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

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04/21/2017 | 11:18pm CEST

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. We also provide 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. We are a global company with wafer manufacturing facilities in the U.S., testing facilities in the Philippines and Thailand and sales and circuit design offices around the world. The major end-markets in which our products are sold are the Automotive, Communications and Data Center, Computing, Consumer and Industrial markets.

During fiscal year 2015, we commenced activities to close down the operations in our Hillsboro, Oregon testing site and consolidate such operations with our facility in Beaverton, Oregon, which were completed in the second quarter of fiscal year 2017.

Also, we announced in July 2015 that we intended to close our wafer level packaging ("WLP") manufacturing facility in Dallas, Texas in fiscal year 2017. On April 7, 2016, we entered into an agreement for the sale of its Dallas, Texas campus, including our WLP manufacturing facility, for approximately $34.5 million. We completed the sale of our Dallas, Texas campus, including our WLP manufacturing facility in Dallas, Texas in the fourth quarter of fiscal year 2016. In connection with this sale agreement, we entered into a lease and facility sharing agreement to lease back portions of the Dallas, Texas campus. We completed the transition of design, administration and manufacturing activities and discontinued our operations in the WLP manufacturing facility in Dallas, Texas during the third quarter of fiscal year 2017.

On April 13, 2016, we entered into agreements for the sale of our micro-electromechanical systems (MEMS) business line, including related assets and inventory, for approximately $42.2 million. We completed the sale of our micro-electromechanical systems (MEMS) business line in the first quarter of fiscal year 2017.

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 financial statements. The Securities and Exchange Commission ("SEC") has defined the most critical accounting policies as the ones that are most important to the presentation 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, which impacts the recording of net revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts impairment of long-lived assets; assessment of recoverability of intangible assets and goodwill, which impacts impairment of goodwill and intangible assets; accounting for income taxes, which impacts the income tax provision; and assessment of litigation and contingencies, which impacts charges recorded in cost of goods sold, selling, general and administrative expenses and income taxes. These policies and the estimates and judgments involved are discussed further in the Management's Discussion and Analysis of Financial Condition in our Annual Report on Form 10-K for the fiscal year ended June 25, 2016. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would 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 25, 2017 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 25, 2016.


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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 25,         March 26,       March 25,        March 26,
                                      2017             2016             2017            2016

Net revenues                          100.0  %          100.0  %        100.0  %         100.0  %
Cost of goods sold                     36.9  %           42.6  %         37.8  %          44.9  %
Gross margin                           63.1  %           57.4  %         62.2  %          55.1  %
Operating expenses:
Research and development               19.4  %           21.5  %         20.1  %          21.7  %
Selling, general and
administrative                         12.7  %           12.9  %         12.8  %          13.3  %
Intangible asset amortization           0.4  %            0.4  %          0.4  %           0.6  %
Impairment of long-lived assets         0.2  %            0.1  %          0.4  %           9.8  %
Severance and restructuring
expenses                                0.1  %            0.5  %          0.7  %           1.3  %
Other operating expenses
(income), net                           0.3  %          (10.0 )%         (1.5 )%          (3.4 )%
Total operating expenses               33.1  %           25.4  %         32.9  %          43.3  %
Operating income                       30.0  %           32.0  %         29.3  %          11.8  %
Interest and other income
(expense), net                         (0.7 )%           (1.1 )%         (0.7 )%          (1.4 )%
Income before provision for
income taxes                           29.3  %           30.9  %         28.6  %          10.4  %
Income tax provision (benefit)          5.2  %            5.7  %          4.5  %           2.1  %
Net income (loss)                      24.1  %           25.2  %         24.1  %           8.3  %



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 25,           March 26,          March 25,           March 26,
                                 2017                2016               2017                2016
Cost of goods sold                  0.4 %               0.3 %              0.4 %               0.5 %
Research and development            1.6 %               1.8 %              1.6 %               1.7 %
Selling, general and
administrative                      1.2 %               1.1 %              1.1 %               1.1 %
                                    3.2 %               3.2 %              3.1 %               3.3 %



Net Revenues

Net revenues were $581.2 million and $555.3 million for the three months ended March 25, 2017 and March 26, 2016, respectively. This increase was primarily driven by a 7% growth in industrial products and a 26% growth in automotive products.

Net revenues were $1,693.6 million and $1,628.6 million for the nine months ended March 25, 2017 and March 26, 2016, respectively. This increase was primarily driven by a 20% growth in automotive products.

During the three months ended March 25, 2017 and March 26, 2016, approximately 89% of net revenues were derived from customers outside of the United States. While more than 98% 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 25, 2017 and March 26, 2016 was immaterial.



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Sales to Samsung, our largest single end customer (through direct sales and distributors), accounted for approximately 14%, 15% and 20% of net revenues in fiscal years 2016, 2015 and 2014, respectively. We expect sales to Samsung to account for smaller percentage of net revenues, but remain at or above 10% of our fiscal 2017 net revenues.

Gross Margin

Our gross margin percentages were 63.1% and 57.4% for the three months ended March 25, 2017 and March 26, 2016, respectively. Our gross margin increased by 5.7%, primarily due to realization of benefits from increased outsourcing of manufacturing and improved utilization of our wafer fabrication facility.

Our gross margin percentages were 62.2% and 55.1% for the nine months ended March 25, 2017 and March 26, 2016, respectively. Our gross margin increased by 7.1%, primarily driven by increased outsourcing of manufacturing and improved utilization of our wafer fabrication facility. In addition, fiscal year 2016 gross margin was impacted by accelerated depreciation relating to the San Jose wafer fabrication facility shutdown.

The below table presents the impact of accelerated depreciation expense on gross margin for all periods presented.

                                Three Months Ended                       Nine Months Ended
                           March 25,           March 26,           March 25,           March 26,
                             2017                2016                2017                2016
                                  (in thousands)                          (in thousands)
Gross margin, as
reported               $      366,904      $      318,841      $    1,052,814      $      897,361
Accelerated
depreciation expense            1,103               4,066               3,459              49,730
Gross margin, without
accelerated
depreciation expense   $      368,007      $      322,907      $    1,056,273      $      947,091

Gross margin %, as
reported                         63.1  %             57.4  %             62.2  %             55.1  %
Gross margin %,
without accelerated
depreciation expense             63.3  %             58.2  %             62.4  %             58.2  %
Impact percentage                (0.2 )%             (0.8 )%             (0.2 )%             (3.1 )%



Research and Development

Research and development expenses were $113.2 million and $119.2 million for the three months ended March 25, 2017 and March 26, 2016, respectively, which represented 19.4% and 21.5% of net revenues for each respective period. The decrease was primarily due to higher revenue and focused R&D initiatives.

Research and development expenses were $340.0 million and $353.7 million for the nine months ended March 25, 2017 and March 26, 2016, respectively, which represented 20.1% and 21.7% of net revenues for each respective period. The $13.7 million decrease was primarily due to focused R&D initiatives.

Selling, General and Administrative

Selling, general and administrative expenses were $74.0 million and $71.8 million for the three months ended March 25, 2017 and March 26, 2016, respectively, which represented 12.7% and 12.9% of net revenues for each respective period. The $2.2 million increase was primarily due to salary and related expense.

Selling, general and administrative expenses were $216.4 million and $217.4 million for the nine months ended March 25, 2017 and March 26, 2016, respectively, which represented 12.8% and 13.3% of net revenues for each respective period. The $1.0 million decrease was primarily due to spending control efforts.

Impairment of Long-Lived Assets

Impairment of long-lived assets were $1.0 million and $0.5 million for the three months ended March 25, 2017 and March 26, 2016, respectively, which represented 0.2% and 0.1% of net revenues for each respective period. These amounts represent the evaluation of the recoverability of carrying amounts of assets and related write down to estimated fair value.


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Impairment of long-lived assets were $7.5 million and $160.2 million for the nine months ended March 25, 2017 and March 26, 2016, respectively, which represented 0.4% and 9.8% of net revenues for each respective period. The $152.7 million decrease was primarily due to classification of our wafer manufacturing facility in San Antonio, Texas as held for sale in the first quarter of fiscal year 2016 and therefore written down to fair value, less cost to sell.

Severance and Restructuring Expenses

Severance and restructuring expenses were $0.5 million and $2.6 million for the three months ended March 25, 2017 and March 26, 2016, respectively, which represented 0.1% and 0.5% of net revenues for each respective period. The $2.1 million decrease was primarily due to the timing of reorganization of certain business units and functions and the closure of the Dallas wafer level packaging manufacturing facilities.

Severance and restructuring expenses were $11.3 million and $20.3 million for the nine months ended March 25, 2017 and March 26, 2016, respectively, which represented 0.7% and 1.3% of net revenues for each respective period. The $9.0 million decrease was primarily due to the timing of reorganization of certain business units and functions and the closure of the Dallas wafer level packaging manufacturing facilities.

Other Operating Expenses (Income), net

Other operating expenses (income), net were $1.7 million and $(55.4) million during the three months ended March 25, 2017 and March 26, 2016, respectively, which represented 0.3% and (10.0)% of net revenues for each respective period. This net decrease in other operating income of $57.1 million was primarily due to the $58.9 million gain on the asset sale of our energy metering business during the three months ended March 26, 2016.

Other operating expenses (income), net were $(24.9) million and $(55.4) million during the nine months ended March 25, 2017 and March 26, 2016, respectively, which represented (1.5)% and (3.4)% of net revenues for each respective period. This net decrease in other operating income of $30.5 million was primarily driven by the $26.6 million gain on the sale of micro-electromechanical systems (MEMS) business line during the first quarter of fiscal 2017 compared to the $58.9 million gain on the asset sale of our energy metering business during the third quarter of fiscal 2016.

Interest and Other Income (Expense), net

Interest and other income (expense), net were $(3.9) million and $(6.4) million for the three months ended March 25, 2017 and March 26, 2016, respectively, which represented (0.7)% and (1.1)% of net revenues for each respective period. The change in interest and other expense of $2.5 million was primarily driven by $2.2 million on interest income from investments during the three months ended March 25, 2017.

Interest and other income (expense), net were $(11.4) million and $(22.4) million for the nine months ended March 25, 2017 and March 26, 2016, respectively, which represented (0.7)% and (1.4)% of net revenues for each respective period. The change in interest and other expense of $11.0 million was primarily driven by the realized gain of $5.0 million on available-for-sale securities as well as interest income from investments during the nine months ended March 25, 2017.

Provision for Income Taxes

In the three and nine months ended March 25, 2017, we recorded an income tax provision of $30.2 million and $75.7 million, respectively, compared to $31.5 million and $34.0 million for the three and nine months ended March 26, 2016, respectively. The company's effective tax rate for the three and nine months ended March 25, 2017 was 17.7% and 15.6%, respectively, compared to 18.4% and 20.1% for the three and nine months ended March 26, 2016, respectively.

Our federal statutory tax rate is 35%. Our effective tax rate for the three and nine months ended March 25, 2017 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates and $4.3 million and $9.5 million of discrete excess tax benefits generated by the settlement of share-based awards in the three and nine months ended March 25, 2017, respectively, partially offset by stock-based compensation for which no tax benefit is expected and $3.6 million and $10.4 million of discrete interest accruals for unrecognized tax benefits in the three and nine months ended March 25, 2017, respectively.

The Company's effective tax rate for the three months ended March 26, 2016 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were


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taxed at lower rates, partially offset by stock-based compensation for which no tax benefit is expected and $20.4 million of non-deductible goodwill included in the sale of the energy metering business.

The Company's effective tax rate for the nine months ended March 26, 2016 was lower than the statutory tax rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates, partially offset by stock-based compensation for which no tax benefit is expected, $5.8 million of discrete interest accruals for unrecognized tax benefits and $20.4 million of non-deductible goodwill included in the sale of the energy metering business.

BACKLOG

At March 25, 2017, our current quarter backlog was approximately $382.3 million. In backlog, we include orders with customer request dates within the next three months. As is customary in the semiconductor industry, these orders may be cancelled in most cases without penalty to customers. 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 25,      March 26,
                                                         2017          2016
                                                           (in thousands)

Net cash provided by (used in) operating activities $ 536,729 $ 467,814 Net cash provided by (used in) investing activities (320,031 ) 27,073 Net cash provided by (used in) financing activities (665,200 ) (335,512 ) Net increase (decrease) in cash and cash equivalents $ (448,502 ) $ 159,375

Operating activities

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

Cash provided by operating activities was $536.7 million in the nine months ended March 25, 2017, an increase of $68.9 million compared with the nine months ended March 26, 2016. This increase was driven by an increase in net income partially offset by reductions in non-cash adjustments to net income of depreciation and amortization of $72.1 million resulting from higher accelerated depreciation in the nine months ended March 26, 2016, relating primarily to the San Jose wafer fabrication facility shut down which began in the second quarter of 2015 and was completed in the second quarter of fiscal year 2016.

Investing activities

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

Cash used in investing activities was $320.0 million in the nine months ended March 25, 2017, an increase of $347.1 million compared with the nine months ended March 26, 2016. The increase was due primarily to an increase in purchases of U.S. treasury securities of $325.3 million and $62.8 million less in proceeds from the sale of businesses during the nine months ended March 25, 2017 compared to the nine months ended March 26, 2016. This increase in cash used was partially offset by $51.0 million of proceeds from the sale of available-for-sale securities related to the sale of our wafer manufacturing facility in San Antonio, Texas, and $25.0 million of proceeds from the maturity of U.S. treasury securities.

Financing activities

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



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Cash used in financing activities was $665.2 million in the nine months ended March 25, 2017, an increase of $329.7 million compared to the nine months ended March 26, 2016. The increase was due primarily to the repayment of our $250.0 million credit agreement, $29.3 million in additional repurchases of our common stock, $22.8 million less proceeds received from employee stock option exercises, and $23.8 million in additional dividends paid.

Liquidity and Capital Resources

Long Term 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 ("2018 Notes").

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 ("2023 Notes").

The estimated fair value of outstanding debt is $1,000 million and $1,027 million as of March 25, 2017 and June 25, 2016, respectively. Short Term Credit Agreement

On June 23, 2016, Maxim Holding Company Ltd., a wholly-owned foreign subsidiary of the Company, entered into a short-term credit agreement in an amount equal to $250 million with a maturity date of June 22, 2017. On December 21, 2016, the $250 million aggregate principal amount of the loan was repaid.

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 25, 2017, 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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Financials ($)
Sales 2017 2 304 M
EBIT 2017 741 M
Net income 2017 576 M
Finance 2017 1 020 M
Yield 2017 2,93%
P/E ratio 2017 22,76
P/E ratio 2018 20,35
EV / Sales 2017 5,07x
EV / Sales 2018 4,76x
Capitalization 12 698 M
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Consensus
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Mean consensus OUTPERFORM
Number of Analysts 27
Average target price 47,8 $
Spread / Average Target 6,3%
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Managers
NameTitle
Tunç Doluca President, Chief Executive Officer & Director
William P. Sullivan Chairman
Bruce E. Kiddoo Chief Financial Officer & Senior Vice President
Anthony J. Stratakos Chief Technology Officer, VP-Advanced R&D
James R. Bergman Independent Director
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