Atmel (ATML)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-K

 

 

Commission file number: 0-19032

ATMEL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

2325 Orchard Parkway, San Jose, California 95131
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(408) 441-0311

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

 

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes þ     No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Yes o     No þ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of June 30, 2010, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 460,534,916 shares of the Registrant’s Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2010) was approximately $2,166,660,547. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of January 31, 2011, the Registrant had 456,889,137 outstanding shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxy statement for the Registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the Registrant’s fiscal year ended December 31, 2010.

 

 

TABLE OF CONTENTS

 

 

 

FORWARD LOOKING STATEMENTS

 

You should read the following discussion in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements”, and “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2011, the expansion of the market for microcontrollers, revenues for our maXTouch products, our gross margins, anticipated revenues by geographic area, operating expenses and capital expenditures, cash flow and liquidity measures, factory utilization, new product introductions, access to independent foundry capacity and the quality issues associated with the use of third party foundries, the effects of our strategic transactions and restructuring efforts, estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in Item 1A — Risk Factors, and elsewhere in this Form 10-K. Generally, the words “may,” “will,” “could,” “should,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-K.

 

BUSINESS

 

General

 

We are one of the world’s leading designers, developers and suppliers of microcontrollers. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch-focused intellectual property, or IP, we have developed. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory and Flash memory products, radio frequency and mixed-signal components and application specific integrated circuits. Our microcontrollers, which are self-contained computers-on-a-chip, and related products are used today in many of the world’s leading smartphones, tablet devices and other consumer and industrial electronics to provide core functionality for touch sensing, security, wireless and battery management. Our semiconductors also enable applications in many other fields, such as smart-metering for utility monitoring and billing, buttons, sliders and wheels found on the touch panels of appliances, various aerospace, industrial, and military products and systems, and electronic-based automotive components, like keyless ignition, access, engine control, lighting and entertainment systems, for standard and hybrid vehicles. Over the past several years, we successfully transitioned our business to a “fab-lite” model, lowering our fixed costs and capital investment requirements, and we currently own and operate just a single manufacturing facility.

 

We intend to continue leveraging our IP portfolio of more than 1,400 U.S. and foreign patents, and our significant software expertise, to further enhance the breadth of applications and solutions we offer. Our patents, and patent applications, cover important and fundamental microcontroller, capacitive touch and other technologies that support our product strategy. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. We expect the market for microcontrollers to continue to expand over time as tactile-based user interfaces become increasingly prevalent, as additional intelligence is built into an ever growing universe of everyday products, as our customers look to replace mechanical or passive controls in their products, and as power management and similar capabilities become increasingly critical to the continued development of consumer and industrial products.

We were originally incorporated in California in December 1984. In October 1999, we were reincorporated in Delaware. Our principal offices are located at 2325 Orchard Parkway, San Jose, California 95131, and our telephone number is (408) 441-0311. Our website is located at: www.atmel.com; however, the information in, or that can be accessed through, our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through the “Investors” section of www.atmel.com and we make them available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains a website located at www.sec.gov that contains our SEC filings.

 

Products

 

We currently organize our business into four operating segments (see Note 14 of Notes to Consolidated Financial Statements for further discussion). Each of our business units offers products that compete in one or more of the end markets described below under the caption “Principal Markets and Customers.”

 

 

Within each operating segment, we offer our customers products and solutions with a range of speed, density, power usage, specialty packaging, security and other features.

 

Microcontrollers

 

Our Microcontroller segment offers customers a full range of products in the industrial, security, communications, computing and automotive markets for embedded controls. Our product portfolio consists of proprietary

and non-proprietary solutions, with four major Flash-based microcontroller architectures targeted at the high volume embedded control market:

 

 

Embedded control systems typically incorporate a microcontroller as the principal active component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit (“CPU”), nonvolatile program memory (Flash and EEPROM), random access memory (“RAM”) for data storage and various input/output peripheral capabilities. In addition to the microcontroller, a complete embedded control system incorporates application-specific software and may include specialized peripheral device controllers and internal or external nonvolatile memory components, such as Flash and EEPROMs, to store additional program software and various analog and interface products.

 

These complex system-on-a-chip solutions are manufactured using our leading-edge process technologies, including complementary metal oxide semiconductor (“CMOS”), double-diffused metal oxide semiconductor (“DMOS”), logic, CMOS logic, bipolar, bipolar CMOS (“BiCMOS”), silicon germanium (“SiGe”), SiGe BiCMOS, analog, bipolar double diffused CMOS and radiation tolerant process technologies. We develop these process technologies ourselves to ensure they provide the maximum possible performance.

 

We believe that microcontrollers will continue to replace mechanical and other passive controls in a wide range of applications, such as lighting, automobile control functions, home automation, wireless communications, white goods and user interfaces in all products that typically require human interaction.

 

Atmel AVR^® 8-bit and 32-bit Microcontrollers

 

Atmel AVR^®, which is our proprietary technology, combines code-efficient architecture for “C” and assembly programming with the ability to tune system parameters throughout the product’s entire life cycle. Our AVR microcontrollers are designed to deliver enhanced computing performance at lower power consumption than any competitive products. We also offer a full suite of industry leading development tools and design support, enabling customers to easily and cost-effectively refine and improve their product offering. We have a significant development community that has evolved for our AVR products, with many developers actively collaborating through social networking sites dedicated to supporting our AVR microcontrollers.

 

Atmel QTouch and Atmel maXTouch

 

Through our QTouch^® and maXTouch products, we are a leading supplier of capacitive sensing solutions for touchscreens and other touch controls.

 

Our maXTouch architecture combines touch sensing with sophisticated algorithms, enabling advanced capabilities on screen sizes ranging from mobile phones to tablet devices. maXTouch enables a device to track up to 16 fingers simultaneously. Its software allows a device to reject unintended touches resulting from gripping the screen or resting the palms on the device. maXTouch detects the lightest touches at very high refresh rates and low latency. This allows for enhanced responsiveness for the end user.

 

Our QTouch^® and maXTouch devices are microcontroller-based capacitive sensing integrated circuits (“ICs”) designed to detect touch with copper electrodes on a printed circuit board (PCB) or Indium Tin Oxide (ITO) electrodes on a clear touchscreen panel, respectively. QTouch is designed for discreet touch button, slider and wheel (BSW) applications. In addition, QMatrix technology allows for the support of a much larger number of sensors in a single chip. With the flexibility our microcontroller architecture offers, a user is able to integrate multiple features in a single device such as “proximity sensing” for detecting a finger or hand at a distance and Haptic effects for providing tactile feedback.

ARM^®-based Solutions

 

Our AT91SAM ARM-based products are designed utilizing the industry-standard 32-bit ARM7^tm, ARM9^tm and ARM Cortex^tm architectures, where we offer a range of products with and without embedded nonvolatile memories. The Atmel SAM3 Cortex M3-based and Atmel SAM7 ARM7TDMI-based microcontrollers provide a migration path from 8/16-bit microcontroller technology for applications where more system performance and larger on-chip Flash memory is required. These products are optimized for low power consumption and reduced system cost and they support QTouch technology. Selected devices integrate cryptographic accelerators and protection against physical attacks, making them suitable for financial transaction applications requiring highest security levels.

 

Our SAM9 ARM926-based products are highly-integrated, high-performance 32-bit embedded microprocessors, with complex analog and digital peripherals integrated on the same chip, offering high-speed connectivity, optimal data bandwidth, and rich interface support. AT91SAM customers save significant development time with the worldwide support ecosystem of industry-leading suppliers of development tools, operating systems including Linux and Android, protocol stacks and applications.

 

Atmel 8051

 

Our 8051 8-bit microcontroller product offering is based on the standard 8051 CPU and ranges from products containing 2 kilobytes (“Kbytes”) of embedded Flash memory to the largest products offering 128Kbytes of embedded Flash memory. The 8051 products address a significant portion of the 8-bit microcontroller market in which the customer already has an installed software and application base using the standard 8051 architecture.

 

Nonvolatile Memories

 

Serial Interface Products

 

Our serial interface products evolved from our EEPROM and Flash memory technology expertise and were developed to meet the market demand for delivery of nonvolatile memory content through specialized, low pin-count interfaces and packages. Our serial interface product portfolio encompasses the industry’s largest offering of Serial EEPROMs and two complete families of Serial Flash memories. From a system cost and silicon area perspective, it is generally more economical to employ Flash memory technology for densities of 512Kbits and above, and the similarity of the feature sets for the Atmel Serial EEPROM and Serial Flash memories allows customers to easily upgrade from densities as low as 1Kbits to as high as 64Mbits.

 

Atmel Serial EEPROMs

 

We currently offer three complete families of Serial EEPROMs, supporting industry standard I²C (2-wire), Microwire^tm (3-wire), and serial peripheral interface (“SPI”) protocols. Primarily used to store personal preference data and configuration/setup data, our Serial EEPROM products can be found in a multitude of consumer, industrial, and automotive applications ranging from WLAN adapters and LCD TVs to video game systems and GPS devices.

 

Atmel DataFlash

 

Our DataFlash^® family of Serial Flash memories delivers proven, reliable solutions to store varying amounts of granular data or to store both embedded program code and data while utilizing very small, low pin-count packages. DataFlash devices are the industry’s most sophisticated and feature-rich Serial Flash memories and are designed to enable advanced features and functionality in a variety of high-volume products and applications. By using DataFlash memories, customers can minimize pin counts, simplify circuit boards, and reduce power consumption, all of which contribute to higher performance and lower system costs. DataFlash products are used in a wide variety of applications such as digital answering machines, fax machines, personal computers, printers, radar detectors, security systems and energy meters.

Atmel SPI Flash

 

Our SPI Serial Flash family offers pin-compatible devices to the entire family of SPI Serial EEPROMs and provides customers with one of the highest performance serial memory solutions in the industry. The SPI Flash family’s enhanced architecture and features allow the devices to be used in a wider array of applications compared to devices from competing suppliers while also providing customers with a more flexible, easier-to-implement solution. Like the Serial EEPROMs and DataFlash devices, our SPI Flash products utilize ultra-small packages like dual flat no-lead, or DFNs, and wafer level chip scale packages, or WLCSPs, in addition to industry standard SOICs. SPI Flash is primarily used for code storage in a diverse set of consumer and industrial applications including high-volume products such as smartphones, tablet computers, desktop and notebook computers, hard disk drives, CD/DVD Read/Write drives, Blu-ray and DVD players, MP3 players, digital picture frames, set-top boxes (STBs) and LCD TVs.

 

Parallel Flash

 

Flash represents a technology used in nonvolatile memory devices that can be reprogrammed within a system. We have traditionally manufactured a select offering of Parallel Flash products in the past but we are phasing these products out as the industry transitions to the use of Serial Flash as a replacement for Parallel Flash.

 

Atmel Parallel EEPROMs

 

We are a leading supplier of high performance, in-system programmable Parallel EEPROMs. We believe that our Parallel EEPROM products represent the industry’s most complete offering. In the design of this product family, we have emphasized high reliability achieved through the incorporation of on-chip error detection and correction features. Parallel EEPROMs offer high endurance programmability and are highly flexible, offering faster data transfer rates and higher memory densities when compared to some serial interface architectures. These products are generally used to store frequently updated data in communications infrastructure equipment and avionics navigation systems.

 

Atmel EPROMs

 

The general one-time programmable (“OTP”) EPROM market has become more of a niche nonvolatile memory segment as other technologies such as Serial Flash become more prevalent. Our OTP EPROM products address the high-performance end of this market where demand and pricing is relatively stable. These products are generally used to store the operating code of embedded microcontroller or DSP-based systems that need a memory solution for direct code execution where the memory contents cannot be tampered with or altered by the user.

 

Radio Frequency (“RF”) and Automotive

 

Automotive RF

 

With our automotive RF products, we are a leading supplier for automobile access solutions. In this sector, our products include complete keyless entry solutions for wireless passive entry go systems, and the corresponding ICs for the receivers and transceivers for the access control unit, and tire pressure monitoring systems built into cars. Innovative immobilizer ICs, which incorporate the widely accepted advanced encryption standard (“AES”), offer car theft protection. In addition, we offer a wide portfolio of products enabling keyless ignition systems.

 

High Voltage

 

High voltage ICs are manufactured utilizing mixed signal high voltage technology, providing analog-bipolar, high voltage DMOS power and CMOS logic function on a single chip. Our high voltage ICs withstand and operate at high voltages and can be connected directly to the battery of a car, and focus on intelligent load drivers, local interconnect network (“LIN”) in-vehicle networking and battery management products for hybrid cars. The applications for the load drivers are primarily motor and actuator drivers and smart valve controls. Our new line of battery management ICs target Li-ion battery systems that are becoming the standard for full electric and hybrid cars. Our LIN in-vehicle networking products help car makers simplify the wire harness by using the LIN bus,

which is rapidly gaining popularity. Many body electronic applications can be connected and controlled via the LIN network bus, including switches, actuators and sensors.

 

RF Components

 

The RF product line includes low frequency RF identification tag ICs targeted toward the access control market and the livestock and pet tagging markets. These ICs are used with a reader IC to make contactless identification possible for a variety of applications. Our RF products also target the industrial, scientific, and medical (ISM) RF market, including wireless remote control applications such as home alarm systems, garage door openers, remote controlled toys, wireless game consoles and many others.

 

Mixed Signal

 

Atmel’s broadcast radio product line includes an industry leading portfolio of highly integrated antenna drivers, which enable small form factor car antennas. In addition, we also offer infrared (“IR”) receivers.

 

ASIC

 

Custom ASICs

 

We design, manufacture and market ASICs to meet customer requirements for high-performance logic devices in a variety of customer-specific applications. Our SiliconCity^® design platform utilizes our extensive libraries of qualified analog and digital IP blocks. This approach integrates system functionality into a single chip based on our unique architecture platform combined with one of the richest libraries of qualified IP blocks in the industry. By combining a variety of logic functions on a single chip, costs are reduced, design risk is minimized, time-to-market is accelerated and performance can be optimized.

 

We design and manufacture ASICs in a range of products that includes standard digital and analog functions, as well as nonvolatile memory elements and large pre-designed macro functions all integrated on a single chip. We work closely with customers to develop and manufacture custom ASIC products so that we can provide them with IC solutions on a sole-source basis. Our ASIC products are targeted primarily at high-volume customers whose applications require high-speed, high-density or low and mixed-voltage devices such as in the medical, consumer and security markets.

