industry downturn in fiscal 2001- 2002 |
| If any one or more of these global EMSs were to file for bankruptcy or otherwise experience significantly adverse financial conditions, our business would be adversely impacted as well |
| Finally, we utilize a relatively small number of global and regional distributors around the world, who buy product directly from us on behalf of their customers |
| For example, one distributor, Avnet, represented approximately 13prca of our revenues for fiscal 2006 and represented 7prca of our accounts receivable as of April 2, 2006 |
| If our business relationships were to diminish or any one or more of these global distributors were to file for bankruptcy or otherwise experience significantly adverse financial conditions, our business could be adversely impacted |
| Because we will be dependent upon continued revenue from a small group of OEM end customers, EMSs and global and regional distributors, any material delay, cancellation or reduction of orders from or loss of these or other major customers could cause our sales to decline significantly, and we may not be able to reduce the accompanying expenses at the same rate |
| Our product manufacturing operations are complex and subject to interruption |
| From time to time, we have experienced production difficulties, including reduced manufacturing yields or products that do not meet our or our customers’ specifications that have caused delivery delays, quality problems and lost revenue opportunities |
| While delivery delays have been infrequent and generally short in duration, we could experience manufacturing problems, capacity constraints and/or product delivery delays in the future as a result of, among other things, the complexity of our manufacturing processes, changes to our process technologies (including transfers to other facilities and die size reduction efforts), and difficulties in ramping production and installing new equipment at our facilities |
| Substantially all of our revenues are derived from products manufactured at facilities which are exposed to the risk of natural disasters |
| If we were unable to use our facilities or those of our subcontractors and third party foundries as a result of a natural disaster or otherwise, our operations would be materially adversely affected |
| While we maintain certain levels of insurance against selected risks of business interruption, not all risks can be insured at a reasonable cost |
| Even if we have purchased insurance, the adverse impact on our business, including both costs and lost revenue opportunities, could greatly exceed the amounts, if any, that we might recover from our insurers |
| We are dependent upon electric power generated by public utilities where we operate our manufacturing facilities and we have periodically experienced electrical power interruptions |
| We maintain limited backup generating capability, but the amount of electric power that we can generate on our own is insufficient to fully operate these facilities, and prolonged power interruptions could have a significant adverse impact on our business |
| Much of our manufacturing capability is relatively fixed in nature |
| Much of our manufacturing cost structure remains fixed in nature and large and rapid swings in demand for our products can make it difficult to efficiently utilize this capacity on a consistent basis |
| Significant reductions in demand for our products, as we have most recently experienced in fiscal 2002-2003, will result in material under utilization of our manufacturing facilities while sudden upturns could leave us short of capacity and unable to capitalize on incremental revenue opportunities |
| These swings and the resulting under utilization of our manufacturing capacity or inability to procure sufficient capacity to meet end customer demand for our products will cause material fluctuations in the gross margins we report, and could have a material adverse affect thereon |
| We build most of our products based on estimated demand forecasts |
| Demand for our products can change rapidly and without advance notice |
| Demand can also be affected by changes in our customers’ levels of inventory and differences in the timing and pattern of orders from their end customers |
| If demand forecasts are inaccurate or change suddenly, we may me be left with large amounts of unsold products, may not be able to efficiently utilize our existing manufacturing capacity or make optimal investment and other business decisions |
| 8 ______________________________________________________________________ We are increasingly reliant upon subcontractors |
| We utilize subcontractors for the majority of our assembly requirements (typically at higher costs than at our internal assembly and test operations) and use of subcontractors has increased with the closure of our test and assembly facility in Manila, the Philippines in fiscal Q2 2006 and the addition of ICS We also have depended on third-party outside foundries for the manufacture of silicon wafers |
| Our increased reliance on subcontractors and third party foundries for our current products increases certain risks because we will have less control over manufacturing quality and delivery schedules, maintenance of sufficient capacity to meet our orders and generally, maintaining the manufacturing processes we require |
| We expect our use of subcontractors and third-party foundries to increase |
| Due to production lead times and potential subcontractor capacity constraints, any failure on our part to adequately forecast the mix of product demand and resulting foundry and subcontractor requirements could adversely affect our operating results |
| In addition, we cannot be certain that these foundries and subcontractors will continue to manufacture, assemble, package, and test products for us on acceptable economic and quality terms or at all and it may be difficult for us to find alternatives if they do not do so |
| We are dependent on a limited number of suppliers |
| Our manufacturing operations depend upon obtaining adequate raw materials on a timely basis |
| The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases needed for our products, is very limited |
| In addition, certain packages for our products require long lead times and are available from only a few suppliers |
| From time to time, vendors have extended lead times or limited supply to us due to capacity constraints |
| Our results of operations would be materially adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials, or if foundry or back-end subcontractor capacity was not available, or was only available at uncompetitive prices |
| We are subject to a variety of environmental and other regulations related to hazardous materials used in our manufacturing processes |
| Any failure by us to adequately control the use or discharge of hazardous materials under present or future regulations could subject us to substantial costs or liabilities or cause our manufacturing operations to be suspended |
| We have limited experience with government contracting, which entails differentiated business risks |
| Currently, certain of our subsidiaries derive revenue from contracts and subcontracts with agencies of, or prime contractors to, the US government, including US military agencies |
| Although former employees of ICS who work for us have experience contracting with agencies of the US government, historically we have not contracted with agencies of the US government |
| As a company engaged, in part, in supplying defense-related equipment to US government agencies, we are subject to certain business risks that are peculiar to companies that contract with US government agencies |
| These risks include the ability of the US government unilaterally to: • Terminate contracts at its convenience; • Terminate, modify or reduce the value of existing contracts, if its budgetary constraints or needs change; • Cancel multi-year contracts and related orders, if funds become unavailable; • Adjust contract costs and fees on the basis of audits performed by US government agencies; • Control and potentially prohibit the export of our products; • Require that the company continue to supply products despite the expiration of a contract under certain circumstances; and • Suspend us from receiving new contracts pending resolution of any alleged violations of procurement laws or regulations |
| In addition, because we have defense industry contracts that are sold both within and outside of the United States, we are subject to the following risks in connection with government contracts: • The need to bid on programs prior to completing the necessary design, which may result in unforeseen technological difficulties and/or cost overruns; • The difficulty in forecasting long-term costs and schedules and the potential obsolescence of products related to long-term fixed price contracts; and • The need to transfer and obtain security clearances and export licenses, as appropriate |
| Intellectual property claims could adversely affect our business and operations |
| The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in significant and often protracted and expensive litigation |
| We have been involved in patent litigation in the past, which adversely affected our operating results |
| Although we have obtained patent licenses from certain semiconductor manufacturers, we do not have licenses from a number of semiconductor manufacturers that have broad patent portfolios |
| Claims alleging infringement of intellectual property rights have been asserted against us in the past and could be asserted against us in the future |
| These claims could result in our having to discontinue the use of certain processes; cease the manufacture, use and sale of infringing products; incur significant litigation costs and damages; and develop non-infringing technology |
| We might not be able to obtain such licenses on acceptable terms or to develop non-infringing technology |
| Further, the failure to renew or renegotiate existing licenses on favorable terms, or the inability to obtain a key license, could materially adversely affect our business |
| 9 ______________________________________________________________________ International operations add increased volatility to our operating results |
| A growing and now substantial percentage of our revenues are derived from international sales, as summarized below: (percentage of total revenues) Fiscal 2006 Fiscal 2005 Fiscal 2004 Americas 26 % 32 % 29 % Asia Pacific 49 % 37 % 39 % Japan 13 % 14 % 16 % Europe 12 % 17 % 16 % Total 100 % 100 % 100 % In addition, our test and assembly facilities in Malaysia and Singapore, our design centers in Canada, China and Australia, and our foreign sales offices incur payroll, facility and other expenses in local currencies |
| Accordingly, movements in foreign currency exchange rates can impact our revenues and costs of goods sold, as well as both pricing and demand for our products |
| Our offshore sites and export sales are also subject to risks associated with foreign operations, including: • political instability and acts of war or terrorism, which could disrupt our manufacturing and logistical activities; • regulations regarding use of local employees and suppliers; • currency controls and fluctuations, devaluation of foreign currencies, hard currency shortages and exchange rate fluctuations; • changes in local economic conditions; • governmental regulation of taxation of our earnings and those of our personnel; and • changes in tax laws, import and export controls, tariffs and freight rates |
| Contract pricing for raw materials and equipment used in the fabrication and assembly processes, as well as for foundry and subcontract assembly services, can also be impacted by currency controls, exchange rate fluctuations and currency devaluations |
