Item 1A.
Risk
Factors
In addition to the other information in this Quarterly Report on Form
10-Q,
the following risk factors should be considered carefully in evaluating our business and us. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition.
Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.
Given the nature of the markets in which we participate, as well as macroeconomic uncertainties, we cannot reliably predict future revenues
and profitability and unexpected changes may cause us to adjust our operations. Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could
seriously negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly from
quarter-to-quarter
and
year-to-year.
For example, from fiscal 2008 to fiscal 2009, net income in one year shifted to net loss in the next year. Some of the factors that may affect our quarterly and
annual results are:
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changes in business and economic conditions, including a downturn in demand or decrease in the rate of growth in demand, whether in the global economy, a regional economy or the semiconductor industry;
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changes in market conditions, potentially including changes in the credit markets, currency exchange rates, expectations for inflation or energy prices;
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the reduction, rescheduling or cancellation of orders by customers;
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fluctuations in timing and amount of customer requests for product shipments;
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changes in the mix of products that our customers purchase;
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changes in the level of customers’ component inventories;
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loss of key customers or employees;
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the availability of production capacity, whether internally or from external suppliers;
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the cyclical nature of the semiconductor industry;
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competitive pressures on selling prices;
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strategic actions taken by our competitors;
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market acceptance of our products and the products of our customers;
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fluctuations in our manufacturing yields and significant yield losses;
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difficulties in forecasting demand for our products and the planning and managing of inventory levels;
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the availability of raw materials, supplies and manufacturing services from third parties;
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the amount and timing of investments in research and development;
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damage awards or injunctions as the result of litigation;
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changes in our product distribution channels and the timeliness of receipt of distributor resale information;
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the impact of vacation schedules and holidays, largely during the second and third quarters of our fiscal year; and
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the amount and timing of costs associated with product returns.
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As a result of these factors, many of which are difficult to control or predict, as well as the
other risk factors discussed in this Quarterly Report on Form
10-Q,
we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis. Changes in demand for our
products and in our customers’ product needs could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenues, increase our costs, lower our gross margin percentage
or require us to recognize impairments of our assets. If product demand declines, our manufacturing or assembly and test capacity could be underutilized and we may be required to record an impairment on our long-lived assets, including facilities
and equipment as well as intangible assets and goodwill, which would increase our expenses. Factory planning decisions may also shorten the useful lives of long-lived assets, including facilities and equipment, and cause us to accelerate
depreciation. In addition, if product demand declines or we fail to forecast demand accurately, we could be required to write off inventory or record underutilization charges, which would have a negative impact on our gross margin.
We may not be successful in our acquisitions.
We have in the past made, and may in the future make, acquisitions of other technologies and companies. These acquisitions involve numerous
risks, including:
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failure to retain key personnel of the acquired business;
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diversion of management’s attention during the acquisition process;
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disruption of our ongoing business;
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the potential strain on our financial and managerial controls and reporting systems and procedures;
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unanticipated expenses and potential delays related to integration of an acquired business;
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the risk that we will be unable to develop or exploit acquired technologies;
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the engineering risks inherent in transferring products from one wafer fabrication facility to another;
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failure to successfully integrate the operations of an acquired business with our own;
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the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;
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the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;
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the risks of entering new markets in which we have limited experience;
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difficulties in expanding our information technology systems or integrating disparate information technology systems to accommodate the acquired businesses;
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the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;
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customer dissatisfaction or performance problems with an acquired company’s products or personnel or with altered sales terms or a changed distribution channel;
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adverse effects on our relationships with suppliers;
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the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash;
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the costs associated with acquisitions, including amortization expenses related to intangible assets, and the integration of acquired operations;
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assumption of known or unknown liabilities or other unanticipated events or circumstances; and
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failure or fraud in
pre-acquisition
due diligence.
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We cannot assure that we will be able to successfully acquire other businesses or product lines
or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems.
As
a result of an acquisition, our financial results may differ from the investment community’s expectations in a given quarter. Further, if one or more of the foregoing risks materialize or market conditions or other factors lead us to change our
strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows or stock price
could be negatively impacted.
Our backlog may not result in future revenues.
Customer orders typically can be cancelled or rescheduled by the customer without penalty to the customer. Cancellations or reschedulings are
common in periods of decreasing demand. Further, in periods of increasing demand, particularly when production is allocated or delivery delayed, customers of semiconductor companies have on occasion placed orders without expectation of accepting
delivery to increase their share of allocated product or in an effort to improve the timeliness of delivery. While we are attuned to the potential for such behavior and attempt to identify such orders, we could accept orders of this nature and
subsequently experience order cancellation unexpectedly.
Our backlog at any particular date is not necessarily indicative of actual
revenues for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations.
Fluctuations in the mix of products sold may adversely affect our financial results.
Changes in the mix and types of products sold may have a substantial impact on our revenues and gross profit margins. In addition, more
recently introduced products tend to have higher associated costs because of initial overall development costs and higher
start-up
costs. Fluctuations in the mix and types of our products may also affect the
extent to which we are able to recover our fixed costs and investments that are associated with a particular product or wafer foundry, and, as a result, can negatively impact our financial results.
Our international operations expose us to material risks.
For the nine months ended December 31, 2016, our net revenues by region were approximately 25.3% in the United States, approximately
28.6% in Europe and the Middle East, approximately 43.4% in the Asia Pacific region and approximately 2.7% in India and the rest of the world. We expect net revenues from foreign markets to continue to represent a majority of total net
revenues. We maintain significant business operations in Germany, the United Kingdom, the Philippines and South Korea and work with subcontractors, suppliers and manufacturers in South Korea, Japan, the Philippines and elsewhere in Europe and the
Asia Pacific region. Some of the risks inherent in doing business internationally are:
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foreign currency fluctuations, particularly in the Euro and the British pound;
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challenges in collecting accounts receivable;
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changes in the laws, regulations or policies of the countries in which we manufacture or sell our products, including the impact of the vote in the United Kingdom to leave the European Union;
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trade restrictions, tariffs, customs, sanctions, embargoes and other barriers to importing/exporting materials and products in a cost effective and timely manner, or changes in applicable tariffs or custom rules;
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cultural and language differences;
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employment regulations;
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limited infrastructure in emerging markets;
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seasonal reduction in business activities;
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labor and union disputes;
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terrorist attack or war; and
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economic or political instability.
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Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that
facility are primarily denominated in Euros, and sales of products manufactured in our Chippenham, U.K. facility and our costs at that facility are primarily denominated in British pounds. Fluctuations in the value of the Euro and the British pound
against the U.S. dollar could have a significant adverse impact on our balance sheet and results of operations. “Brexit,” the expected exit by the United Kingdom from the European Union, has, and in the future may, affect the value of
the British pound and the Euro relative to one another and the U.S. dollar. We generally do not enter into foreign currency hedging transactions to control or minimize currency fluctuation risks. Reductions in the value of the Euro or British pound
would reduce our revenues recognized in U.S. dollars, all other things being equal. Changes in the value of the Euro or the British pound could cause or increase losses associated with foreign currency transactions. Fluctuations in currency exchange
rates could cause our products to become more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Alternatively, fluctuations in currency exchange rates in the face of competitive pricing
pressures could lead to lower gross profit margins, as customer prices in one currency fall relative to costs of production experienced in a different currency. If we expand our international operations or change our pricing practices to denominate
prices in other foreign currencies, we could be exposed to even greater risks of currency fluctuations.
Our financial performance is
dependent on economic stability and credit availability in international markets. Actions by governments to address deficits or sovereign or bank debt issues, particularly in Europe, could adversely affect gross domestic product or currency exchange
rates in countries where we operate, which in turn could adversely affect our financial results. If our customers or suppliers are unable to obtain the credit necessary to fund their operations, we could experience increased bad debts, reduced
product orders and interruptions in supplier deliveries leading to delays or stoppages in our production. Alternatively, governmental actions in China or other emerging markets to address economic problems, such as inflation, asset or other
“bubbles” or the transfer of capital out of the country, could also adversely affect gross domestic product or the growth thereof and result in reduced product orders or increased bad debt expense for us. Brexit may result in additional
tariffs on our products manufactured in the United Kingdom and sold elsewhere, resulting in competitive pricing pressures that may adversely affect our results of operations.
In addition, the laws and courts of certain foreign countries may not protect our products or intellectual property rights to the same extent
as do U.S. laws and courts. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in certain foreign countries.
The semiconductor industry is cyclical, and an industry downturn could adversely affect our operating results.
Business conditions in the semiconductor industry may rapidly change from periods of strong demand and insufficient production to periods of
weakened demand and overcapacity. The industry in general is characterized by:
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changes in product mix in response to changes in demand;
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alternating periods of overcapacity and production shortages, including shortages of raw materials supplies and manufacturing services;
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cyclical demand for semiconductors;
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significant price erosion;
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variations in manufacturing costs and yields;
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rapid technological change and the introduction of new products; and
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significant expenditures for capital equipment and product development.
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These factors could
harm our business and cause our operating results to suffer.
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Our dependence on subcontractors to assemble and test our products subjects us to a number
of risks, including an inadequate supply of products and higher materials costs.
We depend on subcontractors for the assembly and
testing of our products. The substantial majority of our products are assembled by subcontractors located outside of the United States. Assembly subcontractors generally work on narrow margins and have limited capital. We have encountered assembly
subcontractors who have ceased or reduced production because of financial problems. We engage assembly subcontractors who operate while in insolvency proceedings or whose financial stability is uncertain. The unexpected cessation of production or
reduction in production by one or more of our assembly subcontractors could adversely affect our production, our customer relations, our revenues and our financial condition. Our reliance on these subcontractors also involves the following
significant risks:
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reduced control over delivery schedules and quality;
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the potential lack of adequate capacity during periods of excess demand;
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difficulties selecting and integrating new subcontractors;
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limited or no warranties by subcontractors or other vendors on products supplied to us;
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potential increases in prices due to capacity shortages and other factors;
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potential misappropriation of our intellectual property; and
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economic or political instability in foreign countries.
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These risks may lead to delayed
product delivery or increased costs, which would harm our profitability and customer relationships.
Further, we use only a limited number
of subcontractors to assemble most of our products. If one or more of these key subcontractors experience financial, operational, production or quality assurance difficulties, we could experience a significant reduction or interruption in supply.
Although we believe alternative subcontractors are available, our operating results could temporarily suffer until we engage one or more of those alternative subcontractors. Moreover, in engaging alternative subcontractors in exigent circumstances,
our production costs could increase markedly.
We depend on external foundries to manufacture many of our products.
Of our net revenues for the nine months ended, December 31, 2016, 48.2% came from wafers manufactured for us by a number of external
foundries. In particular, the wafers for all of our microcontrollers are fabricated at external foundries. Our dependence on external foundries may grow.
Our relationships with our external foundries do not guarantee prices, delivery or lead times or wafer or product quantities sufficient to
satisfy current or expected demand. Generally, these foundries manufacture our products on a purchase order basis. We provide these foundries with rolling forecasts of our production requirements. However, the ability of each foundry to provide
wafers to us is limited by the foundry’s available capacity. At any given time, these foundries could choose to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us. If growth in demand for our
products occurs, our external foundries may be unable or unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth. Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy
our requirements. In addition, we cannot be certain that we will continue to do business with these or other foundries on terms as favorable as our current terms. If we are not able to obtain foundry capacity as required, our relationships with our
customers could be harmed, we could be unable to fulfill contractual requirements and our revenues could be reduced or our growth limited. Moreover, even if we are able to secure foundry capacity, we may be required, either contractually or as a
practical business matter, to utilize all of that capacity or incur penalties or an adverse effect to the business relationship. The costs related to maintaining foundry capacity could be expensive and could harm our operating results. Other risks
associated with our reliance on external foundries include:
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the lack of control over delivery schedules;
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the unavailability of, or delays in obtaining access to, key process technologies;
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limited control over quality assurance, manufacturing yields and production costs; and
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potential misappropriation of our intellectual property.
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Our requirements typically represent a small portion of the total production of the external
foundries that manufacture our wafers and products. One or more of these external foundries may not continue to produce wafers for us or continue to advance the process design technologies on which the manufacturing of our products is based. If we
are required to transition production from one foundry to another, we may make large last-time buys of product at the foundry that we are exiting, which could eventually result in substantial inventory write-offs if semiconductors are not sold or
utilized. These circumstances could harm our ability to deliver our products or increase our costs.
Our gross margin is dependent
on a number of factors, including our level of capacity utilization.
Semiconductor manufacturing requires significant capital
investment, leading to high fixed costs, including depreciation expense. We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly and testing
facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in lower gross margins. Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for
us in the future.
Our success depends on our ability to manufacture our products efficiently.
We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and subcontract assembly
facilities. The fabrication of semiconductors is a highly complex and precise process, and a substantial percentage of wafers could be rejected or numerous dies on each wafer could be nonfunctional as a result of, among other factors:
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contaminants in the manufacturing environment;
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defects in the masks used to print circuits on a wafer;
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manufacturing equipment failure; or
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For these and other reasons, we could experience a decrease in manufacturing
yields. Additionally, if we increase our manufacturing output, the additional demands placed on existing equipment and personnel or the addition of new equipment or personnel may lead to a decrease in manufacturing yields. As a result, we may not be
able to cost-effectively expand our production capacity in a timely manner.
We order materials and commence production in advance
of anticipated customer demand. Therefore, revenue shortfalls may also result in inventory write-downs.
We typically plan our
production and inventory levels based on our own expectations for customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate significantly. In response to anticipated long lead times to obtain inventory and
materials, we order materials and production in advance of customer demand. This advance ordering and production may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize.
If our goodwill, acquired intangible assets or long-lived assets become impaired, we may be required to record a significant charge to
earnings.
Under generally accepted accounting principles, goodwill is required to be tested for impairment at least annually and
we review our acquired intangible assets and long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the
carrying value of our goodwill, acquired intangible assets or long-lived assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flows and slower growth rates in our industry. From time to time,
we have recorded impairment charges and written down the value of goodwill or acquired intangible assets. For example, in the quarter ended December 31, 2016, we recorded a $1.4 million impairment charge relating to intangible assets
acquired in the acquisition of RadioPulse.
Costs related to product defects and errata may harm our results of operations and
business.
Costs associated with unexpected product defects and errata (deviations from published specifications) due to, for
example, unanticipated problems in our manufacturing processes, include the costs of:
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writing off the value of inventory of defective products;
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disposing of defective products;
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recalling defective products that have been shipped to customers;
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providing product replacements for, or modifications to, defective products; and/or
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defending against litigation related to defective products.
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These costs could be substantial and may, therefore, increase our expenses and lower our gross
margin. In addition, our reputation with our customers or users of our products could be damaged as a result of such product defects and errata, and the demand for our products could be reduced. These factors could harm our financial results and the
prospects for our business.
Semiconductors for inclusion in consumer products have shorter product life cycles.
We believe that consumer products are subject to shorter product life cycles, because of technological change, consumer preferences,
trendiness and other factors, than other types of products sold by our customers. Shorter product life cycles result in more frequent design competitions for the inclusion of semiconductors in next generation consumer products, which may not result
in design wins for us. Shorter product life cycles may lead to more frequent circumstances where sales of existing products are reduced or ended.
Uncertain global macroeconomic conditions could adversely affect our results of operations and financial condition.
Uncertain global macroeconomic conditions that affect the economy and the economic outlook of the United States, Europe, China and other parts
of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition. These uncertainties, including, among other things, the impact of “Brexit” on the United Kingdom
and the European Union, sovereign and foreign bank debt levels, the inability of national or international political institutions to effectively resolve economic or budgetary crises or issues, trade disputes or changes in trading rules and tariffs
between nations, consumer confidence, unemployment levels, interest rates, availability of capital, fuel and energy costs, tax rates, and the threat or outbreak of terrorism or public unrest, could adversely impact our customers and vendors, which
could adversely affect us. Recessionary conditions and depressed levels of consumer and commercial spending may cause customers to reduce, modify, delay or cancel plans to purchase our products and may cause vendors to reduce their output or change
their terms of sales. We generally sell products to customers with credit payment terms. If customers’ cash flow or operating or financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, they may not
be able to pay, or may delay payment to us. Likewise, for similar reasons vendors may restrict credit or impose different payment terms. Any inability of current or potential customers to pay us for our products or any demands by vendors for
different payment terms may adversely affect our results of operations and financial condition.
Economic conditions and regulatory
changes leading up to and following the United Kingdom’s likely exit from the European Union could have a material adverse effect on our business and results of operations.
Following a referendum in which voters in the United Kingdom, or U.K., approved an exit from the European Union, it is expected that the U.K.
government will initiate a process to leave the European Union and begin negotiating the terms of the U.K.’s future relationship with the European Union. We face uncertainty regarding the impact of the likely exit of the U.K. from the European
Union. Adverse consequences such as deterioration in global economic conditions, stability in global financial markets, volatility in currency exchange rates, new or increased tariffs or adverse changes in regulation of the cross-border agreements
could have a negative impact on our operations, financial condition and results of operations.
Our debt agreements contain certain
restrictions that may limit our ability to operate our business.
The agreements governing our debt contain, and any other future
debt agreement we enter into may contain, restrictive covenants that limit our ability to operate our business, including, in each case subject to certain exceptions, restrictions on our ability to:
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incur additional indebtedness;
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consolidate, merge or sell our assets, unless specified conditions are met;
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acquire other business organizations;
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redeem or repurchase our stock; and
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change the nature of our business.
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In addition, our debt agreements contain financial covenants and additional affirmative and
negative covenants. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. If we are not able to
comply with all of these covenants for any reason, some or all of our outstanding debt could become immediately due and payable and the incurrence of additional debt under the credit facilities provided by the debt agreements would not be allowed.
If our cash is utilized to repay any outstanding debt, depending on the amount of debt outstanding, we could experience an immediate and significant reduction in working capital available to operate our business. Related to these risks, our lenders
waived a default under our existing Revolving Credit Agreement caused by the leverage ratio, which compared total funded indebtedness as of March 31, 2016 to EBITDA for the four fiscal quarters ended March 31, 2016. The leverage ratio
minimally exceeded the contractually agreed ratio that was effective at the time. As of December 31, 2016, we complied with all of the financial covenants.
As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if
needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us, such as strategic acquisitions or joint ventures.
If we default on our Revolving Credit Agreement, most of our assets may become subject to security interests, which could lead to our lenders
taking possession, selling or otherwise disposing of such assets, or to bankruptcy to forestall such actions.
We estimate tax
liabilities, the final determination of which is subject to review by domestic and international taxation authorities.
We are
subject to income taxes and other taxes in both the United States and foreign jurisdictions in which we currently operate or have historically operated. We are also subject to review and audit by both domestic and foreign taxation authorities. The
determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires significant judgment and estimation. The provision for income taxes can be adversely affected by a variety of factors, including
but not limited to changes in tax laws, regulations and accounting principles, including accounting for uncertain tax positions, or interpretation of those changes. Significant judgment is required to determine the recognition and measurement
attributes prescribed in the authoritative guidance issued by FASB in connection with accounting for income taxes. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in
our consolidated financial statements and may materially affect our income tax provision, net income, goodwill or cash flows in the period or periods for which such determination is made.
Our intellectual property revenues are uncertain and unpredictable in timing and amount.
We are unable to discern a pattern in or otherwise predict the amount of any payments for the sale or licensing of intellectual property that
we may receive. Consequently, we are unable to plan on the timing of intellectual property revenues and our results of operations may be adversely affected by a reduction in future estimated intellectual property revenues.
Our markets are subject to technological change and our success depends on our ability to develop and introduce new products.
The markets for our products are characterized by:
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changing customer needs;
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frequent new product introductions and enhancements;
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increased integration with other functions; and
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To develop new products for our target markets, we must develop, gain
access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. Failure to do so could cause us to lose our competitive position and seriously impact our future revenues.
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Products or technologies developed by others may render our products or technologies obsolete or
non-competitive.
A fundamental shift in technologies in our product markets would have a material adverse effect on our competitive position within the industry.
Our revenues are dependent upon our products being designed into our customers’ products.
Many of our products are incorporated into customers’ products or systems at the design stage. The value of any design win largely
depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and the extent to which the design of the customer’s electronic system also
accommodates incorporation of components manufactured by our competitors. In addition, our customers could subsequently redesign their products or systems so that they no longer require our products. The development of the next generation of
products by our customers generally results in new design competitions for semiconductors, which may not result in design wins for us, potentially leading to reduced revenues and profitability. We may not achieve design wins or our design wins may
not result in future revenues.
We could be harmed by intellectual property litigation.
As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property
rights. We have been sued for purported patent infringement and have been accused of infringing the intellectual property rights of third parties. We also have certain indemnification obligations to customers and suppliers with respect to the
infringement of third party intellectual property rights by our products. We could incur substantial costs defending ourselves and our customers and suppliers from any such claim. Infringement claims or claims for indemnification, whether or not
proven to be true, may divert the efforts and attention of our management and technical personnel from our core business operations and could otherwise harm our business. For example, in June 2000, we were sued for patent infringement by
International Rectifier Corporation. The case was ultimately resolved in our favor, but not until October 2008. In the interim, the U.S. District Court entered multimillion dollar judgments against us on two different occasions, each of which was
subsequently vacated.
In the event of an adverse outcome in any intellectual property litigation, we could be required to pay substantial
damages, cease the development, manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations upon us. An adverse outcome
in an infringement action could materially and adversely affect our financial condition, results of operations and cash flows.
We
may not be able to protect our intellectual property rights adequately.
Our ability to compete is affected by our ability to
protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and
non-disclosure
and licensing arrangements to protect our
intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently
develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with
competitive advantages or will not be challenged by third parties. Nor can we assure that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do
business. We may also become subject to or initiate patentability or interference proceedings in the U.S. Patent and Trademark Office, which can demand significant financial and management resources and could harm our financial results. Also,
others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.
Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to
research and development and the generation of revenues.
The time from initiation of design to volume production of new
semiconductors often takes 18 months or longer. We first work with customers to achieve a design win, which may take nine months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production,
a period that may last an additional nine months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our
customers.
The markets in which we participate are intensely competitive.
Many of our target markets are intensely competitive. Our ability to compete successfully in our target markets depends on the following
factors:
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proper new product definition;
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product quality, reliability and performance;
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timely delivery of products;
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technical support and service;
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design and introduction of new products;
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market acceptance of our products and those of our customers; and
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breadth of product line.
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In addition, our competitors or customers may offer new products based on new technologies,
industry standards or
end-user
or customer requirements, including products that have the potential to replace our products or provide lower cost or higher performance alternatives to our products. The
introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.
Our
primary power semiconductor competitors include Fuji, Hitachi, Infineon, Microsemi, Mitsubishi, On Semiconductor, Powerex, Renesas Electronics, Semikron International, STMicroelectronics, Toshiba and Vishay Intertechnology. Our IC products compete
principally with those of Cypress Semiconductor, NXP Semiconductors, Microchip Technology, NEC, Renesas Electronics and Silicon Labs. Our RF power semiconductor competitors include Microsemi and Qorvo. Many of our competitors have greater financial,
technical, marketing and management resources than we have. Some of these competitors may be able to sell their products at prices at which it would be unprofitable for us to sell our products or benefit from established customer relationships that
provide them with a competitive advantage. We cannot assure that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition.
We rely on our distributors and sales representatives to sell many of our products.
Most of our products are sold to distributors or through sales representatives. Our distributors and sales representatives could reduce or
discontinue sales of our products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these
distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the
semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives. Foreign distributors are typically granted longer payment terms, resulting in higher accounts receivable balances for a
given level of sales than domestic distributors. Our risk of loss from the financial insolvency of distributors is, therefore, disproportionally weighted to foreign distributors. If any significant distributor or sales representative experiences
financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed. For example, All American Semiconductor, Inc., one of our former distributors, filed for bankruptcy in April 2007.
Our future success depends on the continued service of management and key engineering personnel and our ability to identify, hire and
retain additional personnel.
Our success depends upon our ability to attract and retain highly skilled technical, managerial,
marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of Nathan Zommer, Ph.D. and Uzi Sasson, our Chief Executive Officers, and other members of senior management. The loss of the services of one or more
of our senior management or other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants. There is intense competition for qualified employees in the
semiconductor industry, particularly for highly skilled design, application and test engineers. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace
engineers or other qualified individuals who could leave us at any time in the future. If we grow, we expect increased demands on our resources, and growth would likely require the addition of new management and engineering staff as well as the
development of additional expertise by existing management. If we lose the services of or fail to recruit key engineers or other technical and management personnel, our business could be harmed.
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Acquisitions, expansion, technological and administrative changes and software conversions
and updates place a significant strain on our information systems.
Presently, because of our acquisitions, we are operating a
number of different information systems that are not integrated, some of which are no longer supported by software vendors. As a consequence, we use spreadsheets, which are prepared by individuals rather than automated systems, in our accounting. We
perform many manual reconciliations and other manual steps, which result in a high risk of errors. Manual steps also increase the possibility of control deficiencies and material weaknesses.
If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage or grow our
business may be harmed. Our ability to successfully implement our goals and comply with regulations requires an effective planning and management system and process. We will need to continue to improve existing, and implement new, operational and
financial systems, procedures and controls to manage our business effectively in the future.
In improving, consolidating, changing or
updating our operational and financial systems, procedures and controls, we would expect to periodically implement new or different software and other systems that will affect our internal operations regionally or globally. The conversion process
from one system to another is complex and could require, among other things, that data from the existing system be made compatible with the upgraded or different system.
In connection with any of the foregoing, we could experience errors, interruptions, delays, cessations of service and other inefficiencies,
which could adversely affect our business. Any error, delay, disruption, interruption or cessation, including with respect to any new or different systems, software programs, procedures or controls, could harm our ability to forecast sales demand,
manage our supply chain, achieve accuracy in the conversion of electronic data and record and report financial and management information on a timely and accurate basis. In addition, as we add or change functionality, transition or convert to
different systems or programs or integrate additional data in connection with an acquisition, problems could arise that we have not foreseen. Such problems could adversely impact our ability to do the following in a timely manner: provide quotes;
take customer orders; ship products; provide services and support to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run our business. Failure to properly or adequately address these issues could result in
the diversion of management’s attention and resources, adversely affect our ability to manage our business, increase expenses, or adversely affect our results of operations, cash flows, stock price or reputation.
System security risks, data protection breaches and cyber-attacks could disrupt our operations and any such disruption could reduce our
expected revenues, increase our expenses, damage our reputation or adversely affect our stock price.
Computer programmers and
hackers may be able to penetrate our security controls and misappropriate or compromise our intellectual property or other confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and
hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. The costs to us to eliminate or alleviate cyber or other
security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service
and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
We manage
and store proprietary information and sensitive or confidential data relating to our business and the businesses of third parties. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of
proprietary information or sensitive or confidential data about us or our partners or customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our
partners and customers to a risk of loss or misuse of this information; result in regulatory investigations, fines, litigation and potential liability for us; damage our brand and reputation; or otherwise harm our business. In addition, the cost and
operational consequences of implementing further data protection measures could be significant. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
Regulations related to conflict minerals create additional compliance risks and force us to incur additional
expenses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and
accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo, or DRC, and adjoining countries. As a result, the SEC established annual disclosure and reporting requirements for those
companies who use “conflict” minerals mined from the DRC and adjoining countries in their products. These requirements could affect the sourcing and availability of minerals used in the manufacture of our products. As a result, we
cannot ensure that we will be able to obtain minerals at competitive prices. Moreover, there are additional costs associated with complying with the extensive due diligence and audit procedures required by the SEC. In addition, we may face
reputational challenges with our customers and other stakeholders as we have in the past and may in the future be unable to sufficiently verify the origins of all minerals used in our products. Finally, these rules bring implementation challenges.
We may not successfully implement effective procedures to timely or adequately comply with these rules.
We depend on a limited
number of suppliers for our substrates, most of whom we do not have long term agreements with.
We purchase the bulk of our
silicon substrates from a limited number of vendors, most of whom we do not have long term supply agreements with. Any of these suppliers could reduce or terminate our supply of silicon substrates at any time. Our reliance on a limited number of
suppliers involves several risks, including potential inability to obtain an adequate supply of silicon substrates and reduced control over the price, timely delivery, reliability and quality of the silicon substrates. We cannot assure that problems
will not occur in the future with suppliers.
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Increasing raw material prices could impact our profitability.
Our products use large amounts of silicon, metals and other materials. From time to time, we have experienced price increases for many of
these items. If we are unable to pass price increases for raw materials onto our customers, our gross margins and profitability could be adversely affected.
We may not be able to increase production capacity to meet the present and future demand for our products.
The semiconductor industry has been characterized by periodic limitations on production capacity. These limitations may result in longer lead
times for product delivery than desired by many of our customers. If we are unable to increase our production capacity to meet future demand, some of our customers may seek other sources of supply, our future growth may be limited or our results of
operations may be adversely affected.
We face the risk of financial exposure to product liability claims alleging that the use of
products that incorporate our semiconductors resulted in adverse effects.
Approximately 10.2% of our net revenues for the nine
months ended December 31, 2016 were derived from sales of products used in medical devices, such as defibrillators. Product liability risks may exist even for those medical devices that have received regulatory approval for commercial
sale. We cannot be sure that the insurance that we maintain against product liability will be adequate to cover our losses. Any defects in our semiconductors used in these devices, or in any other product, could result in significant product
liability costs to us.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in
applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a
significant impact on our results of operations (see “Critical Accounting Policies and Significant Management Estimates” in Part I, Item 2 of this
Form 10-Q).
Such methods, estimates, and
judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates and judgments could
significantly affect our results of operations.
We are exposed to various risks related to the regulatory environment.
We are subject to various risks related to new, different, inconsistent or even conflicting laws, rules and regulations that may be
enacted by legislative bodies and/or regulatory agencies in the countries in which we operate; disagreements or disputes between national or regional regulatory agencies; and the interpretation and application of laws, rules and regulations. If
we are found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, our business, financial condition and results of operations could be materially and adversely affected.
In addition, approximately 10.2% of our net revenues for the nine months ended December 31, 2016 were derived from the sale of products
included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the U.S. Food and Drug Administration, or FDA. The FDA and certain foreign regulatory
authorities impose numerous requirements for medical device manufacturers to meet, including adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other countries, which include testing, control and documentation
requirements. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by comparable agencies in other countries. Our failure to comply
with applicable regulatory requirements could prevent our products from being included in approved medical devices or result in damages or other compensation payable to medical device manufacturers.
Our business could also be harmed by delays in receiving or the failure to receive required approvals or clearances, the loss of obtained
approvals or clearances or the failure to comply with existing or future regulatory requirements.
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We invest in companies for strategic reasons and may need to record impairments in the
value of the investments.
We make investments in companies to further our strategic objectives and support our key business
initiatives. Such investments include investments in equity securities of public companies and investments in
non-marketable
equity securities of private companies, which range from early-stage companies that
are often still defining their strategic direction to more mature companies whose products or technologies may directly support a product or initiative. The success of these companies is dependent on product development, market acceptance,
operational efficiency and other key business success factors. The private companies in which we invest may fail for operational reasons or because they may not be able to secure additional funding, obtain favorable investment terms for future
financings or take advantage of liquidity events such as initial public offerings, mergers and private sales. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an
other-than-temporary decline in the fair value exists for the equity securities of the public and private companies in which we invest, we write down the investment to its fair value and recognize the related write-down as an investment loss.
Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment, even at a loss. Our investments in
non-marketable
equity securities of private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could negatively
affect our results of operations.
Our ability to access capital markets could be limited.
From time to time, we may need to access the capital markets to obtain long-term financing. Although we believe that we can continue to access
the capital markets on acceptable terms and conditions, our flexibility with regard to long-term financing activity could be limited by our existing capital structure, our credit ratings and the health of the semiconductor industry. In addition,
many of the factors that affect our ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, are outside of our control. There can be no assurance that we will continue to have
access to the capital markets on favorable terms.
Geopolitical instability, war, terrorist attacks and terrorist threats, and
government responses thereto, may negatively affect many aspects of our operations, revenues, costs and stock price.
Any such
event may disrupt our operations or those of our customers or suppliers. Our markets currently include South Korea, Taiwan, Russia and Israel, which are currently experiencing political instability. Additionally, we have accounting and
administrative operations in the Philippines, an external foundry and some of our design and sales operations are located in South Korea and assembly subcontractors are located in Indonesia, the Philippines and South Korea.
Business interruptions may damage our facilities or those of our suppliers.
Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake, flood and other natural disasters, as well as
power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan and do not have backup generators. Our facilities in California are located near major earthquake fault lines and have
experienced earthquakes in the past. Globally, for example, the March 2011 earthquake in Japan adversely affected the operations of some of our Japanese suppliers, which limited the availability of certain production inputs to us for a period of
time. If a natural disaster occurs, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition and results of operations and cash flows. We cannot be sure that the insurance we maintain
against general business interruptions will be adequate to cover all our losses.
We may be affected by environmental laws and
regulations.
We are subject to a variety of laws, rules and regulations related to the use, storage, handling, discharge and
disposal of certain chemicals and gases used in our manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional
expenses, product costs could significantly increase. Failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.
Nathan Zommer, Ph.D. owns a significant interest in our common stock.
Nathan Zommer, Ph.D., Chief Executive Officer, beneficially owned, as of January 26, 2017, approximately 21.2% of the outstanding
shares of our common stock. As a result, Dr. Zommer can exercise significant control over all matters requiring stockholder approval, including the election of the Board of Directors. His holdings could result in a delay of, or serve as a
deterrent to, any change in control of our company, which may reduce the market price of our common stock.
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Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date. The future market price of our common stock may also fluctuate
significantly in the event of:
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variations in our actual or expected quarterly operating results;
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announcements or introductions of new products;
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technological innovations by our competitors or development setbacks by us;
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conditions in semiconductor markets;
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the commencement or adverse outcome of litigation;
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changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;
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announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by participants in the stock market;
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terrorist attack or war;
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sales of our common stock by one or more members of management, including Nathan Zommer, Ph.D., Chief Executive Officer; or
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general economic and market conditions.
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In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies. These fluctuations have often been unrelated or disproportionate to the operating
performance of companies in our industry, and could harm the market price of our common stock.
The anti-takeover provisions of our
certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control.
Our
Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by
our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or
prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction,
without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.
Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal
to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of
our common stock. The Delaware statute makes it more difficult for us to be acquired without the consent of our Board of Directors and management.