ITEM 1A. RISK FACTORS.
Our company is subject to a number of risks. Some of these risks are common in the fabless semiconductor industry, some are the same or similar
to those disclosed in previous SEC filings, and some may be present in the future. You should carefully consider all of these risks and the other information in this report before investing in PMC. The fact that certain risks are endemic to the
industry does not lessen the significance of the risk.
As a result of the following risks, our business, financial condition, operating
results and/or liquidity could be materially adversely affected. This could cause the trading price of our securities to decline, and you may lose part or all of your investment.
Our global business is subject to a number of economic risks.
We conduct business throughout the world, including in Asia, North America, Europe and the Middle East. Instability in the global credit
markets, including the recent European economic and financial turmoil related to sovereign debt issues in certain countries, the instability in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy
costs, may continue to put pressure on global economic conditions. The world has recently experienced a global macroeconomic downturn. To the extent global economic and market conditions, or economic conditions in key markets, remain uncertain or
deteriorate further, business, operating results, and financial condition may be materially adversely impacted.
Additionally, given the
greater credit restrictions that are being invoked by lenders around the world, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access such capital markets, which could have an impact on
our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.
Our operating results may
be impacted by rapid changes in demand due to the following:
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variations in our turns business;
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customer inventory levels;
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production schedules; and
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fluctuations in demand.
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As a result, there could be significant variability in the demand for
our products, and our past operating results may not be indicative of our future operating results.
Fluctuation in demand is dependent
on, among other things the size of the markets for our products, the rate at which such markets develop, and the level of capital spending by end customers. We cannot assure you of the rate, or extent to which, capital spending by end customers will
grow, if at all.
Our revenues and profits may fluctuate because of factors that are beyond our control. As a result, we may fail to meet the
expectations of securities analysts and investors, which could cause our stock price to decline.
Our ability to project revenues is
limited because a significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our “turns business.” Our turns business varies widely from quarter to quarter. Our customers
may delay product orders and reduce delivery lead-time expectations, which may reduce our ability to project revenues beyond the current quarter. While we regularly evaluate end users’ and contract manufacturers’ inventory levels of our
products to assess the impact of their inventories on our projected turns business, we do not have complete information on their inventories. This could cause our projections of a quarter’s turns business to be inaccurate, leading to lower or
higher revenues than projected.
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We may fail to meet our forecasts if our customers cancel or delay the purchase of our products or if we are
unable to meet their demand.
We rely on customer forecasts in order to estimate the appropriate levels of inventory to build and to
project our future revenues. Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and typically engage contract manufacturers for additional manufacturing
capacity. This complex supply chain creates several variables that make it difficult to accurately forecast our customers’ demand and accurately monitor their inventory levels of our products. If customer forecasts are not accurate, we may
build too much inventory, potentially leaving us with excess and obsolete inventory, which would reduce our profit margins and adversely affect our operating results. Conversely, we may build too little inventory to meet customer demand causing us
to miss revenue-generating opportunities. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize, could result in our holding excess or
obsolete inventory, which could in turn result in write-downs of inventory. This difficulty may be compounded when we sell to OEMs indirectly through distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are
then based on estimates provided by multiple parties.
Our customers often shift buying patterns as they manage inventory levels, market
different products, or change production schedules. This makes forecasting their production requirements difficult and can lead to an inventory surplus or shortage of certain components. In addition, our products vary in terms of the profit margins
they generate. If our customers purchase a greater proportion of our lower margin parts in a particular period, it would adversely impact our results of operations.
Further, our distributors provide us with periodic reports of their backlog to end customers, sales to end customers and quantities of our
products that they have on hand. If the data that is provided to us is inaccurate, it could lead to inaccurate forecasting of our revenues or errors in our reported revenues, gross profit and net income.
While backlog is our best estimate of our next quarter’s expectations of revenues, it is industry practice to allow customers to cancel,
change or defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a significant portion of our operating expenses is fixed, even a small revenue shortfall can have
a disproportionately negative effect on our operating results.
We rely on a few customers for a major portion of our sales, any one of which could
materially impact our revenues should they change their ordering pattern. The loss of a key customer could materially impact our results of operations.
We depend on a limited number of customers for large portions of our net revenues. During each of the rolling twelve month periods ended
September 28, 2013 and September 30, 2012, we had two customers that accounted for more than 10% of our revenues, namely, HP and EMC. During the first nine months of 2013 and 2012, our top ten customers accounted for approximately 65% and
66% of our net revenues, respectively. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with
little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own
product offerings into which our products are incorporated, and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to
these customers in significant quantities.
The loss of a key customer, or a reduction in our sales to any major customer or our inability
to attract new significant customers could materially and adversely affect our business, financial condition or results of operations. In addition, if we fail to win new product designs from our major customers, our business and results of
operations may be harmed.
We use indirect channels of product distribution, in many locations across the world, over which we have limited control.
We generate a portion of our sales through third-party distribution and reseller agreements. Termination of a distributor agreement
either by us or a distributor, could result in a temporary or permanent loss of revenue, if we cannot establish an alternative distributor to manage this portion of our business, or we are unable to service the related end customers directly.
Further, if we terminate a distributor agreement, we may be required to repurchase unsold inventory held by the distributor. We maintain a reserve for estimated returns. If actual returns exceed our estimate, there may be an adverse effect on our
operating results. Our distributors are located all over the world and are of various sizes and financial profiles. Lower sales, lower earnings, debt downgrades, the inability to access capital markets and higher interest rates could potentially
affect our distributors’ operations.
If the demand for our customers’ products declines, demand for our products will be similarly affected
and our revenues, gross margins and operating performance will be adversely affected.
Our customers are subject to their own business
cycles, most of which are unpredictable in commencement, depth and duration. We cannot accurately predict the continued demand of our customers’ products and the demands of our customers for our products. In the past, networking customers have
reduced capital spending without notice, adversely affecting our revenues. As a result of this uncertainty, our past operating results may not be indicative of our future operating results. It is possible that, in future periods, our results may be
below the expectations of public market analysts and investors. This could cause the market price of our common stock to decline.
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Changes in the political and economic climate in the countries in which we do business may adversely affect
our operating results.
We earn a substantial proportion of our revenues in Asia. We conduct an increasing portion of our research and
development and manufacturing activities outside North America. We procure substantially all of our wafers from Taiwan and use assemblers and testers throughout Asia.
Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including economic
sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods. In addition, fluctuations in
foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in affected markets. Similarly, fluctuations in exchange rates may affect demand for our products in foreign
markets or our cost competitiveness and may adversely affect our profitability.
Our results of operations continue to be influenced by
our sales to customers in Asia. Government agencies in this region have broad discretion and authority over many aspects of the telecommunications and information technology industry. Accordingly, their decisions may impact our ability to do
business in this region, and significant changes in this region’s political and economic conditions and governmental policies could have a substantial negative impact on our business.
Laws and regulations to which we are subject, as well as customer requirements in the area of environmental protection and social responsibility, could
impose substantial costs on us and may adversely affect our business.
Our business is subject to or may be impacted by various
environmental protection and social responsibility legal and customer requirements. For example, we are subject to the European Union Directive on the Restriction of the use of certain Hazardous Substances in Electrical & Electronic
Equipment (RoHS) and the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) Regulation in the European Union. Such regulations could require us to redesign our products in order to comply with their requirements and require
the development and/or maintenance of compliance administration systems. Redesigned products could be more costly to manufacture or require more costly or less efficient raw materials. If we cannot develop compliant products on a timely basis or
properly administer our compliance programs, our revenues could decline due to lower sales. In addition, under certain environmental laws, we could be held responsible, without regard to fault, for costs relating to any contamination at our current
or past facilities and at third-party waste-disposal sites. We could also be held liable for consequences arising out of human exposure to such substances or other environmental damage.
Recently there has been increased focus on environmental protection and social responsibility initiatives. We may choose or be required to
implement various standards due to the adoption of rules or regulations that result from these initiatives, such as with respect to the use of conflict minerals, which are certain minerals that originate in the Democratic Republic of the Congo or
adjoining countries. Our customers may also require us to implement environmental or social responsibility procedures or standards before they will continue to do business with us or order new products from us. Our adoption of these procedures
or standards could be costly, and our failure to adopt these standards or procedures could result in the loss of business or fines or other costs.
The
conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could result in additional costs and liabilities.
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established new disclosure and reporting requirements
for those companies who use “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries in their products, whether or not these products are manufactured by third parties. These new requirements could
affect the sourcing and availability of minerals used in the manufacture of our semiconductor products. There will also be costs associated with complying with the disclosure requirements, including for due diligence in regard to the sources of
any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities.
The loss of key personnel could delay us from designing new products.
To succeed, we must retain and hire technical personnel highly skilled at design and test functions needed to develop high-speed networking
products. The competition for such employees is intense.
We do not have employment agreements in place with many of our key personnel. As
employee incentives, we issue common stock options and restricted stock grants that are subject to time vesting, and, in the case of options, have exercise prices at the market value on the grant date. As our stock price varies substantially, the
equity awards to employees are effective as retention incentives only if they have economic value.
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Our revenues may decline if we do not maintain a competitive portfolio of products or if we fail to secure
design wins.
We are experiencing significantly greater competition in the markets in which we participate. We are expanding into
market segments, such as the Storage, Optical, and Mobile market segments, which have established incumbents with substantial financial and technological resources. We expect more intense competition than that which we have traditionally faced as
some of these incumbents derive a majority of their earnings from these markets.
We typically face competition at the design stage, where
customers evaluate alternative design approaches requiring integrated circuits. We often compete in bid selection processes to achieve design wins. These selection processes can be lengthy and can require us to invest significant effort and incur
significant design and development expenditures. We may not win competitive selection processes, and even if we do win such processes, we may not generate the expected level of revenue despite incurring significant design and development
expenditures. Because the life cycles of our customers’ products can last several years and changing suppliers involves significant cost, time, effort and risk, our failure to win a competitive bid can result in our foregoing revenue from a
given customer’s product line for the life of that product.
The markets for our products are intensely competitive and subject to
rapid technological advancement in design tools, wafer manufacturing techniques, process tools and alternate networking technologies. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do
so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next generation equipment with those of current or future competitors, reducing our future revenues. With
the shortening product life and design-in cycles in many of our customers’ products, our competitors may have more opportunities to supplant our products in next generation systems.
Our customers are increasingly price conscious, as semiconductors sourced from third party suppliers comprise a greater portion of the total
materials cost in networking equipment. We continue to experience aggressive price competition from competitors that wish to enter into the market segments in which we participate. These circumstances may make some of our products less competitive,
and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.
Over the next few years, we expect additional competitors, some of which may also have greater financial and other resources, to enter these
markets with new products. These companies, individually or collectively, could represent future competition for many design wins and subsequent product sales.
Design wins do not translate into near-term revenues and the timing of revenues from newly designed products is often uncertain.
From time to time, we announce new products and design wins for existing and new products. While some industry analysts may use design wins as
a metric for future revenues, many design wins have not, and will not, generate any revenues for us, as customer projects are cancelled or unsuccessful in their end market. In the event a design win generates revenues, the amount of revenues will
vary greatly from one design win to another. In addition, most revenue-generating design wins do not translate into near-term revenues. Most revenue-generating design wins take more than two years to generate meaningful revenues.
Product quality problems could result in reduced revenues and claims against us.
We produce highly complex products that incorporate leading-edge technology. Despite our testing efforts and those of our subcontractors,
defects may be found in existing or new products. Because our product warranties against materials and workmanship defects and non-conformance to our specifications are for varying lengths of time we may incur significant warranty, support and
repair or replacement costs. The resolution of any defects could also divert the attention of our engineering personnel from other product development efforts. If the costs for customer or warranty claims increase significantly compared with our
historical experience, our revenue, gross margins and net income may be adversely affected.
Since many of the products we develop do not reach full
production sales volumes for a number of years, we may incorrectly anticipate market demand and develop products that achieve little or no market acceptance.
Our products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another three to
18 months to be designed into our customers’ equipment and sold in production quantities. We sell products whose characteristics include evolving industry standards, short product life spans and new manufacturing and design technologies. As a
result, we develop products many years before volume production and may inaccurately anticipate our customers’ needs. From initial product design-in to volume production, many factors, such as unacceptable manufacturing yields on prototypes or
our customers’ redefinition of their products, can affect the timing and/or delivery of our products. Our products may become obsolete during these delays, resulting in our inability to recoup our initial investments in product development.
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We may be unsuccessful in transitioning the design of our new products to new manufacturing processes.
Many of our new products are designed to take advantage of new manufacturing processes offering smaller device geometries as they
become available, since smaller geometries can provide a product with improved features such as lower power requirements, increased performance, more functionality and lower cost. We believe that the transition of our products to, and introduction
of new products using, smaller device geometries is critical for us to remain competitive. We could experience difficulties in migrating to future smaller device geometries or manufacturing processes, which would result in the delay of the
production of our products. Our products may become obsolete during these delays, or allow competitors’ parts to be chosen by customers during the design process.
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.
The ultimate resolution of outstanding tax matters could be for amounts in excess of our
reserves established. Such events could have a material adverse effect on our liquidity or cash flows in the quarter in which an adjustment is recorded or the tax payment is due.
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 foreign currencies. The U.S. dollar has fluctuated significantly compared to other foreign currencies 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 attempt to limit our
exposure to foreign exchange rate fluctuations from our foreign net asset or liability positions. We recorded a net $3.6 million foreign exchange gain on the revaluation of our income tax liability in the first nine months of 2013 because of the
fluctuations in the U.S. dollar against certain foreign currencies. A five percent shift in the foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $3.2 million impact to our pre-tax net income.
We are exposed to the credit risk of some of our customers.
Many of our customers employ contract manufacturers to produce their products and manage their inventories. Many of these contract
manufacturers represent greater credit risk than our OEM customers, who do not guarantee our credit receivables related to their contract manufacturers.
In addition, a significant portion of our sales flow through our distribution channel. This generally represents a higher credit risk. Should
these companies encounter financial difficulties, our revenues could decrease, and collection of our significant accounts receivables with these companies or other customers could be jeopardized.
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Our business strategy contemplates acquisition of other products, technologies or businesses, which could
adversely affect our operating performance.
Acquiring products, intellectual property, technologies and businesses from third parties
is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our existing
business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of management time and resources, possible divestitures,
inventory write-offs and other charges. We also may be forced to replace key personnel who may leave our company as a result of an acquisition. We cannot be certain that we will find suitable acquisition candidates or that we will be able to meet
these challenges successfully. Acquisitions could also result in customer dissatisfaction, performance problems with the acquired company, investment, or technology, the assumption of contingent liabilities, or other unanticipated events or
circumstances, any of which could harm our business. Consequently, we might not be successful in integrating any acquired businesses, products or technologies and may not achieve anticipated revenues and cost benefits.
An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional equity. If we are
not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our
company.
From time to time, we license, or acquire, technology from third parties to incorporate into our products. Incorporating technology into our
products may be more costly or more difficult than expected, or require additional management attention to achieve the desired functionality. The complexity of our products could result in unforeseen or undetected defects or bugs, which could
adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.
Our current
product roadmap will, in part, be dependent on successful acquisition and integration of intellectual property cores developed by third parties. If we experience difficulties in obtaining or integrating intellectual property from these third
parties, it could delay or prevent the development of our products in the future.
Although our customers, our suppliers and we rigorously
test our products, our highly complex products may contain defects or bugs. We have in the past experienced, and may in the future experience, defects and bugs in our products. If any of our products contain defects or bugs, or have reliability,
quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to buy our products. This could materially and adversely affect our ability to retain existing customers or attract
new customers. In addition, these defects or bugs could interrupt or delay sales to our customers.
We may have to invest significant
capital and other resources to alleviate problems with our products. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product
recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely
lose or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to
improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may
acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead
to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.
Our
business may be adversely affected if our customers or suppliers cannot obtain sufficient supplies of other components needed in their product offerings to meet their production projections and target quantities.
Some of our products are used by customers in conjunction with a number of other components, such as transceivers, microcontrollers and digital
signal processors. If, for any reason, our customers experience a shortage of any component, their ability to produce the forecasted quantity of their product offerings may be affected adversely and our product sales would decline until the shortage
is remedied.
Moreover, if any of our suppliers experience capacity constraints or component shortages, encounters financial difficulties,
or experiences any other major disruption of its operations, we may need to qualify an alternate supplier, which may take an extended period of time and could result in delays in product shipments. These delays could cause our customers to seek
alternate semiconductor companies to provide them with products previously purchased from us. Such a situation could harm our operating results, cash flow and financial condition.
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We rely on limited sources of wafer fabrication, the loss of which could delay and limit our product
shipments.
We do not own or operate a wafer fabrication facility. In the 2012, three outside wafer foundries supplied more than 95% of
our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We also have less
control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we
may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough or at an acceptable cost, to satisfy our production
requirements.
Some companies that supply our customers are similarly dependent on a limited number of suppliers to produce their
products. These other companies’ products may be designed into the same networking equipment into which our products are designed. Our order levels could be reduced materially if these companies are unable to access sufficient production
capacity to produce in volumes demanded by our customers because our customers may be forced to slow down or halt production on the equipment into which our products are designed.
We depend on third parties for the assembly and testing of our semiconductor products, which could delay and limit our product shipments.
We depend on third parties in Asia for the assembly and testing of our semiconductor products. In addition, subcontractors in Asia assemble all
of our semiconductor products into a variety of packages. Raw material shortages, political, economic and social instability, assembly and testing house service disruptions, currency fluctuations, or other circumstances in the region could force us
to seek additional or alternative sources of supply, assembly or testing. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. At times, capacity in the assembly industry has become
scarce and lead times have lengthened. This capacity shortage may become more severe, which could in turn adversely affect our revenues. We have less control over delivery schedules, assembly processes, testing processes, quality assurances, raw
material supplies and costs than competitors that do not outsource these tasks.
Due to the amount of time that it usually takes us to
qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost
of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our
products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.
Our past failure
to maintain effective internal controls, or our inability to implement effective internal controls, could adversely affect our stock price.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”). As
disclosed in Item 9A “Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting (Restated)” in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended
December 29, 2012 (the “2012 10-K/A”), management re-evaluated the effectiveness of our internal control over financial reporting and determined that the material weakness further described in the 2012 10-K/A existed as of
December 29, 2012. Accordingly, as a result of this material weakness, management concluded that our internal control over financial reporting was not effective as of December 29, 2012. As further described in the 2012 10-K/A, after
September 28, 2013 but before the date of this filing, management designed and implemented new and enhanced controls necessary for continued compliance with the Act. Such controls may not operate effectively at all times and may result in a
future material weakness disclosure. The identification of a material weakness in our internal control in our 2012 10-K/A, or the future identification of material weaknesses in our internal control, if any, could indicate a lack of proper controls
to generate accurate financial statements and could cause investors to lose confidence and our stock price to drop.
Our business is vulnerable to
interruption by earthquake, flooding, fire, power loss, telecommunications failure, terrorist activity and other events beyond our control.
We do not have sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur,
and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. We have operations in seismically active regions in California, Japan and British Columbia,
Canada, and we rely on third-party suppliers, including wafer fabrication and testing facilities, in seismically active regions in Asia, which have recently experienced natural disasters. To the extent that manufacturing issues and any related
component shortages result in delayed shipments in the future, and particularly in periods in which we and our contract manufacturers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected
if such matters occur and are not remediated within the same quarter.
We are unable to predict the effects of any such events, but the
effects could be seriously harmful to our business.
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Hostilities in the Middle East and India may have a significant impact on our Israeli and Indian
subsidiaries’ ability to conduct their business.
We have operations, which are primarily research and development facilities,
located in Israel and India which employ approximately 170 and 160 people, respectively. A catastrophic event, such as a terrorist attack or the outbreak of hostilities that results in the destruction or disruption of any of our critical business or
information technology systems in Israel or India could harm our ability to conduct normal business operations and therefore negatively impact our operating results.
On an on-going basis, some of our Israeli employees are periodically called into active military duty. In the event of severe hostilities
breaking out, a significant number of our Israeli employees may be called into active military duty, resulting in delays in various aspects of production, including product development schedules.
From time to time, we become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant
liabilities upon judgment.
We become defendants in legal proceedings from time to time. Companies in our industry have been subject to
claims related to patent infringement and product liability, as well as contract and personal claims. We may not be able to accurately assess the risk related to these suits and we may be unable to accurately assess our level of exposure. An
infringement or product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend and could divert the efforts of our technical and management personnel. These proceedings may result in material
charges to our operating results in the future if our exposure is material and if our ability to assess our exposure becomes clearer.
If we cannot
protect our proprietary technology, we may not be able to prevent competitors from copying or misappropriating our technology and selling similar products, which would harm our business.
To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications. However, our portfolio of patents evolves as new patents are issued
and older patents expire and the expiration of patents could have a negative effect on our ability to prevent competitors from duplicating certain of our products.
We might not succeed in obtaining patents from any of our pending applications. Even if we are awarded patents, they may not provide any
meaningful protection or commercial advantage to us, as they may not be of sufficient scope or strength, or may not be issued in all countries where our products can be sold. In addition, our competitors may be able to design around our patents.
To protect our product technology, documentation and other proprietary information, we enter into confidentiality agreements with our
employees, customers, consultants and strategic partners. We require our employees to acknowledge their obligation to maintain confidentiality with respect to PMC’s products. Despite these efforts, we cannot guarantee that these parties will
maintain the confidentiality of our proprietary information in the course of future employment or working with other business partners. We develop, manufacture and sell our products in Asia and other countries that may not protect our intellectual
property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more likely. Steps we take to protect our proprietary information may not be adequate to prevent theft of our technology. We may
not be able to prevent our competitors from independently developing technologies that are similar to or better than ours.
Our products employ
technology that may infringe on the intellectual property and the proprietary rights of third parties, which may expose us to litigation and prevent us from selling our products.
Vigorous protection and pursuit of intellectual property rights or positions characterize the semiconductor industry. This often results in
expensive and lengthy litigation. We, and our customers or suppliers, may be accused of infringing patents or other intellectual property rights owned by third parties in the future. An adverse result in any litigation against us or a customer or
supplier could force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing technology or find appropriate licenses on reasonable terms or at all. Although some of our suppliers have agreed to indemnify us against certain intellectual property
infringement claims or other losses relating to their products, these contractual indemnification rights may not cover the full extent of losses we incur as a result of these suppliers’ products.
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Patent disputes in the semiconductor industry are often settled through cross-licensing
arrangements. Our portfolio of patents may not have the breadth to enable us to settle an alleged patent infringement claim through a cross-licensing arrangement. We may therefore be more exposed to third party claims than some of our larger
competitors and customers.
The majority of our customers are required to obtain licenses from and pay royalties to third parties for the
sale of systems incorporating our semiconductor devices, and our customers have faced and may continue to face infringement claims related to our products or third-party components used in our products. In the past, customers have sought
indemnification from us or made other claims against us in connection with such infringement claims, and we may face similar claims in the future. Even when we do not ultimately incur any liabilities to third parties, addressing these claims may
require us to divert internal resources and incur other costs. Although we may ultimately be entitled to indemnification from suppliers of third-party components in connection with some such cases, there can be no assurance that we would be fully
indemnified against such losses.
Furthermore, we may initiate claims or litigation against third parties for infringing our proprietary
rights or to establish the validity of our proprietary rights. This could consume significant resources and divert the efforts of our technical and management personnel, regardless of the litigation’s outcome.
We may be subject to intellectual property theft or misuse, which could result in third-party claims and harm our business and results of operations.
We regularly face attempts by others to gain unauthorized access through the Internet to our information technology systems, such as
when such parties masquerade as authorized users or surreptitiously introduce software. We might become a target of computer hackers who create viruses to sabotage or otherwise attack our products and services. Hackers might attempt to penetrate our
network security and gain access to our network and our data centers, misappropriate our or our customers’ proprietary information, including personally identifiable information, or cause interruptions of our internal systems and services. We
seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and other
confidential business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our products; the value of our investment in R&D, product development, and marketing could be
reduced; and third parties might assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data, or system reliability. Our business could be subject to significant disruption, and
we could suffer monetary and other losses, including the cost of product recalls and returns and reputational harm, in the event of such incidents and claims.
Securities we issue to fund our operations could dilute your ownership.
We may decide to raise additional funds through public or private debt or equity financing. If we raise funds by issuing equity securities, the
percentage ownership of current stockholders will be reduced and the new equity securities may have priority rights to your investment. We may not obtain sufficient financing on terms that are favorable to you or us. We may delay, limit or eliminate
some or all of our proposed operations if adequate funds are not available.
Our stock price has been and may continue to be volatile.
We expect that the price of our common stock will continue to fluctuate significantly, as it has in the past. In particular, fluctuations in
our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly
when viewed on a quarterly basis.
Securities class action litigation has often been instituted against a company following periods of
volatility and decline in the market price of their securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management’s attention and resources and have a material
adverse effect on our business, financial condition and operating results. In addition, we could incur substantial punitive and other damages relating to such litigation.
Provisions in Delaware law and our charter documents may delay or prevent another entity from acquiring us without the consent of our Board of Directors.
Our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock
ownership of a potential hostile acquirer. Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
Although we believe these provisions of our charter documents and Delaware law will provide for an opportunity to receive a higher bid by
requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders.
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