SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

February 13, 2008

INFINEON TECHNOLOGIES AG

Am Campeon 1-12
D-85579 Neubiberg/Munich
Federal Republic of Germany
Tel: +49-89-234-0
(Address of principal executive offices)

     Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F þ          Form 40-F o

     Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o          No þ

     If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-___.

 

 

This Report on Form 6-K dated February 13, 2008, contains a quarterly report of Infineon Technologies AG for the Company’s first quarter of the 2008 fiscal year.

 

INFINEON TECHNOLOGIES AG

 

QUARTERLY REPORT

FOR THE THREE MONTHS ENDED

December 31, 2007

 

 

INDEX

 

 

First Quarter of the 2008 Fiscal Year

 

The following were the key developments in our business during the first quarter of fiscal year 2008:

 

 

Net Sales by Segment

 

 

 

In the first quarter of the 2008 fiscal year, the Automotive, Industrial & Multimarket segment reported net sales of €743 million, representing a 9 percent decrease from the prior quarter and a 5 percent increase year-on-year. The sequential revenue decline was mostly due to the deconsolidation of the high-power bipolar business and the weak U.S. dollar with respect to the Euro. Excluding these effects, segment revenues decreased 4 percent sequentially due to seasonality, but grew 13 percent year-on-year.

 

In the first quarter of the 2008 fiscal year, net sales in the Communication Solutions segment were €356 million, up 12 percent from the prior quarter and up 51 percent year-on-year. Excluding exchange rate effects, primarily between the U.S. dollar and the Euro, as well as the contribution of the mobile phone business acquired from LSI and the DSL Customer Premises Equipment (“CPE”) business acquired from Texas Instruments Inc. (“TI”), segment revenues increased 31 percent year-on-year and 1 percent sequentially. In the wireless business, revenues increased significantly, driven mainly by the consolidation of the mobile phone business acquired from LSI and a continued increase in mobile phone platform shipments. Excluding the effects from the DSL CPE business acquired from TI, revenues in the broadband business decreased compared to the prior quarter due to continued weak demand, particularly in the infrastructure business.

 

In the first quarter of the 2008 fiscal year, Qimonda reported revenues of €513 million, down 28 percent sequentially and down 56 percent year-on-year. The decrease was primarily due to a strong average price decline for Qimonda’s DRAM products, decreases in Qimonda’s non-PC bit shipment share, and exchange rate effects.

 

Net Sales in Other Operating Segments for the quarter ended December 31, 2007 as well as for the previous quarter and for the first quarter of the 2007 fiscal year, principally reflected inter-segment sales of wafers from Infineon’s 200-millimeter facility in Dresden to Qimonda under foundry agreement which are eliminated in the Corporate and Eliminations segment. On November 30, 2007, Qimonda cancelled its foundry agreement with Infineon, which will terminate effective March 1, 2008.

Net Sales by Region

 

 

The year-on-year increase in share of net sales in Asia/Pacific and corresponding decrease in North America was primarily the result of OEM customers shifting their production to Asia, as well as regional changes in product mix, primarily in our Qimonda segment.

 

Cost of Goods Sold and Gross Profit

 

The following table sets forth our cost of goods sold and gross profit for the periods indicated.

 

 

The development of our cost of goods sold and our gross profit were both significantly impacted by the unfavorable development in the memory business. In our Qimonda segment, cost of goods sold increased by €104 million, or 13 percent, from €823 million in the three months ended December 31, 2006 to €927 million in the three months ended December 31, 2007. As a percentage of net sales, Qimonda’s cost of goods sold increased from 70 percent to 181 percent over the same period, representing a deterioration of the gross profit of 111 percent in comparison to the three months ended December 31, 2006. The absolute increase in Qimonda’s cost of goods sold was due primarily to a 73 percent increase in bit shipments and negative effects of €122 million of inventory revaluations and reserves triggered by a sharp price decline in the DRAM market in the first quarter of the 2008 fiscal year.

 

Research and Development (“R&D”) Expenses

 

Our R&D expenses for the periods indicated were as follows:

 

 

In the first quarter of the 2008 fiscal year, the increase in our R&D expenses primarily reflected the in-process R&D of €14 million acquired in connection with the mobility business of LSI, which was expensed during the three months ended December 31, 2007, because no future alternative use existed at the date of acquisition.

Selling, General and Administrative (“SG&A”) Expenses

 

Our SG&A expenses for the periods indicated are shown in the following table.