| We sometimes hedge currency risk for currencies that are highly liquid and freely quoted but may not enter into hedge contracts for currencies with limited trading volume |
| Finally, in support of our international operations, a portion of our cash and investment portfolio accumulates offshore |
| At April 2, 2006, we had cash and investments of approximately dlra89dtta8 million invested overseas in accounts belonging to various IDT foreign operating entities |
| While these amounts are primarily invested in US dollars, a portion is held in foreign currencies, and all offshore balances are exposed to local political, banking, currency control and other risks |
| In addition, these amounts may be subject to tax and other restrictions, if repatriated |
| We depend on the ability of our personnel, raw materials, equipment and products to move reasonably unimpeded around the world |
| Any political, military, world health (eg, SARS, Bird Flu) or other issue which hinders this movement or restricts the import or export of materials could lead to significant business disruptions |
| Furthermore, any strike, economic failure, or other material disruption on the part of major airlines or other transportation companies could also adversely affect our ability to conduct business |
| If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending on information technology, or directly impact our marketing, manufacturing, financial and logistics functions, our results of operations and financial condition could be materially adversely affected |
| We are exposed to potential impairment charges on investments |
| From time to time, we have made strategic investments in other companies, both public and private |
| If the companies that we invest in are unable to execute their plans and succeed in their respective markets, we may not benefit from such investments, and we could potentially lose the amounts we invest |
| In addition, we evaluate our investment portfolio on a regular basis to determine if impairments have occurred |
| Impairment charges could have a material impact on our results of operations in any period |
| For example, in Q1 2006, we recorded impairment charges of dlra1dtta7 million for our investment portfolio |
| In addition, in Q1 2005 we recorded impairment charges dlra12dtta8 million for our investment in NetLogic |
| Our common stock has experienced substantial price volatility |
| Such volatility may occur in the future, particularly as a result of quarter-to-quarter variations in our actual or anticipated financial results, those of other semiconductor companies or our customers |
| Stock price volatility may also result from product announcements by us or our competitors, or from changes in perceptions about the various types of products we manufacture and sell |
| In addition, our stock price may fluctuate due to price and volume fluctuations in the stock market, especially in the technology sector |
| Changes in generally accepted accounting principles regarding stock option accounting may adversely impact our reported operating results, our stock price and our competitiveness in the employee marketplace |
| Technology companies like ours have a history of using broad-based employee stock option programs to recruit, incentivize and retain their workforces in what can be a highly competitive employee marketplace |
| Statement of Financial Accounting Standard Nodtta 123, Accounting for Stock-Based Compensation (“SFAS 123”) allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion Nodtta 25, Accounting for Stock Issued to Employees (“APB 25”), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method |
| We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant |
| 10 ______________________________________________________________________ In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard Nodtta 123(R), Share-Based Payment (“SFAS 123R”), which replaces SFAS 123 and supersedes APB 25 |
| Under SFAS 123R, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services |
| Most public companies were initially required to apply SFAS 123R as of the first interim or annual reporting period beginning after June 15, 2005 |
| In April 2005, the SEC postponed the implementation date to the fiscal year beginning after June 15, 2005 |
| The implementation of SFAS 123R beginning in the first quarter of fiscal 2007 will have a significant adverse impact on our Consolidated Statement of Operations as we will be required to expense the fair value of our stock options rather than disclosing the impact on results of operations within our footnotes |
| This will result in lower earnings per share, which could negatively impact our future stock price |
| In addition, this could impact our ability to utilize broad-based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace |
| Our business is subject to changing regulation of corporate governance and public disclosure that has increased both our costs and the risk of noncompliance |
| Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded |
| These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have recently issued requirements and regulations and continue developing additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002 |
| Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities |
| Because new and modified laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies |
| This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices |
| We are dependent on key personnel |
| Our performance is substantially dependent on the performance of our executive officers and key employees |
| The loss of the services of any of our executive officers, technical personnel or other key employees could adversely affect our business |
| In addition, our future success depends on our ability to successfully compete with other technology firms in attracting and retaining key technical and management personnel |
| If we are unable to identify, hire and retain highly qualified technical and managerial personnel, our business could be harmed |