Maxim Q2 '14 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 28, 2013
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.)

160 Rio Robles
San Jose, California 95134
(Address of Principal Executive Offices including Zip Code)

(408) 601-1000
(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 27, 2014 there were 282,066,140 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 28, 2013 and June 29, 2013
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 28, 2013 and December 29, 2012
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 28, 2013 and December 29, 2012
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 28, 2013 and December 29, 2012
 
 
 
 
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. Mine Safety Disclosures
 
 
 
 
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 28,
2013
 
June 29,
2013
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,149,909

 
$
1,174,986

Short-term investments

 
25,060

Total cash, cash equivalents and short-term investments
1,149,909

 
1,200,046

Accounts receivable, net
288,285

 
285,438

Inventories
297,234

 
275,640

Deferred tax assets
69,154

 
82,173

Other current assets
85,554

 
96,609

Total current assets
1,890,136

 
1,939,906

Property, plant and equipment, net
1,372,393

 
1,373,124

Intangible assets, net
404,652

 
157,146

Goodwill
596,898

 
422,004

Other assets
42,803

 
43,730

TOTAL ASSETS
$
4,306,882

 
$
3,935,910

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
99,009

 
$
105,322

Income taxes payable
21,717

 
22,437

Accrued salary and related expenses
140,738

 
187,970

Accrued expenses
91,145

 
60,592

Current portion of long-term debt
2,965

 
2,015

Deferred revenue on shipments to distributors
25,542

 
26,557

Total current liabilities
381,116

 
404,893

Long-term debt
1,000,871

 
503,573

Income taxes payable
337,053

 
282,697

Deferred tax liabilities
202,435

 
206,855

Other liabilities
29,343

 
29,894

Total liabilities
1,950,818

 
1,427,912

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
283

 
288

Retained earnings
2,368,350

 
2,523,457

Accumulated other comprehensive loss
(12,569
)
 
(15,747
)
Total stockholders’ equity
2,356,064

 
2,507,998

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
4,306,882

 
$
3,935,910


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 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
620,274

 
$
605,306

 
$
1,205,515

 
$
1,228,381

Cost of goods sold
291,602

 
241,931

 
529,647

 
479,315

Gross margin
328,672

 
363,375

 
675,868

 
749,066

Operating expenses:
 
 
 
 
 
 
 
Research and development
142,971

 
135,742

 
272,873

 
268,672

Selling, general and administrative
83,471

 
80,058

 
160,901

 
160,245

Intangible asset amortization
4,968

 
3,903

 
8,404

 
7,952

Impairment of long-lived assets
5,197

 
22,222

 
5,197

 
24,929

Severance and restructuring expenses
10,227

 
2,236

 
15,774

 
2,236

Acquisition-related costs
4,137

 

 
7,071

 

Other operating expenses (income), net
7,307

 
1,666

 
6,645

 
2,081

Total operating expenses
258,278

 
245,827

 
476,865

 
466,115

Operating income
70,394

 
117,548

 
199,003

 
282,951

Interest and other income (expense), net
(5,833
)
 
(2,798
)
 
(9,296
)
 
(8,540
)
Income before provision for income taxes
64,561

 
114,750

 
189,707

 
274,411

Provision for income taxes
20,208

 
38,128

 
42,234

 
69,901

Net income
$
44,353

 
$
76,622

 
$
147,473

 
$
204,510

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.26

 
$
0.52

 
$
0.70

Diluted
$
0.15

 
$
0.26

 
$
0.51

 
$
0.68

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings per share:
 
 
 
 
 
 
 
Basic
282,664

 
292,075

 
283,659

 
292,143

Diluted
288,565

 
298,759

 
289,371

 
298,704

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.26

 
$
0.24

 
$
0.52

 
$
0.48


See accompanying Notes to Condensed Consolidated Financial Statements.




4



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


 
Three Months Ended
 
Six Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
(in thousands)
Net income
$
44,353

 
$
76,622

 
$
147,473

 
$
204,510

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains and losses on available-for-sale securities
(15
)
 
(67
)
 
(23
)
 
(102
)
Change in net unrealized gains and losses on cash flow hedges
(667
)
 
(202
)
 
557

 
383

Change in net unrealized gains and losses on post-retirement benefits
283

 
203

 
567

 
1,254

Tax effect of the unrealized exchange gains and losses on long-term intercompany receivables
1,939

 
(466
)
 
2,077

 
(1,548
)
Other comprehensive income (loss)
1,540

 
(532
)
 
3,178

 
(13
)
Total comprehensive income
$
45,893

 
$
76,090

 
$
150,651

 
$
204,497


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 28,
2013
 
December 29,
2012
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
147,473

 
$
204,510

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation
41,609

 
45,342

Depreciation and amortization
115,537

 
105,554

Deferred taxes
13,824

 
9,793

Loss (gain) from sale of property, plant and equipment
301

 
(139
)
Tax benefit (shortfall) related to stock-based compensation
(4,214
)
 
6,522

Impairment of long lived assets
5,197

 
24,929

Excess tax benefit from stock-based compensation
(4,156
)
 
(11,834
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
20,606

 
52,916

Inventories
11,729

 
(15,445
)
Other current assets
11,784

 
(3,748
)
Accounts payable
(12,414
)
 
(36,002
)
Income taxes payable
30,395

 
47,938

Deferred revenue on shipments to distributors
(1,015
)
 
(918
)
All other accrued liabilities
(46,331
)
 
(37,576
)
Net cash provided by (used in) operating activities
330,325

 
391,842

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(82,462
)
 
(112,805
)
Proceeds from sale of property, plant and equipment
3,048

 
4,459

Payments in connection with business acquisition, net of cash acquired
(453,506
)
 

Proceeds from maturity of available-for-sale securities
27,000

 

Net cash provided by (used in) investing activities
(505,920
)
 
(108,346
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Excess tax benefit from stock-based compensation
4,156

 
11,834

Contingent consideration paid
(4,601
)
 
(7,476
)
Repayment of notes payable
(1,839
)
 
(298
)
Issuance of debt
497,895

 

Debt issuance cost
(3,431
)
 

Net issuance of restricted stock units
(14,072
)
 
(13,645
)
Proceeds from stock options exercised
13,869

 
39,214

Issuance of ESPP shares under employee stock purchase program
19,096

 
16,768

Repurchase of common stock
(213,487
)
 
(115,584
)
Dividends paid
(147,068
)
 
(140,262
)
Net cash provided by (used in) financing activities
150,518

 
(209,449
)
Net increase (decrease) in cash and cash equivalents
(25,077
)
 
74,047

Cash and cash equivalents:
 
 
 
Beginning of period
1,174,986

 
881,060

End of period
$
1,149,909

 
$
955,107

Supplemental disclosures of cash flow information:
 
 
 
Cash paid (refunded), net during the period for income taxes
$
(17,269
)
 
$
7,397

Cash paid for interest
$
8,316

 
$
5,282

Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
13,058

 
$
25,490


See accompanying Notes to Condensed Consolidated Financial Statements.

6



MAXIM INTEGRATED PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Maxim Integrated Products, Inc. and all of its majority-owned subsidiaries (collectively, the “Company” or “Maxim Integrated”) 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 of a normal recurring nature which were considered necessary for fair presentation have been included. The year-end condensed consolidated 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 28, 2013 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated interim 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 29, 2013. The Condensed Consolidated Financial Statements included in this Quarterly Report include the financial results of Volterra Semiconductor Corporation (“Volterra”) prospectively from the date of acquisition. Refer to Note 13: "Acquisition" of these Notes to Condensed Consolidated Financial Statements for further discussion in relation to Volterra.

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 years 2014 and 2013 are 52-week fiscal years.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

(i) New Accounting Updates Recently Adopted

In the first quarter of fiscal year 2014, the Company adopted Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220)- Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income that requires reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The adoption of this amended standard resulted in the presentation of the reclassification adjustments on the face of the Condensed Consolidated Statements of Comprehensive Statements and did not change the current requirements for reporting net income or other comprehensive income in the Condensed Consolidated Financial Statements.

(ii) Recent Accounting Updates Not Yet Effective

In July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-11, Income Taxes (Topic 740)-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires certain unrecognized tax benefits to be presented as reductions to deferred tax assets instead of liabilities on the Condensed Consolidated Balance Sheets. The Company will be required to adopt ASU 2013-11 on a prospective basis in the first quarter of fiscal year 2015; however, early adoption is permitted, as is a retrospective application. The Company is currently evaluating the impact of this new standard on its Condensed Consolidated Balance Sheets.

NOTE 3: BALANCE SHEET COMPONENTS

Accounts receivable, net consists of:

 
December 28,
2013
 
June 29,
2013
Accounts Receivable:
(in thousands)
Accounts receivable
$
305,260

 
$
299,083

Returns and allowances
(16,975
)
 
(13,645
)
 
$
288,285

 
$
285,438






7



Inventories consist of:

 
December 28,
2013
 
June 29,
2013
Inventories:
(in thousands)
Raw materials
$
17,180

 
$
14,055

Work-in-process
203,198

 
184,511

Finished goods
76,856

 
77,074

 
$
297,234

 
$
275,640


Property, plant and equipment, net consists of:

 
December 28,
2013
 
June 29,
2013
Property, plant and equipment:
(in thousands) 
Land
$
62,093

 
$
62,093

Buildings and building improvements
368,393

 
364,037

Machinery and equipment
2,136,270

 
2,099,301

 
2,566,756

 
2,525,431

Less: accumulated depreciation and amortization
(1,194,363
)
 
(1,152,307
)
 
$
1,372,393

 
$
1,373,124


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 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 consists of contingent consideration liability related to certain prior years’ acquisitions and certain long-lived assets written down to fair value during the period.












8



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

 
As of December 28, 2013
 
As of June 29, 2013
 
Fair Value
 Measurements Using
 
Total
Balance
 
Fair Value
 Measurements Using
 
Total
Balance
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (1)
$
696,732

 
$

 
$

 
$
696,732

 
$
402,513

 
$

 
$

 
$
402,513

Certificates of deposit (1)

 

 

 

 

 
77

 

 
77

Government agency securities (2)

 

 

 

 

 
25,060

 

 
25,060

Foreign currency forward contracts (3)

 
521

 

 
521

 

 
187

 

 
187

Total Assets
$
696,732

 
$
521

 
$

 
$
697,253

 
$
402,513

 
$
25,324

 
$

 
$
427,837

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (4)
$

 
$
838

 
$

 
$
838

 
$

 
$
1,419

 
$

 
$
1,419

Contingent Consideration (4)

 

 
5,469

 
5,469

 

 

 
8,577

 
8,577

Total Liabilities
$

 
$
838

 
$
5,469

 
$
6,307

 
$

 
$
1,419

 
$
8,577

 
$
9,996


(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 Other current assets in the accompanying Condensed Consolidated Balance Sheets.
(4) Included in Accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

The tables below present reconciliations for liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended December 28, 2013 and December 29, 2012:

Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
December 28,
2013
 
December 29,
2012
Contingent Consideration
 
(in thousands)
Beginning balance
 
$
8,577

 
$
17,737

Total gains or losses (realized and unrealized):
 
 
 
 
Included in earnings
 
1,493

 
2,334

Payments
 
(4,601
)
 
(7,476
)
Ending balance
 
$
5,469

 
$
12,595

 
 
 
 
 
Changes in unrealized losses (gains) included in earnings related to liabilities still held as of period end
 
$
1,493

 
$
2,334


The valuation of contingent consideration is based on a probability weighted earnout model which relies primarily on estimates of milestone achievements and discount rates applicable for the period expected payout. The most significant unobservable input used in the determination of estimated fair value of contingent consideration is the estimates on the likelihood of milestone achievements, which directly correlates to the fair value recognized in the Condensed Consolidated Balance Sheets.

The fair value of this liability is estimated quarterly by management based on inputs received from the Company’s engineering and finance personnel. The determination of the milestone achievement is performed by the Company’s business units and reviewed by the accounting department. Potential valuation adjustments are made as the progress toward achieving milestones becomes determinable, with the impact of such adjustments being recorded to Other operating expenses (income), net. 

During the six months ended December 28, 2013 and the year ended June 29, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

9




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

As of December 28, 2013, certain long-lived assets including manufacturing equipment and held for sale assets were written down to fair value and fair value less cost to sell, respectively, resulting in an impairment loss of $5.2 million which was included in earnings for the period. The impairment charge was measured using Level 3 inputs. Fair value was determined mainly after consideration of evidence such as broker estimates, assets' condition and offers received. Refer to Note 15: "Impairment of Long-Lived Assets" of these Notes to Condensed Consolidated Financial Statements.

As of June 29, 2013, none of the Company's assets and liabilities was measured at fair value on a non-recurring basis.

NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments
Fair values were as follows:
 
December 28, 2013
 
June 29, 2013
 
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
$

 
$

 
$

 
$

 
$
25,024

 
$
36

 
$

 
$
25,060

Total available-for-sale investments
$

 
$

 
$

 
$

 
$
25,024

 
$
36

 
$

 
$
25,060


In the six months ended December 28, 2013 and the year ended June 29, 2013, the Company did not recognize any impairment charges on short-term investments.
The government agency securities matured on December 18, 2013.
Derivative instruments and hedging activities

The Company generates less than 5% of its revenues in various global markets based on orders obtained in non-U.S. currencies, primarily the Japanese Yen, the Euro and the British Pound. The Company incurs expenditures denominated in non-U.S. currencies, principally the Philippine Peso 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.

The Company has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. The Company does not use these foreign currency forward contracts for trading purposes.

Derivatives designated as cash flow hedging instruments

The Company designates certain forward contracts as hedging instruments pursuant to ASC 815 Derivatives and Hedging. As of December 28, 2013 and June 29, 2013, respectively, the notional amounts of the forward contracts we held to purchase U.S. Dollars in exchange for other international currencies were $49.0 million and $53.8 million, respectively, and the notional amounts of forward contracts we held to sell U.S. Dollars in exchange for other international currencies were $3.4 million and $3.2 million, respectively.

Derivatives not designated as hedging instruments

As of December 28, 2013 and June 29, 2013, respectively, the notional amounts of the forward contracts we held to purchase U.S. Dollars in exchange for other international currencies were $16.0 million and $15.0 million, respectively, and the notional amounts of forward contracts we held to sell U.S. Dollars in exchange for other international currencies were $35.5 million and $36.5 million, respectively. The fair values of our outstanding foreign currency forward contracts and amounts included in the statement of income were not material for six months ended December 28, 2013 and year ended June 29, 2013.

10



Long-term debt
The following table summarizes the Company’s long-term debt:
 
December 28,
2013
 
June 29,
2013
 
(in thousands)
3.375% fixed rate notes due March 2023
$
500,000

 
$
500,000

2.5% fixed rate notes due November 2018
500,000

 

Notes denominated in Euro
 
 
 
Term fixed rate notes (2.0%-2.5%) due up to September 2015
2,965

 
4,804

Amortizing floating rate notes (EURIBOR plus 1.5%) due up to June 2014
871

 
784

Total
1,003,836

 
505,588

Less: Current portion
(2,965
)
 
(2,015
)
Total long-term debt
$
1,000,871

 
$
503,573


On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 2.5% coupon senior unsecured and unsubordinated notes due in November 2018 (“2018 Notes”), with an effective interest rate of 2.6%. Interest on the 2018 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on May 15, 2014. The net proceeds of this offering were approximately $494.5 million, after issuing at a discount and deducting paid expenses, and are included in the financing activities in the Condensed Consolidated Statements of Cash Flows.

On March 18, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 3.375% senior unsecured and unsubordinated notes due in March 2023 (“2023 Notes”), with an effective interest rate of 3.5%. Interest on the 2023 Notes is payable semi-annually in arrears on March 15 and September 15 of each year.

The 2018 Notes and the 2023 Notes are governed by a base indenture, dated June 10, 2010, and supplemental indentures, dated March 18, 2013 with respect to the 2023 Notes and November 21, 2013 with respect to the 2018 Notes, between the Company and Wells Fargo Bank, National Association, as trustee.

The Company accounts for all the notes above based on their amortized cost. The discount and expenses are being amortized to Interest and other income (expense), net over the life of the notes. Interest expense associated with the notes was $5.6 million and $2.6 million during the three months ended December 28, 2013 and December 29, 2012, respectively. Interest expense associated with the notes was $9.9 million and $5.2 million during the six months ended December 28, 2013 and December 29, 2012, 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 the Company’s debt was approximately $958 million as of December 28, 2013. The estimated fair value of the debt is based primarily on observable market inputs and is a Level 2 measurement.

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















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 28, 2013 and December 29, 2012:


Three Months Ended

December 28, 2013

December 29, 2012

Stock Options

Restricted Stock Units

Employee Stock Purchase Plan

Total

Stock Options

Restricted Stock Units

Employee Stock Purchase Plan

Total

(in thousands)
Cost of goods sold
$
438


$
2,395


$
533


$
3,366


$
477


$
2,572


$
634


$
3,683

Research and development
2,616


8,728


1,153


12,497


2,288


8,401


1,451


12,140

Selling, general and administrative
1,476


4,996


534


7,006


1,286


5,152


584


7,022

Pre-tax stock-based compensation expense
$
4,530


$
16,119


$
2,220


$
22,869


$
4,051


$
16,125


$
2,669


$
22,845

Less: income tax effect






3,749








3,938

Net stock-based compensation expense








$
19,120








$
18,907


 
Six Months Ended
 
December 28, 2013
 
December 29, 2012
 
Stock Options
 
Restricted Stock Units
 
Employee Stock Purchase Plan
 
Total
 
Stock Options
 
Restricted Stock Units
 
Employee Stock Purchase Plan
 
Total
 
(in thousands)
Cost of goods sold
$
787

 
$
4,313

 
$
1,008

 
$
6,108

 
$
875

 
$
4,743

 
$
1,053

 
$
6,671

Research and development
4,452

 
15,168

 
2,475

 
22,095

 
4,117

 
17,611

 
2,735

 
24,463

Selling, general and administrative
2,740

 
9,523

 
1,143

 
13,406

 
2,841

 
10,271

 
1,096

 
14,208

Pre-tax stock-based compensation expense
$
7,979

 
$
29,004

 
$
4,626

 
$
41,609

 
$
7,833

 
$
32,625

 
$
4,884

 
$
45,342

Less: income tax effect
 
 
 
 
 
 
6,478

 
 
 
 
 
 
 
8,770

Net stock-based compensation expense
 
 
 
 
 
 
$
35,131

 
 
 
 
 
 
 
$
36,572


Volterra Substitute Awards

In connection with the Volterra acquisition, the Company issued substitute awards to certain Volterra employees. Substitute awards included options to purchase approximately 673,185 shares of Maxim Integrated's common stock at a weighted-average grant date fair value of approximately $10.56 and a weighted-average exercise price of approximately $22.26 per share and also issued approximately 418,955 restricted stock units with a weighted-average grant date fair value of $29.53. The terms of these awards were substantially the same as granted by Volterra. The intrinsic value of these awards was substantially the same immediately prior to and after the substitution as of October 1, 2013.

Stock Options

The fair value of options granted to employees under the Company’s Amended and Restated 1996 Stock Incentive Plan is estimated on the date of grant using the Black-Scholes option valuation model.


12



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 to forfeitures on a quarterly basis.

The fair value of options granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model and the following weighted-average assumptions:

 
Stock Options (1)
 
Three Months Ended
 
Six Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Expected holding period (in years)
5.0

 
5.1

 
5.3

 
5.4

Risk-free interest rate
1.5
%
 
0.7
%
 
1.4
%
 
0.7
%
Expected stock price volatility
34.1
%
 
37.6
%
 
34.9
%
 
37.8
%
Dividend yield
3.7
%
 
3.6
%
 
3.2
%
 
3.3
%

(1) Table excludes impact from assumptions used in valuing the Volterra substitute options granted on October 1, 2013 based on an expected holding period of 3.8 years, risk-free interest rate of 1.0%, expected stock price volatility of 27.5% and dividend yield of 3.4%.

The weighted-average fair value of stock options granted was $9.15 and $6.59 per share for the three months ended December 28, 2013 and December 29, 2012, respectively. The weighted-average fair value of stock options granted was $7.44 and $6.26 per share for the six months ended December 28, 2013 and December 29, 2012, respectively.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 28, 2013 and their activity for the six months ended December 28, 2013:

 
Number of
Shares 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (1)
Balance at June 29, 2013
20,081,339

 
$
26.00

 
 
 
 
Options Granted
2,671,444

 
27.11

 
 
 
 
Volterra substitute options granted
673,185

 
22.26

 
 
 
 
Options Exercised
(739,949
)
 
16.21

 
 
 
 
Options Cancelled
(2,365,894
)
 
32.51

 
 
 
 
Balance at December 28, 2013
20,320,125

 
$
25.62

 
3.7
 
$
96,469,224

Exercisable, December 28, 2013
9,202,394

 
$
27.62

 
1.9
 
$
51,039,289

Vested and expected to vest, December 28, 2013
18,917,227

 
$
25.59

 
3.6
 
$
93,908,211

 
(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 27, 2013, 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 28, 2013.
As of December 28, 2013, there was $45.1 million of total unrecognized stock compensation cost related to 11.1 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 3.0 years.

Restricted Stock Units

The fair value of Restricted Stock Units (“RSUs”) under the Company’s Amended and Restated 1996 Stock Incentive Plan is estimated using the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected

13



to be paid on the Company’s common stock prior to vesting. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis.

The weighted-average fair value of RSUs granted was $28.16 and $26.82 per share for the three months ended December 28, 2013 and December 29, 2012, respectively. The weighted-average fair value of RSUs granted was $25.95 and $24.67 per share for the six months ended December 28, 2013 and December 29, 2012, respectively.

The following table summarizes outstanding and expected to vest RSUs as of December 28, 2013 and their activity during the six months ended December 28, 2013:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 29, 2013
7,965,532

 
 
 
 
Restricted stock units granted
2,529,831

 
 
 
 
Volterra substitute restricted stock units granted
418,955

 
 
 
 
Restricted stock units released
(1,411,774
)
 
 
 
 
Restricted stock units cancelled
(459,152
)
 
 
 
 
Balance at December 28, 2013
9,043,392

 
2.9
 
$
259,214,755

Outstanding and expected to vest, December 28, 2013
8,080,689

 
2.8
 
$
225,693,652

(1)
Aggregate intrinsic value for RSUs represents the closing price per share of the Company’s common stock on December 27, 2013, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 28, 2013.
The Company withheld shares totaling $7.1 million and $14.2 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date for the three and six months ended December 28, 2013, 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 28, 2013, there was $154.6 million of unrecognized compensation expense related to 8.6 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Employee Stock Purchase Plan

The fair value of 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 ESPP granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model and the following weighted-average assumptions:

 
ESPP
 
Three Months Ended
 
Six Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Expected holding period (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Expected stock price volatility
21.7
%
 
26.1
%
 
21.7
%
 
26.1
%
Dividend yield
3.7
%
 
3.6
%
 
3.7
%
 
3.6
%

As of December 28, 2013, there was $7.8 million of unrecognized compensation expense related to the ESPP.


14



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 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
(in thousands, except per share data)
Numerator for basic earnings per share and diluted earnings per share
 
 
 
 
 
 
 
Net income
$
44,353

 
$
76,622

 
$
147,473

 
$
204,510

 
 
 
 
 
 
 
 
Denominator for basic earnings per share
282,664

 
292,075

 
283,659

 
292,143

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP and RSUs
5,901

 
6,684

 
5,712

 
6,561

Denominator for diluted earnings per share
288,565

 
298,759

 
289,371

 
298,704

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.26

 
$
0.52

 
$
0.70

Diluted
$
0.15

 
$
0.26

 
$
0.51

 
$
0.68

Approximately 10.5 million and 11.6 million stock options were excluded from the calculation of diluted earnings per share for the three months ended December 28, 2013 and December 29, 2012, respectively. Approximately 9.8 million and 11.2 million stock options were excluded from the calculation of diluted earnings per share for the six months ended December 28, 2013 and December 29, 2012, 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 in one reportable segment. The Company designs, develops, manufactures and markets a broad range of linear and mixed signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by ASC No. 280, Segment Reporting (“ASC 280”).

The Company has three operating segments that aggregate into one reportable segment. Under ASC 280, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of ASC 280, 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 three operating segments;

15



the integrated circuits sold by each of the Company’s operating segments are manufactured using similar semiconductor manufacturing processes;
the integrated circuits marketed by each of the Company’s operating segments are sold to the same types of customers; and
all of the Company’s integrated circuits are sold through a centralized sales force and common wholesale distributors.

All of the Company’s operating segments share similar long-term financial performance as they have similar economic characteristics, including gross margins. 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 the Company’s 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 ASC 280. 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 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
 
(in thousands)
United States
 
$
83,039

 
$
62,860

 
$
172,138

 
$
121,981

China
 
271,311

 
266,479

 
505,209

 
541,384

Korea
 
33,726

 
56,616

 
68,762

 
120,995

Rest of Asia
 
145,221

 
137,246

 
283,567

 
274,673

Europe
 
73,401

 
66,941

 
146,027

 
137,848

Rest of World
 
13,576

 
15,164

 
29,812

 
31,500

 
 
$
620,274

 
$
605,306

 
$
1,205,515

 
$
1,228,381


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

 
December 28,
2013
 
June 29,
2013
 
(in thousands)
United States
$
1,071,426

 
$
1,058,579

Philippines
179,229

 
183,671

Thailand
70,155

 
76,708

Rest of World
51,583

 
54,166

 
$
1,372,393

 
$
1,373,124











16



NOTE 9: COMPREHENSIVE INCOME
 
The changes in accumulated other comprehensive loss by component and related tax effects in the six months ended December 28, 2013 were as follows:

(in thousands)
Unrealized gain (loss) on intercompany receivables
 
Unrealized gain (loss) on post-retirement benefits
 
Cumulative translation adjustment
 
Unrealized gain (loss) on cash flow hedges
 
Unrealized gain (loss) on available-for-sale securities
 
Total
June 29, 2013
$
(7,401
)
 
$
(5,838
)
 
$
(1,527
)
 
$
(1,004
)
 
$
23

 
$
(15,747
)
Other comprehensive income (loss) before reclassifications

 

 

 
(356
)
 
(36
)
 
(392
)
Amounts reclassified out of accumulated other comprehensive income (loss)

 
717

 

 
1,060

 

 
1,777

Tax effects
2,077

 
(150
)
 

 
(147
)
 
13

 
1,793

Other comprehensive income (loss)
2,077

 
567

 

 
557

 
(23
)
 
3,178

December 28, 2013
$
(5,324
)
 
$
(5,271
)
 
$
(1,527
)
 
$
(447
)
 
$

 
$
(12,569
)

NOTE 10: INCOME TAXES

In the three and six months ended December 28, 2013, the Company recorded an income tax provision of $20.2 million and $42.2 million, respectively, compared to an income tax provision of $38.1 million and $69.9 million in the three and six months ended December 29, 2012, respectively.

The Company's federal statutory tax rate is 35%. The Company's effective tax rates for the three and six months ended December 28, 2013 and December 29, 2012 were lower than the statutory tax rate primarily because earnings of foreign subsidiaries were taxed at lower rates. The Company's income tax provision for the three and six months ended December 29, 2012 included a $21.4 million discrete tax charge for research and development expenses of a foreign subsidiary for which no tax benefit is available.

The Company estimates that it is reasonably possible that its liability for unrecognized tax benefits, including accrued interest and penalties, could decrease within the next 12 months by $25 million due to expected settlements with foreign tax authorities.

In fiscal year 2012 the U.S. Internal Revenue Service commenced an audit of the Company's federal corporate income tax returns for fiscal years 2009 through 2011, which is still ongoing.

NOTE 11: COMMITMENTS AND CONTINGENCIES

Legal Proceedings
 
The Company is a party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to intellectual-property matters. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized or reserved, if any.

Indemnification
 
The Company indemnifies certain customers, distributors, suppliers and subcontractors for attorney fees and 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.


17



Pursuant to the Company’s charter documents and separate written indemnification agreements, the Company has certain indemnification obligations to its current officers, employees and directors, as well as certain former officers and directors.

Product Warranty

The Company generally warrants its products for one year from the date of shipment against defects in materials, workmanship and material non-conformance to the Company’s specifications. The general warranty policy provides for the repair or replacement of defective products or a credit to the customer’s account. In limited circumstances, the term of product warranty may extend beyond one year and may include financial responsibility beyond repairing or replacing the product or crediting the customer’s account. In addition, we may also consider the Company’s relationship with its customer when assessing product claims. Warranty expense has historically been immaterial to the Company's consolidated financial statements. However, included within the results of operations for the three months ended December 28, 2013 is a charge of $18.1 million primarily related to a product claim with a major customer. This charge includes product replacement and the cost to remove and install replacement product. Additionally, the Company assumed from its recent acquisition of Volterra Corporation $13.9 million of warranty claims. 

Accruals are based on specifically identified claims and on the estimated, undiscounted cost of incurred-but-not-reported claims. If there is a material increase in the rate of customer claims compared with our historical experience or if the Company's estimates of probable losses relating to specifically identified warranty exposures require revision, the Company may record a charge against future cost of sales. Product warranty liability is included within the balance sheet caption “Accrued Expenses” in the accompanying Condensed Consolidated Balance Sheets.

The changes in Maxim Integrated's aggregate product warranty liabilities for the six months ended December 28, 2013 were as follows:

 
(in thousands)
Product warranty liability at June 29, 2013
$
3,075

Accruals assumed from acquisition
13,911

Accruals for warranties issued
18,274

Payments
(8,759
)
Changes in estimate
(67
)
Product warranty liability at December 28, 2013
$
26,434


NOTE 12: COMMON STOCK REPURCHASES

In July 2013, the Board of Directors authorized the Company to repurchase up to $1 billion 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 superseded by this authorization.

During the six months ended December 28, 2013, the Company repurchased approximately 7.5 million shares of its common stock based on settlement date for $213.5 million. As of December 28, 2013, the Company had remaining authorization of $853.7 million for future share repurchases. 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: ACQUISITION

Fiscal year 2014

VOLTERRA

On October 1, 2013, the Company completed its acquisition of Volterra, formerly a publicly traded company that develops power management solutions. The primary reason for this acquisition was to expand the Company's available market across a wide range of end markets, including enterprise server, cloud computing, communications and energy. The results of operations of Volterra are included in the Company’s Condensed Consolidated Statements of Income, beginning in the second quarter of fiscal year 2014. Volterra net revenues booked in the Company's second quarter of fiscal year 2014 was $35.0 million. Acquisition-related costs for the six months ended December 28, 2013 were $7.1 million. The Company is in the process of integrating the Volterra acquisition with the existing Communications and Automotive Solutions Group.

18





The total purchase price for Volterra was approximately $615 million and was comprised of:

 
 
(in thousands)
Cash consideration for 100% of outstanding common stock of Volterra at $23 per share
 
$
593,250

Cash consideration for vested options settlement
 
21,756

Total preliminary purchase price
 
$
615,006


Volterra Substitute Awards

In connection with the acquisition, the Company issued substitute awards to certain Volterra employees. Refer to Note 6: "Stock-Based Compensation" of these Notes to Condensed Consolidated Financial Statements for further discussion on stock compensation in relation to Volterra.

The preliminary purchase price allocation as of the date of the acquisition is set forth in the table below and reflects various fair value estimates and analysis. These estimates were determined through established and generally accepted valuation techniques, including preliminary work performed by third-party valuation specialists, and are subject to change during the purchase price allocation period (generally one year from the acquisition date) as valuations are finalized.

 
Volterra
 
(in thousands)
Cash and cash equivalents and short-term investments
$
163,500

Accounts receivable
23,453

Inventories
33,339

Other tangible assets
17,151

Accrued expenses
(35,343
)
Income taxes payable
(23,241
)
Other liabilities assumed
(20,149
)
Net tangible assets
158,710

Amortizable intangible assets
226,900

In-process research and development ("IPR&D")
56,200

Goodwill
174,894

Substitution of stock-based compensation awards
(1,698
)
Total purchase price
$
615,006


The fair value of property, plant, and equipment and intangible assets is preliminary pending the completion of the valuation of those assets. In addition, the Company has evaluated and continues to evaluate certain pre-acquisition contingencies, including corporate income tax related payables, uncertain tax positions and certain legal contingencies, relating to Volterra that existed as of the acquisition date. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known to the Company during the remainder of the purchase price allocation period.

IPR&D assets relate to future technology, it is capitalized until the technology is ready for its intended use and then amortized over the technology useful life. IPR&D costs incurred by the Company subsequent to the acquisition are expensed.

Goodwill was primarily attributable to the opportunities from the addition of Volterra's product portfolio which complements the Company’s suite of products, including providing integrated process solutions to customers. The goodwill is not deductible for tax purposes.






19




The amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives as follows:

 
Volterra acquisition
 
Fair value
( in thousands)
 
Weighted average useful life (in years)
Intellectual property
$
192,500

 
4.9
Customer relationships
24,600

 
9.6
Trade name
6,400

 
4.0
Backlog
900

 
0.4
Patents
2,500

 
4.8
Total amortizable intangible assets
$
226,900

 
 

Pro forma results of operations for this acquisition have not been presented because it is not material to the Company's Condensed Consolidated Statements of Income.

Refer to Note 16: "Restructuring Activities" of these Notes to Condensed Consolidated Financial Statements for a discussion on Volterra Restructuring Plan.

Fiscal year 2013

None.

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 goodwill impairment analysis during the first quarter of fiscal year 2014 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value.

Activity and goodwill balances for the six months ended December 28, 2013 were as follows:

 
Goodwill
 
(in thousands)
Balance at June 29, 2013
$
422,004

Volterra acquisition
174,894

Balance at December 28, 2013
$
596,898


Intangible Assets

The useful lives of amortizable intangible assets are as follows:
 
Asset
 
Life
Intellectual property
 
3 months-10 years
Customer relationships
 
5-10 years
Trade name
 
3-4 years
Backlog
 
4 months
Patents
 
5 years
  


20




Intangible assets consisted of the following:
 
 
December 28, 2013
 
June 29, 2013
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Intellectual property
$
426,362

 
$
164,174

 
$
262,188

 
$
230,562

 
$
136,870

 
$
93,692

Customer relationships
119,830

 
61,477

 
58,353

 
95,230

 
54,308

 
40,922

Trade name
8,500

 
2,402

 
6,098

 
2,100

 
1,950

 
150

Backlog
900

 
542

 
358

 

 

 

Patent
2,500

 
127

 
2,373

 

 

 

Total amortizable purchased intangible assets
558,092

 
228,722

 
329,370

 
327,892

 
193,128

 
134,764

IPR&D
75,282

 

 
75,282

 
22,382

 

 
22,382

Total purchased intangible assets
$
633,374

 
$
228,722

 
$
404,652

 
$
350,274

 
$
193,128

 
$
157,146


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 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
(in thousands)
Cost of goods sold
$
19,098

 
$
8,986

 
$
27,190

 
$
18,440

Intangible asset amortization
4,968

 
3,903

 
8,404

 
7,952

Total intangible asset amortization expenses
$
24,066

 
$
12,889

 
$
35,594

 
$
26,392


The following table represents the estimated future amortization expense of intangible assets as of December 28, 2013:
 
Fiscal Year
 
Amount
 
 
(in thousands)
Remaining six months of 2014
 
$
44,592

2015
 
87,698

2016
 
71,146

2017
 
59,241

2018
 
41,789

2019
 
13,838

Thereafter
 
11,066

Total intangible assets
 
$
329,370


NOTE 15: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2014:

During the second quarter of fiscal year 2014, the Company recorded $5.2 million in Impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income.

The impairment includes certain U.S. test operation assets identified as excess as a result of reducing the level and extent of the U.S. test organization. These assets included primarily test manufacturing equipment which was recorded in Property, plant, and

21



equipment, net in the Condensed Consolidated Balance Sheet as of December 28, 2013. These testers were fully impaired. The company also impaired fab tools and a building classified as held for sale. The fab tools were fully impaired while the building was impaired down to fair value less cost to sell. The fair value of the building was determined mainly after consideration of evidence such as broker estimates, building condition, and offers received.

Fiscal year 2013:

During the second quarter of fiscal year 2013, the Company identified certain assets as excess primarily attributable to the transition to utilizing newer, more efficient manufacturing equipment. These assets included used fabrication tools and test manufacturing equipment. 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 $22.2 million was included in Impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of assets fair values. The fair value of the equipment was determined mainly after consideration of quoted market prices of similar equipment adjusted for equipment specifications and condition in addition to the current market demand and size.

During the first quarter of fiscal year 2013, the Company identified certain idle facilities as held for sale. In connection with these circumstances, the Company recorded a charge for the write-down of land and buildings to their estimated fair value, less cost to sell. The total charge of $2.7 million was included in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of assets fair values. The fair value of the land and buildings was determined mainly after consideration of evidence such as appraisals and offers received.

NOTE 16: RESTRUCTURING ACTIVITIES

Volterra Restructuring Plan

In connection with the acquisitions of Volterra, the Company's management approved and initiated plans to restructure the operations of Volterra, including acceleration of certain stock-based compensation awards, costs to vacate duplicative facilities, severance for transitional and exiting employees, contract cancellation costs and other items. The total combined cost of the plan was $9.9 million in Severance and restructuring expenses in the Company's Condensed Consolidated Statements of Income. As of December 28, 2013, the Company recorded all of the costs of the plan based upon the anticipated timing of planned terminations and facility closure costs. Expected severance and retention costs for transitional employees are being accrued over the transitional period. Amounts accrued and future estimated costs to be incurred as of December 28, 2013 are immaterial.

Business Unit Reorganization

During the six months ended December 28, 2013, the Company recorded $5.9 million in Severance and restructuring expenses in the Company's Condensed Consolidated Statements of Income associated with the reorganization of certain business units. Multiple job classifications and locations were impacted as this was a company-wide action. The reorganization was driven by the desire to focus on specific investment areas and simplify business processes.


22



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

Maxim Integrated Products, Inc. (“Maxim Integrated” or the “Company” and also referred to as “we,” “our” or “us”) disclaims any duty to and undertakes no obligation to update any forward-looking statement, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by federal securities laws. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that the Company files with or furnishes to the SEC from time to time, such as its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview of Business

Maxim Integrated is incorporated in the state of Delaware. Maxim Integrated designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of geographically diverse customers. The Company also provides a range of high-frequency process technologies and capabilities that can be used in custom designs. The analog market is fragmented and characterized by many diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. The Company is a global company with wafer manufacturing facilities in the U.S., testing facilities in the Philippines and Thailand and sales and circuit design offices throughout the world. The major end-markets in which the Company’s products are sold are the communications, computing, consumer and industrial markets.

On October 1, 2013, the Company completed the acquisition of Volterra Semiconductor Corporation (“Volterra”) that develops power management solutions, for approximately $615.0 million. The acquisition of Volterra expands our serviceable available market across a wide range of end markets, including enterprise server, cloud computing and communications.

Impact of Acquisition

The comparability of our operating results in the second quarter and first six months of fiscal year 2014 compared with the same periods in fiscal year 2013 is impacted by our acquisition of Volterra in the second quarter of fiscal year 2014.

CRITICAL ACCOUNTING POLICIES

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition and related allowances, which impact the recording of revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts write-offs of fixed assets, intangible assets, and goodwill; accounting for stock-based compensation, which impacts cost of goods sold, gross margins and operating expenses; accounting for income taxes, which impacts the income tax provision; and assessment of contingencies, which impacts charges recorded in cost of goods sold and operating expenses. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or are less likely to have a material impact on our reported results of operations for a given period.

There have been no material changes during the six months ended December 28, 2013 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 29, 2013.


23



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 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
 
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
47.0
 %
 
40.0
 %
 
43.9
 %
 
39.0
 %
Gross margin
53.0
 %
 
60.0
 %
 
56.1
 %
 
61.0
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
23.0
 %
 
22.4
 %
 
22.6
 %
 
21.9
 %
Selling, general and administrative
13.5
 %
 
13.2
 %
 
13.3
 %
 
13.0
 %
Intangible asset amortization
0.8
 %
 
0.6
 %
 
0.7
 %
 
0.6
 %
Impairment of long-lived assets
0.8
 %
 
3.7
 %
 
0.4
 %
 
2.0
 %
Severance and restructuring expenses
1.6
 %
 
0.4
 %
 
1.3
 %
 
0.2
 %
Acquisition-related costs
0.7
 %
 
 %
 
0.6
 %
 
 %
Other operating expenses (income), net
1.3
 %
 
0.3
 %
 
0.6
 %
 
0.2
 %
Total operating expenses
41.7
 %
 
40.6
 %
 
39.5
 %
 
37.9
 %
Operating income
11.3
 %
 
19.4
 %
 
16.6
 %
 
23.1
 %
Interest and other income (expense), net
(0.9
)%
 
(0.5
)%
 
(0.8
)%
 
(0.7
)%
Income before provision for income taxes
10.4
 %
 
18.9
 %
 
15.8
 %
 
22.4
 %
Provision for income taxes
3.3
 %
 
6.3
 %
 
3.5
 %
 
5.7
 %
Net income
7.1
 %
 
12.6
 %
 
12.3
 %
 
16.7
 %

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 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
 
 
 
 
 
 
Cost of goods sold
0.5
%
 
0.6
%
 
0.5
%
 
0.5
%
Research and development
2.0
%
 
2.0
%
 
1.8
%
 
2.0
%
Selling, general and administrative
1.1
%
 
1.2
%
 
1.1
%
 
1.2
%
 
3.6
%
 
3.8
%
 
3.4
%
 
3.7
%


Net Revenues

Net revenues were $620.3 million and $605.3 million for the three months ended December 28, 2013 and December 29, 2012, respectively, an increase of 2.5%. Net revenues were $1,205.5 million and $1,228.4 million for the six months ended December 28, 2013 and December 29, 2012, respectively, a decrease of 1.9%. We classify our shipments by four major end markets: Communications, Computing, Consumer and Industrial. Net shipments increased during the three months ended December 28, 2013 as compared to the three months ended December 29, 2012 due to the acquisition of Volterra, which contributed $35.0 million primarily to the Computing end market and an increase in shipments of our industrial products portfolio driven primarily by design wins and new products offered in the automotive end market. These increases were partially offset by lower demand for products in the consumer markets primarily from smartphones.


24



Net shipments decreased during the six months ended December 28, 2013 as compared to the six months ended December 29, 2012 due to lower demand for products in the consumer markets primarily from smartphones. This decrease was partially offset by an increase in shipments of our industrial products portfolio driven primarily by design wins and new products offered in the automotive end market, and a net increase in shipments to the Computing end market due to the Volterra acquisition partially offset by decreased shipments due to our exit of certain notebook products with low gross margin.

During the three months ended December 28, 2013 and December 29, 2012, approximately 87% and 90% of net revenues, respectively, were derived from customers outside of the United States. During the six months ended December 28, 2013 and December 29, 2012, approximately 86% and 90% of net revenues, respectively, were derived from customers outside of the United States. While the majority of these sales are denominated in U.S. Dollars, we enter into foreign currency forward contracts to mitigate our risks on firm commitments and net monetary assets and liabilities denominated in foreign currencies. The impact of changes in foreign exchange rates on our revenue and results of operations for the three and six months ended December 28, 2013 and December 29, 2012 was immaterial.

Gross Margin

Our gross margin percentages were 53.0% and 60.0% for the three months ended December 28, 2013 and December 29, 2012, respectively. The gross margin decreased due to $18.1 million of product warranty related expenses primarily associated with one customer, $12.7 million of incremental amortization related to Volterra intangible assets and $13.1 million related to Volterra inventory fair value mark-up amortization.

Our gross margin percentages were 56.1% and 61.0% for the six months ended December 28, 2013 and December 29, 2012, respectively. The gross margin decreased due to $18.2 million of product warranty related expenses primarily associated with one customer, $12.7 million of incremental amortization related to Volterra intangible assets, $13.1 million related to Volterra inventory fair value mark-up amortization, and increased inventory reserves of $8.4 million.

Research and Development

Research and development expenses were $143.0 million and $135.7 million for the three months ended December 28, 2013 and December 29, 2012, respectively, which represented 23.0% and 22.4% of net revenues, respectively. The $7.3 million increase was primarily attributable to increases in salaries of $5.3 million, primarily from increased headcount from the Volterra acquisition and an increase in headcount related expenses of $2.4 million resulting from both the Volterra acquisition and an increase in employee health benefits costs.

Research and development expenses were $272.9 million and $268.7 million for the six months ended December 28, 2013 and December 29, 2012, respectively, which represented 22.6% and 21.9% of net revenues, respectively. The $4.2 million increase was primarily attributable an increase in headcount related expenses of $4.0 million resulting from both the Volterra acquisition and an increase in employee health benefits costs.

Selling, General and Administrative

Selling, general and administrative expenses were $83.5 million and $80.1 million for the three months ended December 28, 2013 and December 29, 2012, respectively, which represented 13.5% and 13.2% of net revenues, respectively. The $3.4 million increase was primarily attributable to an increase in legal expense relating to Volterra and an increase in headcount related expenses of $2.0 million resulting from both the Volterra acquisition and an increase in employee health benefits.

Selling, general and administrative expenses were $160.9 million and $160.2 million for the six months ended December 28, 2013 and December 29, 2012, respectively, which represented 13.3% and 13.0% of net revenues, respectively.

Impairment of Long-Lived Assets

Impairment of long-lived assets were $5.2 million and $22.2 million for the three months ended December 28, 2013 and December 29, 2012, respectively, which represented 0.8% and 3.7% of net revenues, respectively. The $17.0 million decrease was primarily due to lower levels of certain assets classified as excess Property, plant and equipment and certain assets classified as held for sale written down to fair value less cost to sell in the three months ended December 29, 2012 as compared to the three months ended December 28, 2013.

Impairment of long-lived assets were $5.2 million and $24.9 million for the six months ended December 28, 2013 and December 29, 2012, respectively, which represented 0.4% and 2.0% of net revenues, respectively. The $19.7 million decrease was primarily due

25



to lower levels of certain assets classified as excess Property, plant and equipment and certain assets classified as held for sale written down to fair value less cost to sell in the six months ended December 31, 2012 as compared to the six months ended December 28, 2013.

Severance and Restructuring Expenses

Severance and restructuring expenses were $10.2 million and $2.2 million for the three months ended December 28, 2013 and December 29, 2012, respectively, which represented 1.6% and 0.4% of net revenues, respectively. The $8.0 million increase was primarily due to the $9.9 million of severance costs associated with restructuring plans arising from the acquisition of Volterra including acceleration of certain stock-based compensation awards, costs to vacate duplicative facilities, severance for transitional and exiting employees, contract cancellation costs and other items.

Severance and restructuring expenses were $15.8 million and $2.2 million for the six months ended December 28, 2013 and December 29, 2012, respectively, which represented 1.3% and 0.2% of net revenues, respectively. The $13.6 million increase was due to the $9.9 million of severance costs associated with restructuring plans arising from the acquisition of Volterra. Furthermore, the Company also recorded $5.9 million in severance and restructuring expenses associated with the reorganization of certain business units. The reorganization was driven by the desire to focus on specific investment areas and simplify business processes.

Acquisition-Related Costs

Acquisition-related costs were $4.1 million and $7.1 million for the three and six months ended December 28, 2013, respectively, and included banker, legal, and other Volterra related acquisition-related costs.

Other Operating Expenses (Income), net

Other operating expenses (income), net were $7.3 million and $1.7 million during the three months ended December 28, 2013 and December 29, 2012, respectively. This net increase in expense of $5.6 million was primarily driven by a $6.0 million intellectual property infringement legal settlement.

Other operating expenses (income), net were $6.6 million and $2.1 million during the six months ended December 28, 2013 and December 29, 2012, respectively. This net increase in expense of $4.5 million was primarily driven by a $6.0 million intellectual property infringement legal settlement.

Interest and Other Income (Expense), net

Interest and other income (expense), net were $(5.8) million and $(2.8) million for the three months ended December 28, 2013 and December 29, 2012, respectively. This net increase in expense of $3.0 million was primarily driven by an increase in interest expense related to higher levels of long-term debt outstanding to date during fiscal year 2014 as compared to fiscal year 2013.

Interest and other income (expense), net were $(9.3) million and $(8.5) million for the six months ended December 28, 2013 and December 29, 2012, respectively. This net increase in expense of $0.8 million was primarily driven by an increase in interest expense related to our higher levels of long-term debt outstanding during fiscal year 2014 as compared to 2013, and a favorable impact from foreign currency exchange rates movements.

Provision for Income Taxes

In the three and six months ended December 28, 2013, the Company recorded an income tax provision of $20.2 million and $42.2 million, respectively, compared to an income tax provision of $38.1 million and $69.9 million in the three and six months ended December 29, 2012, respectively.

The Company's federal statutory tax rate is 35%. The Company's effective tax rates for the three and six months ended December 28, 2013 and December 29, 2012 were lower than the statutory tax rate primarily because earnings of foreign subsidiaries were taxed at lower rates. The Company's income tax provision for the three and six months ended December 29, 2012 included a $21.4 million discrete tax charge for research and development expenses of a foreign subsidiary for which no tax benefit is available.

The Company’s effective tax rate for the three and six months ended December 28, 2013 was 31.3% and 22.3%, respectively, compared to 33.2% and 25.5%, respectively, for the three and six months ended December 29, 2012. The effective tax rate changes are primarily due to shifts of income and loss among jurisdictions with differing tax rates and a $21.4 million discrete tax charge

26



in the three and six months ended December 29, 2012 for research and development expenses of a foreign subsidiary for which no tax benefit is available.

The Company estimates that it is reasonably possible that its liability for unrecognized tax benefits, including accrued interest and penalties, could decrease within the next 12 months by $25 million due to expected settlements with foreign tax authorities.

In fiscal year 2012 the U.S. Internal Revenue Service commenced an audit of the Company's federal corporate income tax returns for fiscal years 2009 through 2011, which is still ongoing.

BACKLOG

At December 28, 2013 and September 28, 2013, our current quarter backlog was approximately $366 million and $390 million, respectively. We include in backlog orders with customer request dates within the next three months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to customers. In addition, backlog includes orders from domestic distributors for which revenues are not recognized until the products are sold by the distributors. Accordingly, we believe that our backlog is not a reliable measure of future revenues. All backlog numbers have been adjusted for estimated future U.S. distribution ship and debit pricing adjustments.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
Financial Condition

Cash flows were as follows:
 
Six Months Ended
 
December 28,
2013
 
December 29,
2012
 
(in thousands)
Net cash provided by (used in) operating activities
$
330,325

 
$
391,842

Net cash provided by (used in) investing activities
(505,920
)
 
(108,346
)
Net cash provided by (used in) financing activities
150,518

 
(209,449
)
Net increase (decrease) in cash and cash equivalents
$
(25,077
)
 
$
74,047

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 28, 2013 decreased by approximately $61.5 million compared with the six months ended December 29, 2012. This was primarily due to a lower net income of $57.0 million, impact of sales linearity on accounts receivable, and lower impairment of property plant and equipment. These decreases were offset partially by relative inventory levels, impacted by the amortization of the Volterra inventory mark-up during the six months ended December 28, 2013

Investing activities

Investing cash flows consist primarily of capital expenditures, net investment purchases and maturities and acquisitions.

Cash provided by investing activities decreased by $397.6 million for the six months ended December 28, 2013 compared with the six months ended December 29, 2012. The decrease was primarily due to payments in connection with the Volterra acquisition, net of cash acquired of $453.5 million.

Financing activities

Financing cash flows consist primarily of debt issuance, repurchases of common stock and payment of dividends to stockholders.

Net cash provided by financing activities increased by approximately $360.0 million for the six months ended December 28, 2013 compared with the six months ended December 29, 2012. The increase was primarily from the issuance of $500 million of the Company's senior unsecured notes on November 21, 2013, net of paid issuance costs and discount; at $494.5 million. This increase was offset by increased level of repurchases of common stock of $97.9 million.

27






Liquidity and Capital Resources

Debt Levels
On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 2.5% senior unsecured and unsubordinated notes due on November 15, 2018.

On March 18, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 3.375% senior unsecured and unsubordinated notes due on March 15, 2023.

Outstanding debt has increased to $1,004 million from $506 million as of December 28, 2013 and June 29, 2013, respectively, bearing weighted average interest rate of 3.0% and 3.5% for the six months ended December 28, 2013 and for the year ended June 29, 2013, respectively.


Available Borrowing Resources

As of December 28, 2013, the Company had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, warrants, rights and units under an automatic shelf registration statement filed with the SEC on August 12, 2013.

The Company also has access to a $250 million senior unsecured revolving credit facility with certain institutional lenders that expires on October 13, 2016. The facility fee is at a rate per annum that varies based on the Company's index debt rating and any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's index debt rating. As of December 28, 2013, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants.

As of December 28, 2013, our available funds consisted of $1,149.9 million in cash, cash equivalents and short-term investments.

The Company believes that its existing sources of liquidity and cash expected to be generated from future operations, together with existing and available borrowing resources if needed, will be sufficient to fund operations, capital expenditures, research and development efforts, dividend payments, common stock repurchases, debt repayments and acquisitions for at least the next twelve months.

Off-Balance-Sheet Arrangements

As of December 28, 2013, 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 29, 2013.

The impact of inflation and changing prices on the Company’s net revenues and on operating income during the six months ended December 28, 2013 and December 29, 2012 was not material.

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 Securities Exchange Act of 1934 (the "Exchange Act") as of December 28, 2013. Our management, including the CEO and the CFO, has concluded that the Company’s disclosure controls and procedures were effective as of December 28, 2013. The purpose of these controls

28



and procedures is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and that such information is accumulated and communicated to our management, including our CEO and our CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

On October 1, 2013 we completed the acquisition of Volterra. We are in the process of integrating Volterra into our systems and control environment as of December 28, 2013. There were no other changes in our internal control over financial reporting during the quarter ended December 28, 2013, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonable likely to materially affect our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Internal Controls

A system of internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with GAAP and no control system, no matter how well designed and operated, can provide absolute assurance. The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement errors and misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.



29



PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The information set forth above under Part I, Item 1, Note 11 “Commitment and Contingencies” to the Condensed Consolidated Financial Statements is incorporated herein by reference.

ITEM 1A: RISK FACTORS

A description of risks associated with our business, financial condition and results of our operations is set forth in Item 1A - Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 29, 2013, which is incorporated herein by reference.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes the activity related to stock repurchases for the three months ended December 28, 2013:

 
Issuer Repurchases of Equity Securit