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| MXIM > SEC Filings for MXIM > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
The Company 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 (particularly Management's Discussion and Analysis of Financial Condition and Results of Operations), its Quarterly Reports on Form 10-Q (particularly Management's Discussion and Analysis of Financial Condition and Results of Operations) and any Current Reports on Form 8-K.
Overview of Business
Maxim Integrated Products, Inc. ("Maxim" or "the Company" and also referred to as "we," "our" or "us") is incorporated in the state of Delaware. Maxim 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 United States, 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 communications, computing, consumer and industrial markets.
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 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; 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 does 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.
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
-----------------------------
September 26, September 27,
2009 2008
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(in thousands)
Net revenues 100.0% 100.0%
Cost of goods sold 44.0% 41.8%
------------- -------------
Gross margin 56.0% 58.2%
Operating expenses:
Research and development 26.0% 27.7%
Selling, general and administrative 12.2% 8.0%
Impairment of long-lived assets 1.8% 1.5%
Severance and restructing expenses (recoveries) -0.3% 0.8%
Other operating expenses, net -3.8% 1.5%
------------- -------------
Total operating expenses 35.9% 39.5%
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Operating income 20.1% 18.7%
Interest income and other, net 0.4% 1.8%
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Income before provision for income taxes 20.5% 20.5%
Provision for income taxes 11.1% 7.0%
------------- -------------
Net income 9.4% 13.5%
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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
-----------------------------
September 26, September 27,
2009 2008
------------- -------------
(in thousands)
Cost of goods sold 1.2% 2.4%
Research and development 3.7% 3.9%
Selling, general and administrative 0.9% 1.2%
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5.9% 7.5%
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Net Revenues
Net revenues were $449.2 million and $501.2 million for the three months ended September 26, 2009 and September 27, 2008, respectively, a decrease of 10.4%. We classify our net revenue by four major end market categories: Communications, Computing, Consumer, and Industrial. In the three months ended September 26, 2009, net revenues decreased in the Communications, Computing and Industrial end markets. Net shipments to Communications, Computing, and Industrial markets decreased by approximately 19%, 20%, and 10% for the three months ended September 26, 2009 as compared to September 27, 2008, respectively. The decline in each of the markets was primarily attributable to a reduction in demand associated with the current economic environment. Net shipments from Consumer markets increased by approximately 6% for three months ended September 26, 2009 as compared to September 27, 2008 driven primarily by increased shipments in the cell phone market.
During the three months ended September 26, 2009 and September 27, 2008, approximately 85% and 83% of net revenues, respectively, were derived from customers outside of the United States. While the majority 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 denominated in foreign currencies. The impact of changes in foreign exchange rates on revenue and our results of operations for the three months ended September 26, 2009 and September 27, 2008 was immaterial.
Our gross margin percentage was 56.0% and 58.2% for the three months ended September 26, 2009 and September 27, 2008, respectively. The gross margin percentage for the three months ended September 26, 2009, as compared to the three months ended September 27, 2008, decreased primarily due to a decline in utilization associated with our manufacturing facilities attributable to a decline in overall demand caused by a slowdown in the global economy. These decreases in margin percentage as noted above were partially offset by an $11.3 million reduction in depreciation expense from the completion of the closure of our Dallas facility at the end of the fiscal year 2009. Inventory write-downs decreased by approximately $5.0 million, from $8.4 million during the three months ended September 27, 2008 to $3.4 million during the three months ended September 26, 2009 due to improvements in management of our inventory levels. In addition stock-based compensation expense declined by $6.5 million.
Research and Development
Research and development expenses were $116.7 million and $138.9 million for the three months ended September 26, 2009 and September 27, 2008, respectively, which represented 26.0% and 27.7% of net revenues, respectively. The decrease in research and development expenses as a percentage of revenue was partially attributable to the transition of our field applications engineers and our business managers from research and development to selling, general and administrative functions subsequent to the first quarter of fiscal year 2009. The total impact of the transition was approximately $13.8 million during the three months ended September 26, 2009. In addition salaries, bonuses and benefits declined by $7.8 million due to reduced headcount attributable to the restructuring actions implemented by the Company during the second half of fiscal year 2009.
Selling, General and Administrative
Selling, general and administrative expenses were $55.0 million and $40.2 million for the three months ended September 26, 2009 and September 27, 2008, respectively, which represented 12.2% and 8.0% of net revenues, respectively. The increase in selling, general and administrative expenses is partially attributable to the transition of our field applications engineers and our business managers from research and development to selling, general and administrative functions subsequent to the first quarter of fiscal year 2009. The total impact of the transition was approximately $13.8 million during the three months ended September 26, 2009.
Stock-based Compensation
The following table shows total stock-based compensation expense by type of
award, and resulting tax effect, included in the Condensed Consolidated
Statements of Income for the three months ended September 26, 2009 and September
27, 2008:
Three Months Ended
---------------------
Sept. 26, Sept. 27,
2009 2008
--------- ---------
(in thousands)
Cost of goods sold
Stock options $ 2,015 $ 6,115
Restricted stock units 3,078 5,805
Employee stock purchase plan 368 -
--------- ---------
$ 5,461 $ 11,920
--------- ---------
Research and development expense
Stock options $ 4,131 $ 7,735
Restricted stock units 11,197 11,684
Employee stock purchase plan 1,413 -
--------- ---------
$ 16,741 $ 19,419
--------- ---------
Selling, general and administrative expense
Stock options $ 1,749 $ 2,410
Restricted stock units 2,378 3,812
Employee stock purchase plan 136 -
--------- ---------
$ 4,263 $ 6,222
--------- ---------
Total stock-based compensation expense
Stock options $ 7,895 $ 16,260
Restricted stock units 16,653 21,301
Employee stock purchase plan 1,917 -
--------- ---------
Pre-tax stock-based compensation expense 26,465 37,561
Less: income tax effect 8,017 12,799
--------- ---------
Net stock-based compensation expense $ 18,448 $ 24,762
--------- ---------
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Pre-tax stock based compensation decreased to $26.5 million during the three months ended September 26, 2009 from $37.6 million during the three months ended September 27 , 2008, which represented 5.9% and 7.5% of net revenues, respectively. The decrease in expenses is attributable to lower charges for stock options in connection with the tender offer to cash settle certain under water stock options completed in December 2008 and the completion of vesting of restricted stock units previously issued. These decreases were partially offset by expenses associated with the Company's annual grant of stock options and restricted stock units which occurred in December 2008.
Test Facilities
During the first quarter of fiscal year 2010, the Company identified certain assets as excess primarily attributable to changes in certain manufacturing technology. In connection with these circumstances, the Company recorded a charge for the write down of equipment to its estimated fair value. The total charge of $5.0 million was included in impairment of long lived assets in the Company's Condensed Consolidated Statements of Income. The Company has ceased depreciation and classified these assets as held for sale based on its intentions to sell the assets and has included $0.6 million in Other assets in the Condensed Consolidated Balance Sheet as of September 26, 2009.
Fabrication Facility, Oregon
During the first quarter of fiscal year 2010, as a result of reduced future wafer output requirements associated with equipment utilizing certain process technologies the Company recorded a write down of equipment to be sold to the equipment's estimated fair value. This charge of $3.3 millionwas included in impairment of long lived assets in the Company's Condensed Consolidated Statements of Income. The Company has ceased depreciation and classified these assets as held for sale based on its intentions to sell the assets and has included $0.5 million in Other assets in the Condensed Consolidated Balance Sheet as of September 26, 2009.
Fabrication Facility, San Jose
During the first quarter of fiscal year 2009, the Company recorded a $7.3 million asset impairment charge as a result of transferring certain wafer manufacturing production from its San Jose, California, wafer manufacturing facility to an outsourced Japanese manufacturing facility, Epson's Sakata, Japan, facility, and reductions in demand and reduced future capacity requirements.
Severance and Restructuring Expenses
Shutdown of Dallas fab
During the first quarter of fiscal year 2010, the Company recorded approximately $1.6 million in restructuring costs associated with the closure of the Dallas, Texas wafer manufacturing facility. These costs consisted of decommissioning of equipment at the facility and estimated severance and benefits associated with employees of the facility.
Change in Estimate
During the first quarter of fiscal year 2010, the Company recognized a reversal of expense of approximately $3.2 million related to a reduction in estimated benefits costs for employees terminated during prior fiscal quarters.
Other Operating Expenses, Net
Other operating expenses, net primarily consists of expense items related to the
restatement of previously reported financial statements and associated
litigation.
The following table summarizes activities for the three months ended September
26, 2009 and September 27, 2008:
Three Months Ended
---------------------------------------
September 26, 2009 September 27, 2008
------------------ ------------------
(in thousands)
Legal and accounting expenses $ 5,742 $ 11,289
Payroll tax and related adjustments (6,229) (5,381)
Derivative litigation settlement (16,419) -
Other 21 1,450
------------------ ------------------
Total $ (16,885) $ 7,358
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As a result of the Company's investigation into equity awards, the Company recorded certain U.S. and foreign payroll tax, interest and penalty accruals in prior years. The Company reversed $6.2 million and $5.4 million of these accruals during the three months ended September 26, 2009 and September 27, 2008, respectively, due primarily to the expiration of the tax statutes of limitations in various foreign jurisdictions.
Interest Income and Other (Expense) Income, Net
Interest income and other income, net, was $1.9 million and $9.1 million for the three months ended September 26, 2009 and September 27, 2008, respectively. This decrease was primarily driven by a decline of $6.0 million in interest income due to lower average interest rates and lower invested cash, cash equivalents and short-term investments.
Provision for Income Taxes
In the three months ended September 26, 2009, the Company recorded an income tax provision of $50.0 million, compared to an income tax provision of $35.1 million for the three months ended September 27, 2008.
The Company's statutory federal tax rate is 35%. The Company's effective tax rate of 54.4% for the three months ended September 26, 2009 was higher than the statutory tax rate primarily because of losses of a foreign subsidiary for which no tax benefit is available. These foreign losses represent costs of ongoing research and developmental efforts. We expect that our effective tax rate for the remainder of the fiscal year 2010 will be materially higher than 35% and that in subsequent years the effective tax rate will begin to decline as our new global structure becomes fully operational, however, the effective tax rate could be adversely impacted should the expected tax benefits from the new global structure occur later than expected or be lower than expected, which could have a material adverse impact on our results of operations.
The Company's effective tax rate of 34.2% for the three months ended September 27, 2008 was lower than the statutory tax rate primarily because of benefits from the domestic production activities deduction.
In the third quarter of fiscal year 2008, the Internal Revenue Service ("IRS") commenced an examination of the Company's federal corporate income tax returns for fiscal years 2005 and 2006, which is still ongoing. As part of this audit the IRS has requested information related to the Company's stock option investigation and subsequently expanded the audit to review stock option transactions in fiscal year 2004. The Company also has ongoing audits by various state and foreign taxing jurisdictions. Management believes that it has adequately provided for any adjustments that may result from these examinations, however, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in the Company's tax audits be resolved in a manner not consistent with management's expectations, the Company will be required to adjust its provision for income tax in the period such resolution occurs.
Recently Issued Accounting Pronouncements
In February 2008, the FASB issued new accounting guidance related to all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of the new guidance did not have a material effect on the Company's consolidated financial condition and results of operations.
In December 2007, the FASB issued new accounting guidance related to the accounting and reporting for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The guidance improves the relevance, comparability and transparency of financial statements and eliminates diversity in practice that currently exists in accounting for transactions between an entity and noncontrolling interests. This guidance is effective for annual periods beginning after December 15, 2008.
In December 2007, the FASB issued new accounting guidance related to business combinations. The new accounting guidance requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted the new accounting guidance during the first quarter of fiscal year 2010. See Note 15 "Acquisitions."
During the first quarter of fiscal year 2010, we adopted three related sets of
accounting guidance as issued by the FASB. The accounting guidance sets forth
(i) rules related to determining the fair value of financial assets and
financial liabilities when the activity levels have significantly decreased in
relation to the normal market, (ii) guidance related to the determination of
other-than-temporary impairments to include the intent and (iii) ability of the
holder as an indicator in the determination of whether an other-than-temporary
impairment exists and interim disclosure requirements for the fair value of
financial instruments. The adoption of the three sets of accounting guidance did
not have a material impact on our consolidated financial statements.
During the first quarter of fiscal year 2010, we adopted new accounting guidance for the determination of the useful life of intangible assets as issued by the FASB. The new guidance amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The new guidance also requires expanded disclosure regarding the determination of intangible asset useful lives. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.
During the first quarter of fiscal year 2010, we adopted the new Accounting Standards Codification (ASC) as issued by the FASB. The ASC has become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC did not have a material impact on our consolidated financial statements.
BACKLOG
At September 26, 2009, backlog shippable within the next quarter was approximately $288.4 million. The Company's backlog shippable within the next quarter at the end of the quarter ended June 27, 2009 was approximately $278.4 million. Our backlog is subject to revisions, cancellations and rescheduling which could have a material impact on the timing and extent of our revenues.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalent and short-term investments were as follows:
September 26, September 27,
2009 2008
------------- -------------
(in thousands)
Cash and cash equivalents $ 836,029 $ 1,051,194
Short-term investments 101,551 205,262
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Total cash, cash equivalents and investments $ 937,580 $ 1,256,456
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