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 March 31, 2018
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
maximlogoa02.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, a smaller reporting company or an emerging growth 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 [ ]
Emerging growth company [ ]
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 13, 2018, there were 279,677,763 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 31, 2018 and June 24, 2017
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2018 and March 25, 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2018 and March 25, 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2018 and March 25, 2017
 
 
 
 
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
 




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
March 31,
2018
 
June 24,
2017
 
(in thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,629,593

 
$
2,246,121

Short-term investments
1,094,801

 
498,718

Total cash, cash equivalents and short-term investments
2,724,394

 
2,744,839

Accounts receivable, net of allowances of $125,761 at March 31, 2018 and $46,575 at June 24, 2017
320,553

 
256,454

Inventories
273,616

 
247,242

Other current assets
22,275

 
57,059

Total current assets
3,340,838

 
3,305,594

Property, plant and equipment, net
589,177

 
606,581

Intangible assets, net
90,848

 
90,867

Goodwill
532,904

 
491,015

Other assets
69,428

 
76,176

TOTAL ASSETS
$
4,623,195

 
$
4,570,233

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
84,407

 
$
77,373

Income taxes payable
24,339

 
3,688

Accrued salary and related expenses
147,771

 
145,299

Accrued expenses
48,384

 
37,663

Deferred margin on shipments to distributors

 
14,974

Current portion of long-term debt
499,050

 

Total current liabilities
803,951

 
278,997

Long-term debt
990,787

 
1,487,678

Income taxes payable
817,969

 
557,498

Other liabilities
59,497

 
43,366

Total liabilities
2,672,204

 
2,367,539

 
 
 
 
Commitments and contingencies (Note 11)


 


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

 
283

Retained earnings
1,963,912

 
2,212,301

Accumulated other comprehensive loss
(13,204
)
 
(9,890
)
Total stockholders’ equity
1,950,991

 
2,202,694

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
$
4,623,195

 
$
4,570,233


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 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25,
2017
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Net revenues
$
648,599

 
$
581,216

 
$
1,846,913

 
$
1,693,610

Cost of goods sold
224,653

 
214,312

 
639,460

 
640,796

Gross margin
423,946

 
366,904

 
1,207,453

 
1,052,814

Operating expenses:
 
 
 
 
 
 
 
Research and development
114,390

 
113,163

 
338,886

 
339,966

Selling, general and administrative
81,304

 
73,987

 
240,308

 
216,382

Intangible asset amortization
876

 
2,348

 
3,623

 
7,139

Impairment of long-lived assets

 
1,000

 
892

 
7,517

Severance and restructuring expenses
2,272

 
450

 
14,227

 
11,279

Other operating expenses (income), net
266

 
1,704

 
(1,535
)
 
(24,868
)
Total operating expenses
199,108

 
192,652

 
596,401

 
557,415

Operating income (loss)
224,838

 
174,252

 
611,052

 
495,399

Interest and other income (expense), net
(2,534
)
 
(3,884
)
 
(9,868
)
 
(11,390
)
Income (loss) before provision for income taxes
222,304

 
170,368

 
601,184

 
484,009

Income tax provision (benefit)
28,677

 
30,155

 
328,038

 
75,705

Net income (loss)
$
193,627

 
$
140,213

 
$
273,146

 
$
408,304

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.69

 
$
0.50

 
$
0.97

 
$
1.44

Diluted
$
0.68

 
$
0.49

 
$
0.95

 
$
1.42

 
 
 
 
 
 
 
 
Shares used in the calculation of earnings (loss) per share:
 
 
 
 
 
 
 
Basic
280,850

 
282,903

 
281,525

 
283,348

Diluted
285,881

 
287,882

 
286,221

 
288,209

 
 
 
 
 
 
 
 
Dividends declared and paid per share
$
0.42

 
$
0.33

 
$
1.14

 
$
0.99


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 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25,
2017
 
 
(in thousands)
Net income (loss)
 
$
193,627

 
$
140,213

 
$
273,146

 
$
408,304

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 $274, $0, $274 and $0, respectively
 
(1,213
)
 
349

 
(3,433
)
 
(1,408
)
Change in net unrealized gains and losses on cash flow hedges, net of tax benefit (expense) of $6, $(590), $(45) and $(273), respectively
 
(217
)
 
1,648

 
133

 
927

Change in net unrealized gains and losses on post-retirement benefits, net of tax benefit (expense) of $(4), $(28), $(168), and $(2,861), respectively
 
18

 
59

 
(14
)
 
4,965

Other comprehensive income (loss), net
 
(1,412
)
 
2,056

 
(3,314
)
 
4,484

Total comprehensive income (loss)
 
$
192,215

 
$
142,269

 
$
269,832

 
$
412,788


See accompanying Notes to Condensed Consolidated Financial Statements.


5



MAXIM INTEGRATED PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
March 31,
2018
 
March 25,
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
273,146

 
$
408,304

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation
58,932

 
53,493

Depreciation and amortization
109,768

 
126,098

Deferred taxes
6,257

 
(9,592
)
Loss (gain) from sale of property, plant and equipment
572

 
9,359

Loss (gain) on sale of business

 
(26,620
)
Impairment of long-lived assets
42

 
797

Impairment of investments in privately-held companies
850

 
6,720

Changes in assets and liabilities:
 
 
 
Accounts receivable
(60,194
)
 
(1,061
)
Inventories
(23,326
)
 
(15,500
)
Other current assets
31,703

 
(2,820
)
Accounts payable
3,429

 
(970
)
Income taxes payable
280,664

 
38,179

Deferred margin on shipments to distributors
(14,974
)
 
(3,055
)
Accrued salary and related expenses
1,826

 
(30,996
)
All other accrued liabilities
4,110

 
(15,607
)
Net cash provided by (used in) operating activities
672,805

 
536,729

Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(53,664
)
 
(38,371
)
Proceeds from sale of property, plant and equipment
5,761

 
3,216

Proceeds from sale of available-for-sale securities
100,004

 
50,994

Proceeds from maturity of available-for-sale securities
422,500

 
25,000

Payment in connection with business acquisition, net of cash acquired
(57,773
)
 

Proceeds from sale of business

 
42,199

Purchases of available-for-sale securities
(1,122,291
)
 
(400,244
)
Purchases of privately-held companies' securities
(3,356
)
 
(2,825
)
Net cash provided by (used in) investing activities
(708,819
)
 
(320,031
)
Cash flows from financing activities:
 
 
 
Repayment of notes payable

 
(250,000
)
Net issuance of restricted stock units
(21,162
)
 
(17,713
)
Proceeds from stock options exercised
26,383

 
44,568

Issuance of common stock under employee stock purchase program
14,975

 
14,464

Repurchase of common stock
(279,944
)
 
(175,943
)
Dividends paid
(320,766
)
 
(280,576
)
Net cash provided by (used in) financing activities
(580,514
)
 
(665,200
)
Net increase (decrease) in cash and cash equivalents
(616,528
)
 
(448,502
)
Cash and cash equivalents:
 
 
 
Beginning of period
$
2,246,121

 
$
2,105,229

End of period
$
1,629,593

 
$
1,656,727


6



Supplemental disclosures of cash flow information:
 
 
 
Cash paid, net, during the period for income taxes
$
17,281

 
$
57,952

Cash paid for interest
$
31,750

 
$
23,125

 
 
 
 
Noncash financing and investing activities:
 
 
 
Accounts payable related to property, plant and equipment purchases
$
6,798

 
$
12,542


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 31, 2018 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 24, 2017.

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 2017 was a 52-week fiscal year and fiscal year 2018 is a 53-week fiscal year. The second quarter of fiscal year 2017 was a 13-week quarter and the second quarter of fiscal year 2018 was a 14-week quarter.

NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

(i) New Accounting Updates Recently Adopted

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), which is intended to improve accounting for hedging activities by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The Company early-adopted ASU 2017-12 in the first quarter of fiscal year 2018. There was no material change to the Company's consolidated financial statements as a result of this adoption. This 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 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 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 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The Company expects to select the modified retrospective transition method. As of the second quarter of fiscal year 2018, the Company recognizes all revenue from distributors on a sell-in basis of accounting. The Company does not expect the new guidance to materially impact the timing of recognition of future revenue, but continues to evaluate and prepare for impacts of the new standard on financial statements and disclosures, operational processes including internal controls, and business systems.

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 application of this ASU will be by means of a cumulative-effect adjustment to the balance sheet. The amendments related to equity securities without 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 currently evaluating the potential impact of this standard on its consolidated 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

8



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.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold. ASU 2016-16 is effective beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting. This update provides guidance for reporting by an employee benefit plan for its interest in a master trust. The guidance is effective beginning in the first quarter of fiscal year 2020 on a retrospective basis, with early application permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on presentation of the service component and the other components of net benefit cost in the statement of operations. The new standard is effective beginning in the first quarter of fiscal year 2019. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this standard provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this standard are effective beginning in the first quarter of fiscal year 2019, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). This standard provides guidance about the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company does not believe the implementation of this standard will result in a material impact to its consolidated financial statements.

NOTE 3: BALANCE SHEET COMPONENTS

Inventories consist of:

 
March 31,
2018
 
June 24,
2017
Inventories:
(in thousands)
Raw materials
$
18,791

 
$
11,779

Work-in-process
176,748

 
151,614

Finished goods
78,077

 
83,849

 
$
273,616

 
$
247,242


Property, plant and equipment, net consists of:


9



 
March 31,
2018
 
June 24,
2017
Property, plant and equipment, net:
(in thousands) 
Land
$
17,731

 
$
18,952

Buildings and building improvements
254,157

 
254,513

Machinery and equipment
1,306,626

 
1,286,031

 
1,578,514

 
1,559,496

Less: accumulated depreciation
(989,337
)
 
(952,915
)
 
$
589,177

 
$
606,581


Accrued salary and related expenses consist of:

 
March 31,
2018
 
June 24,
2017
Accrued salary and related expenses:
(in thousands)
Accrued vacation
$
28,717

 
$
29,621

Accrued bonus
71,829

 
85,600

Accrued salaries
13,509

 
14,528

ESPP Withholding
15,213

 
3,514

Other
18,503

 
12,036

 
$
147,771

 
$
145,299


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 securities, agency securities, corporate debt securities, certificates of deposit, commercial paper, foreign currency forward contracts and long-term debt that are valued using quoted market prices or are determined using a yield curve model based on current market rates.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company's Level 3 assets and liabilities consist of contingent consideration liabilities related to an acquisition during the three months ended March 31, 2018.


10



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

 
As of March 31, 2018
 
As of June 24, 2017
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
107,956

 
$

 
$

 
$
107,956

 
$
952,462

 
$

 
$

 
$
952,462

Commercial paper

 
13,681

 

 
13,681

 

 

 

 

Corporate debt securities

 
5,307

 

 
5,307

 

 

 

 

U.S Treasury securities

 
24,906

 

 
24,906

 

 

 

 

Short term investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
40,375

 

 
40,375

 

 

 

 

Commercial paper

 
43,584

 

 
43,584

 

 

 

 

Corporate debt securities

 
453,716

 

 
453,716

 

 

 

 

U.S. Treasury securities

 
557,126

 

 
557,126

 

 
498,718

 

 
498,718

Other current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts

 
559

 

 
559

 

 
848

 

 
848

Total assets
$
107,956

 
$
1,139,254

 
$

 
$
1,247,210

 
$
952,462

 
$
499,566

 
$

 
$
1,452,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
260

 
$

 
$
260

 
$

 
$
386

 
$

 
$
386

Contingent consideration

 

 
8,000

 
8,000

 

 

 

 

Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration

 

 
8,000

 
8,000

 

 

 

 

Total Liabilities
$

 
$
260

 
$
16,000

 
$
16,260

 
$

 
$
386

 
$

 
$
386


During the nine months ended March 31, 2018 and the year ended June 24, 2017, 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 31, 2018 and June 24, 2017 other than impairments of long-lived assets. For details, please refer to Note 15: “Impairment of long-lived assets”.

NOTE 5: FINANCIAL INSTRUMENTS

Short-term investments
Fair values were as follows:

11



 
March 31,
2018
 
June 24,
2017
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
40,375

 
$

 
$

 
$
40,375

 
$

 
$

 
$

 
$

Commercial paper
43,584

 

 

 
43,584

 

 

 

 

Corporate debt securities
456,301

 
38

 
(2,623
)
 
453,716

 

 

 

 

U.S. Treasury securities
559,479

 
10

 
(2,363
)
 
557,126

 
499,952

 

 
(1,234
)
 
498,718

Total available-for-sale investments
$
1,099,739

 
$
48

 
$
(4,986
)
 
$
1,094,801

 
$
499,952

 
$

 
$
(1,234
)
 
$
498,718


In the nine months ended March 31, 2018 and the year ended June 24, 2017, the Company did not recognize any impairment charges on short-term investments. All available-for-sale investments have maturity dates between April 5, 2018 and March 12, 2021.

The Company invests in various financial instruments including U.S. Treasury securities, corporate debt securities, commercial paper, and certificates of deposit which include instruments issued or managed by industrial, financial, and utility institutions and U.S. Treasury securities which include U.S. government Treasury bills and Treasury notes.

Derivative instruments and hedging activities

In the first quarter of fiscal year 2018, the Company early-adopted ASU 2017-12, Derivatives and Hedging (Topic 815), which is intended to improve accounting for hedging activities by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. There was no material change to the Company's consolidated financial statements as a result of this adoption. This adoption was on a prospective basis and therefore had no impact on prior periods.

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 Euro, Indian Rupee, Japanese Yen, Taiwan New Dollar, South Korean Won, and Chinese Yuan, expenditures for sales offices and research and development activities undertaken outside of the U.S.

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

Derivatives designated as cash flow hedging instruments

The Company designates certain forward contracts as hedging instruments pursuant to Accounting Standards Codification (“ASC”) No. 815-Derivatives and Hedging (“ASC 815”). As of March 31, 2018 and June 24, 2017, the notional amounts of the forward contracts the Company held to purchase international currencies were $37.3 million and $36.2 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $0.6 million and $0.2 million, respectively.

Derivatives not designated as hedging instruments

As of March 31, 2018 and June 24, 2017, the notional amounts of the forward contracts the Company held to purchase international currencies were $19.4 million and $44.5 million, respectively, and the notional amounts of forward contracts the Company held to sell international currencies were $27.0 million and $21.6 million, respectively. The fair values of our outstanding foreign currency forward contracts and gain (loss) included in the Condensed Consolidated Statements of Income were not material for the three and nine months ended March 31, 2018 and the year ended June 24, 2017.

Effect of hedge accounting on the Condensed Consolidated Statements of Income


12



The following table summarizes the gains and (losses) from hedging activities recognized in the Company's Condensed Consolidated Statements of Income:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2018
 
March 31,
2018
 
Net Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
Net Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
(in thousands)
Income and expenses line items in which the effects of cash flow hedges are recorded
$
648,599

 
$
224,653

 
$
199,108

 
$
1,846,913

 
$
639,460

 
$
596,401

 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) reclassified from accumulated other comprehensive income into income
$
(11
)
 
$
165

 
$
356

 
$
(64
)
 
$
116

 
$
1,781


Outstanding debt obligations

The following table summarizes the Company’s outstanding debt obligations:
 
March 31,
2018
 
June 24,
2017
 
(in thousands)
3.45% fixed rate notes due June 2027
$
500,000

 
$
500,000

2.5% fixed rate notes due November 2018
500,000

 
500,000

3.375% fixed rate notes due March 2023
500,000

 
500,000

Total outstanding debt
1,500,000

 
1,500,000

Less: Current portion (included in "Current portion of debt")
(499,050
)
 

Less: Reduction for unamortized discount and debt issuance costs
(10,163
)
 
(12,322
)
Total long-term debt
$
990,787

 
$
1,487,678


On June 15, 2017, the Company completed a public offering of $500 million aggregate principal amount of the Company's 3.45% senior unsecured and unsubordinated notes due in June 2027 (“2027 Notes”), with an effective interest rate of 3.5%. Interest on the 2027 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2017. The net proceeds of this offering were approximately $495.2 million, after issuing at a discount and deducting paid expenses.

On November 21, 2013, the Company completed a public offering of $500 million aggregate principal amount of the Company’s 2.5% senior unsecured and unsubordinated notes due 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, commencing on September 15, 2013. The net proceeds of this offering were approximately $490 million, after issuing at a discount and deducting paid expenses.

The debt indentures that govern the 2027 Notes, 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 2027 Notes, the 2023 Notes or the 2018 Notes, the Company would be required to make an

13



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, were $12.4 million and $7.9 million during the three months ended March 31, 2018 and March 25, 2017, respectively. Amortized discount and expenses, as well as interest expense associated with the notes, were $37.1 million and $26.3 million during the nine months ended March 31, 2018 and March 25, 2017, respectively.

The estimated fair value of the Company’s outstanding debt obligations was approximately $1,485 million as of March 31, 2018. 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 $12.5 million and $8.1 million during the three months ended March 31, 2018, and March 25, 2017, respectively. The Company recorded interest expense of $37.6 million and $26.8 million during the nine months ended March 31, 2018 and March 25, 2017, 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 coverage ratio (EBITDA divided by interest expense) greater than 3.5 to 1. As of March 31, 2018, 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 31, 2018, 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 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 seven 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 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. RSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

MSUs granted to employees typically vest over a four-year cliff 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. For MSUs granted prior to September 2017, 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 SPDR S&P (the “XSD”). For MSUs granted in September 2017, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in the XSD; these MSUs vest based upon annual performance subject to continued service through the end of the four-year cliff period. MSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

14




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 31, 2018 and March 25, 2017, respectively:

Three Months Ended

March 31, 2018

March 25, 2017

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
$
35


$
2,003


$
537


$
2,575


$
105


$
1,660


$
494


$
2,259

Research and development
13


8,725


1,339


10,077


462


7,602


1,251


9,315

Selling, general and administrative
51


7,218


684


7,953


296


5,820


609


6,725

Pre-tax stock-based compensation expense
$
99


$
17,946


$
2,560


$
20,605


$
863


$
15,082


$
2,354


$
18,299

Less: income tax effect






2,053








2,659

Net stock-based compensation expense








$
18,552








$
15,640



 
Nine Months Ended
 
March 31, 2018
 
March 25, 2017
 
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
$
196

 
$
5,783

 
$
1,482

 
$
7,461

 
$
440

 
$
5,000

 
$
1,491

 
$
6,931

Research and development
507

 
24,212

 
3,342

 
28,061

 
1,305

 
22,293

 
3,536

 
27,134

Selling, general and administrative
636

 
21,004

 
1,770

 
23,410

 
1,115

 
16,557

 
1,756

 
19,428

Pre-tax stock-based compensation expense
$
1,339

 
$
50,999

 
$
6,594

 
$
58,932

 
$
2,860

 
$
43,850

 
$
6,783

 
$
53,493

Less: income tax effect
 
 
 
 
 
 
6,830

 
 
 
 
 
 
 
8,551

Net stock-based compensation expense
 
 
 
 
 
 
$
52,102

 
 
 
 
 
 
 
$
44,942


The expenses included in the Condensed Consolidated Statements of Income for RSUs include expenses related to MSUs of $2.2 million and $1.1 million for the three months ended March 31, 2018 and March 25, 2017, respectively and $5.8 million and $2.5 million for the nine months ended March 31, 2018 and March 25, 2017, 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.

There were no stock options granted in the three and nine months ended March 31, 2018 and March 25, 2017.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of March 31, 2018 and their activity for the nine months ended March 31, 2018:

15



 
Number of
Shares 
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in Years)
 
Aggregate Intrinsic Value (1)
Balance at June 24, 2017
2,800,007

 
$
26.92

 
 
 
 
Options Granted

 

 
 
 
 
Options Exercised
(1,031,144
)
 
25.94

 
 
 
 
Options Cancelled
(21,591
)
 
25.81

 
 
 
 
Balance at March 31, 2018
1,747,272

 
$
27.65

 
2.0
 
$
54,470,797

Exercisable, March 31, 2018
1,740,428

 
$
27.63

 
2.0
 
$
54,281,147

Vested and expected to vest, March 31, 2018
1,747,119

 
$
27.64

 
2.0
 
$
54,466,463

(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 30, 2018, 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 31, 2018.

As of March 31, 2018, there was less than $0.1 million of total unrecognized stock compensation cost related to less than 0.1 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 0.3 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 $54.81 and $42.30 per share for the three months ended March 31, 2018 and March 25, 2017, respectively and $44.49 and $37.02 per share for the nine months ended March 31, 2018 and March 25, 2017, respectively.

The following table summarizes the outstanding and expected to vest RSUs and other awards as of March 31, 2018 and their activity during the nine months ended March 31, 2018:
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 24, 2017
5,942,123

 
 
 
 
Restricted stock units and other awards granted
1,933,510

 
 
 
 
Restricted stock units and other awards released
(1,315,630
)
 
 
 
 
Restricted stock units and other awards cancelled
(500,528
)
 
 
 
 
Balance at March 31, 2018
6,059,475

 
2.8
 
$
357,928,876

Outstanding and expected to vest, March 31, 2018
5,061,864

 
2.7
 
$
297,738,815

(1)
Aggregate intrinsic value for RSUs and other awards represents the closing price per share of the Company’s common stock on March 30, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of March 31, 2018.
The Company withheld shares totaling $9.6 million and $21.2 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date for the three and nine months ended March 31, 2018. 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 March 31, 2018, there was $156.4 million of unrecognized compensation expense related to 6.1 million unvested RSUs and other awards, which is expected to be recognized over a weighted average period of approximately 2.8 years.

Market Stock Units (MSUs)

16




The Company grants MSUs to senior members of management in lieu of granting stock options. For MSUs granted prior to September 2017, 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 SPDR S&P (the “XSD”). For MSUs granted in September 2017, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in 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 or the TSR of the companies included in the XSD, as applicable. Vesting for MSUs is contingent upon both service and market conditions and has a four-year vesting cliff period. MSUs granted in September 2017 vest based upon annual performance and are subject to continued service through the end of the four-year period, but will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

The weighted-average fair value of MSUs granted was $51.03 and $37.29 per share for the nine months ended March 31, 2018 and March 25, 2017, respectively.

The following table summarizes the number of MSUs outstanding and expected to vest as of March 31, 2018 and their activity during the nine months ended March 31, 2018:
 
Number of
Shares 
 
Weighted Average
Remaining
Contractual Term
(in Years)
 
 
Aggregate Intrinsic
Value (1) 
Balance at June 24, 2017
818,028

 
 
 
 
Market stock units granted
292,336

 
 
 
 
Market stock units released

 
 
 
 
Market stock units cancelled
(10,028
)
 
 
 
 
Balance at March 31, 2018
1,100,336

 
2.8
 
$
64,721,764

Outstanding and expected to vest, March 31, 2018
680,029

 
2.7
 
$
39,999,293

(1)
Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on March 30, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of March 31, 2018.

As of March 31, 2018, there was $24.4 million of unrecognized compensation expense related to 1.1 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 2.8 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:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25, 2017
Expected holding period (in years)
0.5 years
 
0.5 years
 
0.5 years
 
0.5 years
Risk-free interest rate
1.1% - 1.5%
 
0.5%
 
0.8% - 1.5%
 
0.5% - 0.7%
Expected stock price volatility
20.5% - 20.7%
 
27.2% - 28.2%
 
19.1% - 24.7%
 
22.1% - 30.4%
Dividend yield
3.0% - 3.1%
 
3.5% - 3.6%
 
3.0% - 3.4%
 
3.4% - 3.6%

As of March 31, 2018 and March 25, 2017, there was $3.9 million and $3.6 million, respectively, of unrecognized compensation expense related to the 2008 ESPP.

NOTE 7: EARNINGS (LOSS) PER SHARE


17



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 other awards as well as MSUs. Diluted earnings (loss) per share incorporates the incremental shares issuable upon the assumed exercise of stock options, assumed release of unvested RSUs and other awards as well as 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
 
Nine Months Ended
 
March 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25,
2017
 
(in thousands, except per share data)
Numerator for basic earnings (loss) per share and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
193,627

 
$
140,213

 
$
273,146

 
$
408,304

 
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
280,850

 
282,903

 
281,525

 
283,348

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, ESPP, RSUs, and MSUs
5,031

 
4,979

 
4,696

 
4,861

Denominator for diluted earnings (loss) per share
285,881

 
287,882

 
286,221

 
288,209

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
0.69

 
$
0.50

 
$
0.97

 
$
1.44

Diluted
$
0.68

 
$
0.49

 
$
0.95

 
$
1.42


For the three months ended March 31, 2018 and March 25, 2017 and the nine months ended March 31, 2018 and March 25, 2017, no stock awards 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 and reportable 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, assessed and determined to be the CEO, in deciding how to allocate resources and in assessing performance. The CEO reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

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:

18



 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25,
2017
 
 
(in thousands)
United States
 
$
75,760

 
$
65,698

 
$
223,021

 
$
199,234

China
 
219,160

 
209,437

 
662,114

 
635,763

Rest of Asia
 
222,207

 
186,468

 
586,109

 
534,896

Europe
 
114,254

 
105,126

 
329,939

 
282,048

Rest of World
 
17,218

 
14,487

 
45,730

 
41,669

 
 
$
648,599

 
$
581,216

 
$
1,846,913

 
$
1,693,610


Net long-lived assets by geographic region were as follows:
 
March 31,
2018
 
June 24,
2017
 
(in thousands)
United States
$
362,637

 
$
374,775

Philippines
125,825

 
128,241

Rest of World
100,715

 
103,565

 
$
589,177

 
$
606,581


NOTE 9: COMPREHENSIVE INCOME (LOSS)
 
The changes in accumulated other comprehensive income (loss) by component and related tax effects in the nine months ended March 31, 2018 and March 25, 2017 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 24, 2017
$
(6,280
)
 
$
(1,258
)
 
$
(1,136
)
 
$
18

 
$
(1,234
)
 
$
(9,890
)
Other comprehensive income (loss) before reclassifications

 

 

 
2,012

 
(3,707
)
 
(1,695
)
Amounts reclassified out of accumulated other comprehensive loss (income)

 
154

 

 
(1,834
)
 

 
(1,680
)
Tax effects

 
(168
)
 

 
(45
)
 
274

 
61

Other comprehensive income (loss)

 
(14
)
 

 
133

 
(3,433
)
 
(3,314
)
March 31, 2018
$
(6,280
)
 
$
(1,272
)
 
$
(1,136
)
 
$
151

 
$
(4,667
)
 
$
(13,204
)


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

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

 
7,563

 

 
(1,266
)
 
3,043

 
9,340

Amounts reclassified out of accumulated other comprehensive loss (income)

 
263

 

 
2,466

 
(4,451
)
 
(1,722
)
Tax effects

 
(2,861
)
 

 
(273
)
 

 
(3,134
)
Other comprehensive income (loss)

 
4,965

 

 
927

 
(1,408
)
 
4,484

March 25, 2017
$
(6,280
)
 
$
(1,835
)
 
$
(1,136
)
 
$
435

 
$
(919
)
 
$
(9,735
)


20



NOTE 10: INCOME TAXES

On December 22, 2017 legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was enacted. The primary impact of the Act in fiscal year 2018 is a reduction of the Company’s federal statutory tax rate from 35% to 28.1% (average of a 35% rate for the first half of fiscal year 2018 and a 21% rate for the second half of fiscal year 2018) and taxation of the higher of the accumulated unremitted earnings of the Company’s foreign subsidiaries as of November 2, 2017 or December 31, 2017 (“Repatriation Tax”). Accumulated unremitted earnings are taxed at a rate of 15.5% to the extent of the aggregate foreign cash position of the Company’s foreign subsidiaries and a rate of 8% to the extent that accumulated unremitted earnings exceeds the aggregate foreign cash position. The Act allows the Company to elect to pay the Repatriation Tax in eight annual interest free installments beginning in September 2018, although for accounting purposes the entire tax was recorded in the second quarter of fiscal year 2018. The Act has other provisions that will significantly impact the Company beginning in fiscal year 2019, including a further reduction of the federal statutory tax rate to 21% and provisions that impact taxation of the Company’s international earnings. The Company is still considering the impact of these provisions on its effective tax rate in fiscal year 2019 and future years.

Securities and Exchange Commission Staff Accounting Bulletin No. 118 allowed the use of provisional amounts (reasonable estimates) if accounting for the income tax effects of the Act were not completed when the Company’s financial statements for the second quarter of fiscal year 2018 were issued. Provisional amounts must be adjusted during the measurement period as accounting for the income tax effects of the Act is completed. The measurement period began on December 22, 2017, the enactment date of the Act, and lasts no longer than one year.

In the second quarter of fiscal year 2018, the Company recorded a $236.9 million discrete provisional charge for the Repatriation Tax and a $13.7 million discrete charge to remeasure deferred tax assets and liabilities as of the enactment date of the Act to reflect the federal statutory tax rate reduction. To determine the amount of the Repatriation Tax, we must determine the accumulated unremitted earnings of the Company’s foreign subsidiaries and the amount of foreign income tax paid on such earnings. The Company made a reasonable estimate of the Repatriation Tax and therefore recorded a provisional Repatriation Tax charge of $236.9 million in the second quarter of fiscal year 2018. No adjustment to the provisional Repatriation Tax charge was made in the third quarter of fiscal year 2018 as the Company continues to gather information and analyze the available guidance to more precisely compute the amount of the Repatriation Tax.

In the three and nine months ended March 31, 2018, the Company recorded an income tax provision of $28.7 million and $328.0 million, respectively, compared to $30.2 million and $75.7 million for the three and nine months ended March 25, 2017, respectively. The Company’s effective tax rate for the three and nine months ended March 31, 2018 was 12.9% and 54.6%, respectively, compared to 17.7% and 15.6% for the three and nine months ended March 25, 2017, respectively.

The Company’s federal statutory tax rate for fiscal year 2018 is 28.1%. The Company’s effective tax rate for the three months ended March 31, 2018 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 $4.6 million of discrete excess tax benefits generated by the settlement of share-based awards, partially offset by $5.1 million of discrete interest accruals for unrecognized tax benefits.

The Company’s effective tax rate for the nine months ended March 31, 2018 was higher than the statutory rate primarily due to a $236.9 million discrete provisional charge for the Repatriation Tax, a $13.7 million discrete charge to remeasure deferred taxes as of the enactment date of the Act, and $13.1 million of discrete interest accruals for unrecognized tax benefits, partially offset by earnings of foreign subsidiaries, generated primarily by the Company's international operations managed in Ireland, that were taxed at lower rates and $8.3 million of discrete excess tax benefits generated by the settlement of share-based awards.

The Company’s federal statutory tax rate for the fiscal year 2017 was 35%. The Company’s effective tax rate for the three and nine months ended March 25, 2017 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 $4.3 million and $9.5 million of discrete excess tax benefits generated by the settlement of share-based awards in the three and nine months ended March 25, 2017, respectively, partially offset by stock-based compensation for which no tax benefit is expected and $3.6 million and $10.4 million of discrete interest accruals for unrecognized tax benefits in the three and nine months ended March 25, 2017, respectively.

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 and issued an IRS Revenue Agent’s Report 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.

21



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, which is expected to begin in the fourth quarter of fiscal year 2018. 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 2014, 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.

Product Warranty

The Company accrues for specific and estimated product claims resulting from defects in materials, workmanship and material non-conformance to the Company’s specifications. The Company's aggregate product warranty liabilities as of March 31, 2018 and March 25, 2017 were $6.1 million and $5.3 million, respectively.

NOTE 12: COMMON STOCK REPURCHASES

On July 20, 2017, the board of directors of the Company authorized the repurchase of up to $1 billion of the Company's common stock. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as current stock price, levels of cash generation from operations, cash requirements, and other factors. All prior repurchase authorizations by the Company’s board of directors for the repurchase of common stock were cancelled and superseded by this new repurchase authorization.

During the nine months ended March 31, 2018, the Company repurchased approximately 5.3 million shares of its common stock for $279.9 million. As of March 31, 2018, the Company had remaining authorization of $746.4 million for future share repurchases. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including the price of the Company’s common stock and general market and business conditions.

NOTE 13: ACQUISITION

On January 26, 2018, the Company acquired a privately-held corporation specializing in the development of high performance USB and video extension technology. Total cash consideration paid in connection with this acquisition was $57.8 million, net of cash acquired. The company also agreed to pay up to an additional $16.0 million if the acquired business achieves certain financial milestones for the annual periods ending August 31, 2018 and August 31, 2019. The acquired assets included $26.0 million of developed technology and $10.5 million of other intangible assets. The Company also recorded $41.9 million of goodwill in connection with this acquisition. The goodwill is not deductible for tax purposes.

The purchase price allocation as of the date of the acquisition reflects various fair value estimates and analysis performed by the Company with the assistance of third-party valuation specialists. The Company may revise its preliminary purchase price allocation during the remainder of the measurement period, which will not exceed 12 months from the acquisition date.


22



NOTE 14: GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or more often if events or changes in circumstances indicate that the carrying amount may not be recoverable.

Activity and goodwill balances for the nine months ended March 31, 2018 were as follows:
 
Goodwill
 
(in thousands)
Balance at June 24, 2017
$
491,015

Acquisition
41,889

Balance at March 31, 2018
$
532,904


No indicators or instances of impairment were identified in the nine months and fiscal year ended March 31, 2018 and June 24, 2017, respectively.

Intangible assets consisted of the following:
 
March 31,
2018
 
June 24,
2017
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
Original
Cost
 
Accumulated
Amortization
 
Net
 
(in thousands)
Intellectual property
$
479,645

 
$
412,111

 
$
67,534

 
$
451,885

 
$
377,806

 
$
74,079

Customer relationships
116,334

 
102,596

 
13,738

 
115,634

 
99,812

 
15,822

Trade name
9,340

 
8,535

 
805

 
8,500

 
8,086

 
414

Patents
2,500

 
2,339

 
161

 
2,500

 
1,948

 
552

Total amortizable purchased intangible assets
607,819

 
525,581

 
82,238

 
578,519

 
487,652

 
90,867

IPR&D
8,610

 

 
8,610

 

 

 

Total purchased intangible assets
$
616,429

 
$
525,581

 
$
90,848

 
$
578,519

 
$
487,652

 
$
90,867



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 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25,
2017
 
(in thousands)
Cost of goods sold
$
12,101

 
$
11,064

 
$
34,305

 
$
35,420

Intangible asset amortization
876

 
2,348

 
3,623

 
7,139

Total intangible asset amortization expenses
$
12,977

 
$
13,412

 
$
37,928

 
$
42,559



23



The following table represents the estimated future amortization expense of intangible assets as of March 31, 2018:

Fiscal Year
 
Amount
 
 
(in thousands)
Remaining three months of 2018
 
$
12,395

2019
 
23,348

2020
 
13,692

2021
 
11,992

2022
 
6,313

Thereafter
 
14,498

Total intangible assets
 
$
82,238


NOTE 15: IMPAIRMENT OF LONG-LIVED ASSETS

Fiscal year 2018:

The Company did not record any impairment of long-lived assets during the three months ended March 31, 2018. During the nine months ended March 31, 2018, the Company recorded $0.9 million of impairment of long-lived assets in the Company's Condensed Consolidated Statements of Income. The impairment was primarily associated with certain investments in privately held companies. The Company uses various inputs to evaluate investments in privately held companies, including valuations of recent financing events as well as other information regarding the privately held companies' historical and forecasted performance. The Company reached its conclusion regarding the asset impairment due to changes, during the nine months ended March 31, 2018, in the financial condition of certain investments in privately held companies which indicated an other than temporary impairment.

Fiscal year 2017:

During the three and nine months ended March 25, 2017, the Company recorded $1.0 million and $7.5 million, respectively, in impairment of long-lived assets in the Company’s Condensed Consolidated Statements of Income. 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 nine months ended March 25, 2017, 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.

NOTE 16: RESTRUCTURING ACTIVITIES

Fiscal year 2018:

During the three and nine months ended March 31, 2018, the Company recorded $2.3 million and $14.2 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 primarily associated with continued reorganization of certain business units and functions, which impacted multiple job classifications and locations, as well as employee enrollments in voluntary separation programs.

Fiscal year 2017:

During the three and nine months ended March 25, 2017, the Company recorded $0.5 million and $11.3 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 primarily associated with continued reorganization of certain business units and functions and the closure of the Dallas wafer level packaging (“WLP”) manufacturing facilities. Multiple job classifications and locations were impacted by these activities.

24




As the Company completed the closure of its Dallas, Texas campus, including ceasing operations of its WLP manufacturing facility in the third quarter of fiscal year 2017, the Company recorded accelerated depreciation charges of $1.1 million and $4.2 million during the three and nine months ended March 25, 2017, respectively.

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 31, 2018:

 
Balance, June 24, 2017
 
Nine Months Ended
March 31, 2018
 
Balance, March 31, 2018
 
Charges
 
Cash Payments
 
Change in Estimates
 
 
 
 
 
 
(in thousands)
 
 
 
 
Severance - All plans (1)
$
526

 
$
14,491

 
$
(9,426
)
 
$
(264
)
 
$
5,327


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

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 a wafer manufacturing facility in the U.S., testing facilities in the Philippines and Thailand, and sales and circuit design offices around the world. We also utilize third party foundries for manufacturing of our products. 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 fiscal year 2017.

During fiscal year 2016, we commenced activities to close our wafer level packaging ("WLP") manufacturing facility in Dallas, Texas. We completed the sale of our Dallas, Texas campus, including our WLP manufacturing facility, in fiscal year 2016. We completed the transition of design, administration and manufacturing activities and discontinued our operations in the WLP manufacturing facility in fiscal year 2017.

During fiscal year 2017, we completed the sale of our micro-electromechanical systems (MEMS) business line, including related assets and inventory, for approximately $42.2 million.


CRITICAL ACCOUNTING POLICIES

25




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 24, 2017. 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 nine months ended March 31, 2018 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 24, 2017.


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
 
Nine Months Ended
 
March 31,
2018
 
March 25,
2017
 
March 31,
2018
 
March 25,
2017
 
 
 
 
 
 
 
 
Net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
34.6
 %
 
36.9
 %
 
34.6
 %
 
37.8
 %
Gross margin
65.4
 %
 
63.1
 %
 
65.4
 %
 
62.2
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
17.6
 %
 
19.4
 %
 
18.3
 %
 
20.1
 %
Selling, general and administrative
12.5
 %
 
12.7
 %
 
13.0
 %
 
12.8
 %
Intangible asset amortization
0.1
 %
 
0.4
 %
 
0.2
 %
 
0.4
 %
Impairment of long-lived assets
 %
 
0.2
 %
 
 %
 
0.4
 %
Severance and restructuring expenses
0.4
 %
 
0.1
 %
 
0.8
 %
 
0.7
 %
Other operating expenses (income), net
 %
 
0.3
 %
 
(0.1
)%
 
(1.5
)%
Total operating expenses
30.6
 %
 
33.1
 %
 
32.2
 %
 
32.9
 %
Operating income (loss)
34.7
 %
 
30.0
 %
 
33.2
 %
 
29.3
 %
Interest and other income (expense), net
(0.4
)%
 
(0.7
)%
 
(0.5
)%
 
(0.7
)%
Income before provision for income taxes
34.3
 %
 
29.3
 %
 
32.7
 %
 
28.6
 %
Income tax provision (benefit)
4.4
 %
 
5.2
 %
 
17.8
 %
 
4.5
 %
Net income (loss)
29.9
 %
 
24.1
 %
 
14.9
 %