 

We have also introduced solutions with multimedia and wireless communications devices targeting home entertainment, security and automotive applications where information security is a primary objective.

 

Secure Products

 

Our hardware authentication devices offer a highly secure, hardened solution for reliable authentication of legitimate OEM offerings, storage for confidential information and trusted identification across wired and wireless networks. We sold our Secure Microcontroller Solutions business at the end of the third quarter of 2010. With that disposition, we no longer sell smart card ICs. We continue, however, to produce our CryptoMemory^®, CryptoRF^®, smart card reader chips and secure microcontrollers for point of sales terminals.

 

FPGAs

 

Our FPGAs (field programmable gate arrays), with FreeRAM and Cache Logic^®, provide efficient memory management and a reconfigurable solution for adaptive digital signal processing and other computationally intensive applications. We also offer a family of radiation hardened FPGAs for space applications. Our family of reconfigurable FPGA Serial Configuration EEPROMs can replace one-time-programmable devices for FPGAs from other vendors. In addition we offer FPGA-to-gate array conversions for both military and commercial applications.

Technology

 

For more than 25 years, we have focused our efforts on developing advanced CMOS processes that can be used to manufacture reliable nonvolatile elements for memory and advanced logic integrated circuits. We believe that our experience in single and multiple-layer metal CMOS processing gives us a competitive advantage in developing and delivering high-density, high-speed and low-power logic and memory and logic products.

 

We meet customers’ demands for constantly increasing functionality on ever-smaller ICs by increasing the number of layers we use to build the circuits on a wafer and by reducing the size of the transistors and other components in the circuit. To accomplish this we develop and introduce new wafer processing techniques as necessary. We also provide our fabrication facilities with state-of-the-art manufacturing equipment and development resources that allow us to produce ICs with increasingly sophisticated features. Our current ICs incorporate effective feature sizes as small as 0.13-micron. We are developing processes that will support effective feature sizes smaller than 0.13-micron, which we expect to produce at outside wafer foundries in the future. Since 2005, we have sold five manufacturing facilities as we have moved to a “fab-lite” manufacturing model. As of December 31, 2010, we own and operate only one fabrication facility located in Colorado Springs, Colorado.

 

Principal Markets and Customers

 

Industrial

 

While the industrial electronics market has traditionally been considered a slow growth end-market compared to communications or computing sectors, the use of electronic content in industrial applications has begun to accelerate over the past several years. The demand for energy efficiency and productivity gains in electronic enabled systems is driving the switch from mechanical to digital solutions for products such as temperature sensors, motor controls, factory lighting, smart energy meters, capacitive touch interface and commercial appliances. We provide microcontrollers, nonvolatile memory, high-voltage and mixed-signal products that are designed to work effectively in harsh environments. Principal customers include General Electric, Honeywell, Ingenico, Itron, Siemens, Samsung and Textron.

 

Communications

 

Communications, including capacitive touchscreen technology for smartphones, wireless and wireline telecommunications and data networking, is currently one of our large end user markets. For the wireless market, we also provide nonvolatile memory and baseband and RF ASICs that are used for GSM and code-division multiple access (“CDMA”) mobile phones and their base stations, as well as two-way pagers, mobile radios, and cordless phones and their base stations. We also have a range of products based on the IEEE 802.11 wireless LAN standard, Zigbee, and on Bluetooth, a short-range wireless protocol that enables instant connectivity between electronic devices. Principal customers in the communications market include Ericsson, Fujitsu, HTC, Motorola, Nokia, Pantech, Philips, Qualcomm, Samsung, Sharp and Siemens.

 

Networking and Telecommunications Products

 

We also serve the data networking and wireline telecommunications markets, which continue to evolve due to the rapid adoption of new technologies. For these markets, we provide ASIC, nonvolatile memory and programmable logic products that are used in the switches, routers, cable modem termination systems and digital subscriber line (“DSL”) access multiplexers, which are used to build internet infrastructure. Our principal data networking and wireline telecommunications customers include Alcatel Lucent, Cisco and Siemens.

 

Consumer Electronics

 

Our products are used in many consumer electronics products. We provide microcontrollers for batteries and battery chargers that minimize the power usage by being “turned on” only when necessary. Our microcontrollers are also offered for lighting controls and touchscreen user interface applications. In addition, we provide secure tamper resistant circuits for embedded personal computer security applications.

We also sell buttons, sliders and wheels (BSW) that are used to provide tactile based user interfaces for many consumer products. Our BSW technology can be found, for example, in many home appliances, such as washing machines, dryers and refrigerators. Principal consumer electronics customers include Acer, Dell, Harmon Becker, Honeywell, Hosiden Corporation, Invensys, LG Electronics, Logitech, Matsushita, Philips, Samsung, Sanyo, Sony and Toshiba.

 

Computing, Storage and Printing

 

The computing and computing-peripherals markets are growing as a result of increasing Internet use, network connectivity and digital imaging requirements. For computing applications, we provide Flash memory, serial memory, USB hubs and ASICs for personal computers, servers and USB drives as well as capacitive touchscreen technology for tablet devices. We offer Trusted Platform Module (“TPM”) products that perform platform authentication and security for computing systems. Our biometric security IC verifies a user’s identity by scanning a finger. In today’s security conscious environment we believe TPM and biometry are finding applications where access to information, equipment and similar resources needs to be controlled or monitored. We provide ASICs, nonvolatile memory and microcontrollers for laser printers, inkjet printers, copy machines and scanners. Our principal customers in these markets include Dell, Epson, Hewlett-Packard, IBM, Intel, Lexmark, M-Systems and Samsung.

 

Automotive

 

The automobile sector continues to integrate more and more electronics solutions into its product offerings. For automotive applications, we provide body electronics for passenger comfort and convenience, safety related subsystems such as air-bag drivers, anti-lock brake control and tire pressure monitors, keyless entry transmitters, capacitive touch interface and receivers and in-vehicle entertainment components. With our introduction of high-voltage and high-temperature capable ICs we are broadening our automotive reach to systems and controls in the engine compartment. Virtually all of these are application-specific mixed signal ICs. Although the automotive industry underwent a significant dislocation from 2008 to 2010 as a result of the global economic recession, we believe that this market offers longer-term growth opportunities that will be driven by the ongoing demand for sophisticated electronic systems. Principal customers in these markets include Chrysler, Continental-Temic, Delphi, Hella, Marelli, Robert Bosch, Siemens-VDO and TRW.

 

Military and Aerospace

 

The military and aerospace industries require products that will operate under extreme conditions and are tested to higher standards than commercial products. Our circuits are available in radiation-hardened (RAD) versions that meet stringent requirements (cumulative dose, latch-up and transient phenomena) of space, avionic and industrial applications. For these applications, we provide RAD ASICs, FPGAs, nonvolatile memories and microcontrollers. Principal customers in these markets include BAE Systems, EADS, Honeywell, Litton, Lockheed-Martin, Northrop, Raytheon, Roche and Thales.

 

Manufacturing

 

Once we have fabricated wafers, we probe and test the individual circuits on them to identify those that do not function. This saves us the cost of putting mechanical packages around circuits whose failure can be determined in advance. After probe, we send all of our wafers to one of our independent assembly contractors, located in China, Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan or Thailand where they are cut into individual chips and assembled into packages. Most of the finished products are given a final test at the assembly contractors although some are shipped to our test facilities in the United States where we perform electrical testing and visual inspection before delivery to customers.

The raw materials and equipment we use to produce our integrated circuits are available from several suppliers. We are not dependent upon any single source of supply. However, some materials have been in short supply in the past and lead times on occasion have lengthened, especially during semiconductor expansion cycles.

 

During 2010, we manufactured approximately 68% of our products at our wafer fabrication facility located in Colorado Springs, Colorado and our former manufacturing operation in Rousset, France. In June 2010, we sold our Rousset, France fabrication operations to LFoundry GmbH, and agreed to purchase a minimum amount of wafers from the buyer through 2014. In December 2008, we sold our wafer fabrication operations in Heilbronn, Germany to Tejas Silicon Holdings Limited and agreed to purchase a minimum amount of wafers from the buyer through 2011. In February 2008, we sold our North Tyneside, UK wafer fabrication facility and ceased wafer manufacturing operations in the United Kingdom. As a result of those sales, we currently own and operate a single fabrication facility in Colorado Springs, Colorado. We have increased production at our Colorado Springs wafer fabrication facility to help provide us with the necessary output to meet demand.

 

During 2010, we paid approximately $100 million for additional manufacturing equipment, primarily related to increasing our test capacity. We anticipate that capital equipment purchases for 2011, estimated at $80 million to $100 million, will be focused on maintaining existing levels of fabrication output, providing additional testing capacity and, to a limited extent, on developing advanced process technologies.

 

Environmental Compliance

 

We are subject to a variety of international, federal, state and local governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes.

 

Increasing public attention has been focused on the environmental impact of semiconductor operations. Although we have not experienced any material adverse effect on our operations from environmental regulations, any changes in such regulations or in their enforcement may impose the need for additional capital equipment or other requirements. If for any reason we fail to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations, we could be subject to substantial liability or our manufacturing operations could be suspended.

 

Marketing and Sales

 

We generate our revenue by selling our products directly to original equipment manufacturers (“OEMs”) and indirectly to OEMs through distributors. We market our products worldwide to a diverse base of OEMs serving primarily commercial markets. In the United States and Canada, we sell our products to large OEM accounts primarily by using manufacturers’ representatives or through national and regional distributors. Our agreements with our representatives and distributors are generally terminable by either party on short notice, subject to local laws. Direct sales to OEMs as a percentage of net revenues for the year ended December 31, 2010 were 43%, while sales to distributors were 57% of net revenues.

 

Sales to U.S. OEMs, as a percentage of net revenues totaled 10%, 9% and 8% for the years ended December 31, 2010, 2009 and 2008, respectively. Sales to U.S. distributors, as a percentage of net revenues, totaled 9%, 9% and 7% for the years ended December 31, 2010, 2009 and 2008, respectively. We support this sales network from our headquarters in San Jose, California and through U.S. regional offices in California, Colorado, Florida, Illinois, Massachusetts, Minnesota, North Carolina and Texas.

 

We sell to customers outside of the U.S. primarily by using international sales representatives and through distributors, who are managed from our foreign sales offices. We maintain sales offices in Canada, China, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Malaysia, Mexico, Singapore, South Africa, South Korea, Sweden, Taiwan and the United Kingdom. Our sales outside the U.S. represented 84%, 83% and 86% of net revenues in 2010, 2009 and 2008, respectively. We expect revenues from our international sales and sales to distributors will continue to represent a significant portion of our net revenues. International sales and sales to distributors are subject to a variety of risks, including those arising from currency fluctuations, tariffs, trade barriers, taxes, export license requirements, and foreign government regulations and risk of payment by distributors. See Item 1A — Risk Factors.

Research and Development

 

We believe significant investment in research and development is vital to our success, growth and profitability, and we will continue to devote substantial resources, including management time, to this activity. Our primary objectives are to increase performance of our existing products, develop new wafer processing and design technologies and draw upon these technologies and our experience in embedded applications to create new products.

 

For the years ended December 31, 2010, 2009 and 2008, we spent $237 million, $212 million and $260 million, respectively, on research and development. Research and development expenses are charged to operations as incurred. We expect these expenditures will increase in the future as we continue to invest in new products and new processing technology.

 

Competition

 

We operate in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as Cypress, Freescale, Fujitsu, Hitachi, Infineon, Intel, Microchip, NXP Semiconductors, ON Semiconductor, Renesas, Samsung, Spansion, STMicroelectronics, Synaptics and Texas Instruments. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last three years, we have experienced significant price competition in several business segments, especially in our Nonvolatile Memory segment for EPROM, Serial EEPROM, and Flash memory products, and in our Microcontroller segment for commodity microcontrollers. We expect continuing competitive pressures in our markets from existing competitors and new entrants, new technology and cyclical demand, which, among other factors, will likely result in continuing pressure to reduce future average selling prices for our products.

 

Patents and Licenses

 

Our success and future product revenue growth depend, in part, on our ability to protect our IP. We rely primarily on patents, copyrights, trademarks and trade secrets, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. However, these may not provide meaningful or adequate protection for all of our IP.

 

As of December 31, 2010, we had 1,443 U.S. and foreign patents and 583 published patent applications. These patents, and our patent applications, cover important and fundamental microcontroller, capacitive touch and other technologies that support our product strategy. We operate an internal program to identify patentable developments and we file patent applications wherever necessary to protect our proprietary technologies.

 

The semiconductor industry is characterized by vigorous protection and pursuit of IP rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. From time to time, we receive communications from third parties asserting patent or other IP rights covering our products or processes. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and be required to make corresponding royalty payments, which may adversely affect our operating results.

 

We have several cross-license agreements with other companies. In the future, it may be necessary or advantageous for us to obtain additional patent licenses from existing or other parties, but these license agreements may not be available to us on acceptable terms, if at all.

 

Employees

 

At December 31, 2010, we employed approximately 5,200 employees, compared to approximately 5,600 employees at December 31, 2009. Our future success depends in large part on the continued service of

our key technical and management personnel and on our ability to continue to attract and retain qualified employees, particularly highly skilled design, process and test engineers necessary for the manufacture of existing products and the research and development of new products and processes. The competition for such personnel is intense, and the loss of key employees, most of whom are not subject to an employment agreement or a post-employment non-competition agreement, could adversely affect our business.

 

Backlog

 

We accept purchase orders for deliveries covering periods from one day up to approximately one year from the date on which the order is placed. However, purchase orders, consistent with common industry practices, can generally be revised or cancelled by the customer without penalty. In addition, significant portions of our sales are ordered with relatively short lead times, often referred to as “turns business.” Considering these industry practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future periods.

 

Geographic Areas

 

In 2010, 16% of our net revenues were derived from customers in the United States, 55% from customers in Asia, 27% from customers in Europe and 2% from the rest of the world. We determine the location of our customers based on the destination to which we ship our products for the benefit of those customers.

 

As of December 31, 2010, we owned long-lived assets in the United States with a remaining net book value amounting to $106 million, in France amounting to $31 million, in Germany amounting to $19 million, and in the United Kingdom amounting to $1 million. See Note 14 of Notes to Consolidated Financial Statements for further discussion.

 

Seasonality

 

The semiconductor industry is increasingly characterized by annual seasonality and wide fluctuations of supply and demand. A significant portion of our revenue comes from sales to customers supplying consumer markets and from international sales. As a result, our business may be subject to seasonally lower revenues in particular quarters of our fiscal year, especially as many of our larger consumer focused customers tend to have stronger sales later in the fiscal year as they prepare for the major holiday selling seasons.

 

The industry has also been affected by significant shifts in consumer demand due to economic downturns or other factors, which may result in volatility in order patterns and lead times, sudden shifts in product demand and periodic production over-capacity. We have, in the past, experienced substantial quarter-to-quarter fluctuations in revenues and operating results and expect, in the future, to continue to experience short term period-to-period fluctuations in operating results due to general industry or economic conditions.

 

 

In addition to the other information contained in this Form 10-K, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations. Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In addition, these risks and uncertainties may affect the “forward-looking” statements described elsewhere in this Form 10K and in the documents incorporated herein by reference. They could also affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.

OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN OUR STOCK PRICE.

 

Our future operating results will be subject to quarterly variations based upon a variety of factors, many of which are not within our control. In addition to the other factors discussed in this “Risk Factors” section, factors that could affect our operating results include:

 

 

 

Any unfavorable changes in any of these factors could harm our operating results and may result in volatility or a decline in our stock price. In addition, from time to time, our annual revenues and operating results can become increasingly dependent upon orders booked and shipped within a given quarter and, accordingly, our annual results can become less predictable and subject to greater variability.

 

WE DEPEND SUBSTANTIALLY ON THE SUCCESS OF OUR CUSTOMERS’ END PRODUCTS, OUR NEW PRODUCTS AND ON OUR ABILITY TO REDUCE THE AVERAGE SELLING PRICE OF OUR PRODUCTS OVER TIME.

 

We believe that our future sales will depend substantially on the success of our customers’ end products, our new products and our ability to reduce the average selling price of our products over time. Our new products are generally incorporated into our customers’ products or systems at their design stage. However, so-called design wins can precede volume sales by a year or more. We may not be successful in achieving design wins or design wins may not result in future revenues, which depend in large part on our customer’s ability to sell their end products or systems within the market.

 

Rapid innovation within the semiconductor industry also continually increases pricing pressure, especially on products containing older technology. We experience that pricing pressure, just as many of our competitors do. Product life cycles are relatively short, and as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis. In turn, demand for older technology falls, causing the price at which such products can be sold to drop, often quickly. As a result, the average selling price of each of our products usually declines as individual products mature and competitors enter the market. To offset average selling price decreases and to continue profitably supplying our products, we rely primarily on reducing costs to manufacture our products, improving our process technologies and production efficiency, increasing product sales to absorb fixed costs and introducing new, higher priced products that incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions, production improvements, increased product sales and new product introductions do not occur in a timely manner.

 

THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY CREATES FLUCTUATIONS IN OUR OPERATING RESULTS.

 

The semiconductor industry has historically been cyclical, characterized by annual seasonality and wide fluctuations in product supply and demand. The semiconductor industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Global semiconductor sales decreased 3% to $249 billion in 2008 and 9% to $226 billion in 2009. Global semiconductor sales increased 32% to $298 billion in 2010 from 2009.

 

Our operating results have been adversely affected in the past by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and declining gross margins. In the past, we have recorded significant charges to recognize impairment in the value of our manufacturing equipment, the cost to reduce our workforce, and other restructuring costs. Our business may be harmed in the future by cyclical conditions in the semiconductor industry as a whole and also by any slower growth in any of the specific markets served by our products.

 

A significant portion of our revenue comes from sales to customers supplying consumer markets and from international sales. As a result, our business may be subject to seasonally lower revenues in particular quarters of our fiscal year. The semiconductor industry has also been affected by significant shifts in consumer demand due to economic downturns or other factors, which can exacerbate the cyclicality within the industry and result in further diminished product demand and production over-capacity. We have, in the past, experienced substantial quarter-to-quarter fluctuations in revenues and operating results and expect, in the future, to continue to experience short term period-to-period fluctuations in operating results due to general industry and economic conditions.

WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS AS WE TRANSITION TO A FAB-LITE STRATEGY AND INCREASE DEPENDENCE ON INDEPENDENT FOUNDRIES, BECAUSE THOSE FOUNDRIES MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES OR MAY ABANDON FABRICATION PROCESSES THAT WE REQUIRE.

 

As part of our fab-lite strategy, we have reduced the number of manufacturing facilities we own. In May 2008, we completed the sale of our North Tyneside, United Kingdom wafer fabrication facility. In December 2008, we sold our wafer fabrication operation in Heilbronn, Germany, and in June 2010, we sold our Rousset, France manufacturing operations. As a result, we currently operate only one manufacturing facility in Colorado Springs, Colorado and we increasingly rely on independent third-party foundry manufacturing partners to manufacture certain products. As part of this transition, we have expanded and will continue to expand our foundry relationships by entering into new agreements with third-party foundries. If these agreements are not completed on a timely basis, or the transfer of production is delayed for other reasons, the supply of certain products could be disrupted, which could harm our business. In addition, difficulties in production yields can often occur when transitioning to a new third-party foundry. If our foundries fail to deliver quality products and components on a timely basis, our business could be harmed. For the year ended December 31, 2010, we manufactured approximately 68% of our products in our own wafer fabrication facilities compared to 88% for the year ended December 31, 2009. We expect over time that an ever increasing portion of our wafer fabrication, especially as we seek to expand capacity, will be undertaken by third party foundries.

 

Implementation of our fab-lite strategy exposes us to the following risks:

 

 

If any of the above risks occur, we could experience an interruption in our supply chain or an increase in costs, which could delay or decrease our revenue and adversely affect our business.

 

We hope to mitigate these risks with a strategy of qualifying multiple foundry subcontractors. However, there can be no guarantee that any strategy will eliminate these risks. Additionally, since most independent foundries are located in foreign countries, we are subject to risks generally associated with contracting with foreign manufacturers, including currency exchange fluctuations, political and economic instability, trade restrictions, changes in tariff and freight rates and import and export regulations. Accordingly, we may experience problems maintaining expected timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

 

The terms in which we will be able to obtain wafer production for our products, and the timing and volume of such production will be substantially dependent on future agreements to be negotiated with independent foundries. We cannot be certain that the agreements we reach with such foundries will be on terms reasonable to us. For example, any future agreements with independent foundries may have short terms, may not be renewable, and may provide inadequate certainty regarding the supply and pricing of wafers for our products.

 

If demand for our product increases significantly, we may not be able to guarantee that our third party foundries will be able to increase their manufacturing capacity to a level that meets our requirements, thereby preventing us

from meeting our customer demand and potentially harming our business and customer relationships. Also, even if our independent foundries are able to meet our increased demand, those foundries may decide to charge significantly higher wafer prices to us. That could reduce our gross margins or require us to offset the increased prices by increasing corresponding prices to our customers, either of which could harm our business and operating results.

 

OUR REVENUES ARE DEPENDENT TO A LARGE EXTENT ON SELLING THROUGH THIRD PARTY DISTRIBUTORS.

 

Sales through distributors accounted for 57%, 55% and 48% of our net revenues for the years ended December 31, 2010, 2009 and 2008, respectively. We are dependent on our distributors to supplement our direct marketing and sales efforts. Our agreements with third-party distributors can generally be terminated for convenience by either party upon relatively short notice. These agreements are non-exclusive and also permit our distributors to offer our competitors’ products.

 

If any significant distributor or a substantial number of our distributors terminated their relationship with us, decided to market our competitors’ products in preference to our products, were unable to sell our products or were unable to pay us for products sold for any reason, our ability to bring our products to market could be adversely affected, we could have difficulty in collecting outstanding receivable balances, or we could incur other charges or adjustments, any of which could have a material adverse effect on our revenues and operating results. For example, in the three months ended December 31, 2008, we recorded a one time bad-debt charge of $12 million related to outstanding invoices after one of our Asian distributors appeared on the U.S. Department of Commerce Entity List.

 

OUR REVENUE REPORTING IS HIGHLY DEPENDENT ON RECEIVING ACCURATE SELL-THROUGH INFORMATION FROM OUR DISTRIBUTORS. IF WE RECEIVE INACCURATE OR LATE INFORMATION FROM OUR DISTRIBUTORS, OUR FINANCIAL REPORTING COULD BE MISSTATED.

 

Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. As our distributors resell products, they provide us with periodic data regarding the products sold, including prices, quantities, end customers, and the amount of our products they still have in stock. Because the data set is large and complex and because there may be errors in the reported data, we must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. Actual results could vary unfavorably from our estimates, which could affect our operating results and could adversely affect our business.

 

IN SOME CASES, WE PROVIDE PRICE PROTECTION TO OUR DISTRIBUTORS ON THE INVENTORY THEY CARRY. SIGNIFICANT DECLINES IN THE VALUE OF THAT INVENTORY, OR OTHER PRICE DECLINES IN OUR PRODUCTS, MAY REQUIRE US TO UNDERTAKE INVENTORY WRITE-DOWNS OR OTHER EXPENSES TO REIMBURSE OUR DISTRIBUTORS FOR THOSE CHANGES IN VALUE.

 

Distributors typically maintain an inventory of our products. For certain distributors, we have signed agreements that protect the value of their inventory of our products against price reductions, as well as provide for rights of return under specific conditions. Certain agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns. We defer the gross margins on our sales to these distributors until the applicable products are re-sold by the distributors and reported to us. However, in the event of an unexpected significant decline in the price of our products or significant return of unsold inventory, we may experience inventory write-downs, charges to reimburse costs incurred by distributors, or other charges or adjustments, any of which could result in a material adverse impact to our revenues and operating results.

WE BUILD SEMICONDUCTORS BASED, FOR THE MOST PART, ON NON-BINDING FORECASTS FROM OUR CUSTOMERS. AS A RESULT, CHANGES TO FORECASTS FROM ACTUAL DEMAND MAY RESULT IN EXCESS INVENTORY OR OUR INABILITY TO FILL CUSTOMER ORDERS ON A TIMELY BASIS, WHICH MAY HARM OUR BUSINESS.

 

We schedule production and build semiconductor devices based primarily on non-binding forecasts from customers and our own internal forecasts. Typically, customer orders, consistent with general industry practices, may be cancelled or rescheduled with short notice to us. In addition, our customers frequently place orders requesting product delivery in a much shorter period than our lead time to fully fabricate and test devices. Because the markets we serve are volatile and subject to rapid technological, price and end user demand changes, our forecasts of unit quantities to build may be significantly incorrect. Changes to forecasted demand from actual demand may result in us producing unit quantities in excess of orders from customers, which could result in the need to record additional expense for the write-down of inventory and negatively affect our gross margins and results of operations.

 

Our forecasting risks may increase as we transition to a fab-lite strategy because we will have less control over modifying production schedules to match changes in forecasted demand. If we commit to obtaining foundry wafers and cannot cancel or reschedule commitments without material costs or cancellation penalties, we may be forced to purchase inventory in excess of demand, which could result in a write-down of inventories and negatively affect our gross margins and results of operations.

 

Conversely, failure to produce or obtain sufficient wafers for increased demand could cause us to miss revenue opportunities and could affect our customers’ ability to sell products, which could adversely affect our customer relationships and thereby materially adversely affect our business, financial condition and results of operations. For example, for the year ended December 31, 2010, shipments of our ASIC and memory products were unfavorably affected by limited production capacity, as we allocated wafers to microcontroller customers in an effort to meet significantly increased demand for those products during 2010. In order to support our ASIC and memory customers in 2011, we have increased orders for wafers from independent foundries.

 

OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO COMPLEX LAWS RELATING TO TRADE, EXPORT CONTROLS, FOREIGN CORRUPT PRACTICES AND ANTI-BRIBERY LAWS AMONG MANY OTHERS, AND A VIOLATION OF, OR CHANGE IN, THESE LAWS COULD ADVERSELY AFFECT OUR OPERATIONS.

 

For hardware, software or technology exported from, or otherwise subject to the jurisdiction of, the United States, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against embargoed countries and destinations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”). Hardware, software and technology exported from other countries may also be subject to local laws and regulations governing international trade. Under these laws and regulations, we are responsible for obtaining all necessary licenses and approvals for exports of hardware, software and technology, as well as the provision of technical assistance. We are also required to obtain all necessary export licenses prior to transferring technical data or software to foreign persons. In addition, we are required to obtain necessary export licenses prior to the export or re-export of hardware, software and technology to any person identified on the U.S. Department of Commerce Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons List or the Department of State’s Debarred List. Products for use in nuclear, chemical/biological weapons, rocket systems or unmanned air vehicle applications also require similar export licenses.

 

We are enhancing our export compliance program, including analyzing product shipments and technology transfers. We are also working with U.S. government officials to ensure compliance with applicable U.S. export laws and regulations and developing additional operational procedures. However, export laws and regulations are

highly complex and vary from jurisdiction to jurisdiction and a determination by U.S. or local governments that we have failed to comply with one or more of these export control laws or trade sanctions, including failure to properly restrict an export to the persons or countries set forth on government restricted party lists, could result in significant civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenues from certain customers and exclusion from participation in U.S. government contracts. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors, foundries or other third parties. We have, in the past, previously experienced a situation in which one of our distributors was added to the U.S. Department of Commerce Entity List, resulting in our terminating our relationship with that distributor. Any one or more of these sanctions or a change in law or regulations could have a material adverse effect on our business, financial condition and results of operations.

 

We are also subject to complex laws that seek to regulate the payment of bribes or other forms of compensation to foreign officials or persons affiliated with companies or organizations in which foreign governments may own an interest or exercise control. The Foreign Corrupt Practices Act in the United States requires United States companies to comply with an extensive legal framework to prevent bribery of foreign officials. The laws are complex and require that we closely monitor local practices of our overseas offices. The United States Department of Justice has recently heightened enforcement of these laws. In addition, other countries continue to implement similar laws that may have extra-territorial effect. The United Kingdom, where we have operations, has recently adopted, but not yet implemented, the U.K. Bribery Act that could impose significant oversight obligations on us and could have application to our operations outside of the United Kingdom. The costs for complying with these and similar laws may be significant and could reasonably be expected to require significant management time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition or results of operations.

 

WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS AND CASH FLOWS, AND REVENUES AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS AS A RESULT OF FOREIGN CURRENCY MOVES AGAINST THE DOLLAR.

 

Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse effect on our financial results and cash flows. Our primary exposure relates to operating expenses in Europe.

 

When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we ship our product. This would reduce our revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. For example, in Europe, where we have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, all costs will increase if the local currency strengthens against the dollar. The net effect of average exchange rates for the year ended December 31, 2010, compared to the average exchange rates for the year ended December 31, 2009, resulted in a decrease in income from operations of $12 million. This impact is determined assuming that all foreign currency denominated transactions that occurred for the year ended December 31, 2010 were recorded using the average foreign currency exchange rates in the same period in 2009.

 

We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Similarly, we face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. We have not historically sought to hedge our foreign currency exposure, although we may determine to do so in the future.

WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS WHICH MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND WHICH MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES.

 

After wafer testing, we ship the wafers to one of our independent assembly contractors located in China, Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan or Thailand where the wafers are separated into die, packaged and, in some cases, further tested. Our reliance on independent contractors to assemble, package and test our products may expose us to significant risks, including the following:

 

 

In addition, our independent contractors may not continue to assemble, package and test our products for a variety of reasons. Moreover, because our independent contractors are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions, including export controls, and changes in tariff and freight rates. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

 

WE MAY FACE BUSINESS DISRUPTION RISKS, AS WELL AS THE RISK OF SIGNIFICANT UNANTICIPATED COSTS, AS WE CONSIDER CHANGES IN OUR BUSINESS AND ASSET PORTFOLIO.

 

We are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including those located in Europe, in order to enhance our overall competitiveness and viability. Disposal and restructuring activities that we have taken, and may take in the future, can divert significant time and resources, can involve substantial costs and lead to production and product development delays and may fail to enhance our overall competitiveness and viability as intended, any of which can negatively impact our business. Since 2008, we have sold three manufacturing facilities and completed one other significant asset sale.

 

We have in the past and may, in the future, experience labor union or workers council objections, or labor unrest actions (including possible strikes), when we seek to reduce our manufacturing or operating facilities in Europe and other regions. Many of our operations are located in countries and regions that have extensive employment regulations that we must comply with in order to reduce our workforce, and we may incur significant costs to complete such exercises. Any of those events could have an adverse effect on our business and operating results.

 

We continue to evaluate the existing restructuring accruals related to restructuring plans previously implemented. As a result, there may be additional restructuring charges or reversals or recoveries of previous charges. However, we may incur additional restructuring and asset impairment charges in connection with additional restructuring plans adopted in the future. Any such restructuring or asset impairment charges recorded in the future could significantly harm our business and operating results.

OUR PERIODIC DISPOSAL ACTIVITIES HAVE IN THE PAST AND MAY, IN THE FUTURE, TRIGGER IMPAIRMENT CHARGES AND/OR RESULT IN A LOSS ON SALE OF ASSETS.

 

Our disposal activities have in the past and may, in the future, trigger restructuring, impairment and other accounting charges and/or result in a loss on sale of assets. Any of these charges or losses could cause the price of our common stock to decline.

 

For example, in the fourth quarter of 2009, we announced that we entered into an exclusivity agreement with LFoundry GmbH for the purchase of our manufacturing operations in Rousset, France. As a result of this agreement, we determined that certain assets and liabilities were no longer included in the disposal group as they were not being acquired or assumed by the buyer, and as result, we reclassified these assets and liabilities back to held and used as of December 31, 2009 and recorded an asset impairment charge of $80 million. In determining any potential write down of these assets and liabilities, we considered both the net book value of the disposal group, which was $83 million, and the related credit balance of $129 million for foreign currency translation adjustments (“CTA balance”) that is recorded within stockholders’ equity. As a result, no impairment charge was recorded for the disposal group as its carrying value, net of the CTA balance, could not be reduced to below zero. In the three months ended June 30, 2010, the CTA balance remaining in stockholders’ equity of $97 million was released. In the three months ended June 30, 2010, we recorded an additional $12 million asset impairment charge.

 

TO OBTAIN CAPACITY, WE MAY SOMETIMES ENTER INTO “TAKE-OR-PAY” AGREEMENTS WITH WAFER MANUFACTURERS. IF THE PRICING FOR THOSE WAFERS EXCEEDS THE PRICES WE COULD HAVE OTHERWISE OBTAINED IN THE OPEN MARKET, WE MAY INCUR A CHARGE TO OUR OPERATING RESULTS.

 

In connection with the sale of our manufacturing operations in Rousset, France in June 2010, we entered into a manufacturing services agreement pursuant to which we will purchase wafers from LFoundry until 2014 on a “take-or-pay” basis. If the purchase price of the wafers under that type of agreement is higher than the fair value of the wafers at the time of purchase, based on the pricing we could have obtained from third-party foundries, we would be required to take a charge to our financial statements to reflect the above market price we have agreed to pay. In 2010, we recorded a charge of $92 million for the three months ended June 30, 2010 to reflect above market wafer prices that we were required to pay under our LFoundry agreement.

 

Similarly, in connection with the sale of our manufacturing operations in Heilbronn, Germany in December 2008, we entered into a wafer supply agreement pursuant to which we will purchase wafers from Telefunken Semiconductors GmbH & Co. KG (“TSG”). Under the supply agreement, we purchase wafers at cost in Euros, which represents their fair value at the time of purchase. This commitment is equivalent to approximately 22 million Euros as of December 31, 2010.

 

IF WE ARE UNABLE TO IMPLEMENT NEW MANUFACTURING TECHNOLOGIES OR FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, OUR BUSINESS WOULD BE HARMED.

 

Whether demand for semiconductors is rising or falling, we are constantly required by competitive pressures in the industry to successfully implement new manufacturing technologies in order to reduce the geometries of our semiconductors and produce more integrated circuits per wafer. We are developing processes that support effective feature sizes as small as 0.13-microns, and we are studying how to implement advanced manufacturing processes with even smaller feature sizes such as 0.065-microns.

 

Fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Whether through the use of our foundries or third-party manufacturers, we may experience problems in achieving acceptable yields in the manufacture of wafers, particularly during a transition in the manufacturing process technology for our products.

 

We have previously experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity or transitions in manufacturing process technology. Production delays or

difficulties in achieving acceptable yields at any of our fabrication facilities or at the fabrication facilities of our third-party manufacturers could materially and adversely affect our operating results. We may not be able to obtain the additional cash from operations or external financing necessary to fund the implementation of new manufacturing technologies.

 

WE MAY FACE THIRD PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND AND RESULT IN LOSS OF SIGNIFICANT RIGHTS.

 

The semiconductor industry is characterized by vigorous protection and pursuit of IP rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. From time to time we receive communications from third parties asserting patent or other IP rights covering our products or processes. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and make regular corresponding royalty payments, which may harm our operating results.

 

We have in the past been involved in intellectual property infringement lawsuits, which adversely affected our operating results. It is possible that we will be involved in other intellectual property infringement lawsuits in the future. The cost of defending against such lawsuits, in terms of management time and attention, legal fees and product delays, can be substantial. If such infringement lawsuits are successful, we may be prohibited from using the technologies at issue in the lawsuits, and if we are unable to obtain a license on acceptable terms, license a substitute technology or design new technology to avoid infringement, our business and operating results may be significantly harmed.

 

Many of our new and existing products and technologies are intended to address needs in specialized and emerging markets. Given the aggressive pursuit and defense of intellectual property rights that is typical in the semiconductor industry, we expect to see an increase in intellectual property litigation in many of the key markets that our products and technologies serve in the future. An increase in infringement lawsuits within these markets generally, even if they do not involve us, may divert management’s attention and resources, which may seriously harm our business, results of operations and financial condition.

 

As is customary in the semiconductor industry, our standard contracts provide remedies to our customers, such as defense, settlement, or payment of judgments for intellectual property claims related to the use of our products. From time to time, we will indemnify customers against combinations of loss, expense, or liability related to the sale and the use of our products and services. Even if claims or litigation against us are not valid or successfully asserted, these claims could result in significant costs and diversion of the attention of management and other key employees to defend.

 

OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED REVENUES, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.

 

We operate in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as Cypress, Freescale, Fujitsu, Hitachi, Infineon, Intel, Microchip, NXP Semiconductors, ON Semiconductor, Renesas, Samsung, Spansion, STMicroelectronics, Synaptics and Texas Instruments. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we introduce new products we are increasingly competing directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last several years, we have experienced significant price competition in several business segments, especially in our nonvolatile memory segment for EPROM, Serial EEPROM and Flash memory products, as well as in our commodity microcontrollers. We expect continuing competitive pressures in our markets from existing competitors, new entrants, new technology and

cyclical demand, among other factors; will likely maintain the recent trend of declining average selling prices for our products.

 

In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following:

 

 

Many of these factors are outside of our control, and may cause us to be unable to compete successfully in the future, which would materially harm our business.

 

WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

 

Our future success substantially depends on our ability to develop and introduce new products which compete effectively on the basis of price and performance and which address customer requirements. We are continually designing and commercializing new and improved products to maintain our competitive position. These new products typically are more technologically complex than their predecessors, and thus have increased potential for delays in their introduction.

 

The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. Our development of new products and our customers’ decisions to design them into their systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and customer needs, and the successful introduction of our products may be adversely affected by competing products or by technologies serving the markets addressed by our products. Our qualification process involves multiple cycles of testing and improving a product’s functionality to ensure that our products operate in accordance with design specifications. If we experience delays in the introduction of new products, our future operating results could be adversely affected.

 

In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our future growth will depend in part upon the successful development and market acceptance of these process technologies. Our integrated solution products require more technically sophisticated sales and marketing personnel to market these products successfully to customers. We are developing new products with smaller feature sizes, the fabrication of which will be substantially more complex than fabrication of our current products. If we are unable to design, develop, manufacture, market and sell new products successfully, our operating results will be harmed. Our new product development, process development or marketing and sales efforts may not be successful, our new products may not achieve market acceptance and price expectations for our new products may not be achieved, any of which could significantly harm our business.

 

OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO VARIOUS RISKS.

 

Net revenues outside the United States accounted for 84%, 83% and 86% of our net revenues in years ended December 31, 2010, 2009 and 2008, respectively. We expect that revenues derived from international sales will

continue to represent a significant portion of net revenues. International sales and operations are subject to a variety of risks, including:

 

 

Some of our distributors, independent foundries, independent assembly, packaging and test contractors and other business partners also have international operations and are subject to the risks described above. Even if we are able to manage the risks of international operations successfully, our business may be adversely affected if our distributors, independent foundries and contractors and other business partners are not able to manage these risks successfully.

 

OUR OPERATIONS AND FINANCIAL RESULTS COULD BE HARMED BY BUSINESS INTERRUPTIONS, NATURAL DISASTERS, TERRORIST ACTS OR OTHER EVENTS BEYOND OUR CONTROL.

 

Our operations are vulnerable to interruption by fire, earthquake, volcanoes, power loss, telecommunications failure and other events beyond our control. We do not have a comprehensive disaster recovery plan. In addition, business interruption insurance may not be enough to compensate us for losses that may occur and any losses or damages incurred by us as a result of business interruptions could significantly harm our business.

 

In recent years, based on insurance market conditions, we have relied to a greater degree on self-insurance. For example, we now self-insure property losses up to $10 million per event. Our headquarters, some of our manufacturing facilities, the manufacturing facilities of third party foundries and some of our major suppliers’ and customers’ facilities are located near major earthquake faults and in potential terrorist target areas. If a major earthquake, other disaster or a terrorist act affects us and insurance coverage is unavailable for any reason, we may need to spend significant amounts to repair or replace our facilities and equipment, we may suffer a temporary halt in our ability to manufacture and transport products and we could suffer damages that could materially adversely harm our business, financial condition and results of operations.

 

A LACK OF EFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING COULD RESULT IN AN INABILITY TO ACCURATELY REPORT OUR FINANCIAL RESULTS, WHICH COULD LEAD TO A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

 

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal controls. Evaluations of the effectiveness of our internal controls in the future may lead our management to determine that internal control over financial reporting is no longer effective. Such conclusions may result from our failure to implement controls for changes in our business or from deterioration in the degree of compliance with our policies or procedures.

 

A failure to maintain effective internal control over financial reporting, including a failure to implement effective new controls to address changes to our business, could result in a material misstatement of our consolidated financial statements could cause us to fail to meet our financial reporting obligations. Any material misstatement of our consolidated financial statements or cause us to fail to meet our financial reporting obligations, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. In addition, any material misstatement of our consolidated financial statements could cause us to fail to meet our financial reporting obligations, could subject us to significant civil or

criminal actions and increased U.S. regulatory focus, all of which would divert management’s time and our resources and could harm our business and reputation.

 

PROBLEMS THAT WE EXPERIENCE WITH KEY CUSTOMERS MAY HARM OUR BUSINESS.

 

Our ability to maintain close, satisfactory relationships with large customers is important to our business. A reduction, delay, or cancellation of orders from our large customers would harm our business. The loss of one or more of our key customers, or reduced orders by any of our key customers, could harm our business and results of operations. Moreover, our customers may vary order levels significantly from period to period, and customers may not continue to place orders with us in the future at the same levels as in prior periods. Our business is organized into four operating segments (see Note 14 of Notes to Consolidated Financial Statements for further discussion). The principal customers in each of our markets are described in “Business — Principal Markets and Customers.”

 

WE ARE NOT PROTECTED BY LONG-TERM SUPPLY CONTRACTS WITH OUR CUSTOMERS.

 

We do not typically enter into long-term supply contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we will be able to rapidly replace that revenue source, which would harm our financial results.

 

WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS, WHICH COULD IMPOSE UNANTICIPATED REQUIREMENTS ON OUR BUSINESS IN THE FUTURE. ANY FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS MAY SUBJECT US TO LIABILITY OR SUSPENSION OF OUR MANUFACTURING OPERATIONS.

 

We are subject to a variety of environmental laws and regulations in each of the jurisdictions in which we operate governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. We could incur significant costs as a result of any failure by us to comply with, or any liability we may incur under, environmental, health and safety laws and regulations, including the limitation or suspension of production, monetary fines or civil or criminal sanctions, clean-up costs or other future liabilities in excess of our reserves. We are also subject to laws and regulations governing the recycling of our products, the materials that may be included in our products, and our obligation to dispose of our products at the end of their useful life. For example, the European Directive 2002/95/Ec on restriction of hazardous substances (RoHS Directive) bans the placing on the European Union market of new electrical and electronic equipment containing more than specified levels of lead and other hazardous compounds. As more countries enact requirements like the RoHS Directive, and as exemptions are phased out, we could incur substantial additional costs to convert the remainder of our portfolio, conduct required research and development, alter manufacturing processes, or adjust supply chain management. Such changes could also result in significant inventory obsolescence. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution control equipment, incur other significant expenses or modify our manufacturing processes. We also are subject to cleanup obligations at properties that we currently own or at facilities that we may have owned in the past or at which we conducted operations. In the event of the discovery of new or previously unknown contamination, additional requirements with respect to existing contamination, or the imposition of other cleanup obligations at these or other sites for which we are responsible, we may be required to take remedial or other measures that could have a material adverse effect on our business, financial condition and results of operations.

 

WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS.

 

Our future success depends in large part on the continued service of our key technical and management personnel, and on our ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and in the development of new products and processes. The competition for such personnel is intense, and the loss of key employees, none of whom

is subject to an employment agreement for a specified term or a post-employment non-competition agreement, could harm our business.

 

ACCOUNTING FOR OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS IS SUBJECT TO JUDGMENT AND MAY LEAD TO UNPREDICTABLE EXPENSE RECOGNITION.

 

We have issued performance-based restricted stock units to eligible employees, entitling those employees to a maximum of approximately ten million shares of our common stock under our 2005 Stock Plan, if specified performance criteria are met.

 

We recognize the stock-based compensation expense for performance-based restricted stock units when we believe it is probable that we will achieve the specified performance criteria. If achieved, the award vests. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. We are required to reassess this probability at each reporting date, and any change in our forecasts may result in an increase or decrease to the expense recognized.

 

For the years ended December 31, 2010, 2009 and 2008, we recorded stock-based compensation expense related to performance-based restricted stock units of $25 million, $1 million and $2 million, respectively, as we believe that it is probable that the performance criteria will be achieved and that the performance shares granted will vest during the performance period. If we are incorrect in those assumptions, we could be required to reverse those expenses in our consolidated financial statements of operations.

 

SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.

 

We periodically make enhancements to our integrated financial and supply chain management systems. The enhancement process is complex, time-consuming and expensive. Operational disruptions during the course of such processes or delays in the implementation of such enhancements could impact our operations. Our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired while we are making these enhancements.

 

PROVISIONS IN OUR RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS MAY HAVE ANTI-TAKEOVER EFFECTS.

 

Certain provisions of our Restated Certificate of Incorporation, our Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Our board of directors has the authority to issue up to five million shares of preferred stock and to determine the price, voting rights, preferences and privileges and restrictions of those shares without the approval of our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, by making it more difficult for a third party to acquire a majority of our stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. We have no present plans to issue shares of preferred stock.

 

OUR FOREIGN PENSION PLANS ARE UNFUNDED, AND ANY REQUIREMENT TO FUND THESE PLANS IN THE FUTURE COULD NEGATIVELY AFFECT OUR CASH POSITION AND OPERATING CAPITAL.

 

We sponsor defined benefit pension plans that cover substantially all of our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Pension benefits payable totaled $27 million at December 31, 2010 and $29 million at December 31, 2009. The plans are non-funded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. We expect to pay approximately $0.4 million in 2011 for benefits earned. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively affect our cash position and operating capital.

FUTURE ACQUISITIONS MAY RESULT IN UNANTICIPATED ACCOUNTING CHARGES OR OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND RESULT IN DIFFICULTIES IN ASSIMILATING AND INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES OR BUSINESSES, OR BE DILUTIVE TO EXISTING STOCKHOLDERS.

 

A key element of our business strategy includes expansion through the acquisition of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our skilled engineering workforce or enhance our technological capabilities. Between January 1, 1999 and December 31, 2010, we acquired four companies and assets of five other businesses. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property.

 

Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past experienced and may in the future experience, delays in the timing and successful integration of an acquired company’s technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired.

 

Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense and the recording and later amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline. Effective January 1, 2009, we adopted an amendment to the accounting standard on business combinations. The accounting standard will have an impact on our consolidated financial statements, depending upon the nature, terms and size of the acquisitions we consummate in the future.

 

Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing stockholders.

 

We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits from any of our historic or future acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.

 

We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and at any other time that circumstances arise indicating the carrying value may not be recoverable. At December 31, 2010, we had $55 million of goodwill. We completed our annual test of goodwill impairment in the fourth quarter of 2010 and concluded that we did not have any impairment at that time. However, if we continue to see deterioration in the global economy and the current market conditions in the semiconductor industry worsen, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record a material impairment charge, which would have a negative impact on our results of operations.

WE MAY NOT BE ABLE TO EFFECTIVELY UTILIZE ALL OF OUR MANUFACTURING CAPACITY, WHICH MAY NEGATIVELY IMPACT OUR BUSINESS.

 

The manufacture and assembly of semiconductor devices requires significant fixed investment in manufacturing facilities, specialized equipment, and a skilled workforce. If we are unable to fully utilize our own fabrication facilities due to decreased demand, significant shift in product mix, obsolescence of the manufacturing equipment installed, lower than anticipated manufacturing yields, or other reasons, our operating results will suffer. Our inability to produce at anticipated output levels could include delays in the recognition of revenue, loss of revenue or future orders or customer-imposed penalties for failure to meet contractual shipment deadlines.

 

Gross margins were positively impacted for the year ended December 31, 2010 by higher overall shipment levels, increased production levels and factory loading at our wafer fabrication facilities, and a more favorable mix of higher margin microcontroller products included in our net revenues. If we are unable to operate our manufacturing facilities at optimal production levels, our operating costs will increase and gross margin and results from operations will be negatively affected.

 

DISRUPTIONS TO THE AVAILABILITY OF RAW MATERIALS CAN AFFECT OUR ABILITY TO SUPPLY PRODUCTS TO OUR CUSTOMERS, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

 

The manufacture of semiconductor devices requires specialized raw materials, primarily certain types of silicon wafers. We generally utilize more than one source to acquire these wafers, but there are only a limited number of qualified suppliers capable of producing these wafers in the market. In addition, the raw materials, which include specialized chemicals and gases, and the equipment necessary for our business, could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We have experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more time than expected to fill our orders. Any significant interruption of the supply of raw materials could harm our business.

 

WE COULD FACE PRODUCT LIABILITY CLAIMS THAT RESULT IN SIGNIFICANT COSTS AND DAMAGE TO OUR REPUTATION WITH CUSTOMERS, WHICH WOULD NEGATIVELY AFFECT OUR OPERATING RESULTS.

 

All of our products are sold with a limited warranty. However, we could incur costs not covered by our warranties, including additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls or other damages. These costs could be disproportionately higher than the revenue and profits we receive from the sales of our products.

 

Our products have previously experienced, and may in the future experience, manufacturing defects, software or firmware bugs, or other similar quality problems. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. In addition, any defects, bugs or other quality problems could interrupt or delay sales or shipment of our products to our customers.

 

We have implemented significant quality control measures to mitigate these risks; however, it is possible that products shipped to our customers will contain defects, bugs or other quality problems, such problems may divert our technical and other resources from other development efforts. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur significant additional costs or delay shipments for revenue, which would negatively affect our business, financial condition and results of operations.

THE OUTCOME OF CURRENTLY ONGOING AND FUTURE AUDITS OF OUR INCOME TAX RETURNS, BOTH IN THE U.S. AND IN FOREIGN JURISDICTIONS, COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME AND FINANCIAL CONDITION.

 

We are subject to continued examination of our income tax returns by the Internal Revenue Service and other foreign and domestic tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. While we believe that the resolution of these audits will not have a material adverse effect on our results of operations, the outcome is subject to significant uncertainties. If we are unable to obtain agreements with the tax authority on the various proposed adjustments, there could be an adverse material impact on our results of operations, cash flows and financial position.

 

OUR LEGAL ENTITY ORGANIZATIONAL STRUCTURE IS COMPLEX, WHICH COULD RESULT IN UNANTICIPATED UNFAVORABLE TAX OR OTHER CONSEQUENCES, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME AND FINANCIAL CONDITION. WE CURRENTLY HAVE OVER 40 ENTITIES GLOBALLY AND SIGNIFICANT INTERCOMPANY LOANS BETWEEN ENTITIES.

 

We currently operate legal entities in countries where we conduct manufacturing, design, and sales operations around the world. In some countries, we maintain multiple entities for tax or other purposes. Changes in tax laws, regulations, and related interpretations in the countries in which we operate may adversely affect our results of operations.

 

We also have significant unsettled intercompany balances that could result in adverse tax or other consequences affecting our capital structure, intercompany interest rates and legal structure. We initiated a program in 2010 to reduce the complexity of our legal entity structure, reduce our potential tax exposure in many jurisdictions and reduce our intercompany loan balances. Despite these efforts, we may incur additional income tax or other expense related to our global operations, loan settlements or loan restructuring activities, or incur additional costs related to legal entity restructuring or dissolution efforts.

 

FROM TIME TO TIME WE RECEIVE GRANTS FROM GOVERNMENTS, AGENCIES AND RESEARCH ORGANIZATIONS. IF WE ARE UNABLE TO COMPLY WITH THE TERMS OF THOSE GRANTS, WE MAY NOT BE ABLE TO RECEIVE OR RECOGNIZE GRANT BENEFITS OR WE MAY BE REQUIRED TO REPAY GRANT BENEFITS PREVIOUSLY PAID TO US AND RECOGNIZE RELATED CHARGES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL POSITION.

 

From time to time, we receive economic incentive grants and allowances from European governments, agencies and research organizations targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditure and other covenants that must be met to receive and retain grant benefits and these programs can be subjected to periodic review by the relevant governments. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date. For example, in the three months ended March 31, 2008, we repaid $40 million of government grants as a result of closing our North Tyneside manufacturing facility. In addition, we may need to record charges to reverse grant benefits recorded in prior periods as a result of changes to our plans for headcount, project spending, or capital investment relative to target levels agreed with government agencies at any of these specific locations. If we are unable to comply with any of the covenants in the grant agreements we may face adverse actions from the government agencies providing the grants and our results of operations and financial position could be materially adversely affected.

CURRENT AND FUTURE LITIGATION AGAINST US COULD BE COSTLY AND TIME CONSUMING TO DEFEND.

 

We are subject to legal proceedings and claims that arise in the ordinary course of business. See Item 3 of this Form 10-K. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.

 

 

Not applicable.

 

 

At December 31, 2010, we owned the following facilities:

 

 

In addition to the facilities we own, we lease numerous research and development facilities and sales offices in North America, Europe and Asia. We believe that existing facilities are adequate for our current requirements.

 

We do not identify facilities or other assets by operating segment. Each facility serves or supports multiple products and our product mix changes frequently.

 

 

We are party to various legal proceedings. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur in any of the legal proceedings described below, there exists the possibility of a material adverse effect on our results of operations and cash flows. We have accrued for losses related to the litigation described below that we considers reasonably possible and for which the loss can be reasonably estimated in accordance with FASB requirements. In the event that a loss cannot be reasonably estimated, we have not accrued for such losses. As we continue to monitor these matters, however, our determination could change and we may decide to establish an appropriate reserve in the future. With respect to each of the matters below, except where noted otherwise, management has determined a potential loss is not reasonably possible at this time and, accordingly, no amount has been accrued at December 31, 2010. Management makes a determination as to when a potential loss is reasonably possible based on relevant accounting literature. However, due to the inherent uncertainty of these matters, except as otherwise noted, management does not believe that the amount of loss or a range of possible losses is reasonably estimable.

 

Derivative Litigation.  From July through September 2006, six stockholder derivative lawsuits were filed (three in the U.S. District Court for the Northern District of California and three in Santa Clara County Superior Court) by persons claiming to be company stockholders and purporting to act on the company’s behalf, naming the company as a nominal defendant and some of its current and former officers and directors as defendants. Additional derivative actions were filed in the United States District Court for the Northern District of California (later consolidated with the previously-filed federal derivative actions) and the Delaware Chancery Court. All the suits contained various causes of action relating to the timing of stock option grants awarded by the company. In June 2008, the federal district court denied our motion to dismiss for failure to make a demand on the board, and granted

in part and denied in part motions to dismiss filed by the individual defendants. On March 31, 2010, that court entered an order approving a partial global settlement of these actions, and several other actions seeking to compel inspection of our books and records. Among other things, the settlement resolved all claims against all defendants, except our former general counsel, James Michael Ross, related to the allegations and/or matters set forth in all the derivative actions. The terms of the settlement provided for: (1) a direct financial benefit to the company of $9.7 million; (2) the adoption and/or implementation of a variety of corporate governance enhancements, particularly in the way we grant and document grants of employee stock option awards; (3) the payment by us of plaintiffs’ counsels’ attorneys’ fees, costs, and expenses in the amount of $4.9 million (which we paid on April 8, 2010); and (4) the release of claims by and between the settling parties and dismissal with prejudice of all claims against the settling defendants. On August 13, 2010, the Court approved a settlement of the remaining claims between us, plaintiffs and Mr. Ross related to our historical stock option granting practices. The settlement provided for: (a) payments to the company by our insurers totaling $2.9 million; (b) the dismissal with prejudice and release of the remaining claims against Mr. Ross; and (c) the dismissal without prejudice of Mr. Ross’s related lawsuit against the company in Delaware Chancery Court (described below).

 

Matheson Litigation.  On September 28, 2007, Matheson Tri-Gas (“MTG”) filed suit against us in Texas state court in Dallas County. Plaintiff alleges claims for: (1) breach of contract for the company’s alleged failure to pay minimum payments under a purchase requirements contract; (2) breach of contract under a product supply agreement; and (3) breach of contract for failure to execute a process gas agreement. MTG seeks unspecified damages, pre- and post-judgment interest, attorneys’ fees and costs. In late November 2007, we filed an answer denying liability. In July 2008, we filed an amended answer, counterclaim and cross claim seeking among other things a declaratory judgment that a termination agreement cut off any claim by MTG for additional payments. In an Order entered on June 26, 2009, the Court granted our motion for partial summary judgment dismissing MTG’s breach of contract claims relating to the requirements contract and the product supply agreement. The parties dismissed the remaining claims and, on August 26, 2009, the Court entered a Summary Judgment Order and Final Judgment. MTG filed a Motion to Modify Judgment and Notice of Appeal on September 24, 2009. An oral argument before the Texas Court of Appeals is scheduled on March 9, 2011. We intend to vigorously defend the case. We have accrued for estimated potential losses, which amount is not material.

