Maxim_Q2 '12 10-Q



 
 
 
 
 
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 31, 2011
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 20, 2012 there were 291,775,287 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 31, 2011 and June 25, 2011
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2011 and December 25, 2010
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and December 25, 2010
 
 
 
 
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 and Use of Proceeds
 
 
 
 
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 31,
2011
 
June 25,
2011
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
741,160

 
$
962,541

Short-term investments
75,375

 
50,346

Total cash, cash equivalents and short-term investments
816,535

 
1,012,887

Accounts receivable, net
246,229

 
297,632

Inventories
233,404

 
237,928

Deferred tax assets
87,636

 
113,427

Other current assets
81,396

 
65,978

Total current assets
1,465,200

 
1,727,852

Property, plant and equipment, net
1,365,815

 
1,308,850

Intangible assets, net
237,776

 
204,263

Goodwill
432,809

 
265,125

Other assets
19,055

 
21,653

TOTAL ASSETS
$
3,520,655

 
$
3,527,743

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
118,427

 
$
110,153

Income taxes payable
7,866

 
3,912

Accrued salary and related expenses
159,651

 
215,627

Accrued expenses
62,579

 
47,767

Deferred income on shipments to distributors
31,136

 
36,881

Total current liabilities
379,659

 
414,340

Long term debt
308,700

 
300,000

Income taxes payable
108,462

 
96,099

Deferred tax liabilities
197,839

 
183,715

Other liabilities
21,529

 
22,771

Total liabilities
1,016,189

 
1,016,925

Commitments and contingencies (Note 11)


 


Stockholders' equity:
 
 
 
Common stock and capital in excess of par value
292

 
296

Retained earnings
2,517,166

 
2,524,790

Accumulated other comprehensive loss
(12,992
)
 
(14,268
)
Total stockholders' equity
2,504,466

 
2,510,818

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
$
3,520,655

 
$
3,527,743


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 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
(in thousands, except per share data)

 
 
 
 
 
 
 
 
Net revenues
$
591,359

 
$
612,936

 
$
1,227,361

 
$
1,239,075

Cost of goods sold (1)
243,399

 
232,661

 
483,928

 
472,586

Gross margin
347,960

 
380,275

 
743,433

 
766,489

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
142,084

 
130,001

 
282,297

 
257,780

Selling, general and administrative (1)
80,826

 
72,240

 
163,282

 
144,340

Intangible asset amortization
4,338

 
4,447

 
8,659

 
10,460

Severance and restructuring expenses
6,047

 
488

 
6,539

 
1,654

    Other operating expenses (income), net
155

 
21,100

 
(4,234
)
 
21,133

Total operating expenses
233,450

 
228,276

 
456,543

 
435,367

Operating income
114,510

 
151,999

 
286,890

 
331,122

Interest and other income (expense), net
2,374

 
(4,100
)
 
(1,726
)
 
(7,776
)
Income before provision for income taxes
116,884

 
147,899

 
285,164

 
323,346

Provision for income taxes
28,754

 
38,309

 
63,588

 
96,206

Net income
$
88,130

 
$
109,590

 
$
221,576

 
$
227,140

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.37

 
$
0.76

 
$
0.76

Diluted
$
0.29

 
$
0.36

 
$
0.74

 
$
0.75

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings per share:
 
 
 
 
 
 
 
Basic
291,824

 
296,550

 
293,098

 
297,329

Diluted
299,290

 
303,260

 
300,083

 
301,867

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.22

 
$
0.21

 
$
0.44

 
$
0.42


(1) Includes stock-based compensation charges as follows:
Cost of goods sold
$
3,692

 
$
3,748

 
$
6,949

 
$
7,643

Research and development
$
12,909

 
$
13,916

 
$
26,170

 
$
30,021

Selling, general and administrative
$
6,873

 
$
6,858

 
$
13,820

 
$
13,997



See accompanying Notes to Condensed Consolidated Financial Statements.

4



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 31,
2011
 
December 25,
2010
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
221,576

 
$
227,140

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
     Stock-based compensation
46,939

 
51,661

Depreciation and amortization
104,066

 
104,362

Deferred taxes
39,477

 
103,867

     Tax shortfall related to stock-based compensation plans
(1,153
)
 
(5,676
)
     Excess tax benefit related to stock-based compensation
(7,063
)
 
(3,848
)
     Loss on sale of property, plant and equipment
251

 
14,794

Gain from sale of equity investments
(1,811
)
 

Changes in assets and liabilities:
 
 
 
Accounts receivable
51,970

 
47,624

Inventories
9,246

 
(8,788
)
Other current assets
(13,455
)
 
(7,430
)
Accounts payable
(13,515
)
 
(7,077
)
Income taxes payable
16,317

 
22,345

Deferred income on shipments to distributors
(5,745
)
 
8,486

Accrued liabilities - litigation settlement

 
(173,000
)
All other accrued liabilities
(76,971
)
 
(15,977
)
Net cash provided by operating activities
370,129

 
358,483

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(117,685
)
 
(97,597
)
Proceeds from sale of property, plant, and equipment
1,709

 
25,249

Acquisitions
(166,287
)
 
(73,107
)
Purchases of available-for-sale securities
(25,108
)
 

Proceeds from sale of equity investment
3,225

 

Net cash used in investing activities
(304,146
)
 
(145,455
)
 
 
 
 
Cash flows from financing activities:
 
 
 
           Excess tax benefit related to stock-based compensation
7,063

 
3,848

Mortgage liability repayment

 
(3,237
)
Repayment of notes payable
(20,406
)
 
(1,422
)
Issuance of common stock
16,078

 
9,675

Repurchase of common stock
(161,160
)
 
(125,315
)
Dividends paid
(128,939
)
 
(124,745
)
Net cash used in financing activities
(287,364
)
 
(241,196
)
Net decrease in cash and cash equivalents
(221,381
)
 
(28,168
)
Cash and cash equivalents:
 
 
 
Beginning of period
962,541

 
826,512

End of period
$
741,160

 
$
798,344

Supplemental disclosures of cash flow information:
 
 
 
Cash paid (refunded), net during the period for income taxes
$
16,829

 
$
(34,933
)
Cash paid for interest
5,653

 
5,089

Noncash investing and financing activities:
 
 
 
Accounts payable related to property, plant, and equipment purchases
$
36,450


$
11,488



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 consolidated 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 consolidated financial statements but do not include all disclosures required by GAAP. The results of operations for the six months ended December 31, 2011 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 25, 2011.

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 2012 is a 53-week fiscal year. The extra week is included in our current second fiscal quarter ending December 31, 2011.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-08 relating to Intangibles- Goodwill and Other (Topic 350)-Testing Goodwill for Impairment (ASU 2011-08). The ASU allows an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that it is more likely than not, an entity is required to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for Maxim in fiscal 2013 and earlier adoption is permitted. The Company is evaluating the impact ASU 2011-08 will have on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05 relating to Comprehensive Income (Topic 220)-Presentation of Comprehensive Income (ASU 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU is effective for Maxim in fiscal 2013 and should be applied retrospectively. The Company is evaluating the impact ASU 2011-05 will have on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)-Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective for Maxim in Maxim's third quarter of fiscal 2012 and should be applied prospectively.
NOTE 3: BALANCE SHEET COMPONENTS

Accounts receivables, net consist of:
 
December 31, 2011
 
June 25, 2011
Accounts Receivables:
(in thousands)
Accounts receivable
$
260,449

 
$
315,329

Returns and allowances
(14,220
)
 
(17,697
)
 
$
246,229

 
$
297,632





6




Inventories consist of:

 
December 31, 2011
 
June 25, 2011
Inventories:
(in thousands)
Raw materials
$
18,842

 
$
18,419

Work-in-process
159,944

 
162,245

Finished goods
54,618

 
57,264

 
$
233,404

 
$
237,928


Property, plant and equipment, net consist of:

 
December 31, 2011
 
June 25, 2011
Property, plant and equipment:
(in thousands) 
Land
$
85,427

 
$
86,257

Buildings and building improvements
317,284

 
313,642

Machinery and equipment
2,093,107

 
1,978,827

 
2,495,818

 
2,378,726

Less: accumulated depreciation and amortization                       
(1,130,003
)
 
(1,069,876
)
 
$
1,365,815

 
$
1,308,850


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 as follows:
 
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 certificates of deposit, government agency securities and 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.

The Company's Level 3 liabilities consist of contingent consideration related to certain acquisitions, for details on inputs used in measuring fair value , please refer to the acquisitions footnote.

Assets and liabilities measured at fair value on a recurring basis were as follows:


7



 
As of December 31, 2011
 
As of June 25, 2011
 
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)
$
531,825

 
$

 
$

 
$
531,825

 
$
603,180

 
$

 
$

 
$
603,180

Certificates of deposit (1)

 
6,176

 

 
6,176

 

 
3,457

 

 
3,457

Government agency securities (2)

 
75,375

 

 
75,375

 

 
50,346

 

 
50,346

Foreign currency forward contracts

 
74

 

 
74

 

 
326

 

 
326

Total Assets
$
531,825

 
$
81,625

 
$

 
$
613,450

 
$
603,180

 
$
54,129

 
$

 
$
657,309

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
691

 
$

 
$
691

 
$

 
$
309

 
$

 
$
309

Contingent Consideration (3)

 

 
18,324

 
18,324

 

 

 
8,800

 
8,800

Total Liabilities
$

 
$
691

 
$
18,324

 
$
19,015

 
$

 
$
309

 
$
8,800

 
$
9,109


(1) Included in Cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets.
(2) Included in Short-term investments in the accompanying Condensed Consolidated Balance Sheets.
(3) Included in Accrued expenses in the Condensed Consolidated Balance Sheets.