 

 

During the three months ended December 31, 2007, Qimonda’s selling, general and administrative expenses as a percentage of sales increased to 9 percent compared to 4 percent in the three months ended December 31, 2006. This increase was mainly attributable to the decrease in sales.

 

Other Items Affecting Earnings

 

Other operating income (expense), net for the three months ended December 31, 2007 was €32 million, and mainly related to a gain of €28 million that resulted from the sale of an interest in our high-power bipolar business. In the three months ended September 30, 2007, other operating income (expenses), net amounted to negative €76 million, and consisted primarily of a loss in the amount of €84 million from the sale of 28.75 million Qimonda American Depositary Shares (“ADSs”).

 

In the three months ended December 31, 2006 and 2007, as well as in the three months ended September 30, 2007, the Inotera Memories Inc. (“Inotera”) joint venture within our Qimonda segment contributed most of our equity in earnings from associated companies, which decreased from €37 million in the first quarter of the 2007 fiscal year to €13 million and €2 million in the fourth quarter of the 2007 fiscal year and the first quarter of the 2008 fiscal year, respectively, primarily due to lower selling prices. Qimonda’s equity in Inotera’s earnings is, however, sensitive not only to fluctuations in the price of DRAM and production volumes, but also to changes in the portion of inventory which Qimonda purchases from Inotera and remains unsold. In addition, the equity in earnings of associated companies with fiscal year ends that differ by not more than three months from Infineon’s fiscal year end is recorded with a three month delay. This applies in particular to Inotera, which has a December 31 fiscal year end. Market price fluctuations during the three months ended December 31, 2007 would, to the extent these impact Inotera’s results, affect Qimonda’s equity in Inotera’s earnings during the three months ending March 31, 2008.

 

Earnings Before Interest and Taxes (EBIT)

 

EBIT is determined from the condensed consolidated statements of operations as follows:

 

EBIT of our segments were as follows:

 

 

 

Group-wide EBIT reflects the combined effects of the following EBIT developments of our segments:

 

 

EBIT for Infineon excluding Qimonda in the first quarter of the 2008 fiscal year was positively influenced by net gains of €11 million, compared to net charges of €94 million in the previous quarter and

net charges of €2 million in the first quarter of the 2007 fiscal year. Net gains (charges) for the periods indicated were as follows:

 

 

Financial Condition

 

 

As of December 31, 2007, our current assets decreased in comparison to September 30, 2007 by €885 million, primarily due to a decrease in cash and cash equivalents of €809 million. This decrease was partly offset by an increase in our investments in marketable securities of €294 million. Additionally, trade accounts receivable, net and inventories decreased from €894 million to €761 million and from €1,217 million to €996 million as of December 31, 2007 compared to September 30, 2007, respectively. The decrease in trade accounts receivable, net is mainly due to lower sales volumes at Qimonda. Inventories mainly decreased in our Qimonda segment as a result of lower gross inventories and higher inventory write-downs due to market price declines during the quarter ended December 31, 2007 compared to the quarter ended September 30, 2007.

 

Non-current assets increased by €154 million in the first quarter of the 2008 fiscal year. This increase primarily results from a €262 million increase in intangible assets, primarily as a result of the acquisition of the mobility business of LSI, partially offset by a decrease in property, plant and equipment, net, which decreased from €3,647 million as of September 30, 2007 to €3,581 million as of December 31, 2007.

 

As of December 31, 2007, current liabilities decreased by €225 million compared to September 30, 2007, mainly due to lower trade accounts payable. Additionally, accrued liabilities decreased as of December 31, 2007, primarily due to the consumption of accrued personnel cost.

 

Non-current liabilities increased as of December 31, 2007 by €125 million, primarily due to an increase in loans payable to banks of €88 million and an increase in capital lease obligations of €78 million resulting from Qimonda’s sale and lease back transactions executed in December 2007. These increases were partly offset by a decrease of €48 million in other liabilities during the first quarter of the 2008 fiscal year.

Liquidity

 

 

Cash used in operating activities during the three months ended December 31, 2007 primarily reflected the net loss of €396 million, which is net of non-cash charges for depreciation and amortization of €303 million, and a €14 million write-off of in-process R&D acquired from LSI. Cash used in operating activities was positively impacted by a decrease in trade accounts receivable and inventories of €340 million, and negatively influenced by a decrease in trade accounts payable of €122 million.

 

Net cash used in investing activities increased to €736 million during the three months ended December 31, 2007, from €323 million in the three months ended December 31, 2006, and €116 million in the three months ended September 30, 2007. The sequential increase was mainly due to higher net purchases of marketable securities of €300 million and the payment €316 million for the acquisition of the mobility business of LSI in the first quarter of the 2008 fiscal year, whereas €45 million was paid for the acquisition of the CPE DSL business of TI in the preceding quarter. The increase year-on-year primarily reflects higher net purchases of marketable securities of €279 million and the LSI acquisition, partly offset by higher proceeds from sales of property, plant and equipment of €130 million.

 

Cash flows from financing activities decreased by €155 million sequentially mainly due to lower new indebtedness, and decreased by €42 million year-on-year primarily due to dividend payments to minority interest holders. The net cash inflows from financing activities during the quarter ended September 30, 2007 primarily reflects the cash proceeds of €215 million received from the issuance of the exchangeable subordinated notes due 2010.

 

Free cash flow, representing cash flows from operating and investing activities excluding purchases or sales of marketable securities, decreased to negative €487 million in the first quarter of the 2008 fiscal year from positive €16 million and €388 million in the three months ended December 31, 2006 and September 30, 2007, respectively. This decrease primarily resulted from a reduction in cash flow from operating activities of €369 million year-on-year and €555 million sequentially. Additionally, free cash flow significantly decreased in the three months ended December 31, 2007 compared to the three months ended September 30, 2007 due to the €316 million cash payment for the acquisition of the mobility business of LSI, and lower proceeds from sales of businesses and interests in subsidiaries.

 

Accordingly, gross cash position as of December 31, 2007, representing cash and cash equivalents and marketable securities, decreased to €1,779 million from €2,294 million as of September 30, 2007 and €2,682 million as of December 31, 2006. The company’s net cash position as of December 31, 2007, defined as gross cash position less short and long-term debt, decreased to negative €92 million for the first quarter of the 2008 fiscal year, from positive €582 million in the prior quarter and positive €660 million in the first quarter of the 2007 fiscal year.

Employees

 

The following table sets forth the composition of our workforce by function and region at the dates indicated.

 

 

Of the total workforce, 12,078, 13,481 and 13,630 as of December 31, 2006, September 30, 2007 and December 31, 2007, respectively, were employees of Qimonda.

 

The increase in our workforce as of December 31, 2007 compared to September 30, 2007 mainly relates to employees that joined the company as a result of the acquisition of the mobility business of LSI.

 

Outlook

 

Industry Environment and Outlook

 

Ongoing financial market turbulences caused by the U.S. sub-prime crisis and recession fears in the United States have dampened economic growth expectations for the United States for calendar year 2008. For Japan and the Euro zone, economic growth prognoses were also reduced. In emerging markets, growth dynamic is still high and seems not yet to be substantially influenced by the U.S. economic slowdown. Overall, uncertainty about world economic growth in calendar year 2008 increased in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal year 2007. Massive reductions of the U.S. Federal Funds Rate and the announced U.S. economic stimulation program aim at limiting the economic downturn.

 

For calendar year 2008, market experts expect semiconductor market growth to slightly accelerate, although they reduced their growth expectations. Market research company Gartner Inc. reduced its 2008 global semiconductor market growth forecast by 2 percentage points to an annual growth rate of 6 percent in its November 2007 forecast, down from 8 percent in the previous forecast.

 

All in all, for calendar year 2008 experts expect a growing semiconductor market which could end with a higher growth rate than last year.

 

Outlook for Infineon excluding Qimonda for the 2008 Fiscal Year

 

Significant planning assumptions:  When preparing this outlook, we made certain important planning assumptions for Infineon excluding Qimonda. In particular, we changed our planning assumptions for the U.S. dollar/Euro exchange rate from 1.40 which was used in our 2007 fiscal year-end outlook, to 1.45 in the following outlook for our business excluding Qimonda, due to the further weakening of the U.S. dollar. Furthermore, all projections made herein exclude the effect of any net gains or charges that may be incurred, since the amount of such net gains or charges cannot be reliably estimated. We can only identify significant events which could lead to net gains or charges. These include, among others, gains or losses that may be realized from potential sales of Qimonda shares or other investments and activities, impairments of investments or other long-term assets, as well as gains or losses resulting from general

restructuring measures. Finally, it should be noted that subsequent to the initial public offering of our majority-owned subsidiary Qimonda, forecasts for this segment are prepared by Qimonda, and are presented separately in this report. We believe that the individual analysis of our memory products business is also meaningful with respect to the price development of our shares. We believe that the results of Qimonda will have a significant impact on the price development of our shares for as long as we continue to hold a significant equity interest in Qimonda.

