10-K 1 atml-201210k.htm 10-K ATML - 2012 10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012

or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                     
 
Commission file number 0-19032

 
ATMEL CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 (State or other jurisdiction of
incorporation or organization)
 
77-0051991
 (I.R.S. Employer
Identification Number)
 
1600 Technology Drive, San Jose, California 95110
(Address of principal executive offices)
 
(408) 441-0311
(Registrant’s telephone number)
Title of Each Class

Common Stock, par value $0.001 per share
 
Name of Exchange on Which Registered

The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 
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 x  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 x

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 x  No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, 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 x  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. x

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):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting filer o
     
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of June 29, 2012, the last business day of the Registrant's most recently completed second fiscal quarter, there were 419,481,576 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 29, 2012) was approximately $2,814,721,375. 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.

On January 31, 2013, the Registrant had 439,341,816 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Registrant's definitive proxy statement for the Registrant's 2013 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, 2012.
 



TABLE OF CONTENTS
 
 
Page
 
 
 
 

2


PART I
ITEM 1. BUSINESS
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 2013 and beyond. Our statements regarding the following matters also fall within the meaning of “forward looking” statements and should be considered accordingly: the expansion of the market for microcontrollers, revenue for our maXTouch® products, expectations for our new XSenseTM products, our gross margin expectations and trends, anticipated revenue by geographic area and the ongoing transition of our revenue base to Asia, expectations or trends involving our operating expenses, capital expenditures, cash flow and liquidity, our factory utilization rates, the effect and timing of new product introductions, our ability to access independent foundry capacity and the corresponding financial condition and operational performance of those foundry partners, the effects of our strategic transactions and restructuring efforts, the estimates we use in respect of the amount and/or timing for expensing unearned stock‑based compensation and similar estimates related to our performance‑based restricted stock units, our expectations regarding tax matters, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector) 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. We undertake 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, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. Our microcontrollers and related products are used in many of the world’s leading smartphones, ultrabooks, tablet devices, e-readers, wireless peripherals and other consumer and industrial electronics in which they provide core functionality for such things as touch sensing, sensor and lighting management, security and encryption features, wireless applications, industrial controls, building automation and battery management. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch‑focused intellectual property ("IP") we have developed, and we continue to leverage our market and technology advantages to expand our product portfolio within the touch‑related eco-system. Toward that end, and as a natural extension of our touch controller business, we announced our XSense products, a new type of touch sensor based on proprietary metal mesh technologies, in 2012. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory, radio frequency and mixed‑signal components and application specific integrated circuits. With our broad product portfolio, our semiconductors also enable applications such as smart‑meters used for utility monitoring and billing, commercial, residential and architectural LED-based lighting systems, touch panels used on household and industrial appliances that integrate our “non-mechanical” buttons, sliders and wheels, various aerospace, industrial and military products and systems, and numerous electronic‑based automotive components like keyless ignition and access, engine control, and lighting and entertainment systems for standard and hybrid vehicles. We have continued to focus on the development of wireless products that allow devices to communicate and connect with each other, and have continued to integrate enhanced wireless capabilities into our product portfolio, including technologies, such as Wi-Fi Direct; that enable the so-called Internet of Things, where smart, connected devices and appliances seamlessly share data and information. We currently own and operate one wafer manufacturing facility in Colorado Springs, Colorado, consistent with our strategic determination made several years ago to maintain lower fixed costs and capital investment requirements.
We intend to continue leveraging our IP portfolio of more than 1,600 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. We expect the market for microcontrollers to continue to expand over time as tactile, gesture and proximity‑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 1600 Technology Drive, San Jose, California 95110, and our telephone number is (408) 441-0311.

3


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 annual 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 reportable operating segments (see Note 14 of Notes to Consolidated Financial Statements for further discussion). Each of those reportable operating segments offer products that compete in one or more of the end markets described below under the caption “Principal Markets and Customers.”
Microcontrollers. This segment includes Atmel's capacitive touch products, including maXTouch and QTouch®, AVR® 8-bit and 32-bit products, ARM® based products, Atmel's 8051 8-bit products, and designated commercial wireless products, including low power radio and SOC products that meet Zigbee and Wi-Fi specifications. Our new XSense product is also included in this segment. The Microcontroller segment comprised 62% of our net revenue for both the years ended December 31, 2012 and 2011.
Nonvolatile Memories. This segment includes serial interface electrically erasable programmable read-only memory (“SEEPROM”), electrically erasable programmable read-only ("EEPROM") and erasable programmable read-only memory (“EPROM”) devices. This segment also includes products with military and aerospace applications. In the third quarter of 2012, we sold our serial flash product line. The Nonvolatile Memories segment comprised 12% of our net revenue for the year ended December 31, 2012, compared to 14% of our net revenue for the year ended December 31, 2011.
Radio Frequency (“RF”) and Automotive. This segment includes automotive electronics, wireless and wired devices for industrial, consumer and automotive applications and foundry services. The RF and Automotive segment comprised 12% of our net revenue for the year ended December 31, 2012, compared to 11% of our net revenue for the year ended December 31, 2011.
Application Specific Integrated Circuits (“ASIC”). This segment includes custom application specific integrated circuits designed to meet specialized single‑customer requirements for their high performance devices, including products that provide hardware security for embedded digital systems, products with military and aerospace applications and application specific standard products for space applications, power management and secure cryptographic memory products. The ASIC segment comprised 14% of our net revenue for the year ended December 31, 2012, compared to 13% of our net revenue for the year ended December 31, 2011.
Within each reportable 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:
our proprietary Atmel AVR 8-bit and 32-bit microcontroller platforms;
our Atmel QTouch and Atmel maXTouch products;
our embedded 32-bit ARM ‑based product family; and
our 8051 8-bit based industry standard microcontroller products
We have determined to include our XSense product in this segment because of its relationship to our capacitive touch product portfolio. We also include our Wi-Fi Direct solutions, which enable personal area networks and direct device-to-device communication and connectivity, within this segment.
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

4


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, 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. We also introduced Atmel Studio 6.0 in 2012, an online, integrated development platform for developing and debugging Atmel ARM Cortex-M and Atmel AVR microcontroller-based applications. We believe that our portfolio of AVR and ARM-based products gives us one of the broadest microcontroller portfolios in the market.
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 and larger screen ultrabooks. Our maXTouch products enable 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 palms on the device. maXTouch detects the lightest touches at very high refresh rates and low latency, allowing 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 or Indium Tin Oxide electrodes on a clear touchscreen panel, respectively. QTouch is designed for discreet touch button, slider and wheel (“BSW”) applications. In addition, our QMatrixTM 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” or gesture recognition for detecting a finger or hand at a distance and haptic effects for providing tactile feedback.
ARM-based Solutions
Our AT91SAM ARM-based products use industry‑standard 32-bit ARM7TM, ARM9TM and ARM Cortex architectures. Those products allow us to offer a range of products with and without embedded nonvolatile memories. The Atmel SAM3 Cortex M3-based, SAM4 Cortex M4-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 support our QTouch technology. Selected devices integrate cryptographic accelerators and protection against physical attacks, making them suitable, as an example, for financial transaction applications requiring the 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.
Our 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. Our

5


8051 products address a significant portion of the 8-bit microcontroller market in which customers already have an installed software and application base that uses standard 8051 architecture.
XSense
Our XSense touch sensors provide a high-performance alternative to existing touch sensors, and are optimal for a wide range of touchscreen products, enabling thinner sensor stacks with superior performance and excellent optical clarity. XSense allows original equipment manufacturers (OEMs) to develop larger, lighter, sleeker, curved and edgeless designs for smartphones, tablets, ultrabooks and other touch-enabled products.
Nonvolatile Memories
EEPROM
EEPROM products offer customers the flexibility and ability to alter single bytes of data. Our EEPROM products consist of two main families, Serial EEPROM and Parallel EEPROM.

Atmel Serial EEPROMs
Our Serial EEPROM products were developed to meet market demand for delivery of nonvolatile memory content through specialized, low pin-count interfaces and packages. The product portfolio includes densities ranging from 1K-bit to 1M-bit. We currently offer three complete families of Serial EEPROMs, supporting industry standard I2C (2-wire), MicrowireTM (3-wire), and serial peripheral interface (“SPI”) protocols. Our Serial EE products are primarily used to store personal preference data and configuration/setup data, in consumer, automotive, telecommunications, medical, industrial, and PC applications, such as WLAN adapters, LCD TVs, video game systems and GPS devices.

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. We emphasize high reliability in the design of our Parallel EEPROMs, which is 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 is a niche segment within the nonvolatile memory market, as Serial Flash and similar technologies have 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
We are a leading supplier of automobile access solutions, which include complete keyless entry products for wireless passive entry/go systems, corresponding ICs for access control unit receivers and transceivers, and tire pressure monitoring systems for automobiles. Our innovative immobilizer ICs, which incorporate the widely accepted advanced encryption standard (“AES”), offer car theft protection.
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 in-vehicle networking (“LIN/IVN”) 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/IVN 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.

6


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 markets, including wireless remote control applications such as home alarm systems, garage door openers, remote controlled toys and wireless game consoles.
Mixed Signal
Our 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 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 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 customers in the medical, consumer and security markets.
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 produce our CryptoMemory®, CryptoRF®, smart card reader chips and secure microcontrollers for point of sales terminals.
Field Programmable Gate Arrays (“FPGAs”)
Our foreign subsidiaries 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 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. Our current ICs incorporate effective feature sizes as small as 65 nanometers. We are developing processes that will support effective feature sizes smaller than 45 nanometers, which we expect to produce at outside wafer foundries in the future. In 2010, we completed our transition to a “fab-lite” manufacturing model and now own and operate one wafer fabrication facility located in Colorado Springs, Colorado.
Principal Markets and Customers
Arrow Electronics, Inc. and Samsung Electronics Co Ltd. (Samsung) accounted for more than 10% of our revenue for the year ended December 31, 2012. There were no customers that accounted for more than 10% of our revenue for the years ended December 31, 2011 and 2010. For further discussion see Note 14 of the Notes to the Consolidated Financial Statements.
Industrial

7


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, Samsung, Siemens and Textron.
Mobile Devices
Mobile devices, which use our capacitive touchscreen and sensor management technologies, are one of our largest end user markets. We offer solutions for screen sizes ranging from 3.5" to 17.3", thereby allowing us to address the smartphone, tablet, ultrabook and personal computer segments. Product life cycles in this segment tend to be significantly shorter than the life cycle for products in the industrial market, requiring more frequent product refreshes and ongoing reviews and enhancements of feature sets.
We also expect our XSense touch sensor product to enable our customers to enhance the touch experience on their mobile devices. Our XSense touch sensors use copper-based mesh technologies to provide a high-performance alternative to existing touch sensors manufactured using primarily indium tin oxide (ITO). We commenced commercial production of our XSense product in the first quarter of 2013. XSense enables thinner sensor stacks with electrical and power performance that is generally better than competing ITO technologies because of the lower resistance and enhanced conductivity that copper offers. We have also been successful in delivering optical quality and clarity that we believe is equivalent to alternative sensor solutions.
We believe that our capacitive touch solutions and XSense products, either alone or in combination with each other, offer a compelling suite of products for the mobile device industry. Principal customers in the mobile device market include Acer, Amazon, ASUS, Huawei, LG, Motorola, Nokia, Pantech, Samsung and ZTE.

Communications, Networking and Telecommunications Products
Communications includes technology for wireless and wireline telecommunications and data networking. 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 ("Wi-Fi") and 802.15.4 ("Zigbee") wireless protocols that enable instant connectivity between electronic devices. We also 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. Principal customers in the communications market include Alcatel Lucent, Cisco, Ericsson, Fujitsu, Motorola, Nokia, Pantech, Philips, Qualcomm, Samsung, Sharp and Siemens.
Automotive
The automobile market continues to rely more extensively on electronics solutions. 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 significant disruption from 2008 to 2011 as a result of the global economic recession and several natural disasters, we believe that this market offers longer-term growth opportunities that will be driven by the ongoing demand for sophisticated automotive electronic systems. Principal customers in these markets include Continental, Delphi, Hella, Magneti Marelli, Robert Bosch, TRW, VDO and Visteon.
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. Through foreign subsidiaries, we offer radiation‑hardened (“Rad-Hard”) products that meet the unique requirements of space and industrial applications. For these applications, our foreign subsidiaries provide Rad-Hard ASICs, FPGAs, nonvolatile memories and microcontrollers. We also offer devices designed for aviation and military applications. Principal customers in the military and aerospace markets include Astrium, BAE Systems, EADS, Honeywell, Litton, Lockheed‑Martin, Northrop Grumman, Raytheon, Ruag and Thales.
Consumer Goods
Our products are used in many consumer electronics products. We provide microcontrollers for batteries and battery chargers that minimize power usage by being “turned on” only when necessary. Our microcontrollers are also offered for lighting

8


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, Harman Becker, Honeywell, Hosiden Corporation, Invensys, LG Electronics, Logitech, Matsushita, Philips, Samsung, Sanyo, Sony and Toshiba.
Manufacturing
Once we either produce or purchase fabricated wafers, we probe and test the individual circuits on them to identify those that do not function. After probe, we send all of our wafers to one of our independent assembly contractors where they are cut into individual chips and assembled into packages. Most of the finished products are given a final test by the assembly contractors although some are shipped to our test facilities in the United States and the Philippines, where we perform final 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.
As of December 31, 2012, we owned and operated one wafer fabrication facility located in Colorado Springs, Colorado.
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. See Item 1A — Risk Factors.
Marketing and Sales
We generate our revenue by selling our products directly to OEMs and indirectly to OEMs through our network of global distributors. We market our products worldwide to a diverse base of OEMs serving primarily commercial markets. We sell our products to large OEM accounts through our direct sales force, 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 revenue for the year ended December 31, 2012 were 49%, while sales to distributors were 51% of net revenue.
Our sales outside the U.S. represented 87%, 86% and 84% of net revenue in 2012, 2011 and 2010, respectively. We expect that revenue from our international customers and sales to distributors will continue to represent a significant portion of our net revenue. 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, foreign government regulations, and risk of non-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, 2012, 2011 and 2010, we spent $251.5 million, $255.7 million and $237.8 million, respectively, on research and development. Research and development expenses are charged to operations as incurred. We expect these expenditures to continue to be significant in the future as we continue to invest in new products and new manufacturing process technology.

9


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 product 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 and Serial EEPROM, 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 intellectual property. 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, 2012, we had 1,642 U.S. and foreign patents and 554 published patent applications. These patents and 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 patent 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, 2012 we employed approximately 5,000 employees compared to approximately 5,200 employees at December 31, 2011. 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 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 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 2012, 13% of our net revenue was derived from customers in the United States, 60% from customers in Asia, 25% 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, 2012, we owned tangible long lived assets in the United States with a net book value of $85.0 million, in France of $28.0 million, in Germany of $17.6 million, and in the Philippines of $61.6 million. See Note 14 of Notes to Consolidated Financial Statements for further discussion.

10


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, particularly the mobile device market, and from international customers. As a result, our business may be subject to seasonally lower revenue 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 revenue 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.
ITEM 1A. RISK FACTORS
 
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 10-K 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 REVENUE AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS.
 
Our future operating results will be subject to quarterly variations based upon a variety of factors, many of which are not within our control. As further discussed in this “Risk Factors” section, factors that could affect our operating results include:
 
uncertain global macroeconomic conditions, especially in Europe and Asia, and fiscal and budget uncertainties in the United States;
the success of our customers’ end products, our ability to introduce new products into the market and our ability to improve and implement new manufacturing technologies and reduce manufacturing costs;
the cyclical nature of the semiconductor industry;
disruption to our business caused by our increased dependence on outside foundries, and the financial instability of those foundries in some cases;
our dependence on selling through independent distributors and our ability to obtain accurate sell-through information from these distributors;
the complexity of our revenue reporting and dependence on our management’s ability to make judgments and estimates regarding inventory write-downs, future claims for returns and other matters affecting our financial statements;
our reliance on non-binding customer forecasts and the effect of customer changes to forecasts and actual demand;
our dependence on international sales and operations and the complexity of international laws and regulations relating to those sales and operations;
the effect of fluctuations in currency exchange rates;
the capacity constraints of our independent assembly contractors;
our ability to implement new manufacturing technologies and achieve acceptable manufacturing yields;
business disruptions caused by the disposal of our manufacturing facilities or restructuring activities and the impact of our related take-or-pay supply agreements if wafer prices decrease over time;
the effect of intellectual property and other litigation on us and our customers, and our ability to protect our intellectual property rights;
the highly competitive nature of our markets and our ability to keep pace with technological change;
our dependence on international sales and operations;

11


information technology system failures or network disruptions and disruptions caused by our system integration efforts;
business interruptions, natural disasters, terrorist acts or similar unforeseen events or circumstances;
our ability to maintain relationships with our key customers, the absence of long-term supply contracts with most of our customers, and product liability claims our customers may bring;
unanticipated changes to environmental, health and safety regulations or related compliance issues;
our dependence on certain key personnel;
uneven expense recognition related to our issuance of performance-based restricted stock units;
the anti-takeover effects in our certificate of incorporation and bylaws;
the unfunded nature of our foreign pension plans;
the effect of acquisitions we may undertake, including our ability to effectively integrate acquisitions into our operations;
disruptions in the availability of raw materials;
the complexity of our global legal entity structure, the effect of intercompany loans within this structure, and the occurrence and outcome of income tax audits for these entities; and
our receipt of economic grants in various jurisdictions, which may require repayment if we are unable to comply with the terms of such grants.
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.
 
UNCERTAIN GLOBAL MACRO-ECONOMIC CONDITIONS, ESPECIALLY IN EUROPE AND ASIA, AND FISCAL AND BUDGET UNCERTAINTIES IN THE UNITED STATES CONTINUE TO AFFECT OUR BUSINESS.

Slowing economic growth throughout the world, and continued uncertainty regarding macro-economic conditions in Europe and Asia, have adversely affected demand for our products. Continued adverse economic conditions, slow global growth, general uncertainty about the global economic recovery and ongoing fiscal and budgetary uncertainty in the United States may continue to adversely affect our business prospects.

WE DEPEND SUBSTANTIALLY ON THE SUCCESS OF OUR CUSTOMERS’ END PRODUCTS, OUR INTRODUCTION OF NEW PRODUCTS INTO THE MARKET, AND OUR ABILITY TO REDUCE MANUFACTURING COSTS OF OUR PRODUCTS OVER TIME.
 
We believe that our future sales will depend substantially on the success of our customers’ end products, our ability to introduce new products into the market, and our ability to reduce the manufacturing costs of our products over time. Our new products are generally incorporated into our customers’ products or systems at their design stage. However, design wins can precede volume sales by a year or more. In addition, we may not be successful in achieving design wins or design wins may not result in future revenue, which depend in large part on our customers’ ability to sell their end products or systems within their respective markets.
 
Rapid innovation within the semiconductor industry also continually increases pricing pressure, especially on products containing older technology. We experience continuous pricing pressure, just as many of our competitors do. Product life cycles in our industry 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 AND MAY ALSO AFFECT JUDGMENTS, ESTIMATES AND ASSUMPTIONS WE APPLY IN PREPARING OUR FINANCIAL STATEMENTS.
 
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.

12


 
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 margin. Our business may be harmed in the future by cyclical conditions in the semiconductor industry as a whole and by conditions within specific markets served by our products. These fluctuations in demand may also affect inventory write-downs we take or other items in our financial statements. Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Determining market value for our inventories involves numerous judgments, estimates and assumptions, including assessing average selling prices and sales volumes for each of our products in future periods. The competitiveness of each product, market conditions and product lifecycles may change over time, resulting in a change in the judgments, estimates and assumptions we apply to establish inventory write-downs. The judgments, estimates and assumptions we apply in evaluating our inventory write-downs, including, for example, shortening or extending the anticipated life of our products, may have a material effect on our financial statements. If we overestimate demand, we may experience excess inventory levels. Inventory adjustments, based on the judgments, estimates and assumptions we make, may affect our results of operations, including our gross margin, in a positive or negative manner, depending on the nature of the adjustment.
 
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 revenue 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 revenue 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 DUE TO INCREASED DEPENDENCE ON OUTSIDE FOUNDRIES.
 
After selling our European manufacturing facilities, we currently operate a single wafer fabrication facility in Colorado Springs, Colorado. As a result, we rely substantially on independent third party foundry manufacturing partners to manufacture products for us. As part of this fab-lite strategy, we have expanded and will continue to expand our foundry relationships by entering into new agreements with third party foundries. If we cannot obtain sufficient capacity commitments, if our foundry partners suffer financial instability affecting their ability to manufacture our products, or if our foundry partners experience production delays for other reasons, the supply of our products could be disrupted, which could harm our business. In addition, difficulties in production yields can often occur when transitioning manufacturing processes to a new third party foundry.  If our foundry partners fail to deliver quality products and components on a timely basis, our business could be harmed. For the year ended December 31, 2012, we manufactured approximately 56% of our products in our own wafer fabrication facility compared to 50% for the year ended December 31, 2011.

We expect over time that an increasing portion of our wafer fabrication will be undertaken by third party foundries.
 
Our fab-lite strategy exposes us to the following risks:
 
reduced control over delivery schedules and product costs;
financial instability, or liquidity issues, affecting our foundry partners;
higher than anticipated manufacturing costs;
inability of our manufacturing subcontractors to develop manufacturing methods appropriate for our products and their unwillingness to devote adequate capacity to produce our products;
possible abandonment of key fabrication processes by our foundry subcontractors for products that are strategically important to us;
reduced control over or decline in product quality and reliability;
inability to maintain continuing relationships with our foundries;
restricted ability to meet customer demand when faced with product shortages or order increases; and
increased opportunities for potential misappropriation of our intellectual property.
If any of the above risks occur, we could experience an interruption in our supply chain, an increase in costs or a reduction in our product quality and reliability, which could delay or decrease our revenue and adversely affect our business.
 
We attempt to mitigate these risks with a strategy of qualifying multiple foundry subcontractors. However, there can be no guarantee that this or any other strategy will eliminate or significantly reduce these risks. Additionally, since most independent foundries are located in foreign countries, we are subject to risks generally associated with contracting with foreign manufacturers,

13


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.

We closely monitor the financial condition of our foundry partners, especially those in Europe with which we have take-or-pay contracts. We believe that we have adequate secondary sources for our products if those companies reduce or discontinue their business activities. Nonetheless, while we do not believe that any financial distress, or any other material adverse financial event affecting those foundries, would be likely to have a material adverse effect on our business, the financial instability of a foundry partner does require an investment of significant management time, may require additional changes in operational planning as conditions develop, and could have other unexpected effects on our business. In the year ended December 31, 2012, we took a charge related to a foundry arrangement of $10.6 million, for excess purchase commitments and an impairment of receivables from a foundry supplier of $6.5 million (See Note 17 of Notes to Consolidated Financial Statements for further discussion).

The terms on 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 favorable terms. For example, any future agreements with independent foundries may be short-term in duration, may not be renewable, and may provide inadequate certainty regarding the future supply and pricing of wafers for our products.
 
If demand for our products increases significantly, we have no assurances that our third party foundries will be able to increase their manufacturing capacity to a level that meets our requirements, potentially preventing us from meeting our customer demand and 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, which could reduce our gross margin or require us to offset the increased prices by increasing prices to our customers, either of which could harm our business and operating results.
 
OUR REVENUE IS DEPENDENT TO A LARGE EXTENT ON SELLING TO END CUSTOMERS THROUGH INDEPENDENT DISTRIBUTORS. THESE DISTRIBUTORS MAY HAVE LIMITED FINANCIAL RESOURCES TO CONDUCT THEIR BUSINESS OR TO REPRESENT OUR INTERESTS EFFECTIVELY AND THEY MAY TERMINATE OR MODIFY THEIR RELATIONSHIPS WITH US IN A MANNER THAT ADVERSELY AFFECTS OUR SALES.
 
Sales through distributors accounted for 51%, 57% and 57% of our net revenue for the years ended December 31, 2012, 2011 and 2010, respectively. We are dependent on our distributors to supplement our direct marketing and sales efforts. Our agreements with independent distributors can generally be terminated for convenience by either party upon relatively short notice. Generally, these agreements are non-exclusive and also permit our distributors to offer and promote 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 or not willing 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 loss of revenue, charges or other adjustments, any of which could have a material adverse effect on our revenue and operating results. In some cases, certain of our distributors in Asia may also have more limited financial resources and constrained balance sheets that distributors in other geographic areas. If these distributors are unable effectively to finance their operations, or to represent our interests effectively because of financial limitations, our business could also be adversely affected.
 
OUR REVENUE REPORTING IS HIGHLY DEPENDENT ON RECEIVING ACCURATE AND TIMELY 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 or delays in the reported data, we may use estimates and apply judgments to reconcile distributors’ reported inventories to their end customer sales transactions. Actual results could vary unfavorably from our estimates, which could affect our operating results and adversely affect our business.

OUR REVENUE REPORTING IS COMPLEX AND DEPENDENT, IN PART, ON OUR MANAGEMENT’S ABILITY TO MAKE JUDGMENTS AND ESTIMATES REGARDING FUTURE CLAIMS FOR RETURNS. IF OUR JUDGMENTS OR ESTIMATES ABOUT THESE MATTERS ARE INCORRECT OR INACCURATE, OUR REVENUE REPORTING COULD BE ADVERSELY AFFECTED.
 
Our revenue reporting is highly dependent on judgments and estimates that our management is required to make when preparing our financial statements. We currently recognize revenue for our distributors based in the United States and Europe in a different manner from the method we use for our distributors based in Asia (excluding Japan).
 

14


For sales to certain distributors (primarily based in the U.S. and Europe) with agreements allowing for price protection and product returns, we have not historically had the ability to estimate future claims at the point of shipment, and given that price is not fixed or determinable at that time, revenue is not recognized until the distributor sells the product to its end customer.
 
For sales to independent distributors in Asia, excluding Japan, 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. After reviewing the pricing, rebate and quotation-related terms, we concluded that we could reliably estimate future claims; therefore, we recognize revenue at the point of shipment for these Asian distributors, assuming all of the other revenue recognition criteria are met, utilizing amounts invoiced, less estimated future claims. As the percentage of our sales to Asia increases, a larger portion of our revenue reporting will be based on this methodology.
 
If, however, our judgments or estimates are incorrect or inaccurate regarding future claims, our revenue reporting could be adversely affected. In addition, the fact that we recognize revenue differently in the United States and Europe than in Asia (excluding Japan) makes the preparation of our financial statements more complicated, and, therefore, potentially more susceptible to inaccuracies over time.
 
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 additional expense for the write-down of excess inventory and negatively affect our gross margin and results of operations.
 
Our forecasting risks may increase as a result of our fab-lite strategy because we will have less control over modifying production schedules to match changes in forecasted demand. If we commit to order foundry wafers and cannot cancel or reschedule our commitment without significant 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 margin 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.

OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO COMPLEX LAWS RELATING TO TRADE, EXPORT CONTROLS, FOREIGN CORRUPT PRACTICES AND ANTI-BRIBERY LAWS AMONG MANY OTHER SUBJECTS. A VIOLATION OF, OR CHANGE IN, THESE LAWS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF 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, or otherwise subject to the jurisdiction of, other countries may also be subject to non-U.S. laws and regulations governing international trade and exports. 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. In many cases, a determination of the applicable export control laws and related licensing requirements depends on design intent, the source and origin of a specific technology, the nationalities and localities of participants involved in creating, marketing, selling or supporting that technology, the specific technical contributions made by individuals to that technology and other matters of an intensely factual nature. 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 space, satellite, military, nuclear, chemical/biological weapons, rocket systems or unmanned air vehicle applications may also require export licenses and involve many of the same complexities and risks of non-compliance in the U.S. and elsewhere.
 
We continually seek to enhance our export compliance program, including ongoing analysis of historical and current product shipments and technology transfers. We also work with, and assist, government officials, when requested, to ensure compliance with applicable export laws and regulations, and we continue to develop additional operational procedures to improve our compliance efforts. However, export laws and regulations are highly complex and vary from jurisdiction to jurisdiction; a determination by U.S.

15


or other governments that we have failed to comply with any 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 revenue from certain customers or damages claims from any customers adversely affected by such penalties, and exclusion from participation in U.S. government contracts. As we review or audit our import and export practices, from time to time, we may discover previously unknown errors in our compliance practices that require corrective actions; these actions could include voluntary disclosures of those matters to appropriate government agencies, discontinuance or suspension of product sales pending a resolution of any reviews, or other adverse interim or final actions. 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. For example, in the past, one of our distributors was added to the U.S. Department of Commerce Entity List, resulting in the termination of our relationship with that distributor. Any one or more of these compliance errors, 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, for example, where we have operations, has enacted the U.K. Bribery Act, which could impose significant oversight obligations on us and could be applicable to our operations outside of the United Kingdom. The costs for complying with these and similar laws may be substantial 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 REVENUE AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS AS A RESULT OF FOREIGN CURRENCY MOVES AGAINST THE DOLLAR. THE ELIMINATION OF THE EURO AS A COMMON CURRENCY OR THE WITHDRAWAL OF MEMBER STATES FROM THE EUROPEAN UNION COULD ALSO ADVERSELY AFFECT OUR BUSINESS AND INTRODUCE UNCERTAINTIES WITH RESPECT TO PAYMENT TERMS IN OUR CONTRACTS.
 
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 revenue and operating expenses in Europe (denominated in Euros).
 
When we take an order denominated in a foreign currency, we will receive fewer dollars, and lower revenue, than we initially anticipated if that local currency weakens against the dollar before we ship our product. Conversely, revenue will be positively impacted if the local currency strengthens against the dollar before we ship our product. Costs may also be impacted by foreign currency fluctuation. For example, in Europe, where we have costs denominated in European currencies, costs will decrease if the local currency weakens against the dollar. Conversely, costs will increase if the local currency strengthens against the dollar. Our income from operations would have been approximately $7.7 million higher had the average exchange rate for the year ended December 31, 2012 remained the same as the average exchange rate for the year ended December 31, 2011. The effect is determined assuming that all foreign currency denominated transactions that occurred for the year ended December 31, 2012 were recorded using the average foreign currency exchange rates for the year ended December 31, 2011.

We also face the risk that our accounts receivable 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 utilized hedging instruments to offset our foreign currency exposure, although we may determine to do so in the future.
 
Because we conduct business in Europe, we may have additional exposure to currency fluctuations if the Euro is eliminated as a common currency within the Eurozone, or if individual countries determine to stop using that currency. In any of those events, we would have to address exchange rate and conversion issues affecting the Euros we then held and the payments that we expected to receive, or to make, in Euros. There is no certainty regarding the potential economic effect of these Euro currency risks, nor is there any certainty regarding the effect on payment terms included within outstanding sales contracts if the Euro were eliminated or not accepted in some countries as legal tender. Because of those uncertainties, we are not able to assess fully, as of the date of this Annual Report, the potential effect on our business or financial condition if the Eurozone were to disband, if a member state determined to substitute a new currency for the Euro within its borders, or if the Euro became generally less accepted as a global currency.
 
WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS THAT MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS OR TO MEET OUR QUALITY AND DELIVERY REQUIREMENTS.
 

16


After wafer testing, we ship wafers to various independent assembly contractors, 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:
 
reduced control over quality and delivery schedules;
the potential lack of adequate capacity;
discontinuance or phase-out of our contractors’ assembly processes;
inability of our contractors to develop and maintain assembly and test methods and equipment that are appropriate for our products;
lack of long-term contracts and the potential inability to secure strategically important service contracts on favorable terms, if at all;
increased opportunities for potential misappropriation of our intellectual property; and
financial instability, or liquidity issues, affecting our subcontractors.
In addition, our independent contractors may not continue to assemble, package and test our products for a variety of reasons. Moreover, because most of our independent assembly 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 with the time, 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, OR AS A RESULT OF, CHANGES IN OUR BUSINESS AND ASSET PORTFOLIO.
 
We are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations in order to enhance our overall competitiveness and viability. Disposal and restructuring activities that we have undertaken, and may undertake in the future, can divert significant time and resources, 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. 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.
 
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 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. 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. During 2012, we implemented various cost reduction actions, and recorded restructuring charges of $23.5 million related to workforce reductions for the year ended December 31, 2012. We also recorded restructuring charges of $0.5 million related to lease terminations associated with those workforce reductions. As of December 31, 2012, we recorded $16.2 million in accrued restructuring charges, and we expect to make the cash severance payments in respect of those accruals within the next twelve months.
 
WE HAVE IN THE PAST ENTERED INTO “TAKE-OR-PAY” SUPPLY AGREEMENTS WITH BUYERS OF OUR WAFER MANUFACTURING OPERATIONS. IF THE CONTRACTUAL 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.
 
We entered into supply agreements with the acquirers of our European wafer manufacturing operations that committed us, or specified subsidiaries of ours, to purchase wafers from these acquirers on a “take-or-pay” basis for a number of years.  For example, in connection with the sale of our manufacturing operations in Rousset, France in June 2010, one of our subsidiaries entered into a manufacturing services agreement that, as amended, requires this subsidiary to purchase wafers from LFoundry Rousset SAS until June 2013 on a “take-or-pay” basis. Similarly, in connection with the sale of our manufacturing operations in Heilbronn, Germany, one of our subsidiaries entered into a wafer supply agreement that, as amended, required this subsidiary to purchase wafers from Telefunken Semiconductors GmbH & Co. KG (“TSG”) through August 2012 on a “take-or-pay” basis. In August 2012, one of our subsidiaries entered into a new wafer supply agreement that requires this subsidiary to purchase wafers from

17


Telefunken Semiconductors International LLC, the parent of TSG, through May 2013 on a "take-or-pay" basis. In addition to the direct financial effects that these “take-or-pay” arrangements may have, they may also cause us, in some cases, to acquire excess inventory at times when not needed based on demand forecasts (See Note 17 of Notes to Consolidated Financial Statements).
 
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 45 nanometers.

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 or with respect to manufacturing of new 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 our fabrication facility 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, DIRECTLY AND INDIRECTLY, FACE THIRD PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND, DISTRACT OUR MANAGEMENT TEAM AND EMPLOYEES, AND RESULT IN LOSS OF SIGNIFICANT RIGHTS.
 
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property 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 intellectual property 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 cash position and operating results.
 
We have in the past been involved in intellectual property infringement lawsuits, which adversely affected our operating results. In addition to patent infringement lawsuits in which we may be directly involved and named as a defendant, we also may assist our customers, in many cases at our own cost, in defending intellectual property lawsuits involving technologies that are combined with our technologies. See Part I, Item 3 of this Form 10-K. The cost of defending against intellectual property lawsuits, responding to subpoenas, preparing our employees to testify, or assisting our customers in 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 are 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. 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, defending these claims could result in significant costs and diversion of the attention of management and other key employees.
 
IF WE ARE UNABLE TO PROTECT OR ASSERT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE HARMED.
 
Our future success will depend, in part, upon our ability to protect and assert our intellectual property rights. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. It is possible that

18


competitors or other unauthorized third parties may obtain, copy, use or disclose our proprietary technologies and processes, despite our efforts to protect them.

We hold numerous U.S. and foreign patents. We can provide no assurance, however, that these, or any of our future patents, will not be challenged, invalidated or circumvented in ways that detract from their value. Changes in laws may also result in us having less intellectual property protection than we may have experienced historically.
 
If our patents do not adequately protect our technology, competitors may be able to offer products similar to our products more easily. Our competitors may also be able to design around our patents, which would harm our business, financial position and results of operations.
 
SIGNIFICANT PATENT LITIGATION IN THE MOBILE DEVICE SECTOR MAY ADVERSELY AFFECT SOME OF OUR CUSTOMERS. UNFAVORABLE OUTCOMES IN SUCH PATENT LITIGATION COULD AFFECT OUR CUSTOMERS’ ABILITY TO SELL THEIR PRODUCTS AND, AS A RESULT, COULD ULTIMATELY AFFECT THEIR ABILITY TO PURCHASE OUR PRODUCTS IF THEIR MOBILE DEVICE BUSINESS DECLINES.
 
There is significant ongoing patent litigation throughout the world involving many of our customers, especially in the mobile device sector. The outcome of these disputes is uncertain. While we may not have a direct involvement in these matters, an adverse outcome that affects the ability of our customers to ship or sell their products could ultimately have an adverse effect on our business. That could happen if these customers reduce their business exposure in the mobile device sector, are prevented from selling their products in certain markets, seek to reduce their cost structures to help fund the payment of unanticipated licensing fees, or are required to take other actions that slow or hinder their market penetration.
 
OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED REVENUE, REDUCED GROSS MARGIN 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 and Serial EEPROM products, as well as in our commodity microcontrollers. Competitive pressures in the semiconductor market from existing competitors, new entrants, new technology and cyclical demand, among other factors, can result in declining average selling prices for our products.  To the extent that such price declines affect our products, our revenue and gross margin could decline.
 
In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following:
 
our success in designing and manufacturing new products that implement new technologies and processes;
our ability to offer integrated solutions using our advanced nonvolatile memory process with other technologies;
the rate at which customers incorporate our products into their systems;
product introductions by our competitors;
the number and nature of our competitors in a given market;
our ability to minimize production costs by outsourcing our manufacturing, assembly and testing functions;
our ability to improve our process technologies and production efficiency; and
general market and economic conditions.
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 that compete effectively on the basis of price and performance and that address customer requirements. We are continually designing and commercializing

19


new and improved products to maintain our competitive position. These new products typically are more technologically complex than their predecessors and have increased risk of deployment delays and quality and yield issues, among other risks.
 
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 other 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 and increased functionality, 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 revenue outside the United States accounted for 87%, 86% and 84% of our net revenue for the years ended December 31, 2012, 2011 and 2010, respectively. We expect that revenue derived from international sales will continue to represent a significant portion of net revenue. International sales and operations are subject to a variety of risks, including:
 
greater difficulty in protecting intellectual property;
reduced flexibility and increased cost of effecting staffing adjustments;
foreign labor conditions and practices;
adverse changes in tax laws;
credit and collectibility risks on our trade receivables with customers in certain jurisdictions;
longer collection cycles;
legal and regulatory requirements, including antitrust laws, import and export regulations, trade barriers, tariffs and tax laws, and environmental and privacy regulations and changes to those laws and regulations;
negative effects from fluctuations in foreign currency exchange rates;
international trade regulations, including duties and tariffs;
cash repatriation restrictions;
impact of natural disasters on local infrastructures, including those of our distributors and end-customers; and
general economic and political conditions in these foreign markets.
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.
 
WE MAY BE SUBJECT TO INFORMATION TECHNOLOGY SYSTEM FAILURES OR NETWORK DISRUPTIONS THAT COULD DAMAGE OUR REPUTATION, BUSINESS OPERATIONS AND FINANCIAL CONDITION.
 
We rely on our information technology infrastructure and certain critical information systems for the effective operation of our business. These information systems are subject to damage or interruption from a number of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, cyber attacks, sabotage, vandalism, or similar events or disruptions. Our security measures or those of our third party service providers may not detect or prevent such security breaches. Any such compromise of our information security could result in the unauthorized publication of our confidential business or proprietary information, result in the unauthorized release of customer

20


or employee data, result in a violation of privacy or other laws, expose us to a risk of litigation or damage our reputation. In addition, our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business, which could negatively affect our operating results.
 
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, public health issues, geopolitical uncertainties, telecommunications failures and other events beyond our control. 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. We do not have a comprehensive disaster recovery plan.
 
In the event of a major earthquake, other natural or manmade disaster or terrorist act, we could experience loss of life of our employees, destruction of facilities or other business interruptions. The operations of our suppliers could also be affected by natural disasters and other disruptions, which could cause shortages and price increases in various essential materials. We use third party freight firms for nearly all our shipments from vendors and our manufacturing facilities and for shipments to customers of our final product. We maintain property and business interruption insurance, but there is no guarantee that such insurance will be available or adequate to protect against all costs associated with such disasters and disruptions.
 
In recent years, based on insurance market conditions, we have relied to a greater degree on self-insurance. 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.
 
WE MAY EXPERIENCE PROBLEMS WITH KEY CUSTOMERS THAT COULD 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. Similarly, the loss of one or more of our key customers, reduced orders by any of our key customers, or significant variations in the timing of orders, could adversely affect our business and results of operations. Our business is organized into four operating segments (see Note 14 of Notes to the Consolidated Financial Statements for further discussion). The principal customers in each of our markets are described in Item 1 “Business — Principal Markets and Customers” in this Annual Report on Form 10-K.

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 lives. 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 to comply with such requirements, 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.

21


 
THE LOSS OF ANY KEY PERSONNEL ON WHOM WE DEPEND 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 could harm our business.
 
ACCOUNTING FOR OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS IS SUBJECT TO JUDGMENT AND MAY LEAD TO UNPREDICTABLE EXPENSE RECOGNITION. THE IMPLEMENTATION OF THE PLAN UNDER WHICH THOSE RESTRICTED STOCK UNITS WERE ISSUED MAY ALSO AFFECT THE DEDUCTIBILITY OF SOME COMPENSATION PAID TO OUR NAMED EXECUTIVE OFFICERS.
 
We have issued, and may in the future continue to issue, performance-based restricted stock units to eligible employees, entitling those employees to receive restricted stock if they, and we, meet designated performance criteria established by our compensation committee. For example, in May 2011, we adopted the 2011 Long-Term Performance-Based Incentive Plan (the “2011 Plan”), which provides for the grant of restricted stock units to eligible employees, subject to the satisfaction of specified performance metrics. The performance periods for the 2011 Plan run from January 1, 2011 through December 31, 2013. We recorded total stock-based compensation expense related to performance-based restricted stock units of $12.7 million and $7.5 million under the 2011 Plan for the years ended December 31, 2012 and 2011, respectively.
 
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 awards vests. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The fair value of each award is recognized over the service period and is reduced for estimated forfeitures. We are required to reassess the probability of vesting at each reporting date, and any change in our forecasts may result in an increase or decrease to the expense recognized. As a result, the expense recognition for performance based restricted stock units could change over time, requiring adjustments to the financial statements to reflect changes in our judgment regarding the probability of achieving the performance goals.  The implementation of our 2011 Plan may also affect our ability to receive federal income tax deductions for compensation in excess of $1 million paid, during any fiscal year, to our named executive officers. To the extent that aspects of a performance-based compensation plan such as ours are adjusted in the discretion of a compensation committee, the exercise of that discretion, notwithstanding that it is expressly permitted by the terms of a plan, may result in plan compensation awarded to named executive officers not being deductible.  Our compensation committee has retained the discretion to implement our 2011 Plan, notwithstanding any potential loss of deductibility, in the manner that it believes most effectively achieves the objectives of our compensation philosophies.
 
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. The projected benefit obligation totaled $40.6 million at December 31, 2012 and $29.8 million at December 31, 2011. The plans are unfunded, 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 $0.5 million

22


in 2013 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 MAY OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND RESULT IN DIFFICULTIES IN 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. 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, products and product development plans as a result of unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, difficulties ramping up volume production, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to stay with us post-acquisition. 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.
 
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 or synergies 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 of our goodwill may not be recoverable. At December 31, 2012, we had $104.4 million of goodwill. We completed our annual test of goodwill impairment in the fourth quarter of 2012 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.
 
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 and price increases 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 or increase in cost 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

23


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, 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 UNFAVORABLE TAX OR OTHER CONSEQUENCES, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME AND FINANCIAL CONDITION.
 
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 have many entities globally and unsettled intercompany balances between some of these entities that could result, if changes in law, regulations or related interpretations occur, in adverse tax or other consequences affecting our capital structure, intercompany interest rates and legal structure.
 
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.
 
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 Part I, 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.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
At December 31, 2012, we owned the following facilities:

24


Number of
Buildings
 
 
Location
 
 
Total Square Feet
 
 
Use
 
6
 
Colorado Springs, Colorado
603,000
Wafer fabrication, research and development, marketing, product design, final product testing.
4
 
Heilbronn, Germany
778,000
Research and development, marketing and product design. Primarily leased to other semiconductor companies.
2
 
Calamba City, Philippines
338,000
Probe operations and final product testing.
5
 
Rousset, France
815,000
Research and development, marketing and product design. Primarily leased to other semiconductor companies.
We sold our former corporate headquarters located in San Jose, California, and adjacent land parcels, in August 2011. We entered into a long-term lease for our new corporate headquarters in San Jose, California in August 2011.
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.
ITEM 3. LEGAL PROCEEDINGS
 
We are party to various legal proceedings. Our 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, results of operations and statement of cash flows. If an unfavorable ruling were to occur in any of the legal proceedings described in Note 11 of Notes to Consolidated Financial Statements, there exists the possibility of a material adverse effect on our financial position, results of operations and cash flows. For more information regarding certain of these proceedings, see Note 11 of Notes to Consolidated Financial Statements, which is incorporated by reference into this Item. We have accrued for losses related to litigation described in Note 11 of Notes to Consolidated Financial Statements that we consider probable and for which the loss can be reasonably estimated. In the event that a loss cannot be reasonably estimated, we have not accrued for such losses. As we continue to monitor these matters or other matters that were not deemed material as of December 31, 2012, our determination could change, however, and we may decide, at some future date, to establish an appropriate reserve. With respect to each of the matters described in Note 11 of Notes to Consolidated Financial Statements, except where noted otherwise, management has determined a potential loss is not probable at this time and, accordingly, no amount has been accrued at December 31, 2012. Our management makes a determination as to when a potential loss is reasonably possible based on relevant accounting literature and then includes appropriate disclosure of the contingency. Except as otherwise noted in Note 11 of Notes to Consolidated Financial Statements, our management does not believe that the amount of loss or a range of possible losses is reasonably estimable.

Infineon Litigation.  On April 11, 2011, Infineon Technologies A.G. and Infineon Technologies North America Corporation (collectively, “Infineon”) filed a patent infringement lawsuit against us in the United States District Court for the District of Delaware. The complaint alleged that we are infringing 11 Infineon patents and sought a declaration that three of our patents are either invalid or not infringed. On July 5, 2011, we answered Infineon’s complaint, and filed counterclaims seeking a declaration that each of the 11 asserted Infineon patents is invalid and not infringed. We also counterclaimed for infringement of six of our patents and breach of contract related to Infineon’s breach of a confidentiality agreement. On July 29, 2011, Infineon answered these counterclaims and sought a declaration that our patents are either invalid or not infringed. On March 13, 2012, we filed amended counterclaims that alleged Infineon’s infringement of four additional Atmel patents. On March 31, 2012, Infineon answered these counterclaims and sought a declaration that our newly-asserted patents are either invalid or not infringed. On December 4, 2012, the Court issued its Markman ruling, in which it interpreted as a matter of law certain disputed terms in the asserted patent claims. On December 28, 2012, the Court granted Atmel and Infineon's joint request to dismiss, without prejudice, four patents per side.  The trial of these claims currently is scheduled to commence in early 2014, and we intend to prosecute our claims and defend vigorously against Infineon's claims.
 
From time to time, we are notified of claims that our products may infringe patents, or other intellectual property, issued to other parties. We periodically receive demands for indemnification from our customers with respect to intellectual property matters. We also periodically 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 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 undertake an accrual for losses relating to those types of claims when we consider those losses “probable” and when a reasonable estimate of loss can be determined. 


25


ITEM 4. MINE SAFETY DISCLOSURES
 
None.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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, 2013 was $6.70 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.
 
 
High
 
Low
Year ended December 31, 2011:
 
 
 
 
First Quarter
 
$
16.31

 
$
11.30

Second Quarter
 
$
15.30

 
$
12.44

Third Quarter
 
$
14.62

 
$
8.07

Fourth Quarter
 
$
11.29

 
$
7.45

Year ended December 31, 2012:
 
 
 
 
First Quarter
 
$
10.73

 
$
8.52

Second Quarter
 
$
9.72

 
$
6.21

Third Quarter
 
$
6.77

 
$
5.26

Fourth Quarter
 
$
6.55

 
$
4.44

As of January 31, 2013, there were approximately 1,424 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 2012.
The following table provides information about the repurchase of our common stock during the three months ended December 31, 2012, pursuant to our Stock Repurchase Program.
Period
 
Total Number of
Shares Purchased
 
Average Price Paid per
Share ($) (1)
 
Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs (2)
 
Approximate Dollar Value of Shares that
May Yet be Purchased Under the Plans
or Programs (3)
October 1 - October 31
 

 

 

 
$
143,396,174

November 1 - November 30
 
2,421,634

 
$
4.66

 
2,421,634

 
$
132,114,003

December 1 - December 31
 
900,000

 
$
5.43

 
900,000

 
$
127,224,933

 _________________________________________
(1)Represents the average price paid per share ($) exclusive of commissions.
(2)Represents shares purchased in open-market transactions under the stock repurchase plan approved by the Board of Directors.
(3)These amounts correspond to a plan announced in August 2010 whereby the Board of Directors authorized the repurchase of up to $200 million of our common stock. In May 2011, Atmel’s Board of Directors authorized an additional $300 million to our existing repurchase program.  In April 2012, Atmel’s Board of Directors authorized an additional $200 million to our existing repurchase program.  The repurchase program does not have an expiration date. Shares repurchased under the program have been and will in the future be retired. Amounts remaining to be purchased are exclusive of commissions. 

ITEM 6. SELECTED FINANCIAL DATA
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 consolidated statement of operations data for 2012, 2011, and 2010 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 2010 and all data for fiscal years 2009 and 2008 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

26


 
Years Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(in thousands, except per share data)
Net revenue

$1,432,110

 

$1,803,053

 

$1,644,060

 

$1,217,345

 

$1,566,763

Income (loss) from operations before income taxes(1)(3)(4)

$42,238

 

$381,190

 
$
116,352

 
$
(136,039
)
 
$
(20,243
)
Net income (loss)

$30,445

 

$314,990

 
$
423,075

 
$
(109,498
)
 
$
(27,209
)
Basic net income (loss) per share:
 
 
 
 
 
 
 
 
 
Net income (loss)

$0.07

 

$0.69

 
$
0.92

 
$
(0.24
)
 
$
(0.06
)
Weighted‑average shares used in basic net income (loss) per share calculations
433,017

 
455,629

 
458,482

 
451,755

 
446,504

Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
 
Net income (loss)

$0.07

 

$0.68

 
$
0.90

 
$
(0.24
)
 
$
(0.06
)
Weighted‑average shares used in diluted net income (loss) per share calculations
437,582

 
462,673

 
469,580

 
451,755

 
446,504


 
As of December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(in thousands)
Cash and cash equivalents
$
293,370

 

$329,431

 

$501,455

 

$437,509

 

$408,926

Cash and cash equivalents and short-term investments
296,057

 
332,510

 
521,029

 
476,140

 
440,633

Fixed assets, net(2)
221,044

 
257,070

 
260,124

 
203,219

 
383,107

Total assets
1,433,533

 
1,526,598

 
1,650,042

 
1,392,842

 
1,530,654

Long-term debt and capital leases less current portion
5,602

 
4,599

 
3,976

 
9,464

 
13,909

Stockholders’ equity
996,638

 
1,082,444

 
1,053,056

 
764,407

 
802,084


(1)
We recorded a loss related to a foundry arrangement of $10.6 million for the year ended December 31, 2012, an impairment of receivables from a foundry supplier of $6.5 million for the year ended December 31, 2012 (See Note 17 of Notes to Consolidated Financial Statements for further discussion), asset impairment charges of $11.9 million, $79.8 million and $8.0 million for the years ended December 31, 2010, 2009 and 2008, respectively, and restructuring charges of $24.0 million, $20.1 million, $5.3 million, $6.7 million and $71.3 million for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively, related primarily to employee termination costs, facility closure costs, sales of businesses and other operations, and the related realignment of our businesses in response to those changes. We recorded a credit from reserved grant income of $10.7 million for the year ended December 31, 2012, and recorded a gain on sale of assets of $35.3 million for the year ended December 31, 2011 related to the sale of our former corporate headquarters located in San Jose, California and a gain on sale of assets of $0.2 million and $32.7 million for the years ended December 31, 2009 and 2008, respectively, related to the sale of our Heilbronn, Germany and North Tyneside, United Kingdom facilities. We recorded a loss on sale of assets of $99.8 million for the year ended December 31, 2010 related to the sale of our manufacturing operations in Rousset, France and the sale of our Secure Microcontroller Solutions business. We recorded an income tax benefit related to release of valuation allowances of $116.7 million related to certain deferred tax assets, and recorded an additional benefit to income tax expense of approximately $151.2 million related to the release of previously accrued penalties and interest on the income tax exposures and a refund from the carryback of tax attributes for the year ended December 31, 2010.
(2)
Fixed assets, net was reduced as of December 31, 2009, compared to December 31, 2008, as a result of the asset impairment charges discussed in (1) above. Additionally, we reclassified $83.2 million in fixed assets to assets held for sale as of December 31, 2009 relating to our fabrication facilities in Rousset, France.
(3)
We recorded pre-tax, stock‑based compensation expense of $72.4 million, $68.1 million, $60.5 million, $30.1 million and $29.1 million for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively, excluding acquisition‑related stock compensation expenses.
(4)
We recorded $7.4 million, $5.4 million, $1.6 million, $16.3 million and $23.6 million in acquisition‑related charges for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively.

27


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 2013 and beyond. Our statements regarding the following matters also fall within the meaning of “forward looking” statements and should be considered accordingly: the expansion of the market for microcontrollers, revenue for our maXTouch products, expectations for our new XSense products, our gross margin expectations and trends, anticipated revenue by geographic area and the ongoing transition of our revenue base to Asia, expectations or trends involving our operating expenses, capital expenditures, cash flow and liquidity, our factory utilization rates, the effect and timing of new product introductions, our ability to access independent foundry capacity and the corresponding financial condition and operational performance of those foundry partners, the effects of our strategic transactions and restructuring efforts, the estimates we use in respect of the amount and/or timing for expensing unearned stock‑based compensation and similar estimates related to our performance‑based restricted stock units, our expectations regarding tax matters, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector) 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. We undertake no obligation to update any forward‑looking statements in this Form 10-K.
OVERVIEW

     We are one of the world’s leading designers, developers and suppliers of microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. Our microcontrollers and related products are used in many of the world’s leading smartphones, ultrabooks, tablet devices, e-readers, wireless peripherals and other consumer and industrial electronics in which they provide core functionality for such things as touch sensing, sensor and lighting management, security and encryption features, wireless applications, industrial controls, building automation and battery management. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch‑focused intellectual property ("IP") we have developed, and we continue to leverage our market and technology advantages to expand our product portfolio within the touch‑related eco-system. Toward that end, and as a natural extension of our touch controller business, we announced our XSense products, a new type of touch sensor based on proprietary metal mesh technologies, in 2012. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory, radio frequency and mixed‑signal components and application specific integrated circuits. With our broad product portfolio, our semiconductors also enable applications such as smart‑meters used for utility monitoring and billing, commercial, residential and architectural LED-based lighting systems, touch panels used on household and industrial appliances that integrate our “non-mechanical” buttons, sliders and wheels, various aerospace, industrial and military products and systems, and numerous electronic‑based automotive components like keyless ignition and access, engine control, and lighting and entertainment systems for standard and hybrid vehicles. We have continued to focus on the development of wireless products that allow devices to communicate and connect with each other, and have continued to integrate enhanced wireless capabilities into our product portfolio, including technologies such as Wi-Fi Direct; that enable the so-called Internet of Things, where smart, connected devices and appliances seamlessly share data and information. We currently own and operate one wafer manufacturing facility in Colorado Springs, Colorado, consistent with our strategic determination made several years ago to maintain lower fixed costs and capital investment requirements.

Net revenue was lower in the year ended December 31, 2012, compared to net revenue in the year ended December 31, 2011, as we were adversely affected by a slowdown in the global economy and excess inventories held by our distributors, particularly in Asia. Lower sales resulted in lower utilization rates for our Colorado Springs wafer facility, which increased our wafer costs and, as a consequence, adversely affected our gross margin. In response to lower sales, we implemented cost reduction programs throughout our operations in the second half of 2012, including labor cost reduction programs. We expect to continue to monitor our cost structure to ensure that it is properly aligned with global economic conditions.

During the year ended December 31, 2012, we repurchased 22.7 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program. As of December 31, 2012, $127.2 million remained available for repurchasing common stock under this program.


28


RESULTS OF OPERATIONS
 
 
Years Ended
 
December 31, 2012
 
December 31, 2011
 
December 31, 2010
 
(in thousands, except percentage of net revenue)
Net revenue
$
1,432,110

100.0
 %
 
$
1,803,053

100.0
 %
 
$
1,644,060

100.0
%
Gross profit
601,319

42.0
 %
820,163

908,233

50.4
 %
894,820

728,184

44.3
%
Research and development
251,519

17.6
 %
 
255,653

14.2
 %
 
237,812

14.5
%
Selling, general and administrative
275,257

19.2
 %
 
280,410

15.6
 %
 
264,296

16.1
%
Acquisition-related charges
7,388

0.5
 %
 
5,408

0.3
 %
 
1,600

0.1
%
Restructuring charges
23,986

1.7
 %
 
20,064

1.1
 %
 
5,253

0.3
%
Impairment of receivables due from foundry supplier
6,495

0.5
 %
 

 %
 

%
Asset impairment charges

 %
 

 %
 
11,922

0.7
%
Credit from reserved grant income
(10,689
)
(0.7
)%
 

 %
 

%
(Gain) loss on sale of assets

 %
 
(35,310
)
(2.0
)%
 
99,767

6.1
%
Income from operations
$
47,363

3.3
 %
 
$
382,008

21.2
 %
 
$
107,534

6.5
%
 
Net Revenue
 
Our net revenue totaled $1.4 billion for the year ended December 31, 2012, a decrease of 21%, or $370.9 million, from $1.8 billion in net revenue for the year ended December 31, 2011. Revenue for the year ended December 31, 2012 was lower than 2011 primarily as a result of lower sales throughout our distribution channel, particularly in Asia. We also continued to see softer global demand in mobile devices and industrial markets, as the economic slowdown affected our customers and their purchasing requirements.
  
Net revenue denominated in Euros was 19%, 21% and 22% of total net revenue for the years ended December 31, 2012, 2011 and 2010, respectively. Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.29, 1.39 and 1.36 Euros to the dollar for the years ended December 31, 2012 2011 and 2010, respectively. Our net revenue for the year ended December 31, 2012 would have been approximately $23.1 million higher had the average exchange rate in the current year remained the same as the average exchange rate in effect for the year ended December 31, 2011.

Net Revenue — By Operating Segment
 
Our net revenue by operating segment is summarized as follows:
 
 
Years Ended
 
 
 
 
 
December 31,
2012
 
December 31,
2011
 
Change
 
% Change
 
(in thousands, except for percentages)
Microcontroller
$
892,839

 
$
1,113,579

 
$
(220,740
)
 
(20
)%
Nonvolatile Memory
170,736

 
255,683

 
(84,947
)
 
(33
)%
RF and Automotive
174,237

 
202,013

 
(27,776
)
 
(14
)%
ASIC
194,298

 
231,778

 
(37,480
)
 
(16
)%
Total net revenue
$
1,432,110

 
$
1,803,053

 
$
(370,943
)
 
(21
)%
 

29


 
Years Ended

 

 
 
December 31,
2011
 
December 31,
2010

Change

% Change
 
(in thousands, except for percentages)
Microcontroller
$
1,113,579


$
892,301


$
221,278


25
 %
Nonvolatile Memory
255,683


277,179


(21,496
)

(8
)%
RF and Automotive
202,013


188,090


13,923


7
 %
ASIC
231,778


286,490


(54,712
)

(19
)%
Total net revenue
$
1,803,053

 
$
1,644,060


$
158,993


10
 %

Microcontroller
 
Microcontroller segment net revenue decreased 20% to $892.8 million for the year ended December 31, 2012 from $1.1 billion for the year ended December 31, 2011. Revenue decreased primarily due to weaker demand in industrial and consumer markets, with ARM and maXTouch products most affected. Microcontroller net revenue represented 62%, 62% and 54% of total net revenue for the years ended December 31, 2012, 2011 and 2010, respectively. Inventory held by distributors of our microcontroller products decreased significantly as of December 31, 2012 as compared to December 31, 2011.
Microcontroller segment net revenue increased 25% to $1.1 billion for the year ended December 31, 2011 from $892.3 million for the year ended December 31, 2010. Revenue increased primarily due to increased sales of our 32-bit microcontrollers and maXTouch microcontrollers.
Nonvolatile Memory
 
Nonvolatile Memory segment net revenue decreased 33% to $170.7 million for the year ended December 31, 2012 from $255.7 million for the year ended December 31, 2011. The decline in our memory business resulted primarily from reduced market demand, a weaker pricing environment and the end of life for several flash products, including Serial EE and Serial Flash products, which saw revenue decrease by 22% and 51% for the years ended December 31, 2012 and 2011, respectively. On September 28, 2012 we sold our serial flash product line and discontinued the products included in that line. Revenue for our serial flash product lines was $39.4 million for the year ended December 31, 2012 compared to $80.7 million for the year ended December 31, 2011.
Nonvolatile Memory segment net revenue decreased 8% to $255.7 million for the year ended December 31, 2011 from $277.2 million for the year ended December 31, 2010. The decline in our memory business was primarily the result of slowing market demand and a weaker overall pricing environment. Serial EE products and BIOS Flash products decreased 16% and 56%, respectively, from 2010 levels, as a result of lower shipments during 2011.
RF and Automotive
 
RF and Automotive segment net revenue decreased 14% to $174.2 million for the year ended December 31, 2012 from $202.0 million for the year ended December 31, 2011. This decrease was primarily related to continued decline in demand for our non-core radio frequency products within this segment, related generally to adverse macro-economic conditions and seasonality effects within the automotive sector, partially offset by an increase of 3% in net revenue from sales of our high voltage products, which are used primarily in automotive applications.
RF and Automotive segment net revenue increased 7% to $202.0 million for the year ended December 31, 2011 from $188.1 million for the year ended December 31, 2010. This increase was primarily related to improved demand in automotive markets during 2011. Our identification and high voltage products increased 41% and 20%, respectively, for the year ended December 31, 2011 over the prior year, driven by higher shipments for vehicle networking products (LIN/IVN applications). In addition, revenue increased 11% for foundry products sourced from our Colorado Springs fabrication facility for the year ended December 31, 2011.

ASIC
 
ASIC segment net revenue decreased 16% to $194.3 million for the year ended December 31, 2012 from $231.8 million for the year ended December 31, 2011. Our military and aerospace business revenue, which represent approximately 28% of overall ASIC revenue, decreased approximately 36% during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily from reduced market demand.
ASIC segment net revenue decreased 19% to $231.8 million for the year ended December 31, 2011 from $286.5 million for the year ended December 31, 2010. The decrease in revenue for the ASIC segment primarily reflects $79.2 million of revenue through the first nine months of 2010 related to our former Secure Microcontroller Solutions business. ASIC segment net revenue was also unfavorably affected by limited production capacity, resulting from wafer allocation to our microcontroller customers. Our military and aerospace business revenue, which represent approximately 37% of overall ASIC revenue, increased approximately 51% during 2011 compared to 2010 as a result of increased test capacity and fulfillment of past due backlog.

30


Net Revenue by Geographic Area
 
Our net revenue by geographic area for the year ended December 31, 2012, compared to the years ended December 31, 2011 and 2010, is summarized in the table below. Revenue is attributed to regions based on the location to which we ship. See Note 14 of Notes to Consolidated Financial Statements for further discussion.
 
 
Years Ended
 
 
 
 
 
December 31,
2012
 
December 31,
2011
 
Change
 
% Change
 
(in thousands, except for percentages)
Asia
$
862,901

 
$
1,062,584

 
$
(199,683
)
 
(19
)%
Europe
353,377

 
462,566

 
(109,189
)
 
(24
)%
United States
189,699

 
249,887

 
(60,188
)
 
(24
)%
Other*
26,133

 
28,016

 
(1,883
)
 
(7
)%
Total net revenue
$
1,432,110

 
$
1,803,053

 
$
(370,943
)
 
(21
)%

 
Years Ended
 
 
 
 
 
December 31,
2011
 
December 31,
2010
 
Change
 
% Change
 
(in thousands, except for percentages)
Asia
$
1,062,584

 
$
908,700

 
$
153,884

 
17
 %
Europe
462,566

 
439,686

 
22,880

 
5
 %
United States
249,887

 
260,091

 
(10,204
)
 
(4
)%
Other*
28,016

 
35,583

 
(7,567
)
 
(21
)%
Total net revenue
$
1,803,053

 
$
1,644,060

 
$
158,993

 
10
 %
_________________________________________
*  Primarily includes South Africa, and Central and South America
 
Net revenue outside the United States accounted for 87%, 86% and 84% of our net revenue for the years ended December 31, 2012, 2011 and 2010, respectively.
 
Our net revenue in Asia decreased $199.7 million, or 19%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in Asia for the year ended December 31, 2012, compared to the year ended December 31, 2011 was primarily due to lower shipments of our microcontroller products as a result of weaker demand in industrial and consumer markets, with ARM and maXTouch products principally affected. In the year ended December 31, 2012 our Asian distributors significantly reduced their inventory of our products as compared to the year ended December 31, 2011. Our net revenue in Asia increased $153.9 million, or 17%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The increase in this region for 2011 compared to 2010 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. Net revenue for the Asia region was 60%, 59% and 55% of total net revenue for the years ended December 31, 2012, 2011 and 2010, respectively.
 
Our net revenue in Europe decreased $109.2 million, or 24%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in this region for year ended December 31, 2012, compared to the year ended December 31, 2011 was primarily a result of the continued decline in industrial markets.  Our net revenue in Europe increased $22.9 million, or 5%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The increase in this region for 2011 compared to 2010 was primarily a result of the improved automotive and industrial markets, partially offset by the decrease in smart card products included within the SMS business we sold in 2010. Net revenue for the Europe region was 25%. 26% and 27% of total net revenue for the years ended December 31, 2012, 2011 and 2010, respectively.    
 
Our net revenue in the United States decreased by $60.2 million, or 24%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. This decrease resulted from a continued decline in industrial markets, primarily in the markets for energy-related products. Our net revenue in the United States decreased by $10.2 million, or 4%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The decrease in this region for 2011 compared to 2010 resulted primarily from lower demand for smart metering and consumer-based products. Net revenue for the U.S. region was 13%, 14% and 16% of total net revenue for the years ended December 31, 2012, 2011 and 2010, respectively.
 

31


Revenue and Costs — Impact from Changes to Foreign Exchange Rates
 
Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies was 19%, 21% and 22% of our total net revenue for the years ended December 31, 2012, 2011 and 2010, respectively.

Costs denominated in foreign currencies were 19%, 19% and 33% of our total costs for the years ended December 31, 2012, 2011 and 2010, respectively.
 
Average exchange rates utilized to translate foreign currency revenue and expenses denominated in Euros were approximately 1.29, 1.39 and 1.36 Euros to the dollar for the years ended December 31, 2012 2011 and 2010, respectively.
 
For the year ended December 31, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue for the year ended December 31, 2012 would have been approximately $23.1 million higher had the average exchange rate in the current year remained the same as the average rate in effect for the year ended December 31, 2011. Our income from operations would have been approximately $7.7 million higher had the average exchange rate in the year ended December 31, 2012 remained the same as the average exchange rate in the year ended December 31, 2011.

For the year ended December 31, 2011, changes in foreign exchange rates had a favorable overall effect on our operating results. Our net revenue for the year ended December 31, 2011 would have been approximately $14.6 million lower had the average exchange rate in the current year remained the same as the average rate in effect for the year ended December 31, 2010. Our income from operations would have been approximately $4.2 million lower had the average exchange rate in the year ended December 31, 2011 remained the same as the average exchange rate in the ended December 31, 2010.

We continue to monitor the economic situation in Europe, which remains uncertain. The elimination of the Euro as a common currency, the withdrawal of member states from the Eurozone or other events affecting the liquidity, volatility or use of the Euro could have a significant effect on our revenue and operations if any of those events were to occur.
 
Gross Margin
 
Gross margin declined to 42.0% for the year ended December 31, 2012, compared to 50.4% for the year ended December 31, 2011. Gross margin in 2012 was negatively affected by lower sales, which resulted in lower utilization rates at our Colorado Springs wafer facility, and a weaker pricing environment. Our gross margin for 2012 was also negatively affected by a $10.6 million charge related to loss from a foundry arrangement (See Note 17 of Notes to Consolidated Financial Statements for further discussion). Over the past several years, we transitioned our business to a "fab-lite" manufacturing model, lowering our fixed costs and capital investment requirements by selling manufacturing operations and transitioning to foundry partners. We currently own and operate one wafer fabrication facility in Colorado Springs, Colorado.

Gross margin rose to 50.4% for the year ended December 31, 2011, compared to 44.3% for the year ended December 31, 2010. Gross margin in 2011 was positively affected by higher shipment levels, a more favorable mix of higher margin microcontroller products and continued cost reduction activities.

Inventory decreased to $348.3 million at December 31, 2012 from $377.4 million at December 31, 2011 primarily related to the sale of our serial flash product line. Inventory write-downs, if undertaken, may affect our results of operations, including gross margin, depending on the nature of those adjustments. If the demand for certain semiconductor products declines or does not materialize as we expect, we could be required to record additional write-downs, which would adversely affect our gross margin.
 
For the year ended December 31, 2012, we manufactured approximately 56% of our products in our own wafer fabrication facility compared to 50% for the year ended December 31, 2011.
 
Our cost of revenue includes the costs of wafer fabrication, assembly and test operations, inventory write-downs, royalty expense, freight costs and stock compensation expense. Our gross margin as a percentage of net revenue fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, reserves for excess and obsolete inventory, and average selling prices, among other factors.

Research and Development
 
Research and development ("R&D") expenses decreased 2%, or $4.1 million, to $251.5 million for the year ended December 31, 2012 from $255.7 million for the year ended December 31, 2011. R&D expenses for the year ended December 31, 2012, were favorably affected by approximately $9.6 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2011. As a percentage of net revenue, R&D expenses totaled 18% for the year ended December 31, 2012, compared to 14% for the year ended December 31, 2011.

R&D expenses increased 8%, or $17.8 million, to $255.7 million for the year ended December 31, 2011 from $237.8 million for the year ended December 31, 2010. R&D expenses increased for the year ended December 31, 2011, primarily due to increased

32


employee related expenses of $13.2 million resulting from increases in product development staffing, increased stock-based compensation expense of $3.6 million and decreased grant income of $3.3 million, offset by decreased mask costs and spending on product development of $5.1 million. R&D expenses, including the items described above, for the year ended December 31, 2011, were favorably affected by approximately $6.3 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2010. As a percentage of net revenue, R&D expenses totaled 14% for each of the years ended December 31, 2011 and 2010.

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 $4.2 million, $3.2 million and $7.9 million for the years ended December 31, 2012, 2011 and 2010, 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 decreased 2%, or $5.2 million, to $275.3 million for the year ended December 31, 2012 from $280.4 million for the year ended December 31, 2011. SG&A expenses were favorably affected by approximately $4.5 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2011. As a percentage of net revenue, SG&A expenses totaled 19% of net revenue for the year ended December 31, 2012, compared to 16% for the year ended December 31, 2011.

Selling, general and administrative ("SG&A") expenses increased 6%, or $16.1 million, to $280.4 million for the year ended December 31, 2011 from $264.3 million for the year ended December 31, 2010. SG&A expenses increased in 2011, primarily due to increased employee-related costs of $19.6 million resulting from increased employee benefits and increased stock-based compensation expense of $4.3 million, offset by a decrease in outside services of $4.8 million and reduced tax and audit fees of $1.3 million. SG&A expenses, including the items described above, were favorably affected by approximately $3.1 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2010. As a percentage of net revenue, SG&A expenses totaled 16% of net revenue for each of the years ended December 31, 2011 and 2010.


Stock-Based Compensation
 
We primarily issue restricted stock units to our employees as equity compensation. Employees may also participate in an Employee Stock Purchase Program that offers the ability to purchase stock through payroll withholdings at a discount to market price.

Stock-based compensation cost for stock options is based on the fair value of the award at the measurement date (grant date). The compensation amount for those options is calculated using a Black-Scholes option valuation model. For restricted stock unit awards, the compensation amount is determined based upon the market price of our common stock on the grant date. Stock-based compensation for restricted stock units, other than performance-based units described below, is recognized as an expense over the applicable vesting term for each employee receiving restricted stock units.
 
The recognition as expense of the fair value of performance-related stock-based awards is determined based upon management’s estimate of the probability and timing for achieving the associated performance criteria, utilizing the fair value of the common stock on the grant date. Stock-based compensation for performance-related awards is recognized over the estimated performance period, which may vary from period to period based upon management’s estimates of achievement and the timing to achieve the related performance goals. These awards vest once the performance criteria are met.
 
The following table summarizes stock-based compensation included in operating results for the year ended December 31, 2012 and 2011:
 

33


 
Years Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2010
 
(in thousands)
Cost of revenue
$
8,052

 
$
7,840

 
$
8,159

Research and development
22,825

 
22,916

 
19,324

Selling, general and administrative
41,565

 
37,369

 
33,027

Total stock-based compensation expense, before income taxes
72,442

 
68,125

 
60,510

Tax benefit
(12,060
)
 
(10,453
)
 
(7,548
)
Total stock-based compensation expense, net of income taxes
$
60,382

 
$
57,672

 
$
52,962


The table above excludes stock-based compensation credit of $3.1 million for the year ended December 31, 2010 for former Quantum executives related to our acquisition of Quantum, which are classified within acquisition-related charges in our consolidated statements of operations.

In May 2011, we adopted the 2011 Long-Term Performance Based Incentive Plan (the “2011 Plan”), which provides for the grant of restricted stock units to eligible employees. Vesting of restricted stock units granted under the 2011 Plan is subject to the satisfaction of performance metrics tied to revenue growth and operating margin over the designated performance periods, and no shares under the 2011 Plan vest, except under limited circumstances that include, for example, a participant's death, until sometime after the end of the final performance period which concludes on December 31, 2013. The performance periods for the 2011 Plan run from January 1, 2011 through December 31, 2013 and consist of three one-year performance periods (calendar years 2011, 2012 and 2013) and a three year cumulative performance period. We issued 0.3 million and 3.5 million performance-based restricted stock units in the years ended December 31, 2012 and 2011, respectively. We recorded total stock-based compensation expense related to performance-based restricted stock units of $12.7 million and $7.5 million under the 2011 Plan in the years ended December 31, 2012 and 2011, respectively.

In the quarter ended June 30, 2011, 8.5 million performance based restricted stock units issued under our 2008 Incentive Plan (the "2008 Plan") vested upon board of director approval on May 23, 2011 as a result of us achieving all of the performance criteria as of March 31, 2011. A total of 5.1 million shares were issued to participants, net of withholding taxes of 3.3 million shares, which represented all remaining shares available under the 2008 Plan. These vested performance based restricted stock units had a weighted average grant date fair value of $4.22 per share on the vesting date. We recorded total stock based compensation expense related to performance based restricted stock units of $6.5 million and $24.8 million under the 2008 Plan in the years ended December 31, 2011 and 2010, respectively.
 
The 2011 Plan performance metrics include revenue growth rankings for us relative to a semiconductor peer group or a microcontroller peer group, as determined by the Compensation Committee. In addition, in order for a participant to receive credit for a performance period, we must achieve a minimum operating margin during such performance period, measured on a pro forma basis as defined in the 2011 Plan, subject to adjustment by the Compensation Committee. We evaluate, on a quarterly basis, the likelihood of meeting our performance metrics in determining stock-based compensation expense for performance share plans.To the extent that aspects of a performance-based compensation plan such as ours are adjusted in the discretion of a compensation committee, the exercise of that discretion, notwithstanding that it is expressly permitted by the terms of a plan, may result in plan compensation awarded to named executive officers not being deductible.  Our Compensation Committee has retained the discretion to implement our 2011 Plan, notwithstanding any potential loss of deductibility, in the manner that it believes most effectively achieves the objectives of our compensation philosophies.

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.

Acquisition-Related Charges

We recorded total acquisition-related charges of $7.4 million, $5.4 million and $1.6 million for the years ended December 31, 2012, 2011 and 2010, respectively, related to amortization of our acquisitions of Ozmo, Inc. ("Ozmo") in December 2012, Advanced Digital Design ("ADD") in 2011 and Quantum Research Group Ltd. ("QRG") in 2008.

Included in those acquisition-related charges is amortization of $5.6 million, $4.6 million and $4.5 million for the years ended December 31, 2012, 2011 and 2010, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. We estimate that charges related to amortization of intangible assets will be approximately $5.2 million for 2013.


34


We also recorded other compensation related charges (credit) for these acquisitions of $1.8 million, $0.8 million and $(2.9) million for the years ended December 31, 2012, 2011 and 2010, respectively, related to our acquisitions noted above. In the quarter ended March 31, 2010, we recorded a credit of $4.5 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.

(Gain) Loss on Sale of Assets
 
Years Ended
 
December 31,
2011
 
December 31,
2010
 
(in thousands)
San Jose Corporate Headquarters
$
(33,428
)
 
$

Secure Microcontroller Solutions

 
5,715

Rousset, France

 
94,052

DREAM, France
(1,882
)
 

Total (gain) loss on sale of assets
(35,310
)
 
99,767


Serial Flash Product Line

On September 28, 2012, we sold our serial flash product line. Under the terms of the sale agreement, we transferred certain assets to the buyer, who assumed liabilities. As part of the sale transaction, we also granted the buyer an exclusive option to purchase our remaining $7.0 million of serial flash inventory. As of December 31, 2012 the buyer had purchased $1.9 million of that remaining inventory. We have, therefore, classified the remaining $5.1 million of serial flash inventory as assets held-for-sale, which are presented as part of other current assets on our consolidated balance sheets at December 31, 2012. We have recorded a deferred gain of $4.4 million, which is presented as part of accrued liabilities on our consolidated balance sheets as of December 31, 2012.

Sale of Former San Jose Corporate Headquarters

In 2011, we completed the sale of our former San Jose corporate headquarters and adjacent parcels of land to Ellis Partners LLC for an aggregate purchase price of $48.5 million. A gain of $33.4 million was recorded in the year ended December 31, 2011, which is summarized below:
 
(in thousands)
Sales price
$
(48,500
)
Net book value of assets transferred
12,262

Transaction related costs
2,810

Gain on sale of assets
$
(33,428
)

DREAM

In 2011, we sold our DREAM business, including our French subsidiary, Digital Research in Electronics, Acoustics and Music SAS (DREAM), which sold custom designed ASIC chips for karaoke and other entertainment machines, for $2.3 million. We recorded a gain of $1.9 million, which is reflected in gain on sale of assets in the consolidated statements of operations.

Secure Microcontroller Solutions

On September 30, 2010, we completed the sale of our SMS business to INSIDE Secure ("INSIDE"). Under the terms of the sale agreement, we received cash consideration of $37.0 million, subject to a working capital adjustment. Cash proceeds of $5.0 million were deposited in escrow by INSIDE to secure the payment of potential post-sale losses and was subsequently released to us during the first half of 2012. We also entered into other ancillary agreements as part of the sale. We recorded a loss on sale of $5.7 million, which is summarized in the following table:

35


 
(in thousands)
Sales consideration
$
(37,000
)
Net assets transferred, including working capital
32,420

Release of currency translation adjustment
2,412

Selling costs
3,882

Other related costs
4,001

Loss on sale of assets
$
5,715


In connection with the sale, we transferred net assets totaling $32.4 million to INSIDE.

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 $2.4 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 $3.9 million, which represented broker commissions and legal fees. We also incurred a transfer fee of $1.3 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 $2.7 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 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's affiliate, LFoundry Rousset, will reduce future commitments under our MSA with LFoundry Rousset.

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.

In connection with the SMS sale, we participated in INSIDE's preferred stock offering and invested $3.9 million in INSIDE. This represented an approximate 3% ownership interest in INSIDE at the time of the investment. This equity investment does not provide us with any decision making rights that are significant to the economic performance of INSIDE and we are shielded from economic losses and do not participate fully in INSIDE's residual economics. Subsequently, INSIDE went public in the first half of 2012 and we have classified this equity investment as short term on the balance sheet as of December 31, 2012. See Note 4 of Notes to Consolidated Financial Statements.

Rousset, France

On June 23, 2010, we closed the sale of our manufacturing operations in Rousset, France to LFoundry. Under the terms of the agreement, we transferred manufacturing assets and related liabilities valued at $61.6 million to LFoundry. In connection with the sale, our subsidiaries entered into ancillary agreements, including a Manufacturing Service Agreement ("MSA") under which a subsidiary agreed to purchase wafers from LFoundry's subsidiary, LFoundry Rousset, for four years following the closing on a "take-or-pay" basis. Upon closing of this transaction, we recorded a loss on sale of $94.1 million in 2010, which is summarized in the following table:
 
(in thousands)
Net assets transferred
$
61,646

Fair value of Manufacturing Services Agreement
92,417

Currency translation adjustment
(97,367
)
Severance cost liability
27,840

Transition services
4,746

Selling costs
3,173

Other related costs
1,597

Loss on sale of assets
$
94,052


"Take-or-pay" obligations under the MSA are limited to specified monthly periods based on rolling forecasts . We purchased all required wafers in each of 2012, 2011 and 2010.

As future wafer purchases under the MSA were negotiated at pricing above their fair value, we recorded a liability in conjunction with the sale, representing the present value of the unfavorable purchase commitment. To determine the liability, current

36


market prices for wafers from unaffiliated, well-known third party foundries were obtained, taking into consideration minimum volume requirements as specified in the contract, process technology, industry pricing trends and other factors. The difference between the contract prices and market prices over the term of the agreement totaled $103.7 million. The present value of this liability totaled $92.4 million (using a discount rate of 7%) and is included in the loss on sale of assets in the consolidated statement of operations. The present value of the liability is reduced over the term of the MSA as the wafers are purchased and the present value discount of $11.2 million is being recognized as interest expense over the same term. The MSA liability was reduced by $34.5 million, $31.9 million and $14.9 million for wafers purchased in the years ended December 31, 2012, 2011 and 2010, respectively.  The amount for the year ended December 31, 2012 included $3.3 million related to the impact of modification of the agreement in the second quarter 2012. We recorded $2.3 million, $4.5 million and $2.9 million in interest expense relating to the MSA in the years ended December 31, 2012, 2011 and 2010, respectively.

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 $97.4 million related to the foreign currency translation adjustment 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 specified 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 recorded a liability of $27.8 million as a component of the loss on sale. This amount was paid to the escrow account in the first quarter of 2011.

As part of the sale of the manufacturing operations, we incurred $4.7 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 $1.6 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 $3.2 million, which represented broker commissions and legal fees associated with the sale of our Rousset manufacturing operations to LFoundry.

Asset Impairment Charges

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 sheets at the lower of carrying amount or fair value, less cost to sell. Assets classified as held for sale are not depreciated.

For the year ended December 31, 2010 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 their 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 $11.9 million in the second quarter of 2010 (see Note 15 for further discussion).
 
Restructuring Charges
 
The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the year ended December 31, 2012, 2011 and 2010:
 


37


December 31, 2012
 
Q3'08
 
Q2'10
 
Q2'12
 
Q4'12
 
Total 2012 activity
 
(in thousands)
January 1, 2012
$
301

 
$
1,846

 
$

 
$

 
$
2,147

Charges - Employee termination costs, net of change in estimate

 
924

 
11,724

 
10,843

 
23,491

Charges - Other

 

 

 
495

 
495

Payments - Employee termination costs
(301
)
 
(1,902
)
 
(4,486
)
 
(2,973
)
 
(9,662
)
Foreign exchange (gain) loss

 
(429
)
 
180

 

 
(249
)
December 31, 2012
$

 
$
439

 
$
7,418

 
$
8,365

 
$
16,222


December 31, 2011
 
Q3'02
 
Q2'08
 
Q3'08
 
Q1'09
 
Q2'10
 
Total 2011 activity
 
(in thousands)
January 1, 2011
$
1,592

 
$
3

 
$
460

 
$
136

 
$
1,286

 
$
3,477

Charges (credits) - Employee termination costs, net of change in estimate

 
(3
)
 

 

 
21,659

 
21,656

Credit - Other
(1,592
)
 

 

 

 

 
(1,592
)
Payments - Employee termination costs

 

 

 

 
(21,461
)
 
(21,461
)
Payments - Other

 

 

 
(136
)
 

 
(136
)
Currency Translation Adjustment

 

 
15

 

 
1,165

 
1,180

Foreign exchange gain

 

 
(174
)
 

 
(803
)
 
(977
)
December 31, 2011
$

 
$

 
$
301

 
$

 
$
1,846

 
$
2,147


December 31, 2010
 
Q3'02
 
Q2'08
 
Q3'08
 
Q1'09
 
Q2'10
 
Total 2010 activity
 
(In thousands)
January 1, 2010
$
1,592

 
$
4

 
$
557

 
$
318

 
$

 
$
2,471

Charges - Employee termination costs, net of change in estimate

 

 

 
986

 
4,267

 
5,253

Payments - Employee termination costs

 

 
(44
)
 
(954
)
 
(2,965
)
 
(3,963
)
Payments - Other

 

 

 
(182
)
 

 
(182
)
Currency Translation Adjustment

 
(1
)
 
(53
)
 
(32
)
 
(16
)
 
(102
)
December 31, 2010
$
1,592

 
$
3

 
$
460

 
$
136

 
$
1,286

 
$
3,477


2012 Restructuring Charges

During the year ended December 31, 2012, we recorded restructuring charges of $23.5 million related to workforce reductions. We also recorded restructuring charges of $0.5 million for leases that were no longer required after we reduced our workforce. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities. We paid $9.7 million related to employee termination costs for the year ended December 31, 2012. We expect to pay the remaining amount accrued over the course of the next twelve months.

2011 Restructuring Charges

For the year ended December 31, 2011, we implemented cost reduction actions, primarily targeting a reduction of labor costs. We incurred restructuring charges of $21.7 million for the year ended December 31, 2011 related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities. We also recorded a restructuring credit of $1.6 million for the year ended December 31, 2011 related to resolution of a litigation matter. We paid $21.5 million related to employee termination costs for the year ended December 31, 2011.

38


    
2010 Restructuring Charges

For the year ended December 31, 2010, we incurred restructuring charges of $5.3 million related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities. We paid $4.0 million related to employee termination costs for the year ended December 31, 2010. We expect to pay the remaining amount accrued over the course of the next twelve months.

Loss From European Foundry Arrangements

In December 2009, a subsidiary entered into a take-or-pay agreement to purchase wafers from a European foundry that had acquired one of our former European manufacturing operations. In connection with the anticipated expiration of this agreement, we notified customers, in the fourth quarter of 2012, of our end-of-life process and requested that customers provide to us last-time-buy orders. To the extent that we believe we have excess wafers that remain after satisfying anticipated customer demand, we estimated a probable loss for those excess wafers, which was approximately $10.6 million. We, therefore, recorded a charge in that amount to our cost of sales in the consolidated statements of operations for the year ended December 31, 2012.

In June 2010, in connection with the sale of one of our former European manufacturing operations, one of our subsidiaries leased facilities to the acquirer of those operations and have charged that acquirer for rent and other occupancy costs. In the fourth quarter of 2012, we recorded a loss of $6.5 million on receivables from that tenant based on financial and other circumstances affecting the collectibility of those receivables, which is reflected under the caption impairment of receivables from foundry supplier in our consolidated statements of operations for the year ended December 31, 2012.

Credit from Reserved Grant Income
 
In March 2012, the Greek government executed a ministerial decision related to an outstanding state grant previously made to a Greek subsidiary. Consequently, we recognized a benefit of $10.7 million in our results for the three months ended March 31, 2012 resulting from the reversal of a reserve previously established for that grant.
 
Interest and Other (Expense) Income, Net
 
Years Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2010
 
(in thousands)
Interest and other (expense) income
$
(1,358
)
 
$
177

 
$
3,154

Interest expense
(4,130
)
 
(7,028
)
 
(7,535
)
Foreign exchange transaction gains
363

 
6,033

 
13,199

Total
$
(5,125
)
 
$
(818
)
 
$
8,818

 
Interest and other expense, net, for the year ended December 31, 2012 resulted in an expense of $5.1 million when compared to the same period in 2011, primarily related to a write off from a private company investment of $1.2 million and an other than temporary impairment charge of $1.2 million related to an equity investments. The decrease in foreign exchange transaction gains for the year ended December 31, 2011 was primarily due to changes to our foreign exchange exposures from intercompany balances between our subsidiaries compared to the year ended December 31, 2010. We continue to have balance sheet exposures in foreign currencies subject to exchange rate fluctuations and may incur further gains or losses in the future as a result of such foreign exchange exposures.

Provision for Income Taxes
We recorded a provision for (benefit from) income taxes of $11.8 million, $66.2 million and $(306.7) million in the years ended December 31, 2012, 2011 and 2010, respectively. For the years ended December 31, 2012 and 2011, the significant components of the tax provision were from operations in jurisdictions with operating profits. Our effective tax rate for the years ended December 31, 2012 and 2011 was lower than the statutory federal income tax rate of 35%, primarily due to income recognized in lower tax rate jurisdictions and the recognition of foreign R&D credits.
For the year ended December 31, 2010, the significant components of the tax benefit were the favorable settlement of the IRS tax audit, the release of valuation allowances attributable to deferred tax assets, and the recognition of certain U.S. foreign tax credits and foreign R&D credits.
Similar to our position during the fourth quarter of 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future, except certain assets related to state net operating losses and state tax credits, including R&D credit carry forwards. As a result, we continue to provide a full valuation allowance on the deferred tax assets relating to those items for year ended December 31, 2012.

39


The tax attribute carryforwards as of December 31, 2012 consist of the following:
Tax Attribute
December 31, 2012
 
Nature of Expiration
 
(In thousands)
 
 
Foreign net operating loss carry forwards
164,491

 
beginning of 2013
State net operating loss carry forwards
502,349

 
2013-2032
Federal R&D credits, net of those related to stock option deductions
5,126

 
beginning of 2020
Federal R&D credits related to stock option deductions
29,314

 
beginning of 2020
State R&D credits
14,817

 
indefinite
Foreign tax credits
43,973

 
beginning of 2020
State investment tax credits
8,255

 
beginning of 2013
Foreign R&D credits
32,203

 
refundable
We believe we may not be able to utilize portions of net operating loss carry forwards in non-U.S. jurisdictions before they expire, starting in 2013.
Included in the unrealized tax benefits ("UTBs") at December 31, 2012, 2011 and 2010, are $27.2 million, $25.2 million and $24.7 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2012, 2011 and 2010, are $45.5 million, $42.8 million and $38.9 million, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred tax assets.
Currently, we have tax audits in progress in various other foreign jurisdictions. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations. We believe that before December 31, 2013, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both.  As such, after we reach settlement with the tax authorities, we expect to record a corresponding adjustment to our unrecognized tax benefits.  Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $10.0 million in the next 12 months.  The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business.
Liquidity and Capital Resources
 
At December 31, 2012, we had $296.1 million of cash, cash equivalents and short-term investments, compared to $332.5 million at December 31, 2011. Our current asset to liability ratio, calculated as total current assets divided by total current liabilities, was 2.84 at December 31, 2012 compared to 3.14 at December 31, 2011. Working capital, calculated as total current assets less total current liabilities, decreased to $621.1 million at December 31, 2012, compared to $708.6 million at December 31, 2011. Cash provided by operating activities was $200.7 million and $221.1 million for the year ended December 31, 2012 and 2011, respectively, and capital expenditures totaled $38.3 million and $84.6 million for the year ended December 31, 2012 and 2011, respectively, with the decrease resulting primarily from a reduction in the purchase of testing equipment in 2012.
 
As of December 31, 2012, of the $296.1 million aggregate cash and cash equivalents and short-term investments held by us, the amount of cash and cash equivalents held by our foreign subsidiaries was $219.3 million. If the funds held by our foreign subsidiaries were needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment of additional U.S. taxes.
 
Operating Activities
 
Net cash provided by operating activities was $200.7 million for the year ended December 31, 2012, compared to $221.1 million for the year ended December 31, 2011. Net cash provided by operating activities for the year ended December 31, 2012 was determined primarily by adjusting net income of $30.4 million for certain non-cash charges for depreciation and amortization of $76.9 million and stock-based compensation charges of $72.4 million.

Net cash provided by operating activities was $221.1 million for the year ended December 31, 2011, compared to $299.5 million for the year ended December 31, 2010. Net cash provided by operating activities for the year ended December 31, 2011 was determined primarily by adjusting net income of $315.0 million for certain non-cash charges for depreciation and amortization of $77.0 million, stock-based compensation charges of $68.1 million, and $36.3 million related to the non-cash portion of the gain on sale related to the sale of our former corporate headquarters. In addition, operating cash flows were reduced by inventory build during the year of $100.7 million as a result of higher build rates to support increased revenue, due to our transition to foundry suppliers with minimum delivery requirements and a decline in shipments in the second half of 2011.
 

40


Accounts receivable decreased by 11% or $24.4 million to $188.5 million at December 31, 2012, from $212.9 million at December 31, 2011. The average number of days of accounts receivable outstanding decreased to 50 days for year ended December 31, 2012 from 51 days for the year ended December 31, 2011.
 
Inventories decreased to $348.3 million at December 31, 2012 from $377.4 million at December 31, 2011. Inventories consist of raw wafers, purchased foundry wafers, work-in-process and finished units. Our number of days of inventory decreased to 148 days for the three months ended December 31, 2012 from 173 days for the three months ended December 31, 2011. As a result of the sale of our serial flash product lines in September 2012, inventories were reduced by $25.6 million, of which $18.6 million was transferred to the buyer at the time of sale. We also granted the buyer an exclusive option to purchase our remaining $7.0 million of serial flash inventory. As of December 31, 2012, $5.1 million of that inventory had not yet been purchased. We expect the remaining $5.1 million to be purchased in 2013.
 
Investing Activities
 
Net cash used in investing activities was $51.9 million for the year ended December 31, 2012, compared to net cash used in investing activities of $43.2 million for the year ended December 31, 2011. For the year ended December 31, 2012, we paid $38.3 million for acquisitions of fixed assets as compared to $84.6 million in the year ended December 31, 2011 resulting principally from reduced purchases of testing equipment. For the year ended December 31, 2012, we paid $43.5 million for acquisitions of businesses, net of cash acquired, as compared to $20.3 million for the year ended December 31, 2011. We also received $26.9 million in cash from the sale of our serial flash product lines during the year ended December 31, 2012.

Net cash used in investing activities was $43.2 million for the year ended December 31, 2011, compared to $75.7 million for the year ended December 31, 2010. For the year ended December 31, 2011, we paid $84.6 million for acquisitions of fixed assets, $4.0 million for intangible assets and $19.4 million, net of cash acquired, for an acquisition we completed, offset in part by net proceeds of $47.3 million from the sale of our former corporate headquarters.
 
We anticipate expenditures for capital purchases in 2013 to be relatively consistent with 2012, and to be used principally to maintain existing manufacturing operations and to expand manufacturing capacity for our XSense product.
 
Financing Activities
 
Net cash used in financing activities was $182.6 million and $346.2 million for the year ended December 31, 2012 and 2011, respectively. The cash used was primarily related to stock repurchases of $179.6 million in the year ended December 31, 2012, compared to stock repurchases of $304.2 million in the year ended December 31, 2011 and tax payments related to shares withheld for vested restricted stock units of $19.8 million for the year ended December 31, 2012, compared to $73.3 million for the year ended December 31, 2011. During the year ended December 31, 2012, we repurchased 22.7 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program. As of December 31, 2012, $127.2 million remained available for repurchases under this program. Proceeds from the issuance of common stock related to exercises of stock options and our employee stock purchase plan totaled $15.5 million and $28.7 million for the years ended December 31, 2012 and 2011, respectively.

Net cash used in financing activities was $346.2 million and $158.5 million for the years ended December 31, 2011 and 2010, respectively. The cash used was primarily related to stock repurchases of $304.2 million in the year ended December 2011, compared to stock repurchases of $89.2 million in the year ended December 31, 2010 and tax payments related to shares withheld for vested restricted stock units of $73.3 million for the year ended December 31, 2011, compared to $11.1 million in 2010. Proceeds from the issuance of common stock in respect of stock options and our employee stock purchase plan totaled $28.7 million and $29.9 million for the years ended December 31, 2011 and 2010, respectively.

We believe our existing balances of cash, cash equivalents and short-term investments, together with anticipated cash flow from operations, available equipment lease financing, and other short-term and medium-term bank borrowings that we believe would be available to us, will be sufficient to meet our liquidity and capital requirements over the next twelve months.
 
Since a substantial portion of our operations are conducted through our foreign subsidiaries, our cash flow, ability to service debt, and payments to vendors are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to us. Our foreign subsidiaries are separate and distinct legal entities and may be subject to local legal or tax requirements, or other restrictions that may limit their ability to transfer funds to other group entities including the U.S. parent entity, whether by dividends, distributions, loans or other payments.
 
During the next twelve months, we expect our operations to continue to generate positive cash flow. However, a portion of cash balances may be used to make capital expenditures, repurchase common stock, or make acquisitions. During 2013 and in future years, our ability to make necessary capital investments or strategic acquisitions will depend on our ability to continue to generate sufficient cash flow from operations and to obtain adequate financing if necessary. We believe we have sufficient working capital to fund our future operations with $296.1 million in cash, cash equivalents and short-term investments as of December 31, 2012 together with expected future cash flows from operations.

41



Off-Balance Sheet Arrangements (Including Guarantees)
 
See the paragraph under the heading “Guarantees” in Note 11 of Notes to Consolidated Financial Statements for a discussion of off-balance sheet arrangements.

Contractual Obligations
The following table describes our commitments to settle contractual obligations in cash as of December 31, 2012. See Note 11 of Notes to Consolidated Financial Statements for further discussion.
 
 
Payments Due by Period
Contractual Obligations:
 
Less than 1 Year
 
1-3
Years
 
3-5
Years
 
More than 5 Years
 
Total
 
 
(In thousands)
Long-term debt
 
$

 
$
9,195

 
$

 
$

 
$
9,195

Capital purchase commitments
 
13,759

 

 

 

 
13,759

Long-term supply agreement obligation(a)
 
70,971

 

 

 

 
70,971

Estimated pension plan benefit payments (b)
 
544

 
1,131

 
2,146

 
9,465

 
13,286

Grants to be repaid
 
5,054

 

 

 

 
5,054

Operating leases(c)
 
8,992

 
16,600

 
14,135

 
28,770

 
68,497

Other long-term obligations(d)
 
18,726

 
7,826

 
1,789

 
6,584

 
34,925

Total other commitments
 
118,046

 
34,752

 
18,070

 
44,819

 
215,687

Add: interest
 
169

 

 

 

 
169

Total
 
$
118,215

 
$
34,752

 
$
18,070

 
$
44,819

 
$
215,856


(a)
Long-term supply agreement obligation of $71.0 million is comprised of $43.9 million related to a manufacturing services agreement entered into with LFoundry Rousset, the buyer of our manufacturing operations in Rousset, France in June 2010 (the original commitment upon closing was $448 million). The remaining balance of $27.1 million relates to a supply agreement entered into with Telefunken Semiconductors International LLC (the original commitment upon closing in 2008 was 82 million Euros).

(b)
The "More than 5 years" amount represents the estimated payments to be made in years 5 through 10. Estimated payments beyond 10 years are not practical to estimate. See Note 13 to the Notes to Consolidated Financial Statements for further discussion.

(c)
Operating leases include the San Jose headquarters of $51.5 million and other worldwide operating leases of $17.0 million.

(d)
Other long-term obligations consist of advances from customers of $14.7 million, of which $10.0 million is paid out annually, until paid in full (see Note 2 of Notes to Consolidated Financial Statements for further discussion). The remaining balance of $20.2 million relates to $9.8 million of obligations relating to software rights, $3.8 million of technology license payments and $6.6 million of various other long-term obligations.
The contractual obligation table above excludes certain estimated tax liabilities of $29.0 million as of December 31, 2012 because we cannot make a reliable estimate of the timing of tax audits, related outcomes and related future tax payments. However, these estimated tax liabilities for uncertain tax positions are included in our consolidated balance sheet. See Notes 2 and 12 of Notes to Consolidated Financial Statements for further discussion.
Recent Accounting Pronouncements
    
In June 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2011-05,Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income.The amendments from this update will result in more converged guidance on how comprehensive income is presented under U.S. GAAP and International Financial Reporting Standards ("IFRS"). With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented. Previously, U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options was to present the components

42


of other comprehensive income as part of the statement of changes in stockholders' equity. This update eliminated that option. The amended guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. On October 21, 2011 the FASB decided to propose a deferral of the requirement to present reclassifications of other comprehensive income on the face of the income statement and on February 5, 2013, the FASB finalized this requirement for public entities beginning after December 15, 2012. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
    
In May 2011, the FASB issued ASU No. 2011-04,Fair Value Measurement (ASC Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements under U.S. GAAP and IFRS. Consequently, the amendments describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements as well as improving consistency in application across jurisdictions to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of Level 3 assets and for measuring the fair value of an instrument classified in a reporting entity's shareholders' equity. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates
 
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. We consider the accounting policies described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

We sell our products to original equipment manufacturers ("OEMs") and distributors and recognize revenue when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable, and collection is reasonably assured. Allowances for sales returns and other credits are recorded at the time of sale.

Contracts and customer purchase orders are used to determine the existence of an arrangement. Shipping documents are used to verify delivery. We assess whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. Sales terms do not include post-shipment obligations except for product warranty, as described in Note 1 of Notes to Consolidated Financial Statements.

For sales to certain distributors (primarily based in the U.S. and Europe) with agreements allowing for price protection and product returns, historically we have not had the ability to estimate future claims at the point of shipment, and given that price is not fixed or determinable at that time, revenue is not recognized until the distributor sells the product to its end customer.

For sales to independent distributors in Asia, excluding Japan, 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. After reviewing the more limited pricing, rebate and quotation-related terms, we concluded that we could reliably estimate future credits or rebates, therefore, we recognize revenue at the point of shipment for our Asian distributors, assuming all of the other revenue recognition criteria are met, utilizing amounts invoiced, less estimated future credits or rebates.

Our revenue reporting is highly dependent on receiving accurate and timely data from our distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities 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 from those estimates.

Allowance for Doubtful Accounts and Sales Returns

We must make estimates of potential future product returns and revenue adjustments related to current period product revenue. Management analyzes historical returns, current economic trends in the semiconductor industry, changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns. If management made

43


different judgments or utilized different estimates, material differences in the amount of our reported revenue may result. We provide for sales returns based on our customer experience and our expectations for revenue adjustments based on economic conditions within the semiconductor industry.

We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers' inability to make required payments. We make our estimate of the uncollectibility of our accounts receivable by analyzing specific customer creditworthiness, historical bad debts and current economic trends. At December 31, 2012 and 2011, the allowance for doubtful accounts was approximately $11.0 million and $11.8 million, respectively.

Income Taxes

In calculating our income tax expense, it is necessary to make certain estimates and judgments for financial statement purposes that affect the recognition of tax assets and liabilities.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the net deferred tax asset would decrease income tax expense in the period such determination is made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the net deferred tax asset would increase income tax expense in the period such determination is made.

In assessing the realizability of deferred tax assets, we evaluate both positive and negative evidence that may exist and consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Any adjustment to the net deferred tax asset valuation allowance would be recorded in the consolidated statement of operations for the period that the adjustment is determined to be required.

Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations.

Valuation of Inventory

Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Cost includes labor, including stock-based compensation costs, materials, depreciation and other overhead costs, as well as factors for estimated production yields and scrap. Determining market value of inventories involves numerous judgments, including average selling prices and sales volumes for future periods. We primarily utilize selling prices in our period ending backlog for measuring any potential declines in market value below cost. Any adjustment for market value provision is charged to cost of revenue at the point of market value decline.

We evaluate our ending inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and forecasted sales levels by product and other factors, including, but not limited to, competitiveness of product offerings, market conditions and product lifecycles. Actual demand may be lower, or market conditions less favorable, than those projected by us. This difference could have a material adverse effect on our gross margin should inventory write-downs beyond those initially recorded become necessary. Alternatively, should actual demand and market conditions be more favorable than those estimated by us, gross margin could be favorably impacted.

We adjust the cost basis for inventories on hand in excess of forecasted demand. In addition, we write off inventories that are considered obsolete. Obsolescence is determined based on several factors, including competitiveness of product offerings, market conditions and product life cycles. Increases to the provision for excess and obsolete inventory are charged to cost of revenue. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-cost inventory is subsequently sold, it will result in lower costs and higher gross margin for those products.

Fixed Assets

We review the carrying value of fixed assets for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition. Factors which could trigger an impairment review include the following: (i) significant negative industry or

44


economic trends, (ii) exiting an activity in conjunction with a restructuring of operations, (iii) current, historical or projected losses that demonstrated continuing losses associated with an asset, (iv) significant decline in our market capitalization for an extended period of time relative to net book value, (v) recent changes in our manufacturing model, and (vi) management's assessment of future manufacturing capacity requirements. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash flows involves numerous assumptions, which require our judgment, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets, future-selling prices for our products and future production and sales volumes. In addition, we must use our judgment in determining the groups of assets for which impairment tests are separately performed.

Our business requires investment in manufacturing facilities that are technologically advanced but can quickly become significantly underutilized or rendered obsolete by rapid changes in demand for semiconductors produced in those facilities.

We estimate the useful life of our manufacturing equipment, which is the largest component of our fixed assets, to be five years. We base our estimate on our experience with acquiring, using and disposing of equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin depreciation on new equipment when it is ready for its intended use. The aggregate amount of fixed assets under construction for which depreciation was not being recorded was approximately $2.7 million and $0.6 million as of December 31, 2012 and 2011, respectively.

Valuation of Goodwill and Intangible Assets

We review goodwill and intangible assets with indefinite lives for impairment annually during the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In 2011, we early adopted ASU 2011-08 "Intangibles-Goodwill and Other" and performed an assessment of qualitative factors to determine whether it was more likely than not that the fair value of our reporting units is less that their carrying value. Based on the carrying amount of our reporting units and our assessment of certain qualitative factors including current macroeconomic, industry and market conditions, we concluded that it is not more likely than not that the fair value of our reporting units is less than their carrying amount. Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that we may not be able to recover the asset's carrying amount. Determining the fair value of a reporting unit is subjective in nature and involves the use of significant estimates and assumptions. We determine the fair value of our reporting unit based on an income approach, whereby we calculate the fair value of the reporting unit based on the present value of estimated future cash flows, which are formed by evaluating operating plans. Estimates of the future cash flows associated with the businesses are critical to these assessments. The assumptions used in the fair value calculation change from year to year and include revenue growth rates, operating margins, risk adjusted discount rates and future economic and market conditions. Changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges in future periods. We base our fair value estimates on assumptions we believe to be reasonable. Actual future results may differ from those estimates.

Stock-Based Compensation

We determine the fair value of options on the measurement date utilizing an option-pricing model, which is affected by our common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors during the expected period between the stock option vesting date and the stock option exercise date. For performance-based restricted stock units, we are required to assess the probability of achieving certain financial objectives at the end of each reporting period. Based on the assessment of this probability, which requires subjective judgment, we record stock-based compensation expense before the performance criteria are actually fully achieved, which may then be reversed in future periods if we determine that it is no longer probable that the objectives will be achieved. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. The fair value of a restricted stock unit is equivalent to the market price of our common stock on the measurement date.

Restructuring Charges

Our restructuring accruals include primarily payments to employees for severance, termination fees associated with leases, other contracts and other costs related to the closure of facilities. Accruals are recorded when management has approved a plan to restructure operations and a liability has been incurred. The restructuring accruals are based upon management estimates at the time they are recorded. These estimates can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded.

Litigation

We accrue for losses related to litigation, including intellectual property, commercial and other litigation, if a loss is probable and the loss can be reasonably estimated. We regularly evaluate current information available to determine whether accruals for litigation should be made. If we were to determine that such a liability was probable and could be reasonably estimated, the adjustment would be charged to income in the period such determination was made.

45



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available-for-sale, and consequently record them on the consolidated balance sheets at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or statements of operations through December 31, 2012.
 
Foreign Currency Risk
 
When we take an order denominated in a foreign currency we will receive fewer dollars, and lower revenue, than we initially anticipated if that local currency weakens against the dollar before we ship our product. Conversely, revenue will be positively impacted if the local currency strengthens against the dollar before we ship our product. Costs may also be affected by foreign currency fluctuation. 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. This impact is determined assuming that all foreign currency denominated transactions that occurred for the year ended December 31, 2012 were recorded using the average foreign currency exchange rates in the year ended December 31, 2011. We do not use derivative instruments to hedge our foreign currency risk.
 
Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies was 19%, 21% and 22% of our total net revenue for the years ended December 31, 2012, 2011 and 2010.

Costs denominated in foreign currencies were 19%, 19% and 33% of our total costs for the years ended December 31, 2012, 2011 and 2010, respectively.
 
Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.29, 1.39 and 1.36 Euros to the dollar for the years ended December 31, 2012 2011 and 2010, respectively.
 
For the year ended December 31, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue for the year ended December 31, 2012 would have been approximately $23.1 million higher had the average exchange rate in the current year remained the same as the average rate in effect for the year ended December 31, 2011. Our income from operations would have been approximately $7.7 million higher had the average exchange rate in the year ended December 31, 2012 remained the same as the average exchange rate in the ended December 31, 2011.

For the year ended December 31, 2011, changes in foreign exchange rates had a favorable overall effect on our operating results. Our net revenue for the year ended December 31, 2011 would have been approximately $14.6 million lower had the average exchange rate in the current year remained the same as the average rate in effect for the year ended December 31, 2010. Our income from operations would have been approximately $4.2 million lower had the average exchange rate in the year ended December 31, 2011 remained the same as the average exchange rate in the ended December 31, 2010.
 
We also face the risk that our accounts receivable denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 18% and 23% of our accounts receivable were denominated in foreign currency as of December 31, 2012 and 2011, respectively.
 
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. Approximately 8% and 10% of our accounts payable were denominated in foreign currencies at both December 31, 2012 and 2011. All of our debt obligations were denominated in foreign currencies at both December 31, 2012 and 2011. We have not historically sought to hedge our foreign currency exposure, although we may determine to do so in the future.
 
There remains ongoing uncertainty regarding the future of the Euro as a common currency and the Eurozone. While we continue to monitor the situation, the elimination of the Euro as a common currency, the withdrawal of member states from the Eurozone or other events affecting the liquidity, volatility or use of the Euro could have a significant effect on our revenue and operations.

Liquidity and Valuation Risk

        Approximately $1.1 million and $2.3 million of our investment portfolio is invested in auction-rate securities at December 31, 2012 and December 31, 2011, respectively.


46




47


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page
Consolidated Financial Statements of Atmel Corporation
 
Financial Statement Schedules
 
The following Financial Statement Schedules for the years ended December 31, 2012, 2011, and 2010 should be read in conjunction with the Consolidated Financial Statements, and related notes thereto:
 
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto
 
Supplementary Financial Data
 

48


Atmel Corporation
Consolidated Statements of Operations
 
 
Years Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2010
 
(in thousands, except per share data)
Net revenue
1,432,110

 
1,803,053

 
1,644,060

Operating expenses
 
 
 
 
 
Cost of revenue
830,791

 
894,820

 
915,876

Research and development
251,519

 
255,653

 
237,812

Selling, general and administrative
275,257

 
280,410

 
264,296

Acquisition-related charges
7,388

 
5,408

 
1,600

Restructuring charges
23,986

 
20,064

 
5,253

Impairment of receivables from foundry supplier
6,495

 

 

Asset impairment charges

 

 
11,922

Credit from reserved grant income
(10,689
)
 

 

(Gain) loss on sale of assets

 
(35,310
)
 
99,767

Total operating expenses
1,384,747

 
1,421,045

 
1,536,526

Income from operations
47,363

 
382,008

 
107,534

Interest and other (expense) income, net
(5,125
)
 
(818
)
 
8,818

Income before income taxes
42,238

 
381,190

 
116,352

(Provision for) benefit from income taxes
(11,793
)
 
(66,200
)
 
306,723

Net income
30,445

 
314,990

 
423,075

Basic net income per share:
 

 
 

 
 

Net income per share
$
0.07

 
$
0.69

 
$
0.92

Weighted-average shares used in basic net income per share calculations
433,017

 
455,629

 
458,482

Diluted net income per share:
 

 
 

 
 

Net income per share
$
0.07

 
$
0.68

 
$
0.90

Weighted-average shares used in diluted net income per share calculations
437,582

 
462,673

 
469,580

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

49


Atmel Corporation
Consolidated Statements of Comprehensive Income
 
<