The tables below present reconciliations for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended December 31, 2011 and for the twelve months ended June 25, 2011:

Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3)

 
 
 
 
 
 
 
December 31,
2011
 
June 25,
2011
Contingent Consideration
 
(in thousands)
Beginning balance
  
$
8,800

 
$

Total gains or losses (realized and unrealized):
 
 
 
 
Included in earnings
  

 

Additions
 
11,354

 
8,800

Payments
 
(1,830
)
 

Ending balance
  
$
18,324

 
$
8,800

 
 
 
 
 
Changes in unrealized gains or losses included in earnings related to assets and liabilities still held as of period end
 
$

 
$


As of December 31, 2011 and June 25, 2011, there were no transfers in or out of level 3 from other levels in the fair value hierarchy.

As of December 31, 2011 and June 25, 2011, none of the Company's assets and liabilities was measured at fair value on a non-recurring basis.










8



NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments
Fair values were as follows:
 
December 31, 2011
 
June 25, 2011
 
Amortized Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated
Fair Value
 
Amortized Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated
Fair Value
 
(in thousands)
Available-for-sale Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
$
74,981

 
$
400

 
$
(6
)
 
$
75,375

 
$
49,826

 
$
520

 
$

 
$
50,346

Total available-for-sale investments
$
74,981

 
$
400

 
$
(6
)
 
$
75,375

 
$
49,826

 
$
520

 
$

 
$
50,346


In the six months ended December 31, 2011 and the year ended June 25, 2011, Maxim did not recognize any impairment charges on short-term investments.
The government agency securities have maturity dates between February 26, 2013 and December 18, 2013.
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 Euro and the British Pound. Maxim incurs expenditures denominated in non-US currencies, principally Philippine Pesos and Thai Baht associated with the Company's manufacturing activities in the Philippines and Thailand, respectively, and expenditures for sales offices and research and development activities undertaken outside of the U.S. 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 these 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 rate 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 Accounting Standards Codification ("ASC") No. 815- Derivatives and Hedging, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive 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 income (expense), 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, 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 value 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 the recorded fair value of derivative financial instruments in the Condensed Consolidated Balance Sheets were as follows:


9



 
As of December 31, 2011
 
As of June 25, 2011
 
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
$
34,129

 
$
43

 
$
679

 
$
35,629

 
$
53

 
$
287

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
16,378

 
31

 
12

 
26,342

 
273

 
22

Total derivatives
$
50,507

 
$
74

 
$
691

 
$
61,971

 
$
326

 
$
309

(1) Represents the face amounts of contracts that were outstanding as of December 31, 2011 and June 25, 2011, respectively.
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 31, 2011 and the year ended June 25, 2011.

 
 
December 31,
2011
 
June 25,
2011
 
 
(in thousands)
Beginning balance
  
$
(234
)
 
$
(235
)
Loss reclassified to income
 
597

 
514

Gain (loss) recorded in other comprehensive loss
  
274

 
(513
)
Ending balance
  
$
637

 
$
(234
)

Maxim expects to reclassify an estimated net accumulated other comprehensive loss of $0.4 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.
The before-tax effect of cash flow derivative instruments for the three and six months ended December 31, 2011 and December 25, 2010 was as follows:
 
 
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective portion)
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Location
 
December 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
 
 
 
(in thousands)
Cash Flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net Revenues
 
$
(3
)
 
$
349

 
$
(245
)
 
$
(1,295
)
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost of goods sold
 
(322
)
 
425

 
(127
)
 
593

Foreign exchange contracts
 
Operating Expense
 
(225
)
 

 
(225
)
 

Total cash flow hedges
 
 
 
$
(550
)
 
$
774

 
$
(597
)
 
$
(702
)




10



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 31, 2011 and December 25, 2010 was as follows:
 
Gain (Loss) Recognized in Income on Derivative Instrument
 
 
Three Months Ended
 
Six Months Ended
 
Location
December 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
 
(in thousands)
Foreign exchange contracts
Interest and other income (expense), net
$
645

 
$
(136
)
 
$
979

 
$
(838
)
Total
 
$
645

 
$
(136
)
 
$
979

 
$
(838
)

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 31, 2011
 
June 25, 2011
 
 
(in thousands)
Euro
 
$
1,691

 
$
1,542

Japanese Yen
 
1,325

 
(5,156
)
British Pound
 
(4,184
)
 
(10,928
)
Philippine Peso
 
14,531

 
17,140

Thai Baht
 
3,592

 
3,523

Total                                                
 
$
16,955

 
$
6,121


Long-term debt
The following table summarizes the Company's long-term debt:
 
December 31, 2011
 
June 25, 2011
 
(in thousands)
3.45% fixed rate notes due June 2013
$
300,000

 
$
300,000

SensorDynamics Debt (Denominated in Euro)
 
 
 
Term fixed rate notes (2.0%-2.5%) due March 2013 to September 2015
6,120

 

Amortizing fixed rate notes (1.5%-2.75%) due up to June 2014
2,215

 

Amortizing floating rate notes (EURIBOR plus 1.5%) due up to June 2014
2,310

 

Total
310,645

 
300,000

Less: Current portion (1)
(1,945
)
 

Total long-term debt
$
308,700

 
$
300,000


(1) Current portion of long-term debt is included under accrued expenses in the Condensed Consolidated Balance Sheets.

On June 17, 2010, the Company completed a public offering of $300 million aggregate principal amount of the Company's 3.45% senior unsecured 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. 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.

In conjunction with the SensorDynamics acquisition as discussed in Note 13 to the condensed consolidated financial statements, Maxim acquired certain fixed and floating rate notes as detailed in the table above.

The Company accounts for the Notes based on their amortized cost. The discount and expenses are being amortized to Interest and other expense, net over the life of the Notes. Interest expenses associated with the Notes was $2.7 million and $2.6 million

11



during the three months ended December 31, 2011 and December 25, 2010, respectively. Interest expenses associated with the Notes was $5.4 million and $5.2 million during the six months ended December 31, 2011 and December 25, 2010, respectively. The interest expense is recorded in Interest and other income (expense), net in the Condensed Consolidated Statements of Income.

The estimated fair value of Maxim's debt was approximately $320 million at December 31, 2011. The estimated fair value of the debt is based primarily on quoted market prices.

As of December 31, 2011, the Company had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, warrants, rights and units under its 2010 Shelf Registration Statement.

Credit Facility

On October 13, 2011, the Company entered into a $250 million senior unsecured revolving credit facility with certain institutional lenders that expires on October 13, 2016. The Company agreed to pay the lenders a facility fee at a rate per annum that varies based on the Company's index debt rating. Any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's debt index rating. The credit agreement requires the Company to comply with certain covenants, including a requirement that the Company maintain a ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of not more than 3 to 1. As of December 31, 2011, the Company had not borrowed any amounts from this credit facility.

Other Financial Instruments
For the balance of Maxim's financial instruments, cash equivalents, accounts receivable, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.


12



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 31, 2011 and December 25, 2010:

Stock-based compensation expense by type of award
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
(in thousands)
Cost of goods sold
 
 
 
 
 
 
 
Stock options
$
565

 
$
729

 
$
1,082

 
$
1,483

Restricted stock units
2,657

 
2,637

 
4,964

 
5,411

Employee stock purchase plan
470

 
382

 
903

 
749

 
$
3,692

 
$
3,748

 
$
6,949

 
$
7,643

Research and development expense
 
 
 
 
 
 
 
Stock options
$
2,440

 
$
2,710

 
$
4,495

 
$
7,259

Restricted stock units
9,207

 
9,914

 
19,165

 
20,128

Employee stock purchase plan
1,262

 
1,292

 
2,510

 
2,634

 
$
12,909

 
$
13,916

 
$
26,170

 
$
30,021

Selling, general and administrative expense
 
 
 
 
 
 
 
Stock options
$
1,704

 
$
1,659

 
$
3,132

 
$
3,288

Restricted stock units
4,778

 
4,847

 
9,903

 
10,005

Employee stock purchase plan
391

 
352

 
785

 
704

 
$
6,873

 
$
6,858

 
$
13,820

 
$
13,997

Total stock-based compensation expense
 
 
 
 
 
 
 
Stock options
$
4,709

 
$
5,098

 
$
8,709

 
$
12,030

Restricted stock units
16,642

 
17,398

 
34,032

 
35,544

Employee stock purchase plan
2,123

 
2,026

 
4,198

 
4,087

Pre-tax stock-based compensation expense
23,474

 
24,522

 
46,939

 
51,661

Less: income tax effect
5,809

 
6,954

 
11,268

 
14,293

Net stock-based compensation expense
$
17,665

 
$
17,568

 
$
35,671

 
$
37,368


Fair Value

The fair value of options granted to employees under the Company's 1996 Stock Incentive 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 Restricted Stock Units ("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 the Black-Scholes option valuation model and the following weighted-average assumptions:


13



 
Stock Option Plan
 
Three Months Ended
 
Six Months Ended
 
December 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
Expected holding period (in years)
5.1

 
5.1

 
5.1

 
5.2

Risk-free interest rate
1.0
%
 
1.3
%
 
1.3
%
 
1.7
%
Expected stock price volatility
38.0
%
 
36.3
%
 
38.0
%
 
36.8
%
Dividend yield
3.8
%
 
4.8
%
 
3.1
%
 
4.3
%

 
ESPP
 
Three Months Ended
 
Six Months Ended
 
December 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
Expected holding period (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.1
%
 
0.2
%
 
0.1
%
 
0.2
%
Expected stock price volatility
32.2
%
 
30.0
%
 
32.2
%
 
30.0
%
Dividend yield
3.8
%
 
4.2
%
 
3.8
%
 
4.2
%

The weighted-average fair value of stock options granted was $6.05 and $4.42 per share for the three months ended December 31, 2011 and December 25, 2010, respectively. The weighted-average fair value of RSUs granted was $23.46 and $20.35 per share for the three months ended December 31, 2011 and December 25, 2010, respectively.
The weighted-average fair value of stock options granted was $5.81 and $3.81 per share for the six months ended December 31, 2011 and December 25, 2010, respectively. The weighted-average fair value of RSUs granted was $20.05 and $14.99 per share for the three months ended December 31, 2011 and December 25, 2010, respectively.

Stock Options

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 31, 2011 and their activity for the six months ended December 31, 2011:
 
Number of
Shares 
 
Weighted Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (in Years)
 
 
Aggregate
Intrinsic
Value(1) 
Balance at June 25, 2011
28,332,486

 
$
25.62

 
 
 
 
Options Granted
2,942,124

 
22.52

 
 
 
 
Options Exercised
(831,689
)
 
16.19

 
 
 
 
Options Cancelled
(2,286,993
)
 
32.32

 
 
 
 
Balance at December 31, 2011
28,155,928

 
$
25.03

 
3.8

 
$
153,055,757

Exercisable, December 31, 2011
15,546,715

 
$
30.86

 
2.5

 
$
45,579,755

Vested and expected to vest, December 31, 2011
26,494,477

 
$
25.39

 
3.6

 
$
141,211,913

 
(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 30, 2011, 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 31, 2011.

As of December 31, 2011, there was $40.9 million of total unrecognized stock compensation cost related to 12.6 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 2.8 years.




14



Restricted Stock Units

The following table summarizes outstanding and expected to vest RSUs as of December 31, 2011 and their activity during the six months ended December 31, 2011:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value(1) 
Balance at June 25, 2011
10,000,738

 
 
 
 
Restricted stock units granted
3,140,684

 
 
 
 
Restricted stock units released
(1,763,984
)
 
 
 
 
Restricted stock units cancelled
(609,368
)
 
 
 
 
Balance at December 31, 2011
10,768,070

 
2.7

 
$
269,478,768

Vested and expected to vest, December 31, 2011
9,924,364

 
2.7

 
$
261,010,767

(1)
Aggregate intrinsic value for RSUs represents the closing price per share of the Company's common stock on December 30, 2011, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 31, 2011.

The Company withheld shares totaling $7.9 million and $14.9 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 and six months ended December 31, 2011, respectively. 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 31, 2011, there was $143.2 million of unrecognized compensation expense related to 10.8 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.7 years.

Employee Stock Purchase Plan

As of December 31, 2011, there was $7.2 million of unrecognized compensation expense related to the ESPP.

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.


15



 
Three Months Ended
 
Six Months Ended
 
December 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
(in thousands, except per share data)
Numerator for basic earnings per share and diluted earnings per share
 
 
 
 
 
 
 
Net income
$
88,130

 
$
109,590

 
$
221,576

 
$
227,140

 
 
 
 
 
 
 
 
Denominator for basic earnings per share
291,824

 
296,550

 
293,098

 
297,329

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP and RSUs
7,466

 
6,710

 
6,985

 
4,538

Denominator for diluted earnings per share
299,290

 
303,260

 
300,083

 
301,867

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.37

 
$
0.76

 
$
0.76

Diluted
$
0.29

 
$
0.36

 
$
0.74

 
$
0.75

Approximately 14.6 million and 15.3 million of the Company's stock options were excluded from the calculation of diluted earnings per share for the three months ended December 31, 2011 and December 25, 2010, respectively. Approximately 14.2 million and 22.9 million of the Company's stock options were excluded from the calculation of diluted earnings per share for the six months ended December 31, 2011 and December 25, 2010, 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 sixteen 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 sixteen 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 electronics 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,

16



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 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
 
(in thousands)
United States
 
$
74,512

 
$
84,354

 
$
151,441

 
$
180,542

China
 
260,396

 
228,143

 
536,826

 
460,444

Japan
 
37,327

 
45,332

 
74,234

 
82,454

Korea
 
41,678

 
66,474

 
107,439

 
152,374

Rest of Asia
 
88,318

 
71,651

 
168,632

 
135,720

Europe
 
70,995

 
94,606

 
154,633

 
184,509

Rest of World
 
18,133

 
22,376

 
34,156

 
43,032

 
 
$
591,359

 
$
612,936

 
$
1,227,361

 
$
1,239,075


Net long-lived assets by geographic region were as follows:

 
December 31,
2011
 
June 25,
2011
 
(in thousands)
United States
$
1,029,537

 
$
972,380

Philippines
202,471

 
204,581

Thailand
111,595

 
120,838

Rest of World
22,212

 
11,051

 
$
1,365,815

 
$
1,308,850



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 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
 
(in thousands)
Net income, as reported
 
$
88,130

 
$
109,590

 
$
221,576

 
$
227,140

Change in unrealized losses on investments, net of tax benefits of $20, $0, $46, and $0, respectively
 
(33
)
 

 
(80
)
 

Change in unrealized gains (loss) on forward exchange contracts, net of tax benefits (expenses) of $(40), $117, $146, and $(25), respectively
 
69

 
(205
)
 
(256
)
 
43

Deferred tax on unrealized exchange gains (loss) on long-term intercompany receivables
 
1,246

 
(813
)
 
1,489

 
(2,878
)
Actuarial gains on post-retirement benefits, net of tax expense of $(35), $(33), $(71), and $(66), respectively
 
62

 
58

 
123

 
116

Total comprehensive income
 
$
89,474

 
$
108,630

 
$
222,852

 
$
224,421

 
The components of Accumulated Other Comprehensive Loss, were as follows:
 
 
December 31,
2011
 
June 25,
2011
 
 
(in thousands)
Deferred tax on unrealized exchange gains on long-term intercompany receivables
 
$
(6,592
)
 
$
(8,081
)
Unrealized components of post-retirement benefits
 
(4,718
)
 
(4,841
)
Cumulative translation adjustment
 
(1,527
)
 
(1,527
)
Net unrealized loss on cash flow hedges
 
(406
)
 
(150
)
Net unrealized gain on available-for-sale securities
 
251

 
331

Accumulated Other Comprehensive Loss
 
$
(12,992
)
 
$
(14,268
)

NOTE 10: INCOME TAXES

In the three and six months ended December 31, 2011, the Company recorded an income tax provision of $28.8 million and $63.6 million, respectively, compared to an income tax provision of $38.3 million and $96.2 million in the three and six months ended December 25, 2010, respectively. 
 
In the first quarter of fiscal year 2012, the Internal Revenue Service commenced an audit of the Company's federal corporate income tax returns for the fiscal years 2009 and 2010.  The Company believes that it has adequately provided for any adjustments that may result from the Internal Revenue Service audit, however, the outcome of tax audits cannot be predicted with certainty.

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 (income) expenses, net.

On February 6, 2008, a putative class action complaint was filed against the Company and certain former officers and employees

18



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. The Company made this payment in July 2010. 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 and directors and certain former officers and directors. More specifically, the Company has separate written indemnification agreements with our current and former executive officers and directors. Pursuant to such obligations, the Company has incurred expenses related to legal fees and expenses advanced to certain former officers of the Company subject to civil charges by the SEC in connection with Maxim's historical stock option granting practices. The Company expenses such amounts as incurred.    

NOTE 12: COMMON STOCK REPURCHASES

In August 2011, 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 31, 2011, the Company repurchased approximately 6.7 million shares of its common stock for $161.2 million. As of December 31, 2011, the Company had remaining authorization to repurchase up to an additional $636.5 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: ACQUISITIONS

Acquisitions completed during fiscal 2012

The purchase price allocation for acquisitions completed in fiscal 2012 is set forth in the table below and reflects various preliminary fair value estimates and analysis, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period (up to one year from the acquisition date) as valuations are finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized are the determination of the deferred tax assets and liabilities and residual goodwill.

Pro forma results of operations for these acquisitions have not been presented because they are not material to Maxim's condensed consolidated results of income, either individually or in the aggregate. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is not expected to be deductible for tax purposes. Acquisition costs for fiscal 2012 were not material.

Aggregate preliminary purchase price allocation for acquisitions made by Maxim during fiscal 2012:

19




 
SensorDynamics
 
Other acquisitions
 
Total
 
 
 
(in thousands)
 
 
Tangible assets
$
18,692

 
$
1,159

 
$
19,851

Debt assumed
(29,078
)
 

 
(29,078
)
Other liabilities assumed
(37,559
)
 
(4,729
)
 
(42,288
)
Net liabilities assumed
(47,945
)
 
(3,570
)
 
(51,515
)
Amortizable intangible assets
20,900

 
17,840

 
38,740

In-process research and development ("IPR&D")
19,600

 

 
19,600

Goodwill (1)
130,594

 
38,392

 
168,986

 
 
 
 
 
 
Total purchase price (1)
$
123,149

 
$
52,662

 
$
175,811

(1) Includes $11.4 million of contingent consideration relating to the other acquisitions.

The following table present details of the Company's intangible assets acquired through business combinations completed during fiscal 2012 (in thousands, except years):

 
Intellectual Property
 
Customer Relationships
 
Trademark
 
Total
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
 
SensorDynamics
7.0

 
$
16,400

 
7.0

 
$
4,100

 
3.0

 
$
400

 
$
20,900

Other acquisitions
9.2

 
15,340

 
3.0

 
2,500

 

 

 
17,840

Total
 
 
$
31,740

 
 
 
$
6,600

 
 
 
$
400

 
$
38,740

Weighted Average (in Years)
8.1

 
 
 
5.5

 
 
 
3.0

 
 
 
 

SENSORDYNAMICS

On July 18, 2011, the Company acquired SensorDynamics, a semiconductor company that develops proprietary sensor and microelectromechanical solutions. SensorDynamics is based in Lebring, near Graz, Austria. The purpose of the acquisition was to allow Maxim to combine sensors with analog products. The total cash consideration associated with the acquisition was approximately $123.1 million.

OTHER ACQUISITIONS

The Company acquired three other companies during fiscal 2012, the biggest of which is a company that develops low power high performance analog circuits. The total cash consideration associated with the acquisition was approximately $41.3 million. Maxim also recorded $11.4 million, representing the fair value of contingent consideration that would be payable in the future should certain specified project milestones be met. Total contingent consideration that could be paid out under the agreement amounts to $7.4 million. The contingent consideration was calculated based on probabilities that were developed regarding the likelihood that the product development milestones would be met and when the contingent payments would occur. Based on these factors, a probability weighted earnout amount was calculated and discounted (at the cost of debt) to present.

Acquisitions completed during fiscal 2011

Aggregate purchase price allocation for Maxim's fiscal 2011 acquisitions:

20



 
 
Phyworks
 
Other acquisitions
 
Total
 
 
 
 
(In thousands)
 
 
Tangible assets
 
$
5,676

 
$
662

 
$
6,338

Liabilities assumed
 
(17,524
)
 
(818
)
 
(18,342
)
Net liabilities assumed
 
(11,848
)
 
(156
)
 
(12,004
)
Amortizable intangible assets
 
50,800

 
1,750

 
52,550

IPR&D
 
5,800

 
2,580

 
8,380

Goodwill (1)
 
26,606

 
14,187

 
40,793

 
 
 
 
 
 
 
Total purchase price (1)
 
$
71,358

 
$
18,361

 
$
89,719

(1) Includes $8.8 million of contingent consideration relating to one of the other acquisitions

The following table present details of the Company's intangible assets acquired through business combinations completed during fiscal 2011 (in thousands, except years):

 
Intellectual Property
 
Customer Relationships
 
Backlog
 
Trademark
 
Total
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
Weighted Average Useful Life (in Years)
 
Amount
 
 
Phyworks
5.0

 
$
47,100

 
5.0

 
$
1,600

 
1.3

 
$
1,900

 
1.0

 
$
200

 
$
50,800

Other acquisitions
3.0

 
1,750

 

 

 

 

 

 

 
1,750

Total
 
 
$
48,850

 
 
 
$
1,600

 
 
 
$
1,900

 
 
 
$
200

 
$
52,550

Weighted Average (in Years)
4.9

 
 
 
5.0

 
 
 
1.3

 
 
 
1.0

 
 
 
 

PHYWORKS

On September 7, 2010, the Company acquired Phyworks Limited ("Phyworks"), a developer of high-speed communications integrated circuits. The Company expects that none of the goodwill associated with the acquisition will be deductible for tax purposes. 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.

OTHER ACQUISITIONS

During fiscal 2011, the Company completed two other acquisitions, The biggest of which is a developer of highly integrated, analog, mixed-signal solutions, as well as design methods and flows for analog system-on-a-chip (SoCs). The total cash consideration associated with the acquisition was $8.2 million. The acquired assets included cash of $0.4 million. Maxim also recorded $8.8 million, representing the fair value of contingent consideration that would be payable in the future should certain specified project milestones be met. Total contingent consideration that could be paid out under the agreement amounts to $12.5 million. As of December 31, 2011 Maxim has paid $1.8 million relating to contingent consideration.

NOTE 14: GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or more often 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 2012 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 31, 2011 were as follows:

21




 
Goodwill
 
(in thousands)
Balance at June 25, 2011
$
265,125

Acquisitions
160,299

Adjustments
7,385

Balance at December 31, 2011
$
432,809


In the first six months of fiscal year 2012, the Company adjusted the carrying values of certain acquired assets and liabilities primarily related to SensorDynamics and fiscal 2011 acquisition IPR&D, resulting in an increase in goodwill of approximately $7.4 million.

Intangible Assets

The useful lives of amortizable intangible assets are as follows:
 
Asset
 
Life
Intellectual Property
 
5-10 years
Customer Relationships
 
3-10 years
Tradename
 
3 years
Backlog
 
1 year
  
Intangible assets consisted of the following:
 
 
December 31, 2011
 
June 25, 2011
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Intellectual property
$
226,412

 
$
82,930

 
$
143,482

 
$
195,912

 
$
64,996

 
$
130,916

Customer relationships
95,230

 
32,124

 
63,106

 
88,630

 
24,915

 
63,715

Backlog
6,400

 
6,400

 

 
6,400

 
5,687

 
713

Tradename
2,100

 
1,292

 
808

 
1,700

 
981

 
719

Total amortizable purchased intangible assets
330,142

 
122,746

 
207,396

 
292,642

 
96,579

 
196,063

IPR&D
30,380

 

 
30,380

 
8,200

 

 
8,200

Total purchased intangible assets
$
360,522

 
$
122,746

 
$
237,776

 
$
300,842

 
$
96,579

 
$
204,263



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 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
(in thousands)
Cost of goods sold
$
8,080

 
$
7,919

 
$
17,514

 
$
14,268

Intangible Asset Amortization
4,338

 
4,447

 
8,659

 
10,460

Total Intangible Asset Amortization Expenses
$
12,418

 
$
12,366

 
$
26,173

 
$
24,728

The following table represents the estimated future amortization expense of intangible assets as of December 31, 2011:

22



 
Fiscal Year
 
Amount
 
 
(in thousands)
Remaining six months of 2012
 
$
26,316

2013
 
50,769

2014
 
39,865

2015
 
38,822

2016
 
26,531

2017
 
18,737

Thereafter
 
6,356

Total
 
$
207,396



NOTE 15: SUBSEQUENT EVENT

On January 18, 2012, the Company sold its clock synchronization, clock synthesis and clock timing product lines to Microsemi Corp. of Irvine, California for total consideration of approximately $44.0 million in cash.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Maxim Integrated Products, Inc. ("Maxim" or the "Company" and also referred to as "we," "our" or "us") disclaims any duty to and undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by federal securities laws. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that the Company files with or furnishes to the SEC from time to time, such as its Annual Reports on Form 10-K (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 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 consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition and related allowances, which impact the recording of revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts write-offs of fixed assets, intangible assets, and goodwill; accounting for stock-based compensation, which impacts cost of goods sold, gross margins and operating expenses; accounting for income taxes, which impacts the income tax provision; and assessment of contingencies, which impacts charges recorded in cost of goods sold and operating expenses. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or are less likely to have a material impact on our reported results of operations for a given period.


23



There have been no material changes during the six months ended December 31, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 25, 2011.

The impact of inflation and changing prices on the Company's net revenues and on operating income during the six months ended December 31, 2011 and December 25, 2010 was not material.

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 31,
2011
 
December 25,
2010
 
December 31,
2011
 
December 25,
2010
 
 
 
 
 
 
Net revenues
100.0
%
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
41.2
%
 
38.0
 %
 
39.4
 %
 
38.1
 %
Gross margin
58.8
%
 
62.0
 %
 
60.6
 %
 
61.9
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
24.0
%
 
21.2
 %
 
23.0
 %
 
20.8
 %
Selling, general and administrative
13.7
%
 
11.8
 %
 
13.3
 %
 
11.6
 %
Intangible asset amortization
0.7
%
 
0.7
 %
 
0.7
 %
 
0.8
 %
Severance and restructuring expenses
1.0
%
 
0.1
 %
 
0.5
 %
 
0.1
 %
    Other operating expenses (income), net
%
 
3.4
 %
 
(0.3
)%
 
1.7
 %
Total operating expenses
39.4
%
 
37.2
 %
 
37.2
 %
 
35.0
 %
Operating income
19.4
%
 
24.8
 %
 
23.4
 %
 
26.9
 %
Interest and other income (expense), net
0.4
%
 
(0.7
)%
 
(0.1
)%
 
(0.6
)%
Income before provision for income taxes
19.8
%
 
24.1
 %
 
23.3
 %
 
26.3
 %
Provision for income taxes
4.9
%