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 March 26, 2016
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 April 15, 2016 there were 284,310,223 shares of Common Stock, par value $.001 per share, of the registrant outstanding.

 
 
 
 
 





MAXIM INTEGRATED PRODUCTS, INC.
INDEX

 
PART I - FINANCIAL INFORMATION
 
Page
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets as of March 26, 2016 and June 27, 2015
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended March 26, 2016 and March 28, 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 26, 2016 and March 28, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 26, 2016 and March 28, 2015
 
 
 
 
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)

 
March 26,
2016
 
June 27,
2015
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,710,340

 
$
1,550,965

Short-term investments
150,076

 
75,154

Total cash, cash equivalents and short-term investments
1,860,416

 
1,626,119

Accounts receivable, net
278,502

 
278,844

Inventories
234,603

 
288,474

Deferred tax assets

 
77,306

Other current assets
88,389

 
49,838

Total current assets
2,461,910

 
2,320,581

Property, plant and equipment, net
748,781

 
1,090,739

Intangible assets, net
188,510

 
261,652

Goodwill
490,648

 
511,647

Other assets
77,886

 
35,557

Assets held for sale
13,733

 
8,208

TOTAL ASSETS
$
3,981,468

 
$
4,228,384

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
82,696

 
$
88,322

Income taxes payable
30,907

 
34,779

Accrued salary and related expenses
151,411

 
181,360

Accrued expenses
42,562

 
48,389

Deferred revenue on shipments to distributors
34,457

 
30,327

Total current liabilities
342,033

 
383,177

Long-term debt
1,000,000

 
1,000,000

Income taxes payable
451,099

 
410,378

Deferred tax liabilities
643

 
90,588

Other liabilities
48,930

 
54,221

Total liabilities
1,842,705

 
1,938,364

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
280

 
28,142

Retained earnings
2,154,767

 
2,279,112

Accumulated other comprehensive loss
(16,284
)
 
(17,234
)
Total stockholders’ equity
2,138,763

 
2,290,020

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
3,981,468

 
$
4,228,384


See accompanying Notes to Condensed Consolidated Financial Statements.

3



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


 
Three Months Ended
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
555,252

 
$
577,263

 
$
1,628,593

 
$
1,724,347

Cost of goods sold
236,411

 
261,995

 
731,232

 
756,181

Gross margin
318,841

 
315,268

 
897,361

 
968,166

Operating expenses:
 
 
 
 
 
 
 
Research and development
119,178

 
123,913

 
353,670

 
400,220

Selling, general and administrative
71,778

 
75,766

 
217,416

 
235,533

Intangible asset amortization
2,538

 
3,977

 
9,667

 
12,459

Impairment of long-lived assets
506

 
5,522

 
160,153

 
66,493

Impairment of goodwill and intangible assets

 

 

 
93,010

Severance and restructuring expenses
2,552

 
2,824

 
20,330

 
17,844

Other operating expenses (income), net
(55,419
)
 
(2,184
)
 
(55,351
)
 
275

Total operating expenses
141,133

 
209,818

 
705,885

 
825,834

Operating income (loss)
177,708

 
105,450

 
191,476

 
142,332

Interest and other income (expense), net
(6,373
)
 
(5,534
)
 
(22,368
)
 
(19,610
)
Income (loss) before provision for income taxes
171,335

 
99,916

 
169,108

 
122,722

Income tax provision (benefit)
31,525

 
20,483

 
33,972

 
15,343

Net income (loss)
$
139,810

 
$
79,433

 
$
135,136

 
$
107,379

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.28

 
$
0.47

 
$
0.38

Diluted
$
0.48

 
$
0.28

 
$
0.47

 
$
0.37

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
285,854

 
283,418

 
285,323

 
283,499

Diluted
289,783

 
288,840

 
289,648

 
288,625

 
 
 
 
 
 
 
 
Dividends declared and paid per share
$
0.30

 
$
0.28

 
$
0.90

 
$
0.84


See accompanying Notes to Condensed Consolidated Financial Statements.



4



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

 
Three Months Ended
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
 
(in thousands)
Net income (loss)
$
139,810

 
$
79,433

 
$
135,136

 
$
107,379

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
265

 
129

 
(18
)
 
21

Change in net unrealized gains and losses on cash flow hedges, net of tax benefit (expense) of $(246), $2, $(76) and $383, respectively
808

 
(454
)
 
452

 
(1,557
)
Change in net unrealized gains and losses on post-retirement benefits, net of tax benefit (expense) of $(81), $(121), $(242) and $(363), respectively
172

 
238

 
516

 
715

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

 
105

 

 
(527
)
Other comprehensive income (loss), net
1,245

 
18

 
950

 
(1,348
)
Total comprehensive income (loss)
$
141,055

 
$
79,451

 
$
136,086

 
$
106,031


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
135,136

 
$
107,379

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation
53,257

 
61,782

Depreciation and amortization
198,223

 
206,757

Deferred taxes
(34,628
)
 
(40,300
)
Loss (gain) from sale of property, plant and equipment
(2,765
)
 
