Infineon Technologies:

Time to Cash in Your Chips?

08/2014-5961

This case was written by Denis Gromb, Professor of Finance, and Joël Peress, Associate Professor of Finance, both at

INSEAD, with the support of doctoral student Jim Goldman. It is intended to be used as a basis for class discussion

rather than to illustrate either effective or ineffective handling of an administrative situation.

The help of Dominik Asam, member of Infineon’s Management Board, Chief Financial Officer, is gratefully

acknowledged.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at

cases.insead.edu.

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In late 2011, Infineon’s leadership was reviewing the company’s financial policy. The semiconductor firm had just completed a most remarkable turnaround and, with record revenue and the sale of its wireless chip unit, was now sitting on net cash of €2.4bn, some 40% of its €5.9bn assets. While returning cash to shareholders seemed reasonable, the flexibility afforded by Infineon’s cash reserves was critical given the sector’s cyclical and capital-intensive nature, the uncertain level of investment needed and the need to be on the lookout for acquisition opportunities. Therefore the review was bound to be a balancing exercise, and management had started receiving unsolicited and conflicting advice as to whether Infineon should disburse cash, how much, and how.

Infineon Technologies AG

Infineon developed, produced and marketed semiconductor products for a wide variety of microelectronic applications focused on energy efficiency, mobility and security. Based near Munich and listed in Frankfurt, Infineon had a €6bn market capitalization, 26,000 employees, global sales and operations on three continents. With €4bn in revenue, it ranked second in Europe and twelfth in the world (Exhibits 1 and 2).

Infineon’s three units were all global market leaders. Automotive (ATV, 39% of sales), its vehicle electronics unit, provided microcontrollers, power chips and sensors for engine and transmission control, chassis and comfort electronics (e.g., suspension), safety systems (e.g., airbags), or battery control for electric cars. Industrial & Multimarket (IMM, 45% of sales) produced power chips involved in efficient generation, transmission and use of electricity in industrial applications or home appliances: high speed trains, computers, medical technology, lighting management systems, consumer electronics as well as communication and navigation systems. Chip Card & Security (CCS, 11% of sales) delivered electronic security in chip cards and mobile devices: electronic ID, SIM cards, credit cards, trusted computing, etc.

Power chips were IMM’s key product and accounted for much of ATV’s revenue too, contributing some 60% of total revenue. These were essentially power switches able to turn ‘on’ and ‘off’ at extremely high frequency while remaining efficient, i.e., allowing only extremely low losses when on and leaks when off. Another core competency of Infineon’s was microcontrollers, i.e., microprocessors with a memory embedded within an application and programmed to control its operations. These were pervasive particularly in Infineon’s target markets for cars and chip card applications.

The production of chips was knowledge-intensive and required extreme accuracy. The front-end process occurred in the cleanroom, at the heart of the fabrication plant (fab), which had to be free of dust and vibrations, and within narrow temperature and humidity banks. Very thin, flat discs of pure silicon (wafers) served as the substrate for hundreds of chips created in a long series of meticulous photolithographic and chemical steps. The back-end process involved dicing, packaging and testing the chips on each wafer. Infineon allocated tasks among its front-end and back-end sites in Europe and Asia based on costs, capabilities, technology complexity, etc. Production was kept in-house for differentiated products and outsourced to dedicated foundries for more standard items.

Despite its specific focus within the semiconductor space, Infineon shared the sector’s main traits: cyclicality, capital intensity, long lead times for new technology and manufacturing capacity, intense rivalry, and fast-paced innovation.

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The sector, which had enjoyed above-GDP average growth for decades, reacted dramatically to macroeconomic fluctuations (Figure 1).1 In booms, production struggled to meet demand, and firms added capacity while customers built up inventory for fear of a shortage of inputs. Indeed, although usually accounting for only a small part of their products’ value, chips were crucial in enabling functionality. In downturns, sagging end-market demand coupled with inventory reduction throughout the supply chain caused massive drops in demand. Given the sector’s high fixed-cost base, lower volume caused steep margin declines. In commoditized segments such as dynamic random access memory (DRAM) computer chips the down-cycle was aggravated by collapses in average selling prices.

Infineon had followed a very rocky path (see A Brief Financial History). However, it had shed its riskiest units in a recent turnaround: memory and communication (wireline and wireless). DRAMs, which once represented 50% of sales, were a commodity subject to wild price swings, far more volatile than its other businesses. Wireless entailed making recurrent large bets: global handset players each picked one supplier per year for their new phones, saddling remaining suppliers with huge development losses.

The reshaped Infineon was safer. Now many projects entailed exclusive, long-term relationships with customers and an intimate knowledge of their systems. Prices were often set contractually and the long-term relationships limited the scope for opportunistic renegotiation. This left volume as the main top-line contingency. Even so, Infineon remained highly cyclical and subject to risks such as technology, competition or exchange rates.

Infineon ranked first or second in its core markets. It held the largest share of the $16bn global power chips market (11.2% in 2010). Scale was critical as it brought economies in R&D and manufacturing, as well as customer traction for more standard product lines. The industry was characterized by fierce rivalry, government intervention notably in developing countries, and the emergence of new Asian markets and players, the latter operating for now at the lower end of the market. (Infineon had also had its fair share of the frequent lawsuits between rivals over intellectual property.) Infineon’s size, technological and cost leadership, and firepower were deemed sufficient to fend off rivals in the foreseeable future.

R&D consumed vast resources: Infineon’s R&D sites employed 3,700 staff and R&D spending had risen by 10% to €439m in FY11 (11% of revenue).2 Intense pressure on cost and performance drove product and process innovation at a staggering pace, e.g., on-chip power density doubled every decade. Yields, the fraction of chips produced that were actually operational, had risen from 10-30% in the 1980s to 80-90%. Infineon explored new materials such as silicon carbide or gallium nitride to meet tighter constraints on electrical resistance, size, etc. In a recent world premiere, it had also produced power chips on 300mm diameter thin wafers, offering a 20-30% lower unit cost than 200mm wafers for fully utilized fabs.3

Investment in fabs and equipment was huge, too. Infineon was building up production and R&D capacity to lower its costs and keep pace with demand, although long lead times made timing tricky, e.g., two to three years were needed to set up a cleanroom, and another two to 18 months to equip it. For instance, for its Power 300 technology, Infineon had bought real estate and fabs in Dresden for €100m from Qimonda, its own defunct memory unit. It would

1 Despite high net cash levels, the sector’s equity beta was about 1.5, among the highest, and Infineon’s 1.2. 2 FY11 refers to Infineon’s 2011 fiscal year, from October 1, 2010 to September 30, 2011. 3 Until then, and for about ten years, only logic and memory chips had been produced on 300mm wafers.

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invest €250m there, and €198m on production capacity in Austria. Infineon planned to spend €250m in Singapore over several years to bolster production and R&D capacity. It would also invest hundreds of millions more to expand its Kulim (Malaysia) site where it was building a second cleanroom, and its Malacca (Malaysia) and Wuxi (China) back-end sites. Overall, the €887m CAPX of FY11 (22% of revenue) was over twice FY10’s level.

Given its leadership in target markets, complete product portfolio, and blue-chip customers, Infineon saw no strategic need for M&A. Even so, it remained open to selective deals, e.g., next-generation technology buy-ins for IMM in power, power conversion or power management. However, acquisitions would have to compete on purely financial terms with other cash deployment options, i.e., organic growth and pay-outs. The bar was high.

“If possible, I don’t want to buy when stocks are peaking,” said CEO Bauer. “As we are not under pressure to buy someone, we would like to watch the market a little bit and see when there is a better timing.” 4

Indeed, organic growth delivered value with relative certainty (Infineon’s target margin of 15% easily compensated for a high degree of capital intensity, as one euro of investment generated about one euro of sales). Instead, M&A premiums made realizing similar gains difficult.5 The buyback hurdle was higher still as Infineon would only consider deals yielding higher EPS and EPS growth than a buyback giving the same pro forma leverage.

A Brief Financial History

In March 2000, Siemens, the electrical engineering and electronics giant, floated Infineon, its recently spun-off semiconductor unit, in Frankfurt and New York. Amid investor hysteria, the stock, offered at €35, closed at €70. By June, it had reached €90. Infineon was the world’s eighth largest chipmaker and the eighth most valuable German stock.6

A record year for the sector in 2000 was followed by its worst to date, with sales down 32%. The outlook, which had started clouding up in the fall, turned apocalyptic as the bursting of the tech bubble, the 9/11 attacks, and the worsening US economy spread global gloom. Infineon was selling DRAMs for $2 vs. $15 a year earlier, and soon its other businesses crashed too.

Infineon launched a cost-savings plan, cutting 5,500 jobs and €1.5bn in CAPX, but maintained its investment in R&D and key technology, chiefly an ultramodern €1.1bn 300mm fab in Dresden. Investing through the cycle would hopefully pay off when it turned. Meanwhile, finances were a pressing issue. Despite a stock price in free-fall, Infineon bit the bullet and sold €1.5bn of equity at a €25 fire-sale price which, with €2bn in credit lines and €700m from divestments, avoided cutting vital investments or seeing debt soar alarmingly.

For two long years conditions remained dire. To make matters worse, in mid-2002, the US Department of Justice started investigating a ten-firm DRAM price-fixing conspiracy involving Infineon. To avoid being forced into a corner, Infineon seized the chance to build

4 Statement in an interview in Singapore on 6/1/2011. Source: Bloomberg. 5 Texas Instruments’ recent $6.5bn acquisition of National Semiconductor had involved a 78% premium. 6 Having sold a 29% stake in the IPO, Siemens would reduce its holdings over time down to zero in 2006.

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reserves afforded by low interest rates and high volatility and raised €1bn with a 5-year convertible bond in 2002 and €700m with a 7-year convertible in 2003. 7

Things started looking up mid-2003 as revived DRAM prices allowed the chip sector to get back into the black. In 2004, global chip sales rose 30%.8 Infineon was doing better too, partly thanks to improved productivity: after €2bn in losses since 2000, it posted a profit in FY04. However, rivals had also adopted new production processes, with modern fabs in Asia undermining its hard-won cost advantage. On the finance front, its leverage remained high.

The boom was woefully short and by mid-2005 the chips were down again. With mostly dollar sales, the strong euro compounded Infineon’s pain. Mid-2006, Infineon floated 14% of Qimonda, its troubled memory unit, on the NYSE. The initial public offering (IPO) at $13 valued Qimonda at a discount to its peers.

By 2007, Infineon’s efforts had paid off. Yet fat returns had fuelled an investment binge and, right on cue, the tech sector entered a downturn, this time exacerbated by the global financial and economic crisis. In early 2008, Infineon cut all its forecasts. Sinking DRAM prices forced it to write down Qimonda’s value, resulting in a €1.4bn loss. A new plan with deep cost and job cuts was launched. In FY08, Infineon made a €3bn loss and had €1bn in debt (Exhibit 3).

In early 2009, Qimonda warned cash might soon run out as DRAM prices crashed to 85ȼ (vs. $6 in 2007). Having failed to secure public aid and with no acquirer volunteering (other chipmakers, themselves in dire straits, were quietly hoping its exit might ease the oversupply), Qimonda went into liquidation. Infineon, still holding a 77.5% stake, set aside hundreds of millions of euros in provisions for possible liabilities (which remained highly uncertain).

Infineon itself flirted with disaster: it owed €900m in debt amid deep losses and a rock-bottom €0.35 stock price. With its back to the wall, it engineered a great escape: it raised €195.6m with a 5-year convertible, sold its wireline unit for €243m to Golden Gate Capital, a private equity group, and raised €725m in a €2.15 rights issue, which allowed it to pay down some of its debt and to build up cash reserves.

At last, Q4 showed a profit as demand perked up ahead of the recovery.9 Infineon doubled its FY10 sales forecast as rampant demand pulled it back from the brink.10 In early 2011, it sold its wireless unit (representing 30% of its sales) to Intel for €1.1bn.11 Just as Infineon completed a remarkable turnaround, a strong upturn kicked in, stretching its capabilities. With plants fully loaded and given long capacity expansion lead times, it found itself struggling to keep up with demand.

