Document



 
 
 
 
 
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 24, 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
image0a04.jpg
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 20, 2017, there were 282,691,389 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 24, 2016 and June 25, 2016
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 24, 2016 and December 26, 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 24, 2016 and December 26, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended December 24, 2016 and December 26, 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)

 
December 24,
2016
 
June 25,
2016
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,687,435

 
$
2,105,229

Short-term investments
399,461

 
125,439

Total cash, cash equivalents and short-term investments
2,086,896

 
2,230,668

Accounts receivable, net of allowances of $23,332 at Q2'17 and $32,108 at
      Q4'16
224,342

 
256,531

Inventories
236,040

 
227,929

Other current assets
75,284

 
91,920

Total current assets
2,622,562

 
2,807,048

Property, plant and equipment, net
660,660

 
692,551

Intangible assets, net
117,393

 
146,540

Goodwill
491,015

 
490,648

Other assets
55,188

 
84,100

Assets held for sale
1,156

 
13,729

TOTAL ASSETS
$
3,947,974

 
$
4,234,616

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
70,505

 
$
82,535

Income taxes payable
3,138

 
21,153

Accrued salary and related expenses
109,475

 
166,698

Accrued expenses
41,418

 
50,521

Deferred revenue on shipments to distributors
36,137

 
38,779

Current portion of debt

 
249,717

Total current liabilities
260,673

 
609,403

Long-term debt
991,281

 
990,090

Income taxes payable
514,498

 
480,645

Other liabilities
37,331

 
46,664

Total liabilities
1,803,783

 
2,126,802

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
284

 
284

Retained earnings
2,155,698

 
2,121,749

Accumulated other comprehensive loss
(11,791
)
 
(14,219
)
Total stockholders’ equity
2,144,191

 
2,107,814

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
3,947,974

 
$
4,234,616


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 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
550,998

 
$
510,831

 
$
1,112,394

 
$
1,073,341

Cost of goods sold
210,820

 
218,662

 
426,484

 
494,821

Gross margin
340,178

 
292,169

 
685,910

 
578,520

Operating expenses:
 
 
 
 
 
 
 
Research and development
114,057

 
113,100

 
226,803

 
234,492

Selling, general and administrative
71,543

 
73,643

 
142,395

 
145,638

Intangible asset amortization
2,348

 
3,538

 
4,791

 
7,129

Impairment of long-lived assets
383

 
1,950

 
6,517

 
159,647

Severance and restructuring expenses
864

 
10,652

 
10,829

 
17,778

Other operating expenses (income), net
1,909

 
(247
)
 
(26,572
)
 
68

Total operating expenses
191,104

 
202,636

 
364,763

 
564,752

Operating income (loss)
149,074

 
89,533

 
321,147

 
13,768

Interest and other income (expense), net
(636
)
 
(9,593
)
 
(7,506
)
 
(15,995
)
Income (loss) before provision for income taxes
148,438

 
79,940

 
313,641

 
(2,227
)
Income tax provision (benefit)
17,961

 
12,471

 
45,550

 
2,447

Net income (loss)
$
130,477

 
$
67,469

 
$
268,091

 
$
(4,674
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.24

 
$
0.95

 
$
(0.02
)
Diluted
$
0.45

 
$
0.23

 
$
0.93

 
$
(0.02
)
 
 
 
 
 
 
 
 
Shares used in the calculation of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
283,294

 
285,526

 
283,464

 
285,057

Diluted
288,106

 
290,521

 
288,364

 
285,057

 
 
 
 
 
 
 
 
Dividends declared and paid per share
$
0.33

 
$
0.30

 
$
0.66

 
$
0.60


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 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
(in thousands)
Net income (loss)
$
130,477

 
$
67,469

 
$
268,091

 
$
(4,674
)
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 $1,633, $0, $0 and $0, respectively
(4,369
)
 
(359
)
 
(1,757
)
 
(283
)
Change in net unrealized gains and losses on cash flow hedges, net of tax benefit (expense) of $439, $(22), $317 and $170, respectively
(1,107
)
 
258

 
(721
)
 
(356
)
Change in net unrealized gains and losses on post-retirement benefits, net of tax benefit (expense) of $(28), $(81), $(2,833) and $(161), respectively
59

 
172

 
4,906

 
344

Other comprehensive income (loss), net
(5,417
)
 
71

 
2,428

 
(295
)
Total comprehensive income (loss)
$
125,060

 
$
67,540

 
$
270,519

 
$
(4,969
)

See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
268,091

 
$
(4,674
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation
35,193

 
35,382

Depreciation and amortization
85,625

 
151,135

Deferred taxes
7,375

 
(34,295
)
Loss (gain) from sale of property, plant and equipment
4,550

 
(5,863
)
Loss (gain) on sale of business
(26,620
)
 

Tax benefit related to stock-based compensation

 
3,173

Impairment of long-lived assets
797

 
159,647

Impairment of investments in privately-held companies
5,720

 

Excess tax benefit from stock-based compensation

 
(6,169
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
32,189

 
47,664

Inventories
(9,995
)
 
13,644

Other current assets
(19,682
)
 
3,878

Accounts payable
(12,857
)
 
(17,435
)
Income taxes payable
17,248

 
7,252

Deferred revenue on shipments to distributors
(2,642
)
 
1,740

Accrued salary and related expenses
(57,223
)
 
(52,152
)
All other accrued liabilities
(11,737
)
 
(3,099
)
Net cash provided by (used in) operating activities
316,032

 
299,828

Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(30,085
)
 
(29,351
)
Proceeds from sale of property, plant and equipment
2,429

 
50,315

Proceeds from sale of available-for-sale securities
50,994

 

Proceeds from maturity of available-for-sale securities
25,000

 

Proceeds from sale of business
42,199

 

Purchases of available-for-sale securities
(300,846
)
 
(50,087
)
Purchases of privately-held companies' securities
(2,663
)
 
(7,008
)
Other investing activities

 
2,380

Net cash provided by (used in) investing activities
(212,972
)
 
(33,751
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from stock-based compensation

 
6,169

Repayment of notes payable
(250,000
)
 

Net issuance of restricted stock units
(9,445
)
 
(12,544
)
Proceeds from stock options exercised
27,066

 
57,447

Issuance of common stock under employee stock purchase program
17,658

 
14,350

Repurchase of common stock
(118,944
)
 
(62,847
)
Dividends paid
(187,189
)
 
(171,099
)
Net cash provided by (used in) financing activities
(520,854
)
 
(168,524
)
Net increase (decrease) in cash and cash equivalents
(417,794
)
 
97,553

Cash and cash equivalents:
 
 
 
Beginning of period
2,105,229

 
1,550,965

End of period
$
1,687,435

 
$
1,648,518

See accompanying Notes to Condensed Consolidated Financial Statements.

6



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

 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
(in thousands)
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid, net, during the period for income taxes
$
48,753

 
$
24,520

Cash paid for interest
$
14,688

 
$
14,693

 
 
 
 
Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
8,359

 
$
8,179



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 statement 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 24, 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 Company's Annual Report on Form 10-K for the fiscal year ended June 25, 2016.

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 2016 was a 52-week fiscal year and fiscal year 2017 will also be a 52-week fiscal year.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

(i) New Accounting Updates Recently Adopted

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. The Company early adopted ASU 2016-09 at the beginning of the first quarter of fiscal year 2017. As a result of the adoption, in the first quarter of fiscal year 2017 the Company recorded a $1.4 million cumulative-effect adjustment to retained earnings for the recognition of excess tax benefits generated by the settlement of share-based awards in prior periods and a discrete income tax benefit of $3.3 million to the income tax provision for excess tax benefits generated by the settlement, in the first quarter of fiscal year 2017, of share-based awards. The adoption also resulted in an increase in cash flow from operating activities and a decrease in cash flow from financing activities of $3.3 million in the first quarter of fiscal year 2017. The adoption was on a prospective basis and therefore had no impact on prior periods.

(ii) Recent Accounting Updates Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09Revenue from Contracts with Customers (Topic 606)This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. 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. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations, as well as its selected transition method.

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 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 2018, 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 consolidated financial assets and liabilities. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The application of this ASU will be by means of a cumulative-effect adjustment to the balance sheet. The amendments related to equity securities without

8



readily determinable fair values (including disclosure requirements) will be applied prospectively to equity investments that exist as of the date of adoption. 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 on a modified retrospective approach. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

NOTE 3: BALANCE SHEET COMPONENTS

Inventories consist of:

 
December 24,
2016
 
June 25,
2016
Inventories:
(in thousands)
Raw materials
$
10,857

 
$
6,505

Work-in-process
144,723

 
148,762

Finished goods
80,460

 
72,662

 
$
236,040

 
$
227,929


Property, plant and equipment, net consists of:

 
December 24,
2016
 
June 25,
2016
Property, plant and equipment, net:
(in thousands) 
Land
$
18,952

 
$
18,952

Buildings and building improvements
254,215

 
240,507

Machinery and equipment
1,365,453

 
1,370,322

 
1,638,620

 
1,629,781

Less: accumulated depreciation
(977,960
)
 
(937,230
)
 
$
660,660

 
$
692,551



Accrued salary and related expenses consist of:

 
December 24,
2016
 
June 25,
2016
Accrued salary and related expenses:
(in thousands)
Accrued vacation
$
31,155

 
$
30,753

Accrued bonus
42,007

 
90,638

Accrued severance and post-employment benefits
12,384

 
14,230

Accrued salaries
13,722

 
14,320

Other
10,207

 
16,757

 
$
109,475

 
$
166,698



9



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, certificates of deposit 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 were 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 December 24, 2016 and June 25, 2016.

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

 
As of December 24, 2016
 
As of June 25, 2016
 
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)
$
1,250,351

 
$

 
$

 
$
1,250,351

 
$
1,658,321

 
$

 
$

 
$
1,658,321

U.S. treasury bills (2)

 
399,461

 

 
399,461

 

 
125,439

 

 
125,439

Foreign currency forward contracts (3)

 
271

 

 
271

 

 
695

 

 
695

Investment in common stock (3)

 

 

 

 

 
40,000

 

 
40,000

Certificates of deposit (1)

 
70

 

 
70

 

 
70

 

 
70

Total Assets
$
1,250,351

 
$
399,802

 
$

 
$
1,650,153

 
$
1,658,321

 
$
166,204

 
$

 
$
1,824,525

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (4)
$

 
$
1,979

 
$

 
$
1,979

 
$

 
$
1,327

 
$

 
$
1,327

Total Liabilities
$

 
$
1,979

 
$

 
$
1,979

 
$

 
$
1,327

 
$

 
$
1,327


(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.

During the six months ended December 24, 2016 and the year ended June 25, 2016, 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 24, 2016 and June 25, 2016 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:
 
December 24, 2016
 
June 25, 2016
 
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
$
400,728

 
$

 
$
1,267

 
$
399,461

 
$
124,950

 
$
489

 
$

 
$
125,439

Total available-for-sale investments
$
400,728

 
$

 
$
1,267

 
$
399,461

 
$
124,950

 
$
489

 
$

 
$
125,439


In the three and six months ended December 24, 2016 and the year ended June 25, 2016, the Company did not recognize any impairment charges on short-term investments. The U.S. Treasury bills have maturity dates between December 15, 2017 and January 31, 2019.

Securities received as consideration for sale of assets

During the third quarter of fiscal 2016, the Company received approximately $40.0 million in common shares of Tower Semiconductor Ltd. as consideration for the sale of the Company's semiconductor wafer manufacturing facility in San Antonio, Texas. During the six months ended December 24, 2016, the Company sold all of these common shares for gross proceeds of approximately $51.0 million and recorded a realized gain of $5.0 million. The Company was required to return to Tower Semiconductor the first $6.0 million in gain realized upon the sale of such shares. During the three months ended December 24, 2016, the Company paid Tower Semiconductor $1.0 million and will pay the remaining $5.0 million over the next two quarters.

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 the European Union Euro, South Korean Won, Japanese Yen and Chinese Yuan associated with 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. As of December 24, 2016 and June 25, 2016, the notional amounts of the forward contracts the Company held to purchase international currencies were $44.3 million and $68.0 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $2.1 million and $2.6 million, respectively.

Derivatives not designated as hedging instruments

As of December 24, 2016 and June 25, 2016, the notional amounts of the forward contracts the Company held to purchase international currencies were $21.3 million and $25.4 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $19.6 million and $24.6 million, respectively. The fair values of our outstanding foreign currency forward contracts and related gain (loss) included in the Condensed Consolidated Statements of Income were not material for the three and six months ended December 24, 2016 and the year ended June 25, 2016.

11




Long-term debt

The following table summarizes the Company’s long-term debt:
 
December 24,
2016
 
June 25,
2016
 
(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

Short-term credit agreement

 
250,000

Total
1,000,000

 
1,250,000

Less: Current portion

 
(249,717
)
Less: Reduction for unamortized discount and debt issuance costs
(8,719
)
 
(10,193
)
Total long-term debt
$
991,281

 
$
990,090


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 debt indentures that govern the 2023 Notes and the 2018 Notes, respectively, include covenants that limit the Company's ability to grant liens on its facilities and to enter into sale and leaseback transactions, which could limit the Company's ability to secure additional debt funding in the future. In circumstances involving a change of control of the Company followed by a downgrade of the rating of the 2023 Notes or the 2018 Notes, the Company would be required to make an offer to repurchase the affected notes at a purchase price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest.

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 $9.3 million and $7.9 million during the three months ended December 24, 2016 and December 26, 2015, respectively. Amortized discount and expenses, as well as interest expense associated with the notes was $18.4 million and $15.7 million during the six months ended December 24, 2016 and December 26, 2015, respectively.

The estimated fair value of the Company’s long-term debt was approximately $1,000 million as of December 24, 2016. The estimated fair value of the debt is based primarily on observable market inputs and is a Level 2 measurement.

The Company recorded interest expense of $9.5 million and $8.2 million during the three months ended December 24, 2016, and December 26, 2015, respectively. The Company recorded interest expense of $18.8 million and $16.3 million during the six months ended December 24, 2016, and December 26, 2015, respectively.

Credit Facility
Revolving 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

12



coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of December 24, 2016, the Company had not borrowed any amounts from this credit facility and was in compliance with all debt covenants.

Short-term credit agreement

On June 23, 2016, Maxim Holding Company Ltd., a wholly-owned foreign subsidiary of the Company, entered into a short-term credit agreement (the “Credit Agreement”) with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Lender”), in order to facilitate the return of capital to the Company. The Credit Agreement provides for, among other things, the Lender making an unsecured term loan in an amount equal to $250.0 million with a maturity date of June 22, 2017. The net proceeds of this Credit Agreement were approximately $249.7 million, after deducting paid issuance costs. The interest rate on the note was based on LIBOR plus a margin. The initial interest rate was 1.69% per annum and was adjusted quarterly. On December 21, 2016, the $250.0 million aggregate principal amount and all outstanding interest on the loan were repaid.

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 December 24, 2016, the Company had one stock incentive plan, the Company's 1996 Stock Incentive Plan (the “1996 Plan”) and one employee stock purchase plan, the 2008 Employee Stock Purchase Plan (the “2008 ESPP”). The 1996 Plan was adopted by the Board of Directors to provide the grant of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), and performance shares, including market stock units (“MSUs”), to employees, directors, and consultants.

Pursuant to the 1996 Plan, the exercise price for incentive stock options and non-statutory 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. Options generally 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 typically vest ratably over a two to 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. The number of shares that are released at the end of the performance period can range from zero to a maximum cap depending on the Company's performance. The performance metrics of this program are based on relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index XSD (the “SPDR S&P”).


13



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 24, 2016 and December 26, 2015, respectively:

Three Months Ended

December 24, 2016

December 26, 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
$
155


$
1,756


$
512


$
2,423


$
279


$
1,970


$
621


$
2,870

Research and development
620


7,995


1,068


9,683


843


7,210


1,085


9,138

Selling, general and administrative
177


5,261


529


5,967


802


5,138


471


6,411

Pre-tax stock-based compensation expense
$
952


$
15,012


$
2,109


$
18,073


$
1,924


$
14,318


$
2,177


$
18,419

Less: income tax effect






2,825








3,295

Net stock-based compensation expense








$
15,248








$
15,124


 
Six Months Ended
 
December 24, 2016
 
December 26, 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
$
335

 
$
3,339

 
$
996

 
$
4,670

 
$
614

 
$
3,958

 
$
1,180

 
$
5,752

Research and development
843

 
14,692

 
2,285

 
17,820

 
1,713

 
13,084

 
2,382

 
17,179

Selling, general and administrative
819

 
10,737

 
1,147

 
12,703

 
1,620

 
9,764

 
1,067

 
12,451

Pre-tax stock-based compensation expense
$
1,997

 
$
28,768

 
$
4,428

 
$
35,193

 
$
3,947

 
$
26,806

 
$
4,629

 
$
35,382

Less: income tax effect
 
 
 
 
 
 
5,892

 
 
 
 
 
 
 
6,057

Net stock-based compensation expense
 
 
 
 
 
 
$
29,301

 
 
 
 
 
 
 
$
29,325



The expenses included in the Condensed Consolidated Statements of Income related to RSUs include expenses related to MSUs of $0.9 million and $0.8 million for the three months ended December 24, 2016 and December 26, 2015, respectively and $1.5 million and $1.3 million for the six months ended December 24, 2016 and December 26, 2015, respectively.

Stock Options

There were no stock options granted in the three and six months ended December 24, 2016 and three and six months ended December 26, 2015.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 24, 2016 and their activity for the six months ended December 24, 2016:


14



 
Number of
Shares 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (1)
Balance at June 25, 2016
5,935,079

 
$
25.11

 
 
 
 
Options Granted

 

 
 
 
 
Options Exercised
(1,197,562
)
 
22.59

 
 
 
 
Options Cancelled
(299,582
)
 
27.18

 
 
 
 
Balance at December 24, 2016
4,437,935

 
$
25.65

 
2.7
 
$
60,309,380

Exercisable, December 24, 2016
2,851,263

 
$
24.15

 
2.2
 
$
43,003,246

Vested and expected to vest, December 24, 2016
4,373,670

 
$
25.61

 
2.7
 
$
59,566,002

(1)
Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company’s common stock on December 23, 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 December 24, 2016.

As of December 24, 2016, there was $3.3 million of total unrecognized stock compensation cost related to 1.6 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 0.9 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 $37.27 and $36.14 per share for the three months ended December 24, 2016 and December 26, 2015, respectively and $36.09 and $28.70 per share for the six months ended December 24, 2016 and December 26, 2015, respectively.

The following table summarizes the outstanding and expected to vest RSUs and other awards as of December 24, 2016 and their activity during the six months ended December 24, 2016:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 25, 2016
6,620,813

 
 
 
 
Restricted stock units and other awards granted
1,839,353

 
 
 
 
Restricted stock units and other awards released
(822,302
)
 
 
 
 
Restricted stock units and other awards cancelled
(559,966
)
 
 
 
 
Balance at December 24, 2016
7,077,898

 
2.9
 
$
278,074,597

Outstanding and expected to vest, December 24, 2016
5,860,743

 
2.8
 
$
229,916,941

(1)
Aggregate intrinsic value for RSUs and other awards represents the closing price per share of the Company’s common stock on December 23, 2016, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 24, 2016.
The Company withheld shares totaling $4.2 million and $9.4 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 24, 2016. 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 24, 2016, there was $154.2 million of unrecognized compensation expense related to 7.1 million unvested RSUs and other awards, which is expected to be recognized over a weighted average period of approximately 2.9 years.


15



Market Stock Units

The Company granted MSUs to senior members of management in September 2014, 2015 and 2016. 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 Semiconductor Exchange Traded Fund index XSD (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 XSD index. Vesting for MSUs is contingent upon both service and market conditions, and has a four-year vesting cliff period.

There were no MSUs granted for the three months ended December 24, 2016 and December 26, 2015.

The weighted-average fair value of MSUs granted was $37.29 and $29.64 per share for the six months ended December 24, 2016 and December 26, 2015, respectively.

The following table summarizes the number of MSUs outstanding and expected to vest as of December 24, 2016 and their activity during the six months ended December 24, 2016:

 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 25, 2016
673,532

 
 
 
 
Market stock units granted
308,432

 
 
 
 
Market stock units released

 
 
 
 
Market stock units cancelled
(112,292
)
 
 
 
 
Balance at December 24, 2016
869,672

 
3.1
 
$
34,117,233

Outstanding and expected to vest, December 24, 2016
690,735

 
3.1
 
$
27,097,531

(1)
Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on December 23, 2016, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of December 24, 2016.

As of December 24, 2016, there was $19.3 million of unrecognized compensation expense related to 0.9 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 3.1 years.

Employee Stock Purchase Plan

Employees are granted rights to acquire common stock under the 2008 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:

 
ESPP
 
ESPP
 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
Expected holding period (in years)
0.5
 
0.5
 
0.5
 
0.5
Risk-free interest rate
0.5% - 0.7%
 
0.1% - 0.4%
 
0.5% - 0.7%
 
0.1% - 0.4%
Expected stock price volatility
22.1% - 30.4%
 
21.8% - 33.1%
 
22.1% - 30.4%
 
21.8% - 33.1%
Dividend yield
3.4% - 3.6%
 
3.3% - 3.6%
 
3.4% - 3.6%
 
3.3% - 3.6%

As of December 24, 2016 and December 26, 2015, there was $6.1 million and $7.5 million, respectively, of unrecognized compensation expense related to the 2008 ESPP.


16



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, Performance Shares, MSUs and assumed issuance of common stock under the 2008 ESPP using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
(in thousands, except per share data)
Numerator for basic earnings (loss) per share and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
130,477

 
$
67,469

 
$
268,091

 
$
(4,674
)
 
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
283,294

 
285,526

 
283,464

 
285,057

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP, RSUs, and MSUs
4,812

 
4,995

 
4,900

 

Denominator for diluted earnings (loss) per share
288,106

 
290,521

 
288,364

 
285,057

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.24

 
$
0.95

 
$
(0.02
)
Diluted
$
0.45

 
$
0.23

 
$
0.93

 
$
(0.02
)

The Company had a net loss for the six months ended December 26, 2015, accordingly all incremental shares totaling 5.6 million shares were determined to be anti-dilutive.

For the three months ended December 24, 2016 and December 26, 2015 and the six months ended December 24, 2016, no securities were determined to be anti-dilutive and therefore none were excluded from 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. All of the Company's products are designed through a centralized R&D function, manufactured using centralized manufacturing (internal and external), and sold through a centralized sales force and shared wholesale distributors.

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 from unaffiliated customers by geographic region were as follows:

17



 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
(in thousands)
United States
$
63,385

 
$
61,633

 
$
133,536

 
$
123,693

China
212,816

 
197,420

 
426,326

 
421,657

Rest of Asia
174,060

 
153,203

 
348,429

 
323,137

Europe
87,284

 
85,951

 
176,922

 
177,854

Rest of World
13,453

 
12,624

 
27,181

 
27,000

 
$
550,998

 
$
510,831

 
$
1,112,394

 
$
1,073,341


Net long-lived assets by geographic region were as follows:
 
December 24,
2016
 
June 25,
2016
 
(in thousands)
United States
$
408,037

 
$
423,653

Philippines
138,703

 
141,569

Rest of World
113,920

 
127,329

 
$
660,660

 
$
692,551


NOTE 9: COMPREHENSIVE INCOME (LOSS)
 
The changes in accumulated other comprehensive income (loss) by component and related tax effects in the six months ended December 24, 2016 and December 26, 2015 were as follows:

(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 25, 2016
$
(6,280
)
 
$
(6,800
)
 
$
(1,136
)
 
$
(492
)
 
$
489

 
$
(14,219
)
Other comprehensive income (loss) before reclassifications

 
7,563

 

 
(2,115
)
 
2,694

 
8,142

Amounts reclassified out of accumulated other comprehensive loss (income)

 
176

 

 
1,077

 
(4,451
)
 
(3,198
)
Tax effects

 
(2,833
)
 

 
317

 

 
(2,516
)
Other comprehensive income (loss)

 
4,906

 

 
(721
)
 
(1,757
)
 
2,428

December 24, 2016
$
(6,280
)
 
$
(1,894
)
 
$
(1,136
)
 
$
(1,213
)
 
$
(1,268
)
 
$
(11,791
)


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

 
$
133

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

 

 

 
(941
)
 
(283
)
 
(1,224
)
Amounts reclassified out of accumulated other comprehensive loss (income)

 
505

 

 
415

 

 
920

Tax effects

 
(161
)
 

 
170

 

 
9

Other comprehensive income (loss)

 
344

 

 
(356
)
 
(283
)
 
(295
)
December 26, 2015
$
(6,280
)
 
$
(9,660
)
 
$
(1,136
)
 
$
(303
)
 
$
(150
)
 
$
(17,529
)


19



NOTE 10: INCOME TAXES

In the three and six months ended December 24, 2016, the Company recorded an income tax provision of $18.0 million and $45.6 million, respectively, compared to $12.5 million and $2.4 million for the three and six months ended December 26, 2015, respectively. The Company’s effective tax rate for the three and six months ended December 24, 2016 was 12.1% and 14.5%, respectively, compared to 15.6% and (109.9)% for the three and six months ended December 26, 2015, respectively.

The Company’s federal statutory tax rate is 35%. The Company’s effective tax rate for the three and six months ended December 24, 2016 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates, and a $5.1 million discrete benefit for differences between our fiscal year 2016 tax returns and the tax provision originally recorded, partially offset by stock-based compensation for which no tax benefit is expected and $3.7 million and $6.7 million of discrete interest accruals for unrecognized tax benefits in the three and six months ended December 24, 2016, respectively.

The Company's effective tax rate for the three months ended December 26, 2015 was lower than the statutory rate primarily due to earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates and a $2.5 million discrete benefit for fiscal year 2015 research tax credits that were generated by the extension, retroactive to January 1, 2015, of the federal research tax credit by legislation that was signed into law on December 18, 2015, partially offset by stock-based compensation for which no tax benefit is expected.

The Company's effective tax rate for the six months ended December 26, 2015 was higher than the statutory rate primarily because of $3.8 million of discrete interest accruals for unrecognized tax benefits and a $1.0 million discrete charge for prior year unrecognized tax benefits, partially offset by a $2.5 million discrete benefit for fiscal year 2015 research tax credits that were generated by the extension, retroactive to January 1, 2015, of the federal research tax credit by legislation that was signed into law on December 18, 2015.

The Company’s federal corporate income tax returns are audited on a recurring basis by the Internal Revenue Service (“IRS”). The IRS has concluded its field examination of the Company’s federal corporate income tax returns for fiscal years 2009 through 2011 (“Audit Years”) and issued a IRS Revenue Agent’s Report (“RAR”) in July 2016 that includes proposed adjustments for transfer pricing issues related to cost sharing and buy-in license payments for the use of intangible property by one of the Company’s international subsidiaries. The Company disagrees with the proposed transfer pricing adjustments and related penalties, and in September 2016, the Company filed a protest to challenge the proposed adjustments and requested a conference with the Appeals Office of the IRS. The Company believes that its reserves for unrecognized tax benefits are sufficient to cover any potential assessments that may result from the final resolution of these transfer pricing issues. In fiscal year 2017, the IRS commenced an audit of the Company’s federal corporate income tax returns for fiscal years 2012 through 2013, which is ongoing.

NOTE 11: COMMITMENTS AND CONTINGENCIES

Legal Proceedings
 
The Company is 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, the Company does 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, 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.


20



Product Warranty

The changes in the Company’s aggregate product warranty liabilities for the six months ended December 24, 2016 and December 26, 2015 were as follows:

 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
Product warranty liability
(in thousands)
Beginning balance
8,606

 
$
14,329

Accruals for warranties
1,307

 
2,247

Payments
(5,430
)
 
(5,909
)
Changes in estimate
922

 
873

Ending balance
$
5,405

 
$
11,540

 
 
 
 
Less: Current portion
5,405

 
7,240

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 six months ended December 24, 2016, the Company repurchased approximately 3.1 million shares of its common stock for $118.9 million. As of December 24, 2016, the Company had remaining authorization of $210.8 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.

No indicators or instances of impairment were identified in the six months ended December 24, 2016 or during the fiscal year ended June 25, 2016.

Intangible Assets

The useful lives of amortizable intangible assets are as follows:

Asset
 
Life
Intellectual property
 
1-10 years
Customer relationships
 
3-10 years
Trade name
 
1-4 years
Patents
 
5 years

Intangible assets consisted of the following:


21



 
December 24,
2016
 
June 25,
2016
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
Original
Cost 
 
Accumulated
Amortization 
 
Net
 
(in thousands)
Intellectual property
$
451,885

 
$
355,677

 
$
96,208

 
$
420,285

 
$
331,321

 
$
88,964

Customer relationships
115,634

 
96,475

 
19,159

 
115,634

 
92,744

 
22,890

Trade name
8,500

 
7,286

 
1,214

 
8,500

 
6,486

 
2,014

Patents
2,500

 
1,688

 
812

 
2,500

 
1,428

 
1,072

Total amortizable purchased intangible assets
578,519

 
461,126

 
117,393

 
546,919

 
431,979

 
114,940

IPR&D

 

 

 
31,600

 

 
31,600

Total purchased intangible assets
$
578,519

 
$
461,126

 
$
117,393

 
$
578,519

 
$
431,979

 
$
146,540



During the first quarter of fiscal year 2017, $31.6 million of IPR&D was completed and reclassified to amortizable Intellectual Property.

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

 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
(in thousands)
Cost of goods sold
$
11,755

 
$
14,734

 
$
24,356

 
$
31,372

Intangible asset amortization
2,348

 
3,538

 
4,791

 
7,129

Total intangible asset amortization expenses
$
14,103

 
$
18,272

 
$
29,147

 
$
38,501


The following table represents the estimated future amortization expense of intangible assets as of December 24, 2016:

Fiscal Year
 
Amount
 
 
(in thousands)
Remaining six months of 2017
 
$
26,526

2018
 
48,146

2019
 
19,861

2020
 
9,942

2021
 
8,154

2022
 
2,563

Thereafter
 
2,201

Total intangible assets
 
$
117,393


NOTE 14: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2017:

During the three and six months ended December 24, 2016, the Company recorded $0.4 million and $6.5 million, respectively, in impairment of long-lived assets in the Company’s Condensed Consolidated Statements of Income.


22



The impairment was primarily associated with certain investments in privately held companies. The Company reached its conclusion regarding the asset impairment after the determination was made that due to factors during the six months ended December 24, 2016, the financial condition of the privately held companies indicated an other than temporary impairment.

During the second quarter of fiscal year 2016, the Company classified the micro-electromechanical systems (MEMS) business line, including associated tangible assets and goodwill, as held for sale but no impairment charge was recorded as the carrying value 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 quoted market prices of similar equipment and offers received. During the first quarter of fiscal year 2017, the Company completed the sale of this business line for approximately $42.2 million, resulting in a gain of $26.6 million, included in Other operating income (expenses), net, in the Condensed Consolidated Statements of Income.

Fiscal year 2016:

During the fiscal year ended June 25, 2016, the Company recorded $160.6 million in impairment of long-lived assets in the Company's Consolidated Statements of Income.

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. ("TowerJazz"), 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 TowerJazz, resulting in a loss of $1.6 million included in Other operating income (expenses), net in the Condensed Consolidated Statements of Income. In addition, approximately $10.0 million in common shares of TowerJazz were 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 included in Other operating income (expenses), net in the Condensed Consolidated Statements of Income.

During the second quarter of fiscal year 2016, the Company classified the energy metering business, including associated tangible and intangible assets and goodwill, as held for sale but no impairment charge was recorded as the carrying value 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 this product line for approximately $105.0 million, resulting in a gain of $58.9 million included in Other operating income (expenses), net in the Condensed Consolidated Statements of Income.

NOTE 15: RESTRUCTURING ACTIVITIES

Fiscal year 2017:

During the three and six months ended December 24, 2016, the Company recorded $0.9 million and $10.8 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 $1.6 million and $3.1 million during the three and six months ended December 24, 2016, respectively.

As of December 24, 2016, the Company expects to incur future restructuring costs of $1.2 million related to these restructuring plans.


23



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 was 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 fiscal year ending June 25, 2016, the Company recorded accelerated depreciation charges of $41.6 million, in “Cost of goods sold” and $0.4 million in “Severance and restructuring expenses” in the 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 fiscal year ending June 25, 2016, the Company recorded $24.0 million in “Severance and restructuring expenses” in the 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 $13.0 million during the fiscal year ending June 25, 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 six months ended December 24, 2016:

 
Balance, June 25, 2016
 
Six Months Ended
December 24, 2016
 
Balance, December 24, 2016
 
Charges
 
Cash Payments
 
Change in Estimates
 
 
(in thousands)
Severance - All plans (1)
$
7,578

 
$
11,276

 
$
(11,928
)
 
$
(447
)
 
$
6,479


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

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 (loss) per share as presented in the table below.


24



 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
(in thousands, except per share data)
Operating income (loss), as reported
$
149,074

 
$
89,533

 
$
321,147

 
$
13,768

Operating income (loss), excluding accelerated depreciation expense
150,635

 
91,565

 
324,268

 
59,432

Effect of change in estimate
$
(1,561
)
 
$
(2,032
)
 
$
(3,121
)
 
$
(45,664
)
 
 
 
 
 
 
 
 
Net income (loss), as reported
$
130,477

 
$
67,469

 
$
268,091

 
$
(4,674
)
Net income (loss), excluding accelerated depreciation expense
131,849

 
73,119

 
270,929

 
37,705

Effect of change in estimate
$
(1,372
)
 
$
(5,650
)
 
$
(2,838
)
 
$
(42,379
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share, as reported
$
0.46

 
$
0.24

 
$
0.95

 
$
(0.02
)
Diluted earnings (loss) per share, as reported
$
0.45

 
$
0.23

 
$
0.93

 
$
(0.02
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share, excluding accelerated depreciation expense
$
0.47

 
$
0.26

 
$
0.96

 
$
0.13

Diluted earnings (loss) per share, excluding accelerated depreciation expense
$
0.46

 
$
0.25

 
$
0.94

 
$
0.13

 
 
 
 
 
 
 
 
Effect of change in estimate - basic earnings (loss) per share
$
(0.01
)
 
$
(0.02
)
 
$
(0.01
)
 
$
(0.15
)
Effect of change in estimate - diluted earnings (loss) per share
$
(0.01
)
 
$
(0.02
)
 
$
(0.01
)
 
$
(0.15
)

25



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. We also provide 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. We are a global company with wafer manufacturing facilities in the U.S., testing facilities in the Philippines and Thailand and sales and circuit design offices around the world. The major end-markets in which our products are sold are the Automotive, Communications and Data Center, Computing, Consumer and Industrial markets.

During fiscal year 2015, we commenced activities to close down the operations in our Hillsboro, Oregon testing site and consolidate such operations with our facility in Beaverton, Oregon, which were completed in the second quarter of fiscal year 2017.

Also, we announced in July 2015 that we intended to close our wafer level packaging ("WLP") manufacturing facility in Dallas, Texas in fiscal year 2017. On April 7, 2016, we entered into an agreement for the sale of its Dallas, Texas campus, including our WLP manufacturing facility, for approximately $34.5 million. We completed the sale of our Dallas, Texas campus, including our WLP manufacturing facility in Dallas, Texas in the fourth quarter of fiscal year 2016. In connection with this sale agreement, we entered into a lease and facility sharing agreement to lease back portions of the Dallas, Texas campus. We intend to complete the transition of design, administration and manufacturing activities during fiscal year 2017 and discontinue our operations in the WLP manufacturing facility in Dallas, Texas by the fourth quarter of fiscal year 2017.

On April 13, 2016, we entered into agreements for the sale of our micro-electromechanical systems (MEMS) business line, including related assets and inventory, for approximately $42.2 million. We completed the sale of our micro-electromechanical systems (MEMS) business line in the first quarter of fiscal year 2017.

CRITICAL ACCOUNTING POLICIES

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Securities and Exchange Commission (“SEC”) has defined the most critical accounting policies as the ones that are most important to the presentation 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, which impacts the recording of net revenues; valuation of inventories, which impacts costs of goods sold and gross margins; the assessment of recoverability of long-lived assets, which impacts impairment of long-lived assets; assessment of recoverability of intangible assets and goodwill, which impacts impairment of goodwill and intangible assets; accounting for income taxes, which impacts the income tax provision; and assessment of litigation and contingencies, which impacts charges recorded in cost of goods sold, selling, general and administrative expenses and income taxes. These policies and the estimates and judgments involved are discussed further in the Management’s Discussion and Analysis of Financial Condition in our Annual Report on Form 10-K for the fiscal year ended June 25, 2016. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would 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 24, 2016 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 25, 2016.

26



RESULTS OF OPERATIONS

The following table sets forth certain Condensed Consolidated Statements of Income data expressed as a percentage of net revenues for the periods indicated:

 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
 
 
 
 
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
38.3
 %
 
42.8
 %
 
38.3
 %
 
46.1
 %
Gross margin
61.7
 %
 
57.2
 %
 
61.7
 %
 
53.9
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
20.7
 %
 
22.1
 %
 
20.4
 %
 
21.8
 %
Selling, general and administrative
13.0
 %
 
14.4
 %
 
12.8
 %
 
13.6
 %
Intangible asset amortization
0.4
 %
 
0.7
 %
 
0.4
 %
 
0.7
 %
Impairment of long-lived assets
0.1
 %
 
0.4
 %
 
0.6
 %
 
14.9
 %
Severance and restructuring expenses
0.2
 %
 
2.1
 %
 
1.0
 %
 
1.7
 %
Other operating expenses (income), net
0.3
 %
 
 %
 
(2.4
)%
 
 %
Total operating expenses
34.7
 %
 
39.7
 %
 
32.8
 %
 
52.7
 %
Operating income
27.0
 %
 
17.5
 %
 
28.9
 %
 
1.2
 %
Interest and other income (expense), net
(0.1
)%
 
(1.9
)%
 
(0.7
)%
 
(1.5
)%
Income before provision for income taxes
26.9
 %
 
15.6
 %
 
28.2
 %
 
(0.3
)%
Income tax provision (benefit)
3.3
 %
 
2.4
 %
 
4.1
 %
 
0.2
 %
Net income (loss)
23.6
 %
 
13.2
 %
 
24.1
 %
 
(0.5
)%

The following table shows stock-based compensation included in the components of the Condensed Consolidated Statements of Income reported above as a percentage of net revenues for the periods indicated:

 
Three Months Ended
 
Six Months Ended
 
December 24,
2016
 
December 26,
2015
 
December 24,
2016
 
December 26,
2015
Cost of goods sold
0.4
%
 
0.6
%
 
0.4
%
 
0.5
%
Research and development
1.8
%