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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March, 27, 2010
OR
[ ]
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 1-34192
 
MAXIM INTEGRATED PRODUCTS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
 
94-2896096 
(I.R.S. Employer I. D. No.)
 
120 San Gabriel Drive
Sunnyvale, California 94086
(Address of Principal Executive Offices including Zip Code)
 
(408) 737-7600 
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ]
 
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 [ ] NO [ ]
 
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 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 [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
YES [ ] NO [x]
 
As of April 26, 2010 there were 302,351,195 shares of Common Stock, par value $.001 per share, of the registrant outstanding.
 
 
 
 
 
 
 

 
 
MAXIM INTEGRATED PRODUCTS, INC.
INDEX
 
 
PART I - FINANCIAL INFORMATION
 
Page
 
 
 
Item 1. Financial Statements (unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets as of March 27, 2010 and June 27, 2009
 
 
 
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 27, 2010 and March 28, 2009
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 27, 2010 and March 28, 2009
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
Item 4. Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1. Legal Proceedings
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
Item 2. Unregistered Sales of Equity Securities
 
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
 
Item 4. Submission of Matters to a Vote of Shareholders
 
 
 
 
Item 5. Other Information
 
 
 
 
Item 6. Exhibits
 
 
 
 
SIGNATURES
 
 
 
 
 
 
 
 

2


 
Part I. FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
March 27,
2010
 
June 27,
2009
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
758,436
 
 
$
709,348
 
Short-term investments
100,425
 
 
204,055
 
Total cash, cash equivalents and short-term investments
858,861
 
 
913,403
 
Accounts receivable, net
297,352
 
 
207,807
 
Inventories
190,589
 
 
217,847
 
Deferred tax assets
247,249
 
 
211,879
 
Income tax refund receivable
15,608
 
 
13,072
 
Other current assets
23,091
 
 
20,943
 
Total current assets
1,632,750
 
 
1,584,951
 
Property, plant and equipment, net
1,325,348
 
 
1,366,052
 
Other assets
120,575
 
 
130,772
 
TOTAL ASSETS
$
3,078,673
 
 
$
3,081,775
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
79,351
 
 
$
70,087
 
Income taxes payable
914
 
 
2,140
 
Accrued salary and related expenses
163,661
 
 
141,334
 
Accrued expenses
34,572
 
 
38,455
 
Deferred income on shipments to distributors
21,105
 
 
16,760
 
Accrual for litigation settlement
173,000
 
 
 
Total current liabilities
472,603
 
 
268,776
 
Other liabilities
24,591
 
 
26,398
 
Income taxes payable
100,184
 
 
124,863
 
Deferred tax liabilities
76,173
 
 
67,273
 
Total liabilities
673,551
 
 
487,310
 
Commitments and contingencies (Note 11)
 
 
 
Stockholders' equity:
 
 
 
Common stock and capital in excess of par value
303
 
 
21,511
 
Retained earnings
2,415,172
 
 
2,580,610
 
Accumulated other comprehensive loss
(10,353
)
 
(7,656
)
Total stockholders' equity
2,405,122
 
 
2,594,465
 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
$
3,078,673
 
 
$
3,081,775
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

3


 
MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
March 27,
2010
 
March 28,
2009
 
March 27,
2010
 
March 28,
2009
 
(Amounts in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
508,880
 
 
$
339,665
 
 
$
1,431,641
 
 
$
1,251,544
 
Cost of goods sold (1)
200,177
 
 
171,960
 
 
579,523
 
 
593,204
 
Gross margin
308,703
 
 
167,705
 
 
852,118
 
 
658,340
 
Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
117,100
 
 
120,974
 
 
352,160
 
 
404,172
 
Selling, general and administrative (1)
62,943
 
 
48,760
 
 
179,241
 
 
153,127
 
In-process research & development
 
 
 
 
 
 
3,900
 
Impairment of long-lived assets
 
 
 
 
8,291
 
 
51,112
 
Severance and restructuring (recoveries) expenses
(625
)
 
10,956
 
 
(123
)
 
28,659
 
Other operating expenses, net
177,546
 
 
3,969
 
 
161,582
 
 
21,579
 
Total operating expenses
356,964
 
 
184,659
 
 
701,151
 
 
662,549
 
Operating (loss) income
(48,261
)
 
(16,954
)
 
150,967
 
 
(4,209
)
Interest income and other, net
644
 
 
(228
)
 
6,175
 
 
16,258
 
(Loss) income before provision for income taxes
(47,617
)
 
(17,182
)
 
157,142
 
 
12,049
 
(Benefit) provision for income taxes
(13,714
)
 
9,244
 
 
90,458
 
 
9,692
 
Net (loss) income
$
(33,903
)
 
$
(26,426
)
 
$
66,684
 
 
$
2,357
 
 
 
 
 
 
 
 
 
(Loss) earnings per share:
 
 
 
 
 
 
 
Basic
$
(0.11
)
 
$
(0.09
)
 
$
0.22
 
 
$
0.01
 
Diluted
$
(0.11
)
 
$
(0.09
)
 
$
0.21
 
 
$
0.01
 
 
 
 
 
 
 
 
 
Shares used in the calculation of (loss) earnings per share:
 
 
 
 
 
 
 
Basic
304,518
 
 
304,415
 
 
305,375
 
 
312,593
 
Diluted
304,518
 
 
304,415
 
 
310,702
 
 
315,540
 
 
 
 
 
 
 
 
 
Dividends declared per share
$
0.200
 
 
$
0.200
 
 
$
0.600
 
 
$
0.600
 
 
 
 
 
 
 
 
 
(1) Includes stock-based compensation charges as follows:
Cost of goods sold
$
1,071
 
 
$
7,574
 
 
$
11,797
 
 
$
50,328
 
Research and development
8,691
 
 
25,194
 
 
40,082
 
 
78,045
 
Selling, general and administrative
5,517
 
 
6,845
 
 
16,798
 
 
32,739
 
 
$
15,279
 
 
$
39,613
 
 
$
68,677
 
 
$
161,112
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

4


 
MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
March 27,
2010
 
March 28,
2009
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
66,684
 
 
$
2,357
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock based compensation
68,677
 
 
161,111
 
Depreciation and amortization
117,138
 
 
148,910
 
Deferred taxes
(27,528
)
 
209,629
 
Tax shortfall related to stock based compensation plans
(12,183
)
 
(204,342
)
Excess tax benefit related to stock based compensation
(5,463
)
 
(540
)
In-process research & development
 
 
3,900
 
Impairment of long-lived assets
8,291
 
 
51,112
 
Loss on sale of property, plant and equipment
590
 
 
2,371
 
Loss (gain) from sale of equity investments
149
 
 
(529
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(89,572
)
 
76,751
 
Inventories
24,211
 
 
27,500
 
Other current assets
(570
)
 
(25,502
)
Accounts payable
14,745
 
 
(8,030
)
Income taxes payable
(26,800
)
 
3,673
 
Deferred income on shipments to distributors
4,345
 
 
(3,437
)
Accrued liabilities - goodwill payments above settlement date fair value
(1,164
)
 
(38,335
)
Accrued liabilities - litigation settlement
173,000
 
 
 
All other accrued liabilities
19,403
 
 
(71,155
)
Net cash provided by operating activities
333,953
 
 
335,444
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(80,234
)
 
(103,532
)
Proceeds from sale of property, plant, and equipment
1,180
 
 
947
 
Other non-current assets
(263
)
 
873
 
Acquisitions
(4,000
)
 
(61,010
)
Purchases of available-for-sale securities
 
 
(4,132
)
Proceeds from sales/maturities of available-for-sale securities
100,233
 
 
7,113
 
Net cash provided by (used in) investing activities
16,916
 
 
(159,741
)
Cash flows from financing activities:
 
 
 
Excess tax benefit related to stock based compensation
5,463
 
 
540
 
Mortgage liability
(30
)
 
(30
)
Payouts under the RSU loan program
 
 
(35,578
)
Proceeds from derivative litigation settlement
2,460
 
 
 
Repayment of notes payable
 
 
(3,827
)
Issuance of common stock
(22,830
)
 
(19,951
)
Repurchase of common stock
(113,616
)
 
(235,131
)
Issuance of common stock under employee stock purchase plan
10,703
 
 
 
Dividends paid
(183,343
)
 
(187,375
)
Settlements of equity instruments
(588
)
 
(14,645
)
Net cash used in financing activities
(301,781
)
 
(495,997
)
Net increase (decrease) in cash and cash equivalents
49,088
 
 
(320,294
)
Cash and cash equivalents:
 
 
 
Beginning of period
709,348
 
 
1,013,119
 
End of period
$
758,436
 
 
$
692,825
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid, net during the period for income taxes
$
159,484
 
 
$
20,012
 
Noncash investing and financing activities:
 
 
 
Accounts payable related to property, plant, and equipment purchases
$
10,230
 
 
$
11,062
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

5


 
MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
 
NOTE 1: BASIS OF PRESENTATION
 
The accompanying unaudited condensed interim consolidated financial statements of Maxim Integrated Products, Inc. and all of its majority-owned subsidiaries (collectively, the "Company" or "Maxim") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles of the United States of America (GAAP) have been condensed or omitted pursuant to applicable rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The year-end condensed balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP. The results of operations for the three months and nine months ended March 27, 2010 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 27, 2009.
 