 

Automotive, Industrial and Multimarket:  We expect the fiscal year 2008 segment revenues to be down slightly compared to the 2007 fiscal year. Excluding net gains and charges, EBIT is anticipated to decrease slightly year-on-year.

 

In the second quarter of the 2008 fiscal year, we expect revenues of our Automotive, Industrial & Multimarket segment to be approximately on the same level as the first quarter, in line with the usual seasonal pattern. EBIT margin is expected to be in the range of eight to nine percent.

 

Revenues in the automotive business are expected to increase compared to the first quarter despite ongoing weakness in demand from U.S. car manufacturers and annual price reductions for major customers. Revenues in the industrial & multimarket business are anticipated to decline due to the usual seasonal pattern in the consumer, computing and telecom markets. Results in the security & ASICs business are anticipated to remain broadly unchanged compared to the first quarter due to a strong demand for chip cards.

 

Communication Solutions:  Revenues in the Communication Solutions segment are expected to return to growth beginning with the third quarter of the 2008 fiscal year. For the full year, we now expect year-on-year revenue growth of 25 to 30 percent in this segment. EBIT is anticipated to be negative and result in a low to mid single-digit negative EBIT margin before net gains or charges, and including amortization of acquisition-related acquired intangibles of about €25 million.

 

Revenues in the Communication Solutions segment are expected to decline by a mid-teens percentage in the second quarter of the 2008 fiscal year compared to the prior quarter. This is expected to be driven mainly by typical wireless seasonality, but also by lower than expected volumes in certain mobile phone platform projects. The broadband business is anticipated to stabilize on the low level of the prior quarter. EBIT is anticipated to follow the revenue decrease and is estimated at approximately negative €30 million.

 

Outlook for Qimonda for the 2008 fiscal year

 

Qimonda is currently targeting an increase in its bit production for the 2008 fiscal year of 30 to 40 percent, compared with its prior estimate of about 50 percent, taking into account an accelerated reduction of 200-millimeter capacities, which is partly offset by productivity improvements through conversion to 80-nanometer and 75-nanometer technologies. Qimonda continues to expect bit demand for DRAM to be driven by continued solid growth in graphics, consumer and communication applications and the move to higher density modules in the PC market. The share of bit-shipments for use in non-PC applications is anticipated to be greater than 50 percent for the full fiscal year. Qimonda has reduced its target for capital expenditures for the 2008 fiscal year to a range of €400 million to €500 million. As part of its savings measures, the construction of a new 300 millimeter manufacturing facility in Singapore has been put on hold pending improving market conditions.

 

Qimonda has reduced its targets for R&D and SG&A expenses for the 2008 fiscal year. It currently expects R&D expenses in the range of €430 million to €460 million, and SG&A expenses in the range of €200 million to €220 million.

 

Risks and Opportunities

 

Infineon is exposed to a number of risks as a result of the high volatility of the semiconductor business, its international orientation and its wide product range. To minimize the negative impact of these risks, we continuously optimize our company-wide applied risk and opportunity management system. We are currently not aware of any circumstances which would lead us to a different assessment of the risks and opportunities than those described in our 2007 Annual Report.

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

Infineon Technologies AG and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended December 31, 2006 and 2007

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

The accompanying condensed consolidated financial statements of Infineon Technologies AG and its subsidiaries (“Infineon” or the “Company”) as of and for the three months ended December 31, 2006 and 2007, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In addition, although the condensed consolidated balance sheet as of September 30, 2007 was derived from audited financial statements, it does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended September 30, 2007. The accounting policies applied in preparing the accompanying condensed consolidated financial statements are consistent with those for the year ended September 30, 2007 (see note 2).

 

The preparation of the accompanying condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

 

All amounts herein are shown in Euro (or “€”) except where otherwise stated. The accompanying consolidated balance sheet as of December 31, 2007, and the condensed consolidated statements of operations and cash flows for the three months then ended are also presented in U.S. dollars (“$”), solely for the convenience of the reader, at the rate of €1 = $1.4603, the Federal Reserve noon buying rate on December 31, 2007.

 

Certain amounts in prior period condensed consolidated financial statements and notes have been reclassified to conform to the current period presentation. Gains and losses from sales of investments in marketable debt and equity securities, previously reported as part of the operating segment’s EBIT, have been reclassified to the Corporate and Eliminations segment.

 

 

Adopted

 

Effective October 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), and related guidance. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law and prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. As a result of the implementation of FIN 48, the Company recorded a charge to retained earnings of €4 million as of October 1, 2007 (see note 7).

 

Issued since October 1, 2007 but principally applicable in future financial years

 

In December 2007, the FASB issued Statement of Accounting Standards (“SFAS”) No. 141 (revised 2007) “Business Combinations”. SFAS No. 141 (revised 2007) requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value”. Pursuant to SFAS No. 141 (revised 2007), all business combinations, including combinations among mutual entities and combinations by contract alone will be accounted for by applying the acquisition

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

 

method. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

 

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements”. SFAS No. 160 requires noncontrolling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS No. 160 is effective for periods beginning on or after December 15, 2008.

 

 

On January 26, 2007, Infineon and Qimonda extended their agreement for the production of wafers in Infineon Technologies Dresden GmbH & Co. OHG production facility through September 30, 2009. On November 30, 2007, Qimonda cancelled its agreement with Infineon for the production of wafers at the Infineon Technologies Dresden GmbH & Co. OHG production facility. The agreement will terminate on March 1, 2008.

 

On October 2, 2007, Sony Corporation and Qimonda announced that they had signed an agreement to found the joint venture Qreatic Design. The scope of the joint venture is the design of high-performance, low power, embedded and customer specific DRAMs for consumer and graphic applications. According to the agreement, the 50:50 joint venture is intended to start with up to 30 specialists from Sony and Qimonda, bringing together their engineering expertise for the mutual benefit of both companies. Qreatic Design, which is located in Tokyo, Japan, started operations by the end of calendar year 2007. Qimonda accounts for its investment in Qreatic Design using the equity method of accounting due to the lack of unilateral control.

 

On October 8, 2007, Qimonda entered into a rental agreement for a new headquarters office south of Munich, Germany. The agreement provides for the construction of a building by a third-party developer-lessor, and includes a 15 year non-cancelable lease term, which is expected to start in early 2010. Qimonda has an option to extend the lease for two 5-year periods at similar lease terms to the initial non-cancelable lease term. The minimum rental payments aggregate €96 million over the initial lease term. The lease provides for rent escalation in line with market-based increases in rent. The agreement will be accounted for as an operating lease with monthly lease payments expensed on a straight-line basis over the lease term.

 

At the formation of Qimonda, certain operations and investments that could not be directly transferred were initially held in trust for Qimonda’s benefit by Infineon until the legal transfer to Qimonda could take place. Pursuant to agreements entered into on December 14, 2007, Infineon’s investments in Advanced Mask Technology Center GmbH & Co. KG (“AMTC”) and Maskhouse Building Administration GmbH & Co. KG (“BAC”) are to be transferred to Qimonda subject to registration in the commercial register (see note 21).

 

 

On October 24, 2007, the Company completed the acquisition of the mobility products business of LSI Corporation (“LSI”) for a price of $450 million (€316 million) plus a contingent performance-based payment of up to $50 million in order to further strengthen its activities in the field of communications. The contingent performance-based payment is based on the relevant revenues in the measurement period following the completion of the transaction and ending December 31, 2008. The mobility products business designs semiconductors and software for cellular telephone handsets. The assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill.

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

 

The following table summarizes the acquisition:

 

 

The above acquisition has been accounted for by the purchase method of accounting and, accordingly, the condensed consolidated statements of operations include the results of the acquired business from the acquisition date. The Company engaged an independent third party to assist in the valuation of net assets acquired. Based on discounted estimated future cash flows over the respective estimated useful life, an amount of €14 million was allocated to purchased in-process research and development and expensed as research and development during the three months ended December 31, 2007, because no future alternative use existed at the date of acquisition. The acquired intangible assets consist of core technology of €42 million with a weighted average estimated useful life of 6 years, customer relationships of €73 million with a weighted average estimated useful life of 6 years, and other intangible assets of €6 million with a weighted average estimated useful life of less than 1 year. The amount of €160 million of goodwill was assigned to the Communication Solutions segment. The goodwill amount is expected to be deductible for tax purposes.

 

Pro forma financial information relating to this acquisition is not material to the results of operations and financial position of the Company and has been omitted.

 

 

On August 8, 2007, the Company and International Business Machines Corporation (“IBM”) signed an agreement in principle to divest their respective shares in ALTIS Semiconductor S.N.C., Essonnes, France (“ALTIS”) via a sale to Advanced Electronic Systems AG (“AES”). Under the terms of the agreement in principle, AES will purchase the equity, which includes the real estate and technology assets of ALTIS, from the Company and IBM, and AES agreed to maintain the level of industrial activity in ALTIS. Pursuant to the agreement, the Company will enter into a two-year supply contract with ALTIS and IBM and Infineon will license certain manufacturing process technologies to AES for use in ALTIS. The agreement is subject to governmental and regulatory approval and works council consultation. As a result of the agreement, the Company reclassified related non-current assets and liabilities into assets and liabilities held for sale during the fourth quarter of the 2007 fiscal year.

 

At September 30, 2007 and December 31, 2007, other current assets included assets held for sale relating to ALTIS. These assets include land, buildings and equipment, and current assets associated with the production facility located in Essonnes, France. Related liabilities are included in other current liabilities. Pursuant to SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the recognition of depreciation expense ceased as of August 1, 2007. The Company performed an impairment assessment and concluded that no impairment was necessary.

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

 

Summarized balance sheet information for ALTIS is set forth below:

 

 

On September 28, 2007, the Company entered into a joint venture agreement with Siemens AG (“Siemens”). Effective September 30, 2007, the Company contributed all assets and liabilities of its high power bipolar business (including licenses, patents, and front-end and back-end production assets) into a newly formed legal entity called Infineon Technologies Bipolar GmbH & Co. KG (“Bipolar”) and Siemens subsequently acquired a 40 percent interest in Bipolar for €37 million. The transaction received regulatory approval and subsequently closed on November 30, 2007. As a result of the sale, the Company realized a gain before tax of €28 million which was recorded in other operating income, net during the three months ended December 31, 2007. The joint venture agreement grants Siemens certain contractual participating rights which inhibit the Company from exercising control over the newly formed entity. Accordingly, the Company accounts for the retained interest in Bipolar under the equity method of accounting (see note 11).

 

 

During the 2007 fiscal year, restructuring measures were taken by the Company, mainly as a result of the insolvency of one of its largest mobile phone customers, BenQ Mobile GmbH & Co. OHG, and in order to further streamline certain research and development locations. Approximately 280 jobs are affected worldwide, thereof approximately 120 in the German locations Munich, Salzgitter and Nuremberg. A large portion of these restructuring measures were completed during the 2007 fiscal year.

 

In December 2007, Qimonda announced plans to consolidate its U.S. research and development facilities. As a result, the development center in Burlington, Vermont, is expected to be closed by June 2008. Qimonda accrued restructuring expenses of €4 million during the three months ended December 31, 2007, primarily for severance payments related to approximately 100 employees and lease termination costs.

 

During the three months ended December 31, 2006 and 2007, charges of €2 million and €6 million, respectively, were recognized as a result of the above-mentioned restructuring initiatives.

 

The development of the restructuring liability during the three months ended December 31, 2007 is as follows:

 

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

Income (loss) before income taxes and minority interest and income tax expense is as follows:

 

 

In the three months ended December 31, 2006 and 2007, respectively, the tax expense of the Company is affected by lower foreign tax rates, tax credits and the need for valuation allowances on deferred tax assets in certain jurisdictions.

 

Additionally in the three months ended December 31, 2006, the positive results of Qimonda in Germany led to current tax expense as tax loss carry-forwards related to the Qimonda segment have been retained by Infineon Technologies AG in connection with the formation of Qimonda. In the three months ended December 31, 2007, the losses of Qimonda in certain jurisdictions result in additional valuation allowances on deferred tax assets.

 

Effective October 1, 2007, the Company adopted FIN 48 (see note 2). The total amount of gross unrecognized tax benefits increased from €105 million as of October 1, 2007 by €8 million to €113 million as of December 31, 2007. Due to existing valuation allowances on deferred tax assets in certain jurisdictions the entire amount of gross unrecognized tax benefits, if recognized, would favorably affect the Company’s effective tax rate as of the date of adoption and December 31, 2007.

 

The Company has accrued interest and penalties of €4 million and €5 Million as of October 1, 2007 and December 31, 2007, respectively. Interest and penalties related to income tax liabilities are included in interest expense, net and other non-operating income, net, respectively.

 

Our German and foreign tax returns are periodically examined by tax authorities, and several entities of the consolidated group are currently subject to such an examination. Although timing of the resolution of tax authority examinations is uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could change within the next 12 months as a result of such on-going and future examinations.

 

 

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is calculated by dividing net income by the sum of the weighted average number of ordinary shares outstanding plus all additional ordinary shares that would have been outstanding if potentially dilutive instruments or ordinary share equivalents had been issued.

 

The computation of basic and diluted EPS is as follows:

 

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

 

The weighted average of potentially dilutive instruments that were excluded from the diluted earnings (loss) per share computations, because the exercise price was greater than the average market price of the ordinary shares during the period or were otherwise not dilutive, includes 43.3 million and 37.0 million shares underlying employee stock options for the three months ended December 31, 2006 and 2007, respectively. Additionally, 18.1 million and 68.4 million ordinary shares issuable upon the conversion of the convertible subordinated notes for the three months ended December 31, 2006 and 2007, respectively, were not included in the computation of diluted earnings (loss) per share as their impact was not dilutive.

 

 

Trade accounts receivable, net consist of the following:

 

 

 

Inventories consist of the following:

 

 

 

The agreement governing the joint venture with Nanya Technology Corporation (“Nanya”) allowed Infineon to transfer its shares in Inotera Memories Inc. (“Inotera”) to Qimonda. However, under Taiwanese law, Infineon’s shares in Inotera are subject to a compulsory restriction on transfer (lock-up) as a result of Inotera’s IPO. Infineon may only transfer these shares to Qimonda gradually over the four years following Inotera’s IPO. The Company sought an exemption from this restriction that would permit the immediate transfer of all of these shares to Qimonda. In connection with the formation of Qimonda, Infineon and Qimonda entered into a trust agreement under which Infineon held its Inotera shares in trust for Qimonda until the shares could be transferred. This trust agreement provided for Infineon to transfer the shares to Qimonda as and when the transfer restrictions expire or Qimonda received the exemption from the lock-up. In March 2007, the Inotera shares (except for the portion representing less than 1 percent of the total shares) were transferred to Qimonda. The Inotera shares remain subject to Taiwanese lock-up provisions related to the Inotera IPO through January 2008, after which the remaining less than 1 percent of the shares are to be transferred to Qimonda. The Company expects the transfer during the current fiscal year ending September 30, 2008.

 

On August 20, 2007, Inotera issued 40 million common shares, representing 1.2 percent of its outstanding share capital, as bonuses to its employees, which diluted the Qimonda’s ownership interest to 35.6 percent (27.6 percent net of Qimonda’s minority interest). Qimonda recorded the related dilution loss of €7 million during the three months ended December 31, 2007.

 

During the three months ended December 31, 2007 Sony Corporation and Qimonda AG established the Qreatic Design joint venture (see note 3).

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements

 

On September 28, 2007, Infineon entered into a joint venture agreement with Siemens, whereby the Company contributed its high power bipolar business into the newly formed legal entity Bipolar, and Siemens subsequently acquired a 40 percent interest in Bipolar. The joint venture agreement grants Siemens certain contractual participating rights which inhibit the Company from exercising control over the newly formed entity. Accordingly, the Company accounted for the retained interest in Bipolar under the equity method of accounting (see note 5).

 

 

Trade accounts payable consist of the following:

 

 

 

Debt consists of the following:

 

 

In September 2007, Qimonda entered into a four-year sale and leaseback transaction of 200-millimeter equipment, followed by a second tranche in December 2007 and a five-year sale and leaseback transaction of 300-millimeter equipment, both at Richmond. The leases are accounted for as capital leases whereby the present values of the lease payments are reflected as a capital lease obligations.

 

On October 25, 2007, 1.25 million Qimonda ADSs that had been borrowed by an affiliate of J.P. Morgan Securities Inc. in connection with the exchangeable subordinated notes due 2010 were returned to the Company (see note 21).

 

The Company has established independent financing arrangements with several financial institutions, in the form of both short- and long-term credit facilities, which are available for anticipated funding purposes.

 

 

Infineon Technologies AG and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements