Adaptec 2007 Annual Report Download - page 25

Table of Contents
characteristics include evolving industry standards, short product life spans and new manufacturing and design technologies. Our products often must be
redesigned because manufacturing yields on prototypes are unacceptable or customers redefine their products to meet changing industry standards or customer
specifications. As a result, we develop products many years before volume production and may inaccurately anticipate our customers’ needs. Redesigning our
products is expensive and may delay production of our products. Our products may become obsolete during these delays, resulting in our inability to recoup our
initial investments in product development.
The final determination of our income tax liability may be materially different from our income tax provision.
We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally our
calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates
are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income
tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a
result of changes in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on
our income tax provision and results of operations in the period or periods in which that determination is made, and potentially to future periods as well. For
instance, we significantly increased our tax provision at the end of 2006 due to an increase in our estimated tax liability following receipt in 2007 of a written
communication from a tax authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group.
If foreign exchange rates fluctuate significantly, our profitability may decline.
We are exposed to foreign currency rate fluctuations because a significant part of our development, test, and selling and administrative costs are incurred
in Canadian dollars, and our selling costs are incurred in a variety of currencies around the world. The U.S. dollar has devalued significantly compared to the
Canadian dollar and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange
rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate movements. In
addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a
12-month maturity.
We regularly limit our exposure to foreign exchange rate fluctuations from our foreign net asset or liability positions. Our accrual for income taxes is
partially hedged against foreign exchange gains and losses, however, we recorded a net $18.2 million foreign exchange loss on the revaluation of our tax liability
because of the weakening of the U.S. dollar. Our profitability would be materially impacted by a 5% shift in the foreign exchange rates between U.S. and
Canadian currencies.
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Source: PMC SIERRA INC, 10-K, February 22, 2008