Maxim Q2'15 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 27, 2014
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 28, 2015 there were 282,881,563 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 27, 2014 and June 28, 2014
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 27, 2014 and December 28, 2013
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 27, 2014 and December 28, 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 27, 2014 and December 28, 2013
 
 
 
 
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 27,
2014
 
June 28,
2014
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,305,870

 
$
1,322,472

Short-term investments
75,012

 
49,953

Total cash, cash equivalents and short-term investments
1,380,882

 
1,372,425

Accounts receivable, net
258,506

 
295,828

Inventories
306,564

 
289,292

Deferred tax assets
59,794

 
74,597

Other current assets
67,244

 
54,560

Total current assets
2,072,990

 
2,086,702

Property, plant and equipment, net
1,195,323

 
1,331,519

Intangible assets, net
306,111

 
360,994

Goodwill
511,838

 
596,637

Other assets
38,265

 
29,766

TOTAL ASSETS
$
4,124,527

 
$
4,405,618

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
82,526

 
$
102,076

Income taxes payable
20,102

 
20,065

Accrued salary and related expenses
150,405

 
186,732

Accrued expenses
54,103

 
64,028

Deferred revenue on shipments to distributors
27,103

 
25,734

Total current liabilities
334,239

 
398,635

Long-term debt
1,000,000

 
1,001,026

Income taxes payable
363,251

 
362,802

Deferred tax liabilities
120,308

 
159,879

Other liabilities
64,988

 
53,365

Total liabilities
1,882,786

 
1,975,707

 
 
 
 
Commitments and contingencies (Note 11)


 


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

 
23,290

Retained earnings
2,259,997

 
2,423,794

Accumulated other comprehensive loss
(18,539
)
 
(17,173
)
Total stockholders’ equity
2,241,741

 
2,429,911

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
4,124,527

 
$
4,405,618


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 27,
2014
 
December 28,
2013
 
December 27, 2014
 
December 28, 2013
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
566,809

 
$
620,274

 
$
1,147,084

 
$
1,205,515

Cost of goods sold
252,732

 
291,602

 
494,186

 
529,647

Gross margin
314,077

 
328,672

 
652,898

 
675,868

Operating expenses:
 
 
 
 
 
 
 
Research and development
135,945

 
142,971

 
276,307

 
272,873

Selling, general and administrative
79,778

 
83,471

 
159,767

 
160,901

Intangible asset amortization
4,155

 
4,968

 
8,482

 
8,404

Impairment of long-lived assets
50,745

 
5,197

 
60,971

 
5,197

Impairment of goodwill and intangible assets
93,010

 

 
93,010

 

Severance and restructuring expenses
13,635

 
10,227

 
15,020

 
15,774

Acquisition-related costs

 
4,137

 

 
7,071

Other operating expenses (income), net
885

 
7,307

 
2,459

 
6,645

Total operating expenses
378,153

 
258,278

 
616,016

 
476,865

Operating income (loss)
(64,076
)
 
70,394

 
36,882

 
199,003

Interest and other income (expense), net
(7,599
)
 
(5,833
)
 
(14,076
)
 
(9,296
)
Income (loss) before provision for income taxes
(71,675
)
 
64,561

 
22,806

 
189,707

Income tax provision (benefit)
359

 
20,208

 
(5,140
)
 
42,234

Net income (loss)
$
(72,034
)
 
$
44,353

 
$
27,946

 
$
147,473

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.25
)
 
$
0.16

 
$
0.10

 
$
0.52

Diluted
$
(0.25
)
 
$
0.15

 
$
0.10

 
$
0.51

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
282,992

 
282,664

 
283,539

 
283,659

Diluted
282,992

 
288,565

 
288,876

 
289,371

 
 
 
 
 
 
 
 
Dividends declared and paid per share
$
0.28

 
$
0.26

 
$
0.56

 
$
0.52


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 27,
2014
 
December 28,
2013
 
December 27, 2014
 
December 28, 2013
 
(in thousands)
Net income (loss)
$
(72,034
)
 
$
44,353

 
$
27,946

 
$
147,473

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains and losses on available-for-sale securities, net of tax benefit (expense) of $0, $9, $0 and $13, respectively
(83
)
 
(15
)
 
(108
)
 
(23
)
Change in net unrealized gains and losses on cash flow hedges, net of tax benefit (expense) of $(89), $143, $381 and $(147), respectively
472

 
(667
)
 
(1,103
)
 
557

Change in net unrealized gains and losses on post-retirement benefits, net of tax benefit (expense) of $(121), $(75), $(242) and $(150), respectively
238

 
283

 
477

 
567

Tax effect of the unrealized exchange gains and losses on long-term intercompany receivables
(92
)
 
1,939

 
(632
)
 
2,077

Other comprehensive income (loss), net
535

 
1,540

 
(1,366
)
 
3,178

Total comprehensive income (loss)
$
(71,499
)
 
$
45,893

 
$
26,580

 
$
150,651


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 27,
2014
 
December 28,
2013
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
27,946

 
$
147,473

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation
43,196

 
41,609

Depreciation and amortization
135,318

 
115,537

Deferred taxes
(24,642
)
 
13,824

Loss (gain) from sale of property, plant and equipment
2,088

 
301

Tax benefit (shortfall) related to stock-based compensation
1,381

 
(4,214
)
Impairment of long-lived assets
60,971

 
5,197

Impairment of goodwill and intangible assets
93,010

 

Excess tax benefit from stock-based compensation
(4,180
)
 
(4,156
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
37,322

 
20,606

Inventories
(17,136
)
 
11,729

Other current assets
(23,965
)
 
11,784

Accounts payable
(7,552
)
 
(12,414
)
Income taxes payable
546

 
30,395

Deferred revenue on shipments to distributors
1,369

 
(1,015
)
All other accrued liabilities
(35,820
)
 
(46,331
)
Net cash provided by (used in) operating activities
289,852

 
330,325

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(50,271
)
 
(82,462
)
Proceeds from sale of property, plant and equipment
24,679

 
3,048

Payments in connection with business acquisition, net of cash acquired

 
(453,506
)
Proceeds from maturity of available-for-sale securities

 
27,000

Purchases of available-for-sale securities
(25,142
)
 

Net cash provided by (used in) investing activities
(50,734
)
 
(505,920
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Excess tax benefit from stock-based compensation
4,180

 
4,156

Contingent consideration paid

 
(4,601
)
Repayment of notes payable
(437
)
 
(1,839
)
Issuance of debt

 
497,895

Debt issuance cost

 
(3,431
)
Net issuance of restricted stock units
(14,860
)
 
(14,072
)
Proceeds from stock options exercised
18,027

 
13,869

Issuance of ESPP shares under employee stock purchase program
18,653

 
19,096

Repurchase of common stock
(122,351
)
 
(213,487
)
Dividends paid
(158,932
)
 
(147,068
)
Net cash provided by (used in) financing activities
(255,720
)
 
150,518

Net increase (decrease) in cash and cash equivalents
(16,602
)
 
(25,077
)
Cash and cash equivalents:
 
 
 
Beginning of period
1,322,472

 
1,174,986

End of period
$
1,305,870

 
$
1,149,909

Supplemental disclosures of cash flow information:
 
 
 
Cash paid (refunded), net during the period for income taxes
$
21,283

 
$
(17,269
)
Cash paid for interest
$
14,712

 
$
8,316

Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
2,476

 
$
13,058


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 27, 2014 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 28, 2014. 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: “Acquisitions” 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 were 52-week fiscal years and fiscal year 2015 will also be a 52-week fiscal year.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

(i) New Accounting Updates Recently Adopted

In the first quarter of fiscal year 2015, the Company adopted Accounting Standards Update (“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, which requires certain unrecognized tax benefits to be presented as reductions to deferred tax assets instead of liabilities on the Condensed Consolidated Balance Sheets. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Balance Sheets.

(ii) Recent Accounting Updates Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 uses a five-step model to determine revenue recognition in contracts with customers. The Company is currently evaluating the potential impact of this standard on its financial statements. ASU 2014-09 is effective for the Company in our first quarter of fiscal year 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 redefines discontinued operations as disposals representing a strategic shift in operations and having a major effect on the organization’s operations and financial results. The Company is currently evaluating the potential impact of this standard on its financial statements. The Company will be required to adopt ASU 2014-08 on a prospective basis starting in fiscal year 2016.


7



NOTE 3: BALANCE SHEET COMPONENTS

Accounts receivable, net consists of:

 
December 27,
2014
 
June 28,
2014
Accounts Receivable:
(in thousands)
Accounts receivable
$
276,555

 
$
313,578

Returns and allowances
(18,049
)
 
(17,750
)
 
$
258,506

 
$
295,828


Inventories consist of:

 
December 27,
2014
 
June 28,
2014
Inventories:
(in thousands)
Raw materials
$
12,079

 
$
14,774

Work-in-process
203,389

 
188,198

Finished goods
91,096

 
86,320

 
$
306,564

 
$
289,292


Property, plant and equipment, net consists of:

 
December 27,
2014
 
June 28,
2014
Property, plant and equipment:
(in thousands) 
Land
$
47,543

 
$
62,093

Buildings and building improvements
372,712

 
378,477

Machinery and equipment
2,074,054

 
2,134,813

 
2,494,309

 
2,575,383

Less: accumulated depreciation and amortization
(1,298,986
)
 
(1,243,864
)
 
$
1,195,323

 
$
1,331,519


Accrued salary and related expenses consist of:

 
December 27,
2014
 
June 28,
2014
Accrued salary and related expenses:
(in thousands)
Accrued bonus
$
39,265

 
$
88,192

Accrued vacation
43,036

 
43,528

Accrued salaries
17,442

 
18,242

Accrued severance and post-employment benefits
15,180

 
12,192

Accrued fringe
11,945

 
6,895

Other
23,537

 
17,683

 
$
150,405

 
$
186,732







8



Accrued expenses

 
December 27,
2014
 
June 28,
2014
Accrued expenses:
(in thousands)
Accrued self-insurance
$
9,564

 
$
14,125

Accrued contract settlement
10,691

 
10,691

Accrued license
7,442

 
4,038

Accrued interest
6,660

 
6,660

Other
19,746

 
28,514

 
$
54,103

 
$
64,028


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 U.S. treasury bills and foreign currency forward contracts that are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, the Company has classified these investments as Level 2 in the fair value hierarchy.
 
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 assets and liabilities consists of contingent consideration liability related to certain prior years’ acquisitions, long-lived assets, goodwill and intangibles when it is recorded at fair value due to an impairment charge.

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


9



 
As of December 27, 2014
 
As of June 28, 2014
 
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)
$
942,012

 
$

 
$

 
$
942,012

 
$
971,868

 
$

 
$

 
$
971,868

U.S. treasury bills (2)

 
75,012

 

 
75,012

 

 
49,953

 

 
49,953

Foreign currency forward contracts (3)

 
244

 

 
244

 

 
316

 

 
316

Total Assets
$
942,012

 
$
75,256

 
$

 
$
1,017,268

 
$
971,868

 
$
50,269

 
$

 
$
1,022,137

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (4)
$

 
$
1,711

 
$

 
$
1,711

 
$

 
$
438

 
$

 
$
438

Contingent Consideration (4)

 

 

 

 

 

 
3,215

 
3,215

Total Liabilities
$

 
$
1,711

 
$

 
$
1,711

 
$

 
$
438

 
$
3,215

 
$
3,653


(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 27, 2014 and December 28, 2013:

Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
December 27,
2014
 
December 28,
2013
Contingent Consideration
 
(in thousands)
Beginning balance
 
$
3,215

 
$
8,577

Total gains or losses (realized and unrealized):
 
 
 
 
Included in earnings
 
384

 
1,493

Payments
 
(3,599
)
 
(4,601
)
Ending balance
 
$

 
$
5,469

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

 
$
1,493


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 in our Condensed Consolidated Statements of Income. 

During the six months ended December 27, 2014 and the year ended June 28, 2014, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.


10



There were no assets or liabilities measured at fair value on a non-recurring basis as of December 27, 2014 and June 28, 2014 other than impairments of Long-Lived assets, Goodwill and Intangible assets. For details, please refer to Note 14: “Goodwill & intangible assets” and Note 15: "Impairment of long-lived assets".

NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments
Fair values were as follows:
 
December 27, 2014
 
June 28, 2014
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury bills
$
75,020

 
$
22

 
$
(30
)
 
$
75,012

 
$
49,853

 
$
100

 
$

 
$
49,953

Total available-for-sale investments
$
75,020

 
$
22

 
$
(30
)
 
$
75,012

 
$
49,853

 
$
100

 
$

 
$
49,953


In the six months ended December 27, 2014 and the year ended June 28, 2014, the Company did not recognize any impairment charges on short-term investments.
Derivative instruments and hedging activities

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. The Company incurs expenditures denominated in non-U.S. currencies, including 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 Accounting Standards Codification (“ASC”)
No. 815-Derivatives and Hedging (“ASC 815”). As of December 27, 2014 and June 28, 2014, respectively, the notional amounts of the forward contracts the Company held to purchase U.S. Dollars in exchange for other international currencies were $62.7 million and $60.6 million, respectively, and the notional amounts of forward contracts the Company held to sell U.S. Dollars in exchange for other international currencies were $2.7 million and $0.8 million, respectively.

Derivatives not designated as hedging instruments

As of December 27, 2014 and June 28, 2014, respectively, the notional amounts of the forward contracts the Company held to purchase U.S. Dollars in exchange for other international currencies were $34.0 million and $31.4 million, respectively, and the notional amounts of forward contracts the Company held to sell U.S. Dollars in exchange for other international currencies were $35.1 million and $48.9 million, respectively. The fair values of our outstanding foreign currency forward contracts and amounts included in the condensed consolidated statement of income were not material for six months ended December 27, 2014 and year ended June 28, 2014.

Long-term debt
The following table summarizes the Company’s long-term debt:

11



 
December 27,
2014
 
June 28,
2014
 
(in thousands)
2.5% fixed rate notes due November 2018
$
500,000

 
$
500,000

3.375% fixed rate notes due March 2023
500,000

 
500,000

Notes denominated in Euro
 
 
 
Amortizing floating rate notes (EURIBOR plus 1.5%) due up to June 30, 2014

 
372

Term fixed rate notes (2.0%) due on September 30, 2015
1,026

 
1,026

Total
1,001,026

 
1,001,398

Less: Current portion
(1,026
)
 
(372
)
Total long-term debt
$
1,000,000

 
$
1,001,026


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 net proceeds of this offering were approximately $490.0 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.

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 in the Condensed Consolidated Statements of Income over the life of the notes. Interest expense associated with the notes was $7.4 million and $5.6 million during the three months ended December 27, 2014 and December 28, 2013, 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 $999 million as of December 27, 2014. The estimated fair value of the debt is based primarily on observable market inputs and is a Level 2 measurement.

Credit Facility

The Company has access to a $350 million senior unsecured revolving credit facility with certain institutional lenders that expires on June 27, 2019. The facility fee is at a rate per annum that varies based on the Company's index debt rating and any advances under the credit agreement will accrue interest at a base rate plus a margin based on the Company's index debt rating. The credit agreement requires the Company to comply with certain covenants, including a requirement that the Company maintain a ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) of not more than 3 to 1 and a minimum interest coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of December 27, 2014, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants.

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.

NOTE 6: STOCK-BASED COMPENSATION

The following tables show 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 27, 2014 and December 28, 2013, respectively:


12




Three Months Ended

December 27, 2014

December 28, 2013

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
$
362


$
2,076


$
550


$
2,988


$
438


$
2,395


$
533


$
3,366

Research and development
1,587


8,415


1,219


11,221


2,616


8,728


1,153


12,497

Selling, general and administrative
1,029


5,038


500


6,567


1,476


4,996


534


7,006

Pre-tax stock-based compensation expense
$
2,978


$
15,529


$
2,269


$
20,776


$
4,530


$
16,119


$
2,220


$
22,869

Less: income tax effect






3,365








3,749

Net stock-based compensation expense








$
17,411








$
19,120


 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
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
$
701

 
$
4,050

 
$
1,074

 
$
5,825

 
$
787

 
$
4,313

 
$
1,008

 
$
6,108

Research and development
3,734

 
17,247

 
2,562

 
23,543

 
4,452

 
15,168

 
2,475

 
22,095

Selling, general and administrative
2,458

 
10,262

 
1,108

 
13,828

 
2,740

 
9,523

 
1,143

 
13,406

Pre-tax stock-based compensation expense
$
6,893

 
$
31,559

 
$
4,744

 
$
43,196

 
$
7,979

 
$
29,004

 
$
4,626

 
$
41,609

Less: income tax effect
 
 
 
 
 
 
6,637

 
 
 
 
 
 
 
6,478

Net stock-based compensation expense
 
 
 
 
 
 
$
36,559

 
 
 
 
 
 
 
$
35,131


The expenses included in the Condensed Consolidated Statements of Income related to Restricted Stock Units include expenses related to Market Stock Units of $0.6 million and $0.4 million for the three months ended December 27, 2014 and December 28, 2013, respectively and $0.9 million and $0.7 million for the six months ended December 27, 2014 and December 28, 2013, respectively.

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.

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 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 using the following weighted-average assumptions:


13



 
Stock Options
 
Three Months Ended
 
Six Months Ended
 
December 27,
2014
 
December 28,
2013
 
December 27,
2014
 
December 28,
2013
Expected holding period (in years)
5.0

 
5.0

 
4.8

 
5.3

Risk-free interest rate
1.7
%
 
1.5
%
 
1.6
%
 
1.4
%
Expected stock price volatility
26.8
%
 
34.1
%
 
26.7
%
 
34.9
%
Dividend yield
3.5
%
 
3.7
%
 
3.2
%
 
3.2
%

The weighted-average fair value of stock options granted was $4.79 and $9.15 per share for the three months ended December 27, 2014 and December 28, 2013, respectively. The weighted-average fair value of stock options granted was $5.56 and $7.44 per share for the six months ended December 27, 2014 and December 28, 2013, respectively.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 27, 2014 and their activity for the six months ended December 27, 2014:

 
Number of
Shares 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (1)
Balance at June 28, 2014
16,163,644

 
$
25.74

 
 
 
 
Options Granted
63,584

 
32.22

 
 
 
 
Options Exercised
(971,283
)
 
17.11

 
 
 
 
Options Cancelled
(1,765,937
)
 
35.73

 
 
 
 
Balance at December 27, 2014
13,490,008

 
$
25.08

 
3.5
 
$
94,968,984

Exercisable, December 27, 2014
6,375,584

 
$
23.57

 
1.9
 
$
59,421,570

Vested and expected to vest, December 27, 2014
13,060,118

 
$
24.96

 
3.4
 
$
92,492,587

 
(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 26, 2014, 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 27, 2014.
As of December 27, 2014, there was $27.2 million of total unrecognized stock compensation cost related to 7.1 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 2.3 years.
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 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 $27.24 and $28.16 per share for the three months ended December 27, 2014 and December 28, 2013, respectively.

The weighted-average fair value of RSUs granted was $27.18 and $26.08 per share for the six months ended December 27, 2014 and December 28, 2013, respectively.

The following table summarizes outstanding and expected to vest RSUs as of December 27, 2014 and their activity during the six months ended December 27, 2014:


14



 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 28, 2014
7,880,997

 
 
 
 
Restricted stock units granted
2,598,878

 
 
 
 
Restricted stock units released
(1,344,153
)
 
 
 
 
Restricted stock units cancelled
(648,653
)
 
 
 
 
Balance at December 27, 2014
8,487,069

 
2.9
 
$
267,916,927

Outstanding and expected to vest, December 27, 2014
7,349,984

 
2.8
 
$
229,319,498

(1)
Aggregate intrinsic value for RSUs represents the closing price per share of the Company’s common stock on December 26, 2014, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 27, 2014.
The Company withheld shares totaling $6.8 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 for the three and six months ended December 27, 2014, 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 27, 2014, there was $159.5 million of unrecognized compensation expense related to 8.5 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

As of December 28, 2013, there was $153.1 million of unrecognized compensation expense related to 9.2 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Market Stock Units

The Company began granting Market Stock Units (“MSUs”) to senior members of management in September 2014 instead of stock options. MSUs are valued based on the relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index, (the “SPDR S&P”). The fair value of MSUs is estimated using a Monte Carlo simulation model on the date of grant. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis. Compensation expense is recognized based on the initial valuation and is not subsequently adjusted as a result of the Company’s performance relative to that of the SPDR S&P index.

The following table summarizes the number of MSUs outstanding and expected to vest as of December 27, 2014 and their activity during the six months ended December 27, 2014:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 28, 2014
120,000

(2 
) 
 
 
 
Market stock units granted
423,044

 
 
 
 
Market stock units released
(42,476
)
 
 
 
 
Market stock units cancelled
(20,532
)
 
 
 
 
Balance at December 27, 2014
480,036

 
3.5
 
$
14,977,123

Outstanding and expected to vest, December 27, 2014
480,036

 
3.5
 
$
14,977,123

(1)
Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on December 26, 2014, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of December 27, 2014.
(2)
Reflects shares previously granted to the Company’s Chief Executive Officer only.

15





As of December 27, 2014, there was $6.4 million of unrecognized compensation expense related to 0.5 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 3.5 years.

As of December 28, 2013, there was $1.6 million of unrecognized compensation expense related to 0.1 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 1.3 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 27,
2014
 
December 28,
2013
 
December 27,
2014
 
December 28,
2013
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
26.4
%
 
21.7
%
 
26.4
%
 
21.7
%
Dividend yield
3.5
%
 
3.7
%
 
3.5
%
 
3.7
%

As of December 27, 2014, there was $7.7 million of unrecognized compensation expense related to the ESPP.

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

NOTE 7: EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share are computed using the weighted average number of shares of common stock outstanding during the period. For purposes of computing basic earnings (loss) per share, the weighted average number of outstanding shares of common stock excludes unvested RSUs and MSUs. Diluted earnings (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and MSUs 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 (loss) per share:

16



 
Three Months Ended
 
Six Months Ended
 
December 27,
2014
 
December 28,
2013
 
December 27,
2014
 
December 28,
2013
 
(in thousands, except per share data)
Numerator for basic earnings (loss) per share and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
(72,034
)
 
$
44,353

 
$
27,946

 
$
147,473

 
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
282,992

 
282,664

 
283,539

 
283,659

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP, RSUs and MSUs

 
5,901

 
5,337

 
5,712

Denominator for diluted earnings (loss) per share
282,992

 
288,565

 
288,876

 
289,371

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.25
)
 
$
0.16

 
$
0.10

 
$
0.52

Diluted
$
(0.25
)
 
$
0.15

 
$
0.10

 
$
0.51


The Company had a net loss for the three months ended December 27, 2014, accordingly all incremental shares totaling 5.8 million shares were determined to be anti-dilutive. Approximately 10.5 million stock options were excluded from the calculation of diluted earnings per share for the three months ended December 28, 2013. Approximately 5.9 million and 9.8 million stock options were excluded from the calculation of diluted earnings per share for the six months ended December 27, 2014 and December 28, 2013, respectively. These options were excluded because they were determined to be anti-dilutive. 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;
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

17



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 27,
2014
 
December 28,
2013
 
December 27,
2014
 
December 28,
2013
 
 
(in thousands)
United States
 
$
70,336

 
$
83,039

 
$
144,931

 
$
172,138

China
 
242,303

 
271,311

 
482,320

 
505,209

Rest of Asia
 
155,388

 
178,947

 
320,820

 
352,329

Europe
 
80,992

 
73,401

 
164,957

 
146,027

Rest of World
 
17,790

 
13,576

 
34,056

 
29,812

 
 
$
566,809

 
$
620,274

 
$
1,147,084

 
$
1,205,515


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

 
December 27,
2014
 
June 28,
2014
 
(in thousands)
United States
$
871,596

 
$
1,035,699

Philippines
173,181

 
172,823

Rest of World
150,546

 
122,997

 
$
1,195,323

 
$
1,331,519


NOTE 9: COMPREHENSIVE INCOME
 
The changes in accumulated other comprehensive loss by component and related tax effects in the six months ended December 27, 2014 were as follows:


18



(in thousands)
Unrealized Gains and Losses on Intercompany Receivables
 
Unrealized Gains and Losses on Post-Retirement Benefits
 
Cumulative Translation Adjustment
 
Unrealized Gains and Losses on Cash Flow Hedges
 
Unrealized Gains and Losses on Available-For-Sale Securities
 
Total
June 28, 2014
$
(5,753
)
 
$
(10,373
)
 
$
(1,136
)
 
$
(11
)
 
$
100

 
$
(17,173
)
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(116
)
 

 

 
(1,917
)
 
(108
)
 
(2,141
)
Amounts reclassified out of accumulated other comprehensive loss (income)

 
719

 

 
433

 

 
1,152

Tax effects
(516
)
 
(242
)
 

 
381

 

 
(377
)
Other comprehensive income (loss)
(632
)
 
477

 

 
(1,103
)
 
(108
)
 
(1,366
)
December 27, 2014
$
(6,385
)
 
$
(9,896
)
 
$
(1,136
)
 
$
(1,114
)
 
$
(8
)
 
$
(18,539
)

NOTE 10: INCOME TAXES

In the three and six months ended December 27, 2014, the Company recorded an income tax provision (benefit) of $0.4 million and $(5.1) million, respectively, compared to $20.2 million and $42.2 million in the three and six months ended December 28, 2013, respectively. The Company’s effective tax rate for the three and six months ended December 27, 2014 was 0.5% and (22.5)%, respectively, compared to 31.3% and 22.3% for the three and six months ended December 28, 2013, respectively.

The Company's federal statutory tax rate is 35%. The Company's effective tax rate for the three months ended December 27, 2014 was higher than the statutory rate primarily because of a $84.1 million discrete goodwill impairment charge that generated no tax benefit and stock-based compensation for which no tax benefit is expected, partially offset by earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, taxed at lower tax rates and a $2.9 million discrete benefit for fiscal year 2014 research tax credits that were generated by the retroactive extension of the federal research tax credit to January 1, 2014 by legislation that was signed into law on December 19, 2014.

The Company’s effective tax rate for the six months ended December 27, 2014 was lower than the statutory tax rate primarily because earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, were taxed at lower rates, a $2.9 million discrete benefit for fiscal year 2014 research tax credits that were generated by the retroactive extension of the federal research tax credit to January 1, 2014 by legislation that was signed into law on December 19, 2014 and a $24.8 million discrete benefit for the favorable settlement of a Singapore tax issue in the first quarter of fiscal year 2015, partially offset by an $84.1 million discrete goodwill impairment charge that generated no tax benefit and stock-based compensation for which no tax benefit is expected.

The Company’s effective tax rates for the three and six months ended December 28, 2013 were lower than the statutory tax rate primarily because earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, were taxed at lower rates, partially offset by stock-based compensation for which no tax benefit is expected.

The Company’s federal corporate income tax returns are audited on a recurring basis by the IRS. 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.

19




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.

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 addition, the Company may consider its relationship with the customer when reviewing product warranty claims. In limited circumstances and for strategic customers in certain unique industries and applications, our product warranty may extend for up to five years, and may also include financial responsibility, such as the payment of monetary compensation to reimburse a customer for its financial losses above and beyond repairing or replacing the product or crediting the customer’s account should the product not meet the Company’s specifications and losses and /or damages results from the defective product.

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 captions “Accrued Expenses” and “Other liabilities” in the accompanying Condensed Consolidated Balance Sheets.

The changes in the Company's aggregate product warranty liabilities for the six months ended December 27, 2014 and December 28, 2013 were as follows:

 
December 27,
2014
 
December 28,
2013
Product warranty liability
(in thousands)
Beginning balance
$
21,296

 
$
3,075

Accruals assumed from acquisition

 
13,911

Accruals for warranties
1,168

 
18,274

Payments
(7,113
)
 
(8,759
)
Changes in estimate
1,380

 
(67
)
Ending balance
$
16,731

 
$
26,434

 
 
 
 
Less: Current portion
8,131

 
17,834

Non-current portion
$
8,600

 
$
8,600


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 27, 2014, the Company repurchased approximately 4.1 million shares of its common stock for $122.4 million. As of December 27, 2014, the Company had remaining authorization of $639.5 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.


20



NOTE 13: ACQUISITIONS

Acquisitions completed in fiscal year 2014

The Company completed two acquisitions during fiscal year 2014.

VOLTERRA SEMICONDUCTOR CORPORATION

On October 1, 2013, the Company completed its acquisition of Volterra Semiconductor Corporation ("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. Acquisition-related costs for the twelve months ended June 28, 2014were $7.0 million.

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 purchase price
 
$
615,006


The 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.

 
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


IPR&D assets relate to future technology, 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.

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


21



 
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.

OTHER ACQUISITION

The Company acquired another company during the fiscal year ended June 28, 2014, which develops low power high performance analog circuits. The total cash consideration paid to acquire this company was approximately $6.1 million for which the purchase price was largely attributable to the developed intellectual property. Goodwill associated with this acquisition was $0.5 million. Acquisition related costs were not material for this transaction.
 
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 2015 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value.
During the quarter ended December 27, 2014, goodwill for the Sensing Solutions reporting unit was determined to be impaired and the Company recorded a charge of $84.1 million. The Sensing Solutions reporting unit develops integrated circuits which are primarily sold in the consumer and automotive end customer markets. The impairment was the result of the Company's decision within the quarter ended December 27, 2014 to exit certain market offerings that have competitive dynamics which are no longer consistent with the Company’s business objectives.

The Company determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the Sensing Solutions reporting unit. The reporting unit's carrying value exceeded its estimated fair value, accordingly a second phase of the goodwill impairment test (“Step 2”) was performed. Under Step 2, the fair value of all Sensing Solution’s assets and liabilities were estimated, including tangible assets and intangible assets (including existing and in-process technology) for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of the goodwill was then compared to the carrying value of the goodwill to determine the amount of the impairment.

The Company estimated the fair value of the Sensing Solutions reporting unit using a weighting of fair values derived equally from the income and market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit.

Prior to completing the goodwill impairment test, the Company tested the recoverability of the Sensing Solutions long-lived assets (other than goodwill) and concluded that existing Property, plant and equipment, net was impaired by $45.2 million and IPR&D was impaired by $8.9 million.
No other indicators or instances of impairment were identified in the quarter ended December 27, 2014.


22



Activity and goodwill balances for the six months ended December 27, 2014 were as follows:

 
Goodwill
 
(in thousands)
Balance at June 28, 2014
$
596,637

Adjustments
(689
)
Impairment
(84,110
)
Balance at December 27, 2014
$
511,838


Intangible Assets

The useful lives of amortizable intangible assets are as follows:
 
Asset
 
Life
Intellectual property
 
1-10 years
Customer relationships
 
4-10 years
Trade name
 
3-4 years
Backlog
 
3-6 months
Patents
 
5 years




Intangible assets consisted of the following:
 
 
December 27,
2014
 
June 28,
2014
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
(in thousands)
Intellectual property
$
435,962

 
$
239,196

 
$
196,766

 
$
435,962

 
$
201,581

 
$
234,381

Customer relationships
120,230

 
76,355

 
43,875

 
120,230

 
69,064

 
51,166

Tradename
8,500

 
4,086

 
4,414

 
8,500

 
3,269

 
5,231

Backlog

 

 

 
1,000

 
1,000

 

Patent
2,500

 
646

 
1,854

 
2,500

 
386

 
2,114

Total amortizable purchased intangible assets
567,192

 
320,283

 
246,909

 
568,192

 
275,300

 
292,892

IPR&D
59,202

 

 
59,202

 
68,102

 

 
68,102

Total purchased intangible assets
$
626,394

 
$
320,283

 
$
306,111

 
$
636,294

 
$
275,300

 
$
360,994


The following table presents the amortization expense of intangible assets and its presentation in the Condensed Consolidated Statements of Income:


23



 
Three Months Ended
 
Six Months Ended
 
December 27,
2014
 
December 28,
2013
 
December 27,
2014
 
December 28,
2013
 
(in thousands)
Cost of goods sold
$
18,750

 
$
19,098

 
$
37,500

 
$
27,190

Intangible asset amortization
4,155

 
4,968

 
8,482

 
8,404

Total intangible asset amortization expenses
$
22,905

 
$
24,066

 
$
45,982

 
$
35,594


The following table represents the estimated future amortization expense of intangible assets as of December 27, 2014:
 
Fiscal Year
 
Amount
 
 
(in thousands)
Remaining six months of 2015
 
$
44,460

2016
 
74,454

2017
 
61,782

2018
 
41,927

2019
 
13,278

2020
 
3,358

Thereafter
 
7,650

Total intangible assets
 
$
246,909


NOTE 15: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2015:

During the second quarter of fiscal year 2015, the Company recorded $50.7 million in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income.

The impairment was primarily related to the write down of equipment relating to the Sensing Solutions reporting unit of $45.2 million. For background, please refer to Note 14: “Goodwill & intangible assets”. The Company reached its conclusion regarding the asset impairment after concluding that the undiscounted cash flows fell below the net book value of the net assets of the Sensing Solutions reporting unit (the asset group). As a result, the Company reduced the assets to their fair value after conducting an evaluation of each asset’s alternative use, the condition of the asset and the current market pricing and demand.

During the first quarter of fiscal year 2015, the Company recorded $10.2 million in impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income.

This impairment was primarily related to used fabrication tools identified by the Company as obsolete in the three months ended September 27, 2014 due to the transition to newer technologies. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of alternative use, the condition of the assets and current market demand.

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 and no longer needed. These assets included primarily test manufacturing equipment which was recorded in Property, plant, and equipment, net in the Condensed Consolidated Balance Sheet as of June 28, 2014. 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.


24



NOTE 16: RESTRUCTURING ACTIVITIES

Fiscal year 2015:

Summary of Restructuring Plans

The Company has accruals for severance and restructuring payments as well as expected losses relating to lease terminations.

The Company's restructuring activities in the six months ended December 27, 2014 were as follows:
 
Balance, June 28, 2014
 
Three Months Ended December 27, 2014 Charges
 
Six Months Ended
December 27, 2014
 
Balance, December 27, 2014
 
As of
December 27, 2014
 
 
Charges
 
Cash Payments
 
Change in Estimates
 
 
Total Costs Incurred to Date
 
Total Expected Costs to be Incurred
San Jose Fab Shutdown
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance
$

 
$
6,042

 
$
6,042

 
$

 
$

 
$
6,042

 
$
6,042

 
$
1,721

Accelerated depreciation

 
8,895

 
8,895

 

 

 

 
8,895

 
71,119

Total San Jose Fab Shutdown

 
14,937

 
14,937

 

 

 
6,042

 
14,937

 
72,840

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Plans
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Severance
5,782

 
7,593

 
8,574

 
(8,263
)
 
404

 
6,497

 
14,760

 

Lease termination losses
9,132

 

 
352

 
(2,019
)
 

 
7,465

 
9,483

 

Total other plans
14,914

 
7,593

 
8,926

 
(10,282
)
 
404

 
13,962

 
24,243

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total restructuring plans
$
14,914

 
$
22,530

 
$
23,863

 
$
(10,282
)
 
$
404

 
$
20,004

 
$
39,180

 
$
72,840

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In Balance Sheets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued salary and related expenses
$
5,782

 
 
 
 
 
 
 
 
 
$
8,628

 
 
 
 
Accrued expenses
$
4,276

 
 
 
 
 
 
 
 
 
$
6,520

 
 
 
 
Other liabilities
$
4,856

 
 
 
 
 
 
 
 
 
$
4,856

 
 
 
 

San Jose Fab Shutdown

On October 23, 2014, the Company initiated a plan to shut down its San Jose wafer fabrication facility. The Company reached the decision that it was not economically feasible to maintain this facility, which is used primarily for fab process development and low volume manufacturing, as the Company intends to utilize other resources to complete such activities in the future. This plan includes cash charges related to employee severance and non-cash charges related to accelerated depreciation.

During the three and six months ended December 27, 2014, respectively, the Company recorded accelerated depreciation charges of $8.9 million in "Cost of goods sold" and $6.0 million in "Severance and restructuring expenses" in the Condensed Consolidated Statement of Income. The expected total cost of the plan is approximately $87.8 million and it is expected to be complete by the end of fiscal year 2016.

Other Plans

During the six months ended December 27, 2014, the Company recorded $8.6 million in "Severance and restructuring expenses" in the Condensed Consolidated Statement of Income related to various restructuring plans designed to reduce costs. These charges were associated with the reorganization of certain business units and functions. Multiple job classifications and locations were impacted by these activities.

The Company also accrued for expected losses relating to lease terminations as a result of plans to consolidate office space. The need for consolidation resulted from acquisition and relocation activities.

Fiscal year 2014:

25




Volterra Restructuring Plan

In connection with the acquisition 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.

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 Automotive, Communications and Data Center, Computing, Consumer and Industrial markets.

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

On October 23, 2014, the Company initiated a plan to shut down its San Jose wafer fabrication facility. In connection with this plan, the Company expects to incur additional charges for accelerated depreciation of approximately $12 million per quarter through the end of fiscal year 2016 which will be included in "Cost of goods sold" in the Condensed Consolidated Statement of Income.

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

26



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 27, 2014 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 28, 2014.


27



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 27,
2014
 
December 28,
2013
 
December 27, 2014
 
December 28, 2013
 
 
 
 
 
 
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
44.6
 %
 
47.0
 %
 
43.1
 %
 
43.9
 %
Gross margin
55.4
 %
 
53.0
 %
 
56.9
 %
 
56.1
 %