What changed in this filing

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Item 1A. Risk Factors

2021-02-22 compared with 2020-02-12 · 230 added, 141 removed, 532 unchanged (41% of the section changed)

6 unchanged sentences

RISKS RELATED TO OUR BUSINESS

The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.

During times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may have a negative impact on our business, operating results and financial condition.

Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our operating results and financial condition.

The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition.

Delays in initiation of production at facilities due to implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies, operating results and financial condition.

We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect our growth and profit margins.

Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales and may demand to audit our operations from time to time.

A failure to qualify a product or a negative audit finding could adversely affect our net sales, operating results and financial condition.

Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our operating results and financial condition.

New technologies could result in the development of new products by our competitors and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market share, operating results and financial condition.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense, reduction in our intellectual property rights and a negative impact on our business, operating results and financial condition.

We depend on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process development, parts and equipment, as well as finished products from other manufacturers, and our reputation with customers, operating results and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner.

If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, our operating results and financial condition.

Part of our growth strategy involves identifying and acquiring companies.

We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition.

We are subject to litigation risks, including securities class action litigation and intellectual property litigation, which may be costly to defend and the outcome of which is uncertain and could adversely affect our business and financial condition.

We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our business, operating results and financial condition.

We may incur additional costs and face emerging risks associated environmental, social and governance (“ESG”) factors impacting our operations.

Our products, or products we purchase from third parties for resale, may be found to be defective and, as a result, warranty claims and product liability claims may be asserted against us and we may not have recourse against our suppliers, which may harm our business, reputation with our customers, operating results and financial condition.

We may fail to attract or retain the qualified technical, sales, marketing, finance and management/executive personnel required to operate our business successfully, which could adversely affect our business, operating results and financial condition.

We may not be able to achieve future growth, and any such growth may place a strain on our management and on our systems and resources, which could adversely affect our business, operating results and financial condition.

Obsolete inventories as a result of changes in demand for our products and change in life cycles of our products could adversely affect our business, operating results and financial condition.

If our direct sales customers or our distributors’ customers do not design our products into their applications, our net sales may be adversely affected.

We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses, which could adversely affect our business, operating results and financial condition.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates or foreign exchange exposure or our counterparties might not perform as agreed.

We may have a significant amount of debt with various financial institutions worldwide.

Any indebtedness could adversely affect our business, operating results, financial condition and our ability to meet payment obligations under such debt.

Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.

Our business benefits from certain Chinese government incentives.

Expiration of, or changes to, these incentives could adversely affect our operating results and financial condition.

We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies or legal entity structures, which could adversely affect our operating results and financial condition.

The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.

Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition.

Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition.

Compliance with government regulations and customer demands regarding the use of “conflict minerals” may result in increased costs and may have a negative impact on our business, operating results and financial condition.

There are risks associated with previous and future acquisitions.

We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our Common Stock.

RISKS RELATED TO OUR INTER NATIONAL OPERATIONS

Our international operations subject us to risks that could adversely affect our operations.

We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating results.

Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material adverse effect on us.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S., may disrupt our activities in the U.S., may have an adverse impact on our profitability and results of operations and may encourage the independent development in China of products and electronic components that will compete with ours or displace our products and components, resulting in an adverse impact on our Chinese business.

The U.K.’s exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

A slowdown in the Chinese economy could limit the growth in demand for electronic devices containing our products, which would have a material adverse effect on our business, operating results and prospects.

Economic regulation in China could materially and adversely affect our business, operating results and prospects.

We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act, the U.K.’s Bribery Act 2010, China’s anti-corruption campaign and similar worldwide anti-bribery laws.

We are subject to foreign currency risk as a result of our international operations.

China is experiencing rapid social, political and economic change, which has increased labor costs and other related costs that could make doing business in China less advantageous than in prior years.

Increased labor costs in China could adversely affect our business, operating results and financial condition.

We may not continue to receive preferential tax treatment in Asia, thereby increasing our income tax expense and reducing our net income.

The distribution of any earnings of certain foreign subsidiaries may be subject to foreign income taxes, thus reducing our net income.

We could be adversely affected by the compromise or theft of our technology, know-how, data or intellectual property or a requirement that we yield rights in technology, know-how, data stored in foreign jurisdictions or intellectual property that we use in such foreign jurisdictions.

RISKS RELATED TO OUR COMMON STOCK

Variations in our quarterly operating results may cause our stock price to be volatile.

We may enter into future acquisitions and take certain actions in connection with such acquisitions that could adversely affect the price of our Common Stock.

Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters.

We were formed in 1959, and our early corporate records are incomplete.

As a result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete.

Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock in such business activities.

Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws, may hinder a take-over attempt.

Section 203 of Delaware General Corporation Law may deter a take-over attempt.

Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt .

GENERAL RISK FACTORS

The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.

Weaknesses in the global economy and financial markets can lead to lower consumer discretionary spending and demand for items that incorporate our products in the consumer electronics, computing, industrial, communications and the automotive sectors.

A decline in end-user demand can affect our customers’ demand for our products, the ability of our customers to meet their payment obligations and the likelihood of customers canceling or deferring existing orders.

Our net sales, operating results and financial condition could be negatively affected by such actions.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S.

or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.

System security risks, data protection breaches, cyber-attacks and other related cybersecurity issues could disrupt our internal operations, and any such disruption could reduce our expected net sales, increase our expenses, damage our reputation and adversely affect our stock price.

RISKS RELATED TO OUR BUSINESS

The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.

I n March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.

COVID-19 continues to spread throughout the United States and other countries across the world (including countries where we maintain operations), and the duration, severity of its effects and ultimate impact to the world’s population and financial impact are currently unknown.

National, state and local governments have responded to the COVID-19 pandemic in a variety of ways including, without limitation, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), ordering businesses to close or limit operations and ordering people to stay at home (i.e., shelter in place), and imposing travel restrictions (including quarantine requirements).

Given these governmental actions, there is no assurance that we will be permitted to operate under every current or future government order or other restriction and in every location where we maintain operations and may be required to limit our operations at, or close, certain locations in the future.

Any such long-term limitations or closures would have a material adverse impact on our ability to service our customers and on our business, financial condition and results of operations.

In particular, any long-term limitations on, or long-term closures of, our manufacturing facilities in Asia or Europe would have a negative adverse impact on our ability to manufacture, sell and ship products and service customers and would have a material adverse impact on our business, financial condition and results of operations.

In the first quarter of 2020, following the extended Chinese New Year, we delayed the start of our manufacturing production in China and at the end of the first quarter of 2020 we temporarily closed our wafer fabrication facilities located in the United Kingdom.

As of the date of this report, our operations in China and the United Kingdom have both resumed full production.

However, we can provide no assurances that those facilities or any of our other facilities may not suffer similar closures or disruptions in the future.

While the Company has already experienced negative impacts from the COVID-19 pandemic to its results of operations, cash flows and financial condition, in light of the current level of uncertainty over the economic and operational impacts of COVID-19 we cannot reasonably estimate the total impact that COVID-19 will have on our results of operations, cash flows or financial condition at this time.

Risks and complications in the Company’s business from COVID-19 include, but are not limited to, changes in ordering patterns and demand for our products and losses in efficiency due to travel limitations and regulations compelling employees to work from home.

While the Company has not experienced a material increase in technology spending, if employees are forced to continue working remotely it could become necessary to increase information technology spending.

Although the Company has not experienced a significant business disruption due to teleworking arrangements, the imposition of increased self-isolation protocols could negatively impact the ability of employees to travel to the Company’s production facilities and possibly create ongoing business disruptions.

The limitations could negatively affect the Company’s ability to produce, sell and transport its products.

The Company’s consolidated financial statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of net sales and expenses during the reporting periods presented.

Such estimates and assumptions affect, among other things, the Company’s goodwill, long-lived asset valuation and indefinite-lived intangible asset valuation;

inventory valuation;

equity investment valuation;

assessment of the annual effective tax rate;

valuation of deferred income taxes and income tax contingencies;

the allowance for doubtful accounts;

measurement of compensation cost for certain share-based awards and cash bonus plans;

and pension plan assumptions.

In addition, depending on the extent and duration of the COVID-19 pandemic, healthcare insurance premiums could increase, increasing our healthcare costs.

In addition, the COVID-19 pandemic may cause disruptions, and in some cases severe disruptions, to the business and operations of our suppliers and customers as a result of quarantines, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.

Certain of our customers and suppliers may in the future be required to close down or operate at a lower capacity, which would adversely impact our business, financial condition and results of operations.

Because of the rapid onset of the COVID-19 pandemic, some of our customers could experience financial difficulties resulting in such customers being unable to pay for products they ordered from us before the COVID-19 pandemic emerged.

There can be no assurance that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in the future.

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We may not be able to compete successfully in the future, and competitive pressures may harm our business, operating results and financial condition.

One of our external suppliers is also a related party.

The loss of this supplier could harm our business, operating results and financial condition.

In 2019, 2018 and 2017, LSC, our largest stockholder, accounted for less than 3% of our silicon wafer supply and our finished goods supply.

The loss of LSC as a supplier could materially harm our business, operating results and financial condition.

In the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC by the Company.

At the effective date of the transaction, each share of LSC will be converted into the right to receive TWD $42.50 per share in cash, or approximately US $1.42 per share based on December 31, 2019 exchange rates.

The aggregate consideration to be paid by the Company, based on the December 31, 2019 exchange rate, is approximately $437 million.

This amount is subject to change, based on the Taiwan dollar to United States dollar exchange rate at closing.

The acquisition received LSC shareholder approval on October 25, 2019, and we anticipate completing the acquisition in the second half of 2020, subject to customary closing conditions and regulatory approvals.

We expect to fund the purchase price of the transaction primarily with proceeds from a new bank financing arrangement.

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If a significant number of purchase orders are cancelled or product quantities ordered are reduced, and we are unable to timely generate replacement orders, we may build up excess inventory and our net sales, operating results and financial condition may suffer.

A disruption in production at our manufacturing facilities could have a material adverse effect on our business.

Disruptions could occur for many reasons, including fire, floods, hurricanes, typhoons, droughts, tsunamis, volcanoes, earthquakes, disease or other similar natural disasters, unplanned maintenance or other manufacturing problems, labor shortages, power outages or shortages, telecommunications failures, strikes, transportation interruption, government regulation, terrorism or other extraordinary events, including epidemics and related travel restrictions, such as the recent outbreak of the Coronavirus originating in Wuhan, China.

Such disruptions may cause direct injury or damage to our employees and property and related internal controls with significant indirect consequences.

Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance.

If one of our key manufacturing facilities is unable to produce our products for an extended period of time, our sales may be reduced by the shortfall caused by the disruption, and we may not be able to meet our customers’ needs, which could cause our customers to seek other suppliers.

Such disruptions could have an adverse effect on our operating results and financial condition.

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We may not be able to accomplish these goals, which would adversely affect our net sales, market share, operating results and financial condition.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions.

We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, to coordinate our sales activities across all of our products and services and to coordinate our administrative activities.

A substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships.

Our systems might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins and similar disruptions affecting the Internet generally.

There can be no assurance that such delays, problems, or costs will not have a material adverse effect on our cash flows, operating results and financial condition.

As our operations grow in both size and scope, we will continuously need to improve and upgrade our systems and infrastructure while maintaining the reliability and integrity of our systems and infrastructure.

The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase.

In particular, we have upgraded our financial reporting system and are currently seeking to upgrade other information technology systems.

These and any other upgrades to our systems and information technology, or new technology, now and in the future, will require that our management and resources be diverted from our core business to assist in compliance with those requirements.

There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded technology (and related customer issues), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect on our cash flows, operating results and financial condition.

A significant portion of our operations operate on a single Enterprise Resource Planning (“ERP”) platform.

To manage our international operations efficiently and effectively, we rely heavily on our ERP system, internal electronic information and communications systems and on systems or support services from third parties.

Any of these systems are subject to electrical or telecommunications outages, computer hacking or other general system failure.

It is also possible that future acquisitions will operate on different ERP systems and that we could face difficulties in integrating operational and accounting functions of new acquisitions.

Difficulties in upgrading or expanding our ERP system or system-wide or local failures that affect our information processing could adversely affect our cash flows, operating results and financial condition and could result in material weaknesses or significant deficiencies in internal controls.

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For example, (i) in 2000, we acquired FabTech, Inc., a wafer fabrication company, in order to have our own wafer manufacturing capabilities, (ii) in 2006, we acquired Anachip Corp.

as an entry into the analog market, (iii) in 2006, we acquired the net operating assets of APD Semiconductor, Inc., (iv) in 2008, we acquired Zetex plc., (v) in 2012, we acquired over 50% of the outstanding common stock of Eris Technology Corporation, (vi) also in 2012, we acquired Power Analog Microelectronics, Inc., (vii) in 2013, we acquired BCD Semiconductor Manufacturing Limited (viii) in 2015, we acquired Pericom Semiconductor Corporation and (vii) in 2019 we acquired Texas Instruments’ 200mm wafer fabrication facility and operations located in Greenock, Scotland.

In addition, in the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC and its subsidiaries by the Company.

The aggregate consideration to be paid by the Company, based on the December 31, 2019 exchange rate, is approximately $437 million.

This amount is subject to change, based on the Taiwan dollar to United States dollar exchange rate at closing.

We expect to fund the purchase price of the transaction primarily with proceeds from a new bank financing arrangement.

as an entry into the analog market, (iii) in 2006, we acquired the net operating assets of APD Semiconductor, Inc., (iv) in 2008, we acquired Zetex plc., (v) in 2012, we acquired over 50% of the outstanding common stock of Eris Technology Corporation, (vi) also in 2012, we acquired Power Analog Microelectronics, Inc., (vii) in 2013, we acquired BCD Semiconductor Manufacturing Limited (viii) in 2015, we acquired Pericom Semiconductor Corporation, (vii) in 2019 we acquired Texas Instruments’ 200mm wafer fabrication facility and operations located in Greenock, Scotland and (viii) in November of 2020 we acquired LSC.

In addition, from time to time, we may be in various stages of discussions with potential acquisition targets as we intend to continue to expand and diversify our operations by making further acquisitions.

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Discovery of contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are enforced, could require us to incur additional costs for compliance or subject us to unexpected financial liabilities.

We may incur additional costs and face emerging risks associated environmental, social and governance (“ESG”) factors impacting our operations .

Stakeholders such as investors, employees and the communities in which we operate have increased their focus on our ESG and sustainability related activities, specifically in the corporate social and environmental responsibility (“CSER”) areas.

Some investors may use our ESG and sustainability related information as well as the ESG ratings and metrics to guide their investment strategies and measure our corporate performance.

Potential and current investors may decrease or withdraw investment, or alternatively increase investment in our competitors if our CSER performance is perceived to be less than our competitors’ CSER performance.

The qualitative and quantitative criteria adopted or published by third party ESG rating agencies and standards organization may continue to evolve.

We may incur additional costs to satisfy these evolving expectations and criteria, and may face additional risks associated with emerging regulations governing CSER performances.

We may communicate certain goals and projects regarding our CSER activities from time to time.

If we are unable to meet those goals or are perceived to fail to meet the goals as planned, or if our CSER policies and practices are perceived to be inadequate, we could face reputational damages and our financial results may be adversely affected.

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therefore, some of our product inventory may become obsolete and, thus, adversely affect our business, operating results and financial condition.

If our direct sales customers do not design our products into their applications, our net sales may be adversely affected.

If our direct sales customers or our distributors’ customers do not design our products into their applications, our net sales may be adversely affected.

We expect an increasingly significant portion of net sales will come from products we design specifically for our customers.

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We currently have a U.S.

banking credit facility under which as of December 31, 2019, we had a remaining principal balance of $75.2 million under a term loan, and had nothing drawn on a $250.0 million revolver, ($250.0 million of which remained available as of December 31, 2019), with the possibility of an additional $200.0 million of borrowings.

In connection with the LSC acquisition, we expect to incur additional debt through a new bank financing arrangement that could subject the Company to additional interest rate and other risks.

credit facility under which, as of December 31, 2020, we had a remaining principal balance of $282.3 million under a term loan, and had nothing drawn on a $150.0 million revolver, $150.0 million of which remained available as of December 31, 2020.

In addition to our U.S.

banking credit facility we have $13.3 million outstanding under short-term foreign credit facilities.

In addition to U.S.

banking credit facility and our short-term foreign credit facilities, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $23.5 million on a long-term basis from local Taiwan banks in order to make an investment.

credit facility we have $140.6 million outstanding under short-term foreign credit facilities.

In addition to our U.S.

credit facility and our short-term foreign credit facilities, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $30.0 million on a long-term basis from local Taiwan banks in order to make an investment.

See “Liquidity and Capital Resources” below and Note 8 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

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As of December 31, 2020, $282.3 million was outstanding under our U.S.

banking credit facility.

credit facility.

In addition, we have short-term foreign credit facilities with borrowing capacities of approximately $307.1 million with an unused amount of $168.9 million.

In connection with the LSC acquisition, we expect to incur additional debt through a new bank financing arrangement that could subject the Company to additional interest rate and other risks.

A significant amount of debt could have significant consequences on our future operations, including:

making it more difficult for us to meet our payment and other obligations under our outstanding debt;

resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which event of default could result in all of our debt becoming immediately due and payable and, in the case of an event of default under our secured debt could permit the lenders to foreclose on our assets securing that debt;

Our outstanding debt could have significant consequences on our future operations, including:

making it more difficult for us to meet our payment and other obligations under our outstanding debt agreements;

resulting in one or more events of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which events of default could result in all of our debt becoming immediately due and payable and, in the case of an event of default under our secured debt could permit the lenders to foreclose on our assets securing that debt;

reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates;

subjecting us to the risks of increased sensitivity to interest rate increases on our indebtedness with variable interest rates;

limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy;

placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Any of the above-listed factors could have an adverse effect on our business, operating results, financial condition and our ability to meet our payment obligations under our debt.

Any of the above-listed factors could have an adverse effect on our business, operating results, financial condition and our ability to meet our payment obligations under our debt agreements.

credit facility and our foreign credit lines bear interest at LIBOR or similar indices plus a specified margin.

On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and it is unclear whether new methods of calculating LIBOR will be established.

If LIBOR ceases to exist after 2021, and if the U.S.

Credit Facility is not amended to incorporate an alternate benchmark rate to replace LIBOR once such an alternate benchmark rate has been identified, the interest rates under the U.S.

Credit Facility will be based on the Base Rate (as defined in the U.S.

Credit Facility), which may result in higher interest rates.

Credit Facility provides a streamlined mechanism for amendment to its interest rate provisions in the event LIBOR becomes unavailable that would permit substitution of an alternate benchmark rate by agreement between the Company and the Administrative Agent, subject only to rejection by a majority of the lenders under the U.S.

Credit Facility.

However, such an amendment would depend upon the identification of an alternate benchmark rate, and agreement between the Company and the Administrative Agent on the alternate benchmark rate and on terms for incorporation of that alternate benchmark rate into the U.S.

In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021.

The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended by the ICE Benchmark Administration until mid-2023.

In response to concerns regarding the future of LIBOR, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (“ARRC”) to identify alternatives to LIBOR.

The ARRC has recommended benchmark-

replacement procedures to assist issuers in continued capital market entry while safeguarding against LIBOR’s discontinuation.

The initial steps in the ARRC’s recommended provision reference variations of the Secured Overnight Financing Rate (“SOFR”).

Additionally, it is uncertain if applicable tenors of LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR.

At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement.

All of our existing debt obligations that are based on LIBOR will mature by the end of 2023, but in anticipation of LIBOR’s phase out, our U.S.

credit facility (which matures May 29, 2023) was amended to provide for alternative benchmark rates (including a hard-wired SOFR-based alternative benchmark) as well as transition mechanisms for selecting another benchmark replacement rate for LIBOR, with such benchmark replacement rate to be mutually agreed with the lenders under the U.S.

credit facility.

If an alternate benchmark rate is not agreed under the U.S.

Credit Facility and/or if an alternate benchmark rate is not available under our foreign credit lines, interest rates governing such indebtedness may increase.

To the extent that these interest rates increase, our interest expense will increase, which could adversely affect our financial condition, operating results and cash flows.

We will continue to monitor the situation and address the potential reference rate changes in future debt obligations that we may incur.

Accordingly, the potential effect of the phase-out or replacement of LIBOR on our cost of capital cannot yet be determined.

Further, the use of an alternative base rate or a benchmark replacement rate as a basis for calculating interest with respect to any outstanding variable rate indebtedness could lead to an increase in the interest we pay and a corresponding increase in our costs of capital or otherwise have a material adverse impact on our business, financial condition or results of operations.

Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.

banking credit facility contains covenants imposing various restrictions on our business and financial activities.

credit facility contains covenants imposing various restrictions on our business and financial activities.

These restrictions may affect our ability to operate our business and undertake certain financial activities and may limit our ability to take advantage of potential business or financial opportunities as they arise.

The restrictions these covenants place on us include limitations on our ability to incur liens, incur indebtedness, make investments, dissolve or merge or consolidate with or into another entity, dispose of certain property, make restricted payments (including dividends and share repurchases), issue or sell equity interests, engage in other different material lines of business, conduct related party transactions, enter into certain burdensome contractual obligations and use proceeds from any credit facility to purchase or carry margin stock or to extend credit to others for the same purpose.

banking credit facility also requires us to meet certain financial ratios, including a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio.

The restrictions these covenants place on us include limitations on our ability to incur liens, incur indebtedness, make investments, dissolve or merge or consolidate with or into another entity, dispose of certain property, make restricted payments (including dividends and share repurchases), issue or sell equity interests, engage in other different material lines of business, conduct related party transactions, enter into certain burdensome contractual obligations and use proceeds from our credit facility to purchase or carry margin stock or to extend credit to others for the same purpose.

credit facility also requires us to meet certain financial ratios, including a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio.

Our ability to comply with the U.S.

banking credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions, and are subject to the risks stated in this section of the Annual Report.

credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions, and are subject to the risks stated in this section of the Annual Report.

The breach of any of these covenants or restrictions could result in an event of default under the facility.

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One of our manufacturing facilities and one of our wafer fabrication facilities located in Shanghai are approved for HNTE status for the tax years 2018-2020.

In addition, one of our wafer fabrication facilities located in Shanghai was approved for HNTE status for the tax years 2017-2019.

The Company expected to continue to meet HTND requirements s in future years.

HNTE qualification requires, but is not limited to, metrics based on China research and development expenditures as well as research and development headcount and overall college-degreed headcount.

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A significant increase in our funding requirements could have a negative impact on our cash flows, operating results and financial condition.

During the first quarter of 2015, we agreed to a payment plan with the trustees of the defined benefit plan, under which we would make annual contributions each year through 2030, of approximately 2 million British Pounds (“GBP”) (approximately $2.7 million based on a GBP:USD exchange rate of 1.33, effective at December 31, 2019).

The annual contributions were expected to meet the deficit disclosed in the plan as of April 5, 2013, by December 31, 2030.

The trustees are required to review the funding position every three years.

Following the pension plan funding valuation as at March 31, 2019, the trustees and the Company have been in discussions regarding a recovery plan with a level of contributions that would result in a plan to recover the deficit by January 1, 2029.

Moving the recovery plan from a 2030 deadline to a 2029 deadline could require us to increase our contributions.

This plan has not been finalized.

If we fail to reach an agreement with the trustees, as we are required to do every three years, the Pension Regulator in the U.K.

The trustees under the plan are required to review the plan’s funding position every three years.

The pension plan funding valuation as at March 31, 2019 resulted in a deficit of approximately GBP 26.7 million (approximately $ 34.7 million based on a GBP:

USD exchange rate of 1:1.3 ).

As a result of this valuation we agreed to a revised schedule of contributions of GBP 2.0 million (approximately $ 2.6 million based on a GBP:

USD exchange rate of 1:1.3 ) to be paid in annual installments with effect from April 1,

2020 to address the deficit revealed by the valuation (with the first payment to be made by March 31, 2021, and payments to be made by December 31 each year thereafter).

These contributions, together with the assumed asset outperformance, are expected to eliminate the deficit by December 31, 2028.

Further, we will pay GBP 0.2 million in annual installments effective April 1, 2020 to cover plan expenses.

Moving the recovery plan from a 2030 deadline to a 2029 deadline could require us to increase our plan contributions.

If we fail to reach an agreement with the plan trustees, as we are required to do every three years, the pension regulator in the U.K.

could impose contributions on Diodes Zetex Limited or Diodes Zetex Semiconductors Limited, or in limited circumstances could require financial support to be provided to the plan from entities connected or associated with Diodes Zetex Limited or Diodes Zetex Semiconductors Limited.

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If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which could harm our financial condition and operating results, and could result in a loss of investor confidence and a decline in our stock price.

Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S.

or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.

Terrorist attacks, or threats or occurrences of other terrorist or related activities, whether in the U.S.

or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our profitability.

Future terrorist or related activities could affect our domestic and international sales, disrupt our supply chains and impair our ability to produce and deliver our products.

Such activities could affect our physical facilities or those of our suppliers or customers.

Such terrorist attacks could cause seaports or airports, to or through which we ship, to be shut down, thereby preventing the delivery of raw materials and finished goods to or from our manufacturing facilities in China, Taiwan and Germany and our wafer fabrication facilities in China, the U.S.

and the U.K., or to our regional sales offices.

Due to the broad and uncertain effects that terrorist attacks have had on financial and economic markets generally, we cannot provide any estimate of how these activities might negatively affect our future operating results and financial condition.

Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise our confidential information or those of third parties, create system disruptions, compromise physical assets or intellectual property, or misappropriate monetary assets or cause shutdowns.

Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our websites or exploit any security vulnerabilities of our websites and information systems.

Our international operations and business relationships could exacerbate these potential risks.

In September 2019, our anti-virus defenses identified a malware infection and brute force password attack.

Breach resolution was accomplished by our internal IT staff.

We do not believe that any confidential or proprietary information was exposed or that there was any material impact on production.

In response to this cyber-intrusion, we engaged an information technology security company to assess the timetable and scope of the intrusion, identify any weaknesses in our IT systems, and assist in designing security measures to strengthen our protection against, and preparation for identifying and responding to, such attacks.

We are reviewing this assessment and have enhanced and continue to enhance our security measures.

Specific measures we have taken

include strengthening our global network access control to further prevent unauthorized or non-compliant devices from accessing our internal networks and developing policies and procedures to more timely respond to intrusions.

The costs to the Company to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our ongoing efforts to prevent and address these problems may not be successful.

Such problems could result in interruptions, delays, cessation of service, extortionate demands to decrypt files and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions and materially adversely affect our operating results, stock price and reputation.

We manage and store various proprietary information and sensitive or confidential data relating to our business and third party business.

Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our partners or customers, including the potential loss, encryption or disclosure of such information or data or the unauthorized transfer of monetary assets as a result of fraud, trickery or other forms of deception, could expose us, our partners and customers or the individuals affected to a risk of loss or misuse of this information, extortionate demands to decrypt files, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business.

In addition, the cost and operational consequences of implementing further data protection measures could be significant.

Delayed sales, significant costs or lost customers resulting from these system security risks, data protection breaches, cyber-attacks and other related cyber-security issues could materially adversely affect our operating results, stock price and reputation.

Cyber and other security problems could originate from within the United States or in foreign countries.

Our foreign operations expose us to additional cyber security risks compared to a company with a smaller international footprint.

RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

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In addition, the majority of our manufacturing facilities are located in China.

For the twelve months ended 2019 our Asian and European subsidiaries represented approximately 77% of our net sales, while in 2018 and 2017, our Asian and European subsidiaries represented over 85% of our net sales.

The decline of net sales in our Asia and European based subsidiaries in 2019 represents a shift in business practices to fulfill more orders from our non-Asia based subsidiaries.

For the twelve months ended 2020 our Asian and European subsidiaries represented approximately 78% of our net sales, while in 2019 and 2018, our Asian and European subsidiaries represented over 77% and 85%, respectively, of our net sales.

The decline of net sales in our Asia and European based subsidiaries beginning in 2019 represents a shift in business practices to fulfill more orders from our non-Asia based subsidiaries.

There are risks inherent in doing business internationally, and any or all of the following factors could cause harm to our business:

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We believe that our operations are in compliance with all applicable legal and regulatory requirements.

the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Changes in the political environment or government policies in those jurisdictions could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations.

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Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent.

Moreover, there is a high degree of fragmentation among regulatory authorities, resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions.

Moreover, there is a high

degree of fragmentation among regulatory authorities, resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions.

The possibility of political conflict between these countries or with the U.S.

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exit, including stresses within the U.K.

itself, may cause significant volatility in global financial markets, including global currency and debt markets, and result in a slowdown in economic activity in the U.K., Europe or globally, which could materially adversely affect our operating results and growth prospects.

itself, may cause significant volatility in global financial markets, including global currency and debt markets, and may result in a slowdown in economic activity in the U.K., Europe or globally, which could materially adversely affect our operating results and growth prospects.

In addition, our business and operations could be materially adversely affected by new or revised trade agreements between countries in which we have operations or do business, including the U.S., the U.K., the European Union and China, as well as by the possible impositions of tariffs or trade or other regulatory barriers by any nation where we have operations or do business.

In May 2019, a t the direction of the President of the United States, the United States increased the level of tariffs from 10% to 25% on approximately $200 billion worth of Chinese imports.

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Trade Representative to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.

These tariffs are in addition to the recently imposed new or higher tariffs on specified products imported from China in response to what the U.S.

These tariffs are in addition to the new or higher tariffs on specified products imported from China in response to what the U.S.

characterizes as unfair trade practices.

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Trade Representative to increase by 5% the tariffs on approximately $550 billion worth of Chinese imports to the U.S.

This would increase the tariff rate on $250 billion worth of Chinese imports, effective October 1, 2019 to 30% and raise the tariff rate to 15% on $300 billion worth of Chinese imports previously announced, but on September 11, 2019 President Trump announced that the effective date would be extended to October 15, 2019 as “a gesture of goodwill.” On October 12, 2019, President Trump announced that the U.S.

This would have increased the tariff rate on $250 billion worth of Chinese imports, effective October 1, 2019 to 30% and raised the tariff rate to 15% on $300 billion worth of Chinese imports previously announced, but on September 11, 2019 President Trump announced that the effective date would be extended to October 15, 2019 as “a gesture of goodwill.” On October 12, 2019, President Trump announced that the U.S.

would halt the October 15, 2019 tariff increase after positive negotiations with the China representatives in Washington, D.C.

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and China signed a Phase One trade deal pursuant to which, among other things, the U.S.

will modify its Section 301 tariff actions (described in this risk factor) in a significant way.

agreed to modify its Section 301 tariff actions (described in this risk factor) in a significant way.

On December 31, 2020, a majority of the previously imposed tariff exclusions expired resulting in an increase in the taxes paid by US companies on imports of many products from China.

In addition, in December 2020, then President-Elect Joe Biden publicly stated that he was not planning to make immediate moves with respect to tariffs.

Given the change in power in the U.S.

government in January 2021, significant uncertainty remains regarding tariffs and their impact on our Company as President Biden’s administration begins to implement new or revised U.S.-China trade policies.

Most of our products are manufactured in China and then a portion of those products are imported into the U.S.

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We have taken actions, and may take additional steps, to mitigate those impacts and protect our competitive position in the marketplace.

If we determine to pass some or all of these new tariff burdens on to our customers, the result may be a degradation of our competitive position and a loss of customers that would adversely affect our operating performance.

If we determine to pass some or all of these new tariff burdens on to our

customers, the result may be a degradation of our competitive position and a loss of customers that would adversely affect our operating performance.

It is not clear at this time what the ultimate outcome of these tariff actions and our mitigation efforts will be, but given the importance of our Chinese operations and related sales, and the impacts of existing and possible future restrictions with regard to transactions with Chinese entities, it is very possible that our operating results and/or financial condition may be adversely affected.

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“International Emergency Economic Powers Act of 1977” as a possible basis for applying a sanction of this sort.

It is not clear at this time when, whether or in what form, this threat will be put into action, but if it does materialize our results of operations and financial condition likely will be materially adversely affected.

In addition, China is stepping up efforts to design and manufacture semiconductors itself rather than buy from the U.S., amid fears that sanctions might cripple its high-tech industry.

Given the inauguration of Mr.

Biden as President of the United States in January 2021, it is not clear when, whether or in what form, this threat will be put into action, but if it does materialize our results of operations and financial condition likely will be materially adversely affected.

In addition to the ongoing issues regarding tariffs, China has been stepping up efforts to design and manufacture semiconductors itself rather than buy from U.S.

companies, amid fears that sanctions might cripple its high-tech industry.

restrictions on exports to Chinese telecoms equipment makers have sharpened Beijing’s focus on semiconductor self-sufficiency.

China’s ministry of finance announced tax breaks “to support the development of integrated circuit design and the software industry,” cancelling corporate taxes for some companies for two years.

China’s ministry of finance announced tax breaks “to support the development of integrated circuit design and the software industry,” cancelling corporate taxes for some domestic Chinese companies for two years.

Although the outcome of these efforts is uncertain, the development of such capacity in China would likely have a material adverse effect on our profitability and results of operations.

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Bribery Act”), China’s anti-corruption campaign and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business.

policies mandate compliance with these anti-bribery laws.

Our policies mandate compliance with these anti-bribery laws.

We operate in many parts of the world that may have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.

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As of December 31, 2020, we had undistributed earnings from non-U.S.

operations of approximately $913 million (including approximately $115 million of restricted earnings, which are not available for dividends).

operations of approximately $1.6 billion (including approximately $287 million of restricted earnings, which are not available for dividends).

Undistributed earnings of our China subsidiaries comprise $469 million of this total.

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Furthermore, the application of laws governing intellectual property rights in certain foreign jurisdictions is uncertain and evolving, and could involve substantial risks to us.

Infringement of our patents or required technology or know-how transfers to foreign entities could create competition for us, and such competition could have a material adverse effect on our longer-term profitability and success.

Infringement of our patents or required technology or know-how transfers to

foreign entities could create competition for us, and such competition could have a material adverse effect on our longer-term profitability and success.

RISKS RELATED TO OUR COMMON STOCK

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Our directors, executive officers and our affiliate, LSC, beneficially own approximately 21% of our outstanding Common Stock, including options to purchase shares of our Common Stock that are exercisable within 60 days of December 31, 2019.

Our directors and executive officers beneficially own approximately 19% of our outstanding Common Stock, including options to purchase shares of our Common Stock that are exercisable within 60 days of December 31, 2020.

These stockholders, acting together, will be able to influence significantly all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations.

This control may delay, deter or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our Common Stock.

LSC, our largest stockholder, owns approximately 15.2% (approximately 7.8 million shares) of our Common Stock.

Some of our directors and executive officers may have potential conflicts of interest because of their positions with LSC or their ownership of LSC common stock.

In the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC by the Company.

The aggregate consideration to be paid by the Company, based on the December 31, 2019 exchange rate, is approximately $437 million.

This amount is subject to change, based on the Taiwan dollar to United States dollar exchange rate at closing.

We expect to fund the purchase price of the transaction primarily with proceeds from a new bank financing arrangement.

Raymond Soong, the Chairman of the Board of Directors, is the Chairman of LSC, and is the Chairman of Lite-On Technology Corporation (“LTC”), a significant shareholder of LSC.

Chen, our former President and Chief Executive Officer and currently the Vice Chairman of the Board of Directors, is also Vice Chairman of LSC and a board member of LTC.

Keh-Shew Lu, a member of our Board of Directors and our President and Chief Executive Officer, is a board member of LTC and a board member of Nuvoton.

Several of our directors and executive officers may own LSC common stock or hold options to purchase LSC common stock.

Service on our Board of Directors and as a director or officer of LSC, or ownership of LSC common stock by our directors and executive officers, could create, or appear to create, actual or potential conflicts of interest when directors and officers are faced with decisions that could have different implications for LSC and us.

For example, potential conflicts could arise in connection with decisions involving the Common Stock owned by LSC, or under the other agreements we may enter into with LSC.

In 2019, 2018 and 2017, LSC accounted for less than 3% of our silicon wafer supply and our finished good’s supply.

Prior to the consummation of our acquisition of LSC, we may have difficulty resolving any potential conflicts of interest with LSC, and even if we do, the resolution may be less favorable than if we were dealing with an unrelated third party.

We were formed in 1959, and our early corporate records are incomplete.

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In particular, our certificate of incorporation authorizes our Board of Directors to issue, without further action by the stockholders, up to 1.0 million shares of preferred stock with rights and preferences, including voting rights, designated from time to time by the Board of Directors.

The existence of authorized but unissued shares of preferred stock enables our Board of Directors to render it more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.

The existence of authorized but unissued shares of preferred stock enables our Board of Directors to

render it more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.

GENERAL RISK FACTORS

Our net sales, operating results and financial condition could be negatively affected by such actions.

A disruption in production at our manufacturing facilities could have a material adverse effect on our business.

Disruptions could occur for many reasons, including fire, floods, hurricanes, typhoons, droughts, tsunamis, volcanoes, earthquakes, disease or other similar natural disasters, unplanned maintenance or other manufacturing problems, labor shortages, power outages or shortages, telecommunications failures, strikes, transportation interruption, government regulation, terrorism or other extraordinary events, including epidemics (such as the outbreak of the COVID-19 virus) and related travel restrictions,.