ITEM 1. BUSINESS
Overview
Maxim Integrated Products, Inc. (“Maxim Integrated” or the “Company” and also referred to as “we,” “our” or “us”) designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. We are a global company with a wafer manufacturing facility in the U.S., test facilities in the Philippines and Thailand, and sales and circuit design offices around the world. We also utilize third parties for manufacturing and assembly of our products. The major end-markets in which our products are sold are the Automotive, Communications & Data Center, Consumer, and Industrial markets.
We are a Delaware corporation originally incorporated in California in 1983. The mailing address for our headquarters is 160 Rio Robles, San Jose, California 95134, and our telephone number is (408) 601-1000. Additional information about us is available on our website at www.maximintegrated.com. The contents of our website are not incorporated into this Annual Report.
We have a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal years 2021, 2020 and 2019 were 52-week fiscal years. Fiscal year 2022 will be a 52-week fiscal year.
We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments to those reports or statements filed or furnished pursuant to the Exchange Act, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The SEC also maintains an internet site at www.sec.gov that contains such reports and statements filed electronically with the SEC by the Company. We also use our Investor Relations website at investor.maximintegrated.com as a routine channel for distribution of other important information, such as news releases, analyst presentations and financial information. We assume no obligation to update or revise any forward-looking statements in this Annual Report, whether as a result of new information, future events or otherwise, unless we are required to do so by applicable laws. A copy of this Annual Report is available without charge and can be accessed at our website at investor.maximintegrated.com.
Impact of COVID-19
The ongoing novel coronavirus ("COVID-19") pandemic and the mitigation efforts by governments to attempt to control its spread are impacting and will likely continue to impact our operations, customers, and suppliers for an indefinite period of time. While we have implemented safeguards and procedures to counter the impact of the COVID-19 pandemic, the full extent to which the COVID-19 pandemic has and will directly or indirectly impact us, including our business, financial condition, and results of operations, will depend on future developments that are highly uncertain and cannot be accurately predicted, including the further mitigation efforts taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, customers, suppliers, and stockholders.
For additional information regarding the impact of COVID-19 on the Company’s business, results of operations, financial condition and other associated risks and uncertainties see Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part I, Item 1A - Risk Factors in this Annual Report.
Recent Developments
On July 13, 2020, the Company announced that it had entered into an Agreement and Plan of Merger, dated July 12, 2020 (as it may be amended from time to time, the “ADI Merger Agreement”) with Analog Devices, Inc., a Massachusetts corporation (“Analog Devices” or "ADI"), and Magneto Corp., a wholly-owned subsidiary of Analog Devices (“Acquisition Sub”), under which, subject to the satisfaction or (to the extent permissible) waiver of the conditions set forth therein, Acquisition Sub will merge with and into the Company, and the Company will survive the merger as a wholly-owned subsidiary of Analog Devices (the “ADI Merger”). Under the terms of the ADI Merger Agreement, at the effective time of the ADI Merger (the “Effective
Time”), each share of common stock, par value $0.001 per share, of the Company (the “Company Common Stock”), issued and outstanding immediately prior to the Effective Time (other than treasury shares and any shares of Company Common Stock held by Analog Devices or Acquisition Sub) will be converted into the right to receive 0.6300 of a fully paid and non-assessable share of common stock, par value $0.16 2/3 per share, of Analog Devices (with cash being paid (without interest and less applicable withholding taxes) in lieu of any fraction of a share of Analog Devices common stock). Analog Devices shareholders will continue to own their existing Analog Devices shares, and the combined company will be named Analog Devices.
On October 8, 2020, the ADI Merger was approved by both the Company’s stockholders and shareholders of Analog Devices. The completion of the ADI Merger is subject to other customary closing conditions, including the receipt of various regulatory approvals. Subject to the satisfaction or (to the extent permissible) waiver of such conditions, the transaction is expected to close in the summer of 2021. The Company cannot guarantee that the ADI Merger will be completed in a timely basis or at all or that, if completed, it will be completed on the terms set forth in the ADI Merger Agreement. On July 12, 2021, the outside date following which the ADI Merger Agreement may be terminated (subject to certain limitations) was automatically extended from July 12, 2021 to October 12, 2021 due to the pendency of certain required regulatory approvals.
For additional information regarding the ADI Merger, including associated risks and uncertainties, see Part I, Item 1A - Risk Factors, Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.
The Linear and Mixed-Signal Analog Integrated Circuit Market
All electronic signals generally fall into one of two categories, linear or digital. Linear or analog signals represent real world phenomena, such as temperature, pressure, sound or speed, and are continuously variable over a wide range of values. Digital signals represent the “ones” and “zeros” of binary arithmetic and are either on or off.
Three general classes of semiconductor products arise from this distinction between linear and digital signals:
•digital devices, such as memories and microprocessors that operate primarily in the digital domain;
•linear devices, such as amplifiers, references, analog multiplexers, and switches that operate primarily in the analog domain; and
•mixed-signal devices such as data converter devices that combine linear and digital functions on the same integrated circuit and interface between the analog and digital domains.
Our strategy has been to target both the linear and mixed-signal markets, often collectively referred to as the analog market. However, some of our products are exclusively or principally digital. While our focus continues to be on the linear and mixed-signal market, our capabilities in the digital domain enable development of new mixed-signal and other products with highly sophisticated digital characteristics.
At the beginning of fiscal year 2020, we combined our Computing Major End-Market category with our Communications and Data Center Major End-Market category. Our former Computing Major End-Market category focused on Desktop Computers, Notebook Computers, and Peripherals and Other Computer markets.
Our linear and mixed-signal products now serve four major end-markets: (i) Automotive, (ii) Communications & Data Center, (iii) Consumer and (iv) Industrial. These major end-markets and their corresponding markets are noted in the table below:
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MAJOR END-MARKET
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MARKET
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AUTOMOTIVE
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Infotainment
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Powertrain
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Body Electronics
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Safety and Security
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COMMUNICATIONS & DATA CENTER
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Base Stations
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Data Center
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Data Storage
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Desktop Computers
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Network & Datacom
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Notebook Computers
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Peripherals & Other Computer
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Server
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Telecom
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Other Communications
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CONSUMER
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Smartphones
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Digital Cameras
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Handheld Computers
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Home Entertainment & Appliances
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Wearables
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Other Consumer
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INDUSTRIAL
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Automatic Test Equipment
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Control & Automation
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Electrical Instrumentation
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Financial Terminals
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Medical
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Security
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USB Extension
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Other Industrial
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Product Quality
We employ a system addressing quality and reliability of our products from initial design through wafer fabrication, assembly, testing and final shipment. We have received ISO 9001, IATF16949 and ISO 14001 certifications for all wafer fabrication, assembly, final test and shipping facilities. Based on industry standard requirements, we conduct reliability stress testing on the products we manufacture and sell. Through this testing, we can detect and accelerate the presence of defects that may arise over the life of a product.
Manufacturing
We primarily utilize third party foundries as well as our own wafer fabrication facility for the production of our wafers. The broad range of products demanded by the analog integrated circuit market requires multiple manufacturing process
technologies. As a result, many different process technologies are currently used for wafer fabrication of our products. The majority of processed wafers are also subject to parametric and functional testing at either our facilities or third-party vendors.
In fiscal year 2007, we entered into a supply agreement with Seiko Epson Corporation (“Epson”). In fiscal year 2010, we entered into a supply agreement with Powerchip Semiconductor Manufacturing Corp. (“Powerchip”) to provide 300mm wafer capacity. In fiscal year 2014, we entered into a supply agreement with UMC Corporation (“UMC”). In fiscal year 2016, we entered into a supply agreement with TowerJazz Texas, Inc. (formerly known as TJ Texas, Inc.) ("TowerJazz"), an indirect wholly-owned subsidiary of Tower Semiconductor Ltd. In fiscal year 2018, we ramped production at our most recently added partner foundry, Mie Fujitsu Semiconductor Limited (“MIFS”). MIFS was a joint venture between Fujitsu Semiconductor Ltd. and UMC that was wholly acquired by UMC and renamed United Semiconductor Japan Co., Ltd. (“USJC”) in 2019. Epson and USJC in Japan and UMC and Powerchip in Taiwan manufacture products for us under rights and licenses using our proprietary technology. In fiscal years 2021, 2020 and 2019, wafers manufactured by our partner foundries and merchant foundries (e.g., Taiwan Semiconductor Manufacturing Company Limited) represented 69%, 72% and 68% respectively, of our total wafer manufacturing.
Once wafer manufacturing has been completed, wafers are sorted in order to determine which integrated circuits on each wafer are functional and which are defective. We currently perform the majority of wafer sorting, final testing and shipping activities at two company-owned facilities, located in Cavite, the Philippines and Chonburi Province, Thailand, although we also utilize independent subcontractors for some wafer sorting.
We process wafers for products that utilize chip scale packaging (“CSP”), also known as wafer level packaging (“WLP”). CSP, or WLP, enables integrated circuits to be attached directly to a printed circuit board without the use of a traditional plastic package. Currently, all WLP processes are done externally.
Integrated circuit assembly is performed by foreign assembly subcontractors, located in China, Japan, Malaysia, the Philippines, Taiwan, Thailand, Singapore, and South Korea, where wafers are separated into individual integrated circuits and assembled into a variety of packages.
After assembly has been completed, a majority of the assembled products are shipped to our facilities located in Cavite, the Philippines or Chonburi Province, Thailand, where the packaged integrated circuits undergo final testing and preparation for customer shipment. In addition, we also utilize independent subcontractors to perform final testing.
The majority of our finished products ship directly from either Cavite, the Philippines or Chonburi Province, Thailand to customers worldwide or to other Company locations for sale to end-customers or distributors.
Customers, Sales and Marketing
We market our products worldwide through a direct-sales and applications organization and through our own and other unaffiliated distribution channels to a broad range of customers in diverse industries. Our products typically require a sophisticated technical sales and marketing effort. Our sales organization is divided into domestic and international regions. Distributors and direct customers generally buy on an individual purchase order basis, rather than pursuant to long-term agreements.
Certain distributors have agreements with us which allow for certain sales price rebates or price adjustments on certain inventory if we change the price of those products. Certain distributor agreements also permit distributors to exchange a portion of certain purchases on a periodic basis. As is customary in the semiconductor industry, our distributors may also market other products that compete with our products.
In fiscal 2021, 54% of our revenues were generated from sales made through distributors which includes distribution sales to Samsung and catalog distributors. The Company's primary distributor is Avnet Electronics (“Avnet”). Avnet accounted for 21%, 22% and 22% of revenues in fiscal years 2021, 2020 and 2019, respectively, and 28% and 28% of accounts receivable as of June 26, 2021 and June 27, 2020, respectively. Sales to WT Microelectronics ("WT") accounted for 17% and 13% of net revenues in fiscal years 2021 and 2020, respectively, and 33% and 22% of accounts receivable as of June 26, 2021 and June 27, 2020, respectively. Avnet and WT, like our other distributors, are not end customers, but rather serve as a channel of sale to many end users of our products. Sales (through direct sales and distributors) to Samsung, the Company's largest single end customer in 2019, accounted for 10% of net revenues in fiscal year 2019 and 4% and 4% of accounts receivable as of June 26, 2021 and June 27, 2020, respectively. No single customer (other than Avnet, WT, and Samsung) nor single product accounted for 10% or more of net revenues in fiscal years 2021, 2020 and 2019. No other customer accounted for 10% or more of the Company's accounts receivable as of June 26, 2021 and June 27, 2020. Based on customers’ ship-to locations, international
sales accounted for approximately 90%, 89% and 89% of our net revenues in fiscal years 2021, 2020 and 2019, respectively. See Note 12: “Segment Information” in the Notes to Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report.
Seasonality
Our revenue is generally influenced on a quarterly basis by customer demand patterns and new product introductions. A large number of our products have been incorporated into consumer electronic products, which are subject to seasonality and fluctuations in demand.
Foreign Operations
We conduct business in numerous countries outside of the United States (“U.S.”). Our international business is subject to numerous risks, including fluctuations in foreign currency exchange rates and controls, import and export controls, and other laws, policies, and regulations of foreign governments. Refer to our discussion of risks related to our foreign operations included in Item 1A, Risk Factors and our discussion of foreign income included in Item 7 under “Results of Operations” included in this Annual Report. Refer to net revenues from unaffiliated customers by geographic region included in Note 12: “Segment Information” in the Notes to Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report.
Backlog
On June 26, 2021 and June 27, 2020, our current quarter backlog was approximately $1,053.0 million and $496.4 million, respectively. Some of these orders may be canceled without penalty to customers. Accordingly, we believe that our backlog is not a reliable measure for predicting future revenues. All backlog amounts have been adjusted for estimated future distribution ship and debit pricing adjustments.
Research and Development
We believe that research and development is critical to our future competitiveness. Objectives for the research and development function include:
•new product definition and development of differentiated products;
•design of products with performance differentiation that achieve high manufacturing yield and reliability;
•development of, and access to, manufacturing processes and advanced packaging;
•development of hardware, software, and algorithms to support the acceptance and design-in of our products in the end customer's system; and
•development of high-integration products across multiple end markets.
Our research and development plans require engineering talent and tools for product definition, electronic design automation (“EDA”), circuit design, process technologies, test development, test technology, packaging development, software development and applications support. Research and development expenses were $454.3 million, $440.2 million and $435.2 million in fiscal years 2021, 2020 and 2019, respectively. See “Research and Development” under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for more information.
Competition
The linear and mixed-signal analog integrated circuit industry is intensely competitive, and virtually all major semiconductor companies presently compete with, or conceivably could compete with, some portion of our business.
We believe the principal elements of competition include:
•technical innovation;
•service and support;
•time to market;
•business, operational, marketing, and financial strategy;
•differentiated product performance and features;
•quality and reliability;
•product pricing and delivery capabilities;
•customized design and applications;
•business relationship with customers;
•experience, skill and productivity of employees and management; and
•manufacturing competence and inventory management.
Our principal competitors include, but are not limited to, Analog Devices, Inc., Cirrus Logic, Inc., Monolithic Power Systems, Inc., NXP Semiconductors N.V., Semtech Corporation, Silicon Laboratories Inc., and Texas Instruments Inc. We expect increased competition in the future from other emerging and established companies as well as through consolidation of our competitors within the semiconductor industry.
Patents, Licenses and Other Intellectual Property Rights
We rely upon both know-how and patents to develop and maintain our competitive position.
It is our policy to seek patent protection for significant inventions that may be patented, though we may elect, in certain cases, not to seek patent protection even for significant inventions if other protection, such as maintaining the invention as a trade secret, is considered by us to be more advantageous. We hold a number of patents worldwide with expiration dates ranging from calendar year 2021 to 2041. We have also registered several of our trademarks and copyrights in the United States and other countries.
Cyber Security and Information Security Risk Oversight
We regularly perform risk assessments relating to cyber security and technology risks. More specifically, an independent third-party performs a Company-wide risk assessment relating to cyber security every other year, and in the years it is not performed an independent third-party performs a penetration test, which is a simulated cyberattack to evaluate the security strength of our systems. Risks identified in this process are analyzed to determine the impact on Maxim Integrated and the likelihood of occurrence. Such risks are continuously monitored to ensure the circumstances and severity of such risks have not changed.
The Company has a Cyber Risk Steering Committee composed of executives and subject matter experts who meet regularly to review: (i) information security at Maxim Integrated, (ii) information security projects, and (iii) and approve new or modified information security policies. The Steering Committee’s projects and work is regularly reviewed by the Company’s Internal Audit Group which is then presented and reviewed by the Audit Committee on a quarterly basis.
For the past several fiscal years, senior leadership has and continues to present to the full Board of Directors no less frequently than quarterly on information security and cyber security matters and risks. Maxim Integrated conducts information security training as part of its ongoing compliance program and every employee of the Company is required to participate in such training.
Periodically, Maxim Integrated is audited by an independent information systems expert to determine both the adequacy of, and compliance with, controls and standards.
Maxim Integrated installs and regularly updates antivirus software on all IT managed systems and workstations to detect and prevent malicious code from impacting Maxim Integrated’s systems. The Company has not experienced a material security breach in the last three years, and as a result, Maxim Integrated has not incurred any net expenses from such a breach. Relatedly, Maxim Integrated has not been penalized or paid any amount under an information security breach settlement over the last three years. Further, the Company has conducted an analysis and determined that an information security risk insurance policy would not be effective, and that Maxim Integrated should continue to self-insure most of the risks that it faces.
Human and Culture Capital Excellence
Since our founding in 1983, we have grown as a global company with approximately 7,100 employees working in the Americas, Asia and Europe as of the end of fiscal year 2021. Of the 7,100 full time employees, approximately 62% of our workforce are men and 38% are women. Our Board of Directors is composed of 67% men and 33% women.
At Maxim Integrated, empowering design innovation means empowering diverse perspectives and ideas. As a company with customers around the world, it is beneficial for our business to foster a workforce that reflects the diversity of the markets we serve and embraces different backgrounds, viewpoints, skills and talents. We provide global training that is accessible to all employees worldwide, and many of our groups provide mentorship programs for new and developing employees on their teams. Maxim Integrated is committed to providing equality of opportunity for all, protecting the dignity of employees, and
promoting respect for others at work. Institutional commitments such as our Pledge of Respect and Fairness and becoming a signatory to the Equal Pay Pledge reinforces these values.
In January 2021, Bloomberg selected Maxim Integrated for membership in the 2021 Gender-Equality Index (GEI). For the fourth straight year, Forbes and JUST Capital named Maxim Integrated one of America’s 100 most JUST Companies of 2020. Maxim scored at or better than the Semiconductor sector average in each of the JUST Companies' five major categories: treatment of workers, community, customers, shareholders and the environment.
A Great Place to Work
To ensure we are earning a reputation as a great place to work and meeting the needs of employees, we provide employee support through health & wellness programs to balance work and family obligations. Our flexible working hours toolkit enables managers to provide alternative arrangements to employee work schedules depending on the job type and employee needs. We also expanded employee eligibility for our Paid Parental Leave policy in the U.S. to include both mothers and fathers. Employees have up to eight weeks of full or partial paid time off to bond with their child due to a birth, adoption, or foster care event.
To ensure that our employees are supported and cared for, we extended healthcare benefits to include domestic partner coverage and transgender benefits and treatment. We now provide coverage to domestic partners as part of our commitment to the diversity of our workforce. A domestic partner includes both same-sex and opposite-sex. Also, we now cover medically necessary transgender services including mental-health services, hormone therapy, and gender-affirming surgeries.
Giving Back
The global pandemic impacted employees’ ability to serve our communities in person. Maxim Integrated is committed to give back to the community.
In calendar 2019, over 1,700 employees volunteered nearly 4,000 hours of their time, while our Maxim Integrated and employee charitable donations increased over 25% from 2018 to a total of $394,000 in support of our community partners.
Environmental Regulations
Our compliance with foreign, federal, state, and local laws and regulations that have been enacted to regulate the environment has not had a material adverse effect on our capital expenditures, earnings, or competitive or financial position.
Executive Officers
For information regarding our current executive officers, see Part III, Item 10 of this Annual Report.
ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also adversely affect our business.
Risks Related to an Acquisition or Merger
The announcement and pending agreement to merge with Analog Devices may adversely affect our business, financial condition, results of operations, and stock price.
Uncertainty relating to the pending ADI Merger could have an adverse effect on our employees, customers, partners, and other third parties that may materially disrupt key business activities and may adversely impact our financial condition, results of operations, and stock price. Moreover, we are subject to various additional risks in connection with the announcement and pendency of the ADI Merger, including:
•the fact that the conditions to the closing of the ADI Merger may not be satisfied or waived;
•uncertainty relating to the pending ADI Merger may cause current and prospective customers to consider alternatives, and potentially change suppliers;
•potential adverse effects on our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles following the ADI Merger;
•the significant diversion of internal resources and key employees’ and management’s attention due to the pending ADI Merger;
•legal proceedings that may arise challenging the ADI Merger and the related transactions contemplated by the ADI Merger Agreement may require us to incur significant legal fees and expenses, and may result in unfavorable outcomes that could delay or prevent the completion of the Merger;
•the restrictions imposed on our business and operations under the ADI Merger Agreement may prevent us from pursuing opportunities without Analog Devices’ approval or taking other actions that we might have undertaken in the absence of the proposed ADI Merger, such as dividend payments, stock repurchases, and restructurings, which may interfere with our ability to effectively respond to competitive pressures, execute business strategies, and meet financial goals;
•the ADI Merger Agreement contains customary provisions that restrict our ability to pursue alternative transactions to the ADI Merger and that may discourage potential competing acquirers from considering or proposing an alternative transaction that may provide a higher value to our stockholders; and
•the required regulatory approvals from governmental entities (U.S. and non-U.S.) may delay the completion of the ADI Merger or result in the imposition of conditions that would allow Analog Devices to terminate the ADI Merger Agreement and be obligated to pay us the termination fee specified in the ADI Merger Agreement in certain circumstances.
Any failure of the pending ADI Merger to be completed may adversely affect our business, financial condition, results of operations, and stock price.
Each of our and Analog Devices’ obligations to complete the ADI Merger is subject to a number of conditions specified in the ADI Merger Agreement, including, among others: (i) the absence of certain laws, orders, judgments, and injunctions that restrain, enjoin, or otherwise prohibit the completion of the Merger; and (ii) subject to certain materiality standards, the accuracy of representations and warranties with respect to the Company and Analog Devices and compliance in all material respects by the Company and Analog Devices with their respective covenants contained in the ADI Merger Agreement. On July 12, 2021, the outside date following which the ADI Merger Agreement may be terminated (subject to certain limitations) was automatically extended from July 12, 2021 to October 12, 2021 due to the pendency of certain required regulatory approvals. There can be no assurance that all of these conditions to the completion of the Merger will be satisfied within the timeframe specified in the Merger Agreement or at all.
Regulatory and governmental authorities may impose conditions on the granting of the required regulatory approvals, including divestitures of certain assets or businesses, which may result in extended negotiations among these entities, Analog Devices and us, which may delay the completion of the ADI Merger and increase the risk that the ADI Merger may not be completed.
If the ADI Merger is not completed, our stock price could decline to the extent that our current share price reflects an assumption that the ADI Merger will be completed. Furthermore, if the ADI Merger is not completed, we may suffer other consequences that could adversely affect our business, financial condition, results of operations, and stock price, including the following:
•we have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs in connection with the ADI Merger, and many of these fees and costs are payable by us regardless of whether the ADI Merger is completed;
•we could be required to pay a termination fee of up to $725 million to Analog Devices under circumstances as described in the ADI Merger Agreement;
•the failure to complete the ADI Merger may result in adverse publicity, negatively impact the reputation of the Company in the capital markets and investment community, and result in critical responses from our customers, partners, and other third parties;
•legal proceedings may be instituted against us, our directors and others relating to the ADI Merger and related transactions;
•any disruptions to our business resulting from the announcement and pendency of the ADI Merger, including any adverse changes to our relationships with customers, vendors, and employees, may continue or intensify in the event the ADI Merger is not completed;
•we may experience employee departures; and
•we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.
Risks Related to the Development, Supply, Manufacturing, and Sale of Products
The sale of our products and our results of operations are dependent upon demand from the end markets of our customers, which is cyclical.
Our products are sold in the following major end-markets: (i) Automotive, (ii) Communications & Data Center, (iii) Consumer, and (iv) Industrial. The demand for our products is subject to the strength of these four major end-markets that we serve and to some extent the overall economic climate. We often experience decreases and increases in demand for our products primarily due to the end-market demand of our customers. Our business and results of operations may be adversely affected if demand for our products decreases or if we are unable to meet an increase in demand without significantly increasing the lead-time for the delivery of our products. The semiconductor market historically has been cyclical with periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction and subject to significant and often rapid increases and decreases in product demand. As a result, changes could have adverse effects on our results of operation.
Our manufacturing operations may be interrupted or suffer yield problems.
The manufacture and design of integrated circuits is highly complex. We may experience a disruption in factory operations, manufacturing problems in achieving acceptable yields, or product delivery delays in the future as a result of, among other things, outdated infrastructure, upgrading or expanding existing facilities, equipment malfunctioning, construction delays, changing our process technologies, capacity constraints, or new technology qualification delays, particularly in our internal fabrication facilities. For example, our internal fabrication facility at Beaverton, Oregon requires additional investment to, among other things, upgrade its infrastructure and manufacturing equipment. In connection with the upgrading of our facilities, we may experience a disruption in factory operations, which could result in damages to the facilities and stoppages to the operations of the facilities. Additionally, our internal fabrication facilities may be harmed or rendered inoperable due to damages resulting from fire, natural disaster, unavailability of electric power or other causes, which may render it difficult or impossible for us to manufacture our products for some period of time.
If our internal fabrication facilities become unavailable to us, it would be time consuming, difficult, and costly to arrange for new manufacturing facilities to supply our products given the nature of our products. In addition, our third parties' manufacturing facilities may not be available to us due to natural or man-made disasters, labor unrest, political conditions, social unrest, civil strife, or other causes. To the extent we experience disruptions at our wafer fabrication facilities, or we do not achieve acceptable manufacturing yields, our results of operations could be adversely affected.
Our operating results may be adversely affected by our inability to timely develop new products through our research and development efforts. We may be unsuccessful in developing and selling new products necessary to maintain or expand our business.
The marketplace for our products is constantly changing and we are required to make substantial ongoing investments in our research and development. The semiconductor industry is characterized by rapid technological change, variations in manufacturing efficiencies of new products, and significant expenditures for capital equipment and product development. New product introductions are a critical factor for maintaining or increasing future revenue growth and sustained or increased profitability. However, they can present significant business challenges because product development commitments and expenditures must be made well in advance of the related revenues. The success of a new product depends on a variety of factors including accurate forecasts of long-term market demand and future technological developments, accurate anticipation of competitors' actions and offerings, timely and efficient completion of process design and product development, timely and efficient implementation of manufacturing and assembly processes, product performance, quality and reliability of the product, and effective marketing.
The loss of, or substantial reduction in sales to, any of our large customers could have a material adverse effect on our business, financial condition, and results of operations.
A reduction in demand or loss of one or more of our large customers may adversely affect our business. The delay, significant reduction in, or loss of, orders from any one or more of our large customers (including curtailments of purchases due to a change in the design, manufacturing or sourcing policies or practices of these customers or the timing of customer inventory adjustments) or demands of price concessions from any one or more of our large customers could have a material adverse effect on our net revenues and results of operations.
Our dependence on subcontractors for assembly, test, freight, wafer fabrication and logistic services and certain manufacturing services may cause delays beyond our control in delivering products to our customers.
We rely on subcontractors located in various parts of the world for assembly and CSP packaging services, freight and logistic services, wafer fabrication, and sorting and testing services. For example, in connection with the sale of our semiconductor wafer fabrication facility in San Antonio, Texas to TowerJazz Texas, Inc. (formerly known as TJ Texas, Inc.) ("TowerJazz"), an indirect wholly-owned subsidiary of Tower Semiconductor Ltd. (“Tower”), we entered into a long-term supply agreement with TowerJazz, pursuant to which we procure from TowerJazz certain quantities of silicon wafers upon which integrated circuits are made that are designed by us. None of the subcontractors we currently use is affiliated with us. Reliability problems experienced by our subcontractors or the inability to promptly replace any subcontractor could cause serious problems in delivery and quality resulting in potential product liability to us. Such problems could impair our ability to meet our revenue plan in the fiscal year period impacted by the disruption. Failure to meet the revenue plan may materially adversely impact our results of operations.
Any disruptions in our sort, assembly, test, freight, and logistic operations or in the operations of our subcontractors, including, but not limited to, the inability or unwillingness of any of our subcontractors to produce or timely deliver adequate supplies of processed wafers, integrated circuit packages, or tested products conforming to our quality standards, or other required products or services could damage our reputation, relationships, and goodwill with customers. Furthermore, finding alternate sources of supply or initiating internal wafer processing for these products may not be economically feasible.
Our independent distributors and sales representatives may underperform relative to our expectations, terminate their relationship with us or fail to make payments on outstanding accounts receivable to us, which would adversely affect our financial results.
A portion of our sales is realized through independent electronics distributors that are not under our direct control. These independent sales organizations generally represent product lines offered by several companies and thus could underperform for various reasons, including as a result of reducing their sales efforts applied to our products, or terminating their distribution relationship with us. In fiscal 2021, 54% of our revenues were generated from sales made through distributors which includes distribution sales to Samsung and catalog distributors. The Company's primary distributor is Avnet Electronics (“Avnet”). Avnet accounted for 21%, 22% and 22% of revenues in fiscal years 2021, 2020 and 2019, respectively, and 28% and 28% of accounts receivable as of June 26, 2021 and June 27, 2020, respectively. Sales to WT Microelectronics ("WT") accounted for 17% and 13% of net revenues in fiscal years 2021 and 2020, respectively, and 33% and 22% of accounts receivable as of June 26, 2021 and June 27, 2020, respectively. We require certain foreign distributors to provide a letter of credit to us in an amount up to the credit limit set for accounts receivable from such foreign distributors. The letter of credit provides for collection on accounts receivable from the foreign distributor should the foreign distributor default on their accounts receivable to us. Where credit limits have been established above the amount of the letter of credit, we are exposed for the difference. We do not require letters of credit from any of our domestic distributors and are not contractually protected against accounts
receivable default or bankruptcy by these distributors. The inability to collect open accounts receivable could adversely affect our results of operations and financial condition. Termination of a significant distributor, whether at our or the distributor's initiative, or the general underperformance of a significant distributor could be disruptive and harmful to our current business. Additional factors that could adversely affect us include the difficulties of managing independent sales organizations due to any matter involving fraud or dishonesty on the part of the independent distributors and sales representatives. It is often difficult to anticipate or immediately detect such misconduct of an independent third party.
We may be liable for additional production costs and lost revenues to certain customers with whom we have entered into customer supply agreements if we are unable to meet certain product quantity and quality requirements.
We enter into contracts with certain customers whereby we commit to supply quantities of specified parts at a predetermined scheduled delivery date. The number of such arrangements continues to increase as this practice becomes more commonplace. Should we be unable to supply the customer with the specific part at the quantity and product quality desired and on the scheduled delivery date, the customer may incur additional production costs. In addition, the customer may lose revenues due to a delay in receiving the parts necessary to have the end-product ready for sale to its customers or due to product quality issues. Under certain customer supply agreements, we may be liable for direct additional production costs or lost revenues. If products are not shipped on time or are quality deficient, we may be liable for penalties and resulting damages. Such liability, should it arise, and/or our inability to meet these commitments to our customers may have a material adverse impact on our results of operations and financial condition and could damage our relationships with the affected customers, reputation and goodwill.
Our results of operations could be adversely affected by warranty claims and product liability.
We face an inherent risk of exposure to product liability suits in connection with reliability problems or other product defects that may affect our customers. Our products are used by a variety of industries, including the automotive and medical industries. Failure of our products to perform to specifications, or other product defects, could lead to substantial damage to both the end product in which our device has been placed and to the user of such end product. Although we take measures to protect against product defects, if a product liability claim is brought against us, the cost of defending the claim could be significant and any adverse determination could have a material adverse effect on our results of operations.
If we fail to enter into future vendor managed inventory arrangements or fail to supply the specific product or quantity under such arrangements, the results of our operations and financial condition may be materially adversely impacted.
We enter into arrangements with certain original equipment manufacturers (“OEMs”) and electronic manufacturing services (“EMS”) partners to consign quantities of certain products within proximity of the OEMs and EMS partners' manufacturing location. The inventory is physically segregated at these locations and we retain title and risk of loss related to this inventory until such time as the OEM or EMS partner pulls the inventory for use in its manufacturing process. Once the inventory is pulled by the OEM or EMS partner, title and risk of loss pass to the customer, at which point we relieve inventory and recognize revenue and the related cost of goods sold. The specific quantities to be consigned are based on a forecast provided by the OEM or EMS partner. Generally, the arrangements with the OEMs and EMS partners provide for transfer of title and risk of loss once product has been consigned for a certain length of time.
We believe these arrangements will continue to grow in terms of number of customers and products and will increase in proportion to consolidated net revenues. Should we be unable or unwilling to enter into such agreements as requested by OEMs or EMS partners, our results of operations may be materially adversely impacted. In addition, should we be unable to supply the specific product in the quantity needed by the OEM or EMS partner as reflected in their forecast, we may be liable for damages, including, but not limited to, lost revenues and increased production costs which could have a material adverse impact on our results of operations and financial condition. Should we supply product in excess of the OEM or EMS partners' actual usage, any inventory not consumed may become excess or obsolete, which would result in an inventory write-down that could materially adversely affect our results of operations.
Shortage of raw materials or supply disruption of such raw materials could harm our business
The semiconductor industry has experienced a large expansion of fabrication capacity and production worldwide over time. As a result of increasing demand from semiconductor, solar and other manufacturers, availability of certain basic materials and supplies, and of subcontract services, has been limited from time to time over the past several years, and could come into short supply again if overall industry demand exceeds the supply of these materials and services in the future. The semiconductor industry and Maxim Integrated has experienced heightened supply constraints within the last year for certain items as a result of changes in the semiconductor industry, global economic conditions, and the COVID-19 pandemic, which have had and can
have a more significant impact on our operating results. Furthermore, these supply constraints coupled with the continuing impact of COVID-19 may limit our ability to fully satisfy demand and creates a heightened risk that suppliers may be unable to perform their obligations due to financial issues and/or regulatory measures. Moreover, this heightened risk may also lead to significant cost increases by suppliers as a result of the aforementioned issues.
We purchase materials and supplies from many suppliers, some of which are sole-sourced. If the availability of these materials and supplies is interrupted, we may not be able to find suitable replacements. In addition, from time to time natural disasters can lead to a shortage of some materials due to disruption of the manufacturer's production. We continually strive to maintain availability of all required materials, supplies and subcontract services. However, we do not have long-term agreements providing for all of these materials, supplies and services, and shortages could occur as a result of capacity limitations or production constraints on suppliers that could have a material adverse effect on our ability to achieve our production requirements.
Extensions in lead-time for delivery of products could adversely affect our future growth opportunities and results of operations.
Supply constraints, which may include limitations in manufacturing capacity, could impede our ability to grow revenues and meet increased customer demands for our products. Our results of operations may be adversely affected if we fail to meet such increase in demand for our products without significantly increasing the lead-time required for our delivery of such products. Any significant increase in the lead-time for delivery of products may negatively affect our customer relationships, reputation as a dependable supplier of products and ability to obtain future design wins, while potentially increasing order cancellations, aged, unsaleable or otherwise unrealized backlog, and the likelihood of our breach of supply agreement terms. Any of the foregoing factors could negatively affect our future revenue growth and results of operations.
Risks Related to Global Business Operations and Industry Dynamics
The ongoing novel coronavirus ("COVID-19") pandemic and the mitigation efforts by governments to attempt to control its spread have negatively impacted and could have a material adverse effect on our business, financial condition, and results of operations.
As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, limits on gatherings, shelter-in-place orders, quarantines, and business limitations and shutdowns. The COVID-19 pandemic and resulting mitigation efforts have impacted and will likely continue to impact our business, results of operations, and financial condition for an indefinite period of time. While we are unable to accurately predict the full extent to which the COVID-19 pandemic and the mitigation efforts by governments to attempt to control its spread will have on our results from operations and financial condition due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our customers and suppliers for an indefinite period of time.
We operate our business in worldwide locations. The potential risks and effects of this pandemic and economic crisis, including potential global or regional recessions or depressions, that could have a material adverse effect on our business, financial condition, and results of operations include, but are not limited to:
•Adverse impact on our customers and supply channels;
•Decrease in product demand and pricing as a result of this pandemic and unfavorable economic and market conditions;
•Disruption in our global operations, including our internal and compliance processes;
•Restrictions on our manufacturing, support operations or workforce, or similar limitations for our customers, vendors, and suppliers, could limit our ability to meet customer demand;
•Potential increased credit risk if customers, distributors, and resellers are unable to pay us, or must delay paying their obligations to us;
•Restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures could result in delays;
•Impact on our workforce/employees due to the ease with which the virus spreads;
•Impact of remote working on effectiveness on new product development; and
•Potential failure of our computer systems or communication systems as well as increased cyber-related risks due to our employees working from home.
Any or all of these items may occur, which individually or in the aggregate, may have a material adverse effect on our business, financial condition, and results of operations. These risks could accelerate or intensify depending on the severity and length of the pandemic. The COVID-19 pandemic has in the short term, and may in the long-term, adversely impacted the global economy, potentially leading to an economic downturn and increased unemployment. Moreover, even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business due to its global economic impact.
The COVID-19 pandemic, and the various responses to it, may also have the effect of heightening many of the other risks disclosed herein.
Incorrect forecasts, reductions, cancellations or delays in orders for our products and volatility in customer demand could adversely affect our results of operations.
As is customary in the semiconductor industry, customer orders may be canceled in most cases without penalty to the customers. Some customers place orders that require us to manufacture products and have them available for shipment, even though the customer may be unwilling to make a binding commitment to purchase all, or even any, of the products. In other cases, we manufacture products based on forecasts of customer demands. As a result, we may incur inventory and manufacturing costs in advance of anticipated sales and are subject to the risk of cancellations of orders, potentially leading to an initial inflation of backlog followed by a sharp reduction. Because of the possibility of order cancellation, backlog should not be used as a measure of future revenues. Furthermore, canceled or unrealized orders, especially for products meeting unique customer requirements, may also result in an inventory of unsaleable products, causing potential inventory write-downs, some of which could be substantial and could have a material adverse effect on our gross margins and results of operations.
Our global operations subject us to risks associated with changes in trade policies, including international trade disputes, and domestic or international political, social, economic or other conditions.
We are subject to the political and legal risks inherent in international operations. Exposure to political instabilities, different business policies and varying legal or regulatory standards, including, but not limited to, international trade disputes, could result in the imposition of tariffs, sanctions, restrictions on the U.S. import and export controls and other trade restrictions or barriers, which could negatively impact economic activity and lead to a contraction of customer demand. For example, in 2018, the U.S. and China began to impose partial tariffs on each other's products, and the trade tension between the two countries has escalated in 2019 through 2021. In addition, the U.S. has and may continue to focus on the business practices of specific foreign companies, including large technology companies based in China, which may result in future U.S. government actions impacting our ability to do business with such companies. The possibility of a deteriorating trade relationship may put us at a disadvantage in competition with non-U.S. companies and lead to a decreased customer demand for our products in the long-term due to the growing economic risks and geopolitical uncertainty between the U.S. and China. International trade disputes could also result in various forms of protectionist trade legislation and other protectionist measures that could limit the Company’s ability to operate its business and have a negative effect on end-market demand, which could have a material adverse impact on our results of operations and financial condition. Additionally, political and economic changes or volatility, political unrest, civil strife, public corruption and other economic or political uncertainties in certain countries, such as the Philippines, could interrupt and negatively affect our business operations. We have been impacted by these problems in the past, but none have materially affected our results of operations. Problems in the future or not-yet-materialized consequences of past problems could affect deliveries of our products to our customers, possibly resulting in business interruptions, substantially delayed or lost sales and/or increased expenses that cannot be passed on to our customers, any of which could ultimately have a material adverse effect on our business.
Our products may fail to meet new industry standards or requirements and the efforts to meet such industry standards or requirements could be costly.
Many of our products are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards or requirements, we could miss opportunities to achieve crucial design wins which in turn could have a material adverse effect on our business, operations and financial results.
We may pursue acquisitions and investments that could harm our operating results and may disrupt our business.
We have made and will continue to consider making strategic business investments, alliances, and acquisitions we consider necessary or desirable to gain access to key technologies that we believe will complement our existing technical capability and support our business model objectives. Investments, alliances, and acquisitions involve risks and uncertainties that may negatively impact our future financial performance and result in an impairment of goodwill. If integration of our acquired businesses is not successful, we may not realize the potential benefits of an acquisition or suffer other adverse effects that we currently do not foresee. We may also need to enter new markets in which we have no or limited experience and where competitors in such markets have stronger market positions.
We also invest in early-to-late stage private companies to further our strategic objectives and support key business initiatives. These strategic investments may not perform as expected. We cannot provide assurance that these companies will operate in a manner that will increase or maintain the value of our investment. If these private companies fail, we may not realize a return on our investments. Thus, all of our investments are subject to a risk of a partial or total loss of investment capital.
Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions. In addition, because acquisitions of high technology companies are inherently risky, no assurance can be given that our previous or future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition.
Our operating results may be adversely affected by increased competition and consolidation of competitors in our market.
The semiconductor industry has experienced significant consolidation in recent years. As a result, we experience intense competition from a number of companies, some of which have significantly greater financial, manufacturing and marketing resources than us, as well as greater technical resources and proprietary intellectual property rights than us. The principal elements of competition include product performance, functional value, quality and reliability, technical service and support, price, diversity of product line, and sale of integrated system solutions which combine the functionality of multiple chips on one chip for a price as part of a complete system solution and delivery capabilities. We believe we compete favorably with respect to these factors, although we may be at a disadvantage in comparison to companies with broader product lines, greater technical service and support capabilities and larger research and development budgets. We may be unable to compete successfully in the future against existing or new competitors and our operating results may be adversely affected by increased competition or our inability to timely develop new products to meet the needs of our customers. In addition, our competitors may become more aggressive in their pricing practices which may adversely impact our gross margins and market share. For example, our competitors may offer lower prices than us, or they may price multiple products or services in a bundle to provide additional incentives that we may not be able to match. We may be unable to mitigate the negative effects of such price competition, which may adversely affect our operating results.
Our quarterly operating results may fluctuate, which could adversely impact our common stock price.
We believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. Our operating results have in the past been, and will continue to be, subject to quarterly fluctuations as a result of numerous factors, some of which may contribute to more pronounced fluctuations in an uncertain global economic environment. These factors include, but are not limited to, the following:
•Fluctuations in demand for our products and services;
•Loss of a significant customer or significant customers electing to purchase from another supplier;
•Reduced visibility into our customers' spending plans and associated revenue;
•The level of price and competition in our product markets;
•Our pricing practices, including our use of available information to maximize pricing potential;
•The impact of the uncertain economic and credit environment on our customers, channel partners, and suppliers, including their ability to obtain financing or to fund capital expenditures;
•The overall movement toward industry consolidations among our customers and competitors;
•Below industry-average growth of the non-consumer segments of our business;
•Announcements and introductions of new products by our competitors;
•Our ability to generate sufficient earnings and cash flow to pay dividends to our stockholders;
•Deferrals of customer orders in anticipation of new products or product enhancements (introduced by us or our competitors);
•Our ability to meet increases in customer orders in a timely manner;
•Striking an appropriate balance between short-term execution and long-term innovation;
•Our ability to develop, introduce, and market new products and enhancements and market acceptance of such new products and enhancements; and
•Our levels of operating expenses.
We may be materially adversely affected by currency fluctuations.
We conduct our manufacturing and other operations in various worldwide locations. A portion of our operating costs and expenses at foreign locations are paid in local currencies. Many of the materials used in our products and much of the manufacturing process for our products are supplied by foreign companies or by our foreign operations, such as our test operations in the Philippines and Thailand. Approximately 90%, 89% and 89% of our net revenues in fiscal years 2021, 2020 and 2019, respectively, were from shipments to customers located outside the United States. Currency exchange fluctuations could decrease revenue and increase our operating costs, the cost of components manufactured abroad, and the cost of our products to foreign customers, or decrease the costs of products produced by our foreign competitors.
Exiting certain product lines or businesses, or restructuring our operations, may adversely affect certain customer relationships and produce results that differ from our intended outcomes.
The nature of our business requires strategic changes from time to time, including restructuring our operations and divesting and consolidating certain product lines and businesses. The sale of facilities, or the exiting of certain product lines or businesses, may adversely affect certain customer relationships, which may have a material adverse effect on our business, financial condition, and results of operations. Additionally, our ability to timely shut down our facilities or otherwise exit product lines and businesses, or to close or consolidate operations, depends on a number of factors, many of which are outside of our control. If we are unable to shut down a facility or exit a product line or business in a timely manner, or to restructure our operations in a manner we deem to be advantageous, this could have a material adverse effect on our business, financial condition, and results of operations. Even if the sale of a facility or divestment is successful, we may face indemnity and other liability claims by the acquirer or other parties.
Risks Related to Intellectual Property Protection, Data Privacy, and Cybersecurity
Our critical information systems are subject to cyber-attacks, data breaches, interruptions, and failures.
We rely on several information technology systems to provide products and services, process orders, manage inventory, process shipments to customers, keep financial, employee, and other records, and operate other critical functions. Maintaining the security of our information technology systems is important to our business and reputation. These information technology systems are subject to damage or interruption from a number of potential sources. Security breaches, including cyber-attacks, phishing attacks, denial-of-service attacks, or attempts to misappropriate or compromise confidential or proprietary information or sabotage enterprise information technology systems, are becoming increasingly frequent and more sophisticated. We currently have developed, and are in the process of developing more systems and procedures that include, among other things, ongoing internal risk assessments to identify vulnerabilities, an internal group dedicated to reviewing cybersecurity threats, and the adoption of an information security policy. Due to the evolving threat landscape, cyber-based attacks will continue and we may experience them going forward, potentially with more frequency. We continue to make investments and adopt measures designed to enhance our protection, detection, response, and recovery capabilities, and to mitigate potential risks to our intellectual property, technology, operations, customer data and proprietary information from potential cyber-attacks. However, although we take steps to detect and investigate security incidents and implement protections to prevent their recurrence, in some cases, we might be unable to anticipate or prevent all attacks because the techniques used to obtain unauthorized access to or sabotage networks and systems are constantly evolving. There can be no assurance that any future system improvements will be effective in preventing attacks or limiting the damage from any future cyber-attacks or disruptions.
Despite our efforts to mitigate risks associated with cybersecurity events, our information technology systems may still be susceptible to adaptive persistent threats, catastrophic cybersecurity attacks, damage, disruptions, or shutdowns due to power outages, hardware failures, computer malware and viruses, telecommunication failures, user errors, or other events. Risks associated with these threats include, but are not limited to, loss of intellectual property, impairment of our ability to conduct our operations, disruption of our customers’ operations, loss or damage to our customer data delivery systems, and increased costs to prevent, respond to or mitigate catastrophic cybersecurity events. A prolonged systemic disruption in the information technology systems could result in the loss of sales and customers and significant consequential costs, which could adversely affect our business. In addition, cybersecurity breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of sensitive or confidential information belonging to us or to our customers,
partners, suppliers, or employees. Our business and reputation could be harmed, and we could be subject to legal and regulatory claims which could result in significant financial or reputational damage.
We may be unable to adequately protect our proprietary rights, which may impact our ability to compete effectively.
We rely upon know-how, trade secrets, and patents to develop and maintain our competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer our products or that the confidentiality agreements upon which we rely will be adequate to protect our interests. Moreover, the laws of some foreign countries generally do not protect proprietary rights to the same extent as the United States, and we may encounter problems in protecting our proprietary rights in those foreign countries. Periodically, we have been asked by certain prospective customers to provide them with broad licenses to our intellectual property rights in connection with the sale of our products to them. Such licenses, if granted, may have a negative impact on the value of our intellectual property portfolio. Other companies have obtained patents covering a variety of semiconductor designs and processes, and we could be required to obtain licenses under some of these patents or be precluded from making and selling products that are alleged to be infringing, if such patents are valid and other design and manufacturing solutions are not available. There can be no assurance that we would be able to obtain licenses, if required, upon commercially reasonable terms or at all.
We may suffer losses and business interruption if our products infringe the intellectual property rights of others.
In the past, it has been common in the semiconductor industry for patent holders to offer licenses on reasonable terms and rates. Although the practice of offering licenses appears to be generally continuing, in some situations, typically where the patent directly relates to a specific product or family of products, patent holders have refused to grant licenses. In any of those cases, there can be no assurance that we would be able to obtain any necessary license on terms acceptable to us, if at all, or that we would be able to re-engineer our products or processes in a cost-effective manner to avoid claims of infringement. Any litigation in such a situation could involve an injunction to prevent the sales of a material portion of our products, the reduction or elimination of the value of related inventories and the assessment of a substantial monetary award for damages related to past sales, all of which could have a material adverse effect on our results of operations and financial condition.
We may experience losses related to intellectual property indemnity claims.
We provide intellectual property indemnification for certain customers, distributors, suppliers and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks and copyrights. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. To date, we have not been required to pay significant amounts for intellectual property indemnification claims. However, there can be no assurance that we will not have significant financial exposure under those intellectual property indemnification obligations in the future.
Risks Related to Legal, Tax, and Regulatory Compliance
Our financial results may be adversely affected by increased tax rates and exposure to additional tax liabilities.
On June 18, 2019, the U.S. Treasury and Internal Revenue Service (“IRS”) released temporary regulations under Internal Revenue Code (“IRC”) Sections 245A and 954(c)(6) (the “Temporary Regulations”), which applied retroactively to intercompany dividends occurring after December 31, 2017. The Temporary Regulations limit the applicability of the foreign personal holding company income (“FPHCI”) look-through exception for certain intercompany dividends received by a controlled foreign corporation. Before application of the retroactive Temporary Regulations, the Company benefited in fiscal years 2018 and 2019 from the FPHCI look-through exception. On August 21, 2020, the U.S. Treasury and IRS released final regulations under IRC Sections 245A and 954(c)(6) (the “Final Regulations”), which generally apply to years ending on or after June 14, 2019. The relevant sections of the Final Regulations are substantially the same as the Temporary Regulations. The Temporary Regulations apply to fiscal year 2018 and the Final Regulations apply to fiscal year 2019 intercompany dividends. The Company does not have any intercompany dividends after fiscal year 2019 that are impacted by relevant sections of the Temporary Regulations or Final Regulations. The Company previously analyzed the relevant Temporary Regulations and concluded that they were not validly issued, a conclusion which the Company determined was not altered by issuance of the Final Regulations. The Company also analyzed the relevant Final Regulations and concluded that they were not validly issued. Therefore, the Company did not account for the effects of the Temporary Regulations or Final Regulations in its results of operations for any prior fiscal period. The Company believes it has strong arguments in favor of its position.
The Company received a private letter ruling (“PLR”) from the IRS, dated May 24, 2021, allowing IRC Section 9100 relief to make a late disregarded entity (“DRE”) election for the foreign subsidiary that paid the fiscal year 2018 and 2019 intercompany dividends impacted by relevant sections of the retroactive Temporary Regulations or Final Regulations. Fiscal year 2018 and 2019 intercompany dividends impacted by the retroactive Temporary Regulations or Final Regulations will be disregarded for U.S. tax purposes because of the late DRE election, and therefore will not be subject to the adverse tax consequences generated by relevant sections of the retroactive Temporary Regulations or Final Regulations. The PLR allows the Company to file a late DRE election by September 21, 2021 and is contingent on the Company filing amended fiscal year 2018 – 2020 federal tax returns, by September 21, 2021, to reflect the tax impact of the late DRE election, which is immaterial. The Company filed the late DRE election on July 7, 2021 and intends to file the amended federal tax returns by September 21, 2021.
The Company would revert to its argument that the Temporary Regulations and Final Regulations are invalid if the IRS revoked the PLR, which in our view is unlikely. The Company would vigorously defend its position, however, due to the uncertainty involved in challenging the validity of regulations as well as a potential litigation process, there can be no assurance that the relevant Temporary Regulations and Final Regulations would be invalidated, modified or that a court of law would rule in favor of the Company. An unfavorable resolution of this issue could have a material adverse impact on our results of operations and financial condition.
We are subject to taxation in various countries and jurisdictions. Significant judgment is required to determine tax liabilities on a worldwide basis. Any significant increase in our future effective tax rates could reduce net income for future periods and may have a material adverse impact on our results of operations. A number of factors may increase our future effective tax rates, including, but not limited to:
•the jurisdictions in which profits are determined to be earned and taxed;
•changes in our global structure that involve changes to investment in technology outside of the United States;
•the resolution of issues arising from tax audits with various tax authorities,
•changes in the valuation of our deferred tax assets and liabilities;
•adjustments to estimated taxes upon finalization of various tax returns;
•increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions;
•changes in available tax credits;
•changes in share-based compensation;
•changes in generally accepted accounting principles; and
•changes in tax laws or the interpretation of such tax laws, including laws or rules enacted as a result of work by the Organization for Economic Co-operation and Development (“OECD”) to make fundamental changes to the international corporate tax system, which include proposals to allocate profits to markets where sales arise and for a jurisdictional-level minimum effective tax rate; U.S. corporate tax changes proposed by the President Biden administration, which include an increase in the U.S. corporate tax rate from 21% to 28% and an increase in the Global Intangible Lowed Taxed Income effective tax rate from 10.5% to 21%; and laws enacted by countries in response to the Base Erosion and Profit Shifting (“BEPS”) project conducted by the OECD.
We are subject to a variety of domestic and international laws and regulations that could impose substantial costs on us and may adversely affect our business.
We are subject to numerous U.S. and international laws, rules and regulations covering a wide variety of subject matters, including, but not limited to, data privacy and protection, environment, safety and health, exports and imports, bribery and corruption, tax, labor and employment, competition, market access, and intellectual property ownership and infringement. Compliance with these laws, rules and regulations may be onerous and expensive and could restrict our ability to operate our business. If we fail to comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to operate our business.
Among other laws and regulations, we are subject to the General Data Protection Regulation (“GDPR”) effective in the European Union (“EU”), which created a data protection compliance regime that imposed substantial obligations on companies collecting, processing and transferring personal data and may impose significant penalties for non-compliance. Similarly, certain jurisdictions in the United States and some countries in which we operate may consider or have passed legislation implementing data protection requirements that could require us to change our business practices and increase the cost and complexity of compliance. In addition to GDPR, we are subject to the U.S. Customs and Export Regulations, including U.S.
International Traffic and Arms Regulations and similar laws, which collectively control import, export and sale of technologies by companies and various other aspects of the operation of our business, and the Foreign Corrupt Practices Act and similar anti-bribery laws, which prohibit companies from making improper payments to government officials for the purposes of obtaining or retaining business.
While our Company’s policies and procedures mandate compliance with such laws and regulations, there can be no assurance that our employees and agents will always act in strict compliance. If we fail to comply or if we become subject to enforcement activity, we could be subject to fines, penalties or other legal liability. Furthermore, should these laws, rules and regulations be amended or expanded, or new ones enacted, we could incur materially greater compliance costs or restrictions on our ability to operate our business, which could have a material adverse impact on our results of operations and financial condition. Our failure or inability to comply with existing or future laws, rules or regulations, or changes to existing laws, rules or regulations could subject us to fines, penalties or other legal liability.
Environmental, safety and health laws and regulations could force us to expend significant capital and incur substantial costs.
Various foreign and domestic federal, state, and local government agencies impose a variety of environmental, safety and health laws and regulations on the storage, handling, use, discharge and disposal of certain chemicals, gases and other substances used or produced in the semiconductor manufacturing process as well as the health and safety regulations related to our employees. Historically, compliance with these regulations has not had a material adverse effect on our capital expenditures, earnings, or competitive or financial position. There can be no assurance, however, that interpretation and enforcement of current or future environmental, safety and health laws and regulations will not impose costly requirements upon us. Any failure by us to adequately control the storage, handling, use, discharge or disposal of regulated substances could result in fines, sales limitations, suspension of production, alteration of wafer fabrication processes and legal liability, which may materially adversely impact our financial condition, results of operations or liquidity.
In addition, some of our customers and potential customers may require that we implement operating practices that are more stringent than applicable legal requirements with respect to health regulations, environmental matters or other items. As a result, these requirements may increase our own costs regarding developing, administering, monitoring and auditing these customer-requested practices at our own sites and those in our supply chain.
Our certificate of incorporation contains certain anti-takeover provisions that may discourage, delay or prevent a hostile change in control of our Company.
Our certificate of incorporation permits our Board of Directors to authorize the issuance of up to 2,000,000 shares of preferred stock and to determine the rights, preferences and privileges and restrictions applicable to such shares without any further vote or action by our stockholders. Any such issuance might discourage, delay or prevent a hostile change in control of our Company, which may be considered beneficial to our stockholders.
General Risk Factors
Our operating results may be adversely affected by unfavorable economic and market conditions.
The global economic environment could subject us to increased credit risk should customers be unable to pay us, or delay paying us, for previously purchased products. Accordingly, reserves for doubtful accounts and write-offs of accounts receivable may increase. In addition, weakness in the market for end users of our products could harm the cash flow of certain of our distributors and resellers who could then delay paying their obligations to us or experience other financial difficulties. This would further increase our credit risk exposure and potentially cause delays in our recognition of revenue on sales to these customers.
If economic or market conditions deteriorate globally, in the United States or in other key markets, our business, operating results, and financial condition may be materially and adversely affected.
If we fail to attract and retain qualified personnel, our business may be harmed.
Our success depends to a significant extent upon the continued service of our chief executive officer, our other executive officers, and key management and technical personnel, particularly our experienced engineers and business unit managers, and
on our ability to continue to attract, retain, and motivate qualified personnel. The loss of the services of one or several of our executive officers could have a material adverse effect on our Company. In addition, we could be materially adversely affected if the turnover rates for engineers and other key personnel increases significantly or we are unsuccessful in attracting, motivating and retaining qualified personnel. Should we lose one or more engineers who are key to a project's completion during the course of a particular project, the completion of such project may be delayed which could negatively affect customer relationships and goodwill and have a material adverse effect on our results of operations.
Our stock price may be volatile.
The market price of our common stock may be volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, including the pending ADI Merger, many of which are beyond our control.
In addition, the market prices of securities of technology companies, including those in the semiconductor industry, generally have been and remain volatile. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. If our actual operating results or future forecasted results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock may decline. Accordingly, an investor may not be able to resell shares of our common stock at a price equal to or higher than the price paid for them.
Due to the nature of our compensation programs, some of our executive officers sell shares of our common stock each quarter or otherwise periodically, including pursuant to trading plans established under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Regardless of the reasons for such sales, analysts and investors could view such actions in a negative light and the market price of our common stock could be adversely affected as a result of such periodic sales.
Material impairments of our goodwill and intangible assets could adversely affect our results of operations.
We have a significant amount of goodwill and intangible assets on our balance sheet. We test goodwill and intangible assets for impairment annually or more frequently if certain impairment indicators arise or circumstances change that indicate fair value of a reporting unit or intangible asset may be below its carrying amount. Determination of fair values require considerable judgment and is sensitive to inherent uncertainties and changes in estimates and assumptions. Declines in market conditions, weak trends in anticipated financial performance of reporting units or declines in revenue projections are examples of indicators that carrying values of goodwill or intangible assets may not be recoverable. We may be required to record an impairment that, when incurred, could have a material adverse effect on our financial statements.
Business interruptions from natural disasters could harm our ability to produce products.
We operate our business in worldwide locations. Some of our facilities and those of our subcontractors are located in areas of the world that are susceptible to damage from natural disasters and other significant disruptions, including earthquakes, typhoons, hurricanes, tsunamis, volcano eruptions, floods, fires, water shortages, and other natural or man-made catastrophic events. In the event of a natural disaster, we may suffer a disruption in our operations that could adversely affect our results of operations.
Our financial condition, operations and liquidity may be materially adversely affected in the event of a catastrophic loss for which we are self-insured.
We are primarily self-insured with respect to many of our commercial risks and exposures. Based on management's assessment and judgment, we have determined that it is generally more cost effective to self-insure these risks. The risks and exposures we self-insure include, but are not limited to, fire, property and casualty, natural disasters, product defects, political risk, social unrest, general liability, theft, counterfeits, patent infringement, certain employment practice matters and medical benefits for many of our U.S. employees. Should there be catastrophic loss from events such as fires, explosions, volcano eruptions, earthquakes, or man-made and other natural disasters, among many other risks, or adverse court or similar decisions in any area in which we are self-insured, our financial condition, results of operations, and liquidity may be materially adversely affected.
Our debt covenants may limit us from engaging in certain transactions or other activities.
We have entered into debt arrangements that contain certain covenants which may limit the manner in which we conduct our business. For example, the debt indentures that govern our outstanding notes include covenants that, under certain
circumstances, limit our ability to grant liens on our facilities and to enter into sale and leaseback transactions, which could limit our ability to secure additional debt funding in the future. In circumstances involving a change of control of the Company followed by a downgrade of the rating of the notes, we would be required to make an offer to repurchase the affected notes at a purchase price greater than the aggregate principal amount of such notes, plus accrued and unpaid interest. Our ability to repurchase the notes in such events may be limited by our then-available financial resources or by the terms of other agreements to which we are a party.
Although we currently have the funds necessary to retire this debt, funds might not be available to repay the notes when they become due in the future.
We are required to comply with the covenants set forth in our debt indentures. If we breach any of the covenants and do not obtain a waiver from the note holders or lenders, then, subject to cure periods, any outstanding indebtedness may be declared immediately due and payable.