1,647

Loss/ (gain) on sale of business
(58,944
)
 

Tax benefit related to stock-based compensation
3,718

 
9,016

Impairment of long-lived assets
160,153

 
66,493

Impairment of goodwill and intangible assets

 
93,010

Excess tax benefit from stock-based compensation
(7,660
)
 
(10,177
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
342

 
17,401

Inventories
36,429

 
(7,942
)
Other current assets
(5,069
)
 
(24,121
)
Accounts payable
(8,752
)
 
(7,075
)
Income taxes payable
36,849

 
23,133

Deferred revenue on shipments to distributors
4,130

 
4,816

All other accrued liabilities
(42,605
)
 
(29,903
)
Net cash provided by (used in) operating activities
467,814

 
471,916

Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(46,881
)
 
(60,456
)
Proceeds from sale of property, plant and equipment
50,451

 
26,294

Proceeds from sale of business
105,000

 

Purchases of available-for-sale securities
(74,948
)
 
(25,142
)
Purchases of privately-held companies' securities
(8,929
)
 
(200
)
Other investing activities
2,380

 
500

Net cash provided by (used in) investing activities
27,073

 
(59,004
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from stock-based compensation
7,660

 
10,177

Repayment of notes payable

 
(437
)
Net issuance of restricted stock units
(21,397
)
 
(23,229
)
Proceeds from stock options exercised
67,336

 
49,125

Issuance of common stock under employee stock purchase program
14,350

 
18,653

Repurchase of common stock
(146,648
)
 
(159,125
)
Dividends paid
(256,813
)
 
(238,351
)
Net cash provided by (used in) financing activities
(335,512
)
 
(343,187
)
Net increase (decrease) in cash and cash equivalents
159,375

 
69,725

Cash and cash equivalents:
 
 
 
Beginning of period
1,550,965

 
1,322,472

End of period
$
1,710,340

 
$
1,392,197

See accompanying Notes to Condensed Consolidated Financial Statements.

6



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)

 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
(in thousands)
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid net during the period for income taxes
$
26,927

 
$
38,645

Cash paid for interest
$
23,131

 
$
23,150

 
 
 
 
Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
8,047

 
$
4,834

Common stock valued at $40.0 million received as consideration in sale of inventory, property, plant and equipment for the Company's wafer manufacturing facility in San Antonio, Texas
$
40,000

 



See accompanying Notes to Condensed Consolidated Financial Statements.

7



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 nine months ended March 26, 2016 are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 27, 2015.

The Company has a 52-to-53-week fiscal year that ends on the last Saturday in June. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2015 was a 52-week fiscal year and fiscal year 2016 will also be a 52-week fiscal year.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

(i) New Accounting Updates Recently Adopted

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 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 early adopted this accounting standard update in the fourth quarter of fiscal year 2015.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The Company early adopted this accounting standard update, on a prospective basis, at the beginning of the second quarter of fiscal year 2016. All deferred tax assets and liabilities as of March 26, 2016, have been classified as noncurrent in the accompanying Condensed Consolidated Balance Sheets and the notes thereto. The adoption at the beginning of the second quarter of fiscal year 2016 resulted in a $50.6 million decrease in current deferred tax assets, a $40.7 million increase in other assets and a $9.9 million decrease to non-current deferred tax liabilities. No prior periods were retrospectively adjusted.

(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 No. 2014-09 uses a five-step model to determine revenue recognition in contracts with customers. Further, in March 2015, the FASB issued ASU 2016-09 which clarifies the implementation guidance on principal versus agent considerations. The Company is currently evaluating the potential impact of this standard on its financial statements. ASU No. 2014-09 is effective for the Company in the first quarter of fiscal year 2019 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 No. 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU No. 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU No. 2014-09. Early adoption in the first quarter of fiscal year 2018 is permitted.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest. ASU No. 2015-03 changes the presentation of debt issuance costs in financial statements. Under the new guidance, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This guidance is effective beginning in the first quarter of fiscal year 2017 and early adoption is permitted in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes that interim period. The company does not believe the guidance will result in a material impact to its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.  ASU No. 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable

8



costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company in the first quarter of fiscal year 2017, with early adoption permitted. The Company does not believe the implementation of this standard will result in a material impact to its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities.  This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019.  The Company is evaluating the effects of the adoption of this ASU to its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the potential impact of this standard on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective beginning in the first quarter of fiscal year 2018 and early adoption is permitted in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the potential impact of this standard on its financial statements.

NOTE 3: BALANCE SHEET COMPONENTS

Accounts receivable, net consists of:

 
March 26,
2016
 
June 27,
2015
Accounts Receivable:
(in thousands)
Accounts receivable
$
295,758

 
$
297,130

Returns and allowances
(17,256
)
 
(18,286
)
 
$
278,502

 
$
278,844


Inventories consist of:

 
March 26,
2016
 
June 27,
2015
Inventories:
(in thousands)
Raw materials
$
9,610

 
$
12,932

Work-in-process
156,056

 
199,716

Finished goods
68,937

 
75,826

 
$
234,603

 
$
288,474


Property, plant and equipment, net consists of:


9



 
March 26,
2016
 
June 27,
2015
Property, plant and equipment:
(in thousands) 
Land
$
24,631

 
$
45,040

Buildings and building improvements
276,279

 
338,394

Machinery and equipment
1,401,115

 
1,970,819

 
1,702,025

 
2,354,253

Less: accumulated depreciation
(953,244
)
 
(1,263,514
)
 
$
748,781

 
$
1,090,739


Other assets consist of:

 
March 26,
2016
 
June 27,
2015
Other assets:
(in thousands) 
Licenses
$
8,337

 
$
8,665

Deferred taxes
23,122

 
1,447

Investments in privately-held companies
11,807

 
2,715

Advance on product purchases
10,000

 

Other
24,620

 
22,730

 
$
77,886

 
$
35,557


Assets held for sale consist of:

 
March 26,
2016
 
June 27,
2015
Assets held for sale:
(in thousands) 
Property, plant and equipment, less accumulated depreciation
$
13,167

 
$
8,208

Goodwill
566

 

 
$
13,733

 
$
8,208


As of March 26, 2016, assets held for sale assets held for sale primarily consisted of equipment and goodwill related to a product line to be divested classified as held for sale during the second quarter of fiscal 2016.

As of June 27, 2015, assets held for sale consisted of land and buildings related to the Company's manufacturing facility in Batangas, the Philippines. This facility was sold in the second quarter of fiscal 2016.

Accrued salary and related expenses consist of:

 
March 26,
2016
 
June 27,
2015
Accrued salary and related expenses:
(in thousands)
Accrued vacation
$
29,524

 
$
36,906

Accrued bonus
65,725

 
86,506

Accrued severance and post-employment benefits
14,676

 
25,136

Accrued salaries
8,787

 
16,572

Accrued fringe
7,846

 
6,007

Other
24,853

 
10,233

 
$
151,411

 
$
181,360


Accrued expenses consist of:

10




 
March 26,
2016
 
June 27,
2015
Accrued expenses:
(in thousands)
Accrued self-insurance
$
9,850

 
$
10,882

Accrued contract settlement
10,691

 
10,691

Accrued interest
5,566

 
6,660

Other
16,455

 
20,156

 
$
42,562

 
$
48,389


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. Also within Level 2 assets and liabilities are shares of common stock received as consideration for the sale of the Company's wafer manufacturing facility in San Antonio, Texas which have been valued based on quoted prices in the active market for identical assets, adjusted for estimated timing of sale.
 
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 did not hold any Level 3 assets or liabilities as of March 26, 2016 and June 27, 2015.

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

 
As of March 26, 2016
 
As of June 27, 2015
 
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)
$
1,273,454

 
$

 
$

 
$
1,273,454

 
$
1,156,239

 
$

 
$

 
$
1,156,239

U.S. treasury bills (2)

 
150,076

 

 
150,076

 

 
75,154

 

 
75,154

Foreign currency forward contracts (3)

 
929

 

 
929

 

 
679

 

 
679

Common stock (4)

 
40,000

 

 
40,000

 

 

 

 

Total Assets
$
1,273,454

 
$
191,005

 
$

 
$
1,464,459

 
$
1,156,239

 
$
75,833

 
$

 
$
1,232,072

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (5)
$

 
$
312

 
$

 
$
312

 
$

 
$
613

 
$

 
$
613

Total Liabilities
$

 
$
312

 
$

 
$
312

 
$

 
$
613

 
$

 
$
613


11




(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 Other assets in the accompanying Condensed Consolidated Balance Sheets.
(5) 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 nine months ended March 26, 2016 and March 28, 2015:

Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
 
March 26,
2016
 
March 28,
2015
Contingent Consideration
 
(in thousands)
Beginning balance
 
$

 
$
3,215

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

 
384

Payments
 

 
(3,599
)
Ending balance
 
$

 
$

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

 
$


During the nine months ended March 26, 2016 and March 28, 2015, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

There were no assets or liabilities measured at fair value on a non-recurring basis as of March 26, 2016 and June 27, 2015 other than impairments of Long-Lived assets. For details, please refer to Note 14: “Impairment of long-lived assets”.

NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments
Fair values were as follows:
 
March 26, 2016
 
June 27, 2015
 
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
$
149,960

 
$
116

 
$

 
$
150,076

 
$
75,022

 
$
132

 
$

 
$
75,154

Total available-for-sale investments
$
149,960

 
$
116

 
$

 
$
150,076

 
$
75,022

 
$
132

 
$

 
$
75,154


In the nine months ended March 26, 2016 and the year ended June 27, 2015, the Company did not recognize any impairment charges on short-term investments. The U.S. Treasury bills have maturity dates between May 15, 2016 and December 15, 2017.
Derivative instruments and hedging activities

The Company incurs expenditures denominated in non-U.S. currencies, primarily the Philippine Peso and the Thai Baht associated with the Company's manufacturing activities in the Philippines and Thailand, respectively, and European Union Euro, South Korean Won, and Japanese Yen expenditures for sales offices and research and development activities undertaken outside of the U.S.

12



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 March 26, 2016 and June 27, 2015, the notional amounts of the forward contracts the Company held to purchase international currencies were $44.8 million and $54.2 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $2.6 million and $3.7 million, respectively.

Derivatives not designated as hedging instruments

As of March 26, 2016 and June 27, 2015, the notional amounts of the forward contracts the Company held to purchase international currencies were $22.9 million and $31.1 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $26.9 million and $28.2 million, respectively. The fair values of our outstanding foreign currency forward contracts and gain (loss) included in the Condensed Consolidated Statement of Income were not material for the nine months ended March 26, 2016 and the year ended June 27, 2015.

Long-term debt
The following table summarizes the Company’s long-term debt:
 
March 26,
2016
 
June 27,
2015
 
(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
 
 
 
Term fixed rate notes (2.0%) due on September 30, 2015

 
1,024

Total
1,000,000

 
1,001,024

Less: Current portion (included in “Accrued expenses”)

 
(1,024
)
Total long-term debt
$
1,000,000

 
$
1,000,000


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.

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.

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. The interest expense is recorded in Interest and other income (expense), net in the Condensed Consolidated Statements of Income. Amortized discount and expenses, as well as interest expense associated with the notes was $8.2 million and $8.1 million during the three months ended March 26, 2016 and March 28, 2015, respectively.

The estimated fair value of the Company’s debt was approximately $1,012 million as of March 26, 2016. The estimated fair value of the debt is based primarily on observable market inputs and is a Level 2 measurement.

Credit Facility

13




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 March 26, 2016, 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

At March 26, 2016, the Company had one stock incentive plan, the Company's Amended and Restated 1996 Stock Incentive Plan (the “1996 Plan”) and one employee stock purchase plan, the 2008 Employee Stock Purchase Plan (the “2008 ESP Plan”). The 1996 Plan was adopted by the Board of Directors to provide the grant of stock options, restricted stock units (“RSUs”), and restricted stock and performance shares, including market stock units (“MSUs”) to employees, directors, and consultants.

Pursuant to the 1996 Plan, the exercise price for all stock options is determined to be the fair market value of the underlying shares on the date of grant. Options typically vest ratably over a four-year period measured from the date of grant. Stock options expire no later than ten years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

RSUs granted to employees typically vest ratably over a four-year period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period.

MSUs granted to employees have a four-year measurement period and are converted into shares of the Company's common stock at the end of the measurement period and upon vesting, subject to the employee's continued service to the Company over that period. The number of shares that are released at the end of the performance period can range from zero to a maximum cap of two hundred percent (200%) of target depending on the Company's performance in comparison to the Semiconductor Exchange Traded Fund index, (the “XSD”). The performance metrics of this program are based on relative performance of the Company’s stock price as compared to the XSD during the measurement period.

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 nine months ended March 26, 2016 and March 28, 2015, respectively:

Three Months Ended

March 26, 2016

March 28, 2015

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
$
120


$
1,182


$
629


$
1,931


$
351


$
2,136


$
588


$
3,075

Research and development
895


7,587


1,522


10,004


637


7,208


1,620


9,465

Selling, general and administrative
795


4,507


638


5,940


764


4,628


655


6,047

Pre-tax stock-based compensation expense
$
1,810


$
13,276


$
2,789


$
17,875


$
1,752


$
13,972


$
2,863


$
18,587

Less: income tax effect






1,989








3,249

Net stock-based compensation expense








$
15,886








$
15,338



14



 
Nine Months Ended
 
March 26, 2016
 
March 28, 2015
 
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
$
735

 
$
5,140

 
$
1,808

 
$
7,683

 
$
1,051

 
$
6,186

 
$
1,662

 
$
8,899

Research and development
2,608

 
20,671

 
3,904

 
27,183

 
4,372

 
24,455

 
4,182

 
33,009

Selling, general and administrative
2,415

 
14,271

 
1,705

 
18,391

 
3,223

 
14,889

 
1,762

 
19,874

Pre-tax stock-based compensation expense
$
5,758

 
$
40,082

 
$
7,417

 
$
53,257

 
$
8,646

 
$
45,530

 
$
7,606

 
$
61,782

Less: income tax effect
 
 
 
 
 
 
8,046

 
 
 
 
 
 
 
9,886

Net stock-based compensation expense
 
 
 
 
 
 
$
45,211

 
 
 
 
 
 
 
$
51,896



The expenses included in the Condensed Consolidated Statements of Income related to RSUs include expenses related to MSUs of $0.7 million and $0.5 million for the three months ended March 26, 2016 and March 28, 2015, respectively and $2.0 million and $1.4 million for the nine months ended March 26, 2016 and March 28, 2015, respectively.

Stock Options

The fair value of options granted to employees under the 1996 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:

 
Stock Options
 
Nine Months Ended
 
March 28,
2015
Expected holding period (in years)
4.8

Risk-free interest rate
1.6
%
Expected stock price volatility
26.7
%
Dividend yield
3.2
%

There were no stock options granted in the three and nine months ended March 26, 2016 and three months ended March 28, 2015. The weighted-average fair value of stock options granted was $5.56 per share for the nine months ended March 28, 2015.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of March 26, 2016 and their activity for the nine months ended March 26, 2016:


15



 
Number of
Shares 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (1)
Balance at June 27, 2015
10,173,016

 
$
25.83

 
 
 
 
Options Granted

 

 
 
 
 
Options Exercised
(2,664,507
)
 
25.59

 
 
 
 
Options Cancelled
(871,493
)
 
33.19

 
 
 
 
Balance at March 26, 2016
6,637,016

 
$
24.96

 
3.2
 
$
68,806,616

Exercisable, March 26, 2016
3,412,184

 
$
22.12

 
2.3
 
$
44,887,722

Vested and expected to vest, March 26, 2016
6,447,265

 
$
24.85

 
3.1
 
$
67,202,987

 
(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company’s common stock on March 24, 2016, 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 March 26, 2016.
As of March 26, 2016, there was $9.2 million of total unrecognized stock compensation cost related to 3.2 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 1.4 years.

Restricted Stock Units and Other Awards

The fair value of RSUs and other awards under the Company’s 1996 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 and other awards granted was $33.15 and $31.01 per share for the three months ended March 26, 2016 and March 28, 2015, respectively.

The weighted-average fair value of RSUs and other awards granted was $29.25 and $27.31 per share for the nine months ended March 26, 2016 and March 28, 2015, respectively.

The following table summarizes the outstanding and expected to vest RSUs and other awards as of March 26, 2016 and their activity during the nine months ended March 26, 2016:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 27, 2015
7,129,985

 
 
 
 
Restricted stock units and other awards granted
2,635,734

 
 
 
 
Restricted stock units and other awards released
(1,567,397
)
 
 
 
 
Restricted stock units and other awards cancelled
(1,179,667
)
 
 
 
 
Balance at March 26, 2016
7,018,655

 
2.7
 
$
250,779,416

Outstanding and expected to vest, March 26, 2016
5,955,859

 
2.7
 
$
210,003,595

(1)
Aggregate intrinsic value for RSUs and other awards represents the closing price per share of the Company’s common stock on March 24, 2016, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of March 26, 2016.
The Company withheld shares totaling $8.9 million and $20.7 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 nine months ended March 26, 2016, respectively. The total payments

16



for the employees’ tax obligations to the taxing authorities are reflected as financing activities within the Condensed Consolidated Statements of Cash Flows.

As of March 26, 2016, there was $141.8 million of unrecognized compensation expense related to 7.0 million unvested RSUs and other awards, which is expected to be recognized over a weighted average period of approximately 2.7 years.

Market Stock Units

The Company granted MSUs to senior members of management in September 2014 and September 2015. The grant of MSUs was in lieu of granting stock options. MSUs are valued based on the relative performance of the Company’s stock price as compared to the XSD. 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 XSD index. Vesting for MSUs is contingent upon both service and market conditions, which is over a four-year period.

There were no MSUs granted for the three months ended March 26, 2016 and March 28, 2015.

The weighted-average fair value of MSUs granted was $29.64 and $15.64 per share for the nine months ended March 26, 2016 and March 28, 2015, respectively.

The following table summarizes the number of MSUs outstanding and expected to vest as of March 26, 2016 and their activity during the nine months ended March 26, 2016:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 27, 2015
414,840

 
 
 
 
Market stock units granted
361,684

 
 
 
 
Market stock units released

 
 
 
 
Market stock units cancelled
(99,356
)
 
 
 
 
Balance at March 26, 2016
677,168

 
3.2
 
$
23,876,944

Outstanding and expected to vest, March 26, 2016
557,244

 
3.1
 
$
19,648,440

(1)
Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on March 24, 2016, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of March 26, 2016.

As of March 26, 2016, there was $12.7 million of unrecognized compensation expense related to 0.7 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 3.2 years.

Employee Stock Purchase Plan

Employees are granted rights to acquire common stock under the Company’s 2008 Employee Stock Purchase Plan (the “ESPP”).

The fair value of ESPP rights granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model using the following assumptions for the offering periods outstanding:


17



 
ESPP
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
Expected holding period (in years)
0.5
 
0.5
 
0.5
 
0.5
Risk-free interest rate
0.2% - 0.4%
 
0.1%
 
0.1% - 0.4%
 
0.1%
Expected stock price volatility
24.2% - 33.1%
 
21.1% - 26.4%
 
21.8% - 33.1%
 
20.7% - 26.4%
Dividend yield
3.3% - 3.6%
 
3.4% - 3.5%
 
3.3% - 3.6%
 
3.4% - 3.7%

As of March 26, 2016 and March 28, 2015, there was $4.7 million and $4.8 million, respectively, 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, including MSUs. Diluted earnings (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs, Performance Shares, including 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:
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
 
(in thousands, except per share data)
Numerator for basic earnings (loss) per share and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
139,810

 
$
79,433

 
$
135,136

 
$
107,379

 
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
285,854

 
283,418

 
285,323

 
283,499

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP, RSUs, and MSUs
3,929

 
5,422

 
4,325

 
5,126

Denominator for diluted earnings (loss) per share
289,783

 
288,840

 
289,648

 
288,625

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
0.49

 
$
0.28

 
$
0.47

 
$
0.38

Diluted
$
0.48

 
$
0.28

 
$
0.47

 
$
0.37


Approximately 0.2 million and 1.8 million stock options were excluded from the calculation of diluted earnings per share for the three months ended March 26, 2016 and March 28, 2015, respectively. Approximately 0.8 million and 5.2 million stock options were excluded from the calculation of diluted earnings per share for the nine months ended March 26, 2016 and March 28, 2015, 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 designs, develops, manufactures and markets a broad range of linear and mixed signal integrated circuits.


18





The Company currently has one operating segment. In accordance with ASC No. 280, Segment Reporting (“ASC 280”), the Company considers operating segments to be components of the Company’s business for which separate financial information is available that is evaluated regularly by the Company’s Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance. The Chief Operating Decision Maker for the Company was assessed and determined to be the CEO. The CEO reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has a single operating and reportable segment.

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 fiscal year.

Net revenues by geographic region was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
 
 
(in thousands)
 
 
 
 
United States
 
$
59,749

 
$
68,640

 
$
183,442

 
$
213,571

China
 
204,840

 
232,827

 
626,497

 
715,147

Rest of Asia
 
171,607

 
170,014

 
494,744

 
490,834

Europe
 
104,218

 
89,254

 
282,072

 
254,211

Rest of World
 
14,838

 
16,528

 
41,838

 
50,584

 
 
$
555,252

 
$
577,263

 
$
1,628,593

 
$
1,724,347


Net long-lived assets by geographic region were as follows:
 
March 26,
2016
 
June 27,
2015
 
(in thousands)
United States
$
472,801

 
$
783,148

Philippines
145,863

 
166,405

Thailand
49,410

 
56,776

Rest of World
80,707

 
84,410

 
$
748,781

 
$
1,090,739


NOTE 9: COMPREHENSIVE INCOME (LOSS)
 
The changes in accumulated other comprehensive loss by component and related tax effects in the nine months ended March 26, 2016 and March 28, 2015 were as follows:


19



(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 27, 2015
$
(6,280
)
 
$
(10,004
)
 
$
(1,136
)
 
$
53

 
$
133

 
$
(17,234
)
Other comprehensive income (loss) before reclassifications

 

 

 
(392
)
 
(18
)
 
(410
)
Amounts reclassified out of accumulated other comprehensive loss (income)

 
758

 

 
920

 

 
1,678

Tax effects

 
(242
)
 

 
(76
)
 

 
(318
)
Other comprehensive income (loss)

 
516

 

 
452

 
(18
)
 
950

March 26, 2016
$
(6,280
)
 
$
(9,488
)
 
$
(1,136
)
 
$
505

 
$
115

 
$
(16,284
)

(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

 

 

 
(6,386
)
 
21

 
(6,365
)
Amounts reclassified out of accumulated other comprehensive loss (income)

 
1,078

 

 
4,446

 

 
5,524

Tax effects
(527
)
 
(363
)
 

 
383

 

 
(507
)
Other comprehensive income (loss)
(527
)
 
715

 

 
(1,557
)
 
21

 
(1,348
)
March 28, 2015
$
(6,280
)
 
$
(9,658
)
 
$
(1,136
)
 
$
(1,568
)
 
$
121

 
$
(18,521
)

NOTE 10: INCOME TAXES

In the three and nine months ended March 26, 2016, the Company recorded an income tax provision of $31.5 million and $34.0 million, respectively, compared to $20.5 million and $15.3 million in the three and nine months ended March 28, 2015, respectively. The Company’s effective tax rate for the three and nine months ended March 26, 2016 was 18.4% and 20.1%, respectively, compared to 20.5% and 12.5% for the three and nine months ended March 28, 2015, respectively.

The Company’s federal statutory tax rate is 35%. The Company’s effective tax rate for the three months ended March 26, 2016 was lower than the statutory rate primarily because earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, were taxed at lower rates, partially offset by stock-based compensation for which no tax benefit is expected and $20.4 million of non-deductible goodwill included in the sale of the energy metering business.

The Company’s effective tax rate for the nine months ended March 26, 2016 was lower than the statutory tax rate primarily because earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, were taxed at lower rates, partially offset by stock-based compensation for which no tax benefit is expected, $5.8 million of discrete interest accruals for unrecognized tax benefits and $20.4 million of non-deductible goodwill included in the sale of the energy metering business.

The Company's effective tax rate for the three months ended March 28, 2015 was lower than the statutory rate primarily because earnings of foreign subsidiaries, generated primarily by our international operations managed in Ireland, were taxed at lower tax

20



rates and a $3.7 million discrete benefit for differences, primarily related to changes in estimates, between our fiscal year 2014 tax returns and the tax provision originally recorded, partially offset by stock-based compensation for which no tax benefit is expected.

The Company’s effective tax rate for the nine months ended March 28, 2015 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 tax 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, a $24.8 million discrete benefit for the favorable settlement of a Singapore tax issue in the first quarter of fiscal year 2015 and a $3.2 million discrete benefit for differences, primarily related to changes in estimates, between our fiscal year 2014 tax returns and the tax provision originally recorded, partially offset by a $84.1 million discrete goodwill impairment charge in the second quarter of fiscal year 2015 that generated no tax benefit and 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.

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 resulting from the 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 nine months ended March 26, 2016 and March 28, 2015 were as follows:


21



 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
Product warranty liability
(in thousands)
Beginning balance
$
13,436

 
$
21,296

Accruals for warranties
3,319

 
1,589

Payments
(9,047
)
 
(7,892
)
Changes in estimate
903

 
320

Ending balance
$
8,611

 
$
15,313

 
 
 
 
Less: Current portion
8,611

 
11,013

Non-current portion
$

 
$
4,300


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 nine months ended March 26, 2016, the Company repurchased approximately 4.4 million shares of its common stock for $146.6 million. As of March 26, 2016, the Company had remaining authorization of $420.1 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: 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 fourth 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 and, 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.


22



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 indicators or instances of impairment were identified in the nine months ended March 26, 2016.

During the three months ended December 26, 2015, $0.6 million of goodwill was reclassified as held for sale. For details, please refer to Note 3: "Balance sheet components" and Note 14: “Impairment of long-lived assets”.

During the three and nine months ended March 26, 2016, $20.4 million of goodwill was included in the sale of the energy metering business to Silergy Corp. This amount was classified as held for sale during the three months ended December 26, 2015.

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
Patents
 
5 years

Intangible assets consisted of the following:

 
March 26,
2016
 
June 27,
2015
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
(in thousands)
Intellectual property
$
347,262

 
$
246,468

 
$
100,794

 
$
435,962

 
$
276,175

 
$
159,787

Customer relationships
96,830

 
71,933

 
24,897

 
120,230

 
82,774

 
37,456

Trade name
8,500

 
6,086

 
2,414

 
8,500

 
4,886

 
3,614

Patents
2,500

 
1,297

 
1,203

 
2,500

 
907

 
1,593

Total amortizable purchased intangible assets
455,092

 
325,784

 
129,308

 
567,192

 
364,742

 
202,450

IPR&D
59,202

 

 
59,202

 
59,202

 

 
59,202

Total purchased intangible assets
$
514,294

 
$
325,784

 
$
188,510

 
$
626,394

 
$
364,742

 
$
261,652


During the three months ended March 26, 2016, $20.3 million of purchased intangible assets, net, was included in the sale of the energy metering business line. For details, please refer to Note 3: "Balance sheet components" and Note 14: “Impairment of long-lived assets”.

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

 
Three Months Ended
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
 
(in thousands)
Cost of goods sold
$
11,829

 
$
18,750

 
$
43,201

 
$
56,250

Intangible asset amortization
2,538

 
3,977

 
9,667

 
12,459

Total intangible asset amortization expenses
$
14,367

 
$
22,727

 
$
52,868

 
$
68,709



23



The following table represents the estimated future amortization expense of intangible assets as of March 26, 2016:

Fiscal Year
 
Amount
 
 
(in thousands)
Remaining three months of 2016
 
$
14,367

2017
 
49,091

2018
 
41,563

2019
 
13,278

2020
 
3,358

2021
 
2,888

Thereafter
 
4,763

Total intangible assets
 
$
129,308


NOTE 14: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2016:

During the first quarter of fiscal year 2016, the Company recorded a $157.7 million impairment of long-lived assets associated with the Company's wafer manufacturing facility in San Antonio, Texas which was classified as held for sale and written down to fair value, less cost to sell. The Company reached its conclusion regarding the asset impairment after conducting an evaluation of assets' fair values. The fair value of the land, buildings and equipment was determined after consideration of expected discounted future cash flows attributable to the assets and outside appraisals. The Company signed an agreement with TowerJazz Texas, Inc.(formerly known as TJ Texas, Inc.), an indirect wholly-owned subsidiary of Tower Semiconductor Ltd. ("Tower"), for the sale of the semiconductor wafer fabrication facility in San Antonio, Texas on November 18, 2015. During the third quarter of fiscal year 2016, the Company completed the sale of this facility for approximately $30.0 million in common shares of Tower, resulting in a loss of $1.6 million. In addition, approximately $10.0 million in common shares of Tower was received for the sale of the inventory on hand associated with this facility.

In addition, the San Jose wafer fabrication facility was classified as held for sale during the first quarter of fiscal year 2016, but no impairment charge was recorded as the carrying value of the associated assets approximated the fair value, less cost to sell. The fair value of the land, buildings and equipment was determined after consideration of outside appraisals, quoted market prices of similar equipment and offers received. The Company completed the sale of this facility in the second quarter of fiscal year 2016 for approximately $39.0 million resulting in a gain of $3.8 million.

During the second quarter of fiscal year 2016, the Company classified certain product lines, including associated tangible, intangible assets and goodwill, as held for sale but no impairment charge was recorded as the carrying value of each of the product lines' associated assets approximated or was less than the fair value, less cost to sell. The fair values of the assets were determined after consideration of offers received. During the third quarter of fiscal year 2016, the Company completed the sale of one of these product lines, the energy metering business, for approximately $105.0 million, resulting in a gain of $58.9 million. The planned sale of the other product line is described in further detail in Note 16 “Subsequent Events.”

Fiscal year 2015:

During the three and nine months ended March 28, 2015, the Company recorded $5.5 million and $66.5 million, respectively, 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. 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.

The impairment was also related to used fabrication tools identified by the Company as obsolete in the three months ended December 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.

24




NOTE 15: RESTRUCTURING ACTIVITIES

Fiscal year 2016:

San Jose Fab Shutdown

In October 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 intended to utilize other resources to complete such activities in the future. This plan included cash charges related to employee severance and non-cash charges related to accelerated depreciation. This plan has been completed, and the shutdown took place in the second quarter of fiscal year 2016.

During the three and nine months ended March 26, 2016, the Company recorded accelerated depreciation charges of $0 and $41.6 million, respectively, in “Cost of goods sold” and $0.1 million and $0.5 million, respectively, in “Severance and restructuring expenses” in the Condensed Consolidated Statements of Income. The sale of the San Jose wafer fabrication facility took place during the second quarter of fiscal year 2016. The cumulative costs recorded in fiscal year 2015 and 2016 to complete this restructuring plan were $100.3 million and no future restructuring costs associated with this plan is expected.

Other Plans

During the three and nine months ended March 26, 2016, the Company recorded $2.5 million and $19.2 million, respectively, in “Severance and restructuring expenses” in the Condensed Consolidated Statements of Income related to various restructuring plans designed to reduce costs. These charges were associated with continued reorganization of certain business units and functions and the planned closure of the Dallas wafer level packaging (“WLP”) manufacturing facilities. Multiple job classifications and locations were impacted by these activities.

As the Company plans to close its Dallas, Texas campus, including its WLP manufacturing facility in fiscal year 2017, the Company recorded accelerated depreciation charges of $4.5 million and $8.5 million during the three and nine months ended March 26, 2016, respectively.

Future expected restructuring costs to be incurred with other plans is $9.4 million as of March 26, 2016.

Restructuring Accruals

The Company has accruals for severance and restructuring payments within Accrued salary and related expenses in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes changes in the accruals associated with these restructuring activities during the nine months ended March 26, 2016:

 
Balance, June 27, 2015
 
Nine Months Ended
March 26, 2016
 
Balance, March 26, 2016
 
Charges
 
Cash Payments
 
Change in Estimates
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Severance - San Jose Fab Shutdown (1)
$
6,725

 
$
973

 
$
(7,166
)
 
$
(532
)
 
$

Severance - Other plans (1)
11,496

 
22,352

 
(22,862
)
 
(3,123
)
 
7,863

Total
$
18,221

 
$
23,325

 
$
(30,028
)
 
$
(3,655
)
 
$
7,863


(1) Charges and change in estimates are included in Severance and restructuring expenses in the accompanying Condensed Consolidated Statements of Income.

Additionally, the Company also accrues 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. During the three and nine month ended March 26, 2016, the Company recorded $0.4 million and $0.7 million in expected lease losses resulting from divestiture and restructuring activities.


25



Fiscal year 2015:

Severance and restructuring expenses were $2.8 million and $17.8 million for the three and nine months ended March 28, 2015.

Change in estimate:

Due to the above mentioned restructuring activities, the Company recorded accelerated depreciation resulting from the change in estimated useful lives of certain long lived assets included in restructuring plans. In all periods that accelerated depreciation expense was recorded, this resulted in additional expense and therefore impacted operating income (loss), net income (loss) and earnings per share as presented in the table below.

 
Three Months Ended
 
Nine Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
 
(in thousands, except per share data)
Operating income (loss), as reported
$
177,708

 
$
105,450

 
$
191,476

 
$
142,332

Operating income (loss), excluding accelerated depreciation expense
182,189

 
115,284

 
241,621

 
161,061

Effect of change in estimate
$
(4,481
)
 
$
(9,834
)
 
$
(50,145
)
 
$
(18,729
)
 
 
 
 
 
 
 
 
Net income (loss), as reported
$
139,810

 
$
79,433

 
$
135,136

 
$
107,379

Net income (loss), excluding accelerated depreciation expense
145,648

 
89,007

 
183,352

 
126,709

Effect of change in estimate
$
(5,838
)
 
$
(9,574
)
 
$
(48,216
)
 
$
(19,330
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share, as reported
$
0.49

 
$
0.28

 
$
0.47

 
$
0.38

Diluted earnings (loss) per share, as reported
$
0.48

 
$
0.28

 
$
0.47

 
$
0.37

 
 
 
 
 
 
 
 
Basic earnings (loss) per share, excluding accelerated depreciation expense
$
0.51

 
$
0.31

 
$
0.64

 
$
0.45

Diluted earnings (loss) per share, excluding accelerated depreciation expense
$
0.50

 
$
0.31

 
$
0.63

 
$
0.44

 
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