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MAXIM INTEGRATED PRODUCTS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 21 -------------------------------------------------------------------------------- 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. 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 interim 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 three months ended September 27, 2014 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. 22 -------------------------------------------------------------------------------- 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 27, September 28, 2014 2013 Net revenues 100.0 % 100.0 % Cost of goods sold 41.6 % 40.7 % Gross margin 58.4 % 59.3 % Operating expenses: Research and development 24.2 % 22.2 % Selling, general and administrative 13.8 % 13.2 % Intangible asset amortization 0.7 % 0.6 % Impairment of long-lived assets 1.8 % - % Severance and restructuring expenses 0.2 % 0.9 % Other operating expenses (income), net 0.3 % 0.5 % Total operating expenses 41.0 % 37.4 % Operating income 17.4 % 21.9 % Interest and other income (expense), net (1.1 )% (0.6 )% Income before provision for income taxes 16.3 % 21.3 % Income tax provision (benefit) (0.9 )% 3.8 % Net income 17.2 % 17.5 % 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 27, September 28, 2014 2013 Cost of goods sold 0.5 % 0.5 % Research and development 2.1 % 1.6 % Selling, general and administrative 1.3 % 1.1 % 3.9 % 3.2 % Net Revenues Net revenues were $580.3 million and $585.2 million for the three months ended September 27, 2014 and September 28, 2013, respectively, a decrease of less than 1%. 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 September 27, 2014 as compared to the three months ended September 28, 2013 due to a decrease in shipments of our consumer products driven primarily by lower demand from smartphones. This decrease was offset primarily by an increase in server revenues, driven by the Volterra acquisition, in the communications and data center end market, and products offered in the automotive end market with new design win ramps across multiple applications and customers. During the three months ended September 27, 2014 and September 28, 2013, approximately 87% and 85% 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 23 -------------------------------------------------------------------------------- denominated in foreign currencies. The impact of changes in foreign exchange rates on our revenue and results of operations for the three months ended September 27, 2014 and September 28, 2013 was immaterial. Gross Margin Our gross margin percentages were 58.4% and 59.3% for the three months ended September 27, 2014 and September 28, 2013, respectively. Gross margin decreased by $8.4 million primarily due to a $10.7 million increase in incremental amortization related to Volterra intangible assets. Research and Development Research and development expenses were $140.4 million and $129.9 million for the three months ended September 27, 2014 and September 28, 2013, respectively, which represented 24.2% and 22.2% of net revenues for each respective period. The $10.5 million increase was primarily attributable to an $8.5 million increase in salaries, fringe, and stock-based compensation expenses primarily resulting from the Volterra acquisition. Selling, General and Administrative Selling, general and administrative expenses were $80.0 million and $77.4 million for the three months ended September 27, 2014 and September 28, 2013, respectively, which represented 13.8% and 13.2% of net revenues for each respective period. The $2.6 million increase was primarily attributable to a $2.4 million increase in salaries and stock-based compensation expenses primarily resulting from the Volterra acquisition. Impairment of Long-Lived Assets Impairment of long-lived assets were $10.2 million and $0 million for the three months ended September 27, 2014 and September 28, 2013, respectively, which represented 1.8% and 0% of net revenues for each respective period. The $10.2 million increase was primarily due to a transition to newer, more efficient fabrication tools and a charge to a software tool that is no longer being utilized. Severance and Restructuring Expenses Severance and restructuring expenses were $1.4 million and $5.5 million for the three months ended September 27, 2014 and September 28, 2013, respectively, which represented 0.2% and 0.9% of net revenues for each respective period. The $4.1 million decrease was primarily due to lower restructuring costs associated with the reorganization of certain business units. The reorganizations were driven by the desire to focus on specific investment areas and simplify business processes. In October 2014, the Company announced plans to permanently lower its cost structure through a combination of operating spending reductions and the closure of the Company's San Jose wafer manufacturing facility. Interest and Other Income (Expense), net Interest and other income (expense), net were $(6.5) million and $(3.5) million for the three months ended September 27, 2014 and September 28, 2013, respectively. This net increase in interest and other expense of $3.0 million was primarily driven by an increase in interest expense relating to long-term notes issued in November 2013. Provision for Income Taxes In the three months ended September 27, 2014 and September 28, 2013, the Company recorded an income tax provision (benefit) of $(5.5) million and $22.0 million, respectively. The Company's effective tax rate for the three months ended September 27, 2014 and September 28, 2013 was (5.8)% and 17.6%, respectively. The Company's federal statutory tax rate is 35%. The Company's effective tax rate for the three months ended September 27, 2014 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 rates, and a $24.8 million discrete benefit for the favorable settlement of a Singapore tax issue, partially offset by stock-based compensation for which no tax benefit is expected. 24 -------------------------------------------------------------------------------- The Company's effective tax rate for the three months ended September 28, 2013 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 rates, partially offset by stock-based compensation for which no tax benefit is expected. BACKLOG At September 27, 2014 and June 28, 2014, our current quarter backlog was approximately $379 million and $377 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: Three Months Ended September 27, September 28, 2014 2013 (in thousands)Net cash provided by (used in) operating activities $ 116,997 $ 95,894 Net cash provided by (used in) investing activities (56,616 ) (33,281 ) Net cash provided by (used in) financing activities (138,970 ) (228,052 ) Net increase (decrease) in cash and cash equivalents $ (78,589 ) $ (165,439 ) 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 three months ended September 27, 2014, cash provided by operating activities of $117.0 million was a result of $100.0 million of net income, non-cash adjustments to net income of $102.2 million and a decrease in net change in assets and liabilities of $85.1 million. During the three months ended September 28, 2013, cash provided by operating activities of $95.9 million was a result of $103.1 million of net income, non-cash adjustments to net income of $90.3 million and a decrease in net change in assets and liabilities of $97.5 million. Investing activities Investing cash flows consist primarily of capital expenditures, net investment purchases and maturities and acquisitions. Cash used in investing activities increased by $23.3 million for the three months ended September 27, 2014 compared with the three months ended September 28, 2013. The increase was primarily due to the payment of $25 million for the purchase of available-for-sale securities in the three months ended September 27, 2014. 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 decreased by approximately $89.1 million for the three months ended September 27, 2014 compared to the three months ended September 28, 2013. The decrease was primarily due to $91.7 million in lower repurchases of our common stock. Liquidity and Capital Resources Debt Levels 25 -------------------------------------------------------------------------------- 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 September 27, 2014 and June 28, 2014, respectively. Available Financing Resources As of September 27, 2014, 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 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 September 27, 2014, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants. As of September 27, 2014, our available funds consisted of $1,319.0 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 September 27, 2014, the Company did not have any material off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. |