Infineon Reports Q4, Full Year

MUNICH -- For the fourth quarter of the 2005 financial year, Infineon Technologies AG (FSE/NYSE:IFX) reported increased revenues in all operating segments compared to the prior quarter. Growth was primarily driven by higher bit shipments and slightly increased average sales prices in the Memory Products segment, as well as improved revenues in the mobile platform and radio frequency transceiver business in the Communication segment. Revenues in the Automotive, Industrial and Multimarket segment were stable, as higher sales of power semiconductors offset continued strong price declines in the security and chip-card business.

Sequential EBIT loss improved significantly in all operating segments. The EBIT loss decrease is primarily attributable to slightly increased average sales prices and a strong reduction in the cost-per-bit in the Memory Products segment, as well as improved gross margin in the Communication segment. The planned phase-out of production at the company’s Munich-Perlach facility and impairment charges in the Communication segment contributed to charges of Euro 64 million, included in the fourth quarter EBIT loss. Third quarter EBIT included charges of Euro 81 million, primarily in connection with the planned phase-out of production at the company’s Munich-Perlach facility and impairment charges in the Communication segment.

In the 2005 financial year, revenues decreased compared to the 2004 financial year, mostly reflecting a strong decline in demand from some customers for mobile-phone components, and continued pricing pressure in all operating segments, in particular in the memory products and security and chip-card businesses. EBIT decreased year-on-year, reflecting lower EBIT in all operating segments. EBIT loss in the 2005 financial year included charges of Euro 222 million primarily related to the planned phase-out of production at the company’s Munich-Perlach facility and net charges resulting from the reorganization measures in the Communication segment, which could not be entirely offset by non-recurring license income of Euro 118 million resulting from the settlement with ProMOS. In the 2004 financial year, EBIT was negatively impacted by net charges aggregating Euro 332 million, resulting primarily from asset impairments and the US and European DRAM antitrust investigations and related potential civil claims. “In the 2005 financial year, we have made substantial progress in cost reduction, and streamlining the company. Nevertheless, the impact of these measures on the year’s financials was more than offset by the strong price erosion and a loss of market share of some mobile phone customers,” said Dr. Wolfgang Ziebart, CEO and President of Infineon Technologies AG. “For the third year in a row, the Memory Products segment reported positive EBIT results despite a strong decline in chip prices. I am especially pleased with the performance of our wireline business, where we achieved the turn-around in the fourth quarter of the 2005 financial year.”

Cash flow, capital expenditures, and savings in the 2005 financial year

Free cash flow in the 2005 financial year was negative Euro 281 million, decreasing from positive Euro 206 million in the previous year. The decline in free cash flow reflected a decrease in cash flow from operations in the 2005 financial year to Euro 1.04 billion compared to Euro 1.86 billion in the 2004 financial year, which was mostly the result of the net loss in the 2005 financial year. This could not be offset by decreases in net cash used in investing activities (excluding net proceeds from sales of marketable securities) to Euro 1.32 billion, thereof Euro 1.37 billion used for capital expenditures in the 2005 financial year, down from Euro 1.65 billion, thereof Euro 1.16 billion used for capital expenditures in the 2004 financial year. Infineon’s net cash position at the end of the 2005 financial year amounted to Euro 341 million, decreasing from Euro 548 million as of September 30, 2004.

SG&A expenses decreased to Euro 655 million in the 2005 financial year, down from Euro 718 million in the 2004 financial year, but remained constant at 10 percent of total revenues in both years.

The company’s Smart Savings program, implemented in the first quarter of the 2005 financial year, resulted in cost levels that were Euro 320 million lower than originally planned.

Employee Data

As of September 30, 2005, Infineon had approximately 36,400 employees worldwide compared to 35,600 employees at the end of the 2004 financial year. Thereof, approximately 7,400 were engaged in Research and Development as of September 30, 2005, compared to approximately 7,200 employees at the end of the 2004 financial year.

Outlook for the first quarter of the 2006 financial year

Industry experts forecast mid-single-digit growth for the worldwide semiconductor market in the 2006 calendar year. For the 2006 financial year, Infineon expects to develop at least in line with the market. In its Automotive, Industrial and Multimarket segment, the company anticipates further growth due to increasing demand for electronics in cars, power conversion, and energy-saving technologies. In addition, Infineon expects further business opportunities in the Communication segment, mainly due to its capability in radio-frequency technologies. In its Memory Product segment, Infineon will continue to focus its portfolio on higher margin growth businesses.

In the first quarter of the 2006 financial year, Infineon expects revenues to increase slightly compared to the fourth quarter of the 2005 financial year. The company will continue to phase out the production at Munich-Perlach, build the new production site in Kulim, Malaysia, and to ramp up the 300-millimeter production facility in Richmond. In the first quarter of the 2006 financial year, Infineon expects no significant charges. In addition, Infineon will begin to recognize stock-based compensation expense in its statements of operations.

In November 2005, the company’s Supervisory Board has approved a plan to separate the memory products business and to form a wholly owned subsidiary of Infineon effective July 1, 2006. It is the preferred plan of the Infineon management to subsequently move towards a public offering of shares in this business.

“We have intensively examined Infineon’s strategic orientation. The logic and the memory segments are increasingly characterized by diverging processes and business models,” commented Dr. Wolfgang Ziebart. “Therefore, we have decided on a new strategic set-up including two companies - one focused on logic products, the other on memories. Both companies will benefit from higher flexibility and will be able to more efficiently exploit growth opportunities.”

Infineon Technologies AG