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MAXIM INTEGRATED PRODUCTS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

04/24/2015 | 01:58pm US/Eastern

Maxim Integrated Products, Inc. ("Maxim Integrated" or the "Company" and also referred to as "we," "our" or "us") disclaims any duty to and undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by federal securities laws. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that the Company files with or furnishes to the SEC from time to time, such as its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview of Business

Maxim Integrated is incorporated in the state of Delaware. Maxim Integrated designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of geographically diverse customers. The Company also provides a range of high-frequency process technologies and capabilities that can be used in custom designs. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. The Company is a global company with wafer manufacturing facilities in the U.S., testing facilities in the Philippines and Thailand and sales and circuit design offices throughout the world. The major end-markets in which the Company's products are sold are the Automotive, Communications and Data Center, Computing, Consumer and Industrial markets.

On October 1, 2013, the Company completed the acquisition of Volterra Semiconductor Corporation ("Volterra"), a company that develops power management solutions, for approximately $615.0 million. The acquisition of Volterra expands our serviceable available market across a wide range of end markets, including enterprise server, cloud computing and communications.

On October 23, 2014, the Company initiated a plan to shut down its San Jose wafer fabrication facility. In connection with this plan, the Company expects to incur additional charges for accelerated depreciation of approximately $56 million during the


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remainder of fiscal 2015 and during fiscal 2016 which will be included in "Cost of goods sold" in the Condensed Consolidated Statements of Income.



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CRITICAL ACCOUNTING POLICIES

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition and related allowances, which impact the recording of revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts write-offs of fixed assets, intangible assets, and goodwill; accounting for stock-based compensation, which impacts cost of goods sold, gross margins and operating expenses; accounting for income taxes, which impacts the income tax provision; and assessment of contingencies, which impacts charges recorded in cost of goods sold and operating expenses. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or are less likely to have a material impact on our reported results of operations for a given period.

There have been no material changes during the nine months ended March 28, 2015 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 28, 2014.



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RESULTS OF OPERATIONS

The following table sets forth certain Condensed Consolidated Statements of Income data expressed as a percentage of net revenues for the periods indicated:

                                       Three Months Ended                  Nine Months Ended
                                   March 28,         March 29,
                                      2015             2014         March 28, 2015    March 29, 2014

Net revenues                          100.0  %          100.0  %        100.0  %           100.0  %
Cost of goods sold                     45.4  %           43.9  %         43.9  %            43.9  %
Gross margin                           54.6  %           56.1  %         56.1  %            56.1  %
Operating expenses:
Research and development               21.5  %           23.4  %         23.2  %            22.9  %
Selling, general and
administrative                         13.1  %           13.3  %         13.7  %            13.3  %
Intangible asset amortization           0.7  %            0.8  %          0.7  %             0.7  %
Impairment of long-lived assets         1.0  %              -  %          3.9  %             0.3  %
Impairment of goodwill and
intangible assets                         -  %            0.4  %          5.4  %             0.1  %
Severance and restructuring
expenses                                0.5  %            0.6  %          1.0  %             1.1  %
Acquisition-related costs                 -  %              -  %            -  %             0.4  %
Other operating expenses
(income), net                          (0.4 )%            0.1  %            -  %             0.4  %
Total operating expenses               36.4  %           38.6  %         47.9  %            39.2  %
Operating income                       18.2  %           17.5  %          8.2  %            16.9  %
Interest and other income
(expense), net                         (1.0 )%            0.9  %         (1.1 )%            (0.2 )%
Income before provision for
income taxes                           17.2  %           18.4  %          7.1  %            16.7  %
Income tax provision (benefit)          3.5  %           (1.8 )%          0.9  %             1.7  %
Net income                             13.7  %           20.2  %          6.2  %            15.0  %



The following table shows stock-based compensation included in the components of the Condensed Consolidated Statements of Income reported above as a percentage of net revenues for the periods indicated:

                                      Three Months Ended                   Nine Months Ended
                                 March 28,          March 29,         March 28,          March 29,
                                   2015               2014              2015               2014

Cost of goods sold                    0.5 %              0.5 %             0.5 %              0.5 %
Research and development              1.6 %              1.9 %             1.9 %              1.9 %
Selling, general and
administrative                        1.0 %              1.2 %             1.2 %              1.1 %
                                      3.1 %              3.6 %             3.6 %              3.5 %



Net Revenues

Net revenues were $577.3 million and $605.7 million for the three months ended March 28, 2015 and March 29, 2014, respectively, a decrease of 4.7%. We classify our shipments by five major end markets: Automotive, Communications and Data Center, Computing, Consumer and Industrial. Net shipments decreased during the three months ended March 28, 2015 as compared to the three months ended March 29, 2014 due to a decrease in shipments of our consumer products driven primarily by lower demand from our smartphones customers. This decrease was partially offset primarily by an increase in products offered in the automotive end market with new design win ramps across multiple applications and customers.

Net revenues were $1,724.3 million and $1,811.2 million for the nine months ended March 28, 2015 and March 29, 2014, respectively, a decrease of 4.8%. Net shipments decreased during the nine months ended March 28, 2015 as compared to the nine


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months ended March 29, 2014 due to a decrease in shipments of our consumer products driven primarily by lower demand from our smartphones customers. This decrease was partially offset primarily by products offered in the automotive end market with new design win ramps across multiple applications and customers and an increase in server revenues, driven by the Volterra acquisition, in the communications and data center end market.

During the three months ended March 28, 2015 and March 29, 2014, approximately 88% and 89% of net revenues were derived from customers outside of the United States. During the nine months ended March 28, 2015 and March 29, 2014, approximately 88% and 87% of net revenues were derived from customers outside of the United States. While more than 95% of these sales are denominated in U.S. Dollars, we enter into foreign currency forward contracts to mitigate our risks on firm commitments and net monetary assets and liabilities denominated in foreign currencies. The impact of changes in foreign exchange rates on our revenue and results of operations for the three and nine months ended March 28, 2015 and March 29, 2014 was immaterial.

Gross Margin

Our gross margin percentages were 54.6% and 56.1% for the three months ended March 28, 2015 and March 29, 2014, respectively. Gross margin for three months ended March 28, 2015 was impacted by accelerated depreciation of $9.8 million relating to the San Jose wafer fabrication facility shut down. Gross margin as a percentage of sales for the three months ended March 29, 2014 included $5.5 million amortization of inventory write-up relating to the Volterra acquisition that did not recur in fiscal year 2015.

Our gross margin percentages were 56.1% for the nine months ended March 28, 2015 and March 29, 2014. Gross margin as a percentage of sales for the nine months ended March 29, 2014 included $18.6 million amortization of inventory write-up relating to the Volterra acquisition that did not recur in fiscal year 2015. Gross margin for nine months ended March 28, 2015 was impacted by accelerated depreciation of $18.7 million relating to the San Jose wafer fabrication facility shut down.

Research and Development

Research and development expenses were $123.9 million and $141.5 million for the three months ended March 28, 2015 and March 29, 2014, respectively, which represented 21.5% and 23.4% of net revenues for each respective period. The $17.6 million decrease was primarily attributable to a decrease in salaries and related expenses of $9.9 million as a result of headcount reductions primarily due to restructuring programs implemented in fiscal year 2015 and spending control efforts.

Research and development expenses were $400.2 million and $414.4 million for the nine months ended March 28, 2015 and March 29, 2014, respectively, which represented 23.2% and 22.9% of net revenues for each respective period. The $14.2 million decrease was primarily attributable to a decrease in salaries and related expenses of $6.4 million as a result of headcount reductions primarily due to restructuring programs implemented in fiscal year 2015 and spending control efforts.

Selling, General and Administrative

Selling, general and administrative expenses were $75.8 million and $80.7 million for the three months ended March 28, 2015 and March 29, 2014, respectively, which represented 13.1% and 13.3% of net revenues for each respective period. The $4.9 million decrease was primarily attributable to spending control efforts and a decrease in salaries and related expenses primarily resulting from headcount reductions.

Selling, general and administrative expenses were $235.5 million and $241.6 million for the nine months ended March 28, 2015 and March 29, 2014, respectively, which represented 13.7% and 13.3% of net revenues for each respective period. The $6.1 million decrease was primarily attributable to spending control efforts and a decrease in salaries and related expenses primarily resulting from headcount reductions.

