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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 December 25, 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 [x] 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 January 14, 2011 there were 296,476,075 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 December 25, 2010 and June 26, 2010
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 25, 2010 and December 26, 2009
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 25, 2010 and December 26, 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. Reserved
 
 
 
 
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)
 
 
December 25,
2010
 
June 26,
2010
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
798,344
 
 
$
826,512
 
Accounts receivable, net
293,264
 
 
339,322
 
Inventories
217,578
 
 
206,040
 
Deferred tax assets
122,552
 
 
217,017
 
Income tax refund receivable
643
 
 
83,813
 
Other current assets
129,305
 
 
33,909
 
Total current assets
1,561,686
 
 
1,706,613
 
Property, plant and equipment, net
1,298,155
 
 
1,324,436
 
Intangible assets, net
228,450
 
 
194,728
 
Goodwill
249,777
 
 
226,223
 
Other assets
27,625
 
 
30,325
 
TOTAL ASSETS
$
3,365,693
 
 
$
3,482,325
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
96,469
 
 
$
107,797
 
Income taxes payable
8,023
 
 
13,053
 
Accrued salary and related expenses
160,435
 
 
175,858
 
Accrued expenses
36,158
 
 
37,030
 
Deferred income on shipments to distributors
34,265
 
 
25,779
 
Accrual for litigation settlement
 
 
173,000
 
Total current liabilities
335,350
 
 
532,517
 
Long term debt
300,000
 
 
300,000
 
Income taxes payable
159,775
 
 
132,400
 
Deferred tax liabilities
161,430
 
 
136,524
 
Other liabilities
24,172
 
 
27,926
 
Total liabilities
980,727
 
 
1,129,367
 
Commitments and contingencies (Note 11)
 
 
 
 
 
Stockholders' equity:
 
 
 
Common stock and capital in excess of par value
297
 
 
301
 
Retained earnings
2,399,329
 
 
2,364,598
 
Accumulated other comprehensive loss
(14,660
)
 
(11,941
)
Total stockholders' equity
2,384,966
 
 
2,352,958
 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
$
3,365,693
 
 
$
3,482,325
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

3

 

MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
(Amounts in thousands, except per share data)
 
 
 
 
 
 
 
 
 
Net revenues
$
612,936
 
 
$
473,515
 
 
$
1,239,075
 
 
$
922,761
 
Cost of goods sold (1)
232,661
 
 
181,727
 
 
472,586
 
 
379,346
 
Gross margin
380,275
 
 
291,788
 
 
766,489
 
 
543,415
 
Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
130,001
 
 
118,017
 
 
257,780
 
 
234,360
 
Selling, general and administrative (1)
72,240
 
 
59,812
 
 
144,340
 
 
113,308
 
Intangible asset amortization
4,447
 
 
1,846
 
 
10,460
 
 
3,690
 
Impairment of long-lived assets
 
 
 
 
 
 
8,291
 
Severance and restructuring expenses
488
 
 
2,063
 
 
1,654
 
 
502
 
Other operating expenses (income), net
21,100
 
 
921
 
 
21,133
 
 
(15,964
)
Total operating expenses
228,276
 
 
182,659
 
 
435,367
 
 
344,187
 
Operating income
151,999
 
 
109,129
 
 
331,122
 
 
199,228
 
Interest and other (expense) income, net
(4,100
)
 
3,630
 
 
(7,776
)
 
5,531
 
Income before provision for income taxes
147,899
 
 
112,759
 
 
323,346
 
 
204,759
 
Provision for income taxes
38,309
 
 
54,124
 
 
96,206
 
 
104,172
 
Net income
$
109,590
 
 
$
58,635
 
 
$
227,140
 
 
$
100,587
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.37
 
 
$
0.19
 
 
$
0.76
 
 
$
0.33
 
Diluted
$
0.36
 
 
$
0.19
 
 
$
0.75
 
 
$
0.32
 
 
 
 
 
 
 
 
 
Shares used in the calculation of earnings per share:
 
 
 
 
 
 
 
Basic
296,550
 
 
305,324
 
 
297,329
 
 
305,821
 
Diluted
303,260
 
 
310,090
 
 
301,867
 
 
310,798
 
 
 
 
 
 
 
 
 
Dividends paid per share
$
0.21
 
 
$
0.20
 
 
$
0.42
 
 
$
0.40
 
 
 
 
 
 
 
 
 
(1) Includes stock-based compensation charges as follows:
 
 
 
 
 
 
 
Cost of goods sold
$
3,748
 
 
$
5,265
 
 
$
7,643
 
 
$
10,726
 
Research and development
$
13,916
 
 
$
14,650
 
 
$
30,021
 
 
$
31,391
 
Selling, general and administrative
$
6,858
 
 
$
7,018
 
 
$
13,997
 
 
$
11,281
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

4

 

MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
227,140
 
 
$
100,587
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
     Stock-based compensation
51,661
 
 
53,398
 
Depreciation and amortization
104,362
 
 
76,328
 
Deferred taxes
103,867
 
 
26,403
 
     Tax shortfall related to stock-based compensation plans
(5,676
)
 
(10,143
)
      Excess tax benefit related to stock-based compensation
(3,848
)
 
(3,898
)
Impairment of long-lived assets
 
 
8,291
 
Loss on sale of property, plant and equipment
14,794
 
 
1,092
 
Loss from sale of equity investments
 
 
149
 
Changes in assets and liabilities:
 
 
 
Accounts receivable
47,624
 
 
(73,315
)
Inventories
(8,788
)
 
19,003
 
Other current assets and income tax refund receivable
(7,430
)
 
8,895
 
Accounts payable
(7,077
)
 
(643
)
Income taxes payable
22,345
 
 
(26,075
)
Deferred income on shipments to distributors
8,486
 
 
1,467
 
Accrued liabilities - goodwill payments above settlement date fair value
(164
)
 
(993
)
Accrued liabilities - litigation settlement
(173,000
)
 
 
All other accrued liabilities
(15,813
)
 
(11,070
)
Net cash provided by operating activities
358,483
 
 
169,476
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(97,597
)
 
(54,752
)
Proceeds from sale of property, plant, and equipment
25,249
 
 
665
 
Other
 
 
1,737
 
Acquisitions
(73,107
)
 
(4,000
)
Proceeds from sales/maturities of available-for-sale securities
 
 
100,233
 
Net cash (used in) provided by investing activities
(145,455
)
 
43,883
 
Cash flows from financing activities:
 
 
 
           Excess tax benefit related to stock-based compensation
3,848
 
 
3,898
 
Mortgage liability
(3,237
)
 
(20
)
Repurchase of options
(17
)
 
(392
)
Proceeds from derivative litigation settlement
 
 
2,460
 
Repayment of notes payable
(1,422
)
 
 
Issuance of common stock
9,692
 
 
(4,267
)
Repurchase of common stock
(125,315
)
 
(64,470
)
Dividends paid
(124,745
)
 
(122,394
)
Net cash used in financing activities
(241,196
)
 
(185,185
)
Net (decrease) increase in cash and cash equivalents
(28,168
)
 
28,174
 
Cash and cash equivalents:
 
 
 
Beginning of period
826,512
 
 
709,348
 
End of period
$
798,344
 
 
$
737,522
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
5,089
 
 
$
 
Cash (refunded) paid, net during the period for income taxes
$
(34,933
)
 
$
101,335
 
Noncash investing and financing activities:
 
 
 
Accounts payable related to property, plant, and equipment purchases
$
11,488
 
 
$
15,523
 
 
 
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 and six months ended December 25, 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 26, 2010.
 
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 2011 is a 52-week fiscal year.
 
NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In January 2010, the FASB issued amended standards that require additional fair value disclosures. These disclosure requirements are effective in two phases. In the second quarter of fiscal year 2010, the Company adopted the requirements for disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers. In the second quarter of fiscal year 2011, the requirement relating to presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3) were effective. These amended standards do not affect the Company's consolidated statements of income or balance sheets.
 

6

 

NOTE 3: BALANCE SHEET COMPONENTS
 
Accounts receivables, net consist of:
 
December 25, 2010
 
June 26, 2010
 
(in thousands)
Accounts receivable
$
312,070
 
 
$
359,005
 
Returns and allowances
(18,806
)
 
(19,683
)
 
$
293,264
 
 
$
339,322
 
 
The components of inventories consist of:
 
December 25, 2010
 
June 26, 2010
Inventories:
(in thousands)
Raw materials
$
17,110
 
 
$
16,747
 
Work-in-process
148,326
 
 
140,497
 
Finished goods
52,142
 
 
48,796
 
 
$
217,578
 
 
$
206,040
 
 
Property, plant and equipment, net consist of:
 
 
December 25, 2010
 
June 26, 2010
Property, plant and equipment:
(in thousands) 
Land
$
85,368
 
 
$
87,237
 
Buildings and building improvements
310,623
 
 
341,734
 
Machinery and equipment
1,905,034
 
 
1,872,349
 
 
2,301,025
 
 
2,301,320
 
Less: accumulated depreciation and amortization                       
(1,002,870
)
 
(976,884
)
 
$
1,298,155
 
 
$
1,324,436
 
 
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 consist of 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's Level 2 assets and liabilities consist of foreign currency forward contracts.
 
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 

7

 

Assets and liabilities measured at fair value on a recurring basis were as follows:
 
 
As of December 25, 2010
 
As of June 26, 2010
 
Fair Value
 
 
 
Fair Value
 
 
 
Measurements Using
 
Total
 
Measurements Using
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Balance
 
Level 1
 
Level 2
 
Level 3
 
Balance
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (1)
$
646,256
 
 
$
 
 
$
 
 
$
646,256
 
 
$
634,358
 
 
$
 
 
$
 
 
$
634,358
 
Foreign currency forward contracts
 
 
334
 
 
 
 
334
 
 
 
 
18
 
 
 
 
18
 
Total Assets
$
646,256
 
 
$
334
 
 
$
 
 
$
646,590
 
 
$
634,358
 
 
$
18
 
 
$
 
 
$
634,376
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$
 
 
$
405
 
 
$
 
 
$
405
 
 
$
 
 
$
851
 
 
$
 
 
$
851
 
Total Liabilities
$
 
 
$
405
 
 
$
 
 
$
405
 
 
$
 
 
$
851
 
 
$
 
 
$
851
 
 
(1) Included in Cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets
 
As of December 25, 2010 and June 26, 2010, none of the company's assets and liabilities were measured at fair value on a non-recurring basis.
 

8

 

NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
Foreign Currency Risk
 
The Company generates revenues in various global markets based on orders obtained in non-U.S. currencies, primarily the Japanese Yen, the British Pound and the Euro. Maxim incurs expenditures denominated in non-US currencies, principally Philippine Pesos and Thailand Baht associated with the Company's 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 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 rates movements. Maxim does not use derivative financial instruments for speculative or trading purposes. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counter party to any of the Company's hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience financial losses.
 
For derivative instruments that are designated and qualify as cash flow hedges under ASC No. 815, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings into the same financial statement line as the item being hedged, and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in interest and other (expense) income, net.
 
For derivative instruments that are not designated as hedging instruments under ASC No. 815, gains and losses are recognized in interest and other (expense) income, net. All derivatives are foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives largely offset the changes in the fair value of the assets or liabilities being hedged.
 
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
Maxim estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and fair value of derivative financial instruments in the Condensed Consolidated Balance Sheets were recorded as follows:
 
As of December 25, 2010
 
As of June 26, 2010
 
Gross Notional(1)
 
Other Current Assets
 
Accrued Expenses
 
Gross Notional (1)
 
Other Current Assets
 
Accrued Expenses
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
41,297
 
 
$
148
 
 
$
315
 
 
$
20,085
 
 
$
2
 
 
$
237
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
32,341
 
 
186
 
 
90
 
 
32,281
 
 
16
 
 
614
 
Total derivatives
$
73,638
 
 
$
334
 
 
$
405
 
 
$
52,366
 
 
$
18
 
 
$
851
 
(1) Represents the face amounts of contracts that were outstanding as of December 25, 2010 and June 26, 2010, respectively.

9

 

Derivatives designated as hedging instruments
 
The following table provides the balances and changes in the accumulated other comprehensive income (loss) related to derivative instruments during the six months ended December 25, 2010 and the year ended June 26, 2010.
 
  
 
 
 
December 25,
2010
 
June 26,
2010
 
 
(in thousands)
Beginning balance
  
$
(235
)
 
$
 
Loss reclassified to income
 
702
 
 
 
Amount recorded in other comprehensive loss
  
(634
)
 
(235
)
Ending balance
  
$
(167
)
 
$
(235
)
 
Maxim expects to reclassify an estimated net accumulated other comprehensive loss of $0.2 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.
Gains recognized in Other Comprehensive Income ("OCI") on derivative instruments (Effective portion) for the three months ended December 25, 2010 and December 26, 2009 were $0.5 million and $0 million, loss recognized in OCI on derivative instruments (Effective portion) for the six months ended December 25, 2010 and December 26, 2009 were $0.6 million and $0 million.
The before-tax effect of derivative instruments in cash flow hedging relationships for the three and six months ended December 25, 2010 and December 26, 2009 was as follows:
 
 
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective portion)
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Location
 
December 25,
2010
 
December 26,
2009
 
December 25,
2010
 
December 26,
2009
 
 
 
 
(in thousands)
Cash Flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net Revenues
 
$
349
 
 
$
 
 
$
(1,295
)
 
$
 
Foreign exchange contracts
 
Cost of goods sold
 
425
 
 
 
 
593
 
 
 
Total cash flow hedges
 
 
 
$
774
 
 
$
 
 
$
(702
)
 
$
 
 
The before-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Income for the three and six months ended December 25, 2010 and December 26, 2009 was as follows:
 
Gain ( Loss) Recognized in Income on Derivative
 
 
Three Months Ended
 
Six Months Ended
 
Location
December 25,
2010
 
December 26,
2009
 
December 25,
2010
 
December 26,
2009
 
 
(in thousands)
Foreign exchange contracts
Interest and other (expense) income, net
$
(136
)
 
$
1,018
 
 
$
(838
)
 
$
(532
)
Total
 
$
(136
)
 
$
1,018
 
 
$
(838
)
 
$
(532
)
 

10

 

 
Volume of Derivative Activity
 
Total net U.S. Dollar notional amounts for foreign currency forward contracts, presented by net currency purchase (sell), are as follows:
 
In United States Dollars
 
December 25, 2010
 
June 26, 2010
 
 
(in thousands)
Euro
 
$
(6,592
)
 
$
(17,874
)
Japanese Yen
 
(24,875
)
 
(17,923
)
British Pound
 
(9,013
)
 
(3,512
)
Philippine Peso
 
12,101
 
 
6,576
 
Thai Bhat
 
4,418
 
 
2,327
 
Total                                                
 
$
(23,961
)
 
$
(30,406
)
 

11

 

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 Income for the three and six months ended December 25, 2010 and December 26, 2009:
 
Stock-based compensation expense by type of award
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25,
2010
 
December 26,
2009
 
(in thousands)
Cost of goods sold
 
 
 
 
 
 
 
Stock options
$
729
 
 
$
401
 
 
$
1,483
 
 
$
2,416
 
Restricted stock units
2,637
 
 
4,730
 
 
5,411
 
 
7,808
 
Employee stock purchase plan
382
 
 
134
 
 
749
 
 
502
 
 
$
3,748
 
 
$
5,265
 
 
$
7,643
 
 
$
10,726
 
Research and development expense
 
 
 
 
 
 
 
Stock options
$
2,710
 
 
$
3,625
 
 
$
7,259
 
 
$
7,756
 
Restricted stock units
9,914
 
 
9,821
 
 
20,128
 
 
21,018
 
Employee stock purchase plan
1,292
 
 
1,204
 
 
2,634
 
 
2,617
 
 
$
13,916
 
 
$
14,650
 
 
$
30,021
 
 
$
31,391
 
Selling, general and administrative expense
 
 
 
 
 
 
 
Stock options
$
1,659
 
 
$
2,273
 
 
$
3,288
 
 
$
4,022
 
Restricted stock units
4,847
 
 
4,454
 
 
10,005
 
 
6,832
 
Employee stock purchase plan
352
 
 
291
 
 
704
 
 
427
 
 
$
6,858
 
 
$
7,018
 
 
$
13,997
 
 
$
11,281
 
Total stock-based compensation expense
 
 
 
 
 
 
 
Stock options
$
5,098
 
 
$
6,299
 
 
$
12,030
 
 
$
14,194
 
Restricted stock units
17,398
 
 
19,005
 
 
35,544
 
 
35,658
 
Employee stock purchase plan
2,026
 
 
1,629
 
 
4,087
 
 
3,546
 
Pre-tax stock-based compensation expense
24,522
 
 
26,933
 
 
51,661
 
 
53,398
 
Less: income tax effect
6,954
 
 
9,061
 
 
14,293
 
 
17,078
 
Net stock-based compensation expense
$
17,568
 
 
$
17,872
 
 
$
37,368
 
 
$
36,320
 
 
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 payments 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 $0.2 million and $4.6 million in stock-based compensation expenses related to this program during the six months ended December 25, 2010 and December 26, 2009, respectively.
 
Fair Value
 

12

 

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 is utilizing the simplified method to estimate expected holding periods. 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 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
 
Stock Option Plan
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
Expected holding period (in years)
5.1
 
 
5.2
 
 
5.2
 
 
5.2
 
Risk-free interest rate
1.3
%
 
2.3
%
 
1.7
%
 
2.3
%
Expected stock price volatility
36.3
%
 
37.8
%
 
36.8
%
 
37.8
%
Dividend yield
4.8
%
 
4.5
%
 
4.3
%
 
4.5
%
 
 
 
ESP Plan
 
ESP Plan
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
Expected holding period (in years)
0.5
 
 
0.5
 
 
0.5
 
 
0.5
 
Risk-free interest rate
0.2
%
 
0.2
%
 
0.2
%
 
0.2
%
Expected stock price volatility
30.0
%
 
34.4
%
 
30.0
%
 
34.4
%
Dividend yield
4.2
%
 
4.5
%
 
4.2
%
 
4.5
%
The weighted-average fair value of stock options granted was $4.42 and $4.26 per share for the three months ended December 25, 2010 and December 26, 2009, respectively.The weighted-average fair value of RSUs granted was $20.35 and $15.97 per share for the three months ended December 25, 2010 and December 26, 2009, respectively.
The weighted-average fair value of stock options granted was $3.81 and $4.21 per share for the six months ended December 25, 2010 and December 26, 2009, respectively. The weighted-average fair value of RSUs granted was $14.99 and $15.96 per share for the six months ended December 25, 2010 and December 26, 2009, respectively.
 

13

 

Stock Options
 
The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 25, 2010 and their activity for the six months ended December 25, 2010:
 
Number of
Shares 
 
Weighted Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (in Years)
 
 
Aggregate
Intrinsic
Value(1) 
Balance at June 26, 2010
29,162,507
 
 
$
27.05
 
 
 
 
 
Options Granted
3,297,984
 
 
16.93
 
 
 
 
 
Options Exercised
(543,423
)
 
16.52
 
 
 
 
 
Options Cancelled
(1,182,511
)
 
31.21
 
 
 
 
 
Balance at December 25, 2010
30,734,557
 
 
$
25.90
 
 
4.0
 
 
$
122,380,638
 
Exercisable, December 25, 2010
17,184,016
 
 
$
33.34
 
 
2.8
 
 
$
17,561,232
 
Vested and expected to vest, December 25, 2010
28,724,264
 
 
$
26.55
 
 
3.9
 
 
$
107,758,448
 
 
(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company's common stock on December 23, 2010, the last business day preceding the fiscal quarter-end multiplied by the number of options outstanding, exercisable or vested and expected to vest as of December 25, 2010.
 
As of December 25, 2010, there was $40.5 million of total unrecognized stock compensation cost related to 13.6 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 2.8 years.
 
Restricted Stock Units
 
The following table summarizes outstanding and expected to vest RSUs as of December 25, 2010 and their activity during the six months ended December 25, 2010:
 
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value(1) 
Balance at June 26, 2010
10,575,417
 
 
 
 
 
Restricted stock units granted
3,456,556
 
 
 
 
 
Restricted stock units released
(2,127,907
)
 
 
 
 
Restricted stock units cancelled
(438,228
)
 
 
 
 
Balance at December 25, 2010
11,465,838
 
 
2.7
 
 
$
271,201,002
 
Vested and expected to vest, December 25, 2010
9,918,529
 
 
2.6
 
 
$
235,168,314
 
 
(1)
Aggregate intrinsic value for RSUs represents the closing price per share of the Company's common stock on December 23, 2010, the last business day preceding the fiscal quarter-end multiplied by the number of RSUs outstanding or expected to vest as of December 25, 2010.
 
The Company withheld shares totaling $7.2 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 December 25, 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 December 25, 2010, there was $139.3 million of unrecognized compensation expense related to 11.5 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.7 years.
 
2010 Employee Stock Purchase Plan:

14

 

 
As of December 25, 2010, there was $6.7 million of unrecognized compensation expense related to the ESPP.
 

15

 

 
NOTE 7: EARNINGS PER SHARE
 
Basic earnings per share are computed using the weighted average number of shares of common stock outstanding during the period. For purposes of computing basic earnings 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 following table sets forth the computation of basic and diluted earnings per share.
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25,
2010
 
December 26,
2009
 
(Amounts in thousands, except per share data)
Numerator for basic earnings per share and diluted earnings per share
 
 
 
 
 
 
 
Net income
$
109,590
 
 
$
58,635
 
 
$
227,140
 
 
$
100,587
 
 
 
 
 
 
 
 
 
Denominator for basic earnings per share
296,550
 
 
305,324
 
 
297,329
 
 
305,821
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP and RSUs
6,710
 
 
4,766
 
 
4,538
 
 
4,977
 
Denominator for diluted earnings per share
303,260
 
 
310,090
 
 
301,867
 
 
310,798
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.37
 
 
$
0.19
 
 
$
0.76
 
 
$
0.33
 
Diluted
$
0.36
 
 
$
0.19
 
 
$
0.75
 
 
$
0.32
 
Approximately 15.3 million and 22.2 million of the Company's stock options were excluded from the calculation of diluted earnings per share for the three months ended December 25, 2010 and December 26, 2009, respectively. Approximately 22.9 million and 22.1 million of the Company's stock options were excluded from the calculation of diluted earnings per share for the six months ended December 25, 2010 and December 26, 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 fifteen 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 fifteen operating segments;
the integrated circuits sold by each of the Company's operating segments are manufactured using similar

16

 

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, 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
 
Six Months Ended
 
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
 
(in thousands)
United States
 
$
84,354
 
 
$
70,158
 
 
$
180,542
 
 
$
139,125
 
China
 
228,143
 
 
159,839
 
 
460,444
 
 
301,260
 
Japan
 
45,332
 
 
30,713
 
 
82,454
 
 
65,123
 
Korea
 
66,474
 
 
74,270
 
 
152,374
 
 
156,785
 
Rest of Asia
 
71,651
 
 
54,747
 
 
135,720
 
 
106,476
 
Europe
 
94,606
 
 
65,182
 
 
184,509
 
 
126,070
 
Rest of World
 
22,376
 
 
18,606
 
 
43,032
 
 
27,922
 
 
 
$
612,936
 
 
$
473,515
 
 
$
1,239,075
 
 
$
922,761
 
 
Net long-lived assets by geographic region were as follows:
 
 
December 25,
2010
 
June 26,
2010
 
(in thousands)
United States
$
941,631
 
 
$
983,761
 
Philippines
215,873
 
 
216,738
 
Thailand
131,194
 
 
116,050
 
Rest of World
9,457
 
 
7,887
 
 
$
1,298,155
 
 
$
1,324,436
 

17

 

NOTE 9: COMPREHENSIVE INCOME
 
The changes in the components of OCI, net of taxes, were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
(in thousands)
Net income, as reported
$
109,590
 
 
$
58,635
 
 
$
227,140
 
 
$
100,587
 
Change in unrealized losses on investments, net of tax benefits of $0, $135, $0, and $348 respectively
 
 
(237
)
 
 
 
(608
)
Change in unrealized (loss) gains on forward exchange contracts, net of tax benefits (expenses) of $117 , $0, $(25), $0, respectively
(205
)
 
 
 
43
 
 
 
Deferred tax on unrealized exchange gains on long-term intercompany receivables
(813
)
 
(531
)
 
(2,878
)
 
(959
)
Actuarial gains on post-retirement benefits, net of tax (expense) benefit of $(33), $(29), $(66), $(58), respectively
58
 
 
52
 
 
116
 
 
104
 
Total comprehensive income
$
108,630
 
 
$
57,919
 
 
$
224,421
 
 
$
99,124
 
 
The components of Accumulated Other Comprehensive Loss, were as follows:
 
December 25, 2010
 
June 26, 2010
 
(in thousands)
Deferred tax on unrealized exchange gains on long-term intercompany receivables
$
(8,483
)
 
$
(5,848
)
Unrealized components of post-retirement benefits
(4,543
)
 
(4,659
)
Cumulative translation adjustment
(1,527
)
 
(1,527
)
Net unrealized loss on cash flow hedges
(107
)
 
(150
)
Net unrealized gain on available-for-sale securities
 
 
243
 
Accumulated Other Comprehensive Loss
$
(14,660
)
 
$
(11,941
)
 
 
NOTE 10: INCOME TAXES
 
In the three and six months ended December 25, 2010, the Company recorded an income tax provision of $38.3 million and $96.2 million respectively, compared to an income tax provision of $54.1 million and $104.2 million in the three and six months ended December 26, 2009, respectively. 
 
The Company's federal statutory tax rate is 35%. The Company's income tax provision for the three and six months ended December 25, 2010 was lower than the amount computed by applying the statutory tax rate primarily because of earnings of foreign subsidiaries taxed at lower rates. The income tax provision for the three and six months ended December 25, 2010 also includes a $5.6 million one-time benefit for the retroactive extension of the federal research tax credit to January 1, 2010 by legislation that was signed into law on December 17, 2010.
 
The Company's income tax provision for the three and six months ended December 26, 2009 was higher than 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 as well as licensing rights to preexisting intangibles.
 
During the fiscal quarter ended December 25, 2010, the Internal Revenue service completed its audit of the Company's federal corporate income tax returns for the fiscal years 2007- 2008 and issued a Revenue Agents Report ("RAR"). The Company agreed with the RAR findings and made a payment of $0.8 million that reduced the Company's liability for uncertain tax positions. The resolution of this audit had no impact on the income tax provision for the fiscal quarter ended December 25, 2010 as the Company

18

 

had adequately provided for all issues in the RAR.
 
In the third quarter of fiscal year 2011 the Company expects to reduce its liability for unrecognized tax benefits by $67.5 million because of the expiration of the federal statute of limitations for the fiscal years 2004 - 2007. Of this reduction, $36.9 million will be credited to the income tax provision and the remaining $30.6 million will be credited to additional paid in capital.

19

 

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 alleging, among other things, wrongful conduct of back-dating stock options as well as security law violations, and named the Company 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, which was approved by the Delaware Court of Chancery on September 16, 2008. All derivative actions pending in the California Superior Court have since been dismissed, with prejudice. Net settlement proceeds of $18.9 million were received by the Company 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 to Other operating expenses (income), net.
On February 6, 2008, a putative class action complaint was filed against the Company and certain former officers and employees in the U.S. District Court for the Northern District of California alleging claims under the federal securities laws based on certain alleged misrepresentations and omissions in the Company's public disclosures concerning its stock option accounting practices.  On June 18, 2010, lead plaintiffs and the Company entered into a stipulation of settlement settling the action and providing for the payment of $173.0 million in cash by the Company.  On September 29, 2010, the Court issued a Final Order and Judgment approving the settlement.
 
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.
 
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.     
 
 
 

20

 

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 six months ended December 25, 2010, the Company repurchased approximately 6.8 million shares of its common stock for $125.3 million. As of December 25, 2010, the Company had remaining authorization to repurchase up to an additional $199.5 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 Income. The Company has ceased depreciation and classified these assets as held for sale based on its intentions to sell the assets.
 
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 Income. The Company has ceased depreciation and classified these assets as held for sale based on its intentions to sell the assets.
 
NOTE 14: RESTRUCTURING ACTIVITIES
 
Business Unit Reorganization
 
During the six months ended December 25, 2010, the Company recorded and paid approximately $1.6 million in severance costs associated with the reorganization of one if its business units and to employees from the Teridian acquisition who remained employed for a temporary period following the completion of the acquisition for transitional purposes.
 
Ireland Sales Operations Restructuring
 
In fiscal year 2010, the Company recorded approximately $3.0 million in restructuring costs associated with the reorganization of its international sales operations to Ireland.
 
Shutdown of Dallas Wafer Fabrication Facility
 
In fiscal year 2010, the Company recorded approximately $1.6 million in restructuring costs associated with the closure of the Dallas, Texas wafer manufacturing facility. These costs consisted of decommissioning of equipment at the facility and estimated severance and benefits associated with employees of the facility.
 
Change in Estimate
 
During fiscal year 2010, the Company recognized reversals of expense of approximately $5.3 million related to reductions in estimated benefits costs compared to amounts originally estimated.
 

21

 

Activity and liability balances related to the restructuring activity for the six months ended December 25, 2010 were as follows:
 
 
Severance and Benefits
 
(in thousands)
Balance at June 26, 2010
$
748
 
 
 
Restructuring accrual
2,258
 
Cash payments
(2,131
)
Changes in estimates
(5
)
 
 
Balance at December 25, 2010                                                                        
$
870
 
 
The Company has included $0.9 million within the line item Accrued salary and related expenses in the Condensed Consolidated Balance Sheets.
 
NOTE 15: ACQUISITIONS
 
PHYWORKS
 
On September 7, 2010, the Company acquired Phyworks Limited. (“Phyworks”), a developer of high-speed communications integrated circuits.  The total cash consideration associated with the acquisition was $76.0 million. The acquired assets included cash of $4.6 million, accounts receivable of $1.2 million, inventories of $2.9 million, $0.1 million in prepaid expenses and other current assets, and $0.4 million in fixed assets. The Company preliminarily allocated $1.9 million to customer order backlog, $47.1 million to Intellectual Property, $5.8 million to in-process research and development (“IPR&D”), $1.6 million to customer relationships, $0.3 million to tradename, and $26.1 million to goodwill.  The Company also assumed $3.8 million in accounts payable and accrued liabilities and $12.2 million in deferred tax liabilities. The Company expects that none of the goodwill will be deductible for tax purposes.
 
The Condensed Consolidated Financial Statements for the three and six months ended December 25, 2010 include the operations of Phyworks commencing as of the acquisition date. No supplemental pro forma information is presented for the acquisition due to the immaterial effect of the acquisition on the Company's results of operations.
 
TERIDIAN
 
On May 11, 2010, the Company completed its purchase of Teridian Semiconductor, Inc. (“Teridian”), a fabless mixed-signal semiconductor company focused on electricity metering and energy measurement for the smart grid. The total cash consideration associated with the acquisition was $314.9 million. The acquired assets included cash of $2.1 million, accounts receivable of $7.3 million, inventories of $14.0 million, $2.7 million in prepaid expenses and other current assets, $2.1 million in fixed assets, $4.3 million in customer order backlog, $85.6 million in Intellectual Property, $3.1 million of IPR&D, $44.7 million in customer relationships, $1.0 million in tradename, $13.8 million in deferred tax assets and $196.6 million in goodwill. The Company also assumed $14.1 million in accounts payable and accrued liabilities and $48.3 million in deferred tax liabilities. The Company expects that none of the goodwill will be deductible for tax purposes.
 
 

22

 

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 of fiscal year 2011 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 six months ended December 25, 2010 were as follows:
 
 
Goodwill
Balance at June 26, 2010
$
226,223
 
Acquisition
26,086
 
Adjustments
(2,532
)
Balance at December 25, 2010
$
249,777
 
 
In the first six months of fiscal year 2011, the Company adjusted the carrying values of certain acquired assets and liabilities primarily related to reserves and allowances, resulting in a reduction in goodwill of approximately $2.5 million.
 
Intangible Assets
 
The useful lives of 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:
 
 
December 25, 2010
 
June 26, 2010
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Intellectual property
$
195,712
 
 
$
48,516
 
 
$
147,196
 
 
$
145,262
 
 
$
33,305
 
 
$
111,957
 
Customer relationships
88,630
 
 
18,304
 
 
70,326
 
 
87,030
 
 
11,745
 
 
75,285
 
Backlog
6,400
 
 
4,975
 
 
1,425
 
 
4,500
 
 
2,350
 
 
2,150
 
Tradename
1,700
 
 
597
 
 
1,103
 
 
1,400
 
 
264
 
 
1,136
 
Total amortizable purchased intangible assets
292,442
 
 
72,392
 
 
220,050
 
 
238,192
 
 
47,664
 
 
190,528
 
IPR&D*
8,400
 
 
 
 
8,400
 
 
4,200
 
 
 
 
4,200
 
Total purchased intangible assets
$
300,842
 
 
$
72,392
 
 
$
228,450
 
 
$
242,392
 
 
$
47,664
 
 
$
194,728
 
 
* IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Maxim will record a charge for the value of the related intangible asset to Maxim's Consolidated Statement of Income in the period it is abandoned.

23

 

The following table presents the amortization expense of intangible assets and its presentation in the Condensed Consolidated Statements of Income:
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25,
2010
 
December 26,
2009
 
(in thousands)
 
 
 
 
 
 
 
 
Cost of goods sold
$
7,919
 
 
$
2,349
 
 
$
14,268
 
 
$
4,694
 
Intangible Asset Amortization
4,447
 
 
1,846
 
 
10,460
 
 
3,690
 
Total Intangible Asset Amortization Expenses
$
12,366
 
 
$
4,195
 
 
$
24,728
 
 
$
8,384
 
 
The following table represents the estimated future amortization expense of intangible assets as of December 25, 2010:
 
Fiscal Year
 
Amount
 
 
(in thousands)
Remaining six months of 2011
 
$
24,216
 
2012
 
47,310
 
2013
 
42,365
 
2014
 
35,210
 
2015
 
32,903
 
2016
 
20,782
 
Thereafter
 
17,264
 
Total
 
$
220,050
 
 

24

 

NOTE 17: LONG-TERM DEBT
 
On June 17, 2010, the Company completed a public offering of $300 million aggregate principal amount of the Company's 3.45% senior unsecured and unsubordinated notes (the"Notes") due on June 14, 2013, with an effective interest rate of 3.49%. Interest on the Notes is payable semi-annually in arrears on June 14 and December 14 of each year, commencing December 14, 2010. The Notes are governed by a base and supplemental indenture dated June 10, 2010 and June 17, 2010, respectively, between the Company and Wells Fargo Bank, National Association, as trustee. The Company accounts for the Notes based on their amortized cost. The discount and expenses are being amortized to Interest and other (expense) income, net over the life of the Notes. Interest expenses associated with the Notes was $2.8 million and $5.6 million during the three and six months ended December 25, 2010, respectively and is recorded in Interest and other (expense) income, net in the Condensed Consolidated Statements of Income.
 
 

25

 

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, intangible assets, and goodwill; 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 material changes during the six months ended December 25, 2010 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 26, 2010.

26

 

RESULTS OF OPERATIONS
 
The following table sets forth certain Condensed Consolidated Statements of Income data expressed as a percentage of net revenues for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
 
 
 
Net revenues
100.0
 %
 
100.0
%
 
100
 %
 
100.0
 %
Cost of goods sold
38.0
 %
 
38.4
%
 
38.1
 %
 
41.1
 %
Gross margin
62.0
 %
 
61.6
%
 
61.9
 %
 
58.9
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
21.2
 %
 
24.9
%
 
20.8
 %
 
25.4
 %
Selling, general and administrative
11.8
 %
 
12.6
%
 
11.6
 %
 
12.3
 %
Intangible asset amortization
0.7
 %
 
0.4
%
 
0.8
 %
 
0.4
 %
Impairment of long-lived assets
 %
 
%
 
 %
 
0.9
 %
Severance and restructuring expenses
0.1
 %
 
0.4
%
 
0.1
 %
 
0.1
 %
Other operating expenses (income), net
3.4
 %
 
0.2
%
 
1.7
 %
 
(1.7
)%
Total operating expenses
37.2
 %
 
38.5
%
 
35.0
 %
 
37.4
 %
Operating income
24.8
 %
 
23.1
%
 
26.9
 %
 
21.5
 %
Interest and other (expense) income, net
(0.7
)%
 
0.8
%
 
(0.6
)%
 
0.6
 %
Income before provision for income taxes
24.1
 %
 
23.9
%
 
26.3
 %
 
22.1
 %
Provision for income taxes
6.3
 %
 
11.4
%
 
7.8
 %
 
11.3
 %
Net income
17.8
 %
 
12.5
%
 
18.5
 %
 
10.8
 %
 
 
The following table shows stock-based compensation included in the components of the Condensed Consolidated Statements of Income reported above as a percentage of net revenues for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
 
 
 
Cost of goods sold
0.6
%
 
1.1
%
 
0.6
%
 
1.2
%
Research and development
2.3
%
 
3.1
%
 
2.4
%
 
3.4
%
Selling, general and administrative
1.1
%
 
1.5
%
 
1.1
%
 
1.2
%
 
4.0
%
 
5.7
%
 
4.1
%
 
5.8
%
 
Net Revenues
 
Net revenues were $612.9 million and $473.5 million for the three months ended December 25, 2010 and December 26, 2009, respectively, an increase of 29.4%. Net revenues for the six months ended December 25, 2010 and December 26, 2009, were $1,239.1 million and $922.8 million, respectively, an increase of 34.3%. We classify our net revenue by four major end market categories: Communications, Computing, Consumer and Industrial. Net shipments from all four markets increased during the three and six months ended December 25, 2010 as compared to the corresponding periods ended December 26, 2009 due to improved demand for our products primarily in the Consumer, Industrial and Communications markets.
 
During the three months ended December 25, 2010 and December 26, 2009, approximately 86% and 85% of net revenues, respectively, were derived from customers outside of the United States. During the six months ended December 25, 2010 and December 26, 2009, approximately 85% of net revenues 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

27

 

firm commitments and net monetary assets and liabilities denominated in foreign currencies. The impact of changes in foreign exchange rates on our revenue and results of operations for the three months ended December 25, 2010 and December 26, 2009 was immaterial.
 
 
Gross Margin
 
Our gross margin percentage was 62.0% and 61.6% for the three months ended December 25, 2010 and December 26, 2009, respectively. The gross margin increased primarily due to a product mix with higher margins, improved factory utilization, and lower stock-based compensation as a percentage of revenue. These improvements were offset by a $10.0 million increase in inventory write-downs and a $5.6 million increase in intangible asset amortization.
 
Our gross margin percentage was 61.9% and 58.9% for the six months ended December 25, 2010 and December 26, 2009, respectively. The gross margin increased primarily due to a product mix with higher margins, improved factory utilization, and lower stock-based compensation as a percentage of revenue. These improvements were offset by a $9.6 million increase in intangible asset amortization and a $6.2 million increase in inventory write-downs.
 
Research and Development
 
Research and development expenses were $130.0 million and $118.0 million for the three months ended December 25, 2010 and December 26, 2009, respectively, which represented 21.2% and 24.9% of net revenues, respectively. The $12.0 million increase in research and development expenses was primarily attributable to an increase in salaries and bonuses of $8.8 million, most of which is related to higher bonus levels in connection with increased profitability for the second quarter of fiscal year 2011 and an increase in headcount.
 
Research and development expenses were $257.8 million and $234.4 million for the six months ended December 25, 2010 and December 26, 2009, respectively, which represented 20.8% and 25.4% of net revenues, respectively. The $23.4 million increase in research and development expenses was primarily attributable to an increase in salaries and bonuses of $20.7 million, most of which is related to higher bonus levels in connection with increased profitability for first six months of fiscal year 2011 and an increase in headcount.
 
 
Selling, General and Administrative
 
Selling, general and administrative expenses were $72.2 million and $59.8 million for the three months ended December 25, 2010 and December 26, 2009, respectively, which represented 11.8% and 12.6% of net revenues, respectively. The $12.4 million increase in selling, general and administrative expenses was primarily attributable to an increase in salaries, bonuses, and benefits of $13.6 million , most of which is related to higher bonus levels in connection with increased profitability for the second quarter of fiscal year 2011 and an increase in headcount.
 
Selling, general and administrative expenses were $144.3 million and $113.3 million for the six months ended December 25, 2010 and December 26, 2009, respectively, which represented 11.6% and 12.3% of net revenues, respectively. The $31.0 million increase in selling, general and administrative expenses was primarily attributable to an increase in salaries, bonuses, and benefits of $26.0 million most of which is related to higher bonus levels in connection with increased profitability for first six months of fiscal year 2011 and an increase in headcount.
 
 
Stock-based Compensation
 
The following table shows total stock-based compensation expense by type of award, and resulting tax effect, included in the Condensed Consolidated Statements of Income for the six months ended December 25, 2010 and December 26, 2009;

28

 

Stock-based compensation expense by type of award
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
(in thousands)
 
(in thousands)
Cost of goods sold
 
 
 
 
 
 
 
Stock options
$
729
 
 
$
401
 
 
$
1,483
 
 
$
2,416
 
Restricted stock units
2,637
 
 
4,730
 
 
5,411
 
 
7,808
 
Employee stock purchase plan
382
 
 
134
 
 
749
 
 
502
 
 
$
3,748
 
 
$
5,265
 
 
$
7,643
 
 
$
10,726
 
Research and development expense
 
 
 
 
 
 
 
Stock options
$
2,710
 
 
$
3,625
 
 
$
7,259
 
 
$
7,756
 
Restricted stock units
9,914
 
 
9,821
 
 
20,128
 
 
21,018
 
Employee stock purchase plan
1,292
 
 
1,204
 
 
2,634
 
 
2,617
 
 
$
13,916
 
 
$
14,650
 
 
$
30,021
 
 
$
31,391
 
Selling, general and administrative expense
 
 
 
 
 
 
 
Stock options
$
1,659
 
 
$
2,273
 
 
$
3,288
 
 
$
4,022
 
Restricted stock units
4,847
 
 
4,454
 
 
10,005
 
 
6,832
 
Employee stock purchase plan
352
 
 
291
 
 
704
 
 
427
 
 
$
6,858
 
 
$
7,018
 
 
$
13,997
 
 
$
11,281
 
Total stock-based compensation expense
 
 
 
 
 
 
 
Stock options
$
5,098
 
 
$
6,299
 
 
$
12,030
 
 
$
14,194
 
Restricted stock units
17,398
 
 
19,005
 
 
35,544
 
 
35,658
 
Employee stock purchase plan
2,026
 
 
1,629
 
 
4,087
 
 
3,546
 
Pre-tax stock-based compensation expense
24,522
 
 
26,933
 
 
51,661
 
 
53,398
 
Less: income tax effect
6,954
 
 
9,061
 
 
14,293
 
 
17,078
 
Net stock-based compensation expense
$
17,568
 
 
$
17,872
 
 
$
37,368
 
 
$
36,320
 
 
Pre-tax stock-based compensation decreased to $24.5 million during the three months ended December 25, 2010 from $26.9 million during the three months ended December 26, 2009, which represented 4.0% and 5.7% of net revenues, respectively. The decrease in stock-based compensation is attributable to completion of vesting associated with grants issued at higher fair values, offset by issuance of newer grants containing a lower fair value at the time of grant.
 
Pre-tax stock-based compensation decreased to $51.7 million during the six months ended December 25, 2010 from $53.4 million during the six months ended December 26, 2009, which represented 4.1% and 5.8% of net revenues, respectively. The decrease in stock-based compensation is attributable to completion of vesting associated with grants issued at higher fair values, offset by issuance of newer grants containing a lower fair value at the time of grant.
 
Intangible Asset Amortization Expenses
 
Intangible asset amortization expenses were $4.4 million and $1.8 million for the three months ended December 25, 2010 and December 26, 2009, respectively. Intangible asset amortization expenses were $10.5 million and $3.7 million for the six months ended December 25, 2010 and December 26, 2009, respectively. The increases in intangible asset amortization expenses is primarily attributable to the acquisition of Phyworks in the first quarter of fiscal year 2011 and the acquisition of Teridian in the fourth quarter of fiscal year 2010.
 
Impairment of Long-lived Assets
 
The year to date decline in impairment charges of $8.3 million relates to a $5.0 million End of Line Sorting and Testing Facilities equipment write-down to its estimated fair value and a $3.3 million write-down of Oregon fabrication facility equipment that occurred during the six months ended December 26, 2009. (For more information on our impairment of long-lived assets, see

29

 

Note 13 to the Condensed Consolidated Financial Statements in Item 1).
 
Severance and Restructuring Expenses
 
Business Unit Reorganization
 
During the six months ended December 25, 2010, the Company recorded and paid approximately $1.6 million in severance costs associated with the reorganization of one if its business units and to employees from the Teridian acquisition who remained employed for a temporary period following the completion of the acquisition for transitional purposes.
 
Ireland Sales Operations Restructuring
 
During the six months ended December 26, 2009, the Company recorded approximately $2.7 million in restructuring costs associated with the reorganization of its international sales operations to Ireland.
 
Shutdown of Dallas Wafer Fabrication Facility
 
During the six months ended December 26, 2009, 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 six months ended December 26, 2009, the Company recognized reversals of expense of approximately $3.8 million related to reductions in estimated benefits costs compared to amounts originally estimated.
 
Other Operating Expenses (Income), Net
 
The following table summarizes activities for the three and six months ended December 25, 2010 and December 26, 2009:
 
 
Three Months Ended
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
December 25, 2010
 
December 26, 2009
 
(in thousands)
 
(in thousands)
Legal expenses
$
6,664
 
 
$
2,735
 
 
$
7,599
 
 
$
8,477
 
Loss on sale of Sunnyvale headquarters
14,283
 
 
 
 
14,283
 
 
 
Payroll tax and related adjustments
153
 
 
(1,814
)
 
(749
)
 
(8,043
)
Derivative litigation settlement
 
 
 
 
 
 
(16,419
)
Other
 
 
 
 
 
 
21
 
Total
$
21,100
 
 
$
921
 
 
$
21,133
 
 
$
(15,964
)
 
The Company's legal expenses increased by $3.9 million during the three months ended December 25, 2010 as compared to the three months ended December 26, 2009. The increase relates to legal settlements and related legal expenses offset by a decrease of $2.2 million in restatement related legal fees, primarily due to decreased indemnification related legal fees and legal fees associated with the settlement of the derivative litigation during the second quarter of fiscal year 2010. The Company's legal expenses decreased by $0.9 million during the six months ended December 25, 2010 as compared to the six months ended December 26, 2009. The decrease relates mainly to lower restatement related legal fees, primarily due to decreased indemnification related legal fees and legal fees associated with the settlement of the derivative litigation during the first six months of fiscal year 2010.
 
Maxim will be relocating its headquarters from the current site in Sunnyvale, California to a newly purchased site in San Jose, California. During the three months ended December 25, 2010, the Company sold and leased back its current headquarter facilities and recognized a loss of $14.3 million in connection with this transaction. The Company received proceeds from this sale of $24.0 million. Additionally, the Company purchased for $19.6 million its future headquarter facilities which is expected to be ready for occupancy in fiscal year 2012.
 

30

 

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. These accruals are being reversed upon the expiration of the tax statute of limitations in various foreign jurisdictions. The increase for the three months ended December 25, 2010 is due to additional interest and penalties recorded combined with the absence of statute of limitations expirations.
 
During the six months ended December 26, 2009 the company also recognized $16.4 million in income attributable to gains directly related to proceeds received associated with the settlement of the derivative litigation during the first quarter of fiscal year 2010. (For more information on contingencies, see Note 11 to the Condensed Consolidated Financial Statements in Item 1).
 
Interest and Other (Expense) Income, Net
 
Interest and other (expense) income, net, was $(4.1) million and $3.6 million for the three months ended December 25, 2010 and December 26, 2009, respectively. This increase in expense, was primarily driven by increased foreign exchange losses of $2.8 million, increased interest expenses of $2.7 million related to long-term debt obligations and decreased interest income of $0.8 million due to lower average invested cash and cash equivalents and lower average interest rates.
 
Interest and other (expense) income, net, was $(7.8) million and $5.5 million for the six months ended December 25, 2010 and December 26, 2009, respectively. This increase in expense, was primarily driven by increased interest expenses of $5.6 million related to long-term debt obligations, increased foreign exchange losses of $4.8 million, and decreased interest income of $1.8 million due to lower average invested cash and cash equivalents and lower average interest rates .
 
Provision for Income Taxes
 
In the three and six months ended December 25, 2010, the Company recorded an income tax provision of $38.3 million and $96.2 million respectively, compared to an income tax provision of $54.1 million and $104.2 million in the three and six months ended December 26, 2009, respectively. 
 
The Company's federal statutory tax rate is 35%. The Company's income tax provision for the three and six months ended December 25, 2010 was lower than the amount computed by applying the statutory tax rate primarily because of earnings of foreign subsidiaries taxed at lower rates. The income tax provision for the three and six months ended December 25, 2010 also includes a $5.6 million one-time benefit for the retroactive extension of the federal research tax credit to January 1, 2010 by legislation that was signed into law on December 17, 2010.
 
The Company's income tax provision for the three and six months ended December 26, 2009 was higher than 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 as well as licensing rights to preexisting intangibles.
 
We expect that our effective tax rate for the remainder of the fiscal year 2011 will be lower than 35% as the Company's 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.
 
During the fiscal quarter ended December 25, 2010, the Internal Revenue service completed its audit of the Company's federal corporate income tax returns for the fiscal years 2007- 2008 and issued a Revenue Agents Report ("RAR"). The Company agreed with the RAR findings and made a payment of $0.8 million that reduced the Company's liability for uncertain tax positions. The resolution of this audit had no impact on the income tax provision for the fiscal quarter ended December 25, 2010 as the Company had adequately provided for all issues in the RAR.
 
In the third quarter of fiscal year 2011 the Company expects to reduce its liability for unrecognized tax benefits by $67.5 million because of the expiration of the federal statute of limitations for the fiscal years 2004 - 2007. Of this reduction, $36.9 million will be credited to the income tax provision and the remaining $30.6 million will be credited to additional paid in capital.
 
 
BACKLOG
 
At December 25, 2010, backlog was approximately $512 million. The Company's backlog at the end of the fiscal quarter ended September 25, 2010 was approximately $595 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 fiscal quarters.

31

 

 
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
 
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, its anticipated level of capital expenditures and common stock repurchases.
 
Financial condition
 
Cash flows were as follows:
 
Six Months Ended
 
December 25,
2010
 
December 26,
2009
 
(in thousands)
Net cash provided by operating activities
$
358,483
 
 
$
169,476
 
Net cash (used in) provided by investing activities
(145,455
)
 
43,883
 
Net cash used in financing activities
(241,196
)
 
(185,185
)
Net (decrease) increase in cash and cash equivalents
$
(28,168
)
 
$
28,174
 
 
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 six months ended December 25, 2010 increased by approximately $189.0 million compared with the six months ended December 26, 2009. This is due to increases in net income of $126.6 million, a reduction in the receivables balance over the six months ended December 25, 2010 as compared to an increase in the corresponding period and increases of $77.5 million and $28.0 million relating to deferred tax provision and depreciation and amortization expenses, respectively. These increases were offset by the payment of $173.0 million related to the litigation settlement. (For more information on contingencies, see Note 11 to the Condensed Consolidated Financial Statements in Item 1).
 
Investing activities
 
Investing cash flows consist primarily of capital expenditures, net investment purchases and maturities ,and acquisitions.
 
Cash used in investing activities increased by $189.3 million for the six months ended December 25, 2010 compared with the six months ended December 26, 2009. The increase is primarily due to maturity of short-term investments of $100.2 million during the six months ended December 26, 2009, as the Company shifted its investment portfolio to money market funds, and cash used for acquisitions, which increased to $73.1 million during the six months ended December 25, 2010 as compared with $4.0 million during the six months ended December 26, 2009. Additionally, a capital expenditures increase of $42.8 million contributed to the increase in cash used in investing activities.
 
Financing activities
 
Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders and withholding tax payments associated with net share settlements of equity awards.
 
Net cash used in financing activities increased by approximately $56.0 million for the six months ended December 25, 2010 compared with the six months ended December 26, 2009. This increase was primarily due to an increase in repurchases of common stock of $60.8 million.
 
CAPITAL RESOURCES
Debt Levels
On June 17, 2010, we completed a public offering of $300 million aggregate principal amount of the Company's 3.45% senior

32

 

unsecured and unsubordinated notes (the"Notes") due on June 14, 2013, with an effective interest rate of 3.49%. Interest on the Notes is payable semi-annually in arrears on June 14 and December 14 of each year.
 
Off-Balance-Sheet Arrangements
 
As of December 25, 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 26, 2010.
 
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 December 25, 2010. Our management, including the CEO and the CFO, has concluded that the Company's disclosure controls and procedures were effective as of December 25, 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.