Item 1A.
Risk
Factors
In addition to the other information included in this Quarterly Report on Form
10-Q,
the following risk factors should be considered carefully in evaluating our company and business. You should also read and consider the risk factors associated with the business of Littelfuse because
these risk factors will relate to the combined company following the completion of the merger. These risk factors may be found in Littelfuses Annual Report on Form
10-K
for the fiscal year ended
December 31, 2016. Such risk factors may be updated or supplemented in each companys subsequently filed Quarterly Reports on Form
10-Q
or Current Reports on Form
8-K.
References to the merger constitute a reference to the merger of a subsidiary of
Littelfuse with and into IXYS (the initial merger), followed by a merger of IXYS with and into another subsidiary of Littelfuse. The merger agreement was filed with the SEC on August 28, 2017 as Exhibit 2.1 to the Current Report on
Form
8-K
(No.
000-26124)
and is incorporated herein by reference.
Risks Related to the Merger
Because the share-election exchange ratio of the merger is fixed and will not be adjusted for stock price changes and the market price of
Littelfuse common stock has fluctuated and will continue to fluctuate, our stockholders cannot be sure of the value of the consideration they will receive.
Upon completion of the initial merger, each issued and outstanding share of our common stock (other than (i) cancelled shares or
(ii) dissenting shares) will be converted into the right to receive, at the election of the stockholder and subject to proration, $23.00 in cash, without interest, less any applicable withholding taxes or 0.1265 of a share of Littelfuse common
stock.
The share-election ratio will not change to reflect changes in the market prices of our common stock and Littelfuse common stock.
The market price of Littelfuse common stock at the time of completion of the merger may vary significantly from the market price of Littelfuse common stock on the date the merger agreement was executed, the date of this Form
10-Q
and the date of the special meeting of stockholders to consider the merger, or the IXYS special meeting. In addition, as discussed below, the merger consideration will be subject to proration. Accordingly, our
stockholders will not know or be able to calculate at the time of the IXYS special meeting the market value of the stock consideration they will receive upon completion of the merger.
In addition, the merger might not be completed until a significant period of time has passed after the IXYS special meeting. Because the
share-election exchange ratio will not be adjusted to reflect any changes in the market values of Littelfuse common stock and our common stock, the market value of the Littelfuse common stock issued in connection with the merger and our common stock
surrendered in connection with the merger may be higher or lower than the value of those shares on earlier dates. Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in
our and Littelfuses respective businesses, operations and prospects, market assessments of the likelihood that the merger will be completed, the timing of the merger, regulatory considerations and other risk factors included or otherwise
referenced herein. Many of these factors are beyond IXYS and Littelfuses control.
Our common stockholders may not
receive all consideration in the form elected.
Our common stockholders electing to receive either the
all-cash
consideration or the
all-stock
consideration in the merger will be subject to proration so that 50% of our common stock issued and outstanding immediately prior to
the effective time will be converted into cash consideration and the remaining common stock will be converted into stock consideration. Accordingly, some of the merger consideration an IXYS common stockholder receives may differ from the type of
consideration selected and such difference may be significant. This may result in, among other things, tax consequences that differ from those that would have resulted if the IXYS common stockholder had received solely the form of consideration
elected.
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The market price of Littelfuse common stock after the initial merger will continue to
fluctuate and may be affected by factors different from those affecting shares of our common stock currently.
Upon completion of
the initial merger, certain holders of our common stock will become holders of Littelfuse common stock. The market price of Littelfuse common stock may fluctuate significantly following completion of the initial merger and holders of our common
stock could lose the value of their investment in Littelfuse common stock. In addition, any significant price and volume fluctuations of the stock markets could have a material adverse effect on the market for, or liquidity of, the Littelfuse common
stock, regardless of Littelfuses actual operating performance. In addition, Littelfuses business differs in important respects from our business, and accordingly, the results of operations of the combined company and the market price of
Littelfuse common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of our operations and the operations of Littelfuse.
Sales of shares of Littelfuse common stock after the completion of the merger may cause the market price of Littelfuse common stock to
fall.
Many of our stockholders may decide not to hold the shares of Littelfuse common stock they will receive in the initial
merger. Other stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of Littelfuse common stock that they receive in the initial merger. Such sales of Littelfuse
common stock could have the effect of depressing the market price for Littelfuse common stock and may take place promptly following the initial merger.
Completion of the merger is subject to the conditions contained in the merger agreement and if these conditions are not satisfied or
waived, the merger will not be completed.
The obligations of both of the companies to complete the merger are subject to the
satisfaction or waiver of a number of conditions, including the approval of the merger proposal by our stockholders.
Many of the
conditions to the closing of the merger are not within our or Littelfuses control, and neither company can predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to February 28,
2018, which deadline may be extended to May 28, 2018 under certain circumstances, it is possible that the merger agreement will be terminated. Although we have agreed with Littelfuse in the merger agreement to use reasonable best efforts to
complete the merger as soon as practicable, these and other conditions to the completion of the merger may not be satisfied. The failure to satisfy all of the required conditions could delay the completion of the merger for a significant period of
time or prevent it from occurring. Any delay in completing the merger could cause Littelfuse not to realize some or all of the benefits that Littelfuse expects to achieve if the merger is successfully completed within its expected timeframe. There
can be no assurance that the conditions to the closing of the merger will be satisfied or waived or that the merger will be completed. See the risk factor titled
Failure to complete the merger could negatively affect our stock price
and our future business and financial results,
below.
The merger was subject to the expiration of applicable waiting
periods and the receipt of approvals, consents or clearances from regulatory authorities in the United States and Germany. Those clearances have been received, but the merger may still be reviewed under antitrust statutes of other governmental
authorities.
IXYS and Littelfuse received early termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 in the United States on October 2, 2017, and, on October 6, 2017, both companies received the requisite clearance under the antitrust/merger control laws of Germany. The merger may still be reviewed under
antitrust statutes of other governmental authorities, including U.S. state laws. In deciding whether to grant the required regulatory approval, consent or clearance, the relevant governmental entities will consider the effect of the merger on
competition within their relevant jurisdiction. The terms and conditions of the approvals, consents and clearances that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined companys
business. Under the merger agreement, we have agreed with Littelfuse to use reasonable best efforts to obtain such approvals, consents and clearances and therefore may be required to comply with conditions or limitations imposed by governmental
authorities. There can be no assurance that other regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the merger or
imposing additional material costs on or materially limiting the revenues of the combined company following the completion of the merger. In addition, neither company can provide assurance that any such conditions, terms, obligations or restrictions
will not result in the delay or abandonment of the merger.
Combining the two companies may be more difficult, costly or time
consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.
IXYS and Littelfuse have
operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on Littelfuses ability to successfully combine and
integrate the businesses of Littelfuse and IXYS. It is possible that the pendency of the merger and/or the integration process could result in the loss of key employees, higher than expected costs, diversion of management attention of both
companies, the disruption
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of either companys ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined companys ability to maintain relationships
with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the merger. As part of the integration process, Littelfuse may also attempt to divest certain assets of the combined company, which may not be possible
on favorable terms, or at all, or if successful, may change the profile of the combined company. If Littelfuse experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may
take longer to realize than expected. Littelfuses management continues to refine its integration plan. These integration matters could have an adverse effect on (i) each of Littelfuse and IXYS during this transition period and
(ii) the combined company for an undetermined period after completion of the merger. In addition, the actual cost savings of the merger could be less than anticipated.
Our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of
stockholders of IXYS more generally.
When considering the recommendation of our board of directors that our stockholders approve
the merger proposal and the merger-related compensation proposal, our stockholders should be aware that our directors and executive officers have certain interests in the merger that may be different from, or in addition to, the interests of our
stockholders more generally. These interests generally include, among others, rights to accelerated vesting of stock options and certain payments and benefits in connection with the merger and/or a qualifying termination of employment following the
merger. Our board of directors was aware of these interests during its deliberations on the merits of the merger and considered them in deciding to recommend that our stockholders vote in favor of the merger proposal and the merger-related
compensation proposal.
The merger agreement limits our ability to pursue alternatives to the merger and may discourage other
companies from trying to acquire us.
The merger agreement contains provisions that make it more difficult for IXYS to sell its
business to a party other than Littelfuse. These provisions include a general prohibition on IXYS soliciting any company takeover proposal or offer for a competing transaction. Further, there are only limited exceptions to (i) IXYS
agreement that our board of directors will not withdraw or modify in a manner adverse to Littelfuse the recommendation of our board of directors that our stockholders vote in favor of the merger proposal and (ii) IXYS agreement not to
enter into an agreement with respect to a competing company takeover proposal. In addition, upon termination of the merger agreement, we are required to pay Littelfuse a termination fee of $28.5 million if the merger agreement is terminated in
certain circumstances involving a company takeover proposal, an adverse recommendation change or a willful breach of our
non-solicitation
obligations under the merger agreement.
These provisions could discourage a third party that might have an interest in acquiring all or a significant part of IXYS from considering or
proposing that acquisition, even if that party were prepared to pay consideration with a higher per share value than the value proposed to be received or realized in the merger. These provisions might also result in a potential competing acquirer
proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.
The merger agreement subjects IXYS to restrictions on its business activities.
The merger agreement subjects IXYS to restrictions on its business activities and obligates IXYS to generally operate its businesses in all
material respects in the ordinary course. These restrictions could have an adverse effect on our results of operations, cash flows and financial position.
The business relationships of Littelfuse and IXYS and their respective subsidiaries may be subject to disruption due to uncertainty
associated with the merger, which could have an adverse effect on the results of operations, cash flows and financial position of Littelfuse, IXYS and, following the completion of the merger, the combined company.
Parties with which Littelfuse and IXYS, or their respective subsidiaries, do business may be uncertain as to the effects on them of the merger
and related transactions, including with respect to current or future business relationships with Littelfuse, IXYS, their respective subsidiaries or the combined company. These relationships may be subject to disruption as customers, suppliers and
other persons with whom Littelfuse and IXYS have a business relationship may delay or defer certain business decisions or might decide to terminate, change or renegotiate their relationships with Littelfuse or IXYS, as applicable, or consider
entering into business relationships with parties other than Littelfuse, IXYS, their respective subsidiaries or the combined company. These disruptions could have an adverse effect on the results of operations, cash flows and financial position of
IXYS, Littelfuse or the combined company following the completion of the merger, including an adverse effect on Littelfuses ability to realize the expected synergies and other benefits of the merger. The risk, and adverse effect, of any
disruption could be exacerbated by a delay in completion of the merger or termination of the merger agreement.
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Failure to complete the merger could negatively affect our stock price and our future
business and financial results.
If the merger is not completed for any reason, including as a result of our stockholders failing
to approve the merger, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, we could be subject to a number of negative consequences, including the following:
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we may experience negative reactions from the financial markets, including negative impacts on our stock price;
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we may experience negative reactions from our customers and suppliers;
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we may experience negative reactions from our employees and may not be able to retain key management personnel and other key employees;
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we will have incurred, and will continue to incur, significant
non-recurring
costs in connection with the merger that we may be unable to recover;
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the merger agreement places certain restrictions on the conduct of our business prior to completion of the merger, the waiver of which is subject to the consent of Littelfuse (not to be unreasonably withheld,
conditioned or delayed in certain circumstances), which may prevent us from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the merger that may be beneficial to
us; and
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matters relating to the merger (including integration planning) will require substantial commitments of time and resources by our management, which could otherwise be devoted
to day-to-day operations
and other opportunities that may be beneficial to us as an independent company.
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In addition, upon termination of the merger agreement, we are required to pay Littelfuse a termination fee of $28.5 million if the merger
agreement is terminated in certain circumstances involving a company takeover proposal, an adverse recommendation change or a willful breach of our
non-solicitation
obligations under the merger agreement.
Finally, we could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement. If the merger is not completed, any of
these risks may materialize and may adversely affect our businesses, financial condition, financial results and stock price.
The
shares of Littelfuse common stock to be received by IXYS stockholders as a result of the merger will have rights different from the shares of IXYS common stock.
Upon completion of the initial merger, our stockholders will no longer be stockholders of IXYS. Former stockholders who receive stock
consideration in the initial merger will become Littelfuse stockholders, and their rights as stockholders will be governed by the terms of the Littelfuse certificate of incorporation and bylaws and by the Delaware General Corporation Law.
After the initial merger, IXYS stockholders will have a significantly lower ownership and voting interest in Littelfuse than they
currently have in IXYS and will exercise less influence over management.
Based on the number of shares of IXYS common stock
outstanding as of October 16, 2017, and the number of shares of Littelfuse common stock outstanding as of October 16, 2017, it is expected that, immediately after completion of the initial merger, former IXYS stockholders will own
approximately 8% of the outstanding shares of Littelfuse common stock. Consequently, former IXYS stockholders will have less influence over the management and policies of Littelfuse than they currently have over the management and policies of IXYS.
In connection with the merger, Littelfuse will incur new indebtedness, which could adversely affect Littelfuse, including by
decreasing Littelfuses business flexibility, and will increase its interest expense.
Littelfuses consolidated
indebtedness as of July 1, 2017 was approximately $482 million. Littelfuse will have substantially increased indebtedness following completion of the merger in comparison to Littelfuses indebtedness on a recent historical basis. In
particular, in order to consummate the merger, Littelfuse expects to incur up to $150 million new debt.
This indebtedness could have
the effect, among other things, of reducing Littelfuses flexibility to respond to changing business and economic conditions and increasing Littelfuses interest expense. The amount of cash required to pay interest on Littelfuses
increased indebtedness levels following completion of the merger, and thus the demands on Littelfuses cash resources, will be greater than the amount of cash flows required to service the indebtedness of Littelfuse prior to the transaction.
The cash resources required to service the increased levels of indebtedness following completion of the merger could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may
create competitive disadvantages for Littelfuse relative to other companies with lower debt levels. If Littelfuse does not achieve the expected benefits and cost savings from the merger, or if the financial performance of the combined company does
not meet current expectations, then Littelfuses ability to service its indebtedness may be adversely impacted.
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Certain of the indebtedness to be incurred in connection with the merger may bear interest at
variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect Littelfuses cash flows.
Moreover, Littelfuse may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions or
other general corporate requirements. Littelfuses ability to arrange additional financing or refinancing will depend on, among other factors, Littelfuses financial position and performance, as well as prevailing market conditions and
other factors beyond Littelfuses control. Littelfuse cannot assure you that it will be able to obtain additional financing or refinancing on terms acceptable to Littelfuse or at all.
The merger will involve substantial costs.
IXYS and Littelfuse have incurred, and expect to continue to incur, a number of
non-recurring
costs
associated with the merger and combining the operations of the two companies. The substantial majority of
non-recurring
expenses will be comprised of transaction costs related to the merger.
Littelfuse also will incur transaction fees and costs related to formulating and implementing integration plans, including facilities and
systems consolidation costs and employment-related costs. Littelfuse continues to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the merger and the integration of the two companies businesses.
Although Littelfuse expects that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow Littelfuse to offset integration-related costs over time,
this net benefit may not be achieved in the near term, or at all. See the risk factor titled
Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of
the merger may not be realized
above.
Lawsuits may in the future be filed against IXYS, our directors and Littelfuse
challenging the merger, and an adverse ruling in any such lawsuit may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
Transactions like the merger are frequently the subject to litigation or other legal proceedings, including actions alleging that the board of
directors of either IXYS or Littelfuse breached their respective fiduciary duties to their stockholders by entering into the merger agreement, by failing to obtain a greater value in the transaction for their stockholders or otherwise. Both
IXYS and Littelfuse believe that any such litigation or proceedings would be without merit, but there can be no assurance that they will not be brought. If litigation or other legal proceedings are in fact brought against either IXYS or
Littelfuse or against the board of directors of either company, they will defend against it, but they might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful,
could have a material adverse effect on the business, results of operation or financial position of IXYS, Littelfuse or the combined company, including through the possible diversion of either companys resources or distraction of key
personnel.
Further, one of the conditions to the completion of the merger is that no injunction by any court or other tribunal of
competent jurisdiction will be in effect that temporarily or permanently prohibits, enjoins or makes illegal the consummation of the merger. As such, if any of the plaintiffs are successful in obtaining an injunction prohibiting the consummation of
the merger, that injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
Uncertainties associated with the merger may cause a loss of management personnel and other key employees of IXYS or Littelfuse, which
could adversely affect the future business and operations of the combined company following the merger.
IXYS and Littelfuse are
dependent on the experience and industry knowledge of their officers and other key employees to execute their business plans. The combined companys success after the merger will depend in part upon its ability to retain key management
personnel and other key employees of IXYS and Littelfuse. Current and prospective employees of IXYS and Littelfuse may experience uncertainty about their future roles with the combined company following the merger, which may materially adversely
affect the ability of each of IXYS and Littelfuse to attract and retain key personnel during the pendency of the merger. Accordingly, no assurance can be given that the combined company will be able to retain key management personnel and
other key employees of IXYS and Littelfuse.
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Risks Related to Our Business
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.
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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 fiscal year ended March 31, 2017, our net revenues by region were approximately 25.3% in the United States, approximately 29.1%
in Europe and the Middle East, approximately 42.9% 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 UK, 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 present or future impact of the departure of the UK from 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, UK 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 UK 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 to 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 UK 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.
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.
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We depend on external foundries to manufacture many of our products.
Of our net revenues for our fiscal year ended March 31, 2017, 47.4% 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 foundrys 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.
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 managements 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 companys 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 communitys 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 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 dice 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.
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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.
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.
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.
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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 UK 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 Kingdoms expected exit from the European Union could have a material adverse effect on our business and results of operations.
The UK government has initiated a process to leave the European Union and to negotiate the terms of the UKs future relationship with the
European Union. We face uncertainty regarding the impact of the expected exit of the UK 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 September 30, 2017, we complied with all of the financial covenants.
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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.
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 customers decision to manufacture the designed product in production quantities, the commercial success of the customers product and the extent to which the design of the customers 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.
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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.
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.
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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 managements 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.
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.
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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 fiscal year ended March 31, 2017 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 fiscal year ended March 31, 2017 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.
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.
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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 our backup power sources have only a limited amount of time for the support of critical systems. 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., our Chief Executive Officer, beneficially owned, as of October 26, 2017, approximately 20.6% 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.
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.