Impairment of Long-Lived Assets

Impairment of long-lived assets were $5.5 million and $0 for the three months ended March 28, 2015 and March 29, 2014, respectively, which represented 1.0% and 0.0% of net revenues for each respective period. The $5.5 million increase was primarily due to equipment impairment associated with used fabrication tools identified by the Company as obsolete in the three months ended March 28, 2014 as well as the write-off of a software license.

Impairment of long-lived assets were $66.5 million and $5.2 million for the nine months ended March 28, 2015 and March 29, 2014, respectively, which represented 3.9% and 0.3% of net revenues for each respective period. The $61.3 million increase was primarily due to the equipment impairment associated with the Sensing Solutions reporting unit.



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Impairment of goodwill and intangible assets

Impairment of goodwill and intangible assets were $0 and $2.6 million for the three months ended March 28, 2015 and March 29, 2014, respectively, which represented 0.0% and 0.4% of net revenues for each respective period. The $2.6 million impairment was driven by in-process research and development abandoned in the three months ended March 29, 2014.

Impairment of goodwill and intangible assets were $93.0 million and $2.6 million for the nine months ended March 28, 2015 and March 29, 2014, respectively, which represented 5.4% and 0.1% of net revenues for each respective period. The $90.4 million increase was primarily driven by goodwill and in-process research and development for the Sensing Solutions reporting unit that was determined to be fully impaired. The Sensing Solutions reporting unit develops integrated circuits that are primarily sold in the consumer and automotive end customer markets. The impairment was the result of the Company's decision within the quarter ended December 27, 2014 to exit certain market offerings that have competitive dynamics which are no longer consistent with the Company's business objectives.

Acquisition-related costs

Acquisition-related costs were $7.0 million for the nine months ended March 29, 2014 and included banker fees, legal fees, and other Volterra acquisition-related costs.

Other Operating Expenses (Income), net

Other operating expenses (income), net were $(2.2) million and $0.3 million during the three months ended March 28, 2015 and March 29, 2014, respectively. This net decrease in expense of $2.5 million was primarily driven by a change in estimate to an expected loss on rent expense for vacated office space of $3.4 million.

Other operating expenses (income), net were $0.3 million and $7.0 million during the nine months ended March 28, 2015 and March 29, 2014, respectively. This net decrease in expense of $6.7 million was primarily driven by a $6.0 million intellectual property infringement legal settlement recorded in the nine month period ended March 29, 2014.

Interest and Other Income (Expense), net

Interest and other income (expense), net were $(5.5) million and $5.2 million for the three months ended March 28, 2015 and March 29, 2014, respectively. The change in interest and other expense of $10.7 million was primarily driven by less income from licensing intellectual property of $14.6 million offset by $3.7 million other long term investment impairment.

Interest and other income (expense), net were $(19.6) million and $(4.1) million for the nine months ended March 28, 2015 and March 29, 2014, respectively. The change in interest and other expense of $15.5 million was primarily driven by less income from licensing intellectual property of $13.4 million and a $5.1 million of higher interest expense on long-term notes offset by $3.9 million of other long term investment impairment.

Provision for Income Taxes

In the three and nine months ended March 28, 2015, the Company recorded an income tax provision (benefit) of $20.5 million and $15.3 million, respectively, compared to $(10.6) million and $31.6 million in the three and nine months ended March 29, 2014, respectively. The Company's effective tax rate for the three and nine months ended March 28, 2015 was 20.5% and 12.5%, respectively, compared to (9.5)% and 10.5% for the three and nine months ended March 29, 2014, respectively.

The Company's federal statutory tax rate is 35%. The Company's effective tax rate for the three months ended March 28, 2015 was lower than the statutory rate primarily because earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, were taxed at lower tax rates and a $3.7 million discrete benefit for differences, primarily related to changes in estimates, between our fiscal year 2014 tax returns and the tax provision originally recorded, partially offset by stock-based compensation for which no tax benefit is expected.

The Company's effective tax rate for the nine months ended March 28, 2015 was lower than the statutory tax rate primarily because earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, were taxed at lower tax rates, a $2.9 million discrete benefit for fiscal year 2014 research tax credits that were generated by the retroactive extension of the federal research tax credit to January 1, 2014 by legislation that was signed into law on December 19, 2014, a $24.8 million discrete benefit for the favorable settlement of a Singapore tax issue in the first quarter of fiscal year 2015 and a $3.2 million discrete benefit for differences, primarily related to changes in estimates, between our fiscal year 2014 tax returns and the tax


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provision originally recorded, partially offset by a $84.1 million discrete goodwill impairment charge in the second quarter of fiscal year 2015 that generated no tax benefit and stock-based compensation for which no tax benefit is expected.

The Company's effective tax rates for the three and nine months ended March 29, 2014 were lower than the statutory tax rate primarily because earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, were taxed at lower tax rates and a $34.6 million one-time discrete benefit for fixed asset tax basis adjustments related to prior year depreciation expense, partially offset by stock-based compensation for which no tax benefit is expected.

BACKLOG

At March 28, 2015 and December 27, 2014, our current quarter backlog was approximately $387 million and $378 million, respectively. We include in backlog orders with customer request dates within the next three months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to customers. In addition, backlog includes orders from domestic distributors for which revenues are not recognized until the products are sold by the distributors. Accordingly, we believe that our backlog is not a reliable measure of future revenues. All backlog numbers have been adjusted for estimated future distribution ship and debit pricing adjustments.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

Cash flows were as follows:
                                                         Nine Months Ended
                                                      March 28,     March 29,
                                                        2015          2014
                                                          (in thousands)

Net cash provided by (used in) operating activities $ 471,916 $ 542,023 Net cash provided by (used in) investing activities (59,004 ) (537,459 ) Net cash provided by (used in) financing activities (343,187 ) 51,698 Net increase (decrease) in cash and cash equivalents $ 69,725 $ 56,262

Operating activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.

During the nine months ended March 28, 2015, cash provided by operating activities of $471.9 million was a result of $107.4 million of net income, non-cash adjustments to net income of $388.2 million and a decrease in net change in assets and liabilities of $23.7 million. During the nine months ended March 29, 2014, cash provided by operating activities of $542.0 million was a result of $270.0 million of net income, non-cash adjustments to net income of $223.5 million and an increase in net change in assets and liabilities of $48.5 million.

Investing activities

Investing cash flows consist primarily of capital expenditures, net investment purchases and maturities and acquisitions.

Cash used in investing activities decreased by $478.5 million for the nine months ended March 28, 2015 compared with the nine months ended March 29, 2014. The decrease was primarily due to the payment during the nine months ended March 29, 2014, in connection with acquisitions, net of cash acquired of $459.3 million.

Financing activities

Financing cash flows consist primarily of debt issuance, repurchases of common stock and payment of dividends to stockholders.

Net cash used in financing activities increased by approximately $394.9 million for the nine months ended March 28, 2015 compared to the nine months ended March 29, 2014. The increase was primarily from the issuance of $500 million of the Company's senior unsecured notes on November 21, 2013, net of paid issuance costs and discount at $494.5 million in the second quarter of fiscal year 2014. This increase was partially offset by $105.4 million in lower repurchases of our common stock.


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Liquidity and Capital Resources

Debt Levels On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company's 2.5% senior unsecured and unsubordinated notes due on November 15, 2018.

On March 18, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company's 3.375% senior unsecured and unsubordinated notes due on March 15, 2023.

Outstanding debt is unchanged at $1,001 million as of March 28, 2015 and June 28, 2014, respectively.

Available Financing Resources

As of March 28, 2015, the Company had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, warrants, rights and units under an automatic shelf registration statement filed with the SEC on August 13, 2013.

The Company has access to a $350 million senior unsecured revolving credit facility with certain institutional lenders that expires on June 27, 2019. The facility fee is at a rate per annum that varies based on the Company's index debt rating and any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's index debt rating. The credit agreement requires the Company to comply with certain covenants, including a requirement that the Company maintain a ratio of debt to EBITDA (earnings (loss) before interest, taxes, depreciation, and amortization) of not more than 3 to 1 and a minimum interest coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of March 28, 2015, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants.

As of March 28, 2015, our available funds consisted of $1,467.3 million in cash and cash equivalents and short-term investments.

The Company believes that its existing sources of liquidity and cash expected to be generated from future operations, together with existing and available borrowing resources if needed, will be sufficient to fund operations, capital expenditures, research and development efforts, dividend payments, common stock repurchases, debt repayments and acquisitions for at least the next twelve months.

Off-Balance-Sheet Arrangements

As of March 28, 2015, the Company did not have any material off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

© Edgar Online, source Glimpses

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