| LINEAR TECHNOLOGY CORP /CA/ ITEM 1A RISK FACTORS In addition to the risks discussed below and elsewhere in this "e Business "e section, see "e Factors Affecting Future Operating Results "e included in "e Managementapstas Discussion and Analysis "e for further discussion of other risks and uncertainties that may affect the Company |
| Semiconductor Industry |
| The semiconductor market has historically been cyclical and subject to significant economic downturns at various times |
| The cyclical nature of the semiconductor industry may cause the Company to experience substantial period-to-period fluctuations in its results of operations |
| Typically, the Companyapstas ability to meet its revenue goals and projections is dependent to a large extent on the orders it receives from its customers within the period |
| Historically, the Company has maintained low lead times, which have enabled customers to place orders close to their true needs for product |
| In defining its financial goals and projections, the Company considers inventory on hand, backlog, production cycles and expected order patterns from customers |
| If the Companyapstas estimates in these areas become inaccurate, it may not be able to meet its revenue goals and projections |
| In addition, some customers require the Company to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even some, of the product |
| The semiconductor industry is characterized by rapid technological change, price erosion, occasional shortages of materials, capacity constraints, variations in manufacturing efficiencies, and significant expenditures for capital equipment and product development |
| New product introductions are a critical factor for future sales growth and sustained profitability |
| Although the Company believes that the high performance segment of the linear integrated circuit market is generally less affected by price erosion or by significant expenditures for capital equipment and product development than other semiconductor market sectors, future operating results may reflect substantial period-to-period fluctuations due to these or other factors |
| Manufacturing |
| The Company relies on its internal manufacturing facilities located in California and Washington to fabricate most of its wafers; however, the Company is dependent on outside silicon foundries for a small portion of its wafer fabrication |
| The Company could be adversely affected in the event of a major earthquake, which could cause temporary loss of capacity, loss of raw materials, and damage to manufacturing equipment |
| Additionally, the Company relies on its internal and external assembly and testing facilities located in Singapore and Malaysia |
| The Company is subject to economic and political risks inherent to international operations, including changes in local governmental policies, currency fluctuations, transportation delays and the imposition of export controls or increased import tariffs |
| The Company could be adversely affected if any such changes are applicable to the Companyapstas foreign operations |
| The Companyapstas manufacturing yields are a function of product design and process technology, both of which are developed by the Company |
| The manufacture and design of integrated circuits is highly complex |
| To the extent the Company does not achieve acceptable manufacturing yields or there are delays in wafer fabrication, its results of operations could be adversely affected |
| Dependence on Independent Subcontractors and Foundries |
| A portion of the Companyapstas wafers (approximately 20prca) are processed by offshore independent assembly subcontractors located in Malaysia and Thailand |
| These subcontractors separate wafers into individual circuits and assemble them into various finished package types |
| Reliability problems experienced by the Companyapstas assemblers could cause problems in delivery and quality resulting in potential product liability to the Company |
| The Company could also be adversely affected by political disorders, labor disruptions, and natural disasters in these locations |
| The Company is dependent on outside silicon foundries for a small portion (less than 5prca) of its wafer fabrication |
| If these foundries are unable or unwilling to produce adequate supplies of processed wafers conforming to the Companyapstas quality standards, the Companyapstas business and relationships with its customers for the limited quantities of products produced by these foundries could be adversely affected |
| Finding alternate sources of supply or initiating internal wafer processing for these products may not be economically feasible |
| Worldwide Operations |
| During fiscal year 2006, 70prca of the Companyapstas revenues were derived from customers in international markets |
| Also, the Company has test and assembly facilities outside the United States in Singapore and Malaysia |
| Accordingly, the Company is subject to the economic and political risks inherent in international operations and their impact on the United States economy in general, including the risks associated with ongoing uncertainties and political and economic instability in many countries around the world as well as the economic disruption from acts of terrorism, and the response to them by the United States and its allies |
| The Company is subject to various legal proceedings arising out of a wide range of matters, including, among others, patent suits, securities issues and employment claims |
| From time to time, as is typical in the semiconductor industry, the Company receives notice from third parties alleging that the Companyapstas products or processes infringe the third parties &apos intellectual property rights |
| If the Company is unable to obtain a necessary license, and one or more of its products or processes are determined to infringe intellectual property rights of others, a court might enjoin the Company from further manufacture and/or sale of the affected products |
| In that case, the Company would need to re-engineer the affected products or processes in such a way as to avoid the alleged infringement, which may or may not be possible |
| An adverse result in litigation arising from such a claim could involve an injunction to prevent the sales of a portion of the Companyapstas products, a reduction or the elimination of the value of related inventories, and/or the assessment of a substantial monetary award for damages related to past sales |
| The Company does not believe that its current lawsuits will have a material impact on its business or financial condition |
| However, current lawsuits and any future lawsuits will divert resources and could result in the payment of substantial damages |
| In addition, the Company may incur significant legal costs to assert its intellectual property rights when the Company believes its products or processes have been infringed by third parties |
| Protecting Proprietary Technology Rights |
| The Companyapstas success depends in part to its proprietary technology |
| While the Company attempts to protect its proprietary technology through patents, copyrights and trade secret protection, the Company believes that its success also depends on increasing its technological expertise, continuing its development of new products and providing comprehensive support and service to its customers |
| However, the Company may be unable to protect its technology in all instances, or its competitors may develop similar or more competitive technology independently |
| The Company currently holds a number of United States and foreign patents and pending patent applications |
| However, other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to the Company or these governments may fail to issue patents for pending applications |
| In addition, the rights granted or anticipated under any of these patents or pending patent applications may be narrower than the Company expects or, in fact provide no competitive advantages |
| The Company may incur significant legal costs to protect its intellectual property |
| Lead-Free Parts |
| Customers are requiring that the Company offer its products in lead-free packages |
| Governmental regulations in certain countries and customers &apos intention to produce products that are less harmful to the environment has resulted in a requirement from many of the Companyapstas customers to purchase integrated circuits that do not contain lead |
| The Company has responded by offering its products in lead-free versions |
| While the lead-free versions of the Companyapstas products are expected to be more friendly to the environment, the ultimate impact is uncertain |
| The transition to lead-free products may produce sudden changes in demand depending on the packaging method used, which may result in excess inventory of products packaged using traditional methods |
| This may have an adverse effect on the Companyapstas results of operations |
| In addition, the quality, cost and manufacturing yields of the lead free products may be less favorable compared to the products packaged using more traditional materials which may result in higher costs to the Company |
| The Companyapstas performance is substantially dependent on the performance of its executive officers and key employees |
| The loss of the services of key officers, technical personnel or other key employees could harm the business |
| The success of the Company depends on its ability to identify, hire, train, develop and retain highly qualified technical and managerial personnel |
| Failure to attract and retain the necessary technical and managerial personnel could harm the Company |
| Customer Purchasing Patterns |
| The Company generates revenue from thousands of customers worldwide and believes that its revenues are diversified by end-market and geographical region |
| However, the loss of, or a significant reduction of purchases by a portion of the Companyapstas customer base could adversely affect the Companyapstas results of operations |
| The Company can lose a customer due to a change in the customerapstas design or purchasing practices |
| In addition, the timing of customers inventory adjustments may adversely affect the Companyapstas results of operations |
| Linear Technology competes in the high performance segment of the linear market |
| The Companyapstas competitors include among others, Analog Devices, Inc, Intersil, Maxim Integrated Products, Inc, National Semiconductor Corporation and Texas Instruments, Inc |
| Competition among manufacturers of linear integrated circuits is intense, and certain of the Companyapstas competitors may have significantly greater financial, technical, manufacturing and marketing resources than the Company |
| The principal elements of competition include product performance, functional value, quality and reliability, technical service and support, price, diversity of product line and delivery capabilities |
| The Company believes it competes favorably with respect to these factors, although it may be at a disadvantage in comparison to larger companies with broader product lines and greater technical service and support capabilities |
| Environmental regulations |
| Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and gases used in semiconductor processing |
| The Companyapstas facilities have been designed to comply with these regulations, and the Company believes that its activities conform to present environmental regulations |
| Increasing public attention has, however, been focused on the environmental impact of electronics manufacturing operations |
| While the Company to date has not experienced any materially adverse business effects from environmental regulations, there can be no assurance that changes in such regulations will not require the Company to acquire costly remediation equipment or to incur substantial expenses to comply with such regulations |
| Any failure by the Company to control the storage, use or disposal of, or adequately restrict the discharge of hazardous substances could subject it to significant liabilities |
| Although the Company believes that it has the product lines, manufacturing facilities and technical and financial resources for its current operations, revenues and profitability can be significantly affected by the above and other factors |
| Additionally, the Companyapstas common stock could be subject to significant price volatility should sales and/or earnings fail to meet the expectations of the investment community |
| Furthermore, stocks of high technology companies are subject to extreme price and volume fluctuations that are often unrelated or disproportionate to the operating performance of these companies |