What changed in this filing

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Item 1A. Risk Factors

2022-05-05 compared with 2022-01-27 · 58 added, 65 removed, 429 unchanged (22% of the section changed)

15 unchanged sentences

We initially experienced some limited disruptions in supply from some of our suppliers, although the disruptions to date have not been significant.

At some of our contract manufacturers in Asia, which include captive lines, we have experienced, and may experience in the future, some disruptions in supply from containment measures.

At some of our contract manufacturers in Asia, which include captive lines and contract packaging facilities, we have experienced, and may experience in the future, some disruptions in supply from containment measures.

Vaccine resistance, coupled with the emergence of fast-spreading variants and the potential waning effectiveness of vaccines, have introduced renewed uncertainty into whether additional measures will be implemented to combat the spread of COVID-19.

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In order to manage our growth and business strategy effectively relative to the uncertain pace of adoption, we must continue to:

• maintain, expand, construct and purchase adequate manufacturing facilities and equipment, as well as secure sufficient third-party manufacturing resources, to meet customer demand, including specifically the expansion of our Silicon Carbide capacity with the construction of a state-of-the-art, automated 200mm capable Silicon Carbide device fabrication facility and an expansion of our materials factory;

• maintain, expand, construct and purchase adequate manufacturing facilities and equipment, as well as secure sufficient third-party manufacturing resources, to meet customer demand, including specifically the expansion of our Silicon Carbide capacity with the opening of a state-of-the-art, automated 200mm capable Silicon Carbide device fabrication facility and an expansion of our materials factory;

• manage an increasingly complex supply chain (including managing the impacts of ongoing supply constraints in the semiconductor industry) that has the ability to supply an increasing number of raw materials, subsystems and finished products with the required specifications and quality, and deliver on time to our manufacturing facilities, our third-party manufacturing facilities, our logistics operations, or our customers;

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There are also inherent execution risks in starting up a new factory or expanding production capacity, whether one of our own factories or that of our contract manufacturers, as well as risks to moving production to different contract manufacturers, that could increase costs and reduce our operating results.

In September 2019, we announced the intent to build a new Silicon Carbide device fabrication facility in Marcy, New York to complement the factory expansion underway at our United States campus headquarters in Durham, North Carolina.

In the fourth quarter of fiscal 2020, we started construction on a new Silicon Carbide device fabrication facility in Marcy, New York to complement the factory expansion underway at our United States campus headquarters in Durham, North Carolina.

The establishment and operation of a new manufacturing facility or expansion of an existing facility involves significant risks and challenges, including, but not limited to, the following:

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Further, we may be required to recognize impairments on our long-lived assets or recognize excess inventory write-off charges, or excess capacity charges, which would have a negative impact on our results of operations.

With the opening of our new Silicon Carbide device fabrication facility in Marcy, New York, we may experience increased pressure on margins during the period when production begins but before the facility is at full production.

Additionally, our large upfront investment in the facility to increase capacity does not guarantee we will need the capacity and we may experience lower than expected capacity once the facility is in production, which could result in further margin pressures.

In addition, our efforts to improve quoted delivery lead-time performance may result in corresponding reductions in order backlog.

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We rely on arrangements with independent shipping companies for the delivery of our products from vendors and to customers both in the United States and abroad.

The failure or inability of these shipping companies to deliver products or the unavailability of shipping or port services, even temporarily, could have a material adverse effect on our business.

The failure or inability of these shipping companies to deliver products or the

unavailability of shipping or port services, even temporarily, could have a material adverse effect on our business.

We may also be adversely affected by an increase in freight surcharges due to rising fuel costs, oil costs and added security.

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We have experienced product quality, performance or reliability problems from time to time and defects or failures may occur in the future.

If failures or defects occur, they could result in significant losses or product recalls due to:

• costs associated with the removal, collection and destruction of the product;

• payments made to replace product;

• costs associated with repairing the product;

• the write-down or destruction of existing inventory;

• insurance recoveries that fail to cover the full costs associated with product recalls;

• lost sales due to the unavailability of product for a period of time;

• delays, cancellations or rescheduling of orders for our products;

• increased product returns.

If failures or defects occur, they could result in significant losses or product recalls.

A significant product recall could also result in adverse publicity, damage to our reputation and a loss of customer or consumer confidence in our products.

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We evaluate inventory levels in the distribution channel, current economic trends and other related factors in order to account for these factors in our judgments and estimates.

As inventory levels and

product return trends change or we make changes to our distributor roster, we may have to revise our estimates and incur additional costs, and our gross margins and operating results could be adversely impacted.

Additionally, our distributors have in the past and may in the future choose to drop our product lines from their portfolio to avoid losing access to our competitors’ products, resulting in a disruption in the project pipeline and lower than targeted sales for our products.

Our distributors have the ability to shift business to different suppliers within their product portfolio based on a number of factors, including customer service and new product availability.

If we are unable to effectively penetrate these channels or develop alternate channels to ensure our products are reaching the intended customer base, our financial results may be adversely impacted.

In addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products or that we will be able to manufacture and deliver them in the timeline established by our customers.

As inventory levels and product return trends change or we make changes to our distributor roster, we may have to revise our estimates and incur additional costs, and our gross margins and operating results could be adversely impacted.

As a result of our continued expansion into new markets, we may compete with existing customers who may reduce their orders.

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Risks related to our global operations

Global economic conditions could materially adversely impact demand for our products and services.

Our operations and performance depend significantly on worldwide economic conditions.

Global economic and geopolitical conditions, including possible trade tariffs and trade restrictions, could materially adversely impact demand for our products and services as well as our suppliers' ability to fulfill our needs for raw materials and machinery.

Our operations and performance depend significantly on worldwide economic and geopolitical conditions.

Uncertainty about global economic conditions could result in customers postponing purchases of our products and services in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material negative effect on demand for our products and services and, accordingly, on our business, results of operations or financial condition.

For example, any economic and political uncertainty caused by the United States tariffs imposed on goods from China, among other potential countries, and any corresponding tariffs or currency devaluations from China or such other countries in response, has negatively impacted, and may in the future, negatively impact, demand and/or increase the cost for our products.

Additionally, our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S.

For example, general trade tensions between the United States and China have been escalating, and any economic and political uncertainty caused by the United States tariffs imposed on goods from China, among other potential countries, and any corresponding tariffs or currency devaluations from China or such other countries in response, has negatively impacted, and may in the future, negatively impact, demand and/or increase the cost for our products.

In addition, Russia’s invasion of Ukraine has triggered significant sanctions from U.S.

and European countries.

Resulting changes in U.S.

trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a potential trade war.

Furthermore, if the conflict between Russia and Ukraine continues for a long period of time, or if other countries, including the U.S., become involved in the conflict, we could face significant adverse effects to our business and financial condition.

For example, if our supply or customer arrangements are disrupted due to expanded sanctions or involvement of countries where we have operations or relationships, our business could be materially disrupted.

Further, the use of cyberattacks could expand as part of the conflict, which could adversely affect our ability to maintain or enhance our cyber security and data protection measures.

Our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S.

Dollar and more competitive in countries with currencies that are increasing in value against the U.S.

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Our business may be adversely affected by uncertainties in the global financial markets and our or our customers’ or suppliers’ ability to access the capital markets.

Global financial markets continue to reflect uncertainty, which has been heightened by the COVID-19 pandemic.

Global financial markets continue to reflect uncertainty, which has been heightened by the COVID-19 pandemic and the ongoing military conflict between Russia and Ukraine.

Given these uncertainties, there could be future disruptions in the global economy, financial markets and consumer confidence.

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Risks associated with our strategic transactions

If we fail to evaluate and execute strategic opportunities successfully, our business may suffer.

From time to time, including the present, we evaluate strategic opportunities available to us for product, technology or business transactions, such as business acquisitions, investments or capacity expansions, joint ventures, divestitures, or spin-offs.

If we choose to enter into such strategic transactions, we face certain risks including:

• the failure of an acquired business, investee or joint venture to meet our performance and financial expectations;

• identification of additional liabilities relating to an acquired business;

• loss of customers due to perceived conflicts or competition with such customers or due to regulatory actions taken by governmental agencies;

• that we are not able to enter into acceptable contractual arrangements in connection with the transaction;

• difficulty integrating an acquired business's operations, personnel and financial and operating systems into our current business;

• that we are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders if we experience wide fluctuations in supply and demand;

• diversion of management attention;

• difficulty separating the operations, personnel and financial and operating systems of a spin-off or divestiture from our current business;

• the possibility we are unable to complete the transaction and expend substantial resources without achieving the desired benefit;

• the inability to obtain required regulatory agency approvals;

• reliance on a transaction counterparty for transition services for an extended period of time, which may result in additional expenses and delay the integration of the acquired business and realization of the desired benefit of the transaction;

• uncertainty of the financial markets or circumstances that cause conditions that are less favorable and/or different than expected;

• expenses incurred to complete a transaction may be significantly higher than anticipated.

We may not be able to adequately address these risks or any other problems that arise from our prior or future acquisitions, investments, joint ventures, divestitures or spin-offs.

Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any such business transaction could adversely affect our business, results of operations or financial condition.

We are subject to a number of risks associated with the sale of our former LED Products segment, and these risks could adversely impact our operations, financial condition and business.

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• our failure to realize the full purchase price anticipated under the LED Purchase Agreement, including the ability of the LED Business to generate revenue and gross profit in the first four full fiscal quarters following the closing (the Earnout Period) sufficient to result in payment of the targeted earnout payment;

• the ability of SMART to pay the unsecured promissory note issued to us at the closing of the transaction and the additional unsecured promissory notes to be issued following the end of the Earnout Period.

• the ability of SMART to pay the unsecured promissory notes to be issued following the end of the Earnout Period.

As a result of these risks, we may be unable to realize the anticipated benefits of the transaction, including the total amount of cash we expect to realize.

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Our failure to realize the anticipated benefits of the transaction would adversely impact our operations, financial condition and business and could limit our ability to pursue additional strategic transactions.

If we fail to evaluate and execute strategic opportunities successfully, our business may suffer.

If we choose to enter into such strategic transactions, we face certain risks including:

• the failure of an acquired business, investee or joint venture to meet our performance and financial expectations;

• identification of additional liabilities relating to an acquired business;

• loss of customers due to perceived conflicts or competition with such customers or due to regulatory actions taken by governmental agencies;

• that we are not able to enter into acceptable contractual arrangements with the significant customers of an acquired business;

• difficulty integrating an acquired business's operations, personnel and financial and operating systems into our current business;

• diversion of management attention;

• difficulty separating the operations, personnel and financial and operating systems of a spin-off or divestiture from our current business;

• the possibility we are unable to complete the transaction and expend substantial resources without achieving the desired benefit;

• the inability to obtain required regulatory agency approvals;

• uncertainty of the financial markets or circumstances that cause conditions that are less favorable and/or different than expected;

• expenses incurred to complete a transaction may be significantly higher than anticipated.

We may not be able to adequately address these risks or any other problems that arise from our prior or future acquisitions, investments, joint ventures, divestitures or spin-offs.

Risks associated with cybersecurity, intellectual property and litigation

We may be subject to confidential information theft or misuse, which could harm our business and results of operations.

We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information.

We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information and such attempts may increase in terms of frequency and severity in light of the sanctions imposed on Russia in response to its invasion of Ukraine.

Our security measures may be breached as the result of industrial or other espionage actions of outside parties, employees, employee error, malfeasance or otherwise, and as a result, an unauthorized party may obtain access to our systems.

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Our existing patents are subject to expiration and re-examination and we cannot be sure that additional patents will be issued on any new applications around the covered technology or that our existing or future patents will not be successfully contested by third parties.

Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing

technology, we cannot be sure that any of our patents, or patents issued to others and licensed to us, will provide significant commercial protection, especially as new competitors enter the market.

Also, because issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents, or patents issued to others and licensed to us, will provide significant commercial protection, especially as new competitors enter the market.

We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights.

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Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us.

In the event of an adverse result in such litigation, we could be required to:

• pay substantial damages;

In the event of an adverse result in such litigation, we could be required to pay substantial damages;

indemnify our customers;

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expend significant resources to develop non-infringing products or processes;

• obtain a license to use third party technology.

or obtain a license to use third party technology.

There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect to our products.

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Factors that may indicate that the carrying value of our goodwill may not be recoverable include a decline in our stock price and market capitalization and slower growth rates in our industry.

In the first quarter of fiscal 2021, we determined we would more likely than not sell all or a portion of the assets comprising our former LED Products segment below carrying value.

As a result of this triggering event, we recorded an impairment to goodwill of $105.7 million as of September 27, 2020.

Additionally, in the second quarter of fiscal 2021, we recorded an additional impairment to goodwill of $6.9 million.

For other assets such as finite-lived intangible assets and fixed assets, we assess the recoverability of the asset balance when indicators of potential impairment are present.

In the fourth quarter of fiscal 2021, we modified our long-range plan regarding a portion of our Durham, North Carolina campus originally intended for expanding our LED production capacity that we had considered using to expand the manufacturing footprint for our Silicon Carbide materials product line.

After we complete our current ongoing Silicon Carbide materials production capacity expansion in Durham, we plan on further expansion of our Silicon Carbide materials production capacity outside of the Durham campus.

As a result, we decided we will no longer complete the construction of certain buildings on the Durham campus.

Accordingly, an expense of $73.9 million was recorded upon an updated valuation of the property in the fourth quarter of fiscal 2021.

The recognition of a significant charge to earnings in our consolidated financial statements resulting from any impairment of our goodwill or other assets could adversely impact our results of operations.

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The manufacturing, assembling and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations.

Our failure to comply with any of these applicable laws or regulations could result in:

• regulatory penalties, fines, legal liabilities and the forfeiture of certain tax benefits;

Our failure to comply with any of these applicable laws or regulations could result in regulatory penalties, fines, legal liabilities and the forfeiture of certain tax benefits;

suspension of production;

alteration of our fabrication, assembly and test processes;

• curtailment of our operations or sales.

and curtailment of our operations or sales.

In addition, our failure to manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to significant costs or future liabilities.

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Historically, our common stock has experienced substantial price volatility, particularly as a result of significant fluctuations in our revenue, earnings and margins over the past few years, and variations between our actual financial results and the published expectations of analysts.

For example, the closing price per share of our common stock on the Nasdaq Global Select Market (until October 1, 2021) and the NYSE (on and after October 4, 2021) ranged from a low of $78.36 to a high of $141.87 during the twelve months ended December 26, 2021.

If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price will likely decline.

1 unchanged sentence

In particular, competition in some of the markets we address such as electric vehicles and 5G, the ramp up of our business, and the effect of tariffs or COVID-19 on our business, may have a dramatic effect on our stock price.

Additionally, actions taken by the option counterparties in the capped call transactions entered into in connection with our 2028 Notes may affect our stock price, including the initial hedges of the capped call transactions as well as the potential modifications of their hedge positions by entering into or unwinding various derivatives with respect to our common stock.

We are exposed to fluctuations in the market value of our investment portfolio and in interest rates, and therefore, impairment of our investments or lower investment income could harm our earnings.

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We have outstanding debt which could materially restrict our business and adversely affect our financial condition, liquidity and results of operations.

As of December 26, 2021, our indebtedness consisted of $575.0 million aggregate principal amount of the 2026 Notes and potential borrowings from our revolving line of credit.

Our ability to pay interest and repay the principal for any outstanding indebtedness under our line of credit and the 2026 Notes is dependent upon our ability to manage our business operations and generate sufficient cash flows to service such debt.

As of March 27, 2022, our indebtedness consisted of our indebtedness consisted of $575.0 million aggregate principal amount of our 2026 Notes and $750.0 million aggregate principal amount of our 2028 Notes (collectively with the 2026 Notes, the Outstanding Notes) and potential borrowings from our revolving line of credit.

Our ability to pay interest and repay the principal for any outstanding indebtedness under our line of credit and the Outstanding Notes is dependent upon our ability to manage our business operations and generate sufficient cash flows to service such debt.

There can be no assurance that we will be able to manage any of these risks successfully.

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incur additional indebtedness, dispose of assets, create liens on assets, make acquisitions or engage in mergers or consolidations, and engage in certain transactions with our subsidiaries and affiliates.

The Indenture governing the 2026 Notes requires us to repurchase the 2026 Notes upon certain fundamental changes relating to our common stock, and also prohibits our consolidation, merger, or sale of all or substantially all of our assets except with or to a successor entity assuming our obligations under the Indenture.

The restrictions imposed by our line of credit and by the Indenture governing the 2026 Notes could limit our ability to plan for or react to changing business conditions, or could otherwise restrict our business activities and plans.

Our ability to comply with our loan covenants and the provisions of the Indenture governing the 2026 Notes may also be affected by events beyond our control and if any of these restrictions or terms is breached, it could lead to an event of default under our line of credit or the 2026 Notes.

The Indentures governing the Outstanding Notes requires us to repurchase the Outstanding Notes upon certain fundamental changes relating to our common stock, and also prohibits our consolidation, merger, or sale of all or substantially all of our assets except with or to a successor entity assuming our obligations under the Indenture.

The restrictions imposed by

our line of credit and by the Indentures governing the Outstanding Notes could limit our ability to plan for or react to changing business conditions, or could otherwise restrict our business activities and plans.

Our ability to comply with our loan covenants and the provisions of the Indentures governing the Outstanding Notes may also be affected by events beyond our control and if any of these restrictions or terms is breached, it could lead to an event of default under our line of credit or the Outstanding Notes.

A default, if not cured or waived, may permit acceleration of our indebtedness.

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If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable to us or at all.

The capped call transactions may not prevent dilution of our common stock upon conversion of the 2028 Notes

In connection with the pricing of the 2028 Notes, we entered into privately negotiated capped call transactions with the option counterparties.

The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of the 2028 Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of the converted 2028 Notes, as the case may be, upon conversion of the 2028 Notes.

If, however, the market price per share of our common stock, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions (currently $212.04), there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the capped call transactions.

Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the state courts of North Carolina will be the sole and exclusive forum for substantially all disputes between us and our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees or agents.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors