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Intangible assets
Intangible
assets include the cost of technologies and licenses purchased from third
parties, amortized over a period ranging from three to seven years, and
goodwill acquired in business combinations amortized up to 2001 over a period
generally ranging between three to five years. From January 1, 2002, good-will
will be subject to an annual impairment test to determine the appropriate
carrying value. The carrying value of intangibles is evaluated whenever changes
in circumstances indicate the carry-ing amount may not be recoverable. In
determining recoverability, we estimate the expected future cash flows
associated with the intangible assets and compare this to the carrying value.
Signifi-cant estimates used in determining the future cash flows include the
applicable industry’s evolution, our market penetration and the market
acceptance of certain new technologies. Our evalua-tions are based on financial
plans updated with the latest available projections of the semiconductor market
evolution and our sales expectations. Future adverse change in market
conditions or poor operating results of businesses acquired may require a
further impairment of some intangible assets, in addition to those impairments
made in 2001.
Inventories
Inventories are stated at the lower of cost or market.
Cost is computed by adjusting standard cost to approximate actual manufacturing
costs on a quarterly basis; the cost is therefore depending of our
manufacturing performances. In case of under-utilization of our manufacturing
facilities, the undercapacity cost is not included in the inventories
valuation. Provisions are estimated for uncommitted inventories based on order
backlog and the previous quarter’s sales. To the extent that future
negative market conditions generate order backlog cancellation and declining
sales, this would require additional inventory write-down charges, negatively
impacting cost of sales.
Property, plant and
equipment
The carrying value of tangible assets is evaluated whenever
changes in circumstances indicate the carrying amount may not be recoverable.
In determining recoverability, we estimate the expected future cash flows
associated with the property, plant and equipment and compare this to the
carrying value. Significant estimates used in determining the future cash flows
include the industry evolution, the utilization of our fabrication facilities
and the ability to upgrade such sites, changes in selling price and the
adoption of new technologies. If the carrying value of a tangible asset were
lower than the fair value, it may be impaired. Our evaluations are based on
financial plans updated with the latest projections of the semiconductor market
and of our sales expectations, from which we derive the future production needs
and loading of our manufacturing facilities; these plans are highly variable
due to the high volatility of the semiconductor business and therefore subject
to continuous modifications. If the future evolution will differ from the basis
of our plans, both in terms of market evolution and production allocation to
our manufacturing plants, this could require a further review of the carrying
amount of our tangible assets for potential impairment, in addition to those
impairments made in 2001.
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Patent and other intellectual property
litigation
We
have from time to time received, and may in future receive, communications
alleging possible infringements of patents and similar intellectual property
rights of others. We constantly monitor, with the support of our outside
attorneys when deemed neces-sary or advisable, the chances of such intellectual
property claims being successfully asserted. We will record a provision when we
estimate that the claim could successfully be asserted, and in the absence of a
valid offset or counterclaim. In the event of litigation, which is adversely
determined with respect to our interests, or in the event we need to change our
evaluation of a potential third party intellectual property claim, based on new
evidence or communications, this could have a material adverse effect on our
results of operations or financial condition at the time it will
materialize.
EURO CONVERSION
On January 1,
1999, eleven of the fifteen member countries of the European Union established
fixed conversion rates between their existing national currencies and the euro.
The participating coun-tries agreed to adopt the euro as their common legal
currency on that date. Until January 1, 2002, either the euro or a
participating country’s present currency (a “national currency”)
will be accepted as legal currency. On January 1, 2002, euro-denominated bills
and coins were issued and national currencies will be with-drawn from
circulation over the coming months. During 2001 we successfully completed the
change of our accounting systems from the use of local currencies to the use of
the euro in all the European countries that have adopted the euro.
BACKLOG AND CUSTOMERS
Our backlog has decreased
significantly since the end of 2000 due to the highly negative downturn in the
semiconductor industry, which also produced an unprecedented high level of
order cancel-lations. Because of this large reduction in our customer demand
and backlog, during 2001 most part of our manufacturing facilities operated
below capacity; in addition, we closed some lines tem-porarily during the year,
mainly at our most mature plants. Also we have reduced the use of external
front-end and back-end services. In 2001, we had several large customers, with
the Nokia group of companies being the largest and accounting for 19.3% of our
revenues. Our top ten customers accounted for approximately 50% of net
revenues. We cannot guarantee that such customers, or any other customer, will
continue to generate revenues for us at the same levels. If we were to lose one
or more of our key customers, or if they were to significantly reduce their
bookings, or fail to meet their payment obligations, our operating results and
financial condition could be adversely affected. |