7 Infineon, among others, was eventually fined $160m in 2004. This triggered various lawsuits. In 2010,

Infineon paid €56.7m in a settlement with the EU competition authorities. 8 CEO Schumacher, unpopular with the IG Metall union for his layoffs, departed abruptly in March that year. 9 Infineon also delisted from the NYSE where it had been trading as an ADR, to migrate to the Over-the-

Counter market OTCQX and avoid the administrative costs linked with the Sarbanes-Oxley Act of 2002. 10 In early 2010, Infineon became embroiled in a high-profile governance drama as several institutional

investors led by UK fund Hermes tried to block chairman-designate Klaus Wucherer in a proxy fight. They viewed the trained engineer as part of the Siemens old guard, lacking in strategic and financial skills. The rebels were finally crushed by a 70% majority but Wucherer agreed to step down early.

11 The sale was strategic, not liquidity driven. Infineon had been providing cell phone modems. The cost-sensitive handset sector now needed modem and application processor on the same chip. This technological shift implied even greater investment levels per product cycle, a bet Infineon was not best placed to take.

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Looking Ahead

Going forward, analysts saw much sector growth coming from the BRICS (Brazil, Russia, India, China, South Africa) and other emerging markets, but the more immediate outlook was mixed given global economic uncertainties (forecasts ranged from 3% growth to a recession).

Prospects were best for ATV and IMM, both set to benefit from the BRICS’ growing middle classes and the demand for cars, electrical devices and power infrastructure they generated. ATV would also gain from the rise in semiconductor content in cleaner and safer vehicles, and from that of e-mobility. Hybrid/e-vehicles, forecast to go from one to five million over 2011-15, had $700 of semiconductor content vs. $300 per combustion engine vehicle.

IMM’s power chips would also be in demand due to the rise in energy needs, the shift toward renewable energy sources, and the search for efficiency in response to rising energy prices and environmental awareness. A telling example was power stations’ semiconductor content of €250,000 vs. €7.5m for same-capacity wind farms. Another was that the CO2 footprint of datacentres, which Infineon helped reduce, now exceeded that of airlines.

For CCS, growth would come from electronic ID cards and transport tickets, the latter taking off due to worldwide urbanization. For instance, Germany had begun issuing electronic ID cards and other countries had similar plans. Electronic systems integration and the explosion of web-based mobile devices made data security a growth area too. New security-intensive technologies included cloud computing, smart metering and near field communication.

On average, the current units had grown at a 7.6% rate since 2000. While growth could reach 10% in normal times (10% or more at ATV and IMM and 5-7% at CCS), it was set to drop from 51% in FY10 and 21% in FY11 to a mid-single-digit percentage contraction in FY12.

Yet Infineon would maintain investment to prepare for a rise in demand in FY13. Hence for FY12, CAPX plans were similar to FY11’s €887m, albeit 20% below initial forecasts, and R&D plans included a 5-10% rise. That said, forecasting investment needs was notoriously hazardous (e.g., the initial CAPX target for FY11 had been €700m, over 25% off the mark).

Infineon’s FY11 “segment result” margin was 20%, a record level for its current businesses, but one it deemed repeatable in good times. While the FY12 forecast was in the low-to-mid-teens, Infineon assumed a 15% average margin across the cycle and a 15% tax rate, implying a 12.75% average after-tax margin.12

The Payout Decision

By year-end 2010, with net cash of €1.3bn and higher free cash flows, CEO Bauer announced that Infineon would pay a dividend, its first since 2000. The news sent the stock up 5%.

In FY11, Infineon used €308m for capital returns: it paid a €0.10 dividend for FY10 (€109m in total), repurchased €173m worth of deep-in-the-money convertible bonds, and issued put warrants, the exercise of which meant a €26m buyback.

12 The low effective tax rate forecast came from over €3bn in tax-loss-carry-forwards, various tax subsidies

(e.g., in Austria or Malaysia), and low tax rates in several countries of operation. Despite the 29% German statutory corporate tax rate, Infineon had enjoyed single digit effective tax rates in the last two years.

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Bauer explained:

“We want to be relatively predictable regarding dividend payments. We are now in a business model where we can afford a regular dividend, and we also announced more returns through buybacks over the course of the next years.” 13

As of September 2011, Infineon’s net cash position was of €2,387m.14 The 80% year-on-year increase came mostly from the divestiture of its wireless unit as well as from record profits in FY11. This level of liquidity was atypical, both by Infineon’s historical standards and relative to its industry peers (Figures 4 and 5). It soon started attracting attention:

“[I]nvestors will be wondering how chief executive Peter Bauer intends to spend Infineon's most eye-catching asset – its €2.4bn of net cash. […] With the shares off 15% this year, Mr Bauer may be tempted to buy back more stock. Or he could go on the acquisition trail. He plays that down, at least in the short term while overcapacity and the global economic slowdown cause havoc with revenue and earnings forecasts. Given that Infineon itself expects a ‘weak year’ for semiconductors in 2012, hoarding cash is not a bad tactic in uncertain economic times. […] The longer it sits on its hands, however, the more tempting a target Infineon becomes for bigger rivals.” 15

Some analysts had been warning for a while about possible downsides to Infineon’s fortune:

“[W]e are concerned that with €2bn of cash burning a hole in management’s pocket, a return to profligacy could see history repeat itself. Management is already guiding for a CAPX hike of 70% in FY11 in addition to potential acquisitions. A small dividend and share buyback is a token concession to shareholders.” 16

Infineon was only one of many technology sector firms sporting large cash balances, Apple’s $50bn being an extreme example. Some observers were bemoaning these as destroying value, like, for instance, a fund manager quoted in the Wall Street Journal:

“We absolutely love the product strategy. However, they are leaving money on the table by having such a large cash balance well below their cost of capital. The cash is earning near zero. [… T]here will be more and more pressure, as overall returns of capital start to reflect that such a large part of the asset base is returning zero.” 17

With a WACC around 10-12% and given the current environment of extremely low interest rates, Infineon was the target of similar critiques.

13 Statement in an interview in Singapore on 6/1/2011. Source: Bloomberg. 14 Gross cash comprised cash and cash equivalents (€1,007m), and financial investments (€1,685m) mostly

held in bank accounts and money market funds. Net cash was defined as gross cash (€2,692m) less short-term debt (€68m) and long-term debt (€237m). The debt was mostly legacy debt or opportunistic loans governments (e.g., China, Malaysia) subsidized to develop an industry they viewed as strategic.

15 Lex Column, The Financial Times, 11/17/2011. 16 James Crawshaw, “Sawing the Seeds for the Next Downturn,” S&P Equity Research, 11/17/2010. 17 Dennis K. Berman, “Apple Holders: Give us Our Cash!” The Wall Street Journal, 1/18/2011.

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Infineon’s leadership had started receiving unsolicited – and conflicting – advice from various quarters as to whether to disburse cash, how much, and by what means.

Some shareholders 18 advocated keeping the cash balance to preserve the financial flexibility Infineon needed to maintain its effort in R&D and CAPX, follow its organic growth path, exploit attractive acquisition prospects, and sail safely through any storm. After all, bankruptcy had seemed imminent only three years prior, and with Qimonda promising to remain a long-term headache, too much cash was better than too little.19

They were also sceptical about relying on credit lines. A hard lesson from the crisis was that these involved clauses and counterparty risk, and had a tendency to vanish when most needed. Moreover, Infineon did not need a credit rating as of now, but might one day, and backward-looking rating agencies might then be favourably impressed by its financial conservatism.

Some major customers saw a strong balance sheet as a guarantee of continued supply, and sometimes as insurance that they would not be dragged into having to rescue a supplier. Many relied critically on Infineon’s deliveries over several years, often through long-term contracts (Capacity Insurance Programmes) securing access to its technology and production capacity. Financial solidity was now part of Infineon’s pitch book, especially for long-term projects. Trade unions, too, regarded the cash cushion as ensuring sustained activity and employment and as safeguarding pensions, although some proposed spending part of the cash on wages.

Other parties, however, thought Infineon could well afford to part with a sizeable portion of its liquidity reserves, although they differed in their preferred payout method. For instance, US investors who were the most familiar with repurchases, which many US corporations conducted routinely, favoured a share buyback program of some kind, whereas UK investors preferred an increase in cash dividends on a regular or exceptional basis.

German investors, who had been burnt in the past, made a point about timing: some cash ought to be returned to shareholders, but with the cycle at its peak, now was not the time to buy shares. That said, many equity analysts had gone on record as saying that at around €6, the stock was a steal, with markets possibly underestimating the defensive qualities of the reshaped Infineon due to the lack of a visible track record over a full cycle.20 They had issued “buy” recommendations and set price targets around €8, and for some as high as €10.

Infineon’s past buyback methods had to be considered as well.

First, most of the convertible bonds issued in the dark hours of 2009 were still outstanding. (They matured in 2014, had a 7.50% coupon, a €2.61 conversion price, and were callable from 01/06/12.) Given the stock’s dramatic rally since 2009, the conversion option was deep-in-the-money. The bonds traded as quasi-equity and buying some back would be akin to

18 The largest shareholders were international institutions: Dodge and Cox International Stock Fund (9.95%),

BlackRock (5.08%), Capital Research and Management (5.06%), and EuroPacific Growth Fund (3.06%). 19 The insolvency administrator (a law firm) was seeking billion euros in damages from Infineon, claiming it

had overvalued the assets it had contributed to create Qimonda, which Infineon denied. The complex case would likely reach higher courts and last for years.

20 As of 09/30/2011, Infineon had 1,087m shares outstanding, trading at €5.59. For the end of FY08, FY09 and FY10, it had 750m shares trading at €3.92, and 1,087m shares trading at €3.86 and €5.08 respectively.

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buying back shares except for one attractive tax angle: the implied buyback loss would be tax-deductible for Infineon.21

Second, market conditions appeared propitious for issuing put warrants: the volatility of Infineon’s enterprise value as estimated from the market prices of calls and puts (its “implied volatility”) far exceeded its peers’ despite the large cash reserves. Some commentators wondered whether the put warrants programme should be scaled up substantially.

The tax implications of retaining or disbursing cash and of different payout methods were also debated. For one, the cash balance generated interest, on which Infineon paid corporate taxes. At the investor level, tax issues were complex due to Infineon’s international ownership. In Germany, at least, individual investors paid 26.25% tax on dividends and interest income. Buyback-implied capital gains, which depended on the price the investor had paid for the stock, were also taxed at 26.25% except for shares bought before 2008, which were tax-exempt. For corporate investors, dividends and capital gains were tax-free, while interest income was subject to the 29% corporate tax rate.

Reaching a decision about the payout would entail two steps. First, assessing whether the company should pay out some of its cash balance, and if so, how much. At a broad level this required weighing not only how much cash Infineon needed, but also the potential ills of holding cash in excess. Second, if cash were to be distributed, a wide array of disbursement methods would have to be contemplated. Crucially, Infineon would have to articulate a rationale for its decision and communicate it in a manner markets would find palatable.

21 At issuance, the bond’s value was split into a liability and an equity component for accounting purposes.

The liability component’s fair value was estimated as the present value of the bond payments using a suitable discount rate, i.e., the yield-to-maturity of similar but straight bonds. The liability’s carrying amount on the books evolved with payments made. At repurchase, a fair value was estimated anew as the remaining payments’ present value. The difference with the carrying amount was recognized as a tax-deductible loss.

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Figure 1: World GDP and semiconductor revenue (1997-2011) Figure 3a: IFX stock price and DJ STOXX 600 Tech Index (2000-2011)

Figure 2: Infineon’s net margin and revenue (1997-2010)

Figure 3b: IFX stock price and DJ STOXX 600 Tech Index (2007-2011)

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IFX revenue in €bn (right axis)024487296120144168192216240264288312336360

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Figure 4a: Infineon’s cash and debt ratios (2001-2011) Figure 5a: Infineon and industry peers’ Cash/Sales (FY11)

Figure 4b: Infineon’s cash and debt positions in €m (2001-2011)

Figure 5b: Infineon and industry peers’ Gross Debt/EBITDA (FY11)

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Exhibit 1: Infineon Worldwide

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Exhibit 2: Infineon’s Units (2011)

Automotive(39% sales)

Industrial and Multimarket(45% sales)

Chip Cards and Security(11% sales)

Applications Applications ApplicationsPowertrains (engine and transmission control); Hybrid/electric cars (drive control for electric motor, battery management, charger); Chassis and comfort electronics (steering, suspension, lights, AC, sunroof, power windows, windshield wipers, central body control units, door electronics); Safety systems (ABS, airbags, ESP, distance warning)

Renewable energy generation, energy transmission and conversion; Electric drive control for industrial applications and home appliances; Lighting management systems and LED lighting; Power supply for computers (servers, PCs, notebooks, netbooks, tablets), games consoles and consumer electronics; Peripheral devices for PCs and games consoles and in industrial and medical engineering applications; Radio-frequency ICs with protection function for navigation and communication devices (e.g. GPS, receivers, smartphones, digital TVs)

SIM card; Payment systems; Near Field Communication (NFC); Electronic passports, ID cards, healthcare cards and driver’s licenses; Transport, ticketing and access control; Object identification; Platform security applications and system solutions; Authentication, e.g. for pay TV, games consoles, accessories, spare parts and industrial controllers

Key customers Key customers Key customers

Autoliv, Bosch, Continental, Delphi, Denso, Hella, Hyundai, Kostal, Lear, Mitsubishi, TRW, Valeo

ABB, Alstom, Bombardier, Dell, Delta, Ericsson, General Electric, HP, LG Electronics, Microsoft, Power One, RIM, Rockwell, Samsung, Schneider Electric, Semikron, Siemens, SMA Solar Technology

Beijing Watch Data, Gemalto, Diesecke & Devrient, Morpho, Oberthur, US Government Printing Office

Market shares Market shares Market sharesRenesas (Japan, 14%), Infineon (10%), STMicroelectronics (France-Italy, 9%), Freescale (USA, 8%), NXP (Netherlands, 6%)

Infineon (12%), Mitsubishi (Japan, 8%), Toshiba (Japan, 7%), STMicroelectronics (France-Italy, 6%), Intenational Rectifier (USA, 5%)

Infineon (25%), NXP (Netherlands, 24%), Samsung (South Korea, 21%), STMicroelectronics (France-Italy, 18%), SHHIC (China, 10%)

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Exhibit 3: Infineon Financial Statements (2008-2011)

Income Statement (in millions of Euros) FY2008 FY2009 FY2010 FY2011Sales 3 903 2 184 3 295 3 997Cost of goods sold 2 029 1 234 1 722 1 979R&D expenses 606 319 399 439Selling, general & adminstrative expenses 517 332 386 449Other operating income (expenses) -245 -29 -104 -30 EBITDA 506 270 684 1 100Depreciation and amortization 552 453 336 364EBIT -46 -183 348 736Interest income (expenses) -123 -53 -66 -26 Participations in associates/affiliates 4 7 8 4EBT -165 -229 290 714Income taxes 39 4 -22 -30 Minority interest -812 -48 1 0Discontinued operations (net of tax) -3 543 -441 348 375Net income -2 935 -626 659 1 119Balance Sheets (in millions of Euros)Assets FY2008 FY2009 FY2010 FY2011Cash and other liquid assets 892 1 507 1 727 2 692Accounts receivable 799 449 622 510Inventories 665 460 514 507Other current assets 724 514 675 671Assets held for sale 2 129 112 495 5Current assets 5 209 3 042 4 033 4 385Property, plant and equipment (net) 1 310 928 838 1 343Goodwill and other intangible assets 443 369 87 111Financial assets 20 27 35 34Fixed assets 1 773 1 324 960 1 488Total assets 6 982 4 366 4 993 5 873Liabilities FY2008 FY2009 FY2010 FY2011Short-term debt 207 521 133 68Accounts payable 506 384 659 720Current provisions 424 436 553 810Other current liabilities 413 308 286 407Liabilities held for sale 2 123 9 177 0Current liabilities 3 673 1 658 1 808 2 005Long-term debt 963 329 263 237Pension plans 43 94 146 168Other liabilities 142 192 151 108Total liabilities 4 821 2 273 2 368 2 518Shareholders' equity 2 161 2 093 2 625 3 355Total liabilities and equity 6 982 4 366 4 993 5 873