The Company has a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2010 is a 52-week fiscal year.
 
NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 requires new disclosures regarding significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales, issuances and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU 2010-06 clarifies existing disclosures regarding input and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances and settlements in the roll forward of Level 3 activity; those disclosures are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 had no current impact and is expected to have no subsequent impact on our consolidated financial position, results of operations or cash flows.
 
In February 2008, the Financial Accounting Standards Board (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. Earlier adoption is prohibited. The adoption of the new guidance did not have a material effect on the Company's consolidated financial position, results of operations and cash flows.
 
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-Acquisition.
 
During the first quarter of fiscal year 2010, the Company adopted three related sets of accounting guidance as issued by the FASB. The accounting guidance sets forth (i) rules related to the determination of the fair value of financial assets and financial liabilities when the activity levels have significantly decreased in relation to the normal market, (ii) guidance that would include the intent and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment exists and (iii) interim disclosure requirements for the fair value of financial instruments. The adoption of the three sets of accounting guidance did not

6


 
have a material impact on the Company's consolidated financial statements.
 
During the first quarter of fiscal year 2010, the Company 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 the Company's consolidated financial statements.
 
During the first quarter of fiscal year 2010, the Company adopted the new Accounting Standards Codification (ASC) as issued by the FASB. The ASC has become the 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 the Company's consolidated financial statements.
 
NOTE 3: BALANCE SHEET COMPONENTS
 
The components of inventories consist of:
 
March 27,
2010
 
June 27,
2009
Inventories:
(in thousands)
Raw materials
$
15,451
 
 
$
14,235
 
Work-in-process
140,272
 
 
166,970
 
Finished goods
34,866
 
 
36,642
 
 
$
190,589
 
 
$
217,847
 
 
The components of other assets consist of:
 
March 27,
2010
 
June 27,
2009
Other Assets:
(In thousands)
Deferred tax assets
$
5,914
 
 
$
5,914
 
Intangible assets, net (Note 16)
64,860
 
 
76,295
 
Goodwill (Note 16)
29,586
 
 
26,710
 
Other
20,215
 
 
21,853
 
 
$
120,575
 
 
$
130,772
 
 
NOTE 4: FAIR VALUE MEASUREMENTS
 
The FASB established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are:
 
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
The Company's Level 1 assets and liabilities consist of U.S. Treasury securities and money market funds.
 
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. The Company uses observable market prices for comparable instruments to value its derivative instruments.
 
The Company's Level 2 assets and liabilities consist of bank certificates of deposit and foreign currency forward contracts.
 
Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
 

7


 
The Company's Level 3 assets include assets held for sale.
 
Assets and liabilities measured at fair value on a recurring basis as of March 27, 2010 were as follows:
 
 
 
 
Fair Value Measurements Using
 
Balance as of March 27, 2010
 
Quoted Prices in
Active Markets for
Identical Instruments
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Money market funds (1)
$
675,871
 
 
$
672,961
 
 
$
2,910
 
 
$
 
U.S. Treasury Notes (2)
100,425
 
 
100,425
 
 
 
 
 
Foreign currency derivative contracts, (net)
807
 
 
 
 
807
 
 
 
Total assets measured at fair value
$
777,103
 
 
$
773,386
 
 
$
3,717
 
 
$
 
 

(1)    Included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets as of
March 27, 2010 

(2)    Included in short-term investments in the accompanying Condensed Consolidated Balance Sheets as of
March 27, 2010 
 
Assets and liabilities measured at fair value on a non-recurring basis as of March 27, 2010 were as follows:
 
 
 
 
Fair Value Measurements Using
 
Balance as of March 27, 2010
 
Quoted Prices in
Active Markets for
Identical Instruments
(Level 1) 
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3) 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Assets Held for Sale (1)
$
3,793
 
 
$
 
 
$
 
 
$
3,793
 
Total assets measured at fair value
$
3,793
 
 
$
 
 
$
 
 
$
3,793
 
 

(1)    Included in Other Assets in the accompanying Condensed Consolidated Balance Sheets as of
March 27, 2010
 
The losses recorded during the three months and nine months ended March 27, 2010 were as follows:
 
 
Total Losses for
 
Three Months Ended
 
Nine Months Ended
 
March 27, 2010
 
March 27, 2010
 
(in thousands)
Impairment of long-lived assets designated as held for sale during the period
$
 
 
$
(8,291
)
Total losses recorded for non-recurring measurements
$
 
 
$
(8,291
)
 
The Company's non-financial assets were measured and recorded at fair value during the three months and nine months ended March 27, 2010 due to previously disclosed events and circumstances, that indicated that the carrying value of the assets or the asset grouping was not recoverable and the Company's decision to hold these assets for sale, resulting in other-than-temporary impairment charges. Most of these asset impairments relate to fab and end-of-line manufacturing assets.
 

8


 
NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
Interest Rate Risk
 
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio, which includes U.S. Treasury securities. The Company limits portfolio duration to reduce default risk, market risk and reinvestment risk. The Company does not use derivative financial instruments to hedge the risks of interest rate volatility. At March 27, 2010, the Company investment portfolio had an expected weighted average return of 2.9% (compared to 2.9% at June 27, 2009) and a weighted maturity of 65 days (compared to 170 days at June 27, 2009). In addition, at March 27, 2010, the Company maintained a significant portfolio of money market fund investments, which are included in cash and cash equivalents. These money market funds are all available on a daily basis.
 
Foreign Currency Risk
 
The Company generates revenues outside the United States based on orders obtained in various non-U.S. currencies, primarily Japanese Yen, British Pound and Euro. Maxim incurs expenditures denominated in various non-US currencies, principally Philippine Pesos and Thailand Baht associated with the Company's end-of-line manufacturing activities in the Philippines and Thailand, respectively. Maxim is exposed to fluctuations in foreign currency exchange rates primarily on orders and accounts receivable from sales in these foreign currencies and cash flows for expenditures in the foreign currencies. Maxim has established risk management strategies designed to reduce the impact of reductions in value and volatility of future cash flows caused by changes in the exchange rates for these currencies. These strategies reduce, but do not entirely eliminate, the impact of currency exchange fluctuations.
 
Foreign currency forward contracts are used to offset the currency risk of non-U.S. dollar-denominated assets and liabilities. The Company typically enters into currency forward contracts quarterly to hedge exposures associated with the Company expenditures in foreign currencies and for the Company accounts receivable and for backlog denominated in foreign currencies. These denominated instruments generally have a maturity of less than one year. Changes in fair value of the underlying assets and liabilities are generally offset by the changes in fair value of the related currency forward contract. The net realized and unrealized gains or losses from hedging non-U.S. dollar denominated assets and liabilities are recognized in Interest income and other, net in the Condensed Consolidated Statements of Income.
 
The effects of derivative instruments not designated as hedging instruments on the consolidated financial statements were as follows as of March 27, 2010 and for the three and nine months then ended (amounts presented exclude any income tax effects):
 
 
 
Fair Value Derivative Instrument
Derivatives not designated as hedging instruments under generally accepted accounting principles
 
 
 
Fair Value
 
Fair Value
 
Balance sheet location
 
March 27, 2010
 
June 27, 2009
 
 
 
 
(in thousands)
Foreign exchange contracts
 
Accounts receivable, net
 
$
807
 
 
$
(480
)
Total
 
 
 
$
807
 
 
$
(480
)
 
 
Derivatives not designated as
hedging instruments under
generally accepted
accounting principles
 
Location of Gain or
(Loss) Recognized in
Income on Derivatives
 
Amount of Gain or (Loss) Recognized in
Income on Derivative
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 27,
2010
 
March 28,
2009
 
March 27,
2010
 
March 28,
2009
 
 
 
 
(in thousands)
Foreign exchange contracts
 
Interest income (expense) and other, net
 
$
1,032
 
 
$
1,464
 
 
$
500
 
 
$
(251
)
Total
 
 
 
$
1,032
 
 
$
1,464
 
 
$
500
 
 
$
(251
)
 

9


 
Volume of Derivative Activity
 
The total gross notional amount for foreign currency forward contracts, recorded at fair value, was $39.0 million and $77.3 million, as of March 27, 2010 and June 27, 2009, respectively. All of the Company's currency forward contracts are single delivery, which are settled at maturity involving one cash payment exchange.
 
Total gross U.S. Dollar notional amounts for foreign currency forward contract, presented by currency, are as follows:
 
In United States Dollars
 
March 27, 2010
 
June 27, 2009
 
 
(in thousands)
Euro
 
$
15,382
 
 
$
28,054
 
Japanese Yen
 
14,396
 
 
36,533
 
British Pound
 
2,140
 
 
6,045
 
Other
 
7,108
 
 
6,703
 
Total
 
$
39,026
 
 
$
77,335
 
 
NOTE 6: STOCK-BASED COMPENSATION
 
The following table shows total stock-based compensation expense by type of award, and the resulting tax effect, included in the Condensed Consolidated Statements of Operations for the three months and nine months ended March 27, 2010 and March 28, 2009:
 
Stock-based compensation expense by type of award
 
Three Months Ended
 
Nine Months Ended
 
March 27,
2010
 
March 28,
2009
 
March 27,
2010
 
March 28,
2009
 
(in thousands)
Cost of goods sold
 
 
 
 
 
 
 
Stock options
$
232
 
 
$
1,881
 
 
$
2,648
 
 
$
31,781
 
Restricted stock units
586
 
 
5,579
 
 
8,394
 
 
18,433
 
Employee stock purchase plan
253
 
 
114
 
 
755
 
 
114
 
 
$
1,071
 
 
$
7,574
 
 
$
11,797
 
 
$
50,328
 
Research and development expense
 
 
 
 
 
 
 
Stock options
$
1,318
 
 
$
3,773
 
 
$
9,074
 
 
$
33,486
 
Restricted stock units
6,038
 
 
20,975
 
 
27,056
 
 
44,112
 
Employee stock purchase plan
1,335
 
 
446
 
 
3,952
 
 
446
 
 
$
8,691
 
 
$
25,194
 
 
$
40,082
 
 
$
78,044
 
Selling, general and administrative expense
 
 
 
 
 
 
 
Stock options
$
1,194
 
 
$
1,910
 
 
$
5,216
 
 
$
19,656
 
Restricted stock units
3,993
 
 
4,899
 
 
10,825
 
 
13,047
 
Employee stock purchase plan
330
 
 
36
 
 
757
 
 
36
 
 
$
5,517
 
 
$
6,845
 
 
$
16,798
 
 
$
32,739
 
Total stock-based compensation expense
 
 
 
 
 
 
 
Stock options
$
2,744
 
 
$
7,564
 
 
$
16,938
 
 
$
84,923
 
Restricted stock units
10,617
 
 
31,453
 
 
46,275
 
 
75,592
 
Employee stock purchase plan
1,918
 
 
596
 
 
5,464
 
 
596
 
Pre-tax stock-based compensation expense
15,279
 
 
39,613
 
 
68,677
 
 
161,111
 
Less: income tax effect
3,889
 
 
13,052
 
 
20,967
 
 
55,026
 
Net stock-based compensation expense
$
11,390
 
 
$
26,561
 
 
$
47,710
 
 
$
106,085
 

10


 
Stock-Based Compensation cost capitalized as part of inventory as of March 27, 2010 and June 27, 2009 was $3.0 million and $5.6 million, respectively.
 
Modifications and Settlements
 
2009 Goodwill Program:
 
In January 2009, the Company's Board of Directors approved a program (the "Goodwill Program"), wherein non-officer employees holding options that were outstanding as of November 1, 2008 which reached or would have reached their contractual 10-year expiration term between November 2008 and December 2009 would be eligible for a payment in the form of cash or restricted stock units ("RSUs"). Under the Goodwill Program, payments exceeding $5,000 would be settled in RSUs that vest over three quarters, contingent upon continued employment, while amounts below $5,000 would be settled in cash in a lump-sum payment. The program was extended to officers in May 2009 with substantially similar terms, except that payments exceeding $5,000 to officers were settled in RSUs vesting over six quarters.
 
The Company recorded a liability for the options settling in cash under the Goodwill Program. Options associated with payments being made in the form of RSUs under the Goodwill Program contained market and service conditions. The Company recognized $0.6 million and $5.2 million in stock-based compensation expenses related to this program during the three and nine months ended March 27, 2010, respectively.
 
Fair Value
 
The fair value of options granted to employees under the Company's 1996 Plan and rights to acquire common stock under the Company's 2008 Employee Stock Purchase Plan (the "ESPP") is estimated on the date of grant using the Black-Scholes option valuation model. The fair value of RSUs is estimated using the value of the Company's common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company's common stock prior to vesting.
 
Expected volatilities are based on the historical volatilities from the Company's traded common stock over a period equal to the expected term. The Company analyzed historical exercise patterns of relatively homogeneous groups of employees to estimate the expected holding period for options granted through December 29, 2008. Subsequent to the end of the second quarter of fiscal year 2009, the Company began utilizing a simplified method, to estimate expected holding periods. This change was attributable to the significant impact resulting from the completion of the tender offer and the Company reducing the contractual term associated with new option grants from ten years to seven years. The risk-free interest rate is based on the U.S. Treasury yield. The Company determines the dividend yield by dividing the annualized dividends per share by the prior quarter's average stock price. The result is analyzed by the Company to decide whether it represents expected future dividend yield. The Company also estimates forfeitures at the time of grant and makes revisions if the estimates change significantly or the actual forfeitures differ from those estimates. The Company changed their estimated forfeiture rate during the three months ended March 27, 2010.
 
The fair value of share-based awards granted to employees has been estimated at the date of grant using a Black-Scholes option valuation model and the following weighted-average assumptions:
 
 
Stock Option Plan
 
Three Months Ended
 
Nine Months Ended
 
March 27,
2010
 
March 28,
2009
 
March 27,
2010
 
March 28,
2009
Expected holding period (in years)
5.0
 
 
4.6
 
 
5.2
 
 
6.3
 
Risk-free interest rate
2.4
%
 
1.7
%
 
2.3
%
 
3
%
Expected stock price volatility
38.0
%
 
37.0
%
 
37.8
%
 
39.0
%
Dividend yield
4.4
%
 
6.0
%
 
4.5
%
 
4.1
%
 
 

11


 
 
ESP Plan
 
Three Months Ended
 
Nine Months Ended
 
March 27,
2010
 
March 28,
2009
 
March 27,
2010
 
March 28,
2009
Expected holding period (in years)
0.5
 
 
0.3
 
 
0.5
 
 
 
Risk-free interest rate
0.15
%
 
0.29
%
 
0.15
%
 
%
Expected stock price volatility
34.35
%
 
62
%
 
34.35
%
 
%
Dividend yield
4.5
%
 
6.0
%
 
4.5
%
 
%
The weighted-average fair value of stock options granted was $4.68 and $2.41 per share for the three months ended March 27, 2010 and March 28, 2009, respectively. The weighted-average fair value of stock options granted was $4.22 and $3.61 per share for the nine months ended March 27, 2010 and March 28, 2009, respectively. The weighted-average fair value of RSUs granted was $17.95 and $12.68 per share for the three months ended March 27, 2010 and March 28, 2009, respectively. The weighted-average fair value of RSUs granted was $16.01 and $11.25 per share for the nine months ended March 27, 2010 and March 28, 2009, respectively.
 
Stock Option Plans
 
Stock Options
 
The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of March 27, 2010 and their activity during fiscal year 2010:
 
 
Number of
Shares 
 
Weighted Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (in Years)
 
 
Aggregate
Intrinsic
Value(1) 
Balance at June 28, 2009
29,599,916
 
 
$
28.83
 
 
 
 
 
Options Granted
3,459,602
 
 
18.06
 
 
 
 
 
Options Exercised
(16,843
)
 
12.82
 
 
 
 
 
Options Cancelled
(3,485,672
)
 
31.56
 
 
 
 
 
Balance at March 27, 2010
29,557,003
 
 
$
27.30
 
 
4.3
 
 
$
51,082,484
 
Exercisable, March 27, 2010
16,348,354
 
 
$
34.37
 
 
3.2
 
 
$
3,415,195
 
Vested and expected to vest, March 27, 2010
27,686,198
 
 
$
28.02
 
 
4.2
 
 
$
44,414,713
 
 
(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company's common stock on March 26, 2010, the last business day proceeding the fiscal quarter-end multiplied by the number of options outstanding, exercisable or vested and expected to vest as of March 27, 2010.
 
As of March 27, 2010, there was $35.0 million of total unrecognized stock compensation cost related to 13.2 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 1.9 years.
 
Restricted Stock Units
 
The following table summarizes outstanding and expected to vest RSUs as of March 27, 2010 and their activity during fiscal year 2010:
 

12


 
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value(1) 
Balance at June 28, 2009
11,867,329
 
 
 
 
 
Restricted stock units granted
3,730,439
 
 
 
 
 
Restricted stock units released
(3,703,179
)
 
 
 
 
Restricted stock units cancelled
(543,927
)
 
 
 
 
Balance at March 27, 2010
11,350,662
 
 
1.6
 
 
$
218,159,724
 
Vested and expected to vest, March 27, 2010
10,231,016
 
 
1.6
 
 
$
196,640,134
 
 
(1)
Aggregate intrinsic value for RSUs represents the closing price per share of the Company's common stock on March 26, 2010, the last business day preceding the fiscal quarter-end multiplied by the number of RSUs outstanding or expected to vest as of March 27, 2010.
 
The Company withheld shares totaling $8.0 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date as determined by the Company's closing stock price for the three months ended March 27, 2010. The total payments for the employees' tax obligations to the taxing authorities are reflected as financing activities within the Condensed Consolidated Statements of Cash Flows.
 
As of March 27, 2010, there was $151.6 million of unrecognized compensation expense related to 11.4 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.6 years.
 
2008 Employee Stock Purchase Plan:
 
As of March 27, 2010, there was $4.7 million of unrecognized compensation expense related to the ESPP.
 
NOTE 7: EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) per share are computed using the weighted average number of shares of common stock outstanding during the period. For purposes of computing basic earnings (loss) per share, the weighted average number of outstanding shares of common stock excludes unvested RSUs. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and assumed issuance of common stock under the employee stock purchase plans using the treasury stock method. The Company cash-settled options that expired (reached the ten year contractual term) as a result of a delay in filing periodic reports with the SEC due to the restatement of past financial statements, the Company suspended the issuance of shares upon exercise of stock options, vesting of RSUs, and purchases of stock under the 1987 Employee Stock Participation Plan, as amended, until the Company became current with all of its required SEC filings and its registration statements on Form S-8 on September 30, 2008 and cash-settled vested RSUs during the three months ended September 27, 2008. These options and RSUs are considered liability instruments and as such are excluded from the diluted earnings (loss) per share calculation for the three months and nine months ended March 28, 2009.
 
The following table sets forth the computation of basic and diluted earnings (loss) per share.
 

13


 
 
Three Months Ended
 
Nine Months Ended
 
March 27,
2010
 
March 28,
2009
 
March 27,
2010
 
March 28,
2009
 
(Amounts in thousands, except per share data)
Numerator for basic (loss) earnings per share and diluted (loss) earnings per share
 
 
 
 
 
 
 
Net (loss) income
$
(33,903
)
 
$
(26,426
)
 
$
66,684
 
 
$
2,357
 
 
 
 
 
 
 
 
 
Denominator for basic (loss) earnings per share
304,518
 
 
304,415
 
 
305,375
 
 
312,593
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP and RSUs
 
 
 
 
5,327
 
 
2,947
 
Denominator for diluted (loss) earnings per share
304,518
 
 
304,415
 
 
310,702
 
 
315,540
 
(Loss) earnings per share:
 
 
 
 
 
 
 
Basic
$
(0.11
)
 
$
(0.09
)
 
$
0.22
 
 
$
0.01
 
Diluted
$
(0.11
)
 
$
(0.09
)
 
$
0.21
 
 
$
0.01
 
Approximately 29.2 million and 31.3 million of the Company's stock options were excluded from the calculation of diluted earnings (loss) per share for the three months ended March 27, 2010 and March 28, 2009, respectively. Approximately 21.8 million and 22.5 million of the Company's stock options were excluded from the calculation of diluted earnings (loss) per share for the nine months ended March 27, 2010 and March 28, 2009, respectively. These options were excluded because they were determined to be antidilutive. However, such options could be dilutive in the future and, under those circumstances, would be included in the calculation of diluted earnings per share.
 
NOTE 8: SEGMENT INFORMATION
 
The Company operates and tracks its results as one reportable segment. The Company designs, develops, manufactures and markets a broad range of analog integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker.
 
The Company has fourteen operating segments which aggregate into one reportable segment. Two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if the segments have similar economic characteristics and if the segments are similar in each of the following areas:
 
  • the nature of products and services;
  • the nature of the production processes;
  • the type or class of customer for their products and services; and
  • the methods used to distribute their products or provide their services.
    The Company meets each of the aggregation criteria for the following reasons:
     
  • the sale of analog and mixed signal integrated circuits is the primary source of revenue for each of the Company's fourteen operating segments;
  • the integrated circuits sold by each of the Company's operating segments are manufactured using similar semiconductor manufacturing processes;
  • the integrated circuits marketed by each of the Company's operating segments are sold to the same types of customers; and
  • all of the Company's integrated circuits are sold through a centralized sales force and common wholesale distributors.
    All of the Company's operating segments share similar economic characteristics as they have a similar long term business model. The causes for variation among the Company's operating segments are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally,

    14


     
    each operating segment is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amounts and types of tools and materials required are similar for each operating segment. Finally, even though the Company periodically reorganizes its operating segments based upon changes in customers, end-markets or products, acquisitions, long-term growth strategies and the experience and bandwidth of the senior executives in charge, the common financial goals for each operating segment remain constant.
     
    Enterprise-wide information is provided in accordance with GAAP. Geographical revenue information is based on customers' ship-to location. Long-lived assets consist of property, plant and equipment. Property, plant and equipment information is based on the physical location of the assets at the end of each reporting period.
     
    Net revenues from unaffiliated customers by geographic region were as follows:
     
     
     
    Three Months Ended
     
    Nine Months Ended
     
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
     
    (in thousands)
    United States (1)
     
    $
    70,172
     
     
    $
    71,404
     
     
    $
    209,297
     
     
    $
    234,681
     
    China
     
    173,239
     
     
    91,006
     
     
    474,499
     
     
    373,903
     
    Japan
     
    31,981
     
     
    22,585
     
     
    97,104
     
     
    93,942
     
    Korea
     
    81,602
     
     
    52,161
     
     
    238,387
     
     
    159,903
     
    Rest of Asia
     
    56,581
     
     
    28,116
     
     
    163,057
     
     
    129,293
     
    Europe
     
    77,278
     
     
    66,964
     
     
    203,348
     
     
    230,891
     
    Rest of World
     
    18,027
     
     
    7,429
     
     
    45,949
     
     
    28,931
     
     
     
    $
    508,880
     
     
    $
    339,665
     
     
    $
    1,431,641
     
     
    $
    1,251,544
     
     
    (1)
    The Company previously included $21.8 million and $68.9 million of Korean revenues in United States revenues during the three and nine months ended March 28, 2009.
    Net long-lived assets by geographic region were as follows:
     
     
    March 27,
    2010
     
    June 27,
    2009
     
    (in thousands)
    United States
    $
    995,141
     
     
    $
    1,016,116
     
    Philippines
    223,359
     
     
    234,004
     
    Thailand
    99,036
     
     
    108,898
     
    Rest of World
    7,812
     
     
    7,034
     
     
    $
    1,325,348
     
     
    $
    1,366,052
     
     

    15


     
    NOTE 9: COMPREHENSIVE (LOSS) INCOME
     
    Comprehensive income consists of net (loss) income and net unrealized (losses) gains on available-for-sale investments, deferred income taxes on unrealized exchange (losses) gains on intercompany receivables, and actuarial loss on post-retirement benefits. The components of comprehensive (loss) income and related tax effects were as follows:
     
     
    Three Months Ended
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
    (in thousands)
    Net (loss) income, as reported
    $
    (33,903
    )
     
    $
    (26,426
    )
     
    $
    66,684
     
     
    $
    2,357
     
    Change in unrealized (losses) gains on investments, net of tax benefits (expenses) of $249, $477, $597 and $(725), respectively
    (436
    )
     
    (833
    )
     
    (1,044
    )
     
    1,275
     
    Deferred tax on unrealized exchange (losses) gains on intercompany receivables
    (881
    )
     
    600
     
     
    (1,840
    )
     
    1,839
     
    Actuarial gains on post-retirement benefits, net of tax (expense) benefit of $(29), $0, $(87) and $0, respectively
    52
     
     
     
     
    156
     
     
     
    Total comprehensive (loss) income
    $
    (35,168
    )
     
    $
    (26,659
    )
     
    $
    63,956
     
     
    $
    5,471
     
     
    Accumulated other comprehensive income presented in the Condensed Consolidated Balance Sheets at March 27, 2010 and June 27, 2009 consist of net unrealized gains on available-for-sale investments of $0.5 million and $1.6 million, respectively, net foreign currency translation loss adjustments of $(1.5) million and $(1.5) million, respectively, actuarial gains (losses) on post-retirement benefits of $(3.6) million and $(3.8) million, respectively, and deferred income tax of $(5.6) million and $(4.0) million, respectively, on unrealized exchange gains (losses) related to an intercompany receivable that is of a long-term investment nature.
     
    NOTE 10: INCOME TAXES
     
    In the three and nine months ended March 27, 2010, the Company recorded an income tax benefit of $13.7 million and an income tax provision of $90.5 million respectively, compared to an income tax provision of $9.2 million and $9.7 million recorded in the three and nine months ended March 28, 2009, respectively.
     
    The Company's statutory tax rate is 35%. The Company's income tax provision for the three and nine months ended March 27, 2010 and three and nine months ended March 28, 2009 differed from the amount computed by applying 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. The income tax provision for the nine months ended March 28, 2009 also includes a benefit of $3.5 million for the retroactive extension of the federal research tax credit to January 1, 2008 by legislation that was signed into law on October 3, 2008.
     
    In the second quarter of fiscal year 2010 the Internal Revenue Service ("IRS") completed its audit of the Company's federal corporate income tax returns for the fiscal years 2004 - 2006 and issued a Revenue Agents Report ("RAR"). The Company agreed with the RAR findings and made a payment of $26.4 million that reduced the Company's liability for unrecognized tax benefits. The settlement of this audit had no impact on the income tax provision for the second quarter of fiscal year 2010 as the Company had adequately provided for all issues in the RAR. Although this audit was settled, the statute of limitations for the assessment of additional federal income tax for the fiscal years 2004 - 2006 does not expire until December 31, 2010.
     
    Management estimates that it is reasonably possible that the liability for gross unrecognized tax benefits, including accrued interest and penalties, could decrease within the next 12 months by an amount in the range of $0 to $70.0 million. Such changes could occur based on the expiration of various statutes of limitations and the possible conclusion of ongoing tax audits.
     
    In the third quarter of fiscal year 2010, the IRS commenced an examination of the Company's federal corporate income tax returns for the fiscal years 2007 and 2008. Management believes that it has adequately provided for any adjustments that may result from the IRS examination, however, the outcome of tax examinations cannot be predicted with certainty.
     

    16


     
    NOTE 11: COMMITMENTS AND CONTINGENCIES
     
    Stock Option Litigation
     
    Beginning on or about May 22, 2006, several derivative actions were filed against certain current and former executive officers and directors of the Company. These derivative lawsuits were filed in: (1) the U.S. District Court for the Northern District of California, as In re Maxim Integrated Products, Inc. Derivative Litigation, Lead Case No. 5:06-cv-03344-JW, which consolidates McKinney v. Beck, et al. (Case No. 06-3344) and Horkay v. Beck, et al. (Case No. 06-3395), City of Pontiac Policemen's and Firemen's Retirement System v. Hood, et al. (Case No. 06-03754) and Corey v. Gifford, et al. (Case No. 06-03755); (2) the California Superior Court, Santa Clara County, as Louisiana Sheriffs' Pension & Relief Fund v. Gifford et al. (Case No. 1-06-CV-065626); and (3) the Delaware Court of Chancery, as Ryan v. Gifford, et al. (Case No. Civ 2213-N). The complaints alleged, among other things, that certain of the Company's current and former executive officers and directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct of back-dating stock options as well as violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company was named solely as a nominal defendant against whom the plaintiffs sought no recovery.
     
    The parties to the derivative litigation in the Delaware Court of Chancery entered into a stipulated settlement agreement on September 16, 2008, conditioned upon final approval by the Delaware Court of Chancery, and subject to enforcement of the final judgment in Delaware approving the settlement to obtain dismissals of all other pending derivative lawsuits in California. On January 2, 2009, the Delaware Court of Chancery issued a Memorandum Opinion approving the settlement in the Ryan, et al. vs. Gifford, et al. action and entered a Final Order and Judgment. The time for appeal of the Final Order and Judgment expired on February 2, 2009, with no party appealing any aspect of the Delaware Final Order and Judgment. All derivative actions pending in the California Superior Court have since been dismissed, with prejudice. All preconditions to distribution of the Delaware settlement proceeds in escrow on behalf of Maxim were met and the net settlement proceeds of $18.9 million were received on September 10, 2009. The Company recognized an increase to additional paid in capital of $2.5 million related to excess gains while the remainder of the proceeds of $16.4 million was recorded as a reduction in Other Operating Expenses, net.
     
    On February 6, 2008, a putative class action complaint was filed against the Company, its former chief executive officer, now deceased, and its former chief financial officer in the U.S. District Court for the Northern District of California. The complaint, brought on behalf of a putative class of Maxim stockholders who purchased or otherwise acquired their shares between April 29, 2003 and January 17, 2008, asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with alleged misrepresentations and omissions concerning the Company's stock option accounting practices. On May 15, 2008, the Court appointed the Cobb County Government Employees Pension Plan, the DeKalb County Pension Plan and the Mississippi Public Employees Retirement System as co-lead plaintiffs (collectively, "Lead Plaintiffs") and Bernstein Litowitz Berger & Grossman LLP and Chitwood Harley Harnes LLP as co-lead counsel.
     
    On November 14, 2008, Lead Plaintiffs filed a Consolidated Class Action Complaint, which continues to assert claims under Sections 10(b) and 20(a) of the Exchange Act and names the Company, its former chief executive officer, its former chief financial officer and its former treasurer as defendants. The Consolidated Class Action Complaint seeks damages in an unspecified amount, as well as interest, costs and expenses, including attorneys' fees. On January 30, 2009, the Company moved to dismiss the Consolidated Class Action Complaint, which motion, on July 16, 2009, was granted in part and denied in part by the Court. On August 28, 2009, the Company answered the Consolidated Class Action Complaint after which discovery commenced. On December 11, 2009, Lead Plaintiffs filed a motion for class certification, which motion is currently pending before the Court.
     
    On May 3, 2010, Lead Plaintiffs and the Company entered into a memorandum of understanding reflecting an agreement in principle to settle all claims asserted against all defendants in the action, which provides for the payment of $173 million in cash by the Company.  The memorandum of understanding contemplates the negotiation and execution of a final settlement agreement, and the settlement is subject to notice to the putative class and final approval by the Court.  In connection with this memorandum of understanding, the Company recorded a charge for the three and nine months ended March 27, 2010, to accrue the $173 million settlement amount which has been recorded in Other operating expenses, net in the Condensed Consolidated Statements of Operations and in Accrual for litigation settlement in the Condensed Consolidated Balance Sheets.
     
    Other Legal Proceedings
     
    In addition to the above proceedings, the Company is subject to other legal proceedings and claims that arise in the normal course of the Company's business. The Company does not believe that the ultimate outcome of such matters arising in the normal course of business will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
     

    17


     
    Indemnifications
     
    The Company indemnifies certain customers, distributors, suppliers and subcontractors for attorney fees, damages and costs awarded against such parties in certain circumstances in which the Company's products are alleged to infringe third party intellectual property rights, including patents, registered trademarks or copyrights. The terms of the Company's indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company's potential liability for indemnification relating to intellectual property infringement claims.
     
    Legal Fees Associated with Indemnification Obligations, Defense and Other Related Costs 
     
    Pursuant to the Company's charter documents and indemnification agreements, the Company has certain indemnification obligations to its officers, directors and certain former officers and directors. More specifically, the Company has separate written indemnification agreements with its current and former executive officers and directors as well as with its director of internal audit. Pursuant to such obligations, the Company has incurred expenses related to legal fees and expenses advanced to certain former officers of the Company who are subject to pending civil suits and civil charges by the SEC and other governmental agencies in connection with Maxim's historical stock option granting practices. The Company expenses such amounts as incurred.
     
    NOTE 12: COMMON STOCK REPURCHASES
     
    In October 2008, the Board of Directors authorized the Company to repurchase up to $750 million of the Company's common stock from time to time at the discretion of the Company's management. This stock repurchase authorization has no expiration date. All prior authorizations by the Company's Board of Directors for the repurchase of common stock were canceled and superseded by this authorization.
     
    During the nine months ended March 27, 2010, the Company repurchased approximately 6.1 million shares of its common stock for $112.8 million. During the fiscal quarter ended March 27, 2010, the Company repurchased approximately $2.6 million shares of its common stock for approximately $49.1 million. At the end of the fiscal quarter ended March 27, 2010, the Company had repurchased a total of 24.2 million shares totaling $347.9 million pursuant to the $750 million repurchase authorized by the Board of Directors. At the end of the fiscal quarter ended March 27, 2010, the Company was authorized to repurchase up to an additional $402.1 million of the Company's common stock. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including the price of the Company's common stock and general market and business conditions.
     
    NOTE 13: IMPAIRMENT OF LONG-LIVED ASSETS
     
    End of Line Sorting and Testing Facilities
     
    During the first quarter of fiscal year 2010, the Company identified certain assets as excess or obsolete, primarily due 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 Operations. 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 March 27, 2010.
     
    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 million was included in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Operations. 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 March 27, 2010.
     
    End of Line Sorting and Testing Facilities
     
    During the second quarter of fiscal year 2009, the Company identified certain assets as excess as a result of reductions in demand for product tested and sorted on certain equipment. In connection with these circumstances, the Company incurred an asset impairment charge of $43.8 million which is included in impairment of long-lived assets in the Company's Consolidated Statements of Operations. The Company has classified these assets as held for sale based on their intentions to sell the assets and has included $3.6 million in other assets in the balance sheet as of March 28, 2009.
     

    18


     
    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.
     
    The Company reached its conclusions regarding the asset impairments after conducting evaluations of the recoverability of the related manufacturing assets. The fair value of the equipment was determined after consideration of equipment specifications, quoted market prices of similar equipment and management's perception of demand for the equipment. The Company applied present value techniques to estimate fair value for certain of the equipment which they believe has limited marketability.
     
    NOTE 14: RESTRUCTURING ACTIVITIES
     
    Ireland Sales Operations Restructuring
     
    During the nine months ended March 27, 2010, the Company recorded approximately $3.0 million in restructuring costs associated with the reorganization of its international sales operations to Ireland. The Company anticipates payment of these obligations to occur during the fourth quarter of fiscal 2010.
     
    Shutdown of Dallas Wafer Fabrication Facility
     
    During the nine months ended March 27, 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 nine months ended March 27, 2010, the Company recognized a reversal of expense of approximately $4.7 million related to a reduction in estimated benefits costs for employees terminated during prior quarters.
     
    Activity and liability balances related to the restructuring activity for the nine months ended March 27, 2010 were as follows:
     
     
    Nine Months Ended
     
    March 27, 2010
     
    (in thousands)
     
    Severance and
    Benefits
     
    Other Exit
    Costs
     
    Total
    Balance, June 27, 2009
    $
    7,694
     
     
    $
     
     
    $
    7,694
     
    Restructuring provision
    3,237
     
     
    1,321
     
     
    4,558
     
    Cash payments
    (4,089
    )
     
    (1,321
    )
     
    (5,410
    )
    Change in estimate
    (4,680
    )
     
     
     
    (4,680
    )
    Balance, March 27, 2010
    $
    2,162
     
     
    $
     
     
    $
    2,162
     
    The Company has included $2.2 million in Accrued salary and related expenses in the Condensed Consolidated Balance Sheets.
     
    NOTE 15: ACQUISITIONS
     
    L&L ENGINEERING
     
    During the first quarter 2010, the Company acquired L&L Engineering, a company developing digital power converter technology for approximately $4.0 million in cash. The Company may pay up to an additional $5.5 million based on the achievement of certain product development and product release milestones and continued employment of certain key employees assumed from L&L Engineering. The Company preliminarily allocated $1.1 million to in-process research and development and $2.9 million to goodwill. The Company will amortize the in-process research and development over the estimated life of the technology upon completion of its development. The Company expects that all of the goodwill will be deductible for tax purposes.
     

    19


     
    NOTE 16: GOODWILL AND INTANGIBLE ASSETS
     
    Goodwill
     
    The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company performed the annual impairment analysis during the first quarter 2010 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.
     
    Activity and goodwill balances for the nine months ended March 27, 2010 were as follows:
     
     
    Goodwill
    Balance at June 27, 2009
    $
    26,710
     
    Acquisition
    2,900
     
    Adjustments
    (24
    )
    Balance at March 27, 2010
    $
    29,586
     
    Intangible Assets
     
    The useful lives of the significant amortizable intangible assets are as follows:
     
    Asset
     
    Life
    Intellectual Property
     
    5-10 years
    Customer Relationships
     
    5-10 years
    Tradename
     
    3 years
    Backlog
     
    1 year
    Intangible assets consisted of the following:
     
     
    March 27, 2010
     
    Original
    Cost 
     
    Accumulated
    Amortization 
     
    Net
     
    (in thousands)
    Intellectual property *
    $
    60,762
     
     
    $
    29,011
     
     
    $
    31,751
     
    Customer relationships
    42,330
     
     
    9,432
     
     
    32,898
     
    Tradename
    400
     
     
    189
     
     
    211
     
    Backlog
    200
     
     
    200
     
     
     
    Total intangible assets
    $
    103,692
     
     
    $
    38,832
     
     
    $
    64,860
     
    * Original cost includes $1.1 million of In-process research and development acquired from L&L Engineering.
     
    Amortization expense of $2.7 million and $8.1 million associated with intellectual property was recorded in cost of goods sold for the three and nine months ended March 27, 2010, respectively, while amortization expense of $1.4 million and $4.2 million associated with customer relationships was recorded in selling, general and administrative expenses for the three and nine months ended March 27, 2010, respectively.
     
    The following table presents the amortization expense of intangible assets:
     

    20


     
     
    Three Months Ended
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
    (in thousands)
    Intellectual property
    $
    2,700
     
     
    $
    2,346
     
     
    $
    8,103
     
     
    $
    5,679
     
    Customer relationships
    1,415
     
     
    873
     
     
    4,240
     
     
    2,124
     
    Tradename
    33
     
     
    33
     
     
    100
     
     
    56
     
    Backlog
     
     
    50
     
     
    100
     
     
    50
     
    Total amortization expense
    $
    4,148
     
     
    $
    3,302
     
     
    $
    12,543
     
     
    $
    7,909
     
    The following table represents the estimated future amortization expense of intangible assets as of March 27, 2010:
     
    Fiscal Year
     
    Amount
     
     
    (in thousands)
    Remaining three months of 2010
     
    $
    4,123
     
    2011
     
    15,893
     
    2012
     
    15,069
     
    2013
     
    11,234
     
    2014
     
    6,819
     
    Thereafter
     
    10,622
     
    Total *
     
    $
    63,760
     
    * The total above excludes $1.1 million of in-process research and development which will be amortized upon completion of development over the estimated useful life of the technology.
     
    NOTE 17: SUBSEQUENT EVENTS
     
    On April 12, 2010, the Company entered into a definitive agreement to acquire Teridian Semiconductor Corporation, a privately held fabless semiconductor company in the energy measurement market, for approximately $315 million in cash. 
     

    21


     
    ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     
    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; and 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 significant changes to the Company's critical accounting policies during the nine months ended March 27, 2010, as compared to the previous disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2009.

    22


     
    RESULTS OF OPERATIONS
     
    The following table sets forth certain Condensed Consolidated Statements of Operations data expressed as a percentage of net revenues for the periods indicated:
     
     
    Three Months Ended
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
     
    Net revenues
    100.0
    %
     
    100.0
    %
     
    100.0
    %
     
    100.0
    %
    Cost of goods sold
    39.3
    %
     
    50.6
    %
     
    40.5
    %
     
    47.4
    %
    Gross margin
    60.7
    %
     
    49.4
    %
     
    59.5
    %
     
    52.6
    %
    Operating expenses:
     
     
     
     
     
     
     
    Research and development
    23.0
    %
     
    35.6
    %
     
    24.6
    %
     
    32.3
    %
    Selling, general and administrative
    12.4
    %
     
    14.4
    %
     
    12.5
    %
     
    12.2
    %
    In-process research and development
    %
     
    %
     
    %
     
    0.3
    %
    Impairment of long-lived assets
    %
     
    %
     
    0.6
    %
     
    4.1
    %
    Severance and restructuring (recoveries) expenses
    (0.1
    )%
     
    3.2
    %
     
    %
     
    2.3
    %
    Other operating expenses, net
    34.9
    %
     
    1.2
    %
     
    11.3
    %
     
    1.7
    %
    Total operating expenses
    70.2
    %
     
    54.4
    %
     
    49.0
    %
     
    52.9
    %
    Operating (loss) income
    (9.5
    )%
     
    (5.0
    )%
     
    10.5
    %
     
    (0.3
    )%
    Interest income and other, net
    0.1
    %
     
    (0.1
    )%
     
    0.4
    %
     
    1.3
    %
    (Loss) income before provision for income taxes
    (9.4
    )%
     
    (5.1
    )%
     
    10.9
    %
     
    1.0
    %
    (Benefit) provision for income taxes
    (2.7
    )%
     
    2.7
    %
     
    6.3
    %
     
    0.8
    %
    Net (loss) income
    (6.7
    )%
     
    (7.8
    )%
     
    4.6
    %
     
    0.2
    %
     
    The following table shows stock-based compensation included in the components of the Condensed Consolidated Statements of Operations reported above as a percentage of net revenues for the periods indicated:
     
     
    Three Months Ended
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
     
    Cost of goods sold
    0.2
    %
     
    2.2
    %
     
    0.8
    %
     
    4.0
    %
    Research and development
    1.7
    %
     
    7.4
    %
     
    2.8
    %
     
    6.2
    %
    Selling, general and administrative
    1.1
    %
     
    2.0
    %
     
    1.2
    %
     
    2.6
    %
     
    3.0
    %
     
    11.7
    %
     
    4.8
    %
     
    12.9
    %
     
    Net Revenues
     
    Net revenues were $508.9 million and $339.7 million for the three months ended March 27, 2010 and March 28, 2009, respectively, an increase of 49.8%. Net revenues for the nine months ended March 27, 2010 and March 28, 2009 were $1,431.6 million and $1,251.5 million, respectively, an increase of 14.4%. We classify our net revenue by four major end market categories: Communications, Computing, Consumer and Industrial. Net shipments from all four markets had increases during the three months ended March 27, 2010 as compared to March 28, 2009 due to an improved demand for our products. Net shipments increased for the nine months ended March 27, 2010 as compared to March 28, 2009 due primarily to the Consumer and Computing markets.
     
    During the three months ended March 27, 2010 and March 28, 2009, approximately 86% and 79% of net revenues, respectively, were derived from customers outside of the United States. During the nine months ended March 27, 2010 and March 28, 2009, approximately 85% and 81% 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

    23


     
    on our revenue and results of operations for the three months ended March 27, 2010 and March 28, 2009 was immaterial.
     
    Gross Margin
     
    Our gross margin percentage was 60.7% and 49.4% for the three months ended March 27, 2010 and March 28, 2009, respectively. The gross margin percentage for the three months ended March 27, 2010, as compared to the three months ended March 28, 2009, increased primarily due to improved factory utilizations which had a favorable impact on gross margin. Additional contributing factors were decreased depreciation expense of $11.4 million attributable to the closure of our Dallas wafer fabrication facility at the end of fiscal year 2009, decreased inventory write-downs of $10.7 million primarily attributable to improved turnover and factory efficiencies of our inventory levels, and decreased stock-based compensation of $6.5 million as described below.
     
    Our gross margin percentage was 59.5% and 52.6% for the nine months ended March 27, 2010 and March 28, 2009, respectively. The gross margin percentage for the nine months ended March 27, 2010, as compared to the nine months ended March 28, 2009, increased primarily due to decreased stock-based compensation of $38.5 million as described below, decreased inventory write-downs of $31.0 million primarily attributable to improved turnover and factory efficiencies of our inventory levels, and decreased depreciation expense of approximately $35.4 million primarily attributable to the closure of our Dallas wafer fabrication facility at the end of fiscal year 2009.
     
    Research and Development
     
    Research and development expenses were $117.1 million and $121.0 million for the three months ended March 27, 2010 and March 28, 2009, respectively, which represented 23.0% and 35.6% of net revenues, respectively. The decrease in research and development expenses was primarily attributable to a reduction in stock-based compensation of approximately $16.5 million as described below, which was offset by an increase of $7.9 million for salaries and benefits, primarily due to anticipated higher bonuses levels in connection with increased profitability for fiscal year 2010. Additionally, the increase in salaries and benefits includes a $2.8 million decrease attributable to the transition of our field applications engineers and our business managers from research and development to selling, general and administrative functions.
     
    Research and development expenses were $352.2 million and $404.2 million for the nine months ended March 27, 2010 and March 28, 2009, respectively, which represented 24.6% and 32.3% of net revenues, respectively. The decrease in research and development expenses primarily due to a reduction in stock-based compensation of approximately $38.0 million as described below, decreased salaries and benefits of $16.2 million, comprised of a $19.3 million decrease attributable to the transition of our field applications engineers and our business managers from research and development to selling, general and administrative functions, offset by an increase of $3.1 million for salaries and benefits, primarily due to anticipated higher bonuses levels in connection with increased profitability for fiscal year 2010.
     
    Selling, General and Administrative
     
    Selling, general and administrative expenses were $62.9 million and $48.8 million for the three months ended March 27, 2010 and March 28, 2009, respectively, which represented 12.4% and 14.4% of net revenues, respectively. The increase in selling, general and administrative expenses is attributable to an increase in salaries and benefits of $8.8 million, primarily due to anticipated higher bonuses levels in connection with increased profitability for fiscal year 2010. Additionally, the increase in salaries and benefits includes a $2.8 million increase attributable to the transition of our field applications engineers and our business managers from research and development to selling, general and administrative functions.
     
    Selling, general and administrative expenses were $179.2 million and $153.1 million for the nine months ended March 27, 2010 and March 28, 2009, respectively, which represented 12.5% and 12.2% of net revenues, respectively. The increase in selling, general and administrative expenses is attributable to an increase in salaries and benefits of $26.0 million, comprised of a $19.3 million increase attributable to the transition of our field applications engineers and our business managers from research and development to selling, general and administrative functions and an increase in salaries and benefits of $6.7 million, primarily due to anticipated higher bonuses levels in connection with increased profitability for fiscal year 2010. These were partially offset by reduced stock-based compensation expenses of approximately $16.0 million as described below.
     
    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 Operations for the three and nine months ended March 27, 2010 and March 28, 2009:

    24


     
    Stock-based compensation expense by type of award
     
    Three Months Ended
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
    (in thousands)
    Cost of goods sold
     
     
     
     
     
     
     
    Stock options
    $
    232
     
     
    $
    1,881
     
     
    $
    2,648
     
     
    $
    31,781
     
    Restricted stock units
    586
     
     
    5,579
     
     
    8,394
     
     
    18,433
     
    Employee stock purchase plan
    253
     
     
    114
     
     
    755
     
     
    114
     
     
    $
    1,071
     
     
    $
    7,574
     
     
    $
    11,797
     
     
    $
    50,328
     
    Research and development expense
     
     
     
     
     
     
     
    Stock options
    $
    1,318
     
     
    3,773
     
     
    $
    9,074
     
     
    $
    33,486
     
    Restricted stock units
    6,038
     
     
    20,975
     
     
    27,056
     
     
    44,112
     
    Employee stock purchase plan
    1,335
     
     
    446
     
     
    3,952
     
     
    446
     
     
    $
    8,691
     
     
    $
    25,194
     
     
    $
    40,082
     
     
    $
    78,044
     
    Selling, general and administrative expense
     
     
     
     
     
     
     
    Stock options
    $
    1,194
     
     
    $
    1,910
     
     
    $
    5,216
     
     
    $
    19,656
     
    Restricted stock units
    3,993
     
     
    4,899
     
     
    10,825
     
     
    13,047
     
    Employee stock purchase plan
    330
     
     
    36
     
     
    757
     
     
    36
     
     
    $
    5,517
     
     
    $
    6,845
     
     
    $
    16,798
     
     
    $
    32,739
     
    Total stock-based compensation expense
     
     
     
     
     
     
     
    Stock options
    $
    2,744
     
     
    $
    7,564
     
     
    $
    16,938
     
     
    $
    84,923
     
    Restricted stock units
    10,617
     
     
    31,453
     
     
    46,275
     
     
    75,592
     
    Employee stock purchase plan
    1,918
     
     
    596
     
     
    5,464
     
     
    596
     
    Pre-tax stock-based compensation expense
    15,279
     
     
    39,613
     
     
    68,677
     
     
    161,111
     
    Less: income tax effect
    3,889
     
     
    13,052
     
     
    20,967
     
     
    55,026
     
    Net stock-based compensation expense
    $
    11,390
     
     
    $
    26,561
     
     
    $
    47,710
     
     
    $
    106,085
     
     
    Pre-tax stock-based compensation decreased to $15.3 million during the three months ended March 27, 2010 from $39.6 million during the three months ended March 28, 2009, which represented 3.0% and 11.7% of net revenues, respectively. The decrease in expenses is partially attributable to a change in estimated forfeiture rate during the three months ended March 27, 2010 and reduced expenses for options and RSUs, as grants with higher fair values completed their vesting while grants with lower fair values were issued during fiscal year 2009.
     
    Pre-tax stock-based compensation decreased to $68.7 million during the nine months ended March 27, 2010 from $161.1 million during the nine months ended March 28, 2009, which represented 4.8% and 12.9% of net revenues, respectively. The decrease in expenses is partially attributable to $23.7 million recorded in connection with the tender offer to cash settle certain underwater stock options completed in December 2008 and $18.6 million of expense related to the cash-settlement of options expiring in October 2008 during the nine months ended March 28, 2009, which did not reoccur during the nine months ended March 27, 2010. In addition, expenses for options and RSUs declined as grants with higher fair values completed their vesting while newer grants at lower fair values were issued.
     
    Impairment of Long-lived Assets
     
    End of Line Sorting and Testing Facilities
     
    During the first quarter of fiscal year 2010, the Company identified certain assets as excess or obsolete primarily due 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 Operations. 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

    25


     
    Balance Sheet as of March 27, 2010.
     
    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 million was included in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Operations. 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 March 27, 2010.
     
    End of Line Sorting and Testing Facilities
     
    During the second quarter of fiscal year 2009, the Company identified certain assets as excess as a result of reductions in demand for product tested and sorted on certain equipment. In connection with these circumstances, the Company incurred an asset impairment charge of $43.8 million which is included in impairment of long-lived assets in the Company's Consolidated Statements of Operations.
     
    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
     
    Ireland Sales Operations Restructuring
     
    During the nine months ended March 27, 2010, the Company recorded approximately $3.0 million in restructuring costs associated with the reorganization of its international sales operations in Ireland. The Company anticipates payment of these obligations to occur during the fourth quarter of fiscal 2010.
     
    Shutdown of Dallas Wafer Fabrication Facility
     
    During the nine months ended March 27, 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 nine months ended March 27, 2010, the Company recognized a reversal of expense of approximately $4.7 million related to a reduction in estimated benefits costs for employees terminated during prior 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 and nine months ended March 27, 2010 and March 28, 2009:
     

    26


     
     
    Three Months Ended
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    March 27,
    2010
     
    March 28,
    2009
     
    (in thousands)
    Legal and accounting expenses
    $
    4,546
     
     
    $
    3,684
     
     
    $
    13,023
     
     
    $
    24,557
     
    Payroll tax and related adjustments
     
     
    285
     
     
    (8,043
    )
     
    (4,765
    )
    Termination benefits
     
     
     
     
     
     
    (2,402
    )
    Derivative litigation settlement
     
     
     
     
    (16,419
    )
     
     
    Class action settlement
    173,000
     
     
     
     
    173,000
     
     
     
    Other
     
     
     
     
    21
     
     
    4,189
     
    Total
    $
    177,546
     
     
    $
    3,969
     
     
    $
    161,582
     
     
    $
    21,579
     
     
    The Company incurred $4.5 million and $3.7 million in legal and accounting expenses associated with the restatement of certain of its previously filed financial statements during the three months ended March 27, 2010 and March 28, 2009, respectively. The increase of $0.8 million in restatement related legal and accounting fees is primarily due to increased indemnification related legal fees, offset by a reduction in accounting expenses associated with the restatement and legal settlement of the derivative litigation during the first fiscal quarter of 2010.
     
    The Company incurred $13.0 million and $24.6 million in legal and accounting expenses associated with the restatement of certain of its previously filed financial statements during the nine months ended March 27, 2010 and March 28, 2009, respectively. The decline of $11.5 million in restatement related legal and accounting fees is primarily due to the completion of the restatement of the Company's previously filed financial statements with the SEC on September 30, 2008, offset by increased indemnification related legal fees associated with our former chief financial officer during the nine months ended March 27, 2010. The Company also recognized $16.4 million in income attributable to gains directly related to proceeds received as a result of the settlement of the derivative litigation during the third quarter of fiscal year 2010. See Note 11-Commitments and Contingencies.
     
    As a result of the Company's investigation into its equity awards, the Company recorded certain U.S. and foreign payroll tax, interest and penalty accruals in prior years. During the nine months ended March 27, 2010, the Company reversed $8.0 million of these accruals due to the completion of a tax audit and the expiration of the tax statute of limitations. The Company also reversed $4.8 million of these accruals in the nine months ended March 28, 2009 due to the expiration of the tax statute of limitations.
     
    During the nine months ended March 28, 2009, the Company reversed $2.4 million of accrued retirement benefits due to the death of its former chief executive officer.
     
    During the three and nine months ended March 27, 2010, the Company recorded a charge to accrue $173 million in connection with an agreement to settle the class action complaint. See Note 11-Commitments and Contingencies.
     
    Interest Income and Other, Net
     
    Interest income and other, net, was $0.6 million and $(0.2) million for the three months ended March 27, 2010 and March 28, 2009, respectively. This increase in income was primarily driven by reduced foreign exchange losses of approximately $3.2 million, which was partially offset by decreased interest income of $1.8 million due to lower average interest rates and lower invested cash, cash equivalents and short-term investments.
     
    Interest income and other, net, was $6.2 million and $16.3 million for nine months ended March 27, 2010 and March 28, 2009, respectively. This decrease was primarily driven by decreased interest income of $11.7 million due to lower average interest rates and lower invested cash, cash equivalents and short-term investments, which was partially offset by an increase in foreign exchange gains of approximately $1.7 million.
     
    Provision for Income Taxes
     
    In the three and nine months ended March 27, 2010, the Company recorded an income tax benefit of $13.7 million and an income tax provision of $90.5 million respectively, compared to an income tax provision of $9.2 million and $9.7 million recorded in the three and nine months ended March 28, 2009, respectively.
     
    The Company's statutory tax rate is 35%. The Company's income tax provision for the three and nine months ended March 27, 

    27


     
    2010 and three and nine months ended March 28, 2009 differed from the amount computed by applying 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. The income tax provision for the nine months ended March 28, 2009 also includes a benefit of $3.5 million for the retroactive extension of the federal research tax credit to January 1, 2008 by legislation that was signed into law on October 3, 2008.
     
    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.
     
    In the second quarter of fiscal year 2010 the Internal Revenue Service ("IRS") completed its audit of the Company's federal corporate income tax returns for the fiscal years 2004 - 2006 and issued a Revenue Agents Report ("RAR"). The Company agreed with the RAR findings and made a payment of $26.4 million that reduced the Company's liability for unrecognized tax benefits. The settlement of this audit had no impact on the income tax provision for the second quarter of fiscal year 2010 as the Company had adequately provided for all issues in the RAR. Although this audit was settled, the statute of limitations for the assessment of additional federal income tax for the fiscal years 2004 - 2006 does not expire until December 31, 2010.
     
    Management estimates that it's reasonably possible that the liability for gross unrecognized tax benefits, including accrued interest and penalties, could decrease within the next 12 months by an amount in the range of $0 to $70.0 million. Such changes could occur based on the expiration of various statutes of limitations and the possible conclusion of ongoing tax audits.
     
    In the third quarter of fiscal year 2010, the IRS commenced an examination of the Company's federal corporate income tax returns for the fiscal years 2007 and 2008. Management believes that it has adequately provided for any adjustments that may result from the IRS examination, however, the outcome of tax examinations cannot be predicted with certainty.
     
    Recently Issued Accounting Pronouncements
     
    In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 requires new disclosures regarding significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales, issuances and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU 2010-06 clarifies existing disclosures regarding input and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances and settlements in the roll forward of Level 3 activity; those disclosures are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 had no current impact and is expected to have no subsequent impact on our consolidated financial position, results of operations or cash flows.
     
    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. Earlier adoption is prohibited. The adoption of the new guidance did not have a material effect on the Company's consolidated financial position, results of operations and cash flows.
     
    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-Acquisition.
     

    28


     
    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 the determination of the fair value of financial assets and financial liabilities when the activity levels have significantly decreased in relation to the normal market, (ii) guidance that would include the intent and ability of the holder as an indicator in the determination of whether an other-than-temporary impairment exists and (iii) 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 March 27, 2010, backlog shippable within the next quarter was approximately $480.2 million. The Company's backlog shippable within the next quarter at the end of the quarter ended December 26, 2009 was approximately $334.6 million. Our backlog is subject to revisions, cancellations and rescheduling which could have a material impact on the timing and extent of our revenues and is not indicative of revenue projections for subsequent quarters.
     
    FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
     
    Cash, cash equivalent and short-term investments were as follows:
     
     
    March 27,
    2010
     
    June 27,
    2009
     
    (in thousands)
    Cash and cash equivalents
    $
    758,436
     
     
    $
    709,348
     
    Short-term investments
    100,425
     
     
    204,055
     
    Total cash, cash equivalents and investments
    $
    858,861
     
     
    $
    913,403
     
     
    Cash flows were as follows:
     
    Nine Months Ended
     
    March 27,
    2010
     
    March 28,
    2009
     
    (in thousands)
    Net cash provided by operating activities
    $
    333,953
     
     
    $
    335,444
     
    Net cash provided by (used in) investing activities
    16,916
     
     
    (159,741
    )
    Net cash used in financing activities
    (301,781
    )
     
    (495,997
    )
    Net increase (decrease) in cash and cash equivalents
    $
    49,088
     
     
    $
    (320,294
    )
     
    Operating activities
     
    Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.
     
    Cash from operations for the nine months ended March 27, 2010 decreased by approximately $1.5 million compared with nine months ended March 28, 2009. Increases in net income of $64.3 million and increases in other working capital changes of $156.1 million for the nine months ended March 27, 2010 compared with the nine months ended March 28, 2009 were offset by a decrease in non-cash adjustments of approximately $222.0 million.
     

    29


     
    Investing activities
     
    Investing cash flows consist primarily of capital expenditures, net investment purchases, maturities and acquisitions.
     
    The decrease in cash used in investing activities is primarily due to an increase in net maturities on short-term investments of $97.3 million as the Company shifted its investment portfolio maturing during the nine months ended March 27, 2010 to money market funds. Cash used in investing activities included $80.2 million and $103.5 million in capital expenditures, and $4.0 million and $61.0 million of cash used for acquisitions, during the nine months ended March 27, 2010 and the nine months ended March 28, 2009, respectively.
     
    On April 12, 2010, the Company entered into a definitive agreement to acquire Teridian Semiconductor Corporation, a privately held fabless semiconductor company in the energy measurement market for approximately $315 million in cash.  The Company expects this acquisition to be completed during the fourth quarter of fiscal year 2010. 
     
    Financing activities
     
    Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, cash settlements associated with RSUs, expiring options, tender offer payments and withholding tax payments associated with net share settlements of equity awards.
     
    Net cash used in financing activities decreased by approximately $194.2 million for the nine months ended March 27, 2010 compared with the nine months ended March 28, 2009. This decrease was primarily due to a decrease in repurchases of common stock of $121.5 million under our repurchase program which commenced in October 2008 and reduced payments of $35.6 million and $12.7 million associated with completion of the RSU loan program and settlement of tendered options and expiring options under the goodwill programs, respectively. In addition, we received proceeds associated with shares issued under the ESPP during the nine months ended March 27, 2010 totaling $10.7 million.
     
    The Company anticipates that the available funds and cash generated from operations will be sufficient to meet the requirements of its business for the next twelve months, including its working capital requirements and its anticipated level of capital expenditures.
     
    Off-Balance-Sheet Arrangements
     
    As of March 27, 2010, the Company did not have any material off-balance-sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
     
    ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
    The Company's market risk has not changed materially from the interest rate and foreign currency risks disclosed in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2009.
     
    ITEM 4: CONTROLS AND PROCEDURES
     
    Evaluation of Disclosure Controls and Procedures
     
    Our management, with the participation of our chief executive officer ("CEO") and our chief financial officer ("CFO"), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of March 27, 2010. Our management, including the CEO and the CFO, has concluded that the Company's disclosure controls and procedures were effective as of March 27, 2010. The purpose of these controls and procedures is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules, and that such information is accumulated and communicated to our management, including our CEO and our CFO, to allow timely decisions regarding required disclosures.
     
    Changes in Internal Control over Financial Reporting
     
    There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 27, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
     
    Inherent Limitations on the Effectiveness of Internal Controls

    30


     
     
    A system of internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and no control system, no matter how well designed and operated, can provide absolute assurance. The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement errors and misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
     
    PART II. OTHER INFORMATION
     
    ITEM 1: LEGAL PROCEEDINGS
     
    The information set forth above under Note 11 in the Notes to Condensed Consolidated Financial Statements is incorporated herein by reference.
     
    ITEM 1A: RISK FACTORS
     
    A description of risks associated with our business, financial condition and results of our operations is set forth in Item 1A - Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 27, 2009, which is herein incorporated by reference. Below is a description of additional risks associated with our business, financial condition and results of operations.
     
    We may encounter difficulties in operating our newly-implemented enterprise resource planning system, which may adversely affect our operations and our ability to meet financial reporting obligations.
     
    We implemented a new enterprise resource planning ("ERP") system in the second quarter of fiscal year 2010 as part of our ongoing efforts to improve and strengthen our operational and financial processes and our reporting systems. Any difficulties encountered in the operation of our new ERP system could cause us to fail to meet customer demand for our product or could delay our ability to meet our financial reporting obligations which, in turn, could materially adversely affect our results of operations.
     
    ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     
    The following table summarizes the activity related to stock repurchases for the three months ended March 27, 2010:
     
     
    Issuer Repurchases of Equity Securities
     
    (in thousands, except per share amounts)
     
    Total Number
    of Shares
    Purchased
     
    Average Price
    Paid
    per Share
     
    Total Number of
    Shares Purchased
    as Part of
    Publicly Announced
    Plans or Programs
     
    Maximum Amount
    That May Yet
    Be Purchased
    Under the Plans
    or Programs
    Dec. 27, 2009 - Jan. 23, 2010
    368
     
     
    $
    19.77
     
     
    368
     
     
    $
    443,945