 

Distributor Litigation.  On June 3, 2009, we filed an action in Santa Clara County Superior Court against three of our now-terminated Asia-based distributors, NEL Group Ltd. (“NEL”), Nucleus Electronics (Hong Kong) Ltd. (“NEHK”) and TLG Electronics Ltd. (“TLG”). In that action, we are seeking, among other things, to recover $8.5 million owed to us, plus applicable interest and attorneys fees. On June 9, 2009, NEHK separately sued us in Santa Clara County Superior Court, alleging that our suspension of shipments to NEHK on September 23, 2008 — one day after TLG appeared on the Department of Commerce, Bureau of Industry and Security’s Entity List — breached the parties’ International Distributor Agreement. NEHK also alleges that we libeled it, intentionally interfered with contractual relations and/or prospective business advantage, and violated California Business and Professions Code Sections 17200 et seq. and 17500 et seq. Both matters now have been consolidated. On July 29, 2009, NEL filed a cross-complaint against us that alleges claims virtually identical to those NEHK has alleged. NEL and NEHK are seeking damages of up to $50 million. Discovery in the case is ongoing and no trial date has yet been set. We intend to prosecute our claims and defend the NEHK/NEL claims vigorously. TLG did not answer, and the Court entered a default judgment of $2.7 million on November 23, 2009.

 

Ross Litigation.  On July 16, 2009, James M. Ross, our former General Counsel, filed a lawsuit in Santa Clara County Superior Court challenging, among other things, our treatment of his post-termination attempt to exercise stock options. On February 3, 2011, the parties reached a settlement and the matter now is concluded. The settlement amount was not material.

 

On December 18, 2009, Mr. Ross filed another lawsuit in Delaware Chancery Court seeking (pursuant to Section 145 of the Delaware General Corporation Law) to enforce certain rights granted him under his indemnification agreement with us, and to recover damages for any breach of that agreement. In particular, Mr. Ross alleged that we breached the agreement in the way we negotiated and structured the partial global settlement in December 2009 in the backdating cases, described above. He also sought advancement of fees and indemnification in connection with the Delaware lawsuit. Pursuant to the Settlement Agreement we reached with him in the federal backdating cases, Mr. Ross filed a dismissal without prejudice on August 25, 2010.

French Labor Litigation.  On July 24, 2009, 56 former employees of our Nantes facility filed claims in the First Instance labour court, Nantes, France against us and MHS Electronics claiming that (1) our sale of the Nantes facility to MHS (XbyBus SAS) in 2005 did not result in the transfer of their labor agreements to MHS, and (2) these employees should still be considered our employees, with the right to claim related benefits from us. Alternatively, each employee seeks damages of at least 0.045 million Euros and court costs. A ruling is expected on June 1, 2011. These claims are similar to those filed in the First Instance labour court in October 2006 by 47 other former employees of our Nantes facility (MHS was not named a defendant in the earlier claims). On July 24, 2008, the judge hearing the earlier claims issued an oral ruling in our favor, finding that there was no jurisdiction for those claims by certain “protected employees,” and denying the claims as to all other employees. Forty of those earlier plaintiffs appealed, and on February 11, 2010, the Court of Appeal of Rennes, France affirmed the lower court’s ruling. Plaintiffs’ time to appeal has expired and the earlier litigation now is concluded.

 

Azure Litigation.  On December 22, 2010, Azure Networks, LLC, a non-practicing entity, and Tri-County Excelsior Foundation, a non-profit organization, sued Atmel and several other semiconductor companies for patent infringement in the United States District Court for the Eastern District of Texas. Plaintiffs claim that Atmel is engaged in the manufacture, sale or importation in the United States of RF transceivers that allegedly infringe United States Patent Number 7,020,501 (entitled “Energy Efficient Forwarding in Ad-Hoc Wireless Networks”). We believe that these claims are without merit, and we intend to vigorously defend this action.

 

From time to time, we are notified of claims that our products may infringe patents, or other intellectual property, issued to other parties. We also periodically receive demands for indemnification from our customers with respect to intellectual property matters. We also periodically we receive claims relating to the quality of our products, including claims for additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls or other damages. Receipt of these claims and requests occurs in the ordinary course of our business, and we respond based on the specific circumstances of each event. We accrue for losses relating to claims of those types when we consider it “possible” that a loss will occur and when the amount of the loss can be reasonably estimated.

 

PART II

 

 

Our common stock is traded on The NASDAQ Stock Market’s Global Select Market under the symbol “ATML.” The last reported price for our stock on January 31, 2010 was $13.54 per share. The following table presents the high and low sales prices per share for our common stock as quoted on The NASDAQ Global Select Market for the periods indicated.

 

As of January 31, 2010, there were approximately 1,611 stockholders of record of our common stock. As many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

We have never paid cash dividends on our common stock, and we currently have no plans to pay cash dividends in the future.

 

There were no sales of unregistered securities in fiscal 2010.

 

The following table provides information about the repurchase of our common stock during the three months ended December 31, 2010, pursuant to our Stock Repurchase Program.

 

 

 

 

The following tables include selected summary financial data for each of our last five years. This data is not necessarily indicative of results of future operations and should be read in conjunction with Item 8 — Financial Statements and Supplementary Data and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. The data for fiscal years 2010, 2009, and the consolidated statement of operations data for 2008 are derived from our audited financial statements that are included in this Annual Report on Form 10-K. The balance sheet data for fiscal year 2008 and all data for fiscal years 2007 and 2006 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

 

 

 

 

 

You should read the following discussion in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements”, and “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2011, the expansion of the market for microcontrollers, revenues for our maXTouch products, our gross margins, anticipated revenues by geographic area, operating expenses and capital expenditures, cash flow and liquidity measures, factory utilization, new product introductions, access to independent foundry capacity and the quality issues associated with the use of third party foundries, the effects of our strategic transactions and restructuring efforts, estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in Item 1A — Risk Factors, and elsewhere in this Form 10-K. Generally, the words “may,” “will,” “could,” “should,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-K.

Overview of 2010 Operating Results

 

We are one of the world’s leading designers, developers and suppliers of microcontrollers. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch-focused intellectual property, or IP, we have developed. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory and Flash memory products, radio frequency and mixed-signal components and application specific integrated circuits. Our microcontrollers, which are self-contained computers-on-a-chip, and related products are used today in many of the world’s leading smartphones, tablet devices and other consumer and industrial electronics to provide core functionality for touch sensing, security, wireless and battery management. Our semiconductors also enable applications in many other fields, such as smart-metering for utility monitoring and billing, buttons, sliders and wheels found on the touch panels of appliances, various aerospace, industrial and military products and systems, and electronic-based automotive components, like keyless ignition, access, engine control, lighting and entertainment systems, for standard and hybrid vehicles. Over the past several years, we successfully transitioned our business to a “fab-lite” model, lowering our fixed costs and capital investment requirements, and we currently own and operate just a single manufacturing facility.

 

Our net revenues totaled $1,644 million for the year ended December 31, 2010, an increase of 35%, or $427 million, from $1,217 million in net revenues for the year ended December 31, 2009. Demand for our products over the course of 2010 exceeded the expectations we had at the beginning of 2010, primarily due to stronger than expected sales of our 8-bit AVR microcontrollers, 32-bit ARM-based microcontrollers, and our new maXTouch microcontrollers. We continued to see significant adoption of our industry leading maXTouch microcontrollers throughout 2010, primarily with high volume Android-based mobile phone customers. Our Microcontroller segment revenues for 2010 increased 95% compared to revenues in that same segment for the year ended December 31, 2009.

 

Gross margin rose to 44.3% for the year ended December 31, 2010, compared to 33.9% for the year ended December 31, 2009. Gross margin in 2010 was positively affected by higher shipments of microcontrollers, improved factory loading, and a more favorable mix of higher margin microcontroller products included in our net revenues. During the year, we sold our Rousset, France manufacturing operations and increased wafer purchases from external foundries at lower costs compared to historical costs, which also contributed to improved gross margins.

 

On September 30, 2010, we completed the sale of our Secure Microcontroller Solutions (SMS) business to INSIDE Contactless S.A. (INSIDE). Under the terms of the sale agreement, INSIDE paid us $32 million cash consideration, net of working capital adjustments, with $5 million of that amount placed in escrow. Net of all closing and other costs, we recorded a loss on the sale of $6 million. Our 2010 and 2009 results included approximately $79 million and $112 million, respectively, of revenues from the SMS business.

 

During 2010, we also completed the sale of our Rousset, France manufacturing operations to LFoundry GmbH (“LFoundry”), for nominal cash consideration and the assumption by LFoundry of specified liabilities. In connection with the sale, we entered into ancillary agreements with LFoundry, including a manufacturing services agreement (“MSA”) under which we agreed to purchase wafers from LFoundry for four years following the closing on a “take-or-pay” basis. As future wafer purchases under the supply agreement were negotiated at pricing above their fair value at the time we purchased the wafers from LFoundry, we recorded a charge in 2010 to recognize the present value of the estimated impact of this unfavorable commitment over the term of the MSA. The sale of our Rousset manufacturing operations marks a significant step in our transformation to a “fab-lite” supply chain structure with lower fixed costs, less capital investment risk, and lower foreign exchange rate exposure. Our analysis indicated that the difference between the contract prices and market prices over the term of the agreement totaled $104 million, and when present value is considered, the fair value of the fixed price agreement resulted in a charge of $92 million, recorded in the second quarter of 2010. The gross value of the MSA charge is recognized as a credit to cost of revenues over the term of the MSA as the wafers are purchased and the present value discount of $11 million is recognized as interest expense over the same term. We recorded a loss on sale of our Rousset manufacturing operations of $94 million, inclusive of the $92 million charge described above.

 

In addition, for the years ended December 31, 2010, 2009 and 2008, we incurred restructuring charges of $5 million, $7 million and $71 million, respectively. The restructuring charges resulted from headcount reductions

and facility closure costs, primarily related to operational re-alignment and cost reduction efforts in our French operations leading up to the sale of our wafer fabrication facility in June 2010.

 

During the year, we recognized significant benefits from income taxes, totaling $307 million in 2010 compared to $27 million for 2009. In the third quarter of 2010, we completed negotiations and concluded our IRS audit for the years 2000 through 2003. The IRS had previously assessed significant additional income taxes against us, primarily related to transfer pricing, which were resolved through the tax appeals process. As a result of that settlement, we recorded a tax benefit of $151 million in the third quarter of 2010. The tax benefit related primarily to release of previously accrued tax reserves, accrued penalties and interest, and a refund receivable from the carryback of tax attributes to tax years prior to the audit. In the fourth quarter of 2010, we recognized an additional $117 million of tax benefit related to the release of tax reserves for certain deferred tax assets, following our evaluation about the likelihood of using these tax attributes in the future in light of the significant improvement in our operating results in 2010 and the implementation of our global tax restructuring on January 1, 2011.

 

Cash provided by operating activities was $299 million and $122 million for the years ended December 31, 2010 and 2009, respectively. Our cash, cash equivalents and short-term investments increased to $521 million at December 31 2010, compared to $476 million at December 31, 2009. Payments for capital expenditures totaled $100 million for the year ended December 31, 2010, compared to $32 million for the year ended December 31, 2009. We repurchased approximately 12 million of our shares during 2010, using $89 million in cash following our Board of Directors’ approval in August 2010 of a repurchase program authorizing us to repurchase up to $200 million of our common stock in the open market. In addition, during 2010, we repaid the remaining balance of $80 million on our revolving credit facility and cancelled this facility in December 2010, as our liquidity levels continued to improve.

 

RESULTS OF CONTINUING OPERATIONS

 

 

Net Revenues

 

Our net revenues totaled $1,644 million for the year ended December 31, 2010, an increase of 35%, or $427 million, from $1,217 million in net revenues for the year ended December 31, 2009. Demand for our products over the course of 2010 exceeded the expectations we had at the beginning of 2010, primarily due to stronger than expected sales of our 8-bit AVR microcontrollers, 32-bit ARM-based microcontrollers, and our new maXTouch microcontrollers. We continued to see significant adoption of our industry leading maXTouch microcontrollers throughout 2010, primarily with high volume Android-based mobile phone customers. Our Microcontroller segment revenues for 2010 increased 95% compared to revenues in that same segment for the year ended December 31, 2009.

Revenues for our RFA segment increased 27% for the year ended December 31, 2010, compared to December 31, 2009, while revenues for our ASIC and Non-volatile Memory segments declined 11% and 5%, respectively, compared to the year ended December 31, 2009. Shipments of Nonvolatile Memory products were unfavorably affected by limited production capacity, as we allocated wafers to microcontroller customers in an effort to meet significantly increased demand during 2010. The decrease in revenues for the ASIC segment primarily reflects the sale of the SMS business in the third quarter of 2010. Our 2010 and 2009 results included approximately $79 million and $112 million, respectively, of revenues from the SMS business.

 

Net revenues denominated in Euros were 22% and 23% for the years ended December 31, 2010 and 2009, respectively. Average exchange rates utilized to translate foreign currency revenues and expenses in Euros were approximately 1.36 and 1.39 Euros to the dollar for the years ended December 31, 2010 and 2009, respectively. Our net revenues for the year ended December 31, 2010 would have been approximately $17 million higher had the average exchange rate for the year ended December 31, 2010 remained the same as the rate in effect for the year ended December 31, 2009.

 

Net Revenues — By Operating Segment

 

Our net revenues by operating segment are summarized as follows:

 

 

 

 

Microcontroller

 

Microcontroller segment net revenues increased 95% to $892 million for the year ended December 31, 2010 from $458 million for the year ended December 31, 2009. The increase in net revenues was primarily related to increased volume shipments from customers for both AVR and ARM-based 8-bit and 32-bit microcontrollers. Microcontroller net revenues represented 54%, 38% and 33% of total net revenues for the years ended December 31, 2010, 2009 and 2008, respectively.

During 2010, we experienced strong demand of our 8-bit AVR microcontrollers, 32-bit ARM-based microcontrollers, and our new maXTouch microcontrollers. Microcontroller demand was especially strong in the industrial, smartphone and consumer markets in 2010. In particular, revenue also increased significantly for touch products, as we introduced our industry leading maXTouch product line of touch screen-related microcontrollers, primarily to mobile phone customers, which we include in the 8-bit Microcontroller family. We saw significant revenues for our maXTouch microcontrollers primarily from high volume Android-based smartphone customers in 2010. We expect that our revenues for maXTouch and related touch products will continue to expand in 2011 as our products are incorporated into new smartphones, additional tablet devices and other volume applications.

 

For the year ended December 31, 2009, Microcontroller segment net revenues decreased 12% to $458 million from $523 million for the year ended December 31, 2008. The decrease in net revenues from 2008 to 2009 was primarily related to reduced demand from customers in Asia as we experienced lower shipments for AVR products to the handset and consumer markets affected by the global economic downturn.

 

Nonvolatile Memory

 

Nonvolatile Memory segment net revenues decreased 5% to $277 million for the year ended December 31, 2010 from $291 million for the year ended December 31, 2009. This decrease is primarily related to lower shipments of Serial EE memory products, which declined 17% from 2009 levels. While demand for memory products remained strong during 2010, shipments of memory products (primarily Serial EE family products) were unfavorably affected by limited production capacity resulting from wafer allocation to our microcontroller customers to satisfy the significant increase in demand in that segment. During 2010, we qualified additional third party foundry partners and increased orders for memory wafers to address demand within this segment.

 

For the year ended December 31, 2009, Nonvolatile Memory segment net revenues decreased 14% to $291 million from $339 million for the year ended December 31, 2008. The decrease in net revenues from 2008 to 2009 was primarily related to reduced demand from customers in Asia for Serial EEPROM and Serial Flash memory products as well as further price erosion in certain competitive commodity segments.

 

RF and Automotive

 

RF and Automotive segment net revenues increased 27% to $188 million for the year ended December 31, 2010 from $148 million for the year ended December 31, 2009. This increase was primarily related to improved demand in automotive markets during 2010. Our high voltage products increased 48% for the year ended December 31, 2010 over the prior year, driven by higher shipments for vehicle networking products (LIN/IVN applications). In addition, revenues increased 45% for foundry products sourced from our Colorado Springs fabrication facility, offset by a reduction of 68% in sales of our DVD products as we exited this low margin business in 2010. Supply of RF and Automotive products was not adversely affected by the wafer capacity allocation issues that affected other non-Microcontroller segments.

 

For the year ended December 31, 2009, RF and Automotive segment net revenues decreased 41% to $148 million from $250 million for the year ended December 31, 2008. The decrease in net revenues was primarily related to the significant decline in automotive sales resulting from the global economic recession and the dislocation of the automobile manufacturing market during that period. In addition, net revenues for 2009 decreased $23 million when compared to 2008 as a result of our exiting the CDMA business and other businesses related to our Heilbronn, Germany foundry for the year ended December 31, 2008. Other RF and Automotive revenues decreased $79 million for the year ended December 31, 2009 as a result of lower demand and increased pricing pressures, primarily in the GPS and DVD customer end-markets.

 

ASIC

 

ASIC segment net revenues decreased 11% to $286 million for the year ended December 31, 2010 from $321 million for the year ended December 31, 2009. The decrease in revenues for the ASIC segment primarily reflects the impact of the sale of the SMS business. Our 2010 and 2009 results included approximately $79 million and $112 million, respectively, of revenues from the SMS business. ASIC segment net revenues were also

unfavorably affected by limited production capacity, resulting from wafer allocation to our microcontroller customers in an effort to satisfy significantly increased demand in 2010 within that segment. Our military and aerospace business revenues, which is also included within this segment, decreased approximately 36% compared to 2009. While demand for aerospace products remains strong, we experienced supply-chain constraints due to product testing requirements which we expect to alleviate in the next 12 months through increased testing capacity.

 

For the year ended December 31, 2009, ASIC segment net revenues decreased 29% to $321 million from $455 million for the year ended December 31, 2008. ASIC segment net revenues decreased from 2008 to 2009 primarily due to $75 million in reduced smart card shipments to European telecom and consumer markets, which was partially offset by higher shipments to banking and pay TV end markets. We also experienced reduced demand in 2009 in our Customer Specific Products, or CSP, and Advanced Product Group, or APG, product families, resulting in a decrease of revenues of $61 million for the year ended December 31, 2009, compared to 2008

 

Net Revenues by Geographic Area

 

Our net revenues by geographic area for the year ended December 31, 2010, compared to the year ended December 31, 2009, are summarized as follows (revenues are attributed to countries based on the location to which we ship; see Note 14 of Notes to Consolidated Financial Statements for further discussion):

 

 

 

 

Net revenues outside the United States accounted for 84%, 83% and 86% of our net revenues for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Our net revenues in Asia increased $301 million, or 50%, for the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase in this region for 2010, compared to 2009 was primarily due to higher shipments of our microcontroller products as a result of improved demand in customer end markets for smartphone and other consumer-based products. Our net revenues in Asia decreased $147 million, or 19%, for 2009, compared to 2008, primarily due to lower shipments of memory and microcontroller products as a result of the global economic recession, as well as reduced demand resulting from lower OEM and distribution inventory levels. Net revenues for the Asia region were 55% of total net revenues for 2010 compared to 50% of total net revenues for 2009.

 

During 2010, we negotiated new sales terms with our independent distributors in Asia, excluding Japan. Under the new terms, we invoice these distributors at full list price upon shipment and issue a rebate, or “credit”, once product has been sold to the end customer and the distributor has met certain reporting requirements. Our previous sales arrangement with Asia distributors was to invoice at a price net of any rebates. We introduced this new methodology to help us achieve improved gross margins on shipments to those distributors by more closely monitoring end-customer pricing, design registration for microcontroller products, and the pricing for our products across all regions.

Our net revenues in Europe increased $59 million, or 15%, for the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase in this region for 2010, compared to 2009 was primarily a result of the improved automotive and industrial markets, partially offset by declining demand for our smart card products included within our SMS business and our Cell Based Integrated Circuit, or CBIC, and Aerospace products. Our net revenues in Europe decreased $188 million, or 33% in 2009, compared to 2008 primarily due to reduced shipments to smart card telecom and consumer markets and lower demand, and increased pricing pressures in GPS, DVD and automotive markets. Net revenues for the Europe region were 27% of total net revenues for 2010 compared to 31% of total net revenues for 2009.

 

Our net revenues in the United States region increased by $51 million, or 24%, for the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase in this region for 2010 compared to 2009 resulted primarily from higher demand for smart metering and consumer-based products. Our net revenues in the United States decreased by $12 million, or 5%, for the year ended December 31, 2009, compared to the year ended December 31, 2008, primarily as a result of the overall global economic slowdown, as well as reduced shipments to microcontroller customers. Net revenues for the United States region were 16% of total net revenues for 2010 compared to 17% of total net revenues for 2009.

 

We expect that Asian net revenues will continue to grow more rapidly than other regions in the future driven by the growth of the electronics industry within Asia and the continued outsourcing of production by large North American and European OEMs.

 

Revenues and Costs — Impact from Changes to Foreign Exchange Rates

 

Changes in foreign exchange rates have historically had a significant effect on our net revenues and operating costs. Net revenues denominated in foreign currencies were 22%, 24% and 23% of our total net revenues for the years ended December 31, 2010, 2009 and 2008, respectively. Costs denominated in foreign currencies were 33%, 39% and 47% of our total costs for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Net revenues denominated in Euros were 22%, 23% and 22% for the years ended December 31, 2010, 2009 and 2008, respectively. Costs denominated in Euros were 29%, 35% and 42% of our total costs for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Net revenues included 265 million Euros, 207 million Euros and 230 million Euros for the years ended December 31, 2010, 2009 and 2008, respectively. Operating expenses included 291 million Euros, 312 million Euros and 429 million Euros for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Average annual exchange rates utilized to translate foreign currency revenues and expenses in Euros were approximately 1.36, 1.39 and 1.48 Euros to the dollar for the years ended December 31, 2010, 2009 and 2008, respectively.

 

For the year ended December 31, 2010, changes in foreign exchange rates had an unfavorable impact on our operating results. Our net revenues for the year ended December 31, 2010 would have been approximately $17 million higher had the average exchange rate in the current year remained the same as the rate in effect for the year ended December 31, 2009. In addition, in 2010, our operating expenses would have been approximately $5 million higher (relating to higher cost of revenues of $0.1 million; research and development expenses of $4 million and sales, general and administrative expenses of $1 million). The net effect, had foreign currency rates remained the same during 2010, would have resulted in an increase to income of operations of approximately $12 million in 2010.

 

For the year ended December 31, 2009, changes in foreign exchange rates had a favorable effect on our operating results. Our net revenues for the year ended December 31, 2009 would have been approximately $18 million higher had the average exchange rate in 2009 remained the same as the rate in effect for the year ended December 31, 2008. In addition in 2009, our operating expenses would also have been approximately $39 million higher (relating to cost of revenues of $19 million; research and development expenses of $13 million; and sales, general and administrative expenses of $7 million). The net effect, had foreign currency rates remained the same during 2009, would have resulted in an increase to loss from operations of approximately $21 million for 2009.

Following the sale of our Rousset, France manufacturing operations in 2010, we began purchasing wafers from the buyer of those operations in US dollars, significantly reducing our spending in foreign currency, specifically the Euro. The combination of lower Euro spending and higher Euro revenues from improved European customer markets in 2010 resulted in our foreign currency revenues nearly matching our foreign currency spending by the end of 2010. Based on information currently available to us, we expect this result to continue in 2011. Unforeseen changes in foreign exchanges rates in future periods could, however, materially affect our revenues, gross margins and operating results.

 

Cost of Revenues and Gross Margin

 

Gross margin rose to 44.3% for the year ended December 31, 2010, compared 33.9% for the year ended December 31, 2009. Gross margin for 2010 was positively affected by higher shipment levels of microcontrollers, improved factory loading, and a more favorable mix of higher margin microcontroller products included in our net revenues. During 2010, we sold our Rousset, France manufacturing operations and increased wafer purchases from external foundries at lower costs compared to historical costs, which also contributed to improved gross margins. We believe we have commitments from our foundry partners for sufficient wafer capacity to support our projected growth in demand for 2011 and beyond.

 

Gross margin declined to 33.9% for the year ended December 31, 2009, compared to 37.7% for the year ended December 31, 2008. Gross margin for 2009 was negatively affected by higher manufacturing costs resulting primarily from reduced factory utilization at our wafer fabrication facilities and test operations compared to utilization levels experienced in 2008. In addition, gross margin was unfavorably affected by inventory write downs and competitive pricing pressures during 2009.

 

During 2010, we also completed the sale of our Rousset, France manufacturing operations to LFoundry for nominal cash consideration and the assumption by LFoundry of specified liabilities. In connection with the sale, we entered into ancillary agreements with LFoundry, including an MSA under which we agreed to purchase wafers from LFoundry for four years following the closing on a “take-or-pay” basis. As future wafer purchases under the supply agreement were negotiated at pricing above our estimate of their fair value at the time we purchase the wafers from LFoundry, we recorded a charge in 2010 to recognize the present value of the estimated impact of this unfavorable commitment over the term of the MSA. The sale of our Rousset manufacturing operations marks a significant step in our transformation to a “fab-lite” supply chain structure with lower fixed costs, less capital investment risk, and lower foreign exchange rate exposure. Our analysis indicated that the difference between the contract prices and market prices over the term of the agreement totaled $104 million, and when present value is considered, the fair value of the fixed price agreement resulted in a charge of $92 million, recorded in the second quarter of 2010. The gross value of the MSA charge is recognized as a credit to cost of revenues over the term of the MSA as the wafers are purchased and the present value discount of $11 million is recognized as interest expense over the same term. We recorded a credit to cost of revenues of $15 million and $3 million in interest expense relating to the MSA in 2010. We recorded a loss on the sale of our Rousset manufacturing operations of $94 million, inclusive of the $92 million charge described above.

 

For the year ended December 31, 2010, we manufactured approximately 68% of our products in our own wafer fabrication facilities compared to 88% in 2009, with the decline resulting primarily from the sale of our Rousset, France fabrication facility.

 

Our cost of revenues includes the costs of wafer fabrication, assembly and test operations, changes in inventory reserves, royalty expense, freight costs and stock compensation expense. Our gross margin as a percentage of net revenues fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, and average selling prices, among other factors.

 

Research and Development

 

Research and development (“R&D”) expenses increased 12%, or $25 million, to $237 million for the year ended December 31, 2010 from $212 million for the year ended December 31, 2009.

R&D expenses increased for the year ended December 31, 2010, primarily due to increased salaries of $7 million related to increases in product development staffing, increased performance-related stock-based compensation expense of $7 million based on the likelihood of our achieving the performance-related criteria, increased mask costs and spending on new product development of $8 million, and higher travel expenses of $1 million. R&D expenses, including items described above, for the year ended December 31, 2010, were favorably affected by approximately $4 million due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses for the year ended December 31, 2009. As a percentage of net revenues, R&D expenses totaled 14% and 17% for the years ended December 31, 2010 and 2009, respectively.

 

R&D expenses decreased by 19%, or $48 million, to $212 million for the year ended December 31, 2009 from $260 million for the year ended December 31, 2008. In 2009, we reduced spending on non-core product development programs and focused development spending on our core high growth opportunities, with increasing emphasis on microcontroller and touchscreen-related products. We reduced spending on internal proprietary process development, as we began a transition to more industry standard processes with foundry partners. R&D expenses in 2009 decreased from 2008 primarily due to decreases in salaries and benefits of $20 million related to reduced headcount, reduced depreciation expenses of $16 million and reduced costs associated with outside services of $7 million, offset in part by a decrease in government grant proceeds of $10 million. R&D expenses, including the items described above, for the year ended December 31, 2009 were favorably affected by approximately $13 million due to foreign exchange rate fluctuations in 2009, compared to rates in effect and the related expenses incurred in 2008. As a percentage of net revenues, R&D expenses totaled 17% for both the years ended December 31, 2009 and 2008, respectively.

 

We receive R&D grants from various European research organizations, the benefit of which is recognized as an offset to related research and development costs. We recognized benefits of $8 million, $11 million and $22 million for the years ended December 31, 2010, 2009 and 2008, respectively.

 

Our internally developed process technologies are an important part of new product development. We continue to invest in developing process technologies emphasizing wireless, high voltage, analog, digital, and embedded memory manufacturing processes. Our technology development groups, in partnership with certain external foundries, are developing new and enhanced fabrication processes, including architectures utilizing advanced processes at the 65 nanometer line width node. We believe this investment allows us to bring new products to market faster, add innovative features and achieve performance improvements. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve.

 

Selling, General and Administrative

 

Selling, general and administrative (“SG&A”) expenses increased 19%, or $43 million, to $264 million for the year ended December 31, 2010 from $221 million for the year ended December 31, 2009.

 

SG&A expenses increased in 2010, primarily due to increased employee-related costs of $14 million, increased performance-related stock-based compensation expense of $20 million based on the likelihood of our achieving the performance-related criteria, $3 million of increased commissions for our sales representatives and costs of additional outside services of $8 million. SG&A expenses, including the items described above, were favorably affected by approximately $1 million due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses incurred in 2009. As a percentage of net revenues, SG&A expenses totaled 16% and 18% of net revenues for the years ended December 31, 2010 and 2009, respectively.

 

SG&A expenses decreased 19%, or $52 million, to $221 million for the year ended December 31, 2009 from $273 million for the year ended December 31, 2008, as reduced headcount and interim cost savings measures reduced employee salaries and benefits by $10 million, travel expenses by $7 million and outside services by $14 million, while lower sales volumes led to a decrease in sales commissions of $4 million. SG&A expenses were also favorably affected in 2009 by reduced bad debt expenses of $13 million and a related partial recovery of $3 million in 2009. SG&A expenses, including the items described above, were favorably affected by approximately $7 million due to foreign exchange rate fluctuations, compared to rates in effect and the related

expenses incurred in 2008. As a percentage of net revenues, SG&A expenses totaled 18% and 17% of net revenues for the years ended December 31, 2009 and 2008, respectively.

 

Stock-Based Compensation

 

In the past, we have issued stock options and restricted stock units to our employees. Starting in 2008, we have generally issued only restricted stock units to our employees as part of our compensation arrangements. We also permit our employees to participate in an Employee Stock Purchase Program that offers our employees the ability to purchase stock through payroll withholdings at a discount to market price.

 

Stock-based compensation cost is measured at the measurement date (grant date), based on the fair value of the award, which is computed using a Black-Scholes option valuation model for stock option awards, and is recognized as expense over the employee’s requisite service period. The fair value of restricted stock unit awards is equivalent to the market price of our common stock on the measurement date. The recognition as expense of the fair value of performance-related stock-based awards is determined based on management’s estimate of probability and timing for achieving the associated performance criteria.

 

The following table summarizes the distribution of stock-based compensation expense related to employee stock options, restricted stock units and employee stock purchases for the years ended December 31, 2010, 2009 and 2008:

 

 

The table above excludes stock-based compensation (credit) expense of $(3) million, $8 million and $6 million for the years ended December 31, 2010, 2009 and 2008, respectively, for former Quantum executives related to our acquisition of Quantum in 2008, which are classified within acquisition-related charges in our consolidated statements of operations.

 

We have issued performance-based restricted stock units to eligible employees, allowing for a maximum of 10 million shares of our common stock to be issued under our 2005 Stock Plan. These restricted stock units vest only if we achieve all, or a portion of, quarterly operating margin performance criteria over a performance period from July 1, 2008 to December 31, 2012. We issued performance-based restricted stock units for up to 9.9 million shares of our common stock during 2008. In May 2009, the performance period was extended by one additional year to December 31, 2012. During 2010 and 2009 we issued additional performance-based restricted stock units to eligible employees for up to 0.5 million and 0.1 million shares, respectively, of our common stock.

 

We recognize stock-based compensation expense for performance-based restricted stock units when management believes it is probable that we will achieve the performance criteria. The awards vest once the performance criteria are met. If our management determines that performance goals are unlikely to be met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. We recorded total stock-based compensation expense related to performance-based restricted stock units of $25 million, $1 million and $2 million for the years ended December 31, 2010, 2009 and 2008, respectively. For the year ended December 31, 2010, charges for performance-based restricted stock units increased as we revised our estimates for achievement of performance plan criteria based on significant improvements in our current

and forecasted operating results. During each of 2010 and 2009, we cancelled performance-based restricted stock units for up to 1.0 million shares of our common stock.

 

Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding.

 

Segment Income (Loss)

 

 

 

 

Microcontroller

 

For the year ended December 31, 2010, Microcontroller segment operating income was $159 million, compared to an operating loss of $(2) million for 2009, resulting principally from significantly higher shipment levels, improved factory loading, and a more favorable mix of higher margin products included in net revenues within this segment. The segment operating loss of $(2) million for 2009, comparing to a segment operating income of $34 million for 2008 was primarily a result of the global economic recession.

 

Nonvolatile Memory

 

For the year ended December 31, 2010, Nonvolatile Memory segment operating income increased to $40 million, compared to operating income of $10 million for 2009. Despite reduced revenues, operating results in this segment improved significantly compared to the prior year as a result of improved pricing conditions and lower production costs related to improved factory loading. The segment operating

income of $10 million for 2009 decreased from segment operating income of $29 million for 2008 primarily as a result of the global economic recession.

 

RF and Automotive

 

For the year ended December 31, 2010, our RF and Automotive segment operating income was $14 million, compared to an operating loss of $(8) million for 2009, resulting primarily from increased shipments. The segment operating loss of $(8) million for 2009, compared to segment operating income of $5 million for 2008, was primarily a result of the global economic recession.

 

ASIC

 

For the year ended December 31, 2010, our ASIC operating income increased to $14 million, compared to an operating loss of $(20) million for the year ended December 31, 2009. Despite reduced revenues, operating results in this segment improved significantly compared to the prior year as a result of improved pricing conditions and lower production costs associated with improved factory loading. The segment operating loss of $(20) million for 2009 increased from a segment operating loss of $(12) million for 2008 primarily as a result of the global economic recession.

 

Charges for Grant Repayments

 

For the years ended December 31, 2010, 2009 and 2008, we recorded interest expense of $1 million, $2 million and $1 million, respectively, within charges for grant repayments on the consolidated statements of operations, primarily related to estimated grant repayment requirements associated with the closure of our former Greece facility.

 

Acquisition-Related Charges

 

We recorded total acquisition-related charges of $2 million, $16 million and $24 million for the years ended December 31, 2010, 2009 and 2008, respectively, related to our acquisition of Quantum Research Group Ltd. in 2008, which comprised of the following components:

 

 

We recorded amortization of intangible assets of $4 million, $5 million and $6 million in each of the years ended December 31, 2010, 2009 and 2008, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. We estimate charges related to amortization of intangible assets will be approximately $4 million for 2011.

 

In the quarter ended March 31, 2010, we recorded a credit of $5 million related to the reversal of the expenses previously recorded for shares that were expected to be issued in March 2011 to a former executive of Quantum, contingent on continuous employment with us. We recorded the credit after these shares were forfeited as a result of a change in employment status.

 

For the year ended December 31, 2008, we recorded a charge of $1 million associated with acquired in-process research and development (“IPR&D”), in connection with the acquisition of Quantum. Our methodology for allocating the purchase price to IPR&D involves established valuation techniques utilized in the high-technology industry.

Asset Impairment Charges and Gain (Loss) on Sale of Assets

 

We assess the recoverability of long-lived assets with finite useful lives whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We measure the amount of impairment of such long-lived assets by the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed, including assets not available for immediate sale in their present condition. We report assets and liabilities to be disposed of by sale as held for sale and recognize those assets and liabilities on the consolidated balance sheet at the lower of carrying amount or fair value, less cost to sell. Assets classified as held for sale are not depreciated.

 

The table below summarizes the asset impairment charges for our wafer fabrication facilities by location included in the consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008, respectively:

 

 

Loss (Gain) on Sale of Assets

 

 

Secure Microcontroller Solutions

 

On September 30, 2010, we completed the sale of our SMS business to INSIDE. Under the terms of the sale agreement, we received cash consideration of $37 million, subject to a working capital adjustment. Cash proceeds of $5 million were deposited in escrow upon completion of the sale, for a period of twenty months, subject to post closing claims. We may receive additional cash consideration of up to $16 million, if certain financial targets are met in 2011. The SMS business did not meet the financial targets for 2010, which could have resulted in payments to us of up to $5 million. We also entered into other ancillary agreements as part of the sale. We recorded a loss on sale of this business of $6 million, which is summarized in the following table:

 

Our East Kilbride, UK facility was included in the assets transferred to INSIDE, resulting in the complete liquidation of our investment in this foreign entity. As a result, we recorded a charge of $2 million as a component of the loss on sale related to the currency translation adjustment balance (“CTA balance”) that was previously recorded within stockholders’ equity.

 

As part of the SMS sale, we incurred direct and incremental selling costs of $4 million, which represented broker commissions and legal fees. We also incurred a transfer fee of $1 million related to transferring a royalty agreement to INSIDE. These costs provided no benefit to us, and would not have been incurred if we were not selling the SMS business unit. Therefore, the direct and incremental costs associated with these services were recorded as part of the loss on sale. We also incurred other costs related to the sale of $3 million, which included performance-based bonuses of $0.5 million for certain employees (no executive officers were included), related to the completion of the sale.

 

INSIDE has entered into a three year supply agreement to purchase wafers from the manufacturing operations in Rousset, France that we sold to LFoundry in the second quarter of 2010. Wafers that INSIDE purchases from LFoundry will reduce future commitment under our wafer supply agreement with LFoundry.

 

We also agreed to provide INSIDE a royalty-based, non-exclusive license to certain SMS business-related intellectual property that we retained in order to support the current SMS business and future product development.

 

Rousset, France

 

On June 23, 2010, we completed the sale of our manufacturing operations in Rousset, France to LFoundry. In connection with the sale, we entered into certain other ancillary agreements, including an MSA under which we will purchase wafers from LFoundry for four years following the closing on a “take-or-pay” basis.

 

In connection with the sale, we recorded a loss on sale of $94 million which is summarized in the following table:

 

 

In connection with the sale of the manufacturing operations, we transferred assets and liabilities specific to the manufacturing operations totaling $62 million to LFoundry.

 

Our “take-or-pay” obligations under the MSA are limited to specified monthly periods based on rolling forecasts we provide to LFoundry. Based on the demand for our products in 2010, we purchased all the wafers available to us under the MSA. We recorded a loss on the sale of our Rousset manufacturing operations of $94 million in 2010.

 

As future wafer purchases under the MSA were negotiated at pricing above their fair value when compared to current pricing available from third-party foundries, we recorded a liability in conjunction with the sale, representing the present value of the unfavorable purchase commitment. We determined that the difference between the contract prices and market prices over the term of the agreement totaled $104 million. The present value of this liability, using a discount rate of 7%, which was based on a rate for unsecured subordinated debt similar to the Company, was determined to be $92 million, and has been included in the loss on sale. The gross value of the MSA is recognized as a credit to cost of revenues over the term of the MSA as the wafers are purchased and the present value discount of $11 million is recognized as interest expense over the same term. We recorded a credit to

cost of revenues of $15 million and $3 million in interest expense relating to the MSA in 2010. We recorded a loss on sale of our Rousset manufacturing operations of $94 million, inclusive of the $92 million charge described above.

 

The sale of our Rousset manufacturing operations resulted in the substantial liquidation of our investment in our European manufacturing facilities, and accordingly, we recorded a gain of $97 million related to currency translation adjustment balance (“CTA balance”) that was previously recorded within stockholders’ equity, as we concluded, based on the relevant accounting guidance, that we should similarly release all remaining related currency translation adjustments.

 

As part of the sale, we agreed to reimburse LFoundry for severance costs expected to be incurred subsequent to the sale. We entered into an escrow agreement in which we agreed to remit funds to LFoundry for the required benefits and payments to those employees who are determined to be part of an approved departure plan. We paid $28 million for severance amounts payable under the arrangement in the fourth quarter of 2010.

 

As part of the sale of the manufacturing operations, we incurred $5 million in software/hardware and consulting costs to set up a separate, independent IT infrastructure for LFoundry. These costs were incurred based on negotiation with LFoundry, provided no benefit to us, and would not have been incurred if we were not selling the manufacturing operations. Therefore, the direct and incremental costs associated with these services were recorded as part of the loss on sale. We also incurred other costs related to the sale of $2 million, which included performance-based bonuses of $0.5 million for certain employees (no executive officers were included), related to the completion of the sale of the Rousset manufacturing operations to LFoundry.

 

We also incurred direct and incremental selling costs of $3 million, which represented broker commissions and legal fees associated with the sale of our Rousset manufacturing operations to LFoundry.

 

Property and equipment previously included in the disposal group and reclassified to held and used in December 2009 totaled $110 million. In connection with this reclassification, we assessed the fair value of the property and the equipment to be retained and concluded that the fair value of the property was lower than its carrying value less depreciation expense that would have been recognized had the asset (disposal group) been continuously classified as held and used. As a result we recorded an impairment charge of $80 million in the fourth quarter of 2009. No impairment charge was recorded for the equipment that was reclassified to held and used but the depreciation expense that would have been recognized had the asset (disposal group) been continuously classified as held and used, which totaled of $5 million was included in operating results in fourth quarter of 2009. For the year ended December 31, 2010, following further negotiation with LFoundry, we determined that certain assets should instead remain with us. As a result, we reclassified property and equipment to held and used in the quarter ended June 30, 2010. In connection with this reclassification, we assessed the fair value of these assets to be retained and concluded that the fair value of the assets was lower than its carrying value less depreciation expense that would have been recognized had the assets been continuously classified as held and used. As a result, we recorded additional asset impairment charges of $12 million in the second quarter of 2010.

 

Heilbronn, Germany

 

On December 30, 2008, we completed the sale of our Heilbronn, Germany manufacturing operations to Tejas Silicon Holding Limited (“TSI”). We recorded an impairment loss of $8 million for the year ended December 31, 2008, which consisted of $3 million for the net book value of the fixed assets and $5 million for selling costs related to legal, commissions and other direct incremental costs. We recorded a gain on sale of $3 million for the year ended December 31, 2008 upon completion of the sale. The sale of the Heilbronn manufacturing operations did not qualify as discontinued operations as the operations and future cash flows were not eliminated from our RF and Automotive segment. We continue to purchase wafers TSI. See Note 11 of the Notes to the Consolidated Financial Statements related to future wafer purchase commitments.

 

North Tyneside, United Kingdom

 

On October 8, 2007, we entered into agreements to sell certain wafer fabrication equipment and land and buildings at North Tyneside to Taiwan Semiconductor Manufacturing Company (“TSMC”) and Highbridge Business Park Limited (“Highbridge”) for a total of approximately $125 million. We recorded proceeds of

$82 million and recognized a gain of $30 million for the sale of the equipment for the year ended December 31, 2008. We received proceeds of $43 million from Highbridge upon completion of the real property portion of the transaction in November 2007. We vacated the facility in May 2008.

 

Restructuring Charges

 

The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the years ended December 31, 2010, 2009 and 2008: