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The
following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included
elsewhere in this annual report. The following discussion contains
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended. The Company's actual
results may differ significantly from those projected in the
forward-looking statements. Factors that might cause future
actual results to differ materially from the Company's recent
results or those projected in the forward-looking statements
include, but are not limited to, those discussed in "Cautionary
Statement Regarding Forward-Looking Statements" and under
the caption "Risk Factors" in the Company's Prospectuses
dated September 16, 1999 and below. The Company assumes no obligation
to update the forward-looking statements or such factors.
Overview
Business conditions in 1999 and 2000 improved from the difficult
conditions experienced in the semiconductor industry in 1997
and 1998. According to trade association data, worldwide sales
of semiconductor products (the total available market or "TAM")
increased 36.8% in 2000 over 1999. Based on trade association
data, the estimated market for products produced by the Company
(the serviceable available market or "SAM") (which
consists of the TAM without DRAMs, and opto-electronic products)
increased approximately 34.8% in 2000 over 1999. However, the
higher rates of increase were recorded in the first three quarters
of 2000, while during the fourth quarter 2000 the semiconductor
industry showed some signs of decreased growth rates with the
total market declining approximately 3% in that quarter compared
to the third quarter 2000. The reverse in the trend in the semiconductor
industry which began in the fourth quarter of 2000 led to negative
growth expectations for 2001. Industry analysts at the end of
2000 were forecasting a downturn in the 2001 semiconductor market.
The Company's net revenues for 2000 increased 54.5% compared
to 1999, a stronger increase than both the TAM and the SAM.
The Company benefited from increased volumes in virtually all
product families and an improved product mix, including sales
of new products.
In the last five years, despite the difficult market conditions
in 1997 and 1998, the Company's net revenues increased from
$4,122.4 million in 1996 to $7,813.2 million in 2000, representing
a compound annual growth rate of 17.3%. According to trade association
data, the TAM increased from $132.0 billion in 1996 to $204.4
billion in 2000, representing a compound annual growth rate
of 11.6%, while the SAM increased from $102.7 billion in 1996
to $165.7 billion in 2000, representing a compound annual growth
rate of 12.7%. During the same period, the Company's share of
the TAM increased from 3.1% to 3.8%, while the Company's share
of the SAM increased from 4.0% to 4.7%. The Company's revenue
growth from 1996 through 2000 was particularly significant for
differentiated ICs (which the Company defines as being its dedicated
products, semicustom devices and microcontrollers).
As a result of the Company's performance during the period 1996
to 2000, the Company not only gained market share against both
the TAM and SAM, but, according to ranking by leading market
analysts, became the sixth largest semiconductor company in
the world during 2000, up from ninth in 1999. However, the Company
believes that the general market conditions have led certain
of its competitors to redirect their marketing focus and manufacturing
capacity toward products that compete with the Company's products.
The Company believes increased competition in its core product
markets is generating greater pricing pressure, increased competition
for market share in the SAM and a generally more challenging
market environment for the Company. |
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There
can be no assurance that the Company will experience revenue
growth at or above the growth rate for the TAM or the SAM, or
that increased competition in the Company's core product markets
will not lead to further price erosion, lower revenue growth
rates and lower margins for the Company.
In 2000, the Company continued to focus on differentiated ICs
and analog ICs. Differentiated ICs accounted for approximately
63% of the Company's net revenues in both 2000 and 1999. Such
products foster close relationships with customers, resulting
in early knowledge of their evolving requirements and opportunities
to access their markets for other products, and are less vulnerable
to competitive pressures than standard commodity products. Analog
ICs (including mixed signal ICs), the majority of which are
also differentiated ICs, accounted for approximately 49% of
the Company's net revenues in 2000 compared to 51% in 1999,
while discrete devices accounted for approximately 10% of the
Company's net revenues in 2000 compared to approximately 12%
in 1999. In recent years, these families of products, in particular
analog ICs, have experienced less volatility in sales growth
rates and average selling prices than the overall semiconductor
industry. However, the difficult competitive environment in
the semiconductor market in more recent years has led to price
pressures in these product families as well.
In order to reinforce the Company's presence in certain strategic
business segments, the Company completed the acquisition from
Nortel Networks of a 6-inch facility in Ottawa, Canada, in June
2000 with a commitment for $2 billion in sales to Nortel Networks
over the following three years (in conjunction with the acquisition,
the Company entered into an agreement with Nortel Networks for
the development of processes, packages and fundamental IP for
high-speed optical interfaces). The Company also acquired Waferscale
Integration (a leading manufacturer of programmable system memory
devices) and Portland Group (a vendor of compilers and software
development tools for the high-performance parallel computing
market).
The Company's gross profit margin increased from 41.4% in 1996
to 46.0% in 2000. Benefiting from a favorable industry environment
in 1996, the Company had a gross profit margin of approximately
41% and an operating income margin of approximately 19%. In
1997 and 1998, in an unfavorable industry environment, which
generated lower margins due to the negative impact of pricing
pressures, gross profit margin declined to slightly above 38%.
This decline in gross profit margin coupled with a higher level
of research and development expenditure, resulted in a lower
operating income as a percentage of net revenues which, however,
remained above 12%. Benefiting from the market recovery in 1999
and 2000, gross profit margin increased in 2000 to 46.0% while
operating income as a percentage of net revenues rose significantly
to 22.8%.
Preliminary projections for 2001 assumed a worsening of the
market correction, estimating the market for the first quarter
of 2001 to decline 19% sequentially versus the fourth quarter
of 2000 and 4% compared to the first quarter of 2000. The latest
forecasts by industry analysts at the end of March 2001 estimate
a 12% decline in the TAM and a 10% decline in the SAM in 2001
compared to 2000. The Company estimates that the market correction
which began abruptly with a sharp inventory adjustment in the
fourth quarter of 2000 is likely to continue through much of
2001. Its duration is closely tied to macroeconomic conditions,
particularly in the United States and Japan, as well as to industry-specific
issues such as over capacity and excess inventory levels.
While the Company is expecting a difficult business environment,
it is confident in its ability to continue to outperform the
industry by a meaningful margin. Within this challenging near
term environment, the Company's strategy continues to be based
upon profitable market share gains through the development of
world-leading products, strong customer alliances, efficient
global manufacturing and a modular approach to capital expenditure. |
